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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 September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001
Commission File Number 000-26659
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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 91362
Westlake Village, California
(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 November 1, 2001 the registrant had 117,463,297 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 SEPTEMBER 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 SEPTEMBER 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........................................................ 1
Unaudited Consolidated Statements of Operations.............................................. 2
Unaudited Consolidated Statements of Cash Flows.............................................. 3
Notes to Unaudited Condensed Consolidated Financial Statements............................... 4
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 18
SIGNATURES............................................................................................ 39
----------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HOMESTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS (Restated)
Current assets:
Cash and cash equivalents......................................................... $ 57,567 $ 167,576
Short-term investments............................................................ 45,270 75,295
Marketable equity securities...................................................... 2,824 247
Accounts receivable, net.......................................................... 54,657 32,028
Current portion of prepaid distribution expense................................... 51,086 49,140
Other current assets.............................................................. 27,279 21,833
---------- ---------
Total current assets.......................................................... 238,683 346,119
Prepaid distribution expense, net of current portion................................... 124,476 159,226
Property and equipment, net............................................................ 97,898 43,483
Intangible assets, net................................................................. 1,065,527 194,274
Restricted cash........................................................................ 103,409 103,409
Other long-term assets................................................................. 22,146 46,839
---------- ---------
Total assets.................................................................. $1,652,139 $ 893,350
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 37,278 $ 13,162
Accrued liabilities............................................................... 98,293 45,473
Deferred revenue from related parties............................................. 47,728 -
Deferred revenue.................................................................. 66,026 33,846
---------- ----------
Total current liabilities..................................................... 249,325 92,481
Distribution obligation................................................................ 200,957 189,848
Other.................................................................................. 2,342 7,542
---------- ----------
Total liabilities............................................................. 452,624 289,871
---------- ----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Convertible preferred stock....................................................... -- --
Common stock...................................................................... 112 83
Additional paid-in capital........................................................ 1,980,674 1,027,423
Treasury stock.................................................................... (18,062) (16,556)
Notes receivable from stockholders................................................ (4,090) (7,938)
Deferred stock-based charges...................................................... (95,326) (97,724)
Accumulated other comprehensive loss.............................................. (3,004) (23)
Accumulated deficit............................................................... (660,789) (301,786)
---------- ----------
Total stockholders' equity.................................................... 1,199,515 603,479
---------- ----------
Total liabilities and stockholders' equity.................................... $1,652,139 $ 893,350
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
1
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Revenues (including non-cash equity charges, see note 10)......... $ 76,588 $ 48,835 $ 206,996 $ 128,741
Revenues from related parties..................................... 9,799 - 20,909 -
---------- ---------- ---------- ----------
Total revenues.................................................... 86,387 48,835 227,905 128,741
Cost of revenues (including non-cash equity charges, see
note 10)....................................................... 31,801 15,837 92,957 40,028
---------- ---------- ---------- ----------
Gross profit...................................................... 54,586 32,998 134,948 88,713
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing (including non-cash equity charges,
see Note 10)................................................ 72,655 35,434 193,971 111,407
Product development (including non-cash equity charges,
see note 10)................................................ 9,646 4,458 23,810 10,222
General and administrative (including non-cash equity
charges, see note 10)....................................... 32,976 17,358 86,019 41,174
Amortization of intangible assets.............................. 57,581 12,139 145,975 31,466
In-process research and development............................ -- 4,048 -- 4,048
Acquisition-related and other charges.......................... -- -- 15,632 --
---------- ---------- ---------- ----------
Total operating expenses................................. 172,858 73,437 465,407 198,317
---------- ---------- ---------- ----------
Loss from operations.............................................. (118,272) (40,439) (330,459) (109,604)
Interest income, net.............................................. 2,025 6,293 10,244 17,347
Other expense, net................................................ (22,078) 200 (38,788) (185)
---------- ---------- ---------- ----------
Net loss.......................................................... $ (138,325) $ (33,946) $ (359,003) $ (92,442)
========== ========== ========== ==========
Basic and diluted net loss per share.............................. $ (1.25) $ (.41) $ (3.44) $ (1.17)
========== ========== ========== ==========
Shares used to calculate basic and diluted net loss per share..... 110,476 82,065 104,422 78,769
========== ========== =========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
2
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
Cash flows from operating activities: (Restated) (Restated)
Net loss.......................................................................................... $(359,003) $ (92,442)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation...................................................................................... 18,564 2,979
Amortization of intangible assets................................................................. 145,974 31,466
Accretion of distribution obligation.............................................................. 11,109 --
Provision for doubtful accounts................................................................... 10,430 2,245
In-process research and development............................................................... -- 4,048
Stock-based charges............................................................................... 60,184 33,271
Write-down of investments......................................................................... 30,743 --
Other non-cash items.............................................................................. 1,865 (798)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................................. (15,363) (20,412)
Prepaid distribution expense..................................................................... 6,993 (21,150)
Other assets..................................................................................... (5,522) (4,307)
Accounts payable and accrued liabilities......................................................... 39,929 18,296
Deferred revenue from related parties............................................................ 47,728 --
Deferred revenue................................................................................. (5,377) 5,527
--------- ---------
Net cash (used in) operating activities........................................................... (11,746) (41,277)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................................... (51,833) (26,662)
Purchases of short-term investments............................................................... (85,925) (202,037)
Maturities of short-term investments.............................................................. 115,485 87,000
Purchases of cost and equity investments.......................................................... -- (29,497)
Acquisitions, net of cash acquired................................................................ (129,290) (38,965)
--------- ---------
Net cash used in investing activities............................................................. (151,563) (210,161)
--------- ---------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes...................................................... 2,341 606
Proceeds from exercise of stock options, warrants and share issuances under employee
stock purchase plan.............................................................................. 56,217 19,313
Net proceeds from issuance of common and preferred stock.......................................... -- 428,903
Transfer to restricted cash....................................................................... -- (103,409)
Repayment of notes payable........................................................................ (481) (38,575)
Issuance of notes receivable...................................................................... (4,777) (1,651)
Subsidiary equity transactions.................................................................... -- 10,850
--------- ---------
Net cash provided by financing activities......................................................... 53,300 316,037
--------- ---------
Change in cash and cash equivalents............................................................... (110,009) 64,599
Cash and cash equivalents, beginning of period.................................................... 167,576 90,382
--------- ---------
Cash and cash equivalents, end of period.......................................................... $ 57,567 $ 154,981
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. ("Homestore" or the "Company") has created the
leading online marketplace for home and real estate-related information and
associated 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. Through our subsidiary, iPlace, Inc.,
("iPlace"), we are the leading provider of online credit and neighborhood
information to consumers and real estate professionals. 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, apartment managers and agents. The Company also has distribution
agreements with a number of leading Internet portal and search engine web sites,
including America Online, Inc. ("AOL").
2. BASIS OF PRESENTATION:
The Company's interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") 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 GAAP 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
September 30, 2001, the Company had an accumulated deficit of $660.8 million,
cash and cash equivalents of $57.6 million and short-term investments of $45.3
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 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.
4
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 "Business Combinations." 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 No. 142.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. SFAS No. 143, is effective for fiscal years beginning after June 15,
2002. The company does not have asset retirement obligations and therefore
believes there will be no impact upon adoption of SFAS No. 143.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of APB Opinion No. 30, "Reporting the Results of Operations." SFAS
No. 144 provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company is in process of evaluating the impact of
adopting SFAS No. 144.
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 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 nine-month periods ended September 30, 2001,
certain transactions resulting in revenue recognition of $17.1 million and $81.6
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 the three-month and nine-month periods ended September 30,
2000, revenue of $11.1 million and $17.3 million, respectively, 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, property and equipment, other assets,
accrued liabilities and deferred revenue. In addition, the results of the
inquiry determined that for the three-month and nine-month periods ended
September 30, 2001, revenue of $11.4 million and $37.4 million, respectively was
improperly recognized on the sale of certain software
5
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 September 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 nine-months periods ended September 30, 2001 was
to reduce previously reported revenue and expense by $1.2 million and $4.0
million, respectively, with no effect on net loss or net loss per share. The
effect on the three-month and nine-month periods ended September 30, 2000 was to
reduce previously reported revenue and expense by $2.3 million and $5.0 million,
respectively
As a result of these items, for the three-month and nine-month periods
ended September 30, 2001, respectively, the Company has reduced its previously
reported revenue by $29.7 million and $123.0 million; increased its net loss
from $106.6 million to $138.3 million and $245.8 million to $359.0 million; and
increased its net loss per share of $(.96) to $(1.25) and $(2.35) to $(3.44).
