One by one, new Homestore management is knocking down the barriers to the company's success that were erected by former mismanagement.

Nearly a year ago, Realty Times published a list of ten reasons why Homestore might be a good bet going forward. At the time, its prospects looked anything but rosy. Facing Homestore simultaneously were an SEC and DOJ investigations, business troubles with revenue and traffic partners Cendant and AOL, and a class action lawsuit by angry shareholders, to name only the largest external problems.

Among Realty Times' predictions at the time were that Homestore would settle the consolidated class action suit filed by shareholders, avoid punishment by the DOJ, and settle its dispute with traffic partner AOL, all of which have come to pass.

The class action lawsuit was brought by shareholders who lost share value due to former management's criminal overstatement of revenues. To date, several former officers of the company have been convicted of falsifying records, and more are expected to face the federal gauntlet.

The lead plaintiff in the class action suit was the California State Teachers' Retirement System, also known as CalSTRS, (pronounced calsters). CalSTRS' estimated losses were more than $9 million on about 431,000 shares that were purchased from May to late December 2001. The basis for the lawsuit was that Homestore issued false statements and engaged in questionable accounting practices.

Now Homestore has settled this largest of claims against the company. According to the terms of the agreement, Homestore will pay $13 million in cash and issue 20 million new shares of Homestore common stock to members of the class and will adopt certain corporate governance provisions designed to enhance shareholder interests. Among them will be the prohibition of stock options as compensation for directors and the appointment of a shareholder director, among other agreements.

Homestore's chief executive officer, Mike Long, commented, "This settlement is an important step forward for Homestore. Since early last year, our management team has worked diligently to resolve our legacy financial and litigation challenges. Today's action allows us to assure our customers, shareholders and employees that we will continue to build a valuable enterprise serving both the real estate industry and consumers. We appreciate those who have supported us during these early stages of our turnaround, and we vigorously renew our commitment to making our customers more productive and profitable."

Jack Ehnes, Chief Executive Officer of CalSTRS, speaking as lead plaintiff on behalf of the class, commented, "We appreciate the straightforward way in which the new management team at Homestore and its Board of Directors worked with us to resolve this case. Our goals were to realize significant compensation for the class and to institute meaningful corporate governance protections, without jeopardizing the company's ability to conduct business going forward. The settlement announced today accomplishes those goals."

According to a press release, both sides anticipate approval by the judge of the U.S. District Court presiding over the case. The parties to the agreement will promptly seek preliminary approval from the Court and anticipate that the Court will rule on the request in the coming months. A final hearing will be held after delivery of notice to class members. At that time, the Court will determine whether to grant final approval of the settlement. The terms of the settlement and the procedure which shareholders may follow will be set forth in the notice to be sent to the class members.

Homestore will pay the $13 million out of its existing cash, and the common stock, currently valued at $50.6 million will result in a one-time litigation settlement charge of approximately $63.6 million, which will be reflected in the company's June 30, 2003 financial statements, which explains why the company results appeared to be later than usual in being announced.

Homestore's second quarter losses widened to reflect the one-time litigation charges and declines in related party revenue (from partners who own stock in Homestore, specifically Cendant.) While Homestore acknowledges that its 91.7 million, or 78 cents a share loss, compared with a loss of $52.3 million, or 44 cents a share, last year, is greater, the company believes it can now concentrate on improving and capitalizing on changes it has already made internally, including a new pricing structure that it feels better reflects the company's ability to expose advertisers.

Homestore recently retooled its listing enhancements and personal exposure models for Realtors to generate more income for the company, and hinted that similar pricing changes would also take place in its other media divisions, and that the company would reveal a new pay-for-click type of advertising model in the near future, among numerous other initiatives.

Homestore CEO Mike Long understates the situation when he said in the conference call following the announcement of the shareholder lawsuit settlement and to discuss second quarter results, "We have had major distractions, and we are gratified that in working with organizations and individuals who had complaints against us, that now we can focus on our business."

As to the new pricing, he says, "We were ridiculously underpriced for so long."

Long told Realty Times after the call, "Our strategy has been two Homestores. The last year and a half, one has been dominated by these external issues - the SEC, DOJ, badly written deal with AOL, a dispute with Cendant, which can't be healthy if you're in the real estate business and then a class action lawsuit, historical accounting problems. That Homestore had this big dark cloud over it, and the question was can any company survive that combination of problems? It looked too hard. It looked easier for customers and pundits to say they aren't going to make it or I'll wait and see.

"The other Homestore is a smaller company whose mission is serving real estate professionals with technology and media services that we think is very important that they have a strong presence," he continues, "and we have the best assets and skills to establish the online presence. You couldn't ignore the former while retooling the latter, so we have used this as an investment period in improving our technology and distribution, pricing our services more fairly, and knowing we had obstacles in re-establishing a strong growth rate. So now we come out of this phase with these issues resolved. Now we think we are sitting here with a more focused company, and the benefits are starting to come online, and for the first time, we are optimistic about the future."

The miracle for Homestore is that new management has executed agreements with AOL, Cendant, and the class action shareholders without depleting its remaining cash of about $55 million, even while the settlements took a toll on Homestore's bottom line.

"We had a great team and our board, and it was the individuals and organizations that we negotiated with that deserve the credit," says Long. "They inherently saw value in what we could deliver and to them specifically. They saw a viable Homestore was best way of recovering over the long term - to accept and compromise.

"I'll admit, we still have a lot of work to do," says Long, "only now I can look forward to spending more time with customers, investors and employees."

Published: August 14, 2003

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