================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
Commission File Number 000-26659
__________
Homestore.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4438337
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
30700 Russell Ranch Road
Westlake Village, California 91362
(Address of Principal Executive Office) (Zip Code)
(805) 557-2300
(Registrant's Telephone Number, Including Area Code)
__________
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
At July 31, 2001 the registrant had 108,844,766 shares of its common stock
outstanding.
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INDEX
THIS 10-Q/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND RESTATING ITEMS 1 AND
2 OF PART I OF FORM 10-Q TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED
FINANCIALS AS OF AND FOR THE PERIODS ENDED JUNE 30, 2000 AND 2001. WE HAVE MADE
NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-Q OTHER THAN TO THE BALANCE
SHEET AS OF DECEMBER 31, 2000, WHICH WAS PREVIOUSLY RESTATED IN THE ANNUAL
REPORT ON FORM 10-K/A FILED ON MARCH 12, 2001. ALL INFORMATION IN THIS FORM 10-
Q/A IS AS OF JUNE 30, 2001 AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR
EVENTS OTHER THAN THE AFOREMENTIONED RESTATEMENT AND THE DESCRIPTION OF
LITIGATION IN NOTE 14 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Homestore.com, Inc. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets.......................................................... 2
Unaudited Consolidated Statements of Operations................................................ 3
Unaudited Consolidated Statements of Cash Flows................................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 17
SIGNATURES. ................................................................................................ 38
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HOMESTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
---------- -----------
(Unaudited)
ASSETS (Restated)
Current assets:
Cash and cash equivalents.................................................................. $ 162,145 $ 167,576
Short-term investments..................................................................... 49,627 75,295
Marketable equity securities............................................................... 4,321 247
Accounts receivable, net................................................................... 68,089 32,028
Current portion of prepaid distribution expense............................................ 48,816 49,140
Other current assets....................................................................... 13,073 21,833
---------- ----------
Total current assets.................................................................... 346,071 346,119
Prepaid distribution expense, net of current portion......................................... 136,254 159,226
Property and equipment, net.................................................................. 82,235 43,483
Intangible assets, net....................................................................... 949,134 194,274
Restricted cash.............................................................................. 103,409 103,409
Other long-term assets....................................................................... 35,747 46,839
---------- ----------
Total assets............................................................................ $1,652,850 $ 893,350
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 32,269 $ 13,162
Accrued liabilities........................................................................ 84,722 45,473
Deferred revenue from related parties...................................................... 53,353 -
Deferred revenue........................................................................... 48,343 33,846
---------- ----------
Total current liabilities............................................................... 218,687 92,481
Distribution obligation...................................................................... 197,254 189,848
Other........................................................................................ 3,336 7,542
---------- ----------
Total liabilities....................................................................... 419,277 289,871
---------- ----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Convertible preferred stock................................................................ -- --
Common stock............................................................................... 108 83
Additional paid-in capital................................................................. 1,888,609 1,027,423
Treasury stock............................................................................. (17,531) (16,556)
Notes receivable from stockholders......................................................... (5,251) (7,938)
Deferred stock-based charges............................................................... (107,642) (97,724)
Accumulated other comprehensive loss....................................................... (2,256) (23)
Accumulated deficit........................................................................ (522,464) (301,786)
---------- ----------
Total stockholders' equity.............................................................. 1,233,573 603,479
---------- ----------
Total liabilities and stockholders' equity.............................................. $1,652,850 $ 893,350
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2001 2000 2001 2000
--------- --------- --------- ---------
(Restated) (Restated) (Restated) (Restated)
Revenues (including non-cash equity charges, see Note 10)............. $ 69,067 $ 42,244 $ 130,408 $ 79,906
Revenues from related parties......................................... 8,633 - 11,110 -
--------- --------- --------- --------
Total revenues........................................................ 77,700 42,244 141,518 79,906
Cost of revenues (including non-cash equity charges, see note 10)..... 33,351 13,433 61,156 24,191
--------- --------- --------- --------
Gross profit.......................................................... 44,349 28,811 80,362 55,715
--------- --------- --------- --------
Operating expenses:
Sales and marketing (including non-cash equity charges, see
note 10).......................................................... 62,517 37,702 121,316 75,973
Product development (including non-cash equity charges,
see note 10)...................................................... 8,680 3,738 14,164 5,764
General and administrative (including non-cash equity
charges, see note 10)............................................. 30,676 11,994 53,043 23,816
Amortization of intangible assets................................... 54,631 10,935 88,394 19,327
Acquisition-related and other charges............................... 8,567 -- 15,632 --
--------- --------- --------- --------
Total operating expenses.............................................. 165,071 64,369 292,549 124,880
--------- --------- --------- --------
Loss from operations.................................................. (120,722) (35,558) (212,187) (69,165)
Interest income, net.................................................. 3,768 6,645 8,219 11,054
Other expense, net.................................................... (3,914) (371) (16,710) (385)
--------- --------- --------- --------
Net loss.............................................................. $(120,868) $(29,284) $(220,678) $(58,496)
========= ========= ========= ========
Basic and diluted net loss per share.................................. $ (1.12) $ (.37) $ (2.18) $ (.76)
========= ========= ========= ========
Shares used to calculate basic and diluted net loss per share......... 107,695 80,153 101,345 77,102
========= ========= ========= ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
--------
2001 2000
---- ----
(Restated) (Restated)
Cash flows from operating activities:
Net loss................................................................................... $(220,678) $ (58,496)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation............................................................................... 10,193 1,537
Amortization of intangible assets.......................................................... 88,393 19,327
Accretion of distribution obligation....................................................... 7,406 --
Provision for doubtful accounts............................................................ 6,068 778
Stock-based charges........................................................................ 41,240 21,835
Write-down of investments.................................................................. 11,592 --
Other non-cash items....................................................................... 1,536 (546)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable...................................................................... (23,368) (11,252)
Prepaid distribution expense............................................................. 4,703 (24,008)
Other assets............................................................................. 1,811 (2,101)
Accounts payable and accrued liabilities................................................. 30,119 8,141
Deferred revenue from related parties.................................................... 53,353 --
Deferred revenue......................................................................... (4,489) 4,477
--------- ---------
Net cash provided by (used in) operating activities........................................ 7,879 (40,308)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................................................ (29,352) (11,948)
Purchases of short-term investments........................................................ (66,317) (151,124)
Maturities of short-term investments....................................................... 90,492 40,000
Purchases of cost and equity investments................................................... -- (27,696)
Acquisitions, net of cash acquired......................................................... (52,392) (21,592)
--------- ---------
Net cash used in investing activities...................................................... (57,569) (172,360)
--------- ---------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes............................................... 1,710 16
Proceeds from exercise of stock options, warrants and share issuances under employee
stock purchase plan....................................................................... 46,780 6,350
Net proceeds from issuance of common and preferred stock................................... -- 428,961
Transfer to restricted cash................................................................ -- (103,067)
Repayment of notes payable................................................................. (481) (38,302)
Issuance of notes receivable............................................................... (3,750) (1,651)
Subsidiary equity transactions............................................................. -- 10,850
--------- ---------
Net cash provided by financing activities.................................................. 44,259 303,157
--------- ---------
Change in cash and cash equivalents........................................................ (5,431) 90,489
Cash and cash equivalents, beginning of period............................................. 167,576 90,382
--------- ---------
Cash and cash equivalents, end of period................................................... $ 162,145 $ 180,871
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. ("Homestore" or the "Company") has created an online
marketplace that is the leading destination on the Internet for home and real
estate-related information, products and services, based on the number of
visitors, time spent on the web sites and number of property listings. Through
its network of web sites, the Company provides a wide variety of information and
tools for consumers, and is the leading supplier of online media and technology
solutions for real estate industry professionals, advertisers and providers of
home and real estate-related products and services. To provide consumers with
real estate listings, access to real estate professionals and other home and
real estate-related information and resources, the Company has established
relationships with key industry participants. These participants include real
estate market leaders such as the National Association of REALTORS(R) ("NAR"),
the National Association of Home Builders ("NAHB"), the largest Multiple Listing
Services ("MLSs"), the NAHB Remodelors Council, the National Association of the
Remodeling Industry ("NARI"), the American Institute of Architects ("AIA"), the
Manufactured Housing Institute ("MHI"), real estate franchises, brokers,
builders and agents. The Company also has distribution agreements with a number
of leading Internet portal and search engine web sites, including the America
Online, Inc. ("AOL") network of properties.
2. BASIS OF PRESENTATION:
The Company's interim financial statements have been prepared in accordance
with generally accepted accounting principles including those for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and note
disclosures required by generally accepted accounting principles for complete
financial statements. These statements are unaudited and, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation, have been included. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Form 10-K/A for the year
ended December 31, 2000 filed with the Securities and Exchange Commission
("SEC") on March 12, 2002. That form 10-K/A reflects a restatement of the
December 31, 2000 balance sheet which is presented herein on the restated basis
in this Form 10-Q/A. The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation. These financial statements have been
restated from a previously filed Form 10-Q as described in Note 4.
Since inception, the Company has incurred losses from operations. As of
June 30, 2001, the Company had an accumulated deficit of $522.5 million, cash
and cash equivalents of $162.1 million and short-term investments of $49.6
million. The Company has no material financial commitments other than those
under operating lease agreements and distribution and marketing agreements. The
Company currently anticipates that its existing cash and cash equivalents, and
any cash generated from operations will be sufficient to fund the Company's
operating activities, capital expenditures and other obligations through at
least the next 12 months. However, in the longer term, the Company faces
significant risks associated with the successful execution of its business
strategy and may need to raise additional capital in order to fund more rapid
expansion, to expand its marketing activities, to develop new or enhance
existing services or products, to satisfy our obligation to AOL and to respond
to competitive pressures or to acquire complementary services, businesses or
technologies. If the Company is not successful in generating sufficient cash
flow from operations, the Company may need to raise additional capital through
public or private financing, strategic relationships or other arrangements. This
additional capital, if needed, might not be available on terms acceptable to the
Company, or at all. The failure to raise sufficient capital when needed could
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional capital were raised through the issuance
of equity securities, the percentage of the Company's stock owned by the
Company's then-current stockholders would be reduced. Furthermore, such equity
securities might have rights, preferences or privileges senior to those of the
Company's common and preferred stock. In addition the Company's liquidity could
be adversely impacted by the litigation referred to in Note 14.
3. RECENT ACCOUNTING DEVELOPMENTS:
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The statement requires the recognition of all derivatives as either
assets or
5
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities in the balance sheet and the measurement of those instruments at
fair value. The accounting for changes in the fair value of a derivative depends
on the planned use of the derivative and the resulting designation. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the adoption of SFAS No. 133 in the first quarter of 2001
did not have an impact on the Company's financial position, results of
operations or cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets", respectively. SFAS No. 141 replaces Accounting Principles Board ("APB")
Opinion No. 16. It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. SFAS No.
142 changes the accounting for goodwill and other intangible assets with
indefinite useful lives ("goodwill") from an amortization method to an
impairment-only approach. Under SFAS No. 142, goodwill will be tested upon
implementation of the standard, annually and whenever events or circumstances
occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations completed after June 30, 2001. Upon
adoption of SFAS No. 142 on January 1, 2002, amortization of goodwill recorded
for business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 will be reclassified to goodwill. The Company
will be required to implement SFAS No. 142 in the first quarter of fiscal 2002.
In connection with the adoption of SFAS No. 142, the Company will be required to
perform a transitional goodwill impairment assessment. The Company is in process
of evaluating the impact of adopting SFAS Nos. 141 and 142.
As described in Note 4, the Company elected to early adopt EITF 01-9
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)".
4. RESTATEMENT AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT:
On December 21, 2001, the Company announced that the Audit Committee of its
Board of Directors was conducting an inquiry of certain of the Company's
accounting practices and that the results of the inquiry to date determined that
certain of its financial statements would require restatement. The Audit
Committee retained independent counsel and independent accountants to assist in
connection with the inquiry. On January 2, 2002, the Company concluded, based on
preliminary findings of the inquiry, that its financial statements for each of
the three quarters ended, September 30, 2001 would be restated. On February 13,
2002, the Company concluded, based upon preliminary findings of the inquiry,
that its financial statements, as of, and for the year ended December 31, 2000,
including the interim periods, would be restated. On March 11, 2002, the Audit
Committee concluded its inquiry. The results of the inquiry determined that for
the three-month and six-month periods ended June 30, 2001, certain transactions
resulting in revenue recognition of $40.0 million and $64.5 million,
respectively, had been improperly recorded as independent cash transactions,
when, in fact, they were reciprocal exchanges that should have been evaluated as
barter transactions. The Company determined that there was insufficient support
to establish the fair value of these barter exchanges and thus the related
revenue has been reversed. The results of the inquiry also determined that in
both the three-month and six-month periods ended June 30, 2000, revenue of $6.1
million had been improperly recorded on this basis. Although the ultimate impact
of these adjustments will be to reduce both revenues and expenses, because some
of the transactions take place over several accounting periods, and because
certain payments for goods and services by the Company were capitalized when
initially recorded, operating results for the years 2000, 2001 and future
periods are impacted. The effect of reversing the revenue associated with
certain of these transactions required offsetting adjustments to various asset
and liability accounts, including: accounts receivable, notes receivable,
property and equipment, other assets, accrued liabilities and deferred revenue.
In addition, the results of the inquiry determined that for the three-month and
six-month periods ended June 30, 2001, revenue of $10.4 million and $26.0
million, respectively was improperly recognized on the sale of certain software
products and services. The transactions did not meet the revenue recognition
requirements of SOP 97-2 due to the existence of other performance commitments
and, accordingly, the revenue should have been deferred through June 30, 2001.
The restated financial statements also include the effects of the Company's
early adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products)" which was issued in
February 2002. This consensus requires companies to report certain consideration
given by a vendor to a customer as a reduction in revenue. Upon adoption,
companies are required to retroactively reclassify such amounts in previously
issued financial statements to comply with the income statement display
requirements of the consensus. The Company has adopted this consensus and the
effect on the three-month and six-months periods ended June 30, 2001 was to
reduce previously reported revenue and expense by $1.2 million and $2.8 million,
respectively, with no effect on net loss or net loss per share. The effect on
the three-month and six-month periods ended June 30, 2000 was to reduce
previously reported revenue and expense by $1.8 million and $2.7 million,
respectively
6
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of these items, for the three-month and six-month periods ended
June 30, 2001, respectively, the Company has reduced its previously reported
revenue by $51.6 million and $93.3 million; increased its net loss from $72.1
million to $120.9 million and $139.2 million to $220.7 million; and increased
its net loss per share of $(.67) to $(1.12) and $(1.37) to $(2.18). For the
three-month and six-month periods ended June 30, 2000, respectively, the Company
has reduced its previously reported revenue by $7.9 million and $8.8 million;
increased its net loss from $24.7 million to $29.3 million and $53.9 million to
$58.5 million; and increased its net loss per share of $(.31) to $(.37) and
$(.70) to $(.76 ).
