It doesn't seem like anyone cares but just in case here is an update on FEVI from stockpatrol.com. Does anyone think this might be a good investment?
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UPDATE – FAR EAST VENTURES, INC. (OTCBB: FEVI) – NO LONGER HORSING AROUND
October 30, 2000
Remember Far East Ventures, Inc. (OTCBB: FEVI)? In May of this year, the Company was busily promoting plans to purchase horse racing tracks in Vancouver, British Columbia and Texas. (See STOCK OR SCHLOCK – FAR EAST VENTURES, Parts I, II, and III). Back then, the Company claimed it would finance those acquisitions, and others, with the proceeds of a $6 million private placement (which it expected to receive imminently) and another $100 million to be raised by “investment bankers.”
That money, it appears, never arrived and Far East Ventures is no longer in the racing game. Instead, the Company says it is now in the telecommunications business by virtue of a reverse-merger with an entity called Sophisticated Communications, Inc. (SCI). What a difference five months makes.
Churchill’s Down
Far East Ventures is no stranger to the reverse-merger game. In November 1999, the Company acquired Churchill Resources, Inc. in exchange for 4.5 million shares of Far East Ventures stock. That left Churchill in control of the Company.
Prior to the Churchill merger, the Company had no assets, no revenues and no operations. On the other hand, Churchill (according to Far East Ventures) had “positioned itself to enter the horse racing and gaming business” with agreements to acquire two tracks in Vancouver, British Columbia. At least that is what the Company was saying at the time to justify the issuance of 4.5 million shares to the former Churchill stockholders.
It now seems that the Company has little to show for those 4.5 million shares. In a Form 10-Q filed with the SEC in August, the Company disclosed that it had abandoned plans to buy the two Canadian horse racing tracks. What caused this abrupt change of direction? The Form 10-Q revealed only that the Company had “withdrawn” from agreements to acquire two Canadian race tracks and “changed its corporate focus from that of acquiring gaming and horse racing establishments to acquiring telecommunications companies.” This shift, the Company explained, “resulted in the removal of certain board members and our recently hired Chief Executive Officer and Chief Financial Officer.”
The Company says that those officers and directors were kicked out by two-thirds of the shareholders because they withheld information concerning the status of pending acquisitions. According to an August 14th press release, the deposed directors failed to disclose that the Company’s bid to acquire a Texas race way had been rejected, or that a government official in Vancouver had publicly opposed slot machines and casino gambling that had been planned for the tracks. Still, the Company has not indicated any plans for legal action against the former officers and directors (although it subsequently revealed that at least one of those officers was contesting the Company’s decision to remove him). Nor has it announced plans to reclaim the Churchill shares.
Perhaps the answers to these questions rests in that vote by two-thirds of the shareholders to remove the directors. There is no record of any shareholders meeting in August, so just how did they go about bouncing the purportedly errant directors? Prior to the reverse merger with SCI, the former owners of Churchill controlled the Company. Together with the Company’s consultants and one other shareholder, they apparently controlled about 8.6 million shares of Far East Ventures common stock. That’s more than two-thirds of the 11.4 million shares that were then outstanding. Did the former Churchill shareholders vote to kill the very business they traded to the Company in exchange for 4.5 million shares? Were the ejected directors merely scapegoats for a business plan that had no chance to get out of the starting gate? In any event, the Churchill investors are not likely to return those shares voluntarily.
It’s All In The Cards
All of that, it seems, is in the past. Far East Ventures says it is now in the telecommunications business, and the Company is back to issuing shares. The Form 10-Q for the period ended June 30th states that the Company acquired SCI on August 10th in exchange for 7 million shares of Far East Ventures common stock.
That Form 10-Q also disclosed that Far East Ventures had issued 500,000 shares to yet another consultant, Shawn A. Becker, on August 1st. This was certainly not the first time the Company had retained a consultant. In fact, only months earlier it had issued, and registered, 2.6 million shares pursuant to a series of consulting agreements (See Far East Ventures Part III – Consultants To Spare).
