Information – make that accurate information – remains an investor’s most powerful tool. As we have seen in Parts I and II of this series, neither 3 E International Corp. nor Pinnacle Business Management, Inc. presently files regular financial reports with the Securities and Exchange Commission. Instead, investors have been exposed to a steady diet of press releases and “analysis” from promoters.
Unfortunately, as it turns out, the SEC now says that one of the Pinnacle promoters was not providing accurate information. On February 25, 2002, the SEC announced that it had filed a lawsuit in federal court alleging that promoter Mark E. Rice carried out a scheme to “pump and dump” the shares of four microcap companies, including Pinnacle. The SEC charges that Rice sent out millions of fraudulent “spam” e-mail messages containing misleading information designed to pump up the value of the four obscure stocks. Using two “alter egos” – Primex Capital and Applegate Sentry, S.A. – Rice then sold restricted shares in three of the four companies, realizing profits of about $900,000.
He may not be keeping much of that money, however; while he has neither admitted nor denied the allegations, Rice has consented to an order prohibiting him from future violations of the securities laws and agreeing to pay back his profits – although the amount of that repayment has yet to be determined.
Which brings us back to the search for accurate, detailed information. When Pinnacle announced plans to spin-off Summit Property Group, Inc. (now known as Corbel Holdings, Inc.) to the Pinnacle shareholders in February 2001, it didn’t say why it had decided to part ways with the inactive subsidiary. Was it just a generous gift from Pinnacle’s management to the Company’s shareholders? Or did Pinnacle have a long range plan in mind? In this installment of our series we take a further glimpse at Pinnacle. And then we look at all those shares of 3 E that are due to be distributed as a result of Corbel’s merger with 3 E.
Being Pro Active
At the beginning of 2001, Pinnacle’s active business consisted principally of an “advance paycheck service” that allowed customers to draw funds against their paychecks. The service appeared to be generating little income, and the Company was experiencing significant losses; revenues for the year 2000 were about $71,000, while operating expenses were more than $1.7 million.In January 2001, Pinnacle shifted its focus, acquiring a group of interrelated businesses in Western Pennsylvania - a pair of automobile dealerships and a telecommunications business - from individuals named Kim and Vincent Lo Castro. The Lo Castro businesses, known as “All Pro Auto Mall,” “All Pro Daewoo,” and “All Pro Communications,” came at a hefty price. Pinnacle issued the Lo Castros 83.3 million shares of common stock, and a promissory note for $6,693,465.
And there’s this catch. Pinnacle is supposed to pay off the promissory note in twenty installments beginning on April 1, 2002. If the Company misses a payment, the Lo Castros can get their businesses back – and they get to keep the Pinnacle stock. Presumably, they also get to keep any Corbel shares that they received from that spin-off.
What does this mean for nervous Pinnacle investors? Pinnacle’s Form 10-Q for the quarter ended June 30, 2001 (the last financial report filed by the Company) reflected approximately $5.2 million in revenues for the first six months of 2001, and a gross profit of $1.7 million. Those revenues, however, came principally from the new “All Pro” businesses. Vehicle sales accounted for $4.1 million of Pinnacle’s income, and telephone systems for another $386,779. The Company’s historic “payday advance” operations generated revenues of only $27,305.
Still, the Company lost money. Operating expenses of $3.6 million (including $1.9 million in stock issued for consulting services) left Pinnacle with an operating loss of $1.9 million. The net loss was even higher, over $2.3 million. As a result, even with the All Pro revenues, Pinnacle conceded that its losses and outstanding financial obligations “raise substantial doubt about the Company’s ability to continue as a going concern.”
Has Pinnacle been preparing for the potential loss of the All Pro operations? In a November 27, 2001 press release, the Company disclosed that it had “entered into an agreement to spin off the All Pro Group to position it to be traded on another exchange.” The Company did not identify the other parties to that agreement, or say why it was looking to jettison its most significant income producing division.
What’s been happening since? The Company stopped filing financial reports after June 2001, so investors have been forced to rely upon press releases for financial information. For example, on February 6, 2002 Pinnacle issued a press release disclosing “preliminary and unaudited” 2001 financial results for the All Pro business. Pinnacle claimed that during 2001 the “All Pro division saw total combined sales of $8,958,770, resulting in pre-tax profits of approximately $253,456 with bad debt reserves of $306,119.” The Company didn’t disclose “preliminary results” for its other operations, or reconcile those “pre-tax profits” against the $3.6 million in operating expenses reported for the first six months of 2001 – or any subsequent expenses.
Numbers in press releases are no substitute for audited financial statements. Consequently, with the Lo Castro note coming due, investors were probably getting anxious. And with good reason. On February 20, 2002, Pinnacle issued another press release, conceding that it “is not currently in position to begin making principle (sic) payments to the Lo Castro's (sic) as called for in April of 2002.” Pinnacle CEO Jeffrey Turino indicated that Pinnacle was “considering several restructuring scenarios that will allow us the proper time to execute the fundamentally strong goals and business plans of The All Pro Group.” He provided no details of those scenarios, and did not say whether they included a plan to spin off All Pro as a separate entity.
In that same press release, Vincent Lo Castro indicated that he had “no current intentions of declaring any default under our agreements.” “Current,” however, is a fluid word, and suggests that his position could change at any time.
Pinnacle shareholders do not seem to be buying the Company’s rosy view. On February 21st Pinnacle stock was trading at just 7/10ths of a cent per share, on volume of 16.8 million shares. The previous day, February 20th, over 36 million shares were traded, making Pinnacle the second most active Pink Sheet stock – five spots ahead of Enron. Who’s bailing out of Pinnacle? Are insiders selling their shares?
Is Pinnacle management looking for a safety net? Is that why Corbel has become a separate, publicly traded entity? If so, we return to an earlier question: who will control Corbel?
Musical Shares
Corbel’s share calculation problems must be contagious. When it first announced the deal on January 22nd, 3 E said that “all of the outstanding common stock of Corbel” would be exchanged for 12,344,160 million newly issued shares of 3E.” Later that day, 3 E sent out a revised press release saying that it instead would be issuing “15,344,160 million newly issued shares of 3E, which includes approximately 5,000,000 shares designated for capital expansion. How many of those were shares being distributed to the Corbel shareholders who received their stock as a result of the Pinnacle spin-off? Pinnacle said that its shareholders would own approximately 48% of the spin-off, but who received the remaining 52%? Was it Kenneth Van Ness, or someone else? And what did they pay for the shares? The silence on those issues seemed deafening.Then, on January 31st, 3 E provided yet another share calculation. This time, it said that 10,370,164 shares had been issued to Corbel, and that 5.5 million of the shares would be held by officers, directors and “joint venture partners.” Had the additional 5 million shares “designated for capital expansion” disappeared, and if not, how were they going to be distributed? Why had the calculation changed? Which numbers are accurate? 3 E offered no explanation. Nor did the Company identify those officers, directors and joint venture partners who would be receiving 5.5 million shares. Did they include Messrs. Hall and Turino? How about Mr. Harlan and Mr. Van Ness? Hall and Turino surely must have received a significant number of the spin-off shares as a result of their Pinnacle holdings – but did they receive part of the 52% as well, and are they getting additional shares from 3 E?
What about those Pinnacle shareholders who were supposed to receive 48% of Summit/Corbel as a result of the spin-off – has anyone figured out who they are? How many of the 3 E shares will they receive? The January 31st press release said that only about “4.5 million of the 10,370,164 shares represent the shares that were issued to Pinnacle (OTC: PCBM) shareholders of record on March 2, 2001 as part of the original Summit Property Group dividend.”
In other words, who is getting the rest of the 3 E stock?
The January 31st press release contained two more items of note. First, the Company said it planned to change its name to COBE, Inc., and its trading symbol to COBE. Second, it disclosed plans to file a Form SB-2 registering the 10,370,164 shares, and seek listing on the OTC Bulletin Board.
That could turn out to be quite a windfall for whoever owns those 10,370,164 shares. Based on the February 21, 2002 closing price ($3.05) those shares would be worth over $31 million. Since then, however, 3 E shares have hit the skids, falling to $1.85 by the close of trading on February 26th. Even at that price, it’s a lot of money to make selling shares of a Company with no discernible business. Did any of the selling shareholders pay for their Corbel shares in the first place, or is this all pure profit?
On the other hand, investors who bought 3 E at its recently elevated prices may be in for a sudden fall. The potential for profits may be good news for insiders who are selling shares that they didn’t pay much – or anything - for, but do investors really want to be left holding the bag when the music finally stops?
Makes you wonder.
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