For the three-month and nine-month periods ended September 30, 2000,
respectively, the Company has reduced its previously reported revenue by $13.4
million and $22.2 million; increased its net loss from $27.1 million to $33.9
million and $81.0 million to $92.4 million; and increased its net loss per share
of $(.33) to $(.41) and $(1.03) to $(1.17 ).
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.
6
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, 2001
------------------
As Reported Adjustments Restated
----------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 70,976 $ (13,409) $ 57,567
Short-term investments............................................. 45,270 -- 45,270
Marketable equity securities....................................... 2,824 -- 2,824
Accounts receivable, net........................................... 63,383 (8,726) 54,657
Current portion of prepaid distribution expense.................... 51,086 -- 51,086
Other current assets............................................... 63,221 (35,942) 27,279
----------- ----------- -----------
Total current assets.......................................... 296,760 (58,077) 238,683
Prepaid distribution expense, net of current portion.................... 124,476 -- 124,476
Property and equipment, net............................................. 112,985 (15,087) 97,898
Intangible assets, net.................................................. 1,081,830 (16,303) 1,065,527
Restricted cash......................................................... 90,000 13,409 103,409
Other long-term assets.................................................. 48,180 (26,034) 22,146
----------- ----------- -----------
Total assets.................................................. $ 1,754,231 $ (102,092) $ 1,652,139
=========== =========== ===========
LIABILITIES, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 37,178 $ 100 $ 37,278
Accrued liabilities................................................ 87,458 10,835 98,293
Deferred revenue from related parties.............................. -- 47,728 47,728
Deferred revenue................................................... 82,721 (16,695) 66,026
----------- ----------- -----------
Total current liabilities.................................... 207,357 41,968 249,325
Distribution obligation................................................. 200,957 -- 200,957
Other................................................................... 2,342 -- 2,342
----------- ----------- -----------
Total Liabilities............................................. 410,656 41,968 452,624
----------- ----------- -----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock....................................................... 112 -- 112
Additional paid-in capital......................................... 1,980,674 -- 1,980,674
Treasury stock..................................................... (18,062) -- (18,062)
Notes receivable from stockholders................................. (4,090) -- (4,090)
Deferred stock-based charges....................................... (95,326) -- (95,326)
Accumulated other comprehensive loss............................... (3,004) -- (3,004)
Accumulated deficit................................................ (516,729) (144,060) (660,789)
----------- ----------- -----------
Total stockholders' equity.................................... 1,343,575 (144,060) 1,199,515
----------- ----------- -----------
Total liabilities and stockholders' equity.................... $ 1,754,231 $ (102,092) $ 1,652,139
=========== =========== ===========
7
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended September 30, 2001
-------------------------------------
As Accounting
Reported Adjustments Change Restated
-------- ----------- ------ --------
Revenues .................................................................... $ 116,135 $ (38,297) $ (1,250) $ 76,588
Revenues from related parties ............................................... -- 9,799 -- 9,799
--------- --------- --------- ---------
Total revenues .............................................................. 116,135 (28,498) (1,250) 86,387
Cost of revenues ............................................................ 31,736 732 (667) 31,801
--------- --------- --------- ---------
Gross profit ................................................................ 84,399 (29,230) (583) 54,586
--------- --------- --------- ---------
Operating expenses:
Sales and marketing .................................................... 67,453 5,785 (583) 72,655
Product development .................................................... 9,896 (250) -- 9,646
General and administrative ............................................. 36,055 (3,079) -- 32,976
Amortization of intangible assets ...................................... 57,606 (25) -- 57,581
--------- --------- --------- ---------
Total operating expenses .................................................... 171,010 2,431 (583) 172,858
--------- --------- --------- ---------
Loss from operations ........................................................ (86,611) (31,661) -- (118,272)
Interest income, net ........................................................ 2,025 -- -- 2,025
Other expense, net .......................................................... (22,018) (60) -- (22,078)
--------- --------- --------- ---------
Net loss applicable to common stockholders .................................. $(106,604) $ (31,721) $ -- $(138,325)
========= ========= ========= =========
Basic and diluted net loss per share ........................................ $ (.96) $ (.29) $ -- $ (1.25)
========= ========= ========= =========
Shares used to calculate basic and diluted net loss per share ............... 110,476 110,476 110,476 110,476
========= ========= ========= =========
Nine Months Ended September 30, 2001
------------------------------------
As Accounting
Reported Adjustments Change Restated
--------- ----------- ------ --------
Revenues ................................................................... $ 350,909 $(139,900) $ (4,013) $ 206,996
Revenues from related parties .............................................. -- 20,909 -- 20,909
--------- --------- --------- ---------
Total revenues ............................................................. 350,909 (118,991) (4,013) 227,905
Cost of revenues ........................................................... 93,782 732 (1,557) 92,957
--------- --------- --------- ---------
Gross profit ............................................................... 257,127 (119,723) (2,456) 134,948
--------- --------- --------- ---------
Operating expenses:
Sales and marketing ................................................... 199,363 (2,936) (2,456) 193,971
Product development ................................................... 24,310 (500) -- 23,810
General and administrative ............................................ 89,677 (3,658) -- 86,019
Amortization of intangible assets ..................................... 146,050 (75) -- 145,975
Acquisition-related and other charges ................................. 15,632 -- -- 15,632
--------- --------- --------- ---------
Total operating expenses ................................................... 475,032 (7,169) (2,456) 465,407
--------- --------- --------- ---------
Loss from operations ....................................................... (217,905) (112,554) -- (330,459)
Interest income, net ....................................................... 10,244 -- -- 10,244
Other expense, net ......................................................... (38,166) (622) -- (38,788)
--------- --------- --------- ---------
Net loss applicable to common stockholders ................................. $(245,827) $(113,176) $ -- $(359,003)
========= ========= ========= =========
Basic and diluted net loss per share ....................................... $ (2.35) $ (1.09) $ -- $ (3.44)
========= ========= ========= =========
Shares used to calculate basic and diluted net loss per share .............. 104,422 104,422 104,422 104,422
========= ========= ========= =========
8
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended September 30, 2000
-------------------------------------
As Accounting
Reported Adjustments Change Restated
-------- ----------- ------ --------
Revenues ................................................................... $ 62,203 $(11,115) $ (2,253) $ 48,835
Cost of revenues ........................................................... 16,325 -- (488) 15,837
-------- -------- -------- --------
Gross profit ............................................................... 45,878 (11,115) (1,765) 32,998
-------- -------- -------- --------
Operating expenses:
Sales and marketing ................................................... 40,614 (3,415) (1,765) 35,434
Product development ................................................... 4,458 -- -- 4,458
General and administrative ............................................ 17,481 (123) -- 17,358
Amortization of intangible assets ..................................... 12,128 11 -- 12,139
In-process research and development ................................... 4,048 -- -- 4,048
-------- -------- -------- --------
Total operating expenses ................................................... 78,729 (3,527) (1,765) 73,437
-------- -------- -------- --------
Loss from operations ....................................................... (32,851) (7,588) -- (40,439)
Interest income, net ....................................................... 6,293 -- -- 6,293
Other expense, net ......................................................... (500) 700 -- 200
-------- -------- -------- --------
Net loss applicable to common stockholders ................................. $(27,058) $ (6,888) $ -- $(33,946)
======== ======== ======== ========
Basic and diluted net loss per share ....................................... $ (.33) $ (.08) $ -- $ (.41)
======== ======== ======== ========
Shares used to calculate basic and diluted net loss per share .............. 82,065 82,065 82,065 82,065
======== ======== ======== ========
Nine Months Ended September 30, 2000
------------------------------------
As Accounting
Reported Adjustments Change Restated
-------- ----------- ------ --------
Revenues .................................................................... $ 150,954 $ (17,258) $ (4,955) $ 128,741
Cost of revenues ............................................................ 40,516 -- (488) 40,028
--------- --------- --------- ---------
Gross profit ................................................................ 110,438 (17,258) (4,467) 88,713
--------- --------- --------- ---------
Operating expenses:
Sales and marketing .................................................... 120,239 (4,365) (4,467) 111,407
Product development .................................................... 10,222 - -- 10,222
General and administrative ............................................. 41,918 (744) -- 41,174
Amortization of intangible assets ...................................... 31,455 11 -- 31,466
In-process research and development .................................... 4,048 -- -- 4,048
Acquisition-related and other charges .................................. -- -- -- --
--------- --------- --------- ---------
Total operating expenses .................................................... 207,882 (5,098) (4,467) 198,317
