<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-Q
[X]QUARTERY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
Commission File Number 000-26659
----------------
Homestore.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 95-4438337
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
225 West Hillcrest Drive, Suite 100
Thousand Oaks, California 91360
(Address of Principal Executive Office) (Zip Code)
</TABLE>
(805) 557-2300
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
At November 3, 1999, the registrant had 70,062,745 shares of its common
stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Homestore.com, Inc
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview.............................................................................. 1
Unaudited Pro Forma Condensed Consolidated Statements of Operations................... 2
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information............. 6
Homestore.com, Inc. Consolidated Financial Statements
Consolidated Balance Sheets........................................................... 7
Unaudited Consolidated Statements of Operations....................................... 8
Unaudited Consolidated Statements of Stockholders' Equity (Deficit)................... 9
Unaudited Consolidated Statements of Cash Flows....................................... 10
Notes to Unaudited Consolidated Financial Statements.................................. 11
NetSelect, Inc. Consolidated Financial Statements
Consolidated Balance Sheets........................................................... 15
Consolidated Statements of Operations................................................. 16
Consolidated Statements of Stockholders' Equity (Deficit)............................. 17
Consolidated Statements of Cash Flows................................................. 18
Notes to Consolidated Financial Statements............................................ 19
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 42
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 43
Item 2. Changes in Securities and Use of Proceeds.............................................. 43
Item 3. Default Upon Senior Securities......................................................... 43
Item 4. Submission of Matters to a Vote of Security Holders.................................... 43
Item 5. Other Information...................................................................... 44
Item 6. Exhibits and Reports on Form 8-K....................................................... 44
SIGNATURES..................................................................................... 45
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On February 4, 1999, NetSelect, Inc. ("NSI") was merged with and into
Homestore.com, Inc. ("Company") in a non-substantive share exchange, which was
provided for in the agreements governing the formation and operation of
RealSelect, Inc. ("RealSelect"), the operating company. 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 the 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". This Reorganization was completed solely to simplify the
Company's legal structure prior to its initial public offering. See Note 1 of
the Homestore.com, Inc. Notes to Consolidated Financial Statements for further
discussion about the Reorganization.
In March 1998, NSI acquired The Enterprise of America, Ltd. (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 and is being amortized
on a straight-line basis over five years.
In July 1998, NSI acquired MultiSearch Solutions, Inc. ("MultiSearch") for
convertible preferred stock equivalent to 1,625,000 shares of common 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 and is being amortized on a straight-line basis
over five years.
In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
common stock and convertible preferred stock equivalent to an aggregate of
5,309,058 shares of common stock. The aggregate acquisition cost of $51.7
million was based on terms and preferences of the shares issued in the
transaction relative to the value received by the Company in the April 1999
Series G preferred stock financing. 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 $42.2
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 nine months ended September 30, 1999 and 1998 and the three
months ended September 30, 1998 give effect to the Reorganization and the
acquisitions of The Enterprise, MultiSearch and SpringStreet as if they had
occurred on January 1, 1998. For comparative purposes, we have included a
statement of operations comparing historical operating results for the three
months ended September 30, 1999 with the pro forma operating results for the
three months ended September 30, 1998.
The unaudited pro forma condensed consolidated statements of operations are
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of January 1, 1998 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 in the Company's
prospectus dated August 4, 1999, relating to the Company's initial public
offering ("IPO"). The unaudited pro forma condensed consolidated financial
information presented herein should be read in conjunction with those
financial statements and related notes.
1
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS/(1)/
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................... $ 18,625 $ 4,900
Cost of revenues........................................... 5,897 2,448
-------- --------
Gross profit............................................... 12,728 2,452
-------- --------
Operating expenses:
Sales and marketing (includes $2,171 in non-cash charges
for the three months ended September 30, 1999).......... 22,574 10,535
Product development...................................... 1,955 2,083
General and administrative............................... 7,034 2,250
Amortization of intangible assets........................ 3,003 2,813
Stock-based compensation................................. 5,290 19,278
Litigation settlement.................................... 8,406
-------- --------
Total operating expenses................................... 48,262 36,959
-------- --------
Loss from operations....................................... (35,534) (34,507)
Interest income, net....................................... 1,308 75
-------- --------
Net loss................................................... (34,226) (34,432)
Repurchase of convertible preferred stock.................. (7,727)
-------- --------
Net loss applicable to common stockholders................. $(34,226) $(42,159)
======== ========
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (0.52) $ (0.95)
======== ========
Shares used to calculate basic and diluted net loss per
share applicable to common stockholders................... 66,063 44,473
======== ========
</TABLE>
- --------
/(1)/See page 5 for a full disclosure of the unaudited pro forma condensed
consolidated statement of operations for the three months ended September
30, 1998. Since there are no pro forma adjustments after June 30, 1999,
the unaudited pro forma condensed consolidated statement of operations
for the three months ended September 30, 1999 reflects our actual
operating results for that period.
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
2
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet Adjustments Forma
------------- ------- ----------- ------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 35,211 $ 2,433 $ -- $ 37,644 $ 2,346 $ -- $ 39,990
Cost of revenues........ 13,007 798 13,805 1,675 15,480
-------- ------- ------ -------- -------- ------- --------
Gross profit............ 22,204 1,635 -- 23,839 671 -- 24,510
-------- ------- ------ -------- -------- ------- --------
Operating expenses:
Sales and marketing
(includes $3,421 in
non-cash charges for
Homestore.com)........ 48,186 4,064 52,250 5,506 57,756
Product development.... 3,322 174 3,496 1,134 4,630
General and
administrative........ 12,953 1,053 14,006 4,416 18,422
Amortization of
intangible assets..... 4,313 261 4,574 4,137(1) 8,711
Stock-based
compensation.......... 9,290 569 9,859 2,243 12,102
Litigation
settlement............ 8,406 8,406 8,406
-------- ------- ------ -------- -------- ------- --------
Total operating
expenses............ 86,470 6,121 92,591 13,299 4,137 110,027
-------- ------- ------ -------- -------- ------- --------
Loss from operations.... (64,266) (4,486) (68,752) (12,628) (4,137) (85,517)
Other income (expense),
net.................... 1,274 (5) 1,269 44 1,313
-------- ------- ------ -------- -------- ------- --------
Net loss................ (62,992) (4,491) (67,483) (12,584) (4,137) (84,204)
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (1,846) (207) 2,053(2)
-------- ------- ------ -------- -------- ------- --------
Net loss applicable to
common stockholders.. . $(64,838) $(4,698) $2,053 $(67,483) $(12,584) $(4,137) $(84,204)
======== ======= ====== ======== ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (2.06)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 31,421
========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (1.41)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 59,664 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
3
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Homestore.com NSI Adjustments Homestore.com Enterprise MultiSearch SpringStreet Adjustments
------------- -------- ----------- ------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ -- $ 8,519 $ -- $ 8,519 $969 $2,054 $ 544 $ --
Cost of revenues... 4,453 4,453 524 947 466
------ -------- ------ -------- ---- ------ ------- -------
Gross profit....... -- 4,066 -- 4,066 445 1,107 78 --
------ -------- ------ -------- ---- ------ ------- -------
Operating expenses:
Sales and
marketing........ 14,773 14,773 174 544 4,412
Product
development...... 3,510 3,510 24 604
General and
administrative... 2 3,861 3,863 274 457 986
Amortization of
intangible
assets........... 1,091 1,091 7,326 (1)
Stock-based
compensation..... 19,518 19,518
------ -------- ------ -------- ---- ------ ------- -------
Total operating
Expenses....... 2 42,753 42,755 448 1,025 6,002 7,326
------ -------- ------ -------- ---- ------ ------- -------
Income (loss) from
operations........ (2) (38,687) (38,689) (3) 82 (5,924) (7,326)
Other income
(expense), net.... 365 365 (32) (24) 144 (154)(4)
------ -------- ------ -------- ---- ------ ------- -------
Net income (loss).. (2) (38,322) (38,324) (35) 58 (5,780) (7,480)
Accretion of
redemption value
and dividends on
convertible
preferred stock... (1,227) 1,227 (2)
Repurchase of
convertible
preferred stock... (7,727) (7,727)
------ -------- ------ -------- ---- ------ ------- -------
Net income (loss)
applicable to
common
stockholders...... $ (2) $(47,276) $1,227 $(46,051) $(35) $ 58 $(5,780) $(7,480)
====== ======== ====== ======== ==== ====== ======= =======
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...... 8,901
======
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........... $ 12,086
Cost of revenues... 6,390
-----------
Gross profit....... 5,696
-----------
Operating expenses:
Sales and
marketing........ 19,903
Product
development...... 4,138
General and
administrative... 5,580
Amortization of
intangible
assets........... 8,417
Stock-based
compensation..... 19,518
-----------
Total operating
Expenses....... 57,556
-----------
Income (loss) from
operations........ (51,860)
Other income
(expense), net.... 299
-----------
Net income (loss).. (51,561)
Accretion of
redemption value
and dividends on
convertible
preferred stock...
