<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
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 (I.R.S. Employer
Incorporation or of Organization) Identification Number)
30700 Russell Ranch Road
Westlake Village, California 91362
(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 October 31, 2000, the registrant had 82,797,703 shares of its common
stock outstanding.
-------------------------------------------------------------------------------
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<PAGE>
Homestore.com, Inc
Index
<TABLE>
<CAPTION>
Page
----
<C> <S> <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................................................... 5
Homestore.com, Inc. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets......................... 6
Unaudited Condensed Consolidated Statements of Operations..... 7
Unaudited Condensed Consolidated Statement of Stockholders'
Equity........................................................ 8
Unaudited Condensed Consolidated Statements of Cash Flows..... 9
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 28
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 29
Item 2. Changes in Securities and Use of Proceeds...................... 29
Item 3. Default Upon Senior Securities................................. 29
Item 4. Submission of Matters to a Vote of Security Holders............ 29
Item 5. Other Information.............................................. 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
SIGNATURES.............................................................. 30
</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" 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 nine months ended September 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. ("CMR") and National School Services, Inc. are 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>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues............................ $ 62,203 $ 20,651 $150,954 $ 45,306
Cost of revenues (excluding non-cash
equity charges, see note 7)........ 16,188 6,342 40,033 16,216
--------- --------- -------- ---------
Gross profit........................ 46,015 14,309 110,921 29,090
--------- --------- -------- ---------
Operating expenses:
Sales and marketing (excluding
non-cash equity charges, see note
7)............................... 30,141 21,252 90,366 55,972
Product development (excluding
non-cash equity charges, see note
7)............................... 4,329 2,025 9,767 5,025
General and administrative
(excluding non-cash equity
charges, see note 7)............. 16,784 7,551 39,458 19,577
Amortization of intangible
assets........................... 12,128 7,166 31,455 21,202
Stock-based charges............... 11,436 7,461 33,271 15,523
In-process research and
development...................... 4,048 -- 4,048 --
Litigation settlement............. -- 8,406 -- 8,406
--------- --------- -------- ---------
Total operating expenses........ 78,866 53,861 208,365 125,705
--------- --------- -------- ---------
Loss from operations................ (32,851) (39,552) (97,444) (96,615)
Interest and other income (expense),
net................................ 5,793 (271) 16,462 (3,410)
--------- --------- -------- ---------
Net loss............................ $ (27,058) $ (39,823) $(80,982) $(100,025)
========= ========= ======== =========
Basic and diluted net loss per
share.............................. $ (.33) $ (.60) $ (1.03) $ (1.67)
========= ========= ======== =========
Shares used to calculate basic and
diluted net loss per share......... 82,065 66,313 78,769 59,914
========= ========= ======== =========
</TABLE>
--------
/(1)/ See page 3 & 4 for a full disclosure of the unaudited pro forma condensed
consolidated statement of operations for the three and nine months ended
September 30, 1999. Since there are no pro forma adjustments after
December 31, 1999, the unaudited pro forma condensed consolidated
statement of operations for the three and nine months ended September 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 SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet Homefair Adjustments Forma
------------- ----- ----------- ------------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 18,625 $ -- $ -- $ 18,625 $ -- $2,075 $ (49)(1) $ 20,651
Cost of revenue
(excluding non-cash
equity charges, see
note 7)................ 5,897 5,897 445 6,342
-------- ----- ----- -------- ----- ------ ------- --------
Gross profit............ 12,728 -- -- 12,728 -- 1,630 (49) 14,309
-------- ----- ----- -------- ----- ------ ------- --------
Operating expenses:
Sales and marketing
(excluding non-cash
equity charges, see
note 7)............... 20,403 20,403 898 (49)(1) 21,252
Product development
(excluding non-cash
equity charges, see
note 7)............... 1,955 1,955 70 2,025
General and
administrative
(excluding non-cash
equity charges, see
note 7)............... 7,034 7,034 517 7,551
Amortization of
intangible assets..... 3,003 3,003 523 3,640 (2) 7,166
Stock-based charges.... 7,461 7,461 7,461
Litigation
settlement............ 8,406 8,406 8,406
-------- ----- ----- -------- ----- ------ ------- --------
Total operating
expenses............ 48,262 -- -- 48,262 -- 2,008 3,591 53,861
-------- ----- ----- -------- ----- ------ ------- --------
Loss from operations.... (35,534) (35,534) (378) (3,640) (39,552)
Interest and other
income (expense), net.. 1,308 1,308 (35) (1,544)(4) (271)
-------- ----- ----- -------- ----- ------ ------- --------
Net loss................ (34,226) -- -- (34,226) -- (413) (5,184) (39,823)
-------- ----- ----- -------- ----- ------ ------- --------
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (369) 369 (5)
-------- ----- ----- -------- ----- ------ ------- --------
Net loss applicable to
common stockholders.... $(34,595) $ -- $ 369 (34,226) $ -- $ (413) $(5,184) $(39,823)
======== ===== ===== ======== ===== ====== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (.65)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 52,903
========
Pro forma basic and
