<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-80419
PROSPECTUS SUPPLEMENT
DATED AUGUST 4, 2000
TO PROSPECTUS DATED
MAY 22, 2000 OF
HOMESTORE.COM, INC.
This Prospectus Supplement includes financial information derived from
Homestore's quarterly report on Form 10-Q for the quarter ended June 30, 2000
which was previously filed with the Securities and Exchange Commission. This
Prospectus Supplement is a part of the Prospectus and must be timely delivered
to any purchaser of the securities covered by the Prospectus.
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"or "Homestore") 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.
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 $41.3
million has been allocated to goodwill and other purchased intangible assets
and is being amortized on a straight-line basis over estimated lives ranging
from three to five years.
In October 1999, the Company acquired Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "HomeFair") for $35.8 million in
cash and other acquisition related expenses, a $37.5 million note payable and
250,000 shares of common stock, with an estimated fair value of $11.2 million,
for a total aggregate purchase price of $83.7 million. 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 $83.3 million has been allocated to goodwill and other
purchased intangible assets and is being amortized on a straight-line basis
over estimated lives ranging from three to five years.
Homestore's unaudited pro forma condensed consolidated statements of
operations for the three and six months ended June 30, 1999 give effect to the
Reorganization and the acquisitions of Springstreet and HomeFair as if they
had occurred on January 1, 1999.
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, 1999 and should
not be construed as being representative of future operating results.
The audited historical financial statements of the Company, NSI, The
Enterprise of America, Ltd., MultiSearch Solutions, Inc., SpringStreet, The
Homebuyer's Fair, Inc., FAS-Hotline, Inc. and The Center For Mobility
Resources, Inc. and National School Services, Inc. are included in the
Company's Form S-1 (No. 333-94467) as filed with the Securities and Exchange
Commission on January 26, 2000 and the Form 8-K/A filed on December 7, 1999.
The unaudited pro forma condensed consolidated statement of operations
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>
For the Six
For the Three Months Months Ended June
Ended June 30, 30,
---------------------- ------------------
2000 1999 2000 1999
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................... $ 50,152 $ 14,246 $ 88,751 $ 24,655
Cost of revenues (excluding non-
cash equity
charges--see note 7).............. 13,285 5,321 23,845 9,874
---------- ---------- -------- --------
Gross profit....................... 36,867 8,925 64,906 14,781
---------- ---------- -------- --------
Operating expenses:
Sales and marketing (excluding
non-cash equity
charges--see note 7)............ 30,440 19,760 60,225 34,720
Product development (excluding
non-cash equity charges--see
note 7)......................... 3,598 1,609 5,438 3,000
General and administrative
(excluding non-cash equity
charges--see note 7)............ 11,859 6,926 22,674 12,026
Amortization of intangible
assets.......................... 10,935 7,022 19,327 14,036
Stock-based charges.............. 11,021 4,859 21,835 8,062
---------- ---------- -------- --------
Total operating expenses....... 67,853 40,176 129,499 71,844
---------- ---------- -------- --------
Loss from operations............... (30,986) (31,251) (64,593) (57,063)
Interest and other income
(expense), net.................... 6,274 (1,548) 10,669 (3,139)
---------- ---------- -------- --------
Net loss........................... $ (24,712) $ (32,799) $(53,924) $(60,202)
========== ========== ======== ========
Basic and diluted net loss per
share............................. $ (.31) $ (.56) $ (.70) $ (1.06)
========== ========== ======== ========
Shares used to calculate basic and
diluted net loss per share........ 80,153 58,735 77,102 56,662
========== ========== ======== ========
</TABLE>
--------
(/1/) See pages 3 and 4 for a full disclosure of the unaudited pro forma
condensed consolidated statements of operations for the three and six
months ended June 30, 1999, respectively. Since there are no pro forma
adjustments after December 31, 1999, the unaudited pro forma condensed
consolidated statements of operations for the three and six months ended
June 30, 2000 reflect our actual operating results.
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
2
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet HomeFair Adjustments Forma
------------- ----- ----------- ------------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 11,016 $ -- $ -- $ 11,016 $ 1,478 $1,803 $ (51) (1) $ 14,246
Cost of revenues........ 4,361 4,361 823 137 5,321
-------- ----- ------ -------- ------- ------ ------- --------
Gross profit............ 6,655 -- -- 6,655 655 1,666 (51) 8,925
-------- ----- ------ -------- ------- ------ ------- --------
Operating expenses:
Sales and marketing.... 15,603 15,603 3,704 504 (51) (1) 19,760
Product development.... 1,037 1,037 458 114 1,609
General and
administrative........ 3,933 3,933 2,707 286 6,926
Amortization of
intangible assets..... 789 789 522 (522) (2) 7,022
6,233 (3)
Stock-based charges.... 3,610 3,610 1,249 4,859
-------- ----- ------ -------- ------- ------ ------- --------
Total operating
expenses............ 24,972 -- -- 24,972 8,118 1,426 5,660 40,176
-------- ----- ------ -------- ------- ------ ------- --------
Loss from operations.... (18,317) -- -- (18,317) (7,463) 240 (5,711) (31,251)
Interest and other
income (expense), net.. 37 37 5 (45) (1,545) (4) (1,548)
-------- ----- ------ -------- ------- ------ ------- --------
Net loss................ (18,280) -- -- (18,280) (7,458) 195 (7,256) (32,799)
-------- ----- ------ -------- ------- ------ ------- --------
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (1,063) 1,063 (5)
-------- ----- ------ -------- ------- ------ ------- --------
Net loss applicable to
common stockholders.... $(19,343) $ -- $1,063 $(18,280) $(7,458) $ 195 $(7,256) $(32,799)
======== ===== ====== ======== ======= ====== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (.79)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 24,350
========
Pro forma basic and
diluted net loss per
share.................. $ (.56)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share..... 58,735 (6)
========
</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
SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet HomeFair Adjustments Forma
------------- ------- ----------- ------------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 16,586 $ 2,433 $ -- $ 19,019 $ 2,346 $3,392 $ (102) (1) $ 24,655
Cost of revenues....... 7,110 798 7,908 1,675 291 9,874
-------- ------- ------ -------- -------- ------ -------- --------
Gross profit........... 9,476 1,635 -- 11,111 671 3,101 (102) 14,781
-------- ------- ------ -------- -------- ------ -------- --------
Operating expenses:
Sales and marketing... 24,361 4,064 28,425 5,506 891 (102) (1) 34,720
Product development... 1,368 174 1,542 1,134 324 3,000
General and
administrative....... 5,918 1,053 6,971 4,416 639 12,026
Amortization of
intangible assets.... 1,311 261 1,572 1,286 (1,286) (2) 14,036
12,464 (3)
Stock-based charges... 5,250 569 5,819 2,243 8,062
-------- ------- ------ -------- -------- ------ -------- --------
Total operating
expenses........... 38,208 6,121 -- 44,329 13,299 3,140 11,076 71,844
-------- ------- ------ -------- -------- ------ -------- --------
Loss from operations... (28,732) (4,486) -- (33,218) (12,628) (39) (11,178) (57,063)
Interest and other
income (expense),
net................... (34) (5) (39) 44 (54) (3,090) (4) (3,139)
-------- ------- ------ -------- -------- ------ -------- --------
Net loss............... (28,766) (4,491) -- (33,257) (12,584) (93) (14,268) (60,202)
Accretion of redemption
value and dividends on
convertible preferred
stock................. (1,477) (207) 1,684 (5) --
-------- ------- ------ -------- -------- ------ -------- --------
Net loss applicable to
common stockholders... $(30,243) $(4,698) $1,684 $(33,257) $(12,584) $ (93) $(14,268) $(60,202)
======== ======= ====== ======== ======== ====== ======== ========
Historical basic and
diluted net loss per
share applicable to
common stockholders... $ (1.48)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders... 20,502
========
Pro forma basic and
diluted net loss per
share................. $ (1.06)
========
Shares used in the
calculation of pro
forma basic and
diluted net loss per
share................. 56,662 (6)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
4
<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) Elimination of intercompany revenues and expenses.
