Articles, poems and commentaries
TECHNOLOGY
by Alyssa A. Lappen
Forbes | Feb. 23, 1987
Vol. 140, No. 3, p. 132
375 words
William Kilpatrick reorganizes his tax shelters
by Alyssa A. Lappen
Forbes | Feb. 9, 1987
Vol. 140, No. 3, pp. 60-61
884 words
Question: What do bad marriages and bad investments have in common? They’re easier to get into than to get out of. Just ask the 1,000 or so luckless souls who invested upwards of $120 million in various tax shelter schemes promoted several years ago by a Denver businessman named William A. Kilpatrick, a prominent target of the Internal Revenue Service’s campaign to stamp out abusive tax shelters.
Tax reform has largely closed down tax shelters of all sorts, including 4-to-1 writeoffs like those Kilpatrick promoted through his United Financial Operations Inc. Those unlucky enough to have invested in Kilpatrick’s limited partnerships have suffered, as the Internal Revenue Service is still fighting to deny investors their promised writeoffs on his deals–assessing them instead with hefty back taxes, penalties and interest charges.
One dazed investor pumped $165,000 into a Kilpatrick deal five years ago and, to stop his tax bill from mounting, recently decided to pay out $580,000 in back taxes and interest. Chastened, he now says: “Businessmen should pay their taxes and hope that next year they owe more.’
As for the investors’ quandary: Kilpatrick insists that his investors pay up on hundreds of limited partnership contracts they signed years ago but which now have little value.
In 1977 Kilpatrick began putting together $700 million worth of convoluted deals involving investments in proposed coal mining and synthetic fuel ventures. In the partnerships, the deals provided that each investor pay $12,500 in cash, as well as sign a promissory note for $37,500 from one of several foreign banks.
Kilpatrick’s operating company promised to invest the resulting funds with a Cayman Islands firm. That company, in turn, would use the money for research and development on synthetic fuel plants, thus giving the investors a total of $50,000 in first-year tax deductions. Investors also signed yet more notes, this time not from the banks but directly from two Cayman Islands research and construction companies.
A lot of supposedly smart people went for the deals, but the IRS considered the whole arrangement just a tax dodge, and Kilpatrick was charged with masterminding $120 million in phony deductions. The court threw out all the fraud charges, ruling that the indictment had “failed to state a crime.’ Overzealous IRS investigators also contaminated the case by manipulating evidence before a grand jury, and the final charge–obstruction of justice–was dismissed in September 1984.
Kilpatrick proclaims himself fully exonerated. But the Justice Department has appealed to have all charges reinstated. Meanwhile, without awaiting the decision, Kilpatrick has come back with another scheme. Without consulting the limited partners, he has consolidated the partnerships from United Financial into a new corporation–Green Mountain Herbs Inc., a spice distributor that was in Chapter 11. It had gone public over-the-counter in the late 1970s, rose to a high of $2 a share, and was languishing at 2 cents a share before United merged with it in late 1986.
Through a complex reorganization plan involving the swap of stock and assets, Kilpatrick arranged to get back $140 million in investor promissory notes from the Cayman Islands research and construction firms that held them, in exchange for 4.4% of Green Mountain stock. Kilpatrick himself took 32% of the stock.
The paper shuffle, in effect a tax-free exchange of “like assets,’ had two other important benefits for Kilpatrick. First, it gave Green Mountain the appearance of a fresh infusion of capital in the form of the Cayman Islands promissory notes and other new assets–primarily a coal-cleaning technology of unproved value. Second, by making United Financial in operating subsidiary of Green Mountain, Kilpatrick could continue arguing with the IRS that United’s investors were indeed entitled to claim their tax deductions, since United remained a going concern.
And now comes the kicker: Kilpatrick has gone back to his original investors and is insisting that they make good on the notes they signed to the Grand Cayman outfit. If they pay, the limited partners are promised a 29% block of Green Mountain stock. But that is hardly a powerful enticement, since the stock now trades at 25 cents bid. It seems unlikely to grow in value by more than whatever cash the investors choose to pay on their promissory notes.
