Re: 9/3/00 - [ITEX/TVCP] Bear Mating Season, Behr Appraisals, Baer Bribes, and other Bare Facts from The Dark Side of corporate finance.
LesLFrench
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Posts: 130
From:Portland, Oregon USA
Registered: Mar 2000
posted 09-03-2000 16:51
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Bear Mating Season, Behr Appraisals, Baer Bribes, and other Bare Facts from The Dark Side of corporate finance.
(Stockholders of ITEX have been informed that ITEX intends to sell all of its assets to an unknown entity, MAXX International, which lists entertainment executive Michael Jay Solomon as a director and its chairman, and a collection of dubious assets. Last week it was shown how online stock touter Michael Zwebner, with his "inner circle" of internet promoters, would be key to promote another Solomon company, Entertainment Internet. This is the fourth in a series of carefully researched articles on The Dark Side of corporate finance. This week: a review of the history of ITEX Corporation's unusual woes, leading up to the present predicament it finds itself within, and new information regarding undisclosed loans received by former CEO Michael Baer. © 2000 by Les L. French)
"I'll make it 'right', if there's any disagreement, just tell me what it will take to make it 'right' stated Terry Neal when confronted at his Oregon home in late 1997 by a gentleman we shall refer to as "Mr. X". Accompanied by two young men of Italian persuasion, X was at Neal's home for the purpose of collecting on X's share of the proceeds from the promised liquidation of over "$6 million worth" of Sky Jones artwork and "pre-paid media due bills". Neal had promised Mr. X that the inventories could be liquidated for about ten cents on the dollar, or about $600,000. Mr. X was to receive 50% of the liquidated proceeds. It was time to collect.
But already four months had transpired since Mr. X, who describes himself as a mining and mineral claims consultant, had sold to Neal a research file on several tracts of government-owned land in Washington State containing deposits of limestone. The research file contained all the information required by Neal to file to establish unpatented mining claims on BLM properties, which could then be appraised at over $6,000,000.
It turns out that X first learned of Terry Leroy Neal and ITEX Corporation on an airplane while returning on a trip from Israel to his Portland home. With time to kill on the plane, he picked up the July 14, 1997, issue of the Oregonian newspaper, which featured a business-section front page article on questionable activities going on at ITEX, and Neal's alleged ties to the company. The article described an ongoing SEC investigation, and referred to questionable assets on the books of the company, such as Sky Jones art and pre-paid media due bills. Mr. X figured he had something that ITEX' accountants needed, so he tried to call ITEX' CEO Graham Norris. Norris never returned the calls, but X did manage to get through to CFO Joe Morris, who reviewed Mr. X' proposal, and ultimately stated that ITEX was not interested in exchanging the artwork and due bills for mining claims.
Persistent, Mr. X then contacted Neal, sensing from the newspaper story that Neal somehow was still involved with the management and accounting practices of ITEX Corporation. Indeed, Mr. Neal gleefully invited Mr. X to meet with him. Neal confided to Mr. X that the questionable assets would not pass Nasdaq or SEC accounting inquiries, calling the Sky Jones artwork and media due bills "six million dollars worth of 'sh*t'".
Both men had agreed that neither the mining claims nor the ownership of the claims should be in Neal's own name. X had mentioned that he could arrange for a "shell" to own and hold the mineral assets, but Neal replied "That's OK, I a shell ready to go". Neal then filed the necessary forms with BLM, placing the unpatented mineral claims into the names of his six children and his wife as locators, and then quit claimed the mineral rights to a new shell, called Pacific Mineral Corporation (PMC). Just eight days after the new corporation was formed by Neal , PMC conveyed ownership of the mineral properties over to ITEX Corporation in exchange for the near-worthless assets. In this manner, ITEX thought it could eliminate $6 million in questionable assets from its balance sheet and replace them with appraised mining claims at roughly the same value-all for the meager price of $20,000 in cash and 50% of the proceeds from the Sky Jones collections.
