AOL, Homestore Settle Dispute

Times Staff Writer

AOL Time Warner and Homestore Inc. settled a dispute Thursday over an ill-fated marketing alliance that ultimately put both companies under the scrutiny of government investigators.

Westlake Village-based Homestore, the online real estate company, agreed to pay AOL $30 million over the next 18 months and allow the New York media giant to fully draw down on a $90-million line of credit secured by Homestore.

In return, Homestore will remain the exclusive provider of real estate content on the AOL service and is relieved from previous contractual commitments that would have required Homestore to pay AOL $57 million this summer to compensate for its slumping stock price.

"The mere risk of that payment has had a significant impact on our company," said Mike Long, Homestore's chief executive.

"The agreement enables us to eliminate the looming risk of that payment and secure a new lower-price relationship.... We think it makes sense to maintain a strong relationship with AOL."

The firms said they would continue to share ad revenue generated from their venture.

The agreement settles an arbitration dispute started by Homestore in 2001 over the collapse of a five-year, $200-million marketing deal signed during the dot-com heyday.

Under the original deal, Homestore paid AOL $20 million and gave the Internet giant 3.9 million of its shares, guaranteeing to make up the difference if Homestore stock fell below the mid-$60 range.

Homestore shares later plummeted, and both sides accused the other of failing to live up to the agreement.

Homestore closed up 3 cents at 94 cents Thursday on Nasdaq. AOL shares closed at $14.33, up 45 cents, on the New York Stock Exchange. News of the agreement was disclosed after the markets closed.

AOL executives said in a statement that they were pleased with the settlement. In addition to access to the $90-million credit line, AOL will receive a $7.5-million termination fee and quarterly cash payments of $3.75 million through June 2004. In return, it will give Homestore greater prominence on AOL's real estate site.

The cash payments are welcome news for AOL, which has been struggling to show Wall Street it can rebuild its advertising revenue.

AOL declined to comment beyond the statement.

According to a recent lawsuit filed by Homestore investors, when the AOL-Homestore deal started to fall apart, former executives at both companies attempted to prop up Homestore stock by cutting bogus "round-trip" advertising deals.

The suit contends that the transactions funneled money from Homestore through a third-party company and then back to the AOL-Homestore joint venture.

The deals, under investigation by the Justice Department and Securities and Exchange Commission, allegedly helped Homestore inflate its advertising revenue and mask its growing problems from Wall Street. AOL and Homestore are cooperating in the investigations.

Four former Homestore managers have pleaded guilty to criminal charges arising from the deals, including Jeffrey M. Kalina, a senior financial manager, who settled a criminal and civil case this week.

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