This Little Piggy (16) And Whitlaw & Company had their own rules. Established by Herb Whitlaw Sr. when he founded the firm in 1936. He termed them ‘fiduciary guidelines.’ Before the Firm’s partners invested in a deal or committed its investors, third-party validation of management-generated projections—preferably by a major accounting firm—was mandatory. Herb Sr. learned early in the game that managements saw their business prospects through rose-colored glasses. Bob tried to delay the inevitable. Recreating historical income statements for transactions that included barter credits was a minefield waiting to happen. “Lou, the last thing I need right now is another big monthly retainer,” wisecracked Bob pleading poverty. “Bob, get serious. We can’t bullshit our way around the barter credit issue; it’s got to be addressed.” Braffman had been around the block with entrepreneurs like Bob. He knew Bob’s ego needed a bone in the form of a Big Five accounting firm that would either buy or at least accept Tothman’s unorthodox accounting treatment. “Lou, I assume you have an idea?” “Precisely, precisely. It’s called Crofts Rockman. Based on my past experience they can be a very flexible accounting firm, if you get my drift.” Bob was a happy puppy. * THE STAINLESS STEEL CAPSULE rocketed skyward to the 104th floor of the World Trade Center as Bob observed sarcastically, “ Michael, you know what they say, the higher the floor the higher the fees.” The Rockman offices were as spectacular as the view through the windows. Early American mahogany furniture striped winged back chairs and antique cherry wood paneling surrounded by floor to ceiling windows that made you feel you could reach out and touch the neighboring clouds. Bob made like a ten-year-old, pressing his nose against the window to gain a 360-degree perspective. Michael, a closet agoraphobic, anchored himself at the conference table in the middle of the room directly across from Managing Director Tony LaMantia and his two lieutenants, engagement managers Michelle Anastasia Laton and Louis Wilton Wallace. Michelle was a snooty little tight ass from Harvard with straight hair and a conservative no frills black dress. Louis looked like one of those preppy, arrogant news anchors, who talked down to you over his tiny Bill Blass designer lens glasses. By contrast, LaMantia exuded a folksy second-generation Italian-American charm that masked his slick, perfectly choreographed, soft-sell pitch. “Our experience suggests developing audited financials for private companies entering the public arena requires a more sensitive mindset than merely the rigid application of standard corporate auditing practices. Michelle and Louis here have worked with me on a number of similar engagements, although I must admit the world of barter credits is new to all of us.” LaMantia’s ‘ sensitive mindset’ reference convinced Bob that he knew the score, which wasn’t the case at all. He was just playing to his audience per a prior briefing from Braffman. “Tony, as Lou probably mentioned, our acquisition contracts have performance triggers, so we are under a time crunch to complete the historical restatements. Do you have the available manpower?” Bob was the perfect straight man. LaMantia socked it to ‘em. “Robert, Rockman not only have the depth of resources but, equally importantly, we have the right resources.” It was fee time! LaMantia shuffled pensively to the window, projecting a pained reluctance. Act one, ‘the reverse sell,’ had begun, “Bob, to be perfectly honest, I’m concerned our fees might put too much of a strain on your operating budget.” “What are we talking about?” “Ninety thousand a per month plus expenses. Bob didn’t even blink. “Is that net after Lou’s referral fee? Seriously, I assume you guys are as good as your reputation. Let’s do it.” “Precisely, my sentiment,” said Lou’s bobbing head, “Precisely.” LaMantia and Bob shook hands as LaMantia gracefully moved to the final act. “I assume it’s okay with you if we have the same warranties and representations as Delano Mondrain Hudson?” They both knew what LaMantia meant. Nothing more needed to be said there. * AFTER SIGNING THE ENGAGEMENT letter and receiving the first month’s retainer in advance, LaMantia called Edleberg. “Marty, as you know the first order of business is to recreate three-year financial histories for each of the companies. I figured we’d start with Nachman since he’s the largest acquisition and probably will require the most time. Who’s the contact person for books and records?” Edleberg tooted the Nachman horn. After all, he was family. And he was getting ten per cent of the gross sale price, including