Additionally, the Company reclassified $13.4 million in previously reported
cash and cash equivalents to restricted cash as a result of certain
collateralized lease and other obligations.
Following are reconciliations of the Company's financial position and
results of operations and cash flows from financial statements previously filed
to these restated financial statements.
CONSOLIDATED BALANCE SHEET
(in thousands) June 30, 2001
-------------
As Reported Adjustments Restated
----------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 175,554 $ (13,409) $ 162,145
Short-term investments.................................................... 49,627 - 49,627
Marketable equity security................................................ 4,321 - 4,321
Accounts receivable....................................................... 79,649 (11,560) 68,089
Current portion of prepaid distribution expense........................... 48,816 - 48,816
Other current assets...................................................... 42,040 (28,967) 13,073
---------- --------- ----------
Total current assets.................................................... 400,007 (53,936) 346,071
Prepaid distribution expense, net of current portion......................... 136,254 - 136,254
Property and equipment, net.................................................. 96,026 (13,791) 82,235
Intangible assets, net....................................................... 965,463 (16,329) 949,134
Restricted cash.............................................................. 90,000 13,409 103,409
Other assets................................................................. 43,581 (7,834) 35,747
---------- --------- ----------
Total assets............................................................ $1,731,331 $ (78,481) $1,652,850
========== ========= ==========
LIABILITIES, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 32,169 $ 100 $ 32,269
Accrued liabilities....................................................... 79,273 5,449 84,722
Deferred revenue from related parties..................................... - 53,353 53,353
Deferred revenue.......................................................... 73,707 (25,364) 48,343
---------- --------- ----------
Total current liabilities............................................... 185,149 33,538 218,687
Distribution obligation...................................................... 197,254 - 197,254
Other non-current liabilities................................................ 3,336 - 3,336
---------- --------- ----------
Total Liabilities....................................................... 385,739 33,538 419,277
---------- --------- ----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock.............................................................. 108 - 108
Additional paid-in capital................................................ 1,888,609 - 1,888,609
Treasury stock............................................................ (17,531) - (17,531)
Notes receivable from stockholders........................................ (5,251) - (5,251)
Deferred stock-based charges.............................................. (107,962) 320 (107,642)
Accumulated other comprehensive income.................................... (2,256) - (2,256)
Accumulated deficit....................................................... (410,125) (112,339) (522,464)
---------- --------- ----------
Total stockholders' equity.............................................. 1,345,592 (112,019) 1,233,573
---------- --------- ----------
Total liabilities and stockholders' equity.............................. $1,731,331 $ (78,481) $1,652,850
========== ========= ==========
7
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended June 30, 2001
--------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ----------- ----------
Revenues............................................................. $ 129,283 $ (59,027) $ (1,189) $ 69,067
Revenues from related parties........................................ -- 8,633 -- 8,633
--------- ---------- --------- ----------
Total revenues....................................................... 129,283 (50,394) (1,189) 77,700
Cost of revenues..................................................... 34,018 -- (667) 33,351
--------- ---------- --------- ----------
Gross profit......................................................... 95,265 (50,394) (522) 44,349
--------- ---------- --------- ----------
Operating expenses:
Sales and marketing............................................. 64,897 (1,858) (522) 62,517
Product development............................................. 8,930 (250) -- 8,680
General and administrative...................................... 30,706 (30) -- 30,676
Amortization of intangible assets............................... 54,656 (25) -- 54,631
Acquisition-related and other charges........................... 8,567 -- -- 8,567
--------- ---------- --------- ----------
Total operating expenses............................................. 167,756 (2,163) (522) 165,071
--------- ---------- --------- ----------
Loss from operations................................................. (72,491) (48,231) -- (120,722)
Interest income, net................................................. 3,768 -- -- 3,768
Other expense, net................................................... (3,352) (562) -- (3,914)
--------- ---------- --------- ----------
Net loss applicable to common stockholders........................... (72,075) $ (48,793) -- $ (120,868)
========= ========== ========= ==========
Basic and diluted net loss per share................................. $ (.67) $ (.45) $ -- $ (1.12)
--------- ---------- ========= ----------
Shares used to calculate basic and diluted net loss per share........ 107,695 107,695 107,695 107,695
========= ========== ========= ==========
Six Months Ended June 30, 2001
------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ------------ ----------- ----------
Revenues............................................................. $ 234,774 $ (101,603) $ (2,763) $ 130,408
Revenues from related parties........................................ -- 11,110 -- 11,110
--------- ---------- --------- ----------
Total revenue........................................................ 234,774 (90,493) (2,763) 141,518
Cost of revenues..................................................... 62,046 -- (890) 61,156
--------- ---------- --------- ----------
Gross profit......................................................... 172,728 (90,493) (1,873) 80,362
--------- ---------- --------- ----------
Operating expenses:
Sales and marketing............................................. 131,910 (8,721) (1,873) 121,316
Product development............................................. 14,414 (250) -- 14,164
General and administrative...................................... 53,622 (579) -- 53,043
Amortization of intangible assets............................... 88,444 (50) -- 88,394
Acquisition-related and other charges........................... 15,632 -- -- 15,632
--------- ---------- --------- ----------
Total operating expenses............................................. 304,022 (9,600) (1,873) 292,549
--------- ---------- --------- ----------
Loss from operations................................................. (131,294) (80,893) -- (212,187)
Interest income, net................................................. 8,219 -- -- 8,219
Other expense, net................................................... (16,148) (562) -- (16,710)
--------- ---------- --------- ----------
Net loss applicable to common stockholders........................... $(139,223) $ (81,455) $ -- $ (220,678)
--------- ---------- --------- ----------
Basic and diluted net loss per share................................. $ (1.37) $ (.81) $ -- $ (2.18)
========= ========== ========= ==========
Shares used to calculate basic and diluted net loss per share........ 101,345 101,345 101,345 101,345
========= ========== ========= ==========
8
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended June 30, 2000
--------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ----------- ----------
Revenues............................................................. $ 50,152 $ (6,143) $ (1,765) $ 42,244
Cost of revenues..................................................... 13,433 -- -- 13,433
--------- ---------- --------- ----------
Gross profit......................................................... 36,719 (6,143) (1,765) 28,811
--------- ---------- --------- ----------
Operating expenses:
Sales and marketing................................................ 40,417 (950) (1,765) 37,702
Product development................................................ 3,738 -- -- 3,738
General and administrative......................................... 12,615 (621) -- 11,994
Amortization of intangible assets.................................. 10,935 -- -- 10,935
In-process research and development................................ -- -- -- --
Acquisition-related and other charges.............................. -- -- -- --
--------- ---------- --------- ----------
Total operating expenses............................................. 67,705 (1,571) (1,765) 64,369
--------- ---------- --------- ----------
Loss from operations................................................. (30,986) (4,572) -- (35,558)
Interest income, net................................................. 6,645 -- -- 6,645
Other expense, net................................................... (371) -- -- (371)
--------- ---------- --------- ----------
Net loss applicable to common stockholders........................... $ (24,712) $ (4,572) -- $ (29,284)
========= ========== ========= ==========
Basic and diluted net loss per share................................. $ (.31) $ (.06) $ -- $ (.37)
========= ========== ========= ==========
Shares used to calculate basic and diluted net loss per share........ 80,153 80,153 80,153 80,153
========= ========== ========= ==========
Six Months Ended June 30, 2000
------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ----------- ----------
Revenues............................................................. $ 88,751 $ (6,143) $ (2,702) $ 79,906
Cost of revenues..................................................... 24,191 -- -- 24,191
--------- ---------- --------- ----------
Gross profit......................................................... 64,560 (6,143) (2,702) 55,715
--------- ---------- --------- ----------
Operating expenses:
Sales and marketing................................................ 79,625 (950) (2,702) 75,973
Product development................................................ 5,764 -- -- 5,764
General and administrative......................................... 24,437 (621) -- 23,816
Amortization of intangible assets.................................. 19,327 -- -- 19,327
In-process research and development................................ -- -- -- --
Acquisition-related and other charges.............................. -- -- -- --
--------- ---------- --------- ----------
Total operating expenses............................................. 129,153 (1,571) (2,702) 124,880
--------- ---------- --------- ----------
Loss from operations................................................. (64,593) (4,572) -- (69,165)
Interest income, net................................................. 11,054 -- -- 11,054
Other expense, net................................................... (385) -- -- (385)
--------- ---------- --------- ----------
Net loss applicable to common stockholders........................... $ (53,924) $ (4,572) $ -- $ (58,496)
========= ========== ========= ==========
Basic and diluted net loss per share................................. $ (.70) $ (.06) $ -- $ (.76)
========= ========== ========= ==========
Shares used to calculate basic and diluted net loss per share........ 77,102 77,102 77,102 77,102
========= ========== ========= ==========
9
HOMESTORE.COM,INC.
NOTES TO UNAUDITED CONSENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30, 2001
---------------------------------------
As Reported Adjustments Restated
------------ ------------ -----------
Cash flows from operating activities:
Net loss......................................................................... $(139,223) $(81,455) $(220,678)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation..................................................................... 10,774 (581) 10,193
Amortization of intangible assets................................................ 88,444 (51) 88,393
Accretion of distribution obligation............................................. 7,406 -- 7,406
Provision for doubtful accounts.................................................. 6,068 -- 6,068
In-process research and development.............................................. -- -- --
Stock-based charges.............................................................. 40,920 320 41,240
Write-down of investments........................................................ 11,592 -- 11,592
Other non-cash items............................................................. (8,075) 9,611 1,536
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................. (22,485) (883) (23,368)
Prepaid distribution expense..................................................... 4,703 -- 4,703
Other assets..................................................................... (14,566) 16,377 1,811
Accounts payable and accrued liabilities......................................... 20,498 9,621 30,119
Deferred revenue from related parties............................................ 53,353 53,353
Deferred revenue................................................................. 30,530 (35,019) (4,489)
--------- -------- ---------
Net cash provided by in operating activities..................................... 36,586 (28,707) 7,879
--------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment.............................................. (42,147) 12,795 (29,352)
Purchases of short-term investments.............................................. (66,317) -- (66,317)
Maturities of short-term investments............................................. 90,492 -- 90,492
Purchases of cost and equity investments......................................... -- -- --
Acquisitions, net of cash acquired............................................... (68,304) 15,912 (52,392)
--------- -------- ---------
Net cash used in investing activities............................................ (86,276) 28,707 (57,569)
Cash flows from financing activities:
Proceeds from payment of stockholders' notes..................................... 1,710 -- 1,710
Proceeds from exercise of stock options, warrants and share issuances
under employee stock purchase plan............................................. 46,780 -- 46,780
Net proceeds from issuance of common and preferred stock......................... -- -- --
Transfer to restricted cash...................................................... -- -- --
Repayment of notes payable....................................................... (481) -- (481)
Issuance of notes receivable..................................................... (3,750) -- (3,750)
Subsidiary equity transactions................................................... -- -- --
--------- -------- ---------
Net cash provided by financing activities........................................ 44,259 -- 44,259
--------- -------- ---------
Change in cash and cash equivalents.............................................. (5,431) -- (5,431)
Cash and cash equivalents, beginning of period................................... 180,985 (13,409) 167,576
--------- -------- ---------
Cash and cash equivalents, end of period......................................... $ 175,554 $(13,409) $ 162,145
========= ======== =========
10
HOMESTORE.COM,INC.
NOTES TO UNAUDITED CONSENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30, 2000
--------------------------------------
As Reported Adjustments Restated
------------ ------------ ----------
Cash flows from operating activities:
Net loss......................................................................... $ (53,924) $ (4,572) $ (58,496)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation..................................................................... 1,658 (121) 1,537
Amortization of intangible assets................................................ 19,327 - 19,327
Accretion of distribution obligation............................................. - - -
Provision for doubtful accounts.................................................. 778 - 778
In-process research and development.............................................. - - -
Stock-based charges.............................................................. 21,835 - 21,835
Write-down of investments........................................................ - - -
Other non-cash items............................................................. (546) - (546)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................. (15,193) 3,941 (11,252)
Prepaid distribution expense..................................................... (24,008) - (24,008)
Other assets..................................................................... (2,101) - (2,101)
Accounts payable and accrued liabilities......................................... 8,841 (700) 8,141
Deferred revenue................................................................. 4,477 - 4,477
--------- --------- ---------
Net cash used in operating activities............................................ (38,856) (1,452) (40,308)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.............................................. (13,400) 1,452 (11,948)
Purchases of short-term investments.............................................. (151,124) - (151,124)
Maturities of short-term investments............................................. 40,000 - 40,000
Purchases of cost and equity investments......................................... (27,696) - (27,696)
Acquisitions, net of cash acquired............................................... (21,592) - (21,592)
--------- --------- ---------
Net cash used in investing activities............................................ (173,812) 1,452 (172,360)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes..................................... 16 - 16
Proceeds from exercise of stock options, warrants and share issuances
under employee stock purchase plan............................................. 6,350 - 6,350
Net proceeds from issuance of common and preferred stock......................... 428,961 - 428,961
Transfer to restricted cash...................................................... (90,000) (13,067) (103,067)
Repayment of notes payable....................................................... (38,302) - (38,302)
Issuance of notes receivable..................................................... (1,651) - (1,651)
Subsidiary equity transactions................................................... 10,850 - 10,850
--------- --------- ---------
Net cash provided by financing activities........................................ 316,224 (13,067) 303,157
--------- --------- ---------
Change in cash and cash equivalents.............................................. 103,556 (13,067) 90,489
Cash and cash equivalents, beginning of period................................... 90,382 - 90,382
--------- --------- ---------
Cash and cash equivalents, end of period......................................... $ 193,938 $ (13,067) $ 180,871
========= ========= =========
11
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS:
The increase in stockholders' equity for the six months ended June 30, 2001
was primarily the result of the acquisitions of Move.com, Inc. and Welcome Wagon
International, Inc., or collectively referred to as the Move.com Group, in which
the Company issued approximately 21.4 million shares of its common stock and
assumed approximately 3.2 million outstanding stock options of Move.com, Inc.