--------- --------- --------- ---------
Loss from operations ........................................................ (97,444) (12,160) -- (109,604)
Interest income, net ........................................................ 17,347 -- -- 17,347
Other expense, net .......................................................... (885) 700 -- (185)
--------- --------- --------- ---------
Net loss applicable to common stockholders .................................. $ (80,982) $ (11,460) $ -- $ (92,442)
========= ========= ========= =========
Basic and diluted net loss per share ........................................ $ (1.03) $ (0.15) $ -- $ (1.17)
========= ========= ========= =========
Shares used to calculate basic and diluted net loss per share ............... 78,769 78,769 78,769 78,769
========= ========= ========= =========
9
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, 2001
------------------------------------
As Reported Adjustments Restated
----------- ----------- --------
Cash flows from operating activities:
Net loss.......................................................................... $(245,827) $ (113,176) $ (359,003)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation...................................................................... 19,498 (934) 18,564
Amortization of intangible assets................................................. 146,050 (76) 145,974
Accretion of distribution obligation.............................................. 11,109 -- 11,109
Provision for doubtful accounts................................................... 10,430 -- 10,430
In-process research and development............................................... -- -- --
Stock-based charges............................................................... 60,184 -- 60,184
Write-down of investments......................................................... 30,743 -- 30,743
Other non-cash items.............................................................. (12,974) 14,839 1,865
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable............................................................... (11,646) (3,717) (15,363)
Prepaid distribution expense...................................................... 6,993 -- 6,993
Other assets...................................................................... (41,847) 36,325 (5,522)
Accounts payable and accrued liabilities.......................................... 24,926 15,003 39,929
Deferred revenue from related parties............................................. -- 47,728 47,728
Deferred revenue.................................................................. 20,970 (26,347) (5,377)
--------- ---------- -----------
Net cash used in operating activities............................................. 18,609 (30,355) (11,746)
--------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................................... (66,277) 14,444 (51,833)
Purchases of short-term investments............................................... (85,925) -- (85,925)
Maturities of short-term investments.............................................. 115,485 -- 115,485
Purchases of cost and equity investments.......................................... -- -- --
Acquisitions, net of cash acquired................................................ (145,201) 15,911 (129,290)
--------- ---------- -----------
Net cash used in investing activities............................................. (181,918) 30,355 (151,563)
--------- ---------- -----------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes...................................... 2,341 -- 2,341
Proceeds from exercise of stock options, warrants and share issuances
under employee stock purchase plan............................................. 56,217 -- 56,217
Net proceeds from issuance of common and preferred stock.......................... -- -- --
Transfer to restricted cash....................................................... -- -- --
Repayment of notes payable........................................................ (481) -- (481)
Issuance of notes receivable...................................................... (4,777) -- (4,777)
Subsidiary equity transactions.................................................... -- -- --
--------- ---------- -----------
Net cash provided by financing activities......................................... 53,300 -- 53,300
--------- ---------- -----------
Change in cash and cash equivalents............................................... (110,009) -- (110,009)
Cash and cash equivalents, beginning of period.................................... 180,985 (13,409) 167,576
--------- ---------- -----------
Cash and cash equivalents, end of period.......................................... $ 70,976 $ (13,409) $ 57,567
========== =========== ===========
10
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, 2000
As Reported Adjustments Restated
----------- ----------- --------
Cash flows from operating activities:
Net loss.......................................................................... $ (80,982) $ (11,460) $ (92,442)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation...................................................................... 3,223 (244) 2,979
Amortization of intangible assets................................................. 31,455 11 31,466
Accretion of distribution obligation.............................................. -- -- --
Provision for doubtful accounts................................................... 2,245 -- 2,245
In-process research and development............................................... 4,048 -- 4,048
Stock-based charges............................................................... 33,271 -- 33,271
Write-down of investments......................................................... -- -- --
Other non-cash items.............................................................. (798) -- (798)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable............................................................... (26,293) 5,881 (20,412)
Prepaid distribution expense...................................................... (21,150) -- (21,150)
Other assets...................................................................... (7,064) 2,757 (4,307)
Accounts payable and accrued liabilities.......................................... 18,775 (479) 18,296
Deferred revenue.................................................................. 5,375 152 5,527
--------- --------- ---------
Net cash used in operating activities............................................. (37,895) (3,382) (41,277)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................... (28,144) 1,481 (26,663)
Purchases of short-term investments............................................... (202,037) -- (202,037)
Maturities of short-term investments.............................................. 87,000 -- 87,000
Purchases of cost and equity investments.......................................... (30,897) 1,401 (29,496)
Acquisitions, net of cash acquired................................................ (39,465) 500 (38,965)
--------- --------- ---------
Net cash used in investing activities............................................. (213,543) 3,382 (210,161)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes...................................... 606 -- 606
Proceeds from exercise of stock options, warrants and share issuances
under employee stock purchase plan............................................. 19,313 -- 19,313
Net proceeds from issuance of common and preferred stock.......................... 428,903 -- 428,903
Transfer to restricted cash....................................................... (90,000) (13,409) (103,409)
Repayment of notes payable........................................................ (38,575) -- (38,575)
Issuance of notes receivable...................................................... (1,651) -- (1,651)
Subsidiary equity transactions.................................................... 10,850 -- 10,850
--------- --------- ---------
Net cash provided by financing activities......................................... 329,446 (13,409) 316,037
--------- --------- ---------
Change in cash and cash equivalents............................................... 78,008 (13,409) 64,599
Cash and cash equivalents, beginning of period.................................... 90,382 -- 90,382
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 168,390 $ (13,409) $ 154,981
========= ========= =========
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 nine months ended September
30, 2001 is primarily the result of the acquisitions of Move.com, Inc. and
Welcome Wagon International, Inc., (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. Adding to the increase in stockholders'
equity for the nine months ended September 30, 2001 was the acquisition of
iPlace.com, Inc. ("iPlace") in which the Company issued approximately 3.5
million shares of its common stock resulting in an increase to additional
paid-in-capital of approximately $87.8 million.
The components of comprehensive loss for each of the periods presented are
as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Net loss...................................... $ (138,325) $ (33,946) $ (359,003) $ (92,442)
Unrealized losses on marketable securities.... (470) (2,318) (3,050) (2,883)
Foreign currency translation.................. (278) (345) 69 (345)
----------- --------- ---------- ---------
Comprehensive loss............................ $ (139,073) $ (36,609) $ (361,984) $ (95,670)
=========== ========= ========== =========
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. The deferred stock-based charge is adjusted
quarterly for changes in the Company's stock price. The net unamortized deferred
balance for this agreement at September 30, 2001 is $6.3 million.
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 were made for expenses
incurred beyond March 31, 2001.
In the second quarter of 2001, the Company incurred a charge of $8.5
million 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 were made for expenses incurred beyond June 30,
2001.
7. IMPAIRMENT OF INVESTMENTS:
During the three and nine months ended September 30, 2001, the Company
recorded a charge of approximately $19.2 million and $30.3 million,
respectively, based on the impairment of the Company's portfolio of investments.
The impairment of these investments to their net realizable values was based on
a review of the companies' financial conditions, cash flow projections,
operating performances and sustained downturn in financial markets.
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
allocated to the assets acquired based on their respective fair values. The
excess of purchase consideration over net tangible assets acquired of
approximately $16.3 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 of the assets ranging
12
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 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 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 of the assets 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 amounting
to 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 of the assets 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 of the assets 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.