(2) Elimination of amortization of intangible assets.
(3) Amortization of goodwill and other intangible assets on a straight-line
basis.
(4) Reduction in interest income related to cash portion of the purchase
consideration, net of an increase in interest expense related to the $37.5
million promissory note which bears interest at 10.875% issued in
connection with the acquisition of HomeFair. The promissory note was
repaid in February 2000.
(5) 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 its initial
public offering ("IPO").
(6) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share reflect the following, as if they
been issued as of January 1, 1999, 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, 1999 or the date of issuance, if later:
<TABLE>
<CAPTION>
For the
Three Months For the
Ended Six Months
June 30, Ended
1999 June 30, 1999
------------ -------------
<S> <C> <C>
SpringStreet acquisition........................ 4,587 4,587
HomeFair acquisition............................ 250 250
NSI Reorganization.............................. -- 2,080
Conversion of preferred stock in connection with
IPO............................................ 25,631 25,326
Conversion of NAR's RealSelect shares into
Homestore.com shares........................... 3,917 3,917
</TABLE>
(7) Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options, stock and warrants issued. The
deferred charges represent the difference between the deemed fair value of
the Company's common stock for accounting purposes and the exercise price
of the options, stock and warrants issued. The following chart summarizes
the stock-based charges that have been excluded from the following
captions for each of the periods presented:
<TABLE>
<CAPTION>
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
------- ------ ------- ------
<S> <C> <C> <C> <C>
Cost of revenues.............................. $ 148 $ 505 $ 346 $ 844
Sales and marketing........................... 9,977 2,459 19,400 4,109
Product development........................... 140 203 326 363
General and administrative.................... 756 1,692 1,763 2,746
------- ------ ------- ------
$11,021 $4,859 $21,835 $8,062
======= ====== ======= ======
</TABLE>
5
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 193,938 $ 90,382
Short-term investments.............................. 110,927
Marketable equity security.......................... 3,863 4,230
Accounts receivable, net............................ 29,631 13,428
Current portion of prepaid distribution expense .... 42,418 7,868
Other current assets................................ 7,552 5,371
--------- ---------
Total current assets.................................. 388,329 121,279
Prepaid distribution expense.......................... 181,565 6,167
Property and equipment, net........................... 19,315 6,305
Intangible assets, net................................ 190,827 138,612
Restricted cash....................................... 90,000
Other long-term assets................................ 42,249 4,200
--------- ---------
Total assets...................................... $ 912,285 $ 276,563
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 9,908 $ 5,349
Accrued liabilities................................. 33,964 23,687
Deferred revenue.................................... 27,073 13,478
Notes payable....................................... 314 37,943
--------- ---------
Total current liabilities............................. 71,259 80,457
--------- ---------
Distribution obligation............................... 185,940
Other................................................. 10,817 633
--------- ---------
Total non-current liabilities..................... 196,757 633
268,016 81,090
--------- ---------
Commitments and contingencies (Note 11)...............
Stockholders' equity:
Convertible preferred stock, $.001 par value
Common stock, $.001 par value; 500,000 shares
authorized, 86,868 and 75,251 shares issued at June
30, 2000 and December 31, 1999, respectively, and
81,332 and 70,189 shares outstanding at June 30,
2000 and December 31, 1999, respectively........... 81 70
Additional paid-in capital.......................... 996,858 413,244
Treasury stock, at cost; 5,062 shares at June 30,
2000 and December 31, 1999......................... (13,676) (13,676)
Notes receivable from stockholders.................. (13,334) (13,350)
Deferred stock-based charges........................ (119,303) (38,947)
Accumulated other comprehensive income.............. 3,300 3,865
Accumulated deficit ................................ (209,657) (155,733)
--------- ---------
Total stockholders' equity........................ 644,269 195,473
--------- ---------
Total liabilities and stockholders' equity........ $ 912,285 $ 276,563
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June Months Ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $ 50,152 $ 11,016 $ 88,751 $ 16,586
Cost of revenues (excluding non-cash
equity charges--see note 7)........... 13,285 4,361 23,845 7,110
-------- -------- -------- --------
Gross profit........................... 36,867 6,655 64,906 9,476
-------- -------- -------- --------
Operating expenses:
Sales and marketing (excluding non-
cash equity charges--see note 7).... 30,440 15,604 60,225 24,361
Product development (excluding non-
cash equity charges--see note 7).... 3,598 1,037 5,438 1,368
General and administrative (excluding
non-cash equity charges--see note
7).................................. 11,859 3,932 22,674 5,918
Amortization of intangible assets.... 10,935 789 19,327 1,311
Stock-based charges.................. 11,021 3,610 21,835 5,250
-------- -------- -------- --------
Total operating expenses........... 67,853 24,972 129,499 38,208
-------- -------- -------- --------
Loss from operations................... (30,986) (18,317) (64,593) (28,732)
Interest and other income (expense),
net................................... 6,274 37 10,669 (34)
-------- -------- -------- --------
Net loss............................... (24,712) (18,280) (53,924) (28,766)
Accretion of redemption value and
dividends on convertible preferred
stock................................. (1,063) (1,477)
-------- -------- -------- --------
Net loss applicable to common
stockholders.......................... $(24,712) $(19,343) $(53,924) $(30,243)
======== ======== ======== ========
Basic and diluted net loss per share
applicable to common stockholders..... $ (.31) $ (.79) $ (.70) $ (1.48)
======== ======== ======== ========
Shares used to calculate basic and
diluted net loss per share applicable
to common stockholders................ 80,153 24,350 77,102 20,502
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Notes Deferred
Common Stock Additional Receivable Stock- Other Total
------------- Paid-in Treasury From Based Comprehensive Accumulated Stockholders'
Shares Amount Capital Stock Stockholders Charges Income Deficit Equity
------ ------ ---------- -------- ------------ --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1999........... 70,189 $70 $413,244 $(13,676) $(13,350) $ (38,947) $3,865 $(155,733) $195,473
--------
Comprehensive income
Net loss
(unaudited)....... (53,924) (53,924)
Unrealized loss on
marketable
security and
short-term
investments
(unaudited)....... (565) (565)
--------
(54,489)
--------
Exercise of stock
options
(unaudited)........ 1,164 1 3,547 3,548
Issuance of common
stock (unaudited).. 5,098 5 1,831 1,836
Issuance of common
stock for
