|To: Jay Fisk who wrote (673)||4/23/2001 5:57:55 AM|
|Agreed. Unfortunately its difficult to find shares to short. Neither MSDW nor Datek had any on Friday. Its pretty clear this puppy is headed toward the pink sheets, or worse.|
Here's one more article of relevance:
MicroStrategy trips over its own miscues
By Larry Barrett
Special to CNET News.com
April 20, 2001, 11:55 a.m. PT
E-business software provider MicroStrategy has declared war on short sellers, investors who profit by betting a stock will fall, but the company might be its own worst enemy.
In a letter to shareholders Thursday, the company asked its investors to help protect the company from excessive short selling, which executives claimed played a significant role in the stock's unfettered collapse in the past year. While acknowledging the downturn in technology stocks, "management believes that the current stock price is also attributable in part to heavy selling pressure from short selling," said MicroStrategy CEO Michael Saylor in the letter.
The letter apparently worked. Shares soared 76 percent Thursday and tacked on another 12 percent Friday to trade just below $6. Analysts weren't impressed. They said the true irony of MicroStrategy's letter to shareholders was that the company's own miscues left the door open for short sellers.
Investors who "short" stocks are the bane of many companies because they profit from a company's misfortune and plunging market capitalization. Shorting a stock means borrowing shares to sell, then "covering" the loan by buying the company's stock on the open market.
Here's an example: A short seller, banking on a sharp decline in a particular stock, might borrow 100 shares of the stock from a brokerage firm at $20 a share and immediately sell the shares for $2,000. If the stock were to fall to $16 a share, the short seller could then buy 100 shares to return to the broker for $1,600 and pocket the difference less a small commission fee.
If they guess wrong and the stock appreciates, short sellers must buy back the shares at a higher price and, in theory, there's no limit to how much the short seller could lose if the stock continues to gain ground. Shorts have made a small fortune as the Nasdaq Stock Market has plunged from its all-time high set in March 2000.
In his letter, Saylor urged shareholders to take possession of MicroStrategy shares by pulling them into their accounts. Shares registered in a broker's name or held in a margin account are loaned to short sellers. Shares registered in an individual shareholder's name that haven't been purchased on margin cannot be "loaned" out to short sellers.
"Our stock wouldn't be where it is right now if the short sellers hadn't piled on us," Saylor said during an interview Thursday. "I think (Thursday's) stock price reflects the sentiment that our shareholders want to do what they can to support this company."
Several analysts disagreed with Saylor's conclusion, suggesting that while a handful of loyal shareholders may have followed the company's directive, a more plausible explanation for the 76 percent surge was that short sellers immediately began to cover their positions by buying shares before any buy-and-hold investors took action.
"Frankly, (the shareholder letter) is a little hard to figure out," said Jim Pickrel, an analyst at J.P. Morgan Chase. "It's hard to gauge how much of this is related to the letter and how much of it is short covering. The stock's going to be a bit tougher to short for a little while, but I don't think this will have much of an impact in the long run."
A brief history
MicroStrategy's letter to shareholders is just the latest development for a company that has seen its stock top $300 in March 2000 before tumbling to a low of $1.75 earlier this month.
Analysts said MicroStrategy's "business intelligence" software is technically sound, but a series of management blunders that hurt the company's credibility on Wall Street, a slowdown in information technology spending and intense competition has sent the company reeling. Analysts said MicroStrategy's business performance coupled by a restatement of sales and earnings and the Securities and Exchange Commission probe that followed practically invited short sellers, who target distressed companies.
MicroStrategy's software lets companies comb their databases for sales trends, customer behavior and other hidden patterns useful for marketing plans. It competes with Cognos and Business Objects.
Things turned sour for MicroStrategy on March 20, 2000 when the company announced it would have to restate its sales and earnings for 1997, 1998 and 1999--which had helped to propel the stock to such a high level--to reflect the fact that the company had lost money rather than turned a modest profit in 1999 and earned only half as much as it as it had previously reported in 1998.
These were no minor adjustments.
For example, sales for 1999 came in at $151 million, down from the original report of $205.3 million. Instead of earning 15 cents a share for the year, it actually posted a loss of $33.7 million. The aberrations between what MicroStrategy reported for sales and earnings in 1997 and 1998 were also off by a considerable margin, sparking 25 class action lawsuits and the SEC probe. The SEC investigation culminated with Saylor and two other executives paying out more than $11 million in fines without admitting or denying wrongdoing.
One analyst at a major brokerage firm who picked up coverage of MicroStrategy from a colleague said it didn't take much time to for him to figure out the company had serious issues.
