Did you catch this? What a trip.
Conversion Solutions files creative annual report
2006-10-18 20:02 ET - Street Wire
by Lee M. Webb
Conversion Solutions Holdings Corp., a reorganized OTC Bulletin Board promotion with a cult-like following, has belatedly filed a creative annual report for the year ending June 30, 2006. Perhaps not yet noticed by the U.S. Securities and Exchange Commission (SEC), the cut-and-paste creation filed on Oct. 16 is missing key information.
As previously reported by Stockwatch, Conversion Solutions is the purported multibillion-dollar product of a merger between a virtually penniless grey sheet outfit with a similar name, Conversion Solutions Inc., and a cash-strapped OTC-BB company, The FrontHaul Group Inc.
The merger, which was announced on July 12, was reportedly consummated on Sept. 13.
"We at Conversion Solutions Holdings Corp. are diligently working to complete and process, in the short term, any and all additional filings and submissions required as we move forward as a new vibrant company," chief executive officer Rufus Paul Harris commented in announcing the happy event.
"We thank every one of our loyal share holders for their patience over the last sixty days as we have battled to overcome many obstacles, many of which are now being brought out into the light of day," Mr. Harris continued, a remark that many of the company's cultish followers took to be a reference to a battle against naked short selling.
"Please rest assured that our staff has put its collective best foot forward in the past and shall continue to do so in the future, no matter what hurdles we may encounter," Mr. Harris promised.
Evidently at least one of the required "additional filings and submissions" turned out to present something of a hurdle.
FrontHaul, the OTC-BB predecessor to Conversion Solutions, filed its dismal third-quarter report for the period ending March 31, 2006, on May 12, but the public company's annual report for the year ending June 30, 2006, was due on Sept. 28.
Conversion Solutions managed to squeeze in the unimpressive audited financial statements for its premerger grey sheet precursor in a Form 8-K filing on Sept. 29, but had to file for a 15-day extension with respect to the required annual report on Form 10-K.
While investors familiar with reporting requirements knew that the 15-day extension gave Conversion Solutions until Oct. 13 to file the annual report, the company's grand pooh-bah, Mr. Harris, publicly insisted to cultish admirers that he had until Oct. 16 to submit the 10-K.
Mr. Harris, who evidently has some rather peculiar understanding of a number of securities regulations, acted upon his inaccurate insistence and filed the delinquent report before the market closed on Oct. 16. Because of the late filing an "E" was appended to the company's symbol on Oct. 18.
The certification
The flavour of the annual report is perhaps aptly captured by Mr. Harris's certification, which is included at the end of the filing.
In a typical certification, the chief executive officer begins by claiming "I have reviewed this annual report" and goes on to say that the report does not contain any untrue statement of material fact, does not omit any necessary material fact, the financial statements fairly represent the company's financial condition and so on.
Mr. Harris's certification opens with "I have created this annual report" before going on to offer the usual assertions.
And what a creation it is.
The creation
If investors were expecting any revelations in the annual report regarding just how a newly hatched penniless promotion managed to acquire assets, primarily bonds, purportedly worth billions of dollars, they were sorely disappointed.
For the most part, Mr. Harris's creation is a cut-and-paste job of information from previous material change reports on Form 8-K, though there are some sloppy additions and some glaring omissions.
Glaringly missing from the annual report is any pertinent financial information at all regarding the OTC-BB promotion's predecessor, FrontHaul.
Indeed, the only financial statements included in the annual report are simply a copy of the dismal, and not very informative, audited statements for the company's grey sheet precursor filed on Sept. 29.
The company's Michigan-based auditor, Thomas Benson, reportedly consented to the inclusion of those audited statements in the annual report.
Oddly or sloppily, Mr. Benson's consent letter, which is included as an exhibit to the annual report, is dated Oct. 15, 2005.
Mr. Harris's creation does contain some new information regarding a peculiar provision in the merger agreement with FrontHaul.
As previously reported by Stockwatch, Mr. Harris has made a number of claims with respect to "resetting" the stock price to $15 per share.
According to the merger agreement, Conversion Solutions had three options available with respect to the share price upon the closing of the deal.
First, Conversion Solutions could elect to "maintain the average closing price at a price equal to the average closing price," whatever that might mean and however an average closing price might be maintained.
Second, the company could "set the average closing price at $15" and pay shareholders an amount in cash equal to $15 minus the actual closing price. Just how a company with a meagre $1,560 in cash could entertain that notion is anyone's guess.
Third, Conversion Solutions could simply elect to set the average closing price at $15 and pay no additional consideration.
Just what all this talk about setting the average closing price might mean remains a mystery to many market watchers, but the company's cult-like following fully expected that Mr. Harris would make good on his blather about resetting the price to $15.
In the annual report, Conversion Solutions disclosed that it had chosen the third option.
Mr. Harris's creation also offers an explanation, such as it is, about how it will "reset" the price.
Evidently the company plans to satisfy the ballyhooed "reset" obligation by issuing more shares "to each shareholder of record as of the close of business on Oct. 16, 2006."
Indeed, given the distribution formula for what looks remarkably like a forward split or a dividend, Conversion Solutions is headed for some massive dilution, if the peculiar scheme passes muster with the SEC.
According to the formula in the annual report, shareholders would receive an additional 6.53 shares for each share currently held.