The acquisition resulted in an increase to additional paid-in capital of
approximately $780.0 million.
The components of comprehensive loss for each of the periods presented are as
follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- --------
(Restated) (Restated) (Restated) (Restated)
Net loss................................................. $(120,868) $(29,284) $(220,678) $(58,496)
Unrealized losses on marketable securities............... (678) (5,002) (2,580) (565)
Foreign currency translation............................. 664 -- 347 --
--------- -------- --------- --------
Comprehensive loss....................................... $(120,882) $(34,286) $(222,911) $(59,061)
========= ======== ========= ========
In January 2001, the Company issued 600,000 shares of its common stock, in
connection with a marketing agreement providing for a multi-faceted marketing
program, the fair market value of which was $11.1 million on the date of
issuance of the shares. The $11.1 million was recorded as deferred stock-based
charges and is being amortized over the five-year term of the agreement. The
counterparty to the marketing agreement also entered into a marketing and web
services agreement with the Company for $15.0 million in cash which is payable
over the five-year term of the agreement. The Company is recording these
transactions on a net basis.
6. ACQUISITION-RELATED AND OTHER CHARGES:
In the first quarter of 2001, the Company incurred acquisition-related and
other charges of $7.1 million from the acquisition of the Move.com Group.
Included in these charges were stay bonuses, severance, and facilities shut-down
costs associated with this acquisition. No accruals have been made for expenses
incurred beyond March 31, 2001.
In the second quarter of 2001, the Company incurred a charge related to the
dissolution of one of the Company's subsidiaries. Included in these charges were
severance, facilities shut-down costs and other dissolution costs. No accruals
have been made for expenses incurred beyond June 30, 2001.
7. IMPAIRMENT OF INVESTMENTS:
During the three-month period ended March 31, 2001, the Company' recorded a
charge of approximately $11.1 million based on an impairment of a portion of the
Company's portfolio of cost investments The impairment of these investments to
their net realizable values was based on a review of the companies' financial
conditions, cash flow projections and operating performances.
8. ACQUISITIONS:
In January 2001, the Company acquired certain assets and licenses and assumed
certain liabilities from Internet Pictures Corporation ("iPIX") for $8.1 million
in cash and a note in the amount of $2.25 million. The acquisition has been
accounted for as a purchase. The acquisition cost has been preliminarily
allocated to the assets acquired based on their respective fair values. The
excess of purchase consideration over net tangible assets acquired of
approximately $13.3 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a straight-line basis
over the estimated useful lives ranging from three to five years. The results of
operations for iPIX for periods prior to the acquisition were not material to
the Company and accordingly, pro forma results of operations have not been
presented.
In January 2001, the Company acquired certain assets and assumed certain
liabilities from Computers for Tracts, Inc. ("CFT") for approximately $4.5
million in cash and 162,850 shares of the Company's common stock valued at $5.0
million. The acquisition has been accounted for as a purchase. The acquisition
cost has been allocated to the assets acquired based on their
12
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respective fair values. The excess of purchase consideration over net tangible
assets acquired of approximately $8.9 million has been allocated to goodwill and
other identifiable intangible assets and is being amortized on a straight-line
basis over the estimated useful lives ranging from three to five years. The
results of operations for CFT for periods prior to the acquisition were not
material to the Company and accordingly, pro forma results of operations have
not been presented.
In February 2001, the Company acquired all the outstanding shares of
HomeWrite, Inc. ("HomeWrite") in exchange for 196,549 shares of the Company's
common stock valued at $5.6 million and assumed the HomeWrite Stock option plan
consisting of 196,200 outstanding stock options with an estimated fair value of
$4.5 million. The acquisition has been accounted for as a purchase. The
acquisition cost has been preliminarily allocated to the assets acquired based
on their respective fair values. The excess of purchase consideration over net
tangible assets acquired of approximately $11.8 million has been allocated to
goodwill and other identifiable intangible assets and is being amortized on a
straight-line basis over the estimated useful lives ranging from three to five
years. The results of operations for HomeWrite for periods prior to the
acquisition were not material to the Company and accordingly, pro forma results
of operations have not been presented.
In February 2001, the Company acquired certain assets and assumed certain
liabilities from Homebid.com, Inc. ("Homebid") for approximately $3.5 million in
cash. The acquisition has been accounted for as a purchase. The acquisition cost
has been allocated to the assets acquired based on their respective fair values.
The excess of purchase consideration over net tangible assets acquired of
approximately $2.5 million has been allocated to goodwill and other identifiable
intangible assets and is being amortized on a straight-line basis over the
estimated useful lives ranging from three to five years. The results of
operations for Homebid for periods prior to the acquisition were not material to
the Company and accordingly, pro forma results of operations have not been
presented.
In May 2001, the Company acquired certain assets and assumed certain
liabilities from Homestyles Publishing and Marketing, Inc. ("Homestyles") for
approximately $14.5 million in cash. The acquisition has been accounted for as a
purchase. The acquisition cost has been preliminarily allocated to the assets
acquired based on their respective fair values. The excess of purchase
consideration over net tangible assets acquired of approximately $15.2 million
has been preliminarily allocated to goodwill and other identifiable intangible
assets and is being amortized on a straight-line basis over the estimated useful
lives ranging from three to five years. The results of operations for Homestyles
for periods prior to the acquisition were not material to the Company and
accordingly, pro forma results of operations have not been presented.
9. RELATED PARTY TRANSACTIONS:
In February 2001, the Company acquired all the outstanding shares of the
Move.com Group from Cendant Corporation ("Cendant") valued at $757.3 million. In
connection with the acquisition, the Company issued an aggregate of 21.4 million
shares of the Company's common stock in exchange for all the outstanding shares
of capital stock of the Move.com Group and assumed approximately 3.2 million
outstanding stock options of Move.com, Inc. Cendant is restricted in its ability
to sell the Homestore.com shares it received in the acquisition and has agreed
to vote such shares on all corporate matters in proportion to the voting
decisions of all other stockholders. In addition, Cendant has agreed to a ten-
year standstill agreement that, under most conditions, prohibits Cendant from
acquiring additional Homestore.com shares. The acquisition has been accounted
for as a purchase. The acquisition cost has been preliminarily allocated to
assets acquired and liabilities assumed based on estimates of their respective
fair values. The excess of purchase consideration over net tangible assets
acquired of $795.4 million has been allocated to goodwill and other identifiable
intangible assets and is being amortized on a straight-line basis over estimated
lives ranging from two to fifteen years.
In connection with and contingent upon the close of the acquisition of the
Move.com Group, we entered into a series of commercial agreements for the sale
of various technology and subscription-based products to Real Estate Technology
Trust ("RETT"), an independent trust established in 1996 to provide technology
services and products to Cendant's real estate franchisees that is considered a
related party of the Company. Under the commercial agreements, RETT committed to
purchase $75.0 million in products to be delivered to agents, brokers and other
Cendant real estate franchisees over the next three years. Revenues from RETT
and Cendant in the three-month and six-month periods ended June 30, 2001 were
$8.6 million and $11.1 million, respectively, and are reported separately in
these financial statements. It is not practical to determine the related costs
of such revenues.
The following summarized unaudited pro forma financial information includes
the acquisition of the Move.com Group as if it had occurred at the beginning of
each period (in thousands, except per share amounts):
13
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(Restated) (Restated) (Restated) (Restated)
Revenues................................................. $ 77,700 $ 64,467 $ 154,465 $ 121,170
Net loss................................................. (120,868) (98,424) (248,128) (197,016)
Net loss per share:
Basic and diluted..................................... $ (1.12) $ (.97) $ (2.32) $ (1.99)
Weighted average shares............................... 107,695 101,515 106,774 98,809
10. STOCK-BASED CHARGES:
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is recognized over the vesting period based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
exercise price on the date of grant. The Company accounts for stock issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") No. 96-18 "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods and Services."
The following chart summarizes the stock-based charges that have been included
in the following captions for each of the periods presented (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
(Restated) (Restated) (Restated) (Restated)
Revenues............................................................. $ 522 $ 1,765 $ 1,873 $ 2,702
Cost of revenues..................................................... 81 148 186 346
Sales and marketing.................................................. 18,758 8,212 38,057 16,698
Product development.................................................. 76 140 175 326
General and administrative........................................... 414 756 949 1,763
------- ------- ------- -------
$19,851 $11,021 $41,240 $21,835
======= ======= ======= =======
11. NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- --------
(Restated) (Restated) (Restated) (Restated)
Numerator:
Net loss.......................................................... $(120,868) $(29,284) $(220,678) $(58,496)
========= ======== ========= ========
Denominator:
Weighted average shares outstanding............................... 107,695 80,153 101,345 77,102
========= ======== ========= ========
Basic and diluted net loss per share................................. $ (1.12) $ (.37) $ (2.18) $ (.76)
========= ======== ========= ========
The per share computations exclude preferred stock, options and warrants which
are anti-dilutive. The number of such shares excluded from the basic and diluted
net loss per share applicable to common stockholders computation was 20,707,672
and 17,086,000 at June 30, 2001 and 2000, respectively.
14
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. SEGMENT INFORMATION:
Segment information is presented in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard is based
on a management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating expenses based
upon internal accounting methods. The Company operates in two principal business
segments and has other business lines which are aggregated as "other". This is
consistent with the data that is made available to the Company's management to
assess performance and make decisions. The two business segments consist of
professional subscriptions and advertising. The expenses presented below for the
two business segments exclude an allocation of certain significant operating
expenses that the Company views as inseparable, including marketing expenses,
such as Internet portal distribution and off-line branding; new product
development costs; web site design and maintenance; listings content
aggregation; customer care and sales operations; billing and collections; data
center hosting costs; corporate expenses, such as finance, legal, internal
business systems, and human resources; amortization of intangible assets; stock-
based charges; and acquisition related charges. There are no inter-segment
revenues. Assets and liabilities are not allocated to segments for internal
reporting purposes.
Summarized information by segment as excerpted from the internal management
reports is as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- --------
Revenues: (Restated) (Restated) (Restated) (Restated)
Professional subscriptions.................................. $ 52,326 $ 28,720 $ 95,318 $ 51,612
Advertising................................................. 9,409 13,524 23,489 28,294
Other....................................................... 15,965 -- 22,711 --
--------- -------- --------- --------
77,700 42,244 141,518 79,906
--------- -------- --------- --------
Cost of revenues and operating expenses:
Professional subscriptions.................................. 26,538 14,223 51,979 25,652
Advertising................................................. 5,370 2,932 17,382 4,272
Other....................................................... 14,078 -- 19,084 --
Unallocated................................................. 152,436 60,647 265,260 119,147
--------- -------- --------- --------
198,422 77,802 353,705 149,071
--------- -------- --------- --------
Loss from operations............................................ $(120,722) $(35,558) $(212,187) $(69,165)
========= ======== ========= ========
Revenues from professional subscriptions for the three-month and six-month
periods ended June 30, 2001 included $8.6 million and $11.1 million,
respectively, of revenue from related parties. There were none in fiscal 2000.
In connection with acquisitions in 2001, the Company expanded it segment
presentation to include a third, "other" segment. The Company's Welcome Wagon
business constitutes $13.9 million and $20.6 million of revenue, respectively,
and $12.1 million and $17.1 million of expenses, respectively, in the three-
month and six-month periods ended June 30, 2001, of those amounts included in
the "other" classification.
13. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in the
normal course of business. Management believes that the resolution of these
matters will not have a material adverse effect on the Company's business,
results of operations, financial condition or cash flows.
On April 25, 2000, the Company received a request for information pertaining
to its business from the Antitrust Division of the U.S. Department of Justice
("DOJ"). The request sought information about the Company's business as it
relates to Internet realty sites in the United States, and the Company has
responded to that request. In July 2001, the Company was formally notified by
the DOJ that the DOJ had concluded its inquiry into certain business activities
of the Company and that no enforcement action is necessary.
15
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. SUBSEQUENT EVENTS:
On August 7, 2001, the Company entered into a definitive agreement to acquire
iPlace, Inc. for approximately $150.0 million in cash and stock, of which
approximately $70.0 million is cash. The closing of the proposed acquisition is
subject to expiration of the required waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, as well as other customary closing conditions and is
expected to close in the third quarter of 2001.
Litigation
Beginning in December 2001 numerous separate complaints purporting to be class
actions were filed in various jurisdictions alleging that the Company and
certain of its officers and directors violated certain provisions of the
Securities Exchange Act of 1934. The complaints contain varying allegations,
including that the Company made materially false and misleading statements with
respect to our 2000 and 2001 financial results in our filings with the SEC,
analysts reports, press releases and media reports. The complaints seek an
unspecified amount of damages. These cases are still in the preliminary stages,
and it is not possible for the Company to quantify the extent of its potential
liability, if any. An unfavorable outcome in these cases could have a material
adverse effect on our business, financial condition, cash flows and results of
operations. In addition, the costs of defending any litigation can be high and
divert management's attention from the day to day operations of the Company's
business.
In January 2002 the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
restatement of the Company's financial results. The SEC has requested that the
Company provide them with certain documents concerning the restatement of the
Company's financial results. The Company is cooperating with the SEC in
connection with this investigation and its outcome cannot be determined.
In February 2002, the Company was notified by Nasdaq of its intent to
institute proceedings against the Company to delist its stock from the Nasdaq
National Stock Market because, as a result of the restatement, its financial
statements had not been filed with the SEC on a timely basis. The Company has
requested a hearing on the matter and is working to update its financial
statements prior to the hearing. However, the Company cannot assure you that its
common stock will continue to be traded on the Nasdaq National Stock Market. In
the event the Company's common stock is delisted from the Nasdaq National
Market, it could be more difficult to trade the Company's common stock, and the
Company cannot assure that a market for its common stock will develop or be
sustained.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact that we make in this Form 10-Q are forward-
looking. In particular, the statements herein regarding industry prospects and
our future results of operations or financial position are forward-looking
statements. Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results may differ significantly from our
expectations. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed in our annual report on Form
10-K for the year ended December 31, 2000.