"Let's just say that after meeting with (Saylor) for the first time, we agreed to disagree," the analyst said. "He wanted to talk about technology. I wanted to talk about the business. I mean, this was a guy who actually argued that there were 35 days in some months.
"The company has never turned a profit, continues to burn through cash and derived about 90 percent of its sales last quarter from its installed base," he said. "There's no growth. Throw in the slowdown in technology spending for even the best companies and you get a good idea of just how much trouble these guys are in."
On April 3, MicroStrategy warned analysts that it would miss estimates yet again, predicting sales of between $47 million and $51 million in the quarter and loss of between 31 cents and 37 cents a share.
It also said it would cut one-third of its work force in a cost-cutting move as part of its effort to "refocus on our core business-intelligence business" and predicted it would achieve profitability by the end of this year.
The "toxic" loan
MicroStrategy's biggest mistake could have been raising $125 million in a convertible loan last summer from Promethean Asset Management, a New York-based hedge fund that has provided similar loans to a number of companies including eToys, Entrade and Ariad Pharmaceuticals.
In investment circles, these convertible loans are known as "death spiral" or "toxic" loans because companies' stocks have a nasty habit of falling below $1 after they are taken out.
And those are the fortunate companies. Many others end up in bankruptcy court. This, according to analysts and executives at companies who have dealt with these hedge funds, is no coincidence.
Terms of the loans typically call for the lenders to be repaid in stock and the farther the stock falls, the more shares the borrower must pay. If the borrowing company can't meet the repayment terms, the hedge fund effectively takes control of a significant minority interest in the company.
If the company can pay, the hedge fund takes the interest--usually in the range of 6 percent to 9 percent--as well as the principal and moves on to the next client.
These hedge funds are Wall Street's answer to the Las Vegas pawn shop, the places companies desperate for financing turn to when the capital markets and traditional lending sources will have nothing to do with them.
As Dale Schmidt, a manager at the Potomac Internet Short Fund, put it: "Companies have to find the money to keep the doors open. But the potential price could be the losing control of your company."
MicroStrategy "was going to do this huge secondary offering but the wheels fell off after the SEC probe," said one analyst who spoke on condition of anonymity. "They needed money so they went to the financing of last resort. The irony here is MicroStrategy took out a loan that encouraged the people they were borrowing from to short its stock. And while the hedge fund won't admit it, that's what's been going on."
The house always wins
In MicroStrategy's case, this convertible loan was due this June and the company didn't have the cash to pay it off. Faced with the prospects of having to either pay the loan or fork over the shares and sustain the enormous dilution to the value of its common stock, Saylor worked out a refinancing deal--announced with the company's April 3 profit warning--to buy his company some more time.
"If converted in the original manner at current levels, MicroStrategy would have had to issue over 50 million shares to convertible preferred shareholders, inflicting serious dilution on common shareholders," First Albany analyst Mark Murphy wrote in a research note. "The deal was restructured so that some of the convertible preferred shares are redeemed for cash in the near-term ($25 million), while other convertible preferred shares are exchanged for Series B, C and D preferred shares with conversion prices of $5, $12.50 and $17.50 per share."
Promethean and other hedge funds have been tagged by a series of lawsuits from borrowing companies in recent years, accusing them of short selling shares in the respective companies to drive down the share price and garner a larger percentage of the company's common stock when the borrower failed to meet the repayment date.
Repeated attempts to contact Promethean founder and CEO James O'Brien were unsuccessful Thursday, but he did tell Bloomberg earlier this year "every one of our investments becomes more valuable as the issuer's stock price increases, and conversely, every one of our investments becomes less valuable if the issuer's stock price declines."
However, Promethean could short sell the stock of a company it holds a note on all the way to basement, then usurp the shares to cover their positions when the company fails to meet the terms of the loan.
In either scenario, the hedge fund wins. If the company continues to flounder, the stock plummets. If the stock falls, it pockets the proceeds from shorting the stock. Eventually, the company runs out of money and the hedge fund swoops in and takes a huge block of common stock to cover its position.
If the company recovers, the hedge fund gets back the original loan plus interest and moves on to the next desperate company.
A chief financial officer at one technology company said his firm managed to repay its convertible loan to Promethean before the stock market collapsed last spring. He said the amount of short selling of his company's stock increased dramatically shortly after the loan was signed.
"Whether the shorting was done by Promethean or by people who closely watch what they do, I don't know," he said. "You could never prove it either way. But I can tell you that we would never do that deal again. Not in a million years."
Shorts a scapegoat?
When pressed, Saylor acknowledges that his stock's poor performance "brought a lot of shorts into the stock" in the past year.
