January 11, 2001

"Mach 1, Incorporated is a world renowned publishing company dedicated to serving God and country. We strive to maintain the respect of our employees, our customers, our suppliers, and our community. We are dedicated to using our exclusive imaging and creativity to promote the word of God and strength of our nation. We will be innovative in our approach, follow principles of integrity and be a model of excellence."

-- Mach 1 web page

Mach 1, Incorporated, a prominent and celebrated Chico firm, is in serious financial trouble and its President and majority stock-holder, Paul Farsai, appears poised to declare bankruptcy, the Chico Examiner has learned.

Mach 1, Incorporated has long been a darling of the local business community, and has been repeatedly held up as an example of successful economic development. Enterprise-Record business reporter Laura Urseny, for example, referred glowing to Mach 1 in her August 12, 2000 "Biz Bits" column. "One of Chico's star businesses at Chico Municipal Airport," wrote Urseny, "is on the verge of another expansion. Mach 1, which went from a small strip-office space to the architectural palace at Fortress Street and Lockheed Avenue, is busting at the seams."

Urseny went on to uncritically report Mach 1's President and majority stockholder Paul Farsai's plans to buy property at the airport from the City of Chico for purposes of erecting a second building to match Mach 1. As Urseny's job is to praise local businesses unquestioningly, her prose was simply an ode to the firm: "Mach 1's building is probably one of the most stunning at the airport, and Farsai said the second project will be architecturally similar, but slightly smaller."

The Chico Economic and Planning Corporation, for its part, takes credit for helping Mach 1 establish itself. "Mach 1, Cal Northern School of Law, United HealthCare - these are projects which the Chico Economic Planning Corporation (CEPCO) has helped coordinate," crowed a October 26, 1999 press release. "CEPCO assisted these firms to locate property, obtain permits and identify a local qualified labor pool."

Farsai is certainly aware of his image in the community and cultivates it diligently. A member of Neighborhood Church, the fundamentalist right wing Christian congregation, Farsai has turned his faith into a marketing device, selling devotional literature and plastering praise to God on Mach 1's web site. The company's titles include Jesus, CEO, Jesus in Blue Jeans, His Face, and the My Utmost for His Highest Journal.

Farsai's Christianity is of such fervor that he begins each business meeting with a prayer, and uses the company conference room to hold meetings related to his church, according to Corinne Mugley, a former accountant with Mach 1. "He crammed religion down our throats all the time," said Mugley. "If he was telling you to do something, he would describe how Jesus would do it.... He apparently had a direct line to Jesus."

Paired with his religion, Farsai is stridently patriotic. Patriotism for Farsai is evidently equated with military prowess, as Mach 1's primary products are photos of military weapons, jets, and the like.

The religious/patriotic pairing has no doubt helped sustain Farsai's image as an upstanding citizen, and that's not an image he will relinquish easily. "I think you should be careful what you write in your newspaper," he told this reporter on the phone Wednesday, "because you can be held legally responsible."

Paul P. Farsai was born in 1955, according to a capsule biography provided by Dunn & Bradstreet. In 1976-77 he attended Cogswell College in San Francisco, then moved over to San Francisco State until 1980. The following year he received a BS in Business Administration form Chico State, then returned to SF State for a Masters in Industrial Design in 1983. From 1981 to 1986 Farsai was employed by the Raychem Corporation. In 1986 Farsai started Mach 1.

Surprisingly, there is nothing at all in the national business press about Mach 1, even though the company eventually employed 15 people and claims to have sales of $2,825,000 annually.

In 1996 Farsai made a deal with the City of Chico to swap a plot of land he owned at the airport for some two acres across the street. The new plot was slightly larger than the original, and so the City financed a $59,067 sale to Farsai, which was to be paid in four annual payments. This sale was to Farsai personally, and not to Mach 1; Farsai built the Mach 1 signature building on the new plot, and rented it to the company he presided over. Farsai made his last payment on that property in December of 2000, and now owns it outright.

