It is too bad," says a man who knows him well, "that Gary Zintgraff's idols are Jimmy Ling and J. R. Ewing."
Zintgraff, the chief executive officer of Chemical Investors Inc., does admire James J. Ling, the upstart Oklahoma native who opened his first business, a Dallas electrical contracting company, with $2,000in 1947. By 1969 Ling had parlayed his grubstake into control of Ling-Temco-Vought Inc., the country's 14th largest corporation, a conglomerate with $3.75 billion in sales. Zintgraff has studied Ling's biographies, analyzed his financial strategies, and made a pilgrimage to Dallas to meet the master. "Thirteen years after Ling completed his first public offering," says Zintgraff, "he put LTV onto the Fortune 500. On February 15, 1978, when Chemical Investors went public, I started my own 13-year clock."
To date, Zintgraff is keeping to the schedule. In 1982, just six years after he founded Chemical Investors with about $15,000 of his own money and $200,000 from other investors, the company ranked No. 9 on the INC. 100 list of the fastest-growing public companies, a distinction not available during Ling's time. It stayed near the top at No. 18 this year, with sales that reached nearly $40 million and a compound annual growth rate of 142%.
But former insiders say that CI's spectacular growth diverts attention from serious problems in the company's development. They point to the fact that in seven years Chemical Investors has never reported a profit from operations and that none of its subsidiaries has achieved prominence in its market. CI's growth has come not from sales but from an aggressive acquisition strategy that Zintgraff could have taken they say, that Zintgraff's management style has prevented him from consolidating his gains. "Gary thinks managing a business is acting like J. R. Ewing," says J Wood, one of numerous managers and executives who have been charmed, then disillusioned, and finally driven off -- or, in several cases, fired -- by the man most of them consider brilliant but flawed.
The Jim Ling in him has allowed Zintgraff, a displaced Texan, to create a company whose growth rate any ambitious CEO could envy. But the J. R. Ewing in him has driven off the kinds of people who might save him from his own excesses, if indeed he needs saving. With Zintgraff you just can't be sure. He is both more and less than the classic model of the hard-bitten entrepreneur.
Born and reared in San Antonio, Zintgraff wears snakeskin cowboy boots and a Stetson hat with his three-piece, pinstriped suits. After four years in the Navy, his chemical engineering degree got him a job with Eli Lilly & Co., the pharmaceutical giant whose laboratories are in Indianapolis.
Lilly, people say, is a staid corporation, where advanced academic degrees and patience are rewarded by steady progress up the technical-management ladder. Zintgraff claims neither of those assets. While he was at Lilly, however, Zintgraff noted that although big pharmaceutical companies like to make things in big, production quantities, many of the ingredients they use are needed only in small amounts. He thought about starting a company that could produce and supply these low-volume, high-margin pharmaceutical intermediates to the majors.
It was the Walter Browne chess game, Zintgraff says, that persuaded him to make the entrepreneurial leap. In 1975, Browne was rated among the eight top chess players in the country. He came to Indianapolis to take on the Eli Lilly Chess Club, where he played, according to Zintgraff, 75 simultaneous games against as many opponents. He won 74 of them. Zintgraff beat him, the only American to do so that year. "Winning that game," Zintgraff says, "gave me a little extra confidence, enough to go out on my own." He still has Xerox copies of the score sheet from that game, with Walter Browne's signature at the bottom acknowledging his resignation on the 31st move.
The chess-match story is no trivial anecdote. Zintgraff takes his games very seriously. At home he keeps a cabinet full of commercially produced war games and some that he has created himself. He subscribes to war-game magazines. He has books depicting and dissecting the strategies used in every major military battle, ancient and modern.
"I love to compete. I really do," Zintgraff says and the ultimate competition, the game with the highest stakes, is business. "I like the analysis -- analyzing where we are as a company, what other People are doing . . . I'm willing to try some new things in business, things that are new to me. That's exciting. That's what gets you in there early in the morning, on the weekends, and at night. That's what you think about all the time . . . I like it. That's fun. That is fun."
