Re: 8/5-11/03 - [EDGH] Stockpatrol.com: Edgetech Services, Inc. - Looking for an Edge (Parts 1, 2 and 3)
EEDGETECH SERVICES, INC. (OTCBB: EDGH) Part I – LOOKING FOR AN EDGE
August 5, 2003
Value, like beauty, may be in the eye of the beholder. Still, one can’t help but think that beyond every valuation is a theory – valid or bogus – and an objective. That’s what makes this one so puzzling. On July 30, 2003 a surprise suitor made an unsolicited offer to purchase 90% of EdgeTech Services, Inc. (OTCBB: EDGH) for $1 a share. Considering EdgeTech’s financial state, the offer seems bizarre.
EdgeTech is an IT consulting firm based in Toronto, Canada that became public in early 2002 (at first calling itself Secure Enterprises Solutions, Inc.) as the result of a reverse merger with a Nevada public corporation called NewsGurus.com, Inc. As part of that transaction the former owners of EdgeTech received 16 million shares of the public company and $66,000. About 12.8 million of those shares went to two brothers, Tae Ho Kim (the Company’s present CEO) and Sang Ho Kim (EdgeTech’s President, CFO and Chairman of the Board). An additional 825,000 shares were issued to an individual named Richard Biscan, who acted as a finder in connection with the transaction.
The Company had less than $18,000 in the bank on April 30, 2003 (the date of its last public report), and although it had revenues of approximately $1.4 million for its most recent fiscal year (which ended April 30, 2003) it lost more than $500,000. After considering recurring losses from the Company’s operations, and an accumulated deficit that exceeds $677,000, EdgeTech’s auditors say there is substantial doubt about its ability to continue as a going concern.
The Company had 31.3 million shares of common stock outstanding as of April 30, 2003, and its common shares were trading at 15 cents on July 29, 2003. So why in the world has someone made an unsolicited offer to buy 90% of EdgeTech at $1.00 a share – or more than $28 million? Even the Company’s insiders might be puzzled by this one. In recent months holders of unregistered EdgeTech shares have announced their intention to sell shares – mostly at prices well below $1 a share. One of those sellers is Richard Biscan, the finder who helped bring about the reverse-merger, who filed Forms 144 to sell 200,000 shares just days before EdgeTech received the tender offer.
What’s going on here?
Tender is the Offer
On July 30, 2003 EdgeTech’s common stock had closed at 16 cents a share, on volume of 234,200 shares. The next morning, EdgeTech issued a press release before the market opened. According to the Company, a Florida firm called Hollingsworth, Rothwell & Roxford (HRR) offered to acquire 90% of EdgeTech’s outstanding shares at almost seven times the current market price.
The letter from HRR, which apparently arrived the previous day (July 30th) by fax and e-mail, dictated several pre-conditions. The first two seemed perfectly reasonable. EdgeTech would have to enter into a confidentiality agreement so that HRR “be able to do all of our due diligence on your fine Company,” and the EdgeTech management team would have to remain in place.
The third condition, however, was somewhat more unusual. HRR insisted that EdgeTech publicly release “this Letter Offer from HRR in its entirety in both Canada and the U.S. on a national scale in both countries.” That, of course, could be expected to have a predictable effect; shares of EdgeTech were likely to soar as investors learned of the $1 tender offer.
EdgeTech said that it planned to respond to the offer within a week. As might be expected, the market reacted immediately. On July 31st EdgeTech stock rose almost 400%, to 75 cents a share, before closing at 50 cents a share. Volume was almost 11 million shares.
Why was HRR insisting that EdgeTech disseminate its offer letter “in its entirety,” rather than simply release news of the unexpected offer?” HRR did not say. The letter attempted to justify the $1 bid, and establish HRR’s credentials.
HRR characterized EdgeTech as “undervalued,” based upon the Company’s public reports, its “well managed” business, and “7 years of continued rising revenues.” It went on to recite EdgeTech’s relationship with “business partners” that include “Microsoft, IBM [and] Symantec,” and its “clients” including “major government and private sector clients in Canada and the U.S., such as IBM, Falconbridge, Bell Nexxia, Rogers Telecom, and the Province of Ontario.”
