One Short-Seller Blows Off Steam About Engineering Animation and Other Issues

Also, a challenge to Lernout & Hauspie.
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Another one bites the dust: This time it was

Engineering Animation


, a software company that makes so-called visual-process software used by automotive, aerospace and other types of manufacturers.

Its stock tumbled 18 1/4, or 46%, to 21 11/16, after the Iowa company warned that its first quarter would miss analysts' estimates -- and miss them by a long shot. It blamed an inability to close several sales that it thought were in the bag. That's not good for a company that loved to brag how it had beaten the Street for 12 straight quarters; its CEO, in fact, was quoted by

Dow Jones

on March 26 as saying he was confident the company would meet its estimates for the year.

The company says it's sticking with its guidance for the final three quarters of the year, but several of its biggest fans in the brokerage industry aren't buying it.

Piper Jaffray

, for example, cut its first-quarter estimate to 4 cents per share from 26 cents, while downgrading the stock to a neutral from a strong buy. (The analyst, Hany Nada, didn't even stop at buy, a sign of how miffed he was.)

Yet this was just the latest in a string of companies that short-sellers had been hammering on charges of aggressive accounting. Never mind EAII's recent restatement, after discussions with the


, of overzealous in-process R&D charges. Back in February, Marc Cohodes of

Rocker Partners

, one of this column's regulars, was quoted

here with a laundry list of reasons he thought it was only a matter of time before the company went kaplooee. (He remains short the stock.) Two key items were unbilled receivables and a negative cash flow. Unbilled receivables occur when a company books revenue on a product that has been shipped without sending out a bill. And since when does a software company have negative cash flow?

Not often, which is why Cohodes, whose recent hits include the blowup of

Network Associates


, had zeroed in on Engineering Animation. "When you do this long enough you see tendencies," he said yesterday. "In the late '80s and early '90s it used to be the use of capitalizing software development costs. Now many of those companies (like

Media Vision




Frame Technology

) were either acquired at low levels or they're out of business. In the late '90s it's in-process R&D, which is getting rectified, and unbilled receivables.

"When you see these they're not a yellow flag. They're not a red flag. They're a black flag. And this company has been playing with unbilled receivables for many quarters. And they've had negative cash flow for more than a year.

"The difficult part about being short names like this is that guys who own the stock make up various stories, and the whole deal with these stocks has been to squeeze the shorts." A short squeeze is when the owners of shares borrowed and resold by short-sellers demand the shares be returned to their rightful owners. The shorts are forced to buy the stock, an event that can cause a stock to rise rapidly. "And when that happens," Cohodes says, "nobody wants to focus on the real issues. This company had real issues, has real issues and will continue to have real issues."

One of those issues is that much of Engineering Animation's business is done toward the end of the quarter. Witness the impact of just a few sales not getting completed. "There were 365 days in the year, and 90 days in the quarter," Cohodes says. "If you're in a business that depends on the last week for your sales, you're in one horrible business."

He adds, not talking about any company in particular: "The good things for shorts is that managements lie and they lie like rugs. The question is, how do you do your research and find stuff before it finds you? That's the trick. The difficult part of the business we are in is finding these names and not getting squeezed before these names blow up.

"And people are real fast to make fun of guys (who are short) and accusing them of doing things and making a bunch of innuendos. But now it's put up or shut up time for many of these companies. It seems to me there's a new sheriff in town, and that new sheriff is the SEC and they don't seem to be in the mood to put up with this accounting nonsense anymore."

Meanwhile, back at Engineering Animation: While the company says it isn't changing guidance for the next three quarters, Cohodes believes the company will miss the second quarter "because usually when you move the refrigerator and find a cockroach, in the tech business you find another one and another one."

Engineering Animation says it never tried to predict its quarter a few days before it ended; they say the March 26

Dow Jones

story expressing comfort about the quarter was based on a March 11 interview. A spokesman adds the company is deeply embarrassed about its quarter, which he blames on poor execution -- a problem it intends to fix. "We're going to have to regain our credibility," he says.

Short Positions

Blame it on Asia:

No, make that Y2K, the latest scapegoat for companies to use as a smokescreen for a host of problems. In the case of Engineering Animation, at least the company didn't take the yellow-bellied way out and blame its problems on Y2K issues.

Steel cage match:

Over the years this column has, on occasion, offered companies a chance to go face to face with their worst critics. Actually, the critic is usually Cohodes (see above) who is one of the few shorts willing to be quoted. Not one company has yet accepted the challenge, and each time the company's stock has turned into a shell of its former self.

This time the challenge is to

Lernout & Hauspie


, and here's pretty much what I proposed yesterday in an email to the company: "Short-sellers, as you know, believe Lernout is headed for a very rough time. Lernout thinks the short-sellers are wrong. So far, that has been communicated through columnists and journalists.

would like to offer both sides a chance to ask and answer questions over a four-day period in a special section featured on our site. On the fifth day I'll summarize. The questions and answers will be unedited (as long as they're not longwinded.) This would allow both sides a chance to go back and forth. This way the company could answer its critics directly in a public forum. If Lernout believes, as strongly as it does, that its business is booming and the shorts are wrong, I would hope it would welcome the opportunity to clear the air. I plan to make this invitation public in my column tomorrow. Please let me know ASAP."

So far, no reply. (Maybe because yesterday, after a long delay, the company reported fourth-quarter earnings that missed the estimates of some analysts.)


Which American business columnist uses the most exclamation marks?


(a k a


StreetLife columnist,

Andrew Serwer

) or the honorable


(a k a the honorable JJC)? I say it's a tie!!!!!!!!!!!!!!!

Herb Greenberg writes daily for 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 Greenberg writes a monthly column for Fortune and provides commentary for CNBC.