Monday, August 29, 2005

Looking In the Footnotes

It's important to look through the past SEC filings to comprehend a company's outlook. You should also look at the economic factors that impact the company's revenues and profits. Another thing to do is to compare findings and valuations to its competitors. These tasks can be daunting, however looking through the 10 Q's and K's can lead to some warning signs that may prohibit further investigation and analysis. For instance, the Management Discussion and Analysis (MD&A) section explains the board's views of its company. You can also find off-balance sheet items that isn't reflected on its financials. I know my previous "blog" analysis on is rather elementary, but a simple 30 minutes of analysis can reveal alot about a company.

I have nothing personal against OSTK's CEO, and putting aside the noise surrounding the company... you must ask questions when you see the following warning signs in its recent 10 Q:

We believe that the cash and marketable securities currently on hand, amounts available under our credit facility and expected cash flows from operations will be sufficient to continue operations for at least the next twelve months. While we anticipate that, beyond the next twelve months, our expected cash flows from operations will be sufficient to fund our operational requirements, we may require additional financing. However, there can be no assurance that if additional financing is necessary it will be available, or, if available, that such financing can be obtained on satisfactory terms. Failure to generate sufficient revenues, generate profitability or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives. Any projections of future cash needs and cash flows are subject to substantial uncertainty. See “Factors that May Affect Future Results.”

What happens after the 12th month? This statement is too vague. Maybe they're basing this number on the working cap burn rate, in which case... what happens after the 15th month? Just a thought.


We may be unable to generate sufficient cash flow to satisfy our debt service obligations.

Our ability to generate cash flow from operations to make interest payments on our debt obligations will depend on our future performance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economic conditions and the health of the internet retail industry. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and acquisitions. Additional funds or alternative financing may not be available to us on favorable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our business, prospects, financial condition and results of operations.

Or what about the part about how they completely depend on the 4th quarter and the holiday sales? One out of four... I don't like those odds.

All this should take you about 15 minutes to find when considering your investments (Hint: know what you're looking for and use the "find" function tool). Some may be willing to take the risk for the potential reward... what I to refer to as risk/reward (punishment) potential, but only you really know your risk tolerance level. At any rate, you should know the facts and use available information to distinguish investing from gambling.


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