diluted net loss per
share.................. $ (.60)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share..... 66,313 (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
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Homestore.com NSI Adjustments Homestore.com SpringStreet Homefair Adjustments Pro Forma
------------- ------- ----------- ------------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 35,211 $ 2,433 $ -- $ 37,644 $ 2,346 $5,467 $ (151) (1) $ 45,306
Cost of revenues
(excluding non-cash
equity charges, see
note 7).............. 13,007 798 13,805 1,675 736 16,216
-------- ------- ------ -------- -------- ------ -------- ---------
Gross profit.......... 22,204 1,635 -- 23,839 671 4,731 (151) 29,090
-------- ------- ------ -------- -------- ------ -------- ---------
Operating expenses:
Sales and marketing
(excluding non-cash
equity charges, see
note 7)............. 44,765 4,064 48,829 5,506 1,788 (151) (1) 55,972
Product development
(excluding non-cash
equity charges, see
note 7)............. 3,322 174 3,496 1,134 395 5,025
General and
administrative
(excluding non-cash
equity charges, see
note 7)............. 12,953 1,053 14,006 4,416 1,155 19,577
Amortization of
intangible assets... 4,313 261 4,574 1,810 4,137 (8) 21,202
(1,810) (2)
12,491 (3)
Stock-based
charges............. 12,711 569 13,280 2,243 15,523
Litigation
settlement.......... 8,406 8,406 8,406
-------- ------- ------ -------- -------- ------ -------- ---------
Total operating
expenses.......... 86,470 6,121 -- 92,591 13,299 5,148 14,667 125,705
-------- ------- ------ -------- -------- ------ -------- ---------
Loss from operations.. (64,266) (4,486) (68,752) (12,628) (417) (14,818) (96,615)
Interest and other
income (expense),
net.................. 1,274 (5) 1,269 44 (89) (4,634) (4) (3,410)
-------- ------- ------ -------- -------- ------ -------- ---------
Net loss.............. (62,992) (4,491) -- (67,483) (12,584) (506) (19,452) (100,025)
-------- ------- ------ -------- -------- ------ -------- ---------
Accretion of
redemption value and
dividends on
convertible preferred
stock................ (1,846) (207) 2,053 (5) -- --
-------- ------- ------ -------- -------- ------ -------- ---------
Net loss applicable to
common stockholders.. $(64,838) $(4,698) $2,053 $(67,483) $(12,584) $ (506) $(19,452) $(100,025)
======== ======= ====== ======== ======== ====== ======== =========
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................ $ (1.67)
=========
Shares used in the
calculation of pro
forma basic and
diluted net loss per
share................ 59,914 (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 accounts receivable, accounts payable,
revenues and expenses
(2) Elimination of Homefair's amortization on its intangible assets.
(3) Amortization of goodwill on a straight-line basis over five years
(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
(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
(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
have been issued as of January 1, 1999, except for preferred stock that
was not issued 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>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------- ------------------
<S> <C> <C>
SpringStreet acquisition............ -- 4,587
HomeFair acquisition................ 250 250
NSI Reorganization.................. -- 2,080
Conversion of preferred stock in
connection with IPO................ 11,670 17,659
Conversion of NAR's RealSelect
shares into Homestore.com shares... 1,490 3,917
</TABLE>
(7) Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options 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 issued and the fair value of warrants issued and have been
classified on the unaudited pro forma condensed consolidated statements of
operations as stock-based charges. The following chart summarizes the
stock-based charges that have been excluded from the following captions
for each of the periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of revenues................... $ 137 $ 421 $ 483 $ 1,190
Sales and marketing................ 10,473 5,153 29,873 9,533
Product development................ 129 280 455 563
General and administrative......... 697 1,607 2,460 4,237
---------- --------- --------- ---------
$ 11,436 $ 7,461 $ 33,271 $ 15,523
========== ========= ========= =========
</TABLE>
(8) Amortization of goodwill in connection with the SpringStreet acquisition
5
<PAGE>
HOMESTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 168,390 $ 90,382
Short-term investments............................ 114,651 --
Marketable equity security........................ 1,389 4,230
Accounts receivable, net.......................... 40,649 13,428
Current portion of prepaid distribution expense... 49,091 7,868
Other current assets.............................. 12,072 5,371
---------- ---------
Total current assets............................ 386,242 121,279
Prepaid distribution expense........................ 171,516 6,167
Property and equipment, net......................... 33,034 6,305
Intangible assets, net.............................. 198,308 138,612
Restricted cash..................................... 90,000 --
Other long-term assets.............................. 45,699 4,200
---------- ---------
Total assets.................................... $ 924,799 $ 276,563
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 14,119 $ 5,349
Accrued liabilities............................... 41,186 23,687
Deferred revenue.................................. 28,198 13,478
Notes payable..................................... 353 37,943
---------- ---------
Total current liabilities........................... 83,856 80,457
---------- ---------
Distribution obligation............................. 186,145 --
Other............................................... 11,322 633
---------- ---------
197,467 633
---------- ---------
Total liabilities............................... 281,323 81,090
---------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Convertible preferred stock, $.001 par value......
