Homestore.com Breaks Financial Silence

Online real estate site Homestore.com, Inc. Wednesday heaped more bad news on investors, as the company says it may have overstated its earnings for the first three quarters of 2001 by as much as $95 million.

The disclosure, which comes amid an internal probe of the Westlake Village, Calif.-based company’s accounting practices, will require that it restate its first-, second- and third-quarter results — and potentially, its full-year 2000 results as well.

Based on early findings of the probe — which is being led by Homestore’s board of directors and conducted by independent auditors — the company said it accounted for barter advertising deals as regular ad sales transactions.

Under Securities and Exchange Commission rules, barter transactions — which occur when a company trades ads for goods or services — must be recorded separately from “real” revenue. Otherwise, companies could report barter ads as having been “sold,” even though no cash changed hands.

Evidently, that appears to be the case with Homestore. The firm said it “overstated its online advertising revenues in the first three quarters of 2001 by between $54 million and $95 million in connection with certain advertising transactions that should have been accounted for as barter transactions because they were related to purchases by the company of goods and services from third parties.”

As a result, Homestore would be reporting 15.4 to 27.1 percent less revenue for the three quarters ended Sept. 30 — down from its previously-posed $350.9 million. After the readjustment, and assuming operating costs remain unchanged, the company would post losses from operations of from $271.9 million to $312.9 million for the period — down from $245.8 million.

On a per-share basis over the three quarters, that works out to a loss of $2.60 per share to $3.00 per share. Per quarter, that’s an average $0.87 to $1.00 loss per share — at worst, a sharp increase from the first, second and third quarters’ losses of $0.71, $0.67 and $0.96 per-share performances, respectively.

And Homestore brass said this may not be the last time it has to eat crow about its financials.

The Audit Committee, independent legal counsel and independent accountants are looking over the books for 2000, as well. If more problems are found, Homestore.com says it may have to restate its financial results for the year ended December 31, 2000.

The audit, which was launched less than a month after the departure of Homestore’s chief financial officer, Joseph Shew, is expected to be concluded by the end of the first quarter of 2002.

In the meantime, trading in the stock remains halted. Because of the probe, NASDAQ officials stopped Homestore’s stock from being traded publicly just before Christmas.

Even before the accounting faux pas — for which Homestore has yet to provide a specific reason — the once-mighty online real estate site showed evidence of significant difficulties.

In October, the firm announced a major restructuring, including a 20 percent workforce reduction. In early November, the company posted a pro forma loss of $0.06 per share loss, or $6.9 million — double Wall Street’s loss expectations, according to First Call estimates.

Due to full disclosure regulations, Homestore spokespeople declined to go into detail about the restatement and the ongoing inquiry. SEC spokespeople were not available for comment.

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