There have been a lot of posts lately about the 10Q. The doomsayers are pointing out all the "negative" wording and the longs are discounting it saying it is just boiler plate wording.
As I have been a CPA for many years, have worked for one of the three largest public accounting firms in the world, and have actually written portions of 10Q's for clients, I think I am qualified to make a few comments on this subject.
I happen to be long on VIXL so one could argue that I am biased, but the objective truth is that the longs are right on this one. If you want to know the truth, 10Q's are rarely worth the paper they are written on. Oh sure, you can find some useful info in them, but you really have to know what to look for and how to sift through the garbage. I know this will be disputed by those that like to pour over them, but in my opinion they would not value them so much if they knew how and why they were written. The 10Q is nothing but a company's giant CYA...COVER YOUR ASS. All of that "negative" language is COMPLETELY GENERIC legal-motivated boiler plate protection. Hell, when the CPA firms help their clients write them, half the time they just copy sections over and over from other client's 10 Q's.
Diligent stock research may demand that you read a company's 10Q, but my advice is to just take it with a grain of salt.
As always, this is just my opinion and I welcome comments, pro or con.
The section below is pasted from Vixel�s 10-Q and is unusually disturbing (see my previous Post #1753). This is an astounding admission from a company that intends to become a supplier of components to the Storage Area Network sector, where reliability is everything.
<A COMPONENT IN OUR TRANSCEIVERS HAS EXPERIENCED AN ABNORMALLY HIGH FAILURE RATE WHICH HAS ADVERSELY AFFECTED AND COULD IN THE FUTURE AFFECT OUR SALES.
Our gigabit interface converter transceivers, or GBICs, and our gigabaud link module transceivers, or GLMs, manufactured prior to March 1999 incorporate a compact disk, or CD, laser manufactured by a third party. GBICs are removable and GLMs are non-removable devices that convert optical and electrical signals. We have observed, and some customers have confirmed, that in certain applications our BBIC and GLM transceivers that incorporate this CD laser have experienced an abnormally high failure rate. Although we recorded a warranty reserve of $3.6 million in the fourth quarter of fiscal 1998 as a result of these problems, there is a risk that this reserve will be inadequate to implement a remedy that is satisfactory to our customers. In addition, we cannot assure you that, over time, failure rates for products that incorporate these CD lasers will not increase or that the lasers which we began using in our GBIC transceiver products in March 1999 will not experience problems. Claims against us in excess of the amount of our reserves could have a material adverse effect on our business and financial condition.
As a result of this problem, Sun Microsystems has reduced its purchases of GBIC transceivers and in August 1999, we issued to Sun Microsystems a warrant for 150,000 shares of our common stock. In addition, if we are unable to resolve this matter to our customers' satisfaction, or if failure rates in transceiver products increase, our reputation and relationships with current and prospective customers could be damaged and adversely affect the sales of all of our products.>
FACT: In response to my previous posting of this excerpt (see Post #1753), several Vixel longs have provided examples of negative comments in the 10-Qs of other companies (see Posts #1763, 1764, 1765, 1769), but their disingenuous ploys to divert attention from the real issue is transparent.
FACT: Vixel�s 10Q is uniquely ominous because it contains the astounding admission that VIXEL�S PRODUCTS ARE FAILURE-PRONE, VIXEL�S CUSTOMERS ARE ANGRY, VIXEL IS TRYING TO APPEASE THEIR ANGRY CUSTOMERS WITH REFUNDS AND WARRANTS, BUT VIXEL�S BIGGEST CUSTOMER (SUN MICROSYSTEMS) HAS CANCELLED ORDERS ANYWAY.
FACT: I expect that Vixel longs will repeat their assertions that all of this is commonplace and appears in the 10-Qs of other companies all the time. BS to that. Show me the data. I have never read anything so astounding in the 10-Qs of any company that I have researched for possible investment, ever.
FACT: I challenge the Vixel longs to post on this board the excerpts from the 10-Qs of other companies that admit to �abnormally high failure rates� in components shipped to customers. I challenge the Vixel longs to post on this board the excerpts from the 10-Qs of other companies admitting that their angry customers have demanded millions of dollars in refunds, millions of dollars in stock warrants, and then cancelled future orders anyway.
FACT: Get busy Vixel longs. I predict that you won�t find any comments that are remotely comparable to what I have posted from Vixel�s 10-Q in the SEC filings of any other companies. You will, of course, find such disclosures in the SEC filings of those companies that have already gone bankrupt.
As a matter of fact not to many people were using Fiber as a means of transporting data before March 1999. In fact I think sun was the only major manufacturer that uses the GBIC Modules. Fiber is just starting to get interest now and anything done before March 1999 is really not worth worrying about. Besides VIXL also sells the high end stuff like fiber switches and fiber hubs. If you want to base your short position on sales before March 1999 then good luck......I have been in the market for some time now and to my knowledge people buy stocks based on the future outlook not yesterdays news.