In addition to that purchase, Farsai also was given an option to buy an adjoining 2.14-acre parcel at anytime over the next five years for $2 per square foot. That expires in November of this year. Last August, Farsai told the City that he wanted to exercise his option, but felt the $2 asking price was too steep, given that other airport property was selling for only around $1.50 per square foot. The City Council's Economic Development Committee, then consisting of Councilmembers Maureen Kirk, Rick Keene, and Coleen Jarvis, agreed, and recommended that the full Council approve the sale for the lesser amount.

Moreover, the Committee agreed to finance the purchase with a loan for 90% of the $139,827 purchase price, to be paid back at 2% above the City's rate of return, or about 8% at current rates. The loan was proposed to be made by the Chico Redevelopment Agency.

The Council approved the sale and the loan last week. Farsai now only needs to finalize the paperwork and submit it to the Council for final approval.

By all appearances, then, things have been going swimmingly for Farsai.

But things may have not been as rosy as they seemed from the outside. "As President and CEO of the company [Mach 1], President of the Board of Directors and majority shareholder of the corporation," wrote Daniel Salcedo, a former Vice-President of Mach 1, to the California Department of Industrial Relations (DIR), "Paul P. Farsai was incapacitated by debt in April of 1999. Worsening relations with banks, creditors and vendors and a deteriorating personal life resulted in his physical absence at critical junctures, paralyzing operations and jeopardizing the future of the company and its employees."

Salcedo was asking the DIR's Division of Labor Standards Enforcement (DLSE) to find in his favor for over $13,000 in unpaid wages in 1999, and $21,634 from 2000, as well as $3,800 in unpaid vacation time, according to Dean Fryer, the media contact person for the DIR. Salcedo submitted a five page letter to the DLSE claiming a series of unethical, improper, and illegal actions on Farsai's part. Salcedo's case, however, is still open, said Fryer.

But while a judgement has yet to be rendered by the DLSE, Salcedo's general assessment of Farsai seems to be substantiated by public court and government records, as well as by other records attained by the Examiner.

On June 8, 1999, Paul Farsai beat up his wife. Farsai filed for a restraining order against her husband two days later, and detailed Farsai's behavior.

"Paul and I have been together 20 years and have 2 boys together, ages 8 and 9," wrote Nancy Farsai. "Throughout our relationship there has been harsh verbal, emotional abuse and controlling behavior. Particularly the first year he started his business (13 years ago) and then increasingly the past two years.

"It was as though nothing I could do would be good enough-unless he decided. Things would be good for a while, then tension would build and there would be more verbal and emotional abuse ('you are the embarrassment of the family, you'd be in the gutter without me, you'd be no one or have nothing without me, all you do is wipe shit for a living'-I'm an R.N. and was hospital supervisor at CCH for 10 years.)

"Recently, he started accusing me of things I wasn't doing and made sure he told the boys. He would state 'look at Mommy -- she's weak and has no class, here's Mommy drinking a bottle of wine in the car while she's driving around, she's cheating the family boys -- she makes $40,000 a year and all she does is make a car payment and cheat and lie about the other bills.' They repeat exactly what he says, yet none of it has ever been true. He knows it and confessed to our pastor that it wasn't true yet keeps versing [sic] the boys."

Nancy Farsai went on to describe an earlier incident when Paul Farsai "lunged at me, grabbing for the keys, tearing my shirt and dragging me across the garage floor." She then claims that she locked herself in the guest room and "he proceeded to kick the door off the hinges."

Then, Nancy Farsai described the events of August 8th. "Last Tuesday morning he started verbally attacking again. 'Oh check the calendar with that big job you have making one car payment and cheating the family' (and more continued slanderous remarks). I went back to the bedroom and Jonathan started being disrespectful to me. 'Ya Mom, you're the stupid one, Dad's the smart one with the big fancy building' (standing puffing his chest out at me). I started to discipline him, telling him not to speak to me that way and he went running 'Dad, Dad.'

"Paul came storming through the garage door and said 'don't touch my son.'... Then Paul turned to me 2" from my face and pointing and yelling in a threatening manner. The look in his eyes really frightened me as did the anger in his voice. I felt so threatened and frightened at his hovering over me that I slapped his cheek with an open hand. He immediately grabbed my arm and started kicking me over and over with his heavy wingtip shoes-on my left thigh, upper right thigh and left buttocks.

"The children were both there. Peter started crying and yelling 'Stop-stop kicking her.' I believe Jonathan said 'call 911.' I picked up the phone, called 911 and they fled.