Common stock, $.001 par value; 500,000 shares
authorized, 88,017 and 75,251 shares issued at
September 30, 2000 and December 31, 1999,
respectively, and 82,711 and 70,189 shares
outstanding at September 30, 2000 and December
31, 1999, respectively........................... 83 70
Additional paid-in capital........................ 1,014,402 413,244
Treasury stock, at cost; 5,306 and 5,062 shares at
September 30, 2000 and December 31, 1999,
respectively..................................... (15,876) (13,676)
Notes receivable from stockholders................ (10,544) (13,350)
Deferred stock-based charges...................... (108,511) (38,947)
Accumulated other comprehensive income............ 637 3,865
Accumulated deficit............................... (236,715) (155,733)
---------- ---------
Total stockholders' equity...................... 643,476 195,473
---------- ---------
Total liabilities and stockholders' equity...... $ 924,799 $ 276,563
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................. $ 62,203 $ 18,625 $150,954 $ 35,211
Cost of revenues (excluding non-cash
equity charges, see note 7)......... 16,188 5,897 40,033 13,007
--------- --------- -------- --------
Gross profit......................... 46,015 12,728 110,921 22,204
--------- --------- -------- --------
Operating expenses:
Sales and marketing (excluding non-
cash equity charges, see note 7).. 30,141 20,403 90,366 44,765
Product development (excluding non-
cash equity charges, see note 7).. 4,329 1,955 9,767 3,322
General and administrative
(excluding non-cash equity
charges, see note 7).............. 16,784 7,034 39,458 12,953
Amortization of intangible assets.. 12,128 3,003 31,455 4,313
Stock-based charges................ 11,436 7,461 33,271 12,711
In-process research and
development....................... 4,048 -- 4,048 --
Litigation settlement.............. -- 8,406 -- 8,406
--------- --------- -------- --------
Total operating expenses......... 78,866 48,262 208,365 86,470
--------- --------- -------- --------
Loss from operations................. (32,851) (35,534) (97,444) (64,266)
Interest and other income (expense),
net................................. 5,793 1,308 16,462 1,274
--------- --------- -------- --------
Net loss............................. (27,058) (34,226) (80,982) (62,992)
Accretion of redemption value and
dividends on convertible preferred
stock............................... -- (369) -- (1,846)
--------- --------- -------- --------
Net loss applicable to common
stockholders........................ $ (27,058) $ (34,595) $(80,982) $(64,838)
========= ========= ======== ========
Basic and diluted net loss per
share............................... $ (.33) $ (.65) $ (1.03) $ (2.06)
========= ========= ======== ========
Shares used to calculate basic and
diluted net loss per share.......... 82,065 52,903 78,769 31,421
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONDENSED 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)....... (80,982) (80,982)
Unrealized loss on
marketable
security and short
term investments
(unaudited)....... (2,883) (2,883)
Foreign currency
translation
(unaudited)....... (345) (345)
--------
(84,210)
--------
Issuance of common
stock (unaudited).. 6,712 7 7,923 7,930
Issuance of common
stock for
acquisitions
(unaudited)........ 589 1 50,636 50,637
Repayment from
stockholders
(unaudited)........ 606 606
Repurchase of common
stock (unaudited).. (244) (2,200) 2,200 --
Deferred stock-based
charges
(unaudited)........ 102,318 (102,318)
Stock-based charges
(unaudited)........ 32,754 32,754
Issuance of common
stock in secondary
public offering
(unaudited)........ 4,073 4 428,899 428,903
Exercise of warrants
(unaudited)........ 1,392 1 11,382 11,383
------ ---- ---------- -------- -------- --------- ------- --------- --------
Balance at September
30, 2000
(unaudited)........ 82,711 $ 83 $1,014,402 $(15,876) $(10,544) $(108,511) $ 637 $(236,715) $643,476
====== ==== ========== ======== ======== ========= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(80,982) $(62,992)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 34,678 5,179
Provision for doubtful accounts......................... 2,245 636
Amortization of discount on notes payable............... -- 234
In-process research and development..................... 4,048 --
Litigation settlement................................... -- 8,406
Stock-based charges..................................... 33,271 12,711
Other non-cash items.................................... (798) 853
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (26,293) (7,736)
Prepaid distribution expense............................ (21,150) (5,484)
Deferred royalties...................................... (692) (1,676)
Other assets............................................ (6,372) (1,949)
Accounts payable and accrued liabilities................ 18,775 10,848
Deferred revenue........................................ 5,375 6,297
-------- --------
Net cash used in operating activities..................... (37,895) (34,673)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (28,144) (2,893)
Purchases of short-term investments....................... (115,037) --
Purchase of other investments............................. (30,897) --
