Time Running Out for Fixes at Homestore.com
By ANTHONY PALAZZO
Staff Reporter
The clock is winding down at Homestore.com.
Over the past several months, the once-mighty real estate portal has endured an accounting scandal, a management overthrow, the evaporation of more than $2 billion in market value and the temporary suspension of trading. It’s been sued by shareholders and former business partners, and of the cash left on its balance sheet, most is restricted, tied up in business disputes.
The next several months will tell whether Homestore.com can overcome these challenges, or whether the problems will prove too much.
Homestore officials, who declined to comment for this story, have said that the company will be cash-flow positive by the end of this year, and that it has the resources to get there. The company had $85 million in cash left at the end of the first quarter, after receiving partial proceeds from the $130 million sale of its ConsumerInfo.com unit to Experian. (The remainder, $58 million, is tied up in a business dispute with MemberWorks Inc. of Stamford, Conn., which sold the unit to Homestore.com last year.)
But Homestore burned through $24 million in the first quarter, and although the burn rate appears to be declining, it doesn’t have much room for error.
One test will come from 19 shareholder lawsuits that were recently combined in federal court here.
The lead plaintiff, the California State Teachers Retirement System, or CalSTRS, will decide this week on an outside law firm to handle the case. Within two months, the retirement fund expects to file an amended complaint against Homestore.com and some of its former officers, including founder and ex-Chairman and Chief Executive Stuart Wolff, who resigned in January.
“I think we’ll be able to achieve a significant recovery for the classes,” said Christopher Waddell, CalSTRS chief counsel.
The basic allegations against Homestore are generally known: that company officials now departed artificially inflated revenue and earnings, allowing them to profit from millions of dollars worth of insider sales.
In late July and early August 2001, for example, only days after Homestore.com reported vastly overstated results, Wolff, Chief Financial Officer Joseph Shew and other executives sold more than $16 million in stock, according to data from Thomson Financial. Wolff and Shew couldn’t be reached.
“We are very interested as a system to pursue recovery from the individual assets of individual wrongdoers,” Waddell said.
Restated reports
Homestore.com already has restated its financial reports from 2000 and the first three quarters of 2001, lopping off $172 million in previously reported revenues and adding $144 million to its already vast losses.
Most of the restatements came as a result of improper “round-trip” or “barter” transactions that shouldn’t have been recorded as revenue. The company also said that it classified some of the payments it made in these deals as capital expenses, so they had the effect of inflating earnings, as well as the assets on Homestore’s balance sheet.
Homestore also reversed some sales that didn’t meet requirements for revenue recognition. The company has said it will recognize some of those sales in future periods. A portion of the restatements are related to an accounting change.
Few details of the barter transactions have been made public. L90 Inc., under its own internal and Securities and Exchange Commission inquiries, has said that questionable transactions with Homestore.com occurred in the second and third quarters of 2001. Homestore.com hasn’t commented.
The allegations, however, may go further than the barter accounting. “That’s part of it,” Waddell said. “It may be more involved than that.”
A lawyer familiar with the case said transactions Homestore.com had with AOL Time Warner Inc.’s America Online unit also have come under scrutiny.
“You’d go to someone like AOL, buy banner advertising. The real kick in the ass was AOL would kick back some of that money to Homestore, I think that was actually cash,” the lawyer said. “When they pay for an asset, somehow that asset comes back to Homestore and gets booked as revenue.”
According to this source, AOL Time Warner’s chief financial officer, Wayne Pace Jr., quickly put an end to these transactions after being named to the post on Nov. 1. “He didn’t like the smell,” the lawyer said.
Others, however, say America Online had been looking at its transactions with Homestore for some time, and that these issues were dealt with by the online unit, not the parent.
An AOL spokeswoman, Wendy Goldberg, declined comment on the company’s dealings with Homestore.com. She said AOL properly accounted for all its barter transactions, but declined to say whether AOL has been contacted by the SEC.
Internal probe noted
Homestore said in a recent disclosure that after it filed its quarterly 10Q on Nov. 14, it “was made aware of a questionable revenue transaction,” and launched an internal investigation, and notified Nasdaq and the SEC.
Separately, in November, Homestore said AOL wasn’t passing on enough revenue in its marketing agreement, and sought arbitration. At issue is $90 million in restricted cash pledged to AOL to protect it from price drops in Homestore.com stock issued as payment.
AOL and Homestore officials declined to comment on the arbitration proceeding.
Since January, Homestore has conducted an overhaul that involved restating its numbers and dismissing seven employees. Undoubtedly, Homestore.com’s lawyers have a tightrope to walk. The more eager the company is to make restitution to shareholders and hold individuals accountable, the easier regulators are likely to go on the company. On the other hand, there could be a need to minimize any payouts for past misdeeds, given the meager resources left.
Randall Lee, the SEC’s regional director for the Pacific Region, declined to confirm or deny even the existence of an investigation into Homestore, or to comment on its actions to date.
In general, Lee said, “the nature and extent of a company’s cooperation tell us a lot about that company’s intent to be a good corporate citizen.” Nevertheless, he added, the transgressions can sometimes be so serious that the SEC must pursue severe punishments.
It’s not clear whether Homestore will distance itself from former executives and their actions. The company has fought vigorously against MemberWorks in the dispute over the purchase of its consumer credit unit, then called iPlace.
MemberWorks claims it was misled by Homestore’s former management into accepting inflated stock in the deal, and in addition was prevented from selling the stock because Homestore.com never registered it. Homestore.com has said it believes the restriction of the proceeds from its sale of ConsumerInfo.com is unnecessary.
It’s also too early to tell whether the shareholder lawsuits can or will be settled, or what actions the SEC might take.
“Stay tuned,” said one well-placed source.
