Los Angeles (1224)

Friday, 28 July 2006 20:00

Making connections

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 In the early 1980s, Chet Pipkin was the head of a fledgling computer accessory manufacturer called Belkin Corp. It was one of hundreds around the country producing largely the same inventory of cables and other components, and Pipkin was content to keep his company on the same track.

“We got our start with copper cable assemblies,” Pipkin says. “We were pretty intent on just sticking with that product line. We were concerned about getting too spread out from a product mix standpoint. We wanted to stick with what we were really good at.”

But as companies started getting squeezed out of the market by high levels of competition, Pipkin, who serves as both president and CEO, quickly realized that in order to survive, Belkin would have to seek out new ideas and growth opportunities.

More than 20 years later, Belkin’s vigilant approach has made it one of the world leaders in its field. From the humble beginnings of Pipkin assembling computer cables on his mother’s dining room table, Belkin is now a Compton-based company with 1,300 employees and projected revenue of $1 billion for fiscal year 2007.

Here’s how Pipkin has kept Belkin one step ahead of the competition along the way.

Provide solutions, not just products
If Belkin were going to grow and survive, its ability to provide customer solutions would be key.

Belkin’s customer base is largely made up of what Pipkin calls VARs, or value-added resellers. The companies Belkin serves, in turn, serve the IT departments of other corporations. In the 1980s, Belkin’s customers were outfitting corporate offices with computers, some for the very first time.

By observing their customers, Pipkin says Belkin’s leaders noticed a trend: They would sell an individual component, such as a printer, but wouldn’t sell the cable that could hook the printer to the computer. Instead, they’d refer the customer to a competitor for the additional items.

Pipkin realized it was an opportunity to coach Belkin’s customers on how to sell computer components together as a unit — a given in today’s world, but a novel idea back then.

That revelation led Belkin’s leaders to form a systematic approach to serving customers. The company’s representatives make it a point to visit their customers, spend time with them, and educate them on selling not only the individual computer components but an entire range of products as a system.

The goal is to maintain a straightforward, streamlined approach that focuses on the end result, he says.

“We just use a very fact-based approach with this,” Pipkin says. “It’s a very common theme for us.”

To begin, Belkin outlines where a company is in terms of variables such as profit margin and customer satisfaction. They then form a plan to help the company reach its goals. The customer’s reaction once the job is done is the verdict, he says.

“They might be skeptical, but when you get it done, they are very appreciative, thankful, a little bit amazed,” Pipkin says. “Your credibility with them scales a lot, and they want to do more stuff with you.”

In a constantly-evolving business, the products that perform the best are those that have the best support, Pipkin says, and the companies that provide the best support are those most likely to retain customers.

Look everywhere for innovation
Belkin’s leaders are always on the lookout for innovations that can improve the company. Ideas are gathered through conventional means such as focus groups and surveys, but the tried-and-true methods are peppered with a large dose of people-watching to identify emerging trends.

Even Pipkin’s seven children are in on the act.

“My wife and I have six boys at home, as well as a daughter we adopted, and we are not bashful about watching them, about what it is they do,” he says. “We have a lot of their friends over all the time. It’s one of the ways we pick up on trends and the way things are being done.”

The same thing is done at Belkin’s locations around the world. The company does research in workplaces and homes, surveys members of the public, collects data about how people are using technology and uses that data to project future movements in technology usage.

Using research and observations to gaze out over the industry horizon has alerted Belkin’s leaders to a number of changes.

“For example, it became very clear to us a few years ago that the way we use computers was going to rapidly evolve from what we call a 6-inch experience to a 6-foot experience,” he says. “We were going from using computers mostly as a productivity tool to one that we would also be getting a lot of content and entertainment out of.”

Apple’s iPod, for which Belkin manufactures accessories, is among the most popular entertainment-centered computer devices produced in recent years.

“I don’t think we would have necessarily predicted Apple was going to be the organization that would bring a killer MP3 player to market,” he says. “We certainly could not have predicted what the iPod was going to be and what it would look like.”

What market research told Pipkin and his associates, however, was that something big was about to happen on the recorded music scene. Digital technology was on its way in, and the company needed to get on board while products such as iPod were still in the formative stages, he says.

The result is a series of highly successful products —the company picked up five of its seven innovation awards from the Consumer Electronics Association this year for iPod accessories — and a big revenue boost. iPod accessories now account for about 20 percent of Belkin’s total revenue, according to a MarketWatch report.

Provide the right environment
Belkin doesn’t only spot trends with binoculars aimed at the horizon. The company’s employees are also a valuable resource.

Pipkin says his employees provide a wellspring of ideas on how to improve the company, and he actively encourages open discourse with a flat organization, free of layers upon layers of management.

“Our organization is flat in terms of the organizational chart but also in the way we communicate between layers of the company,” he says.

Belkin’s facilities in Compton and around the world are constructed with a minimum of interior walls. Most floors are comprised of what Pipkin calls a large bullpen area in the center, with management offices around the perimeter.

“We like to have senior management located throughout our buildings,” he says. “We don’t want them stuck up on a separate floor or at the other end of a long hallway.”

The open style of Belkin’s buildings allows management and employees to share common space, which helps provide those on the lower rungs a level of comfort in speaking to their superiors.