After four months had passed, X still had received no payment from Neal on the supposed liquidation of the merchandise. Reviewing ITEX' SEC quarterly filing, Mr. X soon discovered that Neal, in addition to receiving $20,000 in cash, the artwork, and due bills, Neal also collected an additional sum of 130,000 shares of ITEX common stock. Naturally, X figured at least 50% of those shares belonged to him. The stock of ITEX was trading at about $6 per share at that time. Angered and wary of Neal's failure to return phone calls, X made a trip over to Neal's house accompanied by the two "Guido-types", ready to "make amends" on the delinquent account.
Caught off guard by the visit, Neal invited the gentlemen inside and related that the deal had gone down "as planned", but that Neal had received no compensation from ITEX other than the art and due bills, and that no money had been received from the sale of the artwork. X then replied that he just wanted to be paid and discontinue any further arrangements with Neal, and that he was prepared to pick up 50% of the artwork and the due bills to haul them off, "if for no other reason than to set a bon fire and watch them burn." Stammering and without explanation, Neal confessed that the inventories "were gone" and that he would have to make other arrangements with X. "I'll make it 'right', if there's any disagreement, just tell me what it will take to make it 'right'. I just want to make sure that you feel like the deal has been made 'right'."
Going to a security safe, Neal presented X with a cloth bag, filled with loose diamonds and gem stones. "Here, take any of these stones that you want, whatever you think will make it right" Neal said. X, being somewhat familiar with minerals, was not fooled by the cheap pieces of "glass", and flung the loose stones across the room and all over the shaggy carpet. Horrified, Neal fell to his knees in a desperate attempt to retrieve the stones from the thick carpet. "Now you listen to me" exclaimed X, "I figure you owe me about $300,000, and I want you to pay up now!" When it was over, X walked away with a check for $20,000 cash, drawn on an offshore institution. That was the only payment Mr. X received from Neal, in addition to the original $20,000 which was advanced to Neal by ITEX.
Behr Dolbear Appraisal. If the Sky Jones art and due bills were of "bon fire" quality, one curiously wonders why ITEX, after investing only $20,000 in cash in its mineral claims, would invest another $50,000 in an appraisal, prepared by a highly qualified, internationally recognized geological appraiser, Behr Dolbear & Company? Perhaps the answer lay in the fact that the appraisal, not prepared until weeks after ITEX had already purchased the mining claims, confirmed the properties to be worth almost exactly the "booked value" of the artwork and due bills, and stock paid for the placer claims, of $6,576,000. What an amazing co-incidence that acts of God and nature taking place over millions of years would roughly yield the same financial results as a homeless artist and hotel and media due bills which could be traded but never redeemed! ($50,000 placed in the right hands can work wonders!) Also, there is speculation that ITEX could have purchased an appraisal for much less, however the appraisers were evidently given a "target result" which would have required additional expense to force calculations in a written, qualified opinion.
Bear Mating Season. Nasdaq accountants were not fooled by the hocus-pocus appraisal, which itself pointed out, the properties could only be of value to a company specialized in the mining business with a large, local market for the limestone. The problem with mining the limestone was that no access to the land could take place during the bear mating season, due to federal regulations (if not for the safety of the miners!). The high latitude and altitude of the properties are such that there are only about two months remaining from the end of bear mating season to the beginning of the unapproachable winter weather. In other words, a mining operation would have no more than two months to bring in equipment, set up camp, mine, and then evacuate the area, including the removal of all equipment, on an annual basis. To complicate matters, easement onto the properties would have to be obtained from adjacent property owners. And then there was the problem of finding a local market for the limestone.
ITEX attempted to solve this problem by stating that the company itself would not be mining the properties, but rather would receive royalties from the sale of mining rights to other companies, but Nasdaq pointed out that the potential royalties could never justify the asset value that ITEX was assigning to the locator claims. The mining-claims-for-art swap deal would not pass Nasdaq's approval.
