Much of that red ink was attributed to restructuring charges and the decreased value of acquisitions from prior years. Homestore also attempted to close the books on an accounting scandal that has forced it to retract more than a quarter of its revenues for the past two years. "These filings resolve our historical accounting issues," said Lewis R. Belote, Homestore's chief financial officer, in a press release accompanying the announcement.
Maybe not. Even as Homestore seeks to move forward, it's being haunted by the past. On Mar. 25, a federal judge in Connecticut ordered it to put $58 million of its cash on hand aside for the potential settlement of a lawsuit brought by a company that sold a subsidiary to Homestore last year. Filed on Mar. 1, the suit sheds light on what may have been a last-ditch attempt by Homestore to boost its profits before accounting problems surfaced.
DOT-COM SURVIVOR? If Member Works, the publicly traded marketing company that sued Homestore, is successful, it could mean another blow to Homestore's already damaged finances. The chief executive is sticking to his guns, however. "We don't believe they have a claim," says W. Michael Long, who became Homestore's CEO in January. "We intend to vigorously pursue our case."
Homestore's foundation didn't always look this shaky. It was once considered a dot-com survivor, thanks to its multiple sources of revenue and alliances with existing industry leaders. Homestore began life as the online arm of the National Association of Realtors. Today, more than 14 million visitors a month go to Homestore sites like Realtor.com, which lists existing homes up for sale, and HomeBuilder.com, featuring newly built houses. More than 300,000 Realtors pay the company an average of $560 a year each to put their photographs and contact information next to their home listings.
Homestore's paint began to peel last December, when it announced an internal investigation into its accounting. Seven employees have left the company in connection with the scandal, Homestore says. In addition, the executive team has been replaced, including company founder and CEO Stuart Wolff, who declined to comment for this article.
STOCK OFFER. The company has said more than $100 million worth of online advertising, exchanged on a barter basis between Homestore and other Web companies, was not based on realistic cash values. The Securities & Exchange Commission is investigating the situation. On Mar. 27, a lead plaintiff was named to represent shareholders in more than 20 suits filed against the company.
In its suit, Member Works alleges that Homestore in 2001 misled Member Works into selling its iPlace division for stock with a value inflated by bogus accounting. The suit claims Homestore bested an existing offer for iPlace by more than 50% and asked for an expedited closing of the deal. iPlace provides consumer-credit information from the three major credit agencies for a fee.
Half of the $150 million purchase price was paid in Homestore stock, which now trades at about a one-tenth of its price last August, when the deal was consummated. On Sept. 6, Homestore announced that the acquisition would help it reach its earnings and revenue projections for the year.
A month later, however, Homestore reported a sharp decline in advertising revenues, blamed in part on the September 11 terrorist attacks. Two months after that, it revealed its internal accounting investigation.
FINANCIAL REPAIRS. The Member Works suit has since been moved to a court in California, where it will likely be argued later this year. On Apr. 3, Homestore sold the largest piece of iPlace to Experian for $130 million in cash. Homestore's most recent filing with the SEC states that the company -- which lost $254.9 million on an operating basis last year -- should have sufficient cash to make it through this year.
Long says efforts have been made to cut expenses substantially, including laying off 28% of Homestore's 3,500 employees. The company says it will have $245 million in cash on hand, although $160 million is restricted for various reasons. In addition to the money set aside in the Member Works suit, $90 million has been put in reserve in connection with a two-year-old marketing agreement with AOL Time Warner that is presently being renegotiated.
Homestore is making a lot of the right moves to repair its finances. Still, the company's new management clearly has a ways to go before all the problems are behind it. By Christopher Palmeri in Los Angeles