Shallbetter Industries, Inc. - Mad About Mongolia

Building a business is difficult, time-consuming and expensive.  .  As StockPatrol.com readers have seen, the public marketplace is littered with the remains of companies whose ambitions and pretensions exceeded their grasp and financial means.  That said, we judge success by many standards – dollars earned, jobs created, technologies developed, among others.

But are we ready to measure a company by the number of Tugriks it generates?

The Tugrik, you see, is the official currency of Mongolia, which lies in Central Asia with Siberia to the North and China to the South.  Most of us know Mongolia - formerly called Outer Mongolia – as a place that is far, far away – as in "kids, if you don't start behaving yourselves we're going to send you to Outer Mongolia."  Not exactly a tourist Mecca, or a haven for business - although George W. Bush became the first sitting U.S. President to visit Mongolia in 2005 and Amazing Race contestants made a pit stop among its nomads on this week's episode.  Mongolia is plagued by poor economic growth and political corruption – not exactly an inviting mix. 

To complicate matters further, the official language of Mongolia is Mongolian – what else were you expecting?  Considering all of these obstacles, doing business in Mongolia would seem to present a considerable challenge, even for an established, well-financed U.S-based business.  So why would a tiny, struggling company venture where Genghis Khan once roamed?

That is the first question that occurred to us after we received a series of e-mails touting Shallbetter Industries, Inc. (Pink Sheets: SBNS), an obscure penny stock company that plans to make its mark in Mongolia.  The promoters have been calling Shallbetter a "needle in the haystack" and "the diamond in the dirt," but, as we quickly discovered, Shallbetter has no assets and no revenues.

Even contestants on the Amazing Race are given a few dollars – or Tugriks – as they race around the globe.  They have a fighting chance.  Does Shallbetter? 

From Shallbetter to Shallworse

Shallbetter has a lengthy, undistinguished history that began in the Midwest and led to the Far East.  The Company was formed in Minnesota in 1968 and, for a time, sold electrical products.  In 1982, Shallbetter lost its bank line of credit and landed in bankruptcy.  Since then, the Company has floundered, searching, without success, for a new business.  Shallbetter has not had any operations or assets since emerging from bankruptcy in 1982.

In 2002, the Don and Bonnie Saunders Family Trust gained control of the Company, paying $223,000 for more than 75% of the outstanding shares.  Thomas K. Russell, a California attorney and lobbyist who specialized in mergers, acquisitions and financings became Shallbetter's sole officer and director, and the Company moved its offices from Hopkins, Minnesota to Santa Margarita, California.  Later, the Company shifted its headquarters to Boulder, Colorado.

It was not long before the Company was in play and on the move again.  In September 2003, Shallbetter executed a reverse-merger with Logistics Resources Limited, a British Virgin Islands corporation which purportedly was poised to explore for "minerals" in Outer Mongolia.  By virtue of the reverse-merger, the former owners of Logistics acquired approximately 82% of Shallbetter's outstanding shares, Terry W. Wong became the Company's President, Anthony C.Y. Chow was named Chief Executive Officer, and Thomas Russell resigned in favor of a new five person Board of Directors that included Wong and Chow.  Shortly after the merger, the Company moved its headquarters from Colorado to Vancouver, British Columbia. 

According to a Form 8-K filed by Shallbetter on September 24, 2003, Logistics owned 13 mineral exploration licenses in Outer Mongolia, each of which was valid for 25 years.  At the time, the Company claimed that the licenses were located in an area that "includes a large gold/copper porphyry system."

Did Logistics have any other assets, liabilities or income?  The September 24, 2003 Form 8-K did not include any financial information for Logistics, but the Company promised to file an amended Form 8-K containing financial statements and pro forma reports within 60 days.  No such amendment was filed.  Instead, on December 18, 2003, the Company filed a Form 8-K announcing that the newly ensconced Board of Directors had elected to change the Company's fiscal year from December 31st to September 30th. 

The following day, Shallbetter announced that it had fired its auditor, S.W. Hatfield, and retained the Vancouver accounting firm of Ellis Foster (more accurately, Moore,. Stephens Ellis Foster Ltd). 

Shallbetter did not say why the fiscal year had been shifted to September 30th, but the change had one significant practical effect - meaningful audited financial information about the new operations would not be made public for more than year after the merger.  The Company's Form 10-K for the year ended September 30, 2003 offered little insight.  According to that report, the Company had a total of $55 in assets – including the assets contributed by Logistics.  Shallbetter's new auditors attributed zero value to the "mineral exploration licenses" contributed by the Company's new controlling shareholders.

The Form 10-K cast doubt on the nature of those licenses as well as their value.  Now the Company was saying that Logistics owned 3 mineral exploration licenses covering an area of approximately 75,000 hectares – not 13 licenses as it had claimed immediately following the reverse-merger.  Shallbetter also said it was "in the process" of acquiring another 5 licenses.  And, according to the September 30^th Form 10-K, the licenses were valid for 3 years – not 25 years as the Company had stated less than four months earlier.  Those licenses could be renewed for an additional four year period upon payment of annual fees ranging from $.05 to $1.50 per hectare.

The shorter license term was a significant distinction.  It has been more than three years since the reverse-merger and the Company has not indicated whether the licenses have been renewed – or how it would pay the required fees. 

The state of the licenses is intriguing, but the Company faced more significant obstacles.  As Shallbetter conceded in early 2004, a proposed exploration program would demand a qualified technical team of geologists and engineers and evaluation of data – all of which would require money that the Company did not have.  There is no sign that those funds have been forthcoming.  As of June 30, 2005, the Company had no assets and liabilities of approximately $1.6 million, virtually all of which was due to related parties.

But the Company did have shares to disperse.  On August 11, 2004, Shallbetter filed a pair of Form S-8 Registration Statements, registering 211,109 shares to be issued to officers and directors, and another 186,678 shares to be issued to a consultant named Charles McCallion.  In October 2003, Shallbetter agreed to pay McCallion $300,000 to render advice on general business and financial matters over the following twelve months.  McCallion presumably received the S-8 shares in consideration for those services. 

What did McCallion do for Shallbetter?  As of September 30, 2004 the Company had no operations, no money and no revenues.  Exactly what had Shallbetter been doing since September 2003?  In December 2004, for the second time since the reverse-merger, the Company discharged its auditors – this time replacing Moore Stephens Ellis Foster with Clancy and Company of Phoenix, Arizona.  And the Company was moving its offices – closer to Mongolia – to Honolulu, Hawaii.

Information about Shallbetter was not encouraging in the two years that followed the reverse-merger – but at least it was available.  That changed in September 2005.  From September 2000 until August 2005, the Company filed regular public reports through the SEC's Edgar electronic filing system.  Then the Company failed to file its Form 10-K Annual Report for the year ended September 30, 2005, saying that it had not yet completed its annual audit.  That delay seemed puzzling since there was no sign that the auditors would have no assets or revenues to review.

Then the Company fell silent – failing to file required public reports for the next year.

Aloha China – Hello Promoters

The silence was broken in August 28, 2006, when the Company issued a press release announcing the appointment of a new President and Chief Finance Officer, Bruce Pridmore.  According to the Company, Pridmore would take charge of day-to-day operations, "a new drilling program," and the search for additional properties.  A second press release, issued on September 8^th, said that Pridmore was in China "examining new resource properties" and structuring plans for an expanded exploration program on the Mongolian property.  The press release did not address the status of the Mongolian leases.

The September 8^th press release also stated that the Company was seeking financing and would soon resume filing required SEC reports.  On September 13, 2006 the Company finally filed its Form 10-K Annual Report for the year ended September 30, 2005.  Not surprisingly, Shallbetter had no assets or operations during that fiscal year – although the Company had operating expenses of more than $700,000. 

Shallbetter has not yet filed any reports reflecting its current financial position.

The timing of the press releases and the long-delayed Form 10-K proved to be fortuitous for the promoters.  In early September, spam e-mails touting the Company predicted that Shallbetter shares would rise from 85 cents a share to $1.15 a share.  "Coincidentally," Shallbetter stock reached a high of $1.15 (and a low of 40 cents) on September 8^th, before closing the day at 85 cents a share.   The promoter claimed that Shallbetter stock would "continue to climb due to superb business solutions and creative partnerships in the business world."

Nothing in the Company's history would suggest that Shallbetter had arrived at "superb business solutions" or developed "creative partnerships."

A second series of spam e-mails, dated September 14^th, regurgitated the earlier comments, adding that Shallbetter "has exclusive rights to many mining locations, that are highly sought after because they are rich in gold" – a statement that does not appear to have any factual support. 

Then again, facts are generally unimportant to unscrupulous promoters with undisclosed agendas.  What agenda could be in play here?  Are the promoters being paid to spread misinformation – and, if so, by whom?

A Tugrik for your thoughts.

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