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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-80419
PROSPECTUS
[LOGO OF HOMESTORE.COM(TM)]
UNITS OF COMMON STOCK, WARRANTS TO PURCHASE COMMON STOCK AND COMMON STOCK
ISSUABLE UPON EXERCISE OF WARRANTS
WARRANTS TO PURCHASE COMMON STOCK AND COMMON STOCK ISSUABLE UPON EXERCISE OF
WARRANTS
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Homestore.com, Inc. is offering to home builders up to 35 units consisting of
up to 437,500 shares of common stock and warrants to purchase up to 437,500
shares of its common stock. We are offering to Multiple Listing Services and
Norwest Mortgage, Inc. warrants to purchase up to 1,736,345 shares of common
stock. No public market currently exists for the warrants. We anticipate that
the offering price of the common stock included in the units will be $6.60 per
share, which will give us aggregate proceeds of $2,887,500. The units and
warrants will be offered to home builders and Multiple Listing Services in
exchange for them agreeing to provide us with real property listings or
publicity rights as well as, in the case of the units offered to home
builders, $82,500 per unit if the home builder elects a longer term of the
listing agreement. A warrant is being offered to Norwest Mortgage, Inc.
The warrants will have terms ranging from three to four and one-half years
from the date of issue, except the warrant held by Norwest Mortgage, Inc.
which has a term of one year. The warrants will have an exercise price equal
to the per share price of $20.00 per share. The warrants will not be
transferable without our consent and the shares issued upon exercise will be
subject to resale restrictions which lapse ratably over a 2 1/2, 3 or 4 year
period as described in the section entitled "Plan of Distribution" beginning
on page 91.
Our common stock is listed on the Nasdaq National Market under the symbol
"HOMS." On May 4, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $22 per share. The warrants will not be listed
on any stock market.
Investing in our securities involves risks. See "Risk Factors" beginning on
page 11.
We will not receive any cash proceeds from the issuance of the warrants.
However, when the warrants are exercised, we will receive the exercise price
for the warrants being exercised at a weighted average exercise price of
$21.27 per share covered by the warrants covered by this prospectus. If all of
these warrants are exercised for cash we would receive an additional
$46,231,900. Assuming the sale, issuance and exercise of all units and
warrants offered in this offering, Homestore.com will receive total proceeds
of $49,119,400.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
May 22, 2000
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TABLE OF CONTENTS
<TABLE>
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Page
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Special Note Regarding Forward-Looking Statements........................ 23
Use of Proceeds.......................................................... 24
Price Range of Common Stock.............................................. 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Consolidated Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
</TABLE>
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Page
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Business................................................................... 43
Management................................................................. 61
Related Party Transactions................................................. 73
Principal Stockholders..................................................... 80
Description of Capital Stock............................................... 82
Description of Warrants Offered............................................ 87
Shares Eligible for Future Sale............................................ 89
Plan of Distribution....................................................... 91
Legal Matters.............................................................. 94
Experts.................................................................... 94
Change in Independent Accountants.......................................... 95
Additional Information..................................................... 95
Index to Financial Statements.............................................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell securities and
seeking offers to buy securities only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of securities.
Homestore.com(TM), REALTOR.com(TM), HomeBuilder.com(TM),
SpringStreet.com(TM), Remodel.com(TM), Homefair.com(TM), i-Lead(TM), The
Salary Calculator(TM), The Moving Calculator(TM), The Relocation Wizard(TM),
The Lifestyle Optimizer(TM), The City Reports(TM) and The School Report(TM)
are our trademarks or are exclusively licensed to us. This prospectus contains
trademarks of other companies and organizations. "REALTOR(R)" is a registered
collective membership mark which may be used only by real estate professionals
who are members of the National Association of REALTORS, or the NAR, and
subscribe to its code of ethics.
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
OUR COMPANY
We are the leading destination on the Internet for home and real estate-
related information, advertising products and services, based on the number of
visitors, time spent on our web sites and number of property listings, and 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, 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. To provide consumers with real estate listings, access to real estate
professionals and other home and real estate-related information and resources
throughout the home and real estate life cycle, we have established
relationships with key industry participants. These participants include real
estate market leaders such as the National Association of REALTORS, or the NAR,
the National Association of Home Builders, or the NAHB, the largest Multiple
Listing Services, or MLSs, the NAHB Remodelors Council, the National
Association of the Remodeling Industry, or NARI, the American Institute of
Architects, or the AIA, the Manufactured Housing Institute, or the MHI, real
estate franchises, brokers, builders and agents. The NAR is a not for profit
trade organization whose members include over 720,000 real estate brokers and
agents across the U.S. The NAHB is the largest trade organization of new home
builders in the U.S. MLSs operate proprietary networks that provide real estate
professionals with listings of properties for sale and are regulated by a
governing body of local brokers and/or agents. The NAHB Remodelors Council and
the NARI, the remodeling industry's two leading professional organizations,
together represent more than 100,000 contractors and home improvement
specialists.