HRR did not specify the “publicly available reports” that it had “evaluated in depth.” Presumably, they would have included the Company’s recent Form 10 K, which reflected losses of over $500,000 for the fiscal year ended April 30, 2003, and losses of 2 cents per share - double that of the previous year. Upon reviewing that report, HRR also would have seen that the Company concedes that “without additional capital or profitable operations our ability to operate as a going concern is uncertain.”
As for those “7 years of continued rising revenues,” HRH either has access to audited financial information that has not been made public, or is relying on unsubstantiated statements from the Company. The public records do not reflect audited financial information for EdgeTech going back seven years. Here is what we did find.
On May 31, 2002, the Company filed a Form 8-K with the Securities and Exchange Commission concerning its acquisition of EdgeTech which, until that time, had operated as a private company. According to the Form 8-K, EdgeTech, the private entity, had been “growing steadily since 1995 from sales of $365,000 CDN (approximately $261,000 in U.S. dollars) to sales of approximately $1.7 Million CDN (just over $1.2 million U.S.) in the most recent year ending April 30, 2002.” The Company conceded, however, that sales growth had “slowed due to a significant restructuring in 2001, lack of sufficient growth capital and weaker market conditions,” and promised to file financial statements in connection with the acquisition no later than July 31, 2002.
When those financial statements were filed, in an Amended Form 8-K, they reflected revenues of approximately $1.65 million dollars (Canadian) for the year ended April 30, 2001 but offered no revenue figures for earlier years.
The Company has referred to its purported seven years of revenue growth on more than one occasion, most recently in a July 30, 2003 press release – issued the same day as the tender offer arrived – which bore the headline “EdgeTech Announces Seventh Consecutive Year of Record Revenue Growth With 29% Increase.” Surely, no serious tender offer would be predicated on a headline or other anecdotal statements, unsupported by audited financial information.
HRR’s offer letter also makes reference to EdgeTech’s “partners” and “clients” – repeating, virtually verbatim, the description of those “partners” and “clients” that EdgeTech inserts in its press releases. Here again, one would hope that HRR would have – or seek – more detailed information on those relationships before committing to a $28 million acquisition.
EdgeTech’s public filing offer few clues to the nature of those “partnerships.” The most recent Form 10-K states that
During fiscal 2003, we have added over ten additional "corporate partnerships" with the total now exceeding more than thirty, including those with some of the leading security technology companies in the world. These "partnerships" enable us to offer a broader suite of products and services to potential clients and thus enhance our potential for growth. Additional "corporate partnerships" are contemplated and additions or deletion in the list of corporate partners could occur at any time.
Is there any exclusivity to these “partnerships,” or are they the sort of arrangements that dozens – if not hundreds – of other companies enjoy with major firms like INM and Microsoft? EdgeTech offers no details of the relationships.
It all seems like scant information on which to predicate a $28 million offer. Then again, HRR’s offer letter doesn’t say how it plans to finance the purchase of all those shares. What was HRR thinking? As we will see in Part II of this series, this is not the first time HRR has stepped up to the takeover plate.
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EEDGETECH SERVICES, INC. (OTCBB: EDGH) Part II – THE GAME OF THE NAME
August 7, 2003
Edgetech Services, Inc. (OTCBB: EDGH) is an IT services firm, with an uncertain financial future. As we saw in Part I of this series, the Company recently reported that it had just $18,000 in the bank – and its auditors have expressed substantial doubt about its ability to continue as a going concern. That may not sound too appealing to ordinary investors, but a merger and acquisition firm, with the impressive name of Hollingsworth, Rothwell & Roxford (HRR) has offered to buy 90% of Edgetech’s outstanding stock at $1 a share. When HRR made the offer, Edgetech stock was selling at 16 cents a share.
As we discovered, this was not HRR’s first attempt to acquire or influence a public company.
Measuring Success
Taking control of Edgetech is only the latest in a series of bold – though baffling - initiatives by HRR. As HRR pointed out in its July 30th offer letter to Edgetech, the self-described merger and acquisition firm recently made an offer to acquire all of the outstanding shares of Zapata Corporation (NYSE: ZAP). Zapata, which was founded as an oil company in 1953 by former President George Bush, now is in the “marine protein business.” (See Viva Zapata -- Zapata Corp.).
