Mike: This one keeps coming up on my radar screen. And I don't mean for purchase. You ask:
<<I asked before, but would appreciate insight into the negative cash flow situation?>>
I'm not sure what the question is, but I assume that you're talking about operating cash flow. Let me give it a shot. In this type of business, computer sales, large inventory positions and large accounts receivables are the norm. To the extent that they continuously drive your operating cash flow into the red is not the norm. As a percentage of sales, inventories for VTCH have grown from 5% to 8% to 27.5% for '95, '96 and the first 6 mos. of '97 respectively! This last figure for the inventory build-up as of June, '97 is incredibly high vs. industry standards.
The accounts receivables numbers are also high vs. the industry, though not as dramatic as the inventories numbers. The numbers in the same order and again as a percentage of sales are 23%, 21%, and 17%. These numbers should be understood in light of the fact that prior to '96 no reserves were established for "doubtful accounts". The reserve established last year (in the last 6 months of '96) was $563K and $375K so far this year. If "doubtfuls" build then you are evidently shipping to more and more barrel bottoms.
The true concern here, as you've pointed, out is liquidity. Can the company run its business through internally generated funds, without having to run to the capital markets every year for cash? Each time it cuts a financing deal, the markets breathe a sigh of relief and the cash crunch is deferred. Witness this month's announcement and the rise on the stock price. Shorts will cover if they see a blood transfusion take place that will keep the body alive and tie up their short-invested money for another year or so.
But the inventory build-up should be of concern to anyone long or thinking about being long the stock. In this area (as well as throughout the financials) VTCH's accounting is liberal when given the choice. Although within GAAP standards the company opts for liberalism at every point. As far as the inventories are concerned, they are valued on a FIFO (first-in; first-out) basis. Earlier purchased, lower cost inventories are matched up against later, higher valued sales.
Some things to keep an eye on. Other than the inter-family financial meanderings, that is.
Good luck.
robt |