acquisitions
(unaudited)........ 589 1 46,120 46,121
Repayment from
stockholders
(unaudited)........ 16 16
Deferred stock-based
charges
(unaudited)........ 102,191 (102,191) --
Stock-based charges
(unaudited)........ 21,835 21,835
Issuance of common
stock in public
offering
(unaudited)........ 4,073 4 428,899 428,903
Exercise of warrants
(unaudited)........ 219 1,026 1,026
------ --- -------- -------- -------- --------- ------ --------- --------
Balance at June 30,
2000 (unaudited)... 81,332 $81 $996,858 $(13,676) $(13,334) $(119,303) $3,300 $(209,657) $644,269
====== === ======== ======== ======== ========= ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (53,924) $(28,766)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 20,986 1,694
Provision for doubtful accounts........................ 778 376
Stock-based charges.................................... 21,835 5,250
Other non-cash items................................... (546) 1,005
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................... (15,193) (1,982)
Prepaid distribution expense........................... (24,008) (2,082)
Deferred royalties..................................... (1,141) (631)
Other assets........................................... (960) (670)
Accounts payable and accrued liabilities............... 8,840 5,478
Deferred revenue....................................... 4,477 5,173
--------- --------
Net cash used in operating activities.................... (38,856) (15,155)
--------- --------
Cash flows from investing activities:
Purchases of short-term investments...................... (111,124)
Purchases of other investments........................... (27,696)
Acquisitions, net of cash acquired....................... (21,592)
Purchases of property and equipment...................... (13,400) (1,520)
Cash assumed from acquisition of SpringStreet............ 10,186
--------- --------
Net cash (used in) provided by investing activities...... (173,812) 8,666
--------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............ 18,984
Net proceeds from issuance of common stock............... 428,961 1,776
Proceeds from exercise of stock options and warrants..... 6,350 255
Repayment of notes payable............................... (38,302) (1,200)
Transfer to restricted cash.............................. (90,000)
Repurchase of common stock............................... (11,906)
Issuance of note receivable.............................. (1,651)
Repayment of notes receivable from stockholders.......... 16 3,655
Other.................................................... 10,850
--------- --------
Net cash provided by financing activities................ 316,224 11,564
--------- --------
Change in cash and cash equivalents...................... 103,556 5,075
Cash assumed from NetSelect Inc. ........................ 13,037
Cash and cash equivalents, beginning of period........... 90,382 71
--------- --------
Cash and cash equivalents, end of period................. $ 193,938 $ 18,183
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. operates a family of web sites that includes:
Homestore.com, a home and real estate 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, for moving and
relocation activities. Through its network of web sites, the Company provides
a wide variety of information and communication tools for consumers, real
estate industry professionals, advertisers and providers of home and real
estate related products and services. In addition, the Company provides real
estate professionals with content and contact management tools. The Company
has strategic relationships with key industry participants, including real
estate market leaders such as the National Association of REALTORS ("NAR"),
the National Association of Home Builders ("NAHB"), the National Association
of the Remodeling Industry ("NARI"), the NAHB Remodelors Council, Multiple
Listing Services ("MLS"), the American Institute of Architects ("AIA"), the
Manufactured Housing Institute ("MHI"), 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Short-term investments--The Company's short-term investments consist of
high quality commercial paper and institutional funds. Unrealized gains and
losses are reported as a component of stockholders' equity within accumulated
other comprehensive income. Unrealized losses are charged against income when
a decline in fair value is determined to be other than temporary.
3. 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. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission on March
10, 2000. The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
4. RECENT ACCOUNTING PRONOUNCEMENTS:
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. SFAS No. 133, as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. 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 implement SFAS No. 133 in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides additional guidance in applying
generally accepted accounting principles to revenue recognition in the
financial statements. Subsequent
10
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION--(Continued)
to the issuance of SAB 101, the SEC issued Staff Accounting Bulletin 101A
("SAB 101A"), which delays the implementation date of SAB 101 for registrants
with fiscal years that begin between December 16, 1999 and March 15, 2000. We
have evaluated the provisions of SAB 101 and we believe it will not have a
material impact on our financial position, results of operations or cash
flows.
5. CAPITALIZATION:
Public Offering
In January 2000, the Company completed a public offering of its common
stock. The Company sold 4,073,139 shares of its common stock at $110.00 per
share, generating gross proceeds of $448.0 million. In addition, 4,226,861
shares of the Company's common stock were offered and sold on behalf of
selling stockholders at $110.00 per share. In connection with this offering,
the Company incurred $17.9 million in underwriting discounts and commissions,
and approximately $1.2 million in other related expenses. The Company used a
portion of the proceeds to repay a $37.5 million promissory note, plus accrued
interest, issued in connection with the acquisition of HomeFair.
Other Common Stock Issuance
In March 2000, the Company issued 1,085,271 shares of its common stock,
valued for accounting purposes at approximately $70.0 million, to Budget
Group, Inc. ("BGI") in connection with entering into a ten-year strategic
alliance agreement that allows the Company to participate in online and
offline BGI marketing activities.
6. ACQUISITIONS:
In March 2000, the Company acquired WyldFyre Technologies, Inc.
("WyldFyre") for 589,426 shares of its common stock with an estimated fair
value for accounting purposes of $34.1 million, including other acquisition-
related costs. The acquisition has been accounted for as a purchase. The
acquisition cost has been preliminarily 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 $34.1
million has been preliminarily allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over estimated lives
ranging from three to five years. For the quarter ending September 30, 2000, a
portion of the purchase price will be charged to acquired in-process research
and development pending completion of the purchase price valuation by an
independent third party. The results of operations of WyldFyre are included in
the Company's unaudited consolidated statements of operations from the date of
acquisition.
