The Nasdaq stock exchange announced Monday morning it had halted trading in Homestore.com, (Nasdaq: HOMS) until "additional information requested" from the company had been received.

"Trading," said Nasdaq, "will remain halted until Homestore.com has fully satisfied Nasdaq's request for additional information."

Homestore -- already troubled with huge losses, lay-offs, a dispute with AOL, and declining share values -- announced late Friday afternoon that it "will restate certain of its financial statements" for one or more accounting periods.

Homestore, which owns or operates major sites including Realtor.com and Homebuilder.com, saw shares finish Friday at $3.60, up 34 cents for the day -- however, the markets closed before the audit announcement was distributed. Homestore shares traded at $15.99 on September 10th and as high as $37.25 during the past 52 weeks.

Pro Forma Versus GAAP Accounting

Like most new economy firms, Homestore shows financial results in two ways: With "pro forma" numbers that exclude certain costs and with numbers based on "generally accepted accounting principals," or "GAAP" accounting.

The use of pro forma numbers by public companies in general and without refenerce to any specific firm has raised concerns with the Securities and Exchange Commission.

Pro forma financial information, says the SEC, "can serve useful purposes. Public companies may quite appropriately wish to focus investors' attention on critical components of quarterly or annual financial results in order to provide a meaningful comparison to results for the same period of prior years or to emphasize the results of core operations."

And, says the SEC, "there is no prohibition preventing public companies from publishing interpretations of their results, or publishing summaries of GAAP financial statements."

However, in December the SEC also issued an Investor Alert regarding the use of pro-forma figures.

The federal securities laws require most publicly held companies to file with the SEC financial statements prepared under a set of accounting conventions called "Generally Accepted Accounting Principles," or "GAAP," that are accurate, truthful and complete. When a company prepares its financial statements using GAAP, investors can more consistently track the company's financial results from year to year and compare its performance with other companies.

In contrast, "pro forma" financial results aren't prepared using GAAP, and they may not convey a true and accurate picture of a company's financial well-being. They often highlight only positive information. And because "pro forma" information doesn't have to follow established accounting rules, it can be very difficult to compare a company's "pro forma" financial information to prior periods or to other companies.

By The Numbers With Homestore

Homestore has consistently issued both pro forma and GAAP accounting information to the public -- and the numbers have often differed substantially.

For instance, for the third quarter of 2001 the company announced a pro forma net loss of $6.9 million and revenues of $116.1 million. On a GAAP basis, Homestore's net loss was $106.6 million -- a GAAP loss more than 15 times greater than the pro forma result.

As another example, in April the company reported a first-quarter pro forma net income of $4 million and a GAAP loss of $67.1 million.

Accounting Questions

Homestore's accounting has been questioned in the past.

In May, Merrill Lynch analyst Henry Blodgett gave the company a "buy" rating, said Homestore had properly disclosed how it determined pro forma numbers, and agreed that the firm's use of stock to buy goods and services was a "legitimate, defensible, and even shrewd decision for a young company with a strong currency, in that it conserves cash."

However, Blodgett disagreed with how the company's pro forma numbers had been calculated.

Homestore often buys goods and services by providing stock rather than paying cash. These costs, said Blodgett, should be seen as "operating expenses" rather than "non cash, stock-based" charges. If you counted stock payments his way, said Blodgett, the company would have far larger pro forma losses.

Blodgett estimated that by his accounting Homestore would have had additional pro forma costs in the year 2000 of $46.761 million. For the year 2000, the company said its pro forma net loss was $8.9 million.

For more articles by Peter G. Miller please press here.

Published: December 24, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .