Letter to Hank Rowan
On 22 July 1985 I signed an agreement with Machinoimport to close the old contract in a manner which satisfies Consarc U. K., the British Insurer and the Department of Trade and Industry. The monies received plus removal of known and reserved liabilities are in the order of $200,000. The Soviet Buyers had been demanding a payment of about $600,000 to settle their internal costs including inbound freight charges. The end user was claiming major costs without anything he could use and on that basis refused to release the funds to the Buyers.
The only way to settle this complex problem was to agree to continue to sell materials and services to make the equipment useful for some purpose as allowed by the Export Laws. The signing of additional service or material contracts by Consarc Engineering Limited could be seen by the Insurer as Income Derived and therefore refundable.
The only open solution was to sign a service contract using a company name which was not owned by Consarc Engineering Limited. Strict Soviet regulations do not allow contracts which show payments to our personnel in excess of $1000/week. The way around this was to sign a supply contract in the same or another company name with enough excess profit to cover the shortfall of the service contract. This was signed with a verbal agreement that it could be transferred to another company.
The legal name used for this transaction was BEPA Limited, 7A Avon Street, Motherwell, Scotland, with a current capital of $10. The company is presently wholly owned by a trust outside my control. I am, however, its sole attorney.
In order to maintain the reputation of Consarc, Inductotherm, or any of its companies in the USSR market it is necessary to not default in any contract. Since the American and British Governments do not preclude the continuation of items already delivered, our only out was to force the use of Clause 10 of the contract and pay the damages specified in the contract. This route would also put our companies on the blacklist since the Buyers know that our Governments do not prevent our companies from continuing to supply services and materials which are within our Regulations.
I have a "Hot Potato" which needs to be fully understood by all. The ownership of the company BEPA, its location, and its duties must be quickly defined.
I could find no other solution to match the situation - would appreciate your comments and directions for future actions. Best regards,
Rancocas New Jersey
August 6, 1985
James F Metcalf
Your communications of July 30 and 31 worry me in that I am not sure that either you know or we know where we are going, where you intend taking Consarc and Calcarb, or whether indeed the Russians are making you dance to their tune.
I am upset by the fact that they received some $7 or $8 million worth of equipment absolutely free, that they have no intention of paying for it, and yet because of embargoes by our governments we seem to be the bad guys. The tone of your letter worries me because it is hard to determine your intent. There would seem to be commitments already beyond the acquiesce of the Board of Directors and one can speculate between the lines as to what the real intent of all this may be. I sincerely hope I am wrong.
To address a couple of issues, I cannot agree that the short range possibilities for Calcarb are bleak or that activity in developing hot zones with the Russians would change Calcarb's short range possibilities. If the Russians would like to buy some Calcarb we would be glad to sell it to them, but the Government approval for the startup of the furnaces does not include instructions and in fact it is my impression that we would be specifically out of trust with our Government if we instruct the Russians in the use of the equipment that we just furnished, including instructing them in the use of Calcarb insulation. It seems to me that all Calcarb needs is a good hefty sales effort to capture a couple million dollars a year worth of business at a high profit margin that you originally projected and it would be a very healthy company. Why we are slow or late on replacing some rejected material is hard for me to understand, particularly with someone of your talents and capability on hand.
We are looking forward to your visit during the week of August 19. At that time it would be well to go over your specific written business plan outlining exactly what we intend to do both in Russia and for the Russians, what we intend to do in terms of the sales of additional nonrestricted equipment available from Inductotherm Industries group, and how Consarc might be compensated for this effort. It is also important to study a business plan for Calcarb and what steps we should take to eliminate the bleak short range possibilities.
I hope you can furnish the Directors with these various written business scenarios so we can study them ahead of the meeting during the week of August 19 and make some appropriate and reasonable decisions.
You have been a very important part of the Consarc team and we need your input as to the direction that these endeavors should take.
I will look forward to seeing you on the 19th.
Yours very truly.
H. M. Rowan
To: Inductotherm International
In reply to your letter of 6 August 1985.
The intent is as honorable as it has been for the past 18 years. The bold steps taken were to achieve an end result. The actual acts of signing the BEPA contracts were not premeditated and no concrete plans have been made to accomplish these contracts. The path used to accomplish the task will be one that fits your principles of business.
Let us find the positive side of this situation. We must be determined to satisfy this customer, if allowed by law, if we wish to take advantage of a reputation already established. With respect to "out of trust" with our Government, we must assume the responsibility to know and obey the law with respect to export regulations including any instructions or teachings on how to produce a commodity or in the end use of the equipment. The report to the Department of Commerce was open, complete and factual. The statement that we would not teach or instruct is ours. The people we will have in the field will learn about insulation of this furnace since a major test program with proper instruments will be undertaken. The costs of such a detailed program of tests means that it will never be completed by Calcarb in Bellshill.
We will learn a great deal more from the Soviets than they learn from us. It is this data and additional funds to Calcarb that improves its short range possibilities. Enough funds have already been found in this situation to allow us to complete the building task in Bellshill if we time the completion under present RDG Grants.
We are not dancing to the tune of the Soviets but rather taking the only road open to us. At the time of the embargo the customer took the position that a "contract is a contract" and that we should do all possible, including political pressure on the British Government, to complete the contract as signed.
To be brutally honest the management of the company was extremely satisfied with the outcome of the embargo in that they knew full well that technical problems remained with the furnaces. The Isopress presented a maze of complexities for which we did not have solutions. It seemed that the foregoing of the future USSR market seemed less of a penalty than facing the technical tasks ahead of us.
At this time approval to install the shipped equipment was received from the Government. The BEPA idea was set in action.
In order to find a satisfactory conclusion to the existing contract we were required to do what we had told them we would do:
1. The spare parts were used to settle their internal needs through a no charge contract number 50-0166/53466 to a price value of 397,653 pounds. This contract requires no payment or shipping documents. Since it is for their internal purposes, shipment is covered by the agreement.
2. The agreement closes the contract, by using the spares in settling their books and allowing them to pay us 25,098 pounds for previous sums not insured. It also passes title and removes future liabilities. The Buying House records are clear and we again are good guys.
3. The service contract (BEPA) and its amendment separates previous shipments from future services and has partial income for services.
4. The parts order is their list without our input and is priced to recover some losses on the previous situation and the service contract.
5. We offered to respond to their enquiry for additional equipment not covered by Export regulations (to allow them to spend funds already set aside). Inquiries have been received.
Operate BEPA without employees. This Company should be full arms length without any legal or fiscal ties to Inductotherm Industries to complete the task of satisfying the existing situation. Third parties are to complete items outside the interests of Consarc or Calcarb. No financial gain or loss is to be experienced by BEPA.
Accounting will be by Consarc Engineering. This situation may exist for one year due to the problems of completing a task which was not finished and is not yet defined by the end user. As soon as protocol can be signed this concept will terminate. This firm is to have full authority and responsibility for its acts and is to keep the Consarc Board informed of the situation.
All contracts that fit Consarc or Calcarb will be directly assigned to them.
Look into the costs and market potential of establishing a trading office in Moscow. If they allow purchase of private quarters this will reduce the costs and improve our ability to sell in the market. A reasonable office and living quarters in the Soviet Trade Center would cost $70,000/year.
A full report will be made to the Board by 15 October 1985.