On August 24, 2001, the Company acquired all the outstanding shares of
iPlace in exchange for approximately 3.5 million shares of the Company's common
stock valued at $67.9 million, $73.0 million in cash and assumed 1.1 million
outstanding stock options with an estimated fair value of $19.8 million. The
acquisition has been accounted for as a purchase and the results of operations
have been included in the Company's consolidated financial statements since the
acquisition. 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 $167.2 million
has been allocated to goodwill and other identifiable intangible assets. In
accordance with SFAS No. 141, the Company is not amortizing goodwill for this
acquisition. Other identifiable intangible assets are being amortized on a
straight-line basis over the estimated useful lives of the assets ranging from
three to seven years. See note 9 for pro forma financial information.
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
13
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
goodwill and other identifiable intangible assets and is being amortized on a
straight-line basis over estimated lives of the assets ranging from two to
fifteen years.
In connection with and contingent upon the closing of the acquisition of
the Move.com Group, the Company 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 nine-month periods
ended September 30, 2001 were $9.8 million and $20.9 million, respectively, and
are reported separately in these financial statements. It is not practical to
determine the costs of such revenues.
The following summarized unaudited pro forma financial information
includes the acquisitions of the Move.com Group and iPlace as if they had
occurred at the beginning of each period (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Revenues.......................... $ 90,621 $ 82,756 $ 269,849 $ 217,760
Net loss.......................... (147,927) (102,545) (408,416) (308,690)
Net loss per share:
Basic and diluted............ $ (1.31) $ (.96) $ (3.68) $ (2.97)
Weighted average shares...... 112,518 106,906 111,017 103,955
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 Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Revenue............................ $ 583 $ 1,765 $ 2,456 $ 4,467
Cost of revenues................... 163 137 349 483
Sales and marketing................ 15,766 8,708 53,823 25,406
Product development................ 153 129 328 455
General and administrative......... 2,279 697 3,228 2,460
-------- -------- -------- --------
$ 18,944 $ 11,436 $ 60,184 $ 33,271
======== ======== ======== ========
14
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Numerator: (Restated) (Restated) (Restated) (Restated)
Net loss................................ $(138,325) $(33,946) $(359,003) $(92,442)
========= ======== ========= ========
Denominator:
Weighted average shares outstanding..... 110,476 82,065 104,422 78,769
========= ======== ========= ========
Basic and diluted net loss per share......... $ (1.25) $ (.41) $ (3.44) $ (1.17)
========= ======== ========= ========
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
20,423,800 and 15,832,996 at September 30, 2001 and 2000, respectively.
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 and other exclude an allocation of
certain significant operating expenses which is unavailable, based upon the
Company's current organization and management reporting structure, which
includes 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 Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Revenues:
Professional subscriptions................ $ 51,585 $ 31,818 $ 146,903 $ 83,430
Advertising............................... 10,184 17,017 33,673 45,311
Other..................................... 24,618 - 47,329 -
---------- --------- ---------- ----------
86,387 48,835 227,905 128,741
---------- --------- ---------- ----------
15
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Cost of revenues and operating expenses:
Professional subscriptions................. 24,818 19,434 76,797 45,086
Advertising................................ 12,537 5,415 29,919 9,687
Other...................................... 15,527 - 34,611 -
Unallocated................................ 151,777 64,425 417,037 183,572
--------- -------- --------- ---------
204,659 89,274 558,364 238,345
--------- -------- --------- ---------
Loss from operations $(118,272) $(40,439) $(330,459) $(109,604)
========= ======== ========= =========
Revenues from professional subscriptions for the three-month and nine-
month periods ended September 30, 2001 included $9.8 million and $20.9 million,
respectively, of revenue from related parties. There were none in fiscal 2000.
In connection with acquisitions in 2001, the Company expanded its segment
presentation to include a third, "other" segment. The Company's Welcome Wagon
business constitutes $14.9 million and $35.5 million of revenue, respectively,
and $7.3 million and $24.4 million of expense, respectively, in the three-month
and nine-month periods ended September 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.
14. SUBSEQUENT EVENTS:
On October 25, 2001, the Company announced an organizational realignment
and cost reduction plan to align its cost structure with the current business
environment. Included in this plan is the release of up to 700 employees or
approximately 20% of the Company's workforce, the closing of office facilities
and certain international operations, and the discontinuance of certain
products. The Company will take a fourth quarter charge for costs related to the
implementation of this plan, estimated between $50.0 million and $100.0 million.
On October 30, 2001, the Company announced an agreement with the Budget
Group, Inc. ("Budget") to extend a strategic marketing alliance while at the
same time settling the Company's stock price guarantee due in March 2002. Under
the agreement, the company issued to Budget approximately 4.8 million shares of
the Company's common stock in exchange for the cancellation of Budget's put
option included in its original agreement with the Company. Budget agreed to
changes in the appearance of the Homestore (TM) logos on at least 30,000 Budget
Group trucks. Additionally, the agreement calls for Budget to advertise the
Company's name an additional year through March 2011. The company's shares
issued to Budget will be tradable following the registration statement, as filed
on November 2, 2001, being declared effective by the SEC. Trade volume and
timing restrictions will exist on the shares covered by the registration
statement.
The Company is currently assessing the carrying values of certain
long-lived assets, consisting primarily of goodwill and other intangibles of
approximately $1.1 billion and other assets of approximately $300 million. The
assessment is being performed pursuant to SFAS No. 121. Due to the announced
realignment plan, the current sustained downturn in financial markets, and the
Company's current business outlook, the Company believes it is required to
evaluate whether an impairment of long-lived assets exists. Under SFAS No. 121,
the Company will determine if the carrying values of its long-lived assets are
recoverable on an undiscounted cash flows basis applied at the lowest level of
separately identifiable cash flows. If the long-lived assets are not recoverable
on this basis, an impairment loss will be recognized based on the excess of
carrying value over the discounted future cash flows. Any such impairment would
first be allocated to the goodwill of that asset group being evaluated. The
Company preliminarily anticipates recording an impairment charge in the fourth
quarter 2001 ranging from approximately $650.0 million to $950.0 million.
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
16
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
with respect to its 2000 and 2001 financial results in its 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 the Company's 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 make assurances
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q/A 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/A 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 and elsewhere in this Quarterly
Report, as well as those discussed in our Annual Report on Form 10-K, as amended
on Form 10-K/A, for the year ended December 31, 2000 and in other documents we
filed with the Securities and Exchange Commission, or SEC.
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 nine-month
periods ended September 30, 2001, certain transactions resulting in revenue
recognition of $17.1 million and $81.6 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 the three-month and nine-month
periods ended September 30, 2000, revenue of $11.1 million and $17.3 million,
respectively, 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
nine-month periods ended September 30, 2001, revenue of $11.4 million and $37.4
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 related revenue should have been deferred through
September 30, 2001.
The restated financial statements also include the effects of our early
adoption of EITF 01-09, "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 nine-month periods ended September 30, 2001 was to reduce
previously reported revenue and expense by $1.2 million and $4.0 million,
respectively, with no effect on net loss or net loss per share. The effect on
the three-month and nine-month periods ended September 30, 2000 was to reduce
previously reported revenue and expense by $2.3 million and $5.0 million,
respectively.
The consolidated financial statements for the three and nine months ended
September 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 nine-month periods ended September 30,
2001, respectively, we have reduced our previously reported revenue by $29.7
million and $123.0 million; increased our net loss from $106.6 million to $138.3
million and $245.8 million to $359.0 million; and increased our net loss per
share of $(.96) to $(1.25) and $(2.35) to $(3.44). For the three-month and nine-
month periods ended September 30, 2000, respectively, we have reduced our
previously reported revenue by $13.4 million and $22.2 million; increased our
net loss from $27.1 million to $33.9 million and $81.0 million to $92.4 million;
and increased our net loss per share of $(.33) to $(.41) and $(1.03) to $(1.17).
