Ed, you have a lot of nerve.
As soon as Cisco regains it's momentum then all those that try and create misery will move on to another target.
You may have to wait 10 years for CSCO to regain it's momentum. The momentum it has now is down. How dare you suggest that we bears try to "create misery". What effect do you think the AMZN article in barrons will have on the markets tomorrow? You make me sick! You and your talk of the "have nots". The public will know exactly who the makers of misery really are in the coming years. Why don't you brag some more that you don't care...that you will be on a beach by then...probably having a good laugh with Jeff Bezos, huh?
What Might the SEC Be Probing at Amazon?
By Mark Veverka
Amazon.com last week slipped a nugget into its quarterly financial press release revealing that the Securities and
Exchange Commission has begun an "informal" inquiry into accounting practices related to revenues from its online
commerce partners.
Without getting into great detail, Amazon's chief financial officer, Warren Jenson, explained that the SEC was merely
going over some arcane accounting treatments. Spokesman Tim Stone went on to underscore the message, telling the
Dow Jones Newswires that Amazon had "been doing the accounting on these deals for a while now," that "this is a New
Economy-Old Economy problem, and it's good that the SEC is addressing it."
We suspect, however, that the regulators' queries might, in fact, be far more serious and broader. Specifically, in addition
to accounting treatments, Amazon stated in its release that the SEC is also looking at "disclosure" issues. And they could
prove far more problematic. Of course, the cops at the SEC aren't saying. It is their policy not to comment on any
investigation the agency may be conducting, or even whether one is under way, a spokesman declares. But after looking
at filings, press releases and underwriter research from the past nine months or so, we find it reasonable to conclude that
Amazon has misled investors through insufficient disclosure of material information.
The prospectus for a February offering of convertible eurobonds prominently promotes the financial benefits Amazon
would receive from its commerce-partner relationships with other online retailers. Nowhere, though, does the company
reveal or explain that most initial payments would come in the form of stock, not cash. Yet an equity analyst of the offering's
lead underwriter, Morgan Stanley's Mary Meeker, published a report several days before the debt offering stating that
Amazon had received multiyear "cash" commitments worth more than $450 million. Did Amazon, with the witting or
unwitting help of its underwriter, mislead investors into thinking that many commerce-partner payments were cash when
they were not? (Company disclosure following the offering has revealed that much of the payments is in stock.)
What's more, despite plunging prices of many commerce-partner shares (one, Living.com, has filed for bankruptcy
protection), Amazon continues to report these revenues in press releases at levels well above their current market values.
The prospect of fat commerce-partner revenues was presented to European bond investors in releases and filings as
evidence that Amazon's debt was a better investment than it ultimately was. The convertibles were sold immediately after
the company reported its fourth-quarter 1999 results, and they were essential for Amazon to maintain comfortable cash
balances through the winter and spring of this year. It was the third high-yield debt offering for Amazon in as many years.
The fact that the Eurobonds were sold at all, let alone at favorable terms, was surprising; the company had been under
heavy criticism from Wall Street and had suffered a number of downgrades from brokerage-firm analysts. Fourth-quarter
gross margins were extremely weak and net losses were far larger than investors expected just a few months before. But
in late January and early February, Amazon announced it had entered into partnerships with four other Internet companies:
Audible, Drugstore.com, Greenlight.com and Living.com. Analysts cheered the deals, which were supposed to pump as
much as $130 million a year in high-margin marketing fees into Amazon.
On top of that, Amazon had introduced a new metric, "trailing 12-month revenue per active customer," during its
conference call with analysts to discuss fourth-quarter results. The company says this number shows repeat customers
spending more over time, giving the company higher "wallet share." We have since argued in this space that the
company's methodology is flawed, and have demonstrated why we think active customers actually had been spending
less.
Many analysts, however, cheered, declining to challenge the company on the validity of the new metric. (Since then, at least
two brokerage-house analysts, Banc of America Securities' Tom Courtney and Sanford C. Bernstein's Faye Landes, have
criticized the metric.)
The one-two punch of commerce fees and supposedly rising wallet share was all Wall Street needed to hear to get back
on the Amazon bandwagon, including Morgan Stanley's Meeker. In a February 3 research report entitled "Correction:
Inflection! Amazon.calm!" Meeker sings the praises of Amazon's "very strong customer metrics" and "very strong top line"
that would soon be bolstered by commerce-partner payments.