existing inventory sell-offs. “For anything to do with the numbers, contact Controller Hyro Sanchez. He’s been with Sam forever. I think you’ll be pleasantly surprised. The Nachman books and records are clean as a whistle. Other than possibly a few expense adjustments, the audit should be a breeze.” “Great,” said LaMantia thinking he’d heard that one before. “While I’ve got you, who’s the Mansfield contact?” Edleberg’s tone changed as he established distance. “I have no idea, you’ll have to ask Fred. I’m Nachman’s guy.” “Does Sam carry any reserve against income on Nachman-Tothson transactions for the barter credits issued by Fred?” Edleberg remained elusive. “I have no idea how Tothson accounts for his side of the Tothson-Nachman transactions. It’s just never been a concern.” LaMantia thought Edleberg’s comment odd since more than sixty percent of Nachman revenues was derived from Nachman-Tothson joint ventures. “How can they split profits equally and you don’t know anything about his accounting? Isn’t barter credit fulfillment a deal expense?” “Sam does transactions with lots of other third parties besides Tothson, rebutted Edleberg. “We never ask to look at our partner’s books. Bad faith.” (Edleberg’s protestations sounded like a convicted felon proclaiming his innocence. LaMantia wondered if Edleberg could pass a lie detector test?) * “MARTY WAS RIGHT. Nachman’s books were clean. No audit issues of any kind,” said LaMantia. “Fantastic!” said Bob. “I’ve got some more good news. Due to some adjustments, Nachman’s historical earnings will be a little higher than your original projections.” Bob eyes lit up like 300-watt bulbs. “How much?” “In excess of four million over the three-year period, which conservatively should justify a million dollar increase in annual proforma earnings.” Bob was delirious. Increased valuations danced round his head. At twenty times earnings his net worth went up another twenty million dollars. Thirty seconds later he made like Paul Revere galloping around the office broadcasting the audit results. None of the admins understood what the hell he was talking about---no one except Astrid who made like a CNN analyst. “How does that affect our initial capitalization?” “Does the purchase price increase?” “Is our earnings multiple more attractive?” Bob provided detailed responses, seemingly oblivious that her questions were terribly sophisticated for an administrative assistant. Strutting like a peacock, Bob retired to his office to share his good fortune with Ray Dothan and Jack Berger. As the line on the console lit up, Astrid silently placed the receiver to her ear and began scribbling into her notebook at a furious pace. Ten minutes after Bob had spilled his guts to Berger, Astrid got an informational call from Bernie Dyckman wanting to confirm rumors about the Nachman audit. “Christ, good news does fly” she said. “Astrid, I understand you do some trading of your own?” said Dyckman “Now where would you get such a notion?” “Astrid honey, from time to time, I’d like to get the latest news straight from the horses mouth.” “ How much?” she responded. “Same deal as Jack. But Dyckman’s product is eighty-five percent pure and he delivers right to the door…twenty-four hours a day, seven days a week.” Eighty-five percent pure! Astrid spilled her guts. The LaMantia call, the Nachman results, the answers she got from Bob. She even double-checked her Berger-Dothan notes to see if she missed anything. By noon the following day, there was buying frenzy in ITI stock. Over twelve million shares changed hands. The stock jumped thirty per cent to $4.25. Ten minutes after the closing bell, a concerned Scarborough called Bob. “Robert, did you see today’s ride?” Bob performed his ‘casual and dumb’ impersonation. “Phil, I’m running a business here. Give me a hint, what are you talking about? We don’t subscribe to those minute-by-minute charting services like you Wall Street guys.” “Twelve million shares changed hands today.” said Scarborough. “You’ve got to be kidding.” “Bob, what the hell is going on?” “Phil, you know how things are these days. The market is like Vegas. One rumor and everybody starts placing bets.” Scarborough smelled skunk. “Did LaMantia call you on the Nachman audit?” said Bob changing gears. “Yes, late yesterday. Great news, isn’t it?” As Scarborough listened, the odor became intense. “The Nachman deal is starting to look better and better, eh Phil? Once the post acquisition operating synergies kick in, this business is going to explode. The Street’s already started to factor that into our multiple.” There was only one way The Street could calculate revised multiples on