By MICHAEL POLLICK
michael.pollick@heraldtribune.com

SARASOTA -- It is unusual to find a locked door on an office when there are workers inside. But that's the case at the east Sarasota headquarters of Newsgrade Inc.

The 6-year-old company has already gone through $18 million and has 400 shareholders, yet no reporter has ever been there or in their previous offices in New York City.

As Newsgrade's executive summary explains, they've "conducted their operations in a highly stealth mode."

There are few visual clues, either. All the work is cerebral. You'd have to eavesdrop on a meeting to know what was really going on at all those computers.

The "product" is access to financial software and databases via the Internet. Sounds boring, until president David Markowski shows slides and talks the talk.

In short, the company's managers expect to overtake Dow Jones, Reuters and Bloomberg to become the "world's largest producer and publisher of financial news and information."

They think they've found several vacuums in financial reporting and they are determined to fill them with valuable chunks of data that anyone can understand -- pre-digested, pre-filtered and color-coded.

Newsgrade plans to generate news stories based on all the data, not waiting for the establishment financial press or the company to explain what happened. Newsgrade is planning to simply report what is going on within a company from the data it must publish to remain a publicly held stock.

They have decided to do this for nearly every stock on the planet -- 80,000 issues -- almost instantaneously, and in different languages.

A revelation occurred to them last year while they were getting all the stuff ready for primetime. They think that their software would have spotted Enron as a loser when there was still time to sell it.

A few years ago

Back in 1996, when the Internet was just beginning to get its legs, Newsgrade was two guys -- Michael Markowski and Robert Pittenger -- with an idea.

Before companies such as Yahoo.com got into the stock reporting business, they were picking up corporate press releases and financial reports and posting them to their own Web site, SSNN.com. It stood for "Small Stock News Network." Bill Gates' then-fledgling Internet effort, msn.com, used SSNN news.

Newsgrade was trying to get paid by the stock companies to display pages of their data, but that business model didn't fly.

Meanwhile, though, the two men had developed the infrastructure for a huge database of stock companies using a somewhat arcane, but very powerful, programming language called APL. It allowed them, with one or two lines of computer code, to cross-section the 1,801 data components they are now following for 15,000 stocks, and to do it at high speed.

They could choose a measurement, such as operational cash flow per share, and analyze one company with it, or a whole industry group, or the entire stock market.

Others joined, attracted by the potential of creating a stock research engine that was better than everything else available.

Michael Markowski's brother, David, became president, allowing Michael to focus on what he likes: research. Ron Erickson, who in his pre-Internet life was the chief executive of Egghead Software, became chairman.

Newsgrade was getting bigger, better, faster, but, unfortunately at the time, nobody was buying.

By the fall of 1998, says Michael Markowski, "There was a lot of angst and despair."

The breakthrough

Finally, in October 1998, they ripped up the original plan and came up with a new one.

"We decided, if the companies don't want to pay us, let's go out and use our number-crunching ability to build our own grading system," Michael Markowski said.

Their first effort in this regard was stockgrade.com, and it turned out to be too successful for its own good.

Just like teachers grading students, they began ranking stocks with A, B, C, D or F ratings based on earnings, revenues and stock performance.

Then, they would put out a digital news release when they noticed their computer generating a significant rating change in a widely held stock.

The Internet portal companies such as Yahoo and market specialty sites such as Raging Bull would pick up the items to round out their pile of news for the day.

This in turn would bring people -- too many people at once -- back to Newsgrade, wanting to leave their e-mail address for future alerts. And that become the basis for a potentially profitable subscription business.

But the founders weren't ready.

Newsgrade would put out a significant ratings change, and they would get swamped with people trying to learn more about it.

"We had one small Pentium computer. We just maxed out every day and people couldn't get into the site," said Michael Markowski.

"Just about overnight, we collected 10,000 e-mail addresses," he said. "But the point is we could not handle the volume."