Repurchase of
convertible
preferred stock... (7,727)
-----------
Net income (loss)
applicable to
common
stockholders...... $(59,288)
===========
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...... $ (1.44)
===========
Shares used in the
calculation of pro
forma basic and
diluted net loss
per share
applicable to
common
stockholders...... 41,143 (3)
===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
4
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(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................ $ -- $ 4,547 $ -- $ 4,547 $ 353 $ -- $ 4,900
Cost of revenues........ 2,267 2,267 181 2,448
------ -------- ----- -------- ------- ------- --------
Gross profit............ -- 2,280 -- 2,280 172 -- 2,452
------ -------- ----- -------- ------- ------- --------
Operating expenses:
Sales and marketing.... 8,408 8,408 2,127 10,535
Product development.... 1,864 1,864 219 2,083
General and
administrative........ 1 1,735 1,736 514 2,250
Amortization of
intangible assets..... 745 745 2,068 (1) 2,813
Stock-based
compensation.......... 19,278 19,278 19,278
------ -------- ----- -------- ------- ------- --------
Total operating
expenses.............. 1 32,030 32,031 2,860 2,068 36,959
------ -------- ----- -------- ------- ------- --------
Loss from operations.... (1) (29,750) (29,751) (2,688) (2,068) (34,507)
Other income (expense),
net.................... (14) (14) 89 75
------ -------- ----- -------- ------- ------- --------
Net loss................ (1) (29,764) (29,765) (2,599) (2,068) (34,432)
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (415) 415 (2)
Repurchase of
convertible preferred
stock.................. (7,727) (7,727) (7,727)
------ -------- ----- -------- ------- ------- --------
Net loss applicable to
common stockholders.... $ (1) $(37,906) $ 415 $(37,492) $(2,599) $(2,068) $(42,159)
====== ======== ===== ======== ======= ======= ========
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.... 9,389
======
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.95)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 44,473 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
5
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Pro forma adjustments reflect the following in the unaudited pro forma
condensed consolidated statements of operations:
(1) Amortization of goodwill in connection with the following acquisitions:
<TABLE>
<CAPTION>
Nine months ended
September 30, Three months ended
----------------- September 30,
1999 1998 1998
-------- -------- ------------------
<S> <C> <C> <C>
Enterprise.............................. $ -- $ 188 $ --
MultiSearch............................. -- 934 --
SpringStreet............................ 4,137 6,204 2,068
</TABLE>
(2) Elimination of the accretion of redemption value and dividends on
convertible preferred stock resulting from the assumed conversion of the
Company's preferred stock into common stock in connection with the IPO.
(3) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share applicable to common stockholders
reflect the following, as if they been issued as of January 1, 1998,
except for preferred stock that was not issued in connection with an
acquisition. For this preferred stock, the weighted average shares
reflect the preferred stock as if it had been issued as of January 1,
1998, or the date of issuance, if later:
<TABLE>
<CAPTION>
Nine months ended
September 30, Three months ended
----------------- September 30,
1999 1998 1998
-------- -------- ------------------
<S> <C> <C> <C>
Enterprise acquisition................ -- 525 525
MultiSearch acquisition............... -- 1,625 1,625
SpringStreet acquisition.............. 4,587 4,587 4,587
NSI Reorganization.................... 2,080 5,823 5,823
Conversion of preferred stock in
connection with IPO.................. 17,659 15,765 18,607
Conversion of NAR's RealSelect shares
into Homestore.com shares............ 3,917 3,917 3,917
</TABLE>
(4) Reduction in interest income related to cash paid for The Enterprise and
MultiSearch acquisitions, net of an 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%.
6
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 144,304 $ 71
Accounts receivable, net of allowance for doubtful
accounts of $970 at September 30, 1999........... 10,320
Current portion of prepaid distribution expense... 10,461
Deferred royalties................................ 3,074
Other current assets.............................. 2,584
--------- -------
Total current assets................................ 170,743 71
Prepaid distribution expense........................ 5,577
Property and equipment, net......................... 5,167
Intangible assets, net.............................. 58,521
Other assets........................................ 322
--------- -------
Total assets.................................... $ 240,330 $ 71
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 6,228 $ --
Accrued liabilities............................... 19,211
Due to related party.............................. 70
Deferred revenue.................................. 13,260
Current portion of notes payable.................. 1,797
--------- -------
Total current liabilities........................... 40,496 70
Notes payable....................................... 1,333
Other non-current liabilities....................... 96
--------- -------
41,829 166
--------- -------
Commitments and contingencies (Note 6)..............
