Lignex acquisition announcement holds many surprises
Lignex Inc LGNX
Shares issued 27,384,941 Jun 29 close $0.18
Fri 30 Jun 2000 Street Wire
Also Medical Resorts International Inc (Q:MRINF)
Also Medical Resorts International Inc (MDRE)
FROM KITTY LITTER TO HIV TEST KITS. PERHAPS
by Stockwatch Business Reporter
Lignex Inc., a Toronto-based shell, surprised many shareholders with an
announcement on June 12 that it had entered into a letter of agreement to
acquire control of International Biotech Corp. of Edmonton in a cash and
share transaction. Given the effort to have the news release withdrawn
several hours after it had been distributed, it seems that the announcement
also surprised regulators at the Canadian Dealing Network (CDN) and trading
in the stock was halted pending clarification of the company's affairs.
According to Lignex director Roger Kirby, a draft announcement regarding
the acquisition of IBC, a company that claims to have the right to
manufacture, distribute and market worldwide a home test kit for HIV, was
sent to Canada Newswire by the company's attorney with instructions that it
could be distributed following notification from the lawyer. "Well,
inadvertently, one of their U.S. affiliates released it," Mr. Kirby says.
"CDN said, 'That's a no-no, we haven't seen it,' and doo-da, doo-da, so
they put a halt on the stock."
Les Forde, a surveillance official, says that it is CDN policy to review
all news releases prior to distribution and that is what "usually" happens.
If, as in the case of Lignex, one happens to be inadvertently released, the
CDN might remain unaware of it unless alerted to unusual trading activity
by its automated monitoring program. Mr. Forde points out that the
monitoring system did trigger an alert early in May when there was a sudden
interest in the very thinly traded stock. On May 8, only one transaction
for 20,000 shares at 1.5 cents was recorded but on May 10 the stock was
apparently in hot demand. It was halted until Lignex issued a release
announcing that it had entered into a private placement agreement with four
investors for a total of 11 million shares at 1.5 cents per share. Trading
resumed the same day with 3,641,500 shares changing hands and the stock
touching 20 cents before closing at 13 cents.
According to Mr. Forde, it is not unusual for a stock to tally such numbers
following the announcement of a private placement. The apparently banal
trading activity continued with 2,265,550 shares changing hands on May 11
and 6,246,100 shares trading on May 12 at prices ranging from 10 cents to
16 cents. Indeed, in the 22 trading days from May 10 until June 9 more than
25 million Lignex shares were churned with the stock hitting a 52-week high
of 25 cents on June 9. That total is just under the 27,384,941 shares
issued and outstanding. Given the average daily volume in excess of one
million shares during that period, it is perhaps not surprising that the
948,200 shares traded on June 12, the day of the unauthorized news release,
did not trigger an alert at the CDN. It appears that the news release was
brought to the attention of the CDN by an outside market observer and
trading was subsequently halted.
Two days later, apparently having provided sufficient clarification to
satisfy the CDN, Lignex again issued an announcement of the proposed
acquisition of IBC and the stock resumed trading. "I can't tell very much
difference between the second one and the first one, to tell you the
God-honest truth; where the second one was the one that was approved," Mr.
Kirby remarks. Indeed, the authorized and approved news release on June 14
contains the same details regarding the acquisition of IBC as the earlier
errant release. The deal, consisting of an undisclosed amount of cash and
14.5 million shares of Lignex, is expected to close by the end of June.
According to Mr. Kirby, the acquisition will still need shareholder
approval at the company's annual general and special shareholder meeting
scheduled for July 20.
While the acquisition details were unchanged, the second release did
contain new information regarding the company's status on the CDN following
the resumption of trading. Lignex shares can be traded through authorized
dealers and trades will be reported through the CDN, but quotation of the
shares has been discontinued. The CDN's Mr. Forde says that the move from
the quoted market to the reported market came as a result of Lignex's
change of business. According to Mr. Kirby and the news release, Lignex
intends to apply to reinstate quotation of its shares after the shareholder
meeting on July 20. In the meantime, transactions are far less transparent
to investors than they would be if the shares were quoted.
In addition to the lack of transparency with respect to Lignex trading,
there is much about the proposed deal and the companies involved that is
far from clear. The hapless Mr. Kirby, who is listed as the contact person
on Lignex news releases, was not able to throw much light on matters. He
could offer only sketchy information regarding Lignex and the IBC deal and,
beyond a vague recollection that the company "was going to do some building
products or some such thing," he knew little about the company's history
prior to when he joined the board of directors in April, 1999.