In May 2000, the Company acquired Top Producer Systems, Inc. ("Top
Producer") for $12.7 million in cash, including other acquisition-related
costs and 473,538 shares of its common stock with an estimated fair value for
accounting purposes of $12.1 million. The shares vest over a three-year period
and are contingent upon the Top Producer's chief executive officer's
employment over a three-year period. Contingent purchase price of
approximately $16.2 million may also be paid in cash or stock, if certain
defined performance targets are met during the years ending December 2000
through December 2004. The acquisition has been accounted for as a purchase.
The acquisition cost has been preliminarily 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
$25.1 million has been preliminarily allocated to goodwill and other
intangible assets and is being amortized on a straight-line basis over
estimated lives ranging from three to five years. For the quarter ending
September 30, 2000, a portion of the purchase price will be charged to
acquired in-process research and development pending completion of the
purchase price valuation by an independent third party. The results of
operations of Top Producer are included in the Company's unaudited
consolidated statements of operations from the date of acquisition.
11
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION--(Continued)
7. STOCK-BASED CHARGES:
Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options, stock and warrants issued. The
deferred charges represent the difference between the deemed fair value of the
Company's common stock for accounting purposes and the exercise price of the
options, stock and warrants issued. The following chart summarizes the stock-
based charges that have been excluded from the following captions for each of
the periods presented:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------
2000 1999 2000 1999
---------- ------------------- ---------
<S> <C> <C> <C> <C>
Cost of revenues....................... $ 148 $ 225 $ 346 $ 381
Sales and marketing.................... 9,977 2,030 19,400 2,572
Product development.................... 140 211 326 358
General and administrative............. 756 1,144 1,763 1,939
---------- --------- --------- --------
$ 11,021 $ 3,610 $ 21,835 $ 5,250
========== ========= ========= ========
</TABLE>
8. WARRANTS:
In February 2000, the Company issued warrants to purchase up to 470,089 of
the Company's common stock at an exercise price of $66.50 to the Broker Gold
program members who elected to renew their existing listing agreements with
the Company for an additional two years. All warrants issued are fully vested,
non-forfeitable and are immediately exercisable. The non-cash charge for the
warrants totaled approximately $21.9 million which is being recognized as
expense over three years. The non-cash charge for these warrants totaled
approximately $1.8 million and $3.0 million for the three and six months ended
June 30, 2000, respectively.
In March 2000, the Company issued a warrant to purchase 400,000 shares of
common stock at an exercise price of $35.63 per share to GMAC Mortgage
Corporation. The warrant issued is fully vested, non-forfeitable and
immediately exercisable. The non-cash charge for the warrant totaled
approximately $5.0 million and is being recognized as expense over one year.
The non-cash charge for the warrant totaled approximately $1.2 million and
$1.7 million for the three and six months ended June 30, 2000, respectively.
9. NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net
loss per share applicable to common stockholders for the periods indicated (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June Months Ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss............................. $(24,712) $(18,280) $(53,924) $(28,766)
Accretion of redemption value and
dividends on convertible preferred
stock............................... (1,063) (1,477)
-------- -------- -------- --------
Net loss applicable to common
stockholders........................ $(24,712) $(19,343) $(53,924) $(30,243)
======== ======== ======== ========
Denominator:
Weighted average shares.............. 80,153 24,350 77,102 20,502
======== ======== ======== ========
Basic and diluted net loss per share
applicable to common stockholders..... $ (.31) $ (.79) $ (.70) $ (1.48)
======== ======== ======== ========
</TABLE>
12
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION--(Continued)
The per share computations exclude preferred stock, options and warrants
which are anti-dilutive. The number of such shares excluded from the basic and
diluted net loss per share applicable to common stockholders computation was
17,086,000 and 37,756,000 at June 30, 2000 and 1999, respectively.
10. AOL AGREEMENT:
In April 2000, the Company entered into a five-year marketing and
distribution agreement with America Online, Inc. ("AOL"). In exchange for
entering into this agreement, the Company paid AOL $20.0 million in cash and
issued approximately 3.9 million shares of its common stock. The Company has
guaranteed that the 30-day average closing price, related to 60%, 20% and 20%
of the shares it issued, will be $68.50 per share on the third, fourth and
fifth anniversaries of the agreement, respectively. This guarantee only
applies to shares that continue to be held by AOL at the end of each
respective year. At June 30, 2000, the Company recorded $185.9 million in
other non-current liabilities, which represents the fair market value of the
3.9 million shares of the Company's stock issued upon entering into the
agreement plus the fair market value of the $68.50 per share guarantee of the
stock. The difference between the total guaranteed amount and the liability
recorded will be recorded as other expense over the term of the agreement. In
connection with the guarantee, the Company has established a $90.0 million
letter of credit which has been classified as restricted cash on the balance
sheet. The letter of credit can be drawn upon by AOL in the event that the 30-
day average closing price is less than $68.50 at the end of each respective
guarantee date. The letter of credit will be reduced to $50.0 million at the
end of the third anniversary of the agreement. The term of the agreement may
be reduced if AOL draws more than $40.0 million from the letter of credit at
the end of the third year anniversary of the agreement.
11. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the Company's
business, results of operations, financial condition or cash flows.
The Company received a request for information from the antitrust division
of the U.S. Department of Justice. The request seeks information about the
business of the Company as it relates to Internet realty sites in the United
States. The government has not alleged any violation of law, and the Company
believes it has complied with all laws and regulations. The Company intends to
cooperate fully with the Department of Justice's request.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Prospectus Supplement 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
Prospectus Supplement 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 January 26, 2000 and our Form 10-K
for the year ended December 31, 1999.
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. Our family of web sites, consisting of Homestore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com, Remodel.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 home and real estate-related products and
services. In addition, we provide real estate professionals with content and
contact management tools. We currently generate revenues from several sources,
including subscription fees from agents, brokers, home builders and rental
property owners and fees from 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 National Association of REALTORS
("NAR") and several investors. Under these agreements, we transferred
technology and assets relating to advertising the listing of residential real
estate on the Internet to a newly-formed company, NetSelect LLC, or LLC, in
exchange for a 46% ownership interest in LLC. The investors contributed
capital to a newly-formed company, NetSelect, Inc., or NSI, which owned 54% of
LLC. LLC received capital funding from NSI and in turn contributed the assets
and technology contributed by InfoTouch as well as the NSI capital to a newly
formed entity, RealSelect, Inc., or RealSelect, in exchange for common stock
representing an 85% ownership interest in RealSelect. Also effective December
4, 1996, RealSelect entered into a number of formation agreements with and
issued cash and common stock representing a 15% ownership interest in
RealSelect to the NAR in exchange for the rights to operate the REALTOR.com
web site and pursue commercial opportunities relating to the listing of real
estate on the Internet.