Like the Company’s earlier consultants, Mr. Becker agreed to “advise the Company in structuring mergers and other acquisitions”. Unlike those other consulting agreements, however, this one imposed no obligation upon the Company to register the shares being issued to Mr. Becker. Far East Ventures registered them anyway – just three weeks after the agreement was signed. On August 23rd, the Company filed a Form S-8 registering 800,000 shares on behalf of Mr. Becker.
But where did those 800,000 shares come from? The Form 10-Q, filed just two days earlier, indicated that Mr. Becker had received only 500,000 shares. Had the value of his services increased so dramatically in that brief time, or was the Form 10-Q simply incorrect?
In any event, Far East Ventures is now in the telecommunications business. In an August 18th press release, the Company announced plans to transfer control to SCI, a Florida-based distributor of “prepaid calling cards.” According to that release, SCI had a distribution network of about 50,000 locations in 42 states and was “on track to produce more than $75 million in gross revenues for fiscal 2000 with an estimated net income in excess of $3 million.”
So far, however, SCI has not made public any audited financial statements supporting its numbers. On September 7th the Company filed a form 8-K describing the reverse-merger, and stating that audited financial statements for SCI were not yet available. Far East Ventures promised, however, that those financials would be filed within sixty days – or by early November. That means that, for the time being, the public is left to rely on the figures contained in the Company’s press releases.
Has the Company received any audited financial information from SCI? The Merger Agreement, dated August 28th, provided that Far East Ventures could cancel the transaction if SCI’s audited financial statements did not reflect pre-tax profits of at least $1 million for the previous year. Did the Company close the merger without receiving that information, and if so, why? As a practical matter it seems unlikely that the deal could be unwound at this late date even if the SCI numbers prove inadequate.
The Merger Agreement also provided that an audit would be completed, hopefully within sixty days (around October 30th), by the accounting firm of Merdinger, Fruchter, Rosen & Corso, P.C. It seems then that those accountants were on board by late August. So why did the Company issue a press release on October 23rd announcing that “[t]he firm of Merdinger, Fruchter, Rosen & Corso…has been retained by management of the company to perform its consolidated audit.” Certainly the release implied that they had been retained only recently.
And why did the Company say, in that same press release, that “[c]ompletion of the audit is expected by the end of this fiscal quarter,” which is December 31st. Both the Form 8-K filed with the SEC and the Merger Agreement promised those statements by early November? Why the delay?
The Form 8-K did contain some noteworthy information. It stated, for example that the former SCI owners would receive 12.4 million shares of Far East Ventures common stock rather than 7 million shares as previously indicated. What had caused the value of SCI to increase by 5.4 million shares? The Company did not say.
The Form 8-K also revealed that Michael Fletcher, SCI’s former CEO, was now the Chairman of the Board of Far East Ventures, succeeding an individual named Alan Burditt. Mr. Burditt had become Chairman in August after the purge of those other directors. Apparently, he was also a shareholder. On July 26th, just days before the SCI merger was announced, Mr. Burditt filed to sell 500,000 shares of Far East Ventures common stock under Rule 144. (For more on Rule 144, see (BUYER BE WARY – PLAYING BY THE RULES, PART I – RULE 144).
Waiting By The Phone
The Company certainly seems to have financial data about SCI. – even if the public does not. Despite the absence of any audited financial statements, the Company has issued press releases containing “internal and unaudited” financial information. For example, an August 30th press release stated that SCI’s gross income for June 2000 was approximately $5.9 million, a 24.5% increase over June 1999, and that June 2000 sales were 14% higher than sales in May. It also indicated that net pre-tax profits for June 2000 were $240,000. Those seem like pretty specific details – so why haven’t audited financials for 1999 become available? How about 1998?
The Company’s press releases also offer projections for the future. On August 18th, for example, the Company announced that “SCI sales are growing at a staggering rate of $500,000 per month.” Will the audit support those growth figures or provide a methodology for these projections?