In order to draw additional traffic to our family of web sites, we also have
distribution agreements with the following Internet portal sites: America
Online, Excite@Home and Go Network/Infoseek. These agreements typically provide
that our content will be displayed on the real estate related sections of those
sites along with links to our web sites. We generate revenues from several
sources, including fees from agents, brokers, home builders, rental property
owners and other advertisers.
OUR MARKET OPPORTUNITY
Every participant in the home and real estate life cycle faces a unique set
of challenges. Consumers are continually searching for a comprehensive,
convenient and integrated source of information to assist them in every aspect
of the real estate transaction. Real estate agents and brokers depend on
attracting and retaining customers in order to generate increasing numbers of
transactions and are looking for additional opportunities to market their
services, become more productive and compete more effectively for transactions.
Home building and real estate professionals also depend on attracting and
retaining customers in order to sell new properties in a timely manner and
continue to seek new ways to market their products and services as well as
inform prospective home buyers of the availability of new properties. To make
an informed decision, renters need access to comprehensive information about
available rental units, specific neighborhoods and rental prices in a given
geographic location. In addition, due to the high turnover rate in rental
units, property managers and owners must regularly attract new tenants to
minimize their vacancy rates and consequently continue to seek to market their
available units in a cost-effective manner. Consumers require a number of
ancillary services relating to activities such as home maintenance and repairs,
refinancing, remodeling, landscaping and moving. Finally, service providers and
retailers of home and real estate-related products or services need an
effective mechanism or centralized location to reach consumers who are most
interested in their offerings.
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Because of the size and fragmented nature of the real estate industry and its
reliance on the exchange of information, the Internet offers a compelling means
for consumers, real estate professionals, home builders, renters, property
managers and owners and ancillary service providers to come together to improve
the dissemination of information and enhance communications.
OUR WEB SITES
We operate the Homestore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com,
Remodel.com, and Homefair.com web sites.
. Homestore.com serves as a gateway to our entire family of web sites.
. REALTOR.com contains listings for over 1.2 million of the approximately
1.3 million homes that we estimate are listed nationally for sale as of
December 31, 1999. Users can search our database of homes for sale and
find detailed information on the available homes and their surrounding
neighborhoods. They can also use REALTOR.com to find REALTORS to assist
them in the buying or selling process. The site's primary areas, Getting
Started, Buying, Selling, Offer/Closing, Moving and Owning, also provide
users with information for each stage of the home and real estate life
cycle. Our consumer products and services are available free of charge.
REALTORS can purchase our advertising products and services, which
provide detailed information about their listings, including photos, and
can link their listings to their personal web site pages.
. HomeBuilder.com contains listings of over 130,000 new homes and planned
developments across the U.S. as of December 31, 1999. Users can use
HomeBuilder.com, free of charge, to search for detailed information on a
particular builder or geographic location as well as home attributes.
Builders of all sizes can purchase our advertising products and services
and display their new homes, models or floor plans. Potential buyers can
also contact builders through the site via electronic mail or facsimile.
. SpringStreet.com contains listings for over 45,000 rental properties in
over 6,000 U.S. cities as of December 31, 1999. Users can use
SpringStreet.com, free of charge, to search for detailed information on
particular rental units, buildings and neighborhoods. SpringStreet.com
also provides information for services targeted at renters, such as
insurance, furniture rental and other local services. Property owners
and managers can list their rental properties using basic text-based
listings or, for additional fees, list their properties using enhanced
listings containing additional features, such as color photos and maps.
. Remodel.com provides home improvement and maintenance ideas and
information for both consumers and remodeling professionals. Consumers
can search for a home improvement professional, free of charge, as well
as submit their job requirements to Remodel.com in order to receive
estimates from selected professionals.
. Homefair.com provides interactive tools, calculators and reports to
assist users in moving and relocating. Users can access these features,
free of charge, to conduct research on communities, schools and cost of
living and determine costs and tasks associated with moving.
Homefair.com also offers consumers numerous opportunities to access
related service providers focused on making their move less stressful
and more successful.
In addition to fees we receive from real estate professionals for our
advertising products and services, we also offer to other types of advertisers
a variety of standard Internet advertising products and services on our family
of web sites, such as banner advertisements and sponsorships.
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OUR STRATEGY
Our objective is to extend our position as the leading home and real estate
destination on the Internet. The key elements of our strategy include:
increasing the number of listings and enhancing the home-related content on our
web sites; increasing the number of users on our web sites as well as the
amount of time they spend on the sites; pursuing additional relationships with
key real estate industry participants and home service providers; continuing to
extend our brand name and brand recognition among consumers and home service
professionals; and incorporating new Internet technologies into our web sites
to provide enhanced functions and features.
WE HAVE A HISTORY OF NET LOSSES AND MAY NOT ACHIEVE PROFITABILITY
We have incurred losses from our operations since we were formed in 1993. On
a pro forma basis, we incurred operating losses of $87.1 million in 1998 and
$129.2 million for the year ended December 31, 1999. On an actual basis, we
incurred operating losses of $95.4 million in 1999. We also have an accumulated
deficit of $155.7 million as of December 31, 1999. Therefore, we may not
achieve or sustain profitability.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Warrants offered to MLSs and Norwest
Mortgage, Inc. ............................ 1,736,345 shares(1)
Units of 12,500 shares of common stock and a
warrant for up to 12,500 shares offered to
home builders ............................. 35 units (an aggregate of 437,500
shares and 437,500 shares
subject to warrants)(2)
Common stock outstanding after the
offering................................... 70,626,586 shares
Use of proceeds ............................ For property listings and general
corporate purposes, including
capital expenditures and working
capital. See "Use of Proceeds."
Nasdaq National Market symbol for our common
stock ..................................... HOMS
</TABLE>
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(1) Of these securities, warrants to purchase up to 1,436,470 shares have been
issued through March 31, 2000.
(2) Of these securities, warrants to purchase up to 25,000 shares have been
issued through March 31, 2000.
The number of shares of our common stock outstanding immediately after the
offering is based on the number of shares outstanding at December 31, 1999.
This number does not take into account:
. 4,073,139 shares offered by us in our secondary public offering in
January 2000;
. 10,461,359 shares issuable upon the exercise of outstanding stock
options as of March 31, 2000, at a weighted average per share price of
$18.18;
. 3,303,674 shares issuable upon the exercise of warrants outstanding as
of March 31, 2000 including certain warrants covered by this prospectus,
at a weighted average per share exercise price of $27.89;
. up to 712,375 additional shares subject to warrants being offered in
this offering, excluding shares issuable upon the exercise of warrants
previously issued to MLSs, Norwest Mortgage, Inc., and home builders as
of March 31, 2000;
. 1,085,271 shares issued in March 2000 to Budget Group, Inc. ("BGI") in
exchange for entering into a ten-year strategic alliance agreement;
. 589,426 shares issued in March 2000 in connection with the acquisition
of WyldFyre Technologies, Inc.; and
. 3,894,343 shares issued in April 2000 to America Online, Inc. in
exchange for entering into a distribution agreement.
Following our secondary public offering in January 2000, the NAR owned
approximately 5.4% of our common stock, venture capital funds affiliated with
our board members owned approximately 28.6% of our common stock and our
remaining officers and directors owned approximately 6.1% of our common stock.
We are offering the securities described in this prospectus to MLSs and home
builders in exchange for them agreeing to provide us with real property
listings on a preferred or exclusive basis for a term of one to three years,
and in the case of the units offered to home builders, $82,500 per unit. The
number of shares subject to the warrants offered will vary depending on the
number of listings provided by the particular MLS or home builder.
6
<PAGE>
The warrants being offered under this prospectus:
. may be exercised during a specified period, typically three to four and
one-half years, beginning on the date of purchase of the warrant;
. will have an exercise price of $20.00 per share which is equal to the
price of our common stock in our underwritten initial public offering;
. may also be exercised, or converted to common stock, on a "net exercise"
or "cashless" basis; and
. may not be transferred or assigned by the holder without our prior
written consent.
The shares offered in the units and the shares issued upon exercise of the
warrants will not be transferable after the date of purchase. This restriction
will lapse over the exercise period of the warrant as follows:
. for MLSs with existing exclusive listing agreements with us, 10% of the
shares subject to the warrant will become transferable every three
months, so that after two and one-half years, none of the shares subject
to the warrant will be subject to these restrictions;
. for MLSs that have existing non-exclusive listing agreements with us and
for home builders, 8.33% of the shares subject to the warrant will
become transferable every three months so that after three years, none
of the shares subject to the warrants will be subject to these
restrictions; and
. for the MLSs who receive a second group of warrants, 6.25% of the shares
subject to the warrant will become transferable every three months so
that after four years, none of the shares subject to the warrants will
be subject to these restrictions.
Please read pages 92 and 93 for a description of these transfer restrictions.
7
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table presents consolidated statement of operations data of
Homestore.com. The pro forma statement of operations data below gives effect to
the pro forma basis of presentation described in "Selected Consolidated
Financial Data" on page 27. See Note 2 of Homestore.com's Notes to Consolidated
Financial Statements and Unaudited Pro Forma Condensed Consolidated Financial
Information.
<TABLE>
<CAPTION>
Actual Pro Forma
------------------------ ------------
Year Ended
December 31, Year Ended
------------------------ December 31,
1997 1998 1999 1999
------ ------ -------- ------------
<S> <C> <C> <C> <C>
Consolidated statement of operations
data:
Revenues............................... $ 42 $ -- $ 62,580 $ 73,367
Gross profit........................... 36 -- 41,558 49,046
Loss from operations................... (16) (3) (95,365) (129,202)
Net loss............................... $ (17) $ (3) $(93,007) $(132,046)
Net loss applicable to common
stockholders.......................... $ (17) $ (3) $(95,306) $(132,046)
Net loss per share applicable to common
stockholders:
Basic and diluted.................... $ -- $ -- $ (2.32) $ (2.11)
Weighted average shares-basic and
diluted............................. 8,650 9,173 41,142 62,474
</TABLE>
The following table presents consolidated balance sheet data of Homestore.com
at December 31, 1999.
<TABLE>
<CAPTION>
December 31,
1999
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<S> <C>
Consolidated balance sheet data:
Cash and cash equivalents.......................................... $ 90,382
Working capital.................................................... 40,822
Total assets....................................................... 276,563
Notes payable, long-term and current............................... 38,576
Total stockholders' equity......................................... 195,473
</TABLE>
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Recent Operating Results
On May 3, 2000, we announced selected operating results for the quarter ended
March 31, 2000. The following pro forma statement of operations data for the
quarter ended March 31, 1999 gives effect the pro forma basis of presentation
described in "Selected Consolidated Financial Data" on page 27.
<TABLE>
<CAPTION>
Actual Pro Forma
Three Months Three Months
Ended March 31, Ended March 31,
------------------ ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue......................... $ 38,599 $ 5,570 $ 38,599 $ 10,409
Net loss........................ $(29,212) $(10,486) $(10,006)(a) $(17,186)(a)
Basic and diluted net loss per
share.......................... $ (.39) $ (.63) $ (.14)(a) $ (.31)(a)
Weighted average shares-basic
and diluted.................... 74,052 16,611 74,052 54,566
</TABLE>
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(a) Excludes the effects of non-cash charges for: (1) stock-based charges and
(2) amortization of intangible assets.
RECENT DEVELOPMENTS
On January 27, 2000, we filed a registration statement on Form S-1 which was
declared effective by the Securities and Exchange Commission. We sold 4,073,139
shares of our common stock at $110.00 per share, generating gross proceeds of
$448.0 million. In addition, 4,226,861 shares of our common stock were offered
and sold on behalf of selling stockholders at $110.00 per share, generating
gross proceeds of $465.0 million for the account of selling stockholders. In
connection with that offering, we incurred $17.9 million in underwriting
discounts and commissions, and approximately $1.2 million in other related
expenses.
We have recently received a request for information from the antitrust
division of the U.S. Department of Justice. The request seeks information about
the business of our Company as it relates to Internet realty sites in the
United States. The government has not alleged any violation of law, and we
believe we have complied with all laws and regulations. We intend to cooperate
fully with the Department of Justice's request.
In March 2000, we acquired WyldFyre Technologies, Inc., a developer of
technology solutions for real estate professionals to access MLS information
via the Internet, for approximately 589,000 shares of common stock.
In April 2000, we entered into a marketing and distribution agreement with
America Online, Inc. ("AOL"). Under the terms of the agreement, AOL received
approximately 3.9 million shares of our common stock, which we have guaranteed
will meet certain performance targets throughout the terms of the agreement. As
part of the guarantee, we will issue a $90.0 million letter of credit, which
will be drawn upon only if our stock does not meet the performance targets. AOL
will also receive $20.0 million in cash as part of the agreement.
OUR HISTORY
We were incorporated in July 1993 as InfoTouch, Inc. InfoTouch's initial
business plan was to develop kiosks, or booths with computer screens, to allow
consumers to search for home listings. In December 1996, our RealSelect
subsidiary was formed to operate the REALTOR.com web site. RealSelect was
initially owned by the NAR and an entity called NetSelect LLC. NetSelect LLC
was in turn owned by InfoTouch and another holding company, NetSelect, Inc. In
February 1999, NetSelect, Inc. and NetSelect LLC were merged into InfoTouch and
InfoTouch was renamed NetSelect, Inc. In August 1999, we changed our name to
Homestore.com, Inc. Concurrently with our initial public offering on August 4,
1999, the NAR exchanged substantially all of its
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RealSelect shares for shares of our common stock. Currently, we own in excess
of 99% of RealSelect's stock and the NAR owns less than 1%. Our current
subsidiaries include:
. RealSelect, Inc. which owns our REALTOR.com and Remodel.com web sites;
. SpringStreet, Inc. which owns the SpringStreet.com web site;
. National New Homes Co., Inc. which owns the HomeBuilder.com web site;
. The Homebuyer's Fair, Inc. which owns the Homefair.com web site; and
. The Enterprise of America, Ltd.
The NAR has the right to appoint one member to our board of directors and two
members to RealSelect's board of directors. The RealSelect board members
appointed by the NAR must approve RealSelect's undertaking of a number of
actions. Under a stockholders agreement with the NAR, if we propose to enter
into a new real estate related business, we must first give RealSelect the
opportunity to invest in that business. We pay royalties to the NAR on a
quarterly basis based on revenues. In addition, the NAR must consent to
transfers of stock by many of our existing stockholders and to any proposed
sale of substantially all of our assets. This could have the effect of delaying
or restricting a change of control. Our relationship with the NAR is described
in more detail on pages 11-14 and 74-78.
We are a Delaware corporation. Our principal executive offices are located at
225 West Hillcrest Drive, Suite 100, Thousand Oaks, California 91360. Our
general telephone number is (805) 557-2300. Our world wide web addresses are
"www.Homestore.com," "www.REALTOR.com," "www.HomeBuilder.com,"
"www.SpringStreet.com," "www.Remodel.com" and "www.Homefair.com." The
information on our family of web sites is not incorporated into this
prospectus.
We face a number of risks related to our business including the potential
termination of our agreements with the NAR and NAHB, the influence the NAR has
over how we operate the REALTOR.com and SpringStreet.com web sites and our need
to obtain real estate listings. You should read the information contained in
the section entitled "Risk Factors" carefully.
The NAR, the NAHB and the NARI make no endorsement or recommendation
regarding any purchase of the shares of common stock being sold in this
offering.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, results of operations and financial condition could be materially
adversely affected, the trading price of our common stock could decline, and
you could lose all or part of your investment.
Risks Related to our Business
Our agreement with the National Association of REALTORS could be terminated
by it.
The REALTOR.com trademark and web site address and the REALTOR trademark are
owned by the NAR. The NAR licenses these trademarks to our RealSelect
subsidiary under a license agreement, and RealSelect operates the REALTOR.com
web site under an operating agreement with the NAR.
Although the REALTOR.com operating agreement is a lifetime agreement, the
NAR may terminate it for a variety of reasons. These include:
. the acquisition of Homestore.com or RealSelect;
. a substantial decrease in the number of property listings on our
REALTOR.com site; and
. a breach of any of our other obligations under the agreement that we do
not cure within 30 days of being notified by the NAR of the breach.
Absent a breach by the NAR, the agreement does not contain provisions that
allow us to terminate.
Our agreement with the NAR contains a number of provisions that could
restrict our operations.
Our operating agreement with the NAR contains a number of provisions that
restrict how we operate our business. These restrictions include:
. we must make quarterly royalty payments of up to 15% of RealSelect's
operating revenues in the aggregate to the NAR and the entities that
provide us the information for our real property listings, which we
refer to as our data content providers;
. we are restricted in the type and subject matter of, and the manner in
which we display, advertisements on the REALTOR.com web site;
. the NAR has the right to approve how we use its trademarks, and we must
comply with its quality standards for the use of these marks;
. we must meet performance standards relating to the availability time of
the REALTOR.com web site;
. the NAR has the right to review, approve and request changes to the
content on the pages of our REALTOR.com web site; and
. we may be restricted in our ability to create additional web sites or
pursue other lines of business that engage in displaying real property
advertisements in electronic form by the terms of our agreements with
the NAR.
In addition, our operating agreement with the NAR contains restrictions on
how we can operate the REALTOR.com web site. For instance, we can only enter
into agreements with entities that provide us with real estate listings, such
as MLSs, on terms approved by the NAR. In addition, the NAR can require us to
include on REALTOR.com real estate related content it has developed. See
"Related Party Transactions--Operating Agreement with the National Association
of REALTORS."
11
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If our operating agreement for REALTOR.com terminates, the NAR would be able
to operate the REALTOR.com web site.
If our operating agreement terminates, we must transfer a copy of the
software that operates the REALTOR.com web site and assign our agreements with
data content providers, such as real estate brokers or MLSs, to the NAR. The
NAR would then be able to operate the REALTOR.com web site itself or with a
third party. Many of these data content agreements are exclusive, and we could
be prevented from obtaining and using listing data from the providers covered
by these transferred agreements until the exclusivity periods lapse.
We are subject to noncompetition provisions with the NAR which could
adversely affect our business.
We were required to obtain the consent of the NAR prior to our acquisition
of SpringStreet and the launch of our HomeBuilder.com web site. In the future,
if we were to acquire or develop another service which provides real estate
listings on an Internet site or through other electronic means, we will need
to obtain the prior consent of the NAR. Any future consents from the NAR, if
obtained, could be conditioned on our agreeing to operational conditions for
the new web site or service. These conditions could include paying fees to the
NAR, limiting the types of content or listings on the web sites or service or
other terms and conditions. Our business could be adversely affected if we do
not obtain consents from the NAR, or if a consent we obtain contains
restrictive conditions. These noncompetition provisions and any required
consents, if accepted by us at our discretion, could have the effect of
restricting the lines of business we may pursue.