“Sometimes, I’m the one making the coffee in our break room,” Pipkin says. “It’s a good opportunity for someone to come up and speak to me at that point.”

If employees are comfortable with their managers, they are more apt to take risks by speaking up and expressing ideas if they feel the ideas won’t be immediately dismissed.

“The best way to reach out to employees is to teach people that they are safe,” he says. “By that, I mean that if an idea is proposed or suggested, that it is not belittled or ridiculed.”

Once an idea is suggested, Pipkin says management is obligated to deliver some kind of response to the person who suggested it.

“People gain confidence in being able to communicate only if they sense credibility in the organization,” he says. “If they don’t see things happen, the organization gains no credibility. But if they see things happen, it adds credibility to the approach. People quickly learn that and want to be recognized for their ideas.”

If an idea can’t be used by the company, Pipkin says the person who suggested it still deserves a response.

“If we can’t use an idea, we let them know why it isn’t going to be considered,” he says. “That gives them an opportunity if they want to adjust and resubmit it, or simply to have satisfaction of knowing it was at least looked at and not ignored. Ideas shouldn’t disappear down a black hole.”

Pipkin says an employee who takes the risk of suggesting an idea will always be someone who is admired at Belkin.

“We may not always get the idea, or get it the first time, but we want you to take the risk to speak up,” he says. “If a suggestion is not embraced, we want the person to come back to us with more. If we do that well, people recognize that we want it in a sincere way, that we respect it and admire it.

“When people feel that way, they are inclined to keep coming up with more.”

HOW TO REACH: Belkin Corp., www.belkin.com

Friday, 30 June 2006 08:36

Pistols at 10 paces?

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A certain amount of conflict at the workplace is inevitable. After all, many Americans spend more time with their coworkers than their families. And no matter what type of organization — from White Castle to the White House — there is bound to be a diverse collection of goals, strategies, habits and ideologies on display.

The key to ensuring harmony is acknowledging conflict and understanding the underlying reasons for why these disputes have risen. This is where the practice of conflict resolution comes into play.

“To be successful in conflict resolution, it is important to realize how you usually respond to situations when wishes, goals or interests differ,” says Yael Hellman, a professor in organizational leadership at Woodbury University.

Smart Business spoke with Hellman about the driving forces behind conflict in the workplace, why conflict resolution can be an effective tool in resolving disputes and when an outside facilitator should be used.

What is conflict resolution?
To understand conflict resolution, it is important to know the definition of conflict. Although there are multiple definitions of conflict, a common theme is that for there to be conflict, the conflict must be perceived by the parties involved. These parties are usually two or more people who have interests or goals that appear to be incompatible. Conflict is when one person’s wishes differ from those of another. Conflict resolution, in its simplest term, is getting what you need without stepping on others. The ideal goal is to get to a win-win situation or solution.

What are some of the typical reasons for conflict in the workplace?
Conflict in the workplace may occur when people feel stressed, hassled, overworked or do not feel that they are acknowledged or compensated appropriately. Other reasons include perceived inequities, change and innovation. Change may include any change in status quo in regard to schedules, management, leadership, policies, etc.

How can a business use conflict resolution to address discord?
Businesses that use conflict resolution successfully generally follow these competencies for managing the conflict.

  • Begin with a positive overture.

 

  • Identify the correct definition of the problem.

 

  • Understand the critical ingredients of collaborative thinking.

 

  • Use open communication to resolve the challenges of change.

 

  • Offer tools and assistance, such as mentoring or open-door policies, that best deal with the tensions and pressures that accompany change.

 

  • Have the ability to listen to conflict and provide appropriate feedback.

 

  • Remember that conflict isn’t always negative.

When can conflict be good for an organization?
Whether a conflict is good or bad depends on the type of conflict. In fact, conflict is sometimes encouraged because a harmonious, peaceful, tranquil and cooperative workplace may become static, apathetic and nonresponsive to the needs of change and innovation. Some leaders suggest that a minimal level of conflict should be maintained — just enough to keep the workplace alive, self-critical and creative.

Why is conflict resolution effective in resolving disputes?
Conflict resolution helps to diffuse potentially explosive situations by understanding human driving forces. These are the basic needs of being valued by others, to be in control and the need for personal self-esteem. With conflict resolution, both parties are listened to and heard without judgment or being discounted. Trust is built, information is shared, and communication is enhanced. When employees feel they are being heard and acknowledged, then motivation, production and job satisfaction increase.

What are the dangers of not intervening when there is interpersonal conflict among employees?
When there is unaddressed interpersonal conflict among employees, a company may experience high absenteeism, sabotage, apathy or low morale and low motivation. Also, high turnover can become an issue and, in the worst case, a potentially explosive and violent event could occur.

In what instances should an outside facilitator be brought in?
The intensity of a conflict is generally described as an issue, a dispute or an impasse.

An issue is a mild conflict that may often be resolved informally by the parties involved.

A dispute is a conflict that can become polarized when the issue has a history and the parties are entrenched on both sides. It may take a mediator to help resolve this type of dispute. The mediator may include trained human resource or management personnel. Sometimes, if a big conflict cannot be solved, it can be beneficial to find out if there is a small area within the larger issue that can be resolved.

An impasse is a conflict with a fairly long history and the parties have created a mythology of hate to keep the sides polarized. It usually takes a mediator or an arbitrator from outside the organization to help resolve this type of conflict.

YAEL HELLMAN is a professor in organizational leadership at Woodbury University. Reach her at (818) 252-5145 or yael.hellman@woodbury.edu.

Friday, 30 June 2006 08:02

Wido Schaefer

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After 30 years of piloting TravelStore Inc., Wido Schaefer, founder, president and CEO of the travel agency, is beginning to turn over the wheel to his employees. Schaefer began his trek to retirement last year by selling 10 percent of the operation to his employees through an employee stock ownership plan. He’s unsure if he’ll take the full 10 years he plans to give up complete control of the company, which produced about $180 million in revenue last year, or if he even will give it up at all, but he is in no hurry to spend more time on the golf course. For now, he remains focused on his employees and on leading the company forward. Smart Business spoke with the former Lufthansa executive about the importance of trusting employees, adapting to change and planning for the long haul.

Keep employees informed.
We pretty much run open book. All managers see the financials every month. Branch managers have a vested interest in the results because, in addition to earning a salary, they share in the profits of their branch.

We keep (profit and loss) statements per branch. They’re directly involved. That creates a culture that empowers people. It translates into the way our agents treat customers, because they’re empowered.

Hire the right talent.
When we look for new employees, we look for attitude and talent. We’re not looking for skills. Skills can be taught, but attitude and talent are things that you have or you don’t.

In the past (an executive) would do interview. We’ve started to let the team members into the interview process. If you want to be a corporate agent, we will invite a couple of the corporate agents into the interview process and let them interview separately.

Do they want this person to be on their team? It’s based on simple things — can they look you in the eye? If somebody cannot look you in the eye, they’re out; we don’t even proceed with the interview process.

Treat your people well.
People want to do an honest job and get paid for it. I always paid above-average wages to attract above-average employees.

Our turnover is very low, so we’re holding on to good employees. Employees who don’t work out usually leave within three months. We don’t even have to let them go because the team will say, that new hire really doesn’t fit in; we made a mistake.

Plan for the future.
I always believed in doing things for the long run. Everybody can make a quick buck, but to create a relationship with a client or an employee is really more important.

The basic philosophy is unchanged. Basic honesty, looking people in the eye and not having hidden agendas, all these basic principles.

Reward those who got you there.
I’m in the process of turning the company over to the employees. We have an employee stock ownership program, so employees are shareholders of the company.

We have a corporate culture that is a lot more effective to communicate because now they are owners, and with ownership comes responsibility. That’s a concept that everybody grasps. Overall, it has a very positive effect. There is a message there that has meaning.

Assume the best.
You have to trust people. You have to start off trusting people. Then, if they disappoint you, you change your mind — instead of doing it the other way around, (where) they have to earn your trust.

Let people fail.
Leadership is innate. Skills can be learned. Middle management you can train somebody to do. You can train somebody to establish a schedule, and this is your routine. This is what your agents need to produce, and you need to manage them that everybody does 200 transactions a month, keep your computers running, open on time, close on time.

That can be taught. Decision-making is a lot harder. You have to empower people to make decisions and not get too hard on them if they make a mistake. You have to encourage them to make mistakes and then you’ll see if they use their power wisely or if they make too many mistakes.

Take a chance.
In any business today, the days of being stagnant, they ended in the ’80s. Today, if you’re in business, you have to be No. 1 or 2 in your city and your business, or you’re probably not going to survive.

You can grow two ways — one is organically, but most people have to grow through acquisition. The minute you go through an acquisition, you take risk. You make big advertising decisions — buying a full-page ad in the newspaper, when you’ve never done that before, sign a contract. All of these involve some degree of risk.

Persevere.
Don’t be discouraged by setbacks. Stick to what you believe in. Stick to your guiding principles, even if you have setbacks.

Seek mentors. Listen a lot. Listen more than you talk at the beginning and take risks.

Find a mentor.
I had to make difficult decisions that really exceeded my experience or my financial resources. I had somebody that I could rely on in both cases. That helped me tremendously.

That was not someone who second-guessing my decisions, it was somebody who, 95 percent, said, ‘Just go for it.’

There was not a lot of discussions and criticism. It was just, ‘I think you made the right decision. If that’s your gut decision, go for it.’

Stay the course.
Do you have a vision and stick to it? You can’t be wishy-washy and change directions. You have to believe the marketplace; the pendulum will eventually come back.

You have to believe in the people who work for you. You have to be honest in your relationships with vendors and with clients.

HOW TO REACH: TravelStore Inc., (800) 850-3224 or www.travelstoreusa.com

Thursday, 29 June 2006 20:00

High energy

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Alex Lidow is a preacher. But he’s not trying to save your soul. He’d much rather save the world’s energy supply from your washing machine and refrigerator.

Lidow is a preacher in the church of energy conservation.

While other preachers deliver sermons from a pulpit, Lidow uses his perch as CEO of El Segundo-based International Rectifier Corp. to spread the word about energy efficiency and his belief that every person is responsible for doing his or her part to conserve the world’s energy. It is a guiding principle that he says has driven him in his 29 years at IR, the last 11 as CEO.

As head of a $1.17 billion manufacturer of electric and electronic components, Lidow is in a position to practice what he preaches. Since becoming IR’s leader in 1995, he has spurred a movement in innovation that has focused the company on developing products that cost less to run.

And cost isn’t just a matter of money, he says.

