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To: Chuzzlewit who wrote (56)	2/2/1999 4:10:00 PM
From: Joe E.	Read Replies (1) \| Respond to of 419

On the R+D subject, I think R+D is a capital expenditure. It is not a real estate investment, of course, so it has to be depreciated faster. Same with marketing expenses, to some extent. I don't buy Coke because I just today saw an advertisement for it, it's those years of Coke working on my brain through the tube paying off. Ditto Amazon - Buy.com is cheaper, just to name one, and Borders.com has the same prices, but Amazon has the marketing investment made, and it is drawing the shoppers. I think that accounts payable and accounts receivable changes have to be counted as cash flow changes, just as investments in inventory are. Adjustments can be made for erratic shifts in these things, but just as bricks and mortar stores HAVE to invest in inventory (partially financed by accounts payable)to expand, the internet stocks get to hold their customers' money and so reduce the capital they need.

To: Chuzzlewit who wrote (56)	2/2/1999 4:16:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 419

You didn't read that article I suggested, did you? Just for the exercise, here we go again - rcmfinancial.com <In other words, it does not penalize a company for investing in its future in the form of expanded facilities, but it does treat expenditures for R&D and the like as expenses in the current period. Michael Murphy suggests some alternatives for the treatment of R&D expenses, but I'm not sure that this makes sense because R&D is a much bigger gamble than a manufacturing facility. When you build a plant you can be certain that it can generate product, but when you put funds into R&D who knows what, if anything, will result.> R&D and marketing are investments just like capital expenditures for hard assets are. Think in terms of Microsoft and thier investment in Win 95 and Win NT. Factories carry regret risk just like R&D. AMD and Intel have both built factories without the requisite demand panning out or the desired production capabilities. <Perhaps there is a simple way to move from earnings to free cash flow, which would certainly make more intuitive sense.> There is. Net Operating profit after cash taxes. This is a figure that has reconciled accounting earnings (cleaned them into sustainable earnings) and adjusted them for the real world "cash effect" of taxes. This is rigorous process, so I have created software that queries major databases and performs the calculations on the fly. In order to handle "investments" like R&D and marketing. the software asks the end user to select an amortization schedule for each category (it should correspond with the time to market in terms of R&D or the expected life of the marketing effect in terms of marketing) and it applies an appropriate charge to the current year and every year thereafter to the NOPAAT (up until the amortized amount is completely used). This is the same effect as capitalizing the so-called expenses which are, in the real world, actually investments. Now, if the R&D investment does not pan out in year one, it is reflected negatively on that years NOPAAT, but if it produces in year two it can reflect positively on that years respective NOPAAT. This is the type of analysis that I am offering through the investment club. Notice how, this can be percieved as valuable to a certain audience (assuming they believe it, of course), and make mutual funds (and thier rather piddly attempts at education) seem over-priced. This is why I fully understand the Onsale business model. The problem is knowledge has sustainable value that is difficult to commoditize, while wholesale computer equipment does not. Sooner or later, somebody is going to find a way to apply this model to the management consulting and corporate finance advisory business, then you will really see the fireworks fly (I am working on it:-).