<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-Q
[X]QUARTERY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-26659
----------------
Homestore.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 95-4438337
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
225 West Hillcrest Drive, Suite 100
Thousand Oaks, California 91360
(Address of Principal Executive Office) (Zip Code)
</TABLE>
(805) 557-2300
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
At May 10, 2000, the registrant had 81,189,772 shares of its common stock
outstanding.
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- -------------------------------------------------------------------------------
<PAGE>
Homestore.com, Inc
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview.............................................................................. 1
Unaudited Pro Forma Condensed Consolidated Statements of Operations................... 2
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information............. 4
Homestore.com, Inc. Consolidated Financial Statements
Consolidated Balance Sheets........................................................... 5
Unaudited Consolidated Statements of Operations....................................... 6
Unaudited Consolidated Statements of Stockholders' Equity............................. 7
Unaudited Consolidated Statements of Cash Flows....................................... 8
Notes to Unaudited Consolidated Financial Statements.................................. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 22
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 23
Item 2. Changes in Securities and Use of Proceeds.............................................. 23
Item 3. Default Upon Senior Securities......................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.................................... 23
Item 5. Other Information...................................................................... 24
Item 6. Exhibits and Reports on Form 8-K....................................................... 24
SIGNATURES..................................................................................... 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On February 4, 1999, NetSelect, Inc. ("NSI") was merged with and into
Homestore.com, Inc. ("Company" or "Homestore") in a non-substantive share
exchange, which was provided for in the agreements governing the formation and
operation of RealSelect, Inc. ("RealSelect"), the operating company. The share
exchange lacked substance since both the Company and NSI were shell companies
for their respective investments in RealSelect, and because the respective
underlying ownership interests of the individual investors were unaffected.
Accordingly, the non-substantive share exchange was accounted for at
historical cost. The share exchange between the Company and NSI is referred to
herein as the "Reorganization". This Reorganization was completed solely to
simplify the Company's legal structure prior to its initial public offering.
In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
common stock and convertible preferred stock equivalent to an aggregate of
5,309,058 shares of common stock. The aggregate acquisition cost of $51.7
million was based on terms and preferences of the shares issued in the
transaction relative to the value received by the Company in the April 1999
Series G preferred stock financing. The acquisition has been accounted for as
a purchase. The acquisition cost has been allocated to the assets acquired and
liabilities assumed based on estimates of their respective fair values. The
excess of purchase consideration over net tangible assets acquired of $41.3
million has been allocated to goodwill and other purchased intangible assets
and is being amortized on a straight-line basis over estimated lives ranging
from three to five years.
In October 1999, the Company acquired Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "Homefair") for $35.8 million in
cash and other acquisition related expenses, a $37.5 million note payable and
250,000 shares of common stock, with an estimated fair value of $11.2 million,
for a total aggregate purchase price of $83.7 million. The acquisition has
been accounted for as a purchase. The acquisition cost has been allocated to
the assets acquired and liabilities assumed based on estimates of their
respective fair values. The excess of purchase consideration over net tangible
assets acquired of $83.3 million has been allocated to goodwill and other
purchased intangible assets and is being amortized on a straight-line basis
over estimated lives ranging from three to five years.
Homestore's unaudited pro forma condensed consolidated statement of
operations for the three months ended March 31, 1999 gives effect to the
Reorganization and the acquisitions of Springstreet and Homefair as if they
had occurred on January 1, 1999.
The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of January 1, 1999 and should
not be construed as being representative of future operating results.
The audited historical financial statements of the Company, NSI, The
Enterprise of America, Ltd., MultiSearch Solutions, Inc., SpringStreet, The
Homebuyer's Fair, Inc., FAS-Hotline, Inc. and The Center For Mobility
Resources, Inc. and National School Services, Inc. are included in the
Company's Form S-1 (No. 333-94467) as filed with the Securities and Exchange
Commission on January 26, 2000 and the Form 8-K/A filed on December 7, 1999.
The unaudited pro forma condensed consolidated statement of operations
presented herein should be read in conjunction with those financial statements
and related notes.
1
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS /(1)/
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues................................................... $ 38,599 $ 10,409
Cost of revenues (excluding $198 and $339 in non-cash
equity charges, respectively)............................. 10,560 4,553
-------- --------
Gross profit............................................... 28,039 5,856
-------- --------
Operating expenses:
Sales and marketing (excluding $9,423 and $1,650 in non-
cash equity charges, respectively)...................... 29,785 14,960
Product development (excluding $186 and $160 in non-cash
equity charges, respectively)........................... 1,840 1,391
General and administrative (excluding $1,007 and $1,054
in non-cash
equity charges, respectively)........................... 10,815 5,100
Amortization of intangible assets........................ 8,392 7,014
Stock-based charges...................................... 10,814 3,203
-------- --------
Total operating expenses................................... 61,646 31,668
-------- --------
Loss from operations....................................... (33,607) (25,812)
Interest and other income (expense), net................... 4,395 ( 1,591)
-------- --------
Net loss................................................... $(29,212) $(27,403)
======== ========
Basic and diluted net loss per share....................... $ (0.39) $ (0.50)
======== ========
Shares used to calculate basic and diluted net loss per
share..................................................... 74,052 54,566
======== ========
</TABLE>
- --------
/(1)/ See page 3 for a full disclosure of the unaudited pro forma condensed
consolidated statement of operations for the three months ended March 31,
1999. Since there are no pro forma adjustments after December 31, 1999,
the unaudited pro forma condensed consolidated statement of operations for
the three months ended March 31, 2000 reflects our actual operating
results.