In fact, one of Lignex's early ventures was in the field of building
products. Following a consolidation on the basis of 1 new share for each 9
old shares in September, 1995, Lignex had 503,856 shares issued and
outstanding, paving the way for an agreement entered into on June 5, 1995.
Under that agreement, the company acquired 3,166,672 shares of Moulded
Strandboard Corp. (MSC), a private company with the North American rights
in perpetuity for certain designs and processes for the manufacture of
moulded pallets from waste wood, in exchange for 9.5 million
postconsolidation shares of Lignex. The deal received regulatory approval
and was approved by Lignex shareholders in September, 1996. As a result of
the reverse takeover, the shareholders of MSC held 94.97 per cent of the
shares of Lignex.
In February, 1997, Lignex acquired 51 per cent of Moulded Strandboard
International (MSI), a private Bahamian company with the world rights,
apart from North America, for the moulded pallets in exchange for eight
million shares. MSI, controlled by the same people as MSC, was inactive at
the time of the transaction. Evidently the strandboard venture seemed so
promising that Lignex picked up another 25 per cent of MSC at the same time
by issuing an additional 2,116,760 shares.
Lignex also attempted to venture into the exotic hardwood market,
announcing in February, 1997, that it had entered into an agreement to
purchase all the outstanding shares of IPEC International, a company with
hardwood timber properties in Costa Rica. In spite of a promising
announcement in March that a timber inventory was being conducted on the
properties, that deal apparently collapsed.
The company reportedly also clawed for a share of the kitty litter market
at one time, announcing in January of 1997 that it had orders for its
product from major retailers in the United States. That component of the
company's business plan seems to have vanished into the mists of corporate
history.
By the time the company's audited statements for the year ended July 31,
1997, were compiled, reverse takeover accounting was not required.
According to the notes to the financial statements, a group of MSC
shareholders had sold their interests in Lignex during the year, resulting
in a change of control. It was a timely exit inasmuch as the audited
statements for the year ended July 31, 1998, indicated that the company was
in dire need of cash and if it could not raise additional capital, the
recorded value of its strandboard technology and rights would be written
down to net realizable value. That is precisely what happened; the notes to
the financial statements the following year reported that both MSC and MSI
had formally discontinued operations and had been written off.
With the kitty litter market apparently dried up, the strandboard venture
unravelled, the exotic hardwood dream scrapped and no investor interest in
actually paying money for Lignex paper by participating in a financing, the
board of directors resigned en masse in April, 1999. They were replaced by
Michel Van Herreweghe of Fort Lauderdale, Fla., as president, Francoise
Jacquel, as secretary, and Mr. Kirby, who apparently drew the investor
relations assignment for the shell.
Mr. Kirby, if his duties in fact entail providing information about the
company, is ill-prepared for that assignment, perhaps through no fault of
his own. He was surprised to hear that Lignex trades in the U.S. on the
Pink Sheets, claiming that no one had ever told him that. He could not
recall the last name of fellow-director Francoise Jacquel, remarking that
he had only met her once, nor did he know her telephone number. More
surprisingly, he could not provide a telephone number for Mr. Van
Herreweghe, the company's president. Evidently the corporate communication
structure is unidirectional; Mr. Van Herreweghe contacts Mr. Kirby but Mr.
Kirby claims that he cannot contact the president. A message left with Mr.
Kirby more than a week ago by a Stockwatch reporter requesting an interview
with Mr. Van Herreweghe has gone unanswered.
Mr. Kirby, who seems to function as more of a cut-out than a corporate
contact for Lignex, could not provide much information about the IBC deal,
either. "I don't know much about IBC at all," he admits. He was able to
offer some thoughts on how the proposed deal came together, however. "Well,
it came together through Van Herreweghe, I think," Mr. Kirby says. "He put
out the word that he had the shell and was looking for a deal and the IBC
people called him." Exactly which of the IBC people called Mr. Van
Herreweghe and how they obtained his telephone number remains a mystery.
Doug Wallace, chief executive officer of IBC, might be able to throw some
light on that mystery and other puzzles regarding the company. It is not
clear, for example, whether IBC has yet manufactured, distributed, or made
much headway in marketing the HIV-1 and 2 test kits called V-Scan. The
company does have a Web site that provides some scant information regarding
the kits but a link to an on-line order form does not work.
It is also unclear whether IBC has made any progress toward having V-Scan
cleared for sale in the United States. As recently as June 24, V-Scan was
included in an import alert issued by the U.S. Food and Drug Administration
(FDA), noting that the uncleared medical device was being offered for sale
on the company's Web site and declaring that it may not be legally marketed
in the U.S. According to the FDA, unapproved HIV test kits "could present a
serious hazard to the public health, including possible HIV transmission to
partners and delayed access to medical care due to misdiagnosed false
negative tests."
