<PAGE>
As filed with the Securities and Exchange Commission on July 8, 1999
Registration No. 333-79689
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOMESTORE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 6531 95-4438337
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification No.)
incorporation or
organization)
225 West Hillcrest Drive, Suite 100
Thousand Oaks, California 91360
(805) 557-2300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Stuart H. Wolff
Chairman of the Board and Chief Executive Officer
HomeStore.com, Inc.
225 West Hillcrest Drive, Suite 100
Thousand Oaks, California 91360
(805) 557-2300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Gordon K. Davidson, Esq. Jeffrey D. Saper, Esq.
Laird H. Simons III, Esq. Kurt J. Berney, Esq.
Jeffrey R. Vetter, Esq. Anil P. Patel, Esq.
David A. Bell, Esq. WILSON SONSINI GOODRICH
Andrew J. Schultheis, Esq. & ROSATI, P.C.
FENWICK & WEST LLP 650 Page Mill Road
Two Palo Alto Square Palo Alto, California 94304
Palo Alto, California 94306 (650) 493-9300
(650) 494-0600
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum Proposed
Offering Maximum
Price Aggregate Amount of
Title of Each Class of Amount to be Per Offering Registration
Securities to be Registered Registered(1) Share(2) Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par value
per share................... 8,050,000 $10.00 $80,500,000 $22,379
</TABLE>
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(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of registration
fee pursuant to Rule 457(a).
(3) A fee of $27,800 was previously paid by the Registrant in connection with
the filing on May 28, 1999.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 8, 1999
7,000,000 Shares
[Logo]
COMMON STOCK
-----------
HomeStore.com, Inc. is offering 7,000,000 shares of its common stock. This is
our initial public offering. We have requested that the underwriters reserve up
to 1,100,000 shares to be offered to our directors, officers, employees and
business associates and also to members of the National Association of REALTORS
and the National Association of Home Builders. We anticipate that the initial
public offering price will be between $8 and $10 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "HOMS."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions HomeStore.com
-------- ------------- -------------
<S> <C> <C> <C>
Per Share................... $ $ $
Total....................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
HomeStore.com has granted the underwriters the right to purchase up to an
additional 1,050,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE>
Inside Front Cover Artwork
Upper Half--Black background with text in yellow "If you clicked here, you
would be home by now."
Bottom Half--White background with a rectangular graphical button in the
center. A computer cursor arrow touches the button. Inside the button appears
the word "Click."
Inside Cover Gatefold Artwork
Upper Left Quadrant of Gatefold--Black background with text "HomeStore.com"
centered in the top half of the page inside a box which is offset to the
right. An arrow pointing to the right appears to the right and above
"HomeStore.com."
Lower Left Quadrant of Gatefold--White background with opening page of
HomeStore.com web site offset toward the center of the gatefold. Black house
icon in lower left corner. Graphic links to the REALTOR.COM, HomeBuilder.com,
SpringStreet.com and CommercialSource.com web site are arrayed across the top
of the web page. The words "Press Room" appear in red as a text link in the
upper right corner of the web page.
Upper Right Quadrant--White background with three web pages with a caption
above each web page. The numbers "1," "2" and "3" appear sequentially in black
circles above the captions. The REALTOR.COM web page appears on the left with
the caption "REALTOR.COM(TM) Over 1.37 million homes online. Whether it's
across town or across the country, the official Internet site of the National
Association of REALTORS(R) lets you search for that special home and
REALTOR(R) on the web's largest database." The SpringStreet.com web page
appears in the middle with the caption "SpringStreet.com. If you're looking
for just the right apartment look to us for our comprehensive selection of
rental listings, photos and floor plans. Offering apartments in over 6,000
cities nationwide, we've got what it takes to help you spring into action."
The HomeBuilder.com web page appears on the right. Above this web page appears
the caption "HomeBuilder.com(TM) Over 100,000 new homes and planned
developments for sale throughout the U.S. Stop driving yourself crazy looking
for the newly built home of your dreams. The Official New Homes Site of the
National Association of Home Builders gives you an outside and inside look at
floor plans, elevations, photos, home amenities--even virtual tours. And all
from the comfort of your present home."
Lower Right Quadrant--White background with black text. The following
captions appear inside a box in descending order: "750 Billion Dollar
Residential Resale Market", "150 Billion Dollar New Home Market", "300 Billion
Dollar Rental Market" and "3 branded web sites". The words "1 company."
appears below in a separate box and to the right in a larger font size.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 9
Special Note Regarding Forward-
Looking Statements................. 22
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Consolidated Financial
Data............................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 45
Management......................... 63
Related Party Transactions......... 74
Principal Stockholders............. 81
Description of Capital Stock....... 83
Shares Eligible for Future Sale.... 88
Underwriters....................... 90
Legal Matters...................... 92
Experts............................ 92
Change in Independent Accountants.. 93
Additional Information............. 93
Index to Financial Statements...... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell shares of
common stock and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
HomeStore.com(TM), REALTOR.com(TM), HomeBuilder.com(TM),
SpringStreet.com(TM) and CommercialSource.com(TM) are our trademarks or are
exclusively licensed to us. This prospectus contains trademarks of other
companies and organizations. "REALTOR(R)" is a registered collective membership
mark which may be used only by real estate professionals who are members of the
National Association of REALTORS, or the NAR, and subscribe to its code of
ethics.
Except as otherwise indicated, all information in this prospectus assumes:
. a 5-for-2 stock split to be completed immediately prior to the completion
of this offering;
. each outstanding share of preferred stock is converted into five shares
of common stock upon the closing of this offering, except for one share
of our new Series A preferred stock to be issued to the NAR;
. the changing of our name to HomeStore.com, Inc.; and
. no exercise of the underwriters' over-allotment option.
Until , 1999, 25 days after commencement of this offering, all dealers
that buy, sell or trade the common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
OUR COMPANY
We are the leading destination on the Internet for real estate related
information, products and services and are pioneering the use of the Internet
to bring the real estate industry online. Our family of web sites, consisting
of HomeStore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com and
CommercialSource.com, provides the most comprehensive source of real estate
listings and content on the Internet. Through our family of web sites, we
provide a wide variety of information and tools for consumers, real estate
industry professionals, advertisers and providers of real estate related
products and services. To provide consumers with real estate listings, access
to real estate professionals and other real estate related information and
resources throughout the home and real estate life cycle, we have established
relationships with key industry participants. These participants include real
estate market leaders such as the National Association of REALTORS, or the NAR,
the National Association of Home Builders, or the NAHB, the largest Multiple
Listing Services, or MLSs, real estate franchises, brokers, builders and
agents. The NAR is a not for profit trade organization whose members include
over 720,000 real estate brokers and agents across the U.S. The NAHB is the
largest trade organization of new home builders in the U.S. MLSs operate
proprietary networks that provide real estate professionals with listings of
properties for sale and are regulated by a governing body of local brokers
and/or agents.
In order to draw additional traffic to our family of web sites, we also have
distribution agreements with the following Internet portal sites: America
Online, @Home, Excite, and Go Network/Infoseek. These agreements typically
provide that our content will be displayed on the real estate related sections
of those sites along with links to our web sites. We currently generate
revenues from several sources, including fees from agents, brokers, home
builders, rental property owners and other advertisers.
OUR MARKET OPPORTUNITY
Every participant in the home and real estate life cycle faces a unique set
of challenges. Consumers are continually searching for a comprehensive,
convenient and integrated source of information to assist them in every aspect
of the real estate transaction. Real estate agents and brokers depend on
attracting and retaining customers in order to generate increasing numbers of
transactions and are looking for additional opportunities to market their
services, become more productive and compete more effectively for transactions.
Home building and real estate professionals also depend on attracting and
retaining customers in order to sell new properties in a timely manner and
continue to seek new ways to market their products and services as well as
inform prospective home buyers of the availability of new properties. To make
an informed decision, renters need access to comprehensive information about
available rental units, specific neighborhoods and rental prices in a given
geographic location. In addition, due to the high turnover rate in rental
units, property managers and owners must regularly attract new tenants to
minimize their vacancy rates and consequently continue to seek to market their
available units in a cost-effective manner. Finally, service providers and
retailers of real estate related products or services need an effective
mechanism or centralized location to reach consumers who are most interested in
their offerings.
Because of the size and fragmented nature of the real estate industry and
its reliance on the exchange of information, the Internet offers a compelling
means for consumers, real estate professionals, home builders, renters,
property managers and owners and ancillary service providers to come together
to improve the dissemination of information and enhance communications.
4
<PAGE>
OUR WEB SITES
We operate the HomeStore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com
and CommercialSource.com web sites.
.HomeStore.com serves as a gateway to our entire family of web sites.
. REALTOR.com contains listings for over 1.37 million of the approximately
1.47 million homes that we estimate are listed nationally for sale as of
June 30, 1999. Users can search our database of homes for sale and find
detailed information on the available homes and their surrounding
neighborhoods. They can also use REALTOR.com to find REALTORS to assist
them in the buying or selling process. The site's primary areas, Getting
Started, Buying, Selling, Offer/Closing, Moving and Owning, also provide
users with information for each stage of the home and real estate life
cycle. REALTORS can provide detailed information about their listings,
including photos, and can link their listings to their personal web site
pages.
. HomeBuilder.com contains listings of over 100,000 new homes across the
U.S. as of June 30, 1999. Users can search based on a particular builder
or geographic location as well as home attributes. Builders of all sizes
can display their new homes, models or floor plans. Potential buyers can
also contact builders through the service via electronic mail or
facsimile.
. SpringStreet.com contains listings for over 45,000 rental properties in
over 6,000 U.S. cities as of June 30, 1999. Users can search for detailed
information on particular rental units, buildings and neighborhoods.
SpringStreet.com also provides information for services targeted at
renters, such as moving services, insurance, furniture rental and other
local services. Property owners and managers can list their rental
properties using basic text-based listings or using enhanced listings
containing additional features, such as color photos and maps.
. CommercialSource.com provides links to commercial property listings in
North America. The site also offers links to a number of financing
sources and other information service providers for commercial real
estate.
OUR STRATEGY
Our objective is to extend our position as the leading real estate
destination on the Internet. The key elements of our strategy include:
increasing the number of listings and enhancing the real estate content on our
web sites; increasing the number of users on our web sites as well as the
amount of time they spend on the sites; pursuing additional relationships with
key real estate industry participants; continuing to extend our brand name and
brand recognition among consumers and real estate professionals; and
incorporating new Internet technologies into our web sites to provide enhanced
functions and features.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. 7,000,000 shares
Common stock to be outstanding
after the offering............... 67,037,860 shares
Use of proceeds................... For general corporate purposes, including
capital expenditures, working capital and
accelerated payments of $6.3 million under
our AOL distribution agreement,
$1.0 million under our RE/MAX preferred
marketing agreement, $900,000 in connection
with a prior acquisition, and $600,000
under our operating agreement with the NAR.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol........................... HOMS
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at June 30, 1999.
This number does not take into account:
. 7,802,720 shares subject to options outstanding under our stock plans and
outstanding warrants with an average exercise price per share of $4.37,
of these 3,031,137 shares are subject to vested options or warrants
exercisable within 60 days of June 30, 1999;
. up to 2,111,345 shares and shares subject to warrants being offered to
home builders and Multiple Listing Services concurrently with this
offering; and
. shares subject to warrants that will only be issued if America Online
purchases shares in this offering.
Following this offering, the NAR will own approximately 6.8% of our common
stock, venture capital funds affiliated with our board members will own
approximately 35.6% of our common stock and our remaining officers and
directors will own approximately 11.3% of our common stock.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table presents consolidated statement of operations data of
HomeStore.com. The pro forma net loss per share data below gives effect to (1)
the conversion of each outstanding share of preferred stock into five shares of
common stock upon the closing of the offering and (2) the pro forma basis of
presentation described in "Selected Consolidated Financial Data" on page 26.
See Note 2 of HomeStore.com's Notes to Consolidated Financial Statements and
Unaudited Pro Forma Condensed Consolidated Financial Information.
<TABLE>
<CAPTION>
Actual Pro Forma
---------------------------------------- ---------------------------
Year Ended December Six Months
31, Ended June 30, Year Ended Six Months
---------------------- ---------------- December 31, Ended June 30,
1996 1997 1998 1998 1999 1998 1999
------ ------ ------ ------ -------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated statement
of operations data:
Revenues............... $1,360 $ 42 $ -- $ -- $ 16,586 $ 19,125 $ 21,370
Gross profit........... 1,318 36 -- -- 9,476 9,595 12,572
Loss from operations... (231) (16) (3) (2) (33,888) (69,382) (55,131)
Net loss............... $ (252) $ (17) $ (3) $ (2) $(33,922) $(69,042) $(55,126)
Net loss applicable to
common stockholders... $ (252) $ (17) $ (3) $ (2) $(35,399) $(76,769) $(55,126)
Net loss per share
applicable to common
stockholders:
Basic and diluted...... $ (.07) $ -- $ -- $ -- $ (1.73) $ (1.79) $ (.98)
Weighted average
shares--basic and
diluted............... 3,477 8,650 9,173 8,650 20,502 43,001 56,455
</TABLE>
6
<PAGE>
The following table presents the consolidated balance sheet data of
HomeStore.com at June 30, 1999. The pro forma column in the consolidated
balance sheet data below gives effect to (1) the conversion of each outstanding
share of preferred stock into five shares of common stock upon the closing of
this offering, except for the one share of our new Series A preferred stock to
be issued to the NAR and (2) the conversion of substantially all of the shares
of RealSelect held by the NAR for 3,917,265 shares of HomeStore.com. The pro
forma as adjusted data gives effect to the sale of the 7,000,000 shares of
common stock that we are offering under this prospectus at an assumed initial
public offering price of $9.00 per share after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds," "Capitalization" and Unaudited Pro Forma Condensed
Consolidated Financial Information.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated balance sheet data:
Cash and cash equivalents....................... $ 18,183 $18,183 $65,940
Working capital ................................ 1,057 1,057 57,647
Total assets.................................... 104,303 104,303 152,060
Notes payable, long-term and current portion.... 3,958 3,958 3,025
Redeemable convertible preferred stock.......... 5,094 -- --
Total stockholders' equity...................... 64,569 69,663 126,253
</TABLE>
We have incurred losses from our operations since we were formed in 1993. On
a pro forma basis, we have also incurred substantial operating losses. We also
expect to incur significant non-cash charges relating to stock-based
compensation and the issuance of warrants. Therefore, we may not achieve or
sustain profitability.
OUR HISTORY
We were incorporated in July 1993 as InfoTouch, Inc. InfoTouch's initial
business plan was to develop kiosks, or booths with computer screens, to allow
consumers to search for home listings. In December 1996, our RealSelect
subsidiary was formed to operate the REALTOR.com web site. RealSelect was
initially owned by the NAR and an entity called NetSelect LLC. NetSelect LLC
was in turn owned by InfoTouch and another holding company, NetSelect, Inc. In
February 1999, NetSelect, Inc. and NetSelect LLC, were merged into InfoTouch
and InfoTouch was renamed NetSelect, Inc. Immediately prior to this offering we
will change our name to HomeStore.com, Inc. and the NAR will exchange
substantially all of its RealSelect shares for shares of our common stock.
After this exchange we will own in excess of 99% of RealSelect's stock and the
NAR will own less than 1%. Our current subsidiaries include RealSelect, which
owns our REALTOR.com web site, SpringStreet, Inc. which owns the
SpringStreet.com web site, and National New Homes, which owns the
HomeBuilder.com web site.
The NAR has the right to appoint one member to our board of directors and
two members to RealSelect's board of directors. The RealSelect board members
appointed by the NAR must approve RealSelect's undertaking of a number of
actions. Under a stockholders agreement with the NAR, if we propose to enter
into a new real estate related business, we must first give RealSelect the
opportunity to invest in that business. We pay royalties to the NAR on a
quarterly basis based on REALTOR.com's and SpringStreet.com's revenues. In
addition, the NAR must consent to transfers of stock by many of our existing
stockholders and to any proposed sale of substantially all of our assets. This
could have the effect of delaying or restricting a change of control. Our
relationship with the NAR is described in more detail on pages 9-11 and 75-79.
7
<PAGE>
We are a Delaware corporation. Our principal executive offices are located
at 225 West Hillcrest Drive, Suite 100, Thousand Oaks, California 91360. Our
telephone number is (805) 557-2300. Our world wide web addresses are
"www.HomeStore.com," "www.REALTOR.com," "www.HomeBuilder.com,"
"www.SpringStreet.com" and "www.CommercialSource.com." The information on our
family of web sites is not incorporated into this prospectus.
We face a number of risks related to our business including the potential
termination of our agreements with the NAR and NAHB, the influence the NAR has
over how we operate the REALTOR.com and SpringStreet.com web sites and our need
to obtain real estate listings. You should read the information contained in
the section entitled "Risk Factors" carefully.
The NAR does not make any endorsement or recommendation regarding any
purchase of the shares of common stock being sold in this offering.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. If any of the following risks actually occur, our
business, results of operations and financial condition could be materially
adversely affected, the trading price of our common stock could decline, and
you could lose all or part of your investment.
Risks Related to our Business
Our agreement with the National Association of REALTORS could be terminated
by it.
The REALTOR.com trademark and web site address and the REALTOR trademark
are owned by the NAR. The NAR licenses these trademarks to our RealSelect
subsidiary under a license agreement, and RealSelect operates the REALTOR.com
web site under an operating agreement with the NAR.
Although the REALTOR.com operating agreement is a lifetime agreement, the
NAR may terminate it for a variety of reasons. These include:
. if HomeStore.com or RealSelect is acquired;
. a substantial decrease in the number of property listings on our
REALTOR.com 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 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 web site;
. the NAR has the right to approve how we use its trademarks, and we must
comply with its quality standards for the use of these marks;
. we must meet performance standards relating to the availability time of
the REALTOR.com web site;
. the NAR has the right to review, approve and request changes to the
content on the pages of our REALTOR.com 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 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 real estate related content it has developed. See
"Related Party Transactions--Operating Agreement with the National Association
of REALTORS."
If our operating agreement for REALTOR.com terminates, the NAR would be
able to operate the REALTOR.com web site.
If our operating agreement terminates, we must transfer a copy of the
software that operates the REALTOR.com web site and assign our agreements with
data content providers, such as real estate brokers or
9
<PAGE>
MLSs, to the NAR. The NAR would then be able to operate the REALTOR.com 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 were required to obtain the consent of the NAR prior to our acquisition
of SpringStreet and the launch of our HomeBuilder.com and CommercialSource.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 will need to obtain the prior consent of the NAR. Any
future consents from the NAR, if obtained, could be conditioned on our
agreeing to operational conditions for the new web site or service. These
conditions could 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:
. starting in June 2000, the NAHB can terminate this agreement with six
months' prior notice;
. we are restricted in the type and subject matter of advertisements on the
pages of our HomeBuilder.com web site that contain new home listings; and
. the NAHB has the right to approve how we use its trademarks and we must
comply with its quality standards for the use of its marks.
Our SpringStreet.com web site is subject to a number of restrictions on how
it may be operated.
In agreeing to our acquisition of SpringStreet Inc., the NAR imposed a
number of important restrictions on how we can operate the SpringStreet.com
web site. These include:
. if the consent terminates for any reason, we will have to transfer to the
NAR all data and content, such as listings, on the rental site that were
provided by real estate professionals who are members of the NAR, known
as REALTORS;
. listings for rental units in smaller non-apartment properties generally
must be received from a REALTOR or REALTOR-controlled MLSs in order to be
listed on the web site;
. if the consent is terminated, we could be required to operate our rental
properties web site at a different web address;
. if the consent terminates for any reason, other than as a result of a
breach by the NAR, the NAR will be permitted to use the REALTOR-branded
web address, resulting in increased competition;
. without the consent of the NAR, prior to the time we are using a REALTOR-
branded web address, we cannot provide a link on the SpringStreet.com web
site linking to the REALTOR.com web site and vice versa;
. we cannot list properties for sale on the rental web site for the
duration of our REALTOR.com 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;
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. 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 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 preferred pricing for home pages or enhanced
advertising on the rental web site.
The NAR could revoke its consent to our operating SpringStreet.com.
The NAR can revoke its consent to our operating the SpringStreet.com web
site for reasons which include
. if HomeStore.com or RealSelect is acquired;
. a substantial decrease in property listings on our REALTOR.com web site;
and
. a breach of any of our obligations under the consent or the REALTOR.com
operating agreement that we do not cure within 30 days of being notified
by the NAR of the breach.
The National Association of REALTORS has significant influence over aspects
of our RealSelect subsidiary's corporate governance.
The NAR will have significant influence over RealSelect's corporate
governance.
Board representatives. The NAR is entitled to have one representative as a
member of our board of directors and two representatives as members of our
RealSelect subsidiary'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
web site and real property advertising programming for electronic display and
related businesses. Without the consent of six of RealSelect's seven
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 an 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;
. establish, or appoint any members to, a committee of its board of
directors; or
. issue or redeem any of its equity securities.
The NAR can restrict a change of control of HomeStore.com.
Stockholders holding approximately 67.8% of our outstanding capital stock
at June 30, 1999 have agreed to restrict the sale of their shares of common
stock. Without the prior consent of the NAR, these stockholders may not
transfer these shares of common stock to a person, other than to each other,
whose primary business is "real estate-related" or to a transferee who will
become a holder of more than 5% of our capital stock as a result of the
transfer from the stockholder. Accordingly, these types of changes of control,
even if favorable to stockholders, could be prohibited or restricted absent
the NAR's consent.
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It is difficult to evaluate our current business due to our limited history
with our current business.
HomeBuilder.com was added to our family of web sites in July 1998 after our
acquisition of MultiSearch Solutions. Our CommercialSource.com web site was
launched in October 1998. We acquired our SpringStreet.com web site in June
1999. Therefore, we have only a limited operating history with our current
business. This limited history makes it difficult to evaluate our current
business and prospects.
We have a history of losses and expect losses for the foreseeable future.
We have experienced operating losses in each quarterly and annual period
since 1993, and we incurred operating losses of $33.9 million for the first
two quarters of 1999. On a pro forma basis, we incurred operating losses of
$69.4 million in 1998 and $55.1 million for the first two quarters of 1999. As
of June 30, 1999, we had an accumulated deficit of $96.6 million, and we
expect to incur losses for the foreseeable future. The size of these losses
will depend, in part, on the rate of growth in our revenues from broker,
agent, home builder and rental property owner web hosting fees, advertising
sales and sales of other products and services. The size of our future losses
will also be impacted by non-cash stock-based charges relating to deferred
compensation, stock and warrant issuances and amortization of intangible
assets. As of June 30, 1999, we had approximately $77.1 million of deferred
stock-based compensation and intangible assets to be amortized. After this
offering we will incur substantial stock-based charges in connection with the
following warrants to acquire our common stock:
. warrants currently held by, and required to be granted to, America Online
if it exercises its right to acquire shares in this offering;
. warrants held by MLSs;
. warrants being offered to MLSs concurrently with this offering;
. warrants or other securities which may be offered to brokers or other
real estate industry participants in the future; and
. warrants held by real estate brokers who participated in our Broker Gold
program.
Based on an assumed initial public offering price of $9.00 per share, we
anticipate that we will incur additional charges of approximately
$17.7 million in the aggregate for these warrants. These charges will be
expensed each quarter over the term of the applicable agreement.
It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web sites as
well as for any other products and services we may add. To accomplish this, we
will continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will
need to generate significant additional revenues to achieve profitability. As
a result, we may never achieve or sustain profitability, and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability 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 30 months. At the end of the term of each agreement, the other
party may choose not to continue to provide listing information to us on an
exclusive basis or at all and may choose to provide this information to one or
more of our competitors instead. We have expended significant amounts to
secure both our exclusive and non-exclusive agreements for listings of real
estate for sale and may be required to spend additional large amounts or offer
other incentives in
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order to renew these agreements. If owners of large numbers of property
listings, such as large brokers, MLSs, or property owners in key real estate
markets choose not to renew their relationship with us, our family of web
sites could become less attractive to other real estate industry participants
or consumers.
We must dedicate significant resources to market our services to real
estate professionals.
Because the annual fee for our products and 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 products and services, its affiliated agents are not
required to use them.
It is important to our success that we support our real estate professional
customers.
Since many real estate professionals are not sophisticated computer users
and often spend limited amounts of time in their offices, it is important that
these customers find that our products and services significantly enhance
their productivity and are easy to use. To meet these needs, we provide
customer training and have developed a customer support organization that
seeks to respond to customer inquiries as quickly as possible. If our real
estate professional customer base grows, we may need to expand our support
organization further to maintain satisfactory customer support levels. If we
need to enlarge our support organization, we would incur higher overhead
costs. If we do not maintain adequate support levels, these customers could
choose to discontinue using our service.
Our SpringStreet.com web site may not be able to retain its customer base.
We offer listing services on the SpringStreet.com web site on a
subscription basis. To establish its customer base, SpringStreet signed a
number of customers for its upgraded services on a discounted basis during
1998. We do not know what portion of current customers will renew their
subscriptions to the upgraded services on a fully paid basis.
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 fees from real
estate professionals that subscribe to our services. We also expect to incur
significant sales and marketing expenses to promote our brand and our products
and services. Therefore, our quarterly revenues and operating results are
likely to be particularly affected by the number of subscribers 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 prospectus:
. the amount of advertising on our family of web sites and 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 real estate agent, broker and rental property
owner and manager subscriptions;
. the amount and timing of our operating expenses and capital expenditures;
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. 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 related to acquisitions of businesses or technologies.
We will depend on a third party to sell advertising on some of our web
sites.
To date, we have developed only a small internal direct sales force to sell
advertising on our family of web sites. For the near term, we intend to rely
on America Online to sell the substantial majority of our advertising on our
REALTOR.com and HomeBuilder.com web sites. If we are required to develop a
large advertising sales force, our overhead would increase significantly.
Similarly, if we were to replace America Online as our advertising
representative, our revenues could be adversely impacted as we sought a
satisfactory replacement. While we are guaranteed minimum quarterly payments,
the amount of these guaranteed payments will be adjusted based on traffic
levels to our web sites. Therefore, we cannot estimate the amount or the
timing of any advertising or other payments we may receive from America
Online.
Because we have expanded our operations, our success will depend on our
ability to manage our growth.
We have rapidly and significantly expanded our operations, both by
acquisition and organic growth, and expect to continue to expand our
operations. This growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational, financial and other
resources. For example, we have grown to 733 employees on June 30, 1999 from
79 employees on December 31, 1997 and we recently added to our sales force
throughout the United States. We intend to implement and integrate new
accounting and control systems and we may not be able to do so successfully.
We depend on distribution agreements with a number of Internet portals to
generate traffic on our family of web sites.
We believe that a significant portion of our consumer traffic comes from
the following Internet portal sites: America Online, @Home, Excite and Go
Network/Infoseek. On some of these sites we are featured as the exclusive
provider of home listings. We intend to pursue additional distribution
relationships in the future although we may not succeed in these efforts. To
secure both exclusive and non-exclusive distribution relationships, we often
pay significant fees. However, we may not experience sustained increases in
user traffic from these distribution relationships.
There is intense competition for placement on Internet portals. Our
distribution agreements have terms ranging from two to four years. When they
expire, we may be unable to renew our existing agreements or enter into
replacement agreements. If any of these agreements terminates without our
renewing it, we could experience a decline in the number of our users and our
competitive position could be significantly weakened. Even if we renew our
agreements or enter into agreements with new providers, we may be required to
pay significant fees to do so and may be unable to retain any exclusivity that
we may have enjoyed under these agreements.
Our family of web sites may not achieve the brand awareness necessary to
succeed.
In an effort to obtain additional consumer traffic, increase usage by the
real estate community and increase brand awareness, we intend to continue to
pursue an aggressive online and off-line brand enhancement strategy. These
efforts will involve significant expense. If our brand enhancement strategy is
unsuccessful, we may fail to attract new or retain existing consumers or real
estate professionals, which would have a material adverse impact on our
revenues.
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The market for web-based services relating to real estate is intensely
competitive.
Our main existing and potential competitors for home buyers, sellers and
renters and related content include:
. web sites offering real estate listings together with other related
services, such as Apartments.com, CyberHomes, HomeHunter.com,
HomeSeekers, iOwn, LoopNet, Microsoft's HomeAdvisor, NewHomeNetwork.com
and RentNet;
. web sites offering real estate related content and services such as
mortgage calculators and information on the home buying, selling and
renting processes;
. general purpose consumer web sites such as AltaVista, Lycos and Yahoo!
that also offer real estate-related content on their site; and
. traditional print media such as newspapers and magazines.
Our main existing and potential competitors for advertisements include:
. general purpose consumer web sites such as AltaVista, America Online,
Excite, Lycos, Netscape's Netcenter and Yahoo!;
. general purpose online services that may compete for advertising dollars;
. online ventures of traditional media, such as Classified Ventures; and
. traditional media such as newspapers, magazines and television.
The barriers to entry for web-based services and businesses are low, making
it possible for new competitors to proliferate rapidly. In addition, parties
with whom we have listing and marketing agreements could choose to develop
their own Internet strategies or competing real estate sites upon the
termination of their agreements with us. Many of our existing and potential
competitors have longer operating histories in the Internet market, greater
name recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do.
We must attract and retain personnel while competition for personnel in our
industry is intense.
We may be unable to retain our key employees or to attract, assimilate or
retain other highly qualified employees. We have from time to time in the past
experienced, and we expect in the future to continue to experience, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications as a result of our rapid growth and expansion. Attracting and
retaining qualified personnel with experience in the real estate industry, a
complex industry that requires a unique knowledge base, is an additional
challenge for us. In addition, there is significant competition for qualified
employees in the Internet industry. If we do not succeed in attracting new
personnel or retaining and motivating our current personnel, our business will
be adversely affected.
We need to continue to develop our content and our product and service
offerings.
To remain competitive we must continue to enhance and improve the ease of
use, responsiveness, functionality and features of our family of web sites.
These efforts may require us to develop internally or to license increasingly
complex technologies. In addition, many companies are continually introducing
new Internet-related products, services and technologies, which will require
us to update or modify our technology. Developing and integrating new
products, services or technologies into our family of web sites could be
expensive and time consuming. Any new features, functions or services may not
achieve market acceptance or 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.
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We may experience difficulty in integrating our recent acquisitions.
Our recent acquisitions and 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 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.
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, particularly Stuart
H. Wolff, Ph.D. The loss of the services of Dr. Wolff or other key employees
would likely have a significantly detrimental effect on our business.
We have no employment agreements that prevent any of our key personnel from
terminating their employment at any time. Although we have obtained "key-
person" life insurance for some of our personnel, we believe this coverage
will not be sufficient to compensate us for the loss of these personnel.
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. In addition, in any litigation or proceeding
involving our patent, 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 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 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.
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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 products and services.
Real Estate Industry Risks:
Our business is dependent on the strength of the real estate industry, which
is both cyclical and seasonal.
The real estate industry traditionally has been cyclical. Recently, sales of
real estate in the United States have been at historically high levels.
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 products and services. In addition, reduced traffic on
our family of web sites would likely cause our 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 success of
our operations depends to a significant extent upon a number of factors
relating to discretionary consumer and business spending, and the overall
economy, as well as regional and local economic conditions in markets where we
operate, including:
. perceived and actual economic conditions;
. interest rates;
. taxation policies;
. availability of credit;
. employment levels; and
. wage and salary levels.
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In addition, because a consumer's purchase of real property and related
products and services is a significant investment and is relatively
discretionary, any reduction in disposable income in general may affect us
more significantly than companies in other industries.
We have risks associated with changing legislation in the real estate
industry.
Real estate is a heavily regulated industry in the U.S., including
regulation under the Fair Housing Act, the Real Estate Settlement Procedures
Act and state advertising laws. In addition, states could enact legislation or
regulatory policies in the future which could require us to expend significant
resources to comply. These laws and related regulations may limit or restrict
our activities. For instance, we are limited in the criteria upon which we may
base searches of our real estate listings such as age or race. As the real
estate industry evolves in the Internet environment, legislators, regulators
and industry participants may advocate additional legislative or regulatory
initiatives. Should existing laws or regulations be amended or new laws or
regulations be adopted, we may need to comply with additional legal
requirements and incur resulting costs, or we may be precluded from certain
activities. For instance, SpringStreet.com recently 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 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.
We depend on selling advertisements on our family of web sites.
Our business would be adversely affected if the market for web advertising
fails to develop or develops more slowly than expected. Our ability to
generate advertising revenues 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 and
member demographic characteristics that are attractive to advertisers. Most
potential advertisers and their advertising agencies have only limited
experience with the Internet as an advertising medium and have not devoted a
significant portion of their advertising expenditures to Internet-based
advertising. No standards have been widely accepted to measure the
effectiveness of web advertising. If these standards do not develop, existing
advertisers might reduce their current levels of Internet advertising or
eliminate their spending entirely. The widespread adoption of technologies
that permit Internet users to selectively block out unwanted graphics,
including advertisements attached to web pages, could also adversely affect
the growth of the Internet as an advertising medium. In addition, advertisers
in the real estate industry have traditionally relied upon other advertising
media, such as newsprint and magazines, and have invested substantial
resources in other advertising methods. These advertisers may be reluctant to
adopt a new strategy and advertise on the Internet.
Government regulations and legal uncertainties could affect the growth of
the Internet.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities
and jurisdiction. Additionally, it is uncertain as to how existing laws will
be applied to the Internet. The adoption of new laws or the application of
existing laws may decrease the growth in the use of the Internet, which could
in turn decrease the usage and demand for our services or increase our cost of
doing business.
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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.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and
local level and by various foreign governments to impose taxes on the sale of
goods and services and other Internet activities. Recently, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new
state and local taxes on Internet commerce. However, future laws may impose
taxes or other regulations on Internet commerce, which could substantially
impair the growth of electronic commerce.
We depend on continued improvements to our computer network and the
infrastructure of the Internet.
Any failure of our computer systems that causes interruption or slower
response time of our web sites or services could result in a smaller number of
users of our family of web sites or the web sites that we host for real estate
professionals. If sustained or repeated, these performance issues could reduce
the attractiveness of our services to consumers, real estate professionals,
providers of real estate related products and services and advertisers.
Increases in the volume of our web site traffic could also strain the capacity
of our existing computer systems, which could lead to slower response times or
system failures. This would cause the number of real property search
inquiries, advertising impressions, other revenue producing offerings and our
informational offerings to decline, any of which could hurt our revenue growth
and our brand loyalty. We may need to incur additional costs to upgrade our
computer systems in order to accommodate increased demand if our systems
cannot handle current or higher volumes of traffic.
The recent growth in Internet traffic has caused frequent periods of
decreased performance. Our ability to increase the speed with which we provide
services to consumers and to increase the scope of these services is limited
by and dependent upon the speed and reliability of the Internet. Consequently,
the emergence and growth of the market for our services is dependent on the
performance of and future improvements to the Internet.
Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, most of which are located at our corporate headquarters in Thousand
Oaks, California and SpringStreet's web hosting facility in San Jose,
California. 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, floods, earthquakes,
power loss, telecommunications failures and similar events. Although we
maintain insurance against fires, floods, 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
are in the final stages of implementing a network firewall, and 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.
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We could face liability for information on our web sites and for products
and services sold over the Internet.
We provide third-party content on our family of web sites, particularly
real estate listings. We could be exposed to liability with respect to this
third-party information. Persons might assert, among other things, that, by
directly or indirectly providing links to web sites operated by third parties,
we should be liable for copyright or trademark infringement or other wrongful
actions by the third parties operating those web sites. They could also assert
that our third party information contains errors or omissions, and consumers
could seek damages for losses incurred if they rely upon incorrect
information.
We enter into agreements with other companies under which we share with
these other companies revenues resulting from advertising or the purchase of
services through direct links to or from our family of web sites. These
arrangements may expose us 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.
We face Year 2000 related risks.
Our computer systems could have failures or miscalculations resulting from
issues with respect to the Year 2000, causing disruptions of operations,
including, among other things, a temporary inability to process searches, post
listings, track advertising or engage in similar normal business activities.
Any significant Year 2000 failure could prevent us from operating our
business, prevent users from accessing our family of web sites or change the
behavior of advertisers, consumers or persons accessing our family of web
sites.
In addition, the parties which give us property listings may not accurately
provide date data with respect to home and commercial real estate listings.
For example, during the year 2000, a home constructed in 1900 might
inadvertently be listed on our family of web sites as a newly built home. A
significant number of these failures could cause consumers to doubt the
reliability of information contained in our listings with a potential
resulting reduction in traffic on our family of web sites. Any of these
eventualities could adversely affect our business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
Risks Related to this Offering
A relatively small number of our existing stockholders own a large
percentage of our voting stock.
As of June 30, 1999, our officers, directors and 5% or greater stockholders
beneficially owned or controlled, directly, or indirectly, 36,305,594 shares
of common stock and/or preferred stock, which in the aggregate represented
approximately 59.8% of the outstanding shares of common stock on an as
converted to common stock basis. After this offering and assuming no
additional issuances of common stock, our officers, directors and 5% or
greater stockholders will beneficially own or control, directly, or
indirectly, 36,305,594 shares, which in the aggregate will represent
approximately 53.7% of the outstanding shares of common stock. As a result, if
these persons act together, they will have the ability to influence all
matters submitted to our stockholders for approval, including (1) the election
and removal of directors, other than the director appointed by the NAR, and
(2) any merger, consolidation or sale of all or substantially all of our
assets. So long as the NAR holds its one share of our new Series A preferred
stock, it will be entitled to elect one member to our board of directors.
20
<PAGE>
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 will 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. These provisions and
other provisions of Delaware law could make it more difficult for a third
party to acquire us, even if doing so would benefit our stockholders.
The market price for our common stock could be volatile due to lock up
restrictions and the volatility of stock prices in our industry.
An active trading market for our common stock may never develop or be
sustained. As described under "Underwriters," up to 1,100,000 shares are being
offered to America Online, members of the NAR and NAHB, and to our directors,
officers, employees and business associates, each at the public offering
price. Purchasers of most of these shares will be subject to lock-up
agreements with the underwriters. Therefore, there will be a smaller amount of
shares available for sale in the public market after this offering, which
could result in greater volatility of our stock price. Further, the market
price of our common stock could decline below the initial public offering
price.
The stock markets, particularly the Nasdaq National Market on which we have
applied to have our common stock listed, have experienced substantial price
and volume fluctuations. These fluctuations have particularly affected the
market prices of equity securities of many technology and Internet related
companies and have often been unrelated or disproportionate to the operating
performance of those companies.
Future sales of our common stock may depress our stock price.
After this offering, we will have outstanding 67,037,860 shares of common
stock, calculated as of June 30, 1999. Sales of a substantial number of shares
of common stock in the public market following this offering could cause the
market price of our common stock to decline. All the shares sold in this
offering will be freely tradable. Of the remaining 56,033,360 shares of common
stock outstanding after this offering:
. 11,869,190 shares will be eligible for sale in the public market
beginning 181 days after the date of this prospectus;
. 36,747,250 shares will become available for sale on February 4, 2000;
. 1,125,000 shares will become available for sale on February 18, 2000;
. 1,704,775 shares will become available for sale on April 9, 2000; and
. 4,587,145 shares will become available for sale on June 30, 2000.
In addition, as of June 30, 1999 there were outstanding options and
warrants to purchase up to 7,802,720 shares of common stock. See "Shares
Eligible for Future Sale."
We are uncertain of our ability to obtain additional financing for our
future capital needs.
We may need to raise additional funds in order to fund more rapid
expansion, to expand our marketing activities, to develop new or enhance
existing services or products, to respond to competitive pressures or to
acquire complementary services, businesses or technologies. We may also need
to raise funds in the future to
21
<PAGE>
meet our working capital needs. Banks and other commercial lending
institutions often require a parent company to pledge as collateral for any
loans the stock or assets of its subsidiary. The protective provisions
contained in RealSelect's bylaws and the restrictions on transfer of shares
contained in a stockholders' agreement for RealSelect could deter these types
of lenders from providing us loans. Additional financing may not be available
on terms favorable to us, or at all.
New investors will experience immediate and substantial dilution from this
offering.
Investors in this offering will experience an immediate dilution in the net
tangible book value of the common stock of $8.01 per share, based on the
number of outstanding shares as of June 30, 1999 and an assumed initial public
offering price of $9.00 per share. See "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," or the negative
of these terms or other comparable terminology. The forward-looking statements
contained in this prospectus involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, level
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these statements. These factors include those listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
22
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 7,000,000 shares of
common stock that we are offering will be approximately $56.6 million, at an
assumed initial public offering price of $9.00 per share and after deducting
the estimated underwriting discounts and commissions, and estimated offering
expenses of $2.0 million. If the underwriters' over-allotment option is
exercised in full, we estimate that our net proceeds will be approximately
$65.4 million.
The following agreements require that payments aggregating approximately
$8.8 million will be accelerated and become payable upon the closing of this
offering:
. approximately $6.3 million under an agreement with America Online under
which it provides online distribution services;
. $1.0 million under an agreement with RE/MAX under which we are the
preferred provider of Internet marketing products to its affiliated real
estate agents and brokers;
. approximately $900,000 under a note issued in conneciton with our
acquisition to a stockholder of The Enterprise of America, Ltd. in
connection with our acquisition of that company; and
. $600,000 under the REALTOR.com operating agreement with the NAR.
We intend to use the remainder of the net proceeds for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business.
Pending our use of the net proceeds, we intend to invest them in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends in the foreseeable future.
Except for an annual dividend of $.08 expected to be paid on the one share of
our new Series A preferred stock to be issued to the NAR upon the closing of
this offering, we do not anticipate paying any cash dividends in the
foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
pro forma column reflects (1) the conversion of each outstanding share of
preferred stock into five shares of common stock upon the closing of this
offering, except for the one share of our new Series A preferred stock to be
issued to the NAR, and (2) 3,917,265 shares to be issued to the NAR when it
exchanges substantially all the shares of RealSelect common stock it currently
holds for shares of HomeStore.com common stock.
The pro forma as adjusted column reflects the sale of the 7,000,000 shares
of common stock that we are offering at an assumed initial public offering
price of $9.00 per share and the application of the net proceeds we receive
from this offering.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Notes payable, long-term and current portion..... $ 3,958 $ 3,958 $ 3,025
------- ------- --------
Series E redeemable convertible preferred stock,
$.001 par value per share; actual--325,000
shares authorized, issued and outstanding; pro
forma and pro forma as adjusted--no shares
authorized, issued or outstanding............... 5,094 -- --
------- ------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value
per share; actual--9,675,000 shares
authorized, 6,241,000 shares issued and
5,810,000 shares outstanding; pro forma and
pro forma as adjusted--5,000,000 shares
authorized, one share issued and outstanding.. 6 -- --
Common stock, $.001 par value per share;
actual--225,000,000 shares authorized,
28,348,000 shares issued and 25,445,000 shares
outstanding; pro forma--225,000,000 shares
authorized, 65,100,000 shares issued and
60,038,000 shares outstanding; pro forma as
adjusted--500,000,000 shares authorized,
67,038,000 shares issued and outstanding...... 28 59 66
Additional paid-in capital..................... 198,142 203,211 259,794
Treasury stock................................. (13,676) (13,676) (13,676)
Notes receivable from stockholders............. (5,814) (5,814) (5,814)
Deferred stock compensation.................... (17,469) (17,469) (17,469)
Accumulated deficit............................ (96,648) (96,648) (96,648)
------- ------- --------
Total stockholders' equity................... 64,569 69,663 126,253
------- ------- --------
Total capitalization....................... $73,621 $73,621 $129,278
======= ======= ========
</TABLE>
The data in the table above excludes:
. 6,643,550 shares issuable upon the exercise of outstanding stock options
as of June 30, 1999, at a weighted average per share exercise price of
$4.24;
. 2,083,630 shares available as of that date for future grant under our
current stock plans and additional shares to be reserved for issuance
under our proposed stock plans described in this prospectus;
. 591,475 shares issuable upon the exercise of warrants outstanding as of
June 30, 1999, at a weighted average per share exercise price of $1.41;
. 567,695 shares subject to warrants outstanding as of June 30, 1999 with
an exercise price equal to the per share price in this offering;
. up to 2,111,345 shares and shares subject to warrants being offered to
home builders and Multiple Listing Services concurrently with this
offering with an exercise price equal to the per share price in this
offering;
. shares of common stock having an aggregate value of $3.0 million to be
subject to warrants with a weighted average exercise price of 137.5% of
the per share price in this offering, which warrants are contingent upon
the purchase of $2.0 million of our common stock by America Online in
this offering; and
. up to 425,000 shares subject to warrants, which are contingent upon
defined events occurring in the future. The exercise price will be the
fair value of our common stock when the warrants are issued.
You should read this table together with "Management--Director
Compensation," "Management--Employee Benefit Plans," "Description of Capital
Stock," Notes 12, 13, 14 and 20 of HomeStore.com's Notes to Consolidated
Financial Statements and Unaudited Pro Forma Condensed Consolidated Financial
Information.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $10.1 million
or $.17 per share, assuming the conversion of all of the then outstanding
shares of preferred stock into shares of common stock and the issuance of
3,917,265 shares of common stock to the NAR in exchange for substantially all
of the shares of RealSelect stock it currently holds. Pro forma net tangible
book value per share is determined by dividing the pro forma number of
outstanding shares of common stock into our net tangible book value, which is
our pro forma total tangible assets less total liabilities. After giving
effect to the receipt of the estimated net proceeds from this offering, based
upon an assumed initial public offering price of $9.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of June 30, 1999
would have been approximately $66.7 million, or $.99 per share. This
represents an immediate increase in pro forma net tangible book value of $.82
per share to existing stockholders and an immediate dilution of $8.01 per
share to new investors purchasing shares at the initial public offering price.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $9.00
Pro forma net tangible book value per share as of June 30,
1999...................................................... $.17
Increase per share attributable to new investors........... .82
----
Pro forma net tangible book value per share after offering... .99
-----
Dilution per share to new investors.......................... $8.01
=====
</TABLE>
The following table summarizes as of June 30, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
stockholders and by investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $9.00 per share and
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 60,037,860 90% $130,093,000 67% $2.17
New investors........... 7,000,000 10 63,000,000 33 $9.00
---------- --- ------------ ---
Total................... 67,037,860 100% $193,093,000 100%
========== === ============ ===
</TABLE>
See page 26 for a description of the non-cash consideration, comprised
primarily of our acquisitions of The Enterprise, MultiSearch and SpringStreet,
paid by some of our existing stockholders. As of June 30, 1999, there were
options and warrants outstanding to purchase a total of 7,802,720 shares of
common stock. In addition,
. up to 2,111,345 shares and shares subject to warrants being offered to
home builders and Multiple Listing Services concurrently with this
offering; and
. shares may become subject to warrants in the event that America Online
purchases $2.0 million of our common stock in this offering.
To the extent that any of these options or warrants are exercised or shares
are issued, there will be further dilution to new public investors. See
"Capitalization," "Management--Employee Benefit Plans," "Description of
Capital Stock," Notes 5, 10, 12, 13, 14, 16 and 20 of HomeStore.com's Notes to
Consolidated Financial Statements and Unaudited Pro Forma Condensed
Consolidated Financial Information.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1996, 1997 and 1998, and the
consolidated balance sheet data as of December 31, 1997 and 1998, are derived
from the audited consolidated financial statements of HomeStore.com included
elsewhere in this prospectus. The consolidated statement of operations data
for the years ended December 31, 1994 and 1995 and the six months ended June
30, 1998 and 1999, and the consolidated balance sheet data as of December 31,
1994, 1995 and 1996, and as of June 30, 1999 have been derived from our
unaudited consolidated financial statements. The unaudited consolidated
financial statements have been prepared on substantially the same basis as the
consolidated audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of the financial position and results of operations
for the period. The unaudited pro forma net loss per share data for the year
ended December 31, 1998 and six months ended June 30, 1999, are derived from
unaudited pro forma condensed consolidated financial information included
elsewhere in this prospectus.
As a result of the reorganization of our holding company structure and due
to the fact that our historical results of operations, financial condition and
cash flows were insignificant prior to December 4, 1996, management believes
that a pro forma presentation, which includes a comparison of results of
operations and financial condition of NetSelect, Inc., NetSelect, LLC,
HomeStore.com and RealSelect on a combined basis for 1997 and 1998 and the six
months ended June 30, 1998 and 1999 is the only meaningful basis of
presentation for investors in evaluating our historical financial performance.
See the basis of presentation described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The pro forma consolidated statement of operations data assume that the
following transactions occurred on January 1, 1998:
. our acquisition of The Enterprise for 525,000 shares of common stock
with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, and $705,000 in cash and other acquisition related
expenses;
. our acquisition of MultiSearch for 325,000 shares of our Series E
redeemable convertible preferred stock, which will be converted into an
aggregate of 1,625,000 shares of our common stock on the closing of this
offering, with an estimated fair value of $4.8 million, a note payable
in the amount of $3.6 million, and $875,000 in cash and other
acquisition related expenses;
. our acquisition of SpringStreet for 844,569 shares of our Series H
convertible preferred stock and 1,086,213 shares of common stock with an
estimated fair value of $51.7 million or an aggregate of 5,309,058
shares of common stock, including 721,915 shares of common stock subject
to assumed options, assuming five-for-one conversion of our convertible
preferred stock into common stock prior to this offering;
. the reorganization of our holding company structure in February 1999 by
merging NetSelect, Inc. and NetSelect, LLC with InfoTouch.
26
<PAGE>
The consolidated pro forma data may not, however, be indicative of the
consolidated results of operations of HomeStore.com that actually would have
occurred had the transactions reflected in the consolidated pro forma results
of operations occurred at the beginning of the periods presented, or of the
consolidated results of operations that we may achieve in the future.
<TABLE>
<CAPTION>
Actual Pro Forma (unaudited)
------------------------------------------------------ -----------------------
Six Months Six Months
Year Ended December 31, Ended June 30, Year Ended Ended
------------------------------------- --------------- December 31, June 30,
1994 1995 1996 1997 1998 1998 1999 1998 1999
------- ------ ------ ----- ----- ----- -------- ------------ ----------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ 416 $ 857 $1,360 $ 42 $ -- $ -- $ 16,586 $ 19,125 $ 21,370
Cost of revenues........ 63 58 42 6 -- -- 7,110 9,530 8,798
------- ------ ------ ----- ----- ----- -------- -------- --------
Gross profit........... 353 799 1,318 36 -- -- 9,476 9,595 12,572
Operating expenses:
Sales and marketing.... 956 559 479 14 -- -- 24,767 32,787 37,513
Product development.... 428 474 629 -- -- -- 1,368 5,252 3,167
General and
administrative........ 520 649 441 38 3 2 5,918 9,241 10,746
Amortization of
intangible assets..... -- -- -- -- -- -- 1,311 11,242 5,708
Stock-based charges.... -- -- -- -- -- -- 10,000 20,455 10,569
------- ------ ------ ----- ----- ----- -------- -------- --------
Total operating
expenses............. 1,904 1,682 1,549 52 3 2 43,364 78,977 67,703
------- ------ ------ ----- ----- ----- -------- -------- --------
Loss from operations.... (1,551) (883) (231) (16) (3) (2) (33,888) (69,382) (55,131)
Interest and other
income (expense), net.. (17) (30) (21) (1) -- -- (34) 118 5
------- ------ ------ ----- ----- ----- -------- -------- --------
Net loss before minority
interest............... (1,568) (913) (252) (17) (3) (2) (33,922) (69,264) (55,126)
Minority interest....... -- -- -- -- -- -- -- 222 --
------- ------ ------ ----- ----- ----- -------- -------- --------
Net loss................ (1,568) (913) (252) (17) (3) (2) (33,922) (69,042) (55,126)
Accretion of redemption
value and stock
dividends on
convertible preferred
stock.................. -- -- -- -- -- -- (1,477) -- --
Repurchase of
convertible preferred
stock.................. -- -- -- -- -- -- -- (7,727) --
------- ------ ------ ----- ----- ----- -------- -------- --------
Net loss applicable to
common stockholders.... $(1,568) $ (913) $ (252) $ (17) $ (3) $ (2) $(35,399) $(76,769) $(55,126)
======= ====== ====== ===== ===== ===== ======== ======== ========
Net loss per share
applicable to common
stockholders:
Basic and diluted...... $ (.76) $ (.37) $ (.07) $ -- $ -- $ -- $ (1.73) $ (1.79) $ (.98)
======= ====== ====== ===== ===== ===== ======== ======== ========
Weighted average
shares--basic and
diluted............... 2,053 2,435 3,477 8,650 9,173 8,650 20,502 43,001 56,455
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------- June 30,
1994 1995 1996 1997 1998 1999
----- ----- ---- ----- ---- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........ $ 31 $ 5 $ 36 $ 155 $ 71 $ 18,183
Working capital (deficiency)..... (210) (200) (46) (37) 1 1,057
Total assets..................... 550 181 77 155 71 104,303
Notes payable, long term and
current......................... -- -- -- -- -- 3,958
Redeemable convertible preferred
stock........................... -- -- -- -- -- 5,094
Total stockholders' equity
(deficit)....................... 203 (150) (116) (133) (95) 64,569
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the unaudited
pro forma condensed consolidated financial statements and the consolidated
financial statements and related notes of HomeStore.com appearing elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risk and uncertainties, including, among other things, statements
regarding anticipated costs and expenses, mix of revenues and plans for
addressing Year 2000 issues. Our actual results could differ materially from
the results contemplated by these forward-looking statements as a result of
different factors, including those discussed below and elsewhere in this
prospectus.
Overview
Basis of Presentation
Initial Business and RealSelect Holding Structure. We were incorporated in
1993 under the name of InfoTouch Corporation, or InfoTouch, with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, we began to develop the technology to build and
operate real estate related Internet sites. Effective December 4, 1996, we
entered into a series of agreements with the NAR and several investors. Under
these agreements, we transferred technology and assets relating to advertising
the listing of residential real estate on the Internet to a newly-formed
company, NetSelect LLC, or LLC, in exchange for a 46% ownership interest in
LLC. The investors contributed capital to a newly-formed company, NetSelect,
Inc., or NSI, which owned 54% of LLC. LLC received capital funding from NSI
and in-turn contributed the assets and technology contributed by InfoTouch as
well as the NSI capital to a newly formed entity, RealSelect, Inc., or
RealSelect, in exchange for common stock representing an 85% ownership
interest in RealSelect. Also effective December 4, 1996, RealSelect entered
into a number of formation agreements with and issued cash and common stock
representing a 15% ownership interest in RealSelect to the NAR in exchange for
the rights to operate the REALTOR.com 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, in cooperation with the NAR and
actively began marketing our 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 also 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 Note 4 of
HomeStore.com's Notes to Consolidated Financial Statements. We (InfoTouch)
intend to change our corporate name to HomeStore.com, Inc. prior to this
offering.
28
<PAGE>
The following chart illustrates our corporate structure immediately prior
to the Reorganization in February 1999:
<TABLE>
<S> <C>
InfoTouch, Inc. NetSelect, Inc.
| |
21% | | 79%
| |
NetSelect, LLC
|
| 92%
|
RealSelect, Inc. 8% National Association
| of REALTORS
|
| 100%
--------------------------------------------------
| | |
The Enterprise of National New Homes,
America, Ltd. Co., Inc. d/b/a Touch Tech, Inc.
HomeBuilder.com
</TABLE>
29
<PAGE>
The following chart illustrates our current corporate structure:
<TABLE>
<S> <C>
HomeStore.com, Inc.
(formerly
InfoTouch, Inc.)
|
| 99% *
RealSelect, Inc. less than 1% National Association
| ------------------- of REALTORS
100%
--------------------------------------------------------------------------------
| | | |
The Enterprise of National New
America, Ltd. Homes Co., Inc. d/b/a Touch Tech, Inc. SpringStreet, Inc.
HomeBuilder.com
</TABLE>
- --------
* Gives effect to the NAR's exchange of substantially all its RealSelect
shares for shares of HomeStore.com immediately prior to completion of this
offering.
Our historical consolidated financial statements reflect the results of
operations of HomeStore.com, Inc., formerly InfoTouch. For the years ended
December 31, 1997 and 1998, and through the Reorganization on February 4,
1999, HomeStore.com was a holding company whose sole business was managing its
investment in RealSelect through LLC. This investment was accounted for under
the equity method, and accordingly, HomeStore.com did not record the results
of operations related to the operating entity, RealSelect, until the
Reorganization occurred on February 4, 1999. Prior to February 4, 1999, the
results of operations of RealSelect were consolidated by NSI. Thus, all
revenues through February 4, 1999, were recorded by NSI. Management believes
that a pro forma presentation that includes a comparison of the results of
operations of NSI, LLC, HomeStore.com and RealSelect on a combined basis for
the years ended December 31, 1997 and 1998 and for the six months ended June
30, 1998 and 1999 is the only meaningful presentation for investors in
evaluating our historical financial performance. A comparison of the
historical results of operations of NSI for the years ended December 31, 1997
and 1998 has also been presented to assist investors in evaluating our
historical financial performance. A comparison of the historical results of
operations of HomeStore.com has not been presented because the financial
position, results of operations and cash flows were insignificant for all
periods presented prior to the Reorganization.
Acquisitions. In March 1998, we acquired The Enterprise of America, Ltd.,
or The Enterprise, a provider of web hosting services for real estate brokers,
for $3.0 million in cash, notes and stock, less assumed liabilities. In July
1998, we acquired MultiSearch Solutions, Inc., or MultiSearch, the initial
developer of the HomeBuilder.com web site, for $8.7 million in cash, notes and
stock. In June 1999, we acquired SpringStreet for 844,569 shares of Series H
convertible preferred stock and 1,086,213 shares of common stock, or an
aggregate of 5,309,058 shares of common stock, including 721,915 shares of
common stock to be subject to assumed options, assuming five-for-one
conversion of our convertible preferred stock into our common stock prior to
this offering. Each of these acquisitions has been included in the pro forma
results of operations as if they occurred on January 1, 1997.
We will 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.
Accounting Policies
Revenues. We derive our revenues from the sale of advertising products and
services to real estate agents and brokers, home builders, property owners and
managers, and from advertising sales. Substantially all of our agent products
and many of our property owner and manager products are sold in annual
subscriptions and,
30
<PAGE>
accordingly, we defer these revenues and recognize them ratably over the life
of the contract, generally 12 months. These prepayments appear on our balance
sheet as deferred revenues, totaling approximately $11.3 million as of
June 30, 1999. We also generate revenues from the sale of products and
services to real estate brokers and home builders that are sold on a monthly
subscription basis, with revenues being recognized on a monthly basis. In
addition, we generate banner advertising revenues on our family of web sites.
Substantially all of our advertising revenues are derived from short-term
advertising contracts, which may include the guarantee of a minimum number of
impressions or times that an advertisement appears in pages viewed by the
users. Advertising revenue is recognized ratably based upon the lesser of
impressions delivered over the total number of guaranteed impressions or
ratably over the period in which the advertisement is displayed. We signed an
agreement with America Online in March 1999, in which they agreed to act as
our exclusive third-party advertising sales agent on the REALTOR.com and
HomeBuilder.com web sites through March 2001. In connection with this
agreement, America Online has agreed to pay us minimum quarterly payments,
subject to adjustment based on the number of page views, or number of times a
page on a web site is displayed to a user.
Cost of revenues. Cost of revenues consists of salaries, benefits, and
consulting fees related to our web site operations, credit card processing
fees, data aggregation costs and costs associated with printing our new home
directories. Cost of revenues also includes royalties paid to third-party real
estate listings providers. These royalties are capitalized and amortized over
the related contract period and are classified on our balance sheet as
deferred royalties, totaling approximately $2.0 million as of June 30, 1999.
Real estate listings providers generally receive 10% to 12% of the gross
revenues that we generate from their listings. Some real estate listings
providers have entered into national arrangements with us, under which we have
the exclusive right to list their properties on the Internet. The royalty rate
for agreements with these real estate listings providers is slightly higher
than for other providers. We anticipate continuing increases in cost of
revenues in absolute dollars as our revenues increase. We also expect that
cost of revenues will increase as we continue to make investments to increase
the capacity and speed of our family of web sites.
Sales and marketing. Sales and marketing expenses include salaries, sales
commissions, including commissions under our America Online sales agent
arrangement, benefits, travel and related expenses for our direct sales force,
customer service, marketing, and sales support functions. Sales and marketing
expenses also include fees associated with our Internet portal distribution
agreements and marketing and listing agreements with real estate franchises.
These fees are amortized on a pro rata basis over the terms of the agreements.
We expect to significantly increase the absolute dollar amount of spending in
sales and marketing activities over the next year in an effort to drive
consumer traffic to our family of web sites and to increase brand awareness.
We also anticipate that sales and marketing expenses may fluctuate as a
percentage of total revenues from period to period as new sales personnel are
hired and begin to achieve productivity.
Product development. Product development costs include expenses for the
development of new or improved technologies designed to enhance the
performance of our family of web sites, including salaries and related
expenses for our web site design staff, as well as costs for contracted
services, content, facilities and equipment. We believe that a significant
level of product development activity and expense is required in order to
remain competitive with new and existing web sites. Accordingly, we anticipate
that we will continue to devote substantial resources to product development
and that the absolute dollar amount of these costs will increase in future
periods.
General and administrative. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, legal and human
resources personnel. In addition, general and administrative expenses include
occupancy costs, fees for professional service, and depreciation. We expect
general and administrative expenses to increase in absolute dollars as we
continue to expand our administrative infrastructure to support the
anticipated growth of our business, including costs associated with being a
public company.
Amortization of intangible assets. Amortization of intangible assets
consists of goodwill resulting from the acquisitions of The Enterprise,
MultiSearch and SpringStreet. This goodwill is being amortized on a straight-
line basis over the estimated periods of benefit of five years. In addition,
in connection with our formation, we entered into an operating agreement with
the NAR and received intellectual property. Under the operating agreement with
the NAR, we made various payments in which we issued common stock to the NAR
for the right to use the REALTOR.com trademark and domain name and the
"REALTOR" trademark and for the exclusive use of the web site for real estate
listings. The intellectual property, the stock issued and payments made to the
NAR, as well as milestone-based amounts subsequently earned by the NAR have
been recorded as intangible assets and are being amortized on a straight-line
basis over the estimated period of benefit of 15 years.
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<PAGE>
Stock-based charges
Stock Options. In connection with the grant of stock options to employees
during 1997 and 1998 and the six months ended June 30, 1999, we recorded
aggregate deferred compensation of approximately $23.9 million. This deferred
compensation represented the difference between the deemed fair value of our
common stock for accounting purposes and the exercise price of these options
at the date of grant. Deferred compensation is presented as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options, generally four years.
Warrants. In connection with entering into a distribution agreement with
America Online in April 1998, we issued a warrant to purchase 566,475 shares
of our common stock at an exercise price of $1.26 per share. If America Online
does not purchase any shares in this offering, this warrant will expire.
Additionally, if America Online exercises its right to purchase $2.0 million
of common stock in this offering, we will issue to it warrants to acquire
$3.0 million of common stock with a weighted average exercise price of 137.5%
of the initial public offering price. If warrants are issued in connection
with this offering, the fair value will be measured at the date of this
offering and amortized to sales and marketing expense over the remaining term
of the distribution agreement, approximately two years. Based on an assumed
initial public offering price of $9.00 per share, we anticipate that the
aggregate amount of this charge will be approximately $6.3 million.
During 1998 and early 1999, we issued warrants to purchase up to
209,380 shares of common stock to MLSs that agreed to provide their real
estate listings to us for publication on the Internet on a national basis. The
issuance of these warrants is contingent upon this offering. The exercise
price will be equal to the initial public offering price per share in this
offering. The fair value of issuable warrants will be measured at the date of
this offering and recognized as expense over the term of the applicable MLS
agreement, approximately one to two years. Based on an assumed initial public
offering price of $9.00 per share, we anticipate the aggregate amount of this
charge will be approximately $900,000.
In February 1999, we closed a private equity offering to real estate
brokers under our Broker Gold program. We also issued warrants to purchase up
to 358,315 shares of our common stock with an exercise price to be equal to
the per share price in this offering. The issuance of these warrants is
contingent upon this offering. The fair value of these warrants will be
measured at the date of this offering. Based on an assumed offering price of
$9.00, we expect to incur an additional charge of approximately $1.7 million
which will be recognized as expense over the remaining term of the initial two
year Broker Gold program agreements.
Concurrently with this offering, we are offering shares and shares subject
to warrants to purchase up to 2,111,345 shares of common stock to home
builders and MLSs that agree to provide us their listings on a national basis.
Based on an assumed offering price of $9.00, we expect to incur an additional
charge of approximately $8.8 million, which will be recognized as expense over
the remaining terms of the applicable agreements.
In the future, we may offer up to 425,000 warrants to the Broker Gold
program members who elect to renew their existing listing agreements with us
after their original two year term expires. The broker must also maintain a
minimum number of property listings as well as continue to hold our
securities. If issued, these warrants would have an exercise price based upon
the average of the closing market price of the common stock for the ten
trading days preceding the date which is one day before the warrant is issued.
We would recognize the fair value of the warrants, when issued, as expense
over the term of the renewed agreement, approximately two years. This could
result in HomeStore.com incurring substantial additional charges in the
future.
We have only a limited operating history under our current business model.
Our prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as the Internet. To address these risks, we must, among other
things, be able to continue to respond to highly competitive developments,
attract, retain and motivate qualified personnel, implement and successfully
execute our marketing plans, continue to upgrade our technologies, develop new
distribution channels, and improve operational and financial systems. Although
our revenues have grown significantly in recent periods, we may be unable to
sustain this growth. Therefore, you should not consider our historical growth
indicative of future revenue levels or operating results. We may never achieve
profitability or, if we do, we may not be able to sustain it. A more complete
description of other risks relating to our business is set forth under the
caption "Risk Factors."
32
<PAGE>
Pro Forma Results of Operations
The following tables set forth certain pro forma consolidated statement of
operations data for the periods indicated and assume that the following
transactions occurred on January 1, 1997:
. our acquisition of The Enterprise for 525,000 shares of common stock
with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, and $705,000 in cash and other acquisition related
expenses;
. our acquisition of MultiSearch for 325,000 shares of our Series E
redeemable convertible preferred stock, which will be converted into an
aggregate of 1,625,000 shares of our common stock on the closing of this
offering, with an estimated fair value of $4.8 million, a note payable
in the amount of $3.6 million, and $875,000 in cash and other
acquisition related expenses;
. our acquisition of SpringStreet for 844,569 shares of our Series H
convertible preferred stock and 1,086,213 shares of common stock, or an
aggregate of 5,309,058 shares of common stock, including 721,915 shares
of common stock subject to assumed options, assuming five-for-one
conversion of our convertible preferred stock into common stock prior to
this offering, with an aggregate purchase price of $51.7 million; and
. the reorganization of our holding company structure as previously
described.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues...................... $ 8,629 $ 19,125 $ 7,186 $ 21,370
Cost of revenues.............. 4,205 9,530 3,942 8,798
-------- -------- -------- --------
Gross profit................ 4,424 9,595 3,244 12,572
Operating expenses:
Sales and marketing......... 5,131 32,787 9,368 37,513
Product development......... 753 5,252 2,055 3,167
General and administrative.. 5,510 9,241 3,330 10,746
Amortization of intangible
assets..................... 11,207 11,242 5,604 5,708
Stock-based charges......... 257 20,455 240 10,569
-------- -------- -------- --------
Total operating expenses... 22,858 78,977 20,597 67,703
-------- -------- -------- --------
Loss from operations.......... (18,434) (69,382) (17,353) (55,131)
Interest and other income
(expense), net............... (338) 118 2 5
-------- -------- -------- --------
Net loss before minority
interest..................... (18,772) (69,264) (17,351) (55,126)
Minority interest............. 1,239 222 222 --
-------- -------- -------- --------
Net loss...................... $(17,533) $(69,042) $(17,129) $(55,126)
======== ======== ======== ========
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues...................... 100 % 100 % 100 % 100%
Cost of revenues.............. 49 50 55 41
-------- -------- -------- --------
Gross profit................ 51 50 45 59
Operating expenses:
Sales and marketing......... 59 171 130 176
Product development......... 9 27 29 15
General and administrative.. 64 48 46 50
Amortization of intangible
assets..................... 130 59 78 27
Stock-based charges......... 3 107 3 49
-------- -------- -------- --------
Total operating expenses... 265 412 286 317
-------- -------- -------- --------
Loss from operations.......... (214) (362) (241) (258)
Interest and other income
(expense), net............... (4) -- -- --
-------- -------- -------- --------
Net loss before minority
interest..................... (218) (362) (241) (258)
Minority interest............. 14 1 3 --
-------- -------- -------- --------
Net loss...................... (204)% (361)% (238)% (258)%
======== ======== ======== ========
</TABLE>
33
<PAGE>
Pro Forma Six Months Ended June 30, 1998 and 1999
Revenues
Pro forma revenues increased to $21.4 million for the six months ended June
30, 1999 from $7.2 million for the six months ended June 30, 1998. The
increase was primarily due to growth across our business, including the number
of agent and broker web site home pages sold. Banner advertising revenues also
increased primarily as a result of increased traffic to our web sites in the
first six months of 1999 as compared to the first six months of 1998.
Cost of Revenues
Pro forma cost of revenues increased to $8.8 million for the six months
ended June 30, 1999 from $3.9 million for the six months ended June 30, 1998.
The increase was due primarily to our overall increased sales volume and
increased activity during the first six months of 1999 as compared to the
first six months of 1998.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$37.5 million for the six months ended June 30, 1999 from $9.4 million for the
six months ended June 30, 1998. The increase was primarily attributable to a
significant increase in costs associated with Internet portal distribution and
marketing and listing agreements which we entered into throughout 1998. The
increase was also due to a significant growth of our direct sales force in the
third and fourth quarters of 1998, resulting in increased salaries and
commissions and related travel and entertainment expenses. Increased sales
volume also attributed to an increase in sales related collateral materials.
Increases in advertising, promotional material and trade shows expenses also
contributed to the increase.
Product development. Pro forma product development expenses increased to
$3.2 million for the six months ended June 30, 1999 from $2.1 million for the
six months ended June 30, 1998. The increase was primarily due to salaries and
related expenses for staff, as well as costs for contracted services.
General and administrative. Pro forma general and administrative expenses
increased to $10.7 million for the six months ended June 30, 1999 from $3.3
million for the six months ended June 30, 1998. The increase was primarily due
to hiring key management personnel and increased staffing levels required to
support our expanded operations and significant growth. Facility costs
associated with our new corporate office also increased.
Amortization of intangible assets. Pro forma amortization of intangible
assets was $5.7 million for the six months ended June 30, 1999 as compared to
$5.6 million for the six months ended June 30, 1998.
Stock-based charges. During the years ended December 31, 1997 and 1998 and
the six months ended June 30, 1999, we recorded total pro forma deferred
compensation of $23.9 million in connection with stock option grants. We are
amortizing this amount over the vesting periods of the applicable options,
resulting in expense of $4.6 million for the six months ended June 30, 1999,
as compared to $240,000 for the six months ended June 30, 1998.
In addition, in the six months ended June 30, 1999, we recognized the $6.0
million difference between the deemed fair value of the stock sold in
connection with our Broker Gold program and the price paid as pro forma stock-
based charges.
