<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-80419
PROSPECTUS SUPPLEMENT
DATED JANUARY 31, 2000
TO PROSPECTUS DATED
AUGUST 4, 1999 OF
HOMESTORE.COM, INC.
This Prospectus Supplement includes financial information derived from
Homestore's quarterly report on Form 10-Q for the quarter ended September 30,
1999 and from Homestore's Form 8-K filed in connection with the Homefair
acquisition, both of which were previously filed with the Securities and
Exchange Commission. The Prospectus Supplement also includes summary results
of operations for the three months and the year ended December 31, 1999. This
Prospectus Supplement is a part of the Prospectus and must be timely delivered
to any purchaser of the securities covered by the Prospectus.
FOLLOW-ON OFFERING
On January 27, 2000 Homestore priced a public offering of 8.3 million
shares of its common stock. Of these shares, approximately 4.07 million shares
are being offered by Homestore, and approximately 4.23 million shares are
being offered by Homestore's stockholders. The public offering price is
$110.00 per share, with expected net proceeds to Homestore of approximately
$429.2 million.
SUMMARY RESULTS OF OPERATIONS FOR THE THREE MONTHS AND YEAR ENDED
DECEMBER 31, 1999
On a pro forma basis, revenues for the quarter increased 233% to $28.1
million over revenues of $8.4 million for the fourth quarter of 1998 and 36%
over revenues of $20.7 million for the third quarter of 1999. Gross profit
margin improved to 71% for the quarter, up from 61% for the fourth quarter of
1998 and 69% for the third quarter of 1999. Net loss for the quarter was $16.2
million, or $0.23 per share. That compares to a net loss for the fourth
quarter of 1998 of $15.5 million, or $0.32 per share, and a net loss of $16.8
million, or $0.25 per share for the third quarter of 1999. Revenues for 1999
increased 217% to $73.4 million over revenues of $23.1 million for 1998. Net
loss for 1999 was $71.1 million, or $1.14 per share, compared with a net loss
of $44.9 million or $1.04 per share in 1998.
Pro forma net losses exclude the effects of non-cash charges for: (1)
stock-based charges, (2) amortization of intangible assets, and (3) a
litigation settlement in the third quarter of 1999. To enhance comparability,
the pro forma operating results assume that the acquisitions of SpringStreet
and Homefair, as well as the reorganization of Homestore's corporate
structure, occurred at the beginning of the respective periods for which
information is presented.
On a GAAP basis, Homestore's revenues for the quarter were $27.4 million,
compared to $18.6 million, for the third quarter of 1999. Net loss for the
quarter was $30.0 million, or $0.43 per share, compared to $34.2 million, or
$0.65 per share for the third quarter of 1999. Revenues for 1999 were $62.6
million and net loss for 1999 was $93.0 million, or $2.26 per share.
Homestore's revenues and operating results for 1998 were insignificant on a
GAAP basis.
Revenue growth in the fourth quarter and throughout 1999 was driven largely
by increased revenue from professional subscriptions, as well as an increase
in advertising revenue. The growth in revenue from professional subscriptions
was primarily due to an increase in the number of subscribers on Homestore's
family of web sites, as well as an increase in average subscription rates.
Subscribers grew by more than 10,000 during the quarter, rising to more than
95,000 at December 31, 1999, representing increases of 88% and 12%, compared
to subscriber totals at December 31, 1998 and September 30, 1999,
respectively. The growth in advertising revenue was primarily driven by
increased sponsorships, including the GMAC Mortgage and GMAC Home Services
alliance agreement announced in November of 1999 as well as the Norwest
Mortgage alliance agreement announced in August of 1999. An average of 2.1
million unique users visited the Homestore.com network for an average of 17.8
minutes each month during the quarter, resulting in 114.6 million user-minutes
on the Homestore.com network during the fourth quarter. Traffic decreased
across the Homestore.com network from last quarter as is typical during the
holiday season. Page views for the fourth quarter, which include Homefair.com
for a full quarter, were 363.2 million, and 567 million homes were viewed on
the Homestore.com network during the quarter.
1
<PAGE>
Homestore.com, Inc.
Consolidated Statements of Operations--Pro Forma Basis
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the three
months ended For the year ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues.............................. $ 28,061 $ 8,420 $ 73,367 $ 23,123
Cost of revenues...................... 8,105 3,292 24,321 10,133
-------- -------- --------- --------
Gross profit........................ 19,956 5,128 49,046 12,990
-------- -------- --------- --------
Operating expenses:
Sales and marketing................. 26,031 13,454 82,003 34,560
Product development................. 1,679 1,246 6,704 5,585
General and administrative.......... 9,043 4,343 28,620 11,608
Amortization of intangible assets... 7,274 6,988 28,476 27,897
Stock-based charges................. 8,516 937 24,039 20,455
Litigation settlement............... -- -- 8,406 --
-------- -------- --------- --------
Total operating expenses.............. 52,543 26,968 178,248 100,105
-------- -------- --------- --------
Loss from operations.................. (32,587) (21,840) (129,202) (87,115)
Interest and other income (expense),
net.................................. 566 (1,569) (2,844) (6,090)
-------- -------- --------- --------
Net loss.............................. $(32,021) $(23,409) $(132,046) $(93,205)
======== ======== ========= ========
Basic and diluted net loss per share.. $ (0.46) $ (0.48) $ (2.11) $ (2.15)
======== ======== ========= ========
Shares used to calculate basic and
diluted net loss per share........... 70,068 48,762 62,474 43,251
======== ======== ========= ========
Net loss, excluding non-cash charges
related to the amortization of
intangible assets, stock-based
chargesand litigation settlement..... $(16,231) $(15,484) $ (71,125) $(44,853)
======== ======== ========= ========
Basic and diluted net loss per share,
excluding non-cash charges related to
the amortization of intangible
assets, stock-based charges and
litigation settlement................ $ (0.23) $ (0.32) $ (1.14) $ (1.04)
======== ======== ========= ========
</TABLE>
2
<PAGE>
Homestore.com, Inc.
Consolidated Statements of Operations--As Reported GAAP Basis
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the year
ended December 31, ended December 31,
--------------------------------------------
1999 1998 1999 1998
----------- -------------------- ---------
<S> <C> <C> <C> <C>
Revenues.......................... $ 27,369 $ -- $ 62,580 $ --
Cost of revenues.................. 8,015 -- 21,022 --
----------- -------- ---------- -------
Gross profit.................... 19,354 -- 41,558 --
----------- -------- ---------- -------
Operating expenses:
Sales and marketing............. 25,619 -- 70,384 --
Product development............. 1,611 -- 4,933 --
General and administrative...... 8,828 1 21,781 3
Amortization of intangible
assets......................... 5,879 -- 10,192 --
Stock-based charges............. 8,516 -- 21,227 --
Litigation settlement........... -- -- 8,406 --
----------- -------- ---------- -------
Total operating expenses.......... 50,453 1 136,923 3
----------- -------- ---------- -------
Loss from operations.............. (31,099) (1) (95,365) (3)
Interest and other income
(expense), net................... 1,084 -- 2,358 --
----------- -------- ---------- -------
Net loss.......................... $ (30,015) $ (1) $ (93,007) $ (3)
=========== ======== ========== =======
Basic and diluted net loss per
share............................ $ (0.43) $ -- $ (2.26) $ --
=========== ======== ========== =======
Shares used to calculate basic and
diluted net loss per share....... 69,986 9,980 41,142 9,173
=========== ======== ========== =======
Net loss, excluding non-cash
charges related to the
amortization of intangible
assets, stock-based charges and
litigation settlement............ $ (15,620) $ (1) $ (53,182) $ (3)
=========== ======== ========== =======
Basic and diluted net loss per
share, excluding non-cash charges
related to the amortization of
intangible assets, stock-based
charges and litigation
settlement....................... $ (0.22) $ -- $ (1.29) $ --
=========== ======== ========== =======
</TABLE>
3
<PAGE>
Homestore.com, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 90,382 $ 144,304
Marketable equity security......................... 4,230 --
Accounts receivable, net........................... 13,428 10,320
Current portion of prepaid distribution expense.... 7,868 10,461
Deferred royalties................................. 2,032 3,074
Other current assets............................... 3,339 2,584
--------- ---------
121,279 170,743
--------- ---------
Prepaid distribution expense......................... 6,167 5,577
Property and equipment, net.......................... 6,305 5,167
Intangible assets, net............................... 138,612 58,521
Other long-term assets............................... 4,200 322
--------- ---------
Total assets....................................... $ 276,563 $ 240,330
========= =========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 5,349 $ 6,228
Accrued liabilities................................ 23,687 19,211
Deferred revenue................................... 13,478 13,260
Current portion of notes payable................... 37,943 1,797
--------- ---------
Total current liabilities.......................... 80,457 40,496
Notes payable........................................ 633 1,333
--------- ---------
81,090 41,829
--------- ---------
Stockholders' equity:
Convertible preferred stock, $.001 par value....... -- --
Common stock, $.001 par value...................... 70 70
Additional paid-in capital......................... 413,244 396,447
Treasury stock, at cost............................ (13,676) (13,676)
Notes receivable from stockholders................. (13,350) (12,965)
Deferred compensation.............................. (38,947) (45,657)
Accumulated other comprehensive income............. 3,865 --
Accumulated deficit................................ (155,733) (125,718)
--------- ---------
Total stockholders' equity......................... 195,473 198,501
--------- ---------
Total liabilities and stockholders' equity......... $ 276,563 $ 240,330
========= =========
</TABLE>
4
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On February 4, 1999, NetSelect, Inc. ("NSI") was merged with and into
Homestore.com, Inc. ("Company") in a non-substantive share exchange, which was
provided for in the agreements governing the formation and operation of
RealSelect, Inc. ("RealSelect"), the operating company. The share exchange
lacked substance since both the Company and NSI were shell companies for their
respective investments in RealSelect, and because the respective underlying
ownership interests of the individual investors were unaffected. Accordingly,
the non-substantive share exchange was accounted for at historical cost. The
share exchange between the Company and NSI is referred to herein as the
"Reorganization". This Reorganization was completed solely to simplify the
Company's legal structure prior to its initial public offering. See Note 1 of
the Homestore.com, Inc. Notes to Consolidated Financial Statements for further
discussion about the Reorganization.
In March 1998, NSI acquired The Enterprise of America, Ltd. (the
"Enterprise") for 525,000 shares of common stock with an estimated fair value
of $525,000, a note payable in the amount of $2.2 million, and $705,000 in
cash and other acquisition related expenses. The acquisition has been
accounted for as a purchase. The acquisition cost has been allocated to the
assets acquired and liabilities assumed based on estimates of their respective
fair values. The excess of purchase consideration over net tangible assets
acquired of $3.9 million has been allocated to goodwill and is being amortized
on a straight-line basis over five years.
In July 1998, NSI acquired MultiSearch Solutions, Inc. ("MultiSearch") for
convertible preferred stock equivalent to 1,625,000 shares of common stock
with an estimated fair value of approximately $4.8 million, a note payable in
the amount of $3.6 million, and $875,000 in cash and other acquisition related
expenses. The acquisition has been accounted for as a purchase. The
acquisition cost has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. The excess of
purchase consideration over net tangible assets acquired of $9.4 million has
been allocated to goodwill and is being amortized on a straight-line basis
over five years.
In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
common stock and convertible preferred stock equivalent to an aggregate of
5,309,058 shares of common stock. The aggregate acquisition cost of $51.7
million was based on terms and preferences of the shares issued in the
transaction relative to the value received by the Company in the April 1999
Series G preferred stock financing. The acquisition has been
5
<PAGE>
accounted for as a purchase. The acquisition cost has been allocated to the
assets acquired and liabilities assumed based on estimates of their respective
fair values. The excess of purchase consideration over net tangible assets
acquired of $42.2 million has been allocated to goodwill and is being
amortized on a straight-line basis over five years.
The following unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1999 and 1998 and the three
months ended September 30, 1998 give effect to the Reorganization and the
acquisitions of The Enterprise, MultiSearch and SpringStreet as if they had
occurred on January 1, 1998. For comparative purposes, we have included a
statement of operations comparing historical operating results for the three
months ended September 30, 1999 with the pro forma operating results for the
three months ended September 30, 1998.
The unaudited pro forma condensed consolidated statements of operations are
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of January 1, 1998 and should
not be construed as being representative of future operating results.
The audited historical financial statements of the Company, NSI, The
Enterprise, MultiSearch and SpringStreet are included in the Company's
prospectus dated August 4, 1999, relating to the Company's initial public
offering ("IPO"). The unaudited pro forma condensed consolidated financial
information presented herein should be read in conjunction with those
financial statements and related notes.
6
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(/1/)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................... $ 18,625 $ 4,900
Cost of revenues........................................... 5,897 2,448
-------- --------
Gross profit............................................... 12,728 2,452
-------- --------
Operating expenses:
Sales and marketing (includes $2,171 in non-cash charges
for the three months ended September 30, 1999).......... 22,574 10,535
Product development...................................... 1,955 2,083
General and administrative............................... 7,034 2,250
Amortization of intangible assets........................ 3,003 2,813
Stock-based compensation................................. 5,290 19,278
Litigation settlement.................................... 8,406
-------- --------
Total operating expenses................................... 48,262 36,959
-------- --------
Loss from operations....................................... (35,534) (34,507)
Interest income, net....................................... 1,308 75
-------- --------
Net loss................................................... (34,226) (34,432)
Repurchase of convertible preferred stock.................. (7,727)
-------- --------
Net loss applicable to common stockholders................. $(34,226) $(42,159)
======== ========
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (0.52) $ (0.95)
======== ========
Shares used to calculate basic and diluted net loss per
share applicable to common stockholders................... 66,063 44,473
======== ========
</TABLE>
- --------
(/1/)See page 10 for a full disclosure of the unaudited pro forma condensed
consolidated statement of operations for the three months ended September
30, 1998. Since there are no pro forma adjustments after June 30, 1999,
the unaudited pro forma condensed consolidated statement of operations
for the three months ended September 30, 1999 reflects our actual
operating results for that period.
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
7
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet Adjustments Forma
------------- ------- ----------- ------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 35,211 $ 2,433 $ -- $ 37,644 $ 2,346 $ -- $ 39,990
Cost of revenues........ 13,007 798 13,805 1,675 15,480
-------- ------- ------ -------- -------- ------- --------
Gross profit............ 22,204 1,635 -- 23,839 671 -- 24,510
-------- ------- ------ -------- -------- ------- --------
Operating expenses:
Sales and marketing
(includes $3,421 in
non-cash charges for
Homestore.com)........ 48,186 4,064 52,250 5,506 57,756
Product development.... 3,322 174 3,496 1,134 4,630
General and
administrative........ 12,953 1,053 14,006 4,416 18,422
Amortization of
intangible assets..... 4,313 261 4,574 4,137(1) 8,711
Stock-based
compensation.......... 9,290 569 9,859 2,243 12,102
Litigation
settlement............ 8,406 8,406 8,406
-------- ------- ------ -------- -------- ------- --------
Total operating
expenses............ 86,470 6,121 92,591 13,299 4,137 110,027
-------- ------- ------ -------- -------- ------- --------
Loss from operations.... (64,266) (4,486) (68,752) (12,628) (4,137) (85,517)
Other income (expense),
net.................... 1,274 (5) 1,269 44 1,313
-------- ------- ------ -------- -------- ------- --------
Net loss................ (62,992) (4,491) (67,483) (12,584) (4,137) (84,204)
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (1,846) (207) 2,053(2)
-------- ------- ------ -------- -------- ------- --------
Net loss applicable to
common stockholders.. . $(64,838) $(4,698) $2,053 $(67,483) $(12,584) $(4,137) $(84,204)
======== ======= ====== ======== ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (2.06)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 31,421
========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (1.41)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 59,664 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
8
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Homestore.com NSI Adjustments Homestore.com Enterprise MultiSearch SpringStreet Adjustments
------------- -------- ----------- ------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ -- $ 8,519 $ -- $ 8,519 $969 $2,054 $ 544 $ --
Cost of revenues... 4,453 4,453 524 947 466
------ -------- ------ -------- ---- ------ ------- -------
Gross profit....... -- 4,066 -- 4,066 445 1,107 78 --
------ -------- ------ -------- ---- ------ ------- -------
Operating expenses:
Sales and
marketing........ 14,773 14,773 174 544 4,412
Product
development...... 3,510 3,510 24 604
General and
administrative... 2 3,861 3,863 274 457 986
Amortization of
intangible
assets........... 1,091 1,091 7,326 (1)
Stock-based
compensation..... 19,518 19,518
------ -------- ------ -------- ---- ------ ------- -------
Total operating
Expenses....... 2 42,753 42,755 448 1,025 6,002 7,326
------ -------- ------ -------- ---- ------ ------- -------
Income (loss) from
operations........ (2) (38,687) (38,689) (3) 82 (5,924) (7,326)
Other income
(expense), net.... 365 365 (32) (24) 144 (154)(4)
------ -------- ------ -------- ---- ------ ------- -------
Net income (loss).. (2) (38,322) (38,324) (35) 58 (5,780) (7,480)
Accretion of
redemption value
and dividends on
convertible
preferred stock... (1,227) 1,227 (2)
Repurchase of
convertible
preferred stock... (7,727) (7,727)
------ -------- ------ -------- ---- ------ ------- -------
Net income (loss)
applicable to
common
stockholders...... $ (2) $(47,276) $1,227 $(46,051) $(35) $ 58 $(5,780) $(7,480)
====== ======== ====== ======== ==== ====== ======= =======
Historical basic
and diluted net
loss per share
applicable to
common
stockholders...... $ --
======
Shares used in the
calculation of
historical basic
and diluted net
loss per share
applicable to
common
stockholders...... 8,901
======
Pro forma basic and
diluted net loss
per share
applicable to
common
stockholders......