As of March 9, 5.8 million shares, or roughly 20 percent, of MicroStrategy's shares on the open market were being shorted. By comparison, Cisco Systems and Sun Microsystems had only 0.9 percent and 0.6 percent, respectively, of its available shares in this same position.
Amazon.com hovered at a remarkable 58 percent.
"I sent out the letter to tell our shareholders that it was not in their best interests to let these shares sit in a margin account and be available to short sellers," Saylor said. "This short selling has put a lot of pressure on our stock. We had to do something."
Saylor said a combination of his letter and MicroStrategy's recent restructuring will put the company back on track and fend off short sellers, but analysts have their doubts.
David Hilal, an analyst with Friedman Billings Ramsay, estimates MicroStrategy has about $105 million in cash, but $40 million earmarked for Strategy.com, MicroStrategy's messaging subsidiary. Factor in a $25 million cash payment to Promethean for the convertible loan refinancing, and MicroStrategy has $60 million in the bank.
If the company breaks even in the fourth quarter as it has promised, MicroStrategy will be OK, but it will " require solid execution without much leeway," Hilal said.
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|To: zax who wrote (675)||4/24/2001 1:49:38 AM|
|From: Jay Fisk|
|Lets look at the timing - On Tues 4-17-01 at 3:15 MSTR scheds a Conf Call for 4-30-01. They've already pre-announced larger-than-expected losses earlier in the month. |
Wednesday is spin-control day. Earnings are far worse than anyone expected earlier. Only seven days to unload shares before the 30th and the volume is anemic. What to do ???
Hence the infamous "Letter to Shareholders" was borne. Did anyone actually get one ? Or was it just a press release timed to hit 15 minutes before the market opened on Thursday 4-19-01 ????
What's really bizarre is that anyone believes that placing shares in a non-margin account (or placing a GTC sell order above the market) has any effect at all.
Any market maker that is deemed to "make a market" in MSTR, ie quote a bid and ask, is allowed to short naked, without shares in inventory. Its allowed by NASDAQ, totally legal, done everyday.
In fact any investor outside of the US can do the same thing as well as US citizens with offshore accounts. Nothing illegal as long as you declare your income at tax time.
As far as the hedge funds that provided the 125 mil to MSTR ???? They'll cover with company-provided shares, not a part of the float. (Read the 10Q)
Amazing that anyone still falls for the "call-in-your shares-protect-us-from-the-evil-shorts" scam.
The only twist that would have made it even more believable would have been a self-imposed freeze on new insider sales. (of course pre-existing orders would be OK - just not mentioned.
I'll bet MSTR is in the pinks within 60 days.
Just my 2 cents.
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|To: Anthony@Pacific who wrote (678)||5/2/2001 4:43:31 PM|
|From: Jay Fisk|
|Uhhh.... doesn't look good even with the nonsense proforma numbers reported....|
MicroStrategy's Losses Beat Dire Predictions
(05/01/01, 7:17 p.m. ET) By Rick Whiting, InformationWeek
Business intelligence software supplier MicroStrategy Inc. has reported sales and earnings for its first quarter that slightly exceeded the dire warnings it issued in early April.
The company reported a net loss of $20.6 million (28 cents a share) compared to a net loss of $32.9 million (42 cents) in the same period last year. Revenue increased less than 2 percent to $51.4 million from $50.6 million one year ago.
In April, MicroStrategy (stock: MSTR) said revenue for the first quarter would be $47 million to $51 million and its loss in the range of 31 to 37 cents per share.
The vendor has been struggling for more than a year and has been hit hard by the economic slowdown.
The company, which is in the process of cutting 600 jobs, or one-third of its workforce by the end of the current quarter, reduced its operating expenses by about $5 million and improved its pro-forma operating results by 33 percent year-over-year.
There were warning signs about the future, however. Particularly worrisome was a 25 percent plunge in the vendor's license revenue to $19.6 million from $26 million in the same period last year.
License revenue is a key indicator of future growth.
>> More from InformationWeek >>
Unbelievable anyone would risk one cent on this one !
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|To: Jay Fisk who wrote (680)||5/9/2001 3:18:23 PM|
|From: Carl R.|
|This was on the wire today:|
By Michael Rapoport A Dow Jones Newswires Column
NEW YORK (Dow Jones)When you refinance, you typically do it because you think you'll be better off whether you're a homeowner refinancing a mortgage to take advantage of lower interest rates or a company refinancing its debt to make it easier to pay back.
But, the company's assertions notwithstanding, it's hard to see how beleaguered MicroStrategy Inc. (MSTR) is much better off from its recent refinancing of $125 million in convertible preferred stock.
