Patrick: Do I have these clowns figured out, or what? Exactly as I predicted two weeks ago in post #252, DHMG announced today that it is acquiring the rest of Universal Network.
What a pathetic, obvious scam. Hagen and his buddies rig transactions all year long between DHMG and Universal to make it look like DHMG is actually profitable. Universal can't pay with money for all the goods and services it supposedly bought from DHMG, so it pays in its stock, which DHMG overvalues. Then, since shares in money losing private companies aren't the same thing as American money, and the IRS likes to get paid in money, DHMG acquires Universal at the end of December, which wipes out most of DHMG's sales and earnings for the year.
But for three quarters in 1997 DHMG reported great looking, if imaginary, profits. It inundated its shareholders with reports and letters talking about how great the company was doing, how the stock was so undervalued, how it was being held down by evil short sellers, etc. This was all one big lie, but it induced many innocent people to buy the stock, and allowed Hagen and his pals to unload many hundred of thousands, maybe even millions of dollars, of stock at inflated prices. (Given the bleak reality at DHMG, any price above pennies per share I would call inflated.)
Presumably DHMG would like to try it again in 1998. Perhaps the vehicle in the coming year will be Frama, Inc., another private company of unknown ownership (although I can guess) that "bought" exactly $1,000,000 worth of God-knows-what from DHMG in the third quarter, for which it paid, not money, but its own, most likely worthless, stock.
But I think the scam is at its end. The fact that the company's accountants ran, screaming in terror, from the scene two weeks ago tells me that the SEC is solidly on the case. DHMG is now desperately trying to replace its auditors. It won't be easy to find ones stupid or crooked enough to OK Hagen's shenanigans, especially with the SEC watching every number it submits.
I'm afraid DHMG may have no choice but to hire honest accountants, who will examine in detail all the transactions between DHMG and insiders and the private entities they control. For 1997, probably all the transactions between DHMG and Universal be canceled out, now that they are same company. That will wipe out most of DHMG's sales and earnings right there.
Honest accountants would probably refuse to accept as legitimate most, or all, of the transactions between shareholders and DHMG, as well as the Frama transactions, and similar deals, on the grounds that they were probably rigged to give the false impression that DHMG is profitable. That will probably wipe out a good chunk of the remaining sales, and probably all of any remaining profits.
When an honest accountant gets through with DHMG's books, the statements will probably reveal a money losing joke of a company, with negligible real business. DHMG now has slightly over 6 million shares outstanding after this Universal transaction. That places its present market cap in excess of $33,000,000. If the next audited statement shows what I think it will, a value of well under $1 million would probably be more appropriate.
Of course, that assumes that DHMG can even find an auditor willing to get involved with an obvious den of snakes. If DHMG can't find one, then that may get the stock kicked off the NASDAQ bulletin board system. Of course, that assumes that the SEC hasn't stopped trading before then.
I would think DHMG shareholders might wonder about the purchase price for 76% of Universal not already owned by DHMG. At today's closing price of $5.50 for DHMG, that places a total value of $13,750,000 on Universal, which seems awfully steep for a company whose unaudited statements for the nine months ending September show an impressive loss of $849,000 on sales of only $3,303,000. Universal's book value is only $4,535,000 and that assumes that its $5,312,000 of inventory is accurately valued. Since almost all of Universal's inventory is just stuff that DHMG sold it earlier in the year, presumably at a big markup to DHMG, it is probably quite overvalued. Mark inventory down enough, and there is no equity at all.
The DHMG shareholder might also wonder why DHMG is so quick to increase its shares outstanding by 50% to buy a company whose financial statements are unaudited. Remember, in the Bloomberg interview a week or so ago, a DHMG spokesman said they saw no point in Universal spending the money to get audited. Nah, why would anyone want to know the truth about a company they are buying?
Of course, there is a rational explanation, besides DHMG's inability to pay its tax bill, why management is quick to give out so many shares. That is because they know that, in reality, the shares aren't worth much, so why not? Wildly overpriced shares in exchange for a dog of a company--seems like a fair trade to me.
Any individual Universal shareholder must feel like a real patsy today. Universal raised a bunch of money at $2 per share last winter in a private placement. The shareholders were promised big things; as recently as November 21 DHMG publicly stated that Universal expected to have a $5.00 IPO by next June.
Instead, the suckers who put money into Universal had the great honor of helping keep that company afloat while it lost a huge amount of money helping DHMG show great numbers. Their reward? By my calculation restricted DHMG stock valued at $1.83 per Universal share, which can't be sold for some time. By then, after the SEC and other authorities get through with Hagen and his pals, the stock will probably be selling reasonably close to zero.
OK, Universal shareholders, bend over and say to Mr. Hagen "Thank you sir, I'll have another." |