Cost versus price
Never confuse cost and price, Lidow says. Price is a product of supply and demand, while cost is the sum of everything it took to get a product to its current state.

It goes back to an epiphany he had as a physics graduate student at Stanford University in 1976.

“A friend of mine came in and took off his glasses,” he says. “He asked me if I knew what made the glasses cost what they cost. I gave him some nonsense answer, and he says, ‘No, no, what makes the glasses cost what they cost is the energy it took to bring them to this state.’

“The energy it took to melt the glass, the energy it took to plate the frames, the energy it took to run the store where they were kept until they were purchased.”

Lidow said his friend pointed his finger at him and said, “If you want to improve the global standard of living, figure out how to use energy more efficiently.”

That interaction made energy conservation Lidow’s life mission, he says. It’s something he implements at IR in a program called the “Energy Savings Challenge.”

“We’ve identified ways to save 30 percent of the world’s energy consumption,” Lidow says. “We’ve also identified how to apply this efficient use of energy to enable more and more dense computational and communications products.

“How much we cram into a little laptop or server is running up exponentially the amount of electricity and energy they require and it is therefore very critical that we use it very effectively.”

Diversification
Today, IR has its hands in wide range of technology fields. But that wasn’t always the case. In the mid-1990s, the company relied almost exclusively on one product, a HEXFET, also called a power MOSFET, which is a type of transistor designed to allow for more efficient use of energy in electrical products.

Lidow is one of the inventors of the HEXFET, which he helped design in the late 1970s.

Over the years, it had become IR’s bread and butter. The company had a series of patents on it and ramped up production. By 1995, the power MOSFET had become a commodity, the focus of a multibillion-dollar industry with a field of competitors.

Lidow says he didn’t want IR to get stuck in the groove of producing one item and simply trying to figure out how to do it cheaper than everyone else.

“The challenge I faced was how to take a company that really had a need, a desire, to influence the world’s use of energy, and yet we’re producing commodities,” he said.

The solution, he says, was a strategy called “technology pull.” IR would implement a plan that focused on innovation and bringing new technologies in-house, either through research and development or through outside acquisitions.

It was a complete transformation, Lidow says. Over the past 10 years, IR has tripled the amount it spends on research and development. The company also tripled its revenue over that time, but not everyone was happy.

“There were times when our profits were severely hit by that (decision),” he said. “Our stock was severely hit, and that makes for a lot of unhappy people.”

Lidow says the best way to deal with shareholders is to be upfront with them. He estimates he spends an average of one day per week on the road talking to shareholders to keep those lines of communication open.

“We communicate with our shareholders a lot,” Lidow says. “We get on the road, we have several people, including myself, that talk to analysts and key investors.”

IR seeks out investors who are interested in the company over the long haul, shareholders who are willing to stick it out through the ups and downs of the stock ticker. One of the keys for IR has been finding potential investors who share Lidow’s belief that a business should serve a greater purpose above and beyond its bottom line.

“We like to find investors who are interested in companies that have some kind of social significance,” he says. “That way, we get stable, long-term shareholders who maybe are more understanding — though not much more understanding - than the short-term people.”

Many times, investors seek out companies like IR instead of the other way around, Lidow says. A number of investment firms offer mutual funds that include companies focused on an environmental purpose, such as conserving the world’s energy, and there has been significant growth in many such funds in recent years.

R&D recruiting
Under Lidow, IR’s beating heart has been its research and development wing. It has pumped money into R&D at the expense of its profit margin and has opened 14 design centers around the world.

IR’s ability to stay at the front of its field is heavily dependent on its ability to recruit top talent to its research and development wing, where Lidow got his start as an engineer almost 30 years ago. To do that, the company aggressively recruits the top graduates out of the top engineering programs.

“One thing we try to do with R&D is we tend to go where the talent is rather than try to move all the talent to where we are,” he says.

In California, IR has research and development centers at its corporate headquarters in El Segundo, along with centers in Irvine and Santa Clara. It also has centers in Rhode Island and North Carolina domestically, and countries including Canada, France, Germany, Italy, Denmark, Singapore and China.

The worldwide presence of IR’s research program gives the company a major selling point when recruiting engineering graduates.

“When we recruit somebody, we put them through a two-year training program where we send them on six-month assignments to various parts of our country and the world,” Lidow says. “It’s a pretty exciting gig.”

IR calls it the “Rotation Program,” and it allows recent graduates of master’s and doctorate engineering programs to do half-year stints at IR’s research and development centers, learning about IR’s business and getting a taste of different cultures.

“Usually, when you recruit someone right out of a master’s or Ph.D. program, they are still pretty flexible with regard to moving around,” Lidow says.

By maintaining a worldwide presence and drawing in new innovations for its research and development wing, IR is able to maintain a high profile for its research and development program, which helps in future recruiting efforts.

“With the ‘technology pull’ approach, we have the most tools in the toolbox,” Lidow says. “With us, an R&D person isn’t sitting there, year after year, working on the same project. There is an exciting spectrum of challenges with different tools.”

Supporting and empowering its research and development wing is critical to IR’s success as it competes against industry giants such as Intel.

“I came from an R&D environment, so I know all the R&D people,” Lidow says. “We have about 1,000 of them around the world. It’s visibility, it’s attention, it’s valuing the R&D activity. Another element is people have to think they are achieving something. So when an R&D person works in a company that is at the leading edge of their field as we are, that’s the most exciting place to be.”