Acquisitions, net of cash acquired........................ (39,465) --
Cash assumed from the acquisition of SpringStreet......... -- 10,186
-------- --------
Net cash (used in) provided by investing activities....... (213,543) 7,293
-------- --------
Cash flows from financing activities:
Notes receivable from stockholders........................ 606 3,655
Net proceeds from issuance of common stock................ 428,903 167,597
Proceeds from employee stock plans and warrants........... 19,313 1,346
Transfer to restricted cash............................... (90,000) --
Repurchases of common stock............................... -- (11,906)
Issuance of notes receivable.............................. (1,651) --
Repayment of notes payable................................ (38,575) (2,116)
Other..................................................... 10,850 --
-------- --------
Net cash provided by financing activities................. 329,446 158,576
-------- --------
Change in cash and cash equivalents....................... 78,008 131,196
Cash assumed from NetSelect, Inc.......................... -- 13,037
Cash and cash equivalents, beginning of period............ 90,382 71
-------- --------
Cash and cash equivalents, end of period.................. $168,390 $144,304
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED 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. 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" and SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities
an amendment 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(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.
Subsequent to the issuance of SAB 101A, the SEC issued Staff Accounting
Bulletin 101B ("SAB 101B"), which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal year beginning after
December 15, 1999. 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 acquisition-related
costs. The acquisition has been accounted for as a purchase. The acquisition
cost has been allocated to the assets acquired and liabilities assumed based
on their respective fair values. The excess of purchase consideration over net
tangible assets acquired of $31.9 million has been allocated to goodwill and
other identifiable intangible assets and is being amortized on a straight-line
basis over estimated lives ranging from three to five years. During the
quarter ended September 30, 2000, approximately $2.2 million of the purchase
price was charged to acquired in-process research and development ("IPR&D")
upon completion of the purchase price valuation by an independent third party.
In May 2000, the Company acquired Top Producer Systems, Inc. ("Top
Producer") for $12.7 million in cash, including 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 allocated to the assets acquired and liabilities assumed based on their
respective fair values. The excess of purchase consideration over net tangible
assets acquired of $23.9 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a straight-line basis
over estimated lives ranging from three to five years. During the quarter
ended September 30, 2000, approximately $1.8 million of the purchase price was
charged to acquired in-process research and development upon completion of the
purchase price valuation by an independent third party.
11
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. The income approach, based on the percent complete
method included assumptions relating to revenue estimates, operating expenses,
income taxes and discount rates. The IPR&D was comprised of nine projects and
amounted to $4.0 million of the total purchase price and was charged to
expense during the three months ended September 30, 2000.
In September 2000, the Company acquired The Hessel Group ("THG") for $20.0
million in cash, including acquisition-related costs and the fair value of
options assumed. 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 $18.6
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. 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.
7. STOCK-BASED CHARGES:
Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options 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 issued and the fair value of warrants issued and have been classified
on the unaudited consolidated statements of operations as stock-based charges.
The following chart summarizes the stock-based charges that have been excluded
from the following captions for each of the periods presented (in thousands):
<TABLE>
<CAPTION>
Nine Months
Three Months Ended September
Ended September 30, 30,
-------------------- ---------------
2000 1999 2000 1999
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Cost of revenues.......................... $ 137 $ 421 $ 483 $ 701
Sales and marketing....................... 10,473 5,153 29,873 7,875
Product development....................... 129 280 455 333
General and administrative................ 697 1,607 2,460 3,802
---------- --------- ------- -------
$ 11,436 $ 7,461 $33,271 $12,711
========== ========= ======= =======
</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 $4.9 million for the three and nine months
ended September 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
$2.9 million for the three and nine months ended September 30, 2000,
respectively.