Stockholders' equity (deficit):
Common stock, $.001 par value; 10,000 authorized
at December 31, 1998, 500,000 shares authorized
at September 30, 1999; 9,980 and 74,619 shares
issued at December 31, 1998, and September 30,
1999, respectively; 9,980 and 69,557 outstanding
at December 31, 1998, and September 30, 1999,
respectively..................................... 69 10
Additional paid-in capital........................ 396,448 3,312
Treasury stock, at cost; 5,062 shares at September
30, 1999......................................... (13,676)
Notes receivable from stockholders................ (12,965) (551)
Deferred stock compensation....................... (45,657)
Accumulated deficit............................... (125,718) (2,866)
--------- -------
Total stockholders' equity (deficit)............ 198,501 (95)
--------- -------
Total liabilities and stockholders' equity
(deficit)...................................... $ 240,330 $ 71
========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
1999 1998 1999 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues............................. $ 18,625 $ -- $ 35,211 $ --
Cost of revenues..................... 5,897 13,007
---------- -------- --------- -------
Gross profit......................... 12,728 -- 22,204 --
---------- -------- --------- -------
Operating expenses:
Sales and marketing (includes
$2,171 and $3,421 in non-cash
charges for the three and nine
months ended September 30, 1999,
respectively)..................... 22,574 48,186
Product development................ 1,955 3,322
General and administrative......... 7,034 1 12,953 2
Amortization of intangible assets.. 3,003 4,313
Stock-based compensation........... 5,290 9,290
Litigation settlement.............. 8,406 8,406
---------- -------- --------- -------
Total operating expenses............. 48,262 (1) 86,470 2
---------- -------- --------- -------
Loss from operations................. (35,534) (1) (64,266) (2)
Interest income, net................. 1,308 1,274
---------- -------- --------- -------
Net loss............................. (34,226) (1) (62,992) (2)
Accretion of redemption value and
dividends on convertible preferred
stock............................... (369) (1,846)
---------- -------- --------- -------
Net loss applicable to common
stockholders........................ $ (34,595) $ (1) $ (64,838) $ (2)
========== ======== ========= =======
Basic and diluted net loss per share
applicable to common stockholders... $ (0.65) $ -- $ (2.06) $ --
========== ======== ========= =======
Shares used to calculate basic and
diluted net loss per share
applicable to common stockholders... 52,903 9,389 31,421 8,901
========== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENT 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 Stockholders Compensation Deficit (Deficit)
------- ------ ------ ------ ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1998
(audited)...... -- $ -- 9,980 $10 $ 3,312 $ -- $ (551) $ -- $ (2,866) $ (95)
Reorganization
(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.......... 96 643 3,553 3,553
Issuance of
common stock to
minority
interest....... 1,000 1,000
Exercise of
stock options.. 5,893 5 12,806 (12,601) 210
Repurchase of
common stock... (2,903) (11,906) 3,630 (8,276)
Issuance of
common stock... 350 1,757 (238) 1,519
Repayment from
shareholder.... 25 25
Issuance of
Series G
preferred
stock.......... 341 17,007 17,007
Issuance of
Series H
preferred
stock.......... 845 1 365 51,433 51,434
Deferred stock
compensation... 42,289 (48,289) (6,000)
Stock-based
compensation
and other non-
cash charges... 6,000 12,711 18,711
Accretion of
Series E
redemption
value.......... (159) (159)
Conversion of
convertible
preferred
stock.......... (5,810) (6) 29,050 29 (23) --
Conversion of
redeemable
convertible
preferred
stock.......... 1,625 1 5,123 5,124
Conversion of
NAR shares..... 3,917 4 (4) --
Issuance of
common stock in
initial public
offering....... 8,050 8 144,829 144,837
Exercise of
warrants....... 107 2,000 2,000
Litigation
settlement..... 8,406 8,406
Net loss........ (62,992) (62,992)
------- ----- ------ --- -------- -------- -------- -------- --------- --------
Balance at
September 30,
1999........... -- $ -- 69,557 $69 $396,448 $(13,676) $(12,965) $(45,657) $(125,718) $198,501
======= ===== ====== === ======== ======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months
ended
September 30,
--------------
1999 1998
-------- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(62,992) $ (2)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 5,179
Provision for doubtful accounts............................... 636
Amortization of discount on notes payable..................... 234
Litigation settlement......................................... 8,406
Stock-based compensation...................................... 12,711
Other non-cash items.......................................... 853
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable......................................... (7,736) 2
Prepaid distribution expense................................ (5,484)
Deferred royalties.......................................... (1,676)
Other assets................................................ (1,949)
Accounts payable and accrued liabilities.................... 10,848 65
Deferred revenue............................................ 6,297
-------- ----
Net cash provided by (used in) operating activities........... (34,673) 65
-------- ----
Cash flows from investing activities:
Purchases of property and equipment........................... (2,893)
Cash assumed from the acquisition of SpringStreet............. 10,186
-------- ----
Net cash provided by investing activities..................... 7,293 --
-------- ----
Cash flows from financing activities:
Notes receivable from stockholders............................ 3,655
Proceeds from exercise of stock options....................... 1,346
Net proceeds from issuance of common stock.................... 167,597
Repurchases of common stock................................... (11,906)
Repayment of notes payable.................................... (2,116)
-------- ----
Net cash provided by financing activities..................... 158,576 --
-------- ----
Change in cash and cash equivalents........................... 131,196 65
Cash assumed from NetSelect, Inc.............................. 13,037
Cash and cash equivalents, beginning of period................ 71 155
-------- ----
Cash and cash equivalents, end of period...................... $144,304 $220
======== ====
Supplemental disclosure of cash flow activities
Cash paid during the year for interest........................ $ 31 $--
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Homestore.com, Inc. ("Homestore.com" or "Company") operates a family of web
sites that includes: Homestore.com, a home portal; REALTOR.com, for existing
homes; HomeBuilder.com, for new homes; SpringStreet.com, for rental
properties; Remodel.com, for home improvement activities; and Homefair.com,
which was acquired in October 1999, for moving and relocation activities.
Through its network of web sites, the Company provides a wide variety of
information and communications tools for consumers, real estate industry
professionals, advertisers and providers of home and 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,
the National Association of the Remodeling Industry, the National Association
of Home Builders Remodelors Council, Multiple Listing Services ("MLS"), real
estate franchises, brokers and agents. The Company currently generates
revenues from several sources, including subscription service fees from
agents, brokers, home builders and rental property owners and fees from
advertisers.
Company History
Initial Business--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(R) 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 web
site 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 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 respective ownership
interests of the Company and the NAR in NSI.
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.
11
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. BASIS OF PRESENTATION
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments, except for
litigation settlement) considered necessary for a fair presentation, have been
included. The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the prospectus which is part of the Company's Form S-1
Registration Statement (the "IPO Prospectus"), declared effective August 4,
1999. The results of operations for these interim periods are not necessarily
indicative of the operating results for a full year.
3. STOCKHOLDERS' EQUITY
Initial Public Offering
In August 1999, the Company completed an initial public offering in which
it sold 8,050,000 shares at a price of $20.00 per share, raising $161.0
million in gross proceeds. Offering proceeds to Homestore.com, net of
approximately $11.3 million in underwriters' discounts and commissions were
approximately $149.7 million. As of the closing date of the offering, all of
the shares of convertible preferred stock outstanding, except for one share of
Series A preferred stock held by the National Association of REALTORS(R) ,
were converted into shares of common stock.
Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
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.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
1999 1998 1999 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss....................... $ (34,226) $ (1) $ (62,992) $ (2)
Accretion of redemption value
and dividends on convertible
preferred stock............... (369) (1,846)
---------- -------- --------- -------
Net loss applicable to common
stockholders.................. $ (34,595) $ (1) $ (64,838) $ (2)
========== ======== ========= =======
Denominator:
Weighted average shares........ 52,903 9,389 31,421 8,901
========== ======== ========= =======
Basic and diluted net loss per
share applicable to common
stockholders.................... $ (0.65) $ -- $ (2.06) $ --
========== ======== ========= =======
</TABLE>
4. STOCK SPLIT
On August 4, 1999, the Company effected a 2.5 for 1 stock split of the
outstanding shares of common stock. Accordingly, the accompanying financial
statements and footnotes have been retroactively adjusted to reflect this
stock split.
12
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PRO FORMA FINANCIAL INFORMATION
The following summarized unaudited pro forma financial information assumes
the acquisitions of Enterprise, MultiSearch and SpringStreet occurred at the
beginning of each period presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................... $ 18,625 $ 4,900 $ 39,990 $ 12,086
Net loss.......................... $ (34,226) $ (34,432) $(84,204) $(51,561)
Net loss per share:
Basic and diluted............... $ (0.65) $ (2.12) $ (2.66) $ (3.94)
Weighted average shares......... 52,903 16,270 31,661 13,077
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Molinare Settlement
As previously discussed in the IPO Prospectus, Mr. John D. Molinare filed a
lawsuit against the Company, among other parties, on March 19, 1999 in which
Mr. Molinare was seeking damages of not less than $2.1 million, plus punitive
damages and costs incurred, among other things. On August 4, 1999, the lawsuit
was settled for an immaterial amount.
Other Contingencies
From time to time, the Company is involved in disputes which have arisen in
the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse effect on the
Company's financial position or results of operations.
7. WARRANTS
On August 12, 1999, in exchange for entering into an advertising agreement
with Norwest Mortgage, Inc., the Company issued to it warrants to purchase
500,000 shares at an exercise price of $20.00 per share. The warrants issued
are fully vested, non-forfeitable, are immediately exercisable and expire in
August 2000.