18
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended September 30, 2001 Three Months Ended September 30, 2000
------------------------------------- -------------------------------------
As Accounting As Accounting
Reported Adjustments Change Restated Reported Adjustments Change Restated
-------- ------------ ------ -------- -------- ----------- ------ --------
Revenues................................ $ 116,135 $ (38,297) $ (1,250) $ 76,588 $ 62,203 $(11,115) $ (2,253) $ 48,835
Revenues from related parties........... -- 9,799 -- 9,799 -- -- -- --
--------- --------- -------- ---------- --------- -------- -------- --------
Total revenue........................... 116,135 (28,498) (1,250) 86,387 $ 62,203 $(11,115) $ (2,253) $ 48,835
Cost of revenues........................ 31,736 732 (667) 31,801 16,325 (488) 15,837
--------- --------- -------- ---------- --------- -------- -------- --------
Gross profit............................ 84,399 (29,230) (583) 54,586 45,878 (11,115) (1,765) 32,998
--------- --------- -------- ---------- --------- -------- -------- --------
Operating expenses:
Sales and marketing................ 67,453 5,785 (583) 72,655 40,614 (3,415) (1,765) 35,434
Product development................ 9,896 (250) -- 9,646 4,458 -- -- 4,458
General and administrative......... 36,055 (3,079) -- 32,976 17,481 (123) -- 17,358
Amortization of intangible assets.. 57,606 (25) -- 57,581 12,128 11 -- 12,139
In-process research and
development........................ -- -- -- -- 4,048 -- -- 4,048
Acquisition-related and other
charges............................ -- -- -- -- -- -- -- --
--------- --------- -------- ---------- --------- -------- -------- --------
Total operating expenses................ 171,010 2,431 (583) 172,858 78,729 (3,527) (1,765) 73,437
--------- --------- -------- ---------- --------- -------- -------- --------
Loss from operations.................... (86,611) (31,661) -- (118,272) (32,851) (7,588) -- (40,439)
Interest income, net.................... 2,025 -- -- 2,025 6,293 -- -- 6,293
Other expense, net...................... (22,018) (60) -- (22,078) (500) 700 -- 200
--------- --------- -------- ---------- --------- -------- -------- --------
Net loss applicable to common
stockholders............................ $(106,604) $ (31,721) -- $ (138,325) $ (27,058) $ (6,888) -- $(33,946)
========= ========= ======== ========== ========= ======== ======== ========
Basic and diluted net loss per share.... $ (.96) $ (.29) -- $ (1.25) $ (.33) $ (.08) $ -- $ (.41)
========= ========= ======== ========== ========= ======== ======== ========
Shares used to calculate basic and
diluted net loss per share.............. 110,476 110,476 110,476 110,476 82,065 82,065 82,065 82,065
--------- --------- -------- ---------- --------- -------- -------- --------
Nine Months Ended September 30, 2001 Nine Months Ended September 30, 2000
------------------------------------ ------------------------------------
As Accounting As Accounting
Reported Adjustments Change Restated Reported Adjustments Change Restated
-------- ----------- ------ -------- -------- ----------- ------ --------
Revenues.............................. $ 350,909 $ (139,900) $ (4,013) $ 206,996 $ 150,954 $(17,258) $ (4,955) $ 128,741
Revenues from related parties......... -- 20,909 -- 20,909 -- -- -- --
--------- ---------- --------- --------- --------- -------- -------- ---------
Total revenue......................... 350,909 (118,991) (4,013) 227,905 $ 150,954 $(17,258) $ (4,955) $ 128,741
Cost of revenues...................... 93,782 732 (1,557) 92,957 40,516 -- (488) 40,028
--------- ---------- --------- --------- --------- -------- -------- ---------
Gross profit.......................... 257,127 (119,723) (2,456) 134,948 110,438 (17,258) (4,467) 88,713
--------- ---------- --------- --------- --------- -------- -------- ---------
Operating expenses:
Sales and marketing.............. 199,363 (2,936) (2,456) 193,971 120,239 (4,365) (4,467) 111,407
Product development.............. 24,310 (500) -- 23,810 10,222 -- -- 10,222
General and administrative....... 89,677 (3,658) -- 86,019 41,918 (744) -- 41,174
Amortization of intangible
assets........................... 146,050 (75) -- 145,975 31,455 11 -- 31,466
In-process research and
development...................... -- -- -- -- 4,048 -- -- 4,048
Acquisition-related and other
charges.......................... 15,632 -- -- 15,632 -- -- -- --
--------- ---------- --------- --------- --------- -------- -------- ---------
Total operating expenses.............. 475,032 (7,169) (2,456) 465,407 207,882 (5,098) (4,467) 198,317
--------- ---------- --------- --------- --------- -------- -------- ---------
Loss from operations.................. (217,905) (112,554) -- (330,459) (97,444) (12,160) -- (109,604)
Interest income, net.................. 10,244 -- -- 10,244 17,347 -- -- 17,347
Other expense, net.................... (38,166) (622) -- (38,788) (885) 700 -- (185)
--------- ---------- --------- --------- --------- -------- -------- ---------
Net loss applicable to common
stockholders.......................... $(245,827) $ (113,176) $ -- $(359,003) $ (80,982) $(11,460) $ -- $ (92,442)
========= ========== ========= ========= ========= ======== ======== =========
Basic and diluted net loss per
share................................. $ (2.35) $ (1.09) $ -- $ (3.44) $ (1.03) $ (0.15) $ -- $ (1.17)
========= ========== ========= ========= ========= ======== ======== =========
Shares used to calculate basic and
diluted net loss per share............ 104,422 104,422 104,422 104,422 78,769 78,769 78,769 78,769
========= ========== ========= ========= ========= ======== ======== =========
Overview
Homestore.com, Inc. or Homestore, has created the leading online
marketplace for home and real estate-related information and associated products
and services, based on the number of visitors to our web sites, time spent on
our web sites and number of property listings. Through our family of web sites,
we provide a wide variety of information and tools for consumers, and are 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. Through our subsidiary, iPlace, Inc., or
iPlace, we are the leading provider of online credit and neighborhood
information to consumers and real estate professionals. To provide consumers
with real estate listings, 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 the NARI, the American Institute
of Architects, or AIA, the Manufactured Housing Institute, or MHI, real estate
franchises, brokers, builders, apartment
19
managers and agents. We also have distribution agreements with leading Internet
portal and search engine web sites, including 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 Real Select, 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/A 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., or CFT, for approximately $4.5 million in cash and 162,850 shares
of the our common stock valued at approximately $5.0 million. In February 2001,
we acquired all the outstanding shares of HomeWrite, Inc., or HomeWrite, 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 $14.5 million in cash. In August 2001, we acquired all the
outstanding shares of iPlace for approximately $73.0 million in cash and 3.5
million shares of our common stock valued at $67.9 million. In connection with
the transaction, we assumed the iPlace stock option plan consisting of
approximately 1.1 million outstanding stock options with an estimated fair value
of $19.8 million. The acquisitions described above have been accounted for under
the purchase method in accordance with generally accepted accounting principles.
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 nine-month periods ended September 30, 2001
were $9.8 million and
20
$20.9 million, respectively, and are reported separately in these financial
statements. It is not practical to determine the 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 September 30, 2001 and 2000
Revenues
Revenues increased approximately 77% to $86.4 million for the three months
ended September 30, 2001 from revenues of $48.8 million for the three months
ended September 30, 2000. The increase was primarily due to increased revenue
from professional subscriptions as well as an increase due to the acquisitions.
Our subscription revenue segment consists of The Real Estate Services
Group revenues. The Real Estate Services Group is comprised of our
REALTOR.com(R), Homebuilder.com(TM), Homestore(TM) Apartments & Rentals,
eNeighborhoods(TM) and other real estate businesses.
Real Estate Services revenues increased approximately 62% to $51.6 million
for the three months ended September 30, 2001, compared to $31.8 million for the
three months ended September 30, 2000. Real Estate Services revenues represented
approximately 60% of total revenues for the three months ended September 30,
2001 compared to 65% of total revenues for the three months ended September 30,
2000. The growth in revenue from real estate services was due to increases in
the number of professional subscriptions, including a bulk purchase of
subscription-based products. The number of professional subscribers increased
182% to approximately 369,000 compared to professional subscribers for the three
months ended September 30, 2000. The increase in the number of professionals and
the corresponding increase in the real estate services revenue was primarily due
to the acquisition of the Move.com Group. Acquisitions of Homestyles, iPIX and
eNeighborhoods contributed to the increase in real estate services revenue. We
are projecting a flattening of real estate services revenues over the next
several quarters due to current macroeconomic conditions.
Advertising revenues decreased approximately 40% to $10.2 million for the
three months ended September 30, 2001, compared to $17.0 million for the three
months ended September 30, 2000. Advertising revenues represented approximately
12% of total revenues for the three months ended September 30, 2001 compared to
35% of total revenues for the three months ended September 30, 2000. The
decrease was driven primarily by the non-renewal of several large advertising
and sponsorship accounts, and the general softening in the online advertising
market. We are projecting a decline in advertising dollars due to the general
softening in the online advertising market and the reallocation of our resources
from advertising sales.