Despite the absence of financial statements, the Company says the acquisition should qualify it for listing on the NASDAQ Small Cap Market. But is that likely? To gain that listing a company must meet stringent criteria, including the following:
1. The Company must have either (i) Net Tangible Assets of $4 million; or (ii) Market Capitalization of $50 million or; (iii) Net Income of $750,000 in the latest fiscal year or in two of the last three fiscal years; and
2. There must be a public float of 1 million shares; and
3. The public float must have a market value of $5 million; and
4. The bid price for shares must be $4 or greater.
Without audited financial statements it is impossible to determine whether the Company has either the requisite net tangible assets or sufficient net income to meet that first criterion for NASDAQ listing. It certainly does not appear to have a sufficiently high market cap. The Company, which had 11.4 million shares outstanding on August 14th, now has at least 24.6 million shares outstanding, after issuing 12.4 million shares to SCI and 800,000 shares to the latest consultant. As of October 27th, Far East Ventures stock was trading at around 31 cents, which means that those 24.6 million shares had a market value of only $7.6 million. That’s far short of the $50 million mark required by NASDAQ.
The Company presently falls short on other criteria as well. The value of the public float (consisting of 6.6 million shares) is about $2.1 million, or less than half the amount necessary. And the current stock price of 31 cents would have to increase more than twelvefold in order to meet that listing requirement.
Projects and Projections
Audited financials may not yet have materialized, but that does not mean the Company has been idle. Since the merger it has issued a stream of press releases announcing agreements, acquisitions and plenty of revenue projections.
These press releases have disclosed a variety of plans, including agreements with telecommunications carriers and distributors of pre-paid calling cards; plans to expand its international and cellular pre-paid calling card businesses; and the acquisition of a switched-reseller. Few details of these agreements were provided and, for the most part, the Company did not identify its business partners. But projections were plentiful. A few examples:
• In a September 6th press release Far East Ventures stated that it had entered into agreements with Florida and Texas-based telecommunications carriers “for domestic and international minutes originating in the U.S. for a total value of $100 million over the next three years.” Who are those carriers? The Company’s press release is silent on that point. It also fails to specify what that $100 million represents, or what portion of that money the Company will receive, and retain, after expenses.
That same press release disclosed that the Company had agreed to purchase and resell pre-paid calling cards from MCI Worldcom for calls to the U.S. from overseas. Here, the Company identified MCI Worldcom, a well-recognized telecommunications company, but it provided no further details of that particular agreement or its value to the Company. The Company did estimate that its new “international business” would add “at least 10% to annual positive net cash flow over the next 18 months. Of course, the impact of that projection is difficult to calculate without reference to financial statements. And, the Company did not say whether this “international business”, and those projected results, would flow solely from the three contracts it had just announced, or would require the Company to secure additional relationships and sources of revenue.
• The Company had more projections just one week later. On September 14th Far East Ventures announced it had signed an agreement with a “large master-distributor of pre-paid phone cards, and…entered into a letter of intent with one of the largest distributors of calling cards in the Northeastern U.S., which could contribute an additional $50 million per year to SCI’s revenue base.” The Company did not identify either of these entities or provide a basis for its projections.
That was not all. The Company also said it had plans to purchase “a state-of-the-art switch from a major telecommunications provider.” According to the Company, this was made possible, in part, because of its “new asset based credit facility.” The Company did not name the “major telecommunications provider” from which it would be making this acquisition or identify the source, or amount, of its “asset based credit facility.”
The Company apparently recognized that these announcements were vague. The following week, it issued another press release “clarifying the anticipated economic results of most recent company announcements regarding proposed acquisitions, new distribution agreements, recapitalization, and recent financing transactions.”
But how much was really clarified? The Company still did not identify any of the other parties to these agreements or the source and terms of its financing. Instead, it offered more projections, stating that these new agreements “should result in increased revenues of $40 to $50 million per year.” Consequently, the Company projected gross revenues of at least $100 million in 2001. Does that mean that the audited financial statements will reflect gross revenues for SCI of around $50 million for the year 2000?
As part of its “clarification” Far East Ventures also said that margins would increase from 5% to 9% once it became a facilities based provider by acquiring a switching capacity. How meaningful are these numbers? In the absence of audited statements it is difficult to say.
