COMMENTARY: Top-Line Troubles Are Sobering Reality in New Year

Top-Line Troubles Are Sobering Reality in New Year From The Newsroom by Michael Hart This is the first full week of a new year and everybody is almost, just about, maybe in first-day-of-the-rest-of-your-life mode. For some of us that is cause for optimism, for others it is reason to take a deep breath. For a few, it is time to face sobering reality. That reality comes to at least a handful of the Valley’s publicly traded companies as stockholders and an interested public begin to notice some of the news those companies released quietly during the days preceding and following Christmas when few of us were paying attention. It is unlikely there are many stories of Enron-like magnitude lurking in some office park in Thousand Oaks or down an anonymous hallway in a Woodland Hills office building (or maybe there are), but the news that accounting manipulations possibly designed to benefit a few company insiders while leaving average investors stranded with worthless stock is hard to take, regardless of whether the market cap that’s dissolving is in the mere millions rather than billions. Indeed, some of the minor disasters we’ve seen appear in recent weeks are easier to accept than others. There’s poor little California Amplifier Inc. agreeing to settle 20 lawsuits involving overstated net income figures for a fairly modest $1.5 million. And Capstone Turbine Corp. – the little energy company that couldn’t despite last summer’s golden opportunity of an energy crisis – is in trouble because underwriters may have benefited from kickbacks and violated federal securities laws during its initial public offering. Then there’s Homestore.com Inc. After reporting revenues of $105 million for the first quarter of last year and $129 million for the second, Homestore.com CEO Stuart Wolff – in the Sept. 3 edition of this newspaper – is quoted as saying, “Few companies in today’s environment are generating that kind of top-line growth.” These days Homestore has a different story about what was going on in those quarters of late 2000 and early 2001. After the audit committee of its own board of directors announced it was conducting an inquiry into Homestore’s accounting practices four days before Christmas, after a class action suit filed two days after Christmas accused Wolff and other company officials of overstating revenue and assets to boost stock value enough to sell at least $27 million of their own shares, after Nasdaq stopped trading Homestore’s stock until it learns more about what was going on, Homestore admitted – in the bright sunlight of Jan. 2 – that maybe, just maybe, revenues in the first three quarters of 2001 might have been overstated by as much as $95 million. There are explanations. In its press release last week, Homestore said that perhaps there were “round-trip transactions” in which it received money from companies it then paid back for services and goods. And while Homestore.com was reporting $129 million in second-quarter revenue, if you used generally accepted accounting principles (GAAP), there was also a $72 million net loss. There were explanations then too, and not all of them came from Stuart Wolff. Hundreds of companies last year and probably well into this year have taken advantage of pro forma earnings statements to draw attention away from those $72 million net losses. “It’s the way it is at this point,” Shawn Milne, an analyst with Wit Soundview, told the Business Journal when asked for comment on the same story in which Wolff was telling us few companies are generating “that kind of top-line growth.” “I would suggest you look at cash flow. That’s the most important thing,” Milne said. Then, perhaps ominously, he said, “Look at a hundred other tech companies, it’s the same thing.” Around the time last September when Wolff and Milne were pitching cash flow and top lines, Homestore.com’s stock price had already sunk to the $16 range from a high in February 2000 of $106.50 and $35 in January 2001. When Nasdaq finally put a halt to things two weeks ago, you could buy a share of Homestore.com for $3.60. So, if the newest, most innovative way to buy and sell houses on the Internet was the foundation of your 401(k), that’s your sobering reality for the new year. It could be worse. AOL and Budget Truck Group worked out deals in 2000 with Homestore.com. In exchange for Homestore.com stock, the company would get an exclusive franchise on AOL. A similar stock deal meant Homestore.com’s logo would be pasted all over Budget and Ryder rental trucks. One problem: There were stock price guarantees written into the agreements. In the most immediate example (and it’s not the only one), the 1.1 million shares Budget got must be worth $64.50 in March of this year or Homestore.com owes the difference. (Remember, Nasdaq has frozen the stock at $3.60.) Similar agreements with AOL have stock price triggers that stretch all the way into late 2003. That kind of sobering reality can eat up anybody’s top-line growth pretty quickly. Happy New Year. Michael Hart is editor of the San Fernando Valley Business Journal. He can be reached at [email protected].