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
2
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore.com NSI Adjustments Homestore.com SpringStreet Homefair Adjustments Forma
------------- ------- ----------- ------------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 5,570 $ 2,433 $-- $ 8,003 $ 868 $1,589 $ (51) (1) $ 10,409
Cost of revenues....... 2,749 798 3,547 852 154 4,553
-------- ------- ---- -------- ------- ------ ------- --------
Gross profit........... 2,821 1,635 -- 4,456 16 1,435 (51) 5,856
-------- ------- ---- -------- ------- ------ ------- --------
Operating expenses:
Sales and marketing... 8,758 4,064 12,822 1,802 387 (51) (1) 14,960
Product development... 331 174 505 676 210 1,391
General and
administrative....... 1,985 1,053 3,038 1,709 353 5,100
Amortization of
intangible assets.... 522 261 783 764 (764) (2) 7,014
6,231 (3)
Stock-based charges... 1,640 569 2,209 994 3,203
-------- ------- ---- -------- ------- ------ ------- --------
Total operating
expenses............ 13,236 6,121 -- 19,357 5,181 1,714 5,416 31,668
-------- ------- ---- -------- ------- ------ ------- --------
Loss from operations... (10,415) (4,486) -- (14,901) (5,165) (279) (5,467) (25,812)
Interest and other
income (expense),
net................... (71) (5) (76) 39 (9) (1,545) (4) (1,591)
-------- ------- ---- -------- ------- ------ ------- --------
Net loss............... (10,486) (4,491) -- (14,977) (5,126) (288) (7,012) (27,403)
Accretion of redemption
value and dividends on
convertible preferred
stock................. (414) (207) 621 (5)
-------- ------- ---- -------- ------- ------ ------- --------
Net loss applicable to
common stockholders... $(10,900) $(4,698) $621 $(14,977) $(5,126) $ (288) $(7,012) $(27,403)
======== ======= ==== ======== ======= ====== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders... $ (0.66)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders... 16,611
========
Pro forma basic and
diluted net loss per
share................. $ (0.50)
========
Shares used in the
calculation of pro
forma basic and
diluted net loss per
share................. 54,566 (6)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
3
<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 statement of operations:
(1) Elimination of intercompany revenues and expenses.
(2) Elimination of amortization of intangible assets.
(3) Amortization of goodwill and other intangible assets on a straight-line
basis.
(4) Reduction in interest income related to cash portion of the purchase
consideration, net of an increase in interest expense related to the $37.5
million promissory note which bears interest at 10.875% issued in
connection with the acquisition of Homefair.
(5) Elimination of the accretion of redemption value and dividends on
convertible preferred stock resulting from the assumed conversion of the
Company's preferred stock into common stock in connection with its initial
public offering ("IPO").
(6) Additional weighted average shares used in the calculation of pro forma
basic and diluted net loss per share reflect the following, as if they
been issued as of January 1, 1999, except for preferred stock that was not
issued in connection with an acquisition. For this preferred stock, the
weighted average shares reflect the preferred stock as if it had been
issued as of January 1, 1999 or the date of issuance, if later:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
SpringStreet acquisition................................ 4,587
Homefair acquisition.................................... 250
NSI Reorganization...................................... 4,936
Conversion of preferred stock in connection with IPO.... 24,265
Conversion of NAR's RealSelect shares into Homestore.com
shares................................................. 3,917
</TABLE>
4
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $430,756 $ 90,382
Marketable equity security.......................... 8,667 4,230
Accounts receivable, net of allowance for doubtful
accounts of $2,009 and $1,627, respectively........ 27,243 13,428
Current portion of prepaid distribution expense..... 14,702 7,868
Deferred royalties.................................. 2,635 2,032
Other current assets................................ 4,182 3,339
-------- --------
Total current assets.................................. 488,185 121,279
Prepaid distribution expense.......................... 12,941 6,167
Property and equipment, net........................... 8,367 6,305
Intangible assets, net................................ 175,707 138,612
Other assets.......................................... 16,570 4,200
-------- --------
Total assets...................................... $701,770 $276,563
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,981 $ 5,349
Accrued liabilities................................. 27,025 23,687
Deferred revenue.................................... 17,199 13,478
Current portion of notes payable.................... 1,091 37,943
-------- --------
Total current liabilities............................. 52,296 80,457
Notes payable......................................... 633
-------- --------
52,296 81,090
-------- --------
Commitments and contingencies (Note 7)................
Stockholders' equity:
Convertible preferred stock, $.001 par value
Common stock, $.001 par value; 500,000 shares
authorized, 82,056 and 75,251 shares issued at
March 31, 2000 and December 31, 1999, respectively,
and 76,994 and 70,189 shares outstanding at March
31, 2000 and December 31, 1999, respectively....... 77 70
Additional paid-in capital.......................... 983,032 413,244
Treasury stock, at cost; 5,062 shares............... (13,676) (13,676)
Notes receivable from stockholders.................. (13,279) (13,350)
Deferred stock-based charges........................ (130,037) (38,947)
Accumulated other comprehensive income.............. 8,302 3,865
Accumulated deficit................................. (184,945) (155,733)
-------- --------
Total stockholders' equity........................ 649,474 195,473
-------- --------
Total liabilities and stockholders' equity ....... $701,770 $276,563
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues................................................. $ 38,599 $ 5,570
Cost of revenues (excluding $198 and $156 in non-cash
equity charges, respectively)........................... 10,560 2,749
--------- ---------
Gross profit............................................. 28,039 2,821
--------- ---------
Operating expenses:
Sales and marketing (excluding $9,423 and $542 in non-
cash equity charges, respectively).................... 29,785 8,758
Product development (excluding $186 and $147 in non-
cash equity charges, respectively).................... 1,840 331
General and administrative (excluding $1,007 and $795
in non-cash equity charges, respectively)............. 10,815 1,985
Amortization of intangible assets...................... 8,392 522
Stock-based charges.................................... 10,814 1,640
--------- ---------
Total operating expenses................................. 61,646 13,236
--------- ---------
Loss from operations..................................... (33,607) (10,415)
Interest and other income (expense), net................. 4,395 (71)
--------- ---------
Net loss................................................. (29,212) (10,486)
Accretion of redemption value and dividends on
convertible preferred stock............................. (414)
--------- ---------
Net loss applicable to common stockholders............... $ (29,212) $ (10,900)
========= =========
Basic and diluted net loss per share applicable to common
stockholders............................................ $ (0.39) $ (0.66)
========= =========
Shares used to calculate basic and diluted net loss per
share applicable to common stockholders................. 74,052 16,611
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Notes Deferred
Common Stock Additional Receivable Stock- Other
------------- Paid-in Treasury From based Comprehensive Accumulated
Shares Amount Capital Stock Stockholders Charges Income Deficit Total
------ ------ ---------- -------- ------------ --------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... 70,189 $70 $413,244 $(13,676) $(13,350) $ (38,947) $3,865 $(155,733) $195,473
--------
Comprehensive income
Net loss (unaudited)... (29,212) (29,212)
Unrealized gain on