Shares used in the
calculation of pro
forma basic and
diluted net loss
per share
applicable to
common
stockholders......
<CAPTION>
Pro
Forma
-----------
<S> <C>
Revenues........... $ 12,086
Cost of revenues... 6,390
-----------
Gross profit....... 5,696
-----------
Operating expenses:
Sales and
marketing........ 19,903
Product
development...... 4,138
General and
administrative... 5,580
Amortization of
intangible
assets........... 8,417
Stock-based
compensation..... 19,518
-----------
Total operating
Expenses....... 57,556
-----------
Income (loss) from
operations........ (51,860)
Other income
(expense), net.... 299
-----------
Net income (loss).. (51,561)
Accretion of
redemption value
and dividends on
convertible
preferred stock...
Repurchase of
convertible
preferred stock... (7,727)
-----------
Net income (loss)
applicable to
common
stockholders...... $(59,288)
===========
Historical basic
and diluted net
loss per share
applicable to
common
stockholders......
Shares used in the
calculation of
historical basic
and diluted net
loss per share
applicable to
common
stockholders......
Pro forma basic and
diluted net loss
per share
applicable to
common
stockholders...... $ (1.44)
===========
Shares used in the
calculation of pro
forma basic and
diluted net loss
per share
applicable to
common
stockholders...... 41,143 (3)
===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
9
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Homestore.com NSI Adjustments Homestore.com SpringStreet Adjustments Pro Forma
------------- -------- ----------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 4,547 $ -- $ 4,547 $ 353 $ -- $ 4,900
Cost of revenues........ 2,267 2,267 181 2,448
------ -------- ----- -------- ------- ------- --------
Gross profit............ -- 2,280 -- 2,280 172 -- 2,452
------ -------- ----- -------- ------- ------- --------
Operating expenses:
Sales and marketing.... 8,408 8,408 2,127 10,535
Product development.... 1,864 1,864 219 2,083
General and
administrative........ 1 1,735 1,736 514 2,250
Amortization of
intangible assets..... 745 745 2,068 (1) 2,813
Stock-based
compensation.......... 19,278 19,278 19,278
------ -------- ----- -------- ------- ------- --------
Total operating
expenses.............. 1 32,030 32,031 2,860 2,068 36,959
------ -------- ----- -------- ------- ------- --------
Loss from operations.... (1) (29,750) (29,751) (2,688) (2,068) (34,507)
Other income (expense),
net.................... (14) (14) 89 75
------ -------- ----- -------- ------- ------- --------
Net loss................ (1) (29,764) (29,765) (2,599) (2,068) (34,432)
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (415) 415 (2)
Repurchase of
convertible preferred
stock.................. (7,727) (7,727) (7,727)
------ -------- ----- -------- ------- ------- --------
Net loss applicable to
common stockholders.... $ (1) $(37,906) $ 415 $(37,492) $(2,599) $(2,068) $(42,159)
====== ======== ===== ======== ======= ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ --
======
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 9,389
======
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.95)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 44,473 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
10
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Pro forma adjustments reflect the following in the unaudited pro forma
condensed consolidated statements of operations:
(1) Amortization of goodwill in connection with the following acquisitions:
<TABLE>
<CAPTION>
Nine months ended
September 30, Three months ended
----------------- September 30,
1999 1998 1998
-------- -------- ------------------
<S> <C> <C> <C>
Enterprise.............................. $ -- $ 188 $ --
MultiSearch............................. -- 934 --
SpringStreet............................ 4,137 6,204 2,068
</TABLE>
(2) Elimination of the accretion of redemption value and dividends on
convertible preferred stock resulting from the assumed conversion of the
Company's preferred stock into common stock in connection with the IPO.
(3) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share applicable to common stockholders
reflect the following, as if they been issued as of January 1, 1998,
except for preferred stock that was not issued in connection with an
acquisition. For this preferred stock, the weighted average shares
reflect the preferred stock as if it had been issued as of January 1,
1998, or the date of issuance, if later:
<TABLE>
<CAPTION>
Nine months ended
September 30, Three months ended
----------------- September 30,
1999 1998 1998
-------- -------- ------------------
<S> <C> <C> <C>
Enterprise acquisition................ -- 525 525
MultiSearch acquisition............... -- 1,625 1,625
SpringStreet acquisition.............. 4,587 4,587 4,587
NSI Reorganization.................... 2,080 5,823 5,823
Conversion of preferred stock in
connection with IPO.................. 17,659 15,765 18,607
Conversion of NAR's RealSelect shares
into Homestore.com shares............ 3,917 3,917 3,917
</TABLE>
(4) Reduction in interest income related to cash paid for The Enterprise and
MultiSearch acquisitions, net of an increase in interest expense related
to interest imputed on the non-interest bearing notes issued in
connection with the acquisitions of The Enterprise ($39,000) and
MultiSearch ($97,000) from January 1, 1998 to the respective acquisition
dates. The notes have been discounted at a discount rate of 10%.
11
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 144,304 $ 71
Accounts receivable, net of allowance for doubtful
accounts of $970 at September 30, 1999........... 10,320
Current portion of prepaid distribution expense... 10,461
Deferred royalties................................ 3,074
Other current assets.............................. 2,584
--------- -------
Total current assets................................ 170,743 71
Prepaid distribution expense........................ 5,577
Property and equipment, net......................... 5,167
Intangible assets, net.............................. 58,521
Other assets........................................ 322
--------- -------
Total assets.................................... $ 240,330 $ 71
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 6,228 $ --
Accrued liabilities............................... 19,211
Due to related party.............................. 70
Deferred revenue.................................. 13,260
Current portion of notes payable.................. 1,797
--------- -------
Total current liabilities........................... 40,496 70
Notes payable....................................... 1,333
Other non-current liabilities....................... 96
--------- -------
41,829 166
--------- -------
Commitments and contingencies (Note 6)..............
Stockholders' equity (deficit):
Common stock, $.001 par value; 10,000 authorized
at December 31, 1998, 500,000 shares authorized
at September 30, 1999; 9,980 and 74,619 shares
issued at December 31, 1998, and September 30,
1999, respectively; 9,980 and 69,557 outstanding
at December 31, 1998, and September 30, 1999,
respectively..................................... 69 10
Additional paid-in capital........................ 396,448 3,312
Treasury stock, at cost; 5,062 shares at September
30, 1999......................................... (13,676)
Notes receivable from stockholders................ (12,965) (551)
Deferred stock compensation....................... (45,657)
Accumulated deficit............................... (125,718) (2,866)
--------- -------
Total stockholders' equity (deficit)............ 198,501 (95)
--------- -------
Total liabilities and stockholders' equity
(deficit)...................................... $ 240,330 $ 71
========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
1999 1998 1999 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues............................. $ 18,625 $ -- $ 35,211 $ --
Cost of revenues..................... 5,897 13,007
---------- -------- --------- -------
Gross profit......................... 12,728 -- 22,204 --
---------- -------- --------- -------
Operating expenses:
Sales and marketing (includes
$2,171 and $3,421 in non-cash
charges for the three and nine
months ended September 30, 1999,
respectively)..................... 22,574 48,186
Product development................ 1,955 3,322
General and administrative......... 7,034 1 12,953 2
Amortization of intangible assets.. 3,003 4,313
Stock-based compensation........... 5,290 9,290
Litigation settlement.............. 8,406 8,406
---------- -------- --------- -------
Total operating expenses............. 48,262 (1) 86,470 2
---------- -------- --------- -------
Loss from operations................. (35,534) (1) (64,266) (2)
Interest income, net................. 1,308 1,274
---------- -------- --------- -------
Net loss............................. (34,226) (1) (62,992) (2)
Accretion of redemption value and
dividends on convertible preferred
stock............................... (369) (1,846)
---------- -------- --------- -------
Net loss applicable to common
stockholders........................ $ (34,595) $ (1) $ (64,838) $ (2)
========== ======== ========= =======
Basic and diluted net loss per share
applicable to common stockholders... $ (0.65) $ -- $ (2.06) $ --
========== ======== ========= =======
Shares used to calculate basic and
diluted net loss per share
applicable to common stockholders... 52,903 9,389 31,421 8,901
========== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes Total
Stock Common Stock Additional Receivable Deferred Stockholders'
--------------- -------------- Paid-in Treasury From Stock Accumulated Equity
Shares Amount Shares Amount Capital Stock Stockholders Compensation Deficit (Deficit)
------- ------ ------ ------ ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1998
(audited)...... -- $ -- 9,980 $10 $ 3,312 $ -- $ (551) $ -- $ (2,866) $ (95)
Reorganization
(Note 1)....... 4,528 5 12,480 12 98,119 (1,770) (3,230) (10,079) (60,860) 22,197
Issuance of
common stock
and Series F
preferred
stock.......... 96 643 3,553 3,553
Issuance of
common stock to
minority
interest....... 1,000 1,000
Exercise of
stock options.. 5,893 5 12,806 (12,601) 210
Repurchase of
common stock... (2,903) (11,906) 3,630 (8,276)
Issuance of
common stock... 350 1,757 (238) 1,519
Repayment from
shareholder.... 25 25
Issuance of
Series G
preferred
stock.......... 341 17,007 17,007
Issuance of
Series H
preferred
stock.......... 845 1 365 51,433 51,434
Deferred stock
compensation... 42,289 (48,289) (6,000)
Stock-based
compensation
and other non-
cash charges... 6,000 12,711 18,711
Accretion of
Series E
redemption
value.......... (159) (159)
Conversion of
convertible
preferred
stock.......... (5,810) (6) 29,050 29 (23) --
Conversion of
redeemable
convertible
preferred
stock.......... 1,625 1 5,123 5,124
Conversion of
NAR shares..... 3,917 4 (4) --
Issuance of
common stock in
initial public
offering....... 8,050 8 144,829 144,837
Exercise of
warrants....... 107 2,000 2,000
Litigation
settlement..... 8,406 8,406
Net loss........ (62,992) (62,992)
------- ----- ------ --- -------- -------- -------- -------- --------- --------
Balance at
September 30,
1999........... -- $ -- 69,557 $69 $396,448 $(13,676) $(12,965) $(45,657) $(125,718) $198,501
======= ===== ====== === ======== ======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1999 1998
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (62,992) $ (2)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 5,179
Provision for doubtful accounts........................... 636
Amortization of discount on notes payable................. 234
Litigation settlement..................................... 8,406
Stock-based compensation.................................. 12,711
Other non-cash items...................................... 853
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (7,736) 2
Prepaid distribution expense............................ (5,484)
Deferred royalties...................................... (1,676)
Other assets............................................ (1,949)
Accounts payable and accrued liabilities................ 10,848 65
Deferred revenue........................................ 6,297
---------- ------
Net cash provided by (used in) operating activities....... (34,673) 65
---------- ------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,893)
Cash assumed from the acquisition of SpringStreet......... 10,186
---------- ------
Net cash provided by investing activities................. 7,293 --
---------- ------
Cash flows from financing activities:
Notes receivable from stockholders........................ 3,655
Proceeds from exercise of stock options................... 1,346
Net proceeds from issuance of common stock................ 167,597
Repurchases of common stock............................... (11,906)
Repayment of notes payable................................ (2,116)
---------- ------
Net cash provided by financing activities................. 158,576 --
---------- ------
Change in cash and cash equivalents....................... 131,196 65
Cash assumed from NetSelect, Inc.......................... 13,037
Cash and cash equivalents, beginning of period............ 71 155
---------- ------
Cash and cash equivalents, end of period.................. $ 144,304 $ 220
========== ======
Supplemental disclosure of cash flow activities
Cash paid during the year for interest.................... $ 31 $ --
========== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Homestore.com, Inc. ("Homestore.com" or "Company") operates a family of web
sites that includes: Homestore.com, a home portal; REALTOR.com, for existing
homes; HomeBuilder.com, for new homes; SpringStreet.com, for rental
properties; Remodel.com, for home improvement activities; and Homefair.com,
which was acquired in October 1999, for moving and relocation activities.
Through its network of web sites, the Company provides a wide variety of
information and communications tools for consumers, real estate industry
professionals, advertisers and providers of home and real estate related
products and services. The Company has strategic relationships with key
industry participants, including real estate market leaders such as the
National Association of REALTORS, the National Association of Home Builders,
the National Association of the Remodeling Industry, the National Association
of Home Builders Remodelors Council, Multiple Listing Services ("MLS"), real
estate franchises, brokers and agents. The Company currently generates
revenues from several sources, including subscription service fees from
agents, brokers, home builders and rental property owners and fees from
advertisers.
Company History
Initial Business--The Company was incorporated in the State of Delaware in
1993 under the name of InfoTouch Corporation ("InfoTouch") with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, the Company began to develop the technology to
build and operate high traffic Internet sites with content related to real
estate.
The RealSelect Venture--Effective December 4, 1996, the Company entered
into a series of agreements with the National Association of REALTORS(R) and
its wholly owned subsidiary Realtors Information Network (together referred to
as the "NAR") and several investors (the "Investors"). Under these agreements,
the Company transferred its recently developed technology and certain of its
assets relating to advertising the listing of residential real estate on the
Internet into NetSelect, LLC ("LLC"), a Delaware limited liability
corporation, in exchange for a 46% ownership interest. The Investors
contributed capital to a newly formed company, NetSelect, Inc. ("NSI"). LLC
received capital funding from NSI and in-turn contributed the assets,
intellectual property and the NSI capital to RealSelect, Inc. ("RealSelect"),
a Delaware corporation, in exchange for common stock representing an 85%
ownership interest.
Also effective December 4, 1996, RealSelect entered into a number of
agreements with and issued cash and RealSelect common stock representing a 15%
ownership interest to the NAR in exchange for the rights to operate the web
site REALTOR.com and pursue commercial opportunities relating to the listing
of real estate on the internet.
Pursuant to the agreements governing RealSelect, the Company was required
to terminate its remaining activities, which were insignificant, and dispose
of its remaining assets and liabilities. Accordingly, following the formation
of RealSelect, NSI, LLC and the Company were only shell companies as they had
no liabilities and no assets other than their respective ultimate investments
in RealSelect. In addition, under the agreements, NSI was the only entity
permitted to raise capital to support RealSelect which, once invested,
increased NSI's ownership interests and diluted the respective ownership
interests of the Company and the NAR in NSI.
Reorganization of RealSelect Holding Structure--Under the RealSelect
agreements, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into the
Company (the "Reorganization"). The share exchange lacked economic substance
since both the Company and NSI were shell companies for their respective
investments in RealSelect, and because the respective underlying ownership
interests of individual investors were unaffected. Accordingly, the non-
substantive exchange was accounted for at historical cost.
16
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. BASIS OF PRESENTATION
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments, except for
litigation settlement) considered necessary for a fair presentation, have been
included. The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the prospectus which is part of the Company's Form S-1
Registration Statement (the "IPO Prospectus"), declared effective August 4,
1999. The results of operations for these interim periods are not necessarily
indicative of the operating results for a full year.
3. STOCKHOLDERS' EQUITY
Initial Public Offering
In August 1999, the Company completed an initial public offering in which
it sold 8,050,000 shares at a price of $20.00 per share, raising $161.0
million in gross proceeds. Offering proceeds to Homestore.com, net of
approximately $11.3 million in underwriters' discounts and commissions were
approximately $149.7 million. As of the closing date of the offering, all of
the shares of convertible preferred stock outstanding, except for one share of
Series A preferred stock held by the National Association of REALTORS(R) ,
were converted into shares of common stock.
Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding.
Shares associated with stock options, warrants and convertible preferred stock
are not included to the extent they are anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
1999 1998 1999 1998
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss....................... $ (34,226) $ (1) $ (62,992) $ (2)
Accretion of redemption value
and dividends on convertible
preferred stock............... (369) (1,846)
---------- -------- --------- -------
Net loss applicable to common
stockholders.................. $ (34,595) $ (1) $ (64,838) $ (2)
========== ======== ========= =======
Denominator:
Weighted average shares........ 52,903 9,389 31,421 8,901
========== ======== ========= =======
Basic and diluted net loss per
share applicable to common
stockholders.................... $ (0.65) $ -- $ (2.06) $ --
========== ======== ========= =======
</TABLE>
4. STOCK SPLIT
On August 4, 1999, the Company effected a 2.5 for 1 stock split of the
outstanding shares of common stock. Accordingly, the accompanying financial
statements and footnotes have been retroactively adjusted to reflect this
stock split.
17
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PRO FORMA FINANCIAL INFORMATION
The following summarized unaudited pro forma financial information assumes
the acquisitions of Enterprise, MultiSearch and SpringStreet occurred at the
beginning of each period presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................... $ 18,625 $ 4,900 $ 39,990 $ 12,086
Net loss.......................... $ (34,226) $ (34,432) $(84,204) $(51,561)
Net loss per share:
Basic and diluted............... $ (0.65) $ (2.12) $ (2.66) $ (3.94)
Weighted average shares......... 52,903 16,270 31,661 13,077
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Molinare Settlement
As previously discussed in the IPO Prospectus, Mr. John D. Molinare filed a
lawsuit against the Company, among other parties, on March 19, 1999 in which
Mr. Molinare was seeking damages of not less than $2.1 million, plus punitive
damages and costs incurred, among other things. On August 4, 1999, the lawsuit
was settled for an immaterial amount.
Other Contingencies
From time to time, the Company is involved in disputes which have arisen in
the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse effect on the
Company's financial position or results of operations.
7. WARRANTS
On August 12, 1999, in exchange for entering into an advertising agreement
with Norwest Mortgage, Inc., the Company issued to it warrants to purchase
500,000 shares at an exercise price of $20.00 per share. The warrants issued
are fully vested, non-forfeitable, are immediately exercisable and expire in
August 2000.
