IN THE MONEY: With Sulphco, It's Not Only What You Know..
By Carol S. Remond
06/21/2001
Dow Jones News Service
A Dow Jones Newswires Column
NEW YORK -(Dow Jones)- Sometimes, what's important is not just what a company wants you know. It's what a company neglects to tell you.
Such is the case with a small Nevada start-up called Sulphco Inc. (SLPH) which claims it found a way to remove the pollutant sulfur from gasoline and diesel fuels.
A few examples:
-Big ideas can attract big interest. That's why Bechtel Corp. entered into a business relationship with Sulphco earlier this year. Sulphco's pretty proud of that relationship. It keeps mentioning it in filings with the Securities and Exchange Commission, including some recent ones. There's only one problem - Bechtel Corp. says it ended that exploratory relationship months ago.
-Have you ever heard of Ernst & Young? Wouldn't it be great to have one of the nation's largest and prestigious accounting firms be your auditor? Earlier this year, Sulphco filed a proxy statement with the SEC that asked, among other things, for shareholders to approve Ernst & Young as its auditor. Shareholders voted in favor but there was just one hitch - Ernst & Young turned down the business. Sulphco never told you so.
-No company likes a going concern statement from its auditor. But that's what was attached to Sulphco's annual report for the year ended December 2000, at least the version filed on June 8. By June 14, the company's auditor filed yet another amendment to that report which REMOVES the going concern statement.
These are just a few of the unusual doings that surround Sulphco, a company that until late last year was trying to break into the movie business under the name Filmworld Inc.
Sulphco officials have not returned several phone calls over the past week to talk about these issues.
The company is the brain child of Dr. Rudolph Gunnerman, an entrepreneur who over the past couple of years tried but failed to take public one of his other projects, A-55 Inc., now called Clean Fuels Technology Inc. This company, through making mixtures of water and oil, also hopes to create cleaner-burning and more efficient fuel.
People familiar with the situation said Gunnerman's persuasive presentation of A-55's technology was enough to convince Donaldson Lufkin & Jenrette to get the IPO process started with the filing of a registration statement with the SEC in October 1998. But the investment bank, now part of Credit Suisse First Boston, dropped the IPO plan after Gunnerman failed to deliver on contracts with utilities that were thought to be interested in A-55's technology, these people said. Credit Suisse is still trying to raise money privately for Clean Fuels Technology.
Late last year, Gunnerman's appetite to run a publicly traded company appears to have led him to engineer a reverse merger with Filmworld, a dormant shell company that owned a small number of some movie scripts. Film assets of Filmworld were returned to its former executives, including independent filmmaker Menahem Golan, the man who brought you Chuck Norris and Jean-Claude Van Damme. In return, Gunnerman owned the shell company and it soon changed its focus to removal of sulfur from certain petroleum-based fuels, a hot topic these days given stringent new federal environmental standards requiring a 90% reduction in sulfur content by 2006.
Since its 180 degree occupational change, Filmworld, which officially became Sulphco in late April, has aggressively promoted its new line of business, highlighting its relationships with independent oil refiner Sinclair Oil and engineering and construction firm Bechtel.
"Sinclair Oil and Bechtel are in the process of designing the first commercial unit employing the Sulphco technology, with a prototype expected in 90-120 days," the company said in a March 16 press release.
A review of Sulphco's recent SEC filings shows that as late as June 16, the company continued to play up its relationship with Bechtel.
Bechtel's story is a different one.
A Bechtel spokesman said that both companies signed a memorandum of understanding in early January, but that "no commercial relationship between Sulphco and Bechtel exists" since that agreement expired at the end of March. The spokesman also said that Bechtel had some issues with what it saw as Sulphco's "exaggerated" claims about the potential of its sulfur -removal technology as well as its timing. "We explicitly disagreed with Sulphco," when it said that it could deliver a prototype by summer 2001, the spokesman said.
Sulphco's story continues to be a different one.
"The company will market a complicated design for industrial units through its business relationship with third parties who participate in the design of the units. In this regard, the company's plans on formalizing a long-term relationship with Bechtel." That's from a June 8 Sulphco filing with the SEC, one that's an amendment to its quarterly report for the period ended March 31.
Sinclair Oil confirms it has completed its due diligence and is negotiating a final agreement with Sulphco, including a possible 10% equity stake in the company. Paul Moote, a spokesman for Sinclair said the Sulphco technology had "great commercial viability."
But perhaps Sulphco got a little overly excited when, in a March 28 press release, it described Sinclair as the "second-largest independent refiner in the U.S." Actually, Sinclair's 140,000 barrel a day refining capacity doesn't even come close to Valero Refining Co.'s one million barrels a day, Tosco Refining Co.'s 920,000 barrels a day or Marathon's 793,000 barrel a day. In subsequent press releases, Sulphco stopped referring to Sinclair as the second-largest.
Sulphco appears to have also gotten ahead of itself when it asked shareholders to approve Ernst & Young as its new independent auditor in a proxy documents filed in March. Although shareholders did approve the appointment, Ernst & Young says it wasn't contacted by Sulphco prior to the proxy publication. The accounting firm said it turned down Sulphco in April or May but declined to say why.
And then there is the matter of the going concern statement. Here's what Tanner & Co., Sulphco's new accountant, had to say in a June 8 amended annual report filing with the SEC: "...The company incurred operating losses and has been unable to generate cash flows from operations for the periods ended December 31, 2000 and 1999. These conditions raise substantial doubt about the company's ability to continue as a going concern."
But just six days later in another amended filing for the same annual report, Tanner removed the going concern statement. A Tanner official said the firm felt conformable removing the going concern statement because Sulphco was able to raise $1.2 million through the sale of stock and the exercise of options in April and June. That's almost six months after the close of the period covered by the report. Also in April, the company loaned $2 million to Gunnerman, of which $243,000 was repaid, according to a May 15 SEC filing. Subsequent filings don't address the loan. Tanner officials weren't available to discuss how the loan played into the lifting of the going concern statement.
"This is extremely unusual," said Paul R. Brown, chair of the accounting department at the Stern School of Business at New York University of the removal of the going concern statement by Sulphco's auditor.
All of that aside, one has to wonder if Sulphco has the wherewithal to make good on its claim that it can remove "more than 99% of the sulfur from gas oil, allowing for less expensive refinery production of low- sulfur gasoline and diesel fuel to meet new environmental standards."
Sulphco's most recent quarterly report shows only three full time employees and a measly $1 million in cash and cash equivalents at the end of the first quarter.
On top of that, Mark Cullen, Sulphco's chief executive, appears to have little experience in desulfurization. It's not known whether Sulphco's two other full time employees have any experience in that field. Regulatory filings show that Cullen has a B.S. in chemistry and is chairman of the board of a startup biotech company called NuStem. Mostly Cullen appears to have worked in the obstetrics and gynecology fields in hospitals and universities in Florida and Nevada. A little digging shows he earned his medical degree in 1983 at CETEC, a university in the Dominican Republic. CETEC was closed down by the Dominican government in April 1984 following a scandal involving the issuance of medical degrees for money to U.S. residents.
Apparently eager to move on to a bigger playing field, Sulphco, which trades on the Over-The-Counter Bulletin Board, announced in April that it had applied for listing on the American Stock Exchange. So far however, the company falls far short of AMEX's $4 million stockholder equity listing requirement. An AMEX spokesman declined to comment on the listing application.
Sulphco's stock was recently trading at $4.70 a share, giving the company a $110 million market capitalization. But investors should be aware that about 70% of Sulphco's shares are in the hands of insiders. That could make it difficult for investors to move in and out of the stock. |