On December 21, 2001, we announced that the Audit Committee of our Board of
Directors was conducting an inquiry of certain of our accounting practices and
that the results of the inquiry to date determined that certain of our financial
statements would require restatement. The Audit Committee retained independent
counsel and independent accountants to assist in connection with the inquiry. On
January 2, 2002, we concluded, based on preliminary findings of the inquiry,
that our financial statements for each of the three quarters ended, September
30, 2001 would be restated On February 13, 2002, we concluded, based upon
preliminary findings of the inquiry, that our financial statements, as of, and
for the year ended December 31, 2000, including certain interim periods, would
be restated. On March 11, 2002, the Audit Committee concluded its inquiry. The
results of the inquiry determined that for the three-month and six-month periods
ended June 30, 2001, certain transactions resulting in revenue recognition of
$40.0 million and $64.5 million, respectively, had been improperly recorded as
independent cash transactions, when, in fact, they were reciprocal exchanges
that should have been evaluated as barter transactions. We determined that there
was insufficient support to establish the fair value of these barter exchanges
and thus the related revenue has been reversed. The results of the inquiry also
determined that in both the three-month and six-month periods ended June 30,
2000, revenue of $6.1 million had been improperly recorded on this basis.
Although the ultimate impact of these adjustments will be to reduce both
revenues and expenses, because some of the transactions take place over several
accounting periods, and because certain payments for goods and services by us
were capitalized when initially recorded, operating results for the years 2000,
2001 and future periods are impacted. The effect of reversing the revenue
associated with certain of these transactions required offsetting adjustments to
various asset and liability accounts, including: accounts receivable, notes
receivable, property and equipment, other assets, accrued liabilities and
deferred revenue. In addition, the results of the inquiry determined that for
the three-month and six-month periods ended June 30, 2001, revenue of $10.4
million and $26.0 million, respectively was improperly recognized on the sale of
certain software products and services. The transactions did not meet the
revenue recognition requirements of SOP 97-2 due to the existence of other
performance commitments and, accordingly, the revenue should have been deferred
through June 30, 2001.
The restated financial statements also include the effects of our early
adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)" which was issued in
February 2002. This consensus requires companies to report certain consideration
given by a vendor to a customer as a reduction in revenue. Upon adoption,
companies are required to retroactively reclassify such amounts in previously
issued financial statements to comply with the income statement display
requirements of the consensus. We have adopted this consensus and the effect on
the three-month and six-month periods ended June 30, 2001 was to reduce
previously reported revenue and expense by $1.2 million and $2.8 million,
respectively, with no effect on net loss or net loss per share. The effect on
the three-month and six-month periods ended June 30, 2000 was to reduce
previously reported revenue and expense by $1.8 million and $2.7 million,
respectively.
The consolidated financial statements for the three and six months ended
June 30, 2001 contained herein have been restated to incorporate these
adjustments. (See Note 4 to the Consolidated Financial Statements.) As a result
of these items, for the three-month and six-month periods ended June 30, 2001,
respectively, we have reduced our previously reported revenue by $51.6 million
and $93.3 million; increased our net loss from $72.1 million to $120.9 million
and $139.2 million to $220.7 million; and increased our net loss per share of
$(.67) to $(1.12) and $(1.37) to $(2.18). For the three-month and six-month
periods ended June 30, 2000, respectively, we have reduced our previously
reported revenue by $7.9 million and $8.8 million; increased our net loss from
$24.7 million to $29.3 million and $53.9 million to $58.5 million; and increased
our net loss per share of $(.31) to $(.37) and $(.70) to $(.76).
17
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended June 30, 2001
------------------------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ---------- ----------
Revenues....................................... $ 129,283 $ (59,027) $(1,189) $ 69,067
Revenues from related parties.................. - 8,633 - 8,633
--------- --------- -------- ---------
Total revenues................................. 129,283 (50,394) (1,189) 77,700
Cost of revenues............................... 34,018 - (667) 33,351
--------- --------- -------- ---------
Gross profit................................... 95,265 (50,394) (522) 44,349
--------- --------- -------- ---------
Operating expenses:
Sales and marketing......................... 64,897 (1,858) (522) 62,517
Product development......................... 8,930 (250) - 8,680
General and administrative.................. 30,706 (30) - 30,676
Amortization of intangible assets........... 54,656 (25) - 54,631
Acquisition-related and other charges....... 8,567 - - 8,567
--------- --------- -------- ---------
Total operating expenses....................... 167,756 (2,163) (522) 165,071
--------- --------- -------- ---------
Loss from operations........................... (72,491) (48,231) - (120,722)
Interest income, net........................... 3,768 - - 3,768
Other expense, net............................. (3,352) (562) - (3,914)
--------- --------- -------- ---------
Net loss applicable to common stockholders..... $ (72,075) $ (48,793) - $(120,868)
========= ========= ======== =========
Basic and diluted net loss per share........... $ (.67) $ (.45) - $ (1.12)
========= ========= ======== =========
Shares used to calculate basic and diluted net
loss per share................................. 107,695 107,695 107,695 107,695
========= ========= ======== ========
Three Months Ended June 30, 2000
------------------------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ---------- ----------
Revenues....................................... 50,152 (6,143) (1,765) 42,244
Revenues from related parties.................. - - - -
---------- ---------- ---------- ---------
Total revenues................................. 50,152 (6,143) (1,765) 42,244
Cost of revenues............................... 13,433 - - 13,433
---------- ---------- ---------- ---------
Gross profit................................... 36,719 (6,143) (1,765) 28,811
---------- ---------- ---------- ---------
Operating expenses:
Sales and marketing......................... 40,417 (950) (1,765) 37,702
Product development......................... 3,738 - - 3,738
General and administrative.................. 12,615 (621) - 11,994
Amortization of intangible assets........... 10,935 - - 10,935
Acquisition-related and other charges....... - - - -
---------- ---------- ---------- ---------
Total operating expenses....................... 67,705 (1,571) (1,765) 64,369
---------- ---------- ---------- ---------
Loss from operations........................... (30,986) (4,572) - (35,558)
Interest income, net........................... 6,645 - - 6,645
Other expense, net............................. (371) - - (371)
---------- ---------- ---------- ---------
Net loss applicable to common stockholders..... (24,712) (4,572) - (29,284)
========== ========== ========== =========
Basic and diluted net loss per share........... (.31) (.06) - (.37)
========== ========== ========== =========
Shares used to calculate basic and diluted net
loss per share................................. 80,153 80,153 80,153 80,153
========== ========== ========== =========
Six Months Ended June 30, 2001
--------------------------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ---------- ----------
Revenues..................................... $ 234,774 $ (101,603) $ (2,763) $ 130,408
Revenues from related parties................ - 11,110 - 11,110
--------- ---------- -------- ---------
Total revenues............................... 234,774 (90,493) (2,763) 141,518
Cost of revenues............................. 62,046 - (890) 61,156
--------- ---------- -------- ---------
Gross profit................................. 172,728 (90,493) (1,873) 80,362
--------- ---------- -------- ---------
Operating expenses:
Sales and marketing....................... 131,910 (8,721) (1,873) 121,316
Product development....................... 14,414 (250) - 14,164
General and administrative................ 53,622 (579) - 53,043
Amortization of intangible assets......... 88,444 (50) - 88,394
Acquisition-related and other charges..... 15,632 - - 15,632
--------- ---------- -------- ---------
Total operating expenses..................... 304,022 (9,600) (1,873) 292,549
--------- ---------- -------- ---------
Loss from operations......................... (131,294) (80,893) - (212,187)
Interest income, net......................... 8,219 - - 8,219
Other expense, net........................... (16,148) (562) - (16,710)
--------- ---------- -------- ---------
Net loss applicable to common stockholders... $(139,223) $ (81,455) - $(220,678)
========= ========== ======== =========
Basic and diluted net loss per share......... $ (1.37) $ (.81) - $ (2.18)
========= ========== ======== =========
Shares used to calculate basic and diluted
net loss per share........................... 101,345 101,345 101,345 101,345
========= ========== ======== =========
Six Months Ended June 30, 2000
--------------------------------------------------
As Accounting
Reported Adjustments Change Restated
---------- ----------- ---------- ----------
Revenues..................................... $ 88,751 (6,143) (2,702) 79,906
Revenues from related parties................ - - - -
--------- ---------- -------- ---------
Total revenues............................... 88,751 (6,143) (2,702) 79,906
Cost of revenues............................. 24,191 - - 24,191
--------- ---------- -------- ---------
Gross profit................................. 64,560 (6,143) (2,702) 55,715
Operating expenses:
Sales and marketing....................... 79,625 (950) (2,702) 75,973
Product development....................... 5,764 - - 5,764
General and administrative................ 24,437 (621) - 23,816
Amortization of intangible assets......... 19,327 - - 19,327
Acquisition-related and other charges..... - - - -
--------- ---------- -------- ---------
Total operating expenses..................... 129,153 (1,571) (2,702) 124,880
--------- ---------- -------- ---------
Loss from operations......................... (64,593) (4,572) - (69,165)
Interest income, net......................... 11,054 - - 11,054
Other expense, net........................... (385) - - (385)
--------- ---------- -------- ---------
Net loss applicable to common stockholders... (53,924) (4,572) - (58,496)
========= ========== ======== =========
Basic and diluted net loss per share......... (0.70) (.06) - (.76)
========= ========== ======== =========
Shares used to calculate basic and diluted
net loss per share........................... 77,102 77,102 77,102 77,102
========= ========== ======== =========
Overview
Homestore.com, Inc., or Homestore.com or Homestore, has created an online
marketplace that is the leading destination on the Internet for home and real
estate-related information, products and services, based on the number of
visitors, time spent on the web sites and number of property listings. Through
our family of web sites, Homestore provides a wide variety of information and
tools for consumers, and is the leading supplier of online media and technology
solutions for real estate industry professionals, advertisers and providers of
home and real estate-related products and services. To provide consumers with
real estate listings,
18
access to real estate professionals and other home and real estate-related
information and resources, we have established relationships with key industry
participants. These participants include real estate market leaders such as the
National Association of REALTORS(R), or the NAR, the National Association of
Home Builders, or the NAHB, the largest Multiple Listing Services, or MLSs, the
NAHB Remodelors Council, the National Association of the Remodeling Industry(R),
or NARI, the American Institute of Architects, or AIA, the Manufactured Housing
Institute, or MHI, real estate franchises, brokers, builders and agents. We also
have distribution agreements with a number of leading Internet portal and search
engine web sites, including the America Online, Inc., or AOL, network of
properties.
Basis of Presentation
Initial Business and RealSelect Holding Structure. We were incorporated in
1993 under the name of InfoTouch Corporation, or InfoTouch, with the objective
of establishing an interactive network of real estate "kiosks" for consumers to
search for homes. In 1996, we began to develop the technology to build and
operate real estate related Internet sites. Effective December 4, 1996, we
entered into a series of agreements with the NAR and several investors. Under
these agreements, we transferred technology and assets relating to advertising
the listing of residential real estate on the Internet to a newly-formed
company, NetSelect LLC, or LLC, in exchange for a 46% ownership interest in LLC.
The investors contributed capital to a newly-formed company, NetSelect, Inc., or
NSI, which owned 54% of LLC. LLC received capital funding from NSI and in turn
contributed the assets and technology contributed by InfoTouch as well as the
NSI capital to a newly formed entity, RealSelect, Inc., or RealSelect, in
exchange for common stock representing an 85% ownership interest in RealSelect.
Also effective December 4, 1996, RealSelect entered into a number of formation
agreements with and issued cash and common stock representing a 15% ownership
interest in RealSelect to the NAR in exchange for the rights to operate the
REALTOR.com(R) web site and pursue commercial opportunities relating to the
listing of real estate on the Internet.
The agreements governing RealSelect required us to terminate our remaining
activities, which were insignificant at that time, and dispose of our remaining
assets and liabilities, which we did in early 1997. Accordingly, following the
formation, NSI, LLC and InfoTouch were shell holding companies for their
investments in RealSelect.
Our initial operating activities primarily consisted of recruiting
personnel, developing our web site content and raising our initial capital. We
developed our first web site, REALTOR.com(R), in cooperation with the NAR and
actively began marketing our advertising products and services to real estate
professionals in January 1997.
Reorganization of Holding Structure. Under the formation agreements of
RealSelect, the reorganization of the initial holding structure was provided for
at an unspecified future date. On February 4, 1999, NSI stockholders entered
into a non-substantive share exchange with and were merged into InfoTouch. In
addition, LLC was merged into InfoTouch. We refer to this transaction as the
Reorganization. The share exchange lacked economic substance and, therefore, was
accounted for at historical cost. For a further discussion relating to the
accounting for the Reorganization, see Notes 1, 2 and 3 of Homestore.com's Notes
to the Consolidated Financial Statements included in the annual report on Form
10-K for the year ended December 31, 2000. We (InfoTouch) changed our corporate
name to Homestore.com, Inc. in August 1999.
Acquisitions. In January 2001, we acquired certain assets and licenses and
assumed certain liabilities from Internet Pictures Corporation, or iPIX for $8.1
million in cash and a note in the amount of $2.25 million. In January 2001, we
acquired certain assets and assumed certain liabilities from Computers for
Tracts, Inc. for approximately $4.5 million in cash and 162,850 shares of the
our common stock valued at approximately $5.6 million. In February 2001, we
acquired all the outstanding shares of HomeWrite, Inc. in exchange for 196,549
shares of our common stock valued at $5.6 million and assumed the HomeWrite
stock option plan consisting of 196,200 outstanding stock options with an
estimated fair value of $4.5 million. In February 2001, we acquired certain
assets and assumed certain liabilities from Homebid.com, Inc. for approximately
$3.5 million in cash. In February 2001, we acquired all of the outstanding
shares of Move.com, Inc. and Welcome Wagon International, Inc., or collectively
referred to as the Move.com Group, from Cendant Corporation, or Cendant, valued
at approximately $757.3 million. In connection with the acquisition, we issued
an aggregate of 21.4 million shares of our common stock in exchange for all the
outstanding shares of capital stock of the Move.com Group, and assumed
approximately 3.2 million outstanding stock options of the Move.com Group.
Cendant is restricted in its ability to sell the Homestore shares it received in
the acquisition and has agreed to vote such shares on all corporate matters in
proportion to the voting decisions of all other stockholders. In addition,
Cendant has agreed to a ten-year standstill agreement that, under most
conditions, prohibits Cendant from acquiring additional Homestore.com shares. In
May 2001, we acquired certain assets and assumed certain liabilities from
Homestyles Publishing and Marketing, Inc., or Homestyles, for $22.5 million in
cash. The acquisitions described above have been accounted for under the
purchase method in accordance with generally accepted accounting principles.