The agreements governing RealSelect required us to terminate our remaining
activities, which were insignificant at that time, and dispose of our
remaining assets and liabilities, which we did in early 1997. Accordingly,
following the formation, NSI, LLC and InfoTouch were shell holding companies
for their investments in RealSelect.
Our initial operating activities primarily consisted of recruiting
personnel, developing our web site content and raising our initial capital. We
developed our first web site, REALTOR.com, in cooperation with the NAR. We
actively began marketing our advertising products and services to real estate
professionals in January 1997.
14
<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.
Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. 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 and six months ended June 30, 1999 has been
presented to assist investors in evaluating our historical financial
performance. A comparison of the historical results of operations of
Homestore.com has not been presented because the financial position, results
of operations and cash flows were insignificant for all periods presented
prior to the Reorganization.
Acquisitions. In June 1999, we acquired SpringStreet for common stock and
convertible preferred stock equivalent to an aggregate of 5,309,058 shares of
common stock. In October 1999, we acquired all of the outstanding capital
stock of The Homebuyer's Fair, Inc. and FAS-Hotline, Inc., collectively
HomeFair, for $35.8 million in cash and other acquisition-related expenses, a
$37.5 million promissory note and 250,000 shares of our common stock. Each of
these acquisitions has been included in the pro forma results of operations as
if it had occurred on January 1, 1999.
We will seek to continue to expand our current offerings by acquiring
additional businesses, technologies, product lines or service offerings from
third parties. We may be unable to identify future acquisition targets and may
be unable to complete future acquisitions. Even if we complete an acquisition,
we may have difficulty in integrating it with our current offerings, and any
acquired features, functions or services may not achieve market acceptance or
enhance our brand loyalty. Integrating newly acquired organizations and
products and services could be expensive, time consuming and a strain on our
resources.
15
<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 as of January 1, 1999:
. 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;
. our acquisition of HomeFair for 250,000 shares of our common stock, with
an estimated fair value of $11.2 million, a $37.5 million promissory
note, and $35.8 million in cash and other acquisition-related expenses;
and
. the reorganization of our holding company structure as previously
described.
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------- -------------------
2000(1) 1999 2000(1) 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Pro Forma Consolidated Statements
of Operations Data:
Revenues.......................... $ 50,152 $ 14,246 $ 88,751 $ 24,655
Cost of revenues (excluding non-
cash equity charges--see
note 2).......................... 13,285 5,321 23,845 9,874
-------- -------- -------- --------
Gross profit...................... 36,867 8,925 64,906 14,781
-------- -------- -------- --------
Operating expenses:
Sales and marketing (excluding
non-cash equity charges--see
note 2)........................ 30,440 19,760 60,225 34,720
Product development (excluding
non-cash equity charges--see
note 2)........................ 3,598 1,609 5,438 3,000
General and administrative
(excluding non-cash equity
charges--see note 2)........... 11,859 6,926 22,674 12,026
Amortization of intangible
assets......................... 10,935 7,022 19,327 14,036
Stock-based charges............. 11,021 4,859 21,835 8,062
-------- -------- -------- --------
Total operating expenses....... 67,853 40,176 129,499 71,844
-------- -------- -------- --------
Loss from operations.............. (30,986) (31,251) (64,593) (57,063)
Interest and other income
(expense), net................... 6,274 (1,548) 10,669 (3,139)
-------- -------- -------- --------
Net loss.......................... $(24,712) $(32,799) $(53,924) $(60,202)
======== ======== ======== ========
As a Percentage of Pro Forma
Revenues:
Revenues.......................... 100 % 100 % 100 % 100 %
Cost of revenues.................. 26 37 27 40
-------- -------- -------- --------
Gross profit...................... 74 63 73 60
-------- -------- -------- --------
Operating expenses:
Sales and marketing............. 61 139 68 141
Product development............. 7 11 6 12
General and administrative...... 24 49 26 49
Amortization of intangible
assets......................... 22 49 22 57
Stock-based charges............. 22 34 25 33
-------- -------- -------- --------
Total operating expenses........ 136 282 147 292
-------- -------- -------- --------
Loss from operations.............. (62) (219) (74) (232)
Interest and other income
(expense), net................... 13 (11) 12 (13)
-------- -------- -------- --------
Net loss.......................... (49)% (230)% (62)% (245)%
======== ======== ======== ========
</TABLE>
--------
(1) The unaudited pro forma consolidated statements of operations for the
three and six months ended June 30, 2000 reflect our actual operating
results.
(2) Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options, stock and warrants issued. The
deferred charges represent the difference between the deemed fair
16
<PAGE>
value of our common stock for accounting purposes and the exercise price of
the options, stock and warrants issued. The following chart summarizes the
stock-based charges that have been excluded from the following captions for
each of the periods presented.
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------
2000 1999 2000 1999
--------- ----------------- --------
<S> <C> <C> <C> <C>
Cost of revenues........................... $ 148 $ 505 $ 346 $ 844
Sales and marketing........................ 9,977 2,459 19,400 4,109
Product development........................ 140 203 326 363
General and administrative................. 756 1,692 1,763 2,746
--------- -------- -------- -------
$ 11,021 $ 4,859 $ 21,835 $ 8,062
========= ======== ======== =======
</TABLE>
Pro Forma for the Three Months Ended June 30, 2000 and 1999
Revenues
Revenues increased to $50.2 million for the three months ended June 30,
2000 from pro forma revenues of $14.2 million for the three months ended June
30, 1999. Revenue from both professional subscriptions and advertising, as
well as web site development fees, contributed to the overall revenue growth.
Increased subscription revenue was primarily due to an increase in the number
of professionals on the Homestore.com family of web sites. The increase in the
number of professionals on our family of web sites represented a 64% increase
over the number of professionals at June 30, 1999. Advertising revenue
increased primarily as a result of an expansion in sponsorships and strategic
alliances during the quarter.
Cost of Revenues
Cost of revenues increased to $13.3 million for the three months ended June
30, 2000 from pro forma cost of revenues of $5.3 million for the three months
ended June 30, 1999. The increase was primarily due to an overall increase in
sales volume during the three months ended June 30, 2000, as compared to the
three months ended June 30, 1999. Gross margin for the quarter was 74%, up
from a pro forma gross margin of 63% for the same quarter in 1999. We
anticipate continuing increases in cost of revenues in absolute dollars as our
revenues increase and we continue to make capital investments to increase the
capacity and speed of our family of web sites.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $30.4
million for the three months ended June 30, 2000 from pro forma sales and
marketing expenses of $19.8 million for the three months ended June 30, 1999.