Accordingly, whatever his original investors may have thought back in 1976, Zintgraff evidently did not have in mind the slow, laborious building of a single company that would, God willing, one day achieve singular excellence in the narrow market for pharmaceutical intermediates. His first act was to incorporate the holding company, Chemical Investors Inc. Incorporation of the operating company, Custom Chemical Laboratories Inc., followed. Then, in rapid succession, he created a second subsidiary, Liquid Crystal Dynamics Inc., and an independent company, Specialty Chemicals Inc. He decided to sell Chemical Investors stock to the public before any of its subsidiaries had completed their first year of business.
"We decided at the beginning," Zintgraff says of himself and his first-round investors, "that to do things right was going to require more money than we had. We decided we would sell stock." No underwriter would touch the issue, of course, because in 1976 CI was a newly formed holding company with subsidiaries that themselves had no significant operating history. So Zintgraff managed the sale himself.
Operating under Indiana securities law, which allows such efforts within the state's borders, Zintgraff recruited and trained a sales force of nearly 450 farmers, housewives, retirees, and others attracted by the 6% commission he offered. He remembered that Ling had peddled stock in his first company from a booth at the Texas State Fair, so he did the same in Indianapolis, even though, he recalls, "the only space we could get was in front of the swine barn."
Altogether, Zintgraff sold Indiana investors 450,000 shares of Chemical Investors stock at $10 each. One immediate result of the offering was to make him, his wife, and his children paper millionaires before the company ever earned its first dollar. The 31% share of CI stock they had purchased for $15,000 in 1976 had a new book value of nearly $1.25 million.
The stock offering, however, stretched over more than a year. In the meantime, Zintgraff stayed busy doing deals that didn't require much money. He started Liquid Crystal Dynamics to market promotional plaques. The custom plaques were made up with a corporate or organizational logo encircled by microencapsulated liquid crystals that change color as room temperatures vary. The new company, Zintgraff told his board, would give Custom Chemical an entree into the technology of microencapsulation.
He also created a new division at Custom Chemical, the Veterinary Science Division, by purchasing the distressed inventory of an ailing distributor of veterinary supplies.
The rationale behind both ventures was to generate cash flow while Custom Chemical went about the time-consuming process of developing sophisticated pharmaceutical products and cultivating the technical respectability it would need to establish a sales relationship with major drug-makers. This was the same rationale Zintgraff cited when he started Specialty Chemicals Inc.
Zintgraff knew that large corporations, especially when they are government contractors, frequently look for minority vendors to help them meet minority purchasing goals established by law and by their government contracts. A chemical wholesaler owned and managed by minorities, Zintgraff reasoned, would have a competitive advantage over a mainstream business. So he gathered together a group of blacks, Chinese, and Puerto Ricans willing to make a small investment in exchange for 51% of the equity in a new company called Specialty Chemicals. For $553, according to CI's 1979 annual report, Chemical Investors bought the remaining 49% of the stock. The bulk of Specialty's thin capitalization was in loans from CI.
Specialty was virtually a shell. It owned no assets. It was also, to use the word of a current CI vice-president, a front. It was, in effect, the sales force for Custom Chemical. As president, Zintgraff installed a Puerto Rican woman who knew, as Bill Mays puts it, "as much about chemicals as I know about Shakespearean drama."
Mays, a black manager who had been with Cummins Engine Co. in Columbus, Ind., succeeded Specialty's first president in 1977. "The company had an asset base of a couple of thousand dollars," Mays says. "It didn't even own my secretary's typewriter or the desk I sat at."
Mays boosted Specialty's sales to $2.3 million in 1978 and $4.9 million in 1979, when it earned a little more than $100,000, but disputes between Mays and Zintgraff began almost immediately and quickly escalated.
Specialty shared warehouse and office space with the other CI enterprises, and Mays claims that his company paid most of the bills -- rent, utilities, and other overhead. Specialty also paid a management fee, $70,000 in 1978, to CI. "Zintgraff had pumped thousands of dollars into equipment for Custom Chemical," Mays says, "and it still couldn't produce a pan of boiling water. Liquid Crystal Dynamics was a joke. CI was holding Specialty Chemicals back." Mays persuaded his board to let him move Specialty to another site, removed from Zintgraff's daily presence.