8. STOCK PLANS
During the third quarter of 1999, the Board of Directors adopted and the
stockholders approved, the 1999 Stock Incentive Plan and the 1999 Employee
Stock Purchase Plan. The 1999 Stock Incentive Plan reserves 4,900,000 shares
of common stock for future grants under terms similar to the 1999 Equity
Incentive Plan. The 1999 Employee Stock Purchase Plan reserves 750,000 shares
of common stock for purchase by employees through payroll deductions, with a
purchase price equal to 85% of the lesser of the fair value of the common
stock on the Offering Date or the Purchase Date, as defined in the Plan.
9. SUBSEQUENT EVENTS
Acquisition
On October 31, 1999 the Company completed its acquisition of The
Homebuyer's Fair, Inc. and FAS-Hotline, Inc. (collectively referred to as
"Homefair") pursuant to a stock purchase agreement executed on October 12,
1999. Pursuant to the acquisition, aggregate consideration paid to Homefair
shareholders consisted
18
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $35 million in cash, a $37.5 million note payable and 250,000 shares of the
Company's common stock. The acquisition will be accounted for as a purchase.
Litigation Settlement
On October 22, 1999, the Company and Cendant Corporation announced a
settlement of the pending litigation between the two companies that was
previously discussed in the IPO Prospectus. As part of the settlement, Cendant
received 250,000 shares of the Company's common stock and agreed to take
various actions to reaffirm various alliance agreements with the Company. In
connection with the issuance of the 250,000 shares, the Company recorded a
non-cash charge of $8.4 million.
19
<PAGE>
NETSELECT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, February 4,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,690 $ 13,037
Accounts receivable, net of allowance for doubtful
accounts of $378 and $455 at December 31, 1998 and
February 4, 1999, respectively...................... 2,070 2,333
Current portion of prepaid distribution expense...... 3,830 3,482
Deferred royalties................................... 1,327 1,398
Other current assets................................. 1,674 1,739
-------- --------
Total current assets.................................. 23,591 21,989
Prepaid distribution expense.......................... 7,742 7,072
Property and equipment, net........................... 4,118 2,373
Intangible assets, net................................ 19,724 19,463
Other assets.......................................... 187 286
-------- --------
Total assets....................................... $ 55,362 $ 51,183
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 5,499 $ 4,117
Accrued liabilities.................................. 5,801 6,156
Due to related party................................. 2,200 2,200
Deferred revenue..................................... 5,439 6,065
Current portion of notes payable..................... 1,746 1,746
-------- --------
Total current liabilities............................. 20,685 20,284
Notes payable......................................... 3,236 3,265
-------- --------
23,921 23,549
-------- --------
Commitments and contingencies.........................
Series E redeemable convertible preferred stock, $.001
par value; 325 shares authorized, issued and
Outstanding at December 31, 1998 and February 4,
1999; redemption value of $6,003..................... 4,939 4,963
-------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value; 9,675
shares authorized; 4,959 and 4,959 shares issued at
December 31, 1998 and February 4, 1999,
respectively; 4,528 and 4,528 shares outstanding at
December 31, 1998 and February 4, 1999,
respectively; liquidation preference of $62,048 at
December 31, 1998................................... 5 5
Common stock, $.001 par value; 90,000 authorized;
2,496 and 2,496 issued and outstanding at December
31, 1998 and February 4, 1999, respectively......... 2 2
Additional paid-in capital........................... 96,066 98,129
Treasury stock, at cost; 431 shares of convertible
preferred stock at December 31, 1998 and
February 4, 1999.................................... (1,770) (1,770)
Notes receivable from stockholders................... (3,230) (3,230)
Deferred stock compensation.......................... (8,676) (10,079)
Accumulated deficit.................................. (55,895) (60,386)
-------- --------
Total stockholders' equity......................... 26,502 22,671
-------- --------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity.................... $ 55,362 $ 51,183
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months January 1
Year Ended Ended to
December 31, September 30, February 4,
1998 1998 1999
------------ ------------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues............................... $ 15,003 $ 8,519 $ 2,433
Cost of revenues....................... 7,338 4,453 798
-------- -------- --------
Gross profit........................... 7,665 4,066 1,635
-------- -------- --------
Operating expenses:
Sales and marketing.................. 25,560 14,773 4,064
Product development.................. 4,139 3,510 174
General and administrative........... 6,929 3,861 1,053
Amortization of intangible assets.... 1,893 1,091 261
Stock-based compensation............. 20,455 19,518 569
-------- -------- --------
Total operating expenses............... 58,976 42,753 6,121
-------- -------- --------
Loss from operations................... (51,311) (38,687) (4,486)
Other income (expense), net............ 121 143 (5)
-------- -------- --------
Net loss before minority interest...... (51,190) (38,544) (4,491)
Minority interest...................... 222 222
-------- -------- --------
Net loss............................... (50,968) (38,322) (4,491)
Accretion of redemption value and
dividends on convertible preferred
stock................................. (1,659) (1,227) (207)
Repurchase of convertible preferred
stock................................. (7,727) (7,727)
-------- -------- --------
Net loss applicable to common
stockholders.......................... $(60,354) $(47,276) $(4,698)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Deferred Total
-------------- ------------- Paid-in Treasury from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stock Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997............. 2,614 $ 3 383 $ -- $12,117 $ -- $ -- $ (739) $ (4,927) $ 6,454
Issuance of Series
D preferred...... 681 1 9,999 10,000
Issuance of common
stock for
acquisition of
The Enterprise... 105 525 525
Issuance of Series
F preferred...... 1,664 1 39,701 39,702
Issuance of common
stock............ 1,674 2 10,442 10,444
Exercise of stock
options for notes
receivable....... 221 151 (151) --
Note receivable
from
stockholder...... (3,079) (3,079)
Exercise of
warrants......... 113
Deferred stock
compensation..... 9,497 (9,497) --
Issuance of
warrants and
common stock..... 2,637 2,637
Stock-based
compensation..... 18,895 1,560 20,455
Accretion of
Series E
redemption
value............ (171) (171)
Repurchase of
Series A and B
preferred........ (431) (7,727) (1,770) (9,497)
Net loss.......... (50,968) (50,968)
----- ---- ----- ----- ------- ------- ------- -------- -------- --------
Balance at
December 31,
1998............. 4,528 5 2,496 2 96,066 (1,770) (3,230) (8,676) (55,895) 26,502
Issuance of
warrants
(unaudited)...... 115 115
Deferred stock
compensation
(unaudited)...... 1,972 (1,972) --
Stock-based
compensation
(unaudited)...... 569 569
Accretion of
Series E
redemption value
(unaudited)...... (24) (24)
Net loss
(unaudited)...... (4,491) (4,491)
----- ---- ----- ----- ------- ------- ------- -------- -------- --------
Balance at
February 4, 1999
(unaudited)...... 4,528 $ 5 2,496 $ 2 $98,129 $(1,770) $(3,230) $(10,079) $(60,386) $ 22,671
===== ==== ===== ===== ======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months January 1
Year ended ended to
December 31, September 30, February 4,
1998 1998 1999
------------ ------------- -----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(50,968) (38,572) $(4,491)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 2,551 1,414 339
Provision for doubtful accounts......... 416 240 68
Amortization of discount on notes
payable................................ 215 203 29
Other non-cash items.................... 961 717 206
Minority interest in loss............... (222) (222)
Stock-based compensation................ 20,455 19,518 569
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................... (1,638) (807) (330)
Prepaid distribution expense........... (11,228) (11,796) 1,018
Deferred royalties..................... (1,190) (567) (71)
Due from affiliated company............ 74 (65) (6)
Other assets........................... (3) (606) 178
Accounts payable and accrued
liabilities........................... 8,350 4,383 (1,026)
Deferred revenue....................... 4,125 3,185 626
-------- -------- -------
Net cash used in operating activities... (28,102) (22,975) (2,891)
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment..... (3,853) (1,408) (61)
Acquisition of The Enterprise, net of
cash acquired (705) (705)
Acquisition of MultiSearch, net of cash
acquired (761) (740)
Proceeds from sale of fixed assets...... 1,299
-------- -------- -------
Net cash provided by (used in) investing
activities............................. (5,319) (2,853) 1,238
-------- -------- -------
Cash flows from financing activities:
Repayment of notes payable.............. (1,490) (1,490)
Proceeds from bridge loan............... 12,000 12,000
Repayments on bridge loan............... (1,325)
Note receivable from stockholder........ (3,079) (3,079)
Net proceeds from issuance of common
stock.................................. 8,066 10,462
Net proceeds from issuance of preferred
stock.................................. 40,342 36,700
Repurchase of preferred stock........... (9,497) (9,497)
-------- -------- -------
Net cash provided by financing
activities............................. 45,017 45,096 --
-------- -------- -------
Change in cash and cash equivalents..... 11,596 19,268 (1,653)
Cash and cash equivalents, beginning of
period................................. 3,094 3,094 14,690
-------- -------- -------
Cash and cash equivalents, end of
period................................. $ 14,690 $ 22,362 $13,037
======== ======== =======
Supplemental disclosure of cash flow
activities
Cash paid during the year for
interest............................... $ 170 $ 127 $ --
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
NetSelect, Inc. ("NSI" or the "Company") was incorporated in the state of
Delaware on October 28, 1996. The Company's primary business activity was
managing its investment in NetSelect LLC ("LLC"). Effective December 4, 1996,
the Company made its initial investment in LLC (see Note 3--Investment in
NetSelect, LLC) along with InfoTouch Corporation ("InfoTouch"), the minority
stockholder in LLC. LLC is the majority stockholder of RealSelect, Inc.
("RealSelect"), which is an operating company created to establish an
Internet-based marketing service for real estate.
Pursuant to a number of agreements governing the formation of RealSelect,
both InfoTouch and the Company were required to remain shell companies for
their respective investments in LLC. On February 4, 1999, the Company entered
into a non-substantive share exchange and merged into InfoTouch and NSI ceased
to exist. The Company then changed its name to NetSelect. InfoTouch issued
shares of preferred and common stock and assumed all outstanding NSI options
and warrants for InfoTouch common and preferred stock pursuant to an exchange
ratio equivalent to the respective ownership in LLC of NSI and InfoTouch
stockholders.
2. BASIS OF PRESENTATION
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation, have been included. The balance sheet,
statement of operations and cash flows as of and for the year ended December
31, 1998 have been derived from the audited financial statements at that date.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the prospectus in the
Company's Form S-1 Registration Statement declared effective August 4, 1999.
3. INVESTMENT IN NETSELECT, LLC
Effective December 4, 1996, the Company entered into a series of agreements
with the National Associations of REALTORS, and its wholly owned subsidiary
Realtors Information Network (together referred to as the "NAR"), InfoTouch
and several investors (collectively referred to as the "Investors") in
connection with the formation of RealSelect.
The Company sold $7.0 million of common and preferred stock to the
Investors, the proceeds of which in turn were invested in LLC for an ownership
interest of 54% in LLC. InfoTouch received a 46% interest in LLC for the
transfer of its assets, liabilities and intellectual property relating to the
concept of listing residential real estate on the Internet. The book value of
the net liabilities transferred amounted to $96,000. LLC transferred $5.8
million and the InfoTouch intellectual property to RealSelect, for an 85%
ownership interest in RealSelect. RealSelect received from the NAR the right
to use certain trademarks, an agreement not to compete and in return assumed
certain debt of the NAR. As part of this transaction, RealSelect and the NAR
entered into an operating agreement for the Internet site REALTOR.com, an
agreement not to compete and certain trademark agreements. RealSelect paid the
NAR and its creditors $3.4 million, forgave debt of $266,000 and issued common
stock representing a 15% ownership interest to the NAR.
Since inception, the Company has raised additional capital and issued
common and preferred stock in connection with acquisitions all of which has
been completely invested in RealSelect through LLC. As a result, the ownership
interests of the Company in LLC, and LLC's ownership interest in RealSelect,
increased to 66% and 87%, respectively, as of December 31, 1997, and 79% and
93%, respectively, as of December 31, 1998. The minority investments of
InfoTouch and the NAR in LLC and RealSelect, respectively, have been
eliminated in the consolidated financial statements as each stockholder's
share of the net investee losses have exceeded their investments and there is
no future funding requirements.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so
long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could
cause actual results to differ from the projected results. All statements
other than statements of historical fact that we make in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and our future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed in
our prospectus dated August 4, 1999, relating to our initial public offering.
Overview
We are the leading destination on the Internet for home and real estate
related information, based on the number of advertising products and services,
the number of visitors, time spent on our web sites and the number of property
listings. We are pioneering the use of the Internet to bring the real estate
industry online. Our family of web sites, consisting of Homestore.com,
REALTOR.com, HomeBuilder.com, Remodel.com, SpringStreet.com, and Homefair.com
provides the most comprehensive source of real estate listings and home
related content on the Internet. Through our family of web sites, we provide a
wide variety of information and tools for consumers, real estate industry
professionals, advertisers and providers of real estate related products and
services. We currently generate revenues from several sources, including fees
from agents, brokers, home builders, rental property owners and other
advertisers.
Basis of Presentation
Initial Business and RealSelect Holding Structure. We were incorporated in
1993 under the name of InfoTouch Corporation, or InfoTouch, with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, we began to develop the technology to build and
operate real estate related Internet sites. Effective December 4, 1996, we
entered into a series of agreements with the NAR and several investors. Under
these agreements, we transferred technology and assets relating to advertising
the listing of residential real estate on the Internet to a newly-formed
company, NetSelect LLC, or LLC, in exchange for a 46% ownership interest in
LLC. The investors contributed capital to a newly-formed company, NetSelect,
Inc., or NSI, which owned 54% of LLC. LLC received capital funding from NSI
and in-turn contributed the assets and technology contributed by InfoTouch as
well as the NSI capital to a newly formed entity, RealSelect, Inc., or
RealSelect, in exchange for common stock representing an 85% ownership
interest in RealSelect. Also effective December 4, 1996, RealSelect entered
into a number of formation agreements with, and issued cash and common stock
representing a 15% ownership interest in RealSelect to, the NAR in exchange
for the rights to operate the REALTOR.com web site and pursue commercial
opportunities relating to the listing of real estate on the Internet.
The agreements governing RealSelect required us to terminate our remaining
activities, which were insignificant at that time, and dispose of our
remaining assets and liabilities, which we did in early 1997. Accordingly,
following the formation, NSI, LLC and InfoTouch were shell holding companies
for their investments in RealSelect.
25
<PAGE>
Reorganization of Holding Structure. Under the formation agreements of
RealSelect, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into
InfoTouch. In addition, LLC was merged into InfoTouch. We refer to this
transaction as the Reorganization. The share exchange lacked economic
substance and, therefore, was accounted for at historical cost. We (InfoTouch)
changed our corporate name to Homestore.com, Inc. in August 1999.
Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. For the three and nine
months ended September 30, 1998, and through the Reorganization on February 4,
1999, Homestore.com was a holding company whose sole business was managing its
investment in RealSelect through LLC. This investment was accounted for under
the equity method, and accordingly, Homestore.com did not record the results
of operations related to the operating entity, RealSelect, until the
Reorganization occurred on February 4, 1999. Prior to February 4, 1999, the
results of operations of RealSelect were consolidated by NSI. Thus, all
revenues through February 4, 1999, were recorded by NSI. Pro forma financial
information that includes a comparison of the results of operations of NSI,
LLC, Homestore.com and RealSelect on a combined basis for the three months
ended September 30, 1998 and the nine months ended September 30, 1999 and
1998, has been presented to assist investors in evaluating our historical
financial performance. A comparison of the historical results of operations of
Homestore.com for the three and nine months ended September 30, 1998 has not
been presented because the financial position, results of operations and cash
flows were insignificant for all periods presented prior to the
Reorganization.
Acquisitions. In March 1998, we acquired The Enterprise of America, Ltd.,
or The Enterprise, a provider of web hosting services for real estate brokers,
for $3.0 million in cash, notes and stock, less assumed liabilities. In July
1998, we acquired MultiSearch Solutions, Inc., or MultiSearch, the initial
developer of the HomeBuilder.com web site, for $8.7 million in cash, notes and
stock. In June 1999, we acquired SpringStreet for common stock and convertible
preferred stock equivalent to an aggregate of 5,309,058 shares of common
stock. Each of these acquisitions has been included in the pro forma results
of operations as if they occurred on January 1, 1998. In October 1999, we
acquired all of the outstanding stock of The Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "Homefair"), for $35 million in
cash, a $37.5 million note payable, and 250,000 shares of our common stock.
26
<PAGE>
Pro Forma Results of Operations
The following tables set forth certain pro forma condensed consolidated
statement of operations data for the periods indicated and assume that the
following transactions occurred at the beginning of each period presented:
. our acquisition of The Enterprise for 525,000 shares of common stock
with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, and $705,000 in cash and other acquisition related
expenses;
. our acquisition of MultiSearch for convertible preferred stock
equivalent to 1,625,000 shares of our common stock, with an estimated
fair value of $4.8 million, a note payable in the amount of
$3.6 million, and $875,000 in cash and other acquisition related
expenses;
. our acquisition of SpringStreet for common stock and convertible
preferred stock equivalent to an aggregate of 5,309,058 shares of our
common stock, with an estimated fair value of $51.7 million; and
. the reorganization of our holding company structure as previously
described.