Our agreement with the National Association of Home Builders contains
provisions that could restrict our operations.
Our operating agreement with the NAHB includes a number of restrictions on
how we operate our HomeBuilder.com web site:
. if the NAR terminates our REALTOR.com operating agreement, for the next
six months the NAHB can terminate this agreement with three months'
prior notice;
. we are restricted in the type and subject matter of advertisements on
the pages of our HomeBuilder.com web site that contain new home
listings; and
. the NAHB has the right to approve how we use its trademarks and we must
comply with its quality standards for the use of its marks.
Our SpringStreet.com web site is subject to a number of restrictions on how
it may be operated.
In agreeing to our acquisition of SpringStreet, the NAR imposed a number of
important restrictions on how we can operate the SpringStreet.com web site.
These include:
. if the consent terminates for any reason, we will have to transfer to
the NAR all data and content, such as listings, on the rental site that
were provided by real estate professionals who are members of the NAR,
known as REALTORS;
. listings for rental units in smaller non-apartment properties generally
must be received from a REALTOR or REALTOR-controlled MLSs in order to
be listed on the web site;
. if the consent is terminated, we could be required to operate our rental
properties web site at a different web address;
. if the consent terminates for any reason, other than as a result of a
breach by the NAR, the NAR will be permitted to use the REALTOR-branded
web address, resulting in increased competition;
. without the consent of the NAR, prior to the time we are using a
REALTOR- branded web address, we cannot provide a link on the
SpringStreet.com web site linking to the REALTOR.com web site and vice
versa;
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. we cannot list properties for sale on the rental web site for the
duration of our REALTOR.com operating agreement and for an additional
two years;
. we are restricted in the type and subject matter of, and the manner in
which we display, advertisements on the rental web site;
. we must make royalty payments based on the operating revenues of the
rental site to the NAR and our data content providers at the same rates
as under our REALTOR.com operating agreement, except that the amount
payable to data content providers in the aggregate will be
proportionately based on the percentage of the total content on the site
supplied by them; and
. we must offer REALTORS preferred pricing for home pages or enhanced
advertising on the rental web site.
The NAR could revoke its consent to our operating SpringStreet.com.
The NAR can revoke its consent to our operating the SpringStreet.com web
site for reasons which include:
. the acquisition of Homestore.com or RealSelect;
. a substantial decrease in property listings on our REALTOR.com web site;
and
. a breach of any of our obligations under the consent or the REALTOR.com
operating agreement that we do not cure within 30 days of being notified
by the NAR of the breach.
The National Association of REALTORS has significant influence over aspects
of our RealSelect subsidiary's corporate governance.
The NAR will have significant influence over RealSelect's corporate
governance.
Board representatives. The NAR is entitled to have one representative as a
member of our board of directors and two representatives as members of our
RealSelect subsidiary's board of directors.
Approval rights. RealSelect's certificate of incorporation contains a
limited corporate purpose, which purpose is the operation of the REALTOR.com
web site and real property advertising programming for electronic display and
related businesses. Without the consent of six-sevenths of the members of the
RealSelect board of directors, which would have to include at least one NAR
appointed director, this limited purpose provision cannot be amended.
RealSelect cannot take the following actions without the consent of at least
one of the NAR's representatives on its board of directors:
. amend its certificate of incorporation or bylaws;
. pledge its assets;
. approve transactions with affiliates, stockholders or employees in
excess of $100,000;
. change its executive officers;
. establish, or appoint any members to, a committee of its board of
directors; or
. issue or redeem any of its equity securities.
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The NAR can restrict a change of control of Homestore.com.
Stockholders holding approximately 61.1% of our outstanding capital stock at
December 31, 1999 have agreed to restrict the sale of their shares of common
stock. Without the prior consent of the NAR, these stockholders may not
transfer these shares of common stock to a person, other than to each other,
whose primary business is "real estate-related" or to a transferee who will
become a holder of more than 5% of our capital stock as a result of the
transfer from the stockholder. Accordingly, these types of changes of control,
even if favorable to stockholders, could be prohibited or restricted absent
the NAR's consent.
It is difficult to evaluate our current business due to our limited history
with our current business.
HomeBuilder.com was added to our family of web sites in July 1998 after our
acquisition of MultiSearch Solutions. Our Remodel.com web site was launched in
September 1999. We acquired our SpringStreet.com web site in June 1999 and our
Homefair.com web site in October 1999. Therefore, we have only a limited
operating history with our current business. This limited history makes it
difficult to evaluate our current business and prospects.