Other revenues which represented approximately 28% of total revenues or
$24.6 million for the three months ended September 30, 2001, were new revenues
from companies acquired in 2001. These acquired companies operated primarily in
the direct market business.
Cost of Revenues
Cost of revenues, including non-cash stock-based charges, increased
approximately 101% to $31.8 million for the three months ended September 30,
2001 from cost of revenues of $15.8 million for the three months ended September
30, 2000. The increase was primarily due to our overall increased sales volume
as well as increases in personnel, royalties, hosting costs and depreciation
during the three months ended September 30, 2001 as compared to the three months
ended September 30, 2000. Also contributing to the increase in cost of revenues
were our recent acquisitions, primarily the acquisitions of the Move.com Group,
iPIX, The Hessel Group, or THG, and iPlace. Due to the organization realignment
and cost reduction plan announced on October 25, 2001, we anticipate reductions
in cost of revenues in the future.
Gross margin percentage for the three months ended September 30, 2001 was
63.2%, down from gross margin percentage of 67.6% for the three months ended
September 30, 2000. The decrease in gross margin percentage was primarily due to
a decrease in advertising revenues which historically have larger gross margins.
We anticipate a continued decline in gross margin in our fourth quarter of 2001
as a result of the anticipated decline in advertising sales.
Operating Expenses
21
Sales and marketing. Sales and marketing expenses, including non-cash
stock-based charges, increased approximately 105% to $72.7 million for the three
months ended September 30, 2001 from sales and marketing of $35.4 million for
the three months ended September 30, 2000. The increase was due to increase in
salaries and commissions, customer service related costs, amortization of new
marketing deals, depreciation related to fixed assets, and stock-based charges.
Stock-based charges, included in sales and marketing, increased by $7.1 million
to $15.8 million for the three months ended September 30, 2001 from $8.7 million
for the three months ended September 30, 2000, primarily due to amortization of
stock-based charges relating to an Internet portal distribution agreement with
AOL. In April 2000, in connection with our marketing and distribution agreement
with AOL, we recorded prepaid distribution 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. See Note 19 of the
notes to our audited financial statements included in our Annual Report on Form
10-K/A for the year ended December 31, 2000. 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, primarily the acquisition of the Move.com Group, iPlace and
iPIX. Due to the organization realignment and cost reduction plan we announced
on October 25, 2001, we anticipate reductions in sales and marketing expenses in
the future.
Product development. Product development expenses, including non-cash
stock-based charges, increased approximately 116% to $9.6 million for the three
months ended September 30, 2001 from product development expenses of $4.5
million for the three months ended September 30, 2000. The increase in product
development costs was due to increased costs associated with the expansion of
our web sites, as well as our development of professional productivity tools.
Also contributing to the increase in product development expenses was an
increase in personnel. Due to the organization realignment and cost reduction
plan we announced on October 25, 2001, we anticipate reductions in product
development expenses in the future.
General and administrative. General and administrative expenses, including
non-cash stock-based charges, increased approximately 90% to $33.0 million for
the three months ended September 30, 2001 from general and administrative
expenses of $17.4 million for the three months ended September 30, 2000. The
increase was primarily due to an increase in personnel, consulting, bad debt
expense, and depreciation related to our capital expenditures to support
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
acquisitions of the Move.com Group and iPIX. Due to the organization realignment
and cost reduction plan we announced on October 25, 2001, we anticipate
reductions in general and administrative expenses in the future.
Amortization of intangible assets. Amortization of intangible assets was
$57.6 million for the three months ended September 30, 2001 compared to
amortization of $12.1 million for the three months ended September 30, 2000. The
increase in amortization was due to our acquisitions, primarily the Move.com
Group.
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
September 30,
------------
2001 2000
---- ----
(Restated) (Restated)
Revenues................................ $ 583 $1,765
Cost of revenues........................ 163 137
Sales and marketing..................... 15,766 8,708
Product development..................... 153 129
General and administrative.............. 2,279 697
-------- --------
$18,944 $11,436
======== ========
Stock-based charges increased by $7.5 million to $18.9 million for the
three months ended September 30, 2001 from $11.4 million for the three months
ended September 30, 2000 primarily as a result of amortization relating to the
AOL Internet portal distribution agreement.
Other Expense, Net
Other expense, net, increased to $22.1 million for the three months ended
September 30, 2001 from other income, net, of $200,000 for the three months
ended September 30, 2000. The increase primarily related to a $19.2 million
impairment of our
22
portfolio of cost and equity investments to reflect their net realizable values
based on our review of the companies' financial conditions, cash flow
projections and operating performance. Also contributing to the increase was
accretion relating to our AOL agreement. In connection with this agreement 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 fair market value of 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.
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 September 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
60% of total revenues for the three months ended September 30, 2001, grew 62%
from the three months ended September 30, 2000. The growth in revenue from
professional subscriptions was due to increases in the number of professionals,
including a bulk purchase of subscription-based products. The number of
professional subscriptions increased by 182% to approximately 369,000 compared
to the three months ended September 30, 2000. The increase in the number of
professionals and the corresponding increase in professional subscriptions
revenue was primarily due to the acquisition of the Move.com Group and iPlace.
Acquisitions of Homestyles and iPIX contributed to the increase of professional
subscription revenue.
Advertising revenues, which represented approximately 12% of total
revenues for the three months ended September 30, 2001, decreased 40% from the
three months ended September 30, 2000. The decrease was driven primarily by the
non renewal of several large advertising and sponsorship arrangements, and the
general softening in the online advertising market. We are projecting a decline
in advertising dollars due to the softening in the online advertising market and
the reallocation of our resources away from advertising sales.
Other revenues which represented approximately 28% of total revenues for
the three months ended September 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 $24.8 million for the
three months ended September 30, 2001 from subscription expenses of $19.4
million for the three months ended September 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 personnel. In
addition, our acquisitions of iPlace, iPIX and the Move.com Group also
contributed to the increase.
Advertising expenses increased to $12.5 million for the three months ended
September 30, 2001 from advertising expenses of $5.4 million for the three
months ended September 30, 2000. The increase was due to an increase in
personnel.
Other expenses were $15.5 million for the three months ended September 30,
2001. There were no corresponding expenses in 2000.
Unallocated expenses increased to $151.8 million for the three months
ended September 30, 2001 from unallocated expenses of $64.4 million for the
three months ended September 30, 2000. The increase was due to an increase in
amortization of intangible assets due to acquisitions and an increase in the
stock-based charges primarily relating to an Internet portal distribution
agreement. Also contributing to the increase in unallocated expenses were
increases in costs associated with the expansion of our web sites, increases in
legal and professional fees, and increases in personnel.
Nine Months Ended September 30, 2001 and 2000
Revenues
23
Revenues increased approximately 77% to $227.9 million for the nine months
ended September 30, 2001 from revenues of $128.7 million for the nine months
ended September 30, 2000. The increase was primarily due to increased revenue
from professional subscriptions, advertising and acquisitions.
Our subscription revenue segment consists of The Real Estate Services
Group revenues. The Real Estate Services Group is comprised of our
REALTOR.com(R), Homebuilder.com(TM), Homestore(TM) Apartments & Rentals,
eNeighborhoods(TM) and other real estate businesses.
Real Estate Services revenues increased approximately 76%, to $146.9
million for the nine months ended September 30, 2001, compared to $83.4 million
for the nine months ended September 30, 2000. Subscription revenues represented
approximately 64% of total revenues for the nine months ended September 30,
2001 compared to 65% of total revenues for the nine months ended Sept 30, 2000.
The growth in revenue from real estate services 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
subscribers increased by 182% to approximately 369,000 compared to professional
subscribers for the nine months ended September 30, 2000. The increase in the
number of professionals and the corresponding increase in the real estate
services revenue was primarily due to the acquisition of the Move.com Group.
Acquisitions of Homestyles, THG, and iPIX contributed to the increase in real
estate services revenue. We are projecting a flattening of real estate services
revenues over the next several quarters due to the current macroeconomic
conditions.