projections that had yet to be officially released. But Scarborough choose to turn the other cheek. After all, a rising stock price only increased market demand for the pending Whitlaw & Company financing. Making him and his firm millions richer in the process. * “SO HOW WAS MY HERO’S DAY?” said Sandra tenderly in a candlelit corner at the couple’s favorite ‘by themselves’ suburban restaurant, La Provencale. “As always, an experience.” “So tell Mommy,” said a genuinely interested Sandra. “It’s a lot of business mumbo-jumbo. I thought Madison Avenue had their own lingo. But Wall Street is beyond another world. It’s like another planet” “Give me a shot. Your clients used to tell me, I was a pretty good ad man’s wife.” “Well today, the Street got wind of our proforma’s for the upcoming Whitlaw fiancing, and built that information into the price of the stock.” “Translation.” “Bob or Ray or somebody leaked the numbers we just agreed at the Whitlaw meeting yesterday, causing the stock to jump thirty per cent in a day.” “My goodness, that’s dreadful.” “The Whitlaw managing director, a pretty honest guy, flipped out. He was screaming at Bob on the phone, as he did his Mary Poppins’ routine.” Sandra paused. The thirty percent finally registered. “How much is the stock now?” “About four and a quarter and rising.” “And, how many shares do we have?” “Twenty million.” “Oh my god,” you’re kidding,” said Sandra realizing her net worth was now ninety million plus a few bucks from their former life which took 17 years to create. “I’m not sure if I’m supposed to be horrified or elated. One side of me says, let’s get back to the way it was, before we loose all perspective. The other side of me is thrilled at how rich we’re getting.” “I feel the same way, Baby. But we can’t turned back right now. I can taste it. The important thing is that we’ve got each other. That’s our perspective. That will never change,’ assured Michael. Michael reached across the table and kissed Sandra gently on both hands. At that moment, in that place, he meant it. * THE INITIAL MANSFIELD audit meeting took place four days later. A probing LaMantia immediately raised Tothson’s shackles. “Fred, I’m a virgin when it comes to the world of barter credits, so maybe you can give me an overview of how your business works.” Tothson began his convoluted explanation. “We’re a relatively simple business. Our focus is manufacturers who want to get rid of their excess inventories and need to avoid a write-off. Getting ten cents on the dollar in straight cash simply doesn’t work for a lot of clients. We buy their inventory at full wholesale value and pay them in barter credits.” “Could you explain a barter credit in layman’s terms?” “It’s our ‘best efforts pledge’ to from time-to-time offer our clients the opportunity to obtain cash discounts on goods and services they use in the normal course of their business.” LaMantia was incredulous. “You mean companies let you take title to their inventory for nothing?” Tothson retorted, “No, we pay them in barter credits.” LaMantia asked if they always used the credits. “We offer goods and services but they are under no obligation to accept our offerings,” said Tothson slowly and precisely. “Do the credits have a shelf life?” “Typically, three years,” responded Tothson. LaMantia then created an example to see if he got it. “Let’s say Mansfield buys ten million dollars in computers. You generally offer savings of how much?” “Conservatively, twenty-five percent.” “That means a company would have to buy forty million dollars of something for Mansfield to fulfill the contract.” Tothson calmly puffed on his pipe and nodded. “Sounds about right.” “How many credits have you issued?” “We currently have about two hundred million dollars on the books.” “And how many have you fulfilled?” “I’m not really sure but we can develop the number,” said a Teflon coated Tothson. “I’m a little surprised you don’t have that information right at your fingertips since that’s a core business expense,” said the increasing suspicious LaMantia. “Obviously I’d need that data to complete your audit.” Tothson tossed a change-up. “Look, we’re all on the same team here. Right? To be perfectly frank, I’m much more the salesman than an operations guy. My accountant, Ben Stein, takes care of the numbers. Why don’t I have Barbara organize a date for you guys?” “Why stand on ceremony? Let’s call him now,” pressured LaMantia. As he dialed, Tothson hoped Stein was unavailable or, better yet, was out of the office. It wasn’t Tothson’s day. “Hi, Fred. What’s up?” said Stein. “How’s my favorite client?” Tothson smiled, puffed on his pipe and paused. Stein knew the smile-puff-pause routine signaled ‘caution, danger ahead.’ “Ben, I’m on the speakerphone with one of Croft Rockman’s managing partners, Tony LaMantia. He’s got some questions relative to barter credit fulfillment for the ITI audit. I figured we’d go right to the source of all Mansfield wisdom,” smiled Tothson. “Is this a bad time?” Stein caught the clue. “Great, no problem. How can I help, Tony?” LaMantia was as subtle as a sledgehammer. “Frankly, Ben, I’m having trouble believing a company would transfer title to their inventory for Mansfield barter credits.” Stein proceeded cautiously. “Tony, I don’t believe whether a company does or doesn’t do a deal with Fred is an audit issue. We have a ten-year track record in doing these transactions. How can I help you with the audit?” LaMantia knew he had been told, fuck you. To make matters worse, Stein was correct. LaMantia counterpunched. “Ben, you’re right. That’s not an audit issue. But how is it that Fred takes no reserve against earnings for future fulfillment of these credits? Isn’t he grossly overstating earnings, or have I missed something?” Stein then took LaMantia for a ride around the block. “Typically Fred doesn’t look at a transaction that way. He actually makes a profit on every barter credit he fulfills.” LaMantia was confused. “Fred makes a profit on the goods and services he provides in exchange for the inventory he previously sold for cash. That doesn’t make sense!” Stein knew he needed to talk to Tothson. Alone. “Tony, we can show you the history. Just give me a few days to pull the data together. If you guys don’t mind I have people waiting for another meeting.” LaMantia was convinced barter credit fulfillment was all ‘smoke and mirrors.’ He needed to relate his bookkeeping discovery to Bob and Michael. “Fred, that reminds me, I’ve got another meeting myself. How about I get back to you with a complete due diligence checklist.” Minutes later, LaMantia was on his mobile to Bob. Astrid answered, “Bob’s out of the office at meetings for the afternoon.” “Astrid, I need to meet with Bob and Michael as soon as possible to discuss the Tothson audit.” Astrid sensed a problem. “ Should I cancel Bob’s first appointment tomorrow and pencil you in for 9 a.m.? “Yes.” * “Guys, based on what I heard at Tothson’s yesterday, there is no way I can create a historical audit. His business is pure bullshit!” declared LaMantia. “Because?” said Michael coolly. “Because, he tells me he makes money on fulfillment. Because, he has no idea how many credits he’s fulfilled. Because, his accountant was totally evasive.” Bob was visibly flustered. His blood was boiling. He struggled to construct a coherent response. Michael listened attentively, showing no hint of emotion. He was thinking on his feet. Now it was Michael’s turn. “Tony, I’m confused. Didn’t Fred explain his business was a series of sequential parallel transactions?” “Sequential parallel transactions?” repeated LaMantia. Bob relaxed. He knew Michael had some new Madison Avenue bullshit up his sleeve. “In part A, Fred takes title to the merchandise, selling it for cash. His profit is the gross revenue received, less total selling expenses. Do we agree?” asked Michael. “Agreed.” “In part B, clients buy stuff from Tothson for cash that they use in the normal course of their business. He becomes their purchasing agent. Like any good purchasing agent he buys and resells the goods at a discount to current market prices. Agreed?” “Agreed.” “Like any good businessman, Fred also makes sure he makes a profit on the sale. I mean would you start a business to sell products at a loss?” “Obviously not. That doesn’t make any sense.” “Precisely,” said Michael sounding like Lou Braffman. “Precisely. So you see my point?” The logic was irrefutable. LaMantia softened, “Well, approaching the audit in that fashion could work. We’ll just apply a smaller reserve for barter credit fulfillment against part B of the transaction.” That was not the answer Michael wanted so he kept spinning the web. “Tony, how do you justify a loss reserve in part B when every sale over the past ten years has made a profit—somewhere in the neighborhood of five to eight percent net.” “Well because…” Michael had LaMantia on the ropes. Another one-two combination and he had a TKO. “Let me draw an analogy. Procter & Gamble is in business to sell Tide Detergent at a profit. Would you add an adjustment to their sales because you thought they might sell their product at a loss at some point in the future? How long do you think P&G would retain you?” LaMantia was out on his feet. Michael kept punching.
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