A FEW GOOD COMPANIES . . . TO AVOID

By Larry Cavalena, Registered Principal

What do the following companies have in common?

• Accenture (ACN)
• Everest RE (RE)
• Ingersoll Rand (IR)
• McDermott International (MDR)
• Noble Drilling (NE)
• Segate Technology (STX)
• Trans Ocean, Inc. (RIG)
• Tyco (TYC)
• Weatherford Intl. (WFT)
• Xoma (XOMA)

• Cooper Industries (CBE)
• Foster Wheeler, Ltd. (FWC)
• Helen of Troy (HELE)
• Leucadia National Corp. (LUK)
• Nabors Industries (NBR)
• Playstar (PLAYF)
• PXRE Group, Ltd. (PXT)
• Stanley Works (SWK)
• Veritas (VTS)
• White Mountain Inc. (WTM)

No, this is not some portfolio manager's buy list. The common factor for these companies is that they have all obtained expatriate tax status by reincorporating in tax havens such as Bermuda or The Cayman Islands.

The process is simple and the cost is small. No people or offices move. Not so much as a file cabinet actually relocates. It takes a few thousand dollars in legal paperwork, a post office box and perhaps a lawyer to answer the phone and retrieve the mail.

By relocating the legal address outside the U.S., these companies can dramatically reduce their corporate income taxes. If they place subsidiaries in a tax treaty country such as Barbados or Luxembourg, the income tax can almost be eliminated.

The benefits don't stop with tax savings. These expatriate companies also have greater protection from judgments in U.S. courts along with reduced shareholder disclosure requirements. They can avoid class action suits from shareholders and the corporate executives can better avoid punishment for corporate wrong doing. This is a good place to mention that Enron had more than eight hundred offshore subsidiaries and paid almost no income tax from 1996 to 2001.

In addition to increased protection for their executives and sidestepping the payment of U.S. income taxes, some of these companies have been awarded billions of dollars in federal contracts. And just to prove that the Internal Revenue Service really does have a sense of humor - in the one billion in federal contracts awarded to Accenture, is a five-year program to redesign the IRS website.

With all this income tax being eliminated, you would think there would be substantial profits for distribution to shareholders. Well, think again. Of the twenty companies on the list, thirteen pay no dividends at all. Four have dividend yields of less that 1%. Only four companies have dividend yields in excess of 1%.

I am confident that a major portion of the profits finds it way to executive stock options and bonuses. However, part of the profit goes to political contributions as the following table illustrates:

Company	Annual Tax Breaks for Moving Offshore	Federal Contracts	2000 Campaign Contributions	2002 Campaign Contributions
Tyco	$400 million	over $1 billion	$367,550	$178,547
Ingersoll-Rand	$40 million	$3.8 million	$7,801	$1,500
Cooper Industries	$55 million	not available	$94,475	$26,500
Stanley Works	$30 million	$25 million	none	none
Accenture	not available	Over $1 billion	$237,584	$207,081
Foster Wheeler	not available	Over $600 million	$36,050	$10,250
Pricewaterhouse Coopers	not available	not available	$1.1million	$527,420
Total	$525 million	more than $2.6 billion	$1.9 million	over $950,000

Table compiled from new sources and the Center for Responsive Politics.

This helps to explain why congress seems to ignore this tax and disclosure loophole while arguing ad nauseam about child tax credits, capital gains tax rates and dividend taxation for individual taxpayers.

The problem is not just with these few companies. The real problem is one of corporate governance and credibility. As long as our elected officials continue to do the bidding of large political contributors, I would expect these problems to continue.

There is some improvement. California State Treasurer, Philip Angelides, has taken some action. The State of California will no longer do business with, or invest in, companies that have moved offshore for tax avoidance. Expect other states to follow.

Shareholders are also making progress. More and more corporations are now choosing to expense and disclose employee stock options. Many corporations are increasing dividend payouts or are starting to pay dividends.

More recently, Microsoft Corporation announced that it will end its practice of stock option compensation. Instead, the company will issue direct stock awards and account for those awards as an income statement expense. It is estimated that accounting for stock option costs would have reduced Microsoft's 2002 reported net income by 32% or approximately 2.4 billion dollars.

Investors know that it takes real cash profits to pay dividends and they no longer trust management to act in the shareholders best interest. The situation will continue to improve. It will just take time.

If you have an interest in contacting your congressperson, the following links will help:
www.house.gov
www.senate.gov

Your comments and questions are welcome. Please contact us at www.raymondjamesohio.com Larry Cavalena, Registered Principal.

This article was compiled from the following news sources:

BBC News	www.bbcnews.com
California State Treasurer's Office	www.treasurer.ca.gov
Washington Post	www.washingtonpost.com
Congressman Richard Neal	www.house.gov/neal/news
Congressman John Tierney	www.house.gov/tierney
The Offshore Library	www.cyberhaven.com/offshorelibrary
Pigs at the Trough	Arianna Huffington
Arianna Huffington Online	www.ariannaonline.com
CNN	www.CNN.com
Center for Responsible Politics	www.opensecrets.com
The Daily Enron Briefing	www.thedailyenron.com
Common Dreams News Center	www.commondreams.com

Larry Cavalena
Registered Principal

Your comments are welcome. Please contact us at www.raymondjamesohio.com.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Larry Cavalena and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.