Speaking of shorts, this looks like it may just be one, it's optionable, This was on Street.com
p Stories: *Exclusive* Tel-Save Hid
Expenses, Letter Charges; Borislow
Blasts Back
By Alex Berenson
Staff Reporter
5/22/98 1:39 PM ET
Tel-Save Holdings (TALK:Nasdaq) shifted millions of
dollars in marketing expenses off its books to Group Long
Distance (GLDI:Nasdaq), according to two large
shareholders in GLD, a Florida company that resells
telephone service for Tel-Save.
Filings by Tel-Save and GLD with the Securities and
Exchange Commission appear to support the accusation,
which, if true, raises questions about Tel-Save's reported
financial results.
Ronald Assaf and James Lineberger made the charge and
demanded "a full disclosure of [Tel-Save's] relationship with
GLD" in a May 7 letter to Tel-Save Chairman Daniel
Borislow. TheStreet.com obtained the letter from a third
party.
Four days later, Borislow faxed Assaf a four-paragraph note
calling Assaf and Lineberger "criminal" and "ungrateful
bastards" and telling them to "take your letter and shove it
up your ass." Borislow also referred to Assaf and Lineberger
as "scum balls" and added, "You are not worthy of being in
business, maybe life."
(For the full text of Borislow's letter to Assaf and Lineberger,
click here.)
"It was the most unprofessional thing I've ever seen in my
life," says Assaf, chairman of Sensormatic Electronics
(SRM:NYSE), a billion-dollar company based in Boca Raton,
Fla. "I've been in business 30 years, and I can't ever
remember a piece of paper changing hands like that."
(Assaf and Sensormatic are not exactly blemish-free, either.
In March, Assaf settled SEC civil charges that Sensormatic
cooked its books in 1994 and 1995 by turning back the
clocks on its computers so the company could record
shipments in one quarter as if they'd occurred in the previous
quarter. Without admitting to or denying the charges, Assaf
agreed to pay a $50,000 fine. The case is unrelated to
Tel-Save or Group Long Distance.)
Borislow refused to confirm or deny the language in the
letter, which bears his signature, but acknowledged, "I did
write [Assaf and Lineberger] a letter in May." Borislow
refused to comment further unless he was told how
TheStreet.com obtained the letters. After TSC declined to
reveal its sources, Tel-Save didn't respond to a faxed list of
questions about its relationship with GLD.
Tel-Save, a Pennsylvania-based company that's best known
for selling long-distance service to America Online
(AOL:NYSE) subscribers for 9 cents per minute, uses tiny
Group Long Distance and other little-known "resellers" to
market its service to small and midsized businesses.
Tel-Save works with the resellers, providing them with loans
"to support their marketing activities," according to
Tel-Save's 10-K.
Tel-Save has grown quickly since going public three years
ago, with revenues increasing from $180 million in 1995 to
$305 million last year. But its shares have been under
pressure recently, falling from 30 in February to about 20
today.
Tel-Save bears argue that the company's AOL deal has not
lived up to expectations, and point to its most recent
quarterly results, in which the company fell well short of
analysts' revenue targets, as proof. But Borislow, who owns
almost 25 million Tel-Save shares, insists his company is on
target. "You don't know what you're talking about, you really
don't," he told TSC on Tuesday, punctuating his comments
with expletives.
But if the charges Assaf and Lineberger are making are
accurate, Tel-Save's problems may go much deeper than
weakness in its AOL deal or Borislow's volatile style.
Essentially, the men, who say they together control about
3% of the shares of Group Long Distance, allege that
Tel-Save used GLD as a conduit to shift the cost of
marketing Tel-Save's long-distance service off Tel-Save's
books, boosting its bottom line. They charge that the shift
muddled GLD's balance sheet and helped depress GLD
stock from almost 6 3/4 in July to 2 7/16 today.
According to Assaf and Lineberger, the transfer of expenses
worked as follows: Tel-Save lent GLD millions of dollars to
pay for the costs of marketing Tel-Save to small and
midsized businesses. Reselling long-distance service is a
low-margin business, and the added marketing costs far
outweighed the profits GLD made from its new customers.