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro Forma Consolidated Statement
of Operations Data:
Revenues.......................... $ 18,625 $ 4,900 $ 39,990 $ 12,086
Cost of revenues.................. 5,897 2,448 15,480 6,390
-------- -------- -------- --------
Gross profit.................... 12,728 2,452 24,510 5,696
Operating expenses:
Sales and marketing............. 22,574 10,535 57,756 19,903
Product development............. 1,955 2,083 4,630 4,138
General and administrative...... 7,034 2,250 18,422 5,580
Amortization of intangible
assets......................... 3,003 2,813 8,711 8,417
Stock-based compensation........ 5,290 19,278 12,102 19,518
Litigation settlement........... 8,406 -- 8,406 --
-------- -------- -------- --------
Total operating expenses........ 48,262 36,959 110,027 57,556
-------- -------- -------- --------
Loss from operations.............. (35,534) (34,507) (85,517) (51,860)
Interest income, net.............. 1,308 75 1,313 299
-------- -------- -------- --------
Net loss.......................... $(34,226) $(34,432) $(84,204) $(51,561)
======== ======== ======== ========
As a Percentage of Pro Forma
Revenues:
Revenues.......................... 100% 100% 100% 100%
Cost of revenues.................. 32 50 39 53
-------- -------- -------- --------
Gross profit.................... 68 50 61 47
Operating expenses:
Sales and marketing............. 120 215 144 165
Product development............. 11 43 12 34
General and administrative...... 38 46 46 46
Amortization of intangible
assets......................... 16 57 22 70
Stock-based compensation........ 29 393 30 161
Litigation settlement........... 45 -- 21 --
-------- -------- -------- --------
Total operating expenses.......... 259 754 275 476
-------- -------- -------- --------
Loss from operations.............. (191) (704) (214) (429)
Interest income, net.............. 7 2 3 2
-------- -------- -------- --------
Net loss.......................... (184)% (702)% (211)% (427)%
======== ======== ======== ========
</TABLE>
27
<PAGE>
Pro Forma Three Months Ended September 30, 1999 and 1998
Revenues
Pro forma revenues increased to $18.6 million for the three months ended
September 30, 1999 from $4.9 million for the three months ended September 30,
1998. The growth in revenues was primarily driven by an increase in the number
of subscribers on the Homestore.com network and increased advertising revenue
related to an overall rise in our site traffic, as well as several sponsorship
agreements signed during the quarter, including the Norwest Alliance Agreement
which was signed in August. The number of professional subscribers on our
family of web sites grew by more than 10,000 during the quarter, representing
an increase of 117% over September 30, 1998.
Cost of Revenues
Pro forma cost of revenues increased to $5.9 million for the three months
ended September 30, 1999 from $2.4 million for the three months ended
September 30, 1998. The increase was due primarily to our overall increased
sales volume and increased activity during the three months ended September
30, 1999 as compared to the three months ended September 30, 1998. Our pro
forma gross margin for the quarter was 68%, up from 50% for the same quarter
in 1998. We anticipate continuing increases in cost of revenues in absolute
dollars as our revenues increase. We also expect that cost of revenues in
absolute dollars will increase as we continue to make investments to increase
the capacity and speed of our family of web sites.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$22.6 million for the three months ended September 30, 1999 from $10.5 million
for the three months ended September 30, 1998. The increase was primarily
attributable to a significant increase in costs associated with Internet
portal distribution and marketing and listing agreements which we entered into
throughout 1998. The increase was also due to the significant growth of our
direct sales force since the third quarter of 1998, resulting in increased
salaries and commissions and related travel and entertainment expenses.
Increased sales volume also contributed to an increase in sales related
collateral materials. Increases in advertising, promotional material and trade
show expenses also contributed to the increase. We expect to significantly
increase the absolute dollar amount of spending in sales and marketing
activities over the next year in an effort to drive consumer traffic to our
family of web sites and to increase brand awareness.
In addition, in the nine months ended September 30, 1999, we recorded the
$6.0 million difference between the deemed fair value of the stock sold in
connection with our Broker Gold program and the price paid as deferred
compensation. We are amortizing this amount ratably over the two-year term of
the Broker Gold agreements, resulting in a non-cash charge of $750,000 for the
three months ended September 30, 1999.
In connection with entering into a distribution agreement with America
Online, Inc. in April 1998, we issued warrants to purchase 792,752 shares of
our common stock at a weighted average exercise price of $7.21 per share. We
incurred a total charge of $12.6 million which is being amortized to sales and
marketing expense over the remaining term of the distribution agreement,
approximately two years. The non-cash charges for these warrants totaled
approximately $1.4 million for the three months ended September 30, 1999.
Product development. Pro forma product development expenses decreased to
$2.0 million for the three months ended September 30, 1999 from $2.1 million
for the three months ended September 30, 1998. Product development expenses
for the three months ended September 30, 1999 include costs associated with
the launch of Remodel.com. Product development expenses for the three months
ended September 30, 1998 consist mainly of site development costs for
REALTOR.com. We believe that a significant level of product development
activity
28
<PAGE>
and expense is required in order to remain competitive with new and existing
web sites. Accordingly, we anticipate that we will continue to devote
substantial resources to product development and that the absolute dollar
amount of these costs will increase in future periods.
General and administrative. Pro forma general and administrative expenses
increased to $7.0 million for the three months ended September 30, 1999 from
$2.2 million for the three months ended September 30, 1998. The increase was
primarily due to hiring key management personnel and increased staffing levels
required to support our significant growth, expanded operations and
infrastructure as a public company. Facility costs associated with our new
corporate office also increased. We expect general and administrative expenses
to increase in absolute dollars as we continue to expand our administrative
infrastructure to support the anticipated growth of our business, including
costs associated with being a public company.
Amortization of intangible assets. Pro forma amortization of intangible
assets was $3.0 million for the three months ended September 30, 1999 as
compared to $2.8 million for the three months ended September 30, 1998.
Stock-based compensation.
Stock Options. In connection with the grant of stock options to employees
during 1997 and 1998 and the nine months ended September 30, 1999, we recorded
aggregate deferred compensation of approximately $23.9 million. This deferred
compensation represented the difference between the deemed fair value of our
common stock for accounting purposes and the exercise price of these options
at the date of grant. Deferred compensation is presented as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options, generally four years.
Stock. In August 1998, we sold convertible preferred stock equivalent to
8,320,245 shares of common stock at a purchase price of $4.80 per share and
8,369,955 shares of common stock at a purchase price of $1.26 per share. We
incurred a charge of $18.9 million which represents the difference between the
deemed fair value of the stock and the price paid by the investors as stock-
based compensation in 1998.
Warrants. In February 1999, we closed a private equity offering to real
estate brokers under our Broker Gold program. We also issued warrants to
purchase up to 358,315 shares of our common stock with an exercise price of
$20 per share. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. We incurred a charge of approximately $4.1 million
which is being recognized as expense over the remaining term of the initial
two year Broker Gold program agreements. The non-cash charge for these
warrants totaled approximately $460,000 for the three months ended September
30, 1999.
During the third quarter of 1999, we issued warrants to purchase 892,192
shares of common stock at a weighted average price of $20 per share to
Multiple Listing Services ("MLS") that agreed to provide their real estate
listings to us for publication on the Internet on a national basis. All
warrants issued are fully vested, non-forfeitable and are immediately
exercisable. We incurred a total charge of approximately $10.4 million which
is being recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. The non-cash charge for these warrants totaled
approximately $1.4 million for the three months ended September 30, 1999.
In August 1999, in exchange for entering into an advertising agreement with
Norwest Mortgage, we issued it a warrant to purchase 500,000 shares of our
common stock at an exercise price of $20.00 per share. This warrant issued is
fully vested, non-forfeitable and is immediately exercisable. We incurred a
charge of approximately $3.5 million which is being recognized over the term
of the agreement. The non-cash charge for this warrant totaled approximately
$290,000 for the three months ended September 30, 1999.
In the future, we may offer up to 425,000 warrants to the Broker Gold
program members who elect to renew their existing listing agreements with us
after their original two year term expires. The broker must also maintain a
minimum number of property listings as well as continue to hold our
securities. If issued, these warrants would have an exercise price based upon
the average of the closing market price of the common stock for the ten
trading days preceding the date which is one day before the warrant is issued.
We would recognize the fair value of the warrants, when issued, as expense
over the two year term of the renewed agreement. This could result in
Homestore.com incurring substantial additional non-cash charges in the future.
29
<PAGE>
Litigation Settlement. On October 22, 1999, we announced a settlement with
Cendant Corporation of the pending litigation that was previously discussed in
our Prospectus. As part of the settlement, Cendant received 250,000 shares of
our common stock and agreed to take various actions to reaffirm various
alliance agreements. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
three months ended September 30, 1999.
Interest Income, Net
Pro forma interest income consists of earnings on our cash and cash
equivalents net of imputed interest expense on the notes payable issued in
connection with our acquisitions of The Enterprise and MultiSearch. Interest
income increased to $1.3 million for the three months ended September 30, 1999
from $75,000 for the three months ended September 30, 1998. The increase was
primarily due to interest income earned on a higher average cash balances as a
result of our IPO proceeds.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes for the nine months ended September 30, 1999 and 1998. As of December
31, 1998, we had $36.7 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2007. We have provided a full
valuation allowance on our deferred tax assets, consisting primarily of net
operating loss carryforwards, due to the likelihood that we may not generate
sufficient taxable income during the carry-forward period to utilize the net
operating loss carryforwards.
Pro Forma Nine Months Ended September 30, 1999 and 1998
Revenues
Pro forma revenues increased to $40.0 million for the nine months ended
September 30, 1999 from $12.1 million for the nine months ended September 30,
1998. The increase was primarily due to growth across our business, including
the number of agent and broker web site home pages sold and sponsorships,
including the Norwest Alliance agreement signed in August 1999. Banner
advertising revenues also increased primarily as a result of increased traffic
to our web sites in the first nine months of 1999 as compared to the first
nine months of 1998.
Cost of Revenues
Pro forma cost of revenues increased to $15.5 million for the nine months
ended September 30, 1999 from $6.4 million for the nine months ended September
30, 1998. The increase was due primarily to our overall increased sales volume
and increased activity during the first nine months of 1999 as compared to the
first nine months of 1998. Our pro forma gross margin for the nine months
ended September 30, 1999 was 61%, up from 47% for the same period in 1998. We
anticipate continuing increases in cost of revenues in absolute dollars as our
revenues increase. We also expect that cost of revenues will increase as we
continue to make investments to increase the capacity and speed of our family
of web sites.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$57.8 million for the nine months ended September 30, 1999 from $19.9 million
for the nine months ended September 30, 1998. The increase was primarily
attributable to a significant increase in costs associated with Internet
portal distribution and marketing and listing agreements which we entered into
throughout 1998. The increase was also due to the significant growth of our
direct sales force in the third and fourth quarters of 1998, resulting in
increased salaries and commissions and related travel and entertainment
expenses. Increased sales volume also contributed to an increase in sales
related collateral materials. Increases in advertising, promotional material
and trade show
30
<PAGE>
expenses also contributed to the increase. We expect to significantly increase
the absolute dollar amount of spending in sales and marketing activities over
the next year in an effort to drive consumer traffic to our family of web
sites and to increase brand awareness.
In addition, in the nine months ended September 30, 1999, we recorded the
$6.0 million difference between the deemed fair value of the stock sold in
connection with our Broker Gold program and the price paid as pro forma
deferred compensation. We are amortizing this amount ratably over the two-year
term of the Broker Gold agreements, resulting in a non-cash charge of $2.0
million for the nine months ended September 30, 1999.
In connection with entering into a distribution agreement with America
Online in April 1998, we issued warrants to purchase 792,752 shares of our
common stock at a weighted average exercise price of $7.21 per share. We
incurred a total charge of $12.6 million which is being amortized to sales and
marketing expense over the remaining term of the distribution agreement,
approximately two years. The non-cash charge for these warrants totaled
approximately $1.5 million for the nine months ended September 30, 1999.
Product development. Pro forma product development expenses increased to
$4.6 million for the nine months ended September 30, 1999 from $4.1 million
for the nine months ended September 30, 1998. The increase was primarily due
to costs associated with the launch of Remodel.com, including salaries and
related expenses for staff, as well as contracted services. We believe that a
significant level of product development activity and expense is required in
order to remain competitive with new and existing web sites. Accordingly, we
anticipate that we will continue to devote substantial resources to product
development and that the absolute dollar amount of these costs will increase
in future periods.
General and administrative. Pro forma general and administrative expenses
increased to $18.4 million for the nine months ended September 30, 1999 from
$5.6 million for the nine months ended September 30, 1998. The increase was
primarily due to hiring key management personnel and increased staffing levels
required to support our significant growth and expanded operations and
infrastructure as a public company. Facility costs associated with our new
corporate office also increased. We expect general and administrative expenses
to increase in absolute dollars as we continue to expand our administrative
infrastructure to support the anticipated growth of our business, including
costs associated with being a public company.
Amortization of intangible assets. Pro forma amortization of intangible
assets was $8.7 million for the nine months ended September 30, 1999 as
compared to $8.4 million for the nine months ended September 30, 1998.
Stock-based compensation.
Stock Options. In connection with the grant of stock options to employees
during 1997 and 1998 and the nine months ended September 30, 1999, we recorded
aggregate deferred compensation of approximately $23.9 million. This deferred
compensation represented the difference between the deemed fair value of our
common stock for accounting purposes and the exercise price of these options
at the date of grant. Deferred compensation is presented as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options, generally four years.
Stock. In August 1998, we sold convertible preferred stock equivalent to
8,320,245 shares of common stock at a purchase price of $4.80 per share and
8,369,955 shares of common stock at a purchase price of $1.26 per share. We
incurred a charge of $18.9 million which represents the difference between the
deemed fair value of the stock and the price paid by the investors as stock-
based compensation in 1998.
Warrants. In February 1999, we closed a private equity offering to real
estate brokers under our Broker Gold program. We also issued warrants to
purchase up to 358,315 shares of our common stock with an exercise price of
$20 per share. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. We
31
<PAGE>
incurred a charge of approximately $4.1 million which is being recognized as
expense over the remaining term of the initial two year Broker Gold program
agreements. The non-cash charges for these warrants totaled approximately $2.0
million for the nine months ended September 30, 1999.
During the third quarter of 1999, we issued warrants to purchase 892,192
shares of common stock at a weighted average price of $20 per share to
Multiple Listing Services ("MLS") that agreed to provide their real estate
listings to us for publication on the Internet on a national basis. All
warrants issued are fully vested, non-forfeitable and are immediately
exercisable. We incurred a total charge of approximately $10.4 million which
is being recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. The non-cash charge for these warrants totaled
approximately $1.4 million for the nine months ended September 30, 1999.
In August 1999, in exchange for entering into an advertising agreement with
Norwest Mortgage, we issued it a warrant to purchase 500,000 shares of our
common stock at an exercise price of $20.00 per share. This warrant issued is
fully vested, non-forfeitable and is immediately exercisable. We incurred a
charge of approximately $3.5 million which is being recognized over the term
of the agreement. The non-cash charge for this warrant totaled approximately
$290,000 for the nine months ended September 30, 1999.
In the future, we may offer up to 425,000 warrants to the Broker Gold
program members who elect to renew their existing listing agreements with us
after their original two year term expires. The broker must also maintain a
minimum number of property listings as well as continue to hold our
securities. If issued, these warrants would have an exercise price based upon
the average of the closing market price of the common stock for the ten
trading days preceding the date which is one day before the warrant is issued.
We would recognize the fair value of the warrants, when issued, as expense
over the two year term of the renewed agreement. This could result in
Homestore.com incurring substantial additional non-cash charges in the future.
Litigation Settlement. On October 22, 1999, we announced a settlement with
Cendant Corporation of the pending litigation that was previously discussed in
our Prospectus. As part of the settlement, Cendant received 250,000 shares of
our common stock and agreed to take various actions to reaffirm various
alliance agreements. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
nine months ended September 30, 1998.
Interest Income, Net
Pro Forma interest income consists of earnings on our cash and cash
equivalents net of imputed interest expense on the notes payable issued in
connection with our acquisitions of The Enterprise and MultiSearch. Interest
income increased to $1.3 million for the nine months ended September 30, 1999
from $299,000 for the three months ended September 30, 1998. The increase was
primarily due to interest income earned on a higher average cash balances as a
result of our IPO proceeds.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes for the nine months ended September 30, 1999 and 1998. As of December
31, 1998, we had $36.7 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2007. We have provided a full
valuation allowance on our deferred tax assets, consisting primarily of net
operating loss carryforwards, due to the likelihood that we may not generate
sufficient taxable income during the carry-forward period to utilize the net
operating loss carryforwards.
Liquidity and Capital Resources
Since 1993, we have funded our operations and met our capital expenditure
requirements through the sale of equity securities and through cash generated
from the sale of our products and services and, to a lesser extent, equipment
lease financing. In August 1999, we completed our initial public offering in
which we sold
32
<PAGE>
8,050,000 shares of our common stock at a price of $20.00 per share; raising
$161.0 million in gross proceeds. The offering proceeds, net of approximately
$11.3 million in aggregate underwriters discounts and commissions, were
approximately $149.7 million.
We have had negative cash flows from operating activities since inception.
Net cash used in operating activities was $34.7 million for the nine months
ended September 30, 1999 and $23.0 million in the comparable prior year
period. Net cash used in operating activities in each of these periods was
primarily the result of net operating losses and payments required to be made
relating to our Internet portal distribution and marketing and listing
agreements entered into in 1998. These operating cash outflows were partially
offset by increases in accounts payable, accrued liabilities and deferred
revenues.
Net cash provided in investing activities was $7.3 million for the nine
months ended September 30, 1999, compared to net cash used of $2.9 million in
the comparable prior year period. To date, our investing activities have
consisted of purchases of property and equipment, acquisitions and strategic
operating agreements. Capital expenditures for property and equipment totaled
$3.9 million in 1998 and $2.9 in the nine months ended September 30, 1999.
During the nine months ended September 30, 1999, an additional $3.0 million of
capital expenditures were funded through an equipment lease financing
arrangement. In March 1998 and July 1998, we acquired The Enterprise and
MultiSearch, respectively for an aggregate purchase price of $11.7 million, of
which $1.6 million represented cash payments.
Net cash provided by financing activities was $158.6 million for the nine
months ended September 30, 1999, and $45.1 million in the comparable prior
year period. Cash was provided primarily from net proceeds from the sale of
our common and preferred stock. A total of 4.9 million options were exercised
in the nine months ended September 30, 1999. We also repurchased shares of our
common and preferred stock in 1998 and during the nine months ended September
30, 1999.