The increase was attributable to increased salaries and commissions. The
increase was also due to costs associated with our branding campaign during
2000, as well as increases in promotional material and trade show expenses.
Product development. Product development expenses increased to $3.6 million
for the three months ended June 30, 2000 from pro forma product development
expenses of $1.6 million for the three months ended June 30, 1999. The
increase in product development costs was due to increased costs associated
with the redesign of the Homestore.com web site, as well as product
development costs associated with our acquisitions of WyldFyre Technologies,
Inc. ("WyldFyre") and Top Producer Systems, Inc. ("Top Producer") in 2000.
General and administrative. General and administrative expenses increased
to $11.9 million for the three months ended June 30, 2000 from pro forma
general and administrative expenses of $6.9 million for the three months ended
June 30, 1999. The increase was primarily due to hiring of key management
personnel and
17
<PAGE>
increased staffing levels required to support our growth, expanded operations
and infrastructure as a public company. Facility costs associated with our
corporate office also increased. We expect general and administrative expenses
to increase as we continue to expand our administrative infrastructure to
support the anticipated growth of our businesses.
Amortization of intangible assets. Amortization of intangible assets was
$10.9 million for the three months ended June 30, 2000 as compared to pro
forma amortization of $7.0 million for the three months ended June 30, 1999.
The increase in amortization was primarily the result of the acquisitions of
WyldFyre in March 2000 and Top Producer in May 2000.
In process research and development
For the quarter ending September 30, 2000, a portion of the purchase price
of WyldFyre and Top Producer will be charged to in-process research and
development pending completion of the purchase price valuation by an
independent third party.
Stock-based charges
Stock Options. In connection with the grant of stock options to employees
prior to our initial public offering, 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 March 2000, we issued 1,085,271 shares of common stock valued for
accounting purposes at approximately $70.0 million to Budget Group Inc.
("BGI") in connection with entering into a strategic alliance agreement. We
are amortizing this amount ratably over the ten-year term of the agreement,
resulting in a non-cash charge of $1.8 million for the three months ended June
30, 2000.
Warrants. During the third and fourth quarters of 1999, we issued warrants
to purchase 910,844 shares of common stock at a weighted average exercise
price of $21.18 per share to Multiple Listing Services, or MLSs, 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 $11.2
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 $682,000 for the three months ended June 30,
2000.
In August 1999, we issued Norwest Mortgage a warrant to purchase 500,000
shares of our common stock at an exercise price of $20.00 per share. This
warrant is fully vested, non-forfeitable and is immediately exercisable. We
incurred a charge of approximately $3.5 million which is being recognized over
two years. The non-cash charge for this warrant totaled approximately $435,000
for the three months ended June 30, 2000.
In February 2000, we issued warrants to purchase up to 470,089 shares of
common stock at an exercise price of $66.50 to the Broker Gold program members
who elected to renew their existing listing agreements with us for an
additional two years. All warrants issued are fully vested, non-forfeitable
and are immediately exercisable. The non-cash charge for the warrants totaled
approximately $21.9 million which is being recognized as expense over three
years. The non-cash charge for these warrants totaled approximately $1.8
million for the three months ended June 30, 2000.
In March 2000, we issued a warrant to purchase 400,000 shares of common
stock at an exercise price of $35.63 per share to GMAC Mortgage Corporation.
The warrant issued is fully vested, non-forfeitable and immediately
exercisable. The non-cash charge for the warrant totaled approximately $5.0
million and is being recognized as expense over one year. The non-cash charge
for the warrant totaled approximately $1.2 million for the three months ended
June 30, 2000.
18
<PAGE>
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily 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 of
America, Ltd. and MultiSearch Solutions, Inc. for the three months ended June
30, 1999. Interest and other income increased to $6.3 million for the three
months ended June 30, 2000 from pro forma interest and other expense of $1.5
million for the three months ended June 30, 1999. The increase was primarily
due to interest income earned on higher average cash balances as a result of
our initial and secondary public offering 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 three months ended June 30, 2000 and 1999. As of December 31,
1999, we had $116.7 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 for the Six Months Ended June 30, 2000 and 1999
Revenues
Revenues increased to $88.8 million for the six months ended June 30, 2000
from pro forma revenues of $24.7 million for the six months ended June 30,
1999. Revenue from both professional subscriptions and advertising, as well as
web site development fees, contributed to the increase in revenue. Increased
subscription revenue was primarily due to an increase in the number of
professionals on the Homestore.com family of web sites. Advertising revenue
increased primarily as a result of an expansion in sponsorships and strategic
alliances during the six months ended June 30, 2000.
Cost of Revenues
Cost of revenues increased to $23.8 million for the six months ended June
30, 2000 from pro forma cost of revenues of $9.9 million for the six months
ended June 30, 1999. The increase was primarily due to our overall increased
sales volume during the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. Gross margin for the period was 73%, up from a pro
forma gross margin of 60% for the same period in 1999.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $60.2
million for the six months ended June 30, 2000 from pro forma sales and
marketing expenses of $34.7 million for the six months ended June 30, 1999.
The increase was attributable to an increase in costs associated with Internet
portal distribution, and marketing and listing agreements entered into during
the third and fourth quarter of 1999. The increase was also due to increased
salaries and commissions. Increases in costs associated with our branding
campaign during the six months ended June 30, 2000, promotional material and
trade show expenses also contributed to the increase.
Product development. Product development expenses increased to $5.4 million
for the six months ended June 30, 2000 from pro forma product development
expenses of $3.0 million for the six months ended June 30, 1999. The increase
in product development costs was due to increased costs associated with the
redesign of the Homestore.com web site and the integration of our acquisitions
into our family of web sites, as well as product development costs from our
acquisitions of WyldFyre and Top Producer in 2000.
General and administrative. General and administrative expenses increased
to $22.7 million for the six months ended June 30, 2000 from pro forma general
and administrative expenses of $12.0 million for the
19
<PAGE>
six months ended June 30, 1999. The increase was primarily due to hiring of
key management personnel and increased staffing levels required to support our
growth, expanded operations and infrastructure as a public company. Facility
costs associated with our corporate office also increased.
Amortization of intangible assets. Amortization of intangible assets was
$19.3 million for the six months ended June 30, 2000 as compared to pro forma
amortization of $14.0 million for the six months ended June 30, 1999. The
increase in amortization was primarily the result of the acquisitions of
WyldFyre in March 2000 and Top Producer in May 2000.