8. STOCK PLANS
During the third quarter of 1999, the Board of Directors adopted and the
stockholders approved, the 1999 Stock Incentive Plan and the 1999 Employee
Stock Purchase Plan. The 1999 Stock Incentive Plan reserves 4,900,000 shares
of common stock for future grants under terms similar to the 1999 Equity
Incentive Plan. The 1999 Employee Stock Purchase Plan reserves 750,000 shares
of common stock for purchase by employees through payroll deductions, with a
purchase price equal to 85% of the lesser of the fair value of the common
stock on the Offering Date or the Purchase Date, as defined in the Plan.
9. SUBSEQUENT EVENTS
Acquisition
On October 31, 1999 the Company completed its acquisition of The
Homebuyer's Fair, Inc. and FAS-Hotline, Inc. (collectively referred to as
"Homefair") pursuant to a stock purchase agreement executed on October 12,
1999. Pursuant to the acquisition, aggregate consideration paid to Homefair
shareholders consisted
13
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $35 million in cash, a $37.5 million note payable and 250,000 shares of the
Company's common stock. The acquisition will be accounted for as a purchase.
Litigation Settlement
On October 22, 1999, the Company and Cendant Corporation announced a
settlement of the pending litigation between the two companies that was
previously discussed in the IPO Prospectus. As part of the settlement, Cendant
received 250,000 shares of the Company's common stock and agreed to take
various actions to reaffirm various alliance agreements with the Company. In
connection with the issuance of the 250,000 shares, the Company recorded a
non-cash charge of $8.4 million.
14
<PAGE>
NETSELECT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, February 4,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,690 $ 13,037
Accounts receivable, net of allowance for doubtful
accounts of $378 and $455 at December 31, 1998 and
February 4, 1999, respectively...................... 2,070 2,333
Current portion of prepaid distribution expense...... 3,830 3,482
Deferred royalties................................... 1,327 1,398
Other current assets................................. 1,674 1,739
-------- --------
Total current assets.................................. 23,591 21,989
Prepaid distribution expense.......................... 7,742 7,072
Property and equipment, net........................... 4,118 2,373
Intangible assets, net................................ 19,724 19,463
Other assets.......................................... 187 286
-------- --------
Total assets....................................... $ 55,362 $ 51,183
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 5,499 $ 4,117
Accrued liabilities.................................. 5,801 6,156
Due to related party................................. 2,200 2,200
Deferred revenue..................................... 5,439 6,065
Current portion of notes payable..................... 1,746 1,746
-------- --------
Total current liabilities............................. 20,685 20,284
Notes payable......................................... 3,236 3,265
-------- --------
23,921 23,549
-------- --------
Commitments and contingencies.........................
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; 4,959 and 4,959 shares issued at
December 31, 1998 and February 4, 1999,
respectively; 4,528 and 4,528 shares outstanding at
December 31, 1998 and February 4, 1999,
respectively; liquidation preference of $62,048 at
December 31, 1998................................... 5 5
Common stock, $.001 par value; 90,000 authorized;
2,496 and 2,496 issued and outstanding at December
31, 1998 and February 4, 1999, respectively......... 2 2
Additional paid-in capital........................... 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.......................... (8,676) (10,079)
Accumulated deficit.................................. (55,895) (60,386)
-------- --------
Total stockholders' equity......................... 26,502 22,671
-------- --------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity.................... $ 55,362 $ 51,183
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months January 1
Year Ended Ended to
December 31, September 30, February 4,
1998 1998 1999
------------ ------------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues............................... $ 15,003 $ 8,519 $ 2,433
Cost of revenues....................... 7,338 4,453 798
-------- -------- --------
Gross profit........................... 7,665 4,066 1,635
-------- -------- --------
Operating expenses:
Sales and marketing.................. 25,560 14,773 4,064
Product development.................. 4,139 3,510 174
General and administrative........... 6,929 3,861 1,053
Amortization of intangible assets.... 1,893 1,091 261
Stock-based compensation............. 20,455 19,518 569
-------- -------- --------
Total operating expenses............... 58,976 42,753 6,121
-------- -------- --------
Loss from operations................... (51,311) (38,687) (4,486)
Other income (expense), net............ 121 143 (5)
-------- -------- --------
Net loss before minority interest...... (51,190) (38,544) (4,491)
Minority interest...................... 222 222
-------- -------- --------
Net loss............................... (50,968) (38,322) (4,491)
Accretion of redemption value and
dividends on convertible preferred
stock................................. (1,659) (1,227) (207)
Repurchase of convertible preferred
stock................................. (7,727) (7,727)
-------- -------- --------
Net loss applicable to common
stockholders.......................... $(60,354) $(47,276) $(4,698)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<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
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... 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
compensation..... 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
compensation
(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.
17
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months January 1
Year ended ended to
December 31, September 30, February 4,
1998 1998 1999
------------ ------------- -----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(50,968) (38,572) $(4,491)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 2,551 1,414 339
Provision for doubtful accounts......... 416 240 68
Amortization of discount on notes
payable................................ 215 203 29
Other non-cash items.................... 961 717 206
Minority interest in loss............... (222) (222)
Stock-based compensation................ 20,455 19,518 569
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................... (1,638) (807) (330)
Prepaid distribution expense........... (11,228) (11,796) 1,018
Deferred royalties..................... (1,190) (567) (71)
Due from affiliated company............ 74 (65) (6)
Other assets........................... (3) (606) 178
Accounts payable and accrued
liabilities........................... 8,350 4,383 (1,026)
Deferred revenue....................... 4,125 3,185 626
-------- ------- -------
Net cash used in operating activities... (28,102) (22,975) (2,891)
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment..... (3,853) (1,408) (61)
Acquisition of The Enterprise, net of
cash acquired (705) (705)
Acquisition of MultiSearch, net of cash
acquired (761) (740)
Proceeds from sale of fixed assets...... 1,299
-------- ------- -------
Net cash provided by (used in) investing
activities............................. (5,319) (2,853) 1,238
-------- ------- -------
Cash flows from financing activities:
Repayment of notes payable.............. (1,490) (1,490)
Proceeds from bridge loan............... 12,000 12,000
Repayments on bridge loan............... (1,325)
Note receivable from stockholder........ (3,079) (3,079)
Net proceeds from issuance of common
stock.................................. 8,066 10,462
Net proceeds from issuance of preferred
stock.................................. 40,342 36,700
Repurchase of preferred stock........... (9,497) (9,497)
-------- ------- -------
Net cash provided by financing
activities............................. 45,017 45,096 --
-------- ------- -------
Change in cash and cash equivalents..... 11,596 19,268 (1,653)
Cash and cash equivalents, beginning of
period................................. 3,094 3,094 14,690
-------- ------- -------
Cash and cash equivalents, end of
period................................. $ 14,690 $22,362 $13,037
======== ======= =======
Supplemental disclosure of cash flow
activities
Cash paid during the year for
interest............................... $ 170 $ 127 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<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 was
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 and NSI ceased
to exist. The Company 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. BASIS OF PRESENTATION
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation, have been included. The balance sheet,
statement of operations and cash flows as of and for the year ended December
31, 1998 have been derived from the audited financial statements at that date.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the prospectus in the
Company's Form S-1 Registration Statement declared effective August 4, 1999.
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, the proceeds of which in turn were 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 transferred $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.
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.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so
long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could
cause actual results to differ from the projected results. All statements
other than statements of historical fact that we make in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and our future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed in
our prospectus dated August 4, 1999, relating to our initial public offering.
Overview
We are the leading destination on the Internet for home and real estate
related information, based on the number of advertising products and services,
the number of visitors, time spent on our web sites and the number of property
listings. We 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, Remodel.com, SpringStreet.com, and Homefair.com
provides the most comprehensive source of real estate listings and home
related 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. We currently generate revenues from several sources, including fees
from agents, brokers, home builders, rental property owners and other
advertisers.
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.