Not just an idea
Lidow was beaming after he and his IR colleagues invented the HEXFET. It was 1979, and IR held a big celebration for the product launch.

“We were light years ahead of everybody else, and I was one of the inventors of it,” he says. “I was proud as can be.”

But amid all the hoopla, IR’s then-CEO had some news for him.

“He comes up to me and says, ‘You’ve done too good of a job. You’ve developed a product that is so far ahead of everybody else, all you are going to do now is attract competition.’ And he was right.”

That CEO was Lidow’s father, Eric, the company founder who still serves as chairman.

His father’s comment taught Lidow that having a great idea is only half the battle. Once a business has come up with an industry-changing concept, its leaders must be prepared to become a magnet for competition.

“It’s not just about having an exceptional idea and a whiz-bang product,” Lidow says. “You have to be able to navigate very treacherous competitive waters.

“Too many people think it’s all about that home run idea. Home run ideas are great, but it’s all about navigating through the very complex business world to bring home run ideas to the point where they yield a return for the shareholder.”

Lidow says IR plots its competitive strategy on a case-by-case basis. For the HEXFET, company leaders formulated a plan in 1979 that would help fend off competitive volleys from Japanese companies.

“At that point, the Japanese were coming on really strong in similar fields,” he says. “It involved how to have enough capital to build factories to produce this economically. It involved getting intellectual property rights, and how do you protect them so that others would be faced with paying a high royalty or be kept out of the market?”

The strategy relied heavily on intellectual property rights. Securing intellectual property rights for the HEXFET allowed IR to strike licensing agreements with 18 companies, which today account for about $500 million in annual revenue.

“But there are many facets,” Lidow says. “It’s really situational. Every situation we look at and plot our strategy, and it’s always different.”

HOW TO REACH: International Rectifier Corp., www.irf.com

Wednesday, 17 May 2006 13:06

Reshaping compensation

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The American Jobs Creation Act of 2004 included significant changes in the tax rules regarding deferred compensation. In the past, deferred compensation primarily referred to employees who postponed receiving part of their compensation until a future date and weren’t taxed on the income until it was collected. But the new Code Section 409A, in particular, represents a broad departure from prior law by classifying a host of additional benefits as deferred compensation.

“It is significantly reshaping the way that companies structure and dole out compensation and other benefits to employees and other service providers,” explains Mark Saulino, a tax partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department.

Smart Business spoke with Saulino about why these changes were enacted, how companies should make sure they are in compliance with the new law and the severity of penalties for offenders.

Why were changes made to deferred-compensation laws?
Section 409A was enacted by Congress to prevent perceived abuses by executives and companies in the area of deferred compensation. Deferred-compensation abuses are simply another one in the long list of issues that surfaced as a result of the recent corporate scandals that everyone is all too familiar with. Part of the concern was the perception that there was too much flexibility under prior law to offer benefits to employees and other service providers that had a built-in value today, but were not taxable until a later date.

How should a company determine which plans are subject to the new rules?
Companies really have to be careful about assuming that 409A will not apply to a given situation based on the notion that they’re not doing something that anyone would perceive as ‘abusive.’ 409A is broad in scope and can apply to many arrangements that would fall outside what most people would consider deferred compensation such as stock options, bonus arrangements, severance agreements and expense reimbursement plans.

My advice to companies has been to check for 409A issues whenever the company grants any type of benefit to an employee or another service provider — other than straight wages or salary that are payable at the time that the services are provided. Because the rules are so complicated and voluminous, I think it’s the safest approach until companies become familiar enough with the rules to be sure about what they can and cannot do.

If a company has a deferred-compensation plan with grandfathered benefits, should it amend the old plan or adopt a new one?
There are three requirements that must be met in order for compensation or other benefits to be grandfathered under 409A. Those three requirements are: the arrangement must have been entered into on or before October 3, 2004; the arrangement must not have been materially altered since that date; and the compensation or other benefit under that arrangement must have been earned and vested before January 1, 2005.

Companies that have outstanding arrangements where the benefits are not grandfathered should really consult their tax counsel as to how to best remedy the situation. The ability to terminate a plan that does not comply with 409A generally went by the wayside as of Dec. 31, 2005.

But companies can amend their plans to bring them in compliance with 409A before the end of 2006. Companies should be careful, however, not to take any actions before they consult with their tax counsel because they could create a situation that is more difficult, if not impossible, to fix under the new rules.

Who faces the penalty for noncompliance?
The primary consequences fall on the employee, but employers would really be shortsighted to think that it does not affect them. For one thing, there are reporting and withholding issues for the employer that flow from Section 409A. But those issues really pale in comparison to the concern with avoiding the public relations issues that would flow from saddling one or more critical employees with problems under 409A.

What types of penalties are involved?
The consequences are dire. Service providers face a 20 percent tax on any benefits that do not comply with Section 409A’s requirements for deferred compensation. This is in addition to the regular income taxes that are payable on those benefits. This means that some taxpayers will pay income tax at a rate of more than 60 percent on any benefits that are subject to 409A.

There are also possible interest charges that can be imposed on the benefits. At this point, it is not entirely clear how the additional tax and interest charges will apply in certain contexts — they’re still working on that and we’re waiting for guidance — but suffice it to say that the consequences are pretty severe.

