Lernout & Hauspie: The Plot Continues to Thicken as New Details Emerge

Short-sellers are as critical as ever; the company couldn't be reached.
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An item here

yesterday offered

Lernout & Hauspie


, 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


twice a year, and they're not required to file on the agency's electronic


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


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


(MSFT) - Get Report

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


(INTC) - Get Report

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.