20
<PAGE>
Reorganization of Holding Structure. Under the formation agreements of
RealSelect, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into
InfoTouch. In addition, LLC was merged into InfoTouch. We refer to this
transaction as the Reorganization. The share exchange lacked economic
substance and, therefore, was accounted for at historical cost. We (InfoTouch)
changed our corporate name to Homestore.com, Inc. in August 1999.
Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. For the three and nine
months ended September 30, 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. Pro forma financial
information that includes a comparison of the results of operations of NSI,
LLC, Homestore.com and RealSelect on a combined basis for the three months
ended September 30, 1998 and the nine months ended September 30, 1999 and
1998, has been presented to assist investors in evaluating our historical
financial performance. A comparison of the historical results of operations of
Homestore.com for the three and nine months ended September 30, 1998 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 common stock and convertible
preferred stock equivalent to an aggregate of 5,309,058 shares of common
stock. Each of these acquisitions has been included in the pro forma results
of operations as if they occurred on January 1, 1998. In October 1999, we
acquired all of the outstanding stock of The Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "Homefair"), for $35 million in
cash, a $37.5 million note payable, and 250,000 shares of our common stock.
21
<PAGE>
Pro Forma Results of Operations
The following tables set forth certain pro forma condensed consolidated
statement of operations data for the periods indicated and assume that the
following transactions occurred at the beginning of each period presented:
. 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 convertible preferred stock
equivalent to 1,625,000 shares of our common stock, 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 common stock and convertible
preferred stock equivalent to an aggregate of 5,309,058 shares of our
common stock, with an estimated fair value of $51.7 million; and
. the reorganization of our holding company structure as previously
described.
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro Forma Consolidated Statement
of Operations Data:
Revenues.......................... $ 18,625 $ 4,900 $ 39,990 $ 12,086
Cost of revenues.................. 5,897 2,448 15,480 6,390
-------- -------- -------- --------
Gross profit.................... 12,728 2,452 24,510 5,696
Operating expenses:
Sales and marketing............. 22,574 10,535 57,756 19,903
Product development............. 1,955 2,083 4,630 4,138
General and administrative...... 7,034 2,250 18,422 5,580
Amortization of intangible
assets......................... 3,003 2,813 8,711 8,417
Stock-based compensation........ 5,290 19,278 12,102 19,518
Litigation settlement........... 8,406 -- 8,406 --
-------- -------- -------- --------
Total operating expenses........ 48,262 36,959 110,027 57,556
-------- -------- -------- --------
Loss from operations.............. (35,534) (34,507) (85,517) (51,860)
Interest income, net.............. 1,308 75 1,313 299
-------- -------- -------- --------
Net loss.......................... $(34,226) $(34,432) $(84,204) $(51,561)
======== ======== ======== ========
As a Percentage of Pro Forma
Revenues:
Revenues.......................... 100% 100% 100% 100%
Cost of revenues.................. 32 50 39 53
-------- -------- -------- --------
Gross profit.................... 68 50 61 47
Operating expenses:
Sales and marketing............. 120 215 144 165
Product development............. 11 43 12 34
General and administrative...... 38 46 46 46
Amortization of intangible
assets......................... 16 57 22 70
Stock-based compensation........ 29 393 30 161
Litigation settlement........... 45 -- 21 --
-------- -------- -------- --------
Total operating expenses.......... 259 754 275 476
-------- -------- -------- --------
Loss from operations.............. (191) (704) (214) (429)
Interest income, net.............. 7 2 3 2
-------- -------- -------- --------
Net loss.......................... (184)% (702)% (211)% (427)%
======== ======== ======== ========
</TABLE>
22
<PAGE>
Pro Forma Three Months Ended September 30, 1999 and 1998
Revenues
Pro forma revenues increased to $18.6 million for the three months ended
September 30, 1999 from $4.9 million for the three months ended September 30,
1998. The growth in revenues was primarily driven by an increase in the number
of subscribers on the Homestore.com network and increased advertising revenue
related to an overall rise in our site traffic, as well as several sponsorship
agreements signed during the quarter, including the Norwest Alliance Agreement
which was signed in August. The number of professional subscribers on our
family of web sites grew by more than 10,000 during the quarter, representing
an increase of 117% over September 30, 1998.
Cost of Revenues
Pro forma cost of revenues increased to $5.9 million for the three months
ended September 30, 1999 from $2.4 million for the three months ended
September 30, 1998. The increase was due primarily to our overall increased
sales volume and increased activity during the three months ended September
30, 1999 as compared to the three months ended September 30, 1998. Our pro
forma gross margin for the quarter was 68%, up from 50% for the same quarter
in 1998. We anticipate continuing increases in cost of revenues in absolute
dollars as our revenues increase. We also expect that cost of revenues in
absolute dollars will increase as we continue to make investments to increase
the capacity and speed of our family of web sites.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$22.6 million for the three months ended September 30, 1999 from $10.5 million
for the three months ended September 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 the significant growth of our
direct sales force since the third quarter of 1998, resulting in increased
salaries and commissions and related travel and entertainment expenses.
Increased sales volume also contributed to an increase in sales related
collateral materials. Increases in advertising, promotional material and trade
show expenses also contributed to the increase. 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.
In addition, in the nine months ended September 30, 1999, we recorded 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 deferred
compensation. We are amortizing this amount ratably over the two-year term of
the Broker Gold agreements, resulting in a non-cash charge of $750,000 for the
three months ended September 30, 1999.
In connection with entering into a distribution agreement with America
Online, Inc. in April 1998, we issued warrants to purchase 792,752 shares of
our common stock at a weighted average exercise price of $7.21 per share. We
incurred a total charge of $12.6 million which is being amortized to sales and
marketing expense over the remaining term of the distribution agreement,
approximately two years. The non-cash charges for these warrants totaled
approximately $1.4 million for the three months ended September 30, 1999.
Product development. Pro forma product development expenses decreased to
$2.0 million for the three months ended September 30, 1999 from $2.1 million
for the three months ended September 30, 1998. Product development expenses
for the three months ended September 30, 1999 include costs associated with
the launch of Remodel.com. Product development expenses for the three months
ended September 30, 1998 consist mainly of site development costs for
REALTOR.com. We believe that a significant level of product development
activity
23
<PAGE>
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. Pro forma general and administrative expenses
increased to $7.0 million for the three months ended September 30, 1999 from
$2.2 million for the three months ended September 30, 1998. The increase was
primarily due to hiring key management personnel and increased staffing levels
required to support our significant growth, expanded operations and
infrastructure as a public company. Facility costs associated with our new
corporate office also increased. 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. Pro forma amortization of intangible
assets was $3.0 million for the three months ended September 30, 1999 as
compared to $2.8 million for the three months ended September 30, 1998.
Stock-based compensation.
Stock Options. In connection with the grant of stock options to employees
during 1997 and 1998 and the nine months ended September 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.
Stock. In August 1998, we sold convertible preferred stock equivalent to
8,320,245 shares of common stock at a purchase price of $4.80 per share and
8,369,955 shares of common stock at a purchase price of $1.26 per share. We
incurred a charge of $18.9 million which represents the difference between the
deemed fair value of the stock and the price paid by the investors as stock-
based compensation in 1998.
Warrants. 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 of
$20 per share. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. We incurred a charge of approximately $4.1 million
which is being recognized as expense over the remaining term of the initial
two year Broker Gold program agreements. The non-cash charge for these
warrants totaled approximately $460,000 for the three months ended September
30, 1999.
During the third quarter of 1999, we issued warrants to purchase 892,192
shares of common stock at a weighted average price of $20 per share to
Multiple Listing Services ("MLS") that agreed to provide their real estate
listings to us for publication on the Internet on a national basis. All
warrants issued are fully vested, non-forfeitable and are immediately
exercisable. We incurred a total charge of approximately $10.4 million which
is being recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. The non-cash charge for these warrants totaled
approximately $1.4 million for the three months ended September 30, 1999.