12
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Three Months
Ended September Nine Months Ended
30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss............................. $(27,058) $(34,226) $(80,982) $(62,992)
Accretion of redemption value and
dividends on convertible preferred
stock............................... -- (369) -- (1,846)
-------- -------- -------- --------
Net loss applicable to common
stockholders........................ $(27,058) $(34,595) $(80,982) $(64,838)
======== ======== ======== ========
Denominator:
Weighted average shares.............. 82,065 52,903 78,769 31,421
======== ======== ======== ========
Basic and diluted net loss per share
applicable to common stockholders... $ (.33) $ (.65) $ (1.03) $ (2.06)
======== ======== ======== ========
</TABLE>
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
15,832,996 and 11,108,403 at September 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 to AOL approximately 3.9 million shares of its common stock. In the
agreement, 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 September 30, 2000, the Company has recorded
$186.1 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 the agreement and the 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 established a $90.0 million letter of credit being
shown as restricted cash on the balance sheet, that 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.
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
13
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
has responded to the request and intends to cooperate fully with the
Department of Justice's request.
12. SUBSEQUENT EVENTS:
In October 2000, the Company announced its intention to acquire Move.com,
Inc. and Welcome Wagon International, Inc. (collectively the "Move.com Group")
through two acquisitions. Under the terms of the Agreement and Plan of
Reorganization, the Company will issue to Cendant Corporation, the sole
stockholder of the Move.com Group, an aggregate of up to 25,142,654 shares of
common stock. The shares include shares of the Company's common stock to be
issued upon exercise of options to purchase shares of Move.com common stock
assumed by the Company in the acquisitions and exclude shares to be issued
upon exercise of stock options to be granted. The fair value of the common
stock to be issued was determined based on the average price per share of the
Company's common stock on the dates surrounding the announcement of the
acquisitions while the fair value of the assumed options was determined based
on the Black-Scholes Model. The acquisitions, preliminarily valued at
approximately $804.3 million, will be accounted for as a purchase under
generally accepted accounting principles. Consummation of the transaction is
subject to certain customary closing conditions, including regulatory approval
under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR"). In connection
with its review under the HSR, the department of Justice requested additional
information and as of the date of this report is reviewing the acquisitions.
Although no assurances can be given, the Company anticipates that the closing
of these acquisitions will occur during the first quarter of 2001.
14
<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 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. 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 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.
15
<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 months ended September 30, 1999 and the nine
months ended September 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 have 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, products
and services could be expensive, time consuming and a strain on our resources.
16
<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; and
. 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>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000(1) 1999 2000(1) 1999
----------- --------- ----------- ----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Pro Forma Consolidated
Statement of Operations
Data:
Revenues.................... $ 62,203 $ 20,651 $ 150,954 $ 45,306
Cost of revenues (excluding
non-cash equity charges,
see note 2)................ 16,188 6,342 40,033 16,216
--------- --------- --------- ----------
Gross profit................ 46,015 14,309 110,921 29,090
--------- --------- --------- ----------
Operating expenses:
Sales and marketing
(excluding non-cash
equity charges, see
note 2).................. 30,141 21,252 90,366 55,972
Product development
(excluding non-cash
equity charges, see note
2)....................... 4,329 2,025 9,767 5,025
General and administrative
(excluding non-cash
equity charges, see note
2)....................... 16,784 7,551 39,458 19,577
Amortization of intangible
assets................... 12,128 7,166 31,455 21,202
Stock-based charges....... 11,436 7,461 33,271 15,523
In-process research and
development.............. 4,048 -- 4,048 --
Litigation settlement..... -- 8,406 -- 8,406
--------- --------- --------- ----------
Total operating
expenses............... 78,866 53,861 208,365 125,705
--------- --------- --------- ----------
Loss from operations........ (32,851) (39,552) (97,444) (96,615)
Interest and other income
(expense), net............. 5,793 (271) 16,462 (3,410)
--------- --------- --------- ----------
Net loss.................... $ (27,058) $ (39,823) $ (80,982) $ (100,025)
========= ========= ========= ==========
As a Percentage of Pro Forma
Revenues:
Revenues.................... 100% 100% 100% 100%
Cost of revenues............ 26 31 27 36
--------- --------- --------- ----------
Gross profit................ 74 69 73 64
--------- --------- --------- ----------
Operating expenses:
Sales and marketing....... 48 103 60 124
Product development....... 7 10 6 11
General and
administrative........... 27 37 26 43
Amortization of intangible
assets................... 20 35 21 47
Stock-based charges....... 18 36 22 34
In-process research and
development.............. 7 -- 3 --
Litigation settlement..... -- 40 -- 18
--------- --------- --------- ----------
Total operating expenses.. 127 261 138 277
--------- --------- --------- ----------
Loss from operations........ (53) (192) (65) (213)
Interest and other income
(expense), net............. 9 (1) 11 (8)
--------- --------- --------- ----------
Net loss.................... (44)% (193)% (54)% (221)%
========= ========= ========= ==========
</TABLE>
--------
(1) The unaudited pro forma consolidated statements of operations for the
three and nine months ended September 30, 2000 reflect our actual
operating results.