marketable security
(unaudited)........... 4,437 4,437
--------
(24,775)
--------
Exercise of stock
options (unaudited).... 726 1 2,180 2,181
Issuance of common stock
(unaudited)............ 1,793 2 35,836 35,838
Repayment from
stockholders
(unaudited)............ 71 71
Deferred stock-based
charges (unaudited).... 101,904 (101,904) --
Stock-based charges
(unaudited)............ 10,814 10,814
Issuance of common stock
in public offering
(unaudited)............ 4,073 4 428,899 428,903
Exercise of warrants
(unaudited)............ 213 969 969
------ --- -------- -------- -------- --------- ------ --------- --------
Balance at March 31,
2000 (unaudited)....... 76,994 $77 $983,032 $(13,676) $(13,279) $(130,037) $8,302 $(184,945) $649,474
====== === ======== ======== ======== ========= ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(29,212) $(10,486)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 9,067 658
Provision for doubtful accounts......................... 277 56
Stock-based charges..................................... 10,814 1,640
Other non-cash items.................................... 32 649
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (13,222) (412)
Prepaid distribution expense............................ (13,608) 360
Deferred royalties...................................... (603) (310)
Other assets............................................ (505) 276
Accounts payable and accrued liabilities................ 2,997 2,350
Deferred revenue........................................ 3,728 1,807
-------- --------
Net cash used in operating activities..................... (30,235) (3,412)
-------- --------
Cash flows from investing activities:
Investments............................................... (11,650)
Acquisitions.............................................. (11,298)
Purchases of property and equipment....................... (2,613) (164)
Other..................................................... 754
-------- --------
Net cash used in investing activities..................... (24,807) (164)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 428,943 3,474
Proceeds from exercise of stock options and warrants...... 4,927 109
Repayment of notes payable................................ (37,525)
Repurchases of common stock............................... (11,906)
Issuance of note receivable............................... (1,000)
Notes receivable from stockholders........................ 71 3,631
-------- --------
Net cash provided by (used in) financing activities....... 395,416 (4,692)
-------- --------
Change in cash and cash equivalents....................... 340,374 (8,268)
Cash assumed from NetSelect, Inc.......................... 13,037
Cash and cash equivalents, beginning of period............ 90,382 71
-------- --------
Cash and cash equivalents, end of period.................. $430,756 $ 4,840
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. operates a family of web sites that includes:
Homestore.com, a home and real estate portal; REALTOR.com, for existing homes;
HomeBuilder.com, for new homes; SpringStreet.com, for rental properties;
Remodel.com, for home improvement activities; and Homefair.com, for moving and
relocation activities. Through its network of web sites, the Company provides
a wide variety of information and communication tools for consumers, real
estate industry professionals, advertisers and providers of home and real
estate related products and services. The Company has strategic relationships
with key industry participants, including real estate market leaders such as
the National Association of REALTORS ("NAR"), the National Association of Home
Builders ("NAHB"), the National Association of the Remodeling Industry
("NARI"), the NAHB Remodelors Council, Multiple Listing Services ("MLS"), the
American Institute of Architects ("AIA"), the Manufactured Housing Institute
("MHI"), real estate franchises, brokers and agents. The Company currently
generates revenues from several sources, including subscription service fees
from agents, brokers, home builders and rental property owners and fees from
advertisers.
2. BASIS OF PRESENTATION:
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation, have been included. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission on March
10, 2000. The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year.
3. CAPITALIZATION:
Public Offering
In January 2000, the Company completed a public offering of its common
stock. The Company sold 4,073,139 shares of its common stock at $110.00 per
share, generating gross proceeds of $448.0 million. In addition, 4,226,861
shares of the Company's common stock were offered and sold on behalf of
selling stockholders at $110.00 per share. In connection with this offering,
the Company incurred $17.9 million in underwriting discounts and commissions,
and approximately $1.2 million in other related expenses. The Company used a
portion of the proceeds to repay a $37.5 million promissory note, plus accrued
interest, issued in connection with the acquisition of Homefair.
Other Common Stock Issuance
In March 2000, the Company issued 1,085,271 shares of its common stock
valued for accounting purposes at approximately $70.0 million to Budget Group,
Inc. ("BGI") in connection with entering into a ten-year strategic alliance
agreement that allows the Company to participate in online and offline BGI
marketing activities.
9
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. ACQUISITION:
In March 2000, the Company acquired WyldFyre Technologies, Inc.
("WyldFyre") for 589,426 shares of its common stock with an estimated fair
value for accounting purposes of $34.1 million, including other acquisition-
related costs. The acquisition has been accounted for as a purchase. The
acquisition cost has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. The excess of
purchase consideration over net tangible assets acquired of $34.1 million has
been allocated to goodwill and other intangible assets and is being amortized
on a straight-line basis over estimated lives ranging from three to five
years. The results of operations of WyldFyre are included in the Company's
unaudited consolidated statements of operations from the date of acquisition.
5. WARRANTS:
In February 2000, the Company issued warrants to purchase up to 470,089 of
the Company's common stock at an exercise price of $66.50 to the Broker Gold
program members who elected to renew their existing listing agreements with
the Company for an additional two years. All warrants issued are fully vested,
non-forfeitable and are immediately exercisable. The non-cash charge for the
warrants totaled approximately $21.9 million which is being recognized as
expense over three years. The non-cash charge for these warrants totaled
approximately $1.2 million for the three months ended March 31, 2000.
In March 2000, the Company issued a warrant to purchase 400,000 shares of
common stock at an exercise price of $35.63 per share to GMAC Mortgage
Corporation. The warrant issued is fully vested, non-forfeitable and
immediately exercisable. The non-cash charge for the warrant totaled
approximately $5.0 million and is being recognized as expense over one year.
The non-cash charge for the warrant totaled approximately $414,000 for the
three months ended March 31, 2000.
6. NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net
loss per share applicable to common stockholders for the periods indicated (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Numerator:
Net loss.............................................. $(29,212) $(10,486)
Accretion of redemption value and dividends on
convertible preferred stock.......................... (414)
-------- --------
Net loss applicable to common stockholders............ $(29,212) $(10,900)
======== ========
Denominator:
Weighted average shares............................... 74,052 16,611
======== ========
Basic and diluted net loss per share applicable to
common
stockholders........................................... $ (0.39) $ (0.66)
======== ========
</TABLE>
The per share computations exclude preferred stock, options and warrants
which are anti-dilutive. The number of such shares excluded from the basic and
diluted net loss per share applicable to common stockholders computation were
12,830,000 and 3,277,000 for the three months ended March 31, 2000 and 1999,
respectively.
