OT: Short-Sellers/FLM/LU/ETC
Since I brought up the issue of Herb, I thought I should at least post why I believe in his work. Although all of the link's may not be accessable w/o a subscription, one can see that Herb does: 1) write accountability & report card articles on his articles, 2) have success writing about companies that take significant downturns prior to their decline, 3) mentions the short-sellers name and track record in his articles -- if given permission by the respective short seller. I don't bring this issue up to generate sales for Herb, because Herb no longer writes for realmoney.com but for a sister product (institutional type offering) -- although he still writes for Forbes magazine.
Herb's Accountability:
thestreet.com
Herb on TheStreet
Herb's Report Card: 'Fessing Up
01/14/02 07:23 AM ET
By Herb Greenberg
The columnist reviews his performance for the past six months.
Elan:
thestreet.com
Herb on TheStreet
Does Elan (Indirectly) Give Itself Cash to Help Boost Sales and Earnings?
12/08/98 06:30 AM ET
By Herb Greenberg
thestreet.com
The Pot of Revenue at the End of Elan's Rainbow
By Herb Greenberg
Senior Columnist
11/06/2001 12:20 PM EST
Lucent:
thestreet.com
Why It Was Only a Matter of Time for Lucent
By Herb Greenberg
Senior Columnist
1/6/00 9:16 PM ET
EDS:
thestreet.com
Herb on TheStreet
Will Electronic Data Systems' Financing Shock Investors' Systems?
09/07/01 07:00 AM ET
By Herb Greenberg
The big tech-outsourcing firm has used $2.5 billion in off-balance sheet financing.
LHSP:
thestreet.com
Lernout & Hauspie: The Plot Continues to Thicken as New Details Emerge
By Herb Greenberg
Senior Columnist
4/9/99 6:30 AM ET
An item here yesterday offered Lernout & Hauspie (LHSP:Nasdaq), the Belgian voice-recognition software company, the chance to answer questions directly posed by short-sellers who claim the company won't respond to their queries.
Thus far, Lernout has been silent to this column. So, let's pose a few of those questions right here and now:
Why weren't the fourth-quarter financial statements, released Wednesday, audited? It's not unusual for companies to issue a press release containing unaudited results, but usually they're only unaudited if they're released shortly after the quarter ends, not when they've been delayed for 97 days!
(A reminder: The fourth quarter is always the audited quarter. When the initial results presented to shareholders are unaudited, it behooves investors to read the 10-K to catch any changes; believe it or not, the actual numbers sometimes do change. However, in the case of Lernout, there is no 10-K because Lernout is a foreign company whose stock is dually listed in the U.S. and Belgium. Foreign companies are only required to file financial statements with the SEC twice a year, and they're not required to file on the agency's electronic Edgar system. Many, however, do file on Edgar. Lernout does not. That raises question No. 2: Why not?)
Next: How good is the quality of Lernout's earnings?
According to participants in the fourth-quarter conference call Wednesday, CEO Gaston Bastiaens said the quarter's earnings were of the highest quality. However, one transaction on the last day of the quarter may put the quality of some of those earnings in doubt.
The transaction involved Applied Voice Recognition, a 5-year-old Texas company now called e-Docs.net that makes voice recognition dictation systems for doctors. It trades on the OTC Bulletin Board. The company appeared to be in dire financial straits until an investment partnership run by Lernout founders Jo Lernout and Pol Hauspie happened along. Applied was in such bad shape, according to its just-filed 10-K, that last year it had traded its own stock for such things as consulting services, salaries and office furniture. It was so bad that just two weeks ago its auditors wrote in the 10-K that "without the assurance of new capital, these conditions raise substantial doubt about the Company's ability to continue as a going concern."
Lernout has come under fire in the past for transactions with so-called "related parties" involving L & H Investment Co., run by Mssrs. Lernout and Hauspie. The Applied transaction appears to be the most recent. According to Applied's 10-K, the original deal, struck last Sept. 30, gave Applied nonexclusive rights to certain Lernout software in exchange for $300,000 due Dec. 15.
However, according to the SEC filing, on Dec. 27 the amount owed to Lernout was boosted to $1 million, with $650,000 due Dec. 31 -- the last day of the quarter -- and the balance due on March 15. As it so happens, according to the 10-K, on Dec. 31 L & H Investment also bought $2 million of Applied preferred stock as part of an agreement to invest up to $8.75 million in the company.
Applied CEO Tim Connolly says he saw nothing wrong with the timing of the transaction. In return he received rights to Lernout's telephone-based voice recognition dictation software, filling "a critical part" of his product plan. "I would've moved heaven and earth to buy those rights whether they were investing in us or not, because there's not another company in the U.S. that has telephone voice recognition software for dictation."
He adds, "I knew they wanted to get a sale done by the end of the year, so I used that to my advantage."
Would he have been able to buy the technology if Messrs. Lernout and Hauspie hadn't bought the company's stock? (There was a pause, then Connolly said: "I could have raised the money.")
What about the timing of the transaction? Messrs. Lernout and Hauspie have since invested a total of $5 million in Applied. "Nobody in their right mind would invest $5 million to get $1 million in revenues," Connolly said. (Maybe not, but short-sellers point out that as of last August Messrs. Lernout and Hauspie owned 23% of Lernout stock. The shares, which rose as high as 68 a year ago, yesterday were at 41 1/2; on March 30 they were at 28 1/2.)
Speaking of related-party transactions, we know about Applied because it's public. Does Lernout have any similar transactions with private companies? And how much did related-party transactions contribute to the fourth quarter and all of last year?