Kilpatrick says that he will use what funds he collects to build up the business. In hopes of bolstering the stock price, he is now busy talking up Green Mountain to brokers nationwide. But many investors are skeptical of his plans, and collecting the money won’t be easy. “This is going to be a real dogfight,’ gripes Howard Moon, a Houston investor who sank at least $50,000 into Kilpatrick deals. Adds John Cook, a Texas oilman who put in $98,000 and now faces tax penalties that could bankrupt him, “Nothing he has ever done has worked out. He says, “Trust me again.’ But we will not.’
Undaunted, Kilpatrick now even wants to acquire the assets of seven other tax shelter promoters, holding a total of $40 million in uncollected notes from deals that also have soured. Kilpatrick says he intends to collect on those debts, too. In ice hockey, they’d call that a hat trick. If there were an annual award for the nerviest dealster around, we’d nominate Bill Kilpatrick for the honor.
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Polluted water has caused cancer in huge numbers of fish
by Alyssa A. Lappen
Forbes | Apr. 26, 1986
Vol. 137, No. 8, pp. 124-127
1,116 words
Viewed from shore, Puget Sound’s Eagle Harbor looks postcard idyllic, its wavelets gently lapping the beachfront as gulls bob offshore. But from about 20 feet beneath the surface, a different and completely revolting picture emerges–of a gloppy, creosote-soaked sand bottom that suggests the devil’s own vomit.
In this gunk, which was dumped for years by a local chemical company, English sole must forage for worms. And when researchers haul in the fish and slit open their bellies, they very often find the livers riddled with cancerous tumors.
Cancerous fish have surfaced in epidemic proportions in at least ten fresh- and saltwater shorefronts and estuaries around the country. Up to a quarter of the English sole in 20 areas in Puget Sound are diseased. So, too, are nearly all the saugers, a type of perch that inhabits Torch Lake, Mich. More than 90% of the two-year old Atlantic tomcods that swim in the Hudson River also have liver cancers. Likewise, in Ohio’s Black River tumor-laden catfish are common. And two years ago a quarter of the winter flounder in part of Boston Harbor suffered from liver cancer.
In Massachusetts, where commercial fishing brings in $1 billion a year and saltwater anglers add an estimated $175 million, the public outcry has been intense. “Just about everyone I know has rented a dory and gone out into Boston harbor for flounder, and now the damned things are cancerous,” says Paul Garrity, a former Massachusetts Superior Court judge.
Before he stepped down from the bench in late 1984, Garrity temporarily banned new sewer hookups in the Boston area after the city of Quincy (which is often called “the flounder capital of the world”) sued to force a cleanup of area waters. In response, the Massachusetts legislature promptly set up the Massachusetts Water Resources Authority, which plans to spend $1.2 billion over 17 years to build a waste treatment plant for the area.
Most humans diagnosed with liver cancer die of the disease within five years, and it is likely that most stricken fish will die premature, too. But is there a demonstrable connection between fish with cancer and human disease? Scientists have not been able to document one yet. But one disturbing study on the matter comes from Greta Fein, a researcher at the University of Maryland, who in 1984 reported that the offspring of 242 women who had eaten PCB-tainted fish for years have measurably slower neuro-muscular reflexes.
Warns Thomas Cameron of the National Cancer Institute: “The correlation between fish cancer and pollution is a red flag that there may be problems for people exposed to these waters by bathing, drinking, and eating the fish.”
If that is so, a grim possibility arises. Recreational fishermen spend an estimated $25 billion each year on the sport. In certain areas, they and the inner-city poor, who fish off piers and bridges and often live on what they catch, may actually be slowly poisoning themselves without even knowing it.
Studies show that many toxins from pollution are collected in the fish organs, which most people don’t eat. But some toxins, such as hexachlorobenzene, chlorinated butadienes and polychlorinated biphenyls, accumulate in both fat and flesh–and thus pass into the bodies of those who eat the fish.