In April 1999, the Company issued convertible preferred stock equivalent to
1,704,775 shares of common stock for $17.0 million.
On August 11, 1999, the Company issued America Online warrants to purchase
up to 107,527 shares of common stock, at an exercise price of $18.60 per
share. On August 12, 1999, the warrants were exercised in full, resulting in
total proceeds of $2.0 million.
As of September 30, 1999, we had $144.3 million in cash and cash
equivalents. In October 1999, we used $35 million in cash to fund part of the
purchase price paid for Homefair. We currently anticipate that our existing
cash and cash equivalents and any cash generated from operations will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next 12 months. However, we may need to raise
additional funds in order to fund more rapid expansion, to expand our
marketing activities, to develop new or enhance existing services or products,
to respond to competitive pressures or to acquire complementary services,
businesses or technologies. If we are not successful in generating sufficient
cash flow from operations, we may need to raise additional capital through
public or private financing, strategic relationships or other arrangements.
This additional funding, if needed, might not be available on terms acceptable
to us, or at all. Our failure to raise sufficient capital when needed could
have a material adverse effect on our business, results of operations and
financial condition. If additional funds were raised through the issuance of
equity securities, the percentage of our stock owned by our then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of our common and preferred
stock.
33
<PAGE>
HISTORICAL FINANCIAL STATEMENTS OF HOMEFAIR AND
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF HOMEFAIR
On October 31, 1999, Homestore acquired all of the outstanding capital
stock of The Homebuyer's Fair, Inc., an Arizona corporation, or HBF, and FAS-
Hotline, Inc., an Arizona corporation, or FAS, in exchange for $35.0 million
cash, 250,000 shares of Homestore common stock and $37.5 million principal
amount, 10.875% secured subordinated promissory notes, due October 31, 2000.
HBF and FAS were each 80% owned by Central Newspapers, Inc., an Indiana
corporation, and the remaining 20% of the equity of each of HBF and FAS was
held by certain of the respective employees and former employees of HBF and
FAS and an investment partnership whose general partner was an employee of HBF
and FAS. HBF and FAS collectively provide information and services,
principally over the Internet and telephone, relating to moving and
relocation, which include operating the web site Homefair.com. The cash
portion of the acquisition was funded through Homestore's working capital,
including proceeds from its initial public offering. Historical financial
statements of these companies are included with this supplement, together with
pro forma financial information reflecting this acquisition.
34
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED 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 March 1998, NSI acquired The Enterprise of America, Ltd. (the
"Enterprise") for 525,000 shares of common stock with an estimated fair value
of $525,000, a $2.2 million note payable, and $705,000 in cash and other
acquisition related expenses. The acquisition has been accounted for as a
purchase. The acquisition cost has been allocated to the assets acquired and
liabilities assumed based on estimates of their respective fair values. The
excess of purchase consideration over net tangible assets acquired of $3.9
million has been allocated to goodwill and is being amortized on a straight-
line basis over five years.
In July 1998, NSI acquired MultiSearch Solutions, Inc. ("MultiSearch") for
convertible preferred stock equivalent to 1,625,000 shares of common stock
with an estimated fair value of approximately $4.8 million, a $3.6 million
note payable, and $875,000 in cash and other acquisition related expenses. The
acquisition has been accounted for as a purchase. The acquisition cost has
been allocated to the assets acquired and liabilities assumed based on
estimates of their respective fair values. The excess of purchase
consideration over net tangible assets acquired of $9.4 million has been
allocated to goodwill and is being amortized on a straight-line basis over
five years.
In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
common stock and convertible preferred stock equivalent to an aggregate of
5,309,058 shares of common stock. The aggregate acquisition cost of $51.7
million was based on terms and preferences of the shares issued in the
transaction relative to the value received by the Company in the April 1999
Series G preferred stock financing. The acquisition has been accounted for as
a purchase. The acquisition cost has been allocated to the assets acquired and
liabilities assumed based on estimates of their respective fair values. The
excess of purchase consideration over net tangible assets acquired of $42.2
million has been allocated to goodwill and is being amortized on a straight-
line basis over five years.
In October 1999, the Company acquired Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "Homefair" or "Homefair Group") for
$35.0 million in cash, a $37.5 million note payable and 250,000 shares of
common stock 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 is being amortized on a straight-line basis over
five years.
Homestore's unaudited pro forma condensed combined consolidated balance
sheet as of September 30, 1999 gives effect to the acquisition of the Homefair
Group as if it had occurred on September 30, 1999, by combining the balance
sheet of Homefair as of September 30, 1999 with the Company's balance sheet as
of the same date.
35
<PAGE>
Homestore's unaudited pro forma condensed combined consolidated statements
of operations for the nine months ended September 30, 1999 and for the year
ended December 31, 1998 give effect to the acquisition of the Homefair Group
as if it had occurred on January 1, 1998.
Homestore's unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1999 and for the year ended
December 31, 1998 give effect to the Reorganization and the acquisitions of
The Enterprise, MultiSearch, and SpringStreet as if they had occurred on
January 1, 1998.
Homefair Group's unaudited pro forma condensed combined consolidated
statements of operations for the nine months ended September 30, 1999 and for
the year ended December 31, 1998 give effect to the acquisitions of National
School Reporting Services, Inc., FAS-Hotline, Inc. and The Center For Mobility
Resources, Inc. as if they had occurred on January 1, 1998. See page 10 for a
further description of Homefair Group's pro forma presentation.
The unaudited pro forma statements of operations are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of January 1, 1998 and should not be construed
as being representative of future operating results.
The audited historical financial statements of the Company, NSI, The
Enterprise, MultiSearch and SpringStreet are included in the Company's
prospectus dated August 4, 1999, relating to the Company's initial public
offering ("IPO"). The audited historical financial statements of The
Homebuyer's Fair, Inc., FAS-Hotline, Inc. and The Center For Mobility
Resources, Inc. and National School Services, Inc. are included in this
Prospectus Supplement. The unaudited pro forma condensed consolidated
financial information presented herein should be read in conjunction with
those financial statements and related notes.
36
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PROFORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Homestore Homefair Adjustments Pro Forma
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents....... $ 144,304 $ 1,199 $(35,000)(1) $ 110,503
Accounts receivable, net........ 10,320 1,208 (255)(2) 11,273
Current portion of prepaid dis-
tribution expense.............. 10,461 10,461
Deferred royalties.............. 3,074 3,074
Other current assets............ 2,584 272 (89)(3) 2,767
--------- ------- -------- ---------
Total current assets.............. 170,743 2,679 (35,344) 138,078
Prepaid distribution expense...... 5,577 5,577
Property and equipment, net....... 5,167 544 5,711
Intangible assets, net............ 58,521 10,026 (10,026)(4) 141,795
83,274 (5)
Other assets...................... 322 322
--------- ------- -------- ---------
Total assets.................. $ 240,330 $13,249 $ 37,904 $ 291,483
========= ======= ======== =========
Liabilities and Stockholders'
Equity
Current liabilities:
Accounts payable................ $ 6,228 $ 259 $ (255)(2) $ 6,232
Accrued liabilities............. 19,211 142 19,353
Deferred revenue................ 13,260 13,260
Current portion of note pay-
able........................... 1,797 12 37,500 (1) 39,309
Other current liabilities....... 1,398 800 (6) 2,198
--------- ------- -------- ---------
Total current liabilities......... 40,496 1,811 38,045 80,352
Notes payable..................... 1,333 25 1,358
Other non-current liabilities..... 22 22
--------- ------- -------- ---------
41,829 1,858 38,045 81,732
--------- ------- -------- ---------
Stockholders' equity:
Common stock.................... 69 69
Additional paid-in capital...... 396,448 12,300 (12,300)(7) 407,698
11,250 (1)
Treasury stock.................. (13,676) (13,676)
Notes receivable from stockhold-
ers............................ (12,965) (12,965)
Deferred stock compensation..... (45,657) (45,657)
Accumulated deficit............. (125,718) (909) 909 (7) (125,718)
--------- ------- -------- ---------
Total stockholders' equity.... 198,501 11,391 (141) 209,751
--------- ------- -------- ---------
Total liabilities and
stockholders' equity......... $ 240,330 $13,249 $ 37,904 $ 291,483
========= ======= ======== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial Information.
37
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pr o Forma Pro Forma
Homestore(1) Homefair(2) Adjustments Combined
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues................. $ 39,990 $5,467 (151)(2) $ 45,306
Cost of revenues......... 15,480 736 16,216
-------- ------ ------- ---------
Gross profit............. 24,510 4,731 (151) 29,090
-------- ------ ------- ---------
Operating expenses:
Sales and marketing
(includes $3,421 in
non-cash charges for
Homestore)............ 57,756 1,788 (151)(2) 59,393
Product development.... 4,630 395 5,025
General and
administrative........ 18,422 1,155 19,577
Amortization of
intangible assets..... 8,711 1,810 (1,810)(4) 21,202
12,491 (8)
Stock-based
compensation.......... 12,102 12,102
Litigation settlement.. 8,406 8,406
-------- ------ ------- ---------
Total operating
expenses................ 110,027 5,148 10,530 125,705
-------- ------ ------- ---------
Loss from operations..... (85,517) (417) (10,681) (96,615)
Other income (expense),
net..................... 1,313 (89) (4,634)(9) (3,410)
-------- ------ ------- ---------
Net loss................. $(84,204) $ (506) (15,315) $(100,025)
======== ====== ======= =========
Basic and diluted net
loss per share.......... $ (1.41) $ (1.67)
======== =========
Shares used to calculate
basic and diluted net
loss per share.......... 59,664 59,914 (10)
======== =========
</TABLE>
- --------
(1) See page 41 for a full disclosure of Homestore's unaudited pro forma
condensed consolidated statement of operations for the nine months ended
September 30, 1999.
(2) See page 45 for a full disclosure of Homefair's unaudited pro forma
condensed consolidated statement of operations for the nine months ended
September 30, 1999.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial Information.
38
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Homestore(1) Homefair(2) Adjustments Combined
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues................. $ 19,125 $ 3,998 $ 23,123
Cost of revenues......... 9,530 603 10,133
-------- ------- ------- ---------
Gross profit............. 9,595 3,395 12,990
-------- ------- ------- ---------
Operating expenses:
Sales and marketing.... 32,787 1,773 34,560
Product development.... 5,252 333 5,585
General and
administrative........ 9,241 2,367 11,608
Amortization of
intangible assets..... 11,242 2,415 (2,415)(4) 27,897
16,655 (8)
Stock-based
compensation.......... 20,455 20,455
-------- ------- ------- ---------
Total operating
expenses................ 78,977 6,888 14,240 100,105
-------- ------- ------- ---------
Loss from operations..... (69,382) (3,493) (14,240) (87,115)
Other income (expense),
net..................... 340 (252) (6,178)(9) (6,090)
-------- ------- ------- ---------
Net loss................. (69,042) (3,745) (20,418) (93,205)
Repurchase of convertible
preferred stock......... (7,727) (7,727)
-------- ------- ------- ---------
Net loss applicable to
common stockholders..... $(76,769) $(3,745) (20,418) $(100,932)
======== ======= ======= =========
Basic and diluted net
loss per share
applicable to common
stockholders ........... $ (1.79) $ (2.33)
======== =========
Shares used to calculate
basic and diluted net
loss per share
applicable to common
stockholders............ 43,001 43,251(10)
======== =========
</TABLE>
- --------
(1) See pages 42 for a full disclosure of Homestore's unaudited pro forma
condensed consolidated statement of operations for the year ended December
31, 1998.
(2) See pages 46 for a full disclosure of HomeFair's unaudited pro forma
condensed consolidated statement of operations for the year ended December
31, 1998.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial Information.
39
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION
Pro forma adjustments reflect the following in the unaudited pro forma
condensed combined consolidated balance sheet and statements of operations:
(1) Issuance of 250,000 shares of common stock, $35 million in cash and a
$37.5 million note payable
(2) Elimination of intercompany accounts receivable, accounts payable,
revenues and expenses
(3) Valuation allowance related to Homefair's deferred tax assets
(4) Elimination of Homefair's intangible assets and related amortization
(5) Preliminary allocation of the excess purchase consideration over the fair
value of net tangible assets acquired
(6) Estimated acquisition costs
(7) Elimination of Homefair's stockholders' equity, including additional
paid-in capital
(8) Amortization of goodwill
(9) Reduction in interest income related to cash paid as part of the purchase
price, net of an increase in interest expense related to interest on the
note issued in connection with the acquisition
(10) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share applicable to common stockholders
reflect the issuance of 250,000 shares of common stock as part of the
Homefair purchase consideration as if they been issued on January 1, 1998
40
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore NSI Adjustments Homestore SpringStreet Adjustments Forma
--------- ------- ----------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 35,211 $ 2,433 $ -- $ 37,644 $ 2,346 $ -- $ 39,990
Cost of revenues........ 13,007 798 13,805 1,675 15,480
-------- ------- ------ -------- -------- ------- --------
Gross profit............ 22,204 1,635 -- 23,839 671 -- 24,510
-------- ------- ------ -------- -------- ------- --------
Operating expenses:
Sales and marketing
(includes $3,421 in
non-cash charges for
Homestore)........... 48,186 4,064 52,250 5,506 57,756
Product development... 3,322 174 3,496 1,134 4,630
General and
administrative....... 12,953 1,053 14,006 4,416 18,422
Amortization of
intangible assets.... 4,313 261 4,574 4,137 (1) 8,711
Stock-based
compensation......... 9,290 569 9,859 2,243 12,102
Litigation
settlement........... 8,406 8,406 8,406
-------- ------- ------ -------- -------- ------- --------
Total operating
expenses............... 86,470 6,121 92,591 13,299 4,137 110,027
-------- ------- ------ -------- -------- ------- --------
Loss from operations.... (64,266) (4,486) (68,752) (12,628) (4,137) (85,517)
Other income (expense),
net.................... 1,274 (5) 1,269 44 1,313
-------- ------- ------ -------- -------- ------- --------
Net loss................ (62,992) (4,491) (67,483) (12,584) (4,137) (84,204)
Accretion of redemption
value and dividends on
convertible-preferred
stock.................. (1,846) (207) 2,053(2)
-------- ------- ------ -------- -------- ------- --------
Net loss applicable to
common stockholders.... $(64,838) $(4,698) $2,053 $(67,483) $(12,584) $(4,137) $(84,204)
======== ======= ====== ======== ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (2.06)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 31,421
========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (1.41)
========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 59,664 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
41
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjust- Pro Forma Adjust- Pro
Homestore NSI ments Homestore Enterprise MultiSearch SpringStreet ments Forma
--------- -------- ------- --------- ---------- ----------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ -- $ 15,003 $ -- $ 15,003 $969 $2,054 $ 1,099 $ -- $ 19,125
Cost of revenues....... 7,338 7,338 524 947 721 9,530
------- -------- ------ -------- ---- ------ ------- ------- --------
Gross profit........... -- 7,665 -- 7,665 445 1,107 378 -- 9,595
------- -------- ------ -------- ---- ------ ------- ------- --------
Operating expenses:
Sales and marketing... 25,560 25,560 174 544 6,509 32,787
Product development... 4,139 4,139 24 1,089 5,252
General and
administrative....... 3 6,929 6,932 274 457 1,578 9,241
Amortization of
intangible assets.... 1,893 1,893 9,349 (1) 11,242
Stock-based
compensation......... 20,455 20,455 20,455
------- -------- ------ -------- ---- ------ ------- ------- --------
Total operating expenses.. 3 58,976 58,979 448 1,025 9,176 9,349 78,977
------- -------- ------ -------- ---- ------ ------- ------- --------
Loss from operations... (3) (51,311) (51,314) (3) 82 (8,798) (9,349) (69,382)
Other income (expense),
net................... 343 343 (32) (24) 207 (154)(4) 340
------- -------- ------ -------- ---- ------ ------- ------- --------
Net loss............... (3) (50,968) (50,971) (35) 58 (8,591) (9,503) (69,042)
Accretion of redemption
value and dividends on
convertible preferred
stock................. (1,659) 1,659(2) -- --
Repurchase of
convertible preferred
stock................. (7,727) (7,727) (7,727)
------- -------- ------ -------- ---- ------ ------- ------- --------
Net loss applicable to
common stockholders... $ (3) $(60,354) $1,659 $(58,698) $(35) $ 58 $(8,591) $(9,503) $(76,769)
======= ======== ====== ======== ==== ====== ======= ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders... $ --
=======
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders... 9,173
=======
Pro forma basic and
diluted net loss per
share applicable to
common stockholders... $ (1.79)
========
Shares used in the
calculation of pro
forma basic and
diluted net loss per
share applicable to
common stockholders... 43,001 (3)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
42
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Pro forma adjustments reflect the following in the unaudited pro forma
condensed consolidated statements of operations:
(1) Amortization of goodwill in connection with the following acquisitions:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1999 1998
----------------- ------------
<S> <C> <C>
Enterprise.................................. $ -- $ 188
MultiSearch................................. -- 934
SpringStreet................................ 4,137 8,227
</TABLE>
(2) Elimination of the accretion of redemption value and dividends on
convertible preferred stock resulting from the assumed conversion of the
Company's preferred stock into common stock in connection with the IPO.
