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Homestore, AOL In Arbitration

January 8, 2002

Homes Portal Accuses America Online Of Breaching Marketing Agreement

By Bridget McCrea
Inman News Features

Little was said in October when Homestore.com filed an arbitration action against America Online, and there?s no indication yet as to whether the online homes information and real estate technology company?s financial restatements and management reshuffling will change the course of that proceeding.

The arbitration surfaced in HomeStore?s November Form 10-Q filing with the Securities and Exchange Commission for the third quarter of 2001. Homestore, in the SEC filing, contends AOL has breached certain obligations relating primarily to Internet traffic commitments under an April 2000 five-year marketing and distribution agreement between the two companies.

The notice of arbitration seeks various remedies including damages and equitable relief.

Homestore?s Form-10Q stated that AOL had yet to respond to the notice of arbitration and hadn?t asserted any counter claims against Homestore under the original agreement.

Westlake Village, Calif.-based Homestore, which operates the National Association of Realtors official Realtor.com and other Web sites, last week disclosed it had overstated advertising revenue for the first three quarters of 2001 by $54-$95 million and may have overstated 2000 advertising revenue as well.

Whether the internal audit of the company?s accounting practices has any connection to the AOL arbitration is unknown because the arbitration is being kept under wraps.

Homestore spokesperson Dan Wool said earlier this month "there?s no news to report" on the arbitration beyond what was stated in the Form 10-Q filing.

Homestore paid AOL $20 million in cash and issued about 3.9 million shares of common stock to AOL when the agreement was signed. Homestore at that time guaranteed its common stock would achieve specified 30-day average closing prices on specified future dates. The price was guaranteed to be $65.64 per share with respect to 60 percent of AOL's shares on July 31, 2003, $68.50 per share with respect to 20 percent of AOL's shares on July 31, 2004, and $68.50 per share with respect to the remaining 20 percent of AOL's shares on July 31, 2005.

The agreement stated that Homestore would cover any shortfall in cash payments to AOL. The aggregate amount was limited to $90 million, an amount reported as restricted cash on Homestore?s balance sheet.

Homestore?s stock was trading at $2.50 per share today.

AOL did not return calls seeking comment on the arbitration.

Homestore filed the arbitration with the American Arbitration Association. The group wouldn?t confirm or deny its participation the matter.

Arbitration association spokesperson Katherine E. Burton said arbitration between business partners is more common that one might think and that the group handled nearly 17,800 business arbitrations and mediations last year.

Businesses can name the association in a contract clause without giving the association notice of such provision. The number of matters arbitrated and mediated represents actual disputes and isn?t indicative of all instances when an arbitration clause is included in a commercial contract, Burton added.

Resolution of such matters depends on the willingness of the parties, the complexity of the issues at hand and the extent of pre-hearing discovery, Burton said.

"An arbitration may be settled in anywhere from a few weeks to a couple of months," she said. "This rivals court battles, which may take four to seven years."

Burton also said business relationships between disputing companies tend to be preserved despite an arbitration because arbitration is "an efficient confidential process that is generally less antagonistic than a court trial."

She also said arbitration is less disruptive to business activities because the scheduling is more flexible than that of a courtroom legal action.

Copyright: Inman News Service



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