Tuesday, October 7, 1997

ErgoBilt, Inc.
(Nasdaq: ERGB)
Phone: 972-233-8504
Price (10/6/97): $10 1/8


HOW DID IT DOUBLE?

A manufacturer of ergonomic office chairs, ErgoBilt went public at $7 in February and promptly dropped to $4 1/4. The offering had been a hard sell, and the spring correction punished most new IPOs. But then came decent earnings plus hype surrounding the company's recently acquired Fon'iksWriter stenography system. Ergo: a triple.

Six-month results released in mid-August showed sales up 43% to $10.6 million with pro forma earnings more than tripling to $0.17 per share versus $0.05 a year ago. But the real news came August 28 when ErgoBilt said it was acquiring the assets of Computer Translation Systems and Support Inc. (CTSS, Inc.), including rights to Fon'iksWriter, a proprietary laptop computer system that uses a phonetic keyboard and translation software for use in high-speed stenography.

Terms were not disclosed, but ErgoBilt originally licensed the Fon'iks technology in March. For the first six months of the year, sales of the systems accounted for 11.3% of ErgoBilt's revenue, 12.8% of gross profit, and 29% of per share earnings.

The company has billed this $5,000 system as "one of the most significant advancements in typing information data input," with trained operators capable of typing more than 200 words a minute, reportedly three times faster than what's currently possible. The system can be used by legal, medical, insurance, and entertainment stenographers, with a pay-off, too, in reduced workers' compensation claims due to fewer repetitive stress injuries.

BUSINESS DESCRIPTION

Based in Dallas, ErgoBilt develops, manufactures, and markets ergonomic products that help workplace productivity by minimizing physical stress. Its main BodyBilt product line includes four premium-priced lines of office chairs that can be customized to fit the user.

Now a holding company, ErgoBilt was created to do marketing work for BodyBilt Seating, a firm controlled by Mark McMillan, brother of ErgoBilt's Chairman Gerald. ErgoBilt was a worthless shell company when it offered 1.8 million shares to the public and used the IPO money to acquire BodyBilt for $17.6 million (1x sales), or roughly $7.2 million in cash plus 1.5 million shares of stock valued below the market price at $4.90 per share (now worth $16 million). This "back-door" offering allowed ErgoBilt insiders to control about 45% of a company with real earnings while risking virtually none of their own capital to do so.

On September 16, Gerald McMillan purchased another half million shares of ErgoBilt in a private transaction, raising his personal stake to 37.4% from 28.3%. The price was not disclosed.

In the office furniture market, competitors include Herman Miller, Steelcase Design Partnership, and Haworth Group. ProCat, Rapid Text, TurboCat and Stenograph are said to have products that compete with the Fon'iksWriter.

FINANCIAL FACTS

Income Statement*
12-month sales: $20.8 million
12-month income: $1.7 million
12-month EPS: $0.28
Profit Margin: 8.1%
Market Cap: $61.4 million
(*Pro forma, based on 12-month results for BodyBilt division)

Balance Sheet
Cash: $1.8 million
Current Assets: $8.9 million
Current Liabilities: $3 million
Long-Term Debt: $1.9 million

Ratios
Price-to-earnings: 36.2
Price-to-sales: 2.95

HOW COULD YOU HAVE FOUND THIS DOUBLE?

To find this new offering, you probably needed to be looking for an ergonomic office furniture company, on the theory that all of us digital paper-pushers can use a comfortable chair.

Next, you needed to believe the earnings estimates (in July, about $0.52 a share for FY97) and that the company could grow considerably faster than the 12% industry rate, thanks in part to the wondrous Fon'iksWriter. Finally, you had to ignore the peculiar structure of the public offering/merger, which seemed designed mainly to make the insiders wealthy.

WHERE TO FROM HERE?

On September 24, short-seller Manuel Asensio issued a "strong sell" recommendation on ErgoBilt, followed by a detailed critique of the company's technology officers. He also recounted the tortured history behind Fon'iksWriter, which he claims is based on outdated technology that has failed in the past. Asensio expected the stock to drop to "well below $4 per share." It fell $1 1/2 to $12 1/2 on news of his report.

In its response, ErgoBilt rejected the criticism, expressing confidence in the Fon'iksWriter and suggesting it might sue Asensio. However, the company's press release failed to address many of Asensio's allegations.

The battle by press release continued last week, with Asensio charging that the company had failed to disclose an ongoing patent dispute with a company called Neutral Posture, which is said to hold the rights to the BodyBilt chair designs. ErgoBilt rejected Asensio's version of the story, saying he had misinterpreted a recent court ruling and explaining why the company believes it has a right to use these patents. The firm also said that Fon'iks Writer sales in the third quarter doubled second quarter sales and exceeded expectations.

Shorts usually have a hard time making friends, but Asensio has put together an exceptional record battling hype. He very publicly predicted the demise of Syquest, Diana, and the now bankrupt Solv-Ex. Investors who've followed his counsel have done very well. Asensio is so persistent, even obnoxious, that his involvement also ensures the high level of drama that can make short-selling so much fun.

That's especially true since both analysts covering ErgoBilt represent underwriters of the IPO (Cruttenden Roth and Principal Financial), and their recently raised earnings estimates suggest strong growth ahead: EPS of $0.60 this year and $1.01 in FY98. That's 135% growth over the next six quarters, for a PEG of 0.28 and a YPEG valuation of $25 assuming a guesstimated 25% long-term growth rate. So the bulls and the bears are ready to brawl.

Still, the economics of Ergo-nomics should have an investor on the edge of her chair. The company plans to grow through acquisitions but had only $1.8 million in cash with an equivalent amount of debt at the end of June. Plus, it burned over $1 million in cash during the second quarter, despite reporting positive earnings. Meanwhile, receivables ballooned as did inventories. The quality of sales and earnings look a bit suspect.

The small float makes this a dangerous short, especially since the stock is already on the short-sellers' hit list. On the other hand, the spotty corporate history and the heavily hyped product suggest that ErgoBilt is worth a shark's further attention, if only for the entertainment value.

- Louis Corrigan, TMFSeymor@aol.com


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