A more intriguing puzzle that Mr. Wallace might be able to help investors
sort out is the relationship between IBC and Medical Resorts International,
particularly since he was a director of Medical Resorts prior to heading up
IBC. According to a news release on Feb. 4, 1999, Medical Resorts acquired
60 per cent of the issued shares of IBC in exchange for two million Medical
Resorts' shares. On July 23, 1999, Medical Resorts announced that it
intended to declare a dividend to its shareholders in the form of a
distribution of three million shares of IBC on a pro rata basis. According
to that release, IBC was a wholly owned subsidiary of Medical Resorts.
However, a material change report filed on Nov. 5 indicates that Medical
Resorts acquired 86 per cent of IBC on Sept. 15 through the expenditure of
$315,000.
The dividend in specie scheme was contingent upon IBC becoming a reporting
issuer through the filing of a prospectus. According to the preliminary
prospectus filed on Dec. 30, 1999, IBC was incorporated in Alberta on Feb.
2, just two days before Medical Resorts issued the news release announcing
that it had acquired 60 per cent of the company in a share transaction.
Oddly, the preliminary prospectus claims that the company was formed as a
wholly owned subsidiary of Medical Resorts, raising questions about the
conflicting claims of having acquired either 60 per cent or 86 per cent of
IBC. Perhaps just as oddly, the same document indicates that Medical
Resorts holds only 7.5 million shares of the 8.7 million issued and
outstanding shares of what it claims is its wholly owned subsidiary,
raising even more questions.
The preliminary prospectus also reveals a rather cosy lease agreement
between IBC Anguilla, IBC's offshore subsidiary, and Hotel de Health
Anguilla, Medical Resorts' offshore subsidiary. Under the terms of that
agreement, IBC will lease its production facilities from Hotel de Health at
an annual cost of $100,000 (U.S.) until October, 2002, $120,000 (U.S.)
until 2005 and $180,000 (U.S.) thereafter. It is not clear whether space
has been cleared for those production facilities in Medical Resorts' only
clinic, operated by Hotel de Health in Anguilla, or if the emerging biotech
player will be housed in a separate building.
Mr. Wallace might be able to answer all of those questions. He might also
be able to answer questions regarding whether securities regulators have
found any deficiencies in the preliminary prospectus and whether the
company has taken steps to correct those deficiencies. Stockwatch has
learned from other sources that the document has several deficiencies that
have not been satisfactorily addressed and the preliminary prospectus has
been pretty much abandoned.
Unfortunately, Mr. Wallace is not inclined to respond to questions from a
Stockwatch reporter. IBC's chief executive officer is miffed that an E-mail
message he sent to Stockwatch, seeming to offer a caution regarding claims
made on Stockwatch's unedited Internet public forums by anonymous posters,
was posted to the discussion by Stockwatch editor John Woods. "I thought
that was pretty dirty," said Mr. Wallace. "So I really don't want to talk
to you people right now," he added before hanging up. Apparently his mood
has not changed over the course of several days; subsequent calls to Mr.
Wallace have not yet been returned.
While Mr. Wallace may be at least temporarily sensitive to questions and
public scrutiny, he is certainly not a stranger to it. Mr. Wallace was one
of seven respondents named by the Alberta Securities Commission (ASC) in
November, 1999, for his role in alleged securities violations involving
National Gaming Corporation. National Gaming proposed to bring a national
televised lottery to the Ukraine but ran afoul of regulators for
distributing shares while not registered under the Securities Act and not
filing a prospectus, among other things. Most of the respondents, including
Mr. Wallace, have reached settlement agreements with the ASC. Among those
who have not reached a settlement is Richard Cholach, a key figure in the
scheme and well known to the ASC.
Robert Talbot, president of Medical Resorts, might also be able to answer a
number of questions regarding IBC. Mr. Talbot, in addition to being the
president of Medical Resorts, is identified in the IBC preliminary
prospectus as having been involved in founding and organizing the company
as well as being its promoter. The busy Mr. Talbot, who shares office space
and a telephone number with Mr. Wallace, was not available for an interview
within a few minutes of Mr. Wallace registering his displeasure with
Stockwach to a reporter. A subsequent message requesting an interview with
Mr. Talbot has not yet brought a response.
Like his colleague Mr. Wallace, the Medical Resorts president and IBC
promoter is no stranger to regulatory scrutiny. In January of 1996, Mr.
