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Stocks L / Learning Company, Inc., The


Subject:  insight on factoring from Date:  9/22/1998  6:33 PM
Author:  prichards Number:  456 of 476

Meanwhile, readers continue to add to the discussion here
on The Learning Co.'s (TLC:NYSE) decision to sell off, or
factor, its receivables to a third party.

Analyst Randy Befumo, of Legg Mason Fund Adviser
(yes, that Randy Befumo, the former Fool) writes: "I would
argue the real problem is not how long customers take to
pay for the goods, but how full the distribution channel is. If
TLC has been making its numbers by progressively stuffing
the indirect channel (a la Compaq [CPQ:NYSE] in '96/97),
there will eventually come a time when the channel will just
not take more product and all of the extra revenue growth the
stuffing created will unwind, causing significant negative
revenue growth for two or three quarters.

"The prefactoring DSO count is the best leading indicator
(although imperfect) for how much TLC product is out there
waiting to be sold. The revenue recognition is aggressive, but
the real economic problem is that by filling the channel the
company has pulled future sales forward, robbing Peter to
pay Paul."

David Hamilton, of Burlington, Ontario, adds: "You're right in
saying that after factoring the accounts receivables the
company can get the cash. What you should point out,
though, is that when a company factors their receivables,
they only get a percentage (90% to 95%) of the face value of
the receivables. This compensates for the time value of
money and the credit risk associated with the receivables.

"Factoring is in essence a way to generate cash -- selling an
asset below its value to have the money to spend today.
Although many companies do it, it isn't a good sign to see
most of the receivables factored. It implies that a company is
burning cash. More companies go bankrupt from a lack of
cash rather than cumulative losses."

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