17
<PAGE>
(2) Stock-based charges represent amortization of deferred charges recorded in
connection with grants of stock options 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 issued and the fair value of warrants issued and have been
classified on the unaudited pro forma consolidated statements of
operations as stock-based charges. The following chart summarizes the
stock-based charges that have been excluded from the following captions
for each of the periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of revenues...................... $ 137 $ 421 $ 483 $ 1,190
Sales and marketing................... 10,473 5,153 29,873 9,533
Product development................... 129 280 455 563
General and administrative............ 697 1,607 2,460 4,237
---------- --------- --------- ---------
$ 11,436 $ 7,461 $ 33,271 $ 15,523
========== ========= ========= =========
</TABLE>
Pro Forma for the Three Months Ended September 30, 2000 and 1999
Revenues
Revenues increased to $62.2 million for the three months ended September
30, 2000 from pro forma revenues of $20.7 million for the three months ended
September 30, 1999. Revenue from both professional subscriptions and
advertising contributed to the overall revenue growth. Increase in
subscription revenue, which was approximately 53% of our revenues, was
primarily due to an increase in the number of professionals on the
Homestore.com family of web sites and an increase in the average revenue per
professional. At September 30, 2000, the number of professionals on our family
of web sites increased to 131,000, which represented a 54% increase over the
number of professionals at September 30, 1999. Advertising revenue increased
as a result of an expansion in sponsorships and strategic alliances during the
quarter. During the three months ended September 30, 2000, according to
information published by Media Metrix, we had a monthly average of 4.2 million
unique users, a 54% increase over the third quarter of 1999.
Cost of Revenues
Cost of revenues increased to $16.2 million for the three months ended
September 30, 2000 from pro forma cost of revenues of $6.3 million for the
three months ended September 30, 1999. The increase was primarily due to an
overall increase in sales volume during the three months ended September 30,
2000 as compared to the three months ended September 30, 1999. Increased
salaries and hosting costs also contributed to the increase. We anticipate
continuing increases in cost of revenues in absolute dollars as our revenues
increase and we continue to make capital investments to increase the capacity
of our family of web sites in order to accommodate traffic increases.
Gross margin for the quarter was 74%, up from a pro forma gross margin of
69% for the same quarter of 1999. We anticipate that our gross margin may
decline slightly over the near term as we absorb planned technology
investments to accommodate the increased traffic from the America Online
("AOL") House and Home Channel launched in late September 2000, as well as our
recent acquisitions of technology businesses that have slightly lower margins
than us at this stage of their development.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $30.1
million for the three months ended September 30, 2000 from pro forma sales and
marketing expenses of $21.3 million for the three months ended September 30,
1999. The increase was primarily attributable to increased salaries and
commissions. The increase was also due to online consumer marketing costs and
advertising costs associated with our branding campaign during 2000, as well
as increases in promotional material and trade show expenses.
18
<PAGE>
Product development. Product development expenses increased to $4.3 million
for the three months ended September 30, 2000 from pro forma product
development expenses of $2.0 million for the three months ended September 30,
1999. The increase in product development costs was due to increased costs
associated with the continuing expansion of the Homestore.com web sites, as
well as product development costs from our acquisitions of WyldFyre and Top
Producer in 2000.
General and administrative. General and administrative expenses increased
to $16.8 million for the three months ended September 30, 2000 from pro forma
general and administrative expenses of $7.6 million for the three months ended
September 30, 1999. The increase was primarily due to increased professional
fees, and staffing levels and related hiring costs required to support our
continuing growth, expanded operations and infrastructure. The increase was
also due to costs associated with the full quarter impact of our acquisitions
of Top Producer, and The Hessel Group ("THG") as well as costs associated with
the opening of our centralized customer care facility in Arizona and launch of
several new initiatives including the AOL House and Home Channel. 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 businesses but may decrease as a percentage of
revenues as we continue to leverage our existing infrastructure.
Amortization of intangible assets. Amortization of intangible assets was
$12.1 million for the three months ended September 30, 2000 as compared to pro
forma amortization of $7.2 million for the three months ended September 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. During March 2000, the Company
acquired WyldFyre, which resulted in the write-off of purchased in-process
research and development ("IPR&D") of $2.2 million. During May 2000, we
acquired Top Producer, which resulted in the write-off of IPR&D of $1.8
million. The write off of IPR&D was a result of certain projects not reaching
technological feasibility and having no alternative future uses. The fair
value of the IPR&D for each of the acquisitions was determined using the
income approach based on the percent complete method. The income approach
included assumptions relating to revenue estimates, operating expenses, income
taxes and discount rates.
