Mountain State Sporting Goods (Fraud Investigation Phases I-III.)

Appendix I: Interview of Thomas Workman

MEMO TO FILE

Date: Mar 15, 2009 (transcribed Mar 17)

Re: Meeting with and interview of Thomas Workman (1:30 – 4:15 pm)

Mountain State Sporting Goods, Inc., Charleston, WV

Subj: Assess operations and accounting practices

Introduction of self and purpose of visit:

• Advised Workman that I have been engaged by Mr. Peoples, attorney representing

shareholders, to examine the business operations, including but not limited to its books

and records.

• Advised Workman that the shareholders (JD’s sons) were concerned about the

management of the business, i.e., its reduced profitability, cash flow and failure to fund

the down payment for purchase of building.

• Advised Workman that I had previously reviewed the following:

o The company’s income tax returns for years ’03–’08; o The company’s reviewed reports for Dec 31, ’06 and compilation reports for ‘07

and ’08;

o The company’s valuation report of Dec 31, ’06; o The company’s detailed general ledger and adjusting entries for years ’06-’08;

and

o His employment contract.

• Advised Workman that I had previously interviewed:

o Mr. Charles Hess (the company’s CPA); o Ms. Sue Bryant (the company’s former bookkeeper); o His spouse – Anita Workman; and o The company’s banking agents.

Mr. Workman freely agreed to be interviewed and provided the following:

Personal Background

42. Personal profile:

• Name - Thomas Andrew Workman (TW)

• DOB – Sept 13, 1966

• Education – high school graduate

• Work history

i. 1995 to current Mountain State Sporting Goods

9 Started out as stocking clerk – asst mgr o Avg Comp = $35k including benefits o Worked 45-50 hrs per wk

9 Took over as store manager following Mr. Smith’s death in Dec. of ’06

o Comp = $50k plus benefits � No bonuses received.

o Work 50 hrs per wk – always on call o Belief he is underpaid – happy to help family

ii. 1990 – 1995

General Dollar Store, Asst Mgr (Comp $25k plus benefits)

Note: Store Closed.

iii. 1985 – 1990

Construction labor - various

• Military service

o None

• No significant medical issues

43. Spouse’s profile – Anita G. Workman

• DOB – Jan 28, 1967

• Education – two years of community college (accounting degree)

• Work history

i. Feb ‘07 to current Mountain State Sporting Goods – Secretary and bookkeeper

¾ $500 per week ¾ Works in store 30 to 40 hrs per week – no set schedule ¾ Does a lot of accounting work at home

ii. 1990 – 2007

¾ Stay at home mom ¾ Worked part time at the store – as needed

iii. 1988-‘89

¾ Tax returns and bookkeeping for H&R Block

44. Daughter’s profile – Mia Workman

• DOB – June 20, 1991 (17 yrs old)

• Education – high school (senior yr)

i. Active in school functions (band, etc.)

ii. Saving for college

• Work history

i. Feb ‘07 to current Mountain State Sporting Goods – asst bookkeeper

¾ $250 per week ¾ Works in store 20 to 30 hrs per week – no set schedule ¾ Does a lot of work at home and on weekends ¾ Helps with pawn shop

Discuss Relationship with Hess (CPA)

45. TW advised as follows:

• Have known Hess since high school

• Close friends – hunt, fish, vacation together

• Hess also financial advisor – life insurance, IRAs for self, spouse and daughter

• Helped negotiate employment contract

• Hired by company after J.D.’s death to provide annual reports

• Hess selected because of friendship

• Hess was a new CPA-- just starting out; hungry for business – low rates; also knew

the pawn business

• Company never pays taxes because of Hess

• Hess has small practice – secretary and two bookkeepers

• Hess does quarterly taxes and annual reports – W-2s, tax returns, etc.

• Hess offers advice as needed

• Not sure how Hess bills – hourly (bill offset with house account)

• Allows Hess to charge purchases (at cost) – mostly hunting and fishing gear (guns

and ammo) – offset for services at end of year

• Hess also does personal income tax returns; helped prepare personal financial

statements to banks for mortgage loans

• Hess does not bill for personal work

• Hess works with spouse and daughter as needed; also helps set up computers

• Invested with Hess on beach home in ‘08 – down payment ($50k) borrowed from

company - LOC; loan secured by personal note - pays 1% more than company pays – good deal for company.

• Relies heavily on advice from Hess.