"The sheriff came, took a statement, pictures of bruises, and strongly instructed me to file a restraining order...(Sergeants Duch and Kenyon.)

"I need this restraining order due to fear of retaliation, extremely controlling personality (particularly with the boys) and obvious increasing intensity."

Nancy Farsai's request for a restraining order was painfully typical, and in most cases the request is granted without hesitation. Judge Anne Rutherford, however, delayed giving the "kick-out" order, and left a hand-written note in the court file asking "Where will he stay?" Rutherford apparently worried that CEO of a multi-million dollar corporation who lived in Chico's exclusive Falcon Point neighborhood would not be able to afford to rent a hotel room.

In any event, Nancy Farsai never followed up on the request after Rutherford's delay, and the restraining order was never granted. Deputy District Attorney Kristen Lucena, however, moved forward independently and charged Paul Farsai with a misdemeanor count of Corporal Injury to Spouse.

But Paul Farsai resisted the charges, and managed to repeatedly delay his court appearance, first by demanding a jury trial, then by challenging the presence of the DA's office. Some eleven months later, on June 26, 2000, the morning of the jury trial, Farsai changed his plea to Guilty.

The violent incident with his wife came in the middle of a financial crisis for Farsai, and for Mach 1.

Mugley, the former Mach 1 accountant, said the company had difficulty paying bills when she worked there as an accountant between September of 1998 and February of 1999. "The company was in a state of chaos," she said. "All of the accounts were past due, most of them way over 120 days. I could never pay the bills, because he [Farsai] wouldn't let me."

Mugley recounts having to tell lies to vendors and putting off creditors with false claims.

Worse, Mugley said that Farsai "was extremely abusive... he was very, very cruel, every day. He would get totally emotional, red-faced..."

After only a few months at Mach 1 Mugley quit, but she had trouble collecting her last paycheck. She says that she had to file a complaint with the DIR in order to get paid. "They eventually cut me a check, but I took it to North State [Bank] and there wasn't any money in the account. Eventually, about three months later, somebody called me and told me there was enough money in the account to cash the check, and I ran over and got my money."

Still, Farsai seems to have little difficulty in finding new financing for himself and his business, and new investors for Mach 1.

Farsai refinanced his Falcon Point home in March of 1999. Then, in May, Farsai was given a three-month deferment on his Small Business Administration loan.

While Farsai told this reporter that his personal business affairs have nothing to do with Mach 1, Salcedo, the former Vice-President, said otherwise in his letter to the DLSE. Citing a document that Farsai gave the DLSE to fight Salcedo's claim, Salcedo wrote that "Farsai personally received corporation stock shares worth $1,006,048 in three transactions recorded in May and June of 1999... Furthermore, this same submitted document claims that $200,000 in additional vendor liabilities were removed from the corporation's books in exchange for his personal assumption of this liability. This transaction was reported at face value to new stockholders in order to retain the majority stockholder position of Paul P. Farsai -- it was not reported to the vendor in question, and the vendor continues to hold the company responsible for the $200,000 liability. This additional $200,000 liability was not disclosed to stockholders."

If Salcedo's claims are true, then Farsai essentially stole $200,000 from the company, and therefore the other stockholders. Salcedo suggested that the DLSE see if Farsai's gain was reported to the California Franchise Tax Board or the IRS.

In June, 1999, Craft Print, a Singapore-based publishing company, acquired 200,000 shares in Mach 1 -- constituting 8% of the company, according to the Craft Print website -- to satisfy $200,000 that company was owed by Mach 1. This was in addition to the $200,000 in stock that Salcedo referenced, which he says was given to Farsai in exchange for Farsai assuming a $200,000 debt.

Salcedo cites these transactions and others as proof of the illegal "commingling of funds" belonging to Mach 1 and Farsai.

Moreover, Salcedo said that he advanced several loans to Mach 1. "[T]he unsecured funds that were advanced by myself... were directly utilized to pay the banks holding the B&I building and SBA loans in the name of Paul P. Farsai and the corporate operating loans in the name of Mach 1, Incorporated when these very banks threatened foreclosure and seizure of all assets used to secure the loans-including the personal property, vehicles and home of Paul P. Farsai."