Interest and Other Income (Expense), Net
Pro forma interest income consists of earnings on our cash and cash
equivalents. Pro forma interest expense consists primarily of interest expense
on the notes payable issued in connection with our acquisitions of The
Enterprise and MultiSearch. Interest income increased to $248,000 for the six
months ended June 30, 1999 from $246,000 for the six months ended June 30,
1998. The increase was primarily due to higher average cash
34
<PAGE>
balances. Pro forma interest expense decreased to $98,000 for the six months
ended June 30, 1999 from $244,000 for the six months ended June 30, 1998.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes for the six months ended June 30, 1999 and 1998. As of December 31,
1998, we had $36.7 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 HomeStore.com may not
generate sufficient taxable income during the carry-forward period to utilize
the net operating loss carryforwards.
Pro Forma Years Ended December 31, 1998 and 1997
Revenues
Pro forma revenues increased to $19.1 million for the year ended December
31, 1998 from $8.6 million for the year ended December 31, 1997. The increase
was primarily due to growth across our business, including the number of agent
and broker web site home pages sold and an increase in banner advertising
revenues primarily as a result of increased traffic to our web sites in 1998.
Cost of Revenues
Pro forma cost of revenues increased to $9.5 million for the year ended
December 31, 1998 from $4.2 million for the year ended December 31, 1997. The
increase was primarily due to our overall increased sales volume and activity
during the year ended December 31, 1998.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$32.8 million for the year ended December 31, 1998 from $5.1 million for the
year ended December 31, 1997. The increase was primarily due to our overall
increased sales volume and activity during 1998. Specifically, sales and
marketing-related payroll, including commissions, increased as a result of the
increased sales volume and growth in our sales force in 1998. This increase
was also due to costs related to Internet portal distribution fees and
marketing and listing fees paid to real estate franchises. Increases in public
relations campaign, promotional material and trade show expenses also
contributed to the increase.
Product development. Pro forma product development expenses increased to
$5.3 million for the year ended December 31, 1998 from $753,000 for the year
ended December 31, 1997. The increase was primarily due to increases in site
design expenses, including salaries and related expenses, as well as costs for
contracted services. In addition, costs incurred in the redesign of our
REALTOR.com web site, which began in June 1998 and was completed in December
1998, contributed to the increase.
General and administrative. Pro forma general and administrative expenses
increased to $9.2 million for the year ended December 31, 1998 from $5.5
million for the year ended December 31, 1997. The increase was primarily due
to hiring key management personnel and additional staff to manage and support
our significant growth during 1998. Personnel-related costs, including
recruiting costs, legal and, to a lesser extent, consulting fees also
contributed to the increase. We also incurred costs associated with the
relocation of our corporate office.
Amortization of intangible assets. Pro forma amortization of intangible
assets was $11.2 million for the years ended December 31, 1997 and 1998.
Stock-based charges. During the years ended December 31, 1997 and 1998, we
recorded total pro forma deferred compensation of $10.5 million in connection
with stock option grants. We are amortizing this amount over the vesting
periods of the applicable options, resulting in expense of $1.6 million in
1998, as compared to $257,000 million in 1997.
In connection with the August 1998 Series F financing, we recognized the
$18.9 million difference between the deemed fair value of the stock and the
price paid by investors as pro forma stock-based charges in 1998.
35
<PAGE>
Interest and Other Income (Expense), Net
Pro forma interest income increased to $772,000 for the year ended December
31, 1998 from $70,000 for the year ended December 31, 1997. The increase was
primarily due to higher average cash balances. Pro forma interest expense
increased to $557,000 for the year ended December 31, 1998 from $431,000 for
the year ended December 31, 1997.
Pro forma other expense in 1998 included a write-off of leasehold
improvements and a loss on disposal of certain office furniture and equipment
relating to the relocation of our corporate office.
Income Taxes
As of December 31, 1998, we had $36.7 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 HomeStore.com may not generate sufficient taxable income
during the carry-forward period to utilize the net operating loss
carryforwards.
36
<PAGE>
Selected Quarterly Pro Forma Results of Operations
The following table sets forth our unaudited pro forma statement of
operations data for each quarter of 1998 and the first two quarters of 1999,
as well as this data expressed as a percentage of our pro forma revenues for
the quarters presented. This unaudited quarterly pro forma information has
been prepared on the same basis as our pro forma financial statements and, in
the opinion of management, reflects all normal recurring adjustments that we
consider necessary for a fair presentation of the information for the periods
presented. The pro forma data may not, however, be indicative of the results
of operations of HomeStore.com that actually would have occurred had the
transactions reflected in the pro forma results of operations occurred at the
beginning of the periods presented, or of the results of operations that we
may achieve in the future. Operating results for any quarter are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
Mar. Sept.
31, June 30, 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Pro Forma Statement of
Operations Data:
Revenues................ $ 3,257 $ 3,929 $ 4,900 $ 7,039 $ 8,872 $ 12,498
Cost of revenues........ 1,752 2,190 2,448 3,140 3,888 4,910
------- -------- -------- -------- -------- --------
Gross profit.......... 1,505 1,739 2,452 3,899 4,984 7,588
------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 3,481 5,887 10,535 12,884 16,281 21,232
Product development... 514 1,541 2,083 1,114 1,499 1,668
General and
administrative....... 1,395 1,935 2,088 3,823 4,113 6,633
Amortization of
intangible assets.... 2,802 2,802 2,813 2,826 2,846 2,862
Stock-based charges... 104 136 19,278 937 8,560 2,009
------- -------- -------- -------- -------- --------
Total operating
expenses........... 8,296 12,301 36,797 21,584 33,299 34,404
------- -------- -------- -------- -------- --------
Loss from operations.... (6,791) (10,562) (34,345) (17,685) (28,315) (26,816)
Interest and other
income (expense), net.. 6 (4) 75 41 (37) 42
------- -------- -------- -------- -------- --------
Net loss before minority
interest............... (6,785) (10,566) (34,270) (17,644) (28,352) (26,858)
Minority interest....... 222 -- -- -- -- --
------- -------- -------- -------- -------- --------
Net loss................ $(6,563) $(10,566) $(34,270) $(17,644) $(28,352) $(26,858)
======= ======== ======== ======== ======== ========
As a Percentage of Pro
Forma Revenues:
Revenues................ 100% 100% 100% 100% 100% 100%
Cost of revenues........ 54 56 50 45 44 39
------- -------- -------- -------- -------- --------
Gross profit.......... 46 44 50 55 56 61
------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 107 150 215 183 184 170
Product development... 16 39 43 16 17 13
General and
administrative....... 43 49 43 54 46 53
Amortization of
intangible assets.... 86 71 57 40 32 23
Stock-based charges... 3 4 393 13 96 16
------- -------- -------- -------- -------- --------
Total operating
expenses........... 255 313 751 306 375 275
------- -------- -------- -------- -------- --------
Loss from operations.... (209) (269) (701) (251) (319) (214)
Interest and other
income (expense), net.. -- -- 2 1 -- --
------- -------- -------- -------- -------- --------
Net loss before minority
interest............... (209) (269) (699) (250) (319) (214)
Minority interest....... 7 -- -- -- -- --
------- -------- -------- -------- -------- --------
Net loss................ (202)% (269)% (699)% (250)% (319)% (214)%
======= ======== ======== ======== ======== ========
</TABLE>
37
<PAGE>
We have experienced growth in pro forma revenues in all quarters presented
due primarily to an increase in the number of real estate broker and agent
products sold and an increase in advertising revenues due to increased
traffic. The increase in revenues was also due to price increases during the
second quarter of 1998. To establish its subscriber base, during 1998
SpringStreet signed a number of subscribers for its upgrade services on a
discounted basis. We do not know what portion of SpringStreet's current
subscribers will renew their subscriptions to SpringStreet's upgraded services
on a fully paid basis.
Pro forma cost of revenues increased for each quarter presented. In
addition, during 1998, we entered into arrangements with some of our data
content providers under which we paid a percentage of gross pro forma revenues
for property listings provided exclusively to us. This program resulted in
increased royalty fees for the period beginning in July 1998. In addition, we
incurred significant costs in the second and third quarter of 1998 due to the
redesign and upgrade of our REALTOR.com web sites.
Pro forma operating expenses, excluding pro forma stock-based charges and
pro forma product development, have increased in each of the quarters
presented reflecting the growth of our operations. Pro forma sales and
marketing expenses for each quarter in 1998 increased primarily due to the
addition of sales and marketing personnel and increased commissions associated
with higher sales. The increase was also attributable to an increase in web
portal distribution and preferred alliance fees which began in the second
quarter of 1998. Pro forma product development expenses increased during the
second and third quarters of 1998 due to an increase in our site design costs
resulting from our redesign of our REALTOR.com web site, which began in June
1998 and was completed in December 1998. These costs were expensed as incurred
during the development period. The increase in pro forma general and
administrative expenses for each of the quarters was due primarily to the
expansion of our corporate infrastructure and recruiting and relocation costs
related to the hiring of additional personnel. We also incurred costs related
to the move of our new corporate office during the fourth quarter of 1998.
Our results of operations could vary significantly from quarter to quarter.
We expect that over time our revenues will come from a variety of sources.
However, in the near term, we expect to be substantially dependent on fees
from real estate agents and brokers. We also expect to incur significant sales
and marketing expenses to promote our brand and our services. Therefore, our
quarterly revenues and operating results are likely to be particularly
affected by the number of subscribers 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 a shortfall.
38
<PAGE>
Historical Results of Operations of NetSelect, Inc.
The following table sets forth certain historical data from NetSelect
Inc.'s consolidated statement of operations. These results reflect NSI's
consolidation of RealSelect for the indicated periods prior to the
Reorganization. On February 4, 1999, NetSelect Inc. entered into a non-
substantive share exchange and was merged into InfoTouch. The information for
the period from January 1, 1999 to February 4, 1999 has been derived from
NetSelect Inc.'s unaudited consolidated financial statements, which, in
management's opinion, have been prepared on substantially the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with NetSelect Inc.'s consolidated
financial statements and related notes contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
October 28, 1996 Year Ended
(Inception) to December 31, January 1 to
December 31, ----------------- February 4,
1996 1997 1998 1999
---------------- ------- -------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues..................... $ -- $ 1,282 $ 15,003 $ 2,433
Cost of revenues............. -- 335 7,338 798
----- ------- -------- -------
Gross profit............... -- 947 7,665 1,635
----- ------- -------- -------
Operating expenses:
Sales and marketing........ 9 3,200 25,560 4,064
Product development........ 4 506 4,139 174
General and
administrative............ 348 2,687 6,929 1,053
Amortization of intangible
assets.................... 30 360 1,893 261
Stock-based charges........ -- 257 20,455 569
----- ------- -------- -------
Total operating
expenses................ 391 7,010 58,976 6,121
----- ------- -------- -------
Loss from operations......... (391) (6,063) (51,311) (4,486)
Interest and other income
(expense), net.............. 1 74 121 (5)
----- ------- -------- -------
Net loss before minority
interest.................... (390) (5,989) (51,190) (4,491)
Minority interest............ 213 1,239 222 --
----- ------- -------- -------
Net loss..................... $(177) $(4,750) $(50,968) $(4,491)
===== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, January 1 to
--------------- February 4,
1997 1998 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
As a Percentage of Revenues:
Revenues........................................ 100% 100% 100%
Cost of revenues................................ 26 49 33
------ ------ ----
Gross profit.................................. 74 51 67
------ ------ ----
Operating expenses:
Sales and marketing........................... 250 170 167
Product development........................... 39 28 7
General and administrative.................... 211 46 43
Amortization of intangible assets............. 28 13 11
Stock-based charges........................... 20 136 23
------ ------ ----
Total operating expenses.................... 548 393 251
------ ------ ----
Loss from operations............................ (474) (342) (184)
------ ------ ----
Net loss before minority interest............... (468) (341) (184)
Minority interest............................... 97 1 --
------ ------ ----
Net loss........................................ (371)% (340)% (184)%
====== ====== ====
</TABLE>
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Years Ended December 31, 1998 and 1997 and the Period From October 28, 1996
(Inception) to December 31, 1996
Due to the fact that NetSelect Inc.'s historical results of operations from
the period of October 28, 1996 (Inception) to December 31, 1996 are
insignificant, management believes that a comparison analysis between this
period and the comparable period in 1997 would not be meaningful.
Revenues
Revenues increased to $15.0 million for the year ended December 31, 1998
from $1.3 million for the year ended December 31, 1997. The increase was
primarily due to growth across our business, including the number of agent and
broker web site home pages sold and an increase in banner advertising revenues
primarily as a result of increased traffic to our web sites in 1998.
Cost of Revenues
Cost of revenues increased to $7.3 million for the year ended December 31,
1998 from $335,000 for the year ended December 31, 1997. The increase was
primarily due to our overall increased sales volume and activity during the
year ended December 31, 1998.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $25.6
million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. The increase was primarily due to our overall
increased sales volume and activity during 1998. Specifically, sales and
marketing-related payroll, including commissions, increased as a result of the
increased sales volume and growth in our sales force in 1998. This increase
was also due to costs related to Internet portal distribution fees and
marketing and listing fees paid to real estate franchises. Increases in public
relations campaign, promotional material and trade show expenses also
contributed to the increase.
Product development. Product development expenses increased to $4.1 million
for the year ended December 31, 1998 from $506,000 for the year ended December
31, 1997. The increase was primarily due to increases in site design expenses,
including salaries and related expenses, as well as costs for contracted
services. In addition, costs incurred in the redesign of our REALTOR.com web
site, which began in June 1998 and was completed in December 1998, contributed
to the increase.
General and administrative. General and administrative expenses increased
to $6.9 million for the year ended December 31, 1998 from $2.7 million for the
year ended December 31, 1997. The increase was primarily due to hiring key
management personnel and additional staff to manage and support our
significant growth during 1998. Personnel-related costs, including recruiting
costs, legal and, to a lesser extent, consulting fees also contributed to the
increase. We also incurred costs associated with the relocation of our
corporate office.
Amortization of intangible assets. Amortization of intangible assets was
$1.9 million for the year ended December 31, 1998 as compared to $360,000 for
the year ended December 31, 1997 as a result of The Enterprise and MultiSearch
acquisitions in March and July of 1998.
Stock-based charges. During the years ended December 31, 1997 and 1998, we
recorded total deferred compensation of $10.5 million in connection with stock
option grants. We are amortizing this amount over the vesting periods of the
applicable options, resulting in expense of $1.6 million in 1998, as compared
to $257,000 in 1997.
In connection with the August 1998 Series F financing, we recognized the
$18.9 million difference between the deemed fair value of the stock and the
price paid by investors as stock-based charges in 1998.
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Interest and Other Income (Expense), Net
Interest income increased to $583,000 for the year ended December 31, 1998
from $98,000 for the year ended December 31, 1997. The increase was primarily
due to higher average cash balances. Interest expense increased to $365,000
for the year ended December 31, 1998 from $24,000 for the year ended December
31, 1997.
Other expense in 1998 included a write-off or leasehold improvements and a
loss on disposal or certain office furniture and equipment relating to the
relocation of our corporate office.
Income Taxes
As of December 31, 1998, we had $36.7 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 a likelihood
that HomeStore.com many note generate sufficient taxable income during the
carry-forward period to utilize the net operating loss carryforwards.
Quantitative and Qualitative Disclosures About Market Risk
HomeStore.com does not currently hold any derivative instruments and does
not engage in hedging activities. Also, HomeStore.com currently does not hold
any variable interest rate debt or lines of credit, and currently does not
enter into any transaction denominated in a foreign currency. Thus,
HomeStore.com's exposure to interest rate and foreign exchange fluctuations is
minimal.
Liquidity and Capital Resources
Since 1993, we have funded our operations and met our capital expenditure
requirements through the private sale of equity securities and through cash
generated from the sale of our products and services and, to a lesser extent,
equipment lease financing. Proceeds from the sale of common and preferred
stock through June 30, 1999 totaled approximately $92.4 million.
We have had negative cash flows from operating activities since 1997. Net
cash used in operating activities was $4.0 million in 1997, $28.2 million in
1998 and $15.2 million in the first six months of 1999. Net cash used in
operating activities in each of these periods was primarily the result of net
operating losses and payments required to be made relating to our Internet
portal distribution and marketing and listing agreements entered into in 1998.
These operating cash outflows were partially offset by increases in accounts
payable, accrued liabilities, deferred revenues and stock-based charges.
Net cash used in investing activities was $2.5 million in 1996, $1.6 million
in 1997, and $5.3 million in 1998 and net cash provided by investing
activities was $8.7 million during the six months ended June 30, 1999. To
date, our investing activities have consisted of purchases of property and
equipment, acquisitions and strategic operating agreements. Capital
expenditures for property and equipment totaled $165,000 in 1996, $372,000 in
1997 and $3.9 million in 1998. During the six months ended June 30, 1999, $3.0
million of our capital expenditures were funded through an equipment lease
financing arrangement. In March 1998 and July 1998, we acquired The Enterprise
and MultiSearch, respectively for an aggregate purchase price of $11.7
million, of which $1.6 million represented cash payments.
Net cash provided by financing activities was $4.0 million in 1996, $7.2
million in 1997, and $45.0 million in 1998 and $11.6 million for the six
months ended June 30, 1999. Cash was provided primarily from net proceeds from
the sale of our common and preferred stock. We also repurchased shares of our
common and preferred stock in 1998 and during the six months ended June 30,
1999.
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As of December 31, 1998, our principal commitments consisted of a five-year
lease for our corporate offices, various Internet portal distribution and
marketing and listing agreements and our equipment lease. Future cash payments
under these non-cancelable commitments are $75.1 million, of which
approximately $67.4 million are due through 2001. We expect that our capital
expenditures will increase as our employee base continues to grow. We do not
have any material commitments for capital expenditures, although we anticipate
that our planned purchases of capital equipment and leasehold improvements
will require additional expenditures over the next 12 months.
As of June 30, 1999, we had $18.2 million in cash and cash equivalents. We
currently anticipate that our existing cash and cash equivalents and the net
proceeds from this offering, 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, we may need to raise
additional funds in order to fund more rapid expansion, to expand our
marketing activities, to develop new or enhance existing services or products,
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 funding, 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 funds were raised through the issuance of
equity securities, the percentage of our stock owned by our then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of our common and preferred
stock.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. The adoption of this statement of
position in the first quarter of fiscal 1999 did not have a material impact on
our financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
issued statement of position No. 98-5, "Reporting on the Costs of Start-Up
activities." This statement of position requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all
start-up costs that were capitalized in the past must be written off when this
statement of position is adopted. The adoption of this statement of position
in the first quarter of fiscal 1999 did not have a material impact on our
financial position, results of operations or cash flows.
In June 1998, The Financial Accounting Standards Board issued 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 we do not currently hold any derivative
instruments and do not engage in hedging activities, we believe the impact of
adoption of SFAS No. 133 will not have a material impact on our financial
position, results of operations or cash flows. We will be required to
implement SFAS No. 133 in the first quarter of fiscal 2001.
Year 2000 Compliance
The Year 2000 Issue refers generally to the problems that some computer
systems may have in determining the correct century for the year. For example,
software with date-sensitive functions that is not Year 2000 compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results.
We have been actively involved in initiatives to reduce or eliminate our
exposure to Year 2000 issues. We intend to achieve remediation and compliance
for all our critical infrastructure components, systems, interfaces
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and key suppliers by August 1999. We are following a methodology which
includes six phases: Inventory, Assessment, Planning, Remediation, Testing and
Implementation. The Inventory and Assessment Phases were complete at the end
of March 1999. The Planning through Testing Phases are planned for completion
by July 1999, with final implementation by the end of August 1999.
Internal Infrastructure. As a result of building a new data center in our
Thousand Oaks, California facility, we believe our computer network for
running our REALTOR.com and CommercialSource.com web sites is running on Year
2000 compliant hardware and software purchased within the previous six months.
Our primary Internet service providers have provided statements of compliance
for the networks. In addition, our equipment vendors have informed us that the
hardware and software components used for these web sites are Year 2000
compliant.
We host out HomeBuilder.com web site at a network facility in Dallas,
Texas. We have been informed by our vendors that the hardware and software
components used for the HomeBuilder.com web site are Year 2000 compliant.
We host broker home pages from our data center in Milwaukee, Wisconsin. We
have not yet been informed by our vendors that the hardware and software
components used to host these pages are Year 2000 compliant.
Except as described below, we obtained representations from SpringStreet's
former stockholders that the computers and software used to operate the
SpringStreet.com web site are Year 2000 compliant. SpringStreet.com's database
software program is not Year 2000 compliant. We are in the process of
replacing this software. However, if the software is not timely replaced our
business and operating results could be materially adversely impacted. In
addition, if these representations are incorrect or if we experience unforseen
problems with respect to the Year 2000, we could incur substantial additional
expenses to correct these problems.
Internal Business Systems. Our primary management information and business
systems are running on third party software packages purchased and implemented
during the first quarter of 1999. The vendors of each of these packages have
provided Year 2000 compliance statements. For internally developed software,
we have supplemented our development staff with a third party consulting
company specializing in Year 2000 remediation. We work with hundreds of
Multiple Listing Services to obtain listings data for the REALTOR.com web
site. We are in the process of contacting each of these MLSs to determine
their state of readiness with respect to the Year 2000. The failure of an
MLS's system to be Year 2000 compliant would severely affect our ability to
download and receive listings data from them.
Suppliers and Vendors. During the inventory and assessment phases of our
Year 2000 Program, key vendors and suppliers were listed and prioritized based
on their importance to the business. We are validating compliance with all
vendors and have initiated communications to all priority suppliers and
vendors requesting compliance for their products and services.
Our Internet Service Providers have represented to us that their systems
are Year 2000 compliant.
We have contacted our landlord to determine whether our building and
related systems are Year 2000 compliant. Our building and systems and
telephone, facsimile and other communications have been certified as being
Year 2000 compliant.
Costs. We believe that the total cost of our Year 2000 compliance efforts
will not be material to our business. In addition, the majority of these costs
are attributable to employee time spent in our Year 2000 compliance efforts as
compared to cash outlays. However, if we encounter unexpected problems with
respect to the Year 2000 issue, we could incur additional costs, including
significant cash outlays, which could be material.
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Year 2000 Risks. Despite our investigations of the Year 2000 issue, we have
not received certifications from all of our third party suppliers and vendors
and it is possible that those certifications as well as the other
representations we have obtained could be erroneous. Failures of our or our
customers' systems to operate properly with regard to the Year 2000 could
result in one or more of our web sites being unavailable and our products and
services not functioning properly. Unavailability of our web sites due to a
lack of Year 2000 compliance could have a material adverse impact on our
revenues and operating expenses.
In addition, the Internet is a network of computer systems which depends on
the functioning of a number of parts such as communications connections,
Internet Service Providers and power supplies, all of which are beyond our
control. The failure of these companies to be Year 2000 compliant could result
in a variety of systems failures such as electrical outages, Internet outages
or slower response times or telecommunications failures. These events could
prevent users from accessing our products and services or prevent us from
updating our listings for a period of time, from delivering our services to
our subscribers or from selling advertising on our web sites for a period of
time. Any of these events could have a material adverse effect on our
business, operating results and financial condition.
Contingency Planning. We have not yet developed a formal contingency plan
for any Year 2000 problems, as our contingency plan depends in significant
part upon the results of our Year 2000 investigation. We expect to have a
contingency plan completed by August 1999.
44
<PAGE>
BUSINESS
Overview
Our family of web sites, consisting of HomeStore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com and CommercialSource.com, is the leading
destination on the Internet for real estate-related information, products and
services based on the number of visitors, time spent on our web sites and
number of property listings. As of June 30, 1999, we had listings on our web
sites for over 1.37 million of the approximately 1.47 million homes that we
estimate are listed nationally for sale, over 100,000 new homes for sale and
over 45,000 rental properties. Our family of web sites also offer a wide
variety of real estate related information and tools. We have relationships
with the NAR, the NAHB, MLSs, real estate franchises, brokers, builders and
agents. We also have distribution agreements with a large number of leading
Internet portal web sites.
Industry Background
The Real Estate Industry
The real estate industry accounts for approximately 15% of the gross
domestic product of the United States and is therefore one of the largest
sectors of the economy. The real estate industry is commonly divided into the
residential and commercial sectors. The residential sector includes the
purchase, sale, rental, remodeling and new construction of homes and
represents approximately $1 trillion per year. The commercial sector includes
the lease, resale, and new construction of property for businesses and
represents approximately $300 billion per year.
The Residential Real Estate Market
Buying a home is the largest financial decision, and represents one of the
most difficult and complex processes, most consumers will ever undertake. The
process of finding a home begins a lifelong cycle which most consumers will
move through once every seven to eleven years. This cycle tracks major life
events such as employment, marriage, children and retirement and is
illustrated below:
[PROCESS AND CYCLE CHART APPEARS HERE]
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A significant portion of the United States economy has evolved around
helping consumers as they navigate through this home and real estate cycle. An
enormous network of support services and products exists to assist consumers
in finding a property, building a property, renting or buying a property,
moving, owning a property and selling a property.
Find a Property. The following real estate professionals and organizations
assist consumers in finding a property:
. Real Estate Agents. Real estate agents are independent contractors that
are licensed to negotiate and transact the sale of real estate on behalf
of prospective buyers and sellers. There are over 1.0 million real
estate agents in the United States. Consumers spend in excess of $30
billion annually for assistance with the finding, buying and selling of
residential property.
. Real Estate Brokers. Real estate brokers are paid a commission to bring
buyers and sellers together and assist in negotiating contracts. Real
estate brokers often have their own independent offices and may employ
other licensed real estate agents. There are over 100,000 real estate
brokers in the United States.
. Residential Franchisers. There are six major residential franchisers in
the United States: Century 21, Coldwell Banker and ERA, which
collectively comprise the Cendant franchise; RE/MAX; Prudential; and
Better Homes & Gardens. These franchisers together represent thousands
of independently owned and operated real estate offices and hundreds of
thousands of real estate professionals in the United States.
. Multiple Listing Services. MLSs operate proprietary networks that
provide real estate professionals with listings of properties for sale,
and are regulated by a governing body of local brokers and/or agents.
There are approximately 800 MLSs nationwide that aggregate local
property listings by geographic location. We estimate that, as of June
30, 1999, MLSs provided approximately 1.47 million home listings
nationwide.
. National Association of REALTORS. The NAR is the largest trade
association in the United States that represents real estate
professionals. The NAR consists of residential and commercial REALTORS,
including brokers, agents, property managers, appraisers, counselors and
others engaged in all aspects of the real estate industry. The NAR has
approximately 720,000 members.
Build a Property. In addition to the real estate professionals and
organizations involved in finding a home, the new home market is also served
by a large group of dedicated professionals including:
. Home Builders. New homes are built primarily by a limited number of
national home builders and a much larger number of local volume and
custom builders. In 1998, home builders built over 800,000 homes,
generating over $160 billion in sales.
. National Association of Home Builders. The NAHB is the second largest
real estate trade association in the United States. As of December 31,
1998, the NAHB's members include approximately 197,000 firms.
Approximately one-third of the NAHB's members are home builders and/or
remodelers, and the remainder work in closely related fields within the
residential real estate industry, such as mortgage, finance, building
products, and building services including subcontractors.
Rent a Property. Today, over 30 million households in the United States
reside in rental housing. In addition to real estate agents and brokers who
assist in the leasing of residential rental units, professionals serving this
segment of the market include the following:
. Property Owners. Property owners include owners of individual apartment
units, multi-family apartment complexes, individual single family rental
homes or other residential rental properties.
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Property owners may lease and operate their rental properties themselves
or outsource those functions to other real estate professionals, such as
property managers. The residential rental ownership market is highly
fragmented, with the 50 largest owners of multi-family apartment
complexes owning approximately 10% of all apartment rental units in the
United States.
. Property Managers. Property managers are typically responsible for
leasing available rental units, collecting rents, and maintaining the
property. Property managers typically manage a number of apartment
complexes, and will employ third party leasing agents to assist them
with the leasing function. The property manager market is also highly
fragmented, with the 50 largest property managers, many of whom also own
their properties, managing approximately 10% of all apartment rental
units in the United States.
Buy and Sell a Property. Because of the complexity and size of the purchase
or sale transaction, consumers buying or selling a home typically rely upon a
series of professionals, including real estate agents and ancillary service
providers, such as mortgage brokers, title agents, escrow agents, attorneys,
inspectors and appraisers. These professionals and ancillary service providers
offer products and services, such as mortgages, title insurance, credit
reports, appraisals and inspections, that generated in excess of $49 billion
in transactional fees in 1998.
Move. Every time consumers buy, sell or rent a home, they need assistance
with various relocation related services, such as insurance and moving
supplies and services. We estimate that consumers spend over $100 billion each
year for home and apartment moves including moving services and related
product purchases. In addition, real estate transactions often lead to
significant lifestyle changes for consumers, including changing neighborhoods,
schools, shopping malls, banks, grocers, cleaners and other retail
relationships. As a result, consumers need information about the wide range of
available product and service alternatives relating to all aspects of their
relocation.
Maintain a Property. Ownership represents the longest portion of the home
and real estate life cycle. Homeowners purchase a large number of household
and home related products including furniture, appliances, hardware and
supplies. During this phase of the home and real estate life cycle, homeowners
also require a number of ancillary services, relating to such activities as
home maintenance and repairs, refinancing, remodeling and landscaping. As a
result, homeowners are continuously seeking sources of information to assist
them in locating providers of these products and services.
Challenges in the Real Estate Market
Every participant in the home and real estate life cycle faces a unique set
of challenges:
Home Buyers. In order to dispel the fear of purchasing the wrong home or
paying too much for a home, consumers must be assured that they have
considered all available options. Therefore, home buyers require an extensive
amount of information and several decision tools to help bolster confidence
during the home buying process. To make an informed decision, consumers need
access to a comprehensive listing of homes for sale and require information
about specific neighborhoods and listed prices of comparable homes for sale in
a given geographic location.
Once a home has been selected, consumers must consider a broad range of
related services, including mortgage, title, escrow, insurance, moving and
relocation services as well as remodeling alternatives. As a result, consumers
are continually searching for additional information and resources to assist
them in every aspect of the real estate transaction and need a comprehensive,
convenient and integrated source of information that assists them in each step
of the process.
Real Estate Agents and Brokers. Real estate agents and brokers depend on
attracting and retaining customers in order to generate increasing numbers of
transactions. Due to its size and complexity, it is not uncommon for the real
estate transaction to take several months to complete. As a result, the job of
real estate agents and brokers
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is complicated by a variety of factors. Therefore real estate agents and
brokers are looking for additional opportunities to market their services,
become more productive and compete more effectively for transactions. In
addition, they seek greater efficiency in disseminating information to their
prospective clients and are looking for tools that can help them streamline
their current practices.
Home Builders. Home building and real estate professionals who focus on new
homes and new home developments also depend on attracting and retaining
customers in order to sell new properties in a timely manner. However, home
builders have not developed an infrastructure similar to an MLS to aggregate,
update and share data regarding available inventory. Nor do they have the
infrastructure to communicate this information to potential buyers. As a
result, home building and real estate professionals continue to seek new ways
to market their products and services and inform prospective home buyers of
the availability of new properties.
Renters, Property Managers and Owners. To make an informed decision,
renters need access to comprehensive information about available rental units,
specific neighborhoods and rental prices in a given geographic location.
Because of the high turnover rate in rental units, property managers and
owners must regularly attract new tenants to minimize their vacancy rates. We
estimate that approximately $1.8 billion was spent in 1998 to market
apartments and rental homes. The rental market has not developed a central
repository for comprehensive listings accessable by potential renters
nationwide and property managers and owners are continuously seeking to market
their available units in a cost-effective manner.
Ancillary Service Providers. Consumers require a variety of products and
services throughout the home and real estate life cycle. The real estate
transaction provides service providers and retailers the opportunity to target
consumers at a time when they are shifting their buying patterns. Providers
and retailers of these products or services need an effective mechanism to
reach consumers who are most interested in their offerings. Ideally, these
providers of products and services would have a centralized location where
they could advertise their offerings to a target group of consumers who are
engaged in the real estate process.
The Internet and Real Estate
The emergence and acceptance of the Internet is fundamentally changing the
way that consumers and businesses communicate, obtain information, purchase
goods and services and transact business. Because of its size, fragmented
nature and reliance on the exchange of information, the real estate industry
is particularly well suited to benefit from the Internet. The real estate
industry currently spends $3.5 billion a year on advertising and print media.
Traditional sources of advertising and print media, including classifieds and
other off-line sources, are not interactive and are limited by incomplete and
inaccurate data that is local in scope and is typically disseminated on a
weekly basis. These traditional sources also lack content that can be searched
based on different terms, a centralized database of information and the
ability to conduct two-way communications. The Internet offers a compelling
means for consumers, real estate professionals, home builders, renters,
property managers and owners and ancillary service providers to come together
to improve the dissemination of information and enhance communications.
HomeStore.com
We are pioneering the use of the Internet to bring the real estate industry
online and enabling real estate industry participants to benefit from the
Internet. We currently operate the most frequently visited real estate-focused
family of web sites, including REALTOR.com, HomeBuilder.com and
SpringStreet.com, based on the number of our users, the time users spend on
our web sites and the number of listings. We also recently launched our
CommercialSource.com web site. Our family of web sites allows searches of
information that previously had never been compiled as comprehensively in a
single location. The principal benefits of our products and services include
the following:
Comprehensive Source of Real Estate Listings. Our family of web sites
provides the most comprehensive source of real estate listings on the web. As
of June 30, 1999, of the 1.47 million homes that we estimate are listed for
sale in the United States, our REALTOR.com web site had listings for
approximately 1.37 million. As
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of June 30, 1999, we aggregated information on over 100,000 new homes and
planned developments for sale throughout the United States on our
HomeBuilder.com web site. We also provide comprehensive rental property
related listing information through our SpringStreet.com web site, which
included listings for over 45,000 properties as of June 30, 1999.
Key Industry Relationships. We have a number of relationships with key real
estate industry participants. We believe that none of our competitors have as
many comparable relationships. Under our agreements with the NAR and NAHB, we
operate their official web sites and we receive preferental promotion in their
marketing activities. We also have content relationships under which parties
have given us the right to display their property listings on our web sites
for a period of time with approximately 70 of the 200 largest brokers in the
United States through our Broker Gold program, nine of the ten largest home
builders in the United States, five of the six largest real estate franchises
and over 650 of the approximately 800 MLSs. Under our Broker Gold program,
real estate brokers who agreed to provide us with their listings on an
exclusive national basis also purchased shares of our preferred stock, common
stock and warrants. Our close working relationships with these organizations
allow us to keep pace with the complicated and evolving real estate industry.
In order to draw additional traffic to our family of web sites, we also have
distribution agreements with the following Internet portals: America Online,
@Home, Excite and Go Network/Infoseek.
Provide Comprehensive Set of Products and Services for Consumers. We
provide consumers with access to real estate professionals and qualified,
accurate and timely nationwide listings. Through our family of web sites,
consumers can easily search through substantial amounts of real estate related
information at all stages of the home and real estate life cycle. For example,
we provide decision support information and tools, such as calculators and
worksheets for helping to select financing options and information about
specific neighborhoods, directories of real estate professionals and financing
options. We believe that providing consumers with a comprehensive and
integrated information source for each stage of the home and real estate life
cycle, allows them to be better informed and feel more confident about their
real estate decisions.
Enable Industry Professionals to Benefit from the Internet. Our products
and services allow real estate professionals to utilize the Internet to expand
and grow their customer base. We design and maintain personal home pages for
real estate professionals. They can also have their listings displayed with
detailed information about a property and can have links from their real
estate listings to their personal home page. Through the reach of our family
of web sites, real estate professionals can significantly increase their
visibility among prospective buyers and sellers, especially those outside of
their region. In addition, we believe buyers and sellers that have used
REALTOR.com to research their real estate transaction prior to selecting a
real estate professional are more likely to reach an informed purchase or sale
decision in a shorter period of time.
Provide Attractive Demographic for Advertisers and Service Providers. Our
family of web sites draws an attractive target audience for advertisers and
providers of real estate-related products and services. Because we attract
consumers interested in real estate near the time of a transaction, we provide
businesses with an efficient way to find and communicate with potential
customers. In addition, our audience tends to use our family of web sites for
extended periods of time. According to Media Metrix, in May 1999, the average
time spent per visit to REALTOR.com was 12.8 minutes, ranking it fourth among
the top 200 web sites as measured by the number of unique visitors, or
individual Internet users who visited our web site at least once during the
month.
Our Business Model Provides Multiple Revenue Opportunities. Our business
model is designed to support continued growth in the utilization of the
Internet as a tool for all phases of the home and real estate life cycle. We
currently generate revenues from several sources, including agents and
brokers, home builders, rental property owners and other advertisers.
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Our Strategy
Our objective is to extend our position as the leading real estate
destination on the Internet. The key elements of our strategy include:
Enhance Our Real Estate Content and Data. We will continue to focus on
connecting consumers and professional service providers by increasing the
content and relevant data available on our family of web sites. To achieve
this objective, we will seek to increase the number of new and existing homes,
rental properties and commercial properties listed on our family of web sites
and we will also display additional real-estate related content.
Increase Usage of Our Family of Web Sites. We seek to increase the number
of people using our family of web sites as well as the amount of time they
spend there. To expand our user base, we plan to strengthen our existing
distribution arrangements with Internet portals to apply across our family of
sites. We also intend to pursue distribution relationships with other high
traffic web sites and web sites offering real estate-related services. We also
expect to significantly increase our marketing efforts in traditional media,
such as newspaper advertisements, radio and television promotions. We also
intend to add features and content to our web sites designed to encourage
users to spend more time on our web sites.
Continue to Pursue Relationships with Real Estate Industry Professionals.
We believe that our relationships with key real estate industry participants,
such as the NAR, the NAHB, MLSs, brokers and builders, provide us with a
distinct competitive advantage. These relationships provide us with
opportunities to market our products and services to their members. These
relationships also allow us to provide consumers with comprehensive
information and resources related to all aspects of the home and real estate
life cycle, such as real estate listings and neighborhood information,
directories of REALTORS and real estate news. We plan to pursue additional or
broader listing and marketing relationships with key industry participants.
Continue to Develop and Extend Our Brand Recognition. As more consumers and
real estate professionals utilize the Internet for their real estate needs, we
believe that brand awareness will provide us with a significant competitive
advantage. We plan to expand our marketing efforts with advertising campaigns
in traditional media as well as on the Internet in order to build greater
recognition for our family of web sites.
Incorporate Emerging Internet Technologies. We believe the evolution of the
Internet will provide us with the opportunity to move more real estate related
information and activities onto the Internet. For example, earlier this year
we introduced 360 degree panoramic video "tours" of homes listed for sale and
plan to offer REALTORS the enhanced ability to update their property listing
information, such as photos and text descriptions, from their computer
desktop. We also plan to incorporate new Internet technologies which we
believe will help us provide enhanced functionality and increase overall ease-
of-use of our family of web sites. We believe that continuing to incorporate
enhanced functionality will be a key element in increasing traffic and time
spent on our family of web sites.
Products and Services
We offer a family of web sites including Homestore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com and CommercialSource.com, as well as related
products and services.
HomeStore.com
HomeStore.com is a gateway to our family of web sites providing links and
general information relating to each of our other web sites.
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REALTOR.com
Our primary site, REALTOR.com, enables potential home buyers to browse,
free of charge, from our searchable database of approximately 1.37 million
homes as of June 30, 1999. We have content arrangements with over 650 of the
approximately 800 Multiple Listing Services across the United States to
provide the listings for REALTOR.com. Our property listings typically provide
information that is significantly more detailed and timely than that included
in alternative media channels, such as newspaper classified advertisements.
Many of these listings are from MLSs that have agreed to provide listings
exclusively to us for publication on the Internet. A Multiple Listing Service
operates proprietary networks that provide real estate professionals with
listings of properties for sale and are regulated by a governing body of local
brokers and/or agents. We receive the balance of our listings on REALTOR.com
from real estate brokers. We do not provide "for sale by owner" listings, as
this is prohibited under terms of our agreement with the NAR.
Additionally, REALTOR.com provides decision support tools, such as mortgage
calculators and finance worksheets, information concerning the home buying and
selling process and features that aid users in evaluating the attributes of
particular neighborhoods or geographic locations.
Consumer Products
Our consumer products are offered free to REALTOR.com visitors and are
designed to help them throughout the home and real estate life cycle.
REALTOR.com, has sections representing the various stages of the home and real
estate life cycle, including Getting Started, Buying, Selling, Offer/Closing,
Moving and Owning. For example, at the beginning of the home and real estate
life cycle we offer Find a Home, Find a Neighborhood and Personal Planner. In
addition, we offer information and tools regarding mortgages and home
affordability as well as a specific guide to the home buying process. When
users have made their home selection, they can find information about the
offer process, applying for a loan, closing the purchase or planning the move.
As homeowners, users can find information about remodeling, refinancing and
other aspects of owning a home. When users are ready to sell their home, they
can use Find a REALTOR to find information regarding relocation planning,
pricing, accepting an offer and closing the sale. In addition, while they are
in the process of selling their homes, sellers can use our Find a Home, Find a
Neighborhood and Personal Planner tools to begin the search for their next
home. At all stages, users can visit our Resource Center, for links to a wide
variety of real estate information such as moving services, insurance, home
improvement and appliances.
Find a Home. Our Find a Home feature allows potential home buyers to search
our database of home listings. The user selects a geographic region or a
specific MLS property identification number. The user can refine the home
search by selecting neighborhood and home characteristics. Our search engine
returns a list of homes ranked by their conformity to the users' search
criteria. The search results provide pictures of the homes, if available,
descriptions of the properties, the name and contact information of the agent
that represents the home seller and, for certain homes, virtual tours. For
agents purchasing our Agent Simple product, the consumer's search results also
provide a direct link to their personalized web site displaying each property
listed by the agent.
Find a REALTOR. Our Find a REALTOR feature allows a user to contact a
REALTOR to buy or sell a home in a given geographic area. The user can search
our Yellow Pages Directory for REALTORS who specialize in the cities or zip
codes specified by the user. Users can also search by keyword and/or by office
name or name of the REALTOR. Our Yellow Pages Directory provides a list of
REALTORS meeting the search criteria, which includes a link to each REALTOR's
home page, their office name, phone and fax numbers, their e-mail address and
a brief description of their specialty. We also have a White Pages Directory
listing all REALTORS.
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Resource Center. Our MarketPlace area provides potential home buyers access
to ancillary services that can be helpful at all stages of the home and real
estate life cycle. The services consist of:
. moving services, such as self-storage by Storage Locator, change of
address by Change My Address and moving tools by Homefair;
. home improvement services, such as Improvement Center at Home Depot, Tool
Dictionary by Sierra Home and Improvement Encyclopedia by Sierra Home;
. insurance services, such as auto insurance by InsWeb and title insurance
by Stewart Title;
. books, such as bookstore by Amazon.com.
. finance center, such as calculators from Quicken.com, employment by
Monster.com, interest rate information from Bankrate.com and credit
reports by Qspace;
. home technology, such as Home Business Center by IBM and Communications
Center by GTE; and
. home and family, such as appliances by Whirlpool, furniture by Cort,
child and elderly care by CareGuide, health and wellness by WebMD and
furniture and window coverings by JC Penney.
Through Marketplace, companies can sponsor new services and buy targeted
advertising for their products and services.
Find a Neighborhood. Our Find a Neighborhood feature enables users to
locate desired neighborhoods by searching information such as quality of
schools, crime rate, average home cost, and urban/rural profiles. Once a
profile has been established, our search engine returns a map ranking
geographic areas according to the user's criteria.
Personal Planner. Users can use our Personal Planner feature to save search
results, search criteria, and articles and related content from all areas of
REALTOR.com. Users can create their Personal Planner account by registering
their e-mail address and can choose to be notified via e-mail whenever new
listings match their saved search criteria.
Professional Products
Agent Simple. Agent Simple, our primary product offering for the REALTOR,
is a customized web page that links a REALTOR's professional biography and
their inventory of listings to their web page. The home page and property
listing pages can contain:
. customized textual descriptions and banners on the REALTOR's listed
properties;
. multiple photographs of the properties;
. a personalized voice message from the REALTOR;
. the REALTOR's professional information, including name, photograph,
telephone number, significant accomplishments and mailing and e-mail
addresses; and
. the REALTOR's listing in our Yellow Pages Directory, which is linked to
Find a REALTOR.
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Office Simple. Our Office Simple product is targeted to individual real
estate brokerage offices. Office Simple provides real estate brokers the
opportunity to have their entire inventory of real estate properties linked to
the office's customized web page, whether or not their agents purchase our
Agent Simple product. The agents of the broker are listed on its web page with
Agent Simple subscribers receiving placement above those who do not use Agent
Simple. An embedded link to an office's web address is also available as an
upgrade to Office Simple users, as well as the display of their office logo on
every one of their listings for the entire year. Office Simple subscribers are
also listed in our Yellow Pages Directory of REALTORS.
One Place. Our One Place product integrates Agent Simple with an
interactive voice response system, linked to a pager network. With One Place,
REALTORS are immediately paged when a potential home buyer or seller inquires
about a specific house. In addition, if the buyer sees the telephone number on
the "for sale" sign posted in front of the property and calls the interactive
voice response system, the REALTOR is also paged. The pager message includes a
display of the caller's telephone number and specific property information,
which allows the REALTOR to respond instantaneously and knowledgeably to
interested consumers. One Place is sold on an annual subscription basis, plus
additional upgrades. One Place is typically sold to brokers with at least 100
real estate professionals and/or brokers who commit to obtaining a minimum
agent participation rate.
HomeBuilder.com
HomeBuilder.com is our web site focused on builder information, including
new homes, subdivisions and developments. We have developed a nationwide
listing of builders' models, newly built homes, and housing plans, which we
aggregate directly from builders and organize in a similar fashion to listings
on REALTOR.com.
Consumer Products
HomeBuilder.com, like REALTOR.com, allows potential home buyers to browse,
free of charge, through our searchable database of new homes. Many of the
features available on the REALTOR.com web site, such as mapping and community
profiles, are also available on HomeBuilder.com. The site's Lead Generation
Program allows consumers to send the builder detailed requests via electronic
mail or facsimile for information on each property. Potential buyers can
search for new homes using the following features:
Find a New Home. Our Find a New Home feature allows potential home buyers
to search our database of new homes using criteria they select. A user
initiates a search by selecting Find a New Home on the HomeBuilder.com home
page and may refine the search by geographic location.
Market Level Searching. Users may search listings of models, newly built
homes and housing plans within a market as follows:
. New Homes. This feature enables the user to search by geographic location
with individual home details such as price, square footage and number of
bedrooms and bathrooms. Users can view other details about the home such
as the floor plan, elevation and picture along with maps, school
information and other demographic data pertaining to the community. A
text link from the builder's name to its web site is also available.
. Builders. This feature enables users to search within the market for
homes built by a particular builder. The search offers the same criteria
as the New Homes search. By clicking on the builder's name, the user can
view a detailed list of the selected builder's homes.
. Custom Builders. This search produces a list of custom builders within a
specified geographic region. The list includes the name and phone number
of the builder, the price range of the builder's homes and a text link to
view the builder's inventory. Links to the builders' web site are also
available.
. Real Estate Agents. This search enables users desiring to find a REALTOR
to assist them in their new home search in a specified geographic area.
After entering search criteria, the results display a list of agents by
real estate office. By clicking on the agent's name, users go to the
selected agent's home page. Links to real estate offices are also
available.
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Professional Product Basic Services Package. We collect, store and display
the builder's information and train the builder's salespeople how to respond
to sales leads generated from the Internet.
Our Basic Services Package includes the following:
. collection, entry and periodic updating of the builder's inventory of
models, newly built homes and floor plans and community information;
. scanning and entry of the builder's floor plans, elevations and available
pictures;
. detailed property profiles with floor plans, descriptions, mapping,
photographs, specifications, elevations and virtual tours;
. participation in our Home Builder Lead Generation Program;
. direct links to the builder's web sites and home pages through our
Builder Link feature; and
. page header advertising banners with direct links to the builder's web
site.
SpringStreet.com
On our SpringStreet.com web site, potential renters have access to rental
property listings, free of charge, just as home buyers have to sale listings
on our REALTOR.com and HomeBuilder.com web sites. Potential renters can access
listing information from more than 45,000 properties and located in over 6,000
cities nationwide. Users can develop their own lists of favorite properties
and store them on the site. They can also access our information resource
center which is designed to help make the relocation process easier, and
includes information relating to moving services, renter's insurance,
furnishings, and local content and statistics about a user's new neighborhood.
In addition, users can build and develop customized moving checklists, store
them on our site and receive reminders from us by electronic mail as each item
on the checklist is triggered over time.
SpringStreet.com, like our REALTOR.com and HomeBuilder.com web sites,
generates revenues primarily from products offered to real estate
professionals. These products are targeted to property owners who operate
their own rental properties and to property managers. Properties listed on our
web site include large multi-family apartment complexes as well as smaller,
single family homes.
Multi-Family Apartment Complexes. SpringStreet.com offers property owners
and managers of multi-family apartment complexes the opportunity to list basic
rental information free of charge. Basic listing information is a text-based
presentation of information which summarizes rental listings in a manner
similar to that which might be found in a local listing publication. We also
offer enhanced features to owners and managers for a monthly subscription fee.
These enhanced features can include:
. color photos and detailed property and rental unit descriptions for all
unit types, including monthly rental ranges;
. premium placement of listings at the top of rental search results
returned, as well as links to an owner's or manager's web page;
. maps and driving instructions to the property;
. inquiries from renters inquiring about specific properties sent by
electronic mail; and
. detailed monthly reports of web page and lead activity.
Single Family Homes. Owners of individual units or small buildings listed
with a REALTOR, and in some areas other real estate professionals, can list
their available rental units with the individual unit listing service. The
owner completes a form which contains up to 24 standard features about the
unit and its amenities. The owner can also designate special amenities about
the unit and have a photo of the unit posted for an additional fee.
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We offer these services to real estate professionals on a subscription
basis. To establish its customer base, during 1998 SpringStreet signed a
number of subscribers for its upgraded services on a discounted basis. We do
not know what portion of SpringStreet's current customers, if any, will renew
their subscriptions to the upgraded services on a fully paid basis.
We also sell advertising on the SpringStreet.com web site, and offer a fee-
based consumer service. The consumer service allows consumers to receive
access to less widely disseminated rental listings in markets where vacancies
are very low, such as in New York City, San Francisco and Seattle.
CommercialSource.com
CommercialSource.com serves as a portal site for commercial real estate and
includes an organized list of links to domestic and international commercial
property listings as well as other related sites of interest for industry
professionals. The site includes several channels of information including:
Property Listings. The property listings feature provides access to
commercial property listings by linking to a comprehensive collection of web
sites containing commercial property listings. By providing access to a
centralized resource for commercial property links, we enable commercial real
estate professionals to connect quickly and easily to web sites containing
listings that were not previously accessible from a single source.
Finance. Our finance feature offers links to a number of financing sources
for commercial real estate such as general lending institutions, direct
lenders, brokers and key industry sites including Fannie Mae, GE Capital, and
GMAC. This allows parties in need of financing to research a number of
different providers and financing options to identify optimal financing terms.
Products and Services. CommercialSource.com also offers links to a number
of information service providers related to the commercial real estate
industry. These include providers of property valuation services, credit
services, demographic data and analytic services, environmental and flood
reports, market reports and insurance services.
News. Our News area provides access to a group of industry news sources.
RealTimes is featured with their daily online overview of late breaking news
related specifically to the commercial real estate industry.
Advertising Services
We currently offer the following advertising options on our family of web
sites that may be purchased individually or in packages:
Banner Advertising. Advertisers can purchase banner advertisements on
various content areas of our family of web sites to reach consumers interested
in specific regions or in specific products or services relating to the home
and real estate life cycle.
Sponsorships. Sponsorships allow advertisers to maximize their exposure on
our family of web sites by featuring fixed "buttons" or other prominent
placements on certain pages to gain fixed positions on our sites and present a
user with the more opportunities to click-through directly to their site.
Sponsorships are typically sold for a fixed monthly fee over the life of the
contract and may include other advertising components such as content or
banner advertisements.
Content Centers. Advertisers can sponsor a page of content featuring their
products or services or purchase pop-up ads that appear in a new window when
the user enters the Marketplace resource center. Typically, these advertisers
pay us a monthly fee to sponsor the content page. These arrangements usually
have a duration of six to twelve months. We also offer Finance Centers and
other content areas on our sites on which advertisers can purchase banner
advertisements or sponsorship buttons. We typically charge premium rates for
placement in these areas because of the targeted nature of their content. Our
operating agreement with the NAR contains
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limitations on the types of advertisers from which we can accept advertising
for the real estate listings pages as well as the manner in which
advertisements can be displayed on the REALTOR.com web site. Our agreement
with the NAHB also contains limitations on the types of advertisers from which
we can accept advertising for the HomeBuilder.com web site.
Real Estate Industry Relationships
We have relationships with a number of important participants in the real
estate industry. These include our relationships with the NAR and the NAHB,
our content relationships with brokers, homebuilders and MLS's and our
marketing relationships with major real estate franchises.
National Association of REALTORS. The NAR is the largest trade association
in the United States that represents real estate professionals. We have an
exclusive agreement with the NAR to operate REALTOR.com as well as a license
to use the "REALTOR.com" domain name and trademark and the "REALTORS"
trademark. As a result of our close relationship with the NAR, we are also
featured prominently for Internet-based REALTOR services in the NAR's
marketing activities, conventions and conferences.
On May 28, 1999, we issued 187,500 shares of common stock to the NAR in
cancellation of $600,000 of our $1.2 million outstanding obligation to the NAR
related to the reimbursement for advertising costs as well as for our payment
obligation once our REALTOR.com web site achieved property listings. The
remaining $600,000 will be paid upon closing of this offering.
Beginning in 1999, we are required to make quarterly payments to the NAR as
follows:
In 1999, we must pay the NAR the lesser of:
. 5% of RealSelect's operating revenues; or
. 12.5% of RealSelect's operating revenues less the percentage of our
operating revenues paid to real property listing providers.
In 2000 and each year after 2000, we must pay the NAR annually the lesser
of:
. 5% of RealSelect's operating revenues; or
. 15% of RealSelect's operating revenues less the percentage of our
operating revenues paid to real property listing providers.
We must also pay the NAR an annual royalty equal to the lesser of (1) 5% of
SpringStreet.com's rental site's operating revenues and (2) 15% of the rental
site's operating revenues multiplied by the percentage of our rental property
listings provided by REALTORS less the percentage of our operating revenues
paid to rental property listings providers. For a discussion of the other
terms of our agreements with the NAR, please see pages 75 through 79.
National Association of Home Builders. The NAHB is the largest trade
organization of home builders in the United States. In 1998, we entered into
an agreement with the NAHB under which we became the exclusive provider of
Internet real estate related listing services to the NAHB and its members. We
also participate in their national trade shows.
Under our agreement, the NAHB agreed it would not engage in types of
activities that are competitive with HomeBuilder.com during the term of the
operating agreement and for the one year period after the agreement terminates
it would not:
. engage in the electronic display, other than through analog television,
of advertisements for new residential property;
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. develop, maintain or house home pages for members of the NAHB; or
. create Internet sites for persons affiliated with the sale or marketing
of new residential real estate.
This agreement expires in June 2003 and automatically renews for successive
one year periods. However, starting in June 2000, the NAHB can terminate the
agreement at any time, for any reason if it provides us with six months' prior
notice. For a discussion of the other terms of our agreements with the NAHB,
please see pages 79 through 80.
Multiple Listing Services. As of June 30, 1999, we had agreements with
approximately 650 of the approximately 800 MLSs. These agreements allow us to
aggregate and display the MLS's property listings on our REALTOR.com web site.
As of that date, these agreements gave us access to approximately 1.37 million
of the approximately 1.47 million homes that we estimate are listed
nationally. We have exclusive national Internet listing rights in key real
estate markets such as Boston, Cleveland, Dallas, Denver, Philadelphia and
St. Louis. We also have agreements in many key markets including Chicago,
Detroit, Long Island, many portions of the greater Los Angeles area, many
portions of the New York City metropolitan area, Pittsburgh and Washington,
D.C under which the MLS agreed to promote REALTOR.com as its preferred
Internet site. Under each of these agreements, the MLS, gives us the right to
display their property listings for an agreed to period of time. In addition,
we pay each MLS royalties based on revenues received from advertisements sold
on the web site and any revenues received from the MLS's members.
Residential Franchisers. We have agreements with five of the six major
residential franchisers--Century21, Coldwell Banker, ERA, RE/MAX and
Prudential, which together represent over 280,000 real estate professionals in
over 15,000 offices. These agreements are marketing relationships and
typically provide that HomeStore.com will be featured as the real estate
franchise's preferred vendor of Internet products and services to its members.
In many cases, we agree to operate a web site for these companies. These
agreements have terms of varying lengths, from two to five years. In addition,
these agreements typically provide that the broker franchise will receive a
sales commission based on a percentage of sales or our products and services
to its members. Under the terms or our agreement with RE/MAX, we must pay the
remaining $1.0 million owed to it within 90 days of this offering.
Real Estate Brokers and Agents. We have relationships with approximately 70
major brokers which allow us to exclusively list their properties on the
Internet on a national basis. The brokers gave us the right to display their
property listing for an agreed to period of time. Brokers who participated in
our Broker Gold Program agreed to do so on an exclusive basis and also
purchased shares of our preferred stock, common stock and warrants to purchase
common stock. We also operate over 100 web sites for brokers not affiliated
with the major residential franchisers. We market to these group's members and
promote our products and services in their publications and at their
conferences.
Home Builders. We have agreements with nine of the ten largest home
builders in the United States including Centex, Pulte Home, The Ryland Group
and US Home. These agreements allow us to aggregate a large number of new home
listings on a national basis.
You should read the risk factors on pages 9, 10 and 11 which more fully
describe risks relating to these relationships in more detail.
Sales and Marketing
An important element of our business strategy is to build brand recognition
around our family of web sites and our products and services.
Consumer Marketing. We employ a variety of methods to promote our brands.
In addition to our distribution arrangements with a number of web portals and
our online advertising efforts, we have an internal public relations staff. We
also engage in other off-line advertising efforts, such as advertisements in
targeted real estate
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industry publications, on radio stations and in other traditional media. The
NAR currently highlights REALTOR.com in its television commercials as part of
its ongoing consumer awareness campaign. We also conduct focus group studies,
consumer surveys and usability testing to help us in designing new products
and services.
Real Estate Professional Marketing. Our sales and marketing group markets
our products and services to the real estate professional market, including
residential and commercial REALTORS and home builders. With our relationships
with leading trade organizations, as well as our relationships with major real
estate franchisers and brokers, we market to these group's members and promote
our products and services in their publications and at their conferences.
In addition to our advertising campaigns, our sales force is involved in
our marketing process. Our account executives host office-based seminars and
events coordinated with local real estate associations. We also promote our
products and services in local real estate professional publications and at
real estate conventions and functions.
Web Portals. We believe that our Internet distribution relationships are an
important means of generating traffic on our family of web sites and building
brand recognition. For example, we have an agreement with America Online which
provides that our branding and content will be placed within primary real
estate related areas on AOL.com, CompuServe, America Online's Digital City and
America Online's proprietary service and that we will receive a number of
guaranteed impressions. We also have distribution agreements with other
Internet portal sites, including @Home, Excite and Go Network/Infoseek. These
agreements typically provide that our web sites will, for a fee, be featured
through links on portions of these portals and affiliated portals dedicated to
real estate. Often we provide versions of our web sites to these web portal
sites in exchange for featuring our web sites and sharing advertising
revenues. These agreements typically require us to pay a significant annual
fee for these arrangements.
Advertising. A group of our sales and marketing staff focuses on selling
advertising on our web sites. In instances where we develop co-branded content
for a web portal site, the portal's internal sales force is typically
responsible for selling advertisements on the co-branded areas. Under our
advertising agreement, America Online will act as our exclusive advertising
sales agent on the REALTOR.com and HomeBuilder.com web sites through March
2001. In connection with this arrangement, America Online has agreed to pay us
minimum quarterly payments, subject to adjustments based on the number of page
views delivered on these web sites.
Since January 1, 1997, more than 130 companies have purchased advertising
on our family of web sites. General Motors, Home Depot, IBM, Kmart and Stewart
Title have each purchased in excess of $100,000 of advertising on our family
of web sites since January 1, 1997. No single advertising customer accounted
for more than 10% of our total revenues for any period.
Product Development
We believe that it is important for us to continually enhance the
performance of, and features on, our family of web sites. Our development team
is focused on developing products and services for consumers and real estate
professionals that differentiate us from our competitors. We seek to maintain
and enhance our market position by building proprietary systems and features,
such as search engines for real estate listings and the technologies used to
aggregate real estate content. We expect that enhancements to our family of
web sites and to our products and services will come from both internally and
externally developed technologies.
Our current development activities relate to improving functionality,
performance of our family of web sites as well as the ability of our sites to
handle larger numbers of users, extending our custom developed web sites and
products and services, as well as the development of web sites supporting new
business opportunities. Future delays or unforeseen problems in these
development efforts could delay the introduction of new products, services or
features on our family of web sites.
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Our market is characterized by rapid technological developments, new
products and services and evolving industry standards. We will be required to
continually and timely improve the performance and features of our products
and services, particularly in response to competitive offerings. If we do not
develop new features, products or services in a timely manner or if our
introductions are not commercially successful, our web sites and products and
services might not be as attractive to consumers or real estate industry
professionals. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or standards or other
technological changes could render our products and services obsolete.
Infrastructure and Technology
Our family of web sites is designed to provide fast, secure and reliable,
high-quality access to our services, while minimizing the capital investment
needed for our computer systems. Our systems supporting our family of web
sites must accommodate a high volume of user traffic, store a large amount of
listings and other related data, process a significant number of user searches
and deliver frequently updated information. Any significant increases in these
could strain the capacity of our computers, causing slower response times or
outages. We intend to pursue the development of a duplicate web site for each
of our web sites' server computers to be located at a third party service
provider in order to help insure maximum disaster recovery and business
continuity. We host our REALTOR.com and CommercialSource.com web sites in
Thousand Oaks, California and custom broker web pages in our Milwaukee,
Wisconsin facility. Our HomeBuilder.com web site is located at a third party's
facility in Dallas, Texas. The SpringStreet.com web site is located in San
Jose, California. Because substantially all of our computer and communications
hardware for each of our web sites is located at one location, our systems are
vulnerable to fire, floods, telecommunications failures, break-ins,
earthquakes and similar events. You should read the risk factors on page 19
which more fully describe risks relating to our computer infrastructure and
technology.
Customer Care
Our success depends in part on our ability to provide efficient and
personalized customer support for the real estate professional and the
consumer. Our customer support process has been designed to have a member of
our staff respond to customer calls in person. We believe this is critical as
typical real estate professionals primarily work outside of their offices and
are difficult to reach. We have also developed a call tracking system to
provide personalized and timely customer care. In addition, customer care
representatives respond to inquiries on how to update and edit a real estate
professional's web page. They also accept inquiries from real estate
professionals by electronic mail and attempt to answer them within 24 hours.
Competition
We believe that the principal competitive factors in attracting consumers
to our family of web sites are:
. the total number of listings and the number of listings for the
consumer's specific geographic area of interest available on our web
sites;
. the number of visitors to our web sites;
. the time spent on our web sites;
. the parties with which web site operators have listing, marketing or
distribution relationships;
. the quality and comprehensiveness of general real estate related,
particularly home-buying, information available on our web sites;
. the availability and quality of other real estate related products and
services available through our web sites; and
. the ease of use of our web sites.
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We believe that the principal competitive factors in attracting
advertisers, content providers and real estate professionals to our family of
web sites are:
. the number of visitors to our web sites;
. the average length of time these visitors spend viewing pages on our web
sites;
. our relationships with, and support for our services by, the NAR and the
NAHB; and
. our relationships and national contracts with the major home builders and
rental property owners and managers in the United States.
Our main existing and potential competitors for home buyers, sellers and
renters and related content include:
. web sites offering real estate listings together with other related
services, such as Apartments.com, CyberHomes, HomeHunter.com,
HomeSeekers, iOwn, LoopNet, Microsoft's HomeAdvisor, NewHomeNetwork.com
and RentNet;
. web sites offering real estate related content and services such as
mortgage calculators and information on the home buying, selling and
renting processes;
. general purpose consumer web sites, such as AltaVista, Lycos and Yahoo!
that also offer real estate-related content; and
. traditional print media such as newspapers and magazines.
Our main existing and potential competitors for advertisements may include:
. general purpose consumer web sites such as AltaVista, America Online,
Excite, Lycos, Netscape's Netcenter and Yahoo!;
. general purpose online services that may compete for advertising dollars;
. online ventures of traditional media, such as Classified Ventures; and
. traditional media such as newspapers, magazines and television.
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.
Intellectual Property
We regard substantial elements of our family of web sites and underlying
technology as proprietary. We attempt to protect these elements and underlying
technology by relying on trademark, service mark, patent, copyright and trade
secret laws, restrictions on disclosure and other methods. We have been issued
a patent with respect to the technology we use to enable searches of the real
estate listings posted on our family of web sites. Despite our precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar technology
independently.
Our REALTOR.com domain name and the REALTOR(R) trademark are licensed to us
by the NAR. If we were to lose the use of these trademarks or the
"REALTOR.com" domain name, our business would suffer, and we would need to
devote substantial resources towards developing an independent brand identity.
We also hold other domain names that 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
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<PAGE>
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 currently license from third parties technologies and information
incorporated into our family of web sites. As we continue to introduce new
services that incorporate new technologies and information, we may be required
to license additional technology and information from others.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving, and we can give no assurance regarding the future
viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine
the validity and scope of the proprietary rights of others. Litigation could
result in substantial costs and diversion of resources and management
attention. Furthermore, other parties may assert infringement claims against
us, including claims that arise from directly or indirectly providing
hypertext links to web sites operated by third parties or claims based on the
content on our site. These claims and any resultant litigation, should it
occur, might subject us to significant liability for damages, might result in
invalidation of our proprietary rights and, even if not meritorious, might
result in substantial costs and diversion of resources and management
attention.
Employees
As of June 30, 1999, we had 733 full-time equivalent employees. We consider
our relations with our employees to be good. We have never had a work
stoppage, and none of our employees is represented by collective bargaining
agreements. We believe that our future success will depend in part on our
ability to attract, integrate, retain and motivate highly qualified personnel,
and upon the continued service of our senior management and key technical
personnel. None of our key personnel are bound by employment agreements that
prohibit them from ending their employment at any time. Competition for
qualified personnel in our industry and geographical locations is intense. We
cannot assure you that we will be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified employees to conduct
our business in the future.
Facilities
Our principal executive and corporate offices and network operations center
are located in Thousand Oaks, California in approximately 50,000 square feet
of office space under a lease that expires in 2003. We also maintain
operations in Dallas, Texas and Milwaukee, Wisconsin in approximately 11,500
and 16,800 square feet of office space under leases that expire in 2000 and
2003, respectively. We maintain our SpringStreet.com operations in Scottsdale,
Arizona and San Francisco, California, in approximately 11,000 and 16,000
square feet of office space under leases that expire in 2001 and 2004,
respectively. In addition we also maintain a sales support office in San
Diego, California in approximately 6,000 square feet of office space that is
leased on a month-to-month basis. We believe that our facilities are adequate
for our current operations and that additional space can be obtained if
needed.
Legal Proceedings
From time to time, we are involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this prospectus,
except as described below, we are not a party to any litigation or other legal
proceeding that, in our opinion, could have a material adverse effect on our
business, operating results or financial condition.
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<PAGE>
On March 19, 1999, John D. Molinare filed a lawsuit against us, MultiSearch
Solutions, New List Corporation, National New Homes Corporation and Fred
White. This case was filed in the Chancery Division of the Circuit Court of
Cook County, Illinois, case no. 99-04265. Mr. Molinare's claims arise out of
the proposed formation by MultiSearch and New List of a new venture
responsible for the delivery of information on new home construction projects
and services to the public and REALTORS. Mr. Molinare claims that he was to be
the President and Chief Executive Officer of the new venture under an alleged
employment agreement among him, MultiSearch and New List. Mr. Molinare claims
that this venture was never formed. In July 1998, we acquired MultiSearch.
Mr. Molinare alleges that:
. The other defendants breached an employment agreement with him, and Mr.
White, a principal MultiSearch shareholder, did so fraudulently;
. he was entitled to a 10% equity interest in the new venture;
. we interfered with his relationship with MultiSearch and New List; and
. we should be liable for damages caused by MultiSearch as a successor to
MultiSearch.
Mr. Molinare seeks damages of not less than $2.1 million, plus punitive
damages, as well as his costs incurred. He is also seeking to receive "a 10%
interest" in our company.
While this complaint was filed with the court on March 19, 1999, Mr.
Molinare has not yet properly served this complaint. Therefore, we have not
had to respond. Based on currently available information, we believe that we
have valid defenses to these claims and we intend to vigorously defend them.
If served with this complaint, we intend to raise a number of counterclaims.
Predicting the outcome of litigation is inherently uncertain and a court
could find in Mr. Molinare's favor. Defending and pursuing litigation is
costly and frequently diverts management's attention from day-to-day business
operations. If Mr. Molinare's claims are successful, we could be required to
pay the awarded amounts, which amounts could be material. However, the former
principal MultiSearch shareholders, could be required to indemnify us against
some or all of the costs or damages we incur as a result of this litigation.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of June 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stuart H. Wolff, Ph.D... 36 Chairman of the Board and Chief Executive Officer
Michael A. Buckman...... 51 President and Chief Operating Officer
John M. Giesecke, Jr.... 38 Chief Financial Officer, Vice President and Secretary
M. Jeffrey Charney...... 40 Vice President, Corporate Marketing and Communications
Catherine Kwong Giffen.. 34 Vice President, Human Resources and Administration
David M. Rosenblatt..... 34 Vice President, General Counsel
Joseph J. Shew.......... 33 Vice President, Finance
Peter B. Tafeen......... 30 Vice President, Business Development
Michael C. Brooks....... 54 Director
James G. Brown.......... 34 Director
L. John Doerr........... 49 Director
Joe F. Hanauer.......... 61 Director
Richard R. Janssen...... 50 Director
William E. Kelvie....... 51 Director
Kenneth K. Klein........ 55 Director
</TABLE>
Our executive officers and directors are also executive officers and
directors of our subsidiary RealSelect. Under the terms of our stockholders
agreement for RealSelect, the NAR has the right to appoint two members to the
RealSelect board of directors. The additional director for RealSelect is
Dennis R. Cronk, a director of the NAR and the 1999 President-elect of the
NAR.
Stuart H. Wolff, Ph.D. joined HomeStore.com in November 1996 as Chairman
and Chief Executive Officer. From September 1994 to September 1996, Dr. Wolff
was Vice President of Business Services at TCI Interactive and at AND
Interactive, subsidiaries of TCI Communications, Inc., a cable company. Prior
to his tenure at TCI Communications, Inc. Dr. Wolff was an engineer at IBM and
a research scientist at AT&T Bell Labs. In 1986 he was recognized by the
Japanese Ministry of Education and awarded the Monbushu Fellowship at the
Tokyo Institute of Technology. Dr. Wolff received a B.S. in electrical
engineering from Brown University and an M.E.E. and Ph.D. in electrical
engineering from Princeton University.