19
In connection with and contingent upon the close of the acquisition of the
Move.com Group, we entered into a series of commercial agreements for the sale
of various technology and subscription-based products to Real Estate Technology
Trust ("RETT"), an independent trust established in 1996 to provide technology
services and products to Cendant's real estate franchisees that is considered a
related party of the Company. Under the commercial agreements, RETT committed to
purchase $75.0 million in products to be delivered to agents, brokers and other
Cendant real estate franchisees over the next three years. Revenues from RETT
and Cendant in the three-month and six-month periods ended June 30, 2001 were
$8.6 million and $11.1 million, respectively, and are reported separately in
these financial statements. It is not practical to determine the related costs
of such revenues.
We may seek to continue to expand our current offerings by acquiring
additional businesses, technologies, product lines or service offerings from
third parties. We may be unable to identify future acquisition targets and may
be unable to complete future acquisitions. Even if we complete an acquisition,
we may have difficulty in integrating it with our current offerings, and any
acquired features, functions or services may not achieve market acceptance or
enhance our brand loyalty. Integrating newly acquired organizations and products
and services could be expensive, time consuming and a strain on our resources.
Three Months Ended June 30, 2001 and 2000
Revenues
Revenues increased to $77.7 million for the three months ended June 30,
2001 from revenues of $42.2 million for the three months ended June 30, 2000.
The increase was primarily due to increased revenue from professional
subscriptions as well as an increase in advertising revenue.
Subscription revenues, which represented approximately 67% of total
revenues for the three months ended June 30, 2001, grew 82% from the three
months ended June 30, 2000. The growth in revenue from professional
subscriptions was due to increases in the number of professionals on the
Homestore.com family of web sites, including a bulk purchase of subscription-
based products. The number of professional subscriptions increased by 202% to
approximately 368,000 compared to totals for the three months ended June 30,
2000. The increase in the number of professionals and the corresponding increase
in professional subscriptions revenue was also due to the acquisition of the
Move.com Group. Sales of virtual tours also contributed to the increase.
Advertising revenues, which represented approximately 12% of total
revenues for the three months ended June 30, 2001, declined 30% from the three
months ended June 30, 2000. The decrease was driven primarily by the non-renewal
of several advertising and sponsorship accounts and the general softening in the
on-line advertising market. Although our advertising revenue has grown
significantly in absolute dollars in recent periods, we may be unable to sustain
growth, as there has been a softening in the online advertising market in
general. If this softening continues or worsens, our advertising revenues could
be adversely affected.
Other revenues which represented approximately 21% of total revenues for
the three months ended June 30, 2001 were new revenues from companies acquired
in 2001. These acquired companies operated primarily in the direct marketing
business.
Cost of Revenues
Cost of revenues, including non-cash stock-based charges, increased to
$33.4 million for the three months ended June 30, 2001 from cost of revenues of
$13.4 million for the three months ended June 30, 2000. The increase was due
primarily to our overall increased sales volume as well as increases in
salaries, royalties, hosting costs and depreciation during the three months
ended June 30, 2001 as compared to the three months ended June 30, 2000. Also
contributing to the increase in cost of revenues were our recent acquisitions,
primarily the acquisition of the Move.com Group. We anticipate continuing
increases in cost of revenues in absolute dollars as our revenues increase and
we continue to make capital investments to increase the capacity of our family
of web sites in order to accommodate traffic increases.
Gross margin percentage for the three months ended June 30, 2001 was 57.1%,
up from gross margin percentage of 68.2% for the three months ended June 30,
2000. The decrease in gross margin percentage was primarily due to the decrease
in advertising revenues which historically have larger gross margins.
Operating Expenses
Sales and marketing. Sales and marketing expenses, including non-cash
stock-based charges, increased to $62.5 million for the three months ended June
30, 2001 from sales and marketing of $37.7 million for the three months ended
June 30, 2000. The
20
increase was due to increase in salaries and commissions, customer service
related costs and stock-based charges. Stock-based charges increased by $10.5
million to $18.8 million for the three months ended June 30, 2001 from $8.2
million for the three months ended June 30, 2000 primarily due to amortization
of stock-based charges relating to an Internet portal distribution agreement. In
April 2000, in connection with our marketing and distribution agreement with
AOL, we recorded prepaid distribution expense in the amount of $185.9 million,
which represented the fair market value of the approximately 3.9 million shares
issued to AOL and the fair market value of the guaranteed stock price, which was
determined using the Black-Scholes option pricing model. The $185.9 million
stock-based charge is being expensed ratably to sales and marketing over the
five-year term of the agreement, resulting in a quarterly expense of
approximately $9.3 million. Also contributing to the increase in sales and
marketing expenses were our acquisitions.
Product development. Product development expenses, including non-cash
stock-based charges, increased to $8.7 million for the three months ended June
30, 2001 from product development of $3.7 million for the three months ended
June 30, 2000. The increase in product development costs was due to increased
costs associated with the continuing expansion of the Homestore.com web sites,
as well as our continued development of professional productivity tools. Also
contributing to the increase in product development expenses were our
acquisitions.
General and administrative. General and administrative expenses, including
non-cash stock-based charges, increased to $30.7 million for the three months
ended June 30, 2001 from general and administrative expenses of $12.0 million
for the three months ended June 30, 2000. The increase was primarily due to
hiring key management personnel and increased staffing levels required to
support our significant growth and depreciation related to our capital
expenditures to support our expanded operations and infrastructure. Facility
costs increased primarily due to our new corporate and central service offices.
Also contributing to the increase in general and administrative expenses were
our acquisitions, primarily the acquisition of the Move.com Group and iPIX.
Amortization of intangible assets. Amortization of intangible assets was
$54.6 million for the three months ended June 30, 2001 from amortization of
$10.9 million for the three months ended June 30, 2000. The increase in
amortization was due to our acquisitions, primarily the Move.com Group.
Acquisition-related and other charges. Acquisition-related and other
charges were $8.6 million for the three months ended June 30, 2001 related to
the dissolution of one of our subsidiaries. The charges primarily consist of
severance, facilities shut-down costs and other dissolution costs.
Stock-based charges. The following chart summarizes the stock-based charges
that have been included in the following captions for each of the periods
presented (in thousands):
Three Months
Ended June 30,
--------------------------
2001 2000
---- ----
(Restated) (Restated)
Revenues................................. $ 522 $ 1,765
Cost of revenues......................... 81 148
Sales and marketing...................... 18,758 8,212
Product development...................... 76 140
General and administrative............... 414 756
------- -------
$19,851 $11,021
======= =======
Stock-based charges increased by $8.8 million to $19.8 million for the
three months ended June 30, 2001 from $11.0 million for the three months ended
June 30, 2000 primarily as a result of amortization relating to the AOL Internet
portal distribution agreement and the BGI marketing agreement.
Other Expense, Net
Other expense, net, increased to $3.9 million for the three months ended
June 30, 2001 from other expense, net of $371,000 for the three months ended
June 30, 2000. In April 2000, in connection with our marketing and distribution
agreement with AOL, we recorded a non-current liability (named distribution
obligation on the balance sheet) in the amount of $185.9 million, which
represented the fair market value of the approximately 3.9 million shares issued
to AOL and the fair market value of the guaranteed stock price, which was
determined using the Black-Scholes option pricing model. The difference between
the guaranteed stock price and the distribution obligation recorded in April
2000 is being expensed ratably to other expense over the five-year term of the
agreement, resulting in a quarterly expense of approximately $3.7 million.
21
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income taxes
for the three months ended June 30, 2001 and 2000. As of December 31, 2000, we
had $190.8 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning in 2007. We have provided a full valuation
allowance on our deferred tax assets, consisting primarily of net operating loss
carryforwards, due to the likelihood that we may not generate sufficient taxable
income during the carry-forward period to utilize the net operating loss
carryforwards.
Segment Information
We currently operate in two principal business segments and have other
business lines which are aggregated as "other". This is consistent with the
data that is made available to our management to assess performance and make
decisions. The two business segments consist of professional subscriptions and
advertising. For further information regarding segments, refer to Note 12 of the
Notes to the Unaudited Condensed Consolidated Financial Statements included
elsewhere in this Form 10-Q/A.
Segment revenues. Subscription revenues, which represented approximately
67% of total revenues for the three months ended June 30, 2001, grew 82% from
the three months ended June 30, 2000. The growth in revenue from professional
subscriptions was due to increases in the number of professionals on the
Homestore.com family of web sites, including a bulk purchase of subscription-
based products. The number of professional subscriptions increased by 202% to
approximately 368,000 compared to totals at three months ended June 30, 2000.
The increase in the number of professionals and the corresponding increase in
professional subscriptions revenue was also due to the acquisition of the
Move.com Group. Sales of virtual tours also contributed to the increase.
Advertising revenues, which represented approximately 12% of total
revenues for the three months ended June 30, 2001, declined 30% from the three
months ended June 30, 2000. The decrease was driven primarily by the non-renewal
of several advertising and sponsorship accounts and the general softening in
the on-line advertising market.
Other revenues which represented approximately 21% of total revenues for
the three months ended June 30, 2001 were new revenues from companies acquired
in 2001. These acquired companies operated primarily in the direct marketing
business.
Segment expenses. Subscription expenses increased to $28.5 million for the
three months ended June 30, 2001 from subscription expenses of $14.2 million for
the three months ended June 30, 2000. The increase was primarily due to an
overall increase in sales volume, increased marketing to our professional
customers such as REALTORS(R) and an increase in staffing levels to support our
growth. In addition, our acquisitions of The Hessel Group, iPIX and the Move.com
Group also contributed to the increase.
Advertising expenses increased to $5.4 million for the three months ended
June 30, 2001 from advertising expenses of $2.9 million for the three months
ended June 30, 2000. The increase was due to an increase in salaries and
commissions relating to the increase in advertising sales in absolute dollars.
Other expenses were $14.1 million for the three months ended June 30, 2001.
There were no corresponding expenses in 2000.
Unallocated expenses increased to $152.4 million for the three months ended
June 30, 2001 from unallocated expenses of $60.6 million for the three months
ended June 30, 2000. The increase was due to an increase in amortization of
intangible assets due to acquisitions, an increase in the stock-based charges
primarily relating to an Internet portal distribution agreement and costs
associated with the dissolution of one of our subsidiaries. Also contributing to
the increase in unallocated expenses were increases in costs associated with the
continuing expansion of our web sites, increases in legal and professional fees,
increases in costs relating to marketing and listing agreements, and increases
in salaries and staffing levels required to support our significant growth,
expanded operations and infrastructure.
Six Months Ended June 20, 2001 and 2000
Revenues
Revenues increased to $141.5 million for the six months ended June 30, 2001
from revenues of $79.9 million for the six months ended June 30, 2000. The
increase was primarily due to increased revenue from professional subscriptions
as well as an increase in advertising revenue.
22
Subscription revenues, which represented approximately 67% of total
revenues for the six months ended June 30, 2001, grew 85% from the six months
ended June 30, 2000. The growth in revenue from professional subscriptions was
due to increases in the number of professionals on the Homestore.com family of
web sites, including a bulk purchase of subscription-based products. The number
of professional subscriptions increased by 202% to approximately 368,000
compared to totals for the six months ended June 30, 2000. The increase in the
number of professionals and the corresponding increase in professional
subscriptions revenue was also due to the acquisition of the Move.com Group.
Sales of virtual tours also contributed to the increase.
Advertising revenues, which represented approximately 17% of total
revenues for the six months ended June 30, 2001, declined 17% from the six
months ended June 30, 2000. The decrease was driven primarily by the non-renewal
of several advertising and sponsorship accounts and the general softening in the
online advertising market. Although our advertising revenue has grown
significantly in absolute dollars in recent periods, we may be unable to sustain
growth, as there has been a softening in the online advertising market in
general. If this softening continues or worsens, our advertising revenues could
be adversely affected.
Other revenues which represented approximately 16% of total revenues for
the six months ended June 30, 2001, were new revenues from companies acquired in
2001. These acquired companies operated primarily in the direct marketing
business.
Cost of Revenues
Cost of revenues, including non-cash stock-based charges, increased to
$61.1 million for the six months ended June 30, 2001 from cost of revenues of
$24.2 million for the six months ended June 30, 2000. The increase was due
primarily to our overall increased sales volume as well as increases in
salaries, royalties, hosting costs and depreciation during the six months ended
June 30, 2001 as compared to the six months ended June 30, 2000. Also
contributing to the increase in cost of revenues were our acquisitions,
primarily the acquisition of the Move.com Group. We anticipate continuing
increases in cost of revenues in absolute dollars as our revenues increase and
we continue to make capital investments to increase the capacity of our family
of web sites in order to accommodate traffic increases.
Gross margin percentage for the six months ended June 30, 2001 was 56.8%
down from gross margin percentage of 69.7% for the six months ended June 30,
2000. The decrease in gross margin percentage was primarily due to the decrease
in advertising revenues which historically have larger gross margins.
Operating Expenses
Sales and marketing. Sales and marketing expenses, including non-cash
stock-based charges, increased to $121.3 million for the six months ended June
30, 2001 from sales and marketing of $76.0 million for the six months ended June
30, 2000. The increase was due to an increase in salaries and commissions,
customer service related costs and stock-based charges. Stock-based charges
increased by $21.3 million to $38.0 million for the six months ended June 30,
2001 from $16.7 million for the six months ended June 30, 2000 primarily due to
amortization of stock-based charges relating to an Internet portal distribution
agreement. In April 2000, in connection with our marketing and distribution
agreement with AOL, we recorded prepaid distribution expense in the amount of
$185.9 million, which represented the fair market value of the approximately 3.9
million shares issued to AOL and the fair market value of the guaranteed stock
price, which was determined using the Black-Scholes option pricing model. The
$185.9 million stock-based charge is being expensed ratably to sales and
marketing over the five-year term of the agreement, resulting in an expense of
approximately $18.6 million for the six months ended June 30, 2001.
Product development. Product development expenses, including non-cash
stock-based charges, increased to $14.2 million for the six months ended June
30, 2001 from product development of $5.8 million for the six months ended June
30, 2000. The increase in product development costs was due to increased costs
associated with the continuing expansion of the Homestore.com web sites as well
as our continued development of professional productivity tools. Also
contributing to the increase in product development expenses were our
acquisitions.
General and administrative. General and administrative expenses, including
non-cash stock-based charges, increased to $53.0 million for the six months
ended June 30, 2001 from general and administrative expenses of $23.8 million
for the six months ended June 30, 2000. The increase was primarily due to hiring
key management personnel, increased staffing levels required to support our
significant growth and depreciation related to our capital expenditures to
support our expanded operations and infrastructure. Facility costs increased
primarily due to our new corporate and central service offices. Also
contributing to the increase in general and administrative expenses were our
acquisitions, primarily the acquisition of the Move.com Group and iPIX.