HRR did not succeed with that effort, at least not in the sense that it actually acquired control of Zapata. Then again, from HRR’s viewpoint, there apparently is more than one way to measure success.
The Zapata bid bore striking resemblance to HRR’s offer to Edgetech. On March 5, 2003, Zapata disclosed that it had received an unsolicited e-mail from HRR, offering to acquire all outstanding Zapata stock at $45 a share. The offer was promptly rejected by Zapata’s Board of Directors. Two months later, on June 13th, HRR raised its offer to $51 a share.
Approximately 3 million shares of Zapata common stock were outstanding as of March 31, 2003 – which meant the acquisition might have cost HRR as much as $153 million. As best we can determine, HRR has not disclose publicly its own financial condition, or how it intended to pay for those shares if its offer had been accepted.
Payment, however, never became an issue. On July 15th, after Zapata stock had exceeded the $51 offer price, HRR declared that it had “achieved its objectives in enhancing shareholder value in Zapata” and was now throwing its support behind that Company’s Board of Directors.
How did HRR benefit from achieving its objectives? Was there ever a realistic possibility of an acquisition? Enhancing shareholder value is a noble objective, but what did HRR gain from its purported success? HRR’s July 15th press release did not say. Instead, HRR took the opportunity to solicit new business “partners” for “new and very undervalued publicly traded investments and acquisitions” similar to the proposed Zapata deal. According to HRR – which said it had 23 years of experience in mergers and acquisitions - that would include “a large producing gold company that trades on the NYSE that we are currently in friendly talks with, and of which we would pay dividends in gold produced by the company to all of our partners in the acquisition.” HRR did not identify the potential target company.
Then again, if those deals ended without a successful acquisition, à la Zapata, what would those investors gain?
Does the Edgetech offer represent one of those new opportunities? In its July 30th offer letter to Edgetech, HRR claimed that it intended “to achieve the same success for Edgetech Services shareholders as we did for Zapata Corporation shareholders.” Again, absent a successful acquisition, what’s in it for HRR?
Sony! No Baloney!
HRR has had more than Zapata on its mind in recent months. On March 18, 2003, HRR filed a proxy solicitation with the SEC asking the directors of Sony Corporation (NYSE: SNE) to spin off to Sony shareholders 90% of a series of subsidiaries, which it called Sony Electronics, Sony Insurance, Sony Games, Sony Pictures, Sony Music, Sony Real Estate, and other Sony assets, at prices designated by HRR.
In a March 18, 2003 press release, HRR claimed that the Sony spin-offs were calculated “to enhance value for Sony…shareholders for $72.40 a share in spin-offs, in addition to the value of Sony Holding Company.” At the time, Sony shares were trading at under $37 a share.
On April 10th, HRR announced that Sony had declined the proposal, was refusing to provide HRR with its shareholder list, and would not include the spin-off scenario with its proxy materials. Like Zapata, Sony had rejected HRR’s advances. HRR expressed its consternation in an April 10th press release, pointing out that Zapata share prices had fallen after its $45 bid was rebuffed. HRR partner, Theodore Roxford implored unhappy Sony shareholders to support HRR, and urged Zapata shareholders to show for a pending class action lawsuit against that Company. Indeed, HRR posted messages on at least one Internet message board, called VoyForums, asking Sony shareholders to lend their support.
There was more to come. On June 13, 2003, the same day HRR raised its Zapata bid to $51, the merger-acquisition specialists also announced that they had filed a $15.1 billion lawsuit against Sony in Federal District Court in Florida charging, among other things, fraud and violation of the Racketeering Influenced and Corrupt Organizations Act (RICO). In essence, the lawsuit charges that Sony refused to enhance shareholder value when it rejected the HRR offer. HRR has promised to share the proceeds of that action equally “with every Sony shareholder of record date February 7, 2003 or before who e-mails HRR their support.”
Of course, HRR also wants those Sony shareholders to share in the litigation expenses.
The plaintiff in this litigation is Theodore Roxford, who states that he is the sole owner of HRR.
As Sundance said to Butch, who is this guy?
In Part III of this series we will take a further look at HRR, and at Theodore Roxford, the man behind the firm.
©2003 Stock Patrol.com. All rights reserved.