Revenue estimates were developed based on: (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues, (iii)
growth rates for the industry, (iv) the aggregate size of the industry,
(v) anticipated product development and introduction schedules, (vi) product
sales cycles, and (vii) the estimated life of a product's underlying
technology.
Operating expenses used in the valuation analysis of WyldFyre's and Top
Producer's IPR&D included: cost of goods sold; selling, general and
administrative expenses; and research and development expenses.
In developing future expense estimates, an evaluation of both
Homestore.com's and acquired companies' overall business model, specific
product results, including both historical and expected direct expense levels,
as appropriate, and an assessment of general industry metrics, was conducted.
The discount rate of 28% was used for both WyldFyre's and Top Producer's
existing and in-process technologies. In the selection of the appropriate
discount rate, consideration was given to (i) inherent risk and (ii) the
expected growth of the in-process products.
We believe the amounts determined for IPR&D are representative of fair
value and do not exceed the amounts an independent party would pay for these
projects. Failure to deliver new products to the market on a timely basis, or
to achieve expected market acceptance or revenue and expense forecasts, could
have a significant impact on the financial results and operations of the
acquired businesses.
The IPR&D was comprised of nine projects and amounted to $4.0 million of
the total purchase price and was charged to expense during the three months
ended September 30, 2000.
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
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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 $1.7 million for the three months ended September 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 September
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 September 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 September 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
September 30, 2000.
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
September 30, 1999. Interest and other income increased to $5.8 million for
the three months ended September 30, 2000 from pro forma interest and other
expense of $271,000 for the three months ended September 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 September 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.
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Pro Forma for the Nine Months Ended September 30, 2000 and 1999
Revenues
Revenues increased to $151.0 million for the nine months ended September
30, 2000 from pro forma revenues of $45.3 million for the nine months ended
September 30, 1999. Revenue from both professional subscriptions and
advertising, as well as web site development fees, contributed to the overall
growth in revenue. Increase in subscription revenue, which was approximately
55% of our revenues, was primarily due to an increase in the number of
professionals on the Homestore.com family of web sites and an increase in the
average revenue per professional. At September 30, 2000, the number of
professionals on our family of web sites increased to 131,000, which
represented a 54% increase over the number of professionals at September 30,
1999. Advertising revenue increased as a result of an expansion in
sponsorships and strategic alliances during the nine months ended September
30, 2000.
Cost of Revenues
Cost of revenues increased to $40.0 million for the nine months ended
September 30, 2000 from pro forma cost of revenues of $16.2 million for the
nine months ended September 30, 1999. The increase was primarily due to our
overall increase in sales volume, increased salaries, and hosting costs during
the nine months ended September 30, 2000 as compared to the nine months ended
September 30, 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 of our family of web sites in order to
accommodate traffic increases.
Gross margin for the quarter was 73%, up from a pro forma gross margin of
64% for the same period in 1999. We anticipate that our gross margin may
decline slightly over the near term as we absorb planned technology
investments to accommodate the increased traffic from the AOL House and Home
Channel launched in late September 2000, as well as our recent acquisitions of
technology businesses that have slightly lower margins than us at this stage
of their development.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $90.4
million for the nine months ended September 30, 2000 from pro forma sales and
marketing expenses of $56.0 million for the nine months ended September 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 advertising for our branding
campaign, promotional material, and trade show expenses during the nine months
ended September 30, 2000 also contributed to the increase.
Product development. Product development expenses increased to $9.8 million
for the nine months ended September 30, 2000 from pro forma product
development expenses of $5.0 million for the nine months ended September 30,
1999. The increase in product development costs was due to increased costs
associated with the continuing expansion of the Homestore.com web sites 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 $39.5 million for the nine months ended September 30, 2000 from pro forma
general and administrative expenses of $19.6 million for the nine months ended
September 30, 1999. The increase was primarily due to hiring of key management
personnel and increased staffing levels and related hiring costs, and
professional fees required to support our growth, expanded operations and
infrastructure as a public company. The increase was also due to costs
associated with our acquisitions of WyldFyre, Top Producer and THG in 2000, as
well as costs associated with our corporate office and the opening of our
centralized customer care facility in Arizona and launch of several new
initiatives including the AOL House and Home Channel.
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Amortization of intangible assets. Amortization of intangible assets was
$31.5 million for the nine months ended September 30, 2000 as compared to pro
forma amortization of $21.2 million for the nine months ended September 30,
1999. The increase in amortization was primarily the result of the
acquisitions of Homefair in October 1999, WyldFyre in March 2000, Top Producer
in May 2000 and THG in September 2000.