They decided they had a winner, but needed to back off and raise some real money, then come back with a full set of tools.

They had already hooked up with Erickson, who had left Egghead in 1994 and became CEO of his own Seattle-based Internet company, ECharge Inc.

With Erickson as chairman of Newsgrade, the company raised most of its $18 million in cash and, while remaining private, has accumulated a cult following of its own in the form of 400 well-heeled investors.

Newsgrade had good reasons to stay quiet, and it's clear that the founders are unsure how much they should talk about even now. They've made plans that go well beyond the company's StockDiagnostics.com site, and are worried about tipping their hand to competitors too soon.

A number of other fledgling Internet companies already have established their own stock databases and their own ways of measuring stock quality.

ValuEngine Inc. of Stamford, Conn., is spewing out reports on individual stocks at $22 each as well as $49 industry reports. It is spending nothing on marketing, says President Paul Henneman.

"This movement is picking up speed and we hope to be a part of it," Henneman said. "By that I mean turning away from analysts as the gurus of stock market information. We feel that independent research, whether ours or somebody else's, is going to increase its influence. Investors are going to turn to independent research providers that have no ties to the companies that they are covering."

Meanwhile, inside Newsgrade's secure office, the team of two has become a dozen, assisted by another 15 who work in cities from New York to Seattle.

Enron and cash flow

When the Enron scandal broke in late 2001, shares in the once-mighty energy broker became so cheap you'd need more than one to buy a bagel.

But before that, in the middle of 2001, the shares had only lost half their value, from $80-plus to the $30s.

During that first half of 2001, Newsgrade was preparing to relaunch Stockgrade.com as its first product.

Stockgrade, as originally conceived, would not have spotted Enron as a problem stock. Many people even today say there was no way to spot the problems because Enron executives were lying about the company's balance sheet.

Newsgrade's managers started playing around with their statistics, seeing what would have worked. Enron's first quarter 2001 earnings-per-share figure -- the number that gets all the attention from Wall Street and all the ink from the media -- was accompanied by a suddenly negative operational cash flows.

Ditto in the second quarter.

Stated in layman's terms, while Enron was reporting a record profit, it was actually spending more than it took in.

Markowski wondered if the same indicator, operational cash flow per share, would signal problems ahead in other cases. He and his small team of researchers and programmers tried out their new toy on another stock that already run amok, Sunbeam Corp. of Boca Raton.

There too, the writing was on the wall. It was just that nobody outside the company was reading it when it was first published.

As of right now, StockDiagnostics.com, Newsgrade's first revamped offering, is up and running.

Anybody can go to StockDiagnostics.com, for free, and crank in company names or ticker symbols, to get a four-quarter, five-year or 20-quarter picture of the company's operational cash flow per share juxtaposed with its reported earnings per share.

To the right of that is a box in which Newsgrade Inc. assigns a rating number to that company's overall cash flow and earnings trend, 1 being the best rating and 8 being the worst.

When a company does what Enron did last year, Newsgrade says it is exhibiting the "EPS Syndrome" and paints that quarter in pink.

EPS by itself stands for Earnings Per Share. In its simplest terms, the EPS Syndrome occurs when the company is reporting record earnings per share at the same time -- the most public figure reported -- at the same time that the company is more quietly revealing that its cash flow from operations has fallen apart.

Newsgrade has developed sophisticated mathematical algorithms to test this divergence, and filters to eliminate some potential false signals that the software might give.

Out of 7,500 non-financial companies tracked by Newsgrade, 1,457 currently exhibit the problem, about one out of five.

"As someone who works with this data every day, I am just horrified that you could have the death and destruction that I see with this thing," Michael Markowski said.

What Newsgrade has come up with is an indicator that tells you when the record-earnings numbers a company is reporting have potentially become a shell game.

The numbers, according to Newsgrade, can mask a reversal in a core indicator of the health of the business: the cash flowing into its coffers from its operations.

