MAY 1996 E-MAIL FROM WACO
While cleaning up some old files I found this e-mail from Waco, which was written, I believe five months after they first started following it. Thought it might be of interest to some.
Date: Tue, 28 May 1996 23:44:54 GMT
NIAR IS THERE
Ladies & Gentlemen, I want to preface this report to comment on its extreme
high quality. Cliff Shoemake has done a journeyman service, actually
visiting this company, writing up the first true, unadorned picture,
pulling no punches, and giving us all something to work with for the first
time. This is above and beyond the call of duty, and we owe Cliff an debt
of thanks if not more ... especially if this turns around from the present
price and becomes another 775% gainer like QLSI.
The float has changed dramatically from the 200,000 listed in its Dec. 95
company fact sheet, and the 600,000 which we were informed existed. The
total shares outstanding were 591,000 in Dec. 95, and 1.2m, I believe
(maybe someone has our original write-up?), when the Kid issued its report.
This is one of the reasons that the Kid now requires companies it is going
to write up to voluntarily reveal the status of all shares, restricted and
unrestricted, issued.
The bottom line is that the company seems to have been forced to focus and
to turn its assets into the promise that is there ... and it seems to be
working on turning what the SEC considers 'nonassets' into assets. For the
first time, it appears the hard questions have been asked and answered, in
a clear, understandable format.
Cliff obviously has a pipeline here to management now, and if there are
questions which you feel are not addressed, now would be the time to let
him know (shoemake@digital.net). We would like to see a clearer picture
of exactly where and when and how the shares outstanding and float got from
what we were told it was and what it is today. It is quite obvious that
as we were buying into NIAR, someone else had some fresh shares and were
selling. It will take quite a lot for us to feel really comfortable now
with management that in effect, blindsided the Kid.
Meanwhile, the bottom line should be here, that if the company finds and
announces a financial concern to lay off its paper, and as it begins to
exchange its art and media barter for cash or other assets, and as it
announces the completion of the 99-year lease on Cypress Island, the Kid
would see no reason presently to change its target of $2 to $3, and feel if
these objectives above are met, the company will be well on the way to
justifying that target.
That's assuming we get a straightforward answer on the share explosion in
the interim.
Your comments are welcome, and now to Cliff's excellent report:
Kids,
On Friday May 24th, I visited the corporate offices of North American
Resorts (NIAR) and spent over two hours talking to Mr. Tom Arrigoni and
Mr.Holly Rogers, Director/Assistant to CEO. The offices were very nice,
located in a 5 story building near downtown Orlando which also housed such
tenants as IBM, Ford Consumer Credit, Dean Witter, and the Orlando Business
Journal. As I waited in the lobby, the phones were ringing constantly and
there appeared to be a good bit of sales activity going on. I was joined in
the meeting by another Waaco Kid member from south Florida, and I hope he
may give a separate report with his views.
On Sunday May 26th my wife and I visited Cypress Island, and once again met
with Tom Arrigoni and Holly Rogers. We toured the island, watched their
promotional VCR, and basically went through the entire operation on the
island. The island is very natural, and as the brochures say, you see the
"Real Florida" as it was before there was Disney. We had a relaxing day
and enjoyed visiting the island. There are lots of things to do there, and
I think for a family with kids it is definitely an attraction worth
visiting.
Now, let me get some of the specific questions out of the way, and then I
will describe the visit in more detail. Some of the questions I asked
were:
1) What is the number of shares outstanding, how many are restricted, and
until what date? What is the number of shares in the float?
Preferred Shares = 8,882,205
Common Shares = 3,096,967
-------------------
Total = 11,979,172
Total Restricted shares = 3,266,671
(Restricted 10 months = 2,000,000)
(Restricted 20 months = 1,200,000)
Approximate Float = 8,712,501
2) What is the current status of NIAR being listed on NASDAQ?
They never actually filed for NASDAQ listing, but rather had filed to be a
reporting company, which is a prerequisite. They had hoped by the time
they were a reporting company the stock price and assets would qualify them
for NASDAQ, but obviously this did not happen. They will apply for listing
when the financials justify.
3) Are they still in a quiet period?
No, they were during the application for becoming a reporting company, but
that is now past. They should be coming out with some news releases soon.
4) What is the relationship with Cypress Island, are they going to own it,
lease it for 99 years, or just operate it?
A 99 year lease should be completed within 2 weeks.
5) What other acquisitions/partnerships are in the pipeline?
There is a marketing deal which should close very soon which will give
North American greater exposure to national markets.
6) What happened to the stock price?
The stock began to slip when the year end financials were released showing
a loss of nearly one million dollars. Even though the 1st Quarter showed a
net profit before taxes, it has not impacted the stock price in a positive
way. According to Tom Arrigoni, the SEC disallowed several of the
accounting entries for the year end financials, which caused them to go
from a submitted $400K profit, to the reported loss of nearly 1M dollars.
Also, the SEC disallowed their valuation of promotional art work and
prepaid advertising which were traded for restricted shares of stock. When
they submitted, these assets showed over 8.8 million dollars, enough for
the NASDAQ listing, however the SEC lowed the valuation to approximately 2
million. With the slip in stock price, and the lowered assets, NASDAQ
listing is now on hold.
