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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: Mike Hagerty who wrote (10164)	6/3/1998 5:49:00 PM
From: P.T.Burnem	Respond to of 13594

First, "Heard on the Street" is often a contrary indicator. Second, stocks of companies that fudge their numbers tend to do well. At least, until they publicly admit the wrongdoing and move to restate the numbers. Third, internet exposure is a must have for many MF managers. Of these, AOL accounting for over 50% of Internet home use is clearly #1.

To: Mike Hagerty who wrote (10164)	6/3/1998 6:16:00 PM
From: Mick Mørmøny	Read Replies (2) \| Respond to of 13594

AOL's Accounting Questioned America Online (NYSE:AOL - news) gained $2 3/16 to $79 9/16 this morning, taking back some of the loss that it has undergone in the last couple days as "the Street" anticipated a negative "Heard on the Street" column in today's Wall Street Journal. Word that the Journal had been calling around soliciting opinions and quotes on AOL's treatment of the sale of its ANS unit and of Excite (Nasdaq:XCIT - news) stock it held had knocked the stock down about six dollars in the last two days. Seeing as the article flailed a little bit in proving its thesis of how "highflying" AOL is using "fancy accounting methods, creating dollops of extra earnings that carry the stock higher," market forces bouyed the stock this morning. The thesis statement of the article is incorrect to begin with. The company's treatment of its sale of Advanced Network Services and Excite stock cannot "create extra earnings." It can move earnings from the period in which the gains on sale were realized, but it cannot "create extra earnings." If the gain is "X," it doesn't become a multiple of "X" just because the company's income statement portrays the economics of the transaction as something other than an immediate gain. The other problem with the article, and many other articles that purport to "out" America Online's accounting, is that there are three key financial statements that a company is required to publish every quarter: The income statement, the balance sheet, and the statement of cash flows. The three statements work together, and the more detailed each is, the better an investor can get a handle on what's going on with a company's accounting. In AOL's case, the cash flows statement very nicely reports the effect of AOL's sale of ANS: Amortization of deferred network services credit -- (12,703) That means this was a non-cash credit to earnings. A similar credit will appear in the income statement until the liability that now appears on the balance sheet is debited down. Where's the cash from the realization of the sale? It appeared last quarter and will appear in the 10-K this year. From there on in, it's the investor's duty to follow the cash: Net proceeds from acquisition of CompuServe/disposition of ANS -- 207,438 There's where we see the large inflow of $207 million. Once investors understand that an income statement should be read in conjunction with the other two financial statements, there can be less accusations of shady practices on the part of companies that are attempting in good faith to report the economic substance of their businesses. While the Journal might try to portray the economics of a business only through the income statement, it shouldn't expect investors to be so one-dimensional in their perspective on accounting issues. The Motley Fool June 3, 1998