On April 2, 2002, Pinnacle Business Management, Inc. (Pink Sheets: PCBM) announced plans to spin-off its “All-Pro Group” to Pinnacle shareholders of record as of May 31, 2002. The move, which would make the “All Pro Group” a separately traded public company, came less than one week after Pinnacle issued a press release containing the All Pro financial statements for the years 2000 and 2001. (See Update: 3 E International Corp. and Pinnacle Business Management, Inc. – Less Than Meets the Eye).
According to Pinnacle’s April 2nd press release, Pinnacle shareholders will receive one share of All Pro for each fifty shares of Pinnacle that they own on May 1st. But Pinnacle shareholders will not be getting 100% of the All Pro stock. An unspecified number of shares of the new business will be going to All Pro’s former owners, Vincent and Kim Lo Castro “as consideration for deferring principal payments” on a $6,692,465 note that were due from Pinnacle beginning on April 1, 2002 in connection with Pinnacle’s original acquisition of the All Pro businesses. Vincent Lo Castro is also the Chief Operating Officer of Pinnacle.
Until the two companies disclose the number of shares being issued to the Lo Castros it will be impossible for investors to determine just how good, or how bad, this deal really is. In any event, shareholders will find their interest in All Pro diluted.
Pinnacle says that plans are underway for All Pro to become a fully reporting company and apply for listing on the American Stock Exchange. According to the press release, Pinnacle and All Pro have “entered into an agreement” with Roy Lerman and R.I.P. Consultants. Mr. Lerman, described as a senior floor broker, 36 year member of the American Stock Exchange, and author of the “Ask Roy” website, claims he is “very confident that All Pro will be a success and will be accepted for trading on the exchange.”
Is Mr. Lerman’s optimism justified? In June 2001 an OTC Bulletin Board company called CBQ Inc. announced that it had retained Mr. Lerman “as a consultant to facilitate its efforts to secure a listing on the American Stock Exchange (AMEX).” At that time, CBQ quoted Mr. Lerman as saying that he would “work diligently with CBQ management to move the CBQ Listing Agreement along as rapidly as possible.”
As of April 5, 2002, CBQ had not made it to the AMEX; it was still trading on the OTC Bulletin Board.
According to Pinnacle, Mr. Lerman says that that the All Pro stock will be initially priced at $4 per share, above the AMEX “guidelines.” Investors, however, may find $4 a bit pricey for a business whose revenues dropped by almost two thirds from ($1,229,030 in 2000 to $416,681 in 2001), and whose net income slipped by 66% (from $753,502 in 2000 to $253,457 to 2001) this past year.
That $4 price also would appear to establish an aggressive value for the new Company. Pinnacle last filed a financial report with the Securities and Exchange Commission on August 20, 2001 (the Form 10-Q quarterly report for the period ended June 30, 2001). At that time 635,707,064 Pinnacle shares reportedly were issued and outstanding. That means that Pinnacle will be issuing at least 12,714,141 shares of All Pro to its shareholders. And that assumes that the number of Pinnacle shares outstanding have not increased since June 30, 2001. At $4 per share, All Pro would start out with a market value of around $51 million – and that’s not including the value of those shares going to the Lo Castros.
With this in mind, investors may have a few questions to “Ask Roy.” The All Pro Group consists of a used car and light truck dealership in Western Pennsylvania, a Daewoo auto dealership in that same area, and a wireless phone and communications dealership. Does that sound like a business that would reasonably be worth more than $50 million? Consider this. Last year All Pro’s operating income was $416,681. Expenses reduced that figure to just over $250,000.
After they “Ask Roy” how he would justify that valuation, they may want to ask him how the new Company will satisfy the AMEX listing requirements. In order to be listed on the AMEX a company must satisfy one of the following alternatives:
Regular Financial Guidelines
| Pre-tax income | $750,000 latest fiscal year or 2 of most recent 3 fiscal years. |
| Market Value of Public Float | $3,000,000 |
| Price | $3 |
| Operating History | --- |
| Stockholders’ Equity | $4,000,000 |
Alternate Financial Guidelines
| Pre-tax income | --- |
| Market Value of Public Float | $15,000,000 |
| Price | $3 |
| Operating History | 2 years |
| Stockholders’ Equity | $4,000,000 |
Can All Pro satisfy the “Regular Financial Guidelines?” Pre-tax income could be a problem. Its net income for 2001 was just $253,457. So, to qualify under the “Regular Financial Guidelines,” All Pro would have to show pre-tax income exceeding $750,000 in each of the years 1999 and 2000. It doesn’t. The audited financial statements attached to Pinnacle’s March 28th press release suggest that All Pro barely exceeded the $750,000 pre-tax threshold in 2000 - $753,502, to be exact.
But wait a second. Those numbers differ somewhat from the audited results reported by Pinnacle in an April 4, 2001 Amended Form 8-K. That Form 8-K reported that All Pro had net income of $748,609 in 2000, just short of the AMEX requirement.
In any event, All Pro falls short of the “Regular Financial Guidelines” since it did not have $740,000 in pre-tax income in 1999. Again according the Pinnacle’s April 4, 2001 Amended Form 8-K, Pinnacle had net losses of $796,824 in 1999.
If Pinnacle would fail the “Regular Financial Guidelines” test, would it still qualify for AMEX listing under the “Alternative Financial Guidelines?” That could depend upon the calculation of stockholders’ equity and the initial offering price. Stockholders’ equity in 2001 was just $2,413,595, far short of the $4 million AMEX requirement. And while Mr. Lerman may plan to price shares at $4, it remains to be seen whether that price can be justified. The AMEX is not likely to look favorably on a Company that opens for trading at $4 a share in order to meet listing requirements, and drops immediately to a lower, more realistic level.
How does Pinnacle benefit from the spin-off – particularly since All Pro appears to provide the bulk of Pinnacle’s business? Will Pinnacle remain obligated to pay $6,692,465 to the Lo Castros, or is this simply a means of unwinding the earlier acquisition? Those questions are more likely to be answered once All Pro discloses how many shares of the new business are being issued to the Lo Castros.
In the meantime, Pinnacle is creating a demand for its shares by setting a May 31st date for the spin-off. The message: buy 50 shares of Pinnacle now, and get one share of our only significant revenue producing business later. All Pinnacle shareholders as of May 31st will be entitled to receive All Pro shares (on a 1 for 50 basis), but it remains unclear whether those public shareholders, or the Lo Castros, will control the newly public All-Pro.
Maybe investors can “Ask Roy” about that one too.
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