In-process research and development. During March 2000, we acquired
WyldFyre, which resulted in the write-off of IPR&D of $2.2 million. During May
2000, we acquired Top Producer, which resulted in the write-off of IPR&D of
$1.8 million. The fair value of the IPR&D for each of the acquisitions was
determined using the income approach. The income approach included assumptions
relating to revenue estimates, operating expenses, income taxes and discount
rates.
The IPR&D was comprised of nine projects and amounted to $4.0 million of
the total purchase price and was charged to expense during the nine months
ended September 30, 2000.
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 $4.1 million for the nine months ended September 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 $3.6 million for the nine months ended
September 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
$1.3 million for the nine months ended September 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 $4.9
million for the nine months ended September 30, 2000.
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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 $2.9 million for the nine months ended
September 30, 2000.
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 nine months ended
September 30, 1999, and interest expense incurred on the note payable issued
in connection with our HomeFair acquisition for the nine months ended
September 30, 2000. Interest and other income increased to $16.5 million for
the nine months ended September 30, 2000 from pro forma interest and other
expense of $3.4 million for the nine months ended September 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 nine months ended September 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
At September 30, 2000, we had $373.0 million in cash and cash equivalents,
restricted cash and short-term investments as compared to $90.4 million at
December 31, 1999.
Net cash used in operating activities was $37.9 million for the nine months
ended September 30, 2000 and $34.7 million in the nine months ended September
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 $213.5 million for the nine
months ended September 30, 2000, compared to net cash provided of $7.3 million
in the nine months ended September 30, 1999. During the nine months ended
September 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., Top Producer and THG for approximately
$39.5 million in cash. In addition, we invested in non-consolidated entities
for an aggregate $30.9 million in cash. Capital expenditures for property and
equipment totaled $28.1 million for the nine months ended September 30, 2000
and $2.9 million for the nine months ended September 30, 1999. The increase
was primarily attributed to the expansion of existing facilities. During the
nine months ended September 30, 1999, an additional $3.0 million of capital
expenditures were funded through an equipment lease financing arrangement. We
purchased $115.0 million of short-term investment funds during the nine months
ended September 30, 2000.
Net cash provided by financing activities was $329.4 million for the nine
months ended September 30, 2000 compared to $158.6 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 $110.00 per share, raising
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approximately $428.9 million after deducting underwriting discounts and
commissions and offering expenses. In addition, we received approximately
$19.3 million from the exercise of options and warrants during the nine months
ended September 30, 2000.
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.
In April 2000, we entered into a five-year marketing and distribution
agreement with AOL. In exchange for entering into this agreement, we paid AOL
$20.0 million in cash and issued to AOL approximately 3.9 million shares of
our common stock. In the agreement, we have guaranteed that the 30-day average
closing price, related to 60%, 20% and 20% of the shares we 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 September 30, 2000,
we recorded $186.1 million in other non-current liabilities, which represents
the fair market value of the 3.9 million shares of our stock issued upon
entering the agreement and the 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 being shown as
restricted cash on the balance sheet, that 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.
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" and SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities
an amendment 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. Subsequent to the issuance of SAB 101A, the SEC
issued Staff Accounting Bulletin 101B ("SAB 101B"), which delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter
of fiscal year beginning after December 15, 1999. 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.
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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 $32.9 million for the three
months ended September 30, 2000 and $97.4 million for the nine months ended
September 30, 2000. On a pro forma basis we incurred operating losses of $39.6
million for the three months ended September 30, 1999 and $96.6 million for
the nine months ended September 30, 1999. As of September 30, 2000, we had an
accumulated deficit of $236.7 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, stock and warrant
issuances, and amortization of intangible assets. As of September 30, 2000, we
had approximately $493.0 million of deferred stock-based charges, intangible
assets and other liabilities 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
. We must continue to obtain listings from real estate agents, brokers,
homebuilders, 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
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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. These
efforts will involve significant expense. If our brand enhancement strategy is
unsuccessful, we may fail to
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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;
. 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.
. We may particularly be affected by general economic conditions.
. We have risks associated with changing legislation in the real estate
industry.
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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 material 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 11--Commitments and Contingencies, and Note 12--Subsequent Events,
in Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 27, 2000, the Company issued a warrant, with a term of 5 years and
3 months, to American Society of Home Inspectors to purchase up to 7,000
shares of Common Stock at an exercise price of $25.87 per share and was issued
in reliance on Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2000.
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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 14, 2000
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.
Executive Vice President
Chief Financial Officer,
and Secretary
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