• Change in inventory accounting (perpetual to periodic) recommended by Hess. No

one trained on how to use software – always had problems. Periodic much easier –

saves the company time and money

• Consulted with Hess on pawn business - not recording pawn inventory reduces

property taxes, saves on insurance and eliminates write-offs – saves the company

money

• Annual audits a waste of money – saves the company about $10k per year – the kids

wouldn’t understand anyway.

• Hess does yearend accounting –supervises Anita and helps reconciles books – does

reports for kids and tax returns.

Review of Management Tasks / Employment Contract

46. TW advised as follows:

• He understood his contract

• His job was to do his best – make good decisions

• Job included protecting and growing the company

• Knew JD’s kids were not happy – they always wanted more money – they

brought nothing to the table

• Not sure about the difference between an audit and compilation – knew an

audit costs a lot of money – he was saving the company about $10k a year

• Understood his pay was $50k per year, a percentage of sales plus benefits

• Considered his right to benefits same as JD’s – he was running the show

• JD took money when he needed it – he wrote everything off

i. Understood he was the manager not the owner – he was not JD

ii. Acknowledged duty to shareholders

• Believed benefits includes travel – he was always on duty -- 24/7

• Not sure if company pays for IRAs – believe so

• Believes benefits includes use of autos, gas and insurance

• Believed it was ok for him to borrow money from the company – they were in

the business of loaning money - pawn business; agreed the loan amounts were

different – he always guarantees the loans

• Not sure if he actually signed a note/s – Hess would know

• Smart to hire spouse and daughter – they understand the business and are

available as needed

• Hess helped determine their pay

47. Pawn Shop - Operations

• TW advised average loan $100

• TW estimated 20 loans per month

• TW estimated average outstanding loan balance about $50k

• TW estimates redemption rate 60%

• TW acknowledges he makes and collects all pawn loans

• TW states collections treated as sales – processed through register weekly –

usually on Sat

• TW states he does not include forfeited pawn items in physical inventory;

estimated forfeited pawn items available $40-60k

• Forfeited pawn items sold for loan x 2 (not sure about markup)

• TW states money for loans treated as purchases – COGS

• Checks made out to cash for pawn loan disbursements –cks presented (’07 =

$91,230; ’08 = $97,315)

• TW estimates cash on hand for loans varies – avg $10k

• TW acknowledges he has taken forfeited items for family members or for

personal use – jewelry, guns, computer – estimate value $500

• TW acknowledges Hess has taken forfeited items for payment of services –

guns and jewelry

• TW acknowledged accounting for pawn items poor – mostly by hand

• TW acknowledged trashing paper records (index cards) regarding some pawn

transactions – no big deal

• TW does not send out monthly invoices – keeps index card – figures interest

(20%) by hand

• Average pawn loan balance about $50K

• Interest rate of 20% per month

• Default rate about 35-40%

• All principal payments in cash – identified as such on deposit tickets

• Pawn collections (cash or check) would be identified on deposit slips

• Cash deposits identified as pawn loan repayments: ’07 = 48,064 and ‘08 =

$52,053 “seems about right”

• Pawn deposits would represent customers’ interest payments made by check:

’07 = $57,944 and ’08 = $61,942, “seems about right”

48. Sue Bryant - TW advised as follows:

• Decision to retire by mutual agreement (early ‘07)

• She could not get over JD’s death

• She thought she knew everything - anal

• She spent more time hunting for a penny then making dollar

• She could not work with Hess – refused to follow direction

• She was too slow – could not adjust to changes

• She was always questioning his authority and decisions

• She could not work with Anita / Mia

Discussion of Specific Transactions

I advised TW that I had substantially completed my investigation and would like to discuss some

specific transactions.

49. Check for $45,000 on Dec 23, 2006 – initially recorded as employee loan; reclassified

(adj) to reduce sales ($45,000); $20k came from company LOC – coded as payroll tax

payable [Copy of $45,000 check presented]

• TW requested I discuss with Hess and/or Anita – I advised that I had already

discussed it with them and wanted his take

• TW advised that he had not received his YE bonus promised before JD’s

death – his work on setting up the pawn business

• TW stated not sure about his future given JD’s death

• TW not sure if he reported it as income – Hess would know

• TW discussed with Hess and Bryant

• Believe it was Bryant’s idea – we were acting as co-managers

• Not sure if she [Sue] took a bonus – does not think so

• Believe he used bonus to pay off personal debt

• Not sure if he discussed with or disclosed to JD’s family

• TW did not discuss with valuation guy – Hess handled it

Special Notes:

¾ TW stated this was a mistake – he would report as a bonus or pay the money back if necessary

50. Checks to Cash – Charged to COGS [’07 – 19 cks presented totaling $91,230; ’08 – 22

cks presented totaling $97,315]