We have a history of losses and expect losses for the foreseeable future.
We have experienced operating losses in each quarterly and annual period
since 1993, and we incurred operating losses of $95.4 million for the year
ended December 31, 1999. On a pro forma basis, we incurred operating losses of
$87.1 million in 1998 and $129.2 million for the year ended December 31, 1999.
As of December 31, 1999, we had an accumulated deficit of $155.7 million, and
we expect to incur losses for the foreseeable future. The size of these losses
will depend, in part, on the rate of growth in our revenues from broker,
agent, home builder and rental property owner web hosting fees, advertising
sales and sales of other products and services. The size of our future losses
will also be impacted by non-cash stock-based charges relating to deferred
compensation and stock and warrant issuances, and amortization of intangible
assets. As of December 31, 1999, we had approximately $177.6 million of
deferred stock-based compensation and intangible assets to be amortized.
It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web sites as
well as for any other products and services we may add. To accomplish this, we
will continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will
need to generate significant additional revenues to achieve profitability. As
a result, we may never achieve or sustain profitability, and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis. 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.
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We must dedicate significant resources to market our advertising products and
services to real estate professionals.
Because the annual fee for services sold to real estate professionals is
relatively low, we depend on obtaining sales from a large number of these
customers. It is difficult to reach and enroll new subscribers cost-
effectively. A large portion of our sales force targets real estate
professionals who are widely distributed across the United States. This
results in relatively high fixed costs associated with our sales activities.
In addition, our sales personnel generally cannot efficiently contact real
estate professionals on an individual basis and instead must rely on sales
presentations to groups of agents and/or brokers. Real estate agents are
generally independent contractors rather than employees of brokers. Therefore,
even if a broker uses our advertising products and services, its affiliated
agents are not required to use them.
It is important to our success that we support our real estate professional
customers.
Since many real estate professionals are not sophisticated computer users
and often spend limited amounts of time in their offices, it is important that
these customers find that our products and services significantly enhance
their productivity and are easy to use. To meet these needs, we provide
customer training and have developed a customer support organization that
seeks to respond to customer inquiries as quickly as possible. If our real
estate professional customer base grows, we may need to expand our support
organization further to maintain satisfactory customer support levels. If we
need to enlarge our support organization, we would incur higher overhead
costs. If we do not maintain adequate support levels, these customers could
choose to discontinue using our service.
Our quarterly financial results are subject to significant fluctuations.
Our results of operations could vary significantly from quarter to quarter.
In the near term, we expect to be substantially dependent on sales of our
advertising products and services. We also expect to incur significant sales
and marketing expenses to promote our brand and services. Therefore, our
quarterly revenues and operating results are likely to be particularly
affected by the number of persons purchasing advertising products and services
as well as sales and marketing expenses for a particular period. If revenues
fall below our expectations, we will not be able to reduce our spending
rapidly in response to the shortfall.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this prospectus:
. the amount of advertising sold on our family of web sites and the timing
of payments for this advertising and whether these advertisements are
sold by us directly or on our behalf by America Online or other third
parties;
. the level of renewals for our advertising products and services by real
estate agents, brokers and rental property owners and managers;
. the amount and timing of our operating expenses and capital
expenditures;
. the amount and timing of non-cash stock-based charges, such as charges
related to deferred compensation or warrants issued to real estate
industry participants; and
. costs related to acquisitions of businesses or technologies.
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Because we have expanded our operations, our success will depend on our
ability to manage our growth.
We have rapidly and significantly expanded our operations, both by
acquisition and organic growth, and expect to continue to expand our
operations. This growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational, financial and other
resources. For example, we have grown to approximately 993 employees on
December 31, 1999 from 79 employees on December 31, 1997.
We depend on distribution agreements with a number of Internet portals to
generate traffic on our family of web sites.
We believe that a substantial portion of our consumer traffic comes from the
following Internet portal sites: America Online, Excite@Home and Go
Network/Infoseek. On some of these sites we are featured as the exclusive
provider of home listings. We intend to pursue additional distribution
relationships in the future although we may not succeed in these efforts. To
secure both exclusive and non-exclusive distribution relationships, we often
pay significant fees. However, we may not experience sustained increases in
user traffic from these distribution relationships.
There is intense competition for placement on Internet portals. Our
distribution agreements have terms ranging from two to four years. When they
expire, we may be unable to renew our existing agreements or enter into
replacement agreements. If any of these agreements terminates without our
renewing it, we could experience a decline in the number of our users and our
competitive position could be significantly weakened. Even if we renew our
agreements or enter into agreements with new providers, we may be required to
pay significant fees to do so and may be unable to retain any exclusivity that
we may have enjoyed under these agreements.
Our family of web sites may not achieve the brand awareness necessary to
succeed.
