The Wall Street Journal Interactive Edition -- July 30, 1997
As Alydaar Soars, Pros Doubt
It Can Live Up to Its Promises
By RICK BROOKS
Staff Reporter of THE WALL STREET JOURNAL
Alydaar Software is dreaming big.
Though the Charlotte company posted a loss of $5.1 million last
year on a teeny $37,500 in revenue, Alydaar's shares have
produced tremendous returns, thanks partly to massive touting
by investors on the Internet. And top executives are making
some staggering predictions, including that tiny Alydaar will
earn as much as $80 million in 1999.
"That's the kind of earnings potential we have here," says
Hollis Scott, the company's chief financial officer.
But investors ought to think twice before plunking down their
money to go along for the ride. One of the biggest reasons: In
the past, Alydaar, which is working to develop a fix for the
dreaded Year 2000 problem that could cause computers to go
haywire after 1999, often has delivered far less than it promised.
'Biggest Problem'
Flash back, for instance, to a little more than a year ago. In an
interview with The Wall Street Journal, Robert Gruder,
Alydaar's chief executive, predicted that the company would
grow to 1,000 employees by the end of 1996 from 100 at the time.
"Our biggest problem right now is bodies," he said at the time.
"We're hiring as fast as possible."
Mr. Gruder, who owns 7.2 million of Alydaar's 16 million
shares outstanding, also figured the company's first earnings
were right around the corner. In a Charlotte newspaper, he said
Alydaar would go into the black during the last half of 1996.
It didn't happen. In addition to last year's $5.1 million loss, or
$137 for every dollar in revenue, Alydaar lost another $3.1
million in this year's first quarter. And though the employee
head count has since doubled to about 250 now, the increase
brings the company only to where Mr. Gruder predicted it
would be 13 months ago.
So why should anyone care now?
Because despite its failure to accomplish much of anything yet,
including meeting even the modest requirements to be traded
in Nasdaq's small-stock market, Alydaar has generated
astronomical gains for its shareholders. Having soared more
than 1,300% since the end of 1995, the stock's current price of
about $25 gives Alydaar a market value of about $400 million.
(That's about the same as Coca-Cola Bottling Co. Consolidated,
which also is based in Charlotte and had sales of $774 million in
1996.)
And Alydaar fans are counting on lots more to come, as the
company goes after lucrative contracts to fix glitches that may
make it impossible for some computers to recognize the date
when the year 2000 arrives. The company has created a highly
automated process to sift through huge chunks of computer
code to locate spots where the date problem exists.
Because no analysts publish research on Alydaar, much of the
buzz happens on the anything-goes Internet. Earlier this
month, one supporter wrote on Silicon Investor, a popular
World Wide Web site, "This moonshot has all the
qualifications to go beyond the moon and head for Mars."
'Stable History'
But securities analysts who follow other so-called Year 2000
stocks are skeptical. They contend that buying high-flying
Alydaar shares is a gamble, because of the company's unproven
record in a cutthroat business and its failure so far to graduate
from the over-the-counter bulletin board, a market filled with
stocks having scant or dubious credentials. Alydaar also doesn't
file regularly with the Securities and Exchange Commission,
making it a challenge for outsiders to study its financial
condition.
"I like to have companies with a good, stable history," says Kris
Tuttle of SoundView Financial Group in Stamford, Conn.
"They seem like one of those companies no one has actually
spent any time with."
And then there is Mr. Gruder's reputation for saying things
that many experts consider simply too grandiose. "There is
nothing there but a story," says analyst Seth Feinstein of
Crowell Weedon in Los Angeles. "If you're really an investor ...
[you're] not going to invest in a company that isn't reporting [to
the SEC], especially one that has a record of saying things that
don't come true."
On that list are predictions about when Alydaar shares might be
approved for listing on a more-established stock market. In July
1994, Mr. Gruder told a New Orleans reporter that the company
hoped to be a Nasdaq stock within a year. And last year he said
in an interview with the Journal, "We meet all the
requirements for Nasdaq."
The stock still hasn't made it there, though Mr. Scott, the
financial chief, says the SEC is almost done reviewing Alydaar's
financial statements, a preliminary step required for the
sought-after Nasdaq listing. As for Mr. Gruder's earlier
forecasts, Mr. Scott says, "He just didn't understand the
process."
Mr. Scott also concedes that Mr. Gruder, whose stake in Alydaar
now is valued at $180 million, might have been too optimistic
in the past. "Bob needs to take some training in what to say and
what not to say," Mr. Scott says. "That's why he has put me
here to put things in focus." (Mr. Gruder couldn't be reached
for comment.)
'A Total Reversal'
Besides, Mr. Scott contends, no one will care about Mr. Gruder's
unbridled enthusiasm once Alydaar starts working on a flurry
of Year 2000 projects. In addition to 19 contracts already signed,
including two with McDonnell Douglas and Minnesota Mining
& Manufacturing that caused the share price to double in four
days late last month, there are others in the pipeline, including
"one in the $10 million [revenue] range," Mr. Scott says.
Another sign of improving health: Barely three years after
Alydaar's accountant expressed doubt that it could survive, the
company now has $4 million in cash to fund its operations. The
cash hoard will help Alydaar open 20 sales offices around the
country. "We certainly did look bad at the end of the year," Mr.
Scott says. Since then, "it's been a total reversal."
But the improvement doesn't silence the stock's bears, who
think anyone trying to play the Year 2000 game should look
instead at companies where revenue and earnings already are
climbing. "Why don't you go buy a lottery ticket?" says Mr.
Feinstein, of Crowell Weedon. "Your odds are better there."
***
Firing Blanks: Firearms Training Systems tumbled 48% to $7.06,
the steepest decline of any Southeastern stock last week, after
the Suwanee, Ga., maker of interactive weapons-training
equipment reported fiscal first-quarter earnings of only 10 cents
a share, or one-third less than analysts were expecting. The
company also said it expects revenue from the U.S. military this
year to fall as much as $25 million short of estimates.
Gusher: Atlanta-based RPC Inc. jumped 22% to $19 after the oil-
and gas-services company said per-share profit climbed 87% to
41 cents a share in the second quarter from the year-earlier 22
cents, fueled partly by stronger demand for its oil-field
equipment. |
