Unusual corporate affairs leave analysts and investors happy
YBM Magnex International Inc YBM
Shares issued 44,222,901 Mar 9 close $19.90
Tue 10 Mar 98 Street Wire
FROM SHELL TO $900 MILLION
by Stockwatch Business Reporter
YBM Magnex is the sort of success story that makes shell creators on the Vancouver and Alberta stock exchanges swoon. Its journey from Junior Capital Pool shell to today's $20 mark has taken the 1994 shell from worthless to almost $900 million. It has been a fascinating trip.
For over a year, the company and its Canadian analysts have been complimenting YBM's rapid penetration of the North American magnet market. A recent audit, however, has shown this penetration to be non-existent. Apparently, neither this awkward fact, nor other curious elements of the successful promotion, has tempered anyone's enthusiasm. On Monday March 9 the company's shares closed at an all time high of $19.90 giving YBM a market capitalization of close to $900 million.
In August 1996, YBM's vice president of business development, James Held, misled Dow Jones News Service with the claim that US revenue totalled US$5 million for the first six months of the year alone. This was up sharply from US$2.9 million for all of 1995. Mr Held said that YBM was working on "several significant contracts" in the US and Mexico and was close to securing a US $2 million deal in Canada although he declined to provide specifics. Mr Held pointed out that YBM does not provide earnings forecasts but the spokesman said he had no trouble with the numbers being churned out by brokerage industry analysts. Kaan Oran of First Marathon Securities gushed to Dow Jones: "The company has beat my estimates for the last three quarters."
Then in October 1996, James Held reported that "YBM's strong results are due to a number of factors, including the continued penetration of the North American permanent magnet market which contributed approximately 15% of total sales through nine months, compared to 5% for the year 1995."
YBM's 1996 annual report dated March 4, 1997, again highlighted this significant growth in the North American market. The company's Philadelphia accountants, Parente, Randolph, Orlando, Carey and Associates, certified statements showing that YBM's N.A. sales had more than doubled between 1994 and 1995, from US$1.4 million to US$2.9 million, and then jumped to US$13.6 million by year end 1996. According to these figures, since 1994, (when YBM began public life through an Alberta Junior Capital Pool RTO), and 1996, operating profit for North America had increased from just US$7,000 to over
US$3 million. The only other region to experience such exponential growth in sales was the Middle East, where YBM reported 1996 sales of US$3.3 million and operating profit of US$1.2 million. Unfortunately, many of the figures were bogus.
Last fall, in order to satisfy Canadian securities regulators and clear the path for a large YBM prospectus financing, Deloitte & Touche LLP was called in for an audit. The company and its analyst promoters have been quick to point out that the review by Deloitte & Touche resulted in no adjustments to overall sales numbers, which is true. The rest of the truth, so far, is the explanation for "certain adjustments" that resulted from the audit.
Perhaps most significant among the unusual notes to the Deloitte & Touche audit has been the company's North American sales that went poof. Instead of US$13.6 million sales in this market as originally reported by the company, YBM actually sold just $1.8 million in 1996 - a drop from the 1995 numbers. Similarly, N.A. operating profit has devolved - shrinking from a reported US$3 million down to $600,000. Contrasting with previously published reports, the company's growing Middle Eastern sales and operating
profit has been identified as US$0.
Where did the sales go?
According to YBM management, this bizarre circumstance is the result of "certain geographic sales information previously reported based upon the location of the company's distributors" being restated "to reflect the "ultimate end user." When YBM executive James Held was touting major developments in North American sales deals to the press, apparently, he should actually have been talking about more sales in two of the world's most inhospitable business climates: the notoriously murky arenas of Russia
and the Ukraine where the company concentrates the bulk of its activities.
Instead of showing an accelerating trend toward sales in US, Canada and Mexico, YBM's audited results show how the company remains dependent upon unstable and inflationary regions. For year end 1996 net sales were reported as being US$90.3 million, YBM previously stated that European markets accounted for 81%, North America was at 14%, and the Middle East accounted for 4% of this total. In truth, North America accounted for just 2%, and Europe represented a whopping 98%. The Middle East was zero. Of the European amount claimed, 79% of sales were centred in the wild-west financial environment that exists in Russia and the Ukraine today.
How the company managed to mistake $15 million in Russian and Ukrainian sales is anything but clear. Nor is it evident what may be driving a tremendously multiplying demand for the company's magnets in Eastern Europe. YBM management and Canada's financial analysts covering the stock, are confident that the North American thrust will be successful in future.
Likewise, some of the other jarring notes from the Deloitte & Touche report are billed as signs of past problems. The audit uncovered a "weakness in inventory controls" that YBM says can be avoided in future by "the implementation of a corporate wide information system" to "assist management in centralizing accounting controls." Triggering this recognition was a "non-cash adjustment to inventory and cost of sales of US$5.2 million." The magnet company explains this circumstance came about after it provided US$5.2 million in diesel oil inventory to an unidentified distributor. "The contract called for payments to be made to the Company as
such time as the diesel was consumed by end users and profits were realized." Company management blames its credit-good-to-the-last-drop of diesel oil on the decentralized nature of its international operations and on its rapid growth.
As at December 31, 1996, YBM "had $3,000,000 of uninsured deposits in a Russian financial institution." But if this or any other financial notes should give pause to the casual reader of corporate statements, there's a stack of brokerage research reports that tell investors why YBM stock is about to break the $1 billion market cap level.
In a February 3 1998 buy recommendation, First Marathon Securities analyst Kaan Oran described how YBM had come "out of the forensic study by Deloitte and Touche with flying colours." That's a perspective likely shared by others. Vice president and director of First Marathon, Robert Owen Mitchell, also sits on the board of YBM Magnex.
As the company continues to report ever-increasing sales and earnings, the YBM bandwagon has become increasingly crowded of late. Early boosters included Rob McConnachie of Canaccord Capital (now with Scotia Capital Markets), Peter Sklar of Nesbitt Burns and Mike Middleton of Griffiths McBurney Partners. But in today's over-heated mutual fund driven market, there's always room for one more voice telling people what stock to buy.
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