Scrip Firm’s Woes Leave Nonprofits in the Lurch

If you’re a parent of school-age kids, fundraising with scrip is an inextricable part of your life.

You buy groceries or Christmas gifts from retailers that issue these vouchers at a discount to your PTA, which sells them to you at face value and keeps the difference to spend on a paint job for the multipurpose room, or a computer for the school library, or an art teacher’s salary.

It’s all painless -- you’d be spending the money anyway -- unless you’ve been dealing with a Fresno scrip broker named Scrip Advantage. If so, you may be wondering where your money went.

Scrip Advantage shut down a few weeks ago, owing money to PTAs, church groups and other nonprofits. Its phones are no longer taking incoming calls or messages, although the company’s owners have been talking to the press and trying to get their financial house back in order.

There’s a lesson here in how parents have been forced to rely on an unregulated industry to pay for programs that should be the responsibility of their state and local governments.

As a fundraising device for nonprofit groups, retail scrip came into its own in the 1980s. The unlikely trailblazer was Msgr. Thomas J. Keys of the Northern California Diocese of Santa Rosa. While trying to meet his parochial school budget, he learned that local merchants would sell gift certificates to nonprofit groups at a discount, which the charities could pocket for good works by reselling the certificates to their members at face value. The rub was that the discounts were available only for bulk orders of the certificates, and few local charities could muster the necessary volume.

The program Keys created to aggregate orders grew into the National Scrip Center, a diocesan enterprise with 9,000 clients and annual sales of $500 million. The center bought scrip in big enough lots to win discounts of up to 15% and retained as much as 1.5% of the face value for itself; its nonprofit clients kept the rest.

Scrip-based fundraising exploded as budget cuts turned school playgrounds, building maintenance, even art and music programs into financial orphans. But the business is rather trickier to manage than one might think. Because scrip brokers must maximize discounts by purchasing in bulk and must keep a sizable inventory on hand to fill orders, they depend heavily on borrowed money while operating on razor-thin margins.

“You need a lot of cash and very understanding bankers,” says David Burgess, senior vice president of Great Lakes Scrip Center, a big broker in Grand Rapids, Mich. It’s not unprecedented for scrip brokers cut off by their creditors to sink suddenly out of sight.

That may explain the plight of Scrip Advantage. Bob and John Coyle, the Fresno brothers whose family started the company, blame their ills on a lender who abruptly froze their line of credit in early November and applied the money in their bank account -- that is, deposits from their client nonprofit groups -- to their outstanding debt.

“We don’t owe the lender any more money,” Bob Coyle, the scrip company’s chief operating officer, told me last week. “But we don’t have the charities’ money, either.” (Coyle wouldn’t identify the lender but documents on file with the state indicate that IIG Capital, a New York financing firm, has been a significant lender to his firm since at least 2003.)

Coyle wouldn’t say how much Scrip Advantage owes its customers, but indications are that the sum could reach seven figures. The Fresno County district attorney’s office has received about 250 complaints from nonprofit groups, says Chief Deputy Dist. Atty. John Savrnoch, including one claiming a debt of $100,000. More arrive every day. “Some days I’ve had two staff members working full time taking complaints,” Savrnoch says.

Implicit in these complaints are school trips that may be canceled, supplies unpurchased, teachers unpaid. Although Coyle says the problems started in November, some customers detected signs of trouble much earlier.

At Oak Middle School in Los Alamitos, the PTA hoped to raise $5,000 from scrip for projects such as refurbishing a multipurpose room. The group’s scrip coordinator, Diane Goldberg, sent more than $3,500 to Scrip Advantage in September, and began calling the company the first week of October when her orders failed to arrive.

“They kept saying, ‘It’s coming, it’s coming,’ ” she told me. Over the next few weeks, small shipments would arrive by mail -- a single voucher for Bed Bath & Beyond here, a few for Tower Records there. By Nov. 11, when Goldberg got a form e-mail from Bob Coyle expressing hope for a resolution within 30 days (which now seems unlikely), her group was still owed $648. That’s money that the PTA may have to repay its members from its own funds.

The Coyles themselves have a rather colorful history. They and their father entered the scrip business as marketing partners of Msgr. Keys’ National Scrip Center, but left in 1992 under circumstances that became the subject of bitter dispute between the two sides.

They formed their own company, Scrip Plus, which looked promising enough to attract financial backing from a subsidiary of Montgomery Ward & Co. In 1997, Scrip Plus was ranked No. 4 on the Inc. 500, a roster of America’s fastest-growing private companies.

That same year, however, Montgomery Ward filed for bankruptcy protection. Its subsidiary, claiming that Scrip Plus was losing money, fired the Coyles and placed the firm’s assets up for sale.

The buyer was none other than National Scrip Center, the Coyles’ nemesis, which acquired not only the Scrip Plus inventory, but a noncompete agreement barring the brothers from starting a new scrip business until 2002.

The Coyles tried to get the clause nullified, at one point filing a complaint against the diocese before a Vatican tribunal. In 1999, however, they became the beneficiaries of a bizarre turn of events in Santa Rosa: Bishop G. Patrick Zeimann, who served ex officio as National Scrip Center’s chairman, was caught in a sex scandal and sent packing. The new bishop took steps to end the church’s complicated relationship with the money-losing scrip center and voided the noncompete clause in 2000, freeing the Coyles to operate as Scrip Advantage. (Severed from the diocese, National Scrip Center went out of business last year.)

Scrip Advantage has hired Westwood Capital, a New York investment bank specializing in troubled companies, to find a new backer. Coyle says a positive development may be announced as early as this week, but he doubts that the company will be able to refund any money before early next year. That’s bad news for nonprofits whose members paid for scrip to use for Christmas gifts.

Coyle knows his company will have a hard time regaining customer trust, without which it can’t do business even if it does find a new lender. Other scrip merchants are watching the saga nervously. At Great Lakes Scrip, which now serves thousands of former Scrip Advantage customers, the fear is that the episode will sour nonprofits on the whole scrip game.

“I can tell you,” Burgess says with all sincerity, “we’re getting zero satisfaction out of their misfortune.”

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and view his weblog at latimes.com/goldenstateblog.