10
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the Company's
business, results of operations, financial condition or cash flows.
The Company received a request for information from the antitrust division
of the U.S. Department of Justice. The request seeks information about the
business of the Company as it relates to Internet realty sites in the United
States. The government has not alleged any violation of law, and the Company
believes it has complied with all laws and regulations. The Company intends to
cooperate fully with the Department of Justice's request.
8. SUBSEQUENT EVENT:
In April 2000, the Company entered into a five-year marketing and
distribution agreement with America Online, Inc. ("AOL"). In exchange for
entering into this agreement, the Company paid AOL $20.0 million in cash and
issued approximately 3.9 million shares of its common stock. The Company has
guaranteed that the 30-day average closing price, related to 60%, 20% and 20%
of the shares it issued, will be $68.50 per share on the third, fourth and
fifth anniversaries of the agreement, respectively. This guarantee only
applies to shares that continue to be held by AOL at the end of each
respective year. In connection with the guarantee, the Company has established
a $90.0 million letter of credit that can be drawn upon by AOL in the event
that the Company's 30-day average closing price is less than $68.50 at the end
of each respective guarantee date. The letter of credit will be reduced to
$50.0 million at the end of the third anniversary of the agreement. The term
of the agreement may be reduced if AOL draws more than $40.0 million from the
letter of credit at the end of the third year anniversary of the agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so
long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could
cause actual results to differ from the projected results. All statements
other than statements of historical fact that we make in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and our future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed in
our prospectus dated January 26, 2000 and our Form 10-K for the year ended
December 31, 1999.
Overview
We are the leading destination on the Internet for home and real estate
related information, based on the number of advertising products and services,
the number of visitors, time spent on our web sites and the number of property
listings. Our family of web sites, consisting of Homestore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com, Remodel.com, and Homefair.com, provides the
most comprehensive source of real estate listings and home related content on
the Internet. Through our family of web sites, we provide a wide variety of
information and tools for consumers, real estate industry professionals,
advertisers and providers of home and real estate related products and
services. We currently generate revenues from several sources, including
subscription fees from agents, brokers, home builders and rental property
owners and fees from advertisers.
Basis of Presentation
Initial Business and RealSelect Holding Structure. We were incorporated in
1993 under the name of InfoTouch Corporation, or InfoTouch, with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, we began to develop the technology to build and
operate real estate related Internet sites. Effective December 4, 1996, we
entered into a series of agreements with the NAR and several investors. Under
these agreements, we transferred technology and assets relating to advertising
the listing of residential real estate on the Internet to a newly-formed
company, NetSelect LLC, or LLC, in exchange for a 46% ownership interest in
LLC. The investors contributed capital to a newly-formed company, NetSelect,
Inc., or NSI, which owned 54% of LLC. LLC received capital funding from NSI
and in turn contributed the assets and technology contributed by InfoTouch as
well as the NSI capital to a newly formed entity, RealSelect, Inc., or
RealSelect, in exchange for common stock representing an 85% ownership
interest in RealSelect. Also effective December 4, 1996, RealSelect entered
into a number of formation agreements with and issued cash and common stock
representing a 15% ownership interest in RealSelect to the NAR in exchange for
the rights to operate the REALTOR.com web site and pursue commercial
opportunities relating to the listing of real estate on the Internet.
The agreements governing RealSelect required us to terminate our remaining
activities, which were insignificant at that time, and dispose of our
remaining assets and liabilities, which we did in early 1997. Accordingly,
following the formation, NSI, LLC and InfoTouch were shell holding companies
for their investments in RealSelect.
Our initial operating activities primarily consisted of recruiting
personnel, developing our web site content and raising our initial capital. We
developed our first web site, REALTOR.com, in cooperation with the NAR and
actively began marketing our advertising products and services to real estate
professionals in January 1997.
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Reorganization of Holding Structure. Under the formation agreements of
RealSelect, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into
InfoTouch. In addition, LLC was merged into InfoTouch. We refer to this
transaction as the Reorganization. The share exchange lacked economic
substance and, therefore, was accounted for at historical cost.
Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. Through the
Reorganization on February 4, 1999, Homestore.com was a holding company whose
sole business was managing its investment in RealSelect through LLC. This
investment was accounted for under the equity method, and accordingly,
Homestore.com did not record the results of operations related to the
operating entity, RealSelect, until the Reorganization occurred on February 4,
1999. Prior to February 4, 1999, the results of operations of RealSelect were
consolidated by NSI. Thus, all revenues through February 4, 1999, were
recorded by NSI. Pro forma financial information that includes a comparison of
the results of operations of NSI, LLC, Homestore.com and RealSelect on a
combined basis for the three months ended March 31, 1999 has been presented to
assist investors in evaluating our historical financial performance. A
comparison of the historical results of operations of Homestore.com has not
been presented because the financial position, results of operations and cash
flows were insignificant for all periods presented prior to the
Reorganization.
Acquisitions. In June 1999, we acquired SpringStreet for common stock and
convertible preferred stock equivalent to an aggregate of 5,309,058 shares of
common stock. In October 1999, we acquired all of the outstanding capital
stock of The Homebuyer's Fair, Inc. and FAS-Hotline, Inc., collectively
Homefair, for $35.8 million in cash and other acquisition-related expenses, a
$37.5 million promissory note and 250,000 shares of our common stock. Each of
these acquisitions has been included in the pro forma results of operations as
if it had occurred on January 1, 1999.
We will seek to continue to expand our current offerings by acquiring
additional businesses, technologies, product lines or service offerings from
third parties. We may be unable to identify future acquisition targets and may
be unable to complete future acquisitions. Even if we complete an acquisition,
we may have difficulty in integrating it with our current offerings, and any
acquired features, functions or services may not achieve market acceptance or
enhance our brand loyalty. Integrating newly acquired organizations and
products and services could be expensive, time consuming and a strain on our
resources.