"The earnings are up, the stock price is up, but it appears something is going on here because the operating cash flow is down," said Ron Erickson, chairman of the board.

There may well be plausible reasons for the negative cash flow, such as seasonality. Or, as with Enron, the schism between earnings and cash flow might be a symptom of a fundamental flaw.

"And as we have found out, it may be an indication that earnings are being artificially enhanced or manipulated," Erickson said.

The original financial service called Stockgrade has been revamped to include operational cash flow per share as a measure of quality, Michael Markowski said. It will be relaunched soon.

Slide show

Michael Markowski's brother David, 41, the president of Newsgrade, is the one who can show up in a coordinated suit and then run glibly through a PowerPoint slide show.

Michael, 46, is the less public, more inward-looking of the two. His title is director of research. "I'm the nutty professor," he says, making a small laughing noise somewhere between a "hmmm" and a "harrumph."

While David Markowski runs through an explanation of Newsgrade on the slides, his brother drifts in and out of the room.

As the slides make clear, the concept goes much further than just maintaining a database on operational cash flow and letting people access it for a fee.

"What we are doing is we are monitoring the raw data of the company and using a computer to generate newsworthy events that come right out of the data," David Markowski said.

The colleagues believe the activity will provide them access to a huge untapped market. In its literature, the company says it "intends to become the world's largest producer and publisher of financial news and information."

While roughly 3,000 companies continue to receive the top news coverage in English-language financial publications, the number of shareholders in many smaller, unsung companies is growing, as are the number of shareholders in companies all over the world.

By 2003, he said, there will be an estimated 350 million people who own stock, up from 240 million in 2001.

"The point I am making is there is a vacuum, a huge vacuum that we have identified over the last three years," David Markowski said.

The vacuum is even more apparent when you look at German-language coverage of U.S. companies. The German version of Yahoo shows the the disparity: There might be a dozen nuggets of news about General Motors on the English-language site on a given day, while only two or three tidbits show up on the German version.

That's occurring while governments all over the world are putting more retirement planning power into the hands of the people through legislated financial mechanisms similar to the United State's Individual Retirement Account, or IRA.

Within a short time, the partners expect to be sending out operational cash flow bulletins in Spanish and German as well as English.

Because what they are reporting is fresh information on publicly held companies, they expect Internet companies such as Yahoo to link to it.

The partners are counting on that free exposure to build demand for the services that will cost money: complete access to a stock tool kit driven by the database, e-mail alert subscriptions and so on.

Newsgrade has already penned a contract with a major telecommunications company. The larger company, which the partners declined to name, is expected to chip in $2 million for setting up a back-end system of Internet computers for handling the expected onslaught of Web inquiries, David Markowski said.

"When we distribute this news, it can reach 156 million users for virtually nothing, because it is news content."

Stocks showing The EPS Syndrome now
These stocks have current Wall Street "strong buy" recommendations.

Company Name	Ticker Symbol	Diagnosis Date	Price at Diagnosis	Price at Time of Article (5-28-02)	Updated Price (11-22-02)	Percent Change Since Diagnosis
AmerisourceBergen	ABC	2/21/02	64.50	77.27	59.31	-8.05
Astropower	APWR	5/19/00	17.44	33.50	7.88	-54.82
Compudyne	CDCY	5/19/00	9.00	15.03	7.83	-13.00
Centex Corp.	CTX	2/20/02	54.19	52.36	48.03	-11.37
D&K Healthcare Res.	DKWD	2/18/02	31.75	32.71	8.21	-74.14
Echelon Corp.	ELON	5/22/01	25.66	15.25	14.74	-42.56
Gaiam, Inc.	GAIA	8/20/02	18.75	15.76	10.50	-44.00
MCSi, Inc.	MCSI	4/7/00	31.63	13.01	5.08	-83.94
Pricesmart	PSMT	1/21/02	34.65	38.97	24.93	-28.05
Tripos, Inc.	TRPS	4/4/02	25.91	20.09	9.14	-64.72