MARK SAULINO is a tax partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department. Reach him at msaulino@agsk.com.

Wednesday, 17 May 2006 12:45

Industrial Development Bonds

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With rates that are 65 percent to 75 percent of conventional interest rates, Industrial Development Bonds can be a boon for qualifying companies. Providing up to $10 million in low-cost, tax-exempt financing for manufacturers and processors, this type of financing is not for all companies. The typical qualifying company has been in existence for at least five years, has a positive earnings history and annual sales of at least $10 million, with the ability to repay the bonds from existing cash flow.

Before bonds can be issued, a company must demonstrate creditworthiness. This is where lenders come into play.

“The role that the bank plays is actually simple. We provide the credit enhancement. We also handhold the customers through the entire process,” says Rick Arcaro, vice president of middle market lending at Comerica Bank.

In order for Industrial Development Bonds to be viable, a lender must be in the mix to provide a letter of credit that guarantees the funds. The investors who purchase the bonds are not as interested in who’s using the proceeds as in the credit of the bank that is providing the underlying support. In addition, IDBs must also meet state and federal requirements to qualify for tax-exempt status.

Smart Business spoke with Arcaro about how Industrial Development Bonds can be utilized, how lenders help with creditworthiness, and how a company should proceed if they are interested in pursuing this type of financing option.

What types of businesses can use Industrial Development Bonds?
At its core, it is a low-interest financing option that is specifically for manufacturing and processing companies. In order for a company to really benefit from an Industrial Development Bond, the financing needs to be more than $3 million. It’s underwritten just like a loan would be; as such the company has to be profitable and a good credit risk.

How can the funds be used?
The Industrial Development Bonds generate proceeds that can be used for acquisition of owner occupied real estate, company expansion, or for the purchase of equipment or machinery. Typically, the funds are used for buying a building and purchasing new equipment for the building.

What are some of the benefits of Industrial Development Bonds over other types of financing options?
From a cash-flow perspective, you may see a savings of 15 percent to 40 percent over conventional financing with Industrial Development Bonds. From 1982 through 2003 bonds were issued at an overall average interest rate of 2.6 percent lower than the average prime rate for the same period. This form of financing will benefit a company with lower interest cost and ultimately lower monthly payments.

What role does the lender play in helping companies obtain Industrial Development Bonds?
Before a bond can be issued, the company must be creditworthy. The bank-provided letter of credit ensures that the bondholders will get their money. We’ve provided credit enhancements for many different companies within the manufacturing and processing industries. What we’ve found in the marketplace is that there are very few banks supporting Industrial Development Bonds because they are time consuming. There is a six-month average time frame from application submission to closing of the bond issue for land and building projects. Make no mistake, there is a fair amount of work that goes into these transactions. However, the savings will benefit most businesses for many years to come.

In addition to the lender, who else is involved with the process?
Most companies use a third-party advisor to quarterback the proceedings. The advisor assists in the handling of the application with the state and federal governments, while at the same time manages actual bond issuance processes. There’s also bond counsel, the bank’s attorney and the customer’s attorney. There are a lot of moving parts involved.

How should a company proceed if they are interested in applying for an Industrial Development Bond?
Typically at a minimum, banks request three fiscal year-end statements, and personal financial statements of the business owners. Also, a “sources and uses summary” to show what the financing will be used for. The summary would include cost of the building with a break out of land versus construction, new equipment purchases and other expenses that would impact the customer’s project. In addition the bank would require projections to show the future cash flow of the completed project. An evaluation is completed prior to starting the process with Industrial Development Bonds financing to make sure that it makes sense financially.

RICK ARCARO is vice president of middle market lending at Comerica Bank. Reach him at (213) 486-6239 or rarcaro@comerica.com.

Wednesday, 03 May 2006 05:38

Beware brain aneurysms

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The UCLA Medical Center lays claim to pioneering the way that brain aneurysms are treated. Developed by a former faculty member about 15 years ago, the Guglielmi Detachable Coil (GDC coil) is now a standard alternative or supplement to neurosurgery for treating brain aneurysms.

“Coils have dramatically altered the landscape for treating aneurysms,” says Dr. Gary Duckwiler, professor of interventional neuroradiology at UCLA Medical Center. “In the United States, we now have about 50 percent of the aneurysms being treated by coiling, whereas this treatment didn’t even exist before 1990.”

Smart Business spoke with Duckwiler about the risk factors associated with brain aneurysms, how they are treated, and what some of the advantages of using GDC coils are.

What are some of the risk factors associated with brain aneurysms?
There are some hereditary associations with aneurysms, but for the vast majority there is no significant family history. If you do have a history in your family of two close relatives having an aneurysm, then we recommend screening for aneurysms, because you definitely have an increased risk. There is a possibility that the creation and rupture of an aneurysm may be associated with smoking and high blood pressure. If you can stop smoking and control blood pressure, it may reduce your risk.

When a brain aneurysm ruptures, what are some of the physical signs?
People typically describe the abrupt onset of a very severe headache. Typically, on a scale of 0 to 10, they describe it as a 15. It is often described as a thunderclap headache: fine one second and the next second it is blinding. Even if the headache is not as severe as that — in other words, a minor hemorrhage — people typically describe it as something that they’ve never felt before. Sometimes with a severe hemorrhage there may be an associated loss of consciousness.