Congress is alarmed. The House Fisheries & Wildlife Conservation & the Environment subcommittee plans to convene hearings in June to raise public consciousness about fish and water pollution. Says Michigan Democrat Dennis Hertel, a committee member, “We don’t want people eating those fish or swimming in polluted water.”
Federal agencies, funded by new research grants, are starting to look for an answer to the dilemma. The Environmental Protection Agency has allocated $14 million this year to assess environmental risks in Buzzards Bay, Narragansett Bay, Long Island Sound, Puget Sound and Chesapeake Bay. Likewise, the National Oceanic & Atmospheric Administration (NOAA) has mounted its own effort–an investigation costing $5 million this year alone that will examine correlations between cancerous fish and contaminated sediments in 50 coastal areas.
Early findings offer some clues. Apparently, toxic chemicals that cause mammalian cancer trigger the disease in fish, too, says Donald Malins, director of environmental conservation at Seattle’s Northwest & Alaska Fisheries Center. The fish feed off heavily contaminated sediments that contain large doses of toxic wastes. Time and again, scientists find traces of toxic elements in the gallbladders of fish with cancerous livers.
Environmental problems like these have put industry on the spot. In industrialized Midland, Mich., Dow Chemical began operating a $4.3 million pressure sand filter system last year to remove dioxin from wastewater that flows into Saginaw Bay, where PCB-tained fish have been found. Meanwhile, Occidental Chemical, which makes chlorine, caustic soda and hydrochloric acid at its Tacoma, Wash. plant, has also taken action, reinforcing its chemical storage tanks’ walls and surrounding them with asphalt and concrete dikes to contain spills. “We have a plant full of fishermen and hunters. We’re as concerned about the environment as anyone,” says Occidental plant manager Dave Scholes.
State authorities are trying to enforce clean water laws as best they can. Their efforts are particularly intense in situations in which pollution winds up putting state revenues in jeopardy. Last year the Washington State legislature created the Puget Sound Water Quality Authority, and the state’s Department of Ecology has stepped up enforcement actions by 30% over 1984. Michigan has restricted sales of tainted carp and catfish, and New York State now forbids sale of PCB-tainted striped bass as well.
Meanwhile, in the last five years state authorities elsewhere have closed 11% of the nation’s active shellfishing grounds. Such estuaries are the spawning grounds for more than 65% of commercially valuable species, such as bluefish, snapper and pompano, which inhabit the Gulf and East coasts. Luckily for seafood lovers, and for the $18 billion fishing industry, mature saltwater fish caught for commercial sale live in clean, deep waters and so far don’t show signs of developing cancers.
Under the eye of the EPA, states are charged with responsibility for enforcing existing water pollution laws. In Michigan, where recreational fishing is a $1 billion industry, authorities have slapped Velsicol Inc., BASF, National Steel and dozens of others with nearly $19 million in penalties, much of it relating to water pollution, since 1982. Even so, because EPA regulations don’t cover them, small businesses that dump into sewers, such as textile mills and commercial laundries, continue to pollute unchecked. More research is necessary before firm conclusions can be drawn as to whether cancer in fish is a harbinger of disease in humans or simply a warning of developing environmental danger. Either way, the threat is obvious, and foot-dragging is risky.
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California Almond Growers’ Exchange
by Alyssa A. Lappen
Forbes | Mar. 10, 1986
Vol. 137, No. 5, p. 156
711 words
Blue Diamond, the 5,700-member California Almond Growers’ Exchange, a farmers’ cooperative, has been so successful getting folks here and abroad to gobble more nuts that it sold 70% of the world’s almonds last year. That was more than $400 million worth, with 60% of sales in 90 foreign countries. Between 1968 and 1985, with not one penny of federal subsidy, the California farmers expanded their almond crop from 80 million pounds annually to 460 million pounds, selling every nut that they grew.
But there’s one small problem in this marketing coup: The growers haven’t made a dime in five years. The trouble is that their break-even point has been stuck at 90 cents to $1.000 a pound since 1980. There is price resistance, and the strong dollar has been a problem for much of that time. Delicious though they are, almonds aren’t quite as necessary as oil.