Zintgraff says Mays was not a team player. "He tried to take Specialty away from us . . . CI had invested heavily in Specialty, which gave us the same type of control any secured lender would have. You don't tell your banker that what you're doing with his money is none of his business."
When Zintgraff tried to place a third white director on Specialty's five-member board in 1980, removing even the appearance of minority control, Mays resigned and started his own competing company. Specialty's sales and profits never recovered. Later Mays offered to buy Specialty. Zintgraff turned him down, but one year and two presidents later he sold the business for less than Mays had offered. The sales of Mays's own Indianapolis chemical distribution company, which carries his name, have grown to $1 million a month.
In May 1979, Zintgraff almost lost Chemical Investors itself. A disenchanted board of directors summoned him to a special meeting, had the locks changed on his office door, and fired him. In August, after a drawn-out power struggle, Zintgraff regained control and ousted his ousters, two retired Eli Lilly executives. "They treated me like I was still a junior bench chemist at Lilly," Zintgraff says.
Zintgraff reorganized the board, which currently consists of himself; his wife, Carolyn; his best friend and corporate attorney; a CI vice-president; and one outsider. The old board, Zintgraff says, didn't understand how an entrepreneur on a fast track has to work. Jim Burnette, CI's controller at the time, says that was part of it. "But the number one thing was, the company just wasn't getting off square one. The board had lived with Gary since 1977. They'd heard all his stories, and they weren't believing them anymore."
At the end of 1979, Chemical Investors hardly looked like a fast-growth company. In fact, it was barely a company. The sales of Liquid Crystal Dynamics were virtually nil. And the custom pharmaceutical intermediate business that Zintgraff had promised still didn't exist. CI's 1979 annual report shows that total sales for the year were $54,000, in contrast to operating expenses of $386,000. Only the interest collected on the capital raised in the public offering and CI's share of Specialty Chemicals' earnings allowed the holding company to report a small profit. Nearly $3 million of the $4 million raised at the stock offering still sat in the bank or in interest-bearing securities. The balance sheet showed less than $250,000 invested in hard assets.
Zintgraff at that point did what Jim Ling would have done. He began looking for an acquisition. What happened next is fairly quickly summarized. Within three years, Chemical Investors became a $40 million company.
In September 1980, CI bought Borden Inc.'s Mystik Tape division in Northfield, Ill. for $15.7 million -- $1 million in cash, the rest in notes to Borden and floating rate loans from a commercial lender. In January 1982, CI rounded out Mystik's line of consumer and industrial tapes by paying $7.5 million, all of it borrowed, for DAP Inc.'s mothballed Arno tape plant in Michigan City, Ind.
"Mystik, for us," Zintgraff says, "was all the right things. It was that big flywheel that would put Chemical Investors on the map. . . . Here was something doing $30 million. It was a chance to change the whole company's image."
One part of the image that changed quickly was its debt-to-equity ratio, which jumped from 0 to 4.5-to-1 immediately and to more than 8-to-1 by the end of the following year, 1981. At the time Chemical Investors bought it, Mystik was losing money at the rate of $1 million a year. Some $680,000 in cost reductions, according to Zintgraff, let the plant turn an operating profit during the first full year of CI's ownership. But interest charges on the borrowed capital and losses from CI's other subsidiaries resulted in CI's reporting a $1.4 million loss in 1981. Shareholders' equity dropped to $1.6 million, not a very plump cushion.
The Arno plant that Chemical Investors bought in January 1982 and incorporated within its Mystik subsidiary had been closed for nearly a year. Its principal product was duct tape, and much of its market had already been lost to other suppliers. The best efforts of CI's sales force produced only $8 million in revenue from the Arno plant in its first year under CI management, down from its $30 million peak a few years earlier.
