Say this for the ancient Egyptians: they may not have known multilevel marketing from crabgrass, but they sure knew how to build pyramids. Big ones, with foundations to stand the test of time.
Not so United Sciences of America Inc. (USA), or so it seems. On January 21, the Dallas-based distributor of dietary supplements and other health-care products (see INC., February 1986) filed for Chapter 11 protection in federal bankruptcy court. After barely a year in business, and with listed assets of $7.3 million and liabilities of $8.6 million, the erstwhile "fastest-growing company in America" faced a slew of trouble on multiple fronts: criticism by the Food and Drug Administration for mislabeling products; allegations of fraudulent sales practices brought by states attorneys in Texas, New York, and California; and an embarrassing prime-time expose on NBC-TV's "1986" news program. By February, high-profile spokesmen Gary Carter and Joe Montana, among others, were under subpoena to tell a court about their associations with the company.
What is already known about USA's approach to multilevel marketing provokes sharp differences of opinion. Prosecutors portray it as a classic pyramid scheme, with a broad base of individual distributors (at one point as many as 140,000) funneling cash toward the top in illegal "chain-letter" fashion. According to Texas assistant attorney general Steve Gardner, only 1% of USA's revenues, which are estimated as high as $50 million, came from actual retail transactions -- meaning, says Gardner, that "the company wasn't making money selling product; it was selling people." Charges of illegal kickbacks have also surfaced. Even loyal creditors and distributors, some of whom take exception to the law's dim view of company sales practices, admit they were lied to, manipulated, and paid with rubber checks. And the "blue-ribbon" panel of scientific advisers, whose names were once freely used in USA's promotional literature, has long since degenerated into armed camps, squabbling over the ethics of paid endorsements, product claims, and fat research contracts.
Some fundamental questions remain unanswered, however. For instance, were USA products really bogus -- as some nutritionists have claimed -- or merely overhyped? Also, given the history of such companies as Herbalife International and Cambridge Plan, two similar diet-plan marketers that swiftly fell by the wayside, could these problems not have been foreseen -- and avoided? Finally, how could a company with few fixed assets and projected annual revenues of $100 million go down the tubes so quickly? Was income diverted elsewhere, misspent, or just overoptimistically reported?
Finding answers to these questions could consume several court hearings. Yet through the testimony of close observers, an outline of USA's travails begins to emerge.
According to these sources, USA was drawing nothing but aces in the first quarter of 1986. Sales doubled virtually every month. With products sold only for cash and no -- as in zero -- accounts receivable, USA had plenty of money to pay its creditors promptly and its in-house celebrities generously. Spending widely, if not well, USA thereupon blew $500,000 on a Founders' Day weekend in June and sank another $1.2 million into research grants -- most of which went to members of its advisory board.
Perhaps most significant -- and in keeping with the style of its founder, former computer whiz Robert Adler -- USA continued calling attention to itself. A clutch of Nobel Prize-winning clinicians, along with the world-class athletes, turned out to attract too much. Just as it took personal health concerns and turned them into high drama, USA took distinguished scientists and puffed up their association with its products. These tactics inspired bitter attacks by such groups as the National Council Against Health Fraud, and led, ultimately, to an investigation by the FDA. Hard on their heels came a highly public controversy, ignited in The New England Journal of Medicine, over the recruitment and funding of the big-name medical people to shill for USA's product line.
All this happened through last summer and early fall, but "the real crunch came in October," notes Robert McIntyre, USA's largest single distributor and holder of an IOU now worth some $50,000. "It was the nature of the business that sales were heaviest during the last few days of the month. NBC aired its show on October 28, and sales instantly dried up. By mid-November, management had run out of cash to meet its obligations, and the whole thing went downhill from there."
By the time USA distributors met in Los Angeles on January 9, Adler was trying to rally the troops by introducing two North Carolina venture capitalists he claimed had "signed on" to refinance the operation. As controversy over USA persisted, however, the new money men soon bailed out. Compounding the air of panic, Adler promised his people they could exchange bounced checks for bank checks at a local distribution center the following Friday. When the claimants showed up to get their money, they found the center closed. By midwinter, so were USA's home offices outside Dallas, and no one with the company would talk to the press.
Despite these fiascos, not everyone is ready to count Adler or USA out of the marketplace. "It's my feeling that the Chapter 11 filing will take the pressure off management and give them time to restructure," says Thomas T. Tierney, president of VitaTech International Inc., one of USA's major suppliers. "I'm not a happy camper, being number one on their creditor list [to the tune of $426,000]. But if they were really out of it, they'd have gone Chapter 7."
McIntyre agrees, saying he has no problems with either the product or the program. "With the deception and manipulation, yes. But let me say this: Robert Adler is a supersalesman, one of the best I've ever seen. I'm just not sure he ever got the right people under him."
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