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Pro Forma Results of Operations
The following tables set forth certain pro forma condensed consolidated
statement of operations data for the periods indicated and assume that the
following transactions occurred as of January 1, 1999:
. our acquisition of SpringStreet for common stock and convertible
preferred stock equivalent to an aggregate of 5,309,058 shares of our
common stock, with an estimated fair value of $51.7 million;
. our acquisition of Homefair for 250,000 shares of our common stock, with
an estimated fair value of $11.2 million, a $37.5 million promissory
note, and $35.8 million in cash and other acquisition-related expenses;
and
. the reorganization of our holding company structure as previously
described.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000(1) 1999
---------- ---------
(unaudited)
<S> <C> <C>
Pro Forma Consolidated Statement of Operations Data:
Revenues............................................... $ 38,599 $ 10,409
Cost of revenues (excluding $198 and $339 in non-cash
equity charges, respectively)......................... 10,560 4,553
--------- ---------
Gross profit........................................... 28,039 5,856
--------- ---------
Operating expenses:
Sales and marketing (excluding $9,423 and $1,650 in
non-cash equity charges, respectively).............. 29,785 14,960
Product development (excluding $186 and $160 in non-
cash equity charges respectively)................... 1,840 1,391
General and administrative (excluding $1,007 and
$1,054 in non-cas equity charges, respectively)..... 10,815 5,100
Amortization of intangible assets.................... 8,392 7,014
Stock-based charges.................................. 10,814 3,203
--------- ---------
Total operating expenses............................. 61,646 31,668
--------- ---------
Loss from operations................................... (33,607) (25,812)
Interest and other income (expense), net............... 4,395 (1,591)
--------- ---------
Net loss............................................... $ (29,212) $ (27,403)
========= =========
As a Percentage of Pro Forma Revenues:
Revenues............................................... 100 % 100 %
Cost of revenues....................................... 27 44
--------- ---------
Gross profit........................................... 73 56
--------- ---------
Operating expenses:
Sales and marketing.................................. 77 144
Product development.................................. 5 13
General and administrative........................... 28 49
Amortization of intangible assets.................... 22 67
Stock-based charges.................................. 28 31
--------- ---------
Total operating expenses............................... 160 304
--------- ---------
Loss from operations................................... (87) (248)
Interest and other income (expense), net............... 11 (15)
--------- ---------
Net loss............................................... (76)% (263)%
========= =========
</TABLE>
- --------
(1) The unaudited pro forma consolidated statement of operations for the three
months ended March 31, 2000 reflects our actual operating results.
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<PAGE>
Pro Forma for the Three Months Ended March 31, 2000 and 1999
Revenues
Revenues increased to $38.6 million for the three months ended March 31,
2000 from pro forma revenues of $10.4 million for the three months ended March
31, 1999. The growth in revenues was driven by both an increase in the number
of professionals on the Homestore.com network and increased advertising
revenue related to an overall rise in our site traffic, as well as an increase
in web site development fees. The number of professionals on our family of web
sites grew substantially during the quarter, representing an increase of 70%
over March 31, 1999.
Cost of Revenues
Cost of revenues increased to $10.6 million for the three months ended
March 31, 2000 from pro forma cost of revenues of $4.6 million for the three
months ended March 31, 1999. The increase was primarily due to our overall
increased sales volume during the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999. Gross margin for the
quarter was 73%, up from a pro forma gross margin of 56% for the same quarter
in 1999. 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 capital investments to
increase the capacity and speed of our family of web sites.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $29.8
million for the three months ended March 31, 2000 from pro forma sales and
marketing expenses of $15.0 million for the three months ended March 31, 1999.
The increase was primarily attributable to an increase in costs associated
with Internet portal distribution, and marketing and listing agreements which
we entered into during the third and fourth quarter of 1999. The increase was
also due to the growth of our direct sales force since the first quarter of
1999, 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.
Product development. Product development expenses increased to $1.8 million
for the three months ended March 31, 2000 from pro forma product development
expenses of $1.4 million for the three months ended March 31, 1999. The slight
increase in product development costs was due to increased costs associated
with the expansion of the Homestore.com web site and the integration of our
family of web sites.
General and administrative. General and administrative expenses increased
to $10.8 million for the three months ended March 31, 2000 from pro forma
general and administrative expenses of $5.1 million for the three months ended
March 31, 1999. The increase was primarily due to hiring of key management
personnel and increased staffing levels required to support our growth,
expanded operations and infrastructure as a public company. Facility costs
associated with our corporate office also increased. 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.
Amortization of intangible assets. Amortization of intangible assets was
$8.4 million for the three months ended March 31, 2000 as compared to pro
forma amortization of $7.0 million for the three months ended March 31, 1999.
The increase in amortization was primarily a result of the acquisition of
WyldFyre in March 2000.
Stock-based charges
Stock Options. In connection with the grant of stock options to employees
during 1997, 1998 and 1999, we recorded aggregate deferred compensation of
approximately $23.9 million. This deferred compensation
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<PAGE>
represented the difference between the deemed fair value of our common stock
for accounting purposes and the exercise price of these options at the date of
grant. Deferred compensation is presented as a reduction of stockholders'
equity and amortized over the vesting period of the applicable options,
generally four years.
Stock. In March 2000, we issued 1,085,271 shares of common stock valued for
accounting purposes at approximately $70.0 million to BGI in connection with
entering into a strategic alliance agreement. We are amortizing this amount
ratably over the ten-year term of the agreement, resulting in a non-cash
charge of $583,000 for the three months ended March 31, 2000.
Warrants. During the third and fourth quarters of 1999, we issued warrants
to purchase 910,844 shares of common stock at a weighted average exercise
price of $21.18 per share to Multiple Listing Services, or MLSs, that agreed
to provide their real estate listings to us for publication on the Internet on
a national basis. All warrants issued are fully vested, non-forfeitable and
are immediately exercisable. We incurred a total charge of approximately $11.2
million which is being recognized as expense over the term of the applicable
MLS agreement, approximately one to two years. The non-cash charge for these
warrants totaled approximately $2.3 million for the three months ended March
31, 2000.
In August 1999, we issued Norwest Mortgage a warrant to purchase 500,000
shares of our common stock at an exercise price of $20.00 per share. This
warrant is fully vested, non-forfeitable and is immediately exercisable. We
incurred a charge of approximately $3.5 million which is being recognized over
two years. The non-cash charge for this warrant totaled approximately $435,000
for the three months ended March 31, 2000.
