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Homestore Settles with Calif. Teachers' Fund

Online real estate technology and information provider Homestore Wednesday said that it had settled its marquee class action lawsuit with the California State Teachers Retirement System (CalSTRS).

The third largest public pension fund in the nation, which lost approximately $9 million on Homestore shares, filed suit in a Los Angeles district court last year, accusing Homestore of padding ad revenues through complicated third-party transaction. If the court approves, the CalSTRS fund will get $13 million in cash plus 20 million new shares of Homestore common stock, currently valued at more than $50 million. Homestore also agreed to adopt stringent corporate governance measures.

" We see this as a milestone for shareholders," CalSTRS spokesperson Sherry Reser told internetnews.com,/i>. The cash settlement is great, but more important, Reser said, were the corporate governance reforms. "From the very beginning," Reser said, "that was a major part of our effort. These reforms are an excellent way to help restore investor confidence in the market."

CalSTRS is the, with a $100 billion investment portfolio. It administers retirement, disability and survivor benefits for more than 715,000 of California's public school educators and beneficiaries in grades kindergarten through community college. The fund is also participating in shareholder class action suits against WorldCom and AOL Time-Warner .

Westlake Village, Calif.-based Homestore provides technology that powers online real estate listings. In 2001, it came under fire from the SEC and Department of Justice for its accounting practices. In 2002, Homestore let go a number of executives who were involved in a complicated third-party scheme to overstate AOL ad revenues. The company replaced its chairman, chief executive and chief financial officer, and added a COO, admitting that it had overstated its saying that it overstated its earnings for the first three quarters of 2001 by as much as $95 million.

The CalSTRS suit was not the least of a series of issues the company has dealt with in the last eighteen months, Homestore executive vice president of corporate development Allan Merrill told internetnews.com.

"The last eighteen months has been about prioritizing resources and resolving issues, while at the same time focusing the company on providing better solutions to customers," he said.

According to Homestore's earnings statement for the second quarter ending June 30, June 30, 2003, revenue was $53.9 million, versus $54.9 million for the previous quarter, with gross margins constant at 72 percent. The company took charges of $75.8 million related to the settlements with CalSTRS, while in the first quarter it had a one-time non-recurring gain of $104.1 million related to the settlement with AOL. Its EBITDA loss from operations was $7.6 million in the second quarter, compared to a loss of $4.1 million in the first quarter of 2003.

The litigation hasn't slowed down Homestore's deal-making. In July, it expanded its alliance with Yahoo , placing around 6.4 million Homestore Apartments & Rentals listings and its affiliate Homebuilder.com's 100,000 new home listings on Yahoo's Real Estate section. In the same month, it struck a similar multi-year relationship with Microsoft's MSN network, to provide listings for MSN's House & Home channel, which registers more than 300 million users each month.

Homestore also renewed its long-standing agreement to be AOL's exclusive provider of real estate listings -- even though Merrill characterizes the original partnership as "a very badly structured contract." Merrill said the original deal to pay AOL Time Warner to offer its members real estate content and information cost Homestore $15 million a quarter. The new deal costs Homestore under $5 million a quarter. Merrill said it's worth it to pay AOL for traffic, because Homestore qualifies the traffic and then resells it to real estate professionals.

The settlement covers only Homestore, Inc. and some officers and directors. Separate legal actions against Stuart H. Wolff, former chief executive officer and chairman of the board, Peter B. Tafeen, former executive vice president, business development and sales, and PricewaterhouseCoopers, the accounting firm that audited Homestore's financial statements, is pending.