(3) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share applicable to common stockholders
reflect the following, as if they been issued as of January 1, 1998,
except for preferred stock that was not issued in connection with an
acquisition. For this preferred stock, the weighted average shares reflect
the preferred stock as if it had been issued as of January 1, 1998, or the
date of issuance, if later:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1999 1998
----------------- ------------
<S> <C> <C>
Enterprise acquisition.................... -- 525
MultiSearch acquisition................... -- 1,625
SpringStreet acquisition.................. 4,587 4,587
NSI Reorganization........................ 2,080 5,823
Conversion of preferred stock in connec-
tion with IPO............................ 17,659 17,351
Conversion of NAR's RealSelect shares into
Homestore.com shares..................... 3,917 3,917
</TABLE>
(4) Reduction in interest income related to cash paid for The Enterprise and
MultiSearch acquisitions, net of an increase in interest expense related
to interest imputed on the non-interest bearing notes issued in connection
with the acquisitions of The Enterprise ($39,000) and MultiSearch
($97,000) from January 1, 1998 to the respective acquisition dates. The
notes have been discounted at a discount rate of 10%.
43
<PAGE>
HOMEFAIR GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION
Overview
On September 9, 1998, Homefair acquired National School Reporting Services,
Inc. ("NSRS") for $6.0 million in cash and other acquisition related expenses.
The acquisition was 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 $7.2 million is being amortized on a straight-line basis
over 5 years.
On April 1, 1999, Homefair acquired FAS-Hotline, Inc. and The Center For
Mobility Resources, Inc. (collectively referred to as "FAS") for $4.0 million
in cash and 225 shares of common stock, with an estimated fair value of $1.3
million, and other acquisition related expenses. The acquisition was 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 $4.9
million is being amortized on a straight-line basis over 5 years.
On October 31, 1999, Homestore acquired of all Homefair's outstanding
shares of common stock, at which time Homefair became a wholly-owned
subsidiary of Homestore.
Homefair Group's unaudited pro forma condensed combined consolidated
statements of operations for the nine months ended September 30, 1999 and for
the year ended December 31, 1998 give effect to the acquisitions of NSRS and
FAS as if they had occurred on January 1, 1998.
The unaudited pro forma condensed combined consolidated statements of
operations are not necessarily indicative of the operating results that would
have been achieved had the transactions been in effect as of January 1, 1998
and should not be construed as being representative of future operating
results.
The audited historical financial statements of Homebuyer's Fair, Inc., NSRS
and FAS are included elsewhere in this Prospectus Supplement. The unaudited
pro forma condensed combined consolidated financial information presented
herein should be read in conjunction with those financial statements and
related notes.
44
<PAGE>
HOMEFAIR GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Homefair FAS Homefair Adjustments Pro Forma
-------- ---- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues....................... $5,087 $380 $5,467 $ -- $5,467
Cost of revenues............... 716 20 736 736
------ ---- ------ ----- ------
Gross profit................... 4,371 360 4,731 -- 4,731
------ ---- ------ ----- ------
Operating expenses:
Sales and marketing.......... 1,600 188 1,788 1,788
Product development.......... 291 104 395 395
General and administrative... 1,016 139 1,155 1,155
Amortization of intangible
assets...................... 1,567 1,567 243 (1) 1,810
------ ---- ------ ----- ------
Total operating expenses....... 4,474 431 4,905 243 5,148
------ ---- ------ ----- ------
Loss from operations........... (103) (71) (174) (243) (417)
Other expense, net............. (606) (606) (60)(2) (89)
577 (5)
------ ---- ------ ----- ------
Net loss....................... $ (709) $(71) $ (780) $ 274 $ (506)
====== ==== ====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
45
<PAGE>
HOMEFAIR GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Homefair FAS NSRS Homefair Adjustments Pro Forma
-------- ------ ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $2,072 $1,311 $ 615 $ 3,998 $ -- $ 3,998
Cost of revenues........ 261 189 153 603 603
------ ------ ------- ------- ------- -------
Gross profit............ 1,811 1,122 462 3,395 -- 3,395
------ ------ ------- ------- ------- -------
Operating expenses:
Sales and marketing... 528 610 635 1,773 1,773
Product development... 133 27 173 333 333
General and
administrative....... 736 599 1,567 2,902 (535)(3) 2,367
Amortization of
intangible assets.... 480 480 1,935 (1) 2,415
------ ------ ------- ------- ------- -------
Total operating ex-
penses............... 1,877 1,236 2,375 5,488 1,400 6,888
------ ------ ------- ------- ------- -------
Loss from operations.... (66) (114) (1,913) (2,093) (1,400) (3,493)
Other expense, net...... (165) (10) (175) (240)(2) (252)
163 (5)
------ ------ ------- ------- ------- -------
Net loss................ (231) (114) (1,923) (2,268) (1,477) (3,745)
Accrued dividends on
convertible preferred
stock.................. (127) (127) 127 (4)
------ ------ ------- ------- ------- -------
Net loss applicable to
common stockholders.... $ (231) $ (114) $(2,050) $(2,395) $(1,350) $(3,745)
====== ====== ======= ======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial Information.
46
<PAGE>
HOMEFAIR GROUP
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
Pro forma adjustments reflect the following in the unaudited pro forma
condensed consolidated statements of operations:
(1) Amortization of goodwill in connection with the following acquisitions:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1999 1998
----------------- ------------
<S> <C> <C>
FAS......................................... $243 $975
NSRS........................................ -- 960
</TABLE>
(2) Reduction in interest income due to cash paid for FAS and NSRS
(3) Elimination of NSRS's stock-based compensation
(4) Elimination of NSRS's accrued dividends on redeemable convertible preferred
stock
(5) Elimination of Homefair's income tax expense
47
<PAGE>
The Homebuyer's Fair, Inc.
Report on Consolidated Financial Statements
For the years ended December 31, 1997 and 1998
and for the nine months ended September 30, 1999
48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Homebuyer's Fair, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of The
Homebuyer's Fair, Inc. and its subsidiaries (the "Company") at December 31,
1997 and 1998 and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Century City, California
November 22, 1999
49
<PAGE>
THE HOMEBUYER'S FAIR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1997 1998 1999
-------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 96,185 $ 469,486 $ 1,198,888
Accounts receivable, net of allowance for
doubtful accounts of $4,300 at December
31, 1997, $99,901 at December 31, 1998,
and $226,647 at September 30, 1999....... 43,004 235,287 1,208,021
Deferred tax asset........................ 59,296 11,366 88,957
Due from related party.................... -- -- 125,250
Prepaids and other current assets......... -- 31,088 58,001
-------- ---------- -----------
Total current assets........................ 198,485 747,227 2,679,117
Property and equipment, net................. 24,761 183,026 543,486
Goodwill, net............................... -- 6,717,571 10,026,020
-------- ---------- -----------
Total assets............................ $223,246 $7,647,824 $13,248,623
======== ========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................... $ 7,250 $ 132,834 $ 259,122
Accrued liabilities....................... -- 81,718 142,075
Income taxes payable...................... 37,289 151,916 803,230
Deferred rent............................. -- 13,591 --
Due to related party...................... 5,284 21,466 144,454
Deferred revenue.......................... 143,203 380,183 450,049
Current portion of capital lease
obligation............................... -- 10,649 11,909
-------- ---------- -----------
Total current liabilities................... 193,026 792,357 1,810,839
Notes payable............................... -- 25,000 25,000
Capital lease obligation.................... -- 31,009 21,920
-------- ---------- -----------
193,026 848,366 1,857,759
-------- ---------- -----------
Commitments and contingencies (Note 9)......
Stockholders' equity:
Common stock, no par value; 2,000 shares
authorized, issued and outstanding at
December 31, 1997 and 1998 and September
30, 1999................................. -- -- --
Additional paid-in capital................ -- 7,000,000 12,300,000
Accumulated earnings (deficit)............ 30,220 (200,542) (909,136)
-------- ---------- -----------
Total stockholders' equity.............. 30,220 6,799,458 11,390,864
-------- ---------- -----------
Total liabilities and stockholders'
equity................................. $223,246 $7,647,824 $13,248,623
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
THE HOMEBUYER'S FAIR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
------------------- September 30,
1997 1998 1999
-------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Revenues..................................... $635,669 $2,072,165 $5,087,297
Cost of revenues............................. 44,739 261,217 716,193
-------- ---------- ----------
Gross profit................................. 590,930 1,810,948 4,371,104
-------- ---------- ----------
Operating expenses:
Sales and marketing........................ 90,946 528,019 1,599,815
Product development........................ 1,000 132,542 291,350
General and administrative................. 137,713 736,518 1,015,690
Amortization of intangible assets.......... -- 479,826 1,567,173
-------- ---------- ----------
Total operating expenses..................... 229,659 1,876,905 4,474,028
-------- ---------- ----------
Income (loss) from operations................ 361,271 (65,957) (102,924)
Other income (expense)....................... 3,917 (2,248) (28,498)
-------- ---------- ----------
Income (loss) before income tax.............. 365,188 (68,205) (131,422)
Income tax benefit (expense)................. 22,007 (162,557) (577,172)
-------- ---------- ----------
Net income (loss)............................ $387,195 $ (230,762) $ (708,594)
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
51
<PAGE>
THE HOMEBUYER'S FAIR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
------ ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997...................... -- $ -- $ -- $ (67,194) $ (67,194)
Reorganization............. 2,000
Distributions.............. (289,781) (289,781)
Net income................. 387,195 387,195
----- ---- ----------- --------- -----------
Balance at December 31,
1997....................... 2,000 -- -- 30,220 30,220
Capital contributions made
in connection with
acquisition............... 7,000,000 7,000,000
Net loss................... (230,762) (230,762)
----- ---- ----------- --------- -----------
Balance at December 31,
1998...................... 2,000 -- 7,000,000 (200,542) 6,799,458
Capital contributions made
in connection with
acquisitions (unaudited).. 5,300,000 5,300,000
Net loss (unaudited)....... (708,594) (708,594)
----- ---- ----------- --------- -----------
Balance at September 30,
1999 (unaudited).......... 2,000 $ -- $12,300,000 $(909,136) $11,390,864
===== ==== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
52
<PAGE>
THE HOMEBUYER'S FAIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
---------------------- September 30,
1997 1998 1999
--------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 387,195 $ (230,762) $ (708,594)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 4,222 27,750 94,106
Provision for doubtful accounts......... 4,300 95,601 126,746
Deferred rent........................... -- (2,360) (13,591)
Amortization of intangible assets....... -- 479,826 1,567,173
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................... (11,695) (277,905) (928,039)
Other assets.......................... (23,843) (20,445)
Deferred income taxes................. (59,296) 47,930 (77,591)
Accounts payable and accrued
liabilities.......................... 49,823 (266,954) 816,470
Deferred revenues..................... (43,870) (214,830) 69,866
--------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 330,679 (365,547) 926,101
--------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment..... (20,595) (26,994) (241,486)
Acquisition of NSRS, net of cash
acquired............................... -- (5,845,400) --
Acquisition of FAS & CMR, net of cash
acquired............................... -- -- (3,940,269)
--------- ----------- -----------
Net cash used in investing activities... (20,595) (5,872,394) (4,181,755)
--------- ----------- -----------
Cash flows from financing activities:
Capital contributions from Central
Newspaper, Inc. ....................... -- 7,000,000 4,000,000
Capital distributions................... (289,781) -- --
Repayment of note payable............... -- (405,000) --
Net proceeds from (payments to) related
parties................................ -- 16,242 (7,115)
Repayment of capital lease obligation... -- -- (7,829)
--------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (289,781) 6,611,242 3,985,056
--------- ----------- -----------
Change in cash and cash equivalents..... 20,303 373,301 729,402
Cash and cash equivalents, beginning of
period................................. 75,882 96,185 469,486
--------- ----------- -----------
Cash and cash equivalents, end of
period................................. $ 96,185 $ 469,486 $ 1,198,888
========= =========== ===========
Supplemental disclosure of non-cash
investing activities:
Net assets acquired (liabilities
assumed) in connection with
acquisitions........................... $ -- $(1,197,397) $ 424,379
========= =========== ===========
Issuance of equity in connection with
the acquisition of CMR, Inc. .......... $ -- $ -- $ 1,300,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
53
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business:
The Company--The Homebuyer's Fair, Inc. (the "Company") is an Arizona
corporation and subsidiary of Central Newspapers, Inc. ("CNI"), a media and
information company. The Company provides internet-based relocation-related
services and information to individuals who are relocating and to corporations
who are relocating employees.
In September 1998, the Company acquired 100% of National School Reporting
Services, Inc.'s ("NSRS") issued and outstanding common stock at which time
NSRS became a wholly-owned subsidiary of the Company. NSRS provides internet-
based information related to schools across the nation.
In April 1999, the Company acquired 80% of FAS Hotline, Inc.'s ("FAS") and
100% of The Center for Mobility Resources, Inc.'s ("CMR") issued and
outstanding common stock through its parent company, CNI. FAS provides a full
range of both domestic and international relocation services and information
to both individuals and corporations. The information is compiled and
presented in an automated fashion through CMR's web sites.
Effective October 31, 1999, Homestore.com, Inc. acquired from CNI and
minority shareholders all of the Company and its subsidiaries' outstanding
shares of common stock, at which time the Company became a wholly-owned
subsidiary of Homestore.com, Inc.
2. Summary of Significant Accounting Policies:
Basis of Presentation--The consolidated financial statements of the Company
reflect the financial position, results of operations and cash flows of NSRS
from September 10, 1998, and FAS and CMR from April 1, 1999. All intercompany
transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial Information--The interim consolidated financial
information of the Company for the nine months ended September 30, 1999 is
unaudited. The unaudited interim financial information has been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows as of and for the nine months ended
September 30, 1999.
Use of Estimates--The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results may differ from
those estimates.
Cash Equivalents--The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of deposits in money market funds.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and
accounts receivable. Cash and cash equivalents are deposited with high credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located in the United States. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
54
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues generated from one of the Company's customers accounted for 27% of
net revenues for the year ended December 31, 1997 and revenues generated from
another customer accounted for 12% of net revenues for the year ended December
31, 1998. No customers accounted for more than 10% of net revenues for the
nine months ended September 30, 1999 (unaudited). At September 30, 1999
(unaudited), one customer accounted for 13% of net accounts receivable.
Fair Value of Financial Instruments--The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
and notes payable are carried at cost, which approximates their fair values
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally five years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Goodwill--Goodwill resulted from the acquisitions of NSRS, FAS and CMR.
This goodwill is being amortized on a straight-line basis over the estimated
period of benefit of five years (Note 5).
The Company reviews its long-lived and intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows attributable to
such assets to their carrying value. If the carrying value of the assets
exceeds the forecasted undiscounted cash flows, then the assets are written
down to their fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--The Company sells leads and referrals to companies in
the relocation industry services pursuant to short-term contracts. Revenue
from leads and referrals is recognized as leads and referrals are delivered.
The Company also sells banner advertising pursuant to short-term contracts.
Advertising revenue is recognized based upon the lesser of impressions
delivered over the total number of guaranteed impressions or ratably in the
period in which the advertisement is displayed, provided that no significant
company obligations remain and collection of the resulting receivable is
probable. Company obligations typically include the guarantee of a minimum
number of impressions or times that an advertisement appears in pages viewed
by the users of the Company's online properties. Revenues are also derived
from the sale of marketing and advertising products and services to real
estate agents and brokers. Substantially all of the agent marketing products
and services are sold on a monthly, quarterly or annual subscription basis.
Accordingly, such revenues are deferred and recognized ratably over the period
services are provided.
Product Development Costs--Product development costs incurred by the
Company to develop, enhance, manage, monitor and operate the Company's web
sites are expensed as incurred. Costs related to the research and compiling of
information for the Company's web sites are expensed as incurred.
Advertising Expense--Advertising costs are expensed as incurred and totaled
$52,823, $88,591 and $481,227 (unaudited) for the years ended December 31,
1997 and 1998 and for the nine months ended September 30, 1999, respectively.
Income Taxes--Income taxes are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
55
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year End--The Company operates under thirteen-week calendar
quarters. For financial statement presentation purposes, however, the
reporting periods are referred to as ended on the last calendar day of the
period. The accompanying consolidated financial statements for the years ended
December 31, 1997 and 1998 are for the fifty-two weeks ended December 28, 1997
and December 27, 1998, respectively. The accompanying unaudited consolidated
financial statements for the nine-months ended September 30, 1999 are for the
thirty-nine weeks ended September 26, 1999.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 in the first quarter of 1999 did not have a significant
impact on the Company's financial position, results of operations or cash
flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on the Company's financial position, results of operations
or cash flows.
3. Acquisitions:
Effective September 9, 1998, the Company acquired all the outstanding
shares of NSRS, a Delaware corporation, in exchange for $6,000,000 in cash.
This acquisition was funded through the Company's parent, CNI. The transaction
has been accounted for as a purchase. The excess of purchase consideration
over the net tangible assets acquired of $7,197,397 has been allocated to
goodwill and is being amortized on a straight-line basis over five years. The
purchase agreement also provides for certain contingent earn-out payments in
the event that a predetermined level of earnings is achieved. For the year
ended December 31, 1998 and for the nine months ended September 30, 1999 no
earn-out payments were earned under the terms of this agreement.
Effective April 1, 1999, the Company acquired 80% of the outstanding shares
of FAS, an Arizona corporation, in exchange for $4,000,000 in cash. This
acquisition was funded through the Company's parent, CNI. The transaction has
been accounted for as a purchase. The excess of purchase consideration over
the net tangible assets acquired of $3,659,792 has been allocated to goodwill
and is being amortized on a straight-line basis over five years. The purchase
agreement also provides for certain contingent earn-out payments in the event
that a predetermined level of earnings is achieved. For the nine months ended
September 30, 1999, no earn-out payments were earned under the terms of this
agreement.
Effective April 1, 1999, the Company acquired 100% of the outstanding
shares of CMR through the Company's parent, CNI. Prior to this acquisition,
CNI had owned 89% of the Company. In exchange for 9% of the Company's equity
held by CNI valued at $1,300,000, the Company acquired 100% of CMR. The
transaction has been accounted for as a purchase. The excess of purchase
consideration over the net tangible assets acquired of $1,215,830 has been
allocated to goodwill and is being amortized on a straight-line basis over
five years. The
56
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase agreement also provides for certain contingent earn-out payments in
the event that a predetermined level of earnings is achieved. For the nine
months ended September 30, 1999, no earn-out payments were earned under the
terms of this agreement.