Michael A. Buckman joined HomeStore.com in February 1999 as President and
Chief Operating Officer. Prior to joining HomeStore.com, Mr. Buckman served as
Chief Executive Officer for Worldspan Travel Information Services, a worldwide
travel reservation and airline support services organization, since June 1995.
From January 1992 to June 1995, Mr. Buckman was Executive Vice President of
American Express Company. Prior to his tenure at American Express, he was
Chief Operating Officer of Lifeco Services Corporation, a travel services
company, and President of the Sabre Travel Information Network, a travel
distribution company. Mr. Buckman received a B.B.A. from the University of
Texas and an M.B.A. from the University of Missouri.
John M. Giesecke, Jr. joined HomeStore.com in June 1998 as Vice President
of Finance, was appointed as Secretary in August 1998 and was promoted to
Chief Financial Officer in December 1998. From March 1994 to March 1998, Mr.
Giesecke was Vice President of Corporate Controllership in charge of worldwide
controllership activities for The Walt Disney Company. Prior to his tenure at
The Walt Disney Company, Mr. Giesecke spent eight years as a certified public
accountant with Price Waterhouse LLP, most recently as Senior Manager.
Mr. Giesecke received a B.S. in business and public administration from the
University of Arizona.
M. Jeffrey Charney joined HomeStore.com in June 1999 as Vice President of
Marketing and Communications. From June 1994 to June 1999, Mr. Charney served
as Senior Vice President of Marketing and Communications for Kaufman and Broad
Home Corporation, a real estate development company. Prior to joining
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Kaufman and Broad, Mr. Charney served as Director of Advertising and Employee
Communications for Rockwell International from 1988 through 1994. Earlier,
from 1982-1988, he managed public relations at Raytheon Corporation. Mr.
Charney received his B.A. in Journalism (Advertising/Public Relations) from
the University of South Carolina and his M.A. in Journalism from Ohio State
University.
Catherine Kwong Giffen joined HomeStore.com in April 1998 as Vice President
of Human Resources and Administration. Prior to joining HomeStore.com, Ms.
Giffen served from April 1994 to April 1998 as Vice President of Human
Resources and Administration of Iwerks Entertainment, Inc., an entertainment
company. Previously she has served as Vice President of Human Resources for
the Real Estate Industries Division of BankAmerica Corporation and Vice
President of Human Resources for the Securities Lending and Mortgage-Backed
Securities Division of Security Pacific National Bank. Ms. Giffen received a
B.A. in political science from the University of California at Los Angeles.
David M. Rosenblatt joined HomeStore.com in October 1998 as Vice President,
Marketing and General Counsel. Prior to joining us, Mr. Rosenblatt was Senior
Product Manager for Intuit Inc.'s QuickenMortgage from August 1997 to October
1998. Prior to his tenure at Intuit, Mr. Rosenblatt founded and served as
President of CyberSports, Inc., a software company, from January 1995 to
February 1999. He practiced corporate law for Weil, Gotshal & Manges LLP and
for Chadbourne & Parke LLP from 1990 to January 1996. Mr. Rosenblatt received
an M.B.A. from the Harvard University Graduate School of Business, a J.D. from
Northwestern University School of Law and a B.A. in accounting from
Pennsylvania State University.
Joseph J. Shew joined HomeStore.com in August 1998 as Controller and was
promoted to Vice President of Finance in January 1999. From October 1994 to
August 1998, Mr. Shew was Director of Corporate Controllership for The Walt
Disney Company. Prior to his tenure at Disney, Mr. Shew spent six years as a
certified public accountant with Price Waterhouse LLP, most recently as
Manager. Mr. Shew received a B.S. in accounting from Villanova University.
Peter B. Tafeen joined HomeStore.com in September 1997 as Vice President of
Business Development. From June 1995 to September 1997, Mr. Tafeen served as
Director of Business Development for PointCast Incorporated, an Internet
software company. Prior to his tenure at PointCast, from March 1993 to June
1995, Mr. Tafeen served as an Area Director for the Gartner Group, Inc., a
technology consulting company. Mr. Tafeen received a B.S. in political science
from the University of Massachusetts at Amherst.
Michael C. Brooks, has served as a director of HomeStore.com since
November 1996. He has been a General Partner of J. H. Whitney & Co., and a
managing member of the general partner of Whitney Equity Partners, L.P., two
venture capital investment partnerships, since January 1985. Mr. Brooks serves
as a director of Media Metrix, Inc., Pegasus Communications Corporation,
SunGard Data Systems Inc., USinternetworking, Inc., and several private
companies. Mr. Brooks received a B.A. from Yale University and an M.B.A. from
the Harvard University Graduate School of Business.
James G. Brown has served as a director of HomeStore.com since January
1998. He is a Senior Vice President and Industry Leader with GE Capital Equity
Capital Group, Inc., or GE Equity, the private investing arm of General
Electric Capital Corporation, or GE Capital, which he joined in 1995. From
December 1994 to August 1995, Mr. Brown was Vice President of Corporate
Planning for Lehman Brothers Holdings Inc. Prior to his tenure at Lehman
Brothers, Mr. Brown served at Bain & Company, Inc., a consulting firm. Mr.
Brown received a B.S. in marketing and decision sciences with honors from New
York University and an M.B.A. from the Wharton Business School of the
University of Pennsylvania.
L. John Doerr has served as a director of HomeStore.com since August 1998.
He has been a general partner of Kleiner Perkins Caufield & Byers since
September 1980. Prior to his tenure at Kleiner Perkins, Mr. Doerr was employed
by Intel Corporation for five years. He serves on the boards of directors of
Amazon.com, Inc., @Home Corporation, Intuit Inc., Platinum Software
Corporation and Sun Microsystems, Inc. Mr. Doerr received a B.S.E.E and an
M.E.E from Rice University and an M.B.A. from the Harvard University Graduate
School of Business.
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Joe F. Hanauer has served as a director of HomeStore.com since November
1996. Since 1988, Mr. Hanauer, through Combined Investments, L.P., has
directed investments in companies primarily involved in real estate and
financial services. Mr. Hanauer is former Chairman of Grubb & Ellis Company
and former Chairman of Coldwell Banker Residential Group, Inc. Mr. Hanauer is
a director of Grubb & Ellis Company, MAF Bancorp, Inc. and Regit, Inc., a
national insurance broker. Mr. Hanauer is a member of the Executive Committees
of the National Association of REALTORS. Mr. Hanauer received a B.S. in
business administration from Roosevelt University.
Richard R. Janssen served as President and Chief Operating Officer of
HomeStore.com from December 1996 through March 1999. Mr. Janssen was a founder
of InfoTouch. He served as President and Chief Executive Officer, and was a
director of InfoTouch from July 1993 until February 1999, when InfoTouch
merged with NetSelect. Previously, Mr. Janssen was President of Janssen &
Associates, a consulting firm specializing in strategic planning, and co-
founded Delphi Information Systems, Inc., an insurance software company,
holding various positions, including Chairman of the Board, Chief Executive
Officer, and President. Mr. Janssen received a B.S. in mathematics and
computer science and in economics from the University of California at Los
Angeles.
William E. Kelvie has served as a director of HomeStore.com since August
1998. He is Chief Information Officer responsible for information technology
systems at Fannie Mae, including its technology business and its internal
systems. Mr. Kelvie joined Fannie Mae in 1990 as Senior Vice President and
Chief Information Officer. Prior to his tenure at the Federal National
Mortgage Association, Mr. Kelvie was a partner with Nolan, Norton & Co., a
management consulting company specializing in information technology
strategies and plans and served in various capacities with The Dexter
Corporation, a specialized manufacturing company, and The Travelers Insurance
Company, an insurance and financial services company. Mr. Kelvie received a
B.S. in english literature from Tufts University and an M.S. in english
literature from Trinity College.
Kenneth K. Klein has served as a director of HomeStore.com since August
1998. He has served as President and Chief Executive Officer of Kleinco
Construction Services, Inc., a general contracting company, since 1980.
Mr. Klein is National Vice President and a member of the Executive Committee
of the National Association of Home Builders. Mr. Klein is a past Chairman of
the Board of the Home Builders Institute, a national organization that teaches
building-craft skills. Mr. Klein received a B.S. in accounting from Oklahoma
State University.
Under the stockholders agreement that we have with a number of our
stockholders, the following stockholders or their affiliated entities have
appointed a member to our board of directors:
. CDW Internet LLC, whose representative is Dr. Wolff;
. Whitney Equity Partners, whose representative is Mr. Brooks;
. the former stockholders of InfoTouch, whose representative is Mr.
Janssen;
. GE Capital, whose representative is Mr. Brown;
. Kleiner Perkins Caufield & Byers, whose representative is Mr. Doerr;
. the NAHB, whose representative is Mr. Klein;
. the Federal National Mortgage Association, whose representative is Mr.
Kelvie; and
. the NAR, whose representative is Mr. Hanauer.
These provisions of the stockholders agreement will terminate after this
offering. After the consummation of this offering, the NAR will be entitled to
appoint one member to the Board of Directors of HomeStore.com through its
ownership of the one share of Series A preferred stock to be issued to it.
Our bylaws provide, that, following the offering, our board of directors
will be divided into three classes as nearly equal in size as possible with
staggered three-year terms. The term of office of our Class I directors will
expire at the annual meeting of stockholders to be held in 2000; the term of
office of our Class II directors will
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expire at the annual meeting of stockholders to be held in 2001; and the term
of office of our Class III directors will expire at the annual meeting of the
stockholders to be held in 2002. The classification of our board of directors
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of
HomeStore.com.
Messrs. Brooks, Brown, and Janssen are Class I directors; Messrs. Kelvie
and Klein are Class II directors; and Messrs. Wolff, Doerr, and Hanauer are
Class III directors. It is currently anticipated that Messrs. Brooks, Brown
and Janssen will not stand for re-election at the annual meeting of
stockholders to be held in 2000.
Board Committees
Our board has three committees, the audit committee, the compensation
committee and the nominations committee. The audit committee consists of
Messrs. Brown and Kelvie. The compensation committee and nominations committee
each consists of Messrs. Brooks, Doerr and Hanauer. The audit committee
reviews our financial statements and accounting practices, makes
recommendations to the board regarding the selection of independent auditors
and reviews the results and scope of the audit and other services provided by
our independent auditors. The compensation committee makes recommendations to
the board concerning salaries and incentive compensation for our officers and
employees and administers our stock plans and employee benefit plans. The
nominations committee makes recommendations to the board concerning board
composition and recruiting of new members.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since the
formation of HomeStore.com been an officer or employee of HomeStore.com. No
executive officer of HomeStore.com serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee.
Director Compensation
Our directors do not receive cash compensation for their services as
directors, but are reimbursed for their reasonable and necessary expenses for
attending board and board committee meetings.
We intend to adopt a Directors Stock Option Plan. The number of shares to
be reserved under this plan will be determined by the board, subject to
stockholder approval, prior to this offering. Members of the board who are not
our employees, or employees of any parent, subsidiary or affiliate of
HomeStore.com, will be eligible to participate in the plan unless they are
representatives of venture capital funds or corporate investors. The option
grants under the plan will be automatic and nondiscretionary, and the exercise
price of the options will be the fair market value of the common stock on the
date of grant.
Each eligible director who is or becomes a member of the board on or after
the effective date of the registration statement of which this prospectus
forms a part will be granted an option to purchase shares. Immediately
following each annual meeting of our stockholders, each eligible director will
automatically be granted an additional option to purchase shares if the
director has served continuously as a member of the board since the date of
the director's initial grant.
The options will have ten year terms, but will terminate seven months after
the date the director ceases to be a director or a consultant or 12 months
after a termination if the termination is due to death or disability.
All options granted under the directors plan will become exercisable over a
four year period at a rate of 2.083% per month, so long as the optionee
continues as a member of the board or as a consultant of HomeStore.com. In the
event of our dissolution or liquidation, or a "change in control" transaction,
options granted under the plan will become fully vested and immediately
exercisable.
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Executive Compensation
The following table sets forth all compensation paid or accrued during 1998
to our Chief Executive Officer and our three other most highly compensated
executive officers whose salary and bonus for 1998 was more than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------- ------------
Securities
Underlying
Name and Principal Positions Salary ($) Bonus ($) Options (#)
- ---------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Stuart H. Wolff, Ph.D.
Chairman of the Board and Chief Executive
Officer.................................... $185,538 $100,000 1,475,000
Richard R. Janssen
Former President and Chief Operating
Officer.................................... 183,603 40,000 -
John M. Giesecke, Jr.
Chief Financial Officer, Vice President and
Secretary(1)............................... 71,417 29,000 375,000
Peter B. Tafeen
Vice President, Business Development........ 156,442 52,500 125,000
</TABLE>
- --------
(1) Mr. Giesecke commenced his employment in June 1998.
Option Grants in 1998
The following table sets forth grants of stock options to our Chief
Executive Officer and our three other most highly compensated executive
officers in 1998.
All options granted to these executive officers are immediately exercisable
and are either incentive stock options or nonqualified stock options and
generally vest over four years at the rate of 25% of the shares subject to the
option on the first anniversary of the date of grant and 2.083% each
subsequent month. Some of these options are subject to acceleration upon a
change of control of HomeStore.com or termination of the optionee's
employment. See "--Employment-Related Agreements." The options expire ten
years from the date of grant and were granted at an exercise price equal to
the fair market value of our common stock on the date of grant, as determined
by the board.
Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the exercise price per
share, (b) assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rates shown in the table for the
entire ten year term of the option and (c) subtracting from that result the
aggregate option exercise price. The 5% and 10% assumed annual rates of stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock prices.
<TABLE>
<CAPTION>
Potential
Realizable Value at
Percentage Assumed Annual
Number of of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration -------------------
Name Granted(#) in 1998(1) ($/Sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stuart H. Wolff, Ph.D... 375,000 7.8% $1.00 1/26/08 $235,835 $ 597,653
1,100,000 23.0 1.26 8/22/08 874,415 2,215,940
Richard R. Janssen...... -- -- -- -- -- --
John M. Giesecke, Jr. .. 175,000 3.7 1.20 6/15/08 132,068 334,686
200,000 4.2 1.60 12/18/08 201,246 509,998
Peter B. Tafeen......... 50,000 1.0 1.20 6/1/08 37,734 95,625
75,000 1.6 1.26 10/28/08 59,619 151,087
</TABLE>
- --------
(1) Based on options to purchase a total of 4,782,500 shares of common stock
of HomeStore.com granted during 1998.
Dr. Wolff's options vest monthly over four years. Mr. Giesecke's June 15,
1998 option vests over four years with 25% vesting on the first anniversary of
the date of grant and 2.083% vesting each subsequent month. Mr. Giesecke's
December 18, 1998 option vests monthly over four years. Mr. Tafeen's June 1,
1998 option vests over four years with 25% vesting on the first anniversary of
the date of grant and 2.083% vesting each month thereafter. Mr. Tafeen's
October 28, 1998 option vests monthly over four years.
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Aggregate Option Exercises in 1998 and Values at December 31, 1998
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1998 and the number of shares
of common stock subject to exercisable and unexercisable stock options held as
of December 31, 1998 by our Chief Executive Officer and each of our three most
highly compensated executive officers. Also reported are values of "in-the-
money" options, which represent the positive spread between the exercise
prices of outstanding stock options and an assumed initial public offering
price of $9.00 per share.
The value received equals the fair market value of the purchased shares on
the option exercise date, less the exercise price paid for those shares. The
options are immediately exercisable to the extent it qualifies as an incentive
stock option for federal income tax purposes for all of the option shares, but
any shares acquired upon exercise of those options will be subject to
repurchase by HomeStore.com, at the original exercise price paid per share, if
the optionee ceases service with HomeStore.com before those shares are vested.
The heading "Vested" refers to shares that are no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase as
of December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options at
Shares December 31, 1998 December 31, 1998
Acquired Value ---------------------- -----------------------
Name on Exercise Realized Vested Unvested Vested Unvested
- ---- ----------- -------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stuart H. Wolff, Ph.D... 674,145 $724,519 142,630 1,528,815 $ 7,080,719 $ 12,215,438
Richard R. Janssen...... 867,137(1) 856,280 -- 217,645 -- 1,946,617
John M. Giesecke, Jr. .. -- -- -- 375,000 -- 2,845,000
Peter B. Tafeen......... -- -- 87,500 287,500 752,613 1,860,738
</TABLE>
- --------
(1) The number of shares acquired on exercise by Mr. Janssen include 431,842
shares of InfoTouch stock acquired when Mr. Janssen exercised options to
purchase shares of InfoTouch stock. These shares were converted into
shares of NetSelect stock in connection with the combination of InfoTouch
and NetSelect described in "Related Party Transactions."
Employee Benefit Plans
1996 Stock Incentive Plan. As of June 30, 1999, options to purchase
4,387,625 shares of common stock granted under the plan had been exercised,
and options to purchase 2,579,255 shares of common stock at a weighted average
exercise price of $1.04 per share were outstanding.
This plan will terminate immediately prior to this offering. As a result,
no options will be granted under the plan after this offering. However, the
termination of this plan will not affect any outstanding options, all of which
will remain outstanding until exercised or until they terminate or expire.
Options granted under this plan are subject to terms substantially similar to
those described below with respect to options to be granted under the 1999
Stock Incentive Plan.
1999 Equity Incentive Plan. As of June 30, 1999, options to purchase
1,240,995 unvested shares of common stock granted under the plan had been
exercised, options to purchase 3,342,380 shares of common stock at a weighted
average exercise price of $7.07 per share were outstanding under this plan and
2,083,630 shares of common stock remain available for issuance upon the
exercise of options that may be granted in the future under the plan. This
plan will terminate immediately prior to this offering, at which time
HomeStore.com's 1999 Stock Incentive Plan will become effective. As a result,
no options will be granted under the plan after this offering. However, the
termination of this will not affect any outstanding options, all of which will
remain outstanding until exercised or until they terminate or expire. Options
granted under the plan are subject to terms substantially similar to those
described below with respect to options granted under the 1999 Stock Incentive
Plan.
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1999 Stock Incentive Plan. We intend to adopt the 1999 Stock Incentive Plan
prior to the completion of this offering. The number of shares to be reserved
under this plan will be determined by the board, subject to stockholder
approval, prior to this offering. Also reserved under this plan will be shares
reserved under the 1996 Stock Incentive Plan and the 1999 Equity Incentive
Plan not issued or subject to outstanding grants on the date of this
prospectus and any shares issued under these plans that are forfeited or
repurchased by HomeStore.com or that are issuable upon exercise of options
that expire or become unexercisable for any reason without having been
exercised in full. This plan will become effective on the date of this
prospectus. Shares that:
. are subject to issuance upon exercise of an option granted under the
1999 Stock Incentive Plan that cease to be subject to that option
for any reason other than exercise of the option;
. have been issued pursuant to the exercise of an option granted under
the 1999 Stock Incentive Plan that are subsequently forfeited or
repurchased by HomeStore.com at the original purchase price;
. are subject to an award granted pursuant to a restricted stock
purchase agreement under the 1999 Stock Incentive Plan that are
subsequently forfeited or repurchased by HomeStore.com at the
original issue price; or
. are subject to stock bonuses granted under the 1999 Stock Incentive
Plan that otherwise terminate without shares being issued,
will again be available for grant and issuance under the 1999 Stock Incentive
Plan.
This plan will terminate after ten years, unless it is terminated earlier
by the board. The plan will authorize the award of options, restricted stock
and stock bonuses. No person will be eligible to receive more than a specified
number of shares in any calendar year under the plan other than a new employee
of HomeStore.com who will be eligible to receive no more than a specified
number of shares in the calendar year in which the employee commences
employment. These amounts will be determined by the board prior to this
offering.
The plan will be administered by the compensation committee, which
currently consists of Messrs. Brooks, Doerr and Hanauer, all of whom are "non-
employee directors" under applicable federal securities laws and "outside
directors" as defined under applicable federal tax laws. The compensation
committee will have the authority to construe and interpret the plan, grant
awards and make all other determinations necessary or advisable for the
administration of the plan.
The plan will provide for the grant of both incentive stock options that
qualify under Section 422 of the Internal Revenue Code, and nonqualified stock
options. Incentive stock options may be granted only to employees of
HomeStore.com or of a parent or subsidiary of HomeStore.com. All other awards
other than incentive stock options may be granted to employees, officers,
directors, consultants, independent contractors and advisors of HomeStore.com
or any parent or subsidiary of HomeStore.com, provided the consultants,
independent contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must be at least
equal to the fair market value of HomeStore.com's common stock on the date of
grant. The exercise price of incentive stock options granted to 10%
stockholders must be at least equal to 110% of that value. The exercise price
of non qualified stock options must be at least equal to 85% of the fair
market value of HomeStore.com's common stock on the date of grant.
Options may be exercisable only as they vest or immediately exercisable
with the shares issued subject to our right of repurchase that lapses as the
shares vest. In general, options will vest over a five-year period.
The maximum term of options granted under the plan is ten years.
Awards granted under the plan may not be transferred in any manner other
than by will or by the laws of descent and distribution. They may be exercised
during the lifetime of the optionee only by the optionee. The compensation
committee could determine otherwise and provide for these provisions in the
award agreement, but only with respect to awards that are not incentive stock
options. Options granted under the plan generally may be exercised for a
period of time after the termination of the optionee's service to
HomeStore.com or a
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parent or subsidiary of HomeStore.com. Options will generally terminate
immediately upon termination of employment for cause.
The purchase price for restricted stock will be determined by the
compensation committee. Stock bonuses may be issued for past services or may
be awarded upon the completion of services or performance goals.
In the event of HomeStore.com's dissolution or liquidation or a "change in
control" transaction, outstanding awards may be assumed or substituted by the
successor corporation, if any. In the discretion of the compensation
committee, the vesting of these awards may accelerate upon one of these
transactions.
Employee Stock Purchase Plan. We intend to adopt an Employee Stock Purchase
Plan prior to the completion of this offering. The number of shares to be
reserved will be determined by the board, subject to stockholder approval,
prior to this offering. On each January 1, the aggregate number of shares
reserved for issuance under the plan will increase automatically by a number
of shares equal to 1% of our outstanding shares on the preceding December 31.
The aggregate number of shares reserved for issuance under the plan may not
exceed a specified number of shares, which the board will determine when
adopting this plan. The plan will be administered by the compensation
committee. The compensation committee will have the authority to construe and
interpret the plan, and its decision will be final and binding. The plan will
become effective on the first business day on which price quotations for the
common stock are available on the Nasdaq National Market.
Employees generally will be eligible to participate in the plan if they are
customarily employed by HomeStore.com, or its parent or any subsidiaries that
we designate, for more than 20 hours per week and more than five months in a
calendar year and are not, and would not become as a result of being granted
an option under the plan, 5% stockholders of HomeStore.com or its designated
parent or subsidiaries.
Under the plan, eligible employees will be permitted to acquire shares of
our common stock through payroll deductions. Eligible employees may select a
rate of payroll deduction up to 5% of their compensation as defined in the
plan and are subject to certain maximum purchase limitations described in the
plan. Participation in the plan will end automatically upon termination of
employment for any reason.
Each offering period under the plan will be for two years and consist of
four six-month purchase periods. The first offering period is expected to
begin on the first business day on which price quotations for our common stock
are available on the Nasdaq National Market. The length of the first purchase
period may be more or less than six months. Subsequent offering periods and
purchase periods will begin on May 1 and November 1 of each year.
The plan will provide that, in the event of the proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event shall continue for the duration of the offering period,
provided that the compensation committee may fix a different date for
termination of the plan. The purchase price for our common stock purchased
under the plan is 85% of the lesser of the fair market value of our common
stock on the first or last day of the applicable offering period. A
participant may not purchase more than 1,000 shares in any purchase period.
The compensation committee will have the power to change the duration of
offering periods without stockholder approval, if the change is announced at
least 15 days prior to the beginning of the affected offering period.
The plan will be intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. Rights granted under the plan
will not be transferable by a participant other than by will or the laws of
descent and distribution.
The plan will terminate on the date ten years following its inception,
unless it is terminated earlier under the terms of the plan. The board will
have the authority to amend, terminate or extend the term of the plan, except
that no action may adversely affect any outstanding options previously granted
under the plan. Except for the annual increase of shares due to the automatic
increase provision described above, stockholder approval is required to
increase the number of shares that may be issued or to change the terms of
eligibility under the plan.
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The board may make the amendments to the plan as it determines to be advisable
if the financial accounting treatment for the plan is different from the
financial accounting treatment in effect on the date the plan was adopted by
the board.
401(k) Plan. HomeStore.com sponsors the HomeStore.com, Inc. 401(k)
Retirement Plan, a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code. Employees who are at least 21 years old and
who have been employed with us for at least 90 days are generally eligible to
participate and may enter the Plan as of the first day of any calendar
quarter. Participants may make pre-tax contributions to the plan of up to 15%
of their eligible earnings, subject to a statutorily prescribed annual limit.
Each participant is fully vested in his or her contributions and the
investment earnings. We may make matching contributions on a discretionary
basis to the plan, but we had not done so as of June 30, 1999. Contributions
by the participants or HomeStore.com to the plan, and the income earned on
these contributions, are generally not taxable to the participants until
withdrawn. Contributions by us, if any, are generally deductible by
HomeStore.com when made. Participant and company contributions are held in
trust as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives.
Employment-Related Agreements
Dr. Wolff
In August 1998, we entered into a three-year employment agreement with
Stuart H. Wolff, Ph.D. Under this agreement:
Compensation. Dr. Wolff initially received a base salary equal to $200,000
per year for the first year of the agreement. His salary can be increased by
the board in subsequent years. Dr. Wolff is also eligible to receive an annual
bonus in an amount up to 100% of his base salary for that year. He also
receives an automobile and cellular phone allowance of up to $4,800 per year.
Acceleration of stock option vesting. If we are acquired or if a change in
control of HomeStore.com occurs, 50% of his then unvested options will
immediately become vested.
Termination of employment. If Dr. Wolff's employment is terminated without
cause or if Dr. Wolff resigns for "good reason," he will be entitled to
receive an amount equal to his annual base salary and his stock options will
continue to vest for another 12 months. Good reason includes a material
reduction in his duties or responsibilities or a reduction in his salary.
"Cause" is defined as:
(a) the executive's material breach of the agreement,
(b) conviction of the executive for any crime constituting a felony or
moral turpitude, or any other criminal act against HomeStore.com, or
(c) willful misconduct which damages HomeStore.com.
Mr. Janssen
In August 1998, we entered into a one-year employment agreement with
Richard R. Janssen for him to serve as our interim President and Chief
Operating Officer. Under this agreement:
Compensation. Mr. Janssen initially received a base salary equal to
$190,000 per year. Mr. Janssen was also eligible to receive an annual bonus in
an amount up to 100% of his base salary. He also received an automobile and
cellular phone allowance of up to $4,800 per year.
Consulting option. Following Mr. Janssen's employment, we retained him as a
consultant for three months and pay him $15,833 per month for these services,
as provided in his employment agreement.
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Mr. Buckman
In February 1999, we entered into an at-will employment agreement with
Michael A. Buckman for him to serve as our President and Chief Operating
Officer. Under this agreement:
Compensation. Mr. Buckman initially received a base salary equal to
$200,000 per year. Mr. Buckman may also be eligible to receive an annual bonus
in an amount up to 125% of his base salary with a guaranteed first year bonus
of $250,000. In addition, we granted Mr. Buckman an option to purchase 750,000
shares of our common stock, subject to vesting requirements. Mr. Buckman will
also be entitled to receive a supplemental cash bonus based upon the market
price of our common stock during (1) the eight week period following the
anniversary of his employment agreement and (2) the year following the
anniversary of his employment agreement. The total amount of this supplemental
cash bonus will in no event exceed $450,000 for the first year or $700,000 for
the second year and is subject to downward adjustment for the first year based
on specified events occurring during the second year. Mr. Buckman will also
receive customary employee benefits and reimbursement of relocation and travel
expenses.
Termination of employment. If we terminate Mr. Buckman's employment without
cause prior to the first anniversary of his employment agreement, he will be
entitled to receive $250,000 and 187,500 shares of our common stock subject to
his option will immediately become vested. If we terminate Mr. Buckman's
employment without cause on or after the first anniversary of his employment
agreement, he will be entitled to receive a cash bonus based upon the price of
our common stock on the date of termination that will in no event exceed
$300,000.
Change in Control. In the event of a change in control of HomeStore.com, an
additional 30% of the then unvested shares subject to Mr. Buckman's stock
option will immediately become vested.
Mr. Giesecke
In June 1998, we entered into an at-will employment agreement with John M.
Giesecke, Jr. Under this agreement:
Compensation. Mr. Giesecke initially received a base salary of $130,000 per
year. Mr. Giesecke's current base salary is $160,000 per year. He is also
eligible to receive an annual bonus in an amount up to 30% of his base salary.
Termination. Upon termination other than for cause, Mr. Giesecke will
receive a severance payment equal to four months base salary.
Mr. Rosenblatt
In September 1998, we entered into an at-will employment agreement with
David M. Rosenblatt. Under this agreement:
Compensation. Mr. Rosenblatt initially received a base salary of $140,000
per year. Mr. Rosenblatt's current base salary is $155,000 per year. He is
also eligible to receive an annual bonus in an amount up to 30% of his base
salary.
Mr. Tafeen
In September 1997, we entered into an at-will employment agreement with
Peter B. Tafeen. Under this agreement:
Compensation. Mr. Tafeen will receive a base salary of $140,000 per year.
Mr. Tafeen's current base salary is $160,000 per year. He is also eligible to
receive an annual bonus in an amount up to 30% of his base salary.
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Termination. Upon termination other than for cause, death or disability,
Mr. Tafeen will receive a severance payment equal to three months base salary.
Indemnification of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to HomeStore.com or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our certificate of incorporation, our bylaws or agreements to which we
are party; and
. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and officers to
give them additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and
to provide additional procedural protections. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
for which indemnification is sought. We are not aware of any threatened
litigation that may result in claims for indemnification.
We currently have liability insurance for our directors and officers and
intend to extend that coverage for public securities matters.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
Stock Financings
The share numbers and per share prices below are adjusted to reflect the
conversion of convertible preferred stock into common stock at a ratio of
one share of preferred stock to two shares of common stock.
Series A Preferred Stock Financing
In December 1996, we sold 8,235,295 shares of Series A preferred stock for
approximately $.57 per share. The purchasers of the Series A preferred stock
included, among others:
. CDW Internet, LLC--2,058,825 shares;
. J.H. Whitney & Co., Inc.--1,647,055 shares; and
. Whitney Equity Partners, L.P.--2,470,590 shares.
Stuart H. Wolff, Ph.D., our Chairman of the Board and Chief Executive
Officer, as well as our promoter was a co-manager of CDW Internet, LLC.
Michael C. Brooks, one of our directors, is a managing member of Whitney
Equity Partners, L.P. and a general partner of J.H. Whitney & Co., Inc.
J. H. Whitney & Co., Inc. subsequently transferred all of its Series A
preferred stock to Whitney Equity Partners, L.P., an affiliated entity.
Series B Preferred Stock Financing
In December 1996, we sold 1,764,705 shares of Series B preferred stock for
approximately $1.32 per share. The purchasers of the Series B preferred stock
included, among others:
. Daniel A. Koch--138,655 shares.
Daniel A. Koch holds more than 5% of our outstanding common stock on an as-
converted basis.
Series C Preferred Stock Financing
In September 1997, we sold 3,071,870 shares of Series C preferred stock for
approximately $1.46 per share. The purchasers of the Series C preferred stock
included, among others:
. CDW Internet, LLC--375,450 shares;
. Ingleside Interests, L.P.--477,845 shares; and
. Whitney Equity Partners, L.P.--614,375 shares.
Joe F. Hanauer, one of our directors, is a general partner of Ingleside
Interests, L.P.
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Series D Preferred Stock Financing
In January 1998, we sold 3,406,005 shares of our Series D preferred stock
for approximately $2.94 per share to GE Capital. James G. Brown, one of our
directors, is a Senior Vice President and Industry Leader with GE Equity, the
private investing arm of GE Capital.
Bridge Financing
In July 1998, we borrowed a principal amount of $12.0 million from, among
others, venture capital funds affiliated with Kleiner Perkins Caufield &
Byers. The lenders included:
. Kleiner Perkins Caufield & Byers VIII L.P.-- $6,635,520;
. KPCB VIII Founders Fund L.P.-- $384,480; and
. KPCB Information Sciences Zaibatsu Fund II, L.P.--$180,000.
All of these bridge loans, together with accrued interest, which accrued at
a rate of six percent per year, were converted into shares of our Series F
preferred stock as part of the purchase price for the Series F preferred stock
and the common stock described below. Kleiner Perkins Caufield & Byers VIII,
KPCB VIII Founders Fund and KPCB Information Sciences Zaibatsu Fund are
affiliated entities. L. John Doerr, one of our directors, is a general partner
of the general partner of these funds.
Series F Preferred Stock Financing
In August 1998, we sold 8,320,245 shares of Series F preferred stock at
$4.80 per share and 8,369,955 shares of common stock at a purchase price of
$1.26 per share. These shares were sold to a number of venture capital funds
as well as other corporate investors. The purchasers in this financing
included, among others:
<TABLE>
<CAPTION>
Series F
Preferred Common Aggregate
Shares Shares Purchase
Purchaser Purchased Purchased Price
--------- --------- --------- -----------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers VIII.......... 1,131,405 6,650,750 $13,823,990
KPCB VIII Founders Fund........................ 65,560 385,370 801,025
KPCB Information Sciences Zaibatsu Fund II..... 30,690 180,410 374,989
Whitney Equity Partners, L.P. ................. 184,075 400,535 1,389,035
General Electric Capital Corporation........... 132,495 288,300 999,811
Fannie Mae..................................... 2,083,335 -- 10,000,008
National Association of REALTORS............... 132,520 288,355 1,000,000
Ingleside Interests, L.P. ..................... 18,590 40,445 140,274
</TABLE>
William Kelvie, one of our directors, is the Chief Information Officer of
Fannie Mae.
The shares received by the NAR were issued in satisfaction of our
obligation to make a payment of $1.0 million as our share of advertising costs
for the association's advertising program which also features our web site. In
addition, the NAR received 297,620 shares of RealSelect common stock to
satisfy one of our payment obligations to the NAR under the operating
agreement discussed below.
Operating agreement with the National Association of REALTORS
In November 1996, we entered into an operating agreement with the NAR which
governs how our RealSelect subsidiary operates the REALTOR.com web site on
behalf of the NAR. The agreement may be terminated if:
. the number of real estate listings on REALTOR.com falls below 500,000;
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. we breach any of our obligations under the agreement and do not cure that
breach within 30 days;
. a third party acquires more than 50% of HomeStore.com's or RealSelect's
voting stock; or
. the individuals on RealSelect's board of directors, as it was constituted
on November 1996, cease to constitute a majority of our board of
directors without the approval of the board or directors approved by the
board.
Restrictions on How We Operate the REALTOR.com Web Site
The operating agreement contains a number of restrictions on how our
RealSelect subsidiary can operate the REALTOR.com web site. These include:
. it cannot display any "for sale by owner" real estate listings;
. it can only enter into agreements with parties that provide us with real
estate listings, such as MLSs, on terms approved by the NAR;
. there are specific provisions as to the types of information that the
real property listings may contain as well as the manner in which they
may be displayed;
. the NAR has the right to approve the design and layout of the REALTOR.com
home page;
. the NAR can require RealSelect to include on REALTOR.com real estate
related content it develops;
. RealSelect cannot provide links from listings of existing real property
listings to rental or new home listings with exceptions for our
HomeBuilder.com and SpringStreet.com web sites;
. we cannot market any data or information received from data content
providers such as real estate agents or brokers other than aggregate
statistical data without its consent; and
. although we can collect fees for enhanced Internet services, we cannot
charge fees to brokers or agents who provide us only basic real property
listing information.
We Are Subject to Noncompetition Provisions
The REALTOR.com operating agreement with the NAR requires that our
REALTOR.com site be our exclusive web site for displaying real property
listings. This required us to obtain the consent of the NAR prior to our
acquisition of the SpringStreet.com web site and the launch of our
HomeBuilder.com and CommercialSource.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 will need to obtain the
prior consent of the NAR in order to complete the acquisition. Any future
consents from the NAR, if obtained, could be conditioned on our restricting
the operations of 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.
Performance Requirements for the REALTOR.com Web Site
RealSelect must maintain adequate computer systems, communications and
capacity to accommodate all the real property listings on the REALTOR.com web
site. The computer system must also meet a number of other performance
requirements. If another means of displaying electronic advertisements for
real property emerges, and we do not adequately provide for the electronic
display of these advertisements in the new medium, the NAR is entitled to
select another real property listing provider for that new medium.
Restrictions on the Types of Advertising We May Display on the REALTOR.com
Site
RealSelect cannot display advertisements in connection with a real property
listing from many types of advertisers. For example, RealSelect cannot include
advertisements related to political issues, religion, alcoholic beverages or
adult-oriented products and services. Also, there are restrictions as to how
RealSelect displays advertisements from banks, loan brokers, mortgage bankers
and other participants in the real estate lending industry. For example, none
of these advertisers can occupy or reserve more than 25% of the available
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advertising space for a geographic location or be given an exclusive right to
advertise with respect to a particular business on the REALTOR.com web site.
Compensation to the NAR
As consideration for entering into the operating agreement with respect to
REALTOR.com, we are obligated to pay the amounts described below to the NAR.
Fixed Fees. We paid the NAR $1.0 million to fund advertising activities of
the NAR. This amount was paid by issuing shares of our Series F convertible
preferred stock and common stock described above. We also paid the NAR an
additional $1.0 million for advertising and for exceeding 1,300,000 real
property listings, as specified in the operating agreement. This amount was
paid by issuing the NAR shares of RealSelect common stock.
Additional Payment. On May 28, 1999, we issued 187,500 shares of common
stock to the NAR in cancellation of $600,000 of our $1.2 million outstanding
obligation to the NAR. These additional amounts are payable based upon our
available cash flow from operations equaling or exceeding $2.0 million, as
specified in the operating agreement. The remaining $600,000 will be repaid
from the net proceeds of this offering.
Variable Fees. Beginning in 1999, we are required to make quarterly
payments to the NAR based on RealSelect's operating revenues.
In 1999, RealSelect must pay the NAR quarterly the lesser of:
. 5% of RealSelect's operating revenues; or
. 12.5% of RealSelect's operating revenues less the percentage of our
quarterly operating revenues paid to parties that provide us with real
estate listings.
In 2000 and each year after 2000, RealSelect must pay the NAR annually the
lesser of:
. 5% of RealSelect's operating revenues; or
. 15% of RealSelect's operating revenues less the percentage of our
operating revenues paid to parties that provide us with real estate
listings.
These operating revenues are our consolidated gross revenues under this
agreement, less sales commissions paid to third parties related to those
revenues, less any revenues from permitted marketing of information or data.
Protective Provisions in Agreements with Respect to RealSelect
The board of directors of our RealSelect subsidiary consists of seven
members, two of whom are appointed by the NAR under the RealSelect
stockholders agreement. Without the consent of the approval of six of its
seven board members, RealSelect cannot (1) enter into a merger or
consolidation transaction, (2) sell substantially all of its assets, or (3)
change its business purpose from that specified in its certificate of
incorporation, which purpose is the operation of the REALTOR.com web site and
real property advertising programming for electronic display and related
businesses.
It also cannot engage in a number of transactions without the approval of a
majority of its board members and at least one member nominated by the NAR.
These include:
. amending its certificate of incorporation or bylaws;
. establishing, or appointing any members to, a board committee;
. approving transactions with affiliates, stockholders or employees in
excess of $100,000;
. changing its executive officers;
. pledging its assets;
. issuing more than 10 shares of RealSelect stock; and
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. declaring dividends or making other distributions to its stockholders.
The RealSelect bylaws also contain protective provisions which could
restrict portions of RealSelect's operations or require us to incur additional
expenses. For instance, if the RealSelect board of directors cannot agree on
an annual budget for RealSelect, it would use as its 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 or review salaries
for or award bonuses to executive officers of RealSelect without the approval
of a majority of its board, including an NAR representative, we would also
need to fund those expenditures.
After the completion of this offering, the NAR will own 4,525,640 shares of
common stock, or 6.8% of the total outstanding shares.
Conversion of RealSelect Stock into HomeStore.com Stock
Immediately prior to this offering, the NAR will convert all of their
shares of RealSelect for our common stock, except for one half of one share of
RealSelect common stock, into an aggregate of 3,917,265 shares of our common
stock. The NAR can require that we convert the remaining one half share into
an aggregate of 124,815 shares of our common stock if we merge HomeStore and
RealSelect within one year of this offering.
Restrictions on How We Operate the SpringStreet.com Web Site
We were required to obtain the consent of the NAR in connection with our
pending SpringStreet acquisition. In agreeing to the proposed acquisition, the
NAR imposed a number of important restrictions on how we can operate the
SpringStreet.com web site. We must pay the NAR an annual royalty equal the
lesser of (1) 5% of the rental site's operating revenues and (2) 15% of the
rental site's operating revenues multiplied by the percentage of our real
estate listings for REALTORS less the percentage of our operating revenues
paid to data content providers.
Under the consent, in addition to the SpringStreet.com web address, we must
use a REALTOR-branded rental web address. If the consent is terminated we
could be required to operate our rental properties web site at a different web
address.
Unless the consent is terminated as a result of a breach by the NAR, the
NAR would be entitled to use the REALTOR-branded web address. As a result, we
would face competition from the NAR. Other important restrictions include:
. we cannot display advertisements from the same types of advertisers that
we are prohibited from displaying on our REALTOR.com web site;
. we are subject to the same restrictions as we are on the REALTOR.com site
as to how we display advertisements from banks, loan brokers, mortgage
brokers and other participants in the real estate industry on pages
containing listings by a REALTOR;
. the site will be owned by or through our RealSelect subsidiary;
. we must offer REALTORS preferred pricing for home pages or enhanced
advertising on the rental web site;
. we must use our best efforts to ensure that operating the rental site
will not impact the quality or timeliness of how we perform our
obligations under the operating agreement for REALTOR.com;
. without the consent of the NAR, prior to the time we are using only the
REALTOR-branded web address, we cannot provide a link on the
SpringStreet.com web site linking the REALTOR.com web site to the
SpringStreet.com web site and vice versa;
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. we cannot display listings for rental of units in smaller properties
unless those units are listed with a REALTOR or listed on a REALTOR-
controlled MLS, unless the NAR agrees that in a particular market, fewer
than 50% of the listings are listed through REALTORS, in which case these
properties must be listed with other non-REALTOR real estate
professionals; and
. we cannot list properties for sale on this site for the duration of our
REALTOR.com operating agreement and for an additional two years.
Trademark License and Joint Ownership of Software
Under a trademark license agreement with the NAR, we are exclusively
authorized to use the NAR's federally registered REALTOR membership mark, the
domain name REALTOR.com and an NAR logo in conjunction with our REALTOR.com
web site. Under a joint ownership agreement, the software we use to run the
REALTOR.com web site and any enhancements to that software are jointly owned
by the NAR and us. If the agreement under which we operate REALTOR.com is
terminated, we must transfer a copy of this software and assign our agreements
with data content providers, including MLSs, to the NAR. The NAR would then be
entitled to use the software for "real estate related businesses" and could
operate the REALTOR.com web site itself or through a third party. Following
any termination of the operating agreement, the NAR could also terminate the
trademark license agreement.
Right of First Refusal
RealSelect has a stockholders agreement with the NAR which provides that we
must give RealSelect a right of first refusal to invest in "real estate
related" business opportunities prior to our entry into any of these
businesses. "Real estate related" businesses include real estate brokerage,
real estate management, mortgage financing, appraising, counseling, land
development and building, title insurance, escrow services, franchising,
operation of an association comprised of real estate licensees and operation
of a Multiple Listing Service.
Board Representation
Upon consummation of this offering, we will issue to the NAR one share of
our New Series A Preferred Stock. As long as the REALTOR.com operating
agreement is in effect and the NAR continues to hold at least 20% of the
shares of common stock it owned immediately prior to this offering, through
its ownership of the one share of our New Series A Preferred Stock the NAR
will be entitled to nominate one member to our board. See "Description of
Capital Stock." Under our RealSelect stockholders agreement, so long as our
operating agreement remains in effect, the NAR will have the right to nominate
two members to RealSelect's board of directors.
Mr. Hanauer, the NAR designee to our board, is a member of the Executive
Committee of the National Association of REALTORS.
Agreements with the National Association of Home Builders
Operating Agreement
In June 1998, we entered into an operating agreement with the NAHB. Under
this agreement, we agreed to display electronic ads for new residential
property.
The NAHB's agreement not to compete. The NAHB agreed it would not, during
the term of the operating agreement and for the one year period after the
agreement terminates:
. engage in the electronic display, other than through analog television,
of advertisements for new residential property;
. develop, maintain or house home pages for members of the NAHB; or
. create Internet sites for persons affiliated with the sale or marketing
of new residential real estate.
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Term of the agreement. This agreement runs through June 2003 and
automatically renews for successive one year periods. However, starting in
June 2000, the NAHB can terminate the agreement at any time, for any reason if
it provides us with six months' prior notice. If the NAHB chooses to terminate
the agreement in this manner, however, its non-competition obligation
described above will last for a period of three years after the agreement
terminates. In addition, if the termination occurs prior to June 2003, the
NAHB must surrender all the shares received by it upon its exercise of the
warrant described below. If the NAHB terminates the agreement between June
2003 and June 2008, it must surrender 50% of the shares it received upon its
exercise of that warrant. The operating agreement may also be terminated if
either of us materially breaches a term of the agreement or becomes bankrupt
or insolvent.
Warrant
In June 1998, we issued a warrant to purchase 566,440 shares of our common
stock to the NAHB at an exercise price of $.0002 per share. This warrant has
been exercised.
Restrictions on the NAHB's Ability to Sell Shares
The NAHB cannot transfer any of the shares it received upon exercise of the
warrant until June 2003. It cannot sell more than 50% of the shares unless the
transferee agrees to be bound by the surrender provisions described above.
Repurchase of Mr. Janssen's InfoTouch Stock
In February 1999, we repurchased 1,054,015 shares of InfoTouch common stock
held by Mr. Janssen for cash at a purchase price of $4.10 per share under a
stock redemption agreement that we entered into in August 1998.
Loans to Executive Officers
In August 1998, Dr. Wolff exercised options to acquire 674,145 shares and
Mr. Janssen exercised options to acquire 435,295 shares of our common stock,
for an aggregate exercise price of $126,252 in the case of Dr. Wolff, and
$24,377 in the case of Mr. Janssen. Dr. Wolff paid $126,117 and Mr. Janssen
paid $24,289 of the purchase price with promissory notes. In April 1999, Dr.
Wolff exercised options to acquire 1,671,445 shares, Mr. Buckman exercised
options to acquire 750,000 shares, Mr. Giesecke exercised options to acquire
166,660 shares, Mr. Rosenblatt exercised options to acquire 229,545 shares and
Mr. Tafeen exercised options to acquire 150,000 shares of our common stock.
The aggregate exercise price of these stock option exercises in April 1999 was
$1.7 million for Dr. Wolff, $199,992 for Mr. Giesecke, $348,254 for Mr.
Rosenblatt and $229,650 for Mr. Tafeen. Dr. Wolff paid $1.7 million,
Mr. Buckman paid $1.5 million, Mr. Giesecke paid $199,959, Mr. Rosenblatt paid
$348,208 and Mr. Tafeen paid $229,575, of the purchase price with promissory
notes.
Acquisition of SpringStreet
In June 1999, we acquired SpringStreet. Kleiner Perkins Caufield & Byers
VIII L.P., KPCB VIII Founders Fund L.P. and KPCB Information Sciences Zaibatsu
Fund II, L.P., who are stockholders of HomeStore.com, were also stockholders
of SpringStreet. In the merger, Kleiner Perkins Caufield & Byers VIII L.P.
received 1,135,465 shares of our Series H preferred stock, KPCB VIII Founders
Fund L.P. received 65,730 shares of our Series H preferred stock and KPCB
Information Sciences Zaibatsu Fund II, L.P. received 30,795 shares of our
Series H preferred stock. Each share of our Series H preferred stock will be
converted into five shares of our common stock upon the closing of this
offering.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of June 30, 1999, as adjusted to
reflect the exchange by the NAR of substantially all its shares of RealSelect
common stock for shares of HomeStore.com common stock and the sale of our
common stock in this offering, by (1) each stockholder known by us to be the
beneficial owner of 5% or more of our common stock, (2) each of our directors,
(3) each executive officer listed in the summary compensation table, and (4)
all executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of common stock subject to options that
are currently exercisable or exercisable within 60 days of June 30, 1999 are
deemed to be outstanding and to be beneficially owned by the person holding
the options for the purpose of computing the percentage ownership of that
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise indicated, the
address for each listed stockholder is c/o HomeStore.com, Inc., 225 West
Hillcrest Drive, Suite 100, Thousand Oaks, CA 91360.
The number of shares of common stock outstanding after this offering
includes 7,000,000 shares of common stock being offered and does not include
the shares that are subject to the underwriters' over-allotment option. The
percentage of common stock outstanding as of June 30, 1999 is based on
67,037,860 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Shares Owned
Beneficially -----------------
Owned Prior Before After
Name of Beneficial Owner to Offering Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
L. John Doerr(1).............................. 9,676,192 16.1% 14.4%
Kleiner Perkins Caufield & Byers
Michael C. Brooks(2).......................... 5,316,630 8.9 7.9
Whitney Equity Partners, L.P.
Joe F. Hanauer(3)(4).......................... 5,062,520 8.4 7.6
Ingleside Interests, L.P.
National Association of REALTORS(4)........... 4,525,640 7.5 6.8
James G. Brown(5)............................. 3,826,800 6.4 5.7
General Electric Capital Corporation
Stuart H. Wolff, Ph.D.(6)..................... 3,050,590 5.1 4.6
Daniel A. Koch(7)............................. 2,715,730 4.5 4.1
Independent Consultants, Inc.
William E. Kelvie(8).......................... 2,083,335 3.5 3.1
Fannie Mae
Richard R. Janssen(9)......................... 1,747,975 2.9 2.6
Kenneth K. Klein(10).......................... 566,440 * *
National Association of Home Builders
Peter B. Tafeen(11)........................... 509,375 * *
John M. Giesecke, Jr.(12)..................... 375,000 * *
All 15 directors and executive officers as a
group(13).................................... 36,305,594 59.8 53.7
</TABLE>
- --------
* Represents beneficial ownership of less than 1%
(1) Represents 8,917,620 shares held by Kleiner Perkins Caufield & Byers
VIII, 516,660 shares held by KPCB VIII Founders Fund and 241,895 shares
held by KPCB Information Sciences Zaibatsu Fund II. L. John
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Doerr is a general partner of the general partner of these funds. Mr. Doerr
disclaims beneficial ownership of shares held by these entities except to
the extent of his pecuniary interest in these entities. The address of
Kleiner Perkins Caufield & Byers and Mr. Doerr is 2750 Sand Hill Road,
Menlo Park, CA 94025.
(2) Represents 5,316,630 shares held by Whitney Equity Partners, L.P. Michael
C. Brooks is a managing member of the general partner of this fund. Mr.
Brooks disclaims beneficial ownership of shares held by this entity
except to the extent of his pecuniary interest in these entities. The
address of Whitney Equity Partners, L.P. is 177 Broad Street, Stamford,
CT 06901.
(3) Includes 4,525,640 shares held by the NAR, of which Mr. Hanauer is a
member of the Executive Committees. Mr. Hanauer disclaims beneficial
ownership of shares held by this association. Also includes 536,880
shares held by Ingleside Interests, L.P. Mr. Hanauer is a general partner
of this entity. Mr. Hanauer disclaims beneficial ownership of shares held
by this entity except to the extent of his pecuniary interest in this
entity. The address for the NAR is 430 North Michigan Avenue, Chicago, IL
60611.
(4) Includes 3,917,265 shares to be issued to the NAR prior to the closing of
this offering in exchange for substantially all of its shares of
RealSelect stock.
(5) Represents shares held by GE Capital. Mr. Brown is Senior Vice President
and Industry Leader with GE Equity, the private investing arm of GE
Capital. Mr. Brown disclaims beneficial ownership of these shares. The
address of General Electric Capital Corporation is 120 Long Ridge Road,
Stamford, CT 06927.
(6) Includes 1,206,040 shares that are subject to our right to repurchase
these shares. This right of repurchase lapses with respect to 53,800
shares per month.
(7) Includes 166,735 shares held by Independent Consultants, Inc., of which
Mr. Koch is Chief Executive Officer. Mr. Koch disclaims beneficial
ownership of shares held by this entity except to the extent of his
pecuniary interest in this entity. The address of Daniel A. Koch is 12905
Lafayette Ave., Omaha NE 68154.
(8) Represents shares held by Fannie Mae. Mr. Kelvie is the Chief Information
Officer of Fannie Mae. Mr. Kelvie disclaims beneficial ownership of any
shares held by Fannie Mae.
(9) Includes 217,645 shares that are subject to our right to repurchase these
shares.
(10) Represents 566,440 shares held by the NAHB, of which Mr. Klein is a
member of the Executive Committee. Mr. Klein disclaims beneficial
ownership of all shares held by this association.
(11) Includes 375,000 shares held by Mr. Tafeen, of which 235,028 are subject
to our right to repurchase these shares. This right of repurchase lapses
with respect to 7,813 shares per month. Also includes 134,375 shares
subject to options that are exercisable as of August 28, 1999.
(12) Includes 166,660 shares held by Mr. Giesecke, of which 122,910 are
subject to our right to repurchase these shares. This right of repurchase
lapses with respect to 1,458 shares per month. Also includes 208,340
shares subject to options that are exercisable as of August 28, 1999.
(13) Includes the shares beneficially owned by the persons and entities
described in footnotes (1)-(6) and (8)-(11). Also includes an additional
1,375,000 shares, 750,000 of which are shares held by other officers and
625,000 of which are shares subject to options held by those other
officers that are exercisable as of August 28, 1999.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock of HomeStore.com will consist of 500,000,000 shares of common stock,
$.001 par value per share, and 10,000,000 shares of undesignated preferred
stock, $.001 par value per share. As of June 30, 1999, and assuming the
conversion of all outstanding preferred stock into common stock, there were
outstanding 60,037,860 shares of common stock held of record by approximately
275 stockholders, one share of our new Series A preferred stock to be issued
to the NAR, options to purchase 6,643,550 shares of common stock and warrants
to purchase 1,159,170 shares of common stock.
Common Stock
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as the board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of
the shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Preferred Stock
Upon the closing of this offering, each outstanding share of our existing
preferred stock will be converted into five shares of common stock, except our
new Series A preferred stock, which will not convert and will remain
outstanding. See Note 11 of Notes to Financial Statements for a description of
this preferred stock.
Upon completion of this offering, we will have authorized and outstanding
one share of our new Series A preferred stock which will be held by the NAR.
The rights of this stock are identical to our common stock, except:
. it is non voting, except that for so long as our operating agreement
with the NAR has not been terminated and the NAR holds 20% of its stock
owned prior to this offering, the NAR will be entitled to elect one
director;
. the holder of this stock is entitled to receive a non-cumulative, non-
mandatory dividend preference of $.08 per annum and liquidation
preference of $1.00 per share;
. this stock is automatically converted to one share of common stock upon
sale, transfer, pledge or other disposition of the share of Series A
preferred stock;
. this stock is subject to a right of first refusal at $1.00 in our favor
upon any proposed transfer by the NAR; and
. this stock is redeemable by us at $1.00 if the operating agreement is
terminated or if the NAR fails to hold 20% of its stock owned prior to
this offering.
Following the offering, HomeStore.com will be authorized, subject to
limitations prescribed by Delaware law, to issue preferred stock in one or
more series, to establish from time to time the number of shares to be
included in each series, to fix the rights, preferences and privileges of the
shares of each wholly unissued series and any of its qualifications,
limitations or restrictions. The board can also increase or decrease the
number of shares of any series, but not below the number of shares of that
series then outstanding, without any further vote
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or action by the stockholders. The board may authorize the issuance of
preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of
HomeStore.com and may adversely affect the market price of the common stock
and the voting and other rights of the holders of common stock. We have no
current plan to issue any shares of preferred stock.
Warrants
Warrants to purchase 1,159,170 shares of common stock were outstanding as
of June 30, 1999.
America Online. In connection with entering into a distribution agreement
with America Online in April 1998, we issued a warrant to purchase 566,475
shares of our common stock at an exercise price of $1.26 per share. If America
Online does not purchase any shares in this offering, the warrant will expire.
Additionally, if America Online exercises its right to purchase $2.0 million
of common stock in this offering, we will issue to it warrants to acquire
166,667 shares of common stock with an exercise price of $9.00 per share,
55,556 shares with an exercise price of $13.50 per share and 41,667 shares
with an exercise price of $18.00 per share, in each case, based on an assumed
initial public offering price of $9.00 per share.
Original MLSs. During 1998 and early 1999, we agreed to issue warrants to
purchase up to 209,380 shares of common stock to MLSs that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis. The issuance of these warrants is contingent upon
this offering. The exercise price will be equal to the initial public offering
price per share price in this offering. These warrants will expire at various
times from May 2000 to January 2001.
Broker Gold. In February 1999, we closed a private equity offering to real
estate brokers under our Broker Gold program. We also agreed to issue warrants
to purchase up to 358,315 shares of our common stock with an exercise price to
be equal to the per share price in this offering. The issuance of these
warrants is contingent upon this offering.
Additional MLS Warrants. Concurrently with this offering, we intend to offer
warrants to purchase up to 1,236,345 shares of common stock to MLSs that agree
to provide us their listings on a preferred national basis.
Additional Broker Warrants. In the future, we may offer up to 425,000
warrants to the Broker Gold program members who elect to renew their existing
listing agreements with us after their original two year term expires. The
broker must also maintain a minimum number of property listings as well as
continue to hold our securities. If issued, we anticipate that these warrants
would have an exercise price based upon the average of the closing market
price of the common stock for the ten trading days preceding the date which is
one day before the warrant is issued.
Home Builder Warrants. Concurrently with this offering, we intend to offer
warrants to purchase up to 437,500 shares of common stock to home builders
that agree to provide us their listings on a preferred national basis.
Other. There is an additional outstanding warrant to purchase 25,000 shares
of our common stock at an exercise price of $4.80 per share. This warrant
expires on January 19, 2002.
Registration Rights
The holders of approximately 45,474,915 shares of common stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.
Demand Registration
Right to demand registration. At any time six months after this offering,
these stockholders can request that we file a registration statement so they
can publicly sell their shares.
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Who may make a demand. Either General Electric Capital Corporation or funds
affiliated with Kleiner Perkins Caufield & Byers can require that we file a
registration statement. Otherwise, holders of at least 10% of the shares
having registration rights must demand that we file a registration statement.
Number of times holders can make demands. We will only be required to file
two registration statements for General Electric Capital Corporation and no
more than four total. However, if we are eligible to file a registration
statement on Form S-3, there is no limit to the number of registration
statements we could be asked to file so long as the aggregate amount of
securities to be sold in each registration exceeds $1.0 million.
Postponement. We may postpone the filing of a registration statement for up
to 180 days once in a 12 month period if we determine that the filing would
interfere with corporate transactions or would require premature disclosure of
them.
Expenses. We will pay only the expenses for two registrations effected on
Form S-1 and two registrations effected on Form S-3. However, even with
respect to these registrations, we are not obligated to pay the sellers'
underwriting discounts or commissions.
Piggyback Registration
If we register any securities for public sale, these stockholders will have
the right to include their shares in the registration statement. However, this
right does not apply to a registration relating to securities to be sold under
one of our stock plans or to be issued in a merger, consolidation or
reorganization transaction. The underwriters of any underwritten offering will
have the right to limit the number of shares to be so included in a
registration statement.
We will pay all of the expenses relating to any piggyback registration,
other than underwriting discounts and commissions.
Expiration of Registration Rights
The registration rights described above will expire five years after this
offering is completed, or earlier with respect to a particular stockholder if
that holder can resell all of its securities in a three month period under
Rule 144 of the Securities Act or another exemption from the registration
requirements of the Securities Act.
In addition to the foregoing registration rights, if America Online
exercises its rights to acquire shares in this offering, it will have the
right to demand the registration of the shares of common stock issuable upon
the exercise of the warrants granted to it in connection with its share
purchase in this offering. See "-- Warrants."
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation, our
bylaws, the NAR operating agreement and our stockholders agreement may have
the effect of delaying, deferring or discouraging another person from
acquiring control of our company. Our certificate of incorporation and bylaws
contain provisions that could have the effect of delaying, preventing or
discouraging a change of control of our company. These include:
. We will have a classified board, which is divided into three classes with
staggered three-year terms;
. Our stockholders are unable to fill any interim vacancy on our board of
directors;
. Any action required or permitted to be taken by our stockholders at an
annual meeting or a special meeting of the stockholders may only be taken
if it is properly brought before that meeting and may not be taken by
written consent;
. Our stockholders are limited in their ability to remove any director or
the entire board of directors without cause;
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. Our bylaws provide that special meetings of the stockholders may be
called at any time by the board of directors, and must be called upon the
request of the chairman of the board of directors, the chief executive
officer, the president, or by a majority of the members of the board of
directors and may not be called by stockholders; and
. Stockholders must follow specified procedures in order to properly submit
any business before a stockholder meeting.
These provisions are designed to reduce the vulnerability of HomeStore.com
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of HomeStore.com. These provisions are also intended to discourage tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for our shares and,
consequently, may also inhibit fluctuations in the market price for our shares
that could result from actual or rumored takeover attempts. These provisions
may also have the effect of preventing changes in our management. See "Risk
Factors--Our certificate of incorporation and bylaws, Delaware law and other
agreements contain provisions that could discourage a takeover."
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging in a "business combination," which includes a
merger or sale of more than 10% of the corporation's assets with any
"interested stockholder," or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates
of stockholder, for three years following the date that stockholder became an
"interested stockholder" unless:
. the transaction is approved by the board prior to the date the
"interested stockholder" attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced; or
. on or subsequent to such date the "business combination" is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the "interested stockholder."
A Delaware corporation may "opt out" of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not "opted out" of this provision. The statute could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
NAR Operating Agreement
The NAR operating agreement is subject to termination if:
. a third party acquires 50% or more of our voting stock or the voting
stock of RealSelect; or
. a majority of our board ceases to serve on that board and their
replacements have not been approved by the board or replacements approved
by them.
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Stockholder Agreement
The stockholder agreement entered into among stockholders holding
approximately 67.5% of our outstanding capital stock at June 30, 1999, the NAR
and us, will restrict a change of control or a sale of all or substantially
all of our assets. Under the agreement, without the prior consent of the NAR,
which may not unreasonably be withheld:
. the stockholders who are party to the agreement, including various
entities affiliated with Kleiner Perkins Caufield & Byers and Whitney
Equity Partners, are restricted from transferring in non-public market
sales, other than to any other stockholder party to the agreement or in
an underwritten public offering, their shares to any transferee whose
primary business is real estate related or who will become a holder of
more than 5% of our capital stock; and
. we may not sell, lease or exchange all or substantially all of our
assets.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We intend to enter
into separate indemnification agreements with our directors and executive
officers that provide them indemnification protection in the event the
certificate of incorporation is subsequently amended.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they may incur in investigations
and legal proceedings resulting from their services to us, which may include
services in connection with takeover defense measures. These provisions may
have the effect of preventing changes in the management.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
87
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock including shares issued upon
exercise of outstanding warrants or options in the public market after this
offering could adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through sale of equity securities.
Furthermore, as described below, 7,095,150 shares currently outstanding will
be available for sale after the expiration of contractual restrictions on
resale with us and/or the underwriters. Sales of substantial amounts of our
common stock in the public market after contractual restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding 67,037,860
shares of common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Of these
shares, the 7,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act unless purchased by our
"affiliates." Based on shares outstanding as of June 30, 1999, the remaining
shares will become eligible for public sale as follows:
<TABLE>
<CAPTION>
Approximate
Number of
Shares
Eligible
For Future
Date Sale Comment
---- ----------- -------
<S> <C> <C>
Date of this
Prospectus............. 0
181 days after the date
of this 11,869,190 Lock-up released. These shares may be sold
Prospectus ............ under Rules 144, 144(k) or 701.
February 4, 2000........ 36,747,250 Restricted securities held for at least one
year that may be sold under Rule 144.
February 18, 2000....... 1,125,000 Restricted securities held for at least one
year that may be sold under Rule 144.
April 9, 2000........... 1,704,775 Restricted securities held for at least one
year that may be sold under Rule 144.
June 30, 2000........... 5,309,057 Restricted securities held for at least one
year that may be sold under Rule 144.
</TABLE>
Lock-Up Agreements with the Underwriters
Stockholders holding approximately 97% of our common stock on an as-
converted basis, including all of our officers and directors, have signed
lock-up agreements with the Underwriters under which they agreed not to sell,
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior consent of Morgan Stanley & Co. Incorporated
for a period of 180 days after the date of this prospectus.
Morgan Stanley & Co. Incorporated may choose to release some of these
shares from these restrictions prior to the expiration of this 180-day period,
although we are not aware of any current intention to request them to do so.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of Common Stock then outstanding, which will
equal approximately 670,379 shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
88
<PAGE>
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about HomeStore.com.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, 144(k) shares may be sold immediately upon the completion of this
offering.
Rule 701
Any employee, officer or director of, or consultant to, HomeStore.com who
purchased his or her shares under a written compensatory plan or contract may
be entitled to sell their shares in reliance on Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell these shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. Under this rule, all holders of Rule 701 shares
are required to wait until 90 days after the date of this prospectus before
selling those shares. However, because all shares that we have issued under
Rule 701 are subject to lock-up agreements, they will only become eligible for
sale when the 180-day lock-up agreements expire. As a result, they may be sold
90 days after the offering only if the holder obtains the prior written
consent of Morgan Stanley & Co. Incorporated.
Registration Rights
Upon completion of this offering, the holders of 45,474,915 shares of
common stock, or their transferees, will be entitled to certain rights with
respect to the registration of those shares under the Securities Act. See
"Description of Capital Stock--Registration Rights." After these shares are
registered, they will be freely tradable without restriction under the
Securities Act.
Stock Options
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of Common Stock reserved for issuance
under our stock option and employee stock purchase plans. As of June 30, 1999,
options to purchase 6,643,550 shares of common stock were issued and
outstanding.
Upon the expiration of the lock-up agreements described above, at least
3,031,137 shares of common stock will be subject to vested options, based on
options outstanding as of June 30, 1999. This registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under this
registration statement will, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after the 180-day lock-up agreements expire.
Warrants
As of June 30, 1999, we had outstanding warrants to purchase 1,159,170
shares of common stock. If these warrants are exercised and the exercise price
is paid in cash, the shares must be held for one year before they can be sold
under Rule 144.
89
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancBoston
Robertson Stephens Inc. are acting as representatives, have severally agreed
to purchase, and we have agreed to sell to them, severally, the respective
number of shares of common stock set forth opposite the names of the
underwriters below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..............................
Donaldson, Lufkin & Jenrette Securities Corporation............
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
BancBoston Robertson Stephens Inc..............................
---------
Total........................................................ 7,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to other conditions.
The underwriters are obligated to take and pay for all of the shares of common
stock offered by this prospectus, other than those covered by the over-
allotment option described below, if any of the shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ a share to other underwriters or to other dealers. After
the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the representatives of
the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 1,050,000
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering over-allotments, if any, made in connection with this offering of
the shares of common stock. To the extent this option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of the additional shares of common stock as
the number set forth next to that underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriters' over-
allotment option is exercised in full, the total price to public would be
$ , the total underwriters' discounts and commissions would be $ , and the
total proceeds to us would be $ before deducting estimated offering
expenses of $2.0 million.
90
<PAGE>
At our request, the underwriters have reserved up to 1,100,000 shares of
common stock to be sold in the offering for sale, at the public offering
price, to our directors, officers, employees and business associates, America
Online and also to members of the National Association of REALTORS and the
National Association of Home Builders. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals and entities purchase the reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.
We, our directors, officers and substantially all of our stockholders have
each agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, we will not:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, whether
the shares or any of those securities are then owned by that person or
are later acquired directly from us; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance by HomeStore.com of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security outstanding on
the date of this prospectus which is described in the prospectus;
. transactions by any person other than HomeStore.com relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
. issuances of shares of common stock or options to purchase shares of
common stock under our employee benefit plans as in existence on the date
of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol: "HOMS."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions. Any of these
activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage
in these activities and may end any of these activities at any time.
91
<PAGE>
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
In August 1998, we sold shares of our Series F preferred stock in a private
placement at a purchase price of $4.80 per share. In this private placement,
Morgan Stanley Dean Witter Equity Funding, Inc. purchased 416,665 shares of
Series F preferred stock, for approximately $2.0 million. Morgan Stanley
Venture Partners III, L.P. purchased 365,575 shares for approximately $1.8
million. Morgan Stanley Venture Investors III, L.P. purchased 35,100 shares
for approximately $168,000. Morgan Stanley Venture Partners Entrepreneur Fund,
L.P. purchased 15,995 shares for approximately $77,000. These funds purchased
these shares of Series F preferred stock on the same terms as the other
investors in the private placement. These funds are affiliated entities of
Morgan Stanley & Co. Incorporated, the lead representative of the underwriters
in this offering.
Pricing of this Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between HomeStore.com and the
representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be our record of operations, our
current financial position and future prospects, the experience of our
management, sales, earnings and our other financial and operating information
in recent periods, the price-earnings ratios, price-sales ratios, market
prices of securities and financial and operating information of companies
engaged in activities similar to ours.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus. Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California,
will pass upon legal matters in connection with this offering for the
Underwriters. Wilson Sonsini Goodrich & Rosati, Professional Corporation
represented HomeStore.com in its acquisition of SpringStreet, Inc.
EXPERTS
The consolidated financial statements of HomeStore.com, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for the years ended December
31, 1996, 1997 and 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of NetSelect, Inc. and subsidiaries
as of December 31, 1997 and 1998 and for the period from October 28, 1996
(Inception) to December 31, 1996 and the years ended December 31, 1997 and
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of NetSelect, LLC and subsidiaries as
of December 31, 1997 and 1998 and for the period from October 28, 1996
(Inception) to December 31, 1996 and the years ended December 31, 1997 and
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of The Enterprise of America, Ltd. as of December
31, 1997 and March 31, 1998 and for the year ended December 31, 1997 and the
three months ended March 31, 1998 included in this prospectus statement have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
92
<PAGE>
The consolidated financial statements of MultiSearch Solutions, Inc. and
subsidiary as of December 31, 1997 and June 30, 1998 and for the year ended
December 31, 1997 and the six months ended June 30, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of SpringStreet, Inc. at December 31,
1998 and 1997, and for the year ended December 31, 1998 and for the period
from August 21, 1997 (commencement of operations) through December 31, 1997,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 21, 1999, PricewaterhouseCoopers LLP was engaged as our
independent accountants. Prior to January 21, 1999, Deloitte & Touche LLP had
been our independent accountants. The decision to change independent
accountants was approved by our board of directors.