23
Amortization of intangible assets. Amortization of intangible assets was
$88.4 million for the six months ended June 30, 2001 from amortization of $19.3
million for the six months ended June 30, 2000. The increase in amortization was
due to our acquisitions, primarily the acquisition of the Move.com Group.
Acquisition-related and other charges. Acquisition-related and other
charges were $15.6 million for the six months ended June 30, 2001 related to the
stay bonuses, severance and facilities shut-down costs associated with the
acquisition of the Move.com Group and costs associated with the dissolution of
one of our subsidiaries.
Stock-based charges. The following chart summarizes the stock-based charges
that have been included in the following captions for each of the periods
presented (in thousands):
Six Months Ended
June 30,
--------
2001 2000
---- ----
(Restated) (Restated)
Revenues........................................ $ 1,873 $ 2,702
Cost of revenues................................ 186 346
Sales and marketing............................. 38,057 16,698
Product development............................. 175 326
General and administrative...................... 949 1,763
---------- ---------
$ 41,240 $ 21,835
========== =========
Stock-based charges increased by $19.4 million to $41.2 million for the six
months ended June 30, 2001 from $21.8 million for the six months ended June 30,
2000 primarily as a result of amortization relating to the AOL Internet portal
distribution agreement and the BGI marketing agreement.
Other Expense, Net
Other expense, net, increased to $16.7 million for the six months ended
June 30, 2001 from other expense, net of $385,000 for the six months ended June
30, 2000. The increase primarily related to an $11.1 million write-down of a
portion of our portfolio of cost investments to reflect their net realizable
values based on our review of the companies' financial conditions, cash flow
projections and operating performances.
In April 2000, in connection with our marketing and distribution agreement
with AOL, we recorded a non-current liability (named distribution obligation on
the balance sheet) in the amount of $185.9 million, which represented the fair
market value of the approximately 3.9 million shares issued to AOL and the fair
market value of the guaranteed stock price, which was determined using the
Black-Scholes option pricing model. The difference between the guaranteed stock
price and the distribution obligation recorded in April 2000 is being expensed
ratably to other expense over the five-year term of the agreement, resulting in
an expense of approximately $7.4 million for the six months ended June 30, 2001.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income taxes
for the six months ended June 30, 2001 and 2000. As of December 31, 2000, we had
$190.8 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning in 2007. We have provided a full valuation
allowance on our deferred tax assets, consisting primarily of net operating loss
carryforwards, due to the likelihood that we may not generate sufficient taxable
income during the carry-forward period to utilize the net operating loss
carryforwards.
Segment Information
We currently operate in two principal business segments and have other
business lines which are aggregated as "other". This is consistent with the data
that is made available to our management to assess performance and make
decisions. The two business segments consist of professional subscriptions and
advertising. For further information regarding segments, refer to Note 12 of the
Notes to the Unaudited Condensed Consolidated Financial Statements included
elsewhere in this Form 10-Q/A.
Segment revenues. Subscription revenues, which represented approximately
67% of total revenues for the six months ended June 30, 2001, grew 85% from the
six months ended June 30, 2000. The growth in revenue from professional
subscriptions was
24
due to increases in the number of professionals on the Homestore.com family of
web sites, including a bulk purchase of subscription-based products. The number
of professional subscriptions increased by 202% to approximately 368,000
compared to totals at six months ended June 30, 2000. The increase in the number
of professionals and the corresponding increase in professional subscriptions
revenue was also due to the acquisition of the Move.com Group. Sales of virtual
tours also contributed to the increase.
Advertising revenues, which represented approximately 17% of total revenues
for the six months ended June 30, 2001, declined 17% from the six months ended
June 30, 2000. The decrease was driven primarily by the non-renewal of several
advertising and sponsorship accounts and the general softening in the on-line
advertising market.
Other revenues which represented approximately 16% of total revenues for
the six months ended June 30, 2001 were new revenues from companies acquired in
2001. These acquired companies operated primarily in the direct marketing
business.
Segment expenses. Subscription expenses increased to $52.0 million for the
six months ended June 30, 2001 from subscription expenses of $25.7 million for
the six months ended June 30, 2000. The increase was primarily due to an overall
increase in sales volume, increased marketing to our professional customers such
as REALTORS(R) and an increase in staffing levels to support our growth. In
addition, our acquisitions of The Hessel Group, iPIX and the Move.com Group also
contributed to the increase.
Advertising expenses increased to $17.4 million for the six months ended
June 30, 2001 from advertising expenses of $4.3 million for the six months ended
June 30, 2000. The increase was due to an increase in salaries and commissions
relating to the increase in advertising sales.
Other expenses were $19.1 million for the six months ended June 30, 2001.
There were no corresponding expenses in 2000.
Unallocated expenses increased to $265.3 million for the six months ended
June 30, 2001 from unallocated expenses of $119.1 million for the six months
ended June 30, 2000. The increase was due to an increase in amortization of
intangible assets due to acquisitions, an increase in the stock-based charges
primarily relating to an Internet portal distribution agreement, costs
associated with the write-down of a portion of our portfolio of cost
investments, acquisition-related charges and charges related to the dissolution
of one of our subsidiaries. Also contributing to the increase in unallocated
expenses were increases in costs associated with the continuing expansion of our
web sites, increases in legal and professional fees, increases in costs relating
to marketing and listing agreements, and increases in salaries and staffing
levels required to support our significant growth, expanded operations and
infrastructure.
Liquidity and Capital Resources
Net cash provided by operating activities of $7.8 million for the six
months ended June 30, 2001 was attributable to the net loss, offset by non-cash
expenses including depreciation, amortization of intangible assets, accretion of
distribution obligation, provision for doubtful accounts, stock-based charges
and non-cash items related to the write-down of a portion of our portfolio of
cost investments, aggregating to $166.4 million. Also contributing to cash
provided by operations were the changes in operating assets and liabilities, net
of acquisitions, of $62.1 million. Net cash used in operating activities was
$40.3 million for the six months ended June 30, 2000. Net cash used in operating
activities was the result of the net operating loss, offset by non-cash expenses
including depreciation, amortization of intangible assets and stock-based
charges, aggregating to $42.9 million. Adding to the cash used in operations
were the changes in operating assets and liabilities, net of acquisitions, of
$24.7 million.
Net cash used in investing activities of $57.6 million for the six months
ended June 30, 2001 was attributable to purchases of short-term investments of
$66.3 million offset by maturities of short-term investments of $90.5 million,
capital expenditures of $29.4 million and cash paid for acquisitions of $52.4
million including acquisition-related costs. Net cash used in investing
activities of $172.4 million for the six months ended June 30, 2000 was
attributable to the purchase of cost and equity investments of $27.7 million,
purchases of short-term investments of $151.1 million offset by maturities of
short-term investments of $40.0 million, capital expenditures of $11.9 million
and cash paid for acquisitions of $21.6 million including acquisition-related
costs.
Net cash provided by financing activities of $44.3 million for the six
months ended June 30, 2001 was primarily attributable to the proceeds from
exercise of stock options, warrants and share issuances under our employee stock
purchase plan of $46.8 million, proceeds from the payment of stockholders' notes
of $1.7 million, offset by the issuance of notes receivable of $3.7 million. Net
cash provided by financing activities of $303.2 million for the six months ended
June 30, 2000 was attributable to our follow-on public offering of common stock
of $428.9 million, proceeds from exercise of stock options, warrants and share
issuances under our employee stock purchase plan of $6.4 million, subsidiary
equity transactions of $10.9 million, offset by the repayment of notes payable
of $38.3 million, the transfer of $103.1 million to restricted cash, and
issuance of notes receivable of $1.7 million. In January 2000, we completed our
follow-on public offering to the public in which we sold 4,073,139 shares of our
25
common stock at a price of $110 per share, raising approximately $428.9 million,
after deducting underwriting discounts, commissions and offering expenses.
In March 2000, we issued 1,085,271 shares of our common stock to BGI in
connection with entering into a ten-year marketing agreement. During the six
months following March 2002, for any shares it then owns, BGI has the right to
require us to compensate it for any shortfall between our trailing 30-day
average closing price per share and $64.50. At our option, we may compensate BGI
by making a cash payment equal to the shortfall amount, by delivering stock with
a value equal to the shortfall amount or by repurchasing the shares for $64.50
per share in cash.
In April 2000, we entered into a five-year marketing and distribution
agreement with AOL. As part of this agreement, we paid AOL $20.0 million in cash
and issued to AOL approximately 3.9 million shares of our common stock. In the
agreement, we have guaranteed that the 30-day average closing price per share of
our common stock will be:
. $65.64 per share with respect to 60% of AOL's shares on July 31, 2003;
. $68.50 per share with respect to 20% of AOL's shares on July 31, 2004;
and
. $68.50 per share with respect to the remaining 20% of AOL's shares on
July 31, 2005.
This guarantee only applies to shares that continue to be held by AOL at the
applicable date.
If there is a shortfall between the guaranteed price and the 30-day average
closing price per share on the applicable date, we would have to make cash
payments to AOL. The aggregate amount of cash payments we would be required to
make in performing under this agreement is limited to $90.0 million. To the
extent that the aggregate shortfall exceeds $90.0 million over the course of the
agreement, AOL can shorten the term of the agreement. We have placed $90.0
million in restricted cash on our balance sheet, which represents a letter of
credit in favor of AOL for this obligation. If we are obligated to pay AOL less
than $40.0 million at the first guarantee date of July 31, 2003, then we will
have the right to reduce the restricted cash to $50.0 million, which will then
represent our maximum aggregate cash payment we would make in performing under
the agreement after July 31, 2003.
Since inception, we have incurred losses from operations. As of June 30,
2001, we had an accumulated deficit of $522.5 million, cash and cash equivalents
of $162.1 million and short-term investments of $49.6 million. We have no
material commitments other than those under operating lease agreements and
distribution and marketing agreements. We currently anticipate that our existing
cash and cash equivalents, and any cash generated from operations will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next 12 months. However, in the longer term, we
face significant risks associated with the successful execution of our business
strategy and may need to raise additional capital in order to fund more rapid
expansion, to expand our marketing activities, to develop new or enhance
existing services or products, to satisfy our obligations to AOL as described
above and to respond to competitive pressures or to acquire complementary
services, businesses or technologies. If we are not successful in generating
sufficient cash flow from operations, we may need to raise additional capital
through public or private financing, strategic relationships or other
arrangements. This additional capital , if needed, might not be available on
terms acceptable to us, or at all. Our failure to raise sufficient capital when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional capital were raised through
the issuance of equity securities, the percentage of our stock owned by our
then-current stockholders would be reduced. Furthermore, these equity securities
might have rights, preferences or privileges senior to those of our common and
preferred stock. In addition, the Company's liquidity could be adversely
impacted by the litigation referred to in Note 14 to our Condensed Consolidated
Financial Statements included herein.
Risk Factors
In addition to the factors discussed in the "Liquidity and Capital
Resources" section above and in our Form 10-K for the year ended December 31,
2000 under the caption "Risk Factors" and elsewhere, the following additional
factors may affect our future results. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
Risks Related to our Business:
Our agreement with the National Association of REALTORS(R) could be
terminated by it.
26
The REALTOR.com(R) trademark and web site address and the REALTOR(R)
trademark are owned by the NAR. The NAR licenses these trademarks to our
subsidiary RealSelect under a license agreement, and RealSelect operates the
REALTOR.com(R) web site under an operating agreement with the NAR.
Although the REALTOR.com(R) operating agreement is a lifetime agreement,
the NAR may terminate it for a variety of reasons. These include:
. the acquisition of Homestore.com or RealSelect;
. a substantial decrease in the number of property listings on our
REALTOR.com(R) site; and
. a breach of any of our other obligations under the agreement that we
do not cure within 30 days of being notified by the NAR of the breach.
Absent a breach by the NAR, the agreement does not contain provisions that
allow us to terminate.
Our agreement with the NAR contains a number of provisions that could
restrict our operations.
Our operating agreement with the NAR contains a number of provisions that
restrict how we operate our business. These restrictions include:
. we must make quarterly royalty payments of up to 15% of RealSelect's
operating revenues in the aggregate to the NAR and the entities that
provide us the information for our real property listings, which we
refer to as our data content providers;
. we are restricted in the type and subject matter of, and the manner in
which we display, advertisements on the REALTOR.com(R) web site;
. the NAR has the right to approve how we use its trademarks, and we
must comply with its quality standards for the use of these marks;
. we must meet performance standards relating to the availability time
of the REALTOR.com(R) web site;
. the NAR has the right to review, approve and request changes to the
content on the pages of our REALTOR.com(R) web site; and
. we may be restricted in our ability to create additional web sites or
pursue other lines of business that engage in displaying real property
advertisements in electronic form by the terms of our agreements with
the NAR.
In addition, our operating agreement with the NAR contains restrictions on
how we can operate the REALTOR.com(R) web site. For instance, we can only enter
into agreements with entities that provide us with real estate listings, such as
MLSs, on terms approved by the NAR. In addition, the NAR can require us to
include on REALTOR.com(R) real estate related content it has developed. See
"Certain Relationships and Related Transactions--Operating Agreement with the
National Association of REALTORS(R)" included in our Form 10-K for the year
ended December 31, 2000.
If our operating agreement for REALTOR.com(R) terminates, the NAR would be
able to operate the REALTOR.com(R) web site.
If our operating agreement terminates, we must transfer a copy of the
software that operates the REALTOR.com(R) web site and assign our agreements
with data content providers, such as real estate brokers and MLSs, to the NAR.
The NAR would then be able to operate the REALTOR.com(R) web site itself or with
a third party. Many of these data content agreements are exclusive, and we could
be prevented from obtaining and using listing data from the providers covered by
these transferred agreements until the exclusivity periods lapse.
We are subject to noncompetition provisions with the NAR which could
adversely affect our business.
We obtained the consent of the NAR prior to our acquisition of SpringStreet
and operation of the HomeBuilder.com web sites. In the future, if we were to
acquire or develop another service which provides real estate listings on an
Internet site or through other electronic means, we may need to obtain the prior
consent of the NAR. Any future consents from the NAR, if obtained, could be
conditioned on our agreeing to operational conditions for the new web site or
service. These conditions could
27
include paying fees to the NAR, limiting the types of content or listings on the
web sites or service or other terms and conditions. Our business could be
adversely affected if we do not obtain consents from the NAR, or if a consent we
obtain contains restrictive conditions. These noncompetition provisions and any
required consents, if accepted by us at our discretion, could have the effect of
restricting the lines of business we may pursue.