The following summarized unaudited pro forma financial information assumes
the acquisitions of NSRS, FAS and CMR occurred at the beginning of each
period:
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months Ended
---------------------- September 30,
1997 1998 1999
---------- ---------- -----------------
<S> <C> <C> <C>
Revenues.............................. 2,127,000 3,998,000 5,467,000
Net loss.............................. (4,850,000) (3,908,000) (1,083,000)
</TABLE>
4. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Computer equipment........................... $29,915 $125,326 $ 569,781
Furniture and fixtures....................... -- 13,062 19,954
Leasehold improvements....................... -- 36,142 39,361
Equipment under capital lease................ -- 41,400 41,400
------- -------- ---------
29,915 215,930 670,496
Less: Accumulated depreciation including
capital lease amortization of $0, $3,577,
and $8,406 at December 31, 1997 and 1998,
and September 30, 1999 (unaudited),
respectively................................ (5,154) (32,904) (127,010)
------- -------- ---------
$24,761 $183,026 $ 543,486
======= ======== =========
</TABLE>
5. Goodwill:
Goodwill consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Goodwill--NSRS....................................... $7,197,397 $ 7,197,397
Goodwill--FAS & CMR.................................. -- 4,875,622
---------- -----------
7,197,397 12,073,019
Less: Accumulated amortization....................... (479,826) (2,046,999)
---------- -----------
$6,717,571 $10,026,020
========== ===========
</TABLE>
57
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Related-Party Transactions:
At December 31, 1997 and 1998, the Company owed $5,284 and $21,466,
respectively to a company owned by certain stockholders of the Company. This
liability resulted from the payment of certain operating expenses on behalf of
the Company.
At September 30, 1999, the Company owed $144,454 (unaudited) to its parent
company, CNI. This liability resulted from CNI paying certain database
consulting fees on behalf of the Company.
At September 30, 1999, the Company was owed $125,250 (unaudited) by its
parent company, CNI. This receivable resulted from the Company paying for
certain expenses on behalf of CNI.
7. Note Payable:
In connection with the acquisition of NSRS, the Company assumed a $25,000
note payable, which is due and payable on June 30, 2002.
8. Income Taxes:
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Current Federal.................................... $(29,868) $ (91,816)
Current State...................................... (7,421) (22,811)
Deferred Federal................................... 47,496 (38,392)
Deferred State..................................... 11,800 (9,538)
-------- ---------
$ 22,007 $(162,557)
======== =========
</TABLE>
The following is a summary of deferred tax assets as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating losses.............................. $ -- $ 2,286,061
Depreciation and amortization..................... -- 413,349
Accruals and reserves............................. 59,296 158,173
------- -----------
Total deferred tax assets......................... 59,296 2,857,583
Less: valuation allowance......................... -- (2,846,217)
------- -----------
$59,526 $ 11,366
======= ===========
</TABLE>
As a result of the acquisition of NSRS by the Company, the deferred tax
assets and related valuation allowance of NSRS are included in the Company's
deferred tax asset balance at December 31, 1998. NSRS has net operating loss
("NOL") carryforwards for federal and state income tax purposes of
approximately $5,686,718 which expire beginning in the tax year 2011.
Realization of these NOLs and other deferred tax assets is dependent on future
earnings of NSRS, if any, the timing and the amount of which are uncertain.
Accordingly, based on management's assessment, a valuation allowance, related
solely to the NSRS NOLs and deferred tax assets, has been established to
reflect these uncertainties. The valuation allowance increased by $0 and
$2,846,217 during the years ended December 31, 1997 and 1998, respectively.
58
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company was acquired by CNI in October 1997 thereby terminating the
Company's Limited Liability Company ("LLC") status. LLCs generally are treated
as partnerships for tax purposes and thus income and losses of LLCs flow
through to the partners and are taxed on the partners' income tax returns.
Following the acquisition, the Company's income and losses were included in
CNI's consolidated income tax return.
The provision for income taxes results in an effective tax rate that
differs from the federal statutory rate as a result of the acquisition of the
Company by CNI and nondeductible goodwill.
<TABLE>
<CAPTION>
For the years
ended December 31,
-------------------
1997 1998
--------- --------
<S> <C> <C>
Federal statutory provision (benefit).................. $ 130,354 $(26,409)
State taxes, net of federal benefit.................... (2,847) 21,027
Permanent differences.................................. (149,514) 167,939
--------- --------
$ (22,007) $162,557
========= ========
</TABLE>
9. Commitments and Contingencies:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2001. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and increases in the Consumer Price Index.
Future minimum lease payments under these operating leases as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 47,154
2000............................................................. 97,426
2001............................................................. 12,520
--------
Total.......................................................... $157,100
========
</TABLE>
Rental expense for operating leases was $19,327, $29,400 and $63,506 for
the years ended December 31, 1997 and 1998 and for the nine months ended
September 30, 1999 (unaudited), respectively.
59
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition of NSRS, the Company assumed capital
leases for certain computer, telephone and copier equipment. The future
minimum lease payments under capital leases, (including present value of net
minimum lease payments) as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 16,162
2000.............................................................. 16,162
2001.............................................................. 16,162
2002.............................................................. 3,570
2003.............................................................. 964
--------
Total minimum obligations......................................... 53,020
Less amounts representing interest................................ (11,362)
--------
Present value of minimum obligations.............................. 41,658
Less current portion.............................................. 10,649
--------
Long-term obligations............................................. $ 31,009
========
</TABLE>
Contingencies
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Based on the advice of counsel, management
believes that the resolution of these matters will not have a material adverse
effect on the Company's business, results of operations, financial condition
or cash flows.
60
<PAGE>
FAS-Hotline, Inc. & The Center
For Mobility Resources, Inc.
Combined Financial Statements
For the Years Ended December 31, 1997 and 1998
and for the three months ended March 31, 1999
61
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FAS-Hotline, Inc. and The Center For Mobility Resources, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of FAS-
Hotline, Inc. and The Center For Mobility Resources, Inc. (collectively
referred to as the "Company") at December 31, 1997 and 1998, and the results
of their operations and their cash flows for the years ended December 31, 1997
and 1998, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Century City, California
November 22, 1999
62
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash........................................... $ 66,171 $105,421 $ 59,731
Accounts receivable, net of allowance for
doubtful accounts of $10,000 at December 31,
1997 and 1998, and March 31, 1999............. 108,767 85,046 161,441
Due from related parties....................... -- 11,430 5,744
Other current assets........................... -- -- 6,468
-------- -------- ---------
Total current assets............................. 174,938 201,897 233,384
Property and equipment, net...................... 194,712 186,332 213,081
-------- -------- ---------
Total assets................................. $369,650 $388,229 $ 446,465
======== ======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................... $ 20,914 $ 37,758 $ 22,467
Accrued liabilities............................ 9,424 19,988 6,486
Due to related parties......................... 2,041 5,343 10,607
-------- -------- ---------
Total current liabilities........................ 32,379 63,089 39,560
-------- -------- ---------
Commitments (Note 4).............................
Stockholders' equity:
Common stock, no par value; 100,000 shares
authorized, 2,300 shares issued and
outstanding at December 31, 1997, 1998 and
March 31, 1999................................ -- -- --
Additional paid-in capital..................... 122,891 257,891 515,495
Accumulated earnings (deficit)................. 214,380 67,249 (108,590)
-------- -------- ---------
Total stockholders' equity................... 337,271 325,140 406,905
-------- -------- ---------
Total liabilities and stockholders' equity... $369,650 $388,229 $ 446,465
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
63
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended
--------------------- March 31,
1997 1998 1999
--------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Net revenues................................ $ 681,321 $1,310,842 $ 380,003
Cost of revenues............................ 30,880 188,839 19,509
--------- ---------- ---------
Gross profit................................ 650,441 1,122,003 360,494
--------- ---------- ---------
Operating expenses:
Sales and marketing....................... 278,323 610,191 188,094
Product development....................... 36,219 26,780 103,500
General and administrative................ 377,447 598,801 139,602
--------- ---------- ---------
Total operating expenses.................... 691,989 1,235,772 431,196
--------- ---------- ---------
Net loss.................................... $ (41,548) $ (113,769) $ (70,702)
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
64
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------- Paid-In Accumulated
Shares Amount Capital (Deficit) Total
------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.. 2,300 $ -- $ 2,300 $ 275,928 $ 278,228
Distributions................. (20,000) (20,000)
Capital contributions......... 120,591 120,591
Net loss...................... (41,548) (41,548)
----- ----- -------- --------- ---------
Balance at December 31, 1997.. 2,300 -- 122,891 214,380 337,271
Distributions................. (33,362) (33,362)
Capital contributions......... 135,000 135,000
Net loss...................... (113,769) (113,769)
----- ----- -------- --------- ---------
Balance at December 31, 1998.. 2,300 -- 257,891 67,249 325,140
Distributions (unaudited)..... (105,137) (105,137)
Capital contributions
(unaudited).................. 257,604 257,604
Net loss (unaudited).......... (70,702) (70,702)
----- ----- -------- --------- ---------
Balance at March 31, 1999
(unaudited).................. 2,300 $ -- $515,495 $(108,590) $ 406,905
===== ===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
65
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended
-------------------- March 31,
1997 1998 1999
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (41,584) $(113,769) $ (70,702)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............ 10,000 -- --
Depreciation and amortization.............. 56,472 100,610 40,875
Changes in operating assets and
liabilities:
Accounts receivable and related party
receivables............................. 104,092 12,292 (70,709)
Other current assets..................... -- -- (6,468)
Accounts payable and other current
liabilities............................. (8,609) 30,710 (23,529)
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ 120,371 29,843 (130,533)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........ (164,293) (92,231) (67,624)
--------- --------- ---------
Net cash used in investing activities...... (164,293) (92,231) (67,624)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from capital contributions........ 120,591 135,000 257,604
Capital distributions...................... (20,000) (33,362) (105,137)
--------- --------- ---------
Net cash provided by financing activities.. 100,591 101,638 152,467
--------- --------- ---------
Change in cash............................. 56,669 39,250 (45,690)
Cash, beginning of period.................. 9,502 66,171 105,421
--------- --------- ---------
Cash, end of period........................ $ 66,171 $ 105,421 $ 59,731
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
66
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business:
FAS-Hotline, Inc. ("FAS") and The Center for Mobility Resources, Inc.
("CMR") (the "Companies" or "Company") are Arizona corporations that were
formed on July 7, 1994 and March 9, 1995, respectively. The Company is a
provider of a full range of both domestic and international relocation
services, which include cost of living comparisons, homemarketing and selling,
homebuying, mortgage information and van line services, and rental property
support.
Effective April 1, 1999, The Homebuyer's Fair, Inc. ("HBF") acquired 100%
of CMR's outstanding shares of Common Stock, and Central Newspapers, Inc.
("CNI") (CNI, parent company of HBF) acquired 80% of FAS's outstanding shares
of Common Stock, at which time the Companies effectively became wholly owned
subsidiaries of HBF and its parent, CNI.
On October 31, 1999, Homestore.com acquired all of HBF and its
subsidiaries' outstanding shares of common stock, at which time the Company
became a wholly-owned subsidiary of Homestore.com, Inc.
2. Summary of Significant Accounting Policies:
Basis of Presentation--The combined financial statements include the
accounts of the Companies. All intercompany transactions and balances have
been eliminated in combination.
Unaudited Interim Financial Information--The interim consolidated financial
information of the Company for the three months ended March 31, 1999 is
unaudited. The unaudited interim financial information has been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows as of and for the three months ended
March 31, 1999.
Use of Estimates--The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of risk consist of cash and accounts
receivable. Cash is deposited with high credit quality financial institutions.
The Company's accounts receivable are derived from revenue earned from
customers located in the United States. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of its accounts
receivable.
During the years ended December 31, 1997 and 1998 and for the three months
ended March 31, 1999 (unaudited) no customers accounted for more than 10% of
net revenues or net accounts receivable.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally five years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Long-Lived Assets--The Company continually reviews the recoverability of
the carrying value of long-lived assets. The Company also reviews long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
attributable to such assets to their carrying value. If the
67
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
carrying value of the assets exceeds the forecasted undiscounted cash flows,
then the assets are written down to their fair value, Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature
of the assets.
Revenue Recognition--The primary source of the Company's revenue is derived
from the sale of referrals to van lines, mortgage providers and other
companies in the real estate and relocation industry. Revenue is recognized as
such referrals are made.
Product Development Costs--Costs related to the research and compiling of
cost of living information is expensed as incurred.
Advertising Expenses--Advertising costs are expensed as incurred and
totalled $32,928, $42,168 and $27,009 (unaudited) for the years ended December
31, 1997 and 1998 and for the three months ended March 31, 1999, respectively.
Income Taxes--Income taxes are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 in the first quarter of 1999 did not have a significant
impact on the Company's financial position, results of operations or cash
flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on the Company's financial position, results of operations
or cash flows.
3. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
Computer equipment.......................... $235,430 $ 312,866 $ 380,490
Office furniture and fixtures............... 27,794 42,588 42,588
-------- --------- ---------
263,224 355,454 423,078
Less: Accumulated depreciation.............. (68,512) (169,122) (209,997)
-------- --------- ---------
$194,712 $ 186,332 $ 213,081
======== ========= =========
</TABLE>
68
<PAGE>
FAS-HOTLINE, INC. AND CMR, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
4. Commitments:
The Company leases its office facility under a three year noncancellable
operating lease. The lease contains renewal options and payments that may be
adjusted for increases in operating expenses and increases in the Consumer
Price Index. Future minimum lease payments under this noncancellable operating
lease as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 50,190
2000.............................................................. 52,426
2001.............................................................. 8,770
--------
Total......................................................... $111,386
========
</TABLE>
Rent expense was $17,506, $31,856 and $8,355 (unaudited) for the years
ended December 31, 1997 and 1998, and for the three months ended March 31,
1999, respectively.
5. Related Party Transactions:
At December 31, 1997 and 1998 and as of March 31, 1999, the Company had an
outstanding receivable due from HBF in the amount of $0, 11,430, and $5,744
(unaudited), respectively. This receivable resulted from FAS paying certain
operating expenses on behalf of HBF.
At December 31, 1997 and 1998, and as of March 31, 1999, the Company owed
$2,041, $5,343, and $10,607 (unaudited), respectively to HBF. This liability
resulted from HBF paying certain operating expenses on behalf of the Company.
During the year ended December 31, 1998, the Company paid sales commissions
to two of the Company's stockholders amounting to $199,907.
During 1997 and 1998, the Company entered into a consulting agreement with
a shareholder of the Company. The agreement provided for an annual fee of
$80,000 for management services. Included in general and administrative
expenses for 1997 and 1998 are management fees of $80,000, respectively. The
contract was cancelled on January 1, 1999.
6. Income Taxes:
The Companies are Subchapter S corporations for federal and state income
tax purposes. In accordance with federal and state provisions, corporate
earnings flow through to the stockholders and are taxed at the stockholder
level. Deferred income tax assets and liabilities are not considered material
to the financial position of the Companies at December 31, 1997 and 1998, and
March 31, 1999. The provision for income taxes is comprised of the minimum
Arizona franchise tax and is not material for the years ended December 31,
1997 and 1998 and for the three months ended March 31, 1999. Due to the
acquisition of the Companies by HBF on April 1, 1999, the Company's Subchapter
S status terminated (Note 1).
69
<PAGE>
National School Reporting
Services, Inc.
Report on Financial Statements
For the Year Ended December 31, 1997
and for the Period from January 1, 1998 through
September 9, 1998
70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
National School Reporting Services, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of National School Reporting
Services, Inc. (the "Company") at December 31, 1997 and the results of its
operations and its cash flows for the year ended December 31, 1997 and the
period from January 1, 1998 to September 9, 1998, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Century City, California
November 22, 1999
71
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Assets
Current assets:
Cash........................................................... $ 1,797
Accounts receivable, net of allowance for doubtful accounts of
$1,978........................................................ 3,069
Prepaid expenses and other current assets...................... 4,294
-----------
Total current assets............................................. 9,160
-----------
Property and equipment, net...................................... 230,682
Other assets..................................................... 7,004
-----------
Total assets................................................. $ 246,846
===========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity Deficit
Current liabilities:
Accounts payable............................................... $ 108,722
Accrued liabilities............................................ 75,541
Accrued professional fees...................................... 124,215
Due to related party........................................... 67,500
Deferred revenue............................................... 204,116
Deferred rent.................................................. 20,671
Current portion of capital lease obligation.................... 7,775
-----------
Total current liabilities........................................ 608,540
Capital lease obligation......................................... 34,690
Note payable..................................................... 25,000
-----------
668,230
-----------
Commitments (Note 9).............................................