Most important, Meeker reported that the payments would be made in the form of cash. In a February note published five
days before Morgan Stanley lead-managed Amazon's convertible eurobond offering, Meeker wrote: "These partnerships
are now developing into a high-margin revenue stream for Amazon. Combined, the multiyear cash commitments to
Amazon from its partners now total over $450 million." While we could find no documents by Amazon stating that such
payments would be made explicitly in cash, the Meeker statement, coming from an analyst with the company's lead
underwriter, was significant.
What's more, as yet another example of Amazon's lack of clear disclosure, documents filed by the company with the SEC
related to the bond offering fail to make plain that some of the payments would be made in stock.
The following is an excerpt from an SEC filing by Amazon: "On January 31, 2000, we announced that we had agreed to
acquire 5% of Audible Inc., a leader in Internet-delivered spoken audio for PC-based listening. In connection with this
investment, we also announced that we had entered into an agreement to feature on the Amazon.com site content and
services from Audible Inc. in exchange for payments of $30 million to us over a three-year period."
That reads to us as though Amazon would get $30 million in cash from Audible. But in fact, Amazon received $20 million in
stock up front with a pledge for the remaining $10 million in the third year of their agreement. The reality is that the $20
million in Audible stock is now worth about $1.3 million, and Audible's ability to pay the rest is in question. The result of all
of this is that investors could have been led to believe that Amazon would reap at least $450 million in high-margin cash
revenues from its commerce partners as opposed to a fraction of that sum, as represented by pounded-down shares.
Amazon, in response to telephone calls and an e-mail message, responded with an e-mailed copy of a joint press release,
which relates to one of their commerce partners and is dated last December 1. It states: "In exchange for the investment
and the marketing relationship, Amazon.com will hold approximately 16.6% of Ashford.com's outstanding common stock
upon the closing of the transaction." The company would not answer any questions or offer any other examples.
Meeker's research note certainly didn't discourage European investors from buying Amazon's convertibles. Nor did it hurt
Amazon's stock on the Nasdaq. The shares soared 21% to $84.19 on February 3, the first trading day after Amazon
announced its commerce-partner backlog. Another question is whether Meeker violated SEC quiet-period rules by
publishing a research note about her employer's client prior to an offering. Convertible-bond offerings are covered by the
same SEC rules as equity offerings, subjecting equity analysts as well as bond analysts to the same restrictions, says
Harvey Goldschmid, a Columbia University law professor and former SEC counsel.
According to a February 14 SEC filing, Amazon's eurobond deal was registered with the SEC. The rules indicate that
quiet periods should begin when the underwriter and client agree to initiate an offering and ends 45 days after the offering
has been completed. Meeker's publishing "would seem to be in sharp conflict of SEC quiet-period rules," says John
Coffee, a Columbia University professor of securities law. "It doesn't sound like something she should have been doing. It
doesn't sound kosher."
Meeker was in Japan and unavailable for comment, but Morgan Stanley spokesman Ray O'Rourke said that the analyst
"had no knowledge of the eurobond offering" when she published her note. "She published that note independent of the
fact that our brokers were underwriting the [convertible] eurobond offering." In addition, O'Rourke said, Morgan Stanley's
lawyers say that under their interpretation of SEC regulations, Meeker was permitted to publish a research note up to the
day before the offering. What made her believe that the commerce-partner marketing payments would be in the form of
cash? "We checked with the company," O'Rourke said, referring to Amazon. Amazon could have set the record straight
sooner and explained the nature of the payments. If early payments were not intended to be made mostly in cash, it could
have easily released a statement clarifying or correcting Meeker's information. Amazon seems to us to be reluctant to
shed light on the severely impaired value of its commerce-partner stock payments. The company still counts about $30
million in stock paid by Drugstore.com in marketing fees as income on its books. Those shares are now worth only about
$3 million. Similarly, the $50 million in Ashford stock it received is now worth about $16 million.
While we have no knowledge about which of these issues might be catching the eyes of SEC regulators, we suspect
there's enough there to keep them busy for a while.
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