What is the primary focus of treatment when an aneurysm occurs?
First, we need to stabilize the patient, so it’s a 911 call. Once the patient is stabilized from a medical standpoint, we address the treatment of the aneurysm. There is a very high likelihood that the aneurysm will rupture again shortly after the original rupture, so we consider it an emergency and treat the aneurysm as soon as possible using either surgery or the coil technique.

How have advances in coil technology changed the way that aneurysms are treated?
The first detachable coils for use in brain aneurysms were developed here at UCLA in the late ‘80s and early ‘90s by Dr. Guido Guglielmi. They are small, very thin, platinum coils, so they’re very soft and very dense on the X-rays. In many European countries, aneurysm coiling has replaced surgery with about 70 percent of the aneurysms being treated by coiling and only 30 percent by surgery.

What are some of the advantages of using GDC coils versus surgery?
The coil procedure itself is minimally invasive. We use a needle and do our treatment within the blood vessel system, so all that is left at the end of the procedure is a Band-Aid over the area of the entry, not too dissimilar from an intravenous line. The minimally-invasive nature of this procedure really shortens recovery time.

In addition, some aneurysms lie very deep within the brain and are very difficult to approach surgically. Because we’re navigating within the blood vessel system, we can access nearly any vessel that harbors an aneurysm. That being said, for many aneurysms, surgery is still the preferred method of treatment.

Here at UCLA, we’re lucky enough to have superb services both in neurosurgery and interventional, with the most appropriate option being offered to the patient.

In the future, what other innovations do you expect to see in the treatment of aneurysms?
Since the first detachable coils, many innovations have occurred, such as changes to the shape of the coil. When it’s placed into the catheter, it’s straight. As it comes out of the catheter, it takes its predefined shape. The different diameters and shapes of the coil are utilized to fill the aneurysm to the best degree.

Also, shunts and liquid agents can help in some of the larger, giant aneurysms that we now have difficulty treating.

Finally, we’re involved with research, looking at blood flow in the artery and aneurysm. An aneurysm develops because there is an underlying weakness in the wall and also because the blood flowing against that weak area causes the aneurysm to expand. We are doing research into altering that flow so that the impact on the wall of the aneurysm is diminished, and thus the risk of growth and rupture is reduced.

GARY DUCKWILER is a professor of interventional neuroradiology at UCLA Medical Center. For more information, reach the UCLA Medical Center at (310) 264-7113.

Monday, 01 May 2006 09:37

Easing the pain

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Most people don’t incorporate dying into their business plans. Nor do they plan on key personnel suddenly passing away. But in case tragedy does strike, it is important to have a safety net in place. Both key-person insurance and buy-sell agreements help ensure that a business continues to hum smoothly after losing a partner or key employee.

Randy Donsky, a financial and business planner with Sander A. Kessler & Associates Inc., believes that businesses can benefit greatly from having these safeguards in place.

“Key-person insurance is to indemnify and minimize interruptions to a company’s cash flow if a key person dies,” he says. “The buy-sell agreement is very important, because it establishes continuity and sets the value of a company with minimal distractions.”

Smart Business spoke with Donsky about the importance of having key-person insurance, who should be covered, and how buy-sell agreements should be valued and funded.

What is key-person insurance and how does it work?
It’s an insurance policy that is going to protect the business from the death of a key employee. The proceeds from a life insurance policy go into the company’s till, and they use that money to indemnify themselves against the loss of the sales or the revenue generated by that key person. The monies can also be used to provide the capital to fund a search for the replacement. This includes using a headhunting firm or putting an ad in the paper. It’s really a two-pronged purpose.

Why is it so important for a business to have key-person insurance in place?
If you have a key person who is the rainmaker for the revenues of the company, the loss of that person could have a severely detrimental affect on the cash flow. Let’s say that you have a person who is really good at bringing in business and another person who is good at operations. Without one, the other is not as strong. If you lose the rainmaker, the person inside won’t have a way to bring in new sales and vice versa.

How should a business determine who should be covered?
They should review how important a person’s function is. Without that person, how would it affect the company and how quickly could they replace that person? Would that person not being there have an adverse affect on the company’s ongoing success? If the answer is yes, then a policy would be warranted. Typically, these policies cover senior management, but it could be a senior sales person or technology person. The policy should cover up to ten times the salary of the key person.

What is the purpose of a buy-sell agreement?
A buy-sell agreement is a document between business owners or partners that obligates a buyer and seller and sets the price of the transaction that is going to occur. In other words, if you and I are in business together and something happens to me, it obligates you to buy my shares from my estate and it obligates my family to sell to you. It’s a very, very important document. It puts everything in writing, and it minimizes areas of disputes and distractions that come along with the loss of a partner.

How is value established with a buy-sell agreement?
A business can have an appraisal done by a third party, or through that third party it can identify a formula like a percent of sales or revenues or income. That formula is made part of the buy-sell agreement so it is an ongoing, moving target. Sometimes parties will agree on a price that is good for 12 months. Then they revisit the issue and establish a new price, which is good for another 12 months, so the process is ongoing.