In February 2000, we issued warrants to purchase up to 470,089 shares of
common stock at an exercise price of $66.50 to the Broker Gold program members
who elected to renew their existing listing agreements with us for an
additional two years. All warrants issued are fully vested, non-forfeitable
and are immediately exercisable. The non-cash charge for the warrants totaled
approximately $21.9 million which is being recognized as expense over three
years. The non-cash charge for these warrants totaled approximately $1.2
million for the three months ended March 31, 2000.
In March 2000, we issued a warrant to purchase 400,000 shares of common
stock at an exercise price of $35.63 per share to GMAC Mortgage Corporation.
The warrant issued is fully vested, non-forfeitable and immediately
exercisable. The non-cash charge for the warrant totaled approximately $5.0
million and is being recognized as expense over one year. The non-cash charge
for the warrant totaled approximately $414,000 for the three months ended
March 31, 2000.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of earnings on
our cash and cash equivalents, net of imputed interest expense on the notes
payable issued in connection with our acquisitions of The Enterprise of
America, Ltd. and MultiSearch Solutions, Inc. for the three months ended March
31, 1999, and interest expense incurred on the note payable issued in
connection with our Homefair acquisition for the three months ended March 31,
2000. Interest and other income increased to $4.4 million for the three months
ended March 31, 2000 from pro forma interest and other expense of $1.6 million
for the three months ended March 31, 1999. The increase was primarily due to
interest income earned on higher average cash balances as a result of our
initial and secondary offering proceeds.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes for the three months ended March 31, 2000 and 1999. As of December 31,
1999, we had $116.7 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2007. We have provided a full
valuation allowance on our deferred tax assets,
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<PAGE>
consisting primarily of net operating loss carryforwards, due to the
likelihood that we may not generate sufficient taxable income during the
carry-forward period to utilize the net operating loss carryforwards.
Liquidity and Capital Resources
Since inception, we have funded our operations and met our capital
expenditure requirements through the sale of equity securities and through
cash generated from the sale of our products and services and, to a lesser
extent, equipment lease financing. At March 31, 2000, we had cash and cash
equivalents of $430.8 million as compared to $90.4 million at December 31,
1999.
Net cash used in operating activities was $30.2 million for the three
months ended March 31, 2000 and $6.3 million in the three months ended March
31, 1999. Net cash used in operating activities in each of these periods was
primarily the result of net operating losses, including payments required to
be made relating to our Internet portal distribution and marketing and listing
agreements. These operating cash outflows were partially offset by increases
in accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $24.8 million for the three
months ended March 31, 2000, compared to net cash provided of $1.1 million in
the three months ended March 31, 1999. During the three months ended March 31,
2000, our investing activities consisted of acquisitions, investments and
purchases of property and equipment. We purchased NewList Corporation and
certain publication businesses from Haas Publishing Companies, Inc. for an
aggregate of $11.3 million. In addition, we invested in Smarthome.com, Inc.,
CornerHardware.com, and HandGear.com, Inc. for an aggregate of $11.7 million.
Capital expenditures for property and equipment totaled $2.6 million for the
three months ended March 31, 2000 and $225,000 for the three months ended
March 31, 1999. In the three months ended March 31, 1999, an additional $3.0
million of capital expenditures were funded through an equipment lease
financing arrangement. In January 1999, we received approximately $1.3 million
from sale of fixed assets.
Net cash provided by financing activities was $395.4 million for the three
months ended March 31, 2000 compared to net cash used of $4.7 million in the
comparable prior year period. Cash was provided primarily from net proceeds
from the sale of our common and preferred stock. In January 2000, we completed
our secondary public offering in which we sold 4,073,139 shares of our common
stock at a price of $110.0 per share, raising approximately $428.9 million
after deducting underwriting discounts and commissions and offering expenses.
In addition, we received approximately $4.9 million from exercise of options
and warrants during the three months ended March 31, 2000.
As of March 31, 2000, we had $430.8 million in cash and cash equivalents.
We expect to continue using our working capital to finance our ongoing
operations and rapid expansion, our marketing activities as well as the
development of new or enhanced existing services or products. Additionally, we
expect to use a portion of our cash for the acquisition and subsequent funding
of technologies, content, investments or businesses complimentary to our
current business. We currently anticipate that our existing cash and cash
equivalents and any cash generated from operations will be more than
sufficient to fund our operating activities, capital expenditures and other
obligations for the next twelve months.
In April 2000, we entered into a five-year marketing and distribution
agreement with AOL. In exchange for entering into this agreement, we paid AOL
$20.0 million in cash and issued approximately 3.9 million shares of its
common stock. We have guaranteed that the 30-day average closing price,
related to 60%, 20% and 20% of the shares it issued, will be $68.50 per share
on the third, fourth and fifth anniversaries of the agreement, respectively.
This guarantee only applies to shares that continue to be held by AOL at the
end of each respective year. In connection with the guarantee, we have
established a $90.0 million letter of credit that can be drawn upon by AOL in
the event that the our 30-day average closing price is less than $68.50 at the
end of each respective guarantee date. The letter of credit will be reduced to
$50.0 million at the end of the third anniversary of the agreement. The term
of the agreement may be reduced if AOL draws more than $40.0 million from the
letter of credit at the end of the third year anniversary of the agreement.
17
<PAGE>
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative
and the resulting designation. SFAS No. 133, as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we believe the impact of adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash
flows. We will implement SFAS No. 133 in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides additional guidance in applying
generally accepted accounting principles to revenue recognition in the
financial statements. Subsequent to the issuance of SAB 101, the SEC issued
Staff Accounting Bulletin 101A ("SAB 101A"), which delays the implementation
date of SAB 101 for registrants with fiscal years that begin between December
16, 1999 and March 15, 2000. We have evaluated the provisions of SAB 101 and
we believe it will not have a material impact on our financial position,
results of operations or cash flows. We will implement SAB 101 in the second
quarter of fiscal 2000.
Year 2000 Compliance
The Year 2000 Issue refers generally to the problems that some computer
systems may have in determining the correct century for the year. For example,
software with date-sensitive functions that are not Year 2000 compliant may
not be able to distinguish whether "00" means 1900 or 2000, which may result
in failures or the creation of erroneous results. We have experienced no
material Year 2000 problems in the period since January 1, 2000, although
unexpected Year 2000 problems in the future might have a material adverse
effect on our business, operating results or financial condition. We continue
to monitor our systems for Year 2000 compliance.