For the period from October 28, 1996 through December 31, 1998 and for the
period from January 1, 1999 through January 21, 1999, we and Deloitte & Touche
LLP did not have any disagreement on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
The report of Deloitte & Touche LLP on our financial statements for the
periods from October 28, 1996 through December 31, 1996 and January 1, 1997
through December 31, 1997 did not contain an adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and the common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, we
refer you to the copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document filed as an
exhibit is qualified in all respects by the filed exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any
part of it may be obtained from that office after payment of fees prescribed
by the SEC. The SEC maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data
for the first three quarters of each year.
93
<PAGE>
HOMESTORE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview................................................................. F-2
Pro Forma Condensed Consolidated Statements of Operations................ F-3
Notes to Pro Forma Condensed Consolidated Financial Information.......... F-5
HomeStore.com, Inc. Consolidated Financial Statements
Report of Independent Accountants........................................ F-7
Consolidated Balance Sheets.............................................. F-8
Consolidated Statements of Operations.................................... F-9
Consolidated Statements of Stockholders' Equity (Deficit)................ F-10
Consolidated Statements of Cash Flows.................................... F-11
Notes to Consolidated Financial Statements............................... F-12
NetSelect, Inc. Consolidated Financial Statements
Report of Independent Accountants........................................ F-30
Consolidated Balance Sheets.............................................. F-31
Consolidated Statements of Operations.................................... F-32
Consolidated Statements of Stockholders' Equity.......................... F-33
Consolidated Statements of Cash Flows.................................... F-34
Notes to Consolidated Financial Statements............................... F-35
NetSelect, LLC Consolidated Financial Statements
Report of Independent Accountants........................................ F-48
Consolidated Balance Sheets.............................................. F-49
Consolidated Statements of Operations.................................... F-50
Consolidated Statements of Shareholders' Equity.......................... F-51
Consolidated Statements of Cash Flows.................................... F-52
Notes to Consolidated Financial Statements............................... F-53
The Enterprise of America, Ltd. Financial Statements
Report of Independent Accountants........................................ F-66
Balance Sheets........................................................... F-67
Statements of Operations................................................. F-68
Statements of Stockholders' Deficit...................................... F-69
Statements of Cash Flows................................................. F-70
Notes to Financial Statements............................................ F-71
MultiSearch Solutions, Inc. Consolidated Financial Statements
Report of Independent Accountants........................................ F-74
Consolidated Balance Sheets.............................................. F-75
Consolidated Statements of Operations.................................... F-76
Consolidated Statements of Stockholders' Deficit......................... F-77
Consolidated Statements of Cash Flows.................................... F-78
Notes to Consolidated Financial Statements............................... F-79
SpringStreet, Inc. Financial Statements
Report of Independent Auditors........................................... F-82
Balance Sheets........................................................... F-83
Statements of Operations................................................. F-84
Statements of Shareholders' Deficit...................................... F-85
Statements of Cash Flows................................................. F-86
Notes to Financial Statements............................................ F-87
</TABLE>
F-1
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On February 4, 1999, NetSelect, Inc. ("NSI") was merged with and into the
Company pursuant to a non-substantive share exchange, which was provided for
in the agreements governing the formation and operation of RealSelect, Inc.
The share exchange lacked substance since both the Company and NSI were shell
companies for their respective investments in RealSelect, and because the
respective underlying ownership interests of individual investors were
unaffected. Accordingly, the non-substantive share exchange was accounted for
at historical cost. The share exchange between the Company and NSI is referred
to herein as the "Reorganization". See Note 1 of HomeStore.com, Inc. Notes to
Consolidated Financial Statements for further discussion about the
Reorganization.
In March 1998, NSI acquired The Enterprise for 525,000 shares of common
stock with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, and $705,000 in cash and other acquisition related expenses.
The acquisition has been accounted for as a purchase. The acquisition cost has
been allocated to the assets acquired and liabilities assumed based on
estimates of their respective fair values. The excess of purchase
consideration over net tangible assets acquired of $3.9 million has been
allocated to goodwill which is being amortized on a straight-line basis over
five years.
In July 1998, NSI acquired MultiSearch for 325,000 shares of Series E
redeemable convertible preferred stock with an estimated fair value of
approximately $4.8 million, a note payable in the amount of $3.6 million, and
$875,000 in cash and other acquisition related expenses. The acquisition has
been accounted for as a purchase. The acquisition cost has been allocated to
the assets acquired and liabilities assumed based on estimates of their
respective fair values. The excess of purchase consideration over net tangible
assets acquired of $9.4 million has been allocated to goodwill which is being
amortized on a straight-line basis over five years.
In June 1999, the Company acquired SpringStreet for 844,569 shares of
Series H convertible preferred stock and 1,086,213 shares of common stock, or
an aggregate of 5,309,058 shares of common stock, including 721,915 shares of
common stock to be subject to assumed options, assuming a five-for-one
conversion of our convertible preferred stock into our common stock prior to
this offering. The aggregate acquisition cost of $51.7 million was based on
the terms and preferences of the shares issued in the transaction relative to
the value received by the Company in the April 1999 Series G financing and
direct acquisition expenses. The excess of purchase consideration over net
tangible assets acquired of $41.3 million has been allocated to goodwill and
is being amortized on a straight-line basis over five years.
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1998 and the six months ended June
30, 1999 give effect to the Reorganization and the acquisitions of The
Enterprise, MultiSearch and SpringStreet as if they had occurred on January 1,
1998.
The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of the beginning of the period
presented and should not be construed as being representative of future
operating results.
The audited historical financial statements of the Company, NSI, The
Enterprise, MultiSearch and SpringStreet are included elsewhere in this
Prospectus and the unaudited pro forma financial information presented herein
should be read in conjunction with those financial statements and related
notes.
F-2
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjust- Pro Forma Adjust-
HomeStore.com NSI ments HomeStore.com Enterprise MultiSearch SpringStreet ments
------------- -------- ------- ------------- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ -- $ 15,003 $ -- $ 15,003 $969 $2,054 $ 1,099 $ --
Cost of revenues... 7,338 7,338 524 947 721
------ -------- ------ -------- ---- ------ ------- -------
Gross profit....... -- 7,665 -- 7,665 445 1,107 378 --
------ -------- ------ -------- ---- ------ ------- -------
Operating expenses:
Sales and
marketing........ 25,560 25,560 174 544 6,509
Product
development...... 4,139 4,139 24 1,089
General and
administrative... 3 6,929 6,932 274 457 1,578
Amortization of
intangible
assets........... 1,893 1,893 9,349 (1)
Stock-based
charges.......... 20,455 20,455
------ -------- ------ -------- ---- ------ ------- -------
Total operating
expenses....... 3 58,976 58,979 448 1,025 9,176 9,349
------ -------- ------ -------- ---- ------ ------- -------
Loss from
operations........ (3) (51,311) (51,314) (3) 82 (8,798) (9,349)
Interest income.... 583 583 207 (18)(2)
Interest expense... (365) (365) (32) (24) (136)(3)
Other expense...... (97) (97)
------ -------- ------ -------- ---- ------ ------- -------
Net loss before
minority
interest.......... (3) (51,190) (51,193) (35) 58 (8,591) (9,503)
Minority interest.. 222 222
------ -------- ------ -------- ---- ------ ------- -------
Net loss........... (3) (50,968) (50,971) (35) 58 (8,591) (9,503)
Accretion of
redemption value
and stock
dividends on
convertible
preferred stock... (1,659) 1,659 (4) --
Repurchase of
convertible
preferred stock... (7,727) (7,727)
------ -------- ------ -------- ---- ------ ------- -------
Net loss applicable
to common
stockholders...... $ (3) $(60,354) $1,659 $(58,698) $(35) $ 58 $(8,591) $(9,503)
====== ======== ====== ======== ==== ====== ======= =======
Historical basic
and diluted net
loss per share
applicable to
common
stockholders...... $ --
======
Shares used in the
calculation of
historical basic
and diluted net
loss per share
applicable to
common
stockholders...... 9,173
======
Pro forma basic and
diluted net loss
per share
applicable to
common
stockholders......
Shares used in the
calculation of pro
forma basic and
diluted net loss
per share
applicable to
common
stockholders......
<CAPTION>
Pro
Forma
------------
<S> <C>
Revenues........... $ 19,125
Cost of revenues... 9,530
------------
Gross profit....... 9,595
------------
Operating expenses:
Sales and
marketing........ 32,787
Product
development...... 5,252
General and
administrative... 9,241
Amortization of
intangible
assets........... 11,242
Stock-based
charges.......... 20,455
------------
Total operating
expenses....... 78,977
------------
Loss from
operations........ (69,382)
Interest income.... 772
Interest expense... (557)
Other expense...... (97)
------------
Net loss before
minority
interest.......... (69,264)
Minority interest.. 222
------------
Net loss........... (69,042)
Accretion of
redemption value
and stock
dividends on
convertible
preferred stock... --
Repurchase of
convertible
preferred stock... (7,727)
------------
Net loss applicable
to common
stockholders...... $(76,769)
============
Historical basic
and diluted net
loss per share
applicable to
common
stockholders......
Shares used in the
calculation of
historical basic
and diluted net
loss per share
applicable to
common
stockholders......
Pro forma basic and
diluted net loss
per share
applicable to
common
stockholders...... $ (1.79) (4)
============
Shares used in the
calculation of pro
forma basic and
diluted net loss
per share
applicable to
common
stockholders...... 43,001 (4)
============
</TABLE>
See accompanying notes to Pro Forma Condensed Consolidated Financial
Information
F-3
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
HomeStore.com NSI Adjustments HomeStore.com SpringStreet Adjustments Pro Forma
------------- ------- ----------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 16,586 $ 2,433 $ -- $ 19,019 $ 2,351 $ -- $ 21,370
Cost of revenues........ 7,110 798 7,908 890 8,798
-------- ------- ------ -------- -------- ------- --------
Gross profit............ 9,476 1,635 -- 11,111 1,461 -- 12,572
-------- ------- ------ -------- -------- ------- --------
Operating expenses:
Sales and marketing.... 24,767 4,064 28,831 8,682 37,513
Product development.... 1,368 174 1,542 1,625 3,167
General and
administrative........ 5,918 1,053 6,971 3,775 10,746
Amortization of
intangible assets..... 1,311 261 1,572 4,136 (5) 5,708
Stock-based charges.... 10,000 569 10,569 10,569
-------- ------- ------ -------- -------- ------- --------
Total operating
expenses............ 43,364 6,121 49,485 14,082 4,136 67,703
-------- ------- ------ -------- -------- ------- --------
Loss from operations.... (33,888) (4,486) (38,374) (12,621) (4,136) (55,131)
Interest income......... 153 51 204 44 248
Interest expense........ (67) (31) (98) (98)
Other expense........... (120) (25) (145) (145)
-------- ------- ------ -------- -------- ------- --------
Net loss................ (33,922) (4,491) (38,413) (12,577) (4,136) (55,126)
Accretion of redemption
value and stock
dividends on
convertible preferred
stock.................. (1,477) (207) 1,684 (6) --
-------- ------- ------ -------- -------- ------- --------
Net loss applicable to
common stockholders.... $(35,399) $(4,698) $1,684 $(38,413) $(12,577) $(4,136) $(55,126)
======== ======= ====== ======== ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (1.73)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 20,502
========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (.98) (6)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 56,455 (6)
========
</TABLE>
See accompanying notes to Pro Forma Condensed Consolidated Financial
Information
F-4
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Pro forma adjustments giving effect to the Reorganization and the
acquisition of The Enterprise, MultiSearch and SpringStreet in the unaudited
pro forma condensed consolidated statements of operations for the year ended
December 31, 1998, reflect the following:
(1) Amortization of goodwill for The Enterprise, MultiSearch and
SpringStreet acquisitions of $188,000 $934,000 and $8.2 million,
respectively.
(2) Reduction in interest income related to interest earned on cash
consideration prior to the March 1998 acquisition of the Enterprise and
June 1998 acquisition of MultiSearch.
(3) Increase in interest expense related to interest imputed on the non-
interest bearing notes issued in connection with the acquisitions of
The Enterprise ($39,000) and MultiSearch ($97,000) from January 1, 1998
to the respective acquisition dates. The notes have been discounted at
a discount rate of 10%.
(4) The difference between the historical and pro forma basic and diluted
net loss per share applicable to common stockholders for the year ended
December 31, 1998, other than the adjustments discussed above, is the
result of the following:
Decrease in net loss applicable to common stockholders:
. Elimination of the accretion of redemption value and stock dividends
on convertible preferred stock of $1,659,000 resulting from the
assumed conversion of the Company's preferred stock into common
stock in connection with the IPO.
Increase in shares used in the calculation of pro forma net loss per
share applicable to common stockholders:
. Inclusion of shares issued in connection with the acquisitions of
The Enterprise, MultiSearch and SpringStreet as if such shares were
outstanding from January 1, 1998. The increase attributable to
shares issued in The Enterprise, MultiSearch and SpringStreet
acquisitions was 525,000, 1,625,000 and 4,587,000 shares,
respectively.
. Automatic exchange in connection with the IPO of RealSelect common
stock owned by the NAR for shares of the Company's common stock as
of January 1, 1998 of 3,917,000 shares.
. Inclusion of shares of Company common stock issued to NSI
stockholders in the Reorganization from January 1, 1998 or the date
of original issuance by NSI, if later, of 5,823,000.
. Automatic conversion in connection with the IPO of the Company's
convertible preferred stock into shares of common stock as of
January 1, 1998 or the date of issuance by NSI or the Company, if
later, was 17,351,000.
Pro forma adjustments giving effect to the Reorganization and the
acquisition of SpringStreet in the unaudited pro forma consolidated statement
of operations for the six months ended June 30, 1999, reflect the following:
(5) Amortization of goodwill for the SpringStreet acquisition.
F-5
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSEDCONSOLIDATED FINANCIAL INFORMATION--
(Continued)
(6) The difference between the historical and pro forma basic and diluted
net loss per share applicable to common stockholders for the six months
ended June 30, 1999, other than the adjustments discussed above, is the
result of the following:
Decrease in net loss applicable to common stockholders:
. Elimination of the accretion of redemption value and dividends on
convertible preferred stock of $1,684,000 resulting from the assumed
conversion of the Company's preferred stock into common stock in
connection with the IPO.
Increase in shares used in the calculation of pro forma net loss per
share applicable to common stockholders:
. Increase resulting from inclusion from January 1, 1999 of the shares
issued in connection with the SpringStreet acquisition of 4,587,000.
. Increase resulting from the assumed conversion in connection with
the IPO of RealSelect common stock owned by the NAR into shares of
the Company's common stock as of January 1, 1999 or the date of
issuance if later of 3,917,000 shares.
. Increase resulting from the inclusion of shares of Company common
stock issued to NSI stockholders in the Reorganization from January
1, 1999 or the date of original issuance by NSI if later of
2,080,000.
. Increase resulting from the assumed conversion in connection with
the IPO of the Company's redeemable and non-redeemable convertible
preferred stock into shares of common stock as of January 1, 1999 or
the date of issuance by NSI or the Company if later was 25,369,000.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
HomeStore.com, Inc.
The stock split described in Note 20 to the consolidated financial statements
has not been consummated at July 6, 1999. When it has been consummated, we
will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of HomeStore.com, Inc. (the
"Company") at December 31, 1997 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
Century City, California
March 31, 1999, except for
the effect of the stock
splits described in Note 20,
as to which the dates are
April 5, 1999 and July ,
1999
F-7
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
---------------- June 30, June 30, 1999
1997 1998 1999
------- ------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents....... $ 155 $ 71 $ 18,183
Accounts receivable, net of
allowance for doubtful accounts
of $873 at June 30, 1999....... 4,826
Current portion of prepaid
distribution expense........... 6,287
Deferred royalties.............. 2,030
Other current assets............ 2,159
------- ------- --------
Total current assets............. 155 71 33,485
Prepaid distribution expense..... 6,348
Property and equipment, net...... 4,276
Intangible assets, net........... 59,588
Other assets..................... 606
------- ------- --------
Total assets................... $ 155 $ 71 $104,303
======= ======= ========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................ $ -- $ -- $ 5,351
Accrued liabilities............. 49 13,401
Due to related party............ 143 70 600
Deferred revenue................ 11,330
Current portion of notes
payable........................ 1,746
------- ------- --------
Total current liabilities........ 192 70 32,428
Notes payable.................... 2,212
Other non-current liabilities.... 96 96
------- ------- --------
288 166 34,640
------- ------- --------
Commitments and contingencies
(Note 19).......................
Series E redeemable convertible
preferred stock, $.001 par
value; 325 shares authorized,
issued and outstanding at June
30, 1999; and no shares pro
forma, redemption value of
$6,003.......................... -- -- 5,094 --
------- ------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock,
$.001 par value; 9,675 shares
authorized; 6,241 shares issued
and 5,810 shares outstanding at
June 30, 1999, respectively;
liquidation preference of
125,611 at June 30, 1999; no
shares pro forma............... 6 --
Common stock, $.001 par value;
10,000 authorized at December
31, 1997 and 1998, 225,000
shares authorized at June 30,
1999; 8,650, 9,980 and 28,348
shares issued at December 31,
1997 and 1998, and June 30,
1999, respectively; 8,650,
9,980 and 25,445 outstanding at
December 31, 1997 and 1998, and
June 30, 1999, respectively;
60,038 shares pro forma........ 3 4 28 59
Additional paid-in capital...... 2,727 3,318 198,142 203,211
Treasury stock, at cost; 431
shares of convertible preferred
stock at June 30, 1999; and
2,903 shares of common stock at
June 30, 1999.................. (13,676) (13,676)
Notes receivable from
stockholders................... (551) (5,814) (5,814)
Deferred stock compensation..... (17,469) (17,469)
Accumulated deficit............. (2,863) (2,866) (96,648) (96,648)
------- ------- -------- --------
Total stockholders' equity
(deficit)..................... $ (133) $ (95) $ 64,569 $ 69,663
------- ------- -------- ========
$ 155 $ 71 $104,303
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December Six Months Ended
31, June 30,
---------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,360 $ 42 $ -- $ -- $ 16,586
Cost of revenues................... 42 6 7,110
------ ------ ------ ------- ---------
Gross profit....................... 1,318 36 -- -- 9,476
------ ------ ------ ------- ---------
Operating expenses:
Sales and marketing.............. 479 14 24,767
Product development.............. 629 1,368
General and administrative....... 441 38 3 2 5,918
Amortization of intangible
assets.......................... 1,311
Stock-based charges.............. 10,000
------ ------ ------ ------- ---------
Total operating expenses........... 1,549 52 3 2 43,364
------ ------ ------ ------- ---------
Loss from operations............... (231) (16) (3) (2) (33,888)
Other expense...................... (21) (1) (34)
------ ------ ------ ------- ---------
Net loss........................... $ (252) $ (17) $ (3) $ (2) $ (33,922)
Accretion of redemption value and
stock dividends on convertible
preferred stock................... (1,477)
------ ------ ------ ------- ---------
Net loss applicable to common
stockholders...................... $ (252) $ (17) $ (3) $ (2) $ (35,399)
====== ====== ====== ======= =========
Basic and diluted net loss per
share applicable to common
stockholders...................... $ (.07) $ -- $ -- $ -- $ (1.73)
====== ====== ====== ======= =========
Shares used to calculate basic and
diluted net loss per share
applicable to common
stockholders...................... 3,477 8,654 9,173 8,654 20,502
====== ====== ====== ======= =========
Pro forma basic and diluted net
loss per share applicable to
common stockholders............... $ (.74)
=========
Shares used to calculate pro forma
basic and diluted net loss per
share applicable to common
stockholders...................... 45,894
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes Total
Stock Common Stock Additional Receivable Deferred Stockholders'
--------------- -------------- Paid-in Treasury From Stock Accumulated Equity
Shares Amount Shares Amount Capital Stock Stockholder Compensation Deficit (Deficit)
------ ------- ------ ------ ---------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1996........... 532 $ 1,495 2,810 $ 3 $ 947 $ -- $ -- $ -- $ (2,594) $ (149)
Conversion of
preferred
stock.......... (532) (1,495) 5,615 6 1,489 --
Issuance of
common stock... 225 285 285
Net loss........ (252) (252)
------ ------- ------ --- -------- -------- ------- -------- -------- --------
Balance at
December 31,
1996........... -- -- 8,650 9 2,721 -- -- -- (2,846) (116)
Net loss........ (17) (17)
------ ------- ------ --- -------- -------- ------- -------- -------- --------
Balance at
December 31,
1997........... -- -- 8,650 9 2,721 -- -- -- (2,863) (133)
Exercise of
stock options.. 1,330 1 591 (551) 41
Net loss........ (3) (3)
------ ------- ------ --- -------- -------- ------- -------- -------- --------
Balance at
December 31,
1998........... -- -- 9,980 10 3,312 -- (551) -- (2,866) (95)
Reorganization
(unaudited)
(Note 1)....... 4,528 5 12,480 12 98,119 (1,770) (3,230) (10,079) (60,860) 22,197
Issuance of
common stock
and Series F
preferred stock
(unaudited).... 96 643 1 3,552 3,553
Issuance of
common stock to
minority
interest
(unaudited).... 1,000 1,000
Exercise of
stock options
(unaudited).... 4,530 5 5,701 (5,450) 256
Repurchase of
common stock
(unaudited).... (2,903) (11,906) 3,630 (8,276)
Issuance of
common stock
(unaudited).... 350 1,757 (238) 1,519
Repayment from
shareholder
(unaudited).... 25 25
Issuance of
Series G
preferred stock
(unaudited).... 341 17,007 17,007
Issuance of
Series H
preferred stock
(unaudited) ... 845 1 365 51,433 51,434
Deferred stock
compensation
(unaudited).... 11,390 (11,390) --
Stock-based
charges
(unaudited).... 6,000 4,000 10,000
Accretion of
Series E
redemption
value
(unaudited).... (129) (129)
Net loss
(unaudited).... (33,922) (33,922)
------ ------- ------ --- -------- -------- ------- -------- -------- --------
Balance at June
30, 1999
(unaudited).... 5,810 6 25,445 28 198,142 (13,676) (5,814) (17,469) (96,648) 64,569
Assumed
conversion of
convertible
preferred stock
(unaudited).... (5,810) (6) 29,050 29 (23) --
Assumed
conversion of
redeemable
convertible
preferred stock
(unaudited).... 1,625 2 5,092 5,094
------ ------- ------ --- -------- -------- ------- -------- -------- --------
Balance at June
30, 1999, pro
forma
(unaudited).... -- $ -- 56,120 $59 $203,211 $(13,676) $(5,814) $(17,469) $(96,648) $ 69,663
====== ======= ====== === ======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
----------------- ------------------
1996 1997 1998 1998 1999
----- ---- ---- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(252) $(17) $ (3) $ (2) $ (33,922)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 39 1,694
Provision for doubtful accounts........ 376
Amortization of discount on notes
payable............................... 146
Other non-cash items................... 6 859
Stock-based charges.................... 10,000
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................. (349) 2 2 (1,982)
Prepaid distribution expense......... (2,082)
Deferred royalties................... (631)
Other assets......................... (6) 14 (670)
Accounts payable and accrued
liabilities......................... 286 107 (122) 8 5,884
Deferred revenues.................... 5,173
----- ---- ---- ------ ----------
Net cash provided by (used in)
operating activities.................. (282) 112 (125) 8 (15,155)
----- ---- ---- ------ ----------
Cash flows from investing activities:
Purchases of property and equipment.... (93) (1,520)
Proceeds from sale of property and
equipment............................. 19
Cash assumed from the acquisition of
SpringStreet.......................... 10,186
----- ---- ---- ------ ----------
Net cash provided by (used in)
investing activities.................. (93) 19 -- -- 8,666
----- ---- ---- ------ ----------
Cash flows from financing activities:
Notes receivable from stockholders..... 3,655
Proceeds from exercise of stock
options............................... 255
Net proceeds from issuance of common
stock................................. 41 1,776
Net proceeds from issuance of preferred
stock................................. 285 18,984
Proceeds from officer and director
loans................................. 164
Repurchases of preferred and common
stock................................. (11,906)
Repayment of notes payable............. (1,200)
Repayment of capital lease obligation.. (43) (12)
----- ---- ---- ------ ----------
Net cash provided by (used in)
financing activities.................. 406 (12) 41 -- 11,564
----- ---- ---- ------ ----------
Change in cash and cash equivalents.... 31 119 (84) 8 5,075
Cash assumed from NetSelect, Inc. ..... 13,037
Cash and cash equivalents, beginning of
period................................ 5 36 155 155 71
----- ---- ---- ------ ----------
Cash and cash equivalents, end of
period................................ $ 36 $155 $ 71 $ 163 $ 18,183
===== ==== ==== ====== ==========
Supplemental disclosure of cash flow
activities
Cash paid during the year for
interest.............................. $ 21 $ 1 $ -- $ -- $ --
===== ==== ==== ====== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business:
HomeStore.com, Inc. ("HomeStore.com" or "Company") offers a family of web
sites, which include REALTOR.com, HomeBuilder.com, CommercialSource.com and
through its pending SpringStreet acquisition, SpringStreet.com, providing the
most comprehensive source of real estate listings and content on the Internet.
Through its family of web sites, the Company provides a wide variety of
information and communications tools for consumers, real estate industry
professionals, advertisers and providers of real estate related products and
services. The Company has strategic relationships with key industry
participants, including real estate market leaders such as the National
Association of REALTORS, the National Association of Home Builders, Multiple
Listing Services, real estate franchises, brokers and agents. The Company
currently generates revenues from several sources, including web hosting fees
from agents, brokers, home builders and (through our pending SpringStreet
acquisition) rental property owners and fees from advertisers.
Company History
Initial Business--HomeStore.com, Inc. (the "Company") was incorporated in
the State of Delaware in 1993 under the name of InfoTouch Corporation
("InfoTouch") with the objective of establishing an interactive network of
real estate "kiosks" for consumers to search for homes. In 1996, the Company
began to develop the technology to build and operate high traffic Internet
sites with content related to real estate.
The RealSelect Venture--Effective December 4, 1996, the Company entered
into a series of agreements with the National Association of Realtors and its
wholly owned subsidiary Realtors Information Network (together referred to as
the "NAR") and several investors (the "Investors"). Under these agreements,
the Company transferred its recently developed technology and certain of its
assets relating to advertising the listing of residential real estate on the
Internet into NetSelect, LLC ("LLC"), a Delaware limited liability
corporation, in exchange for a 46% ownership interest. The Investors
contributed capital to a newly formed company, NetSelect, Inc. ("NSI"). LLC
received capital funding from NSI and in-turn contributed the assets,
intellectual property and the NSI capital to RealSelect, Inc. ("RealSelect"),
a Delaware corporation, in exchange for common stock representing an 85%
ownership interest.
Also effective December 4, 1996, RealSelect entered into a number of
agreements with and issued cash and RealSelect common stock representing a 15%
ownership interest to the NAR in exchange for the rights to operate the
website REALTOR.com and pursue commercial opportunities relating to the
listing of real estate on the internet.
Pursuant to the agreements governing RealSelect, the Company was required
to terminate its remaining activities, which were insignificant, and dispose
of its remaining assets and liabilities. Accordingly, following the formation
of RealSelect, NSI, LLC and the Company were only shell companies as they had
no liabilities and no assets other than their respective ultimate investments
in the RealSelect. In addition, under the agreements, NSI was the only entity
permitted to raise capital to support RealSelect which, once invested,
increased NSI's ownership interests and diluted the ownership interests of the
Company and the NAR.
Reorganization of RealSelect Holding Structure--Under the RealSelect
agreements, 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 the
Company (the "Reorganization"). The share exchange lacked economic substance
since both the Company and NSI were shell companies for their respective
investments in RealSelect, and because the respective underlying ownership
interests of individual investors were unaffected. Accordingly, the non-
substantive exchange was accounted for at historical cost. For further
discussion about accounting for the non-substantive exchange, see Note 4.
F-12
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Initial Public Offering and Unaudited Pro Forma Balance Sheet--In May 1999,
the Board of Directors authorized the filing of a registration statement with
the Securities and Exchange Commission ("SEC") that would permit the Company
to sell shares of the Company's common stock in connection with a proposed
initial public offering ("IPO"). If the IPO is consummated under the terms
presently anticipated, upon the closing of the proposed IPO all of the then
outstanding shares of the Company's convertible preferred stock will
automatically convert into shares of common stock on a five-for-one basis. The
conversion of the convertible preferred Stock has been reflected in the
accompanying unaudited pro forma stockholders' equity as if it had occurred on
June 30, 1999.
2. Summary of Significant Accounting Policies:
Basis of Presentation--The Company's consolidated financial statements
reflect the financial position, results of operations and cash flows of
HomeStore.com, Inc., formerly InfoTouch. Accordingly, the operations up
through December 4, 1996, reflect operations prior to the formation of
RealSelect. The consolidated financial statements for 1997 and 1998 primarily
reflect the Company's investment in LLC accounted for under the equity method
(Note 3). The consolidated financial statements following the date of the
Reorganization include the accounts of RealSelect and its wholly owned
subsidiaries, in which the Company held a 92% (unaudited) ownership interest
at June 30, 1999. Minority stockholder's interest has been eliminated to the
extent of the minority stockholder's investment in the Company. All material
intercompany transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial Information--The interim consolidated financial
information of the Company for the six months ended June 30, 1998 and 1999 is
unaudited. The unaudited interim financial information has been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows as of and for the six months ended June
30, 1998 and 1999.
Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of deposits in money market funds.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from customers located in the
United States. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable
are collected upon processing of credit card transactions. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
During the years ended December 31, 1996, 1997 and 1998, and the six months
ended June 30, 1998 and 1999 (unaudited), no customers accounted for more than
10% of net revenues or net accounts receivable.
Fair Value of Financial Instruments--The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
and notes payable are carried at cost, which approximates
F-13
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
their fair value because of the short-term maturity of these instruments and
the relatively stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably, over the term of the agreement, generally two to five years.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill
resulting from the acquisitions of The Enterprise of America, Ltd. ("The
Enterprise") and MultiSearch Solutions, Inc. ("MultiSearch") acquired by NSI
prior to the Reorganization and the acquisition of SpringStreet, Inc.
("SpringStreet"). This goodwill is being amortized on a straight-line basis
over the estimated periods of benefit of five years (Note 5). In addition, in
connection with its formation, RealSelect made various payments and issued
common stock to the NAR for the right to use the REALTOR.com trademark and
domain name, the "REALTORS" trademark and the exclusive rights to use the web
site for real estate listings under an exclusive lifetime operating agreement.
The stock issued and payments made to the NAR, as well as certain milestone-
based amounts subsequently earned by the NAR are being amortized on a
straight-line basis over the estimated period of benefit of 15 years.
The Company reviews its long-lived and intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows attributable to
such assets to their carrying value. If the carrying value of the assets
exceeds the forecasted undiscounted cash flows, then the assets are written
down to their fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--Following the Reorganization, the Company's revenues
are derived principally from the sale of products and services to real estate
agents and brokers, home builders and from advertising sales. Revenues
associated with the sale of agent products are recognized ratably over the
term of the contract, generally 12 months. Royalties directly associated with
these revenues are deferred and amortized over the same period. The Company
also sells banner advertising pursuant to short-term contracts, which may
include the guarantee of a minimum number of impressions or times that an
advertisement appears in pages viewed by the users of the Company's online
properties. Advertising revenue is recognized ratably based upon the lesser of
impressions delivered over the total number of guaranteed impressions or
ratably over the period in which the advertisement is displayed. Prior to the
formation of RealSelect, the Company recognized revenue from customers of its
kiosk business at the time of the advertisement placement. In addition, the
Company recorded revenues totaling $1.0 million in 1996 under its development
contract with the NAR whereby the NAR reimbursed the Company for costs of
developing the Internet website.
Product Development Costs--Product development costs incurred by the
Company to develop, enhance, manage, monitor and operate the Company's web
sites are expensed as incurred.
Advertising Expense--Advertising costs are expensed as incurred and
totalled $3.0 million during the six months ended June 30, 1999 (unaudited).
No advertising costs were incurred during the years ended December 31, 1996,
1997 and 1998 and for the six months ended June 30, 1998.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is recognized over the
vesting period based on the difference, if any, on the date of grant between
the
F-14
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
deemed fair value for accounting purposes 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") 96-18.
Income Taxes--Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No.109, deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Loss Per Share--Net loss per share is computed by dividing the net loss
applicable to common stockholders for the period by the weighted average
number of common shares outstanding. Shares associated with stock options,
warrants and convertible preferred stock are not included to the extent they
are anti-dilutive.
Pro Forma Net Loss Per Share (Unaudited)--Pro forma net loss per share is
computed by dividing the net loss for the period by the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's convertible preferred stock into shares
of the Company's common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on January 1, 1999 or
at the date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute basic and
diluted net loss per share of 25,392 for the six months ended June 30, 1999.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Segments--Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable business segments as of December 31, 1998
and June 30, 1999.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 in the first quarter of 1999 did not have a significant
impact on the Company's financial position, results of operations or cash
flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on the Company's financial position, results of operations
or cash flows.
In June 1998, the Financial Accounting Standards Board issued 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.
F-15
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because the Company does not currently hold any derivative instruments and
does not engage in hedging activities, the impact of adoption of SFAS No. 133
is not currently expected to have a material impact on financial position,
results of operations or cash flows. The Company will be required to implement
SFAS No. 133 in the first quarter of fiscal 2001.
3. Equity Investment in NetSelect, LLC:
At the formation of RealSelect the Investors agreed to invest $7.0 million
through NSI, which in turn was invested in LLC. For this investment, NSI
received an ownership interest of 54% in LLC. The Company received a 46%
interest in LLC for the transfer of substantially all of its assets,
liabilities and intellectual property relating to the concept of listing
residential real estate on the Internet. The book value of the net liabilities
transferred amounted to $96,000. LLC agreed to transfer $5.8 million and the
assets, liabilities and intellectual property contributed by the Company to
RealSelect, for an ownership interest of 85%. The NAR received a 15% ownership
interest in RealSelect. RealSelect received from the NAR the right to use
certain trademarks and an agreement not to compete. As part of this
transaction, RealSelect and the NAR entered into an operating agreement for
the Internet site REALTOR.COM, and RealSelect paid the NAR and its creditors
$3.4 million and forgave debt of approximately $266,000.
Pursuant to the terms contained in the RealSelect agreement, the Company
has ceased all operations other than it's LLC ownership interest.
The investment in LLC prior to the Reorganization is accounted for under
the equity method. The Company's share of losses is limited to the extent of
its investment since there are no obligations to support or provide further
financial assistance to LLC. Since these amounts exceed the equity in common
stock of LLC, based upon the historical cost of the technology and assets
contributed, the investment has been recorded at no value.
Summarized consolidated financial data for NetSelect, LLC and its
subsidiary, RealSelect at December 31, 1997 and 1998 and for the period from
October 28, 1996 (Inception of RealSelect) to December 31, 1996 and the years
ended December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Current assets............................................ $ 3,671 $ 23,632
Total assets.............................................. 8,728 54,908
Current liabilities....................................... 2,580 20,685
Total liabilities......................................... 2,727 23,921
Redeemable preferred stock................................ 4,939
Accumulated deficit....................................... (5,380) (56,390)
Stockholders' equity...................................... 6,001 26,048
</TABLE>
<TABLE>
<CAPTION>
October 28,
1996
(Inception) Year Ended
to December 31,
December 31, ----------------
1996 1997 1998
------------ ------ --------
<S> <C> <C> <C>
Revenues..................................... $ -- $1,282 $ 15,003
Loss from operations......................... (391) (6,031) (51,278)
Net loss applicable to common stockholders... (248) (5,132) (60,396)
</TABLE>
F-16
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of additional capital issued by NSI and NSI shares issued in
connection with certain acquisitions, all of which were invested in RealSelect
through LLC, the Company's ownership interest in LLC decreased to 34%, 21% and
21% (unaudited) at December 31, 1997, 1998 and February 4, 1999, respectively.
Immediately following the Reorganization, the Company's ownership interest in
RealSelect was 92%.
4. Reorganization of RealSelect:
As described in Note 1, on February 4, 1999, RealSelect was reorganized
through a non-substantive exchange of the Company's capital stock for all of
the outstanding capital stock of NSI including the assumption of warrants and
options to acquire common stock. Accordingly, the Company issued the following
capital stock to NSI stockholders in exchange for an equivalent number of
shares (in thousands, unaudited):
<TABLE>
<S> <C>
Common Stock....................................................... 12,480
Series A Convertible Preferred Stock............................... 1,378
Series B Convertible Preferred Stock............................... 191
Series C Convertible Preferred Stock............................... 614
Series D Convertible Preferred Stock............................... 681
Series E Redeemable Convertible Preferred Stock.................... 325
Series F Convertible Preferred Stock............................... 1,664
Options to purchase Common Stock................................... 6,560
Warrants to purchase Common Stock.................................. 310
Warrants to purchase Preferred Stock............................... 5
</TABLE>
F-17
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because the exchange did not affect the economic interests of NSI and
Company stockholders, the Reorganization has been accounted for as a
combination of the historical assets and liabilities of the two individual
companies at February 4, 1999. At the date of the Reorganization, NSI assets,
liabilities and stockholders' equity were as follows (in thousands):
<TABLE>
<CAPTION>
February 4,
1999
-----------
(unaudited)
<S> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 13,037
Other current assets............................................. 8,952
--------
Total current assets.............................................. 21,989
Prepaid distribution expense...................................... 7,072
Property and equipment, net....................................... 2,373
Intangible assets, net............................................ 19,463
Other............................................................. 286
--------
$ 51,183
========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities......................... $ 12,473
Deferred revenue................................................. 6,065
Current portion of notes payable................................. 1,746
--------
Total current liabilities......................................... 20,284
Notes payable..................................................... 3,265
--------
Total liabilities................................................. 23,549
--------
Redeemable convertible preferred stock............................ 4,963
--------
Convertible preferred stock....................................... 5
Common stock...................................................... 5
Additional paid-in capital........................................ 98,126
Treasury stock at cost............................................ (1,770)
Notes receivable from stockholders................................ (3,230)
Deferred stock compensation....................................... (10,079)
Accumulated deficit............................................... (60,386)
--------
Total stockholders' equity..................................... 22,671
--------
$ 51,183
========
</TABLE>
5.Acquisitions:
The following acquisitions were consummated by NSI prior to the
Reorganization.
TouchTech Corporation
Effective December 31, 1997, NSI acquired all the outstanding stock of
TouchTech Corporation, a Canadian company, in exchange for 146,910 shares of
common stock with a value of $53,000, which is based on the terms and
preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition.
The acquisition has been accounted for as a purchase. The excess of fair value
of purchase consideration over net tangible assets has been allocated to
goodwill and is being amortized on a straight-line basis over five years.
F-18
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Enterprise
Effective March 31, 1998, NSI acquired all the outstanding stock of The
Enterprise in exchange for aggregate consideration consisting of 525,000
shares of common stock with an estimated fair value of $525,000, which is
based on the terms and preferences of the shares issued in the transaction
relative to the value received by the Company in its most recent financing
prior to the acquisition, a note payable in the amount of $2.2 million,
$705,000 in cash and the assumption of $946,000 of net liabilities. The
acquisition has been accounted for as a purchase. The excess of purchase
consideration over net tangible assets of $3.9 million has been allocated to
goodwill which is being amortized on a straight-line basis over five years.
The purchase agreement also provides for certain contingent payments in the
event that predetermined levels of sales are achieved. Such payments, if any,
will be accounted for as compensation expense in the period earned and in no
event shall such aggregate payments exceed $1.0 million. For the year ended
December 31, 1998, no contingent payments were required under the terms of the
agreement.
MultiSearch
Effective July 1, 1998, NSI acquired all the outstanding stock of
MultiSearch, in exchange for issuing 325,000 shares of Series E redeemable
convertible preferred stock with a value of $4.8 million, which is based on
the terms and preferences of the shares issued in the transaction relative to
the value received by the Company in its most recent financing prior to the
acquisition, a note payable in the amount of $3.6 million, $875,000 in cash
and the assumption of $657,000 of net liabilities. The acquisition has been
accounted for as a purchase. The excess of total purchase consideration over
net tangible assets acquired of $9.4 million has been allocated to goodwill
which is being amortized on a straight-line basis over five years. The
purchase agreement also provides for certain contingent payments in the event
that predetermined levels of sales and earnings are achieved. Such payments,
if any, will be accounted for as compensation expense in the period earned.
For the year ended December 31, 1998, $360,000 of expense was recognized under
the terms of the agreement.
6. Pro Forma Financial Information (Unaudited):
The following summarized unaudited pro forma financial information assumes
the Reorganization and the Enterprise, MultiSearch and SpringStreet, Inc.
(Note 20) acquisitions occurred at the beginning of each period (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------ -----------------
1997 1998 1998 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues............................ $ 8,629 $ 19,125 $ 7,186 $21,370
Net loss applicable to common
stockholders....................... (17,533) (76,769) (17,129) (55,126)
Net loss per share applicable to
common stockholders:
Basic and diluted................. $ (1.55) $ (4.96) $ (1.50) $ (2.38)
Weighted average shares........... 11,308 15,487 11,455 23,195
</TABLE>
7. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
1999
-----------
(unaudited)
<S> <C>
Computer equipment............................................... $ 3,285
Furniture and fixtures........................................... 1,188
Leasehold improvements........................................... 1,026
-------
5,499
Less: Accumulated depreciation................................... (1,223)
-------
$ 4,276
=======
</TABLE>
F-19
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the year ended December 31, 1996 was $39,000 and
$384,000 for the six months ended June 30, 1999 (unaudited). The Company held
no depreciable assets in 1997 and 1998.
8. Intangible Assets:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
1999
-----------
(unaudited)
<S> <C>
Goodwill......................................................... $54,578
NAR operating agreement.......................................... 7,405
Other............................................................ 1,367
-------
63,350
Less: Accumulated amortization................................... (3,762)
-------
$59,588
=======
</TABLE>
Amortization expense for the six months ended June 30, 1999 was $1.3
million (unaudited).
9. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll and related
benefits........................... $33 $-- $ 3,776
Accrued distribution fees........... 4,631
Accrued royalties................... 1,883
Other............................... 16 3,111
--- --- -------
$49 $-- $13,401
=== === =======
</TABLE>
10. Related-Party Transactions:
At June 30, 1999, the Company was indebted to an officer for $188,000
(unaudited). The loan is due on demand and bears interest at 10% per annum.
In March 1999, the NAR received shares of RealSelect common stock
convertible into 297,620 shares (unaudited) of Company common stock in
satisfaction of certain obligations under the NAR operating agreement totaling
$1.0 million. As of June 30, 1999, the Company was indebted to the NAR for
$600,000 (unaudited) which bears interest at 9% and is payable on or before
the earlier of October 31, 1999 or thirty days after the closing of the sale
of the Company's common stock in connection with an initial public offering.
In connection with a 1998 stock redemption agreement, NSI loaned $3.1
million to a stockholder. The non-interest bearing note, which is full
recourse and collateralized by shares of common stock was repaid in February
1999 following the Reorganization. At December 31, 1998, the note was
classified as a component of stockholders' equity.
At December 31, 1998, the Company and NSI held notes receivable from
employees and directors totalling $702,000 for the exercise of stock options.
The notes bear interest at 5.3% per annum and are due on or before August 21,
2003. The notes, which are classified as a component of stockholders' equity,
are full recourse and collateralized by shares of common stock owned by the
employees and directors. Following the Reorganization in February 1999,
$551,000 of the notes were repaid (unaudited).
F-20
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first quarter of 1999, the Company received a note receivable
from an employee totalling $1.5 million (unaudited) representing amounts owed
to the Company from the exercise of stock options. The note is full recourse
and collateralized by shares of common stock of the Company and bears interest
at 4.7%. The note, which is classified as a component of stockholders' equity,
is due in 2005.
11. Notes Payable:
As part of the acquisition of The Enterprise, NSI issued a $2.2 million
non-interest bearing note payable which has been discounted at 10%. The note
is payable in four installments, and matures March 31, 2001.
As part of the acquisition of MultiSearch, NSI issued a $3.6 million non-
interest bearing note payable which has been discounted at 10%. The note is
payable in three installments, and matures April 1, 2001.
As of December 31, 1998, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending Principal
December 31, Payments
------------ ---------
<S> <C>
1999............................................................ $2,097
2000............................................................ 1,797
2001............................................................ 1,895
------
5,789
Less: Discount................................................... (807)
------
Present value of notes payable................................... 4,982
Less current portion............................................. 1,746
------
Long-term portion................................................ $3,236
======
</TABLE>
12. Stock Options:
Prior to the Reorganization, the Company granted stock options under the
InfoTouch 1994 Stock Incentive Plan. In connection with the formation of
RealSelect, options to purchase 1,326,000 shares of common stock, representing
all outstanding options granted prior to December 4, 1996, became fully
vested. In December 1996, the Company granted options to purchase 275,000
shares of common stock with an exercise price per share of $.06. In 1997,
options to purchase 258,000 shares at $.45 per share were canceled. In 1998,
options to purchase 1,328,000 shares at a weighted average exercise price of
$.45 were exercised. Accordingly, at December 31, 1998 and up through the date
of the Reorganization, options to purchase 15,000 shares were outstanding with
a weighted average exercise price of $.64 per share.
In connection with the Reorganization, the Company assumed the NSI 1996
Stock Incentive Plan (the "Plan") which provides for the grant of options to
purchase up to 10,000,000 common shares. Under the terms of the plan, options
and other equity incentive awards may be granted to employees, officers,
directors and consultants at the then-current market value of the Company's
common shares, as determined by the Board of Directors. Options granted
generally vest over four years, 25% for the first year and monthly thereafter
over the remaining three years, and expire 10 years after the date of grant.
F-21
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan (including the
InfoTouch options) for the period from October 28, 1996 (Inception of NSI) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the six
months ended June 30, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Shares Share Price
--------- ------------ --------
<S> <C> <C> <C>
Outstanding at October 28, 1996 -- $ -- $ --
Outstanding InfoTouch options at December
4, 1996................................. 1,326 .45 to .90 .54
Granted.................................. 1,949 .05 to .06 .06
------
Outstanding at December 31, 1996........... 3,275 .05 to .90 .25
Granted.................................. 1,434 .30 .30
Canceled................................. (256) .45 .45
------
Outstanding at December 31, 1997........... 4,453 .05 to .90 .26
Granted.................................. 4,782 1.00 to 1.60 1.21
Exercised................................ (2,434) .06 to 1.00 .31
Canceled................................. (426) .30 to 1.00 .78
------
Outstanding at December 31, 1998........... 6,375 .05 to 1.60 .91
Granted (unaudited)...................... 4,583 2.00 to 9.00 5.78
Exercised (unaudited).................... (4,530) .06 to 3.00 1.26
Canceled (unaudited)..................... (506) .30 to 1.26 .99
------
Outstanding at June 30, 1999 (unaudited)... 5,922 4.41
======
</TABLE>
NSI options granted during the years ended December 31, 1997 and 1998 and
the six months ended June 30, 1999 resulted in total compensation of $1.0
million, $9.5 million and $11.4 million (unaudited), respectively, and were
recorded as deferred stock compensation in stockholders' equity. The deferred
stock compensation is recognized as stock-based charges in the consolidated
statement of operations over the related vesting period of the options. Common
stock available for future grants at December 31, 1998 was 2,535,000 shares.
In connection with the acquisition of SpringStreet, Inc. (see Note 20), the
Company assumed options to acquire 721,915 shares of Common Stock.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------------- ---------------
Number Weighted Average Average Number Average
of Remaining Exercise of Exercise
Prices: Shares Contractual Life Price Shares Price
------- ------ ---------------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$.06........................ 565 7.90 $ .06 40 $ .06
.30......................... 1,300 8.70 .30 335 .30
.90 to 1.00................. 1,085 9.20 1.00 105 .98
1.20........................ 905 9.50 1.20 115 1.20
1.26........................ 2,105 9.70 1.26 135 1.26
1.60........................ 415 9.90 1.60 5 1.60
----- ---
6,375 735
===== ===
</TABLE>
F-22
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates...................................... 6% 6% 5%
Expected lives (in years)..................................... 4 5 4
Dividend yield................................................ 0% 0% 0%
Expected volatility........................................... 0% 0% 0%
</TABLE>
The compensation expense associated with the stock-based compensation plans
did not result in a material difference from the reported net loss for the
years ended December 31, 1996, 1997 or 1998.
13. Warrants:
In connection with the Reorganization, the Company assumed warrants to
purchase common stock. The following describes the terms of and accounting for
the warrants assumed in the Reorganization and issued subsequently.
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued a warrant to purchase 566,475 shares
of the Company's common stock at an exercise price of $1.26 per share. The
warrant is contingent upon America Online exercising its right to purchase
$2.0 million of common stock in an IPO. Additionally, if America Online
exercises its right to purchase $2.0 million of common stock in an IPO, the
Company will issue warrants to America Online to acquire $3.0 million of
common stock with a weighted average exercise price of 137.5% of the initial
public offering price. If warrants are purchased in connection with an IPO,
the fair value will be measured at the date of the IPO and amortized to sales
and marketing expense over the remaining term of the distribution agreement.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 566,440 shares of common
stock at an exercise price $0.0002 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
During 1998, the Company issued warrants to purchase up to 209,380 shares
of common stock to Multiple Listing Services ("MLSs") that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis over an initial term of 18 months. The issuance of
these warrants is contingent upon completion of an IPO. The exercise price
will be equal to the IPO per share price. Concurrently with an IPO, the
Company will offer up to 2,111,345 shares and shares subject to warrants
(unaudited) to home builders and MLSs that agree to provide the Company their
listings on a preferred national basis. The fair value of issuable warrants
will be measured at the date an IPO is deemed to be probable and recognized as
expense over the terms of the applicable agreements.
In February 1999, the Company closed a private equity offering to real
estate brokers under its Broker Gold program. The Company also issued warrants
to purchase up to 358,315 shares (unaudited) of its common stock at an
exercise price equal to the IPO per share price. The issuance of these
warrants is contingent upon the completion of an IPO. The fair value of these
warrants will be measured at the date an IPO is deemed to be probable and
recognized as expense over the remaining term of the initial two year Broker
Gold program agreements.
F-23
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the future, the Company may offer up to 425,000 warrants to the Broker
Gold program members who elect to renew their existing listing agreements with
the Company after their original two year term expires. The broker must also
maintain a minimum number of property listings as well as continue to hold the
Company's securities. If issued, these warrants would have an exercise price
based upon the average of the closing market price of the common stock for the
ten trading days preceding the date which is one day before the warrant is
issued. The Company would recognize the fair value of the warrants, as then
determined, as expense over the term of the renewed agreement.
14. Capitalization:
Convertible preferred stock at June 30, 1999 (unaudited) consists of the
following (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A.................................. 1,647 1,378 $ 4,541
Series B.................................. 353 191 1,372
Series C.................................. 614 614 5,030
Series D.................................. 681 681 10,937
Series F.................................. 2,100 1,760 44,459
Series G.................................. 341 341 17,140
Series H.................................. 845 845 42,132
Undesignated.............................. 3,094 -- --
----- ----- --------
9,675 5,810 $125,611
===== ===== ========
</TABLE>
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion from the date of the
Reorganization of $1.3 million (unaudited) for the six months ended June 30,
1999 related to the Series D and Series F dividends. No dividends have been
declared or paid from inception.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
F-24
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion from the
date of the Reorganization of $129,000 (unaudited) for the six months ended
June 30, 1999 related to the Series E redeemable preferred stock redemption
value.
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
five-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $9.97 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
15. Net Loss Per Share:
The following table sets forth the computation of basic and diluted net
loss per share applicable to common stockholders per share for the periods
indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------------- -----------------
1996 1997 1998 1998 1999
------ ------ ------ ----- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Historical Presentation
Numerator:
Net loss........................... $ (252) $ (17) $ (3) $ (2) $(33,922)
Accretion of redemption value and
stock dividends on convertible
preferred stock................... (1,477)
------ ------ ------ ----- --------
Net loss applicable to common
stockholders...................... $ (252) $ (17) $ (3) $ (2) $(35,399)
====== ====== ====== ===== ========
Denominator:
Weighted average shares............ 3,477 8,650 9,173 8,650 20,502
====== ====== ====== ===== ========
Basic and diluted net loss per share
applicable to common stockholders.. $ (.07) $ -- $ -- $ -- $ (1.73)
====== ====== ====== ===== ========
Pro forma presentation
Numerator:
Net loss applicable to common
stockholders...................... $(35,399)
Accretion of redemption value and
stock dividends on convertible
preferred stock................... 1,477
--------
Net loss applicable to common
stockholders...................... $(33,922)
========
Denominator:
Shares used above................... 20,502
Weighted average effect of
convertible securities:
Series A preferred stock......... 6,890
Series B preferred stock......... 952
Series C preferred stock......... 3,072
Series D preferred stock......... 3,406
Series E redeemable preferred
stock........................... 1,625
Series F preferred stock......... 8,671
Series G......................... 753
Series H......................... 23
--------
Denominator for pro forma
calculation (unaudited)............ 45,894
========
Pro forma basic and diluted net loss
per share applicable to common
stockholders (unaudited)........... $ (.74)
========
</TABLE>
F-25
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 computation were 1,600,000, 1,342,500 and 15,000
for the years ended December 31, 1996, 1997 and 1998, respectively, and
1,342,500 (unaudited) and 37,756,000 (unaudited) for the six months ended June
30, 1998 and 1999, respectively. The number of such shares excluded from the
unaudited pro forma basic and diluted net loss per share computation was
7,081,000 for the six months ended June 30, 1999.
16. Supplemental Cash Flow Information:
During the six months ended June 30, 1999 (unaudited):
. The Company issued shares of RealSelect common stock convertible into
297,620 shares of Company common stock to the NAR in satisfaction of
certain obligations under the operating agreement totalling $1.0
million.
. The Company issued notes receivable to stockholders for $5.5 million in
connection with exercising stock options.
. The Company issued 364,000 shares of common stock valued at $3.3
million, 844,569 shares of Series H convertible preferred stock valued
at $42.1 million and assumed net assets of $10.1 million as part of the
SpringStreet acquisition.
. The Company issued 187,500 shares of common stock to the NAR in
satisfaction of certain obligations under the operating agreement
totaling $1.3 million.
. The Company issued 162,500 shares of common stock totaling $488,000 to
an employee for cash of $250,000 and a note receivable of $238,000.
During the year ended December 31, 1998:
. The Company issued notes receivable to stockholders for $551,000 in
connection with the exercise of stock options.
17. Defined Contribution Plan:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
18. Income Taxes:
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December
31,
------------
1997 1998
----- -----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 838 $ 839
Other........................................................ 90 90
----- -----
928 929
Less: valuation allowance.................................... (928) (929)
----- -----
Net deferred taxes............................................. $ -- $ --
===== =====
</TABLE>
The Company has placed a valuation allowance against its otherwise
recognizable deferred tax assets due to the likelihood that the Company may
not generate sufficient taxable income during the carryforward period to
utilize the net operating loss carryforwards.
F-26
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company had net operating losses for federal and
state income tax purposes of approximately $2.3 million and $1.1 million,
respectively, which begin to expire in 2007 for federal and 2001 for state
income tax purposes. The net operating losses can be carried forward to offset
future taxable income. Utilization of the above carryforwards may be subject
to utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
19. Commitments and Contingencies:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and increases in the Consumer Price Index.
In connection with the Reorganization, the Company assumed noncancellable
operating leases. Future minimum lease payments under these operating leases
as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 2,295
2000............................................................... 2,686
2001............................................................... 2,553
2002............................................................... 1,636
2003............................................................... 1,365
-------
Total.......................................................... $10,535
=======
</TABLE>
Total NSI rental expense for operating leases was $7,000, $149,000 and
$749,000 for the period from October 28, 1996 (Inception of NSI) to December
31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
Distribution Agreements
In connection with the Reorganization, the Company assumed various Internet
portal distribution agreements and marketing and listing agreements with real
estate franchises. Payments remaining over the next five years for these
agreements as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $23,643
2000............................................................... 21,536
2001............................................................... 14,646
2002............................................................... 4,250
2003............................................................... 500
-------
Total.......................................................... $64,575
=======
</TABLE>
Approximately $7.3 million of these payments are subject to acceleration
upon consummation of an IPO.
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. Based on the advice of counsel, 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.
F-27
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 19, 1999, John D. Molinare filed a lawsuit against the Company,
MultiSearch, New List Corporation ("New List") and Fred White in Cook County,
Illinois. Mr. Molinare's claims arise out of the proposed formation by
MultiSearch and New List of a new venture. Mr. Molinare claims that he was to
be the President and Chief Executive Officer of the new venture under an
alleged employment agreement among him, MultiSearch and New List. Mr. Molinare
alleges that (1) the other defendants breached an employment agreement with
him, (2) he was entitled to a 10% equity interest in the new venture, (3) the
Company interfered with his relationship between MultiSearch and New List, and
(4) that the Company should be liable for damages caused by MultiSearch as a
successor to MultiSearch.
Mr. Molinare is seeking damages of not less than $2.1 million, plus
punitive damages, as well as his costs incurred. He is also seeking to receive
a "10% interest" in the Company. While this complaint was filed with the
court, Mr. Molinare has not properly served this complaint. Therefore, the
Company has not responded to the complaint. The Company believes that based on
information currently available to it, it has valid defenses to these claims
and management intends to vigorously defend these claims.
20. Subsequent Events (unaudited):
Equipment Leasing Arrangement
In January 1999, NSI entered into an equipment leasing arrangement which
provided for the sale and leaseback of certain existing equipment and lease
financing for additional equipment needs. As of March 31, 1999, the Company
had leased $3.0 million of equipment, which covers the total availability
under the agreement. In addition, the agreement provides the lessor with
warrants to purchase up to 5,000 shares of Series F preferred stock at an
exercise price of $24.00 per share. The Company determined that the fair value
of the warrants approximated $115,000 on the date of grant.
Stock Options
In January 1999, the Board of Directors adopted, and in March 1999 the
Company's stockholders approved, the 1999 Equity Incentive Plan (the "Plan")
to replace the 1996 Stock Incentive Plan ("1996 Plan"). The Plan provides for
the issuance of both non-statutory and incentive stock options to employees,
officers, directors and consultants of the Company. The total number of shares
of common stock reserved for issuance under the Plan is equal to that number
previously reserved and available for grant under the 1996 Plan. The Company
will not issue new options under the 1996 Plan. In April 1999 and June 1999,
the Board of Directors authorized, subject to stockholder approval, an
increase in the number of shares reserved for issuance under the Plan by an
additional 3,000,000 shares and 625,000 shares, respectively.
Repurchase of Common Stock
In February 1999, the Company repurchased 2,903,865 shares of common stock
for $11.9 million.
Sale of Common Stock and Series F Convertible Preferred Stock
In February 1999, the Company closed a private equity offering to real
estate brokers under its Broker Gold program. In the aggregate, the Company
sold 94,248 shares of Series F convertible preferred stock and 628,760 shares
of common stock for approximately $3.5 million. The Company recognized the
$6.0 million difference between the deemed fair value of the stock for
accounting purposes and the price paid by the brokers as stock-based charges
during the three months ended March 31, 1999.
F-28
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes Receivable from Stockholders
During the six months ended June 30, 1999, the Company issued promissory
notes to employees of the Company totaling $5.5 million for the exercise of
stock options. These notes are full recourse and collateralized by common
stock of the Company and bears interest at 4.7% per annum. These notes, which
are classified as a component of stockholders' equity, are due in 2005.
Advertising Sales Agreement
The Company signed an agreement with America Online in March 1999, in which
they agreed to act as the Company's exclusive third-party advertising sales
agent on the REALTOR.com and HomeBuilder.com web sites through March 2001. In
connection with this agreement, America Online has agreed to pay minimum
quarterly payments, subject to adjustment based on the number of page views
delivered on these web sites.
Sale of Convertible Preferred Stock
In April 1999, the Company issued 340,955 shares of Series G convertible
preferred stock for $17.0 million. All holders of Series G shares have voting,
dividend and liquidation preferences substantially the same as holders of
Series D and Series F convertible preferred stock. There are no redemption
rights.
Stock Split
On April 5, 1999, the Company's Board of Directors effected a two-for-one
stock split of the outstanding shares of common stock. All share and per share
information included in these consolidated financial statements have been
retroactively adjusted to reflect this stock split.
On July , 1999, the board of directors effected a five-for-two stock split
of the outstanding shares of common stock all share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect this stock split.
Acquisition
In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
844,569 shares of Series H convertible preferred stock and 1,086,213 shares of
common stock, or an aggregate of 5,309,058 shares of common stock, including
721,915 shares of common stock subject to assumed options, assuming five-for-
one conversion of convertible preferred stock of the Company in exchange for
all of the outstanding shares, including employee stock options, of
SpringStreet. The acquisition costs aggregated approximately $51.7 million and
were based on the priviledges and preferences of the shares issued in the
transaction relative to the value received by the Company in its April 1999
Series G financing and certain acquisition expenses. The SpringStreet
acquisition was accounted for using the purchase method of accounting. The
excess of total purchase consideration over net tangible assets acquired of
$41.3 million has been allocated to goodwill which is being amortized on a
straight line basis over 5 years.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NetSelect, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
NetSelect, Inc. and its subsidiaries (the "Company") at December 31, 1997 and
1998 and the results of their operations and their cash flows for the period
from October 28, 1996 (Inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-30
<PAGE>
NETSELECT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------- February 4,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 3,094 $ 14,690 $ 13,037
Accounts receivable, net of allowance for
doubtful accounts of $42, $378 and $455 at
December 31, 1997, 1998 and February 4, 1999,
respectively................................. 282 2,070 2,333
Current portion of prepaid distribution
expense...................................... 3,830 3,482
Deferred royalties............................ 137 1,327 1,398
Other current assets.......................... 158 1,674 1,739
------- -------- --------
Total current assets........................... 3,671 23,591 21,989
Prepaid distribution expense................... 7,742 7,072
Property and equipment, net.................... 397 4,118 2,373
Intangible assets, net......................... 5,019 19,724 19,463
Other assets................................... 169 187 286
------- -------- --------
Total assets................................. $ 9,256 $ 55,362 $ 51,183
======= ======== ========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 494 $ 5,499 $ 4,117
Accrued liabilities........................... 772 5,801 6,156
Due to related party.......................... 2,200 2,200
Deferred revenue.............................. 1,314 5,439 6,065
Current portion of notes payable.............. 1,746 1,746
------- -------- --------
Total current liabilities...................... 2,580 20,685 20,284
Notes payable.................................. 3,236 3,265
Minority interest.............................. 222
------- -------- --------
2,802 23,921 23,549
------- -------- --------
Commitments and contingencies (Note 16)........
Series E redeemable convertible preferred
stock, $.001 par value; 325 shares authorized,
issued and outstanding at December 31, 1998
and February 4, 1999; redemption value of
$6,003........................................ -- 4,939 4,963
------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value;
9,675 shares authorized; 2,614, 4,959 and
4,959 shares issued at December 31, 1997 and
1998 and February 4, 1999, respectively;
2,614, 4,528 and 4,528 shares outstanding at
December 31, 1997 and 1998 and February 4,
1999, respectively; liquidation preference of
$62,048 at December 31, 1998................. 3 5 5
Common stock, $.001 par value; 90,000
authorized; 383, 2,496 and 2,496 issued and
outstanding at December 31, 1997 and 1998 and
February 4, 1999, respectively............... 2 2
Additional paid-in capital.................... 12,117 96,066 98,129
Treasury stock, at cost; 431 shares of
convertible preferred stock at December 31,
1998 and February 4, 1999.................... (1,770) (1,770)
Notes receivable from stockholders............ (3,230) (3,230)
Deferred stock compensation................... (739) (8,676) (10,079)
Accumulated deficit........................... (4,927) (55,895) (60,386)
------- -------- --------
Total stockholders' equity................... $ 6,454 $ 26,502 $ 22,671
------- -------- --------
$ 9,256 $ 55,362 $ 51,183
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
October 28, Three
1996 Year Ended Months January 1
(Inception) to December 31, Ended to
December 31, ----------------- March 31, February 4,
1996 1997 1998 1998 1999
-------------- ------- -------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ $ 1,282 $ 15,003 $ 1,244 $ 2,433
Cost of revenues........ 335 7,338 735 798
----- ------- -------- ------- -------
Gross profit............ -- 947 7,665 509 1,635
----- ------- -------- ------- -------
Operating expenses:
Sales and marketing... 9 3,200 25,560 2,110 4,064
Product development... 4 506 4,139 366 174
General and
administrative....... 348 2,687 6,929 708 1,053
Amortization of
intangible assets.... 30 360 1,893 88 261
Stock-based charges... 257 20,455 104 569
----- ------- -------- ------- -------
Total operating
expenses........... 391 7,010 58,976 3,376 6,121
----- ------- -------- ------- -------
Loss from operations.... (391) (6,063) (51,311) (2,867) (4,486)
Interest income......... 1 98 583 126 51
Interest expense........ (24) (365) (3) (31)
Other expense........... (97) (25)
----- ------- -------- ------- -------
Net loss before minority
interest............... (390) (5,989) (51,190) (2,744) (4,491)
Minority interest....... 213 1,239 222 222
----- ------- -------- ------- -------
Net loss................ (177) (4,750) (50,968) (2,522) (4,491)
Accretion of redemption
value and stock
dividends on
convertible preferred
stock.................. (1,659) (406) (207)
Repurchase of
convertible preferred
stock.................. (7,727)
----- ------- -------- ------- -------
Net loss applicable to
common stockholders.... $(177) $(4,750) $(60,354) $(2,928) $(4,698)
===== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Deferred Total
-------------- ------------- Paid-in Treasury from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stock Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October
28, 1996
(inception)...... $-- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock............ 353 --
Issuance of Series
A preferred...... 918 1 2,354 2,355
Issuance of Series
B preferred...... 242 1,525 1,525
Net loss.......... (177) (177)
----- --- ----- ---- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1996............. 1,160 1 353 3,879 -- -- -- (177) 3,703
Issuance of Series
A preferred...... 729 1 2,064 2,065
Issuance of Series
B preferred...... 111 686 686
Issuance of Series
C preferred...... 614 1 4,439 4,440
Issuance of common
stock for
acquisition of
TouchTech, Inc... 30 53 53
Deferred stock
compensation..... 996 (996) --
Stock-based
charges.......... 257 257
Net loss.......... (4,750) (4,750)
----- --- ----- ---- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1997............. 2,614 3 383 12,117 -- -- (739) (4,927) 6,454
Issuance of Series
D preferred...... 681 1 9,999 10,000
Issuance of common
stock for
acquisition of
The Enterprise of
America, Ltd..... 105 525 525
Issuance of Series
F preferred...... 1,664 1 39,701 39,702
Issuance of common
stock............ 1,674 2 10,442 10,444
Exercise of stock
options for notes
receivable....... 221 151 (151) --
Note receivable
from
stockholder...... (3,079) (3,079)
Exercise of
warrants......... 113
Deferred stock
compensation..... 9,497 (9,497) --
Issuance of
warrants and
common stock..... 2,637 2,637
Stock-based
charges.......... 18,895 1,560 20,455
Accretion of
Series E
redemption
value............ (171) (171)
Repurchase of
Series A and B
preferred........ (431) (7,727) (1,770) (9,497)
Net loss.......... (50,968) (50,968)
----- --- ----- ---- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1998............. 4,528 5 2,496 2 96,066 (1,770) (3,230) (8,676) (55,895) 26,502
Issuance of
warrants
(unaudited)...... 115 115
Deferred stock
compensation
(unaudited)...... 1,972 (1,972)
Stock-based
charges
(unaudited)...... 569 569
Accretion of
Series E
redemption value
(unaudited)...... (24) (24)
Net loss
(unaudited)...... (4,491) (4,491)
----- --- ----- ---- ------- ------- ------- -------- -------- --------
Balance at
February 4, 1999
(unaudited)...... 4,528 $ 5 2,496 $ 2 $98,129 $(1,770) $(3,230) $(10,079) $(60,386) $ 22,671
===== === ===== ==== ======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended Three months ended January 1 to
October 28, 1996 December 31, March 31, February 4,
(Inception) to ----------------- ------------------ ------------
December 31, 1996 1997 1998 1998 1999
----------------- ------- -------- ------------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (177) $(4,750) $(50,968) $(2,522) $(4,491)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 35 472 2,551 148 339
Provision for doubtful
accounts............... 267 416 68
Amortization of discount
on notes payable....... 215 29
Other non-cash items.... 961 206
Minority interest in
loss................... (213) (1,239) (222) (222)
Stock-based charges..... 257 20,455 104 569
Changes in operating
assets and liabilities,
net of acquisitions:
Accounts receivable... 149 (91) (1,638) (110) (330)
Prepaid distribution
expense.............. (11,228) (518) 1,018
Deferred royalties.... (137) (1,190) (71)
Due from affiliated
company.............. 7 (119) 74 2 (6)
Other assets.......... (18) (241) (3) (321) 178
Accounts payable and
accrued liabilities.. 282 441 8,350 1,771 (1,026)
Deferred revenues..... 24 1,290 4,125 741 626
------- ------- -------- ------- -------
Net cash provided by
(used in) operating
activities............. 356 (4,117) (28,102) (927) (2,891)
------- ------- -------- ------- -------
Cash flows from
investing activities:
Purchases of property
and equipment.......... (72) (372) (3,853) (217) (61)
Acquisition of The
Enterprise of America
Ltd., net of cash
acquired............... (705) (705)
Acquisition of
MultiSearch Solutions,
Inc., net of cash
acquired............... (761)
Proceeds from sale of
fixed assets........... 1,299
Payments made in
connection with
operating agreement.... (2,371) (1,260)
------- ------- -------- ------- -------
Net cash provided by
(used in) investing
activities............. (2,443) (1,632) (5,319) (922) 1,238
------- ------- -------- ------- -------
Cash flows from
financing activities:
Repayment of notes
payable................ (1,490) (836)
Proceeds from bridge
loan................... 12,000
Repayments on bridge
loan................... (1,325)
Note receivable from
stockholder............ (3,079)
Net proceeds from
issuance of common
stock.................. 9 8,066
Net proceeds from
issuance of preferred
stock.................. 3,730 7,191 40,342 9,995
Repurchase of preferred
stock.................. (9,497) --
------- ------- -------- ------- -------
Net cash provided by
financing activities... 3,730 7,200 45,017 9,159 --
------- ------- -------- ------- -------
Change in cash and cash
equivalents............ 1,643 1,451 11,596 7,310 (1,653)
------- ------- -------- ------- -------
Cash and cash
equivalents, beginning
of period.............. 1,643 3,094 3,094 14,690
------- ------- -------- ------- -------
Cash and cash
equivalents, end of
period................. $ 1,643 $ 3,094 $ 14,690 $10,404 $13,037
======= ======= ======== ======= =======
Supplemental disclosure
of cash flow activities
Cash paid during the
year for interest...... $ -- $ -- $ 170 $ -- $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business:
NetSelect, Inc. ("NSI" or the "Company") was incorporated in the state of
Delaware on October 28, 1996. The Company's primary business activity has been
managing its investment in NetSelect LLC ("LLC"). Effective December 4, 1996,
the Company made its initial investment in LLC (see Note 3--Investment in
NetSelect, LLC) along with InfoTouch Corporation ("InfoTouch"), the minority
stockholder in LLC. LLC is the majority stockholder of RealSelect, Inc.