The company, still trying to recover from its accounting disaster of last year, has touted the refinancing as removing a lot of uncertainty from its future by turning away from a path that could have resulted in virtually unlimited dilution to the value of its existing shares. But while refinancing buys some time for MicroStrategy, it carries its own problems, including a big cash outlay that depletes the company's coffers and significant dilution a few years down the road regardless.
And after all that maneuvering, the refinancing doesn't even remove the danger of UNLIMITED dilution it was ostensibly meant to address. If MicroStrategy can't get its stock price back up from its current singledigit level over the next few years, current shareholders could face major dilution to the value of their holdings.
Before getting into the refinancing, here's how the original financing would have played out.
MicroStrategy originally issued the $125 million in convertible preferred stock last June. At that point, it was convertible into MicroStrategy common shares at a price of $33.39 a share, based on MicroStrategy's share price at the time. But there was a time bomb in the terms: The conversion price could be reset once a year, to wherever MicroStrategy's price was around the anniversary of the financing.
That meant that if MicroStrategy's stock price plunged, preferredstock holders would get more common shares when they converted their $125 million into a commonstock stake. The lower the price went, the more shares they'd get, creating greater and greater dilution. That's why these types of convertibles are known as "deathspiral" securities.
MicroStrategy stock is currently trading at just over $5 a share, and the anniversary date of the financing is approaching. So unless the stock price were to suddenly shoot upward, the conversion price would have gotten revised sharply downward soon and it was possible some of those preferred holders would start converting.
Ultimately, if the stock stayed at its current price, MicroStrategy might have had to issue 24 million shares to convert the stock, plus up to another 6 millionplus shares over a maximum term of four years for dividends on the preferred stock. That's total dilution of about 37%. And if the stock's price had continued to fall, the price could have been reset again, and dilution could have gotten even worse.
Enter the refinancing, in early April. The new terms call for the company to buy back some of the preferred shares for $25 million in cash, and to exchange most of the rest for three new series of preferred shares maturing in 2004, all with much lower conversion prices from $5 to $17.50 a share.
Problem solved, right? At those conversion prices, MicroStrategy would still suffer some dilution about 11 million common shares would be issued to convert the preferred stock, causing dilution of about 13.5% over the next few years but at least it removes the flexible conversion prices that raised the risk of unlimited dilution.
"Given recent market developments, our capital structure was creating too much uncertainty for investors," said Michael Saylor, MicroStrategy's chief executive, in a statement at the time the refinancing was announced. (A MicroStrategy spokesman declined further comment.)
But read the fine print. The $5 conversion price on one of the new series of preferred stock is fixed, but there's still some worrisome flexibility on the other two series.
When the preferred shares mature in 2004, MicroStrategy has a choice: It can either pay about $61 million in cash to redeem the preferred shares, or it can convert them to common stock. The cash option is probably what MicroStrategy would prefer, but it may not have a choice the company is currently a little hardpressed for cash, although it's impossible to say what things will look like in three years.
So, if the cash isn't available, MicroStrategy may have to convert the preferred stock. But here's the rub: If MicroStrategy's stock price is lower at the time of maturity than the two preferred series' conversion prices $12.50 and $17.50 a share then the conversion price gets revised downward to the market price, wherever it is.
And that would mean greater dilution. If the stock's price stays where it is today, in fact, MicroStrategy would have to issue about 7.4 million shares more than it would have to under the current conversion prices.
And that's not all. Those two series of preferred stock carry huge dividend rates of 12.5% a year, payable in cash or common stock. Again, it's possible MicroStrategy might have to use stock instead of cash to pay those dividends. That would mean an extra $23 million worth of stock issued by 2004 4.4 million more shares if the price stays where it is now.
Finally, there's another $5.3 million worth of the original preferred stock that isn't being converted to new stock. Either MicroStrategy will pay cash to redeem it, or it'll have ITS conversion price lowered to the market price in July. At current prices, that's another 1 million shares.
Add it up: 11 million common shares to be issued in 2004 under the best circumstances, plus another 7.4 million if the stock's price stays where it is now, plus another 4.4 million for dividends over the next three years, plus another 1 million for the remnants of the old stock. In all, MicroStrategy may have to issue up to 23.8 million shares, which would be dilution of about 29%.
When you put that together with the $25 million in cash the company is paying, the refinancing doesn't seem like a great bargain. And remember, this is assuming the stock stays where it is now. If it's lower in 2004, dilution is even more severe; if it's higher in 2004, dilution is less severe.