How are buy-sell agreements funded?
Having just a buy-sell agreement without a funding source is not a good thing. You must have a funding vehicle, and that is typically done through a life insurance contract. An entity purchase is where the corporation would be the buyer of the policy and it would buy the shares from the deceased family’s estate and retire those shares. A cross-purchase is where both partners take policies on each other’s lives.

RANDY DONSKY is a financial and business planner with Sander A. Kessler & Associates Inc., a property and casualty insurance and employee benefits firm. Reach him at (310) 309-2233 or rdonsky@sanderkessler.com.

Sunday, 30 April 2006 20:00

Need money for exports?

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The Export-Import Bank’s Working Capital Guarantee Program provides a number of financing options designed to meet the needs of U.S. exporters. The program guarantees 90 percent of the principal and interest on loans extended by commercial lenders, and the loan amount may be used for a variety of purposes related to exporting goods.

Pete Knudson, senior vice president at Comerica Bank — one of the lenders that offers this program — says that obtaining financing for exports can be a dicey proposition.

“Most banks and financial institutions do not typically accept foreign accounts receivable as collateral, nor do they accept export orders as evidence of orders for goods to be purchased and/or manufactured or services to be provided,” he explains. “This really makes the Working Capital Program beneficial, particularly for small to mid-sized companies.”

Smart Business spoke with Knudson about how a new Fast Track program can be beneficial for companies in need of rapid funding, eligibility requirements for the program, and why the U.S. government is aiming to level the playing field in the competitive world of exports.

What is the Fast Track program, and how can a business secure this type of funding?

The Fast Track program was introduced at the end of last year. We are one of only eight lenders in the United States — six are commercial banks and the other two are finance companies — that offer this service. It provides a quick and easy process for credit facilities in excess of $10 million and up to $25 million. The company must have a domestic credit facility with the financing institution of at least $5 million and a positive tangible net worth. If there is a personal ownership level of at least 20 percent, then that personal ownership must be supported by a personal guarantee.

Who is eligible for the program?

Eligibility is specifically for companies that are located in the U.S. It can be a foreign company, but the location must be in the U.S. It must have a one-year operating history, and must have a positive net worth. Financial statements are required. The U.S. government provides us with a 90 percent guarantee, so we need to examine the creditworthiness of the companies.

It depends on the size of the transaction and the size of the company as to whether the statements are prepared by the company or a CPA.

What are some common reasons for claim denials?

The most common reason for claim denials would be missing a claim filing deadline. Other reasons include changing material terms with the exporter without the Export-Import Bank’s approval, non-notification of any events of default, and no collateral security filings. Another critical one would be nonpayment of the Ex-Im fees.

Once the financing has been approved, what can the funds be used for?

The funds are used to purchase finished product for export. They can be used for payment of raw materials, equipment, supplies, labor and overhead used to produce goods and/or provide services for the export. They can cover standby letters of credit that serve as bid bonds, performance bonds or any type of payment guarantee. Also, they can be used to finance foreign receivables.

What are some advantages of the Export-Import Bank’s guarantee program over other types of credit programs?

Typically, it is done with a fee structure that gives it an advantage over private commercial insurance programs. Also, it is a guarantee — which is quite a bit different than insurance. Insurance tends to provide support against named perils, whereas a guarantee from the U.S. government covers all events and not just named perils.

How important is this program for American exporters to be able to compete globally?

Much of the eligible collateral would not be acceptable to a lending institution. Therefore, having the U.S. government provide a 90 percent guarantee can either make or break the financing requirement for the individual exporting company.

Many foreign competitors are also provided support by their individual governments, whether they are in the U.K., France, Germany or Japan. These countries all have institutions that provide governmental support to their exporters.

This program is an attempt by the U.S. government to level the playing field and allow our companies to compete with companies that are located in other countries.

PETE KNUDSON is senior vice president at Comerica Bank. Reach him at (310) 297-2849 or peter_knudson@comerica.com.

Friday, 28 April 2006 11:48

The Newman file

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Born: 1934, Yonkers, N.Y.

Education: Bachelor of science degree, civil engineering, Bucknell University; master’s degree, civil engineering, Columbia University; graduate, Executive Management Program, University of California, Los Angeles

First job: Library page in high school

What is the greatest business lesson you’ve learned?

Financial discipline is very important. Somebody once told me it’s OK to make mistakes as long as they’re not fatal ones.

But a successful company does not put profits above all else. Whether you’re in a service business or making widgets, public or private, the object must be to create value for clients and employees.

What is the most difficult challenge you’ve faced?
AECOM started out owing a great deal of money to various creditors. I knew we had to get it right, right from the beginning.

What’s the best advice you ever got?
If you have a problem, spend as much time thinking about how you got into it as on how to fix it, and develop a process so you only fix it once.

Whom do you admire most in business and why?
My father was a self-made man, a banker, who taught me about integrity. I got my discipline and work ethic from him.

My father-in-law was in the import-export business and a real entrepreneur. I learned management skills from him.

Al Dorman, CEO of DMJM when I joined them and later our first chairman of AECOM, insisted on finding the process for precluding future problems as well as solving current ones.

I’ve been inspired by the way CEO Steve Baum at Semper Energy leads, taking time to build vision, consensus and excitement, and by Jonathan Lovelace Jr., chairman emeritus of the Capital Group of asset management companies. He has a philosophy that every employee is an associate and that it’s better to be a small part of a winning team than a superstar on a losing one. All these people have been my role models and mentors.