General Overview
-------------------------
North American's main business has been selling vacation packages to visit
the Orlando area, and they have agreements with various hotel and
condominium owners to accommodate these sales. The new venture is selling
timeshare memberships to Cypress Island, of which they have already sold
about 200 memberships. Since there are no condominiums (cabins) built on
Cypress Island yet, they are selling the membership with rights to use
other timeshares which NIAR owns or has agreements on, specifically with a
development named Ocean Landings in Cocoa Beach Florida. They have also
included a paragraph in the contract which states that NIAR does not ever
have to actually build cabins on Cypress Island.
The sale of memberships is both the biggest potential, and the biggest
problem. When a membership is sold for $5,000, the purchaser puts down
about 10% and finances the balance over 5 years at an average of 15.5%.
NIAR had intended to be able to sell these loans to a third party, thus
capturing the entire $5,000 membership fee immediately. They have been
unable to secure a contract to sell this "paper", and this is causing a
severe cash flow problem. The SG&A expense for marketing and processing is
approximately 35%, and they are only collecting 10% down payment. So each
time they sell a membership to Cypress Island, the company has a negative
cash flow. They have had to slow down the marketing effort until they
secure a third party to buy these loans. Tom feels that they will have
this in place within a few weeks, and then they will be able to ramp up the
marketing effort.
What is the Game Plan
----------------------------------
- Sell the current Accounts Receivable, and work out a deal to sell the new
membership loans on a weekly basis. This is in the works and Tom hopes to
have the relationship finalized very soon.
- Trade the promotional art work for cash or other assets. They have a
bartering company working on this.
- Split up the prepaid TV advertising, and sell some of it for cash.
- Bring in a professional stock promotion firm, CMI. ( done )
- With the cash from these changes, gear up the marketing plan, and begin
aggressively selling the memberships to Cypress Island.
What is the Potential for Sales
---------------------------------------------
According to Tom's 5 year plan, there is room on Cypress Island, and zoning
would allow NIAR to build up to 850 units (cabins). Tom feels that about
125 to 150 cabins is more reasonable to build. After visiting the Island,
I personally agree that 850 units would probably destroy the natural
environment that they are trying to promote. Let's assume that only 125
cabins will be built. With each cabin built, NIAR can sell 50 memberships,
for a total of 6,250 memberships. At $5,000 each, this would be a total
revenue of $31,250,000. Subtract from this the 35% overhead, or
$10,937,500 and the cost of building the cabins at $50,000 each, or
$6,250,000, and you are left with a net profit potential of $14,062,500.
Increase or decrease this number based on the number of units actually
built.
How fast can they do this? Tom believes that during the busy summer
season, they can sell up to 50 memberships per week. Once they get the
third party to buy the paper weekly, this would mean $250,000 revenue per
week, or $1M per month. Out of this cash flow, they would build additional
cabins at the rate of one per week, to keep up with the anticipated sales.
This gives a potential quarterly sales of $3,000,000, with capitol cost to
build 13 cabins of $650,000, and overhead expense of $1,050,000, for a net
profit of $1,300,000 per quarter from the Cypress Island membership
operation. This does not include revenues for Cypress Island as a tourist
destination, food, boat rentals, etc. etc. etc. This also does not include
their ongoing vacation package sales, which accounted for the majority of
the $903,000 in sales for the 1st Quarter 1996 as reported May 7th.
What could this mean to the Stock Price
-----------------------------------------------------------
Keep in mind that these estimates are very speculative, and North American
Resorts may never be able to sell the number of memberships described
above. I'm going to assume that at best the above rates can be attained
for about one quarter per year, and during the other 9 months they will
only achieve half of those numbers due to the reduced traffic visiting
Orlando
during the off season. This would yield a net profit for the year of 2.6
million, and I'll round up to 3 million to account for profit from other
operations. With a float of approximately 8 million shares, the EPS would
be about .38 cents. Let's give them the conservative P/E of 15, and you
would have a share price of $5.70.
Now how long would it take them to reach this level. I don't know. Tom
talks like it could begin very soon, and if some things fall into place,
maybe they could start driving these kind of numbers by this time next
year.
My Personal Assessment
--------------------------------------
I certainly don't think that anyone should sell their shares at this low
price. I may even pick up some additional shares at this level. Any good
news at all should be able to get this share price back to the .50 - .75
cents area, which would be a huge gain based on the .20 cent price today. I
would not be investing anything but your Vegas money here. This is
certainly not a sure thing, and it could end up worthless. But there is
potential.
What you are investing in is a Marketing company. Tom Arrigoni and company
are selling Time Shares, a business not always associated with high
standards. As evidenced by the rejection of many of the numbers in their
SEC filings, it is also obvious that they do not run their books like a
Fortune 500 company. But I do believe that they know how to sell the
product they are attempting to sell, and if they do, the numbers will take
care of themselves.
--
Cliff Shoemake
shoemake@digital.net
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