In August 1999, in exchange for entering into an advertising agreement with
Norwest Mortgage, we issued it a warrant to purchase 500,000 shares of our
common stock at an exercise price of $20.00 per share. This warrant issued is
fully vested, non-forfeitable and is immediately exercisable. We incurred a
charge of approximately $3.5 million which is being recognized over the term
of the agreement. The non-cash charge for this warrant totaled approximately
$290,000 for the three months ended September 30, 1999.
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 two year term of the renewed agreement. This could result in
Homestore.com incurring substantial additional non-cash charges in the future.
24
<PAGE>
Litigation Settlement. On October 22, 1999, we announced a settlement with
Cendant Corporation of the pending litigation that was previously discussed in
our Prospectus. As part of the settlement, Cendant received 250,000 shares of
our common stock and agreed to take various actions to reaffirm various
alliance agreements. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
three months ended September 30, 1999.
Interest Income, Net
Pro forma interest income consists of earnings on our cash and cash
equivalents net of imputed interest expense on the notes payable issued in
connection with our acquisitions of The Enterprise and MultiSearch. Interest
income increased to $1.3 million for the three months ended September 30, 1999
from $75,000 for the three months ended September 30, 1998. The increase was
primarily due to interest income earned on a higher average cash balances as a
result of our IPO proceeds.
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 nine months ended September 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 we may not generate
sufficient taxable income during the carry-forward period to utilize the net
operating loss carryforwards.
Pro Forma Nine Months Ended September 30, 1999 and 1998
Revenues
Pro forma revenues increased to $40.0 million for the nine months ended
September 30, 1999 from $12.1 million for the nine months ended September 30,
1998. The increase was primarily due to growth across our business, including
the number of agent and broker web site home pages sold and sponsorships,
including the Norwest Alliance agreement signed in August 1999. Banner
advertising revenues also increased primarily as a result of increased traffic
to our web sites in the first nine months of 1999 as compared to the first
nine months of 1998.
Cost of Revenues
Pro forma cost of revenues increased to $15.5 million for the nine months
ended September 30, 1999 from $6.4 million for the nine months ended September
30, 1998. The increase was due primarily to our overall increased sales volume
and increased activity during the first nine months of 1999 as compared to the
first nine months of 1998. Our pro forma gross margin for the nine months
ended September 30, 1999 was 61%, up from 47% for the same period in 1998. 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.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$57.8 million for the nine months ended September 30, 1999 from $19.9 million
for the nine months ended September 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 the 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 contributed to an increase in sales
related collateral materials. Increases in advertising, promotional material
and trade show
25
<PAGE>
expenses also contributed to the increase. 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.
In addition, in the nine months ended September 30, 1999, we recorded 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
deferred compensation. We are amortizing this amount ratably over the two-year
term of the Broker Gold agreements, resulting in a non-cash charge of $2.0
million for the nine months ended September 30, 1999.
In connection with entering into a distribution agreement with America
Online in April 1998, we issued warrants to purchase 792,752 shares of our
common stock at a weighted average exercise price of $7.21 per share. We
incurred a total charge of $12.6 million which is being amortized to sales and
marketing expense over the remaining term of the distribution agreement,
approximately two years. The non-cash charge for these warrants totaled
approximately $1.5 million for the nine months ended September 30, 1999.
Product development. Pro forma product development expenses increased to
$4.6 million for the nine months ended September 30, 1999 from $4.1 million
for the nine months ended September 30, 1998. The increase was primarily due
to costs associated with the launch of Remodel.com, including salaries and
related expenses for staff, as well as contracted services. 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. Pro forma general and administrative expenses
increased to $18.4 million for the nine months ended September 30, 1999 from
$5.6 million for the nine months ended September 30, 1998. The increase was
primarily due to hiring key management personnel and increased staffing levels
required to support our significant growth and expanded operations and
infrastructure as a public company. Facility costs associated with our new
corporate office also increased. 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. Pro forma amortization of intangible
assets was $8.7 million for the nine months ended September 30, 1999 as
compared to $8.4 million for the nine months ended September 30, 1998.
Stock-based compensation.
Stock Options. In connection with the grant of stock options to employees
during 1997 and 1998 and the nine months ended September 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.
Stock. In August 1998, we sold convertible preferred stock equivalent to
8,320,245 shares of common stock at a purchase price of $4.80 per share and
8,369,955 shares of common stock at a purchase price of $1.26 per share. We
incurred a charge of $18.9 million which represents the difference between the
deemed fair value of the stock and the price paid by the investors as stock-
based compensation in 1998.
Warrants. 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 of
$20 per share. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. We
26
<PAGE>
incurred a charge of approximately $4.1 million which is being recognized as
expense over the remaining term of the initial two year Broker Gold program
agreements. The non-cash charges for these warrants totaled approximately $2.0
million for the nine months ended September 30, 1999.
During the third quarter of 1999, we issued warrants to purchase 892,192
shares of common stock at a weighted average price of $20 per share to
Multiple Listing Services ("MLS") that agreed to provide their real estate
listings to us for publication on the Internet on a national basis. All
warrants issued are fully vested, non-forfeitable and are immediately
exercisable. We incurred a total charge of approximately $10.4 million which
is being recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. The non-cash charge for these warrants totaled
approximately $1.4 million for the nine months ended September 30, 1999.
In August 1999, in exchange for entering into an advertising agreement with
Norwest Mortgage, we issued it a warrant to purchase 500,000 shares of our
common stock at an exercise price of $20.00 per share. This warrant issued is
fully vested, non-forfeitable and is immediately exercisable. We incurred a
charge of approximately $3.5 million which is being recognized over the term
of the agreement. The non-cash charge for this warrant totaled approximately
$290,000 for the nine months ended September 30, 1999.
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 two year term of the renewed agreement. This could result in
Homestore.com incurring substantial additional non-cash charges in the future.
Litigation Settlement. On October 22, 1999, we announced a settlement with
Cendant Corporation of the pending litigation that was previously discussed in
our Prospectus. As part of the settlement, Cendant received 250,000 shares of
our common stock and agreed to take various actions to reaffirm various
alliance agreements. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
nine months ended September 30, 1998.
Interest Income, Net
Pro Forma interest income consists of earnings on our cash and cash
equivalents net of imputed interest expense on the notes payable issued in
connection with our acquisitions of The Enterprise and MultiSearch. Interest
income increased to $1.3 million for the nine months ended September 30, 1999
from $299,000 for the three months ended September 30, 1998. The increase was
primarily due to interest income earned on a higher average cash balances as a
result of our IPO proceeds.
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 nine months ended September 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 we may not generate
sufficient taxable income during the carry-forward period to utilize the net
operating loss carryforwards.
Liquidity and Capital Resources
Since 1993, we have funded our operations and met our capital expenditure
requirements through the sale of equity securities and through cash generated
from the sale of our products and services and, to a lesser extent, equipment
lease financing. In August 1999, we completed our initial public offering in
which we sold
27
<PAGE>
8,050,000 shares of our common stock at a price of $20.00 per share; raising
$161.0 million in gross proceeds. The offering proceeds, net of approximately
$11.3 million in aggregate underwriters discounts and commissions, were
approximately $149.7 million.
We have had negative cash flows from operating activities since inception.
Net cash used in operating activities was $34.7 million for the nine months
ended September 30, 1999 and $23.0 million in the comparable prior year
period. 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 and deferred
revenues.
Net cash provided in investing activities was $7.3 million for the nine
months ended September 30, 1999, compared to net cash used of $2.9 million in
the comparable prior year period. 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
$3.9 million in 1998 and $2.9 in the nine months ended September 30, 1999.