Although the Arno addition increased overall sales at Mystik from 1981 levels, Mystik still failed to show a profit for its new parent, and CI's bottom line for the year was, once again, negative. A major inventory discrepancy at the Mystik plant delayed the audited 1982 year-end figures, but any loss was more than CI could stand. Its payments to suppliers were already more than 60 days in arrears. Zintgraff had reduced inventories and stretched payables at all the other CI subsidiaries. But those efforts weren't enough to keep the company liquid. In February 1983, CI ran out of cash and missed a payment to one of its lenders. The next month Zintgraff had to ask for a restructuring of CI's debt, submit a new business plan to his lenders, and begin a drastic progam of cost-cutting and plant consolidation.
"Nobody," says Zintgraff in explaining CI's losses, "could have predicted that interest rates would go as high as they did. Not to mention the fact that we've been through the worst two-year recession I've ever seen in my lifetime."
Not even his most severe critics fault Zintgraff on his acquisition strategy. The leveraged buyout of Mystik was "audacious. I give Gary nothing but credit," says John Darrah, who helped Zintgraff plan and execute the Mystik deal. But any discussion of Zintgraff with many of the executives who worked closely with him, and with some of the people who still do, inevitably arrives at the same point. "He's a brilliant strategist," says Bill Mays, the former Specialty Chemicals president, "and he can put together wonderful deals. But Gary Zintgraff can't run anything."
It is hard to say precisely how many people have come to work for Zintgraff at Chemical Investors and have either been fired or left in frustration. In its first two years, according to one former CI executive, 32 people had come and gone at the young company. The toll among senior executives has been especially high. Specialty Chemicals alone had four presidents in less than four years. With one exception, the senior managers at Mystik who decided to come with the company when Zintgraff bought it have left, voluntarily or otherwise. Custom Chemical Laboratories has had more than four chief operating officers. Controllers usually don't last more than a year; one at Mystik stayed just four days. Not one executive or director who started with CI seven years ago remains with the corporation today.
Zintgraff in fact, appears to handle people with little more sensitivity than he applies to the make-believe armies he manipulates on the board games he plays. During a drive from Indianapolis to Michigan City he explained, for example, that part of the cost-cutting plan for Mystik included moving many of the staff functions from the Illinois plant to the Arno plant in Indiana. That move would take place, he said, on April 11, just three weeks off. But he had only just bothered to tell the people about their move, people who had homes to sell and children in school. He mentioned a relocation assistance plan as if one existed. The manager in charge claimed it didn't. "You want to know why the senior people around here look so glum?" asked one CI executive that morning. "It's because they've got to sit down with Gary this afternoon and explain what's going to happen if he tries to move all these people at once with no warning. He'll be furious."
"I wish," says Robert Campbell, CI's vice-president for operations, "that Gary would do the things he does well -- the finance, buying companies, generating ideas and strategies -- and let me run the company."
Zintgraff does have ideas he is working on, and he talks much more eagerly about them than about gross margins on tape sales, new products in veterinary supplies, or relocation-assistance plans.
Zintgraff says, for example, that he is pondering the possibility of selling $20 million in preferred stock and convertible debentures. He could, he thinks, use $2.8 million of the money raised to repurchase a $4.3 million note held by DAP. "On a discounted cash-flow basis," Zintgraff says, "that's what the note is worth to them." The difference, $1.5 million, would, just as in a scheme Jim Ling worked years ago, show up as income.
Also, Zintgraff says he could improve CI's earnings per share (assuming there are some earnings) by permitting existing shareholders to use their stock to purchase units in the new offering, thereby reducing the amount of common stock outstanding. The axiom here is: The next best thing to a larger numerator is a smaller denominator.
Zintgraff also talks about setting up the old corporate shell of Specialty Chemicals, the erstwhile minority wholesaler, as a financial planning group. CI could then pay Specialty fees out of the money raised through the offering, which would flow back to Cheraical Investors, Zintgraff explains, thereby converting equity to profit.