("RealSelect"), which is an operating company created to establish an
Internet-based marketing service for real estate.
Pursuant to a number of agreements governing the formation of RealSelect,
both InfoTouch and the Company were required to remain shell companies for
their respective investments in LLC. On February 4, 1999, the Company entered
into a non-substantive share exchange and merged into InfoTouch, which then
changed its name to NetSelect. InfoTouch issued shares of preferred and common
stock and assumed all outstanding NSI options and warrants for InfoTouch
common and preferred stock pursuant to an exchange ratio equivalent to the
respective ownership in LLC of NSI and InfoTouch stockholders.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information--The interim consolidated financial
information of the Company for the three months ended March 31, 1998 and the
period from January 1, 1999 to February 4, 1999 is unaudited. The unaudited
interim consolidated financial information has been prepared on the same basis
as the annual consolidated financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows at and for the period from January 1, 1999 to
February 4, 1999 and for the three months ended March 31, 1998.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. As a result
of net losses, minority stockholders' interests have been eliminated to the
extent of such minority stockholders' investments. All material intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of deposits in money market funds.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from customers located in the
United States. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable
are collected upon processing of credit card transactions. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
During the period from October 28, 1996 (Inception) to December 31, 1996,
the years ended December 31, 1997 and 1998, and the three months ended March
31, 1998 (unaudited) and the period from January 1, 1999 to February 4, 1999
(unaudited), no customers accounted for more than 10% of net revenues or net
accounts receivable.
F-35
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments--The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
and notes payable are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably over the term of the agreements, generally two to five years.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill
resulting from the acquisitions of The Enterprise of America, Ltd. ("The
Enterprise") and MultiSearch Solutions, Inc. ("MultiSearch"). This goodwill is
being amortized on a straight-line basis over the estimated periods of benefit
of five years. In addition, in connection with its formation, the Company
entered into an exclusive lifetime operating agreement with the NAR and
received intellectual property from InfoTouch. Pursuant to an operating
agreement, the Company made various payments and issued RealSelect common
stock to the National Association of REALTORS (the "NAR") for the right to use
the REALTOR.com trademark and domain name, the "REALTORS" trademark and the
exclusive use of the web site for real estate listings. The InfoTouch
intellectual property, the stock issued and payments made to the NAR, as well
as certain milestone-based amounts subsequently earned by the NAR have been
recorded as intangible assets and are being amortized on a straight-line basis
over the estimated period of benefit of 15 years.
The Company reviews its long-lived and intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows attributable to
such assets to their carrying value. If the carrying value of the assets
exceeds the forecasted undiscounted cash flows, then the assets are written
down to their fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--The Company's revenues are derived principally from
the sale of products and services to real estate agents and brokers, home
builders and from advertising sales. Revenues associated with the sale of
agent products are recognized ratably over the term of the contract, generally
12 months. Royalties directly associated with these revenues are deferred and
amortized over the same period. The Company also sells banner advertising
pursuant to short-term contracts, which may include the guarantee of a minimum
number of impressions or times that an advertisement appears in pages viewed
by the users of the Company's online properties. Advertising revenue is
recognized ratably based upon the lesser of impressions delivered over the
total number of guaranteed impressions or ratably over the period in which the
advertisement is displayed..
Product Development Costs--Product development costs incurred by the
Company to develop, enhance, manage, monitor and operate the Company's web
sites are expensed as incurred.
Advertising Expense--Advertising costs, including co-operative advertising
costs, are expensed as incurred and totalled $5,000, $818,000 and $3.3 million
during the period from October 28, 1996 (Inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, respectively.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting
F-36
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under
APB 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. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and EITF
96-18.
Income Taxes--Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No.109, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Segments--Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable business segments as of December 31, 1998
and February 4, 1999.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 during the first quarter of 1999 did not have a
significant impact on financial position, results of operations or cash flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on financial position, results of operations or cash flows.
3. Investment in NetSelect, LLC:
Effective December 4, 1996, the Company entered into a series of agreements
with the National Associations of Realtors, and its wholly owned subsidiary
Realtors Information Network (together referred to as the "NAR"), InfoTouch
and several investors (collectively referred to as the "Investors") in
connection with the formation of RealSelect.
The Company sold $7.0 million of common and preferred stock to the
Investors which in turn was invested in LLC for an ownership interest of 54%
in LLC. InfoTouch received a 46% interest in LLC for the transfer of its
assets, liabilities and intellectual property relating to the concept of
listing residential real estate on the Internet. The book value of the net
liabilities transferred amounted to $96,000. LLC transfered $5.8 million and
the InfoTouch intellectual property to RealSelect, for an 85% ownership
interest in RealSelect. RealSelect received from the NAR the right to use
certain trademarks, an agreement not to compete and in return assumed certain
debt of the NAR. As part of this transaction, RealSelect and the NAR entered
into an operating agreement for the Internet site REALTOR.COM, an agreement
not to compete and certain trademark agreements. RealSelect paid the NAR and
its creditors $3.4 million, forgave debt of $266,000 and issued common stock
representing a 15% ownership interest to the NAR.
F-37
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since inception, the Company has raised additional capital and issued
common and preferred stock in connection with acquisitions all of which has
been completely invested in RealSelect through LLC. As a result, the ownership
interests of the Company in LLC, and LLC's ownership interest in RealSelect,
increased to 66% and 87%, respectively, as of December 31, 1997, and 79% and
93%, respectively, as of December 31, 1998. The minority investments of
InfoTouch and the NAR in LLC and RealSelect, respectively, have been
eliminated in the consolidated financial statements as each stockholder's
share of the net investee losses have exceeded their investments and there is
no future funding requirements.
4. Acquisitions:
TouchTech Corporation
Effective December 31, 1997, the Company acquired all the outstanding stock
of TouchTech Corporation, a Canadian company, in exchange for 29,382 shares of
common stock with a value of $53,000. The acquisition has been accounted for
as a purchase. The excess of fair value of purchase consideration over net
tangible assets has been allocated to goodwill and is being amortized on a
straight-line basis over five years.
The Enterprise
Effective March 31, 1998, the Company acquired The Enterprise in exchange
for aggregate consideration consisting of 105,000 shares of Company common
stock with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, $705,000 in cash and the assumption of $946,000 of net
liabilities. Included in liabilities assumed were $836,000 of demand notes
payable that were paid by the Company on the effective date of the
acquisition. The acquisition has been accounted for as a purchase. The excess
of purchase consideration over net tangible assets acquired of $3.9 million
has been allocated to goodwill which is being amortized on a straight-line
basis over five years. The purchase agreement also provides for certain
contingent payments in the event that predetermined levels of sales are
achieved. Such payments, if any, will be accounted for as compensation expense
in the period earned and in no event shall such aggregate payments exceed $1.0
million. For the year ended December 31, 1998, no contingent payments were
required under the terms of the agreement.
MultiSearch
Effective July 1, 1998, the Company acquired MultiSearch, in exchange for
aggregate consideration consisting of 325,000 shares of Series E convertible
preferred stock with a value of $4.8 million, a note payable in the amount of
$3.6 million, $875,000 in cash and the assumption of $657,000 of net
liabilities. Included in liabilities assumed were $654,000 of demand notes
payable that were paid by the Company on the effective date of the
acquisition. The acquisition has been accounted for as a purchase. The excess
of total purchase consideration over net tangible assets acquired of $9.4
million has been allocated to goodwill which is being amortized on a straight-
line basis over five years. The purchase agreement also provides for certain
contingent payments in the event that predetermined levels of sales and
earnings are achieved. Such payments, if any, will be accounted for as
compensation expense in the period earned. For the year ended December 31,
1998, $360,000 of expense was recognized under the terms of the agreement.
The following summarized unaudited pro forma financial information assumes
The Enterprise and MultiSearch acquisitions occurred at the beginning of each
period (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1997 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
Revenues............................... $ 8,505 $ 18,026 $ 3,182
Net loss applicable to common
stockholders.......................... (9,470) (61,969) (3,922)
</TABLE>
F-38
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment................................. $ 394 $2,903
Furniture and fixtures............................. 77 1,337
Leasehold improvements............................. 50 700
----- ------
521 4,940
Less: Accumulated depreciation..................... (124) (822)
----- ------
$ 397 $4,118
===== ======
</TABLE>
Depreciation expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$5,000, $119,000 and $659,000, respectively.
6. Intangible Assets:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Goodwill........................................... $ $13,243
RIN operating agreement............................ 4,745 6,745
Other.............................................. 656 2,012
------ -------
5,401 22,000
Less: Accumulated amortization..................... (382) (2,276)
------ -------
$5,019 $19,724
====== =======
</TABLE>
Amortization expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$30,000, $360,000 and $1.9 million, respectively.
7. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued payroll and related benefits.................. $ 442 $1,973
Accrued distribution fees............................. 1,366
Accrued royalties..................................... 979
Other................................................. 330 1,483
----- ------
$ 772 $5,801
===== ======
</TABLE>
F-39
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Related-Party Transactions:
At December 31, 1997 and 1998, the Company was indebted to an officer for
$168,000 and $188,000, respectively. The loan is due on demand and bears
interest at 10% per annum.
In August 1998, the Company issued 57,671 shares of common stock and 26,504
shares of Series F convertible preferred stock to the NAR in satisfaction of a
$1.0 million obligation for the Company's share of advertising costs for a co-
operative advertising program with the NAR. At December 31, 1998, the Company
was indebted to the NAR for $2.2 million pursuant to certain provisions of the
operating agreement.
In connection with a 1998 stock redemption agreement, the Company loaned
$3.1 million to a stockholder of InfoTouch. The note is non-interest bearing,
full recourse and collateralized by the shares of common stock. At December
31, 1998, the note was classified as a component of stockholders' equity.
At December 31, 1998, the Company held promissory notes from employees and
directors totaling $151,000 for the exercise of stock options. The notes bear
interest at 5.3% per annum and are due on or before August 21, 2003. The
notes, which are classified as a component of stockholders' equity, are full
recourse and collateralized by shares of common stock of the Company owned by
the employees and directors.
9. Notes Payable:
As part of the acquisition of The Enterprise, the Company issued a $2.2
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $354,000. The
note is payable in four installments, and matures on March 31, 2001.
As part of the acquisition of MultiSearch, the Company issued a $3.6
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $453,000. The
note is payable in three installments, and matures on April 1, 2001.
As of December 31, 1998, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Payments
------------ ---------
<S> <C>
1999.......................................................... $2,097
2000.......................................................... 1,797
2001.......................................................... 1,895
------
5,789
Less: Discount................................................. (807)
------
Present value of notes payable................................. 4,982
Less: Current portion.......................................... 1,746
------
Long-term portion.............................................. $3,236
======
</TABLE>
F-40
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stock Options:
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the grant
of options to employees, officers, directors and consultants at the then-
current market value of the Company's common stock, as determined by the Board
of Directors. Options granted generally vest over four years, 25% on the first
anniversary and monthly thereafter over the remaining three years, and expire
10 years from the date of grant.
The following table summarizes activity under the Plan for the period from
October 28, 1996 (Inception) to December 31, 1996, for the years ended
December 31, 1997 and 1998, and for the period from January 1, 1999 to
February 4, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Exercise
Shares Per Share Price
--------- ------------ --------
<S> <C> <C> <C>
Outstanding at October 28, 1996 -- --
Granted................................ 335 $ .28 $ .28
-----
Outstanding at December 31, 1996......... 335 .28 .28
Granted................................ 287 1.50 1.50
-----
Outstanding at December 31, 1997 622 .28 to 1.50 .84
Granted................................ 956 5.00 to 8.00 6.02
Exercised.............................. (221) .28 to 5.00 .68
Canceled............................... (85) 1.50 to 5.00 3.90
-----
Outstanding at December 31, 1998 1,272 .28 to 8.00 4.56
Granted (unaudited).................... 40 10.00 10.00
-----
Outstanding at February 4, 1999
(unaudited)............................. 1,312 .28 to 10.00 4.74
=====
</TABLE>
Options granted during the years ended December 31, 1997 and 1998 resulted
in total compensation of $1.0 million and $9.5 million, respectively and were
recorded as deferred stock compensation in stockholders' equity. The deferred
stock compensation amount will be recognized as compensation expense over the
vesting period. During the years ended December 31, 1997 and 1998, such stock-
based charges were $257,000 and $1.6 million, respectively. Options
outstanding at December 31, 1998 were exercisable for 144,000 shares of common
stock. Common stock available for future grants at December 31, 1998 was
507,000 shares.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Prices: Shares Life Price Shares Price
------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$.28............................. 113 7.90 $.28 8 $.28
1.50............................. 250 8.70 1.50 67 1.50
5.00............................. 224 9.20 5.00 18 5.00
6.00............................. 181 9.50 6.00 23 6.00
6.32............................. 421 9.70 6.32 27 6.32
8.00............................. 83 9.90 8.00 1 8.00
----- ---
1,272 144
===== ===
</TABLE>
F-41
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rates.............. 6% 6% 5%
Expected lives (in years)............. 4 5 4
Dividend yield........................ 0% 0% 0%
Expected volatility................... 0% 0% 0%
</TABLE>
The compensation expense associated with the stock-based compensation plans
did not result in a material difference from the reported net loss for the
period from October 28, 1996 (inception) to December 31, 1996 or years ended
December 31, 1997 and 1998.
11. Warrants:
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued a warrant to purchase 113,295 shares
of the Company's common stock at an exercise price of $6.32 per share. The
warrant is contingent upon America Online exercising its right to purchase
$2.0 million of common stock in an IPO. Additionally, if America Online
exercises its right to purchase $2.0 million of common stock in an IPO, the
Company will issue warrants to America Online to acquire $3.0 million of
common stock with a weighted average exercise price of 137.5% of the initial
public offering price. If warrants are purchased in connection with an IPO,
the fair value will be measured at the date of the IPO and amortized to sales
and marketing expense over the remaining term of the distribution agreement.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 113,288 shares of common
stock at an exercise price $.001 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
During 1998, the Company issued warrants to purchase up to 41,876 shares of
common stock to Multiple Listing Services ("MLSs") that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis over an initial term of 18 months. The issuance of
these warrants is contingent upon completion of an IPO. The exercise price
will be equal to the IPO per share price. The fair value of issuable warrants
will be measured at the date an IPO is deemed to be probable and recognized as
expense over the terms of the applicable MLS agreement.
F-42
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Capitalization:
Convertible preferred stock at December 31, 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A................................. 1,647 1,378 $ 4,416
Series B................................. 353 191 1,334
Series C................................. 614 614 4,884
Series D................................. 681 681 10,543
Series F................................. 2,100 1,664 40,871
Undesignated............................. 4,280
----- ----- -------
9,675 4,528 $62,048
===== ===== =======
</TABLE>
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion of $1.5 million for the year
ended December 31, 1998 related to the Series D and Series F dividends.
No dividends have been declared or paid from inception through December 31,
1998.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
F-43
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion of
$171,000 for the year ended December 31, 1998 related to the Series E
redeemable preferred stock redemption value.
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
two-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $24.93 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
Repurchase of Preferred Stock--In November 1998, the Company repurchased
431,664 shares of Series A and Series B convertible preferred stock for $9.5
million. The difference of $7.7 million between the carrying value of the
preferred stock prior to repurchase and the price paid has been included in
net loss for the year ended December 31, 1998 in the computation of net loss
applicable to common stockholders.
Sale of Common Stock--In connection with the August 1998 Series F
financing, the Company sold an aggregate of 1,673,991 shares of common stock
to certain investors and received gross proceeds of approximately $10.6
million. The Company recognized the $18.9 million difference between the
estimated fair value of the stock and the price paid by investors as stock-
based charges in 1998.
13. Supplemental Cash Flow Information:
During the the period from January 1, 1999 to February 4, 1999 (unaudited):
. In connection with an equipment lease financing arrangement, the Company
sold $749,000 of net property and equipment in exchange for assumption
of third party payables.
During the year ended December 31, 1998:
. The Company issued common and convertible preferred stock valued at $1.9
million in connection with an advertising agreement.
. The Company incurred a $2.0 million payable to a related party in
connection with certain obligations under a lifetime operating
agreement.
. Convertible notes in the amount of $10.7 million, plus $64,000 in
accrued interest, were converted into Series F convertible preferred
stock.
. The Company issued notes receivable to stockholders for $151,000 in
connection with the exercise of stock options.
. The Company issued warrants with a fair value of $1.4 million.
. The Company issued 105,000 shares of common stock valued at $525,000, a
note payable of $2.2 million and assumed net liabilities of $946,000 as
part of the acquisition of The Enterprise.
. The Company issued 325,000 shares of Series E redeemable convertible
preferred stock valued at $4.8 million, a note payable of $3.6 million
and assumed net liabilities of $657,000 as part of the acquisition of
MultiSearch.
F-44
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1997:
. The Company issued 29,382 shares of common stock with a value of $53,000
as part of the acquisition of TouchTech.
During the period from October 28, 1996 (Inception) to December 31, 1996:
. The Company issued common stock valued at $560,000 in exchange for
intellectual property.
. The Company issued common stock valued at $1.1 million in connection
with the right to use certain trademarks and an operating agreement.
. The Company assumed net liabilities totalling $1.2 million in exchange
for trademarks and an operating agreement.
14. Defined Contribution Plan:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
15. Income Taxes:
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 2,036 $ 12,807
Other.................................................. 348 1,078
------- --------
2,384 13,885
Less: valuation allowance.............................. (2,384) (13,885)
------- --------
Net deferred taxes...................................... $ -- $ --
======= ========
</TABLE>
Due to the uncertainty surrounding the timing of the realization of the
benefits from its favorable tax attributes in future tax returns, the Company
has placed a valuation allowance against its otherwise recognizable deferred
tax assets.
NSI, LLC and RealSelect do not file income tax returns on a consolidated
basis. As a result, net operating losses of one entity may not be available to
offset future taxable income of another entity. NSI has net operating loss
carryforwards for federal and state income tax purposes of approximately
$161,000 and $80,000, respectively, which begin to expire in 2018 for federal
and 2003 for state purposes. RealSelect has net operating loss carryforwards
for federal and state purposes of approximately $34.4 million and $18.1
million, respectively, which begin to expire in 2007 for federal and 2001 for
state purposes. LLC is treated as a partnership for federal and state
purposes. As a result, all income and loss items flow through to its
investors. Utilization of the above carryforwards may be subject to
utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
F-45
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Commitments and Contingencies:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and the Consumer Price Index. Future minimum
lease payments under noncancellable operating leases at December 31, 1998 are
(in thousands):
<TABLE>
<S> <C>
1999............................................................. $ 2,295
2000............................................................. 2,686
2001............................................................. 2,553
2002............................................................. 1,636
2003............................................................. 1,365
-------
Total.......................................................... $10,535
=======
</TABLE>
Total rental expense for operating leases was $7,000, $149,000 and $749,000
for the period from October 28, 1996 (Inception) to December 31, 1996 and the
years ended December 31, 1997 and 1998, respectively.
Distribution Agreements
The Company has entered into various distribution and preferred alliance
agreements. Payments remaining over the next five years for the distribution
and preferred alliance agreements are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................. $21,143
2000............................................................. 19,036
2001............................................................. 14,646
2002............................................................. 4,250
2003............................................................. 500
-------
Total.......................................................... $59,575
=======
</TABLE>
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. Based on the advice of counsel, 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.
17. Subsequent Events (unaudited):
Equipment Leasing Arrangement
In January 1999, the Company entered into an equipment leasing arrangement
which provided for the sale and leaseback of certain of the Company's existing
equipment and lease financing for additional equipment needs. The total
availability under the agreement is $3.0 million. In addition, the agreement
provides the lessor with warrants to purchase up to 5,000 shares of Series F
convertible preferred stock at an exercise price of $24.00 per share. The
Company determined that the fair value of the warrants approximated $115,000
on the date of grant.
F-46
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
In January 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan (the "Plan") to replace the 1996 Stock Incentive Plan ("1996 Plan"). The
Plan provides for the issuance of both non-statutory and incentive stock
options to employees, officers, directors and consultants of the Company. The
total number of shares of common stock reserved for issuance under the Plan is
equal to that number previously reserved and available for grant under the
1996 Plan. The Company will not issue new options under the 1996 Plan.
F-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NetSelect, LLC
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
NetSelect, LLC and its subsidiaries (the "Company") at December 31, 1997 and
1998 and the results of their operations and their cash flows for the period
from October 28, 1996 (Inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-48
<PAGE>
NETSELECT, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, February 4,
----------------- -----------
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 3,094 $ 14,690 $ 13,037
Accounts receivable, net of allowance for
doubtful accounts of $42, $378 and $455 at
December 31, 1997, 1998 and February 4, 1999,
respectively................................. 282 2,070 2,333
Current portion of prepaid distribution
expense...................................... 3,830 3,482
Deferred royalties............................ 137 1,327 1,398
Other current assets.......................... 158 1,715 1,780
------- -------- --------
Total current assets........................... 3,671 23,632 22,030
Prepaid distribution expense................... 7,742 7,072
Property and equipment, net.................... 397 4,118 2,373
Intangible assets, net......................... 4,491 19,229 18,989
Other assets................................... 169 187 286
------- -------- --------
Total assets................................. $ 8,728 $ 54,908 $ 50,750
======= ======== ========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 494 $ 5,499 $ 4,117
Accrued liabilities........................... 772 5,801 6,156
Due to related party.......................... 2,200 2,200
Deferred revenue.............................. 1,314 5,439 6,065
Current portion of notes payable.............. 1,746 1,746
------- -------- --------
Total current liabilities...................... 2,580 20,685 20,284
Notes payable.................................. 3,236 3,265
Minority Interest.............................. 147
------- -------- --------
2,727 23,921 23,549
------- -------- --------
Commitments and contingencies (Note 15)........
Series E redeemable convertible preferred
stock, $.001 par value; 325 shares authorized,
issued and outstanding at December 31, 1998
and February 4, 1999; redemption value of
$6,003........................................ -- 4,939 4,963
------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value;
9,675 shares authorized; 2,614, 4,959 and
4,959 shares issued at December 31, 1997 and
1998 and February 4, 1999, respectively;
2,614, 4,528 and 4,528 shares outstanding at
December 31, 1997 and 1998 and February 4,
1999, respectively; liquidation preference of
$62,048 at December 31, 1998................. 3 5 5
Common stock, $.001 par value; 90,000
authorized; 2,113, 4,492 and 4,492 issued and
outstanding at December 31, 1997 and 1998 and
February 4, 1999, respectively............... 3 3
Additional paid-in capital.................... 12,117 96,657 98,720
Treasury stock, at cost; 431 shares of
convertible preferred stock at December 31,
1998 and February 4, 1999.................... (1,770) (1,770)
Notes receivable from stockholders............ (3,781) (3,781)
Deferred stock compensation................... (739) (8,676) (10,079)
Accumulated deficit........................... (5,380) (56,390) (60,860)
------- -------- --------
Total stockholders' equity................... $ 6,001 $ 26,048 $ 22,238
------- -------- --------
$ 8,728 $ 54,908 $ 50,750
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
NETSELECT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
October 28, Three
1996 Year Ended Months January 1
(Inception) to December 31, Ended to
December 31, ----------------- March 31, February 4,
1996 1997 1998 1998 1999
-------------- ------- -------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ $ 1,282 $ 15,003 $ 1,244 $ 2,433
Cost of revenues........ 335 7,338 735 798
----- ------- -------- ------- -------
Gross profit............ -- 947 7,665 509 1,635
----- ------- -------- ------- -------
Operating expenses:
Sales and marketing... 9 3,200 25,560 2,110 4,064
Product development... 4 506 4,139 366 174
General and
administrative....... 348 2,687 6,929 708 1,053
Amortization of
intangible assets.... 30 328 1,860 81 240
Stock-based charges... 257 20,455 104 569
----- ------- -------- ------- -------
Total operating
expenses........... 391 6,978 58,943 3,369 6,100
----- ------- -------- ------- -------
Loss from operations.... (391) (6,031) (51,278) (2,860) (4,465)
Interest income......... 1 98 583 126 51
Interest expense........ (24) (365) (3) (31)
Other expense........... (97) (25)
----- ------- -------- ------- -------
Net loss before Minority
Interest............... $(390) $(5,957) $(51,157) $(2,737) $(4,470)
Minority Interest....... 142 825 147 147
----- ------- -------- ------- -------
Net loss................ (248) (5,132) (51,010) (2,590) (4,470)
Accretion of redemption
value and stock
dividends on
convertible preferred
stock.................. (1,659) (406) (207)
Repurchase of preferred
stock.................. (7,727)
----- ------- -------- ------- -------
Net loss applicable to
common stockholders.... $(248) $(5,132) $(60,396) $(2,996) $(4,677)
===== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
NETSELECT, LLC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Deferred Total
-------------- ------------- Paid-in Treasury From Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stock Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October
28, 1996......... $-- $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock............ 2,083 1 1
Issuance of Series
A preferred...... 918 1 2,353 2,354
Issuance of Series
B preferred...... 242 1,525 1,525
Net loss.......... (248) (248)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1996............. 1,160 1 2,083 3,879 -- -- -- (248) 3,632
Issuance of Series
A preferred...... 729 1 2,064 2,065
Issuance of Series
B preferred...... 111 686 686
Issuance of Series
C preferred...... 614 1 4,439 4,440
Issuance of common
stock for
acquisition of
TouchTech, Inc... 30 53 53
Deferred stock
compensation..... 996 (996) --
Stock-based
charges.......... 257 257
Net loss.......... (5,132) (5,132)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1997............. 2,614 3 2,113 12,117 -- -- (739) (5,380) 6,001
Issuance of Series
D preferred...... 681 1 9,999 10,000
Issuance of common
stock for
acquisition of
The Enterprise of
America, Ltd..... 105 525 525
Issuance of Series
F preferred...... 1,664 1 39,701 39,702
Issuance of common
stock............ 1,674 2 10,442 10,444
Exercise of stock
options for notes
receivable....... 487 1 742 (702) 41
Note receivable
from
stockholder...... (3,079) (3,079)
Exercise of
warrants......... 113
Deferred stock
compensation..... 9,497 (9,497) --
Issuance of
warrants and
common stock..... 2,637 2,637
Stock-based
charges.......... 18,895 1,560 20,455
Accretion of
Series E
redemption
value............ (171) (171)
Repurchase of
Series A and B
preferred........ (431) (7,727) (1,770) (9,497)
Net loss.......... (51,010) (51,010)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1998............. 4,528 5 4,492 3 96,657 (1,770) (3,781) (8,676) (56,390) 26,048
Issuance of
warrants
(unaudited)...... 115 115
Deferred stock
compensation
(unaudited)...... 1,972 (1,972) --
Stock-based
charges
(unaudited)...... 569 569
Accretion of
Series E
redemption value
(unaudited)...... (24) (24)
Net loss
(unaudited)...... (4,470) (4,470)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at
February 4, 1999
(unaudited)...... 4,528 $ 5 4,492 $ 3 $98,720 $(1,770) $(3,781) $(10,079) $(60,860) $ 22,238
===== === ===== === ======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
NETSELECT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
Three Months
October 28, 1996 Ended January 1 to
(Inception) to March 31, February 4,
December 31, 1996 1997 1998 1998 1999
----------------- ------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (248) $(5,132) $(51,010) $(2,590) $(4,470)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 35 440 2,518 141 317
Provision for doubtful
accounts............... 267 416 68
Amortization of discount
on notes payable....... 215 29
Other non-cash items.... 961
Minority interest in
loss................... (142) (825) (147) (147)
Stock-based charges..... 257 20,455 104 569
Changes in operating
assets and liabilities,
net of acquisitions:
Accounts receivable.... 149 (91) (1,638) (110) (330)
Prepaid distribution
expense............... (11,228) (518) 1,018
Deferred royalties..... (137) (1,190) (71)
Due from affiliated
company............... 7 (119) 74 2
Other assets........... (18) (241) (3) (321) (82)
Accounts payable and
accrued liabilities... 282 441 8,350 1,771 (565)
Deferred revenues...... 24 1,290 4,125 741 626
------- ------- -------- ------- -------
Net cash provided by
(used in) operating
activities............. 356 (4,117) (28,102) (927) (2,891)
------- ------- -------- ------- -------
Cash flows from
investing activities:
Purchases of property
and equipment.......... (72) (372) (3,853) (217) (61)
Acquisition of The
Enterprise of America
Ltd., net of cash
acquired............... (705) (705)
Acquisition of
MultiSearch Solutions,
Inc., net of cash
acquired............... (761)
Proceeds from sale of
property and
equipment.............. 1,299
Payments made in
connection with
operating agreement.... (2,371) (1,260)
------- ------- -------- ------- -------
Net cash provided by
(used in) investing
activities............. (2,443) (1,632) (5,319) (922) 1,238
------- ------- -------- ------- -------
Cash flows from
financing activities:
Repayment of notes
payable................ (1,490) (836)
Proceeds from bridge
loan................... 12,000
Repayments on bridge
loan................... (1,325)
Note receivable from
stockholder............ (3,079)
Net proceeds from
issuance of common
stock.................. 9 8,066
Net proceeds from
issuance of preferred
stock.................. 3,730 7,191 40,342 9,995
Repurchase of preferred
stock.................. (9,497)
------- ------- -------- ------- -------
Net cash provided by
financing activities... 3,730 7,200 45,017 9,159 --
------- ------- -------- ------- -------
Change in cash and cash
equivalents............ 1,643 1,451 11,596 7,310 (1,653)
------- ------- -------- ------- -------
Cash and cash
equivalents, beginning
of period.............. 1,643 3,094 3,094 14,690
------- ------- -------- ------- -------
Cash and cash
equivalents, end of
period................. $ 1,643 $ 3,094 $ 14,690 $10,404 $13,037
======= ======= ======== ======= =======
Supplemental disclosure
of cash flow activities
Cash paid during the
year for interest...... $ -- $ -- $ 170 $ -- $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business:
NetSelect, LLC ("LLC" or the "Company") is a Delaware limited liability
corporation that was incorporated on October 28, 1996 between two corporate
partners, NetSelect, Inc. ("NSI") and InfoTouch Corporation ("InfoTouch"). The
Company's sole business activity has been managing its investment in
RealSelect, Inc. ("RealSelect"), a Delaware corporation. RealSelect is an
operating company created to establish an Internet-based marketing service for
real estate.
The RealSelect Venture--Effective December 4, 1996, InfoTouch entered into
a series of agreements with the National Association of Realtors and its
wholly owned subsidiary Realtors Information Network (together referred to as
the "NAR") and several investors (the "Investors"). Under these agreements,
InfoTouch transferred its recently developed technology and assets relating to
advertising the listing of residential real estate on the Internet into the
Company in exchange for a 46% ownership interest, including outstanding stock
options. The Investors contributed capital to NSI. The Company received
capital funding from NSI and in-turn contributed the InfoTouch assets,
intellectual property and the NSI capital to RealSelect in exchange for common
stock representing an 85% ownership interest.
Also effective December 4, 1996, RealSelect entered into a number of
agreements with and issued cash and RealSelect common stock representing a 15%
ownership interest to the NAR in exchange for the rights to operate the
website REALTOR.com and to pursue commercial opportunities relating to the
listing of real estate on the internet.
Pursuant to the agreements governing RealSelect, InfoTouch was required to
terminate its remaining activities, which were insignificant, and dispose of
its remaining assets and liabilities. Accordingly, following the formation,
NSI and InfoTouch were only shell companies as they had no liabilities and no
assets other than their respective investments in the Company. In addition,
under the agreements, NSI was the only entity permitted to raise capital to
support RealSelect which, once invested, increased NSI's ownership interest in
the Company and RealSelect and diluted the ultimate ownership interests of
InfoTouch and the NAR.
Reorganization of Holding Structure--Under the RealSelect agreements, 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 (the
"Reorganization"). The Company was dissolved into InfoTouch in connection with
the Reorganization.
2. Summary of Significant Accounting Policies:
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
As a result of additional capital raised by NSI and NSI shares issued in
connection with certain acquisitions, all of which was invested in RealSelect
through the Company, the Company's ownership interest in RealSelect increased
to 87%, 93% and 93% (unaudited) at December 31, 1997, 1998 and February 4,
1999, respectively. Minority interest of the NAR in RealSelect net losses have
been eliminated to the extent of the NAR's net investment as the NAR has no
future funding commitment.
Unaudited Interim Financial Information--The interim financial information
of the Company for the three months ended March 31, 1998 and the period from
January 1 to February 4, 1999 is unaudited. The unaudited interim financial
information has been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
and for the period from January 1 to February 4, 1999 and for the three months
ended March 31, 1998.
F-53
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of deposits in money market funds.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from customers located in the
United States. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable
are collected upon processing of credit card transactions. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
During the period from October 28, 1996 (Inception) to December 31, 1996,
the years ended December 31, 1997 and 1998, and the three months ended March
31, 1998 (unaudited) and the period from January 1, 1999 to February 4, 1999
(unaudited), no customers accounted for more than 10% of net revenues or net
accounts receivable.
Fair Value of Financial Instruments--The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
and notes payable are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably over the term of the agreements, generally two to five years.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill
resulting from the acquisitions of The Enterprise of America, Ltd. ("The
Enterprise") and MultiSearch Solutions, Inc. ("MultiSearch"). This goodwill is
being amortized on a straight-line basis over the estimated periods of benefit
of five years. In addition, in connection with its formation, the Company
entered into an exclusive lifetime operating agreement with the NAR. Pursuant
to our operating agreement, the Company made various payments and issued
RealSelect common stock to the NAR for the right to use the REALTOR.com
trademark and domain name, the "REALTORS" trademark and the exclusive use of
the web site for real estate listings. The RealSelect common stock issued and
payments made to the NAR, as well as certain milestone-based amounts
subsequently earned by the NAR have been recorded as intangible assets and are
being amortized on a straight-line basis over the estimated period of benefit
of 15 years.
The Company reviews its long-lived and intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows attributable to
such assets to their carrying value. If the carrying value of the assets
exceeds the forecasted undiscounted cash flows, then the assets are written
down to their fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
F-54
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition--The Company's revenues are derived principally from
the sale of products and services to real estate agents and brokers, home
builders and from advertising sales. Revenues associated with the sale of
agent products are recognized ratably over the term of the contract, generally
12 months. Royalties directly associated with these revenues are deferred and
amortized over the same period. The Company also sells banner advertising
pursuant to short-term contracts, which may include the guarantee of a minimum
number of impressions or times that an advertisement appears in pages viewed
by the users of the Company's online properties. Advertising revenue is
recognized ratably based upon the lesser of impressions delivered over the
total number of guaranteed impressions or ratably over the period in which the
advertisement is displayed.
Product Development Costs--Product development costs incurred by the
Company to develop, enhance, manage, monitor and operate the Company's web
sites are expensed as incurred.
Advertising Expense--Advertising costs, including co-operative advertising
costs, are expensed as incurred and totalled $5,000, $818,000 and $3.3 million
during the period from October 28, 1996 (Inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, respectively.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB 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. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and EITF 96-18.
Income Taxes--Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No.109, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Segments--Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable business segments as of December 31, 1998
and February 4, 1999.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 during the first quarter of 1999 did not have a
significant impact on financial position, results of operations or cash flows.
F-55
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on financial position, results of operations or cash flows.
3. Acquisitions:
TouchTech Corporation
Effective December 31, 1997, the Company acquired all the outstanding stock
of TouchTech Corporation, a Canadian company, in exchange for 29,382 shares of
common stock with a value of $53,000, which is based on the terms and
preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition.
The acquisition has been accounted for as a purchase. The excess of fair value
of purchase consideration over net tangible assets has been allocated to
goodwill and is being amortized on a straight-line basis over five years.
The Enterprise
Effective March 31, 1998, the Company acquired The Enterprise in exchange
for aggregate consideration consisting of 105,000 shares of Company common
stock with an estimated fair value of $525,000, which is based on the terms
and preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition,
a note payable in the amount of $2.2 million, $705,000 in cash and the
assumption of $946,000 of net liabilities. Included in liabilities assumed
were $836,000 of demand notes payable that were paid by the Company on the
effective date of the acquisition. The acquisition has been accounted for as a
purchase. The excess of purchase consideration over net tangible assets
acquired of $3.9 million has been allocated to goodwill which is being
amortized on a straight-line basis over five years. The purchase agreement
also provides for certain contingent payments in the event that predetermined
levels of sales are achieved. Such payments, if any, will be accounted for as
compensation expense in the period earned and in no event shall such aggregate
payments exceed $1.0 million. For the year ended December 31, 1998, no
contingent payments were required under the terms of the agreement.
MultiSearch
Effective July 1, 1998, the Company acquired MultiSearch, in exchange for
aggregate consideration consisting of 325,000 shares of Series E convertible
preferred stock with a value of $4.8 million, which is based on the terms and
preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition,
a note payable in the amount of $3.6 million, $875,000 in cash and the
assumption of $657,000 of net liabilities. Included in liabilities assumed
were $654,000 of demand notes payable that were paid by the Company on the
effective date of the acquisition. The acquisition has been accounted for as a
purchase. The excess of total purchase consideration over net tangible assets
acquired of $9.4 million has been allocated to goodwill which is being
amortized on a straight-line basis over five years. The purchase agreement
also provides for certain contingent payments in the event that predetermined
levels of sales and earnings are achieved. Such payments, if any, will be
accounted for as compensation expense in the period earned. For the year ended
December 31, 1998, $360,000 of expense was recognized under the terms of the
agreement.
The following summarized unaudited pro forma financial information assumes
The Enterprise and MultiSearch acquisitions occurred at the beginning of each
period (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1997 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
Revenues............................... $ 8,505 $ 18,026 $ 3,182
Net loss applicable to common
stockholders.......................... (9,470) (61,969) (3,922)
</TABLE>
F-56
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment................................. $ 394 $2,903
Furniture and fixtures............................. 77 1,337
Leasehold improvements............................. 50 700
----- ------
521 4,940
Less: Accumulated depreciation..................... (124) (822)
----- ------
$ 397 $4,118
===== ======
</TABLE>
Depreciation expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$5,000, $119,000 and $659,000, respectively.
5. Intangible Assets:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Goodwill........................................... $ -- $13,243
NAR operating agreement............................ 4,745 6,745
Other.............................................. 96 1,452
------ -------
4,841 21,440
Less: Accumulated amortization..................... (350) (2,211)
------ -------
$4,491 $19,229
====== =======
</TABLE>
Amortization expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$30,000, $328,000 and $1.9 million, respectively.
6. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued payroll and related benefits.................. $ 442 $1,973
Accrued distribution fees............................. 1,366
Accrued royalties..................................... 979
Other................................................. 330 1,483
----- ------
$ 772 $5,801
===== ======
</TABLE>
7. Related-Party Transactions:
At December 31, 1997 and 1998, the Company was indebted to an officer for
$168,000 and $188,000, respectively. The loan is due on demand and bears
interest at 10% per annum.
F-57
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1998, the Company issued 57,671 shares of common stock and 26,504
shares of Series F convertible preferred stock to the NAR in satisfaction of a
$1.0 million obligation for the Company's share of advertising costs for a co-
operative advertising program with the NAR. At December 31, 1998, the Company
was indebted to the NAR for $2.2 million pursuant to certain provisions of the
operating agreement.
In connection with a 1998 stock redemption agreement, the Company loaned
$3.1 million to a stockholder of InfoTouch. The note is non-interest bearing,
full recourse and collateralized by the shares of common stock. At December
31, 1998, the note was classified as a component of stockholders' equity.
At December 31, 1998, the Company held promissory notes from employees and
directors totaling $702,000 for the exercise of stock options. The notes bear
interest at 5.3% per annum and are due on or before August 21, 2003. The
notes, which are classified as a component of stockholders' equity, are full
recourse and collateralized by shares of common stock of the Company owned by
the employees and directors.
8. Notes Payable:
As part of the acquisition of The Enterprise, the Company issued a $2.2
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $354,000. The
note is payable in four installments, and matures on March 31, 2001.
As part of the acquisition of MultiSearch, the Company issued a $3.6
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $453,000. The
note is payable in three installments, and matures on April 1, 2001.
As of December 31, 1998, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Payments
------------ ---------
<S> <C>
1999.......................................................... $2,097
2000.......................................................... 1,797
2001.......................................................... 1,895
------
5,789
Less: Discount................................................. (807)
------
Present value of notes payable................................. 4,982
Less: Current portion.......................................... 1,746
------
Long-term portion.............................................. $3,236
======
</TABLE>
9. Stock Options:
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the grant
of options to employees, officers, directors and consultants at the then-
current market value of the Company's common shares, as determined by the
Board of Directors. Options granted generally vest over four years, 25% for
the first year and monthly thereafter over the remaining three years, and
expire 10 years from the date of grant.
In connection with the 1996 formation of the Company, options to purchase
265,000 shares of common stock at a weighted average exercise price of $2.68
per share from the former InfoTouch stock option plan were assumed and fully
vested.
F-58
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan (including the
InfoTouch options assumed) for the period from October 28, 1996 (Inception) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the period
from January 1, 1999 to February 4, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Shares Share Price
--------- ------------- --------
<S> <C> <C> <C>
Outstanding at October 28, 1996 -- $ -- $ --
Assumed................................. 265 2.26 to 4.50 2.68
Granted................................. 390 .28 .28
-----
Outstanding at December 31, 1996.......... 655 .28 to 4.50 1.26
Granted................................. 287 1.50 1.50
Canceled................................ (52) 2.26 2.26
-----
Outstanding at December 31, 1997.......... 890 .28 to 4.50 1.28
Granted................................. 957 5.00 to 8.00 6.02
Exercised............................... (487) .28 to 5.00 1.52
Canceled................................ (85) 1.50 to 5.00 3.90
-----
Outstanding at December 31, 1998.......... 1,275 .28 to 8.00 4.56
Granted (unaudited)..................... 40 10.00 10.00
-----
Outstanding at February 4, 1999
(unaudited).............................. 1,315 .28 to 10.00 4.72
=====
</TABLE>
Options granted during the years ended December 31, 1997 and 1998 resulted
in total compensation of $1.0 million and $9.5 million, respectively, and were
recorded as deferred stock compensation in stockholders' equity. The deferred
stock compensation is recognized as stock-based charges in the consolidated
statement of operations over the related vesting period of the options. During
the years ended December 31, 1997 and 1998, such stock-based charges were
$257,000 and $1.6 million, respectively. Common stock available for future
grants at December 31, 1998 was 507,000 shares.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Prices: Shares Life Price Shares Price
------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ .28............................ 113 7.90 $ .28 8 $ .28
1.50............................ 260 8.70 1.50 67 1.50
4.50 to 5.00.................... 217 9.20 5.00 21 4.92
6.00............................ 181 9.50 6.00 23 6.00
6.32............................ 421 9.70 6.32 27 6.32
8.00............................ 83 9.90 8.00 1 8.00
----- ---
1,275 147
===== ===
</TABLE>
F-59
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rates.............. 6% 6% 5%
Expected lives (in years)............. 4 5 4
Dividend yield........................ 0% 0% 0%
Expected volatility................... 0% 0% 0%
</TABLE>
The compensation expense associated with the stock-based compensation plans
did not result in a material difference from the reported net loss for the
period from October 28, 1996 (inception) to December 31, 1996 or years ended
December 31, 1997 and 1998.
10. Warrants:
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued a warrant to purchase 113,295 shares
of the Company's common stock at an exercise price of $6.32 per share. The
warrant is contingent upon America Online exercising its right to purchase
$2.0 million of common stock in an IPO. Additionally, if America Online
exercises its right to purchase $2.0 million of common stock in an IPO, the
Company will issue warrants to America Online to acquire $3.0 million of
common stock with a weighted average exercise price of 137.5% of the initial
public offering price. If warrants are purchased in connection with an IPO,
the fair value will be measured at the date of the IPO and amortized to sales
and marketing expense over the remaining term of the distribution agreement.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 113,288 shares of common
stock at an exercise price $.001 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
During 1998, the Company issued warrants to purchase up to 41,736 shares of
common stock to Multiple Listing Services ("MLSs") that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis over an initial term of 18 months. The issuance of
these warrants is contingent upon completion of an IPO. The exercise price
will be equal to the IPO per share price. The fair value of issuable warrants
will be measured at the date an IPO is deemed to be probable and recognized as
expense over the terms of the applicable MLS agreement.
F-60
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Capitalization:
Convertible preferred stock at December 31, 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A................................. 1,647 1,378 $ 4,416
Series B................................. 353 191 1,334
Series C................................. 614 614 4,884
Series D................................. 681 681 10,543
Series F................................. 2,100 1,664 40,871
Undesignated............................. 4,280
----- ----- -------
9,675 4,528 $62,048
===== ===== =======
</TABLE>
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion of $1.5 million for the year
ended December 31, 1998 related to the Series D and Series F dividends.
No dividends have been declared or paid from inception through December 31,
1998.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion of
$171,000 for the year ended December 31, 1998 related to the Series E
redeemable preferred stock redemption value.
F-61
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
two-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $24.93 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
Repurchase of Preferred Stock--In November 1998, the Company repurchased
431,664 shares of Series A and Series B convertible preferred stock for $9.5
million. The difference of $7.7 million between the carrying value of the
preferred stock prior to repurchase and the price paid has been included in
net loss for the year ended December 31, 1998 in the computation of net loss
applicable to common stockholders.
Sale of Common Stock--In connection with the August 1998 Series F
financing, the Company sold an aggregate of 1,673,991 shares of common stock
to certain investors and received gross proceeds of approximately $10.6
million. The Company recognized the $18.9 million difference between the
estimated fair value of the stock and the price paid by investors as stock-
based charges in 1998.
12. Supplemental Cash Flow Information:
During the period from January 1, 1999 to February 4, 1999 (unaudited):
. In connection with an equipment lease financing arrangement, the Company
sold $749,000 of net property and equipment in exchange for assumption
of third party payables.
During the year ended December 31, 1998:
. The Company issued common and convertible preferred stock valued at $1.9
million in connection with an advertising agreement.
. The Company incurred a $2.0 million payable to a related party in
connection with certain obligations under a lifetime operating
agreement.
. Convertible notes in the amount of $10.7 million, plus $64,000 in
accrued interest, were converted into Series F convertible preferred
stock.
. The Company issued notes receivable to stockholders for $702,000 in
connection with the exercise of stock options.
. The Company issued warrants with a fair value of $1.4 million.
. The Company issued 105,000 shares of common stock valued at $525,000, a
note payable of $2.2 million and assumed net liabilities of $946,000 as
part of the acquisition of The Enterprise.
. The Company issued 325,000 shares of Series E redeemable convertible
preferred stock valued at $4.8 million, a note payable of $3.6 million
and assumed net liabilities of $657,000 as part of the acquisition of
MultiSearch.
During the year ended December 31, 1997:
. The Company issued 29,382 shares of common stock with a value of $53,000
as part of the acquisition of TouchTech.
F-62
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the period from October 28, 1996 (Inception) to December 31, 1996:
. The Company issued common stock valued at $1.1 million in connection
with the right to use certain trademarks and an operating agreement.
. The Company assumed net liabilities totalling $1.2 million in exchange
for trademarks and an operating agreement.
13. Defined Contribution Plan:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
14. Income Taxes:
LLC is treated as a partnership for federal and state income tax purposes.
Consequently, all income and loss items flow through to its investors.
Accordingly, the provision for income taxes is based on the operating results
of RealSelect.
As a result of net operating losses, RealSelect has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 2,036 $ 12,747
Other.................................................. 348 1,078
------- --------
2,384 13,825
Less: valuation allowance.............................. (2,384) (13,825)
------- --------
Net deferred taxes...................................... $ -- $ --
======= ========
</TABLE>
Due to the uncertainty surrounding the timing of the realization of the
benefits from its favorable tax attributes in future tax returns, RealSelect
has placed a valuation allowance against its otherwise recognizable deferred
tax assets.
At December 31, 1998, RealSelect has net operating losses for both federal
and state income tax purposes of approximately $34.4 million and $18.1
million, respectively, which begin to expire in 2007 for federal and 2001 for
state income tax purposes. The net operating losses can be carried forward to
offset future taxable income. Utilization of the above carryforwards may be
subject to utilization limitations, which may inhibit RealSelect's ability to
use carryforwards in the future.
F-63
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Commitments and Contingencies:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and increases in the Consumer Price Index.
Future minimum lease payments under noncancellable operating leases at
December 31, 1998 are (in thousands):
<TABLE>
<S> <C>
1999............................................................. $ 2,295
2000............................................................. 2,686
2001............................................................. 2,553
2002............................................................. 1,636
2003............................................................. 1,365
-------
Total.......................................................... $10,535
=======
</TABLE>
Total rental expense for operating leases was $7,000, $149,000 and $749,000
for the period from October 28, 1996 (Inception) to December 31, 1996 and the
years ended December 31, 1997 and 1998, respectively.
Distribution Agreements
The Company has entered into various distribution and preferred alliance
agreements. Payments remaining over the next five years for the distribution
and preferred alliance agreements are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................. $21,143
2000............................................................. 19,036
2001............................................................. 14,646
2002............................................................. 4,250
2003............................................................. 500
-------
Total.......................................................... $59,575
=======
</TABLE>
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. Based on the advice of counsel, 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.
16. Subsequent Events (unaudited):
Equipment Leasing Arrangement
In January 1999, the Company entered into an equipment leasing arrangement
which provided for the sale and leaseback of certain of the Company's existing
equipment and lease financing for additional equipment needs. The total
availability under the agreement is $3.0 million. In addition, the agreement
provides the lessor with warrants to purchase up to 5,000 shares of Series F
convertible preferred stock at an exercise price of $24.00 per share. The
Company determined that the fair value of the warrants approximated $115,000
on the date of grant.
F-64
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
In January 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan (the "Plan") to replace the 1996 stock Incentive Plan ("1996 Plan"). The
Plan provides for the issuance of both non-statutory and incentive stock
options to employees, officers, directors and consultants of the Company. The
total number of shares of common stock reserved for issuance under the Plan is
equal to that number previously reserved and available for grant under the
1996 Plan. The Company will not issue new options under the 1996 Plan.
F-65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Enterprise of America, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of The Enterprise of America, Ltd.
(the "Company") at December 31, 1997 and March 31, 1998, and the results of
its operations and its cash flows for the year ended December 31, 1997 and the
three months ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-66
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash............................................... $ 3,214 $ 414
Accounts receivable, net of allowance for doubtful
accounts of $100,000 for December 31, 1997 and
$125,000 for March 31, 1998....................... 367,607 429,402
----------- -----------
Total current assets................................. 370,821 429,816
Property and equipment, net.......................... 529,534 763,057
Other assets......................................... 34,533 16,394
----------- -----------
Total assets..................................... $ 934,888 $ 1,209,267
=========== ===========
Liabilities and Stockholders' Deficit:
Current liabilities:
Cash overdraft..................................... $ -- $ 126,332
Accounts payable................................... 355,631 544,305
Accrued liabilities................................ 333,764 334,230
Current portion of capital lease obligation........ 43,832 51,747
Related party notes payable........................ 809,678 821,468
----------- -----------
Total current liabilities............................ 1,542,905 1,878,082
Capital lease obligation............................. 122,279 108,503
Commitments (Note 6)
Stockholders' deficit:
Common stock, $1 par value; authorized 9,000
shares, issued and outstanding 100 shares at
December 31, 1997 and March 31, 1998.............. 100 100
Additional paid-in capital......................... 606,337 606,337
Note receivable from stockholder................... (294,108) (305,597)
Accumulated deficit................................ (1,042,625) (1,078,158)
----------- -----------
Total stockholders' deficit...................... (730,296) (777,318)
----------- -----------
Total liabilities and stockholders' deficit...... $ 934,888 $ 1,209,267
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues.......................................... $4,182,776 $969,138
Cost of revenues...................................... 2,226,698 524,418
---------- --------
Gross profit...................................... 1,956,078 444,720
---------- --------
Operating expenses:
Sales and marketing................................. 551,183 174,094
General and administrative.......................... 1,428,630 273,905
Loss on disposal of assets.......................... 34,750
---------- --------
Total operating expenses.......................... 2,014,563 447,999
---------- --------
Loss from operations.................................. (58,485) (3,279)
Interest expense...................................... (29,227) (32,254)
---------- --------
Net loss.............................................. $ (87,712) $(35,533)
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Note
------------- Paid-In Receivable Accumulated
Shares Amount Capital Stockholder Deficit Total
------ ------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 100 $100 $606,337 $ -- $ (954,913) $(348,476)
Note receivable issued
to stockholder......... (294,108) (294,108)
Net loss................ (87,712) (87,712)
--- ---- -------- --------- ----------- ---------
Balance at December 31,
1997................... 100 100 606,337 (294,108) (1,042,625) (730,296)
Note receivable issued
to stockholder......... (11,489) (11,489)
Net loss................ (35,533) (35,533)
--- ---- -------- --------- ----------- ---------
Balance at March 31,
1998................... 100 $100 $606,337 $(305,597) $(1,078,158) $(777,318)
=== ==== ======== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (87,712) $ (35,533)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization....................... 206,269 46,245
Provision for doubtful accounts..................... 65,684 25,000
Loss on sale of fixed assets........................ 34,750
Changes in operating assets and liabilities:
Accounts receivable............................... 33,996 (86,795)
Other assets...................................... (22,677) 18,139
Cash overdraft.................................... (75,064) 126,332
Accounts payable.................................. (24,153) 187,808
Accrued liabilities............................... 109,430 1,332
--------- ---------
Net cash provided by operating activities........... 240,523 282,528
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment................. (124,105) (279,768)
Proceeds from sale of fixed asset................... 223,632
--------- ---------
Net cash provided by (used in) investing
activities......................................... 99,527 (279,768)
--------- ---------
Cash flows from financing activities:
Note receivable from stockholder.................... (294,108) (11,489)
Repayment of line of credit......................... (852,855)
Proceeds from related party notes payable........... 809,678 11,790
Payments on capital lease obligation................ (5,861)
--------- ---------
Net cash used in financing activities............... (337,285) (5,560)
--------- ---------
Change in cash...................................... 2,765 (2,800)
Cash, beginning of period........................... 449 3,214
--------- ---------
Cash, end of period................................. $ 3,214 $ 414
========= =========
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest.............. $ 29,312 $ 32,254
========= =========
Cash paid during the year for income taxes.......... $ 807 $ 510
========= =========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1997, the Company acquired $166,110 of production equipment through a
capital lease.
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS
1. The Company:
The Enterprise of America, Ltd. (the "Company") is a Wisconsin corporation
that was formed on November 1, 1990. The Company's primary business activity
is an Internet-based marketing service for real estate and television
production and editing of home real estate shows.
On March 31, 1998, NetSelect, Inc. acquired all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of NetSelect, Inc. which was subsequently renamed
HomeStore.com, Inc.
2. Summary of Significant Accounting Policies:
Use Of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates.
Property And Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Long-Lived Assets--The Company continually reviews the recoverability of
the carrying value of long-lived assets. The Company also reviews long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
attributable to such assets to their carrying value. If the carrying value of
the assets exceeds the forecasted undiscounted cash flows, then the assets are
written down to their fair value. Fair value is determined based on discounted
cash flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--The Company's revenues are derived principally from
the sale of Internet-based marketing services and tools for real estate
professionals and production and editing of home real estate programs.
Revenues from Internet-based marketing services are recognized as such
services are rendered. Revenues associated with production and editing are
recognized upon delivery of the completed program to the television station.
Advertising Expense--Advertising costs are expensed as incurred and
totalled $9,000 during the year ended December 31, 1997 and $52,500 for the
three months ended March 31, 1998.
Income Taxes--Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Concentration Of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and
accounts receivable. Cash is deposited with high credit quality financial
institutions. The Company's accounts receivable are derived from revenue
earned from customers located in the United States. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
During the year ended December 31, 1997 and the three months ended March
31, 1998, no customers accounted for more than 10% of net revenues or net
accounts receivable.
F-71
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segments--Statement of Financial Accounting Standards No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
business segments.
3. Property And Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ----------
<S> <C> <C>
Computer and production equipment................... $ 607,033 $ 607,033
Office furniture and fixtures....................... 439,127 451,062
Leasehold improvements.............................. 36,616 304,449
---------- ----------
1,082,776 1,362,544
Accumulated depreciation............................ (553,242) (599,487)
---------- ----------
$ 529,534 $ 763,057
========== ==========
</TABLE>
4. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Accrued revenue sharing............................... $151,159 $142,583
Accrued compensation.................................. 80,484 81,314
Accrued legal......................................... 62,000 62,000
Accrued other......................................... 40,121 48,333
-------- --------
$333,764 $334,230
======== ========
</TABLE>
5. Related Party Notes Payable:
At December 31, 1997 and March 31, 1998, the Company was indebted to a
related party for $96,568 and $108,358, respectively.
At December 31, 1997 and March 31, 1998, the Company was indebted to a
related party for $713,110.
Notes payable and accrued interest to the related parties were subsequently
repaid in April of 1998 when the Company was acquired by NetSelect, Inc. (see
Note 1). Therefore, all amounts due to related parties are classified as
current liabilities.
6. Commitments:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. The operating leases generally contain renewal options and
payments that may be adjusted for increases in operating expenses and
increases in the Consumer Price Index. The Company also leases production
equipment which is being accounted for as a capital lease.
F-72
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancellable capital and operating
leases as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999..................................................... $ 75,329 $127,634
2000..................................................... 75,329 137,854
2001..................................................... 50,219 137,859
2002..................................................... 141,135
2003..................................................... 141,135
Thereafter............................................... 5,678
-------- --------
Total minimum obligations............................ 200,877 $691,295
========
Less interest............................................ (40,627)
--------
Present value of minimum obligations..................... 160,250
Less current portion..................................... (51,747)
--------
Long-term obligations at March 31, 1998.................. $108,503
========
</TABLE>
Total rental expenses for operating leases was $13,159 for the three months
ended March 31, 1998 and $227,762 for the year ended December 31, 1997.
7. Note Receivable from Stockholder:
At December 31, 1997 and March 31, 1998, the Company held a note receivable
from its stockholder totaling $294,108 and $305,597, respectively. The note,
which is classified as a component of stockholders' equity, was forgiven by
NetSelect, Inc. (Note 1) as part of the purchase price of the acquisition.
8. Income Taxes:
The Company is a Subchapter S corporation for federal and state income tax
purposes. In accordance with federal and state provisions, corporate earnings
flow through to the stockholder and are taxed at the stockholder level.
Deferred income tax assets and liabilities are not considered material to the
financial position of the Company at December 31, 1997 and March 31, 1998. The
provision for income taxes is comprised of the minimum Wisconsin franchise tax
and is not material for the year ended December 31, 1997 and the three months
ended March 31, 1998. Due to the acquisition of the Company by NetSelect, Inc.
on March 31, 1998, the Company's Subchapter S status terminated (Note 1).
F-73
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MultiSearch Solutions, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' deficit and of cash flows
present fairly, in all material respects, the financial position of
MultiSearch Solutions, Inc. and its subsidiary (the "Company") at December 31,
1997 and June 30, 1998, and the results of their operations and their cash
flows for the year ended December 31, 1997 and the six months ended June 30,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-74
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Assets:
Current assets:
Cash................................................. $ 43,141 $ 113,861
Accounts receivable, net of allowance for doubtful
accounts of $170,000 and $82,475 for December 31,
1997 and June 30, 1998, respectively................ 185,293 139,867
Prepaid expenses..................................... 10,664 922
---------- ----------
Total current assets.................................. 239,098 254,650
Property and equipment, net........................... 145,682 130,200
Other assets.......................................... 3,212 93,400
---------- ----------
Total assets....................................... $ 387,992 $ 478,250
========== ==========
Liabilities and Stockholders' Deficit:
Current liabilities:
Accounts payable..................................... $ 394,810 $ 322,125
Accrued liabilities.................................. 237,621 210,570
Due to stockholders and related parties.............. 322,637 454,390
Customer deposit..................................... 100,000 100,000
---------- ----------
Total current liabilities............................. 1,055,068 1,087,085
Commitments (Note 4)
Stockholders' deficit:
Common stock, $1.00 par value; authorized 1,000,000
shares, 1,000 shares issued and 409 shares
outstanding at December 31, 1997 and June 30, 1998.. 409 409
Additional paid-in capital........................... 138,180 138,180
Treasury stock....................................... (409,409) (409,409)
Accumulated deficit.................................. (396,256) (338,015)
---------- ----------
Total stockholders' deficit........................ (667,076) (608,835)
---------- ----------
Total liabilities and stockholders' deficit........ $ 387,992 $ 478,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Net revenues........................................... $3,040,162 $2,054,055
Cost of revenues....................................... 1,563,969 947,265
---------- ----------
Gross profit........................................... 1,476,193 1,106,790
---------- ----------
Operating expenses:
Sales and marketing.................................. 725,478 543,853
Product development.................................. 73,519 23,621
General and administrative........................... 980,862 456,705
---------- ----------
Total operating expenses........................... 1,779,859 1,024,179
---------- ----------
Income (loss) from operations.......................... (303,666) 82,611
Interest expense....................................... (28,973) (24,370)
Other income........................................... 222,617 --
---------- ----------
Net income (loss)...................................... $ (110,022) $ 58,241
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-76
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Treassury Stock
------------- Additional ----------------
Paid-In Accumulated
Shares Amount Capital Shares Amount Deficit Total
------ ------ ---------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.. 580 $580 $138,180 420 $(349,580) $(286,234) $(497,054)
Repurchase of stock........... (171) (171) 171 (59,829) (60,000)
Net loss...................... (110,022) (110,022)
---- ---- -------- --- --------- --------- ---------
Balance at December 31, 1997.. 409 409 138,180 591 (409,409) (396,256) (667,076)
Net income.................... 58,241 58,241
---- ---- -------- --- --------- --------- ---------
Balance at June 30, 1998...... 409 $409 $138,180 591 $(409,409) $(338,015) $(608,835)
==== ==== ======== === ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-77
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $(110,022) $ 58,241
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization......................... 69,312 51,575
Provision for doubtful accounts....................... 170,000 (87,525)
Settlement of implied agreement....................... (200,000)
Gain on sale of assets................................ (5,100)
Changes in operating assets and liabilities:
Accounts receivable................................. (150,421) 132,951
Prepaid expenses.................................... (10,664) 9,742
Other assets........................................ 10,371 (90,188)
Accounts payable.................................... 38,564 (72,685)
Accrued liabilities................................. 144,651 (27,051)
--------- --------
Net cash used in operating activities................. (43,309) (24,940)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment................... (146,799) (36,093)
Proceeds from sale of assets.......................... 5,100
--------- --------
Net cash used in investing activities................. (141,699) (36,093)
--------- --------
Cash flows from financing activities:
Net advances under line of credit agreement from
stockholders......................................... 153,553 158,004
Loan repayments to related parties.................... (33,815) (26,251)
--------- --------
Net cash provided by financing activities............. 119,738 131,753
--------- --------
Change in cash........................................ (65,270) 70,720
Cash, beginning of period............................. 108,411 43,141
--------- --------
Cash, end of period................................... $ 43,141 $113,861
========= ========
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest................ $ 24,153 $ 24,340
========= ========
Cash paid during the year for income taxes............ $ 800 $ 800
========= ========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1997, the Company utilized $60,000 of its line of credit agreement
with its stockholders to repurchase 171 shares of its common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
F-78
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies:
The Company--MultiSearch Solutions, Inc. (the "Company") is a Texas
corporation that was formed on May 27, 1993. The Company's primary business
activity is an Internet-based marketing and publishing service for newly
constructed real estate.
Effective June 30, 1998, NetSelect, Inc. acquired all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of NetSelect, Inc. which was subsequently renamed
HomeStore.com, Inc.
Summary Of Significant Accounting Policies
Principles Of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiary. All intercompany transactions
and balances have been eliminated in consolidation.
Use Of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Concentration Of Credit Risk--Financial instruments that potentially
subject the Company to a concentration risk consist of cash and accounts
receivable. Cash is deposited with high credit quality financial institutions.
The Company's accounts receivable are derived from revenue earned from
customers located in the United States. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of accounts
receivable.
During the year ended December 31, 1997 and the six months ended June 30,
1998, no customers accounted for more than 10% of net revenues or net accounts
receivable.
Property And Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Long-Lived Assets--The Company continually reviews the recoverability of
the carrying value of long-lived assets. The Company also reviews long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
attributable to such assets to their carrying value. If the carrying value of
the assets exceeds the forecasted undiscounted cash flows, then the assets are
written down to their fair value. Fair value is determined based on discounted
cash flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--The Company's revenues are derived principally from
the sale of advertising in its publications and web site hosting for new home
builders. Revenues are recognized ratably over the periods in which
advertisements are displayed and web site hosting and other services are
provided.
Product Development Costs--Product development costs include expenses
incurred by the Company to develop, enhance, manage, monitor and operate the
Company's web sites. Product development costs are expensed as incurred.
Advertising Expenses--Advertising costs are expensed as incurred and
totalled $44,000 during the year ended December 31, 1997 and $23,000 for the
six months ended June 30, 1998.
F-79
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes--Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Segments--Statement of Financial Accounting Standards No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
business segments.
2. Property And Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment................................... $ 189,148 $ 189,148
Office furniture and fixtures........................ 267,686 303,452
--------- ---------
456,834 492,600
Less: Accumulated depreciation....................... (311,152) (362,400)
--------- ---------
Total.............................................. $ 145,682 $ 130,200
========= =========
</TABLE>
3. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Accrued compensation.................................. $ 62,070 $158,499
Accrued sales taxes................................... 51,329 52,071
Accrued revenue sharing............................... 31,795
Accrued legal......................................... 92,427
-------- --------
$237,621 $210,570
======== ========
</TABLE>
4. Commitments:
The Company leases certain facilities and equipment. The leases generally
contain renewal options and payments that may be adjusted for increases in
operating expenses and increases in the Consumer Price Index. Future minimum
lease payments under noncancellable operating leases with original terms of
more than one year as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $335,447
2000............................................................ 262,737
2001............................................................ 58,411
--------
$656,595
========
</TABLE>
Rent expense was $128,500 for the year ended December 31, 1997 and $86,000
for the six months ended June 30, 1998.
F-80
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Other Income:
During 1997, $200,000 in other income was recognized in connection with the
settlement of an implied agreement entered into in 1996.
6. Due to Stockholders and Related Parties:
At December 31, 1997 and June 30, 1998, the Company was indebted to certain
of its stockholders under a revolving line of credit agreement in the amounts
of $213,852 and $371,856, respectively. The line of credit is due on demand
and bears interest at 12% per annum.
At December 31, 1997 and June 30, 1998, the Company was indebted to a
related party for $28,315 and $10,956, respectively. The loan was made in
connection with the repurchase of the Company's common stock and is payable in
24 monthly installments of $2,307, bears interest at 10% per annum, and is due
on March 1, 1999.
At December 31, 1997 and June 30, 1998, the Company was indebted to a
related party for $80,470 and $71,578, respectively. The loan is payable in 48
monthly installments, bears interest at 5.25% per annum, and is due on March
1, 2001.
The amounts due to stockholders and related parties were subsequently
repaid in July of 1998 in connection with the acquisition of the Company by
NetSelect, Inc. (Note 1). Therefore, all amounts due to stockholders and
related parties have been classified as current liabilities.
7. Income Taxes:
As a result of the net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Net operating loss carryforwards.................... $ 37,000 $ 49,000
Other............................................... 47,000 12,000
-------- --------
Deferred tax assets................................. 84,000 61,000
Valuation allowance................................. (84,000) (61,000)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has recorded a
valuation allowance against its otherwise recognizable deferred tax assets.
At June 30, 1998, the Company has net operating losses for both federal and
state income tax purposes of approximately $120,000 expiring beginning in the
years 2007 for federal and 1998 for state purposes. The net operating losses
can be carried forward to offset future taxable income. Utilization of the
above carryforwards may be subject to utilization limitations, which may
inhibit the Company's ability to use carryforwards in the future.
F-81
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
SpringStreet, Inc.
We have audited the accompanying balance sheets of SpringStreet, Inc., as of
December 31, 1997 and 1998, and the related statements of operations,
shareholders' deficit and cash flows for the period from August 21, 1997
(commencement of operations) through December 31, 1997 and for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpringStreet, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from August 21, 1997 (commencement of operations) through December 31,
1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
April 12, 1999
F-82
<PAGE>
SPRINGSTREET, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 2,805 $ 4,686 $ 16,738
Accounts receivable, net of allowance for
doubtful accounts of $50 at December 31, 1998
and $88 at March 31, 1999..................... -- 970 491
Other current assets........................... 40 225 743
------- ------- --------
Total current assets............................. 2,845 5,881 17,972
Fixed assets, net................................ 280 721 910
Other assets..................................... 33 43 466
------- ------- --------
Total assets................................. $ 3,158 $ 6,645 $ 19,348
======= ======= ========
Liabilities, convertible preferred stock subject
to redemption and shareholders' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses.......... $ 178 $ 236 $ 824
Accrued compensation and related expenses...... 158 729 1,094
Advance from shareholder....................... 245 -- --
Deferred revenue................................. -- 1,092 1,169
------- ------- --------
Total current liabilities........................ 581 2,057 3,087
Convertible preferred stock subject to
redemption:
Series B--no par value; 3,684,210 shares
authorized, issued and outstanding as of
December 31, 1997, 1998 and March 31, 1999.... 3,500 3,500 3,500
Series C--no par value; 4,850,000 shares
authorized and 4,689,080 shares issued and
outstanding as of December 31, 1998 and March
31, 1999...................................... -- 10,274 10,274
------- ------- --------
Total convertible preferred stock subject to
redemption...................................... 3,500 13,774 13,774
Shareholders' equity (deficit):
Convertible preferred stock Series A--no par
value; 3,750,000 shares authorized, issued and
outstanding as of December 31, 1997, 1998 and
March 31, 1999................................ 202 202 202
Convertible preferred stock Series D--no par
value; 3,153,846 shares authorized and
2,430,772 issued and outstanding as of March
31, 1999...................................... -- -- 15,800
Common stock--no par value; 20,000,000 and
25,000,000 shares authorized, 1,250,000,
1,281,562 and 1,298,374 shares issued and
outstanding as of December 31, 1997, 1998 and
March 31, 1999, respectively.................. 1 1,959 4,031
Deferred stock compensation.................... -- (1,630) (3,275)
Accumulated deficit............................ (1,126) (9,717) (14,271)
------- ------- --------
Total shareholders' equity (deficit)......... (923) (9,186) 2,487
------- ------- --------
Total liabilities, convertible preferred
stock subject to redemption and
shareholders' equity (deficit).............. $ 3,158 $ 6,645 $ 19,348
======= ======= ========
</TABLE>
See accompanying notes.