Or look at it another way. Forget about dilution. Forget about what MicroStrategy's stock will do. Under the original terms, MicroStrategy would have had to pay out about $163 million in cash and/or stock to preferredstock holders, counting all dividends and assuming MicroStrategy extended the maturity date to 2004, the maximum it was allowed to under the agreement. Under the restructuring, MicroStrategy will have to pay out about $148 million by that time. A savings of only $15 million over three years? Doesn't seem like a lot for all the effort.
Of course, by 2004 this matter may be moot, one way or the other. MicroStrategy says it expects its core business to hit the breakeven point by the end of 2001, and maybe the company will generate enough cash by 2004 to redeem the preferred stock. But as of March 31, the company had a cash position of only $91.4 million and that may not last long for a company whose operations burned through $87.8 million in cash during 2000. Especially when the company has just committed to that $25 million cash payment for the preferred sock, and plans to spend more on restructuring.
Any significant dilutionrelated issues for MicroStrategy are well in the future, of course, and may never come to pass. But don't think the refinancing has magically solved all of MicroStrategy's potential problems with dilution. It hasn't.
By Michael Rapoport, Dow Jones Newswires; 2019385976; email@example.com
(END) DOW JONES NEWS 050901
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|To: Jay Fisk who wrote (680)||5/12/2001 6:51:13 PM|
|From: Glenn Petersen|
|From this week's Barron's:|
On March 5 of last year, Michael Saylor, a 35-year-old multi-billionaire, disclosed his plan to spend $100 million for an online university that would offer "free education for everyone on earth, forever."
Saylor, the chief executive of a highflying software firm called MicroStrategy, was then worth (on paper, anyway) about $12 billion. His "data-mining" firm had been extolled in the press for doing everything from allowing GE Capital to better manage its fleet of leased cars to helping Victoria Secret discover the alluring fact that New York City stores sell the largest number of black bras.
From a 1998 offering price of $6, the stock had soared as high as $333 just days before Saylor's announcement, giving the company a market cap of a whopping $27 billion.
But then, on March 20 the company disclosed that reported earnings had been an accounting fiction. Boom! The stock plunged $140 in a day.
When the financials were subsequently restated-for '97, '98 and '99-profits turned to losses.
But that wasn't the end of it. The SEC charged that MicroStrategy's accounting fiction was outright accounting fraud. In December, Saylor and two other execs, without admitting or denying the charges, agreed to pay over $1 million in fines.
Just last week, MicroStrategy's accountants, PricewaterhouseCoppers, agreed to pay $51 million to settle a shareholder suit stemming from the collapse.
Even though early last month MicroStrategy' stock traded as low as $1.75 a share, Michael Saylor insists that by focusing on its core business and dramatically slashing costs, the company will break into the black this year. On April 19, in a stirring letter to stockholders, he urged them to "combat short selling" by immediately transferring their stock out of street name to stop brokers from "loaning" the shares to short sellers.
That day the stock shot up 76% to $5.23. It closed Friday at $4.76.
So what are the odds of a turnaround.
Here's the dope from the guy at Merrill Lynch, MicroStrategy's lead underwriter: "We believe the deterioration of MSTR's business is accelerating. Employee attrition, cash constraints, internal restructing and a macroeconomic slowdown augur poorly for the company's prospects." In May, the analyst noted, "risks are increasing."
In early February, Saylor announced that he would sell 15,000 shares a day for the next two years, no matter what the price of the stock. The proceeds on the first day, February 12, were $156,000; on the second, $166,650; on the third, $158,400-well you get the idea.
It got us thinking that Saylor's advice to shareholders is absolutely right. Under no circumstances should they be "loaning" out their shares. Instead, like Saylor, they should be selling them.
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|To: Glenn Petersen who wrote (682)||8/2/2001 12:07:54 AM|
|From: Jay Fisk|
|A couple odd items that need explanation:|
1. How did the $25 million in restricted cash get tapped? Wasn't that supposed to stay with Strategy.com?
2. They claimed a $25 million gain in litigation settlement. In the past, litigation stuff was not part of the pro forma, but I guess since it's positive, they'll throw it in.
3. They claimed an additional $11 million for refinancing the Series A preferred and $18 million for conversion, resulting in a net loss of $5 million.
Now if we really took out the one-time items:
That's a total of $54M in earnings adjustments that only occur once. Adjust accordingly, and the quarterly loss is around $60M.
Considering revenues were $49M, they've got a long way to go to making money.
Burned another $30M this quarter. It's not looking pretty.
For all the longs: I can't see how you consider this an improvement. These guys are doomed. Do you really think the current valuation of $300M is justified? I don't think MSTR is even worth the amount of debt they currently have.
Courtesty of an opinion found on Yahoo
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