Our agreement with the National Association of Home Builders contains
provisions that could restrict our operations.
Our operating agreement with the NAHB includes a number of restrictions on
how we operate our HomeBuilder.com web site:
. if the NAR terminates our REALTOR.com(R) operating agreement, for the
next six months the NAHB can terminate this agreement with three
months' prior notice;
. we are restricted in the type and subject matter of advertisements on
the pages of our HomeBuilder.com web site that contain new home
listings; and
. the NAHB has the right to approve how we use its trademarks and we
must comply with its quality standards for the use of its marks.
Our SpringStreet.com web site is subject to a number of restrictions on how
it may be operated.
In agreeing to our acquisition of SpringStreet Inc., the NAR imposed a
number of important restrictions on how we can operate the SpringStreet.com web
site. These include:
. if the consent terminates for any reason, we will have to transfer to
the NAR all data and content, such as listings, on the rental site
that were provided by real estate professionals who are members of the
NAR, known as REALTORS(R);
. listings for rental units in smaller non-apartment properties
generally must be received from a REALTOR(R) or REALTOR(R)-controlled
MLSs in order to be listed on the web site;
. if the consent is terminated, we could be required to operate our
rental properties web site at a different web address;
. if the consent terminates for any reason, other than as a result of a
breach by the NAR, the NAR will be permitted to use a REALTOR(R)-
branded web address, resulting in increased competition;
. without the consent of the NAR, prior to the time we are using a
REALTOR(R)-branded web address, we cannot provide a link on the
SpringStreet.com web site linking to the REALTOR.com(R) web site and
vice versa;
. we cannot list properties for sale on the rental web site for the
duration of our REALTOR.com(R) operating agreement and for an
additional two years;
. we are restricted in the type and subject matter of, and the manner in
which we display, advertisements on the rental web site;
. we must make royalty payments based on the operating revenues of the
rental site to the NAR and our data content providers at the same
rates as under our REALTOR.com(R) operating agreement, except that the
amount payable to data content providers in the aggregate will be
proportionately based on the percentage of the total content on the
site supplied by them; and
. we must offer REALTORS(R) preferred pricing for home pages or enhanced
advertising on the rental web site.
The NAR could revoke its consent to our operating SpringStreet.com.
The NAR can revoke its consent to our operating the SpringStreet.com web
site for reasons which include:
. the acquisition of Homestore.com or RealSelect;
. a substantial decrease in property listings on our REALTOR.com(R) web
site; and
. a breach of any of our obligations under the consent or the
REALTOR.com(R) operating agreement that we do not cure within 30 days
of being notified by the NAR of the breach.
28
The NAR(R) has significant influence over aspects of RealSelect's corporate
governance and has a representative on our board.
Board representatives. The NAR is entitled to have one representative as a
member of our board of directors and two representatives as members of
RealSelect's board of directors.
Approval rights. RealSelect's certificate of incorporation contains a limited
corporate purpose, which purpose is the operation of the REALTOR.com(R) web site
and real property advertising programming for electronic display and related
businesses. Without the consent of six-sevenths of the members of the RealSelect
board of directors, which would have to include at least one NAR appointed
director, this limited purpose provision cannot be amended.
RealSelect's bylaws also contain protective provisions which could restrict
portions of its operations or require us to incur additional expenses. If the
RealSelect board of directors cannot agree on an annual operating budget for
RealSelect, it would use as its operating budget that from the prior year,
adjusted for inflation. Any expenditures in excess of that budget would have to
be funded by Homestore.com. In addition, if RealSelect desired to incur debt or
invest in assets in excess of $2.5 million without the approval of a majority of
its board, including a NAR representative, we would need to fund those
expenditures.
RealSelect cannot take the following actions without the consent of at least
one of the NAR's representatives on its board of directors:
. amend its certificate of incorporation or bylaws;
. pledge its assets;
. approve transactions with affiliates, stockholders or employees in excess
of $100,000;
. change its executive officers;
. declare dividends or make other distributions to its stockholders;
. establish, or appoint any members to, a committee of its board of
directors; or
. issue or redeem any of its equity securities.
We have a history of net losses and expect net losses for the foreseeable
future.
We have experienced net losses in each quarterly and annual period since 1993,
and we incurred operating losses of $212.2 million and $69.2 million for the six
months ended June 30, 2001 and 2000, respectively. As of June 30, 2001, we had
an accumulated deficit of $522.5 million, and we may continue to incur
additional net losses. The size of these net losses will depend, in part, on the
rate of growth in our revenues from broker, agent, home builder and rental
property owners, web hosting fees, advertising sales and sales of other products
and services. The size of our future net losses will also be impacted by non-
cash stock-based charges relating to deferred compensation, stock and warrant
issuances, and amortization of intangible assets. As of June 30, 2001, we had
approximately $1,056.8 million of deferred stock-based charges and intangible
assets to be amortized. In July 2001, the Financial Accounting Standards Board,
or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 142.
Upon adoption of SFAS No. 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease. In connection with
the adoption of SFAS No. 142, we will be required to perform a transitional
goodwill impairment assessment, which could result in future charges relating to
write-downs.
It is critical to our success that we continue to devote financial, sales and
management resources to developing brand awareness for our web sites as well as
for any other products and services we may add. To accomplish this, we will
continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years. With increased expenses, we will need to generate significant additional
revenues to achieve net income. As a result, we may never achieve or sustain net
income, and, if we do achieve net income in any period, we may not be able to
sustain or increase net income on a quarterly or annual basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We must continue to obtain listings from real estate agents, brokers, home
builders, Multiple Listing Services and property owners.
We believe that our success depends in large part on the number of real estate
listings received from agents, brokers, home builders, MLSs and residential,
rental and commercial property owners. Many of our agreements with MLSs, brokers
and agents
29
to display property listings have fixed terms, typically 12 to 36 months. At the
end of the term of each agreement, the other party may choose not to continue to
provide listing information to us on an exclusive basis or at all and may choose
to provide this information to one or more of our competitors instead. We have
expended significant amounts to secure both our exclusive and non-exclusive
agreements for listings of real estate for sale and may be required to spend
additional large amounts or offer other incentives in order to renew these
agreements. If owners of large numbers of property listings, such as large
brokers, MLSs, or property owners in key real estate markets choose not to renew
their relationship with us, our family of web sites could become less attractive
to other real estate industry participants or consumers.
We must dedicate significant resources to market our subscription products and
services to real estate professionals.
Because the annual fee for services sold to real estate professionals is
relatively low, we depend on obtaining sales from a large number of these
customers. It is difficult to reach and enroll new subscribers cost-effectively.
A large portion of our sales force targets real estate professionals who are
widely distributed across the United States. This results in relatively high
fixed costs associated with our sales activities. In addition, our sales
personnel generally cannot efficiently contact real estate professionals on an
individual basis and instead must rely on sales presentations to groups of
agents and/or brokers. Real estate agents are generally independent contractors
rather than employees of brokers. Therefore, even if a broker uses our
subscription products and services, its affiliated agents are not required to
use them.
It is important to our success that we support our real estate professional
customers.
Since many real estate professionals are not sophisticated computer users and
often spend limited amounts of time in their offices, it is important that these
customers find that our products and services significantly enhance their
productivity and are easy to use. To meet these needs, we provide customer
training and have developed a customer support organization that seeks to
respond to customer inquiries as quickly as possible. If our real estate
professional customer base grows, we may need to expand our support organization
further to maintain satisfactory customer support levels. If we need to enlarge
our support organization, we would incur higher overhead costs. If we do not
maintain adequate support levels, these customers could choose to discontinue
using our service.
Our quarterly financial results are subject to significant fluctuations.
Our results of operations could vary significantly from quarter to quarter. In
the near term, we expect to be substantially dependent on sales of our
subscription and advertising products and services. We also expect to incur
significant sales and marketing expenses to promote our brand and services.
Therefore, our quarterly revenues and operating results are likely to be
particularly affected by the number of persons purchasing subscription and
advertising products and services as well as sales and marketing expenses for a
particular period. If revenues fall below our expectations, we will not be able
to reduce our spending rapidly in response to the shortfall.
Other factors that could affect our quarterly operating results include those
described below and elsewhere in this Form
10-Q:
. the amount of advertising sold on our family of web sites, the timing of
payments for this advertising and whether these advertisements are sold by
us directly or on our behalf by America Online or other third parties;
. the level of renewals for our subscription products and services by real
estate agents, brokers and rental property owners and managers;
. the amount and timing of our operating expenses and capital expenditures;
. the amount and timing of non-cash stock-based charges, such as charges
related to deferred compensation or warrants issued to real estate industry
participants; and
. costs and charges related to acquisitions of businesses or technologies.
Because we have expanded our operations, our success will depend on our
ability to manage our growth.
We have rapidly and significantly expanded our operations, both by acquisition
and organic growth, and expect to continue to expand our operations. This growth
has placed, and is expected to continue to place, a significant strain on our
managerial,
30
operational, financial and other resources. For example, we have grown to
approximately 2,900 employees on June 30, 2001 from approximately 2,000
employees on December 31, 2000.
We depend on distribution agreements with a number of Internet portals and
search engine web sites to generate traffic on our family of web sites.
We believe that a substantial portion of our consumer traffic comes from
Internet portals and search engine web sites, including the AOL network of
properties. On some of these sites we are featured as the exclusive provider of
home listings. To secure both exclusive and non-exclusive distribution
relationships, we often pay significant fees. However, we may not experience
sustained increases in user traffic from these distribution relationships.
There is intense competition for placement on Internet portals. Our
distribution agreements have terms ranging from two to five years. When they
expire, we may be unable to renew our existing agreements or enter into
replacement agreements. If any of these agreements terminates without our
renewing it, we could experience a decline in the number of our users and our
competitive position could be significantly weakened. Even if we renew our
agreements or enter into agreements with new providers, we may be required to
pay significant fees to do so and may be unable to retain any exclusivity that
we may have enjoyed under these agreements.
Our family of web sites may not achieve the brand awareness necessary to
succeed.
In an effort to obtain additional consumer traffic, increase usage by the real
estate community and increase brand awareness, we intend to continue to pursue
an aggressive online and off-line brand enhancement strategy. These efforts will
involve significant expense. If our brand enhancement strategy is unsuccessful,
we may fail to attract new or retain existing consumers or real estate
professionals, which would have a material adverse impact on our revenues.
The market for web-based subscription and advertising products and services
relating to real estate is intensely competitive.
Our main existing and potential competitors include web sites offering real
estate related content and services as well as general purpose online services,
and traditional media such as newspapers, magazines and television that may
compete for advertising dollars.
The barriers to entry for web-based services and businesses are low, making it
possible for new competitors to proliferate rapidly. In addition, parties with
whom we have listing and marketing agreements could choose to develop their own
Internet strategies or competing real estate sites upon the termination of their
agreements with us. Many of our existing and potential competitors have longer
operating histories in the Internet market, greater name recognition, larger
consumer bases and significantly greater financial, technical and marketing
resources than we do.
We must attract and retain personnel while competition for personnel in our
industry is intense.
We may be unable to retain our key employees or to attract, assimilate or
retain other highly qualified employees. We have from time to time in the past
experienced, and we expect in the future to continue to experience, difficulty
in hiring and retaining highly skilled employees with appropriate qualifications
as a result of our rapid growth and expansion. Attracting and retaining
qualified personnel with experience in the real estate industry, a complex
industry that requires a unique knowledge base, is an additional challenge for
us. If we do not succeed in attracting new personnel or retaining and motivating
our current personnel, our business will be adversely affected.
We need to continue to develop our content and our product and service
offerings.
To remain competitive, we must continue to enhance and improve the ease of
use, responsiveness, functionality and features of our family of web sites.
These efforts may require us to develop internally or to license increasingly
complex technologies. In addition, many companies are continually introducing
new Internet-related products, services and technologies, which will require us
to update or modify our technology. Developing and integrating new products,
services or technologies into our family of web sites could be expensive and
time consuming. Any new features, functions or services may not achieve market
acceptance or
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enhance our brand loyalty. If we fail to develop and introduce or acquire new
features, functions or services effectively and on a timely basis, we may not
continue to attract new users and may be unable to retain our existing users.
Furthermore, we may not succeed in incorporating new Internet technologies, or
in order to do so, we may incur substantial expenses.
We may experience difficulty in integrating our recent acquisitions and our
acquisition strategy may fail.
We have made a number of recent acquisitions, including Internet Pictures
Corporation and Computers for Tracts, Inc. in January 2001, the Move.com Group,
Homebid.com, Inc. and HomeWrite, Inc. in February 2001 and HomeStyles in May
2001. We currently propose to acquire iPlace. We intend to pursue additional
acquisition opportunities in the future. We may not be able to identify suitable
acquisition candidates, or if we do, we may not be able to enter into agreements
with these companies on favorable terms. In addition, our prior and proposed
acquisitions, as made as any future acquisitions, may result in our not
achieving the desired benefits of the transaction. Risks related to our
acquisitions include:
. difficulties in assimilating the operations of the acquired businesses;
. potential disruption of our existing businesses;
. the potential need to obtain the consent of the NAR;
. assumption of unknown liabilities and litigation;
. our inability to integrate, train, retain and motivate personnel of the
acquired businesses;
. diversion of our management from our day-to-day operations;
. our inability to incorporate acquired products, services and technologies
successfully into our family of web sites;
. potential impairment of relationships with our employees, customers and
strategic partners; and
. inability to maintain uniform standards, controls, procedures and policies.
Our inability to successfully address any of these risks could materially harm
our business.
Future acquisitions could result in dilutive issuances of stock and the need
for additional financing.
We have typically paid for our acquisitions with cash and or by issuing shares
of our capital stock, as we did for the Move.com Group acquisition. In the
future, we may effect other large or small acquisitions by using stock, and this
will dilute our stockholders. We could also use cash or incur additional debt to
pay for future acquisitions. Acquisition financing may not be available on
favorable terms or at all.
Our business is dependent on our key personnel.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel. The loss of the services of
key employees would likely have a significant detrimental effect on our
business.
We have no employment agreements that prevent any of our key personnel from
terminating their employment at any time.
We rely on intellectual property and proprietary rights.