F-83
<PAGE>
SPRINGSTREET, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period through Year ended Three months ended March 31,
December 31, December 31, ----------------------------
1997 1998 1998 1999
-------------- ------------ -------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Net revenue............. $ 82 $ 1,099 $ 75 $ 869
Cost of net revenue..... 73 721 118 341
------- ------- -------------- --------------
Gross profit............ 9 378 (43) 528
------- ------- -------------- --------------
Operating expenses:
Selling and
marketing............ 641 6,509 910 3,054
General and
administration....... 340 1,578 214 1,073
Research and
development.......... 173 1,089 137 994
------- ------- -------------- --------------
Total operating
expenses........... 1,154 9,176 1,261 5,121
------- ------- -------------- --------------
Loss from operations.... (1,145) (8,798) (1,304) (4,593)
Interest income......... 19 207 34 39
------- ------- -------------- --------------
Net loss................ $(1,126) $(8,591) $ (1,270) $ (4,554)
======= ======= ============== ==============
Net loss per share--
basic and diluted...... $ (1.77) $(11.00) $ (1.81) $ (4.78)
======= ======= ============== ==============
Number of shares used in
net loss per share
calculation--basic and
diluted................ 636,837 780,830 700,404 951,908
======= ======= ============== ==============
</TABLE>
See accompanying notes.
F-84
<PAGE>
SPRINGSTREET, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Shareholders' Equity (Deficit)
Convertible ----------------------------------------------------------------------
Preferred Convertible
Stock Subject Preferred
to Redemption Stock Common Stock Total
-------------- -------------- ------------- Deferred Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Compensation Deficit Equity (Deficit)
------ ------- ------ ------- ------ ------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- -- $ -- 1,250 $ 1 $ -- $ -- $ 1
Issuance of Convertible
Preferred Stock--Series
A...................... -- -- 3,750 202 -- -- -- -- 202
Issuance of Convertible
Preferred Stock--Series
B, subject to
redemption............. 3,684 3,500 -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- -- (1,126) (1,126)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balances at December 31,
1997................... 3,684 3,500 3,750 202 1,250 1 -- (1,126) (923)
Issuance of common stock
upon exercise of stock
options................ -- -- -- -- 32 3 -- -- 3
Issuance of Convertible
Preferred Stock--Series
C, subject to
redemption............. 4,689 10,274 -- -- -- -- -- -- --
Deferred stock
compensation........... -- -- -- -- -- 1,955 (1,955) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 325 -- 325
Net loss................ -- -- -- -- -- -- -- (8,591) (8,591)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balances at December 31,
1998................... 8,373 13,774 3,750 202 1,282 1,959 (1,630) (9,717) (9,186)
Issuance of common stock
upon exercise of stock
options (unaudited).... -- -- -- -- 16 1 -- -- 1
Issuance of Convertible
Preferred Stock--Series
D (unaudited).......... -- -- 2,431 15,800 -- -- -- -- 15,800
Deferred stock
compensation
(unaudited)............ -- -- -- -- -- 2,071 (2,071) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 426 -- 426
Net loss (unaudited).... -- -- -- -- -- -- -- (4,554) (4,554)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balance at March 31,
1999 (unaudited)....... 8,373 $13,774 6,181 $16,002 1,298 $4,031 $(3,275) $(14,271) $ 2,487
===== ======= ===== ======= ===== ====== ======= ======== =======
</TABLE>
See accompanying notes.
F-85
<PAGE>
SPRINGSTREET, INC.
For the period from August 21, 1997 (commencement of operations)
through December 31, 1997 and for the year ended December 31, 1998
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months
Period through Year ended ended March 31,
December 31, December 31, ----------------
1997 1998 1998 1999
-------------- ------------ ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Cash used in operating
activities
Net loss........................ $(1,126) $(8,591) $(1,270) $(4,554)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization... 17 161 26 62
Amortization of deferred stock
compensation................... -- 325 8 426
Expenses paid through advance by
a shareholder.................. 232 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable............. -- (970) (31) 479
Other assets.................... (74) (201) (93) (572)
Accounts payable and accrued
expenses....................... 178 58 (87) 578
Accrued compensation and related
expenses....................... 158 571 144 365
Deferred revenue................ -- 1,092 -- 77
------- ------- ------- -------
Net cash used in operating
activities..................... (615) (7,555) (1,303) (3,139)
------- ------- ------- -------
Cash used in investing
activities
Purchases of fixed assets....... (93) (596) (116) (220)
Business purchase, net of broker
fees........................... -- -- -- (390)
------- ------- ------- -------
Net cash used in investing
activities..................... (93) (596) (116) (610)
------- ------- ------- -------
Cash provided in financing
activities
Proceeds from issuance of
Convertible Preferred Stock--
Series B....................... 3,500 -- -- --
Proceeds from issuance of
Convertible Preferred Stock--
Series C, net of issuance
costs.......................... -- 10,274 -- --
Proceeds from issuance of
Convertible Preferred Stock--
Series D, net of issuance
costs.......................... -- -- -- 15,800
Proceeds from exercise of common
stock options.................. -- 3 -- 1
Proceeds from advance from
shareholder.................... 100 -- -- --
Repayment of advance from
shareholder.................... (87) (245) (245) --
------- ------- ------- -------
Net cash provided by financing
activities..................... 3,513 10,032 (245) 15,801
------- ------- ------- -------
Net increase in cash and cash
equivalents.................... 2,805 1,881 (1,664) 12,052
Cash and cash equivalents at
beginning of period............ -- 2,805 2,805 4,686
------- ------- ------- -------
Cash and cash equivalents at end
of period...................... $ 2,805 $ 4,686 $ 1,141 $16,738
======= ======= ======= =======
Supplemental disclosure: non-
cash transaction
Issuance of Convertible
Preferred Stock--Series A in
exchange for fixed assets...... $ 202 $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-86
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company:
SpringStreet Inc. (the "Company"), formerly AllApartments, Inc., provides a
comprehensive selection of rental listings throughout the United States as
well as links to relocation services including on-line change of address,
truck rental, insurance and credit reports on the Company's Web site,
www.springstreet.com. These services are packaged to assist individuals locate
and transition into new rental residences.
The Company commenced operations in its current form on October 13, 1997
upon the issuance of 1,250,000 shares of common stock to its two founding
officers and 3,750,000 shares of Series A Convertible Preferred Stock to
Marcus & Millichap Company ("M&M"). For the period from August 21, 1997
(commencement of operations) through October 12, 1997, the initial planning
and development activities of the business were conducted by M&M as a separate
division along with M&M's other businesses and such activity has been included
in these revenues and expenses for 1997. Activity prior to August 21, 1997 was
not separate or discrete and is not included here-in.
Consideration for the common and preferred stock issued on October 13, 1997
was in the form of fixed assets, assignments of technology and cancellation of
indebtedness which had stated values of $125,000 and $1,301,000, respectively.
For the purposes of these financial statements, the basis of the technology
and fixed assets transferred was the underlying basis to the shareholders:
$1,250 for the common shares and $202,000 for the preferred shares.
The Company has experienced operating losses to date and had an accumulated
deficit at December 31, 1998. Increasing and significant net losses are
expected for the foreseeable future. Since its formation, the Company has
raised significant capital through private placements of equity securities. At
March 31, 1999, the Company had $16,738,000 (unaudited) in cash and cash
equivalents. Future capital requirements are primarily dependent upon the
Company's ability to execute its business plan. There can be no assurance that
the Company, if necessary, will be able to raise additional financing, or that
such financing will be available on terms satisfactory to the Company. Failure
to raise additional funding when needed could adversely affect the ability of
the Company to implement its current business plan.
The financial statements of the Company reflect those of M&M's subsidiary
prepared on a stand alone basis until the issuance of preferred shares to
third party investors in amounts sufficient to provide for de-consolidation.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information--The interim financial information
of the Company for the three months ended March 31, 1998 and 1999 are
unaudited. The unaudited interim financial information have been prepared on
the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position at March 31,
1999 and the results of operations and cash flows for the three months ended
March 31, 1998 and 1999.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and the accompanying notes. These estimates are based upon
information available as of the date of the financial statements; therefore,
actual results could differ from these estimates, although management does not
believe that any differences would materially affect Springstreet's financial
position or results of operations.
Cash and Cash Equivalents--Cash and cash equivalents, which consist of cash
and highly liquid short-term investments with insignificant interest rate risk
and original maturities of three months or less at the date of purchase are
stated at cost which approximates fair value.
F-87
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk and Credit Risk Evaluations--Financial
instruments which subject the Company to concentrations of credit risk consist
primarily of temporary cash investments and trade accounts receivable. Cash
equivalents consist principally of money market funds held with domestic
financial institutions with high credit standing.
The Company performs ongoing credit evaluations of its corporate customers
and generally does not require collateral. Reserves are maintained for
potential credit issues, and such losses to date have been within management's
expectations.
For the period August 21, 1997 (commencement of operations) through
December 31, 1997 and for the year ended December 31, 1998, no single customer
accounted for greater than 10% of net revenue.
Fixed Assets--Fixed assets are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized over the shorter of the assets'
useful life or the remaining lease term.
Other Long-lived Assets, including Intangible Assets--The Company
continually reviews the recoverability of the carrying value of long-lived
assets. The Company also reviews long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount of such assets
may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows attributable to such assets to their carrying value.
If the carrying value of the assets exceeds the forecasted undiscounted cash
flows, then the assets are written down to their fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in
accounting for income taxes. Under FAS 109, deferred tax assets and
liabilities are measured based on differences between the financial reporting
and tax bases of assets and liabilities using enacted tax rate and laws that
are expected to be in effect when the differences are expected to reverse.
Stock-Based Compensation--Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), encourages but
does not require companies to record compensation expense for stock-based
employee compensation plans at fair value. The Company has chosen to account
for stock-based compensation under the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and has adopted the disclosure-only alternative
provided by FAS 123.
Revenue Recognition--The Company's revenues are derived primarily from the
sale of "electronic brochure" listings to property owners, banner advertising
sales and transaction fees generated from on-line referrals.
The terms of electronic brochure contracts range from one month to one
year. Revenue on these contracts is recognized ratably over the contract term.
Deferred revenue is comprised of billings in excess of recognized revenue
related to these contracts.
Banner advertising revenue is recognized over the period in which the
advertisement is displayed, provided that no significant Company obligations
remain at the end of the period and collections are probable. To the extent
minimum guaranteed "impressions" are not met, the Company defers recognition
of the corresponding revenues until the remaining impression levels are
achieved.
F-88
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Referral services generally involve Web site linking arrangements between
the Company and its strategic business partners. Revenues from referral
arrangements are recognized at the time the referral is completed or upon
notification from the partner that revenues have been earned by the Company.
Computation of Net Loss per Share--Basic and diluted net loss per common
share are presented in conformity with Financial Accounting Standards Board
Statement No. 128, "Earning Per Share", ("FAS 128") for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. For the
purposes of this computation, shares issued to the founders and to the Series
A preferred shareholders are assumed to be outstanding from the date of
commencement of operations. Shares associated with stock options and
convertible preferred stock are not included in the computation of diluted net
loss per share because their inclusion would be antidilutive. The total number
of shares excluded from the calculations of diluted net loss per common share
are 4,567,309, 11,250,219 and 14,338,909 for the period from August 21, 1997
through December 31, 1997, for the year ended December 31, 1998 and for the
quarter ended March 31, 1999, respectively.
<TABLE>
<CAPTION>
Three
Period Months
through Year ended Ended
December 31, December 31, March 31,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Net loss.......................... $(1,126,000) $(8,591,000) $(4,554,000)
=========== =========== ===========
Weighted-average shares of common
stock outstanding................ 1,250,000 1,258,000 1,295,467
Less: weighted-average shares
subject to repurchase............ (613,163) (477,170) (343,559)
----------- ----------- -----------
Weighted-average shares used in
computing basic and diluted net
loss per share................... 636,837 780,830 951,908
=========== =========== ===========
Basic and diluted net loss per
share............................ $ (1.77) $ (11.00) $ (4.78)
=========== =========== ===========
</TABLE>
Recent Accounting Pronouncements--As of January 1, 1998 the Company adopted
Financial Accounting Standards Board Statement No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in full set of general-
purpose financial statements. The Company had no material components of
comprehensive income. The adoption of this standard has had no impact on the
Company's financial position, shareholders' equity (deficit), results of
operations or cash flows. Accordingly, the Company's comprehensive loss for
the year ended December 31, 1998 is equal to its reported loss.
Additionally, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS 131") "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. The
Company adopted FAS 131 in 1998. The Company operates in a single segment.
In March 1998, The American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
guidelines for accounting for the costs of all computer software developed or
obtained for internal use. The Company was required to adopt SOP 98-1
effective January 1, 1999. The adoption of SOP 98-1 did not have a material
impact on the Company's financial statements.
Fair Value of Financial Instruments--As of December 31, 1997 and 1998, the
respective carrying values of the Company's financial instruments approximated
their fair values. These financial instruments include cash
F-89
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and certain other assets and liabilities that are considered financial
instruments. Carrying values were estimated to approximate fair value for
these financial instruments as they are short term in nature and are
receivable or payable on demand.
3. Fixed Assets:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment......................... $179,000 $ 430,000 $ 442,000
Computer software.......................... 93,000 166,000 200,000
Leasehold improvements..................... -- 95,000 119,000
Furniture and equipment.................... 23,000 200,000 380,000
-------- --------- ----------
Total...................................... 295,000 891,000 1,141,000
Less: Accumulated depreciation............. (15,000) (170,000) (231,000)
-------- --------- ----------
Fixed assets, net.......................... $280,000 $ 721,000 $ 910,000
======== ========= ==========
</TABLE>
4. Line of Credit:
At December 31, 1998 the Company has a line of credit agreement with a
financial institution for $750,000 bearing interest on the outstanding balance
at the bank's prime rate plus one half percent, which was 8.25% at
December 31, 1998. The Company has an outstanding letter of credit for a lease
of office space for $350,000 which reduces the availability of the line of
credit. The net amount available under the line of credit is $400,000 as of
December 31, 1998.
5. Income Taxes:
The provision for income taxes results in an effective tax rate that
differs from the federal statutory rate primarily due to net operating losses
for which a valuation allowance has been established.
The following is a summary of deferred tax assets:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................... $ 420,000 $ 3,500,000
Accruals and reserves.............................. 40,000 260,000
Other.............................................. -- 100,000
--------- -----------
Total deferred tax assets............................ 460,000 3,860,000
--------- -----------
Valuation allowance.................................. (460,000) (3,860,000)
--------- -----------
Net deferred tax assets.............................. $ -- $ --
========= ===========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,700,000 which expire beginning
in the tax year 2012.
Realization of net operating losses is dependent on future earnings, if
any, the timing and the amount of which are uncertain. Accordingly, a
valuation allowance in an amount equal to the deferred tax assets as of
December 31, 1997 and 1998 has been established to reflect these
uncertainties. The valuation allowance increased by $460,000 and $3,400,000
during the period through December 31, 1997 and the year ended December 31,
1998, respectively.
F-90
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. As a result of the
annual limitation, a portion of these carryforwards may expire before
ultimately becoming available to reduce future income tax liabilities.
6. Commitments and Related Party Transactions:
The Company has entered into operating leases for certain office space and
equipment. Minimum lease payments by year and in the aggregate under lease
obligations with initial or remaining terms of one year or more consist of the
following:
<TABLE>
<S> <C>
1999.............................................................. $1,228,000
2000.............................................................. 1,352,000
2001.............................................................. 1,235,000
2002.............................................................. 489,000
2003.............................................................. 489,000
Thereafter........................................................ 40,000
----------
Total............................................................. $4,833,000
==========
</TABLE>
Rent expense for the period August 21, 1997 (commencement of operations)
through December 31, 1997 and for the year ended December 31, 1998 was $15,000
and $358,000, respectively.
The Company entered into an agreement with a shareholder to co-brand a Web
site and to share related revenue. This activity resulted in net revenues for
1998 of $58,000 and net receivables from the shareholder of $58,000 at
December 31, 1998.
7. Shareholders' Equity (Deficit):
The Company has two classes of authorized stock: common stock and preferred
stock.
Common Stock
The Company has authorized 20,000,000 and issued 1,250,000 and 1,281,562
shares of common stock as of December 31, 1997 and 1998, respectively. Of the
total shares, 1,250,000 shares were sold to founders of the Company on October
13, 1997 and are subject to the Company's right, but not its obligation, to
repurchase the shares at $0.10, if certain events occur. Fifty percent of this
right lapsed in October 1997 and the remaining portion lapses ratably over a
36 month period ending November 2000. In addition, these rights lapse in full
at such time as the Company merges with or is sold to another company. As of
December 31, 1997 and 1998, 590,278 and 381,946 shares, respectively were
subject to repurchase by the Company.
The Company is required to reserve and keep available out of its authorized
but unissued shares of common stock such number of shares sufficient to effect
the conversion of all outstanding shares of convertible preferred stock plus
shares granted and available for grant under the Company's stock option plan.
The amount of such shares of common stock reserved for these purposes is as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1997 1998 1999
--------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Conversion of Convertible Preferred
Stock.................................... 7,434,210 12,123,290 14,554,062
Outstanding stock options................. 623,634 1,642,801 2,047,779
Additional shares available for grant
under the Company's stock option plan.... 1,001,366 450,637 28,847
--------- ---------- ----------
Total common stock reserved for issuance.. 9,059,210 14,216,728 16,630,688
========= ========== ==========
</TABLE>
F-91
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Preferred Stock
The Company is authorized to issue 12,284,210 shares of convertible
preferred stock in one or more series. Dividends on each series of convertible
preferred stock are non cumulative and are payable when and if declared by the
Company.
Convertible preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 March 31, 1999
---------------------- ----------------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Series A................ 3,750,000 $ 202,000 3,750,000 $ 202,000 3,750,000 $ 202,000
Series B................ 3,684,210 3,500,000 3,684,210 3,500,000 3,684,210 3,500,000
Series C................ -- -- 4,689,080 10,274,000 4,689,080 10,274,000
Series D................ -- -- -- -- 2,430,772 15,800,000
--------- ---------- ---------- ----------- ---------- -----------
Total................... 7,434,210 $3,702,000 12,123,290 $13,976,000 14,554,062 $29,776,000
========= ========== ========== =========== ========== ===========
</TABLE>
Holders of Series B and C Convertible Preferred Stock are entitled to
receive a liquidation preference prior and in preference to any distribution
to the holders of Series A Convertible Preferred Stock and the common
shareholders in the amount equal to all declared but unpaid dividends, if any,
attributable to the Series B and C Convertible Preferred Stock, plus $0.95 and
$2.20 per share, respectively, adjusted for any combinations, consolidations,
stock distributions or dividends. The liquidation preference for the holders
of Series B Convertible Preferred Stock was $3,500,000 at December 31, 1997
and 1998. The liquidation preference for the holders of Series C Convertible
Preferred Stock was $10,315,800 at December 31, 1998.
After payment of the prior liquidation preference to Series B and C
Convertible Preferred Stock, holders of Series A Convertible Preferred Stock
are entitled, prior and in preference to any distribution to the common
shareholders to receive an amount equal to all declared but unpaid dividends,
if any, attributable to the Series A Convertible Preferred Stock plus $0.347
per share, as adjusted for any combinations, consolidations, stock
distributions or dividends. The aggregate liquidation preference for holders
of Series A Convertible Preferred Stock at December 31, 1997 and 1998 was
$1,301,250.
If the distributable assets are insufficient to permit payment to the
Series B and C preferred shareholders of their preferential amount, then the
entire amount of distributable assets shall be distributed pro rata among the
Series B and C preferred shareholders in proportion to their respective
preferential amounts. Similarly, if the remaining distributable assets after
payment of the Series B and C preferred shareholders' initial liquidation
amount is insufficient to permit payment to the Series A preferred
shareholders of their preferred amount, then the remaining distributable
assets shall be distributed pro rata among the Series A preferred shareholders
in proportion to their respective preferential amounts.
Following payment of such liquidation preference, the remaining assets, if
any, will be available for distribution to the holders of the Company's common
stock and convertible preferred stock pro ratably based the number of shares
of common stock and common stock into which the shares of convertible
preferred stock could be converted at the time the remaining assets are
distributed. However, the holders of the Series B and C Convertible Preferred
Stock are not entitled to participate with the holders of the Company's common
stock after holders of Series B Convertible Preferred Stock have received a
total of $3.80 per share and the holders of Series C Convertible Preferred
Stock have received a total of $8.80 per share. The holders of Series A
Convertible Preferred Stock are not entitled to participate with the holders
of common stock after the holders of Series A Convertible Preferred Stock have
received an aggregate amount per share of Series A Convertible Preferred Stock
equal to the Series A preference discussed above plus eighteen percent of the
Series A preference, compounded annually from the date of issuance through the
fifth anniversary of the date of issuance.
F-92
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of Series A, B and C Convertible Preferred Stock ("Voting
Preferred") carries voting rights. Each holder of Voting Preferred is entitled
to the number of votes equal to the number of shares of common stock into
which such shares of Voting Preferred held by such preferred shareholder could
then be converted.
Each share of Voting Preferred is convertible at the option of the holder
into shares of common stock equal to the number of preferred shares multiplied
by the then effective Conversion Rate. At December 31, 1997 and 1998, the
conversion rate for each series of Convertible Preferred Stock was one share
of common stock for each share of preferred stock.
In addition, each share of Voting Preferred shall automatically be
converted into shares of common stock at the then effective Conversion Rate
for such share immediately prior to the consummation of a firmly underwritten
public offering of common stock, provided that the price per share (prior to
underwriter's discounts or commissions and offering expenses) is not less than
$6.60 (subject to appropriate adjustment for stock splits, stock dividends,
reclassifications, recapitalizations and the like) and the aggregate gross
proceeds to the Company are not less than $20 million after deduction of
underwriters' commissions and expenses.
Series B and C Convertible Preferred Stock are redeemable after September
30, 2002 by the holders of Series B and C Convertible Preferred Stock at such
time that sixty-six and two-thirds percent of the then outstanding Series B
Convertible Preferred Stock and fifty percent of the then outstanding Series C
Convertible Preferred Stock provide written notice to the Company. The
redemption price shall be an amount equal to $0.95 and $2.20 per share, plus
any dividends declared but unpaid, for the Series B and C Convertible
Preferred Stock, respectively. In the event that the funds of the Company are
insufficient to redeem the total number of shares of Series B and C
Convertible Preferred Stock, those funds which are legally available will be
used to ratably redeem the Series B and C Convertible Preferred Stock.
Stock Option Plan
Under the 1997 Incentive Stock Plan (the "Plan"), the Company offers
options to purchase shares of common stock to employees and consultants. At
December 31, 1997, the Company had reserved 1,625,000 shares of common stock
for issuance through the Plan. At December 31, 1998 and March 31, 1999
(unaudited) the Company had reserved 2,125,000 shares of common stock for
issuance through the Plan.
The following summarizes stock option activity and related information
since the Company's inception:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price per Share
--------- ---------------
<S> <C> <C>
Granted (exercise price of $0.10)............... 623,634 $0.10
--------- -----
Outstanding at December 31, 1997................ 623,634 0.10
Granted (exercise price ranging from $0.10 to
$0.20)....................................... 1,486,005 0.17
Exercised..................................... (31,562) 0.10
Canceled...................................... (435,276) 0.12
--------- -----
Outstanding at December 31, 1998................ 1,642,801 0.15
Granted (exercise price ranging from $0.20 to
$1.00) (unaudited)........................... 503,000 0.43
Exercised (unaudited)......................... (16,812) 0.11
Canceled (unaudited).......................... (81,210) 0.30
--------- -----
Outstanding as of March 31, 1999 (unaudited).... 2,047,779 $0.21
========= =====
Options exercisable at December 31, 1997........ -- $ --
========= =====
Options exercisable at December 31, 1998........ 138,328 $0.10
========= =====
Options exercisable at March 31, 1999........... 182,566 $0.10
========= =====
</TABLE>
F-93
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Exercise prices for stock options outstanding as of December 31, 1997 and
1998 and March 31, 1999 (unaudited) and the weighted-average remaining
contractual life are as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$0.10............................ 623,634 9.9 years --
December 31, 1998
$0.10............................ 744,196 9.0 years 138,328
$0.20............................ 898,605 9.7 years --
--------- --------- -------
Total.............................. 1,642,801 9.3 years 138,328
========= ========= =======
March 31, 1999 (unaudited)
$0.10............................ 712,274 8.7 years 182,566
$0.20............................ 1,019,005 9.5 years --
$0.40............................ 244,500 9.9 years --
$1.00............................ 72,000 9.9 years --
--------- --------- -------
Total.............................. 2,047,779 9.3 years 182,566
========= ========= =======
</TABLE>
As discussed in Note 2, the Company has elected to follow APB Opinion No.
25 and related interpretations in accounting for its employee stock-based
awards because, as discussed below, the alternative fair value accounting
provided for under FAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock-based awards. Under APB
Opinion No. 25, the Company does not recognize compensation expense with
respect to such awards if the exercise price equals or exceeds the fair value
of the underlying security on the date of grant and other terms are fixed.
The fair value of these awards for the purpose of the alternative fair
value disclosures required by FAS 123 was estimated as of the date of grant
using the minimum value option pricing model. This model was developed for use
in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected
life of the options. Because the Company's stock-based awards have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards. For the purposes of the Company's pro forma disclosures, the
fair value of options granted during the period ended December 31, 1997, and
the year ended December 31, 1998 was determined using the minimum value method
with a risk-free interest rate of approximately 6.0%, an expected life of four
years, and a dividend yield of zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Period
through Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss, as reported (in thousands)............. $(1,126) $(8,591)
Net loss, pro forma (in thousands)............... (1,126) (8,600)
Net loss per share--basic and diluted, as
reported........................................ (1.77) (11.00)
Net loss per share--basis and diluted, pro
forma............................................ (1.77) (11.01)
</TABLE>
F-94
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The compensation expense associated with the Company's stock-based
compensation plans determined using the minimum value method prescribed above
did not result in a material difference from the reported net income for the
period from August 21, 1997 (commencement of operations) through December 31,
1997 and the year ended December 31, 1998. Future pro forma statement of
operations results may be materially different from actual amounts reported.
Deferred Compensation
The Company has recorded deferred stock compensation charges of $1,955,000
for the year ended December 31, 1998 for the difference between the exercise
price and the deemed fair value of certain stock options granted by the
Company. Such amount is included as an increase in shareholders' deficit and
is being amortized by charges to operations, using an accelerated method, over
the vesting periods of the individual stock options, which range from one
month to four years. Amortization of deferred stock compensation totaled
$325,000 for the year ended December 31, 1998.
8. Retirement Plan:
The Company established a 401(k) Profit Plan (the "401(k) Plan") which is
available to all employees who meet the Plan's eligibility requirements.
Employees may elect to contribute up to 15% of their eligible earnings to the
401(k) Plan subject to certain limitations. This defined contribution plan
provides that the Company may, at its discretion, make contributions to the
401(k) Plan on a periodic basis.
9. Subsequent Events:
In March 1999, the Company authorized 3,153,846 shares of Series D
Convertible Preferred Stock and issued 2,430,772 shares at $6.50 per share for
net proceeds of $15,800,000 to new and existing investors. In addition, the
Company authorized an additional 5,000,000 shares of common stock.
In February and March 1999, the Company entered into co-branding agreements
with several Internet services companies under which the Company is obligated
to pay approximately $1,630,000 over a twelve month period.
In March 1999, the Company entered into an Asset Purchase Agreement to
purchase the assets of a rental listing service for $420,000.
10. Year 2000 Risks (Unaudited):
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. We are in the process of reviewing the Year 2000
compliance of our internally developed proprietary software, which includes
substantially all of the systems for the operation of our website, such as our
instant online approval system, customer interaction and transaction systems
and our security, monitoring and back-up capabilities, including development
of contingency plans. Our information technology systems also depend on
information technology and services supplied by third parties. We are
currently assessing the Year 2000 readiness of these third party vendors. Year
2000 problems experienced by us or any of such third parties could materially
adversely affect our business. Additionally, the Internet could face serious
disruptions arising from the Year 2000 problem.
F-95
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Event Subsequent to Date of Auditors' Report (Unaudited):
On June 30, 1999, HomeStore.com, Inc. acquired all of the Company's
outstanding shares of common stock, at which time the Company became a wholly-
owned subsidiary of HomeStore.com, Inc.
F-96
<PAGE>
Inside Back Cover Artwork
Top Border--Approximately one inch black background with the words "Our
industry partnerships and affiliations. Below the top border appear two tables
with black border lines and the sections in each.
Top Table--The first section (top to bottom) contains the words
"REALTOR.com(TM) is the official Internet site of the NATIONAL ASSOCIATION OF
REALTORS(R)" and the REALTOR(R) "Box-R" logo. The second section contains the
words "HomeBuilder.com is the official new home site of THE NATIONAL
ASSOCIATION OF HOME BUILDERS" and the NAHB "eagle" logo (with the words
"NATIONAL ASSOCIATION OF HOME BUILDERS"). The third section contains the words
"Our portal relationships put us in front of more Internet users," and ten
logos of other companies.
Bottom Table--The first section (top to bottom) contains the words
"REALTOR.com(TM)" and five logos of other companies. The second section
contains the word "HomeBuilder.com(TM)" and seven logos of other companies.
The third section contains the word "SpringStreet.com(TM)" and ten logos of
other companies.
Below the bottom table appear the words "THE NATIONAL ASSOCIATION OF
REALTORS(R) does not make any endorsement or recommendation regarding any
purchase of the shares of common stock being sold in this offering." In the
lower left appears "HomeStore.com" in larger type within a box in the lower
right.
<PAGE>
[Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by
HomeStore in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 27,800
NASD filing fee............................................... 10,500
Nasdaq National Market listing fee............................ 95,000
Accounting fees and expenses.................................. 750,000
Legal fees and expenses....................................... 500,000
Road show expenses............................................ 50,000
Printing and engraving expenses............................... 500,000
Blue sky fees and expenses.................................... 10,000
Transfer agent and registrar fees and expenses................ 30,000
Miscellaneous................................................. 26,700
----------
Total....................................................... $2,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director, except for liability:
. for any breach of the director's duty of loyalty to the Registrant or
its stockholders,
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases); or
. for any transaction from which the director derived an improper
personal benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:
. the Registrant is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions;
. the Registrant may indemnify its other employees and agents as set
forth in the Delaware General Corporation Law;
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions; and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant intends to enter into Indemnification Agreements with each
of its current directors and officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Registrant's Certificate of Incorporation and to provide
additional procedural protections. At present, there is no pending litigation
or proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.
Reference is also made to Section of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities. The indemnification
provision in the Registrant's Certificate of Incorporation, Bylaws and the
Indemnity Agreements entered into between the Registrant and each of its
directors and officers may be sufficiently broad to permit indemnification of
the Registrant's directors and officers for liabilities arising under the
Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Underwriting Agreement (draft dated July 7, 1999)................. 1.01
Registrant's Amended and Restated Certificate of Incorporation.... 3.01
Registrant's Amended and Restated Bylaws.......................... 3.03
Second Amended and Restated NetSelect Stockholders' Agreement..... 4.02.1
Form of Indemnity Agreement....................................... 10.01
</TABLE>
Item 15. Recent Sales of Unregistered Securities.
The following table sets forth information regarding all securities sold by
the Registrant in the past three years.
<TABLE>
<CAPTION>
Aggregate
Class of Date Title of Number of Purchase Form of
Purchaser of Sale Securities Securities (1) Price Consideration
- --------- --------- ----------------------- ------------- ---------- ---------------------
Sales by (Pre-InfoTouch-
NetSelect Merger)
NetSelect, Inc.
<S> <C> <C> <C> <C> <C>
CDW Internet, L.L.C. ... 12/4/96 Class A Common Stock(2) 1,182,350 236 Cash
CDW Internet, L.L.C. ... 12/4/96 Class B Common Stock(2) 582,350 116 Cash
Whitney Equity Partners, 12/4/96- Series A Preferred(2) 4,117,645 $2,333,333
L.P.................... 1/31/97 Cash
Allen & Company......... 12/4/96- Series A Preferred(2) 2,058,825 $1,166,667
1/31/97 Cash
CDW Internet, L.L.C..... 12/4/96- Series A Preferred(2) 2,058,825 $1,166,667
1/31/97 Cash
Michael N. Flannery..... 12/12/96- Series B Preferred(2) 1,247,900 $1,652,795 Cash and
1/31/97 cancellation of
indebtedness
Daniel Koch............. 1/31/97- Series B Preferred(2) 138,655 $ 183,854 Cash and
12/15/97 cancellation of
indebtedness
John F. Petrick, Jr..... 1/31/97- Series B Preferred(2) 378,150 $ 500,000 Cash
5/15/97
Jason Chapnik........... 3/31/98 Common Stock(3) 73,455 -- -- Exchange of
shares in
connection with
TouchTech acquisition
Glen Graff.............. 3/31/97 Common Stock(3) 73,455 -- -- Exchange of
shares in
connection with
TouchTech acquisition
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Class of Date Title of Number of Purchase Form of
Purchaser of Sale Securities Securities (1) Price Consideration
- --------- -------- --------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Whitney Equity Partners, 9/29/97 Series C Preferred(2) 614,375 $ 900,000 Cash
L.P....................
GeoCapital IV, L.P...... 9/29/97 Series C Preferred(2) 1,535,940 $ 2,250,000 Cash
Broadview Partners 9/29/97 Series C Preferred(2) 68,260 $ 100,000 Cash
Group..................
Ingleside Interests, a
Colorado limited
partnership............ 9/29/97 Series C Preferred(2) 477,845 $ 700,000 Cash
CDW Internet, L.L.C..... 12/15/97 Series C Preferred(2) 375,450 $ 550,000 Cash
Daniel Koch(2).......... 12/15/97 Series C Preferred(2) 375,450 $ 550,000
General Electric Capital 1/12/98 Series D Preferred(2) 3,406,005 $10,000,031 Cash
Corporation............
Roger Scommegna......... 3/31/98 Common Stock(2) 525,000 -- -- Exchange of
shares in
connection with
The Enterprise
of America
Acquisition
AOL Warrants............ 4/8/98 Warrant to purchase 566,475 -- -- As part of
Common Stock(2) advertising
agreement
Fred White.............. 7/7/98 Series E Preferred(2) 788,125 -- -- Exchange of
shares in
connection with
merger of
National New
Homes Co.,
Inc., a wholly-
owned
subsidiary, and
MultiSearch
Solutions, Inc.
Roscoe F. White, III.... 7/7/98 Series E Preferred(2) 788,125 -- -- Exchange of
shares in
connection with
merger of
National New
Homes Co.,
Inc., a wholly-
owned
subsidiary, and
MultiSearch
Solutions, Inc.
Charles Ingrum.......... 7/7/98 Series E Preferred(2) 48,750 -- -- Exchange of
shares in
connection with
merger of
National New
Homes Co.,
Inc., a wholly-
owned
subsidiary, and
MultiSearch
Solutions, Inc.
Whitney Equity Partners, 8/21/98 Common Stock(2) 400,535 $ 505,475 Cash
L.P....................
GeoCapital IV, L.P.
(Richard A. Vines)..... 8/21/98 Common Stock(2) 130,010 $ 164,073 Cash
Broadview Partners Group
(Peter J. Mooney)...... 8/21/98 Common Stock(2) 5,780 $ 7,294 Cash
Ingleside Interests, a
Colorado limited
partnership (Joe F.
Hanauer)............... 8/21/98 Common Stock(2) 40,445 $ 51,042 Cash
General Electric Capital
Corporation (James G.
Brown)................. 8/21/98 Common Stock(2) 288,300 $ 363,828 Cash
Kleiner Perkins Caufield 8/21/98 Common Stock(2) 6,650,750 $ 8,393,247 Cash and
& Byers VIII, L.P...... cancellation of
indebtedness
KPCB VIII Founders Fund, 8/21/98 Common Stock(2) 385,370 $ 486,337 Cash and
L.P.................... cancellation of
indebtedness
KPCB Information 8/21/98 Common Stock(2) 180,410 $ 227,677 Cash and
Sciences Zaibatsu Fund cancellation of
II, L.P................ indebtedness
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Class of Date Title of Number of Purchase Form of
Purchaser of Sale Securities Securities (1) Price Consideration
- --------- -------- --------------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
National Association of 8/21/98 Common Stock(2) 288,355 $ 363,904 Cash and
REALTORS............... cancellation of
indebtedness
Whitney Equity Partners, 8/21/98 Series F Preferred(2) 184,075 $ 883,560 Cash
L.P....................
GeoCapital IV, L.P.
(Richard A. Vines)..... 8/21/98 Series F Preferred(2) 59,750 $ 286,800 Cash
Broadview Partners Group
(Peter J. Mooney)...... 8/21/98 Series F Preferred(2) 2,655 $ 12,744 Cash
Ingleside Interests, a
Colorado limited
partnership (Joe F.
Hanauer)............... 8/21/98 Series F Preferred(2) 18,590 $ 89,232 Cash
General Electric Capital
Corporation (James G.
Brown)................. 8/21/98 Series F Preferred(2) 132,495 $ 635,976 Cash
Kleiner Perkins Caufield 8/21/98 Series F Preferred(2) 1,131,405 $ 5,430,744 Cash and
& Byers VIII, L.P...... cancellation of
indebtedness
KPCB VIII Founders Fund, 8/21/98 Series F Preferred(2) 65,560 $ 314,688 Cash and
L.P.................... cancellation of
indebtedness
KPCB Information 8/21/98 Series F Preferred(2) 30,690 $ 147,312 Cash and
Sciences Zaibatsu Fund cancellation of
II, L.P................ indebtedness
National Association of 8/21/98 Series F Preferred(2) 132,520 $ 636,094 Cash and
REALTORS............... cancellation of
indebtedness
Intuit, Inc............. 8/21/98 Series F Preferred(2) 729,165 $ 3,499,992 Cash and
cancellation of
indebtedness
Fannie Mae.............. 8/21/98 Series F Preferred(2) 2,083,335 $10,000,008 Cash
Cox Interactive Media, 8/21/98 Series F Preferred(2) 2,083,335 $10,000,008 Cash
Inc....................
Morgan Stanley Venture 8/21/98 Series F Preferred(2) 365,575 $ 1,754,760 Cash
Partners III, L.P......
Morgan Stanley Venture 8/21/98 Series F Preferred(2) 35,100 $ 168,480 Cash
Investors III, L.P.....
The Morgan Stanley
Venture Partners
Entrepeneur Fund,
L.P.................... 8/21/98 Series F Preferred(2) 15,995 $ 76,776 Cash
Morgan Stanley Dean 8/21/98 Series F Preferred(2) 416,665 $ 2,000,016 Cash
Witter Equity Funding,
Inc....................
UBS Capital II, L.L.C... 8/21/98 Series F Preferred(2) 833,335 $ 4,000,008 Cash
Equipment Lease Warrants 1/11/99 Series F Preferred(2) 25,000 -- -- As partial
to El Camino consideration
Properties............. for lease
<CAPTION>
Sales by InfoTouch, Inc.
<S> <C> <C> <C> <C> <C>
Daniel A. Koch.......... 11/25/96 Common Stock(2) 64,835 $ 87,500 Cash
Michael S. Luther....... 11/25/96 Common Stock(2) 64,835 $ 87,500 Cash
Nussbaum Family Trust... 11/25/96 Common Stock(2) 37,050 $ 50,000 Cash
William Spazante........ 11/25/96 Common Stock(2) 18,525 $ 25,000 Cash
Employee option 8/16/98 Common Stock(2) 1,326,265 $ 594,039 Cash and
exercises, as a group.. promissory notes
<CAPTION>
Sales made in connection
with
NetSelect-InfoTouch
merger:
<S> <C> <C> <C> <C> <C>
NetSelect Common Stock 2/4/99 Common Stock(5) 12,482,445 -- -- Exchanged for
Shareholders........... Common Stock
of pre-NetSelect-
InfoTouch
merger
NetSelect ("Old
NetSelect")
NetSelect Series A 2/4/99 Series A Preferred(5) 6,890,000 -- -- Exchanged for
Preferred Series A
Shareholders........... Preferred of
Old NetSelect
NetSelect Series B 2/4/99 Series B Preferred(5) 951,690 -- -- Exchanged for
Preferred Series B
Shareholders........... Preferred of
Old NetSelect
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Class of Date Title of Number of Purchase Form of
Purchaser of Sale Securities Securities (1) Price Consideration
- --------- --------- --------------------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
NetSelect Series C 2/4/99 Series C Preferred(5) 3,071,865 -- -- Exchanged for
Preferred Series C
Shareholders........... Preferred of
Old NetSelect
NetSelect Series D 2/4/99 Series D Preferred(5) 3,406,005 -- -- Exchanged for
Preferred Series D
Shareholders........... Preferred of
Old NetSelect
NetSelect Series E 2/4/99 Series E Preferred(5) 1,625,000 -- -- Exchanged for
Preferred Series E
Shareholders........... Preferred of
Old NetSelect
NetSelect Series F 2/4/99 Series F Preferred(5) 8,320,245 -- -- Exchanged for
Preferred Series F
Shareholders........... Preferred of
Old NetSelect
<CAPTION>
Sales by (Post-
InfoTouch-NetSelect
Merger) NetSelect, Inc.
<S> <C> <C> <C> <C> <C>
Broker Gold 2/18/99 Common Stock(2) 643,030 $2,012,032 Cash
Shareholders, as a
group..................
Broker Gold 2/18/99 Series F Preferred(2) 481,970 $1,507,968 Cash
Shareholders, as a
group..................
Broker Gold Warrants.... 2/18/99 Warrant to purchase 358,315 -- -- As partial
Common Stock(2) consideration
for data content
agreements
ATGF II................. 4/9/99 Series G Preferred(2) 376,905 $7,516,993 Cash
Litton Master Trust..... 4/9/99 Series G Preferred(2) 56,250 $1,121,850 Cash
James Stableford........ 4/9/99 Series G Preferred(2) 2,500 $ 49,860 Cash
Anthony Ciulla.......... 4/9/99 Series G Preferred(2) 2,500 $ 49,860 Cash
Ralph H. Cechettini 1995 4/9/99 Series G Preferred(2) 15,000 $ 299,160 Cash
Trust..................
Pivotal Partners........ 4/9/99 Series G Preferred(2) 35,000 $ 698,040 Cash
Marc Weiss.............. 4/9/99 Series G Preferred(2) 12,500 $ 249,300 Cash
Dana Smith.............. 4/9/99 Series G Preferred(2) 750 $ 14,958 Cash
Integral Capital 4/9/99 Series G Preferred(2) 249,570 $4,977,424 Cash
Partners IV, L.P.......
Integral Capital 4/9/99 Series G Preferred(2) 1,132 $ 22,587 Cash
Partners IV MS Side
Fund, L.P..............
Cox Interactive Media... 4/9/99 Series G Preferred(2) 100,280 $1,999,984 Cash
Employee option 2/12/99- Common Stock(4) 4,773,040 $4,276,537 Cash and
exercises, as a group.. 4/30/99 promissory
notes
Gold Alliance Warrants.. 5/98-3/99 Warrant to purchase 209,380 -- -- As partial
Common Stock(2) consideration
for data content
agreements
9 SpringStreet 6/30/99 Common Stock(5) 1,086,212 Exchange of shares
shareholders, as a in connection
group.................. with SpringStreet
acquisition
46 SpringStreet 6/30/99 Series H Preferred(5) 4,222,845 -- -- Exchange of shares
shareholders, as a in connection
group.................. with SpringStreet
acquisition
</TABLE>
II-5
<PAGE>
- --------
(1) Each share of Series A, Series B, Series C, Series D, Series E, Series F
and Series G Preferred Stock will convert automatically into two shares of
common stock, respectively, upon the consummation of this offering.
(2) Sales made in reliance on Section 4(2) of the Securities Act and/or Rule
506 of Regulation D promulgated under the Securities Act.
(3) Sales made in reliance on Section 4(2) of the Securities Act and/or Rule
504 of Regulation D promulgated under the Securities Act.
(4) All sales of common stock made pursuant to the exercise of stock options
were made in reliance on Rule 701 under the Securities Act.
(5) Sales exempt under Section 3(a)(10) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.01 Form of Underwriting Agreement (draft dated July 7, 1999).(1)
2.01 Agreement and Plan of Merger dated December 31, 1998, between
NetSelect, Inc. and InfoTouch Corporation.
2.02 Agreement and Plan of Reorganization dated June 20, 1998, among
NetSelect, Inc., National New Homes Co., Inc., MultiSearch
Solutions, Inc., Fred White, and R. Fred White III.
2.03 Exchange Agreement dated March 31, 1998, among NetSelect, Inc., The
Enterprise of America, Ltd., and Roger Scommegna.
2.04 Agreement and Plan of Reorganization/Merger between NetSelect, Inc.
and SpringStreet.com.
3.01 Registrant's Amended and Restated Certificate of Incorporation
dated April 8, 1999.
3.02 Registrant's Amended and Restated Certificate of Incorporation to
be filed immediately after the closing of this offering.(1)
3.03 Registrant's Amended (and Restated) Bylaws dated February 4, 1999.
3.04 Registrant's Bylaws to be filed immediately after the closing of
this offering.(1)
3.05.1 RealSelect, Inc.'s Certificate of Incorporation dated October 25,
1996.
3.05.2 RealSelect, Inc.'s Certificate of Amendment to Certificate of
Incorporation dated November 25, 1996.
3.06 RealSelect, Inc.'s Bylaws dated November 26, 1996.
4.01 Form of Specimen Certificate for Registrant's common stock.(1)
4.02.1 NetSelect, Inc. Second Amended and Restated Stockholders Agreement
dated January 28, 1999.
4.02.2 Amendment No. 1 to NetSelect, Inc. Second Amended and Restated
Stockholders Agreement dated January 28, 1999.
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.(1)
10.01 Form of Indemnity Agreement between Registrant and each of its
directors and executive officers.
10.02.1 Operating Agreement dated November 26, 1996, between REALTORS(R)
Information Network, Inc. and RealSelect, Inc.
10.02.2 First Amendment to Operating Agreement between REALTORS(R)
Information Network, Inc. and RealSelect, Inc. dated December 27,
1996.
10.02.3 Amendment No. 2 to Operating Agreement between REALTORS(R)
Information Network, Inc. and RealSelect, Inc. dated May 28, 1999.
10.03 Master Agreement dated November 26, 1996, among NetSelect, Inc.,
NetSelect, L.L.C., RealSelect, Inc., CDW Internet, L.L.C., Whitney
Equity Partners, L.P., Allen & Co., InfoTouch Corporation, and
REALTORS(R) Information Network, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
10.04 Joint Ownership Agreement dated November 26, 1996, among the
National Association of REALTORS(R), NetSelect, L.L.C., and
NetSelect, Inc.
10.05 Trademark License dated November 26, 1996, between the National
Association of REALTORS(R) and RealSelect, Inc.
10.06 Stock and Interest Purchase Agreement (NetSelect Series A and B
Preferred) dated November 26, 1996, among NetSelect, Inc.,
NetSelect L.L.C., and InfoTouch Corporation.
10.07 GeoCapital IV, L.P. Subscription Agreement (NetSelect Series C
Preferred) dated September 29, 1997.
10.08 Broadview Partners Group Subscription Agreement (NetSelect Series C
Preferred) dated September 29, 1997.
10.09 Ingleside Interests Subscription Agreement (NetSelect Series C
Preferred) dated September 29, 1997.
10.10 Daniel Koch Subscription Agreement (NetSelect Series C Preferred)
dated September 29, 1997.
10.11 Whitney Equity Partners Subscription Agreement (NetSelect Series C
Preferred) dated September 29, 1997.
10.12 CDW Internet Subscription Agreement (NetSelect Series C Preferred)
dated September 29, 1997.
10.13 NetSelect Series D Preferred Stock Purchase Agreement dated January
12, 1998.
10.14 NetSelect Series F Preferred Stock Purchase Agreement dated August
21, 1998.
10.15 NetSelect Series G Preferred Stock Purchase Agreement dated April
9, 1999.
10.16 NetSelect, Inc. 1996 Stock Incentive Plan.
10.17 NetSelect, Inc. 1999 Equity Incentive Plan.
10.18 HomeStore.com, Inc. 1999 Stock Incentive Plan.(3)
10.19 HomeStore.com, Inc. 1999 Employee Stock Purchase Plan.(3)
10.20 InfoTouch Corporation 1994 Stock Incentive Plan.
10.21 Employment Agreement between NetSelect, Inc. and Stuart H. Wolff,
Ph.D.
10.22 Employment Agreement between NetSelect, Inc. and Richard Janssen.
10.23 Employment Agreement between NetSelect, Inc. and Michael A.
Buckman.
10.24.1 Office Lease dated September 18, 1998 between RealSelect, Inc. and
WHLNF Real Estate Limited Partnership for 225 West Hillcrest,
Suite 100, Thousand Oaks, California
10.24.2 First Amendment to Office Lease dated March 31, 1999 between
RealSelect, Inc. and WHLNF Real Estate Limited Partnership for 225
West Hillcrest, Suite 100, Thousand Oaks, California
10.25 401(k) Plan.
10.26.1 Employment Agreement between NetSelect, Inc. and Peter Tafeen.(1)
10.26.2 Amendment to Employment Contract between NetSelect, Inc. and
Peter Tafeen.(1)
10.27 Employment Agreement between NetSelect, Inc. and John M. Giesecke.
10.28 Employment Agreement between NetSelect, Inc. and David Rosenblatt.
10.29 Agreement dated August 21, 1998 among RealSelect, RIN, the NAR,
NetSelect and NetSelect L.L.C.
10.30 Agreement among NetSelect, Inc., RealSelect, Inc., RIN and NAR
dated May 28, 1999.
10.31 Second Amended and Restated Interactive Marketing Agreement among
RealSelect, Inc., NetSelect, Inc. and America Online, Inc. dated
April 8, 1998.(1)
10.32 Letter Agreement regarding rental site acquisition among the NAR,
RIN and RealSelect, Inc. dated May 17, 1999.(2)
10.33 Employment Agreement between HomeStore.com, Inc. and M. Jeffrey
Charney.(1)
21.01 Subsidiaries of Registrant.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).(1)
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.(1)
23.03 Consent of PricewaterhouseCoopers LLP, independent accountants.(1)
23.04 Consent of PricewaterhouseCoopers LLP, independent accountants.(1)
23.05 Consent of PricewaterhouseCoopers LLP, independent accountants.(1)
23.06 Consent of PricewaterhouseCoopers LLP, independent accountants.(1)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
23.07 Consent of Ernst & Young LLP, independent auditors.(1)
23.08 Consent of Deloitte & Touche LLP, independent auditors.(1)
24.01 Power of Attorney (see page II-9).
27.01 Financial Data Schedule.
</TABLE>
- --------
Unless otherwise indicated, exhibits have previously been filed.
(1) Documents filed herewith.
(2) Certain information in these exhibits has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.46.
(3) To be supplied by amendment.
(b) Financial Statement Schedules
Financial statement schedules are omitted because the information called
for is not required or is shown either in the financial statements or the
notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Thousand Oaks, State of California, on the 8th
day of July, 1999.
HomeStore.com, Inc.
/s/ Stuart H. Wolff
By:__________________________________
Stuart H. Wolff
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Principal Executive Officer:
<S> <C> <C>
/s/ Stuart H. Wolff Chairman of the Board, Chief July 8, 1999
____________________________________ Executive Officer and
Stuart H. Wolff Director
Principal Financial Officer and
Principal Accounting Officer:
/s/ John M. Giesecke, Jr. Chief Financial Officer and July 8, 1999
____________________________________ Secretary
John M. Giesecke, Jr.
Additional Directors:
* Director July 8, 1999
____________________________________
Richard R. Janssen
* Director July 8, 1999
____________________________________
Michael C. Brooks
* Director July 8, 1999
____________________________________
James G. Brown
* Director July 8, 1999
____________________________________
L. John Doerr
* Director July 8, 1999
____________________________________
Joe F. Hanauer
* Director July 8, 1999
____________________________________
William E. Kelvie
* Director July 8, 1999
____________________________________
Kenneth K. Klein
*By: /s/ Stuart H. Wolff Attorney-in-fact July 8, 1999
__________________________________
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement (draft dated July 7, 1999).
3.02 Registrant's Amended and Restated Certificate of Incorporation to be
filed immediately after the closing of this offering.
3.04 Registrant's Bylaws to be filed immediately after the closing of this
offering.
4.01 Form of Specimen Certificate for Registrant's common stock.
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
10.26.1 Employment Agreement between NetSelect, Inc. and Peter Tafeen.
10.26.2 Amendment to Employment Contract between NetSelect, Inc. and
Peter Tafeen.
10.31 Second Amended and Restated Interactive Marketing Agreement among
RealSelect, Inc., NetSelect, Inc. and America Online, Inc. dated
April 8, 1998.
10.33 Employment Agreement between HomeStore.com, Inc. and M. Jeffrey
Charney.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.03 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.04 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.05 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.06 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.07 Consent of Ernst & Young LLP, independent auditors.
23.08 Consent of Deloitte & Touche LLP, independent auditors.
</TABLE>
<PAGE>
EXHIBIT 1.1
[Draft Dated 07/07/99]
----------------------
7,000,000 Shares
HOMESTORE.COM, INC.
Common Stock, par value $0.001 per share
UNDERWRITING AGREEMENT
__________, 1999
<PAGE>
_____________, 1999
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
BancBoston Robertson Stephens Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
HomeStore.com, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") 7,000,000 shares of its common stock, $0.001 par value per share
(the "Firm Shares"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 1,050,000 shares of its common stock,
$0.001 par value per share (the "Additional Shares"), if and to the extent that
you, as Managers of the offering, shall have determined to exercise, on behalf
of the Underwriters, the right to purchase such shares of common stock granted
to the Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The shares of
common stock, $0.001 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
<PAGE>
As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares
set forth opposite its name on Schedule II to this Agreement, up to _________
shares, for sale to the Company's employees, officers and directors and other
parties associated with the Company (collectively, "Participants"), as set forth
in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the first business day
after the date on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent
-3-
<PAGE>
that the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under
-4-
<PAGE>
this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(n) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect
-5-
<PAGE>
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries;
and any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with
the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, in each case except as described in the
Prospectus.
(o) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and,
except as described in the Prospectus, neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse affect on the Company and
its subsidiaries, taken as a whole.
(p) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or,
to the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent labor disturbance by the employees
of any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(q) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(r) The Company and its subsidiaries have complied and are in
compliance with all federal, state, local and foreign statutes, executive
orders, proclamations, regulations, rules, directives, decrees, ordinances
and similar provisions having the force or effect of law and all judicial
and administrative orders, rulings, determinations and common law
concerning the importation of
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merchandise, the export or reexport of products, services and technology,
and the terms and conduct of international transactions applicable to the
Company and its subsidiaries in connection with the conduct of the
Company's or any subsidiary's business (including as the same relates to
record keeping requirements) ("International Trade Laws and Regulations");
neither the Company nor any of its subsidiaries has made or provided any
material false statement or material omission to any agency of any federal,
state or local government, purchasers of products, or foreign government or
foreign agency, in connection with the exportation of merchandise
(including with respect to export licenses, exceptions and other export
authorizations and any filings required for or related to exportation of
any item), the importation of merchandise or other approvals required by a
foreign government or agency or any other requirement relating to any
International Trade Laws and Regulations; neither the Company nor any of
its subsidiaries has made any payment, offer, gift, promise to give, or
authorized or otherwise participated in, assisted or facilitated any
payment or gift related to the Company's or any subsidiary's business that
is prohibited by the United States Foreign Corrupt Practices Act.
(s) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
business, and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described the Prospectus.
(t) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(u) PricewaterhouseCoopers LLP are independent public accountants
with respect to the Company and its subsidiaries as required by the
Securities Act.
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(v) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as disclosed therein; the
supporting schedules, if any, included in the Registration Statement
present fairly in accordance with generally accepted accounting principles
the information required to be stated therein; and the other financial and
statistical information and data set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) are, in all
material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(w) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(x) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(y) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
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<PAGE>
(z) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except such as have been validly waived.
(aa) The Company has reviewed its operations and the operations of
its subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which
the business or operations of the Company or any of its subsidiaries will
be affected by the Year 2000 Problem. As a result of such review, the
Company has no reason to believe, and does not believe, that the Year 2000
Problem will have a material adverse effect on the Company and its
subsidiaries taken as a whole. The "Year 2000 Problem" as used herein
means any significant risk that the computer hardware or software used in
the receipt, transmission, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems
of any kind will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively as in the case of dates
or time periods occurring prior to January 1, 2000.
(bb) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(cc) The Nasdaq Stock Market, Inc. has approved the Common Stock for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(dd) Except for the Shares, all outstanding shares of Common Stock,
and all securities convertible into or exercisable or exchangeable for
Common Stock, are subject to valid and binding agreements (collectively,
the "Lock-up Agreements") that restrict the holders thereof from selling,
making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common Stock,
or any such securities convertible into or exercisable or exchangeable for
Common Stock, for a period of 180 days after the date of the Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated.
(ee) The Company (i) has notified each holder of a currently
outstanding option issued under the 1996 Stock Incentive Plan and the 1999
[Stock Option] Plan (each an "Option Plan") and each person who has
acquired shares of
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Common Stock pursuant to the exercise of any option granted under any
Option Plan that pursuant to the terms of such Option Plan, that none of
such options or shares may be sold or otherwise transferred or disposed of
for a period of 180 days after the date of the Prospectus and (ii) has
imposed a stop-transfer instruction with the Company's transfer agent in
order to enforce the foregoing lock-up provision imposed pursuant to each
Option Plan.
[(ff) The Company (i) has notified each shareholder who is party to
the Amended and Restated RealSelect Stockholders Agreement dated January
__, 1999, as amended (the "Registration Rights Agreement"), that pursuant
to the terms of the Registration Rights Agreement, none of the shares of
the Company's capital stock held by such shareholder may be sold or
otherwise transferred or disposed of for a period of 180 days after the
date of the Prospectus and (ii) has imposed a stop-transfer instruction
with the Company's transfer agent in order to enforce the foregoing lock-up
provision imposed pursuant to the Registration Rights Agreement.]
(gg) The Company represents and warrants to Morgan Stanley that (i)
the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with
any applicable laws or regulations of foreign jurisdictions in which the
Prospectus or any preliminary prospectus, as amended or supplemented, if
applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order,
registration or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
(hh) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business
with the Company or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "Purchase Price").
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<PAGE>
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 1,050,000
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder, (B) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which the Underwriters have been advised in
writing, (C) the grant of options to purchase Common Stock pursuant to the
Company's 1999 [Stock Option] Plan and (D) the issuance by the Company of shares
of Common Stock pursuant to the Company's 1999 Employee Stock Purchase Plan.
3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are
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to be offered to the public initially at $_____________ a share (the "Public
Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of $______ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or to
certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on _________, 1999, or at such
other time on the same or such other date, not later than _________, 1999, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
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(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Fenwick & West LLP, outside counsel to the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of
Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole;
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(ii) each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
the Company or any of its subsidiaries that is material to the Company
and its subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any
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governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the captions
"Risk Factors--Certain existing stockholders own a large percentage of
our voting stock," "Risk Factors--Future sales of our common stock may
depress our stock price," "Risk Factors--Our certificate of
incorporation, bylaws, Delaware law and our agreements with the
National Association of REALTORS contain provisions that could
discourage a takeover," "______________", "_____________",
"Management--[Benefit Plans]," "Management--[Change of Control
Agreements,]" "Management-- [Employment Agreements], "Management--
Limitation of Liability and Indemnification," "Certain Transactions,"
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriters" and (B) in the Registration Statement in Items 14 and
15, in each case insofar as such statements constitute summaries of
the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein;
(x) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;
(xii) the Company and its subsidiaries (A) are in compliance
with any and all applicable Environmental Laws, (B) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (C) are
in compliance with all terms and conditions of any such permit,
license or
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approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as
a whole; and
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules included therein and financial and statistical data derived
therefrom, as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities Act and
the applicable rules and regulations of the Commission thereunder, (B)
has no reason to believe that (except for financial statements and
schedules included therein and financial and statistical data derived
therefrom, as to which such counsel need not express any belief) the
Registration Statement and the prospectus included therein at the time
the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (C) has no reason to believe that (except
for financial statements and schedules included therein and financial
and statistical data derived therefrom, as to which such counsel need
not express any belief) the Prospectus contains any untrue statement
of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of [________________], intellectual property counsel to the
Company, dated the Closing Date, with respect to certain intellectual
property matters, to the effect that:
(i) The Company owns all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described
in the Prospectus as being owned by it or necessary for the conduct of
its business, and such counsel is not aware of any claim to the
contrary or any challenge by any other person to the rights of the
Company with respect to the foregoing other than those identified in
the Prospectus;
(ii) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company alleging that
the
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Company is infringing or otherwise violating any patents or trade
secrets owned by others other than those identified in the Prospectus;
(iii) Such counsel has reviewed the descriptions of patents and
patent applications under the captions "Risk Factors--Our success
depends on our ability to protect our proprietary technology" and
"Business--Patents and Proprietary Rights" in the Registration
Statement and Prospectus, and, to the extent they constitute matters
of law or legal conclusions, these descriptions are accurate and
fairly and completely present the patent situation of the Company;
(iv) For each copyrightable product described in the Prospectus,
the Company either (i) has registered all copyrights for such product
and has obtained and properly recorded written assignments of all
rights and title therein to the Company from all authors and owners of
such copyrights other than the Company, including without limitation
any and all independent contractors; or (ii) was vested with original
title to all copyrights for such product and no written assignments
for such copyrights are required to perfect Company's rights and title
thereto;
(v) After review of the file history and patent attorney's file
with respect to the security of patent protection on the Company's
technology for each patent or patent application described in the
Prospectus as being owned by the Company or necessary for the conduct
of its business, such counsel is aware of nothing that causes such
counsel to believe that, as of the date of the Registration Statement
became effective and as of the date of such opinion, the description
of patents and patent applications under the captions "Risk Factors--
Our success depends on our ability to protect our proprietary
technology" and "Business--Patents and Proprietary Rights" in the
Registration Statement and Prospectus contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made therein, in light of the circumstances under which
they were made, not misleading, including without limitation, any
undisclosed material issue with respect to the subsequent validity or
enforceability of such patent or patent issuing from any such pending
patent application; and
(vi) [Additional opinions to follow pending due diligence
investigation.]
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(e) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, dated the Closing Date, covering the matters
referred to in Sections 5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Fenwick & West LLP and
Wilson Sonsini Goodrich & Rosati, Professional Corporation, may state that
their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof,
but are without independent check or verification, except as specified.
The opinion of Fenwick & West LLP described in Section 5(c) above
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(f) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from PricewaterhouseCoopers LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the securityholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
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6 Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five (5) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
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(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending [September 30], 2000 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws
as provided in Section 6(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
National Association of Securities Dealers, Inc. (the "NASD"), (v) all fees
and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or depositary,
(viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation,
expenses associated with the production of road show slides and graphics,
fees and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any
such consultants, and the cost of any aircraft chartered in connection with
the road show, (ix) all fees and disbursements of counsel incurred by the
Underwriters in connection with the
-20-
<PAGE>
Directed Share Program and stamp duties, similar taxes or duties or other
taxes, if any, incurred by the Underwriters in connection with the Directed
Share Program, and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution," and the last paragraph of Section 9 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they
may make.
(g) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date of
the effectiveness of the Registration Statement. Morgan Stanley will
notify the Company as to which Participants will need to be so restricted.
The Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time.
Furthermore, the Company covenants with Morgan Stanley that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
7 Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
-21-
<PAGE>
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("Morgan Stanley Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in conjunction with the
Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the shares
which, immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided that,
the Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(c), such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have
-22-
<PAGE>
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in respect of the legal expenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all such indemnified parties and that all such fees and expenses
shall be reimbursed as they are incurred. Such firm shall be designated in
writing by Morgan Stanley, in the case of parties indemnified pursuant to
Section 7(a), and by the Company, in the case of parties indemnified pursuant to
Section 7(c). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7(b) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Morgan Stanley within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act.
(e) To the extent the indemnification provided for in Section 7(a),
7(b) or 7(c) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(e)(i)
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<PAGE>
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 7(e)(i) above
but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the
-24-
<PAGE>
Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares.
8 Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
--
9 Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 9 by an amount in excess of one-
ninth of such number of Shares without the written consent of such Underwriter.
If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you and the Company for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or
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<PAGE>
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option (i) to
terminate their obligation hereunder to purchase Additional Shares or (ii) to
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10 Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11 Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
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<PAGE>
12 Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
HOMESTORE.COM, INC.
By: _______________________________
Stuart H. Wolff
Chairman of the Board and
Chief Executive Officer
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
BancBoston Robertson Stephens Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By: __________________________
Name:
Title:
-27-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares to be
Underwriter Purchased
---------------------- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities
Corporation
BancBoston Robertson Stephens Inc.
Merrill Lynch, Pierce Fenner
& Smith Incorporated
--------------
Total........................................
==============
</TABLE>
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<PAGE>
Exhibit A
FORM OF LOCK-UP LETTER
-29-
<PAGE>
EXHIBIT 3.02
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOMESTORE.COM, INC.
HomeStore.com, Inc., a Delaware corporation, hereby certifies that the
Amended and Restated Certificate of Incorporation of the Corporation attached
hereto as Exhibit "A", which is incorporated herein by this reference, has been
-----------
duly adopted by the Corporation's Board of Directors and stockholders in
accordance with Sections 242 and 245 of the Delaware General Corporation Law,
with the approval of the Corporation's stockholders having been given by written
consent without a meeting in accordance with Section 228 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, said corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its by duly authorized officer.
Dated: __________, 1999
HOMESTORE.COM, INC.
----------------------------------------
Stuart H. Wolff, Chief Executive Officer
<PAGE>
EXHIBIT "A"
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOMESTORE.COM, INC.
(Originally incorporated on July 29, 1993
under the name InfoTouch Corporation)
ARTICLE I
The name of the Corporation is HomeStore.com, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 15 East North Street, City of Dover, County of Kent. The name of its
registered agent at such address is United Corporate Services, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
(a) The Corporation is authorized to issue two classes of shares which
shall be designated as Common Stock, $0.001 par value per share, and Preferred
Stock, $0.001 par value per share. The total number of shares that the
Corporation is authorized to issue is 200,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock.
(b) The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors of the Corporation (the "Board of
--------
Directors") is expressly authorized to provide for the issue of all or any of
- ---------
the remaining shares of the Preferred Stock in one or more series, to determine
the designation of each such series, to fix the number of shares and to
determine or alter for each such series, such voting powers, full or limited, or
no voting powers, and such designations, preferences, and relative,
participating, optional, or other rights and such qualifications, limitations,
or restrictions thereof, as shall be stated and expressed in the resolutions or
resolutions adopted by the Board of Directors providing for the issue of such
shares and as may be permitted by the General Corporation Law of the State of
Delaware. Except as otherwise expressly provided in any certificate of
designation designating any series of Preferred Stock pursuant to the foregoing
provisions of this Article IV, any new series of Preferred Stock may be
designated, fixed and determined as provided herein by the Board of Directors
without approval of the holders of Common Stock or the holders of Preferred
Stock, or
-2-
<PAGE>
any series thereof, and any such new series may have powers, preferences and
rights, including, without limitation, voting rights, dividend rights,
liquidation rights, redemption rights and conversion rights, senior to, junior
to or pari passu with the rights of the Common Stock, the Preferred Stock, or
any future class or series of Preferred Stock or Common Stock. The Board of
Directors is also expressly authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series. In case the number
of shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
There is hereby designated a series of Preferred Stock, designated as
Series A Preferred Stock, $0.001 par value per share (the "Series A Preferred").
------------------
The authorized number of shares of Series A Preferred is one (1) share. The
relative rights, preferences, privileges, and restrictions granted to or imposed
upon the Series A Preferred are as follows:
(a) Dividends. In each calendar year, the holder of the Series A Preferred
---------
shall be entitled to receive, when, as and if declared by the Board, out of any
funds and assets of the Corporation legally available therefor, non-cumulative
dividends in an amount equal to $0.08 per share (as appropriately adjusted for
stock splits, stock dividends, recapitalizations and the like), prior and in
preference to the payment of any dividend on the Common Stock in such calendar
year. Dividends on the Series A Preferred shall not be mandatory or cumulative,
and no rights or interest shall accrue to the holder of the Series A Preferred
by reason of the fact that the Corporation shall fail to declare or pay
dividends on the Series A Preferred in any calendar or fiscal year of the
Corporation. If, after dividends in the full preferential amounts specified in
this Section for the Series A Preferred have been paid or declared and set apart
in any calendar year of the Corporation, the holder of Series A Preferred shall
have no further rights to receive any further dividends that the Board may
declare or pay in that calendar year.
(b) Liquidation. In the event of any liquidation, dissolution or winding up
-----------
of the Corporation, whether voluntary or involuntary, the Series A Preferred
shall be entitled to receive, prior and in preference to any payment or
distribution on any shares of Common Stock, an amount per share equal to $1.00
per share of Series A Preferred. After payment of such amount, any further
amounts available for distribution shall be distributed among the holders of
Common Stock and the holder of Preferred Stock other than Series A Preferred, if
any, entitled to receive such distributions.
(c) Redemption. Upon the earlier to occur of (i) termination of that
----------
certain Operating Agreement dated November 26, 1996, as the same may be amended
from time to time (the "Operating Agreement"), or (ii) the National Association
-------------------
of Realtors ("NAR") ceases to own at least 149,778 shares of Common Stock of the
---
Corporation, or (iii) the existence and continuance of a material breach by the
NAR of that certain Joint Ownership Agreement, dated as of November 26, 1996,
among the NAR, NetSelect and NetSelect, L.L.C., or the Trademark License dated
as of November 26, 1996, by and between NAR and RealSelect, at any time
thereafter the Corporation may, at the option of the Board, redeem the Series A
Preferred. The redemption price for each share of Series A Preferred shall be
$1.00 per share. If the Corporation
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<PAGE>
elects to redeem the Series A Preferred, it shall give written notice (the
"Redemption Notice") to the holder of the Series A Preferred, at the address
-----------------
last shown on the records of the Corporation for such holder, notifying the
holder of the redemption to be effected, the redemption date (which may be
selected by the Corporation in its discretion), and the place at which payment
may be obtained, and calling upon such holder to surrender to the Corporation,
in the manner and at the place designated, the certificate or certificates
representing the shares to be redeemed. On or before the designated redemption
date, each holder of Series A Preferred to be redeemed shall surrender the
certificate(s) representing such shares to be redeemed to the Corporation, in
the manner and at the place designated in the Redemption Notice, and thereupon
the redemption price for such shares shall be payable to the order of the person
whose name appears on such certificate(s) as the owner thereof, and each
surrendered certificate shall be canceled and retired. If the Redemption Notice
shall have been duly given, and if on the Redemption Date the redemption price
is either paid or made available for payment, then notwithstanding that the
certificates evidencing any of the shares of Series A Preferred so called for
redemption shall not have been surrendered, all dividends with respect to such
shares shall cease to accrue after the redemption date, such shares shall not
thereafter be transferred on the Corporation's books and the rights of all of
the holders of such shares with respect to such shares shall terminate after the
redemption date, except only the right of the holder to receive the redemption
price without interest upon surrender of their certificate(s) therefor.
