INTERNET—Shares Plummet as Cash Runs Low at Homestore.com

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If cash is king, Homestore.com Inc. could be in a royal bind.

The Westlake Village-based network of online real estate sites was sitting pretty with cash and equivalents of $284 million at the end of the first quarter. But it has burned through $213 million by Sept. 30, leaving $71 million in its coffers.

That’s a problem for a company that posted $94 million in sales and administrative expenses in the third quarter, is sitting on $410 million in liabilities and faces a huge decline in advertising revenues.

Adding to Homestore’s balance sheet challenges is a $650 million to $950 million charge it may take in the fourth quarter due to reduced valuations of recent acquisitions.

When the company announced on Nov. 2 that advertising revenue would account for just 10 percent of its projected $100 million in revenues in the fourth quarter, the market responded by trashing its stock, which bottomed out at $2.28 a share, down from a 52-week high of $37. As of late last week, the stock was trading at $3.

“They did not have as keen an understanding of their advertising fundamentals as one might have hoped,” said Lanny Baker, an analyst for Salomon Smith Barney.

Homestore.com officials declined comment, but they have responded to the cash crunch on Oct. 25 by announcing the elimination of 700 jobs, 20 percent of its workforce.

Job cuts and other cost saving measures may stem the tide, but looming over the company is a potentially crippling obligation to AOL, the result of a deal struck more than a year ago.

Under the terms of the agreement, Homestore has to hand over 2.3 million shares, with a guaranteed closing price of $68.50, to AOL in April 2003.

The agreement contains a “make good” provision in which Homestore guaranteed AOL it would pay the difference in cash if its shares are below that level.

Homestore’s reduced cash position and depressed market cap which now stands at $386 million handcuffs the company from making any major acquisitions. And given its reduced revenue expectations and the fact that it burned through $10 million last quarter alone, a cash crunch could develop just as their first AOL bill is due.

On Nov. 15, Homestore said it would seek to get out of this deal by seeking arbitration against AOL, claiming that the multimedia giant has not directed enough online traffic to Homestore’s sites.

Homestore.com reported a net loss of $106.6 million (96 cents per diluted share) for the third quarter ended Sept. 30, compared to a loss of $27.1 million (33 cents) in the like year-earlier quarter. Third quarter revenues were $116.1 million, vs. $86.9 million in the third quarter of 2000. Third quarter figures are based on generally accepted accounting principals, not pro forma numbers.

The company had been on a buying spree all year, with purchases ranging from the $3.5 million acquisition of Homebid.com to the $757 million stock purchase of Move.com from Cendant Corp. in February.

The acquisitions further cemented Homestore.com’s position as the dominant Web site for residential real estate. In fact, the company’s partnership with the National Association of Realtors in ownership of the site Realtor.com triggered antitrust inquiries by the U.S. Justice Department in April 2000. The case was dropped last July.

At that point, the stock was trading at $36 a share, a far cry from its all-time high of $121 in January 2000, but still maintaining a steady level over the previous nine months.

Problems began in the third quarter, when, after second quarter results revealed a $34 million net cash loss from operations and a $108 million drop in overall cash balance, a number of brokers downgraded the stock.

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