In process research and development
For the quarter ending September 30, 2000, a portion of the purchase price
of WyldFyre and Top Producer will be charged to in process research and
development pending completion of the purchase price valuation by an
independent third party.
Stock-based charges
Stock Options. In connection with the grant of stock options to employees
prior to our initial public offering, 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 March 2000, we issued 1,085,271 shares of common stock valued for
accounting purposes at approximately $70.0 million to BGI in connection with
entering into a strategic alliance agreement. We are amortizing this amount
ratably over the ten-year term of the agreement, resulting in a non-cash
charge of $2.3 million for the six months ended June 30, 2000.
Warrants. During the third and fourth quarters of 1999, we issued warrants
to purchase 910,844 shares of common stock at a weighted average exercise
price of $21.18 per share to Multiple Listing Services, or MLSs, 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 $11.2
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 $2.9 million for the six months ended June 30,
2000.
In August 1999, we issued Norwest Mortgage a warrant to purchase 500,000
shares of our common stock at an exercise price of $20.00 per share. This
warrant is fully vested, non-forfeitable and is immediately exercisable. We
incurred a charge of approximately $3.5 million which is being recognized over
two years. The non-cash charge for this warrant totaled approximately $869,000
for the six months ended June 30, 2000.
In February 2000, we issued warrants to purchase up to 470,089 shares of
common stock at an exercise price of $66.50 to the Broker Gold program members
who elected to renew their existing listing agreements with us for an
additional two years. All warrants issued are fully vested, non-forfeitable
and are immediately exercisable. The non-cash charge for the warrants totaled
approximately $21.9 million which is being recognized as expense over three
years. The non-cash charge for these warrants totaled approximately $3.0
million for the six months ended June 30, 2000.
In March 2000, we issued a warrant to purchase 400,000 shares of common
stock at an exercise price of $35.63 per share to GMAC Mortgage Corporation.
The warrant issued is fully vested, non-forfeitable and immediately
exercisable. The non-cash charge for the warrant totaled approximately $5.0
million and is being recognized as expense over one year. The non-cash charge
for the warrant totaled approximately $1.7 million for the six months ended
June 30, 2000.
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Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily 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 of
America, Ltd. and MultiSearch Solutions, Inc. for the six months ended June
30, 1999, and interest expense incurred on the note payable issued in
connection with our HomeFair acquisition for the six months ended June 30,
2000. Interest and other income increased to $10.7 million for the six months
ended June 30, 2000 from pro forma interest and other expense of $3.1 million
for the six months ended June 30, 1999. The increase was primarily due to
interest income earned on higher average cash balances as a result of our
initial and secondary offering 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 six months ended June 30, 2000 and 1999. As of December 31,
1999, we had $116.7 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 inception, 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. At June 30, 2000, we had cash and cash
equivalents of $193.9 million as compared to $90.4 million at December 31,
1999. Also at June 30, 2000, we had $110.9 million in short-term investments.
Net cash used in operating activities was $38.9 million for the six months
ended June 30, 2000 and $15.2 million in the six months ended June 30, 1999.
Net cash used in operating activities in each of these periods was primarily
the result of net operating losses, including payments required to be made
relating to our Internet portal distribution, and marketing and listing
agreements. These operating cash outflows were partially offset by increases
in accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $173.8 million for the six months
ended June 30, 2000, compared to net cash provided of $8.7 million in the six
months ended June 30, 1999. During the six months ended June 30, 2000, our
investing activities consisted of acquisitions, investments and purchases of
property and equipment and short-term investment funds. We acquired New List
Corporation, certain publication businesses from Haas Publishing Companies,
Inc. and Top Producer for an amount including $21.6 million in cash. In
addition, we invested in non-consolidated entities for an aggregate $27.7
million in cash. Capital expenditures for property and equipment totaled $13.4
million for the six months ended June 30, 2000 and $1.5 million for the six
months ended June 30, 1999. During the six months ended June 30, 1999, an
additional $3.0 million of capital expenditures were funded through an
equipment lease financing arrangement. We purchased $111.1 million of short-
term investment funds during the six months ended June 30, 2000.
Net cash provided by financing activities was $316.2 million for the six
months ended June 30, 2000 compared $11.6 million in the comparable prior year
period. The increase in cash was provided primarily from net proceeds from our
secondary public offering. In January 2000, we completed a secondary public
offering in which we sold 4,073,139 shares of our common stock at a price of
$110.0 per share, raising approximately $428.9 million after deducting
underwriting discounts and commissions and offering expenses. In addition, we
received approximately $6.4 million from the exercise of options and warrants
during the six months ended June 30, 2000.
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In April 2000, we entered into a five-year marketing and distribution
agreement with America Online, Inc. ("AOL"). In exchange for entering into
this agreement, we paid AOL $20.0 million in cash and issued approximately 3.9
million shares of our common stock. We have guaranteed that the 30-day average
closing price, related to 60%, 20% and 20% of the shares it issued, will be
$68.50 per share on the third, fourth and fifth anniversaries of the
agreement, respectively. This guarantee only applies to shares that continue
to be held by AOL at the end of each respective year. At June 30, 2000, we
recorded $185.9 million in other non-current liabilities, which represents the
fair market value of the 3.9 million shares of our stock issued upon entering
into the agreement plus the fair market value of the $68.50 per share
guarantee of the stock. The difference between the total guaranteed amount and
the liability recorded will be recorded as other expense over the term of the
agreement. In connection with the guarantee, we have established a $90.0
million letter of credit which has been classified as restricted cash on the
balance sheet. The letter of credit can be drawn upon by AOL in the event that
the our 30-day average closing price is less than $68.50 at the end of each
respective guarantee date. The letter of credit will be reduced to $50.0
million at the end of the third anniversary of the agreement. The term of the
agreement may be reduced if AOL draws more than $40.0 million from the letter
of credit at the end of the third year anniversary of the agreement.
As of June 30, 2000, we had $394.9 million in cash and cash equivalents,
restricted cash, and short-term investments. We expect to continue using our
working capital to finance our ongoing operations and rapid expansion, our
marketing activities as well as the development of new or enhanced existing
services or products. Additionally, we expect to use a portion of our cash for
the acquisition and subsequent funding of technologies, content, investments
or businesses complimentary to our current business. We currently anticipate
that our existing cash and cash equivalents and any cash generated from
operations will be more than sufficient to fund our operating activities,
capital expenditures and other obligations for the next twelve months.
Recent Accounting Pronouncements
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. SFAS No. 133, as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. 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 implement SFAS No. 133 in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides additional guidance in applying
generally accepted accounting principles to revenue recognition in the
financial statements. Subsequent to the issuance of SAB 101, the SEC issued
Staff Accounting Bulletin 101A ("SAB 101A"), which delays the implementation
date of SAB 101 for registrants with fiscal years that begin between December
16, 1999 and March 15, 2000. We have evaluated the provisions of SAB 101 and
we believe it will not have a material impact on our financial position,
results of operations or cash flows.