(d) Voting. Except as provided in this paragraph, the Series A Preferred
------
shall not be entitled to notice of any stockholders' meetings and shall not be
entitled to vote on any matters with respect to any question upon which holders
of Common Stock or Preferred Stock have the right to vote, except as may be
required by law (and, in any such case, the Series A Preferred shall have one
vote per share and shall vote together with the Common Stock as a single class).
The holder of Series A Preferred shall be entitled to elect one (1) director of
the Corporation. If there shall be any vacancy in the office of a director
elected by the holder of the Series A Preferred, then a director to hold office
for the unexpired term of such directorship may be elected by the vote or
written consent of the holder of the Series A Preferred. Subject to Section
141(k) of the Delaware General Corporation Law, any director who shall have been
elected to the Board by the holders of Series A Preferred, or by any directors
elected by holders of the Series A Preferred as provided above, may be removed
during his or her term of office only for cause by, and only by, the affirmative
vote of shares representing a majority of the voting power of the outstanding
shares of Series A Preferred. The provisions of this Article may not be amended
without the approval of the holder of the Series A Preferred.
(e) Automatic Conversion. Each share of Series A Preferred Stock shall
--------------------
automatically be converted into one fully paid and nonassessable share of Common
Stock upon any sale, transfer, pledge, or other disposition of the share of
Series A Preferred to any person or entity other than the initial holder of such
share of Series A Preferred, or any successor by operation of law that functions
as a non-profit trade association for Realtors under Section 501(c)(6) of
Internal Revenue Code of 1986, as amended, that owns the REALTOR trademark, or
any wholly-owned affiliate of such holder as long as the holder continues to own
such affiliate.
-4-
<PAGE>
ARTICLE VI
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(a) The conduct of the affairs of the Corporation shall be managed
under the direction of its Board of Directors. The number of directors shall be
fixed from time to time exclusively by resolution of the Board of Directors;
effective on the date that this Restated Certificate is filed with the Delaware
Secretary of State, and subject to the preceding provisions of this sentence,
the initial number of directors shall be eight (8).
(b) Notwithstanding the other provisions of this Article VI, each
director shall hold office until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(c) Subject to the rights of the holders of any series of Preferred
Stock, any vacancy occurring in the Board of Directors for any cause, and any
newly created directorship resulting from any increase in the authorized number
of directors, shall, unless (i) the Board of Directors determines by resolution
that any such vacancies or newly created directorships shall be filled by the
stockholders, or (ii) as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director, and not by the stockholders. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred.
(d) Subject to the rights of the holders of any series of Preferred
Stock, a director may be removed only for cause by, and only by, the holders of
a majority of the shares then entitled to vote at an election of directors.
(e) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the directors
shall be divided, with respect to the time for which they severally hold office,
into three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors, with the number of directors in
each class to be divided as equally as reasonably possible. The term of office
of the Class I directors shall expire at the Corporation's first annual meeting
of stockholders following the closing of the Corporation's initial public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock to the
public (the "Initial Public Offering"), the term of office of the Class II
directors shall expire at the Corporation's second annual meeting of
stockholders following the closing of the Initial Public Offering, and the term
of office of the Class III directors shall expire at the Corporation's third
annual meeting of stockholders following the closing of the Initial Public
Offering. At each annual meeting of stockholders commencing with the first
annual meeting of stockholders following the closing of the Initial Public
Offering, directors elected to succeed those directors of
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<PAGE>
the class whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election.
(f) Election of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
(g) No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws of the Corporation, and no action shall be taken by the stockholders
by written consent.
(h) Advance notice of stockholder nominations for the election of
directors of the Corporation and of business to be brought by stockholders
before any meeting of stockholders of the Corporation shall be given in the
manner provided in the Bylaws of the Corporation. Business transacted at special
meetings of stockholders shall be confined to the purpose or purposes stated in
the notice of meeting.
ARTICLE VII
The Board of Directors of the Corporation is authorized and empowered from
time to time in its discretion to make, alter, amend or repeal Bylaws of the
Corporation.
ARTICLE VIII
The Corporation shall, to the fullest extent permitted by the provisions of
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it shall
have power to indemnify under said section from and against any and all
expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such person.
ARTICLE IX
To the fullest extent permitted by law, no director of the Corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended. Neither
any amendment nor repeal of this Article VIII, nor the adoption of any provision
of this Certificate of Incorporation inconsistent with this Article VIII, shall
eliminate, reduce or otherwise adversely affect any limitation on the personal
liability of a director of the Corporation existing at the time of such
amendment, repeal or adoption of such an inconsistent provision.
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<PAGE>
EXHIBIT 3.04
BYLAWS
OF
HOMESTORE.COM, INC.
A Delaware Corporation
As Adopted _________, 1999
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. Unless directors are elected by written
consent in lieu of an annual meeting, as permitted by Section 211 of the
Delaware General Corporation Law, an annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Board of Directors, the
Chairperson of the Board of Directors, the Chief Executive Officer or the
President of the Corporation, or by a majority of the members of the Board of
Directors. Special meetings may not be called by any other person or persons. If
a special meeting of stockholders is called by any person or persons other than
by a majority of the members of the Board of Directors, then such person or
persons shall call such meeting by delivering a written request to call such
meeting to each member of the Board of Directors, and the Board of Directors
shall then determine the time, date and place of such special meeting, which
shall be held not more than one hundred twenty (120) nor less than thirty-five
(35) days after the written request to call such special meeting was delivered
to each member of the Board of Directors.
Section 1.3: Notice of Meetings. Written notice of all meetings of
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder of record entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, then a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting. At the adjourned meeting the Corporation may transact
any business that might have been transacted at the original meeting.
Section 1.5: Quorum. At each meeting of stockholders the holders of a
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall fail
to attend any meeting, the chairperson of the meeting or the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
at the meeting may adjourn the meeting. Shares of the Corporation's
<PAGE>
stock belonging to the Corporation (or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation are held, directly or indirectly, by the Corporation), shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of the Corporation or any other
corporation to vote any shares of the Corporation's stock held by it in a
fiduciary capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided over
by such person as the Board of Directors may designate, or, in the absence of
such a person, the Chairperson of the Board of Directors, or, in the absence of
such person, the President of the Corporation, or, in the absence of such
person, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, at the meeting. Such
person shall be chairperson of the meeting and, subject to Section 1.11 hereof,
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seems to him or her to be in order. The Secretary of the Corporation shall
act as secretary of the meeting, but in such person's absence the chairperson of
the meeting may appoint any person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
Certificate of Incorporation, and subject to the provisions of Section 1.8 of
these Bylaws, each stockholder shall be entitled to one (1) vote for each share
of stock held by such stockholder. Each stockholder entitled to vote at a
meeting of stockholders, or to express consent or dissent to corporate action in
writing without a meeting, may authorize another person or persons to act for
such stockholder by proxy. Such a proxy may be prepared, transmitted and
delivered in any manner permitted by applicable law. Voting at meetings of
stockholders need not be by written ballot unless such is demanded at the
meeting before voting begins by a stockholder or stockholders holding shares
representing at least one percent (1%) of the votes entitled to vote at such
meeting, or by such stockholder's or stockholders' proxy; provided, however,
that an election of directors shall be by written ballot if demand is so made by
any stockholder at the meeting before voting begins. If a vote is to be taken by
written ballot, then each such ballot shall state the name of the stockholder or
proxy voting and such other information as the chairperson of the meeting deems
appropriate. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Unless otherwise provided by applicable law,
the Certificate of Incorporation or these Bylaws, every matter other than the
election of directors shall be decided by the affirmative vote of the holders of
a majority of the shares of stock entitled to vote thereon that are present in
person or represented by proxy at the meeting and are voted for or against the
matter.
Section 1.8: Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
<PAGE>
Directors and which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action. If no record date is fixed by the Board of Directors, then the
record date shall be as provided by applicable law. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.9: List of Stockholders Entitled to Vote. A complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
Section 1.10: Action by Written Consent of Stockholders.
(a) Procedure. Unless otherwise provided by the Certificate of
Incorporation, any action required or permitted to be taken at any annual
or special meeting of the stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders
of outstanding stock having not less than the number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Written stockholder
consents shall bear the date of signature of each stockholder who signs the
consent and shall be delivered to the Corporation by delivery to its
registered office in the State of Delaware, to its principal place of
business or to any officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. No written consent
shall be effective to take the action set forth therein unless, within
sixty (60) days of the earliest dated consent delivered to the Corporation
in the manner provided above, written consents signed by a sufficient
number of stockholders to take the action set forth therein are delivered
to the Corporation in the manner provided above.
(b) Notice of Consent. Prompt notice of the taking of corporate action
by stockholders without a meeting by less than unanimous written consent of
the stockholders shall be given to those stockholders who have not
consented thereto in writing and, who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting, if the record
date for such meeting had been the date that written consents signed by a
sufficient number of holders to take the action were delivered to the
Corporation. In the case of a Certificate of Action (as defined below), if
the Delaware General Corporation Law so requires, such notice shall be
given prior to filing of the certificate in question. If the action which
is consented to requires the filing of a certificate under the Delaware
General Corporation Law (the "Certificate of Action"), then if the Delaware
General Corporation Law so requires, the certificate so filed shall
<PAGE>
state that written stockholder consent has been given in accordance with
Section 228 of the Delaware General Corporation Law and that written notice
of the taking of corporate action by stockholders without a meeting as
described herein has been given as provided in such section.
Section 1.11: Inspectors of Elections.
(a) Applicability. Unless otherwise provided in the Corporation's
Certificate of Incorporation or required by the Delaware General
Corporation Law, the following provisions of this Section 1.11 shall apply
only if and when the Corporation has a class of voting stock that is: (i)
listed on a national securities exchange; (ii) authorized for quotation on
an automated interdealer quotation system of a registered national
securities association; or (iii) held of record by more than two thousand
(2,000) stockholders. In all other cases, observance of the provisions of
this Section 1.11 shall be optional, and at the discretion of the Board of
Directors of the Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors of election to act at the
meeting and make a written report thereof. The Corporation may designate
one or more persons as alternate inspectors to replace any inspector who
fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting.
(c) Inspector's Oath. Each inspector of election, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to
the best of such inspector's ability.
(d) Duties of Inspectors. At a meeting of stockholders, the inspectors
of election shall (i) ascertain the number of shares outstanding and the
voting power of each share, (ii) determine the shares represented at a
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period of time a record
of the disposition of any challenges made to any determination by the
inspectors, and (v) certify their determination of the number of shares
represented at the meeting, and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening and
the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced by the inspectors at the meeting. No
ballot, proxies or votes, nor any revocations thereof or changes thereto,
shall be accepted by the inspectors after the closing of the polls unless
the Court of Chancery upon application by a stockholder shall determine
otherwise.
(f) Determinations. In determining the validity and counting of
proxies and ballots, the inspectors shall be limited to an examination of
the proxies, any envelopes submitted with those proxies, any information
provided in connection with proxies in accordance with Section 212(c)(2) of
the Delaware General Corporation Law, ballots and the regular books and
records of the Corporation, except that the inspectors may consider other
reliable information for the limited purpose of reconciling proxies and
ballots submitted by or on behalf of banks, brokers, their nominees or
similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder
holds of record. If the inspectors consider other reliable information
<PAGE>
for the limited purpose permitted herein, the inspectors at the time they
make their certification of their determinations pursuant to this Section
1.11 shall specify the precise information considered by them, including
the person or persons from whom they obtained the information, when the
information was obtained, the means by which the information was obtained
and the basis for the inspectors' belief that such information is accurate
and reliable.
Section 1.12: Notice of Stockholder Business; Nominations.
(a) Annual Meeting of Stockholders.
(i) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders shall be made
at an annual meeting of stockholders (A) pursuant to the Corporation's
notice of such meeting, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of the notice provided for in
this Section 1.12, who is entitled to vote at such meeting and who complies
with the notice procedures set forth in this Section 1.12.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of subparagraph
(a)(i) of this Section 1.12, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other
business must otherwise be a proper matter for stockholder action. To be
timely, a stockholder's notice must be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business
on the ninetieth (90th) day prior to the first anniversary of the preceding
year's annual meeting (except in the case of the 2000 annual meeting, for
which such notice shall be timely if delivered in the same time period as
if such meeting were a special meeting governed by subparagraph (b) of this
Section 1.12); provided, however, that in the event that the date of the
annual meeting is more than thirty (30) days before or more than sixty (60)
days after such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following
the day on which public announcement of the date of such meeting is first
made by the Corporation. Such stockholder's notice shall set forth: (a) as
to each person whom the stockholder proposes to nominate for election or
reelection as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected; (b) as to
any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (1) the name and address of
such stockholder, as they appear on the Corporation's books, and of such
beneficial owner, and (2) the class and number of shares of the Corporation
that are
<PAGE>
owned beneficially and held of record by such stockholder and such
beneficial owner.
(iii) Notwithstanding anything in the second sentence of subparagraph
(a)(ii) of this Section 1.12 to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased Board
of Directors at least seventy (70) days prior to the first anniversary of
the preceding year's annual meeting (or, if the annual meeting is held more
than thirty (30) days before or sixty (60) days after such anniversary
date, at least seventy (70) days prior to such annual meeting), a
stockholder's notice required by this Section 1.12 shall also be considered
timely, but only with respect to nominees for any new positions created by
such increase, if it shall be delivered to the Secretary of the Corporation
at the principal executive office of the Corporation not later than the
close of business on the tenth (10th) day following the day on which such
public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of such meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of such meeting (i) by or at the direction of the
Board of Directors or (ii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a stockholder of record at the time
of giving of notice of the special meeting, who shall be entitled to vote
at the meeting and who complies with the notice procedures set forth in
this Section 1.12. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board
of Directors, any such stockholder may nominate a person or persons (as the
case may be), for election to such position(s) as specified in the
Corporation's notice of meeting, if the stockholder's notice required by
subparagraph (a)(ii) of this Section 1.12 shall be delivered to the
Secretary of the Corporation at the principal executive offices of the
Corporation not earlier than the ninetieth (90th) day prior to such special
meeting and not later than the close of business on the later of the
sixtieth (60th) day prior to such special meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors
to be elected at such meeting.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 1.12. Except as otherwise
provided by law or these Bylaws, the chairperson of the meeting shall have
the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case
may be, in accordance with the procedures set forth in this Section 1.12
and, if any proposed nomination or business is not in compliance herewith,
to declare that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section 1.12, the term "Public Announcement"
shall mean
<PAGE>
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 1.12, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 1.12 shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
of one or more members. The initial number of directors shall be eight (8), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. Subject to the
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the directors shall be divided, with
respect to the time for which they severally hold office, into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors, with the number of directors in each class to be divided
as equally as reasonably possible. The term of office of the Class I directors
shall expire at the corporation's first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class II
directors shall expire at the corporation's second annual meeting of
stockholders following the closing of the Initial Public Offering, and the term
of office of the Class III directors shall expire at the corporation's third
annual meeting of stockholders following the closing of the Initial Public
Offering. At each annual meeting of stockholders commencing with the first
annual meeting of stockholders following the closing of the Initial Public
Offering, directors elected to succeed those directors of the class whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election. Prior to the
closing of the Initial Public Offering, each director shall hold office until
the next annual meeting of stockholders and until such director's successor is
elected and qualified, or until such director's earlier death, resignation or
removal. Any director may resign at any time upon written notice to the
Corporation. Subject to the rights of the holders of any series of Preferred
Stock, any vacancy occurring in the Board of Directors for any cause, and any
newly created directorship resulting from any increase in the authorized number
of directors, shall, unless (i) the Board of Directors determines by resolution
that any such vacancies or newly created directorships shall be filled by the
stockholders, or (ii) as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director, and not by the stockholders. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred. Subject to the rights of any holders of Preferred Stock, a director
may be
<PAGE>
removed only for cause by, and only by, the holders of a majority of the shares
then entitled to vote at an election of directors.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
may be called by the Chairperson of the Board of Directors, the President or a
majority of the members of the Board of Directors then in office and may be held
at any time, date or place, within or without the State of Delaware, as the
person or persons calling the meeting shall fix. Notice of the time, date and
place of such meeting shall be given, orally or in writing, by the person or
persons calling the meeting to all directors at least four (4) days before the
meeting if the notice is mailed, or at least twenty-four (24) hours before the
meeting if such notice is given by telephone, hand delivery, telegram, telex,
mailgram, facsimile or similar communication method. Unless otherwise indicated
in the notice, any and all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee of the Board, may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
Section 2.6: Quorum; Vote Required for Action. At all meetings of the Board
of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation, or required by law, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall be
presided over by the Chairperson of the Board of Directors, or in such person's
absence by the President, or in such person's absence by a chairperson chosen at
the meeting. The Secretary shall act as secretary of the meeting, but in such
person's absence the chairperson of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.8: Written Action by Directors. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board of Directors
or such committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee, respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
<PAGE>
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting of
such committee who are not disqualified from voting, whether or not such member
or members constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in a resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation and may authorize the seal of the Corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority in reference to the following matters: (i) approving,
adopting, or recommending to the stockholders any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or (ii) adopting, amending or repealing any bylaw of the
Corporation.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of a
Chief Executive Officer and/or a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers, including a Chairperson of the
Board of Directors and/or Chief Financial Officer, as may from time to time be
appointed by the Board of Directors. All officers shall be elected by the Board
of Directors; provided, however, that the Board of Directors may empower the
Chief Executive Officer of the Corporation to appoint officers other than the
Chairperson of the Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Treasurer. Each officer shall hold office until such
person's successor is elected and qualified or until such person's earlier
resignation or removal. Any number of offices may be held by the same person.
Any officer may resign at any time upon written notice to the Corporation. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise may be filled by the Board of Directors.
Section 4.2: Chief Executive Officer. Subject to the control of the Board
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
(a) To act as the general manager and, subject to the control of the
Board of Directors, to have general supervision, direction and control of
the business and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
<PAGE>
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such
places as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds,
conveyances, mortgages, guarantees, leases, obligations, bonds,
certificates and other papers and instruments in writing which have been
authorized by the Board of Directors or which, in the judgment of the
Chief Executive Officer, should be executed on behalf of the Corporation;
to sign certificates for shares of stock of the Corporation; and, subject
to the direction of the Board of Directors, to have general charge of the
property of the Corporation and to supervise and control all officers,
agents and employees of the Corporation.
The President shall be the Chief Executive Officer of the Corporation
unless the Board of Directors shall designate another officer to be the Chief
Executive Officer. If there is no President, and the Board of Directors has not
designated any other officer to be the Chief Executive Officer, then the
Chairperson of the Board of Directors shall be the Chief Executive Officer.
Section 4.3: Chairman of the Board. The Chairperson of the Board of
Directors shall have the power to preside at all meetings of the Board of
Directors and shall have such other powers and duties as provided in these
Bylaws and as the Board of Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive Officer
of the Corporation unless the Board of Directors shall have designated another
officer as the Chief Executive Officer of the Corporation. Subject to the
provisions of these Bylaws and to the direction of the Board of Directors, and
subject to the supervisory powers of the Chief Executive Officer (if the Chief
Executive Officer is an officer other than the President), and subject to such
supervisory powers and authority as may be given by the Board of Directors to
the Chairperson of the Board of Directors, and/or to any other officer, the
President shall have the responsibility for the general management the control
of the business and affairs of the Corporation and the general supervision and
direction of all of the officers, employees and agents of the Corporation (other
than the Chief Executive Officer, if the Chief Executive Officer is an officer
other than the President) and shall perform all duties and have all powers that
are commonly incident to the office of President or that are delegated to the
President by the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such powers
and duties as are commonly incident to the office of Vice President, or that are
delegated to him or her by the Board of Directors or the Chief Executive
Officer. A Vice President may be designated by the Board of Directors to perform
the duties and exercise the powers of the Chief Executive Officer in the event
of the Chief Executive Officer's absence or disability.
Section 4.6: Chief Financial Officer. The Chief Financial Officer shall be
the Treasurer of the Corporation unless the Board of Directors shall have
designated another officer as the Treasurer of the Corporation. Subject to the
direction of the Board of Directors and the Chief Executive Officer, the Chief
Financial Officer shall perform all duties and have all powers that are commonly
incident to the office of Chief Financial Officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all moneys and
securities of the Corporation. The Treasurer shall make such disbursements of
the funds of the
<PAGE>
Corporation as are authorized and shall render from time to time an account of
all such transactions. The Treasurer shall also perform such other duties and
have such other powers as are commonly incident to the office of Treasurer, or
as the Board of Directors or the Chief Executive Officer may from time to time
prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued all
authorized notices for, and shall keep, or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of Secretary, or as the Board of Directors or the Chief Executive Officer
may from time to time prescribe.
Section 4.9: Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve at the
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to have
a certificate signed by or in the name of the Corporation by the Chairperson or
Vice-Chairperson of the Board of Directors, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to agree to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it, against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1: Indemnification of Officers and Directors. Each person who was
or is made a party to, or is threatened to be made a party to, or is involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (the "Proceeding"), by reason of the fact that such person (or a
person of whom such person is the legal representative), is or was a director or
officer of the Corporation or a Reincorporated Predecessor (as defined below) or
is or was serving at the request of the Corporation or a Reincorporated
Predecessor (as defined below) as a director or officer of another corporation,
or of a partnership, joint venture, trust or other enterprise, including service
<PAGE>
with respect to employee benefit plans, shall be indemnified and held harmless
by the Corporation to the fullest extent permitted by the Delaware General
Corporation Law, against all expenses, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith, provided such person acted in good faith and in a manner
which the person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
Proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Such indemnification shall continue as to a person who has ceased to
be a director or officer and shall inure to the benefit of such person's heirs,
executors and administrators. Notwithstanding the foregoing, the Corporation
shall indemnify any such person seeking indemnity in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
As used herein, the term the "Reincorporated Predecessor" means a corporation
that is merged with and into the Corporation in a statutory merger where (a) the
Corporation is the surviving corporation of such merger; (b) the primary purpose
of such merger is to change the corporate domicile of the Reincorporated
Predecessor to Delaware.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
(including attorneys' fees) incurred by such a director or officer in defending
any such Proceeding as they are incurred in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law then so
requires, the payment of such expenses incurred by such a director or officer in
advance of the final disposition of such Proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
not be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a Proceeding, alleging that such person has breached
such person's duty of loyalty to the Corporation, committed an act or omission
not in good faith or that involves intentional misconduct or a knowing violation
of law, or derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any person
in this Article VI shall not be exclusive of any other right that such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote or consent of stockholders or
disinterested directors, or otherwise. Additionally, nothing in this Article VI
shall limit the ability of the Corporation, in its discretion, to indemnify or
advance expenses to persons whom the Corporation is not obligated to indemnify
or advance expenses pursuant to this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification rights
to such person. Such rights may be greater than those provided in this Article
VI.
<PAGE>
Section 6.5: Effect of Amendment. Any amendment, repeal or modification of
any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, when dispatched, and (iv) in the case of
delivery via telegram, telex, mailgram, or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof that
authorizes the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if: (i) the material facts as to his, her or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; (ii) the material
facts as to his, her or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified by the
Board of Directors, a committee thereof, or the stockholders. Interested
directors
<PAGE>
may be counted in determining the presence of a quorum at a meeting of the Board
of Directors or of a committee which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate seal,
which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
Section 9.3: Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of such person's duties, be fully protected in relying
in good faith upon records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of the
Corporation's officers or employees, or committees of the Board of Directors, or
by any other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of any
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be held
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Stockholders of the Corporation holding a
majority of the Corporation's outstanding voting stock shall have the power to
adopt, amend or repeal Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal Bylaws of the Corporation, except
insofar as Bylaws adopted by the stockholders shall otherwise provide.
<PAGE>
CERTIFICATION OF BYLAWS
OF
[Company]
A Delaware Corporation
KNOW ALL BY THESE PRESENTS:
I, _________________________, certify that I am Secretary of [Company], a
Delaware corporation (the "Corporation"), that I am duly authorized to make and
deliver this certification, that the attached Bylaws are a true and correct copy
of the Bylaws of the Corporation in effect as of the date of this certificate.
Dated: ____________________
John M. Giesecke, Jr., Secretary
<PAGE>
BYLAWS
OF
[Company]
A Delaware Corporation
TABLE OF CONTENTS
PAGE
Article I - STOCKHOLDERS
Section 1.1: Annual Meetings
Section 1.2: Special Meetings
Section 1.3: Notice of Meetings
Section 1.4: Adjournments
Section 1.5: Quorum
Section 1.6: Organization
Section 1.7: Voting; Proxies
Section 1.8: Fixing Date for Determination of Stockholders of Record
Section 1.9: List of Stockholders Entitled to Vote
Section 1.10: Action by Written Consent of Stockholders
Section 1.11: Inspectors of Elections
Section 1.12: Notice of Stockholder Business; Nominations
<PAGE>
Article II - BOARD OF DIRECTORS
PAGE
Section 2.1: Number; Qualifications
Section 2.2: Election; Resignation; Removal; Vacancies
Section 2.3: Regular Meetings
Section 2.4: Special Meetings
Section 2.5: Telephonic Meetings Permitted
Section 2.6: Quorum; Vote Required for Action
Section 2.7: Organization
Section 2.8: Written Action by Directors
Section 2.9: Powers
Section 2.10: Compensation of Directors
Article III - COMMITTEES
Section 3.1: Committees
Section 3.2: Committee Rules
<PAGE>
Article IV - OFFICERS
PAGE
Section 4.1: Generally
Section 4.2: Chief Executive Officer
Section 4.3: Chairperson of the Board
Section 4.4: President
Section 4.5: Vice President
Section 4.6: Chief Financial Officer
Section 4.7: Treasurer
Section 4.8: Secretary
Section 4.9: Delegation of Authority
Section 4.10: Removal
Article V - STOCK
Section 5.l: Certificates
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance
of New Certificate
Section 5.3: Other Regulations
<PAGE>
Article VI - INDEMNIFICATION
PAGE
Section 6.1: Indemnification of Officers and Directors
Section 6.2: Advance of Expenses
Section 6.3: Non-Exclusivity of Rights
Section 6.4: Indemnification Contracts
Section 6.5: Effect of Amendment
Article VII - NOTICES
Section 7.l: Notice
Section 7.2: Waiver of Notice
Article VIII - INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum
Article IX - MISCELLANEOUS
Section 9.1: Fiscal Year
Section 9.2: Seal
<PAGE>
PAGE
Section 9.3: Form of Records
Section 9.4: Reliance Upon Books and Records
Section 9.5: Certificate of Incorporation Governs
Section 9.6: Severability
Article X - AMENDMENT
Section 10.1: Amendments
BYLAWS
OF
[Company]
A Delaware Corporation
As Adopted ________, 1999
<PAGE>
EXHIBIT 4.01
Number Shares
HOMESTORE.COM
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING
THE STATE OF DELAWARE TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 437852 10 6
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001
PER SHARE, OF
HOMESTORE.COM, INC.
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[corporate seal]
/s/ John M. Giesecke, Jr. /s/ Stuart H. Wolff
CHIEF FINANCIAL OFFICER PRESIDENT AND
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______________ Custodian _____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act _________________________________
tenants in common (State)
UNIF TRF MIN ACT -- ________ Custodian (until age _________)
(Cust)
________________ under Uniform Transfers
(Minor)
to Minors and _________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________
________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF
ASSIGNEE)
________________________________________________________________________
________________________________________________________________________
_________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________
X_____________________________________________
X_____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARATNEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-16.
<PAGE>
EXHIBIT 5.01
------------
July 6, 1999
HomeStore.com, Inc.
225 West Hillcrest Drive, Suite 100
Thousand Oaks, CA 91360
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-1
(File Number 333-79689) (the "Registration Statement") filed by you with the
Securities and Exchange Commission (the "Commission") on May 28, 1999, as
subsequently amended, in connection with the registration under the Securities
Act of 1933, as amended, of an aggregate of up to 8,050,000 shares of your
Common Stock (the "Stock").
In rendering this opinion, we have examined the following:
(1) your registration statement on Form 8-A filed with the Commission on
July 7, 1999;
(3) the Registration Statement, together with the Exhibits filed as a part
thereof;
(4) the Prospectuses prepared in connection with the Registration
Statement;
(5) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your minute
books and the minute books of your predecessor, NetSelect, Inc., a
California corporation ("NetSelect California"), that are in our
possession; and
(6) the stock records for both you and NetSelect California that you have
provided to us (consisting of a list of stockholders) and a list of
option and warrant holders respecting your capital and of any rights
to purchase capital stock that was prepared by you and dated July 7,
1999 verifying the number of such issued and outstanding securities).
(7) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations.
We have confirmed your eligibility to use Form S-1 and, by telephone call
to the offices of the Commission, we have also confirmed the continued
effectiveness of the Company's registration under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the timely filing by you of all
reports required to be filed by you pursuant to Rules 13, 14 and 15 promulgated
under the Exchange Act.
<PAGE>
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents submitted
to us as originals, the conformity to originals and completeness of all
documents submitted to us as copies, the legal capacity of all natural persons
executing the same, the lack of any undisclosed termination, modification,
waiver or amendment to any document reviewed by us and the due authorization,
execution and delivery of all documents where due authorization, execution and
delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from public
officials and records referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of such information
or to determine the existence or non-existence of any other factual matters;
however, we are not aware of any facts that would cause us to believe that the
- -------
opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we
express no opinion herein with respect to the application or effect of the laws
of any jurisdiction other than the existing laws of the United States of America
and the State of California and (without reference to case law or secondary
sources) the existing Delaware General Corporation Law.
In connection with our opinion expressed below, we have assumed that,
at or prior to the time of the delivery of any shares of Stock, the Registration
Statement will have been declared effective under the Securities Act of 1933, as
amended, that the registration will apply to such shares of Stock and will not
have been modified or rescinded and that there will not have occurred any change
in law affecting the validity or enforceability of such shares of Stock.
Based upon the foregoing, it is our opinion that the 8,050,000 shares
of Stock to be to be issued and sold by you, when issued and sold in accordance
in the manner referred to in the relevant Prospectus associated with the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to all references to us, if any, in
the Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof. This
opinion is intended solely for the your use as an exhibit to the Registration
Statement for the purpose of the above sale of the Stock and is not to be relied
upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
By: /s/ Jeffrey R. Vetter
--------------------------------------
<PAGE>
EXHIBIT 10.26.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, is made as of September 22, 1997 by and between NetSelect,
Inc., a Delaware corporation (the "Company"), and Peter Tafeen (the
"Executive").
WHEREAS, the Company and Executive desire to enter into this Agreement
providing for the Executive's employment as Vice President of Business
Development, all on the terms, and subject to the conditions, as hereinafter set
forth;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Company and the Executive agree as follows:
ARTICLE I
Period of Employment
1.1 Period of Employment. The Executive shall be an employee at-will and
--------------------
there shall be no specified term of employment. The period during which the
Executive is providing services to the Company hereunder shall be referred to as
the Period of Employment.
ARTICLE II
Position and Duties
2.1 Position. The Executive shall be employed as the Vice President of
--------
Business Development.
2.2 Duties. The Executive agrees to perform the duties, undertake the
------
responsibilities and exercise the authority customarily performed, undertaken
and exercised by persons situated in a similar executive capacity The Company
and the Executive agree that the Executive shall report to the Chief Executive
Officer of the Company, or such other executive officer as the Chief Executive
Officer shall direct. Excluding periods of vacation and sick leave to which the
Executive is entitled, the Executive agrees that during the Employment Term he
shall devote substantially all his business time to the business and affairs of
the Company and to the duties and responsibilities assigned to him hereunder.
Notwithstanding the foregoing, the Executive may (i) with the written permission
of the Chief Executive Officer serve on corporate boards, (ii) serve on civic or
charitable boards or committees, (iii) manage personal investments and (iv)
deliver lectures and teach at educational institutions, so long as such
activities in clauses (i) through (iv) do not significantly interfere with the
performance of the Executive's duties and responsibilities hereunder.
ARTICLE III
Compensation
3.1 Base Salary. The Company agrees to pay or cause to be paid to the
-----------
Executive during the first year of the employment hereunder a base salary at the
rate of $140,000 per annum (the "Base Salary"). Such Base Salary shall be
payable in accordance with the
<PAGE>
Company's customary practices applicable to its executives. Such rate of salary,
or increased rate of salary, if any, as the case may be, shall be reviewed at
least annually by the Chief Executive Officer and may be further increased (but
not decreased) in such amounts as the Chief Executive Officer may decide.
3.2 Short-Term Incentives. For each calendar year ending during the
---------------------
Period of Employment, the Executive's bonus compensation ("Annual Bonus") shall
be a rate equal to a percentage between 0% and 30% of his Base Salary in effect
on the last day of such year, with a target of 30% of Base Salary, if the
Executive achieves budgeted financial and other performance targets which shall
be mutually established by the Executive and the Chief Executive Officer. With
respect to the first calendar year, such targets shall be established within 60
days of the date hereof and such bonus shall be appropriately prorated to
reflect that Executive was not employed for the entire year. Executive may earn
a maximum of 15% of Base Salary for each six-month period and such Annual Bonus
may be paid in semi-annual installments.
ARTICLE IV
Other Benefits
4.1 Long-Term Incentives; Parity Incentives.
---------------------------------------
The Executive shall be granted options to purchase 40,000 shares of the
Company's voting common stock ("Common Stock"), at $5.54 or Best Possible per
share. The options shall be granted pursuant to the terms of the NetSelect, Inc.
Stock Incentive Plan (the "Plan") and, to the maximum extent possible, shall
qualify as incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended). The options shall vest in four (4)
nearly equal annual installments (each, an "Option Installment") beginning on
the first anniversary of the date hereof, subject to Executive's continued
employment on such date.
4.2 Executive Benefits. Subject to the terms of such plans, the Executive
------------------
will be covered under all retirement and welfare benefit plans maintained from
time to time by the Company for its senior executives.
4.3 Vacation and Sick Leave. The Executive shall be entitled to annual
-----------------------
vacation in accordance with the policies as periodically established by the
Board of Directors for similarly situated executives of the Company, which shall
in no event be less than three (3) weeks per year. The Executive shall be
entitled to sick leave (without loss of pay) in accordance with the Company's
policies as in effect from time to time.
4.4 Expenses. The Company shall reimburse the Executive for all
--------
reasonable travel, entertainment and other business expenses incurred by him in
accordance with Company policy regarding travel, entertainment and business
expenses in connection with the performance of the Executive's duties under this
Agreement during the Employment Term, such reimbursement to be made in
accordance with the Company's policy and practice relating to reimbursement of
senior executives.
2
<PAGE>
4.5 Expenses Incurred in Relocation. The Company will pay or reimburse
-------------------------------
the Executive for all normal and reasonable expenses incurred by the Executive
in relocating his family and personal effects to the Westlake Village,
California area, including cancellation fees incurred in respect of Executive's
current residence; provided, however, all such reimbursements shall not exceed
$6,000.
ARTICLE V
Termination of Employment
5.1 Termination other than for Cause, Death or Disability. The Company
-----------------------------------------------------
may, at any time, terminate the Executive's employment. If, during the Period
of Employment, the Company terminates the Executive's employment other than for
Cause, death or Disability the Company shall provide the following to the
Executive upon Executive's signing of a general release of claims in form and
manner acceptable to the Company:
(a) As soon as practicable and in no event more than thirty days after
the Termination Date (as hereinafter defined) a lump sum cash payment equal to
the aggregate of the following:
(i) the portion of the Executive's then current Base Salary
accrued to the Termination Date but unpaid as of the
Termination Date (the "Unpaid Salary"); plus
(ii) an amount equal to three (3) months Base Salary.
(b) If prior to the first anniversary of the date hereof Executive's
employment is terminated by the Company other than for Cause, death or
Disability, the first Option Installment shall be deemed vested as of the
Termination Date. If after the first anniversary but prior to the fourth
anniversary of the date hereof Executive's employment is terminated by the
Company other than for Cause, death or Disability, the next Option Installment
which would vest (i.e., with respect to 10,000 shares) following Executive's
Termination of Employment shall be deemed vested with respect to the number of
whole shares equal to the total number of shares covered by the Option
Installment multiplied by a fraction the numerator of which is the number of
whole months that have occurred from the last anniversary date to the
Termination Date and the denominator of which is 12. All options granted to
Executive, to the extent vested on the Termination Date, remain outstanding for
three (3) months from the Termination Date.
5.2 Termination in the Event of Death or Disability. If, during the
-----------------------------------------------
Period of Employment, the Company terminates the Executive's employment due to
the Executive's death or Disability, the Company shall provide the following to
the Executive (or his Beneficiary):
(a) As soon as practicable after the Termination Date, a lump sum cash
payment equal to the sum of the Unpaid Salary.
(b) All stock options granted to the Executive by the Company shall,
to the extent vested, remain outstanding for three (3) months from the
Termination Date or one (1) year from the date of death, as the case may be.
3
<PAGE>
5.3 Termination for Cause.
----------------------
(a) Except as otherwise set forth in this Section 5.3, all obligations
of the Company under this Agreement shall cease if, during the Period of
Employment, the Company terminates the Executive for Cause. Upon such
termination, the Executive shall be entitled to receive in a lump sum cash
payment as soon as practicable after the Termination Date, an amount equal to
the Unpaid Salary. In addition, all options held by Executive, whether or not
vested, shall be forfeited and any shares held by Executive which were acquired
upon exercise of an option ("Option Shares") shall be subject to repurchase by
the Company as provided below at their then Fair Value.
(b) For purposes of this Employment Agreement, the "Fair Value" of the
shares of Company Stock shall mean the fair market value thereof as agreed
between the Company and the Executive or, if the Company and the Executive are
unable to agree within 45 days, the Fair Value thereof determined in accordance
with the Appraisal Procedure. "Appraisal Procedure" shall mean a determination
of Fair Value per share by an appraiser selected by the Company and the
Executive. The Company and the Executive shall each submit to the appraiser a
statement setting forth their respective calculations of Fair Value of the
shares and the appraiser shall be instructed to select the proposed Fair Value
closest in amount to the value which the appraiser believes to be accurate. The
appraiser shall be obligated to select the Company's or the Executive's proposed
Fair Value and may not select any other amount. The determination of Fair Value
shall be deemed to be binding on the Company and the Executive upon (i)
resolution of any disagreement as to Fair Value by mutual agreement of the
parties or (ii) notification by the appraiser of its final selection of either
the Company's or the Executive's proposed Fair Value. The fee of such appraiser
shall be borne equally by the parties.
(c) The purchase price for any shares to be purchased by the Company
pursuant to this Section 5.3 may be paid in cash, by certified check or by wire
transfer of immediately available funds.
(d) The right to buy the Executive's Option Shares hereunder shall be
exercised by the Company by the giving of written notice to the Executive within
120 days after the Termination Date. The closing of the purchase and sale of
Option Shares sold in accordance with this Section 5.3 shall take place on such
date or dates as the parties to such transaction may agree, but not later than
30 days after delivery of the notice exercising the right to buy such Shares.
Unless otherwise agreed, the closing of any sale and purchase of such Option
Shares shall take place in New York, New York. In the event of the purchase and
sale of such Option Shares hereunder, certificates representing such Shares
shall be delivered at the closing endorsed in blank or accompanied by stock
powers endorsed in blank.
5.4 Voluntary Resignation. If, during the Period of Employment, the
---------------------
Executive resigns, the Executive shall be entitled to receive in a lump sum,
cash payment as soon as practicable after the Termination Date, an amount equal
to the Unpaid Salary. In addition, all stock options granted to the Executive
by the Company shall, to the extent vested, remain outstanding for three (3)
months from the Termination Date.
4
<PAGE>
5.5 Payments upon the Executive's Termination. The foregoing payments
-----------------------------------------
upon the Executive's termination shall constitute the exclusive payments due the
Executive upon termination from his employment with the Company under this
Agreement or otherwise; provided, however, that except as stated above, such
payments shall have no effect on any benefits which may be payable to the
Executive under any plan of the Company which provides benefits after
termination of employment, other than severance pay or salary continuation
pursuant to a Company plan which amount shall be reduced by the amount of the
Severance Amount received by the Executive pursuant to this Agreement.
ARTICLE VI
Certain Definitions
6.1 "Beneficiary" means the person or trust designated in writing by the
-----------
Executive to receive any payments due under this Agreement in the event of the
Executive's death and if no such person or trust is designated, the Executive's
estate.
6.2 "Cause" means (a) the Executive's material breach of this Agreement or
-----
of generally applicable Company policy, (b) conviction of the Executive for (i)
any crime constituting a felony in the jurisdiction in which committed, (ii) any
crime involving moral turpitude (whether or not a felony), (iii) any other
criminal act against the Company involving dishonesty or willful misconduct
intended to injure the Company (whether or not a felony), (c) willful
malfeasance or gross misconduct by the Executive which damages the Company, (d)
a continuous and substantial dereliction of duties which is uncured after
written notice, or (e) repeated insubordination which is uncured after written
notice.
6.3 "Disability" means any medically determinable physical or mental
----------
impairment that renders the Executive substantially unable to perform all of the
Executive's duties required under Article I hereof for 180 days out of any 360-
day period. The date of the Disability is the date on which the Executive is
certified as having incurred a Disability by a physician mutually acceptable to
the Executive (or the Executive's representative) and the Company.
6.4 "Termination Date" means the date as of which the Executive's
----------------
employment with the Company is terminated by the Company or by the Executive for
any reason which, except in the event of the Executive's death, shall be
specified in a written notice of termination received by either party from the
other.
ARTICLE VII
Executive Covenants
7.1 Confidential Information. The Executive agrees and understands that
------------------------
in the Executive's position with the Company, the Executive may be exposed to
and receive information relating to the confidential affairs of the Company,
including but not limited to business and marketing plans, membership lists,
products, promotions, development, financing, expansion plans, business policies
and practices, and information considered by the Company to be confidential and
in the nature of trade secrets. The Executive agrees that during the Period of
Employment and thereafter the Executive will keep such information confidential
and not
5
<PAGE>
disclose such information to any third person or entity without the prior
written consent of the Company. The Executive shall not be liable for the
inadvertent or accidental disclosure of such information, if such disclosure
occurs despite the exercise of a reasonable degree of care. This confidentiality
covenant shall not apply to any knowledge or information that: (i) is or becomes
available to others, other than as a result of a breach by the Executive of this
section 7.1; (ii) was available to the Executive on a nonconfidential basis
prior to its disclosure to the Executive through his status as an officer of the
Company; or (iii) becomes available to the Executive on a nonconfidential basis
from a third party is not bound by any confidentiality obligation to the
Company.
7.2 Ownership of Trade Secrets. The Executive agrees that any trade
--------------------------
secret, invention, improvement, patent, patent application or writing, and any
program, method, process, systems or novel technique or idea (whether or not
capable of being trademarked, copyrighted or patented), conceived, devised,
developed, or otherwise obtained by the Executive during the Period of
Employment, shall be and become the property of the Company and the Executive
agrees to give the Company prompt written notice of his conception, invention,
authorship, development or acquisition of any such trade secret, invention,
improvement, patent application, writing, program, method, process, system or
novel technique or idea and to execute such instruments or transfer, assignment,
conveyance or confirmation and such other documents and to do all appropriate
lawful acts as may be requested by the Company to transfer, assign, confirm, and
perfect in the Company all legally protectable rights in any such trade secret,
invention, improvement, patent, patent application, writing, program, method,
process, system or novel technique or idea.
7.3 Non-Compete. (a) By and in consideration of the Base Salary, bonus
-----------
and other benefits to be provided by the Company hereunder, and further in
consideration of the Executive's exposure to the proprietary information of the
Company, the Executive agrees that the Executive will not, while employed by the
Company, and for a period of twelve (12) months after termination of employment
hereunder, directly or indirectly own, manage, operate, join, control, be
employed by, or participate in the ownership, management, operation or control
of or be connected in any manner, including but not limited to holding the
positions of shareholder, director, officer, consultant, independent contractor,
employee, partner, or investor, with any Competing Enterprise (as hereinafter
defined); provided, however, that the Executive may invest in stocks, bonds, or
other securities of a Competing Enterprise (but without otherwise participating
in the business thereof if (i) such stocks, bonds, or other securities are
listed on any national securities exchange or are registered under Section 12(g)
of the Securities Exchange Act of 1934, as amended (or any successor statute
thereto); and (ii) his investment does not exceed, in the case of any class of
the capital stock of any one issuer, 5% of the issued and outstanding shares, or
in the case of bonds or other securities, 5% of the aggregate principal amount
thereof issued and outstanding.
(b) For purposes of this Agreement, the term "Competing Enterprise"
--------------------
shall mean any person, corporation, partnership or other entity engaged in a
business in the United States or in any foreign jurisdiction in which the
Company is engaged in business on the Termination Date, in each case which is in
competition with any of the on-line real estate businesses of the Company or any
of its affiliates as of the date of the termination of this Agreement.
6
<PAGE>
7.4 Survival. The provisions of this Section 7 shall survive any
--------
termination of this Agreement and the Period of Employment, and the existence of
any claim or cause of action by the Executive against the Company, whether
predicated on this Agreement or otherwise, shall not constitute, defense to the
enforcement by the Company of the covenants and agreements of this Section 7.
ARTICLE VIII
Taxes
8.1 Taxes. Any amounts payable to the Executive hereunder shall be paid
-----
to the Executive subject to all applicable taxes required to be withheld by the
Company pursuant to federal, state or local law. The Executive or his
Beneficiary, if applicable, shall be solely responsible for all taxes imposed on
the Executive or his Beneficiary by reason of his receipt of any amounts of
compensation or benefits payable to the Executive hereunder.
ARTICLE IX
Miscellaneous
9.1 Assignment, Succession. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns and the Executive and his Beneficiary.
9.2 Severability. If all or any part of this Agreement is declared by any
------------
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
9.3 Amendment and Waiver. This Agreement shall not be altered, amended or
--------------------
modified except by written instrument executed by the Company and the Executive.
A waiver of any term, covenant, agreement or condition contained in this
Agreement shall not be deemed a waiver of any other term, covenant, agreements
or condition, and any waiver of any default in any such term, covenant,
agreement or condition shall not be deemed a waiver of any later default thereof
or of any other term, covenant, agreement or condition.
9.4 Notices. All notices and other communications required hereunder
-------
shall be in writing and delivered by hand or by first class registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company:
NetSelect, Inc.
5655 Lindero Canyon Road
Suite 106
Westlake Village, CA 91362
7
<PAGE>
With a copy to:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attention: Charles H. Baker, Esq.
If to the Executive:
Peter Tafeen
With a copy to:
Any party may from time to time designate a new address by notice given in
accordance with this Paragraph. Notice and communications shall be effective
when actually received by the addressee.
9.5 Counterpart Originals. This Agreement may be executed in several
---------------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument. The Agreement may be
signed by facsimile provided the original execution pages are delivered to the
other party within thirty (30) days after signing.
9.6 Entire Agreement. This Agreement and the Exhibits attached hereto and
----------------
made a part hereof form the entire agreement between the parties herein with
respect to any severance payments and with respect to the subject matter
contained in this Agreement.
9.7 Applicable Law. This Agreement and the rights and obligations of the
--------------
parties hereto shall be governed by and construed and enforced in accordance
with the laws of the State of California, without giving effect to the conflicts
of law principles thereof. The Executive and the Company hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the courts of
the State of California or the United States of America located in the State of
California for any actions, suits or proceedings arising out of or relating to
this Agreement and the transactions contemplated hereby (and the parties agree
not to commence any action, suit or proceeding relating hereto except in such
courts), and further agree that service of any process, summons, notice or
documents by United States registered
8
<PAGE>
EXHIBIT 10.26.2
Amendment to Employment Contract
This letter will constitute an amendment to the employment contract between
Peter Tafeen and NetSelect, Inc., which agreement was effective September 22,
1997. This amendment by no means affects the enforceability of the employment
agreement as it relates to any other part of the agreement except for the
portion amended below:
Executive shall be granted an additional option to purchase 10,000 shares of the
Company's voting common stock at a price of $5.00 per share, with a vesting
period of 4 years.
These options shall be granted pursuant to the terms of the NetSelect, Inc.
Stock Incentive Plan and, to the maximum extent possible, shall qualify as
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended).
This amendment will be effective as of the date below:
Accepted this 14 day of March 1998.
By and between
/s/ Stuart Wolff /s/ Peter Tafeen
- --------------------------------- ----------------------------------
Stuart Wolff Peter Tafeen
Chief Executive Officer Group Vice President
<PAGE>
EXHIBIT 10.31
[CONFIDENTIAL TREATMENT REQUESTED]
Final Execution Copy
Confidential
SECOND AMENDED AND RESTATED
INTERACTIVE MARKETING AGREEMENT
This Second Amended and Restated Interactive Marketing Agreement (the
"Agreement"), effective as of April 8, 1998 (the "Effective Date"), is entered
into as of June , 1999 (the "Execution Date") by and between America Online,
Inc. ("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166, on the one hand, RealSelect, Inc. ("RealSelect") and NetSelect,
Inc. ("NetSelect"), each a Delaware corporation, with headquarters at 225 West
Hillcrest Drive, Suite 100, Thousand Oaks, CA 91360, on the other hand.
RealSelect and NetSelect are collectively referred to herein as "RS". AOL and RS
may be referred to individually as a "Party" and collectively as "Parties."
INTRODUCTION
------------
AOL, RealSelect and NetSelect entered into an interactive marketing
relationship through that certain Interactive Marketing Agreement dated as of
April 8, 1998 (the "Original Agreement"), whereby AOL would, among other things,
promote and distribute a customized Interactive Site containing RS property
listings for existing homes and NetSelect issued certain warrants to AOL. The
Original Agreement was superseded in its entirety as of March 15, 1999 by an
Amended and Restated Interactive Marketing Agreement (the "First Amended and
Restated Agreement"). AOL, RealSelect and NetSelect desire to amend the First
Amended and Restated Agreement in accordance with the revised terms and
conditions set forth in this Agreement. This Agreement amends and restates the
First Amended and Restated Agreement in its entirety and, upon the full
execution hereof and the simultaneous execution of another agreement by and
between AOL and RS (the "Other Agreement"), the First Amended and Restated
Agreement will be superseded and replaced by this Agreement and of no further
force or effect. Defined terms used but not defined in the body of the Agreement
will be as defined on Exhibit A attached hereto.
TERMS
-----
1. ADVERTISING AND TRANSACTIONAL INVENTORY.
---------------------------------------
1.1. AOL Rights to Sell Advertising and Transactional Inventory.
-----------------------------------------------------------
1.1.1. Exclusive Rights of AOL. Beginning on March 15, 1999 until
-----------------------
the expiration of the Exclusive Sales Period (as defined in
Section 1.4 below):
(a) AOL will have the exclusive right, subject to both
Parties' then generally applicable advertising policies,
to sell, as agent for RS, Advertisements and
Transactional Inventory (other than the Home Finance
Products) through the RS Home Builder Site, the RS
Realtor.com Site and the Co-Branded Sites;
(b) AOL will have the exclusive right, subject to both
Parties' then generally applicable advertising policies,
to sell, as agent for RS, Advertisements and
Transactional Inventory (other than the Home Finance
Products) through any real estate-related RS Interactive
Site now or hereafter developed provided that AOL offers,
and RS agrees, to have such site be the exclusive
provider of the real-estate related services offered by
such site directly promoted by AOL within the AOL
Properties; and
1
<PAGE>
(c) AOL will be the only individual or entity (other than RS
and the co-branding partner for such site) entitled to
sell Advertisements and Transactional Inventory (other
than the Home Finance Products) on any co-branded
versions with third parties now or hereafter developed of
the sites with respect to which AOL has exclusive rights
pursuant to paragraph (a) or (b) above, and RS will use
all reasonable efforts to provide AOL the exclusive right
to sell Advertisements and Transactional Inventory (other
than the Home Finance Products) on all such co-branded RS
Interactive Sites.
RS shall not have the right to sell, or to appoint another
agent on their behalf to sell, Advertising in any of the AOL
Exclusive Sites. The generally applicable advertising policies
of RS shall not be changed so as to prohibit AOL from selling
any type of Advertising and Transactional Inventory (other
than Home Finance Products) or otherwise diminish the rights
of AOL hereunder.
1.1.2. Nonexclusive Rights of AOL. AOL will have the non-exclusive
--------------------------
right to sell the Home Finance Products on the AOL Exclusive
Sites.
1.1.3. Limitations. AOL may sell Ad Products to any individual or
-----------
entity other than an entity listed on Exhibit B, which list
shall be modified by RS from time to time during the Term to
add, subject to AOL's approval, an individual or entity or to
remove from the list any individual or entity that ceases to
pose a significant problem for RS in obtaining RS Listings
Content from others as soon as such individual or entity no
longer poses such a problem, provided, however, that, in
addition to any other limitations on the sale of such Ad
Products set forth elsewhere in this Agreement:
(a) AOL shall notify RS in writing of any contract for Ad
Products on the RS Properties pursuant to which AOL will
receive more than * * in Gross AOL Sales
-------------
Revenue attributable to the Ad Products, and such
contract shall be subject to RS' prior written approval,
which approval shall not be unreasonably withheld. RS
shall have five (5) days from the receipt of written
notice of the contract to grant or deny such approval in
writing. Any such contract which RS has not denied in
writing within such five (5) day period shall be deemed
approved;
(b) AOL shall notify RS in writing of any contract for
Closing Services Advertisements pursuant to which AOL
will receive more than * * per month in Gross
-------------
AOL Sales Revenue attributable to the Closing Services
Advertisements and such contract shall be subject to RS'
prior written approval, which approval shall not be
unreasonably withheld. RS shall have five (5) days from
the receipt of written notice of the contract to grant or
deny such approval in writing. Any such contract which RS
has not denied in writing within such five (5) day period
shall be deemed approved;
(c) AOL shall notify RS in writing of any contract for
Mortgage Services Advertisements pursuant to which AOL
will receive more than * * in Gross AOL Sales
-------------
Revenue attributable to the Mortgage Services
Advertisements, or more than * * attributable
-------------
to the Mortgage Services Advertisements in any local
geographic area on an AOL Exclusive Site, and such
contract shall be subject to RS' prior written approval,
which approval shall not be unreasonably withheld. RS
shall
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
2
<PAGE>
have five (5) days from the receipt of written notice of
the contract to grant or deny such approval in writing.
Any such contract which RS has not denied in writing
within such five (5) day period shall be deemed approved;
(d) AOL may not sell more than twenty-five percent (25%) of
the available slots for Advertisements located at any
local geographic area on an AOL Exclusive Site to any one
advertiser of Mortgage Services;
(e) AOL shall not enter into any contract for the sale of Ad
Products that expires more than * * after
------------------
the expiration of the Exclusive Sales Period (including
any contract which would extend beyond such period as the
result of a de facto automatic renewal period (e.g.,
renewal at the advertiser's sole discretion)) without RS'
prior written approval. RS shall have ten (10) days from
the receipt of written notice of the contract to grant or
deny such approval in writing. Any such contract which RS
has not denied in writing within such ten (10) day period
shall be deemed approved. In the event that RS approves
such Ad Product contract, then AOL shall be paid its
commission on such Ad Product contract at the same
percentages and on the same terms as AOL receives such Ad
Product revenues during the second year of the Exclusive
Sales Period, provided, however, that RS shall have the
right, in its sole discretion, to cancel such Ad Sales
contract at any time after the third anniversary of the
expiration of the Exclusive Sales Period upon 30 days
prior written notice, and pay to AOL any sums, and at
such times, that AOL would have been entitled to receive
such sums, as if no cancellation, had occurred. AOL
agrees to cause any contract for Ad Products to be
cancelable in accordance with this Section 1.1.3(e);
(f) AOL shall notify RS in writing of any contract for
Advertisements, Transactional Inventory or Home Finance
Products that would require a change in any portion of
the AOL Exclusive Sites other than the Advertisement
slots and, if such contract would require a material
change as reasonably determined by RS, such contract
shall be subject to RS' prior written approval, which
approval shall not be unreasonably withheld. RS shall
have ten days from the receipt of written notice of the
contract to grant or deny any such approval in writing.
Any such contract which RS has not denied in writing
within such ten day period shall be deemed approved; and
(g) Notwithstanding any other provision of this Agreement, RS
shall receive an aggregate total of the first * *
----------
Net RS Sales Revenues received pursuant to the contracts
in existence as of March 15, 1999 between RS and the
entities set forth on Exhibit C. Any additional Net RS
Sales Revenues received pursuant to contracts with such
entities shall be shared equally between the Parties and
shall count toward the Quarterly Commitments set forth in
Section 1.6.1. AOL shall have the exclusive right to
negotiate any amendments to or renewals of such
contracts.
1.2. Additional Limitations. RS will ensure that:
----------------------
(a) The Co-Branded Sites and the AOL Exclusive Sites do not
in any respect promote, advertise, market or distribute
the products, services or Content of * *;
-------------
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
3
<PAGE>
(b) Subject to Sections 1.2 (a-c), the Co-Branded Sites do
not in any respect promote, advertise, market or
distribute the products, services or Content of any third
party Interactive Service;
(c) During the Exclusive Sales Period, the Co-Branded Sites
do not in any respect promote, advertise, market or
distribute the products, services or Content of any
entity reasonably construed to be in competition with any
third party with which AOL has an exclusive (or premier)
relationship, provided that such third party's category
of Content is included on a list mailed to RS by AOL
within 5 business days after March 15, 1999 (the
"Category List"), which Category List may be modified as
further described below, or AOL has notified RS in
writing of such category of Content, and except with
respect to any Home Finance Products offered by such
third party. Beginning on March 15, 1999, AOL shall have
the right to add up to two additional Content categories
to the Category List each year. AOL may substitute new
Content categories for ones included on the Category List
at any time provided that such substitutions do not
affect the total number of items on the list.
1.3. Unsold Advertisement Inventory. AOL shall use commercially reasonable
------------------------------
efforts to fill any Advertisement slots on the AOL Exclusive Sites
that are not sold by AOL to third parties in accordance with the
following allocation between AOL Advertisements and RS Advertisements
in each year during the Exclusive Sales Period: (a) until such time
as AOL Gross Sales Revenues in such year equal * *
--------------------
RS Advertisements, * * AOL Advertisements, and (b)
---------------------
once AOL Gross Sales Revenues in such year equal * *
-----------------
RS Advertisements and * * AOL Advertisements.
---------------------------
Regardless of the level of AOL Gross Sales Revenues, all RS
Advertisements in unsold slots will be used to promote the Co-Branded
Sites and no such Advertisements on the Co-Branded Sites shall be used
to promote Home Finance Content. In addition, the Advertisements in
such unsold slots shall be subject to the same limitations as other
Advertising on the Co-Branded Sites, including, without limitation,
the limitations contained in Section 1.1.3 and the limitations set
forth in Section 1.2. AOL may use up to twenty-five percent (25%) of
the Advertisements on the AOL Exclusive Sites to promote DCI. AOL will
work with RS to provide reporting to RS as to how unsold
Advertisements are being delivered and will work to ensure that
delivery of unsold Advertisements is mutually acceptable to the
Parties. In the event that AOL does not provide RS unsold
Advertisement slots in the allocation set forth above on the AOL
Exclusive Sites, as RS' sole remedy, AOL shall offer RS a comparable
number of Advertisements in the house advertisements used on any or
all of the AOL Properties.
1.4. RS Sale Home Finance Products and Builder/Realtor Products
----------------------------------------------------------
1.4.1. Home Finance Products. RS shall retain the right to contract
---------------------
with third parties for the distribution of Home Finance
Products on the AOL Exclusive Sites, subject to the other
terms and conditions of this Agreement, including, without
limitation, the limitations set forth in Section 1.2 above.
1.4.2. Builder/Realtor Products. The Parties acknowledge that RS
------------------------
sells RS Listings to builders and realtors. The Parties agree
that RS may continue such sales of RS Listings to builders and
realtors and that RS may offer DCI Guides and DCI Yellow Page
inventory for sale to such builders and realtors at such
prices and in such RS Listing packages as the Parties shall
mutually agree. The Parties further acknowledge and agree that
AOL will not receive a commission from any sales of RS
Listings by RS.
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
4
<PAGE>
1.5. Exclusive Sales Period. The "Exclusive Sales Period" shall commence on
----------------------
* * and continue until * *,
------------------------- ------------------------
provided, however, that AOL shall have the first right to negotiate
with RS for a one-year extension of the Exclusive Sales Period. To
exercise such first right to negotiate, AOL shall notify RS in writing
of its desire to extend the Exclusive Sales Period at least 150 days
prior to * *. In the event that AOL exercises
---------------------------
the foregoing first right to negotiate, the Parties shall negotiate in
good faith a one-year extension of the Exclusive Sales Period for a
period of sixty (60) days from the date RS receives such notice. RS
shall not, and shall cause its co-branding partners to not, grant any
third party the right to sell Advertisements through the AOL Exclusive
Sites for the option alone-year extension period until the expiration
of such sixty (60) day period. If the Parties have not agreed to such
an extension in writing prior to the expiration of such sixty (60) day
period, RS shall be free to grant a third party the right to sell
Advertisements and Transactional Inventory through the AOL Exclusive
Sites beginning on the expiration of the Exclusive Sales Period,
subject to the additional limitations set forth in Section 1.6.4
below.
1.6. Advertising and Transactional Revenue Commitment.
------------------------------------------------
1.6.1. Minimum Revenue Commitment. Subject to the revenue commitment
--------------------------
adjustments set forth in Section 1.6.2 and 1.6.3, as a minimum
sales guarantee, AOL agrees to pay RS a total of * *
-----------
per year in accordance with the following schedule: (a) during
the first year following * * in the first quarter,
-------------
* * in the second quarter, * * in the
------------- -------------
third quarter and * * in the fourth quarter (each a
-------------
"First Year Quarterly Commitment") and (b) during the second
year following * *, * * in each quarter
------------- -------------
(each a "Second Year Quarterly Commitment"). The First Year
Quarterly Commitments and the Second Year Quarterly
Commitments shall be collectively referred to herein as the
("Quarterly Commitments.") Such Quarterly Commitments shall be
in addition to any amounts payable pursuant to Section 2.1 and
shall be paid to RS even if AOL fails to generate Gross AOL
Sales Revenue greater than or equal to any Quarterly
Commitment. The Quarterly Commitment for each quarter shall be
paid at the end of such quarter. For the purposes of this
Section 1.6.1, a quarter shall mean a calendar quarter. The
first calendar quarter during the Term shall be pro-rated
based on the number of days in the Exclusive Sales Period
during such calendar quarter, the remainder of the Quarterly
Commitment for the first calendar quarter shall be paid for
the period between the end of the quarter in which last Second
Year Quarterly Commitment and March 15, 2001.
1.6.2. Revenue Commitment Adjustments. The Parties acknowledge and
------------------------------
agree that (a) the First Year Quarterly Commitments are based
on RS' provision of an estimated * * ad-enabled page
-------------
views on the AOL Exclusive Sites during such year (the "First
Year Page View Commitment"); and (b) the Second Year Quarterly
Commitments are based on RS' provision of an estimated
* * ad-enabled page views on the AOL Exclusive Sites
-------------
during such year (the "Second Year Page View Commitment"). Ad-
enabled page views shall not include any page views that are
unavailable for the sale or delivery of Advertisements. In the
event RS fails to meet the First Year Page View Commitment or
the Second Year Page View Commitment, the Quarterly
Commitments shall be adjusted as follows:
(i) If RS provides fewer ad-enabled page views than the First
Year Page View Commitment during the first year after
* *, the First
-------------
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
5
<PAGE>
Year Quarterly Commitments shall be reduced by an amount
proportionate to the percentage difference between the
First Year Page View Commitment and the number of ad-
enabled page views provided during such year; and
(j) If RS provides fewer ad-enabled page views than the
Second Year Page View Commitment during the second year
after March 15, 1999, the Second Year Quarterly
Commitments shall be reduced by an amount proportionate
to the percentage difference between the Second Year Page
View Commitment and the number of ad-enabled page views
provided during such year.
1.6.3. Review of Sales Restrictions and Network Buys. Upon the
---------------------------------------------
request of AOL, AOL and RS agree to meet seven (7) months
after March 15, 1999 to review the restrictions imposed on
AOL's right to sell Advertisements and Transactional Inventory
on the AOL Exclusive Sites pursuant to this Agreement,
including, without limitation, the limitations set forth in
Section 1.1.3. Upon the request of RS, AOL and RS agree to
meet seven (7) months after March 15, 1999 to review the
provisions of Section 2.2 relating to Network Buys. In the
event either AOL or RS initiates such a meeting, AOL and RS
shall negotiate in good faith, for a period of up to thirty
(30) days, the removal or relaxation of such restrictions
and/or the treatment of Network Buys. In the event that AOL
and RS have not reached a mutually satisfactory agreement with
respect to such restrictions within such thirty (30) day
period, the Party initiating the meeting may, at its option,
terminate the Exclusive Sales Period and the provisions of
Sections 1.6.1 and 1.6.2 as of the date eighteen (18) months
after March 15, 1999 by written notice to the other Parties
within ten (10) days after the end of such thirty (30) day
period. If the Party initiating the meeting elects to
terminate the Exclusive Sales Period and Sections 1.6.1 and
1.6.2 pursuant to this Section 1.6.3, the other of AOL and RS
may elect to terminate the Exclusive Sales Period and Section
1.6.1 and 1.6.2 sooner at any time upon thirty (30) days
written notice.
1.6.4. Post Exclusive Sales Period. After the expiration of the
---------------------------
Exclusive Sales Period, the following provisions shall apply:
(a) Both Parties will have the non-exclusive right to sell
Advertisements and Transactional Inventory through the
Co-Branded Sites, subject to AOL's and RS' then generally
applicable advertising policies and AOL's applicable
exclusivity commitments, provided, however, that:
(i) At least 90 days prior to the expiration of the
Exclusive Sales Period, AOL shall provide RS with a
written list of up to eight third parties and in no
event will RS use any third party included on such
list (or any agent of such third party) to sell
Advertisements or Transactional Inventory on the
Co-Branded Sites; and
(ii) In no event will either Party sell Advertisements
or Transactional Inventory on the Co-Branded Sites:
(a) which promotes the Home Listings Service of
Intuit or Get Smart; (b) to a party listed on
Exhibit B, (c) to an Interactive Service; (d) to
any entity reasonably construed to be in
competition with any third party with which AOL has
an exclusive or premier relationship provided such
third party's category of Content is listed on the
Category List as provided in Section 1.2 (c) above;
and
6
<PAGE>
(iii) In no event will either Party in any respect
promote, advertise, market or distribute on any
First Screen of the Co-Branded Sites, the products,
services or Content of any entity reasonably
construed to be in competition with any third party
with which AOL has an exclusive or premier
relationship (except any Home Finance Products
offered by such third party) provided that such
third party's category of Content is listed on the
Category List as provided in Section 1.2 (c) or AOL
has notified RS in writing of such category of
Content, excluding any promotion, advertisement,
marketing or distribution which RS is obligated as
of the date of such notice to provide pursuant to a
binding written agreement;
(b) RS may offer the Home Finance Products on any screen of
the Co-Branded Sites other than a First Screen and may
offer any other Transactional Inventory in (i) the area
of the Co-Branded Sites dedicated to RS' commerce
offerings (the "Resource Center") and (ii) subject to
mutual approval of the Parties, in any other areas of the
Co-Branded Sites; and
(c) Any sales of Transactional Inventory through the Co-
Branded Sites will be conducted through a direct sales
format (provided that RS may conduct auctions of real
estate within an appropriate sub-area of the Co-Branded
Sites and subject to the terms and conditions herein and
AOL's then generally applicable policies regarding
auction sales); RS will promote, sell, offer or otherwise
distribute any Products through any other format (e.g.,
through fee-based membership clubs) without the prior
written consent of AOL; provided, however, that RS will
be entitled to offer (i) any third-party fee-based
membership clubs, including the AOL versions of such
clubs offered by Cendant Corp. (e.g., AOL AutoVantage)
(other than a Home Listings Service), subject to the
terms and conditions herein and (ii) a membership club
for real estate professionals.
1.7. Advertising and Transactional Inventory. The Parties will consult and
---------------------------------------
mutually agree on logistical matters relating to the Advertising and
Transactional Inventory on the AOL Exclusive Sites, such as slots and
availability. All ad impressions on the AOL Exclusive Sites will be
standard industry impressions or such other form as AOL may determine,
subject to Section 1.1.3(f). RS will be responsible for integrating
the Advertisements and Transactional Inventory sold by AOL into the
respective sites and will consult with AOL in advance regarding any
redesigns of such sites that might affect the Advertising or
Transactional Inventory. In the event that RS modifies its generally
applicable advertising policies in a manner that adversely affects the
Advertising or Transactional Inventory opportunities available to AOL
on of the AOL Exclusive Sites the Impressions guarantee set forth in
the Carriage Plan and the Quarterly Commitments set forth in Section
1.6.1 shall be equitably reduced. AOL will be primarily responsible
for account service and advertising relationships. RS shall have
knowledgeable individuals on call from 9 a.m. to 5 p.m. PST to assist
AOL with any issues relating to the Advertising or Transactional
Inventory arising from the AOL Exclusive Sites. RS shall provide AOL
with at least 60 days prior written notice of any changes in the
Advertisement or Transactional Inventory for the AOL Exclusive Sites.
AOL owns all right, title and interest in and to the promotional and
advertising spaces within the AOL Network. Subject to the advertising
rights of AOL hereunder, RS owns all right, title and interest in and
to the promotional and advertising spaces within the RS Properties.
7
<PAGE>
1.8. Ad Serving and Reporting Technology. AOL will use its own and third
-----------------------------------
party ad serving and reporting technology on the Co-Branded Sites and
other AOL Exclusive Sites and will handle all billing and account
management for Advertisement and Transactional Inventory partners on
such sites. In order for such targeted ad serving to be implemented,
RS will ensure that the data necessary to facilitate such targeting
(e.g., location of home, location of move, etc.) will be made
available to AOL in a manner which allows proper incorporation into
AOL's ad server, and will assist AOL by performing the logical lookup
of Advertisements based on the logic defined. In addition, AOL will
consult with RS in order to aid RS in tracking Impressions through
the AOL Exclusive Sites for purposes of fulfilling RS' reporting and
revenue payment requirements hereunder. The Parties will cooperate to
make available targeted ad serving for use on the Co-Branded Sites
and other AOL Exclusive Sites as soon as commercially practical
following the Effective Date.
1.9. Personnel. RS shall dedicate at least two full-time employees to
---------
manage the Advertisement and Transactional Inventory on the Co-
Branded Sites and the relationship with AOL.