During the nine months ended September 30, 1999, an additional $3.0 million of
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 $158.6 million for the nine
months ended September 30, 1999, and $45.1 million in the comparable prior
year period. Cash was provided primarily from net proceeds from the sale of
our common and preferred stock. A total of 4.9 million options were exercised
in the nine months ended September 30, 1999. We also repurchased shares of our
common and preferred stock in 1998 and during the nine months ended September
30, 1999.
In April 1999, the Company issued convertible preferred stock equivalent to
1,704,775 shares of common stock for $17.0 million.
On August 11, 1999, the Company issued America Online warrants to purchase
up to 107,527 shares of common stock, at an exercise price of $18.60 per
share. On August 12, 1999, the warrants were exercised in full, resulting in
total proceeds of $2.0 million.
As of September 30, 1999, we had $144.3 million in cash and cash
equivalents. In October 1999, we used $35 million in cash to fund part of the
purchase price paid for Homefair. We currently anticipate that our existing
cash and cash equivalents and any cash generated from operations will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next 12 months. However, 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.
28
<PAGE>
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 followed a Year 2000 project methodology which includes six phases:
Inventory, Assessment, Planning, Remediation, Testing and Implementation. The
Inventory and Assessment Phases were completed at the end of March 1999. The
Planning through Testing Phases were completed at the end of September 1999.
As part of our final implementation before year end, we plan to audit all
systems, including technical and business operation contingency plans, as well
as our Year 2000 compliance project for Homefair, our most recent acquisition.
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 Homestore.com, REALTOR.com, Remodel.com and CommercialSource.com
web sites is running on Year 2000 compliant hardware and software purchased
within the previous 10 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 our 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 our Homefair.com web site at a network facility in Scottsdale,
Arizona. We have been informed by our vendors that the hardware and software
components used for the Homefair.com web site will be certified Year 2000
compliant before the end of this year.
We host broker home pages from our data center in Milwaukee, Wisconsin. We
have been informed by our vendors that the hardware and software components
used to host these pages will be Year 2000 compliant.
We host our SpringStreet.com web site at a network facility in San
Francisco, California. We have been informed by our vendors that all hardware
and software components used for the SpringStreet.com web site are Year 2000
compliant.
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
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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. To
date, all management information and internal business systems have been
certified as Year 2000 compliant. We also work with hundreds of Multiple
Listing Services to obtain listings data for the REALTOR.com web site and have
contacted and received confirmation that all MLS's data that is reliant on a
two digit date field is Year 2000 compliant. We have also continued with the
process of contacting all available MLSs to determine their internal state of
readiness with respect to the Year 2000. To date, we have had minimal response
to our requests. 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. The failure of
a supplier or vendor to be Year 2000 compliant might have a material adverse
effect on our operations.
Our Internet Service Providers have represented to us that their 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.
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.
Additional Factors That May Affect Future Results
In addition to the factors discussed in the "Liquidity and Capital
Resources" section above and in the IPO Prospectus under the caption "Risk
Factors" and elsewhere, the following additional factors may affect our future
results:
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:
. the acquisition of Homestore.com or RealSelect;
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. 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 in the aggregate to the NAR and the entities that
provide us the information for our real property listings, which we
refer to as our data content providers;
. we are restricted in the type and subject matter of, and the manner in
which we display, advertisements on the REALTOR.com 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.
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 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 Homefair, and the launch of our HomeBuilder.com,
Remodel.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.
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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;
. 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:
. the acquisition of Homestore.com or RealSelect;
. 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.
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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 6 of RealSelect's 7 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 two-thirds of our outstanding capital
stock at September 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.
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, we launched Remodel.com in September 1999 and we acquired Homefair in
October 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 $64.3 million for the first
three quarters of 1999. On a pro forma basis, we incurred operating losses of
$51.9 million in the first nine months of 1998 and $85.5 million for the first
three quarters of 1999. As
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of September 30, 1999, we had an accumulated deficit of $125.7 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 September 30, 1999, we had approximately 104.2 million of
deferred stock-based compensation and intangible assets to be amortized.
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.
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 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 advertising products and
services to real estate professionals.
Because the annual fee for services sold to real estate professionals is
relatively low, we depend on obtaining sales from a large number of these
customers. It is difficult to reach and enroll new subscribers cost-
effectively. A large portion of our sales force targets real estate
professionals who are widely distributed across the United States. This
results in relatively high fixed costs associated with our sales activities.
In addition, our sales personnel generally cannot efficiently contact real
estate professionals on an individual basis and instead must rely on sales
presentations to groups of agents and/or brokers. Real estate agents are
generally independent contractors rather than employees of brokers. Therefore,
even if a broker uses our advertising 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.
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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 sales of our
advertising products and services. We also expect to incur significant sales
and marketing expenses to promote our brand and services. Therefore, our
quarterly revenues and operating results are likely to be particularly
affected by the number of persons purchasing advertising products and services
as well as sales and marketing expenses for a particular period. If revenues
fall below our expectations, we will not be able to reduce our spending
rapidly in response to the shortfall.
Other factors that could affect our quarterly operating results include:
. the amount of advertising sold 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 our advertising products and services by real
estate agents, brokers and rental property owners and managers;
. the amount and timing of our operating expenses and capital
expenditures;
. the amount and timing of non-cash stock-based charges, such as charges
related to deferred compensation or warrants issued to real estate
industry participants; and
. costs related to acquisitions of businesses or technologies.
The Company's common stock price may be volatile, which could result in
substantial losses for individual stockholders
The market price for the Company's common stock is likely to be highly
volatile and subject to wide fluctuations in response to factors including the
following, some of which are beyond the Company's control:
. actual or anticipated variations in the Company's quarterly operating
results;
. announcements of technological innovations or new products or services
by the Company or its competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and/or online commerce industries;
. changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
. announcements by the Company or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. additions or departures of key personnel;
. release of lock-up or other transfer restrictions on the Company's
outstanding shares of common stock or sales of additional shares of
common stock; and
. potential litigation.
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If the Company's stock price is volatile, the Company could face a securities
class action lawsuit
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If the Company were sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources and could cause the Company's stock price to fall.
We will depend on a third party to sell banner and sponsorship advertising on
some of our web sites.
To date, we have developed only a small internal direct sales force to sell
banner and sponsorship advertising on our family of web sites. For the near
term, we intend to rely on America Online to sell the substantial majority of
this kind of 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 872 employees as of September 30,
1999 from 79 employees on January 1, 1998 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, Excite@Home, Go
Network/Infoseek and Lycos. 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 advertising products and services relating to real
estate is intensely competitive.
Our main existing and potential competitors for real estate professionals,
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 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 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 advertising 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 our advertising 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
advertising products and services.
If the Internet fails to become a viable marketplace for real estate
content and information, our business will not grow. Broad acceptance and
adoption of the Internet by consumers and businesses when searching for real
estate and related products and services will only occur if the Internet
provides them with greater efficiencies and improved access to information.
In addition to selling advertising products and services to real estate
professionals, we depend on selling other types of advertisements on our
family of web sites.
Our business would be adversely affected if the market for web advertising
fails to develop or develops more slowly than expected. Our ability to
generate advertising revenues from selling banner advertising and sponsorships
on our web sites will depend on, among other factors, the development of the
Internet as an advertising medium, the amount of traffic on our family of web
sites and our ability to achieve and demonstrate user demographic
characteristics that are attractive to advertisers. Most potential advertisers
and their advertising agencies have only limited experience with the Internet
as an advertising medium and have not devoted a significant portion of their
advertising expenditures to Internet-based advertising. No standards have been
widely accepted to measure the effectiveness of web advertising. If these
standards do not develop, existing advertisers might reduce their current
levels of Internet advertising or eliminate their spending entirely. The
widespread adoption of technologies that permit Internet users to selectively
block out unwanted graphics, including advertisements attached to web pages,
could also adversely affect the growth of the Internet as an advertising
medium. In addition, advertisers in the real estate industry, including real
estate professionals, have traditionally relied upon other advertising media,
such as newsprint and magazines, and have invested substantial resources in
other advertising methods. These persons may be reluctant to adopt a new
strategy and advertise on the Internet.