Additional Factors That May Affect Future Results
In addition to the factors discussed in the "Liquidity and Capital
Resources" section above and in our Form 10-K for the year ended December 31,
1999 under the caption "Factors That May Affect Future Results" and elsewhere,
the following additional factors may affect our future results:
Risks Related to our Business:
. Our agreement with the National Association of REALTORS could be
terminated by it.
. Our agreement with the NAR contains a number of provisions that could
restrict our operations.
. If our operating agreement for REALTOR.com terminates, the NAR would be
able to operate the REALTOR.com web site.
. We are subject to noncompetition provisions with the NAR which could
adversely affect our business.
. Our agreement with the National Association of Home Builders contains
provisions that could restrict our operations.
. Our SpringStreet.com web site is subject to a number of restrictions on
how it may be operated.
. The NAR could revoke its consent to our operating SpringStreet.com.
. The National Association of REALTORS has significant influence over
aspects of our RealSelect subsidiary's corporate governance.
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<PAGE>
. The NAR can restrict a change of control of Homestore.com.
. It is difficult to evaluate our current business due to our limited
history with our current business.
. We have a history of losses and expect losses for the foreseeable
future.
We have experienced operating losses in each quarterly and annual period
since 1993, and we incurred operating losses of $33.6 million for the three
months ended March 31, 2000. On a pro forma basis we incurred operating losses
of $25.8 million for the three months ended March 31, 1999. As of March 31,
2000, we had an accumulated deficit of $184.9 million, and we may continue to
incur losses. The size of these losses will depend, in part, on the rate of
growth in our revenues from broker, agent, home builder and rental property
owner, web hosting fees, advertising sales and sales of other products and
services. The size of our future losses will also be impacted by non-cash
stock-based charges relating to deferred compensation and stock and warrant
issuances, and amortization of intangible assets. As of March 31, 2000, we had
approximately $305.7 million of deferred stock-based charges and intangible
assets to be amortized.
It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web sites as
well as for any other products and services we may add. To accomplish this, we
will continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will
need to generate significant additional revenues to achieve profitability. As
a result, we may never achieve or sustain profitability, and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
. We must continue to obtain listings from real estate agents, brokers,
home builders, Multiple Listing Services and property owners.
We believe that our success depends in large part on the number of real
estate listings received from agents, brokers, home builders, MLSs and
residential, rental and commercial property owners. Many of our agreements
with MLSs, brokers and agents to display property listings have fixed terms,
typically 12 to 30 months. At the end of the term of each agreement, the other
party may choose not to continue to provide listing information to us on an
exclusive basis or at all and may choose to provide this information to one or
more of our competitors instead. We have expended significant amounts to
secure both our exclusive and non-exclusive agreements for listings of real
estate for sale and may be required to spend additional large amounts or offer
other incentives in order to renew these agreements. If owners of large
numbers of property listings, such as large brokers, MLSs, or property owners
in key real estate markets choose not to renew their relationship with us, our
family of web sites could become less attractive to other real estate industry
participants or consumers.
. We must dedicate significant resources to market our advertising
products and services to real estate professionals.
. It is important to our success that we support our real estate
professional customers.
Since many real estate professionals are not sophisticated computer users
and often spend limited amounts of time in their offices, it is important that
these customers find that our products and services significantly enhance
their productivity and are easy to use. To meet these needs, we provide
customer training and have developed a customer support organization that
seeks to respond to customer inquiries as quickly as possible. If our real
estate professional customer base grows, we may need to expand our support
organization further to maintain satisfactory customer support levels. If we
need to enlarge our support organization, we would incur higher overhead
costs. If we do not maintain adequate support levels, these customers could
choose to discontinue using our service.
. Our quarterly financial results are subject to significant fluctuations.
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Our results of operations could vary significantly from quarter to quarter.
In the near term, we expect to be substantially dependent on sales of our
advertising products and services. We also expect to incur significant sales
and marketing expenses to promote our brand and services. Therefore, our
quarterly revenues and operating results are likely to be particularly
affected by the number of persons purchasing advertising products and services
as well as sales and marketing expenses for a particular period. If revenues
fall below our expectations, we will not be able to reduce our spending
rapidly in response to the shortfall.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this Form 10-Q:
. the amount of advertising sold on our family of web sites and the timing
of payments for this advertising;
. the level of renewals for our advertising products and services by real
estate agents, brokers and rental property owners and managers;
. the amount and timing of our operating expenses and capital
expenditures;
. the amount and timing of non-cash stock-based charges, such as charges
related to deferred compensation or warrants issued to real estate
industry participants; and
. costs related to acquisitions of businesses or technologies.
. Because we have expanded our operations, our success will depend on our
ability to manage our growth.
. We depend on distribution agreements with a number of Internet portals
to generate traffic on our family of web sites.
. Our family of web sites may not achieve the brand awareness necessary to
succeed.
In an effort to obtain additional consumer traffic, increase usage by the
real estate community and increase brand awareness, we intend to continue to
pursue an aggressive online and off-line brand enhancement strategy. These
efforts will involve significant expense. If our brand enhancement strategy is
unsuccessful, we may fail to attract new or retain existing consumers or real
estate professionals, which would have a material adverse impact on our
revenues.
The market for web-based advertising products and services relating to real
estate is intensely competitive.
Our main existing and potential competitors for real estate professionals
and service providers, home buyers, homeowners, sellers and renters and
related content include:
. web sites offering real estate listings together with other related
services, such as Apartments.com, iOwn, Microsoft's HomeAdvisor,
NewHomeNetwork.com, Move.com and RentNet;
. web sites offering real estate related content and services such as
mortgage calculators and information on the home buying, selling and
renting processes;
. web sites offering real estate improvement content and services such as
ImproveNet;
. web sites offering moving and relocation content and services such as
MonsterData, Virtual Relocation, Lysias, School Match, and Move Central;
. general purpose consumer web sites such as AltaVista and Yahoo! that
also offer real estate-related content on their site; and
. traditional print media such as newspapers and magazines.
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Our main existing and potential competitors for advertisements include:
. general purpose consumer web sites such as AltaVista, America Online,
Excite, Lycos, Netscape's Netcenter and Yahoo!;
. general purpose online services that may compete for advertising
dollars;
. online ventures of traditional media, such as Classified Ventures; and
. traditional media such as newspapers, magazines and television.