To finance the losses, GLD used warrants to buy Tel-Save
stock at below-market prices. Then Group Long Distance
sold the stock it bought with the warrants and used most of
the profits it made to repay Tel-Save for the loans Tel-Save
had made to GLD.
In effect, the men charge, Tel-Save found a way to sell stock
without having to report the sales to the SEC, and used the
money to fund marketing expenses that didn't show up on
its balance sheet. "GLD suffer[ed] substantial losses while
your company benefited from not having to directly bear
those costs and expenses," Assaf and Lineberger wrote to
Borislow.
"If [Borislow] didn't have Group Long Distance do the
telemarketing, he would have had to do it and get the
business directly," says Lineberger, a founder of
Sensormatic who now is a private investor based in
Connecticut.
During the nine months ended Jan. 31, 1998, GLD reported
sales of $41.6 million, "cost of sales" of $29.2 million,
marketing costs of $15.4 million, and other costs, including
taxes, depreciation, and general and administrative
expenses, of $9.7 million. But the company showed a total
profit of $667,000, or 19 cents per share, thanks to "other
income" of $13.4 million -- nearly the same amount as its
marketing costs.
For all of 1997, Tel-Save reported a loss of $21 million, or 33
cents a share, on revenue of $305 million, so the $15.4
million in marketing expenses could have materially affected
its bottom line.
The other income, GLD says later in its report, was "a direct
result of the profit on sale of Tel-Save stock ... as a result of
the private sale of 1,347,000 shares of common stock of
Tel-Save Holdings at approximately $19.76 per share, for
gross proceeds to the company of approximately $26.6
million" and gross profits of more than $21 million.
The company acquired the warrants, which had an average
exercise price of $4.08 per Tel-Save share, "in connection
with" its August 1997 takeover of Eastern
Telecommunications, a small long-distance reseller based
in Brooklyn, N.Y., for $8.3 million. But because the warrants
vested in proportion to the amount of Tel-Save long distance
a reseller sold, they were worth more to GLD than Eastern
Telecom. GLD exercised warrants for 600,000 Tel-Save
shares in August and for an additional 747,000 in October.
Then, on Oct. 17, 1997, GLD cashed out, selling the shares
to Anschutz Family Investment, a private Colorado
company. (On the day GLD sold its Tel-Save stock to
Anschutz, Tel-Save traded on the Nasdaq for 23 1/4 to 25
1/4 per share, well above the $19.76 that GLD received.)
It's not clear whether GLD needed Tel-Save's approval to
take possession of the Eastern Telecom warrants. In his
May 11 letter, Borislow refers to "the independent warrant
transaction GLD did with another company, ETI (which
needed our consent)." But in its quarterly filing, Group Long
Distance makes an explicit connection between the profits
from the warrant sale and its Tel-Save marketing. GLD says
it used about two-thirds of the $21 million in profits from the
warrant sale "to pay down debt and accounts payable owed
to Tel-Save, including ... marketing expenses incurred in
connection with the Company's telemarketing effort during
the first half of fiscal year 1998."
Group Long Distance Chairman Gerald Dunne Jr. says GLD
"is very positive on its long-term relationship with Tel-Save...
They provide us with exceptional networking services as well
as financing." Like Borislow, Dunne declined to answer more
questions about Tel-Save's relationship with GLD unless he
was told how TSC obtained the letters between Borislow and
Assaf.
But Assaf says, "If I were Gerald Dunne, I wouldn't be able
to say anything else either. [Tel-Save] can pull the plug on
GLD in a moment... They control the cash." Indeed, in his
reply to Assaf and Lineberger, Borislow threatens to "take
control of GLD assets."
"You guys are a bunch of ungrateful bastards," Borislow's
letter concludes. "Go back to the section of hell you came
from, and tell [GLD founder] Gerry Sr. I said Hi when you get
there. Sincerely, Daniel Borislow."
Assaf and Lineberger say they're considering referring the
matter to securities regulators. "It would be interesting to
see what kind of letter he would send to an inquiry from the
SEC," Assaf says. |