The Baer Loans. The "Sky Jones" dilemma was inherited by CEO Graham Norris from his predecessor, Michael T. Baer. Baer was "CEO" of ITEX from 1991 to the summer of 1996, but the truth is that he was never the defacto CEO of ITEX. It has been recently revealed, for the first time, in documents obtained by the SEC as part of its investigation, that in 1995, Michael Baer received huge amounts of cash, in the form of "loans", in the amount of $350,000. These "loans", which Baer received from two of Neal's entities, Wycliff Fund and Newcastle Holdings, were never disclosed to ITEX' shareholders or to the public on any SEC filings or other disclosure. In fact, no record shows that even the ITEX directors were informed of these transactions. Yet, during the same time period of 1995 & 1996, ITEX, under Baer's direction, advanced millions in credit lines to Neal's Wycliff and Newcastle, and to their joint subsidiary, Bailey Mutual Fund. It was through these entities that ITEX acquired most of the "bon-fire quality" Sky Jones art and due bills, paying Neal over $6 million in securities.
The receipt of the $350,000 in undisclosed cash by Baer roughly equates to investments that Baer made in ITEX stock during the same time period. During 1995 and up to January, 1996, the stock of ITEX soared, and peaked at $12 in January, 1996. Baer sold most of his holdings during that time at huge profits. Now the SEC is attempting to recover nearly $1.4 million from Baer which regulators allege in court Baer received illegally as a result of his dealings with Neal. And the IRS is conducting an inquiry into why income was not reported, and taxes paid, on Neal's off-shore dealings with Baer and other ITEX associates.
A restatement of ITEX' financials demonstrated that at least since 1994 to 1999, ITEX Corporation NEVER once turned a profit. Its cash flow was supported entirely by heavily discounted private offshore sales of its stock, primarily to Neal, and by sales of preferred shares. Neal would then sell the securities back into the U.S. using a loophole in the SEC's Regulation S law, and use a portion of profits from each transaction to fund the next transaction. However, once the Nasdaq delisting was revealed, this source of financial subsistence for ITEX management was cut off.
In February, 2000, the SEC obtained a judgment against ITEX, requiring the company to write off all of these dubious assets. But ITEX still has in tact its main prized asset: its barter exchange of over 10,000 small business members. Now ITEX shareholders have been told that this remaining asset will be traded over to an unknown company called MAXX International, which principal business operation appears to be an internet service called "Pure Vision Internet", operated by a former convicted felon, Bruce Gammill, and his girl friend, Katie McGee. On the board of directors of MAXX Intl. is former film producer and entertainment executive Michael Jay Solomon. Is it possible that Solomon is on the board because he is a major cash investor in MAXX? If so, where has all the cash investment gone? Next time I will explore in detail Solomon's curious acquaintances.
(to be continued)
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1 The "president" of Pacific Mineral Corporation was James Fontano of Carson City, Nevada. At the time of the Nasdaq delisting inquiry, Fontano was listed as "president" of over 90 Nevada corporations. Busy guy!
2 Neal outright lied about receiving the 130,000 shares of stock. Transfer agency records show that Neal indeed received the shares, and transferred them to other entities under his control.
3 I was able to trace at least 10 of the Sky Jones paintings to an individual in Michigan, who stated that he had traded the paintings in exchange for $500,000 worth of real estate deeds in Michigan. He said the party who sold him the paintings was David Newren, the same person who had signed the worthless due bills. When I told this person that I was afraid the Sky Jones art was not worth $500,000, he responded, "well those real estate deeds I gave them aren't worth no $500,000 either!"
4 During the SEC investigation of ITEX, it was revealed by Michael Whipple, AKA Sky Jones, that Whipple created his own appraisals of his own art using the pseudonym "Joseph Banker", appraising each piece as high as $50,000 or more, when, in reality, none of the art had ever been sold on the open market for cash. Furthermore, according to one witness I interviewed, much of the art bearing the "Sky Jones" name was in fact created by homeless people by mass production in Salt Lake City who were being employed at minimum wage by David Newren. Whipple also testified that at the time, he was living in a Ft. Worth, Texas warehouse with no running water, and ate three days a week at a Salvation Army soup kitchen.
5 This particular grade of limestone can be useful as a bleaching agent in the manufacture of paper. However, the economics of freight demand a local market for the processed mineral product, i.e., paper mills which are local to the mining operation.
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