Advertising revenues, decreased approximately 26% to $33.7 million for the
nine months ended September 30, 2001, compared to $45.3 million for the nine
months ended September 30, 2000. Advertising revenues represented approximately
15% of total revenues for the nine months ended September 30, 2001 compared to
35% of total revenues for the nine months ended September 30, 2000. The decrease
was driven primarily by the non-renewal of several large advertising and
sponsorship accounts and the general softening in the on-line advertising
market. Although our advertising revenue has grown significantly, we are
projecting a decline in advertising dollars due to the softening in the online
advertising market in general and the reallocation of our resources away from
advertising sales.
Other revenues which represented approximately 22% of total revenues or
$47.3 million for the nine months ended September 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
approximately 132% to $92.9 million for the nine months ended September 30, 2001
from cost of revenues of $40.0 million for the nine months ended September 30,
2000. The increase was primarily due to our overall increased sales volume as
well as increases in personnel, royalties, hosting costs and depreciation during
the nine months ended September 30, 2001 as compared to the nine months ended
September 30, 2000. Also contributing to the increase in cost of revenues were
our acquisitions, primarily the acquisitions of the Move.com Group, iPIX and
THG. Due to the organization realignment and cost reduction plan we announced on
October 25, 2001, we anticipate reductions in cost of revenues in the future.
Gross margin percentage for the nine months ended September 30, 2001 was
59.2%, unchanged from gross margin of 68.9% for the nine months ended September
30, 2000. The decrease in gross margin percentage was primarily due to a
decrease in advertising revenues which historically have larger gross margins.
We anticipate a decline in gross margin in the fourth quarter of 2001 as a
result of the anticipated decline in advertising sales.
Operating Expenses
Sales and marketing. Sales and marketing expenses, including non-cash
stock-based charges, increased approximately 74.1% to $194.0 million for the
nine months ended September 30, 2001 from sales and marketing of $111.4 million
for the nine months ended September 30, 2000. The increase was due to an
increase in salaries and commissions, customer service related costs,
amortization of new marketing deals, depreciation related to our fixed assets
and stock-based charges. Stock-based charges, included in sales and marketing,
increased by $28.4 million to $53.8 million for the nine months ended September
30, 2001 from $25.4 million for the nine months ended September 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 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. See note 19 of the notes to our audited financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2000.
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 $27.9 million for the nine months ended September 30, 2001. Also
contributing to the increase in sales and marketing expenses were our
acquisitions, primarily the
24
acquisitions of the Move.com Group and iPIX. Due to the organization
realignment, we anticipate reductions in sales and marketing expenses in the
future.
Product development. Product development expenses, including non-cash
stock-based charges, increased approximately 133% to $23.8 million for the nine
months ended September 30, 2001 from $10.2 million for the nine months ended
September 30, 2000. The increase in product development costs was primarily due
to increased costs associated with the expansion of our web sites, as well as
our development of professional productivity tools. Also contributing to the
increase in product development expenses was an increase in personnel. Due to
the organization realignment, we anticipate reductions in product development
expenses in the future.
General and administrative. General and administrative expenses, including
non-cash stock-based charges, increased approximately 109% to $86.0 million for
the nine months ended September 30, 2001 from general and administrative
expenses of $41.2 million for the nine months ended September 30, 2000. The
increase was primarily due to an increase in personnel, consulting, bad debt
expense and depreciation related to our capital expenditures to support
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
acquisitions of the Move.com Group and iPIX. Due to the organization
realignment, we anticipate reductions in general and administrative expenses in
the future.
Amortization of intangible assets. Amortization of intangible assets was
$146.0 million for the nine months ended September 30, 2001 compared to
amortization of $31.5 million for the nine months ended September 30, 2000. The
increase in amortization was due to our acquisitions, primarily the acquisitions
of the Move.com Group, iPIX, Top Producer Systems, Inc., HomeWrite and THG.
Acquisition-related and other charges. Acquisition-related and other
charges were $15.6 million for the nine months ended September 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):
Nine Months Ended
September 30,
------------
2001 2000
---- ----
(Restated) (Restated)
Revenues................................... $2,456 $4,467
Cost of revenues........................... 349 483
Sales and marketing........................ 53,823 25,406
Product development........................ 328 455
General and administrative................. 3,228 2,460
------ -------
$60,184 $33,271
======= =======
Stock-based charges increased by $26.9 million to $60.2 million for the
nine months ended September 30, 2001 from $33.3 million for the nine months
ended September 30, 2000 primarily as a result of amortization relating to the
AOL Internet portal distribution agreement.
Other Expense, Net
Other expense, net, increased to $38.8 million for the nine months ended
September 30, 2001 from other expense, net of $185,000 for the nine months ended
September 30, 2000. The increase primarily related to a $30.7 million impairment
of our portfolio of cost and equity investments to reflect their net realizable
values based on our review of the companies' financial conditions, cash flow
projections and operating performance. Also contributing to the increase was
accretion relating to our AOL agreement. In connection with the AOL agreement 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 fair market value of 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 $11.1 million for the nine
months ended September 30, 2001.
Income Taxes
25
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 nine months ended September 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
64% of total revenues for the nine months ended September 30, 2001, grew 76%
from the nine months ended September 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 182% to approximately 369,000 compared to the nine months ended September 30,
2000. The increase in the number of professionals and the corresponding increase
in professional subscriptions revenue was primarily due to the acquisition of
the Move.com Group and iPlace. Acquisitions of, Homestyles, THG, and iPIX also
contributed to the increase in professional subscription revenues.
Advertising revenues, which represented approximately 15% of total
revenues for the nine months ended September 30, 2001, declined 26% from the
nine months ended September 30, 2000. The decrease was driven primarily by the
non-renewal of several large advertising and sponsorship accounts and the
general softening in the on-line advertising market. Although our advertising
revenue has grown significantly, we are projecting a decline in advertising
dollars due to the softening in the online advertising market in general and the
reallocation of our resources away from advertising sales.
Other revenues which represented approximately 21% of the total revenues
for the nine months ended September 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 $76.8 million for the
nine months ended September 30, 2001 from subscription expenses of $45.1 million
for the nine months ended September 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 personnel. In addition, our
acquisitions of iPlace, iPIX and the Move.com Group also contributed to the
increase.
Advertising expenses increased to $29.9 million for the nine months ended
September 30, 2001 from advertising expenses of $9.7 million for the nine months
ended September 30, 2000. The increase was due to an increase in personnel
relating to the increase in advertising sales.
Other expenses were $34.6 million for the nine months ended September 30,
2001. These were no corresponding expenses in 2000.
Unallocated expenses increased to $417.0 million for the nine months ended
September 30, 2001 from unallocated expenses of $183.6 million for the nine
months ended September 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,
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 expansion of our web sites, increases in
legal and professional fees, and increases in personnel.
Intangibles and Other Long-Lived Assets
We are currently assessing the carrying values of certain long-lived
assets, consisting primarily of goodwill and other intangibles of approximately
$1.1 billion and other assets of approximately $139.5 million. The assessment is
being performed pursuant to Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of". Due to the announced realignment plan, the current sustained
downturn in financial markets, and our current business outlook, we believe we
are required to evaluate whether an impairment of long-lived assets exists.
Under SFAS No. 121, we will determine if the carrying values of our long-lived
assets are recoverable on an undiscounted cash flows basis applied at the lowest
level of separately identifiable cash flows. If the long-lived assets are not
recoverable on this basis, an impairment loss will be recognized based on the
excess of carrying value over the discounted future cash flows. Any such
impairment would first be allocated to the goodwill of that asset group being
evaluated. We preliminarily anticipate recording an impairment charge in the
fourth quarter 2001 ranging from approximately $650.0 million to $950.0 million.
26
Liquidity and Capital Resources
Net cash used in operating activities of $11.7 million for the nine
months ended September 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 $278.9 million. Offsetting the net
cash used in operating activities were the changes in operating assets and
liabilities, net of acquisitions of 68.4 million. Net cash used in operating
activities was $41.3 million for the nine months ended September 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 $73.2 million. Adding to the cash
used in operations were the changes in operating assets and liabilities, net of
acquisitions, of $22.0 million.