Government regulations and legal uncertainties could affect the growth of the
Internet.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities
and jurisdiction. Additionally, it is
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uncertain as to how existing laws will be applied to the Internet. The
adoption of new laws or the application of existing laws may decrease the
growth in the use of the Internet, which could in turn decrease the usage and
demand for our services or increase our cost of doing business.
Some local telephone carriers have asserted that the increasing popularity
and use of the Internet have burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet
service providers and online service providers. If access fees are imposed,
the costs of communicating on the Internet could increase substantially,
potentially slowing the increasing use of the Internet. This could in turn
decrease demand for our services or increase our cost of doing business.
Taxation of Internet transactions could slow the use of the Internet.
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 web sites to consumers and our advertising products
and services to real estate professionals, providers of real estate related
products and services and other Internet advertisers. Increases in the volume
of our web site traffic could also strain the capacity of our existing
computer systems, which could lead to slower response times or system
failures. This would cause the number of real property search inquiries,
advertising impressions, other revenue producing offerings and our
informational offerings to decline, any of which could hurt our revenue growth
and our brand loyalty. We may need to incur additional costs to upgrade our
computer systems in order to accommodate increased demand if our systems
cannot handle current or higher volumes of traffic.
The recent growth in Internet traffic has caused frequent periods of
decreased performance. Our ability to increase the speed with which we provide
services to consumers and to increase the scope of these services is limited
by and dependent upon the speed and reliability of the Internet. Consequently,
the emergence and growth of the market for our services is dependent on the
performance of and future improvements to the Internet.
Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, 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
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<PAGE>
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.
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."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Homestore.com currently does not 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 transactions denominated in a foreign currency. Thus,
Homestore.com's exposure to interest rate and foreign exchange fluctuations is
minimal.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6--Commitments and Contingencies and Note 9--Subsequent Events, in
Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, Homestore.com completed an initial public offering in which
it sold 8,050,000 shares of its common stock, $0.001 par value. The managing
underwriters in the offering were Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities, Corporation Merrill Lynch, and
BancBoston Robertson Stephens Inc.. The shares of common stock sold in the
offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg.
No.333-80419) that was declared effective by the Securities and Exchange
Commission on August 4, 1999. All 8,050,000 shares of common stock registered
under the Registration Statement were sold at a price of $20.00 per share for
gross proceeds of $161.0 million. Offering proceeds to Homestore.com, net of
approximately $11.3 million in aggregate underwriter discounts and
commissions, were approximately $149.7 million. On October 31, 1999,
Homestore.com used $35 million of the net proceeds to fund part of the
purchase price paid for FAS-Hotline, Inc. and Homebuyer's Fair, Inc. The
remaining net proceeds from the initial public offering will be used for
general corporate purposes, including working capital to fund anticipated
operating losses, expenses associated with its advertising campaigns, brand-
name promotions and other marketing efforts and capital expenditures.
Homestore.com also may use a portion of the remaining net proceeds, currently
intended for general corporate purposes, to acquire or invest in businesses,
technologies, products or services, although no specific acquisitions are
planned and no portion of the net proceeds has been allocated for any
acquisition. None of the net offering proceeds of Homestore.com have been or
will be paid directly or indirectly to any director, officer, general partner
of Homestore.com or their associates, persons owning 10% or more of any class
of Homestore.com's common stock, or an affiliate of Homestore.com.
Upon the closing of the initial public offering of the Company's common
stock, all outstanding shares of the Company's Preferred Stock automatically
converted into five shares of common stock, except for one share of the new
Series A preferred Stock, which did not convert and remains outstanding.
On August 11, 1999 the Company issued warrants to purchase up to 107,527
shares of common stock to America Online, at an exercise price of $18.60 per
share. On August 13, 1999, the warrants were exercised in full. The securities
were issued in reliance on the private placement exemption under Section 4(2)
of the Securities Act of 1933, as amended, based on the small number and
sophistication of the purchaser.
In August 1999, the Company issued warrants to purchase up to 500,000
shares of common stock to Norwest Mortgage, Inc. at an exercise price of
$20.00 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the third quarter of 1999, the Board of Directors adopted and the
stockholders approved, the 1999 Stock Incentive Plan and the 1999 Employee
Stock Purchase Plan and also approved an amendment to the Company's
certificate of incorporation regarding, among other matters, change of
corporate name, amendment to the Company's by-laws in connection with the
Company's IPO and indemnification agreement with the Company's directors and
officers. The 1999 Stock Incentive Plan reserves 4,900,000 shares of common
stock for future grants under terms similar to the 1999 Equity Incentive Plan.
The 1999 Employee Stock Purchase Plan reserves 750,000 shares of common stock
for purchase by employees through payroll deductions, with a purchase price
equal to 85% of the lesser of the fair value of the common stock on the
Offering Date or the Purchase Date, as defined in the Plan.
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<PAGE>
The Board of Directors and stockholders also approved a 2.5 for 1 stock
split of the outstanding shares of common stock, which was effected in August
1999.
Holders of in excess of 80% of the Company's common stock and 71% of the
Company's preferred stock consented to the foregoing actions, and shareholders
holding less than 1% of the preferred stock voted against such actions.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
2.01 Stock Purchase Agreement dated October 12, 1999 by and among
Homestore.com, Inc., The Homebuyer's Fair, Inc., the Shareholders of
the Homebuyer's Fair, Inc. and Central Newspapers, Inc. (incorporated
by reference from Exhibit 2.01 to the Company's Report on Form 8-K,
filed on November 15, 1999 (the "Form 8-K")
2.02 Stock Purchase Agreement dated October 12, 1999 by and among
Homestore.com, Inc., FAS-Hotline, Inc., the Shareholders of FAS-
Hotline, Inc. and Central Newspapers, Inc. (incorporated by reference
from Exhibit 2.02 to the Form 8-K)
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Homestore.com, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 15, 1999
Homestore.com, Inc
/s/ Stuart H. Wolff
By: _________________________________
Stuart H. Wolff
Chairman of the Board and
Chief Executive Officer
/s/ John M. Giesecke, Jr.
By: _________________________________
John M. Giesecke, Jr.
Chief Financial Officer,
Vice President and Secretary
45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
HOMESTORE.COM'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 18,625 0
<TOTAL-REVENUES> 18,625 0
<CGS> 5,897 0
<TOTAL-COSTS> 5,897 0
<OTHER-EXPENSES> 48,262 (1)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (34,226) (1)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (35,534) (1)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (34,595) (1)
<EPS-BASIC> (0.65) 0
<EPS-DILUTED> (0.65) 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
HOMESTORE.COM'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 144,304 0
<SECURITIES> 0 0
<RECEIVABLES> 11,290 0
<ALLOWANCES> 970 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 170,743 0
<PP&E> 5,167 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 240,330 0
<CURRENT-LIABILITIES> 40,496 0
<BONDS> 0 0
0 0
0 0
<COMMON> 69 0
<OTHER-SE> 198,432 0
<TOTAL-LIABILITY-AND-EQUITY> 240,330 0
<SALES> 35,211 0
<TOTAL-REVENUES> 35,211 0
<CGS> 13,007 0
<TOTAL-COSTS> 13,007 0
<OTHER-EXPENSES> 86,470 2
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (62,992) (2)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (64,266) (2)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (64,838) (2)
<EPS-BASIC> (2.06) 0
<EPS-DILUTED> (2.06) 0
</TABLE>