The barriers to entry for web-based services and businesses are low, making
it possible for new competitors to proliferate rapidly. In addition, parties
with whom we have listing and marketing agreements could choose to develop
their own Internet strategies or competing real estate sites upon the
termination of their agreements with us. Many of our existing and potential
competitors have longer operating histories in the Internet market, greater
name recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do.
. We must attract and retain personnel while competition for personnel in
our industry is intense.
. We need to continue to develop our content and our product and service
offerings.
. We may experience difficulty in integrating our recent acquisitions.
. Our business is dependent on our key personnel.
. We rely on intellectual property and proprietary rights.
. We may not be able to protect the web site addresses that are important
to our business.
. We could be subject to litigation with respect to our intellectual
property rights.
Real Estate Industry Risks:
. Our business is dependent on the strength of the real estate industry,
which is both cyclical and seasonal.
. We may particularly be affected by general economic conditions.
. We have risks associated with changing legislation in the real estate
industry.
Internet Industry Risks:
. We depend on increased use of the Internet to expand our real estate
related advertising products and services.
. Government regulations and legal uncertainties could affect the growth
of the Internet.
. Taxation of Internet transactions could slow the use of the Internet.
. We depend on continued improvements to our computer network and the
infrastructure of the Internet.
. Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, located at our corporate headquarters in Thousand Oaks, California
and our other offices in Dallas, Texas; Milwaukee, Wisconsin; Phoenix,
Arizona; and San Jose, California. Although we have not experienced any
material outages to date, we currently do not have a redundant system for our
family of web sites and other services at an alternate site. Therefore, our
systems are vulnerable to damage from break-ins, unauthorized access,
vandalism, fire, earthquakes, power loss, telecommunications failures and
similar events. Although we maintain insurance against
21
<PAGE>
fires, earthquakes and general business interruptions, the amount of coverage
may not be adequate in any particular case.
Experienced computer programmers, or hackers, may attempt to penetrate our
network security from time to time. Although we have not experienced any
material security breaches to date, a hacker who penetrates our network
security could misappropriate proprietary information or cause interruptions
in our services. We might be required to expend significant capital and
resources to protect against, or to alleviate, problems caused by hackers. We
do not currently have a fully redundant system for our family of web sites. We
also may not have a timely remedy against a hacker who is able to penetrate
our network security. In addition to purposeful security breaches, the
inadvertent transmission of computer viruses could expose us to litigation or
to a material risk of loss.
. We could face liability for information on our web sites and for
products and services sold over the Internet.
. Our common stock price may be volatile, which could result in
substantial losses for individual stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Homestore.com currently does not hold any derivative instruments and does
not engage in hedging activities. Also, Homestore.com currently does not hold
any variable interest rate debt or lines of credit, and currently does not
enter into any transactions denominated in a foreign currency. Thus,
Homestore.com's exposure to interest rate and foreign exchange fluctuations is
minimal.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 -- Commitments and Contingencies in Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Homestore.com made the following unregistered sales of the Company's Common
Stock during the quarter ended March 31, 2000:
<TABLE>
<CAPTION>
Aggregate
Date of Number of Purchase
Class of Purchaser Sale Title of Securities Securities Price: Form of Consideration
------------------ ------- ------------------- ---------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
Pickford Realty, Ltd.... 1/700 Common Stock(1) 12,500 $40,000 Cash
Manufactured Housing 1/19/00 Warrant to purchase 40,000 -- -- As part of operating
Industry............... Common Stock agreement
Broker Gold Warrants.... 2/18/00 Warrant to purchase 470,089 -- -- As partial consideration
Common Stock for data content agreements
Budget Group, Inc....... 3/7/00 Common Stock (1) 1,085,271 -- -- As part of advertising agreement
17 Shareholders of 3/15/00 Common Stock (1) 589,426 -- -- Exchange of shares in connection
WyldFyre Technologies, with WyldFyre acquisition
Inc, as a group........
GMAC Mortgage 3/23/00 Warrant to purchase 400,000 -- -- As part of marketing agreement
Corporation............ Common Stock (1)
</TABLE>
- --------
(1) Sales made in reliance on Section 4(2) of the Securities Act and/or Rule
506 of Regulation D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Homestore.com, Inc. was convened on
April 12, 2000 at 2:00 p.m. There were present at the meeting, in person or by
proxy, the holders of 59,870,497 shares, representing 80% of the total number
of shares outstanding and entitled to vote at the meeting, such percentage
representing a quorum. The proposal to elect two Class I directors to hold
office until the 2003 Annual Meeting of Stockholders received the following
votes:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
Nigel D.T. Andrews 59,812,866 None 57,631
Richard R. Janssen 59,784,521 None 85,976
The proposal to ratify the selection of PricwaterhouseCoopers LLP as the
Company's independent accountants received the following vote:
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
59,849,428 6,791 14,278
</TABLE>
The foregoing proposal was approved and accordingly ratified.
23
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
27.01 Financial Data Schedule.*
</TABLE>
- -------
* Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Homestore.com, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 15, 2000
Homestore.com, Inc
/s/ Stuart H. Wolff
By: _________________________________
Stuart H. Wolff
Chairman of the Board and
Chief Executive Officer
/s/ John M. Giesecke, Jr.
By: _________________________________
John M. Giesecke, Jr.
Executive Vice President
Chief Financial Officer,
and Secretary
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 430,756 0
<SECURITIES> 8,667 0
<RECEIVABLES> 29,252 0
<ALLOWANCES> 2,009 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 488,185 0
<PP&E> 11,258 0
<DEPRECIATION> 2,891 0
<TOTAL-ASSETS> 701,770 0
<CURRENT-LIABILITIES> 52,296 0
<BONDS> 0 0
0 0
0 0
<COMMON> 77 0
<OTHER-SE> 649,397 0
<TOTAL-LIABILITY-AND-EQUITY> 701,770 0
<SALES> 38,599 5,570
<TOTAL-REVENUES> 38,599 5,570
<CGS> 10,560 2,749
<TOTAL-COSTS> 10,560 2,749
<OTHER-EXPENSES> 61,646 13,236
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (29,212) (10,486)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (29,212) (10,486)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (29,212) (10,486)
<EPS-BASIC> (.39) (.66)
<EPS-DILUTED> (.39) (.66)
</TABLE>