The California growers have no hope of artificially cutting supplies, in the OPEC manner, to bolster prices. They figure they grow the nut of choice and that, given an already smaller crop and a weaker dollar, they will come out all right if they keep pressing their innovative merchandising worldwide.
That in itself will be no small feat. “Each country’s market for almonds is a little different from the next,” says Roger Baccigaluppi, Blue Diamond’s president and chief executive.
Take West Germany, Blue Diamond’s largest market outside the U.S. At first most of its almonds were bought from Spain primarily for marzipan, which is used to make candy and as filling in pastries. The conventional wisdom was that the German market was sated. But Baccigaluppi discovered that his competitor’s almonds arrived in burlap bags ocntaining stems and branches, thereby padding the weight of the shipments. Blue Diamonds made sure its weight was all almonds. And it offered German candymakers 12-month contracts with a guaranteed price instead of the month-to-month shipments and the fluctuating prices of the Spanish product. Then Baccigaluppi showed the Germans how almonds could be slivered for bakery goods, mashed for almonds butter, added wole to candy bars, and so on. The result: Although the U.S. dollar has kicked up the price of California almonds by 25% in Germany since 1980, almonds use will grow more than 50% this year, to 90 million pounds.
Having conquered West Germany, Baccigaluppi marched on Russia, Blue Diamond’s second-largest foreign market. Consumption of California almonds grew 300% in 1985 to 45 million pounds, and sales should nearly double by year-end. “The Soviet Union does not lend itself to promotion,” Baccigaluppi notes. Nevertheless, he noticed that the government’s 1980 five-year plan included improving the Soviet diet. He promptly commissioned a study from the University of California at Davis, which reported that almonds have no cholesterol and contain as much protein per pound as cooked lean beef. Clearly, Moscow was impressed. The Soviets have largely replaced imports of Indian cashews and Turkish hazelnuts with California almonds, which are also an officially endorsed snack food in the U.S.S.R.’s anti-alcoholism campaign.
Baccigaluppi had earlier invaded Japan, now Blue Diamond’s third-largest foreign market. Back in the late 1960s almonds were an unknown commodity there. But Baccigaluppi, undaunted, had opened a Japan Market Development Office staffed by Japanese. Those staffers have since developed a mind-boggling menu that ranges from almond tofu, soy sauce and spaghetti sauce to almond miso soup, sausages and milk.
There’s more. In the last six months consumption of California almonds has grown 55% in Holland, 48% in France, 40% in the U.K. and 23% in Switzerland.
Which is all very impressive, of course, but would be even more so if Baccigaluppi’s boys were making money. Marketing cannot alone create a successful business. But in this case, it is certainly a major reason the almond growers may be eyeing that light at the end of their long, dark tunnel. This year the nut growers expect to break even and next year, they say, they’ll make a few bucks. After all, the dollar is now moving more in their favor and the California crop has topped out, while world almond consumption has not. Oh, yes, and Baccigaluppi is moving on to Scandinavia, Korea, Taiwan and India, among others.
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COMPANIES
by Alyssa A. Lappen
Forbes | Feb. 24, 1986
Vol. 137., No. 4, pp. 64-65
919 words
If the best lessons are the most expensive ones, Donald Gustafson has bought himself a fine education. Six years ago Gustafson’s stake in the little office equipment company he started, Kroy Inc., was worth $40 million. Today it is worth $11 million.
“I have learned a marketing lesson, and I hope it’s one of the last we ever learn,” Gustafson, 67, grimaces. Asked to articulate the $29 million lesson, he replies: “That [by pushing] sales growth at the expense of profits, you’ll self-destruct.”
Let’s back up. Gustafson, formerly a vice president at a Minneapolis bank, bought control of Kroy, then a thermoplastics company, in the 1960s. Kroy developed a nifty lettering machine, which resembles the Dymo labeling gun, except that Kroy’s rotating-disk fonts type black letters onto clear tape. Press the tape onto a paper master, make a copy and presto! all you see is a typeset headline. The machines became a success with engineers and architects, but now anyone with reports and memos to jazz up can use them. The cheapest ones sell for $295; for $2,495 you can get a fancy electronic keyboard that lets you type over errors.
