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A Harbinger Of Things To Come
Two Internet Companies In Financial Trouble
New trends often start with what appears at first to be isolated incidents. Last week two well-known Internet
companies, Cdnow and Drkoop, announced that their auditors expressed “substantial doubt” about the two company’s
ability to stay in business. Cdnow is an on-line seller of compact discs and videos. Its auditor, Arthur Andersen, stated
that the company suffered from a shortage of working capital, losses from operations and significant payments due this
year for marketing agreements. The company's stock, first offered in February 1998, peaked at 39 two months later,
and is now selling at 3. We believe Cdnow’s problems are the beginning of a trend for many second-tier e-tailors that are having similar troubles
and that we will see more such announcements in the next few months.
Drkoop is also suffering from sustained losses and negative cash flow since its inception. The on-line health-care company has been highly
publicized, has advertised heavily, and was founded by a high-profile former U.S. Surgeon General. The stock was offered in June 1999, topped out
at 47 in the following month, and is now at 3. We believe that there are probably a great many other second-tier Internet companies with similar
business models facing potential difficulties which will soon become apparent. This will be another negative factor weighing heavily on the NASDAQ
Composite in the period ahead.
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