Since we seem to be having a serious failure to communicate here, let me step in and try to articulate the short case as I see it.
They way I understand it, there is not so much ironclad stand-up-in-court kind of proof that Tava is engaging in fraud, as there is a large number of "red flags" indicating all is not as it seems or as it should be. (Bill Wexler may take issue with the proof issue; I for one don't know what kind of "proof" he got through his telephone inquiries. I rather wish he would leave a hint as to where he placed those calls.)
For red flags, let's start with the financials filed with the SEC.
edgar-online.com
Let's look at the most recent 10-Q. Skip down past page marker 5 to the statement of cash flows. Net cash flow from operating activites the first nine months of FY98 was minus $8 million. To even make such spending possible, Tava was forced to raise $15 million in "financing activities". Much of this came from issuing of additional common stock and exercising of options. These have the effect of diluting the pool of stock, an activity that is never good for investors, in the short term, anyway. Financing activities deleterious to shareholder value is a RED FLAG.
Another $4 million came from a loan from a company called Sirrom Capital, through its Tandem Capital subsidiary.
tandemcapital.com
Tandem Captial is in the business of making loans to small companies, and appears to specialize in particularily risky companies. One such company, Ergobilt, recently defaulted on a loan and rocked Sirrom stock in doing so. Tandem makes up for the risk by charging higher than normal interest rates, and requiring its loanees to put up "substantially all assets" as collateral on seven-figure loans. The fact that Tava has chosen to put up everything it has, supposedly worth $129 million even in this bearish market, for a mere $4 million is another RED FLAG.
Enough about numbers, what exactly does Tava do? Stories vary (a yellow flag for that alone), but the most reputable disinterested source I've come across on the topic is by Cory Johnson, West Coast Bureau Chief for theStreet.com, reporting on the Cruttenden Tech Conference.
Reported Johnson: "[Tava] CEO John Jenkins spoke in very vague terms about the company's "more than 35" clients, calling them "a major food processing company" or "a leading soft drink company." But in explaining the Tava business model, it increasingly sounds like Tava provides very little bang for the buck. Essentially, what the company offers is a list of devices that won't work after 2000.
"Tava sends out people to the factory floor to do an inventory, the Tava crew jots down some serial numbers and model numbers, and, according to Jenkins, "we send that inventory to our database of 12,000 items for suspects." And then what happens? "Then," says Jenkins, "we create a paper compilation that is a status of the inventory."
Johnson sums up: "You see, now I'd just call that a report and I couldn't see how that process would justify a $140 million market cap -- but I guess that's why I'm not qualified to be a Year 2000 CEO."
A strong indication that the financial press has not bought into Tava's story, another RED FLAG.
Okay, enough about what Tava does now, what's it going to do in the future? Anyone with a long-term horizon has to be looking a good 18 months into the future, and as the folks on this board are fond of pointing out, the year 2000 is less than 18 months away. So what will Tava's main source of revenue be after the clock ticks over, either to 2000 or 1900? A recent post quoting John Jenkins addressing the question:
Message 5383389
"We have the ear, at this point, of the CFO, CIO. And we have the opportunity then to tell the story of the value that those large, multi-site, multi-national organizations can derive from, let's say, an enterprise integration strategy that includes bringing the process information up through an advanced planning system into their ERP system."
Note the "let's say". As in "we're really not sure, but one thing we might be able to offer these companies is...". Does that sound like a CEO who knows where his company is going? Bill Gates would not only know what his company was doing, but he'd be spouting a brand name for it and running TV ads about it. Big RED FLAG there.
Another small indicator is some of the attitude I am feeling from this board. I get the impression that every long here seems to believe that "The Y2K problem exists, therefore Tava will make me rich." No allowance is made that, perhaps, a lot of companies are handling the problem just fine without Tava's help, thank you, or maybe Tava's management just isn't executing worth a darn. Faith in a company is okay, but it does seem, if not blind, at least a trifle astigmatic.
RED FLAG.
Compounding that are the implications by Mr. Mansfield that Wexler, by expressing his opinion, is somehow committing an illegal act! That is a sign of near-irrational defensiveness and a gigantic RED FLAG.
There is also the fact that Tava is delaying their annual 10-K for the fiscal year ended June until mid-September. Another of posters here have excused this, saying something about how long it takes to put together an annual report, but it is strange how other companies whose years end in December have no trouble filing well before January 31, much less mid-March. It is a rule of thumb among traders that the longer a filing is delayed, the more likely it is that that is because the company is trying to put off bad news for as long as possible. Every day that passes without a report waves an ever larger RED FLAG.
Oh, and it is not as if Tava does not have the procedure of making SEC filings down pat. It is of note that every single press release Tava makes is filed as an 8-K form with the government! Quirky behavior to say the least. I know of no other company which does this, do you? It is not clear if by this Tava is trying to say "We really believe the SEC needed to be told formally that we are part of the Russell 2000 now", or "Our press releases are the most important factor in the movement of our stock price." RED FLAG.
I know I'm missing some major details in the bear case, not exactly being the most experienced of shorts, but I'll leave it to the Bills to fill in the blanks, and to Cheryl and John to tell me where to stick all of this. All in all, I'd certainly be looking for another place to put my money. If I were dead set on investing in Y2K, I'd suggest perhaps looking at Keane (KEA). At any rate, I hope I was of service. Good luck. |