Gustafson sold the machines through a network of 1,000 independent office supply dealers around the country–“peddlers,” Gustafson condescendingly called his dealers. But the peddlers knew their territories and helped keep Kroy’s overhead down. By 1982, when FORBES wrote glowingly of the company, Kroy’s sales had reached $44 million, profits $6.1 million (FORBES, Dec. 20, 1982).
Now comes Gustafson’s expensive education. Kroy’s 36% return on equity, Gustafson reasonably figured, was bound to attract competition, maybe from such office products giants as IBM, Wang, Sperry or Exxon. To get the jump on the giants, Gustafson decided to expand his product line to include high-priced computerized headline writers with electronic keyboards and cassette memory banks. Price, when the product finally arrived: $4,995. To move these upmarket machines, Gustafson decided to dump his 1,000 “peddlers,” on the grounds that independents would not be up to the task of selling against the button-down boys from IBM.
No matter that the idependents knew their markets and their accounts, many of them small local businesses. No matter that Gustafson had to start his new marketing force from scratch. In place of the independents, Gustafson hired a direct sales staff of 140 to workout of 23 branch sales offices and put them in competition against Kroy’s old “peddlers.” The predictable results were (1) some very hard feelings and (2) internal chaos. In the midst of all this, Gustafson moved Kroy’s headquarters to Scottsdale, Ariz., where he planned soon to retire.
By fiscal 1983 (ended March 1983) Kroy’s sales had climed to $47 million. Profits, however, fell nearly a third, to $4.5 million. The new generation of letterers was delayed, forcing Gustafson’s expensive new salesmen to move the older, cheaper models. Rather than throttle back on his new marketing strategy, Gustafson hired 110 more salesmen. By fiscal 1985 sales had reached $66 million. But operating earnings had all but evaporated.
Gustafson had also erred in 1981, when he asked Scott drill to take over Kroy’s Far East sales. Drill, who had been Kroy’s international sals manager, took the offer as an insult. In February 1983, as Gustafson fretfully scanned the horizon for competition that failed to appear, Drill started Varitronic Systems and eventually took 14 other frustrated Kroy managers out the back door. Varitronic quickly came out with a couple of Japanese-made lettering machines. Dubbed “Merlin,” Varitronic’s machines are similar in principle to Kroy’s but are smaller, twice as fast and cheaper.
Drill already had a willing sales force: the independents over whom Gustafson had run roughshod. Just 14 months in business, Varitronic has already sold $20 million worth of Merlins and now wants a piece of Kroy’s tape and carbon supply business as well. “If you are writing about Kroy,” a jubilant Drill tells FORBES, “you are writing about the wrong company.”
Couldn’t Gustafson have soothed Drill and the other defectors? Possibly. But he had already repaired to Scottsdale to play golf and oversee the corporate move.
Sublesson here: If you push people around, don’t be surprised when they shove back.
Finally, in February of last year, Gustafson brought in Errol Bartine to clean up the mess. Bartine, 54, a former planning director and corporate vice president at Sperry and AM International, immediately began closing Kroy’s new sales offices. On average, each of Kroy’s salesmen was producing less than $200,000 annually in sales. “If you can’t get $400,000 to $500,000 [in sales] per salesperson per year, you have no business trying to maintain a direct operation,” says Bartine, who has already shuttered 11 branches and laid off a third of the company’s work force, which now numbers about 700.
Now Bartine is sorting through the ranks of his remaining 400 “peddlers,” begging the good ones to forgive and forget. He now has 80 high-volume dealers and hopes to build that to at least 225. On a less positive note, Bartine is suing Varitronic for patent infringement.
Bartine’s most recent report card is impressive. Kroy’s operating expenses were down 25% in the first nine months of fiscal 1986 (ending Mar. 31). Earnings were back up to $4.8 million on sales of $45 million, compared with less than $1 million on sales of $49 million in the same period last year. If bartime can maintain this pace, the $29 million hit to Gustafson’s net worth will have been tuition well spent.