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EDGETECH SERVICES, INC. (OTCBB: EDGH) Part III – WHAT'S IN A NAME?
August 11, 2003
Edgetech Services, Inc. (OTCBB: EDGE) edged its way into the spotlight late last month after a Florida-based acquisitions firm offered to acquire 90% of the Company. What seemed so appealing about Edgetech? As we saw in Parts I and II of this story, Edgetech has serious financial concerns that could impair its ability to stay in business. Such considerations did not deter the merger and acquisition specialists at Hollingsworth, Rothwell and Roxford (HRR), which made headlines earlier this year with bids to take over Zapata Corporation and force Sony Corporation to spin-off valuable assets.
Leading us to ask – who is behind HRR?
Ready to Roxford and Roll
What can investors learn about HRR and the men behind the firm? HRR’s web site (www.hrrma.com) describes the entity as a private mergers and acquisitions firm that specializes in finding extremely undervalued companies around the world a nd putting offers together.” But while HRR lists “deals” originated by its principals – with notable companies including Canadian Air, ICN Corporation, Stop & Shop, Placer Dome, Newmont, Gulf & Western - it does not say whether any of those transactions have been consummated. As we noted previously, HRR failed in recent efforts to take over Zapata and force Sony to spin-off its business divisions.
The website lists a telephone number for HRR, but when we tried to call a recorded message said it was “temporarily” out of service. A second telephone number, listed on the HRR press releases, was answered by a machine that identified the phone number, but not the firm.
Then there are the principals of the firm. According to HRR’s website, the trio of Hollingsworth, Rothwell and Roxford have been together for twenty years. Still, information about Messrs. Hollingsworth and Rothwell, in particular, is scant. The June 13, 2003 press release announcing HRR’s $15.1 billion lawsuit against Sony Corporation attributes brief remarks to each man, but we have been unable to find any independent information about their professional experience or qualifications as merger-acquisition specialists.
The HRR website does offer a brief, though vague, glimpse of their background, stating that Hollingsworth “has 40 years in electronics, on military contracts, domestic and foreign, including Japan, Southeast Asia, and Europe” and that “Rothwell has 30 years in Navy, Intelligence, Aerospace & Communication electronics and mergers & acquisitions, in Japan, Southeast Asia, Turkey, the UK, the Middle East, Africa, and Australia.” How did they gain that experience? Where did they work, and in what capacity? HRR does not say.
On the other hand, there is considerable information available about the third member of this triumvirate – Theodore Roxford - who claims that he now owns 100% of HRR. Until 1994, Roxford was known as Lawrence David Niren. And while Niren/Roxford reportedly now claims that he is, and always has been, a respectable businessman, he did not always take that position.
In 1995 the San Francisco Chronicle reported that Niren was planning to appear on television to confess to an eight year long scheme to bilk hundreds of publicly traded oil, gas and mining companies out of more than $2 million by collecting consulting fees for services that he never rendered. When clients complained, he deflected their concerns by claiming a death in the family, or a business partner’s heart attack. At the time, Niren told the Chronicle that he “conned because it got me out of bankruptcy.” He had been forced into bankruptcy in 1986 after his former employer, Princeton Economic Consultants, sued him for revealing confidential company information.
Still, it appears that Niren did enjoy certain success. He reportedly earned a $500,000 fee by advising corporate raider T. Boone Pickens to orchestrate a hostile takeover of Newmont Mining Corp.
Niren, who was then negotiating his surrender with the U.S. Attorneys Office, told the Chronicle that he planned to write a book about his escapades. His plans went awry. Victims of his so-called schemes declined to press charges and prosecutors declared that they had no interest in arresting him since the alleged crimes seemed more like civil matters.
So much for that book deal.
It seems that Roxford’s self image has changed since the days of the San Francisco Chronicle interview. Roxford recently told The New York Time that he never was a con man. Instead, he said that it all was just “a publicity stunt to sell a novel.” He claimed he changed his name because he “wrote a controversial novel that talked about the corruption of companies who cheat people.” But the book was never published – so why was the name change necessary?
Meanwhile, HRR’s activities remain shrouded in mystery, and its agenda is difficult to discern. The New York Times noted that Roxford “refuses to provide any substantive information about his partners,” maintaining instead that “[y]ou will not find any information on us because of the highest security clearance for three of the partners.”