The press release also indicated the Company was working with “investment bankers” and “financial consultants” to implement cost control measures that would result in pre-tax earnings of $5.6 million in 2001. Who are those bankers and consultants? What is their relationship to the Company? None are identified. Are they the same investment bankers who failed to raise $106 million for the Company previously? Far East Ventures does not say.
• On September 28th, the Company announced that it had entered into a letter of intent with a Florida-based sales and distribution organization to expand into the pre-paid cellular business. Again the Company offered projections. However it did not provide details of the agreement, the identity of the “distribution organization” involved or the basis for those projections.
• On October 5th the Company announced a joint venture with Key Com, Inc., a California-based company, that is marketing something called XTRAN Electronic Money Transfer machines. Although the release did not describe SCI’s role in the joint venture, CEO Michael Fletcher predicted that the project would add $5 million to the Company’s revenues in 2001.
One week later, on October 12th, the Company issued a second release, noting plans to place the XTRAN machines “in SCI’s network of distributors reaching 50,000 locations nationwide.” According to the Company, those machines will sell pre-paid calling cards as well as facilitate money transfers. This time the Company projected revenues from the project of $6.5 million in 2001. That’s 25% more than Mr. Fletcher projected just one week earlier.
The XTRAN agreement leaves a number of key questions to be addressed. What are the exact terms of the contract? Must the Company place machines in 50,000 locations? What is the Company’s relationship to these 50,000 distributors? Does it have contracts with each? Can it compel them to install the XTRAN machines?
• On October 19th, the Company announced it had signed an agreement to acquire an unidentified switched-reseller for an estimated $1.5 million of cash and stock. Who are they acquiring? The Company maintains it cannot disclose the seller’s identity yet because of a confidentiality agreement.
Again, details of the agreement are sparse, but projections are provided. The Company indicates that as a switched reseller it could “increase…bottom line results by approximately 10% and gross revenues should reach $125 and $150 million in 2001 and 2002.” Of course, gross revenues are just one entry on the balance sheet.
Preston Chango
Just last week, Far East Ventures announced that Preston Research, Ltd.- identified only as a Texas and California-based management firm – had agreed to convert $1 million in debt that it was owed by the Company into unregistered shares of common stock. What is Preston Research? Why had the “management company” extended so much credit to the Company in the first place? Had Preston Research received additional shares when it extended those loans? More important, how many shares of Far East Ventures stock would they be receiving upon the conversion? Were there plans to register those shares in the future? The Company does not offer these details.
Although the Company has periodically referred to Preston Research in the past, as best we can determine, it has not publicly identified the principals of that entity or their relationship to Far East Ventures, Churchill Resources or SCI. Who owns Preston Research?
The Company also said that Preston Research will advance an additional $500,000 to be used for acquisitions. In consideration for those funds, Preston Research will receive more shares of the Company’s stock. How many shares will be issued, and at what price? The Company does not say.
Apparently there are still more shares to be issued. Far East Ventures indicates that “management has been in discussions with several other companies with which it has been doing business for a long period of time, and expects to announce similar recapitalization plans in the near future.” Does this mean that the Company has additional outstanding debt? The most recent Form 10-Q filed by Far East Ventures indicated that, before the SCI merger, the Company had liabilities of approximately $821,000. Did SCI have debts that were assumed by the Company upon the merger? How much was owed to SCI, and when are payments due? How many more shares would be issued on those conversions? In the absence of financial statements, investors remain in the dark.
The absence of detailed financial information certainly has not deterred investors who have been responding to the company’s optimistic press releases. For example, on August 18th, when Far East Ventures announced its agreement to merge with SCI, over 1 million shares were traded and prices soared from 35 cents to 60 cents. Then, on September 6th, the day the Company announced “over $100 Million In Major Contracts” over 4.7 million shares traded and prices doubled from 42 cents to 84 cents in intraday trading.
So who has been selling all those shares? Does the value of this Company justify that level of activity? Until audited financial statements become available investors can only speculate on the Company’s prospects. Just remember, as they say at the race track, there’s no such thing as a sure bet.
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