Homestore Settles Suit, Reports Loss

Homestore.com Inc., the largest source of for-sale home listings on the Internet, announced a second-quarter net loss of $52.3 million Monday after agreeing to pay $23 million to settle a lawsuit that accused the company of securities fraud.

The second-quarter loss is a substantial improvement over the year-earlier net loss of $120.9 million, despite a 15% decline in revenue to $65.9 million.

But the Westlake Village company said it was unable to make any forecasts for 2003--a troubling sign to analysts.

“They’re going in the right direction,” said Safa Rashtchy, senior analyst at U.S. Bancorp Piper Jaffray. “But their balance sheet needs to be simplified and cleaned up.”

Homestore’s latest results reflect a $23-million charge for the settlement of litigation with telemarketing company MemberWorks Inc.

They also include a gain from discontinued operations of $10.2 million from the sale of the company’s ConsumerInfo division this year.

Stamford, Conn.-based MemberWorks filed its lawsuit in March, after Homestore restated certain financial statements following an inquiry by the board’s audit committee into questionable accounting practices. The restatement caused Homestore’s shares to tumble.

Homestore agreed in August 2001 to buy IPlace, an Internet company that collects and analyzes crime information from police jurisdictions, from MemberWorks for about $72 million in cash and stock worth about $78 million.

MemberWorks claimed in its lawsuit that it was unable to sell any of the Homestore shares it had received in the sale in the wake of Homestore’s restatement.

In April, weeks after Homestore announced its accounting problems, the company reached a deal to sell ConsumerInfo, a unit of IPlace, for $130 million in cash to credit-checking company Experian.

MemberWorks then obtained a court order placing $58 million of the $130-million cash proceeds in a constructive trust in favor of the plaintiffs, pending the outcome of litigation.

Under terms of the settlement announced Monday, $23 million of the trust will be released to MemberWorks and other former IPlace shareholders to settle their claims.

MemberWorks will receive about $19.2 million in cash. Homestore will receive the remaining $35 million of unrestricted cash from the constructive trust after the settlement.

Shares of Homestore.com closed at 92 cents Monday on Nasdaq, up 8 cents. Shares of MemberWorks closed at $14.74, up $1.77, also trading on Nasdaq.

Homestore said that in the third quarter it would record a $58-million reduction in restricted cash, as well as a $35-million increase in cash and cash equivalents.

The company had posted $64.9 million in cash and cash equivalents available to fund operations in June, plus $151.2 million in restricted cash.

Its viability is questionable, however, depending on how well the new management executes its business plan, analysts say.

“This company is still shedding businesses, still seeing one-time charges,” said Jeetil Patel, senior analyst at Deutsche Bank.

“The strategy is still in progress. But balance-sheet-wise, it looks better. It will take a couple of quarters to see where they’re going.”

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Dow Jones was used in compiling this report.