Another capital-raising possibility Zintgraff has in mind is an advertising limited partnership. Investors would put up cash to fund a national advertising campaign for specific Mystik products. The payback would come in the form of royalties paid as a percentage of any increased sales of those products for a specified time. The deal would benefit CI in two ways. It might, of course, help to sell more tape. It would also help the balance sheet for 1983, still heavily weighted with debt, if the cash from the limited partnership were deposited with CI, say, late in the year and no expenditures were made until 1984. The money is not exactly equity, like money paid for company stock, but it isn't debt, either. Zintgraff calls it "equitylike."
Still another plan that Zintgraff discusses involves creating a new corporation, taking it public through an in-state stock offering, and using the new equity to buy the assets of CI's Veterinary Science Division, freeing CI from that cash drain.
Ling's admirer and biographer, Stanley H. Brown, conceded that the great man was a horrid manager. But, he wrote, "to ask how he managed his companies was almost to miss the point of what he really was doing."
Ask Zintgraff what he is really doing and he will say he is building a business. How big? Press him for an answer. "Big enough," he says finally, "to be independent of the vagaries of the marketplace . . . I don't know. As big, as successful as I can make it I guess . . . I don't know what you're getting at. It's really the process that intrigues me."
LTV generated $3.75 billion in sales in 1969, the year Jim Ling lost control of it. For all the size his strategies had built, profits remained elusive, and Ling was toppled as part of someone else's elaborate and unsuccessful scheme for boosting the market price of LTV stock. Within a few years, the company and the man, once the stuff of headlines, passed into dim memory.
Zintgraff is an enigma, a 39-year-old entrepreneur of potential fame whose former associates are already mourning his anticipated failure with genuine, if premature, sympathy. They would really like him to succeed, but they can't see how he will.
"Look," says Darrah, "at what Zintgraff has been doing for the past seven years: raising capital, acquiring businesses, scheming for new financing. None of that is running a business . . . If he would just get good people to run the companies and leave them alone, he'd be a rich man today."
"By God," says J Wood, Zintgraff believes "everybody else ought to just do what he says . . . He really thought business is negotiating contracts. He never thought about having the right people and treating them right. If he'd just let other people use their brains, too . . . When I first started [in 1976], Gary said, 'You go out and hire 10 people. If each of them sells $100,000, we'll do $1 million.' I said, 'Hey, what are we going to sell? We need cars for them; they need meals; we have to pay these people.' He said, 'You just hire the people, and I'll take cure of the rest.' We started out just selling toilet-bowl cleaner, that sort of thing. One day I got a call from Eli Lilly. They had four Custom Chemical Lab salesmen there in the office and none of them knew each other . . . There was no planning.
"Yes, when it comes to financing he does well. He just doesn't have a good personality for people unless he wants to. He can wine and dine you and impress you, but then he can be uncaring . . . I was asked to stay, but I'd been promised more money. He keeps trying to hire that cheap person . . . Gary was always trying to beat you out of something. He always felt like people were trying to take something away from him.
"He means well, but . . . it bugs him that people think differently than him. He believes that if the boss says it, you go along with it. He felt like people were devious and trying to get rid of him . . . He sure destroyed an excellent company [Specialty Chemicals] . . . If we could have kept going, we'd be in the neighborhood of $15 million, $17 million, maybe $20 million today. Now he's sold it for zip and got no cash for it. He slowly destroys these companies he buys . . . It's sad . . . It's a little bit of sour grapes, but not a lot. We just think it could have been a lot better . . . . Bill Mays pleaded with Gary -- 'Just back off and let me do what I do well.' Bill thought the company and 16 people were worth more than the feud . . . The night Bill quit he worked until 7 p.m. to be sure he left things right."
Jim Burnette says Zintgraff has "about run his course in making mistakes. He'll run through all his capital and become just one more statistic." John Darrah gives CI six months before the company goes to bankruptcy court. No, says a former controller, Zintgraff will survive if only he can learn some patience. "Maybe," he says, "Gary should read about Ray Kroc [of McDonald's Corp.], who was nobody until he was 52 or 53."