Talbot, along with his wife Page Edgar, Paul Owens and the well-known Mr.
Cholach, reached a settlement agreement with the ASC with respect to
securities violations involving subscription agreements for Hotel de
Health. Under the terms of the settlement, Mr. Talbot and Mr. Cholach were
banned from serving as directors or officers of any issuer for a period of
nine months and from trading in any securities for the same period.
A few months later, Mr. Talbot had the notable distinction of drawing some
scrutiny in the Alberta Legislature in connection with a beds-for-cash
scheme involving Hotel de Health's privatization proposal for two Alberta
hospitals. In fact, during question period on March 18, 1996, Liberal
leader Grant Mitchell claimed that three cabinet ministers were looking
into the activities of Mr. Talbot and Hotel de Health. Mr. Mitchell also
mentioned that Mr. Talbot's mother-in-law, Viola Edgar, had written the
Minister of Justice, "drawing his attention to what she believed to be a
fraudulent house transaction involving Mr. Talbot."
Mr. Talbot, Ms. Edgar and Hotel de Health drew further extensive discussion
in the legislature in following days after Mr. Talbot's lawyer, Robert
Burgener, sent a rather ominous sounding letter to Mr. Mitchell. "Mr.
Talbot believes you may feel unaccountable for any statements that you make
in the Legislature," the letter stated. The letter included a caution that
Mr. Burgener would issue to many other people on behalf of his litigious
client: "Mr. Talbot requests that I make it absolutely clear that he will
pursue his legal remedies in the event that you make any misleading or
derogatory statements which may impugn his character or reputation."
Apparently Mr. Talbot puts great stock in his character and reputation.
In August of 1997, it became clear that Mr. Talbot and Ms. Edgar had drawn
scrutiny from another agency. Acting on instructions from Revenue Canada,
bailiffs seized the couple's household assets and two vehicles as part of
an attempt to collect unpaid taxes totalling $420,000. According to a
report in the Edmonton Journal on Aug. 23, 1997, Mr. Talbot was "too mad"
to talk to a reporter about the seizure. Given Mr. Talbot's concern for his
character and reputation, it is not surprising that he was also reportedly
"extremely upset that an ITV camera person was at the scene when the goods
were being loaded on the truck."
A relatively new form of scrutiny on an Internet discussion site drew Mr.
Talbot's ire in March of 1999. He took exception to claims made about him
and Medical Resorts by posters to a stock discussion site hosted by
StockHouse and launched a $6-million suit against the company and two
anonymous posters. Mr. Talbot was eventually successful in obtaining the
identities of those two posters and others, launching a further spate of
suits. The threat of legal action seems to have done little to quell the
persistent questions and criticisms of Medical Resorts and its president.
Indeed, some of the claims made by a resolved group of posters have become
even more pointed and may have played a part in the extended trading halt
against Medical Resorts.
There has been wide speculation that the halt, in effect since Oct. 21,
1999, was issued by the CDN at the request of the Ontario Securities
Commission (OSC) and that Medical Resorts is being investigated by the OSC.
An investigator with the OSC would not confirm that speculation, citing the
OSC policy of not commenting on investigations or even whether complaints
have been lodged against a reporting issuer. However, Stockwatch has
learned that a number of complaints have been made and that Medical Resorts
has, in fact, been under investigation.
Among the disclosure issues that regulators have been examining are insider
trading reports, or the lack thereof, for Medical Resorts. They have also
been reviewing the company's financial statements, attempting to reconcile
the quarterly reports with the audited financial statements, no small task.
Perhaps most significantly, the OSC has been examining some of the puzzling
share transactions and disclosures regarding share issuance. Regulators
believe that far more shares of the company have been issued than have been
reported in a timely fashion in accordance with disclosure requirements.
Some Medical Resorts shareholders who rely on the company's news releases
may be surprised to learn that the total may well be in the neighbourhood
of 100 million shares issued and outstanding; perhaps as surprised as they
were to learn of the Lignex proposal to acquire IBC.
There may be more surprises yet in store for shareholders of Medical
Resorts and Lignex as the IBC acquisition proposal and related matters
unfold. Meanwhile, the pace of trading in Lignex, the former purveyor of
kitty litter, has dropped off; the stock closed at 18 cents on June 29,
with 102,000 shares changing hands. Only 8,000 Lignex shares traded on the
Pink Sheets in the U.S. where it closed at 16 cents (U.S.) on June 28.
While Medical Resorts is halted in Canada, it continues to trade on the
Pink Sheets, closing at 1.5 cents on a volume of 3,419,000 shares on June
28. |