Redeemable convertible preferred stock, $0.01 par value; 7,077
shares authorized,
5,002 issued and outstanding; redemption value of $5,862,024.... 5,862,024
-----------
Stockholders' deficit:
Common stock, $0.01 par value, 11,123,934 shares authorized,
4,166,675 shares issued and outstanding....................... 41,667
Additional paid-in capital..................................... 190,000
Note receivable from stockholder............................... (33,224)
Accumulated deficit............................................ (6,481,851)
-----------
Total stockholders' deficit.................................. (6,283,408)
-----------
Total liabilities and stockholders' equity................... $ 246,846
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
72
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 1,
Year Ended 1998 through
December 31, September 9,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues....................................... $ 810,083 $ 615,058
Cost of revenues................................... 312,001 153,326
----------- -----------
Gross profit....................................... 498,082 461,732
----------- -----------
Operating expenses:
Sales and marketing.............................. 1,032,627 634,811
Product development.............................. 584,788 173,298
General and administrative....................... 1,393,822 1,566,993
----------- -----------
Total operating expenses........................... 3,011,237 2,375,102
----------- -----------
Loss from operations............................... (2,513,155) (1,913,370)
Interest expense, net.............................. 11,398 6,206
Other expense...................................... 16,840 3,214
----------- -----------
Net loss........................................... (2,541,393) (1,922,790)
Accrued dividends on redeemable convertible
preferred stock................................... (502,904) (126,944)
----------- -----------
Net loss applicable to common stockholders......... $(3,044,297) $(2,049,734)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
73
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Note
Common Stock Additional Receivable Total
----------------- Paid-in From Accumulated Stockholders'
Shares Amount Capital Stockholder Deficit Deficit
--------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996................... 4,166,675 $41,667 $ -- $(33,224) $(3,437,554) $(3,429,111)
Accrued stock
compensation for
services............... 190,000 190,000
Accrued dividends on
redeemable convertible
preferred stock........ (502,904) (502,904)
Net loss................ (2,541,393) (2,541,393)
--------- ------- ---------- -------- ----------- -----------
Balances at December 31,
1997................... 4,166,675 41,667 190,000 (33,224) (6,481,851) (6,283,408)
Forgiveness of note
receivable............. 33,224 33,224
Issuance of common stock
for services........... 1,225,383 12,254 480,173 492,427
Stock-based compensation
for options granted.... 535,445 535,445
Conversion of note
payable to common
stock.................. 133,334 1,333 48,667 50,000
Repurchase of preferred
stock.................. 4,418,778 4,418,778
Accrued dividends on
redeemable convertible
preferred stock........ (126,944) (126,944)
Net loss................ (1,922,790) (1,922,790)
--------- ------- ---------- -------- ----------- -----------
Balance at September 9,
1998................... 5,525,392 $55,254 $5,673,063 $ -- $(8,531,585) $(2,803,268)
========= ======= ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
74
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 1,
Year Ended 1998 Through
December 31, September 9,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(2,541,393) $(1,922,790)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 437,165 80,949
Deferred rent...................................... (7,080) (4,720)
Forgiveness of note receivable from stockholder.... -- 33,224
Stock-based compensation........................... 190,000 1,027,871
Other non-cash items............................... 11,451 37,500
Changes in operating assets and liabilities:
Accounts receivable.............................. 16,668 (6,910)
Prepaid expenses and other current assets........ 5,826 4,053
Accounts payable and accrued liabilities......... 106,836 280,405
Deferred revenues................................ (104,193) 247,694
----------- -----------
Net cash used in operating activities.............. (1,884,720) (222,724)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (33,028) (2,825)
Proceeds from sale of assets....................... 7,703 --
----------- -----------
Net cash used in investing activities.............. (25,325) (2,825)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of redeemable preferred
stock............................................. 1,850,000 350,000
Repayment of capital lease obligations............. (4,025) (7,260)
Proceeds from notes payable........................ 30,000 --
Repayment of related party notes payable........... (25,000) (30,000)
----------- -----------
Net cash provided by financing activities.......... 1,850,975 312,740
----------- -----------
Change in cash..................................... (59,070) 87,191
Cash, beginning of period.......................... 60,867 1,797
----------- -----------
Cash, end of period................................ $ 1,797 $ 88,988
=========== ===========
Supplemental disclosure of cash flows activities:
Cash paid during the year for interest............. $ 11,398 $ 6,206
=========== ===========
Supplemental schedule of non-cash investing and
financing activities:
Issuance of note payable in exchange for repurchase
of redeemable convertible preferred stock......... $ -- $ 405,000
=========== ===========
Conversion of related party payables into common
stock............................................. $ -- $ 50,000
=========== ===========
Conversion of related party payables into
redeemable convertible preferred stock............ $ -- $ 25,000
=========== ===========
Equipment obtained under capital lease obligation.. $ 46,490 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies:
The Company--National School Reporting Services, Inc. (the "Company"), a
Delaware corporation, is a leading provider of school information to the
relocation market. Prior to moving, families can obtain school information
free on the Company's network of Internet sites or through our network of real
estate agents and brokers, who subscribe to the Company's service. Service
programs offer selected products and services to enhance the existing
relationships between the relocation industry and its customers.
Effective September 9, 1998, The Homebuyer's Fair, Inc. ("HBF"), an Arizona
corporation and a subsidiary of Central Newspapers, Inc. ("CNI"), acquired all
of the Company's issued and outstanding shares of common stock, at which time
the Company became a wholly-owned subsidiary of HBF.
Effective October 31, 1999, Homestore.com, Inc. acquired all of HBF and its
subsidiaries' outstanding common stock from CNI, at which time HBF became a
wholly-owned subsidiary of Homestore.com, Inc.
2. Summary of Significant Accounting Policies:
Use of Estimates--The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration risk consist of cash and accounts
receivable. Cash is deposited with high credit quality financial institutions.
The Company's accounts receivable are derived from revenue earned from
customers located in the United States. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of accounts
receivable.
During the year ended December 31, 1997 and for the period from January 1,
1998 through September 9, 1998, no customers accounted for more than 10% of
net revenues or net accounts receivable.
Property and Equipment--Property and equipment are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three to five years,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Long-Lived Assets--The Company continually reviews the recoverability of
the carrying value of long-lived assets. The Company also reviews long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
attributable to such assets to their carrying value. If the carrying value of
the assets exceeds the forecasted undiscounted cash flows, then the assets are
written down to their fair value. Fair value is determined based on discounted
cash flows or appraised values, depending upon the nature of the assets.
Revenue Recognition--Revenues are derived from the sale of advertising and
marketing products and services to real estate agents and brokers.
Substantially all of the agent advertising products and services are sold on a
monthly, quarterly or annual subscription basis. Accordingly, revenues are
deferred and recognized ratably over the service period, as such services are
rendered.
Product Development Costs--Product development costs incurred by the
Company to develop, enhance, manage, monitor and operate the company's
websites are expensed as incurred. Costs related to the research, compiling
and updating of school information are expensed as incurred.
76
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising Expense--Advertising costs are expensed as incurred and
totalled $58,083 during the year ended December 31, 1997 and $20,128 for the
period from January 1, 1998 through September 9, 1998.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the use of the liability method in accounting
for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are
measured based on differences between the financial reporting and tax basis of
assets and liabilities using enacted tax rate and laws that are expected to be
in effect when the differences are expected to reverse.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB 25, compensation expense
is recognized over the vesting period based on the difference, if any, on the
date of grant between the deemed fair value for accounting purposes
of the Company's stock and the exercise price on the date of grant. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18.
Comprehensive Income--Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
Recent Accounting Pronouncements--In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 98-1, "Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. The
adoption of SOP 98-1 in the first quarter of 1999 did not have a significant
impact on the Company's financial position, results of operations or cash
flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of 1999 did not have a
significant impact on the Company's financial position, results of operations
or cash flows.
3. Related Party Transactions:
At December 31, 1997 the Company had a note receivable from stockholder in
the amount of $33,224. At September 9, 1998, the note was forgiven and
recorded as compensation expense.
On July 1, 1992, the Company obtained a $12,500 note payable from a
stockholder which is due and payable on July 31, 2002. This note was issued in
connection with a Participation Agreement (see Note 8). During 1998, the note
was converted into 25 shares of the Company's redeemable preferred stock (see
note 10).
On November 15, 1992, the Company obtained a $25,000 note payable from a
stockholder which is due and payable on November 15, 2002. The note bears
interest at a rate of 7.02% per annum. During 1998, the note plus accrued
interest was converted into 133,334 shares of the Company's Common Stock (see
Note 10).
On December 10, 1997, the Company obtained a $30,000 note payable from a
stockholder. The note bears interest at a rate of 8% per annum. The principle
and interest on this note was paid on February 12, 1998.
77
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Income Taxes:
The provision for income taxes results in an effective tax rate that
differs from the federal statutory rate primarily due to the establishment of
a valuation allowance against the Company's net operating losses and other
deferred tax assets.
The following is a summary of deferred tax assets as of December 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 1,657,544
Accruals and reserves......................................... 158,556
Other......................................................... 257,156
-----------
Total deferred tax assets................................... 2,073,256
Less: valuation allowance....................................... (2,073,256)
-----------
Net deferred tax assets....................................... $ --
===========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $4,123,245 which begin
to expire in the tax year 2011.
Realization of net operating losses and deferred tax assets is dependent on
future earnings, if any, the timing and the amount of which are uncertain.
Accordingly, based on management's assessment, a valuation allowance in an
amount equal to the deferred tax assets as of December 31, 1997 has been
established to reflect these uncertainties.
5. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Equipment under capital lease................................. $ 46,490
Computer equipment and software............................... 1,128,056
Office furniture and fixtures................................. 37,307
Leasehold improvements........................................ 78,501
-----------
1,290,354
Less: accumulated depreciation including capital lease
amortization of $7,660....................................... (1,059,672)
-----------
$ 230,682
===========
</TABLE>
6. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Accrued payroll and employee benefits........................... $ 40,144
Other accrued liabilities....................................... 35,397
--------
$ 75,541
========
</TABLE>
7. Note Payable:
On July 1, 1992, the Company obtained a $25,000 note payable, which is due
and payable on June 30, 2002. This note was issued in connection with a
Participation Agreement (see Note 8).
78
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Participation Agreement:
On July 1, 1992 the Company entered into Participation Agreements with two
individuals ("Participants"). The Participants invested funds to further
finance the Company's operations and marketing efforts in exchange for a
participation interest in the annual fees paid by real estate agencies in
territories as stipulated in the Agreements and a Promissory Note for the
investment amount (see Notes 3 and 7).
Participation interest is calculated based on the number of real estate
agencies (new and renewal) at varying rates. Expense related to the
participation agreements was $8,586 and $3,672 for the year ended December 31,
1997 and for the period from January 1, 1998 through September 9, 1998,
respectively.
The Agreements are for a period of ten years ending June 30, 2002. In
addition, the Agreements include a call provision granting the Company the
option of purchasing all of the Participant's participation interest and other
rights and terminate all of the Company's obligations at amounts stipulated in
the Agreement. During 1998, the Company called the Participation Agreement
with a related party (see Note 3). As part of this call, the principal and
related participation interest was converted into 25 shares of the Company's
Series D Preferred Stock (see Note 10).
9. Commitments:
On December 1, 1995 the Company entered into a noncancellable five year
operating lease. The lease provides free rent for the first six months. In
accordance with SFAS No. 13, "Accounting for Leases" the free rent is deferred
and recognized over the term of the related lease. The effect of such
accounting results in additional cash payments over rent expense of $7,080 and
$4,720 for the year ended December 31, 1997 and for the period from January 1,
1998 through September 9, 1998, respectively. Future minimum lease payments
under this noncancellable operating lease are $70,850 per year for 1998
through 2000.
Rent expense was $63,770 for the year ended December 31, 1997 and $48,417
for the period from January 1, 1998 through September 9, 1998.
During 1997, the Company entered into capital leases for certain computer
and telephone equipment totaling $46,490 of capitalized costs.
The future minimum lease payments under capital leases, (including the
present value of net minimum lease payments) as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................. $ 13,270
1999............................................................. 13,270
2000............................................................. 13,270
2001............................................................. 13,270
2002............................................................. 678
--------
Total minimum obligations........................................ 53,758
Less amounts representing interest............................... (11,293)
--------
Present value of minimum obligations............................. 42,465
Less current portion............................................. 7,775
--------
Long-term obligations............................................ $ 34,690
========
</TABLE>
79
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Deficit
The Company has one class of authorized common stock and four series of
authorized redeemable convertible preferred stock ("preferred stock").
Common Stock
The Company is required to reserve and keep available out of its authorized
but unissued shares of common stock such number of shares sufficient to effect
the conversion of all outstanding shares of preferred stock and all
outstanding common stock warrants, plus shares granted and available for grant
under the Company's stock option plan. The amount of such shares of common
stock reserved for these purposes is as follows:
<TABLE>
<CAPTION>
December 31, September 9,
1997 1998
------------ ------------
<S> <C> <C>
Conversion of preferred stock.................... 9,038,211 3,110,808
Outstanding warrants............................. -- 1,077,360
Outstanding stock options........................ 75,758 1,180,796
Additional shares available for grant under the
Company's stock option plan..................... 1,496,573 391,535
---------- ---------
10,610,542 5,760,499
========== =========
</TABLE>
Preferred Stock
As of December 31, 1997 and September 9, 1998, the Company had the
following preferred stock outstanding:
<TABLE>
<CAPTION>
December 31, September 9,
1997 1998
------------ ------------
<S> <C> <C>
Series A, $.01 par value, 2,152 shares authorized,
2,152 and 238 shares issued and outstanding at
December 31, 1997 and September 9, 1998,
respectively..................................... $2,735,333 $ 324,983
Series B, $.01 par value, 1,000 shares authorized,
1,000 and 0 shares issued and outstanding at
December 31, 1997 and September 9, 1998,
respectively..................................... 1,151,967 --
Series C, $.01 par value, 3,250 and 2,575 shares
authorized, 1,550 and 425 shares issued and
outstanding at December 31, 1997 and September 9,
1998, respectively............................... 1,674,724 494,269
Series D, $.01 par value, 675 authorized, 300 and
675 shares issued and outstanding at December 31,
1997 and September 9, 1998, respectively......... 300,000 720,937
---------- ----------
$5,862,024 $1,540,189
========== ==========
</TABLE>
Each share of Series A, B, C and D preferred stock is entitled to vote on
all matters. Each holder of preferred stock is entitled to the number of votes
equal to the number of shares of common stock into which such shares of
preferred stock shares could then be converted. The holders of preferred
stock, voting as a separate class, elect four members of the Board of
Directors.
80
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of preferred stock earns cumulative dividends at a rate of $120
per share per year. These dividends accrue whether or not earned or declared.
Additionally, the preferred stock is convertible at the option of the holder
into shares of common stock equal to the initial purchase value of preferred
shares of $1,000 per share divided by the applicable conversion rate. The
conversion rates for the preferred stock at December 31, 1997 and September 9,
1998 were $.7709 for Series A, $.3855 for series B, $.42405 for Series C and
$.375 for Series D.
In addition, each share of preferred stock shall automatically be converted
into shares of common stock at the then effective Conversion Rate for such
share immediately prior to the consummation of a firmly underwritten public
offering of common stock. The Preferred Stock is converted provided that the
price per share is not less than $2.313 (subject to appropriate adjustment for
stock splits, stock dividends, reclassifications, recapitalizations and the
like) and the aggregate gross proceeds to the Company are not less than $20
million.
Under the terms of the preferred stock agreements, 33% of each series of
preferred stock is redeemable on June 30, 2000, 67% is redeemable on June 30,
2001 and 100% is redeemable on June 30, 2002. The redemption price shall be an
amount equal to $1,000 per share, plus any unpaid cumulative dividends.
In February 1998 the Company entered into a Stock Redemption Agreement with
certain holders of Preferred Stock. Under this agreement the Company redeemed
1,912 shares of Series A Preferred Stock, 1,000 shares of Series B Preferred
Stock and 1,125 shares of Series C Preferred Stock with a redemption value of
$4,823,778 in exchange for a note payable of $405,000 and warrants to purchase
1,077,360 shares of Common Stock. The difference between the redemption value
of the Series C Preferred Stock and the note payable was recorded as
additional paid-in capital. The warrants were issued at an exercise price of
$.01 per share and expire on January 20, 2008.
Stock Option Plan
Under the 1996 Incentive Stock Plan (the "Plan"), the Company offers
options to purchase shares of common stock to employees and consultants. At
December 31, 1997, the Company had reserved 1,572,331 shares of common stock
for issuance through the Plan.
The following table summarizes stock option activity and related
information:
<TABLE>
<CAPTION>
Weighted-Average
Exercise Price
Shares per Share
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996................. 75,758 $1.00
Granted........................................ -- --
Exercised...................................... -- --
Canceled....................................... -- --
--------- -----
Outstanding at December 31, 1997................. 75,758 $1.00
--------- -----
Granted--exercise price less than fair value... 1,105,038 $ .05
Exercised...................................... -- --
Canceled....................................... -- --
--------- -----
Outstanding at September 9, 1998................. 1,180,796 $ .11
========= =====
Options exercisable at December 31, 1997....... 75,758 $1.00
========= =====
Options exercisable at September 9, 1998....... 689,023 $ .16
========= =====
</TABLE>
81
<PAGE>
NATIONAL SCHOOL REPORTING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Additional information with respect to the outstanding options as of
September 9, 1998 is as follows:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- ------------------
Weighted Average
Remaining Average Average
Number of Contractural Exercise Number of Exercise
Prices Shares Life Price Shares Price
------ --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00................ 75,758 8.0 $1.00 75,758 $1.00
$.05................. 1,105,796 10.0 $ .05 1,105,796 $ .05
</TABLE>
Compensation expense of $535,445 was recorded for the period ended
September 9, 1998 in connection with the grant of stock options, based on the
sale price per share of the Company to HBF on that date. No compensation
expense was recognized for its stock-based compensation plans for the year
ended December 31, 1997.
If compensation expenses had been recognized based on the fair value of the
options at their grant date, in accordance with SFAS 123, the results of
operations would have been as follows:
<TABLE>
<CAPTION>
January 1,
Year ended 1998 Through
December 31, September 9,
1997 1998
------------ ------------
<S> <C> <C>
Loss applicable to common stock:
As reported.................................... $(3,044,297) $(2,049,734)
Pro forma under FAS 123........................ (3,044,297) (2,049,734)
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the Black-Scholes option pricing model as prescribed
by SFAS No. 123 using the following weighted average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate.............................................. 4.68%
Expected lives (in years)............................................ 0
Dividend yield....................................................... 0
Expected volatility.................................................. 0%
</TABLE>
As additional options are expected to be granted in future years and the
options vest over several years, the above pro forma results are not
necessarily indicative of future pro forma results.
82