On the other hand, Roxford has not been shy when it comes to litigation. Not only has he sued Sony; earlier he filed a federal court lawsuit claiming that he, operating as “Vakil” was entitled to a finder’s fee in connection with an acquisition by Ameritech Corporation. His complaint was dismissed and his appeal was rejected by the United States Court of Appeals for the Seventh Circuit.
Against this background, HRR has said that it is “currently seeking additional affluent partners on a limited basis, in order to make further acquisitions of extremely undervalued companies worldwide in the near future, like Edgetech Services.”
Any takers?
Timing is Everything
Finally we take a peek at several recent stock sales by Edgetech insiders and a Form S-8 registration statement filed by the Company.
Since late April 2003, there have been eight separate Forms 144 filed with the SEC by individuals declaring their intention to sell unregistered shares of Edgetech stock. Among those filings – one by Edgetech’s CEO Tae Kim, who filed to sell 300,000 shares (about 5% of his holdings) on July 14th, and one by Edgetech director Frederick Fulcher, who filed to sell 300,000 shares (about 40% of his holdings, on July 15th.
The filings by Kim, Fulcher, and others do not indicate whether any of those shares were sold before the HRR offer boosted the price of Edgetech stock.
On May 9, 2003, the Company filed a Form S-8 Registration Statement, registering 3 million shares of Edgetech common stock under the Company’s “2003 Stock Incentive Plan.” The stock was to be issued to officers, directors, and consultants in exchange for unspecified services. The Form S-8 did not identify the potential recipients by name, describe the services to be rendered, or say whether any of those shares already had been issued. The Company has not filed any amendment to the Form S-8 providing that information.
And, as with the Rule 144 stock, there is no public information indicating whether any of those S-8 shares were sold prior to the HRR tender offer. The aggregate value of those 3 million shares would have soared from about $450,000 on May 15th (the day the Form S-8 was filed) to $1.5 million on July 31st (the closing price on the day after the HRR offer). Based on the intra-day price on July 31st, they would have been worth $2.25 million.
Like we said. Timing is everything.
Delayed Response
Edgetech’s July 31st press release promised that the Board of Directors would meet “and decide on a suitable response [to the HRR offer] within the next week. As of August 10th there had been no public announcement of the Board’s position.
There has, however, been a running dialogue about the offer on the Edgetech Message Board on the Raging Bull website. On August 8th a new Raging Bull member, using the moniker hrrma, posted on the Edgetech Message Board a letter that purportedly had been sent from HRR to Edgetech increasing the offer for Edgetech shares from $1 to $1.15 a share. According to that letter, the latest offer was final, non-negotiable, and conditioned upon:
• the execution of a confidentiality agreement;
• prompt completion of due diligence;
• the Edgetech management team staying in place;
• all management and directors pledging to sell all of their shares to HRR at $1.15 a share; and
• the Company immediately releasing a public statement regarding the new offer.
So far, the Company has not issued any public statement indicating that it has received a new offer.
Is Raging Bull’s hrrma actually HRR? The so-called “final” offer letter shares a similar style with the original HRR offer. But the terms of the final offer are perplexing, and do not seem calculated to win support from Edgetech’s management. Why would management agree to remain in place, yet pledge all of their shares to HRR? Isn’t share ownership an incentive for management to make the Company grow?
In any event, hrrma seems determined to use the Raging Bull Message Board as a forum for establishing HRR’s legitimacy. In a series of messages posted on the Message Board on August 9th, hrrma has insisted that HRR has the funds to complete the Edgetech offer; expressed annoyance that anyone might doubt the viability of the Edgetech offer; and recounted the experience of HRR’s partners (including their unspecified roles in a series of vaguely recounted “deals” and market predictions).
According to hrrma, HRR was formed in January 2003, its three partners have worked “with some of the greatest financiers in this business” and “talk with the SEC about everything we do and enjoy talking with them.”
Is hrrma actually speaking for HRR? If so, why has HRR chosen to communicate its “final offer” through a posting on an Internet Message Board?
Oh yes. One more question. With whom at the SEC have they been discussing the Edgetech offer?
And are those talks still enjoyable?
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