All the while, said Salcedo, Mach 1 leased a BMW for the personal use of Farsai for $1,250.97 per month.

Farsai averted financial disaster for Mach 1 that winter, but only by simply refusing to make $30,000 monthly payments on a North State National Bank loan.

While North State held off for a while, other banks were not so patient, according to Salcedo, who claims that "[b]ank foreclosures on the building, inventory and personal assets were narrowly averted in April and May [2000] by outside investment. This resulted in the commingling of funds. Funds that were intended by these investors for the expansion of equipment assets were diverted to to pay the building loans taken out in the name of Paul P. Farsai-this diversion of monies then required that the necessary equipment be acquired through long term leases with his full knowledge and consent. The President [Farsai] is now seeking to terminate these leases. If action is not taken to correct the diversion of stockholder funds which were meant for the expansion of the company -- rather than for the personal benefit of Paul P. Farsai -- the matter will go before the SEC as an additional federal count of criminal fraud."

While Salcedo's claims have not yet been officially substantiated, Butte County Superior Court Judge Roger Gilbert has awarded an equipment leasing firm a $50,000 judgement against Farsai and Mach 1 for failure to make lease payments on an "eCommerce" machine.

The Examiner asked Farsai about Salcedo's claims. "I don't know what he's talking about," Farsai said. Farsai also refused to talk about what he termed "my personal business." "You're asking about private matters," he said; "I think you're asking inappropriate questions." Farsai then terminated the conversation.

On May 2, 2000, Paul Lenz of Novato made a personal loan to Farsai of $70,000; this loan was secured by the Falcon Point house. On August 11, however, Paul and Nancy Farsai filed a "Declaration of Homestead" on the house, thereby protecting it through any bankruptcy proceedings.

On the very same day that Farsai Homesteaded his house, August 11, 2000, Farsai sent a letter to the DLSE contesting Salcedo's claims for back pay. Also on that day, according to Salcedo, "the corporation held an emergency stockholder meeting to state its intention to file Chapter 7 bankruptcy."

Then, in Salcedo's words, "eighteen hours after announcing to the shareholders of Mach 1, Incorporated that he intended to initiate bankruptcy proceedings, Paul P. Farsai attended a public meeting of the City of Chico Economic Development Committee. Representing himself as Paul Farsai of Mach 1 -- not as Paul P. Farsai...-- he announced his intention to immediately exercise a 2.14 acre airport business property worth $186,611... The premature exercise of this business expansion option is an incredibly reckless, if not suspicious, act in view of the current situation and claim of imminent bankruptcy which he did not disclose to the committee."

As of Friday, neither Mach 1 nor Farsai personally have applied for bankruptcy protection.

North State National Bank finally took action against Farsai on December 22. The bank is suing Mach 1, the corporation, as well as Paul and Nancy Farsai personally. A summons has been issued for Farsai, although he says he is unaware of the action.

According to the suit, North State issued a promissory note on September 3, 1997 for $650,255 to Mach 1, Inc. That loan was "modified" on June 24, 1998, and again on October 4, 1999. These "modifications" were presumably refinancing schemes the bank had agreed to in order to avert default on the loan. The suit says that the loan was guarantied by Paul and Nancy Farsai personally.

But "Mach 1, Inc., has defaulted on the said promissory note in that it has not paid the principal installment of $30,000 which was due January 15, 2000 or any installment of principal coming due thereafter and the outstanding principal balance of said note in the sum of $273,484.25 is unpaid..." The bank is asking the court for a judgment of that amount, as well as $25,288.02 interest and $2500 in attorney fees.

No one in City government contacted by the Examiner was aware of North State's action against Farsai and Mach 1. "I heard rumors of financial trouble, so I asked Paul about it," said City Manager Tom Lando. "But he's made all his payments" to the City.

Linda Herman, a budget analyst for the City, said that the City doesn't typically run credit checks on people applying for Redevelopment loans because the loan is secured by the property, and any improvements made to the property. "If they don't pay us, we get the property back," she said.

But like Salcedo, it's hard not to wonder if the loan is "incredibly reckless, if not suspicious" on Farsai's part. And for that matter, on the City's part.