1.10. Ownership of Data. As between AOL and RS, RS shall own and shall
-----------------
retain all right, title and interest in the Content provided on the
RS Properties, and any information provided to AOL hereunder which
derives from the RS Properties, including any information about usage
of the Co-Branded Sites and other RS Properties for which AOL sells
Advertising or Transactional Inventory. RS hereby grants to AOL the
following licenses: (i) a nonexclusive, perpetual, royalty-free
license to reproduce, modify, display and use user data (including,
without limitation, all data on usage patterns and user demographics)
derived from the Co-Branded Sites, but not the right to sell or
otherwise distribute such data to third parties; (ii) during the
Exclusive Sales Period, a nonexclusive, royalty-free license to
reproduce, modify, display and use solely for purposes of performing
its obligations under this Agreement and the Other Agreement in
accordance with the terms of such Agreements any user data
(including, without limitation, all data on usage patterns and user
demographics) derived from any RS Properties for which AOL sells
Advertising or Transactional Inventory, excluding the Co-Branded
Sites. AOL shall not distribute any user data derived from the Co-
Branded Sites or the RS Properties to third parties without the prior
written consent of RS. RS shall provide such user information to AOL
on a monthly basis in a timely manner during the Term.
2. PAYMENTS.
--------
2.1. Commission Sales Revenues.
-------------------------
2.1.1. AOL Sales Revenues. During each of the first and second
------------------
years following March 15, 1999, AOL will pay to RS the
following amount (the "RS Ad Share") relating to the Gross
AOL Sales Revenues received by AOL on behalf of RS from the
sale of Ad Products by AOL or its agents on the Co-Branded
Sites and other AOL Exclusive Sites:
(i) Until Gross AOL Sales Revenues in such year exceed
* * of the Net AOL Sales Revenues received; and
------------
(ii) Once Gross AOL Sales Revenues in such year exceed
* * of the Net AOL Sales Revenues received
------------
from the Gross AOL Sales Revenues in excess of
* *.
------------
AOL will pay the foregoing percentages of Net AOL Sales
Revenues to RS on a quarterly basis within five (5) business
days after the end of the quarter in which
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
8
<PAGE>
such Gross AOL Sales Revenues are received. Any subsequent
changes in the amounts due for a quarter shall be reconciled
during the next payment cycle. If such reconciliation
indicates an underpayment by AOL, AOL shall include an amount
equal to the difference between the amount owed and the amount
paid in the payment for the next quarter. If such
reconciliation indicates an overpayment by AOL, such amounts
shall be creditable toward any subsequent payments owed by AOL
to RS. Any excess payments outstanding at the end of the last
quarter in which such payments are due shall be promptly
refunded to AOL. Notwithstanding the foregoing, AOL shall be
entitled to offset any such Net AOL Sales Revenues due to RS
against the * * payable by RS pursuant to Section
-------------
4.1(c)-(f) of the Other Agreement, regardless of whether such
payments by RS are due to AOL at the time such Net AOL Sales
Revenues are due to RS.
2.1.2. RS Sales Revenues. If pursuant to Section 1.1.1, AOL has the
-----------------
exclusive right to sell Advertisements to less than * *
---------
of the total traffic to the RS Realtor.com Site and the RS
HomeBuilder Site in any quarter, and AOL has not satisfied the
Quarterly Commitment for such quarter, within thirty (30) days
after the end of such quarter, RS will pay AOL an amount equal
to * * of the Net RS Sales Revenues from the sales of
------------
Advertisements on any versions of the RS Realtor.com Site or
RS HomeBuilder Site which are not AOL Exclusive Sites by RS or
its agents.
2.1.3. Sharing of Revenues from Home Finance Products. Each year, RS
----------------------------------------------
will pay AOL as a commission a Transaction Share (as defined
below) of any RS Home Finance Product Revenues received in
such year. "Transaction Share" means the sum of the following
amounts:
(a) With respect to any RS Home Finance Product Revenues
received from the Co-Branded Sites during the Term: (i)
* * of RS Home Finance Product Revenues; plus
---------------
(ii) * * of all RS Home Finance Product
--------------
Revenues above * *, plus (iii) an additional
---------------
* * of RS Home Finance Product Revenues for
--------------
each * * by which such RS Home Finance Product
--------------
Revenues received in such year exceed * *. For
-------------
example, if RS Home Finance Product Revenues from the Co-
Branded Sites in a year total * *;
-------------
(b) With respect to any RS Home Finance Product Revenues
received from the distribution of Mortgage Services
through the AOL Exclusive Sites other than the Co-Branded
Sites during the Exclusive Sales Period: (i) * *
-----------
of such RS Home Finance Product Revenues from Mortgage
Services; plus (ii) * * of all such RS Home
--------------
Finance Product Revenues from Mortgage Services above
* *; and
---------------
(c) With respect to any RS Home Finance Product Revenues
received from the distribution of Closing Services
through the AOL Exclusive Sites other than the Co-Branded
Sites during the Exclusive Sales Period: (i) * *
-----------
of such RS Home Finance Product Revenues from Closing
Services; plus (ii) * * of all such RS Home
--------------
Finance Product Revenues from Closing Services above
* *.
----------------
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
9
<PAGE>
RS will pay the foregoing amounts on a quarterly basis within
thirty (30) days following the end of the quarter in which the
applicable RS Home Finance Product Revenues were generated.
2.1.4. Revenues from Sales of DCI Guides and Yellow Page Inventory.
-----------------------------------------------------------
For all sales that RS makes of DCI Guide and DCI Yellow Page
inventory as provided in Section 1.4.2, AOL shall pay to RS a
sales commission equal to * * of the net revenues
-------------
attributable to such sales, and AOL shall receive the
remainder of such net revenues.
2.2. Network Buys. To the extent any Gross AOL Sales Revenues are derived
------------
from the sale or provision of Advertisements (including any
Advertisements for Home Finance Products) through a Network Buy, the
prices for the RS Advertisements shall be allocated across such
Network Buy *
--------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
*.
---------------
2.3. Alternative Revenue Streams. In the event RS or any of its Affiliates
---------------------------
(a) receives or desires to receive any direct compensation in
connection with the Co-Branded Sites other than Sales Revenues or Home
Finance Product Revenues (an "Alternative Revenue Stream"), RS will
promptly inform AOL in writing, and the Parties will negotiate in good
faith regarding the equitable portion of revenues from such
Alternative Revenue Stream (if applicable) that will be shared with
AOL. RS will not launch the product or service from which such
Alternative Revenue Stream will be derived, until agreement on such
equitable portion of revenues is reached. In the event the Parties
cannot in good faith reach agreement regarding such Alternative
Revenue Stream within ten (10) days of AOL's request to negotiate, AOL
will have the right to request RS to submit the issue for resolution
pursuant to Section 4.
2.4. Late Payments; Wired Payments. All amounts owed hereunder not paid
-----------------------------
when due and payable will bear interest from the date such amounts are
due and payable at the prime rate in effect at such time. All
payments to either Party required hereunder will be paid in
immediately available, non-refundable U.S. funds and wired to the
following accounts or such other account as designated in writing by
such Party:
If to AOL: "America Online" account, Account Number 323070752 at
---------
The Chase Manhattan Bank, 1 Chase Manhattan Plaza, New York, NY
10081 (ABA: 021000021).
If to RS: "RealSelect" account, Account Number 14656-01665 Bank
--------
of America, Warner Center Regional Office #1465, 5945 Canoga
Avenue, Woodland Hills, CA 91367 (ABA: 121000358).
2.5. Auditing Rights. Each Party will maintain complete, clear and
---------------
accurate records of all expenses, revenues and fees in connection with
the performance of this Agreement. For the sole purpose of ensuring
compliance with this Agreement, each Party will have the right, at its
expense, to direct an independent certified public accounting firm to
conduct a reasonable and necessary inspection of portions of the books
and records of the other Party which are relevant to such other
Party's payment of such expenses, revenues and fees. Any such audit
may be conducted after twenty (20) business days prior written notice;
provided that no such audit of AOL will occur during the period
commencing June 1 and ending September 30.
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
10
<PAGE>
2.6. Taxes. Each Party will collect and pay and indemnify and hold the
-----
other Party harmless from, any sales, use, excise, import or export
value added or similar tax or duty not based on the other Party's net
income, including any penalties and interest, as well as any costs
associated with the collection or withholding thereof, including
attorneys' fees.
2.7. Reports.
-------
2.7.1. RS Reports. RS will provide AOL in an automated manner with a
----------
monthly report in a mutually agreed format, detailing the
following activity in such period by AOL Users (and any other
information mutually agreed upon by the Parties or reasonably
required for measuring revenue activity by RS through the Co-
Branded Sites): (i) summary sales information by day (date,
number of products, number of orders, total Home Finance
Product Revenues); (ii) detailed sales information (order
date/time stamp (if technically feasible), purchaser name and
screenname, SKU or product description); (iii) daily numbers
of searches for listings; (iv) with respect to all listings
searched in each month, average data for RS' search criteria
(e.g., sales price, number of bedrooms, etc.); (v) detailed
pageview reporting by screen type and/or location of screen;
and (vi) to the extent available to RS, aggregate data across
such search criteria in each month (e.g., number of searches
for 4-bedroom homes) (such information in clauses (i), (ii),
(iii), (iv) and (v), "Sales Reports"). RS shall begin
providing such reports as soon as possible after March 15,
1999, and shall have the capacity to provide all such reports
in place no later than 90 days after March 15, 1999. AOL will
be entitled to use the Sales Reports in its business
operations, subject to the terms of this Agreement. More
generally, each payment to be made by RS pursuant to this
Section 2 will be accompanied by a report containing
information which supports the payment, including information
identifying Gross RS Sales Revenues and all items deducted or
excluded from Gross RS Sales Revenues to produce Net RS Sales
Revenues.
2.7.2. Fraudulent Transactions. To the extent permitted by
-----------------------
applicable laws, RS will provide AOL with an prompt report of
any fraudulent order, including the date, screen name or email
address and amount associated with such order, promptly
following RS obtaining knowledge that the order is, in fact,
fraudulent.
2.7.3. AOL Reports. AOL will provide RS an automated monthly report
-----------
detailing the advertising activity in such period, customer
purchases of Advertising by property, average CPM across buys,
average CPM by property, term of buy, and user traffic reports
by property, each report in such format as mutually agreed by
the Parties. Each payment of Sales Revenues to be made by AOL
pursuant to Section 2.1.1 will be accompanied by a report
containing information which supports the payment, including
information identifying gross Sales Revenues and all items
deducted or excluded from gross Sales Revenues to produce
Sales Revenues, including, without limitation, Advertising
Sales Commissions.
3. TERM; RENEWAL; TERMINATION.
--------------------------
3.1. Term. Unless earlier terminated as set forth herein, the initial term
----
of this Agreement will commence on the Effective Date and expire on
* * (the "Initial Term").
-----------------
3.2. Renewal. Upon conclusion of the Initial Term of this Agreement, AOL
-------
will have the right to renew the Agreement for up to three (3)
successive one-year renewal terms (each a "Renewal Term" and together
with the Initial Term, the "Term") by providing RS with notice of
AOL's intention to renew the Agreement for a subsequent Renewal Term
no
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
11
<PAGE>
later than thirty (30) days prior to the commencement of such Renewal
Term; provided, however, that the Agreement thereafter may be renewed
for additional successive one-year renewal terms with RS' consent.
During any such Renewal Term: (i) AOL will not have the exclusive
rights set forth in Section 1.1.1; (ii) * *; and (iii) RS
--------------
will pay AOL the greater of (a) * * of Home Finance
---------------
Product Revenues from the Co-Branded Sites only and (b) * *.
------------
AOL's right to renew will apply in connection with (i) an expiration
of the Initial Term or any Renewal Term and (ii) any termination of
the Agreement, except termination by RS pursuant to Section 3.3.
3.3. Termination for Breach. Except as expressly provided elsewhere in
----------------------
this Agreement, either Party may terminate this Agreement at any time
in the event of a material breach of the Agreement by the other Party
which remains uncured after thirty (30) days written notice thereof to
the other Party (or such shorter period as may be specified elsewhere
in this Agreement); provided that the cure period with respect to any
scheduled payment will be fifteen (15) days following written notice
that such payment is due. Notwithstanding the foregoing, in the event
of a material breach of a provision that expressly requires action to
be completed within an express period shorter than 30 days; either
Party may terminate this Agreement if the breach remains uncured
following written notice thereof to the other Party for a time period
equal to the length of such express period.
3.4. Termination for Bankruptcy/Insolvency. Either Party may terminate
-------------------------------------
this Agreement immediately following written notice to the other Party
if the other Party (i) ceases to do business in the normal course,
(ii) becomes or is declared insolvent or bankrupt, (iii) is the
subject of any proceeding related to its liquidation or insolvency
(whether voluntary or involuntary) which is not dismissed within
ninety (90) calendar days or (iv) makes an assignment for the benefit
of creditors.
3.5. Termination on Change of Control. In the event of a Change of Control
--------------------------------
of RS resulting in control of RS by an Interactive Service, AOL may
terminate this Agreement by providing RS with thirty (30) days prior
written notice of such intent to terminate. In the event of a Change
of Control of AOL: (i) AOL may terminate this Agreement by providing
RS with twenty-four (24) months prior written notice of such intent to
terminate; and (ii) in the event of a Change of Control of AOL by a
competitor of RS' real estate related business, RS may terminate this
Agreement by providing AOL with sixty (60) days prior written notice
of such termination. *
------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
*.
---------------
3.6. Termination on Termination of Other Agreement. In the event of the
---------------------------------------------
termination of the Other Agreement, either Party may terminate this
Agreement immediately upon written notice to the other Party.
4. MANAGEMENT COMMITTEE/ARBITRATION.
--------------------------------
4.1. The Parties will act in good faith and use commercially reasonable
efforts to promptly resolve any claim, dispute, claim, controversy or
disagreement (each a "Dispute") between the Parties or any of their
respective subsidiaries, Affiliates, successors and assigns under or
related to this Agreement or any document executed pursuant to this
Agreement or any of the transactions contemplated hereby. If the
Parties cannot resolve the Dispute within such time frame, the Dispute
will be submitted in writing by a Party to
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
12
<PAGE>
the Management Committee for resolution. For ten (10) days following
submission of the Dispute to the Management Committee, the Management
Committee will have the exclusive right to resolve such Dispute;
provided further that the Management Committee will have the final and
exclusive right to resolve Disputes arising from any provision of the
Agreement which expressly or implicitly provides for the Parties to
reach mutual agreement as to certain terms. If the Management
Committee is unable to amicably resolve the Dispute during the ten day
period, then the Management Committee will consider in good faith the
possibility of retaining a third party mediator to facilitate
resolution of the Dispute. In the event the Management Committee
elects not to retain a mediator, the dispute will be subject to the
resolution mechanisms described below. "Management Committee" will
mean a committee made up of a senior executive from each of the
Parties for the purpose of resolving Disputes under this Section 4 and
generally overseeing the relationship between the Parties contemplated
by this Agreement. Neither Party will seek, nor will be entitled to
seek, binding outside resolution of the Dispute unless and until the
Parties have been unable amicably to resolve the Dispute as set forth
in this Section 4 and then, only in compliance with the procedures set
forth in this Section 4.
4.2. Except for Disputes relating to issues of (i) proprietary rights,
including but not limited to intellectual property and
confidentiality, and (ii) any provision of the Agreement which
expressly or implicitly provides for the Parties to reach mutual
agreement as to certain terms (which will be resolved by the Parties
solely and exclusively through amicable resolution as set forth in
Section 4.1), any Dispute not resolved by amicable resolution as set
forth in Section 4.1 will be governed exclusively and finally by
arbitration. Such arbitration will be conducted by the American
Arbitration Association ("AAA") in Washington, D.C. (if the Dispute
was first submitted to the Management Committee by RS) or San
Francisco, California (if the Dispute was first submitted to the
Management Committee by AOL) and will be initiated and conducted in
accordance with the Commercial Arbitration Rules ("Commercial Rules")
of the AAA, including the AAA Supplementary Procedures for Large
Complex Commercial Disputes ("Complex Procedures"), as such rules will
be in effect on the date of delivery of a demand for arbitration
("Demand"), except to the extent that such rules are inconsistent with
the provisions set forth herein. Notwithstanding the foregoing, the
Parties may agree in good faith that the Complex Procedures will not
apply in order to promote the efficient arbitration of Disputes where
the nature of the Dispute, including without limitation the amount in
controversy, does not justify the application of such procedures.
4.3. The arbitration panel will consist of three arbitrators. Each Party
will name an arbitrator within ten (10) days after the delivery of the
Demand. The two arbitrators named by the Parties may have prior
relationships with the naming Party, which in a judicial setting would
be considered a conflict of interest. The third arbitrator, selected
by the first two, should be a neutral participant, with no prior
working relationship with either Party. If the two arbitrators are
unable to select a third arbitrator within ten (10) days, a third
neutral arbitrator will be appointed by the AAA from the panel of
commercial arbitrators of any of the AAA Large and Complex Resolution
Programs. If a vacancy in the arbitration panel occurs after the
hearings have commenced, the remaining arbitrator or arbitrators may
not continue with the hearing and determination of the controversy,
unless the Parties agree otherwise.
4.4. The Federal Arbitration Act, 9 U.S.C.(S)(S) 1-16, and not state law,
will govern the arbitrability of all Disputes. The arbitrators will
allow such discovery as is appropriate to the purposes of arbitration
in accomplishing a fair, speedy and cost-effective resolution of the
Disputes. The arbitrators will reference the Federal Rules of Civil
Procedure then in effect in setting the scope and timing of discovery.
The Federal Rules of Evidence will apply in toto. The
13
<PAGE>
arbitrators may enter a default decision against any Party who fails
to participate in the arbitration proceedings.
4.5. The arbitrators will have the authority to award compensatory damages
only. Any award by the arbitrators will be accompanied by a written
opinion setting forth the findings of fact and conclusions of law
relied upon in reaching the decision. The award rendered by the
arbitrators will be final, binding and non-appealable, and judgment
upon such award may be entered by any court of competent jurisdiction.
The Parties agree that the existence, conduct and content of any
arbitration will be kept confidential and no Party will disclose to
any person any information about such arbitration, except as may be
required by law or by any governmental authority or for financial
reporting purposes in each Party's financial statements.
4.6. The non-prevailing Party (as determined by the arbitrators) will pay
the reasonable fees of each Party's own outside attorneys, reasonable
expenses of witnesses and all other reasonable expenses and costs in
connection with the presentation of such Party's case (collectively,
"Attorneys' Fees"). The remaining costs of the arbitration, including
without limitation, fees of the arbitrators, costs of records or
transcripts and administrative fees (collectively, "Arbitration
Costs") will be born equally by the Parties. Notwithstanding the
foregoing, the arbitrators may modify the allocation of Arbitration
Costs and Attorneys' Fees in those cases where fairness dictates a
different allocation of Arbitration Costs between the Parties.
5. ADDITIONAL CONSIDERATION.
------------------------
5.1. Base Warrant. On the tenth day following the Effective Date, Net
------------
Select issued to AOL a warrant (the "Base Warrant") granting to AOL
the right for three (3) years to purchase a number of shares of Net
Select common stock (the "Base Warrant Shares") equal to two and one-
half percent (2.5%) of the equity securities of Net Select, on a fully
diluted basis (excluding any employee stock options) calculated as of
the Effective Date, at a price per share equal to the lowest price per
share paid by investors in first Financing Event (as defined
below)following the Effective Date. The Base Warrant Shares will vest
upon execution of the Base Warrant. AOL will not be entitled to
exercise the Base Warrant Shares until the earlier of the following:
(a) a Change of Control of RS or Net Select, (b) fifteen (15) months
from the Effective Date, (c) the IPO, in the event AOL desires to
purchase IPO Shares, as described in Section 5.2, but is not permitted
to make such purchase, or (d) AOL's purchase of the IPO Shares. The
Base Warrant will expire upon AOL's failure to offer to purchase the
IPO Shares. Any shares of Net Select common stock acquired by AOL
upon exercise of the Base Warrant will possess rights substantially
equal to the rights granted to investors in the first Financing Event
following the Effective Date, but at least co-sale rights, piggyback
registration rights and S-3 demand registration rights. A "Financing
Event" is an IPO or a private equity investment in Net Select. Within
thirty (30) days after March 15, 1999, the Parties shall execute an
agreement documenting the grant of the Base Warrants as of the tenth
day after the Effective Date on the terms set forth in this Section
5.1. In the event that Net Select and AOL have not entered into an
agreement which documents the grant of Base Warrants hereby made by
Net Select to AOL within thirty (30) days from the Effective Date, the
provisions of this Section 5.1 contain all of the principal and
essential terms and conditions of the Base Warrant granted to AOL
hereunder and such provisions will be fully self-effectuating in all
respects. Net Select and AOL will use all reasonable efforts to
negotiate such an agreement in good faith within such 30-day period.
5.2. IPO Shares; Supplemental Warrants. AOL has indicated that it desires
---------------------------------
to purchase shares of the common stock of Net Select aggregating
$2,000,000 in purchase price in
14
<PAGE>
the IPO at the purchase prices per share indicated below (the "IPO
Shares"). Net Select has indicated that it desires to sell the IPO
Shares to AOL. If AOL purchases the IPO Shares in the IPO,
concurrently with the closing of the IPO Net Select agrees to sell to
AOL (in addition to the IPO Shares), at a purchase price equal to 1%
of the aggregate exercise price of the applicable warrant, the
following warrants (the "Supplemental Warrants"), with each warrant
expiring four (4) years after the date of the IPO: (A) a warrant to
purchase a number of shares of Net Select common stock at an exercise
price equal to the "Price to Public" set forth on the cover page of
the prospectus for the IPO (net of underwriting discounts and
commissions) such that the aggregate exercise price is equal to
$1,500,000; (B) a warrant to purchase a number of shares of Net Select
common stock at an exercise price equal to 150% of the "Price to
Public" such that the aggregate exercise price is equal to $750,000;
and (C) a warrant to purchase a number of shares of Net Select common
stock at an exercise price equal to 200% of the "Price to Public" such
that the aggregate exercise price is equal to $750,000. Sale of such
stock and warrants, and subsequent exercise of each warrant, will be
subject to the following: (i) compliance with applicable securities
laws; (ii) execution of appropriate definitive agreements; (iii)
solely with respect to purchase in the IPO, such purchase constituting
10% or fewer of the aggregate number of shares sold in the IPO; and
(iv) solely with respect to exercise of each warrant, AOL acquiring
upon exercise of such warrant a number of shares that is less than 5%
of the outstanding stock of Net Select; provided that in the event
clauses (iii) or (iv) prevent such sale or exercise, AOL and Net
Select will promptly in good faith negotiate and agree upon
alternative arrangements that produce at least substantially similar
compensation for AOL. Shares of Net Select common stock issuable
pursuant to the Supplemental Warrants will either be registered in the
IPO or will possess demand registration rights.
5.3. Alternative IPO. Net Select hereby represents and warrants that (a)
---------------
RS's assets (including the RS Public Site) represent the primary value
of Net Select's business and (b) Net Select does not own or control
any material asset other than RS's assets. Net Select also
acknowledges that its intent is to complete the IPO of Net Select,
rather than the IPO of RS. In the event that (i) there is a material
change in the structure or holdings of Net Select such that RS is no
longer a core asset of Net Select or (ii) Net Select elects to pursue
an IPO of RS rather than of Net Select, at AOL's option, the Base
Warrant and Supplemental Warrants described in this Section 5 will, in
accordance with the terms and conditions specified herein, grant to
AOL rights with respect common stock in RS (or in the entity that then
owns and controls RS).
6. NET SELECT GUARANTEE. Net Select hereby unconditionally guarantees to AOL
--------------------
(i) the full and prompt payment of all amounts which may become due and
owing to AOL from RS pursuant to this Agreement and (ii) the due
performance of RS of all of its obligations under this Agreement, (all of
the foregoing, collectively, are hereinafter referred to as the "Guarantee
Obligations"). The obligations of Net Select under this Section 6 shall
not be impaired by any modification, supplement, extension or amendment of
any contract or agreement between AOL and RS, whether now existing or
hereafter arising, including, without limitation, this Agreement, nor by
any modification, release or other alteration of any of the Guaranteed
Obligations or of any security therefor, and the liability of Net Select
shall apply to the Guaranteed Obligations as so altered, modified,
supplemented, extended or amended. No invalidity, irregularity or
unenforceability of all or any part of the Guaranteed Obligations or of any
security therefor (including, without limitation, as a result of the
bankruptcy, reorganization or insolvency of the RS, or pursuant to any
assignment for the benefit of creditors, receivership, or similar
proceeding) shall affect, impair or be a defense to the obligations of Net
Select under this Section 6 which are the primary obligations of Net
Select, and nothing shall discharge or satisfy the liability of Net Select
15
<PAGE>
hereunder except the full payment and performance of the Guaranteed
Obligations. This Section 6 shall survive termination of this Agreement.
7. STANDARD TERMS. The Standard Legal Terms & Conditions set forth on Exhibit
--------------
D attached hereto are hereby made a part of this Agreement.
16
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. REALSELECT, INC.
By: By:
------------------------------- -------------------------------
Print Name: Print Name:
----------------------- -----------------------
Title: Title:
---------------------------- ----------------------------
Date: Date:
----------------------------- -----------------------------
NETSELECT, INC.
By:
-------------------------------
Print Name:
-----------------------
Title:
----------------------------
Date:
-----------------------------
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<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED] Final Execution Copy
Confidential
EXHIBIT A
Definitions
-----------
The following definitions will apply to this Agreement:
Ad Products. Advertisements, Transactional Inventory and Home Finance Products.
- -----------
Advertising or Advertisements. Promotions, advertisements, links, pointers or
- ----------- --------------
similar services or rights, including without limitation, Standard
Advertisements and Sponsorship Packages, but not Transactional Inventory or RS
Listings.
Affiliate. With respect to any Person, any other Person which, at the time such
- ---------
determination is being made, is Controlling, Controlled by or under common
Control with such Person. For the purposes hereof, (i) "Control," whether used
as a noun or verb, refers to the possession, directly or indirectly, of the
power to affirmatively direct, or affirmatively cause the direction of, the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise, and (ii) a "beneficial owner" of a
security is any Person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has or shares (x) voting
power, which includes the power to vote, or direct the voting of, such security,
or (y) investment power, which includes the power to dispose, or to direct the
disposition of, such security.
AOL Exclusive Sites. The sites with respect to which AOL has the exclusive
- -------------------
right to sell Advertisements and Transactional Inventory pursuant to Section
1.1.1. Each site shall be an AOL Exclusive Site for so long as AOL retains the
exclusive right to sell Advertisements and Transactional Inventory to such
sites.
AOL Interactive Site. Any Interactive Site which is managed, maintained, owned
- --------------------
or controlled by AOL or its agents.
AOL Member. Any authorized user of the AOL Service, including any sub-accounts
- ----------
using the AOL Service under an authorized master account.
AOL Network. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
- -----------
service owned, operated, distributed or authorized to be distributed by or
through AOL or its Affiliates worldwide (and including those properties excluded
from the definitions of the AOL Service, the DCI Service or AOL.com). It is
understood and agreed that the rights of RS relate only to the AOL Service and
AOL.com and not generally to the AOL Network.
AOL Properties. The AOL Service, AOL.com, the DCI Service, the CompuServe
- --------------
Service, the DCI NetCenter Local Service and such other services or sites as the
parties mutually agree in writing to consider AOL Properties.
AOL Service. The standard, narrow-band U.S. version of the America Online(R)
- -----------
brand service (even if accessed at higher speeds), specifically excluding (a)
the DCI Service, AOL.com or any other AOL Interactive Site, (b) the
international versions of the U.S. version of the America Online(R) brand
service (e.g., AOL Japan), (c) "Driveway," "AOL NetFind," "AOL Instant
Messenger," "NetMail" or any similar independent product or service offered by
or through the U.S. version of the America Online(R) brand service, (d) any
programming or Content area offered by or through the U.S. version of the
America Online(R) brand service over which AOL does not exercise substantially
complete operational control (including, without limitation, Content areas
substantially controlled by other parties and member-created Content areas), (e)
any yellow pages, white pages or other search, directory or review services or
Content (other than a Home Listings Service directly promoted by AOL on the
America Online(R) brand service) offered by or through the U.S. version of the
America Online(R) brand service, (f) any property, feature,
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Confidential
product or service which AOL or its Affiliates may acquire subsequent to the
Effective Date (other than a Home Listings Service directly promoted by AOL on
the America Online(R) brand service) and (g) any other version of an America
Online service which is materially different from the narrow-band U.S. version
of the America Online brand service, by virtue of its branding, distribution,
functionality, Content and services, including, without limitation, any co-
branded version of the service and any version distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer.
AOL User. Any user of the AOL Properties or the AOL Network.
- --------
AOL.com. AOL's primary Internet-based Interactive Site marketed under the
- -------
"AOL.COM" brand, specifically excluding (a) the DCI Service and the AOL Service,
(b) any international versions of such site, (c) "Driveway," "AOL NetFind," "AOL
Instant Messenger," "NetMail" or any similar independent product or service
offered by or through such site or any other AOL Interactive Site, (d) any
programming or Content area offered by or through such site over which AOL does
not exercise substantially complete operational control (including, without
limitation, Content areas substantially controlled by other parties and member-
created Content areas), (e) any yellow pages, white pages or other search,
directory or review services or Content offered by or through such site or any
other AOL Interactive Site (other than a Home Listings Service directly promoted
by AOL through such site), (f) any property, feature, product or service which
AOL or its Affiliates may acquire subsequent to the Effective Date (other than a
Home Listings Service directly promoted by AOL through such site)and (g) any
other version of an America Online Interactive Site which is materially
different from AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM" brand, by virtue of its branding, distribution, functionality, Content
and services, including, without limitation, any co-branded versions and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer.
Change of Control. (a) The consummation of a reorganization, merger or
- -----------------
consolidation or sale or other disposition of substantially all of the assets of
a party; or (b) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1933,
as amended) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) of more than 50% of either (i) the then outstanding
shares of common stock of such party; or (ii) the combined voting power of the
then outstanding voting securities of such party entitled to vote generally in
the election of directors.
Closing Services. A fee-based service related to the origination of first
- ----------------
mortgages and the following other fee-based services: appraisals, credit
reports, flood certifications and title reports.
Co-Branded Sites. The version of each of the RS Properties that is co-branded
- ----------------
with AOL in accordance with the terms and conditions of the Other Agreement.
There will be different versions of the Co-Branded Sites for each Co-Branding
Partner.
Co-Branding Partner. The AOL Service, with respect to the AOL Service version
- -------------------
of the Co-Branded Sites; AOL.com with respect to the AOL.com version of the Co-
Branded Sites; the DCI Service with respect to the DCI Service version of the
Co-Branded Sites, the CompuServe Service with respect to the CompuServe version
of the Co-Branded Sites, and the DCI NetCenter Local Service with respect to the
DCI NetCenter version of the Co-Branded Sites.
Commercial Listings Service. An online database of classified listings for new
- ---------------------------
and/or existing commercial properties for sale or rent searchable by prospective
commercial buyers or renters. Commercial Listings Service does not include: (i)
listings for any other form of real estate other than new and/or existing
commercial real estate (including, without limitation, new or existing homes, or
non-commercial rental properties), (ii) any commercial property listings posted
online by AOL Users or a for sale by owner (FSBO) listings database.
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Confidential
CompuServe Service. The standard, narrow-band U.S. version of the CompuServe(R)
- ------------------
brand service (even if accessed at higher speeds) and CompuServe.com,
specifically excluding (a) the DCI Service, AOL.com or any other AOL Interactive
Site, (b) the international versions of the U.S. version of the CompuServe(R)
brand service (e.g., CompuServe Europe), (c) "Driveway," "AOL NetFind," "AOL
Instant Messenger," "NetMail" or any similar independent product or service
offered by or through the U.S. version of the CompuServe(R) brand service, (d)
any programming or Content area offered by or through the U.S. version of the
CompuServe(R) brand service over which CompuServe does not exercise
substantially complete operational control (including, without limitation,
Content areas substantially controlled by other parties and member-created
Content areas), (e) any yellow pages, white pages or other search, directory or
review services or Content (other than a Home Listings Service directly promoted
by AOL on the CompuServe(R) brand service) offered by or through the U.S.
version of the CompuServe(R) brand service, (f) any property, feature, product
or service which AOL or its Affiliates may acquire subsequent to the Effective
Date (other than a Home Listings Service directly promoted by AOL on the
CompuServe(R) brand service) and (g) any other version of the CompuServe Service
which is materially different from the narrow-band U.S. version of the
CompuServe(R) brand service, by virtue of its branding, distribution,
functionality, Content and services, including, without limitation, any co-
branded version of the service and any version distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer.
Confidential Information. Any information relating to or disclosed in the
- ------------------------
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not limited
to, the material terms of this Agreement, information about AOL Members, AOL
Users, AOL Purchasers and RS customers, technical processes and formulas, source
codes, product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party.
Content. Text, images, video, audio (including, without limitation, music used
- -------
in synchronism or timed relation with visual displays) and other data, Products,
advertisements, promotions, links, pointers and software, including any
modifications, upgrades, updates, enhancements and related documentation.
DCI. Digital City, Inc.
- ---
DCI NetCenter Local Service. The standard, narrow-band U.S. version of the DCI
- ---------------------------
co-branded local service carried through Netscape (even if accessed at higher
speeds), specifically excluding (a) the DCI Service, AOL Service and AOL.com or
any other AOL Interactive Site, (b) any international versions of the U.S.
version of the DCI co-branded local service carried through Netscape, (c)
"Driveway," "AOL NetFind," "AOL Instant Messenger," "NetMail" or any similar
independent product or service offered by or through the U.S. version of DCI co-
branded local service carried through Netscape, (d) any version of the DCI co-
branded local service carried through Netscape over which DCI does not exercise
substantially complete ownership or operational control, (e) any programming or
Content area offered by or through the U.S. version of the DCI co-branded local
service carried through Netscape over which DCI does not exercise substantially
complete operational control (including, without limitation, Content areas
substantially controlled by other parties and member-created Content areas), (f)
any yellow pages, white pages, classifieds or other search, directory or review
services or Content offered by or through the U.S. version of the DCI co-branded
local service carried through Netscape (other than a Home Listings Service
directly promoted by AOL through the U.S. version of the co-branded local
service distributed through DCI NetCenter and DCI), (g) any property, feature,
product or service which DCI or its Affiliates may acquire subsequent to the
Effective Date (other than a Home Listings Service directly promoted by AOL
through the DCI co-branded local service carried through Netscape and (h) any
other version of a Digital City service which is materially different from the
narrow-band U.S. version of the DCI co-branded local service carried through
Netscape, by virtue of its branding, distribution, functionality, Content and
services,
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Confidential
including, without limitation, any co-branded version of the service and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer.
DCI Service. The standard, narrow-band U.S. version of the Digital City(R)
- -----------
brand service (even if accessed at higher speeds), specifically excluding (a)
the AOL Service and AOL.com or any other AOL Interactive Site, (b) any
international versions of the U.S. version of the Digital City(R) brand service,
(c) "Driveway," "AOL NetFind," "AOL Instant Messenger," "NetMail" or any similar
independent product or service offered by or through the U.S. version of the
Digital City(R) brand service, (d) any version of the Digital City(R) brand
service over which DCI does not exercise substantially complete ownership or
operational control, (e) any programming or Content area offered by or through
the U.S. version of the Digital City(R) brand service over which DCI does not
exercise substantially complete operational control (including, without
limitation, Content areas substantially controlled by other parties and member-
created Content areas), (f) any yellow pages, white pages, classifieds or other
search, directory or review services or Content offered by or through the U.S.
version of the Digital City(R) brand service (other than a Home Listings Service
directly promoted by AOL through the U.S. version of the Digital City(R) brand
service), (g) any property, feature, product or service which DCI or its
Affiliates may acquire subsequent to the Effective Date (other than a Home
Listings Service directly promoted by AOL through the U.S. version of the
Digital City(R) brand service) and (h) any other version of a Digital City
service which is materially different from the narrow-band U.S. version of the
Digital City(R) brand service, by virtue of its branding, distribution,
functionality, Content and services, including, without limitation, any co-
branded version of the service and any version distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer.
First Screen. The first screen of the Co-Branded Sites that is accessed from
- ------------
any promotion on the AOL Network.
Gross AOL Sales Revenue. The aggregate amount received by or on behalf of AOL
- -----------------------
as agent for RS: (a) on the sale or provision of any Advertisements on ad-
enabled pages of the Co-Branded Sites and any other AOL Exclusive Sites and (b)
on the sale, licensing, distribution or provision of any Transactional Inventory
and Home Finance Products on the Co-Branded Sites and any other AOL Exclusive
Sites.
Gross RS Sales Revenue. The aggregate amount received by or on behalf of RS:
- ----------------------
(a) on the sale or provision of any Advertisements on ad-enabled pages of the
Co-Branded Sites and any other AOL Exclusive Sites and (b) on the sale,
licensing, distribution or provision of any Transactional Inventory on the Co-
Branded Sites and any other AOL Exclusive Sites.
Home Finance Products. The Closing Services and the Mortgage Services.
- ---------------------
Home Listings Service. The aggregation of nation-wide property listings from
- ---------------------
the Multiple Listings Service and other third party content providers for new
and/or existing homes (including vacation homes) in an online database
searchable by prospective home buyers. Home Listings Service does not include:
(i) listings for any other form of real estate other than new and existing homes
(including, without limitation, rental properties or commercial real estate),
(ii) any home listings posted online by AOL Users or a for sale by owner (FSBO)
listings database or (iii) any aggregator of new and/or existing home listings
from such aggregator's own listings (e.g., Century 21, ERA, Coldwell Banker),
except solely to the extent that (a) two (2) or more of the above-named entities
work together to create a single Home Listings Service which combines Home
Listings Services from each participating entity or (b) the amount of existing
and/or new home listings offered online by any such aggregator exceeds twenty-
five percent (25%) of the homes listed nationwide through the Multiple Listing
Services.
Impression. User exposure to the page containing the applicable promotion or
- ----------
advertisement, as such exposure may be reasonably determined and measured by AOL
in accordance with its standard methodologies and protocols.
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Interactive Service. Any entity that offers online or Internet connectivity (or
- -------------------
any successor form of connectivity), aggregates and/or distributes a broad
selection of third-party interactive Content (e.g., Cendant Corp.), or provides
interactive navigational services (including, without limitation, Yahoo,
Microsoft Network, PointCast Network, Infoseek, Lycos, Snap, Classifieds 2000
and USA Today and any online service providers, Internet service providers,
WebTV, @Home or other broadband providers, search or directory providers, "push"
product providers such as the Pointcast Network or providers of interactive
navigational environments such as Microsoft's "Active Desktop").
Interactive Site. Any interactive site or area, including, by way of example and
- ----------------
without limitation, (i) an RS site on the World Wide Web portion of the Internet
or (ii) a channel or area delivered through a "push" product such as the
Pointcast Network or interactive environment such as Microsoft's Active Desktop.
IPO. The date RS completes any initial public underwritten public offering
- ----
registered with the Securities Exchange Commission or any state regulatory
agency.
Licensed Content. All Content offered through the Co-Branded Sites pursuant to
- ----------------
this Agreement or otherwise provided by RS or its agents in connection herewith
(e.g., offline or online promotional Content, Placements, AOL "slideshows" ,
etc.), including, without limitation, the API Software and including in each
case, any modifications, upgrades, updates, enhancements, and related
documentation.
Mortgage Services. First mortgage products offered on AOL Exclusive Sites.
- -----------------
Net AOL Sales Revenue. Gross AOL Sales Revenue less: (i) any handling,
- ---------------------
shipping or service charges; (ii) any amounts paid for sales or use taxes;(iii)
any duties, credits or chargebacks for returned or cancelled goods or services;
and (iv) Operating Expenses, provided however that such Operating Expenses shall
not exceed 15% of the aggregate amounts received with respect to such
Advertising, Transactional Inventory and Home Finance Products net of (i), (ii)
and (iii) above.
Net RS Sales Revenues. Gross RS Sales Revenue less (i) any handling, shipping
- ---------------------
or service charges; (ii) any amounts paid for sales or use taxes;(iii) any
duties, credits or chargebacks for returned or cancelled goods or services; (iv)
fees paid to Fannie Mae, Freddie Mac, Intuit or a third party processor (whose
fees shall not be more than the industry standard) for the use of mortgage
processing related services (except to the extent RS is not entitled to any such
fees); and (v) Operating Expenses, provided however that such Operating Expenses
shall not exceed 15% of the aggregate amounts received with respect to such
Advertising and Transactional Inventory net of (i), (ii) and (iii) above.
Network Buy. The purchase of Advertisements (including any Advertisements for
- ------------
Home Finance Products) on a combination of AOL Exclusive Sites and other AOL
Properties.
Operating Expenses. AOL's or RS', as the case may be, (a) actual cost of goods
- ------------------
sold, plus (b) shipping, handling and service costs paid to AOL or RS and (c)
direct out-of-pocket costs incurred by the Party claiming such Operating
Expenses on a per transaction basis.
Product. Any product, good or service which RS (or others acting on its behalf
- -------
or as distributors) offers, sells, provides, distributes or licenses to AOL
Users directly or indirectly through (i) the Co-Branded Sites (including through
any Interactive Site linked thereto), (ii) any other electronic means directed
at AOL Users (e.g., e-mail offers), or (iii) an "offline" means (e.g., toll-free
number) for receiving orders related to specific offers within the Co-Branded
Sites requiring purchasers to reference a specific promotional identifier or
tracking code, including, without limitation, products sold through surcharged
downloads (to the extent expressly permitted hereunder).
Real Estate Screens. The specific screens set forth on Exhibit B on which AOL
- -------------------
will place promotions for the Co-Branded Sites.
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RS Commercial Listings Site. The primary RS Interactive Site through which RS
- ---------------------------
offers a Commercial Listings Service (currently located at
http:www.commercialsource.com).
RS Homebuilder Site. The primary RS Interactive Site through which RS offers
- -------------------
new homes (currently located at http:www.homebuilder.com).
RS Home Finance Product Revenues. The aggregate amount received by RS and its
- --------------------------------
agents: (a) on the sale, licensing, distribution or provision of any Home
Finance Products on the Co-Branded Sites and any other AOL Exclusive Sites less
(i) any handling, shipping or service charges; (ii) any amounts paid for sales
or use taxes;(iii) any duties, credits or chargebacks for returned or cancelled
goods or services; (iv) fees paid to Fannie Mae, Freddie Mac, Intuit or a third
party processor (whose fees shall not be more than the industry standard) for
the use of mortgage processing related services (except to the extent RS is not
entitled to any such fees), and (v) Operating Expenses, provided however that
such Operating Expenses shall not exceed 15% of the aggregate amounts received
with respect to such Home Finance Products net of (i), (ii) and (iii) above.
RS Interactive Site. Any Interactive Site which is managed, maintained, owned
- -------------------
or controlled by RS or its agents.
RS Listings. Any real-estate related listings in a classified directory of core
- -----------
real-estate services (e.g., builder, commercial, remodeling and realtor
directories/white pages/yellow pages).
RS Properties. The RS Realtor.com Site, the RS Commercial Listings Site, the RS
- -------------
Homebuilder Site, the RS Remodeling Site, the RS Vacation Home Site, and such
other sites as the parties mutually agree in writing to consider RS Properties.
RS Realtor.com Site. The primary RS Interactive Site through which RS offers a
- -------------------
Home Listings Service (currently located at http://www.realtor.com).
RS Remodeling Site. The primary RS Interactive Site through which RS offers
- ------------------
remodeling information (currently planned to be located at
http:www.remodel.com).
RS Vacation Home Site. The primary RS Interactive Site through which RS offers
- ---------------------
vacation homes (currently planned to be located at http:www.vacationhome.com).
Sales Revenues. The combination of AOL Gross Sales Revenues and RS Gross Sales
- --------------
Revenues.
Sponsorship Packages. Any Advertisement (other than a Standard Advertisement)
- --------------------
which creates a permanent branded presence in an RS screen or area linked to
from a Results Screen (e.g., sponsorship of a screen or area).
Standard Advertisement. Banners, buttons, links or comparable standard online
- ----------------------
advertising mechanisms, specifically excluding Sponsorship Packages and links
provided by RS to real estate brokers and agents in connection with RS' web
development services.
Transactional Inventory. Any product, good or service, excluding any
- -----------------------
Advertisement or RS Listings, which is directly or indirectly offered, sold,
provided, licensed or otherwise distributed through (i) the Co-Branded Sites or
AOL Exclusive Sites (including any Interactive Service linked thereto), (ii) any
other electronic means directed at site users (e.g., e-mail offers) from the Co-
Branded Sites or AOL Exclusive Sites, or (iii) any "offline" means (e.g., toll-
free number) for receiving orders related to specific offers within the Co-
Branded Sites or AOL Exclusive Sites requiring purchasers to reference a
specific promotional identifier or tracking code, including without limitation,
products sold through surcharged downloads.
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EXHIBIT B
---------
List of Prohibited Advertisers on Co-Branded Sites
--------------------------------------------------
* *
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* *
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- ---------
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* *
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* *
- ----------------------------
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- --------------------------------
* *
- --------------------------------------------------
* *
- -------------------
* *
- -----------
* *
- -----------------------------------------------------------------------------
* *
- ---------------------------------------------
* *
- -------------------------
* *
- --------------------
* *
- ------
* *
- -------------
* *
- ------
* *
- --------------------
I-1
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
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EXHIBIT C
List Of Existing Advertisers
----------------------------
* *
- ------------
* *
- ----------------
* *
- ----------------------------------
* *
- ------------------------
* *
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- ------------------------------------
* *
- ----------------------------------------------------
* *
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I-2
- -----------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
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EXHIBIT D
Standard Legal Terms & Conditions
---------------------------------
1. Promotional Materials/Press Releases. Each Party will submit to the
------------------------------------
other Party, for its prior written approval, which will not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the Co-Branded Sites and/or referencing the
other Party and/or its trade names, trademarks, and service marks (the
"Materials"); provided, however, that either Party's use of screen shots of the
Co-Branded Sites for promotional purposes will not require the approval of the
other Party so long as America Online(R) is clearly identified as the source of
such screen shots; and provided further, however, that, following the initial
public announcement of the business relationship between the Parties in
accordance with the approval and other requirements contained herein, either
Party's subsequent factual reference to the existence of a business relationship
between the Parties will not require the approval of the other Party. Each
Party will solicit and reasonably consider the views of the other Party in
designing and implementing such Materials. Once approved, the Materials may be
used by a Party and its Affiliates for the purpose of promoting the Co-Branded
Sites and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonable prior notice. In the event such approval
is withdrawn, existing inventories of Materials may be depleted.
Notwithstanding the foregoing, either Party may issue press releases and other
disclosures as required by law or as reasonably advised by legal counsel without
the consent of the other Party and in such event, prompt notice thereof will be
provided to the other Party.
2. License. RS hereby grants AOL a non-exclusive worldwide license to
-------
market, license, distribute, reproduce, display, perform, transmit and promote
the Licensed Content (or any portion thereof) through such areas or features of
the AOL Service, AOL.com, the DCI Service and NetFind as AOL deems appropriate
during the Term of the Agreement. RS acknowledges and agrees that the foregoing
license permits AOL to distribute portions of the Licensed Content in
synchronism or timed relation with visual displays prepared by RS or AOL (e.g.,
as part of an AOL "slideshow"). In addition, AOL Users will have the right to
access and use the Co-Branded Sites.
3. Trademark License. In designing and implementing the Materials and
-----------------
taking other actions necessary to execute the purposes of this Agreement, and
subject to the other provisions contained herein, RS will be entitled to use the
following trade names, trademarks, and service marks of AOL: the "America
Online" brand service, "AOL" service/software and AOL's triangle logo; and AOL
and its Affiliates will be entitled to use the trade names, trademarks, and
service marks of RS for which RS holds all rights necessary for use in
connection with this Agreement (collectively, together with the AOL marks listed
above, the "Marks"); provided that each Party: (i) does not create a unitary
composite mark involving a Mark of the other Party without the prior written
approval of such other Party; and (ii) displays symbols and notices clearly and
sufficiently indicating the trademark status and ownership of the other Party's
Marks in accordance with applicable trademark law and practice. AOL warrants
that neither the AOL Marks nor any AOL-provided Content directly associated the
Co-Branded Sites will infringe on or violate any U.S. copyright, U.S. trademark,
U.S. patent or any other U.S. third party right, including without limitation,
any music performance or other music-related rights.
4. Ownership of Trademarks. Each Party acknowledges the ownership of the
-----------------------
other Party in the Marks of the other Party and agrees that all use of the other
Party's Marks will inure to the benefit, and be on behalf, of the other Party.
Each Party acknowledges that its utilization of the other Party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
5. Quality Standards. Each Party agrees that the nature and quality of
-----------------
its products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees to
supply the other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use of the
other Party's marks.
6. Infringement Proceedings. Each Party agrees to promptly notify the
------------------------
other Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
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infringement proceedings.
7. Representations and Warranties. Each Party represents and warrants to
------------------------------
the other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement.
8. Confidentiality. Each Party acknowledges that Confidential
---------------
Information may be disclosed to the other Party during the course of this
Agreement. Each Party agrees that it will take reasonable steps, at least
substantially equivalent to the steps it takes to protect its own proprietary
information, during the term of this Agreement, and for a period of three years
following expiration or termination of this Agreement, to prevent the
duplication or disclosure of Confidential Information of the other Party, other
than by or to its employees or agents who must have access to such Confidential
Information to perform such Party's obligations hereunder, who will each agree
to comply with this section. Notwithstanding the foregoing, either Party may
issue a press release or other disclosure containing Confidential Information
without the consent of the other Party, to the extent such disclosure is
required by law, rule, regulation or government or court order. In such event,
the disclosing Party will provide at least five (5) business days prior written
notice of such proposed disclosure to the other Party. Further, in the event
such disclosure is required of either Party under the laws, rules or regulations
of the Securities and Exchange Commission or any other applicable governing
body, such Party will (i) redact mutually agreed-upon portions of this Agreement
to the fullest extent permitted under applicable laws, rules and regulations and
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise be
held in the strictest confidence to the fullest extent permitted under the laws,
, rules or regulations of any other applicable governing body.
9. Limitation of Liability; Disclaimer; Indemnification.
----------------------------------------------------
9.1. Liability. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE
---------
LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CORSEQUENTIAL,
SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM BREACH OF THE
AGREEMENT, THE SALE OF PRODUCTS, THE USE OR INABILITY TO USE THE AOL
NETWORK, THE AOL SERVICE, AOL.COM, THE RS SITE, THE DCI RS SITE OR THE
CO-BRANDED SITES, OR ARISING FROM ANY OTHER PROVISION OF THIS
AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED
PROFITS OR LOST BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES");
PROVIDED THAT EACH PARTY WILL REMAIN LIABLE TO THE OTHER PARTY TO THE
EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE
SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 9.3. EXCEPT AS PROVIDED
IN SECTION 9.3, (I) LIABILITY ARISING UNDER THIS AGREEMENT WILL BE
LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND (II) THE
MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY CLAIMS
ARISING IN CONNECTION WITH THIS AGREEMENT WILL NOT EXCEED THE
AGGREGATE AMOUNT OF PAYMENT OBLIGATIORS OWED TO THE OTHER PARTY
HEREUNDER IN THE YEAR IN WHICH LIABILITY ACCRUES; PROVIDED THAT EACH
PARTY WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT
OBLIGATIORS OWED TO THE OTHER PARTY PURSUANT TO THE AGREEMENT.
9.2. No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN
------------------------
THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY
SPECIFICALLY DISCLAIMS ANY REPRESENTATIORS OR WARRANTIES, EXPRESS OR
IMPLIED, REGARDING THE AOL NETWORK, THE AOL SERVICE, AOL.COM, THE RS
SITE, THE DCI RS SITE OR THE CO-BRANDED SITES, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND
IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL AND
RS SPECIFICALLY DISCLAIM ANY WARRANTY REGARDING THE PROFITABILITY OF
THE RS SITE, THE DCI RS SITE OR THE CO-BRANDED SITES.
9.3. Indemnity. Either Party will defend, indemnify, save and hold
---------
harmless the other Party and the officers, directors, agents,
Affiliates, distributors,
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franchisees and employees of the other Party from any and all third
party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the
indemnifying Party's material breach of any duty, representation, or
warranty of this Agreement.
9.4. Claims. If a Party entitled to indemnification hereunder (the
------
"Indemnified Party") becomes aware of any matter it believes is
indemnifiable hereunder involving any claim, action, suit,
investigation, arbitration or other proceeding against the Indemnified
Party by any third party (each an "Action"), the Indemnified Party
will give the other Party (the "Indemnifying Party") prompt written
notice of such Action. Such notice will (i) provide the basis on which
indemnification is being asserted and (ii) be accompanied by copies of
all relevant pleadings, demands, and other papers related to the
Action and in the possession of the Indemnified Party. The
Indemnifying Party will have a period of ten (10) days after delivery
of such notice to respond. If the Indemnifying Party elects to defend
the Action or does not respond within the requisite ten (10) day
period, the Indemnifying Party will be obligated to defend the Action,
at its own expense, and by counsel reasonably satisfactory to the
Indemnified Party. The Indemnified Party will cooperate, at the
expense of the Indemnifying Party, with the Indemnifying Party and its
counsel in the defense and the Indemnified Party will have the right
to participate fully, at its own expense, in the defense of such
Action. If the Indemnifying Party responds within the required ten
(10) day period and elects not to defend such Action, the Indemnified
Party will be free, without prejudice to any of the Indemnified
Party's rights hereunder, to compromise or defend (and control the
defense of) such Action. In such case, the Indemnifying Party will
cooperate, at its own expense, with the Indemnified Party and its
counsel in the defense against such Action and the Indemnifying Party
will have the right to participate fully, at its own expense, in the
defense of such Action. Any compromise or settlement of an Action will
require the prior written consent of both Parties hereunder, such
consent not to be unreasonably withheld or delayed.
9.5. Acknowledgment. AOL and RS each acknowledges that the
--------------
provisions of this Agreement were negotiated to reflect an informed,
voluntary allocation between them of all risks (both known and
unknown) associated with the transactions contemplated hereunder. The
limitations and disclaimers related to warranties and liability
contained in this Agreement are intended to limit the circumstances
and extent of liability. The provisions of this Section 9 will be
enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
9.6. Solicitation of AOL Users. During the term of this Agreement,
-------------------------
and for the two-year period following the expiration or termination of
this Agreement, neither RS nor its agents will use the AOL Network to
(i) solicit, or participate in the solicitation of AOL Users when that
solicitation is for the benefit of any entity (including RS) which
could reasonably be construed to be or become in competition with AOL
or (ii) promote any services which could reasonably be construed to be
in competition with AOL including, but not limited to, services
available through the Internet. In addition, RS may not send AOL Users
e-mail communications promoting RS' Products through the AOL Network
without a "Prior Business Relationship." For purposes of this
Agreement, a "Prior Business Relationship" will mean that the AOL User
has either (i) engaged in a transaction with RS through the AOL
Network or (ii) voluntarily provided information to RS through a
contest, registration, or other communication, which included notice
to the AOL User that the information provided by the AOL User could
result in an e-mail being sent to that AOL User by RS or its agents. A
Prior Business Relationship does not exist by virtue of an AOL User's
visit to the Co-Branded Sites or any RS Interactive Site (absent the
elements above). More generally, RS will be subject to any standard
policies regarding e-mail distribution through the AOL Network which
AOL may implement.
10. Collection of User Information. RS is prohibited from collecting AOL
------------------------------
User screennames from public or private areas within the AOL Service or AOL.com,
except as specifically provided below. RS will ensure that any survey,
questionnaire or other means of collecting User Information including, without
limitation, requests directed to specific AOL User screennames or email
addresses and automated methods of collecting screennames (an "Information
Request") complies with (i) all applicable laws and regulations, (ii) AOL's
applicable Terms of Service, and (iii) any privacy policies which have been
issued by AOL in writing during the term (or, in the case of the Co-Branded
Sites, RS' standard privacy policies, to the extent such policies are
prominently published on the site and provide adequate notice and disclosure to
users regarding RS' collection, use and disclosure of any user information)
(collectively, the "Applicable Privacy Policies"). Each Information Request
will clearly and conspicuously specify to the AOL Users at issue the purpose for
which User Information collected through the Information Request will be used
(the "Specified Purpose").
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11. Use of User Information. RS will restrict use of the User Information
-----------------------
collected through an Information Request to the Specified Purpose. In no event
will RS (i) provide User Information to any third party (except to the extent
specifically (a) permitted under the AOL Privacy Policies or (b) authorized by
the members in question), (ii) rent, sell or barter User Information, (iii)
identify, promote or otherwise disclose such User Information in a manner that
identifies AOL Users as end-users of the AOL Service, AOL.com or the AOL Network
or (iv) otherwise use any User Information in contravention of the Section 10
above. Notwithstanding the foregoing, in the case of AOL Members who purchase
Products from RS, RS will be entitled to use User Information from such AOL
Members as part of RS' aggregate list of Customers; provided that RS' use does
not in any way identify, promote or otherwise disclose such User Information in
a manner that identifies such AOL Members as end-users of the AOL Service,
AOL.com or the AOL Network. In addition, RS will not use any User Information
for any purpose (including any Specified Purpose) not directly related to the
business purpose of the Co-Branded Sites.
12. Excuse. Neither Party will be liable for, or be considered in breach
------
of or default under this Agreement on account of, any delay or failure to
perform as required by this Agreement as a result of any causes or conditions
which are beyond such Party's reasonable control and which such Party is unable
to overcome by the exercise of reasonable diligence.
13. Independent Contractors. The Parties to this Agreement are
-----------------------
independent contractors. Neither Party is an agent, representative or partner
of the other Party. Neither Party will have any right, power or authority to
enter into any agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other Party. This Agreement will not be
interpreted or construed to create an association, agency, joint venture or
partnership between the Parties or to impose any liability attributable to such
a relationship upon either Party.
14. Notice. Any notice, approval, request, authorization, direction or
------
other communication under this Agreement will be given in writing and will be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network (to screenname
"[email protected]" in the case of AOL) or by confirmed facsimile; (ii) on the
delivery date if delivered personally to the Party to whom the same is directed;
(iii) one business day after deposit with a commercial overnight carrier, with
written verification of receipt; or (iv) five business days after the mailing
date, whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available. In the case of AOL, such notice will
be provided to both the Senior Vice President for Business Affairs (fax no. 703-
265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at the
address of AOL set forth in the first paragraph of this Agreement. In the case
of RS, except as otherwise specified herein, the notice address will be the
address for RS set forth in the first paragraph of this Agreement, with the
other relevant notice information, including the recipient for notice and, as
applicable, such recipient's fax number or AOL e-mail address, to be as
reasonably identified by AOL.
15. Launch Dates. In the event that any terms contained herein relate to
------------
or depend on the commercial launch date of any properties contemplated by this
Agreement (the "Launch Date"), then it is the intention of the Parties to record
such Launch Date in a written instrument signed by both Parties promptly
following such Launch Date; provided that, in the absence of such a written
instrument, the Launch Date will be as reasonably determined by AOL based on the
information available to AOL.
16. No Waiver. The failure of either Party to insist upon or enforce
---------
strict performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
17. Return of Information. Upon the expiration or termination of this
---------------------
Agreement, each Party will, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
18. Survival. Sections 2.5, 4, 5 and 6 of the body of the Agreement and
--------
Sections 8 through 28 of this Exhibit, will survive the completion, expiration,
termination or cancellation of this Agreement.
19. Entire Agreement. This Agreement sets forth the entire agreement and
----------------
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20. Amendment. No change, amendment or modification of any provision of
---------
this Agreement will be valid unless set
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forth in a written instrument signed by the Party subject to enforcement of such
amendment, and in the case of AOL, by an executive of at least the same standing
to the executive who signed the Agreement.
21. Further Assurances. Each Party will take such action (including, but
------------------
not limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
22. Assignment. RS will not assign this Agreement or any right, interest
----------
or benefit under this Agreement without the prior written consent of AOL.
Assumption of the Agreement by any successor to RS (including, without
limitation, by way of merger or consolidation) will be subject to AOL's prior
written approval. Subject to the foregoing, this Agreement will be fully
binding upon, inure to the benefit of and be enforceable by the Parties hereto
and their respective successors and assigns.
23. Construction; Severability. In the event that any provision of this
--------------------------
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect.
24. Remedies. Except where otherwise specified, the rights and remedies
--------
granted to a Party under this Agreement are cumulative and in addition to, and
not in lieu of, any other rights or remedies which the Party may possess at law
or in equity; provided that, in connection with any dispute hereunder, RS will
be not entitled to offset any amounts that it claims to be due and payable from
AOL against amounts otherwise payable by RS to AOL.
25. Applicable Law. Except as otherwise expressly provided herein, this
--------------
Agreement will be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia except for its
conflicts of laws principles.
26. Export Controls. Both Parties will adhere to all applicable laws,
---------------
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
27. Headings. The captions and headings used in this Agreement are
--------
inserted for convenience only and will not affect the meaning or interpretation
of this Agreement.
28. Counterparts. This Agreement may be executed in counterparts, each of
------------
which will be deemed an original and all of which together will constitute one
and the same document.
K-5
<PAGE>
EXHIBIT 10.33
HOMESTORE.COM, INC.
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") is made as of June 7, 1999 by and between
HomeStore.com, Inc., a Delaware corporation ("Company"), and M. Jeffrey Charney
("Executive").
WHEREAS, the Company desires to secure the services of Executive as Vice
President of Corporate Marketing and Communications and Executive desires to
perform such services for the Company, on the terms and conditions as set forth
herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements set forth below, it is mutually agreed as follows:
1. Effective Date, Term and Duties. The term of employment of Executive by
-------------------------------
the Company hereunder shall commence on __________, 1999 (the "Commencement
Date") and shall continue thereafter on the same terms and conditions (such
term being hereinafter referred to as the "Employment Period") until
terminated pursuant to Section 4. Executive's employment with the Company
is on an "at will" basis, and either Executive or the Company may terminate
Executive's employment with the Company at any time, for any or no reason.
Executive shall report to the Chief Executive Officer and shall have such
duties as the Chief Executive Officer may from time to time prescribe
consistent with his position as Vice President of Corporate Marketing and
Communications (the "Services"). Executive shall devote his full time,
attention, energies and best efforts to the business. Notwithstanding the
foregoing, the Executive may (i) with the written permission of the Board
of Directors serve on corporate boards, (ii) serve on civic or charitable
boards or committees, (iii) manage personal investments and (iv) deliver
lectures and teach at educational institutions, so long as such activities
in clauses (i) through (iii) do not significantly interfere with the
performance of Executive's duties and responsibilities hereunder.
Additionally, Executive will be eligible for a change in title if similarly
situated executives are afforded same.
2. Compensation. The Company shall pay and Executive shall accept as full
------------
consideration for the Services compensation consisting of the following:
2.1 Base Salary. $160,000.00 per year base salary, payable in bi-
-----------
monthly installments in accordance with the Company's normal payroll
practices, less such deductions or withholdings required by law.
2.2 Bonus. Executive will be eligible to earn an annual target bonus
-----
in the amount of thirty percent (30%) of Executive's base salary based
on the achievement of certain business and financial objectives that
Executive and the Company's Chief Executive Officer will mutually
determine in good faith. The objectives for Executive's first year
will be determined promptly after the execution of this Agreement;
objectives for future years will be determined
<PAGE>
promptly after the beginning of each fiscal year of the Company. Such
bonus shall be paid annually in accordance with the Company's Annual
Incentive Program. Executive's bonus will not be subject to a prorated
maximum for partial service in 1999, and will be eligible to receive a
bonus amount greater than the target of 30% at the discretion of the
Chief Executive Officer.
2.3 Stock Options. Executive shall be entitled to a stock option
-------------
grant of 100,000 shares of HomeStore.com, Inc.'s Common Stock under
the Company's 1999 Stock Option Plan to be awarded by the Compensation
Committee of the Company's Board of Directors within thirty (30) days
after the date hereof (the "Option"). Such Option shall be granted at
the fair market value by the Board of Directors and shall have a ten-
year term, unless earlier terminated as set forth in the stock option
agreement. Options shall vest as to twenty percent (20%) of the shares
on the first anniversary of the Commencement Date and monthly
thereafter for the remaining four years until such Option is vested
with respect to 100% of the shares, unless earlier terminated as set
forth in the stock option agreement. The Option may be exercised at
any time on or after the date of grant subject to the Company's right
to repurchase unvested shares upon Executive's termination of
employment as set forth in the stock option agreement.
2.4 Benefits and Expenses. Executive will receive the Company's
---------------------
customary employee benefits package for similarly situated executives
of the Company, including full participation in current and future
group health insurance plans. Executive shall be entitled to vacation
in accordance with the policies as periodically established by the
Board of Directors for similarly situated executives of the Company,
which shall in no event be less than three weeks per anniversary year.
The Company shall reimburse the Executive for all reasonable travel
and other business expenses incurred by him in connection with the
performance of the Executive's duties under this Agreement during the
Employment Period.
2.5 3-Month Review. Executive will be entitled to a review of his
--------------
performance and compensation package within 3-months of commencement
date.
3. Benefits Upon Termination of Employment Period. Executive's employment by
----------------------------------------------
the Company shall terminate immediately upon Executive's receipt of written
notice by the Company, upon the Company's receipt of written notice by
Executive, or upon Executive's death or permanent disability.
4. Termination of Employment Period. If, within one year from commencement
--------------------------------
date, Executive's employment should be terminated by the Company for any
reason other than for "Cause" (as defined below), Executive shall receive 6
months severance pay, plus any earned bonus payment and be provided a total
of one year (or 20%) accelerated option vesting.
<PAGE>
4.1 Definitions. For purposes of this Agreement, "Cause" means (a)
-----------
conviction of the Executive for (i) any crime constituting a felony in
the jurisdiction in which committed, (ii) any crime involving moral
turpitude (whether or not a felony), or (iii) any other criminal act
against the Company involving dishonesty or willful misconduct
intended to injure the Company (whether or not a felony) or (b)
willful malfeasance or gross misconduct by the Executive which damages
the Company; provided, however, that the Company shall not be deemed
to have Cause pursuant to clause (b) unless the Company gives the
Executive written notice that the specified conduct or event has
occurred and the Executive fails to cure the conduct or event within
thirty (30) days after receipt of such notice. Termination of the
Executive for Cause shall be communicated by a Notice of Termination.
5. Cooperation with the Company After Termination of the Employment Period.
-----------------------------------------------------------------------
Following termination of the Employment Period by Executive, subject to
Executive's employment duties with a subsequent employer, Executive shall
fully cooperate with the Company in all matters relating to the winding up
of his pending work on behalf of the Company and the orderly transfer of
any such pending work to other employees of the Company as may be
designated by the Company.
6. Confidentiality/Non-Solicitation. Executive acknowledges that as an
--------------------------------
employee of the Company, Executive will have access to certain Company
confidential information and Executive may, during the course of
Executive's employment, develop certain information that will be the
property of the Company. To protect the interest of the Company, Executive
agrees to sign the Company's standard Confidentiality Agreement as a
condition of Executive's employment. In addition, the Executive agrees
with the Company that during him employment with the Company and for a
period expiring two (2) years after the date of termination of such
employment, he will not solicit any of the Company's then-current employees
to terminate their employment with the Company or to become employed by any
firm, company or other business enterprise with which the Executive may
then be connected.
7. General.
-------
7.1 Severability. If for any reason a court of competent
------------
jurisdiction or arbitrator finds any provision of this Agreement to be
unenforceable, the provision shall be deemed amended as necessary to
conform to applicable laws or regulations, or if it cannot be so
amended without materially altering the intention of the parties, the
remainder of the Agreement shall continue in full force and effect as
if the offending provision were not contained herein.
7.2 Notices. All notices and other communications required or
-------
permitted to be given under this Agreement shall be in writing and
shall be considered effective upon personal service or upon depositing
such notice in the U.S. Mail, postage prepaid, return receipt
requested and addressed to the Chairman of the Board of
<PAGE>
the Company as its principal corporate address, and to Executive at
him most recent address shown on the Company's corporate records, or
at any other address which he may specify in any appropriate notice to
the Company.
7.3 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of
which taken together constitutes one and the same instrument and in
making proof hereof it shall not be necessary to produce or account
for more than one such counterpart.
7.4 Entire Agreement. The parties hereto acknowledge that each has
----------------
read this Agreement, understands it, and agrees to be bound by its
terms. The parties further agree that this Agreement and the
referenced stock option agreement constitute the complete and
exclusive statement of the agreement between the parties and
supersedes all proposals (oral or written), understandings,
representations, conditions, covenants, and all other communications
between the parties relating to the subject matter hereof.
7.5 Governing Law. This Agreement shall be governed by the law of
-------------
the State of California.
7.6 Assignment and Successors. The Company shall have the right to
-------------------------
assign its rights and obligations under this Agreement to an entity
which acquires substantially all of the assets of the Company. The
rights and obligation of the Company under this Agreement shall inure
to the benefit and shall be binding upon the successors and assigns of
the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
HOMESTORE.COM, INC. EXECUTIVE
/s/ M. Jeffrey Charney
By: /s/ Stuart H. Wolff, Ph.D. ______________________
Name: Stuart H. Wolff, Ph.D. M. Jeffrey Charney
Title: Chairman and Chief Executive Officer Date: _________________
Date: ______________
By: /s/ Catherine Kwong Giffen
Name: Catherine Kwong Giffen
Title: Vice President of HR and Administration
Date: _______________
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-1 of
our report dated March 31, 1999, except as to the stock splits described in
Note 20, which are as of April 5, 1999 and July , 1999, relating to the
consolidated financial statements of HomeStore.com, Inc. which appear in such
registration statement. We also consent to the reference to us under the
heading "Experts" in such registration statement.
Century City, California PricewaterhouseCoopers LLP
July , 1999
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement of
HomeStore.com, Inc. on Form S-1 of our report dated March 31, 1999 relating to
the consolidated financial statements of NetSelect, Inc. which appear in such
registration statement. We also consent to the reference to us under the
heading "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
July 6, 1999
<PAGE>
EXHIBIT 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement of
HomeStore.com, Inc. on Form S-1 of our report dated March 31, 1999 relating to
the consolidated financial statements of NetSelect, LLC which appear in such
registration statement. We also consent to the reference to us under the
heading "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
July 6, 1999
<PAGE>
EXHIBIT 23.05
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement of
HomeStore.com, Inc. on Form S-1 of our report dated March 31, 1999, relating
to the financial statements of The Enterprise of America, Ltd. which appear in
such registration statement. We also consent to the reference to us under the
heading "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
July 6, 1999
<PAGE>
EXHIBIT 23.06
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement of
HomeStore.com, Inc. on Form S-1 of our report dated March 31, 1999, relating to
the financial statements of MultiSearch Solutions, Inc. which appear in such
registration statement. We also consent to the reference to us under the
heading "Experts" in such registration statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
July 6, 1999
<PAGE>
EXHIBIT 23.07
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 12, 1999, with respect to the financial
statements of SpringStreet, Inc. included in the Registration Statement
(Form S-1 No. 333-79689) and the related Prospectus of HomeStore.com, Inc. for
the registration of shares of its common stock.
/s/ Ernst & Young LLP
San Francisco, California
July 5, 1999
<PAGE>
EXHIBIT 23.08
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
April 28, 1999
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments under "Change in Accountants" included
in your Registration Statement on Form S-1 to be filed with the Securities and
Exchange Commission on or about April 30, 1999.
Yours truly,
/s/ Deloitte & Touche LLP
