This story by Dan McCue is reprinted with permission from Charleston Regional Business Journal. www.charlestonbusiness.com

A certified public accountant asked by an anxious investor to review CaroLinks' books deemed the company insolvent after a review of what he described as "incomplete documents" provided for his perusal.

According to Robert Faulkner, a licensed CPA and a principal officer with the Rock Hill accounting firm of Faulkner and Thompson P.A., CaroLinks incurred operating losses of $7.8 million in its two years of existence.

He also concluded that it appeared CaroLinks and the Safe-Ports holding company, under which it operated, raised $4.5 million of equity by selling stock to investors but had no other source of revenue.

During the same period, Faulkner said, Safe-Ports spent nearly $9.5 million and incurred significant debts.

Faulkner was retained by the law firm of James, McElroy & Diehl P.A. to inspect CaroLinks' books on behalf of investor G. Robert Kraus Jr.

Kraus owns 5.5 Class A units of the company, while he and his father, George Kraus, collectively own 312 Class B units of the company.

The Krauses filed suit against CaroLinks, the Safe-Ports holding company under which it operates, and its principals on Oct. 19 in the Court of Common Pleas in Charleston. The investors are seeking the dissolution of the company under the watch of a court-appointed receiver.

Charleston attorney E. Bart Daniel, who has been retained to represent CaroLinks, said, "We disagree with the allegations in the complaint. They are not true, and we intend to contest them."

Asked about the CPA's conclusions, Daniel initially declined to comment, but then quickly added, "A lot has happened financially for this company since he performed his analysis."

Alan Capper, CaroLinks spokesman, said in regard to the Kraus lawsuit, "I want to make clear that the loans they made to the company and that are now part of this lawsuit were repaid."

Capper was referring to $1.7 million in loans the Krauses made to CaroLinks in 2006. Their lawsuit contends that the company defaulted on the loans, leading to a rewrite of the company's operating rules. The amended rules forbid CaroLinks from taking on more debt without the Krauses' approval.

The debt was ultimately repaid in March 2007.

"That's what makes their now taking this action somewhat extraordinary," Capper said. "I can only tell you, having worked with Lucy for over two years, the account described in this lawsuit is not accurate and it will be vigorously refuted."

Faulkner reviewed the company's books, financial records and supporting documentation at its Broad Street office on May 31, 2007.

According to an affidavit he submitted in connection with the Kraus lawsuit, upon his arrival at the office he was given a small binder with a select few documents to review.

"Of the 20 items requested, five appeared to be supplied completely, four items were partially provided, and 11 items were not provided," Faulkner said. "No explanation was given as to why the information was not provided despite the fact that the information requested is relevant to the company's valuation, financial viability, solvency, use or misuse of corporate assets, and prospects for future revenue."

Upon his review, Faulkner said, he found several items to question.

First, Safe-Ports, from its inception in 2005 through May 2007, had not recorded any revenue, Faulkner said.

The company was also delinquent in its payroll taxes, though Faulkner said he was told by Safe-Ports' controller that the company was in the process of working out a payment plan with the Internal Revenue Service.

According to financial statements provided by Safe-Ports, as of May 31, CaroLinks had approximately $50,000 on hand and was owed approximately $66,000 from Safe-Ports. "This comprised most of Safe-Ports' available current assets, which were reported to be $118,000," Faulkner wrote.

As of May 31, Safe-Ports' reported liabilities exceeded its current assets by $1.8 million, he said.

The company has since sold all of its land options to Jafza International for an undisclosed sum. Jafza International, which operates under a holding company owned by the royal family of Dubai, intends to build a massive warehouse, distribution center and light manufacturing park on the land in Orangeburg.

In the weeks after the sale of the options, CaroLinks settled one outstanding investor lawsuit and also paid off its state and federal payroll tax obligations.

But back in May, Faulkner said, CaroLinks' finances were eye-opening. For instance, the CPA found that according to its own financial statements, Safe-Ports/CaroLinks has written off about $2 million in fees associated with expired real estate options or deposits.

"The lost deposits represent approximately 40 percent of the total equity raised by Safe-Ports," Faulkner said.

"It is apparent that a significant portion of the equity raised by Safe-Ports was lost due to large deposits made on land that was never purchased," he added.

Based upon the check register he was provided, Faulkner said it appeared that CaroLinks made several payments to CaroLinks' principals, Lucy Duncan-Scheman and Ron Scheman, and Safe-Ports Inc. Those payments totaled $704,277.

The S.C. Attorney General office's securities division has charged that the Safe-Ports Bank of America account was used for personal purchases by the Schemans.

Of the $9.5 million the company spent between 2005 and 2007, Faulkner said $2 million was related to the expired deposits on land, options and fees; $2.5 million was spent on "professional fees," $1.8 million went to salaries and fees; $1.3 million was spent on land and unexpired deposits; $500,000 went to rent; $500,000 to travel and entertainment; $350,000 was spent on interest on outstanding debt; $300,000 was spent on furniture; fixtures and other assets; $100,000 was spent on marketing, and $150,000 was spent on "other" outlays.

Faulkner stated in his analysis of the company's general ledger that several entries did not adequately describe the purported expense, creditor or business purpose.

As one example, he cited an entry listed as "corporate condo rent" of approximately $33,000 a year. "The 'corporate condo rent' is in addition to corporate office rent," Faulkner said.

Another example of unexplained expenditures was $10,000 given to Spoleto USA, an organization of which Duncan-Scheman serves as a board member.

Faulkner said CaroLinks/Safe-Ports provided no financial projections or plans to indicate how the company expects to repay its creditors or to provide a reasonable return for its equity investors.

"Based on the financial records I reviewed, Safe-Ports/CaroLinks appeared to be insolvent and did not have the assets available to satisfy its financial obligations as they become due," he said.

Despite the sale of its land options to Jafza International, Faulkner declined to revise his assessment.

"The presence of cash from the sale of non-operating assets would not imply that the company's lack of operating revenue, dissipation of cash or operating loses will change going forward," he said.

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