We regard substantial elements of our family of web sites and underlying
technology as proprietary. Despite our precautionary measures, third parties may
copy or otherwise obtain and use our proprietary information without
authorization or develop similar technology independently. Although we have one
patent, we may not achieve the desired protection from, and third parties may
design around, this patent or any other patent that we may obtain in the future.
In addition, in any litigation or proceeding involving our patent, or any other
patent that we may obtain in the future, the patent may be determined invalid or
unenforceable. Any legal action that we may bring to protect our proprietary
information could be expensive and distract management from day-to-day
operations.
Other companies may own, obtain or claim trademarks that could prevent or
limit or interfere with use of the trademarks we use. The REALTOR.com(R) web
site address, or domain name, and trademark and the REALTOR(R) trademark are
important to our
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business and are licensed to us by the NAR. If we were to lose the
REALTOR.com(R) domain name or the use of these trademarks, our business would be
harmed and we would need to devote substantial resources towards developing an
independent brand identity.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and evolving, and we can give no assurance regarding the future viability or
value of any of our proprietary rights.
We may not be able to protect the web site addresses that are important to our
business.
Our web site addresses, or domain names, are important to our business. The
regulation of domain names is subject to change. Some proposed changes include
the creation of additional top-level domains in addition to the current top-
level domains, such as ".com," ".net" and ".org." It is also possible that the
requirements for holding a domain name could change. Therefore, we may not be
able to obtain or maintain relevant domain names for all of the areas of our
business. It may also be difficult for us to prevent third parties from
acquiring domain names that are similar to ours, that infringe our trademarks or
that otherwise decrease the value of our intellectual property.
We could be subject to litigation with respect to our intellectual property
rights.
Other companies may own or obtain patents or other intellectual property
rights that could prevent or limit or interfere with our ability to provide our
products and services. Companies in the Internet market are increasingly making
claims alleging infringement of their intellectual property rights. For example,
in December 1997, we received a letter claiming that our map technology
infringes patents held by another person. We believe this person may have
instituted legal proceedings against two of our competitors. We have received no
further correspondence with respect to this issue and, after discussions with
our patent counsel, we do not believe any of our technology infringes these
patents. However, we could incur substantial costs to defend against these or
any other claims or litigation. If a claim were successful, we could be required
to obtain a license from the holder of the intellectual property or redesign our
advertising products and services.
We may expand into international markets which may expose us to relatively
higher costs and greater risks.
We are exploring the expansion of our operations internationally as part of
our business strategy. The entry into international markets may require
significant management attention and financial resources and may place
additional burdens on our management, administrative, operational and financial
infrastructure. We cannot be certain that our investments in other countries
will produce desired strategic results or levels of revenue or profitability. We
have limited experience in developing localized versions of our products and
marketing and distributing them internationally. As our international operations
expand, our exposure to exchange rate fluctuations will increase. In addition,
we may be subject to the following factors:
. increased financial accounting and reporting burdens and complexities;
. potentially adverse tax consequences;
. compliance with a wide variety of complex foreign laws and treaties;
. reduced protection for intellectual property rights in some countries;
. licenses, tariffs and other trade barriers; and
. disruption from political and economic instability in the countries in
which our operations are located.
These factors may interrupt our ability to conduct business and impose
additional costs upon us.
Depending on the market performance of our common stock, we may be required to
use a significant amount of our cash or issue a significant number of additional
shares under our BGI agreement, and the term of the AOL agreement may be
shortened.
In March 2000, we entered into a 10-year marketing agreement with BGI at which
time, we issued BGI approximately 1.1 million shares of our common stock. During
the six-months following March 2002, for any shares it owns, BGI has the right
to
33
require us to compensate them for any shortfall between our trailing 30-day
average closing price per share and $64.50. At our option, we can compensate BGI
by making a cash payment equal to the shortfall amount by, delivering stock with
a value equal to the shortfall amount or by repurchasing the shares at $64.50
per share in cash.
In April 2000, we entered into a five-year marketing and distribution
agreement with AOL. As part of this agreement, we paid AOL $20.0 million in cash
and issued to AOL approximately 3.9 million shares of our common stock. In the
agreement, we have guaranteed that the 30-day average closing price per share of
our common stock will be:
. $65.64 per share with respect to 60% of AOL's shares on July 31, 2003;
. $68.50 per share with respect to 20% of AOL's shares on July 31, 2004; and
. $68.50 per share with respect to the remaining 20% of AOL's shares on July
31, 2005.
This guarantee only applies to shares that continue to be held by AOL at the
applicable date.
If there is a shortfall between the guaranteed price and the 30-day average
closing price per share on the applicable date, we would have to make cash
payments to AOL. The aggregate amount of cash payments we would be required to
make in performing under this agreement is limited to $90.0 million. To the
extent that the aggregate shortfall exceeds $90.0 million over the course of the
agreement, AOL can shorten the term of the agreement. We have placed $90.0
million in restricted cash on our balance sheet, which represents a letter of
credit in favor of AOL for this obligation. If we are obligated to pay AOL less
than $40.0 million at the first guarantee date of July 31, 2003, then we will
have the right to reduce the restricted cash to $50.0 million, which will then
represent our maximum aggregate cash payment we would make in performing under
the agreement after July 31, 2003.
Real Estate Industry Risks:
Our business is dependent on the strength of the real estate industry, which
is both cyclical and seasonal.
The real estate industry traditionally has been cyclical. Economic swings in
the real estate industry may be caused by various factors. When interest rates
are high or general national and global economic conditions are or are perceived
to be weak, there is typically less sales activity in real estate. A decrease in
the current level of sales of real estate and products and services related to
real estate could adversely affect demand for our family of web sites and our
subscription and advertising products and services. In addition, reduced traffic
on our family of web sites would likely cause our subscription and advertising
revenues to decline, which would materially and adversely affect our business.
We may experience seasonality in our business. The real estate industry
experiences a decrease in activity during the winter. However, because of our
limited operating history under our current business model, we do not know if or
when any seasonal pattern will develop or the size or nature of any seasonal
pattern in our business.
We may particularly be affected by general economic conditions.
Purchases of real property and related products and services are particularly
affected by negative trends in the general economy. The majority of our revenue
has been and is expected to continue to be, derived from customers in the United
States. Recent economic indicators, including growth in gross domestic product,
reflect a decline in economic activity in the United States from prior periods.
The success of our operations depends to a significant extent upon a number of
factors relating to discretionary consumer and business spending, and the
overall economy, as well as regional and local economic conditions in markets
where we operate, including:
. perceived and actual economic conditions;
. interest rates;
. taxation policies;
. availability of credit;
. employment levels; and
. wage and salary levels.
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In addition, because a consumer's purchase of real property and related
products and services is a significant investment and is relatively
discretionary, any reduction in disposable income in general may affect us more
significantly than companies in other industries.
We have risks associated with changing legislation in the real estate
industry.
Real estate is a heavily regulated industry in the U.S., including regulation
under the Fair Housing Act, the Real Estate Settlement Procedures Act and state
advertising laws. In addition, states could enact legislation or regulatory
policies in the future which could require us to expend significant resources to
comply. These laws and related regulations may limit or restrict our activities.
For instance, we are limited in the criteria upon which we may base searches of
our real estate listings such as age or race. As the real estate industry
evolves in the Internet environment, legislators, regulators and industry
participants may advocate additional legislative or regulatory initiatives.
Should existing laws or regulations be amended or new laws or regulations be
adopted, we may need to comply with additional legal requirements and incur
resulting costs, or we may be precluded from certain activities. For instance,
SpringStreet.com was required to qualify and register as a real estate
agent/broker in the State of California. To date, we have not spent significant
resources on lobbying or related government issues. Any need to significantly
increase our lobbying or related activities could substantially increase our
operating costs.
Internet Industry Risks:
We depend on increased use of the Internet to expand our real estate related
advertising products and services.
If the Internet fails to become a viable marketplace for real estate content
and information, our business will not grow. Broad acceptance and adoption of
the Internet by consumers and businesses when searching for real estate and
related products and services will only occur if the Internet provides them with
greater efficiencies and improved access to information.
In addition to selling subscription products and services to real estate
professionals, we depend on selling other types of advertisements on our family
of web sites.
Our business would be adversely affected if the market for web advertising
fails to develop or develops more slowly than expected. Our ability to generate
advertising revenues from selling banner advertising and sponsorships on our web
sites will depend on, among other factors, the development of the Internet as an
advertising medium, the amount of traffic on our family of web sites and our
ability to achieve and demonstrate user demographic characteristics that are
attractive to advertisers. Most potential advertisers and their advertising
agencies have only limited experience with the Internet as an advertising medium
and have not devoted a significant portion of their advertising expenditures to
Internet-based advertising. No standards have been widely accepted to measure
the effectiveness of web advertising. If these standards do not develop,
existing advertisers might reduce their current levels of Internet advertising
or eliminate their spending entirely. The widespread adoption of technologies
that permit Internet users to selectively block out unwanted graphics, including
advertisements attached to web pages, could also adversely affect the growth of
the Internet as an advertising medium. In addition, advertisers in the real
estate industry, including real estate professionals, have traditionally relied
upon other advertising media, such as newsprint and magazines, and have invested
substantial resources in other advertising methods. These persons may be
reluctant to adopt a new strategy and advertise on the Internet.
Government regulations and legal uncertainties could affect the growth of the
Internet.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities and
jurisdiction. Additionally, it is uncertain as to how existing laws will be
applied to the Internet. The adoption of new laws or the application of existing
laws may decrease the growth in the use of the Internet, which could in turn
decrease the usage and demand for our services or increase our cost of doing
business.
Some local telephone carriers have asserted that the increasing popularity and
use of the Internet have burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If access fees are imposed, the costs of
communicating on the Internet could increase substantially, potentially slowing
the increasing use of the Internet. This could in turn decrease demand for our
services or increase our cost of doing business.
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Taxation of Internet transactions could slow the use of the Internet.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by various foreign governments to impose taxes on the sale of goods
and services and other Internet activities. In 1998, the Internet Tax Freedom
Act was signed into law placing a three-year moratorium on new state and local
taxes on Internet commerce. However, future laws may impose taxes or other
regulations on Internet commerce, which could substantially impair the growth of
electronic commerce.
We depend on continued improvements to our computer network and the
infrastructure of the Internet.
Any failure of our computer systems that causes interruption or slower
response time of our web sites or services could result in a smaller number of
users of our family of web sites or the web sites that we host for real estate
professionals. If sustained or repeated, these performance issues could reduce
the attractiveness of our web sites to consumers and our subscription products
and services to real estate professionals, providers of real estate related
products and services and other Internet advertisers. Increases in the volume of
our web site traffic could also strain the capacity of our existing computer
systems, which could lead to slower response times or system failures. This
would cause the number of real property search inquiries, advertising
impressions, other revenue producing offerings and our informational offerings
to decline, any of which could hurt our revenue growth and our brand loyalty. We
may need to incur additional costs to upgrade our computer systems in order to
accommodate increased demand if our systems cannot handle current or higher
volumes of traffic.
The recent growth in Internet traffic has caused frequent periods of decreased
performance. Our ability to increase the speed with which we provide services to
consumers and to increase the scope of these services is limited by and
dependent upon the speed and reliability of the Internet. Consequently, the
emergence and growth of the market for our services is dependent on the
performance of and future improvements to the Internet.
Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, located at our corporate headquarters in Westlake Village, California
and our other offices in Thousand Oaks, California; Milwaukee, Wisconsin;
Phoenix, Arizona; San Jose, California; Westbury, New York and San Francisco,
California. Our facilities in California are currently subject to electrical
blackouts as a result of a shortage of available electrical power. Although we
have not experienced any material outages to date, we currently do not have a
redundant system for our family of web sites and other services at an alternate
site. Therefore, our systems are vulnerable to damage from break-ins,
unauthorized access, vandalism, fire, earthquakes, power loss,
telecommunications failures and similar events. Although we maintain insurance
against fires, earthquakes and general business interruptions, the amount of
coverage may not be adequate in any particular case.
Experienced computer programmers, or hackers, may attempt to penetrate our
network security from time to time. Although we have not experienced any
material security breaches to date, a hacker who penetrates our network security
could misappropriate proprietary information or cause interruptions in our
services. We might be required to expend significant capital and resources to
protect against, or to alleviate, problems caused by hackers. We do not
currently have a fully redundant system for our family of web sites. We also may
not have a timely remedy against a hacker who is able to penetrate our network
security. In addition to purposeful security breaches, the inadvertent
transmission of computer viruses could expose us to litigation or to a material
risk of loss.
We could face liability for information on our web sites and for products and
services sold over the Internet.
We provide third-party content on our family of web sites, particularly real
estate listings. We could be exposed to liability with respect to this third-
party information. Persons might assert, among other things, that, by directly
or indirectly providing links to web sites operated by third parties, we should
be liable for copyright or trademark infringement or other wrongful actions by
the third parties operating those web sites. They could also assert that our
third party information contains errors or omissions, and consumers could seek
damages for losses incurred if they rely upon incorrect information.
We enter into agreements with other companies under which we share with these
other companies revenues resulting from advertising or the purchase of services
through direct links to or from our family of web sites. These arrangements may
expose us
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to additional legal risks and uncertainties, including local, state, federal and
foreign government regulation and potential liabilities to consumers of these
services, even if we do not provide the services ourselves. We cannot assure you
that any indemnification provided to us in our agreements with these parties, if
available, will be adequate.
Even if these claims do not result in liability to us, we could incur
significant costs in investigating and defending against these claims. Our
general liability insurance may not cover all potential claims to which we are
exposed and may not be adequate to indemnify us for all liability that may be
imposed.
Our common stock price may continue to be volatile, which could result in
substantial losses for individual stockholders.
The market price for our common stock is likely to continue to be highly
volatile and subject to wide fluctuations. Factors contributing to this
volatility some of which are beyond our control:
. actual or anticipated variations in our quarterly operating results;
. announcements of significant corporate events such as acquisitions or
litigation;
. announcements of technological innovations or new products or services by
us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet, technology and/or real estate and
real estate-related industries; and
. market prices for stocks of Internet companies and other companies whose
businesses are heavily dependent on the Internet, which have generally
proven to be highly volatile, particularly in recent quarters.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Homestore.com, Inc. has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 29, 2002
Homestore.com, Inc.
By: /s/ W. Michael Long
---------------------------------
W. Michael Long
Chief Executive Officer
By: /s/ Lewis R. Belote, III
---------------------------------
Lewis R. Belote, III
Chief Financial Officer
38