• TW advised that cash used to make pawn loans – need ready cash

• TW states that cash also used for business – out of pocket expenses – gas,

employee lunches, supplies

• TW states it was all business

• TW advised that average cash on hand for pawns $10k

Special Notes:

¾ I advised TW that checks to cash substantially exceeded total pawn sales and interest as reported

¾ I advised TW that the cash on hand was only $3,126 v. $10k ¾ I advised TW that total cash deposits were less than checks for cash

51. Checks (3) drawn on Company LOC -- Payable to TW -- totaling $25,000; Not recorded

on books; entry to reduce sales and increase debt. [Copies of three checks presented -

$5,000, $10,000 and $10,000]

• TW advised he had to report company debt balances

• TW acknowledged he had borrowed the money in the Company’s name

• TW stated he thinks he used the money for down payment on residence

• Not sure if he signed a note or paid it back – thinks so

• TW states he did not disclose to kids

52. Checks payable to Classic Construction – 5 in ’07 totaling $5k ($1k each) and 2 in’08

totaling $8k ($3k and $5k) – disbursements initially coded as outside labor; adj to reduce

outside labor and increase insurance

• TW acknowledged work for contracting done on personal residence

• Paying the contractors allowed him to continue on the job

53. Checks payable to Ford Leasing - $6,000 per year in ’07 and ‘08– initially classified as auto

lease; adj entry made to reclassify to COGS.

• TW not sure – does not understand why it matters.

• TW not sure if they disclosed to family

• Currently two autos – one for self and one for Anita

i. Company also pays fuel and insurance

ii. Leases in Company’s name

iii. Reasonable – always on duty

54. Checks payable to AMX (personal credit card) – 10 cks in ’07 totaling $13,212 and 12 cks

in ’08 totaling $21,409 – payments initially coded as travel – adjusted to advertising,

$12,500 and $20,000 respectively:

• TW states he commonly uses personal cc for business -- no big deal

• TW acknowledged some charges may have been for clothing or vacations –

always on call even when on vacation

• TW states charges should have been sorted – only business paid by company

• TW states he discussed with Hess – Hess actually on one fishing trip – all

business

• TW did not disclose to JD’s kids

55. Check payable to TW May 3, 2008 - $40,000 – initially recorded as loan to employee; adj

Dec 31 ‘08 to furniture and fixtures [Copy of $40,000 check presented]

• Was saving the money for down payment on building

• TW states money used for down payment on condo - better investment

• TW states Hess’ idea – great investment

• TW states condo co-owned with Hess

• TW states business – allow use by employees and customers

• TW states not sure why recoded – he needs to talk to Hess

• TW did not disclose to JD’s kids

• TW thinks he signed a note – Hess would know

• TW stated he would deed his interest back to the company

56. Checks (3) payable to Fidelity Investment in ’08 ($3,000 each) – recorded as COGS.

• TW advised IRA payments

• Simply miscoded.

Representations to Banks I inquired about alleged representations to the bank that he owned the business.

57. TW advised as follows:

• He was given the authority to conduct banking business – including

borrowing and lending money

• Does not recall representing he owned the business

• Believes he may have told the loan officer he had an option to purchase – he

has discussed with both boys

• TW acknowledges an option is not part of employment contract

• Does not believe he provided the bank a copy of his employment contract

Concluding Discussions

I concluded my review of the documents and presented the following summary concerns.

3. I expressed concern that the documents indicate a false accounting to the shareholders -

$250k to $400k:

a) TW stated it “was not that much” -- the total business was only valued at $350k

b) TW agreed to pay back anything in question

c) TW stated he had “worked his ass off to build the business”

d) TW stated the best solution is for he and Hess to buy the business -- $350K –

the appraised value

4. I expressed concerns regarding the nature and role of Hess as the Company’s CPA:

a) TW stated he relied on Hess

b) TW stated that Hess made all the accounting decisions – coding of checks and

so forth

c) TW stated Hess was more of a co-manager than an outside CPA

5. I expressed concern regarding the option to buy the building:

a) TW stated it was not a problem

b) TW stated that Hess had already worked out a deal to purchase the building

from Black Oak and continue the lease with Mt. State – same rent.

6. Inquired how he (TW) saw the problem being resolved:

a) TW stated that he and Hess had already discussed it – would buy the business

– Hess was working on the numbers

7. Inquired if he had any final statements

a) TW agreed the transactions cast a bad light but he had worked his ass off –

built the business up

b) Neither wife or daughter knew what was going on

c) TW stated it was just a matter of money – how much?

End.