On the fourth-quarter conference call, Bastiaens said related-party transactions for the year amounted to $8.7 million in revenues, including $2.2 million in the fourth quarter. However, according to a Feb. 26 Wall Street Journal story, he said the number was $5.4 million through the first nine months. If so, then the real fourth-quarter number should be more like $3.3 million, or $1 million more. Each million equals about 2 cents of earnings; a million here from one transaction, a million there from another and pretty soon, according to short-sellers, the quality of earnings comes into question.
Meanwhile, much has been made of Microsoft's (MSFT:Nasdaq) recent announcement that it had acquired an 8% stake in Lernout, with the exercise of an option last December for additional shares. More recently, Lernout announced that Intel (INTC:Nasdaq) has entered an agreement to buy $30 million of Lernout stock, pending due diligence.
The Intel transaction is currently insignificant because it has not been completed, and not all analysts are impressed with the Microsoft relationship. Lehman Brothers analyst Brian Skiba, who yesterday started coverage on the stock with a neutral, said he doesn't believe the Microsoft relationship will ever amount to anything significant "as Microsoft has shown no historic pattern of making any company financially well-off through technology agreements." (Lehman has done investment banking work for Lernout; another analyst used to cover the stock with a buy rating.)
My question: Is Skiba right?
Requests to speak with Lernout officials were left yesterday on voicemail with two spokeswomen, and a list of questions from this column was emailed to the same spokeswomen. There has been no response. If Lernout does decide to comment on these issues, its response will be posted in this space with the same prominence as these questions.
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.
Fleming:
Herb on TheStreet
Why the Shorts Chomp on Fleming's Failings
11/09/01 12:06 PM ET
By Herb Greenberg
The food distributor's earnings quality is questionable, some short-sellers say.
Fried-day:
Short shrift: Whenever a company blames the shorts for its troubles, it's time to take a closer look. Which brings us to Fleming (FLM:NYSE - news - commentary) , a food distribution company, which filed an 8-K the other day containing a letter to investors that blames the shorts for its swooning stock price. Among other things, the company encourages investors to "call your broker ... and determine whether your shares have been loaned to short sellers." The company also says it's looking into "all legal and regulatory remedies ... to identify and combat any coordinated activities by short sellers."
A little Enronesque, no?! Time to take out the magnifying glass and see. Why in the world would a company like Fleming attract so many shorts? Talk to any Fleming short-seller and you're bound to hear about the company's deal earlier this year to supply food to financially hobbled Kmart (KM:NYSE - news - commentary) .
"Who in their right mind would bet the company on Kmart, anyway?" asks one Fleming short. Fleming has never disclosed many details about its Kmart deal, but it's important to note that SuperValu (SVU:NYSE - news - commentary) decided not to bid on the Kmart deal because it would be too unprofitable in what is already a low-margin business. Kmart has since become Fleming's largest customer, generating 15% of sales in the second quarter and rising. With Kmart itself having trouble, Fleming has warned in a recent proxy that there's a risk Kmart won't meet certain sales projections, which would mean "the benefits that we will receive as the result of the agreement will decrease."
The Kmart deal is also capital-intensive, and capital isn't something the company has in great abundance. Last quarter Fleming had cash of only $43 million, vs. debt and capital lease obligations of $1.9 billion (though it had $345 million left on its credit line as of the second quarter).
As if Fleming really needs more debt?! This might explain why the company is so focused on its stock, which has lost 37% of its value since Aug. 1: It can't very well raise cash via a stock deal if there are more sellers than buyers for its stock.
The shorts are also attracted to the quality of earnings, or lack thereof. Quarterly earnings have been skewed by a series of "adjustments" related to a strategic plan three years ago. (Just say, "Charge it!") Cash flow from operations is also a red flag: It has gone from positive $169 million for the six months ended June 1999 to a negative $64 million in the first six months of this year.
What's more, in 1999 and 2000 cash flow from operations was less than 30% of adjusted earnings before interest, taxes, depreciation and amortization. That's low by retail standards. It's always a warning, says one analyst, when that figure slips below 50% because it shows the size of the discrepancy between the cash a company has generated and its reported (or, in this case, adjusted) earnings. The bigger the gap, the more the business is failing to generate the cash it should.
The industry itself is a tough one. There's more, but you get my drift. Company officials couldn't be reached.
Tech talk: The way some of these chip and tech stocks are moving would make you think happy days are here again. Oh, really? That's not what Jim Coleman, of Blackfin Research -- formerly of Fechtor Detwiler -- found in his recent channel checks. As he wrote to clients Thursday: "After spending time with some ex-colleagues of mine in distribution, one thing was certain; improving business in October did not cause Wall Street's party. The stories we're getting out of distribution are not about rebounds and order pick-ups, but more somber notes like three of the largest branches of one of the major semiconductor distributors closed October at roughly 50% of sales budget."
Coleman adds that "distribution is an excellent leading indicator for future business. As business begins to improve, requirements/orders start out small and hence tend to trickle into the [distribution] channel first. Once things get 'hot' and requirements large enough, manufacturers begin to take orders 'direct.' Right now, visibility remains murky at best as turns business remains the name of the game.
"One final thought. While a number of market pundits are starting to preach that inventories have been worked off, distribution is still extremely cautious on this issue. After experiencing declining cancellations during the last three months, returns and credits shot up some 7% in October."
Lights, camera: Catch me on CNBC at 11:50 a.m. EST Monday, where I'll be waving the red flags.
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Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to Herb Greenberg. Greenberg also writes a monthly column for Fortune.
Brian Harris and Mark Martinez assisted with the reporting of this column. |