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How to prevent back injuries
by Alyssa A. Lappen
Forbes | Feb. 24, 1986
Vol. 137, No. 4, pp. 102-103
718 words
In 1981 Roger Daneault, a 32-year-old Mississippi electrician, bent over to pick up a 50-pound motor on an offshore drilling rig. His life has not been the same since.
Four years and at least $90,000 later, Daneault it still paying the price of backache caused by improper lifting–in his case, a ruptured spinal disk that eventually required corrective surgery and months of therapy before he was able to return to work.
Backache, one of the least understood of physical afflictions, is business’ silent crippler, costing an estimated $56 billion annually in insurance, treatment, lost production and employee retraining. Until now, nostrums have included everything from pain pills, bed rest and surgery to chiropractic spinal adjustment, acupuncture and even psychotherapy. Yet a growing number of physical therapists nationwide are at last beginning to attack the problem from the prevention angle, beforehand, with the so-called extension technique.
Says David Apts, who cofounded the American Back School in Ashland, Ky. in 1981 and is a proselytizer of extension techniques: “The feeling in the medical community is that you can only treat backs when you have someone in acute pain. But I got sick of seeing all these people maimed with back pain. Why couldn’t we take an industry with serious back problems and prevent them?”
The approach is catching on. Safety directors at a lengthy list of companies, including IBM, Owens-Corning, Westmoreland Coal, CSX, Dow Chemical, Schlumberger, United Parcel Service, Data General, Lockheed and Coors, are now providing extension-technique training to employees to prevent backache.
What is extension technique? In contrast to conventional treatments such as “flexion” exercises, which emphasize a combination of pelvic tilts and knee-to-chest routines to flatten and strengthen the back, extension technique involves a method of sitting, standing and lifting that capitalizes on the spine’s three natural curves. This lets the back extension muscles, in concert with the backbone, bear the stress of weight loads, which can exceed 1,000 pounds per square inch of disk when a person lifts even 70 pounds.
Known also as the McKenzie technique, for Robin McKenzie, the New Zealander who introduced it to the U.S. in the mid-1970s, extension technique is designed to preserve normal lordosis, and inward curve in the low back. “Most people have lost the curve through faulty sitting, watching TV five hours at a stretch, and driving,” says therapist Peter Mayock, who instructs workers on the technique at Anheuser-Busch’s brewery in Merrimack, N.H.
One useful technique recommended by Mayock: When sitting, place a rolled towel behind you to support the natural curve at the base of the spine. To stretch the abdominal muscles and the spine’s long front ligament, necessary for normal lordosis, Mayock also recommends a kind of semi-push-up that bows the low back in. For lifting, Mayock prefers the style that lets an Olympic weight lifter heave 300 pounds and lift it over the head by, in essense, locking the back into its naturally curved position instead of squat-lifting with a flat back and the legs bearing the load.
Extension technique is already showing real success in reducing injury on the job. After 350 “high-risk” workers at Public Service of New Hampshire completed Mayock’s two-hour course in late 1983, the number of back injuries dropped 60%.
Texas Instruments’ data systems group in Austin cut the number of back injuries there by 60% after 2,000 employees took Gilbert Gimbel’s Las Cruces, N.M.-based Save-A-Back extension back care course. After 183 workers at Austin Power & Light took Gimbel’s class, the number of lost-time back injuries fell by two-thirds. Inco’s Huntington Alloys in Huntington, W.Va. cut compensation costs 21% after Apts trained nearly 1,600 of its workers.
Treating backache is, of course, complex, and extension technique, although used for treatment, is by itself hardly a cure-all once a person does damage to his spine. But as a way to prevent damage from occurring in the first place, the technique has much to commend it. Compared with the cost of injuries, the $10 to $30 per head that therapist-instructors charge for prevention is small. Mississippi Power safety director Mikel Gusa says back injuries fell from 12 a year to zero after 1,200 employees took a back class there.
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