Whether this scheme will actually materialize is an open question. Among other things, Mr. Harris did not file any advance notice regarding a forward split or a dividend issuance.
In any event, after filing the annual report, Mr. Harris had more to say about the scheme in an Oct. 16 news release that will be examined later in this article.
In addition to some glaring omissions and sloppy additions, the annual report created by Mr. Harris contains a number of inconsistencies.
For example, in Part II of the annual report, the company claims that its certificate of incorporation authorizes the issuance of 200 million common shares. In the notes to the financial statements and according to a copy of the articles of incorporation, however, the company is only authorized to issue 100 million common shares.
Setting aside that inconsistency, the number of authorized shares will become an issue, regardless of whether it is 100 million shares or 200 million shares, in the event Mr. Harris proceeds with his scheme for a forward split or dividend. The number of shares entailed by that scheme far exceeds what the company is authorized to issue.
Another peculiar inconsistency appears in Part III of the annual report in the section regarding officers and directors.
The list of officers provided in the opening of that section does not include a chief financial officer.
Oddly, in the biographical sketches that follow the list of officers, Certified Internal Auditor and Certified Public Accountant Daryl Horton is identified as the company's chief financial officer.
Indeed, Mr. Horton's biographical information is the most detailed and is approximately five times longer than Mr. Harris's biographical information.
It is not clear whether Mr. Harris sloppily forgot to include Mr. Horton in the opening list of officers or sloppily forgot to remove the biographical information. In short, it is not clear whether Mr. Horton is still with the company.
In any event, the chief financial officer, if the company still has one, did not sign off on the Sarbanes-Oxley certification. Mr. Harris took that responsibility himself as chief financial officer and "principal financial and accounting officer."
The creative filing evidently satisfied most of the company's cult-like following and, as far as anyone can tell, the U.S. regulators.
The news release
A few hours after filing the creative cut-and-paste annual report, Conversion Solutions issued a news release advising that an amendment to the report had also been filed.
The amended 10-KSB attempted to clear up some confusion resulting from sloppiness with respect to the company's declared record date for the forward split or dividend or, as Mr. Harris insists on calling it, the reset issuance.
Conversion Solutions also used the news release for some promotional puffery, claiming that the filing "highlights the company's strong growth and the large market expansion of its Asset Backed Portfolio."
The company went on the claim that it currently has an asset portfolio of approximately $7.3-billion.
"The total current issued share (sic) of the corporation after the merger as of today, October 16, 2006 close of business is 103,135,657 giving the corporation a current estimated book value of $70.71," the upbeat announcement continued.
Mr. Harris went on to offer an explanation of the announced "reset" scheme and the distribution formula, which is $15 divided by the closing price of $1.80 on Oct. 16 minus the closing price of $1.80.
"The Threshold Price Reset means that for every share you owned as of the close of business today you will receive 6 additional share (sic) (no fractions will be issued and will be rounded down to the nearest whole) of CSHD on or around October 30, 2006," Mr. Harris reported.
It is not clear what fuzzy math would be used to support the claim in the annual report that such a scheme will "reset the share value to an equivalent of $15," given that seven shares at $1.80 per share only have a value of $12.60.
"This transaction will take the total issued share number to 618,813,942 giving the corporation an estimated book value of $11.78," Mr. Harris added.
In fact, setting aside the effect on the purported book value, if Mr. Harris's cockamamie "reset" scheme with its attendant massive dilution proceeds, it will add 618,813,942 shares to the already issued and outstanding 103,135,657 shares for a total issued and outstanding of 721,949,599 shares.
In any event, there are some hurdles to this proposed scheme.
As previously noted, the company's authorized share capital, whether it is 100 million shares or 200 million shares, will have to be changed to accommodate the massive dilution.
Moreover, Mr. Harris does not appear to have satisfied the requirement to provide advance notice of such a stock issuance.
It remains to be seen how regulators react, if at all, to this latest nose thumbing.
Giggles and laughs
As previously reported by Stockwatch, while the company's cultish followers seem to hang on every word from Mr. Harris and other members of the newly hatched promotion, critics of Conversion Solutions suggest that the OTC-BB company does not pass the giggle test.
In addition to some clearly seasoned Internet message board critics who have been poking holes in the promotion, Stocklemon.com, an Internet publication with a nose for sniffing out stinky stocks, was taking some cuts at the OTC-BB company as early as July 26 and Our-Street.com later joined in with some scathing reports.
A veteran market observer recently remarked that it is but a short step from giggling at a wild promotion to laughing the securities regulators who let it continue.
In the case of Conversion Solutions, some critics have already moved from laughing at the SEC to being absolutely appalled at their lack of action with respect to what they believe to be an egregious in-your-face promotion with little regard for securities regulations.
Meanwhile, Conversion Solutions spent Oct. 18 trading with an "E" appended to its symbol because, contrary to the assertions of Mr. Harris, the company was delinquent in filing its annual report.
With approximately 1.1 million shares changing hands, Conversion Solutions dropped 21 cents to close at $1.81 on Oct. 18.
Stockwatch will continue to follow developments.
Comments regarding this article may be sent to lwebb@stockwatch.com. (More information regarding Conversion Solutions Holdings Corp. is available in a Stockwatch article published on Oct. 13 and 16, 2006.)
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