Net cash used in investing activities of $151.5 million for the nine
months ended September 30, 2001 was attributable to purchases of short-term
investments of $85.9 million offset by maturities of short-term investments of
$115.5 million, capital expenditures of $51.8 million and cash paid for
acquisitions of $129.3 million including acquisition-related costs. Net cash
used in investing activities of $210.2 million for the nine months ended
September 30, 2000 was attributable to the purchase of cost and equity
investments of $29.5 million, purchases of short-term investments of $202.0
million offset by maturities of short-term investments of $87.0 million, capital
expenditures of $26.7 million and cash paid for acquisitions of $39.0 million
including acquisition-related costs.
Net cash provided by financing activities of $53.3 million for the nine
months ended September 30, 2001 was primarily attributable to the proceeds from
the exercise of stock options, warrants and share issuances under our employee
stock purchase plan of $56.2 million, proceeds from the payment of stockholders'
notes of $2.3 million, offset by the issuance of notes receivable of $4.8
million. Net cash provided by financing activities of $316.0 million for the
nine months ended September 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
$19.3 million, subsidiary equity transactions of $10.9 million, offset by the
repayment of notes payable of $38.6 million, the transfer of $103.4 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 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 Budget,
Inc., or Budget, in connection with entering into a ten-year marketing
agreement. During the six months following March 2002, for any shares it then
owns, Budget 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 Budget 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.
On October 30, 2001, we announced an agreement with Budget to extend the
strategic marketing alliance while at the same time settling our stock price
guarantee due in March 2002. Under the agreement, we issued to Budget
approximately 4.8 million shares of our common stock in exchange for the
cancellation of Budget's put option included in its original agreement with us.
The agreement calls for Budget to extend the agreement an additional year
through March 2011. The shares issued to Budget will be tradable following the
registration statement, as filed on November 2, 2001, being declared effective
by the SEC. Trade volume and timing restrictions exist on the shares covered by
the registration statement.
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,
27
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 September
30, 2001, we had an accumulated deficit of $660.8 million, cash and cash
equivalents of $57.6 million and short-term investments of $45.3 million. We
have no material financial 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 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, our liquidity could be adversely impacted by the
litigation referred to in Note 14 to our 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/A 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 the NAR(R)
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 reasons include:
. the acquisition or change in control 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;
28
. 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 to operate the new web site or service
acquired. 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 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 Homestore Apartments and Rentals web site is subject to a number of
restrictions on how it may be operated.
In agreeing to our acquisition of SpringStreet Inc., now part of Homestore
apartments and rentals the NAR imposed a number of important restrictions on how
we can operate the web sites. 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;
29
. 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 Homestore Apartments and Rentals.
The NAR can revoke its consent to our operating the Homestore Apartments
and Rentals 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.
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;
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. 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 $330.5 million and $109.6 million for
the nine months ended September 30, 2001 and 2000, respectively. As of September
30, 2001, we had an accumulated deficit of $660.8 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 September 30,
2001, we had approximately $1,160.9 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.
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 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 of
resources to secure 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 or enter into others.
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
relationships 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 not to renew
their subscriptions.
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
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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/A:
. 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.
Our success will depend on our ability to manage growth.
Despite our recently announced reduction in workforce and the recent
downturn in general economic conditions, since inception, we have rapidly and
significantly expanded our operations through acquisitions and organic growth.
This growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational, financial and other resources.
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 AOL network of
properties. On some of these sites we are featured as the exclusive provider of
home listings. To secure 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.
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 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. The rapid pace of technological
change constantly creates new opportunities for existing and new competitors and
it can quickly render our existing technologies less valuable.
Our future success depends largely on our ability to attract, retain and
motivate key personnel.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial and sales personnel. In spite of the
economic slowdown, competition for experienced management and key personnel is
intense, particularly in the market segments in which we compete. Volatility or
lack of positive performance in our stock price may also adversely affect our
ability to retain key employees, all of whom have been granted stock options.
Due to the decline in the trading price of our common stock, a substantial
portion of the stock options held by our employees have an exercise price that
is higher than the
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current trading price of our common stock, and therefore these stock options may
not be effective in helping us to retain valuable employees.
Also, we have recently executed workforce reductions and have announced
that we are restructuring our business operations into two primary business
units. As a result, we will need to operate with fewer employees and existing
employees may have to perform new tasks. These factors may create concern about
job security among existing employees that could lead to increased turnover. We
may have difficulties in retaining and attracting employees. Employee turnover
may result in a loss of knowledge about our customers, our operations and our
internal systems, which could materially harm our business. If any of these
employees leave, we may not be able to replace them with employees possessing
comparable skills. 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. The loss of services of any of our key
personnel, excessive turnover of our work force, the inability to retain and
attract qualified personnel in the future or delays in hiring required personnel
may have a material adverse effect on our business, operating results or
financial condition.
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 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, Homestyles in May 2001
and iPlace in August 2001. We may 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 well 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
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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 certificate of incorporation and bylaws, Delaware law and other
agreements contain provisions that could discourage a takeover.
Delaware law, our certificate of incorporation and bylaws, our operating
agreement with the NAR and a stockholders agreement could have the effect of
delaying or preventing a third party from acquiring us, even if a change in
control would be beneficial to our stockholders. For example, we have a
classified board of directors. In addition, our stockholders are unable to act
by written consent or to fill any vacancy on the board of directors. Our
stockholders cannot call special meetings of stockholders for any purpose,
including to remove any director or the entire board of directors without cause.
In addition, the NAR could terminate the Realtor.com operating agreement if
Homestore.com or RealSelect is acquired.
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 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 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.
Our agreement with the International Consortium of Real Estate
Associations may expose us to higher costs and greater risks.
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We recently entered into an agreement with the International Consortium of
Real Estate Associations. This consortium, formed in May 2001, consists of
approximately 24 real estate associations worldwide and was created to provide
consumers with a single Internet based source for real property around the
world. Pursuant to that agreement, we agreed to operate the consortium's web
site and have been endorsed as the exclusive provider of certain products and
services to real estate agents in the countries in which members of the
consortium have operations. As we expand our service and product offerings to
the consortium's member associations, our exposure to currency exchange rate
fluctuations will increase. In addition, we may be subject to the following
risks:
. 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 the consortium member associations are located.
These factors may interrupt or otherwise adversely affect our ability to
expand our international operations and may impose additional costs upon us.
Depending on the market performance of our common stock, we may be
required to use a significant amount of cash under our AOL agreement, and the
term of the agreement may be shortened.
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.
Our current organizational realignment and cost reduction plan may not
meet its objectives and could adversely affect our results of operations and
financial position.
On October 25, 2001, the Company announced an organizational realignment
and cost reduction plan to focus the Company more tightly on its core customer
segments and to allow for increased operational efficiencies. This restructuring
plan included a reduction in workforce of up to 700 employees or about 20% of
our workforce and established two primary business groups. If we do not meet our
restructuring objectives or if the economic slowdown continues, we may have to
implement additional plans for restructuring in order to reduce our operating
costs. Developing and implementing restructuring plans are time consuming and
could divert management's attention, which could have an adverse effect on our
financial results.
Real Estate Industry Risks:
Our business is dependent on the strength of the real estate industry,
which is cyclical and seasonal.
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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.
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.
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We have experienced a deterioration in the demand for our advertising
services due to the slowdown in the U.S. economy, decreased corporate spending
and concerns about the effectiveness of Internet advertising. 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 the 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 the 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. If the demand for the Internet advertising remains
sluggish due to a weak U.S economy, our revenue and operating results could be
materially harmed.
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.
Taxation of Internet transactions could slow the use of the Internet.
In 1998, Congress passed the Internet Tax Freedom Act, which places a
three-year moratorium on state and local taxes on Internet based transaction,
unless such tax was already imposed prior to October 1, 1998, and on
discriminatory taxes on e-commerce. Legislation extending the moratorium, which
ended October 21, 2001, has not yet been enacted. If Congress chooses not to
renew this legislation, U.S. state and local governments would be free to impose
new taxes on electronically purchased goods. Although proposed legislation
extending the moratorium is currently under consideration by Congress, it is not
clear whether or when any such legislation will be enacted, and if enacted,
whether or how it will differ from the recently expired legislation. Unless and
until new legislation is enacted extending the moratorium on the imposition of
new taxes on Internet-based transactions, states are free to impose such taxes.
The imposition of such taxes could impair the growth of electronic commerce and
thereby adversely affect the growth of our business.
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.
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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, including real
estate listings and consumer online credit reports. 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, privacy violations 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 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 include:
. 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.
38
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
39