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 are 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 experienced no
material Year 2000 problems in the period since January 1, 2000, although
unexpected Year 2000 problems in the future might have a material adverse
effect on our business, operating results or financial condition. We continue
to monitor our systems for Year 2000 compliance.
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Additional Factors That May Affect Future Results
In addition to the factors discussed in the "Liquidity and Capital
Resources" section above and in our Form 10-K for the year ended December 31,
1999 under the caption "Factors That May Affect Future Results" and elsewhere,
the following additional factors may affect our future results:
Risks Related to our Business:
. Our agreement with the National Association of REALTORS could be
terminated by it.
. Our agreement with the NAR contains a number of provisions that could
restrict our operations.
. If our operating agreement for REALTOR.com terminates, the NAR would be
able to operate the REALTOR.com web site.
. We are subject to noncompetition provisions with the NAR which could
adversely affect our business.
. Our agreement with the National Association of Home Builders contains
provisions that could restrict our operations.
. Our SpringStreet.com web site is subject to a number of restrictions on
how it may be operated.
. The NAR could revoke its consent to our operating SpringStreet.com.
. The National Association of REALTORS has significant influence over
aspects of our RealSelect subsidiary's corporate governance.
. The NAR can restrict a change of control of Homestore.com.
. It is difficult to evaluate our current business due to our limited
history with our current business.
. We have a history of net losses and expect net losses for the
foreseeable future.
We have experienced operating losses in each quarterly and annual period
since 1993, and we incurred operating losses of $31.0 million for the three
months ended June 30, 2000 and $64.6 million for the six months ended June 30,
2000. On a pro forma basis we incurred operating losses of $31.3 million for
the three months ended June 30, 1999 and $57.1 million for the six months
ended June 30, 1999. As of June 30, 2000, we had an accumulated deficit of
$209.7 million, and we may continue to incur net losses. The size of these net
losses will depend, in part, on the rate of growth in our revenues from
broker, agent, home builder and rental property owner, web hosting fees,
advertising sales and sales of other products and services. The size of our
future net losses will also be impacted by non-cash stock-based charges
relating to deferred compensation and stock and warrant issuances, and
amortization of intangible assets. As of June 30, 2000, we had approximately
$310.1 million of deferred stock-based charges and intangible assets.
It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web sites as
well as for any other products and services we may add. To accomplish this, we
will continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will
need to generate significant additional revenues to achieve profitability. As
a result, we may never achieve or sustain profitability, and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
. We must continue to obtain listings from real estate agents, brokers,
home builders, Multiple Listing Services and property owners.
We believe that our success depends in large part on the number of real
estate listings received from agents, brokers, home builders, MLSs and
residential, rental and commercial property owners. Many of our agreements
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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.
. It is important to our success that we support our real estate
professional customers.
Since many real estate professionals are not sophisticated computer users
and often spend limited amounts of time in their offices, it is important that
these customers find that our products and services significantly enhance
their productivity and are easy to use. To meet these needs, we provide
customer training and have developed a customer support organization that
seeks to respond to customer inquiries as quickly as possible. If our real
estate professional customer base grows, we may need to expand our support
organization further to maintain satisfactory customer support levels. If we
need to enlarge our support organization, we would incur higher overhead
costs. If we do not maintain adequate support levels, these customers could
choose to discontinue using our service.
. Our quarterly financial results are subject to significant fluctuations.
Our results of operations could vary significantly from quarter to quarter.
In the near term, we expect to be substantially dependent on sales of our
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
those described below and elsewhere in this Form 10-Q:
. the amount of advertising sold on our family of web sites and the timing
of payments for this advertising;
. 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.
. Because we have expanded our operations, our success will depend on our
ability to manage our growth.
. We depend on distribution agreements with a number of Internet portals
to generate traffic on our family of web sites.
. 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.
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These efforts will involve significant expense. If our brand enhancement
strategy is unsuccessful, we may fail to attract new or retain existing
consumers or real estate professionals, which would have a material adverse
impact on our revenues.
The market for web-based advertising products and services relating to real
estate is intensely competitive.
Our main existing and potential competitors for real estate professionals
and service providers, home buyers, homeowners, sellers and renters and
related content include:
. web sites offering real estate listings together with other related
services, such as Apartments.com, iOwn, Microsoft's HomeAdvisor,
NewHomeNetwork.com, Move.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;
. web sites offering real estate improvement content and services such as
ImproveNet;
. web sites offering moving and relocation content and services such as
MonsterData, Virtual Relocation, Lysias, School Match, and Move Central;
. 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 need to continue to develop our content and our product and service
offerings.
. We may experience difficulty in integrating our recent acquisitions.
. Our business is dependent on our key personnel.
. We rely on intellectual property and proprietary rights.
. We may not be able to protect the web site addresses that are important
to our business.
. We could be subject to litigation with respect to our intellectual
property rights.
Real Estate Industry Risks:
. Our business is dependent on the strength of the real estate industry,
which is both cyclical and seasonal.
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. We may particularly be affected by general economic conditions.
. We have risks associated with changing legislation in the real estate
industry.
Internet Industry Risks:
. We depend on increased use of the Internet to expand our real estate
related advertising products and services.
. Government regulations and legal uncertainties could affect the growth
of the Internet.
. Taxation of Internet transactions could slow the use of the Internet.
. We depend on continued improvements to our computer network and the
infrastructure of the Internet.
. Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, located at our corporate headquarters in Thousand Oaks, California
and our other offices in Dallas, Texas; Milwaukee, Wisconsin; Phoenix,
Arizona; and 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, earthquakes, power loss, telecommunications failures and
similar events. Although we maintain insurance against fires, earthquakes and
general business interruptions, the amount of coverage may not be adequate in
any particular case.
Experienced computer programmers, or hackers, may attempt to penetrate our
network security from time to time. Although we have not experienced any
material security breaches to date, a hacker who penetrates our network
security could misappropriate proprietary information or cause interruptions
in our services. We might be required to expend significant capital and
resources to protect against, or to alleviate, problems caused by hackers. We
do not currently have a fully redundant system for our family of web sites. We
also may not have a timely remedy against a hacker who is able to penetrate
our network security. In addition to purposeful security breaches, the
inadvertent transmission of computer viruses could expose us to litigation or
to a material risk of loss.
. We could face liability for information on our web sites and for
products and services sold over the Internet.
. Our common stock price may be volatile, which could result in
substantial losses for individual stockholders.
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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