In an effort to obtain additional consumer traffic, increase usage by the
real estate community and increase brand awareness, we intend to continue to
pursue an aggressive online and off-line brand enhancement strategy. These
efforts will involve significant expense. If our brand enhancement strategy is
unsuccessful, we may fail to attract new or retain existing consumers or real
estate professionals, which would have a material adverse impact on our
revenues.
The market for web-based advertising products and services relating to real
estate is intensely competitive.
Our main existing and potential competitors for real estate professionals
and service providers, home buyers, homeowners, sellers and renters and
related content include:
. web sites offering real estate listings together with other related
services, such as Apartments.com, iOwn, Microsoft's HomeAdvisor,
NewHomeNetwork.com, Move.com and RentNet;
. web sites offering real estate related content and services such as
mortgage calculators and information on the home buying, selling and
renting processes;
. web sites offering real estate improvement content and services such as
ImproveNet;
. web sites offering moving and relocation content and services such as
MonsterData, Virtual Relocation, Lysias, School Match, and Move Central;
. general purpose consumer web sites such as AltaVista and Yahoo! that
also offer real estate-related content on their site; and
. traditional print media such as newspapers and magazines.
Our main existing and potential competitors for advertisements include:
. general purpose consumer web sites such as AltaVista, America Online,
Excite, Lycos, Netscape's Netcenter and Yahoo!;
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. general purpose online services that may compete for advertising
dollars;
. online ventures of traditional media, such as Classified Ventures; and
. traditional media such as newspapers, magazines and television.
The barriers to entry for web-based services and businesses are low, making
it possible for new competitors to proliferate rapidly. In addition, parties
with whom we have listing and marketing agreements could choose to develop
their own Internet strategies or competing real estate sites upon the
termination of their agreements with us. Many of our existing and potential
competitors have longer operating histories in the Internet market, greater
name recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do.
We must attract and retain personnel while competition for personnel in our
industry is intense.
We may be unable to retain our key employees or to attract, assimilate or
retain other highly qualified employees. We have from time to time in the past
experienced, and we expect in the future to continue to experience, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications as a result of our rapid growth and expansion. Attracting and
retaining qualified personnel with experience in the real estate industry, a
complex industry that requires a unique knowledge base, is an additional
challenge for us. In addition, there is significant competition for qualified
employees in the Internet industry. If we do not succeed in attracting new
personnel or retaining and motivating our current personnel, our business will
be adversely affected.
We need to continue to develop our content and our product and service
offerings.
To remain competitive we must continue to enhance and improve the ease of
use, responsiveness, functionality and features of our family of web sites.
These efforts may require us to develop internally or to license increasingly
complex technologies. In addition, many companies are continually introducing
new Internet-related products, services and technologies, which will require
us to update or modify our technology. Developing and integrating new
products, services or technologies into our family of web sites could be
expensive and time consuming. Any new features, functions or services may not
achieve market acceptance or enhance our brand loyalty. If we fail to develop
and introduce or acquire new features, functions or services effectively and
on a timely basis, we may not continue to attract new users and may be unable
to retain our existing users. Furthermore, we may not succeed in incorporating
new Internet technologies, or in order to do so, we may incur substantial
expenses.
We may experience difficulty in integrating our recent acquisitions.
Our recent acquisitions, including SpringStreet.com in June 1999 and
Homefair in October 1999, and any future acquisitions may result in our not
achieving the desired benefits of the transaction. Risks related to our
acquisitions include:
. difficulties in assimilating the operations of the acquired businesses;
. potential disruption of our existing businesses;
. the potential need to obtain the consent of the NAR;
. assumption of unknown liabilities and litigation;
. our inability to integrate, train, retain and motivate personnel of the
acquired businesses;
. diversion of our management from our day-to-day operations;
. our inability to incorporate acquired products, services and
technologies successfully into our family of web sites;
. potential impairment of relationships with our employees, customers and
strategic partners; and
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. inability to maintain uniform standards, controls procedures and
policies.
Our inability to successfully address any of these risks could materially
harm our business.
Our business is dependent on our key personnel.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel, particularly Stuart H.
Wolff, Ph.D. The loss of the services of Dr. Wolff or other key employees
would likely have a significantly detrimental effect on our business.
We have no employment agreements that prevent any of our key personnel from
terminating their employment at any time. Although we have obtained "key-
person" life insurance for Mr. Wolff, we believe this coverage will not be
sufficient to compensate us for the loss of his services.
We rely on intellectual property and proprietary rights.
We regard substantial elements of our family of web sites and underlying
technology as proprietary. Despite our precautionary measures, third parties
may copy or otherwise obtain and use our proprietary information without
authorization or develop similar technology independently. Although we have
one patent, we may not achieve the desired protection from, and third parties
may design around, this patent. In addition, in any litigation or proceeding
involving our patent, the patent may be determined invalid or unenforceable.
Any legal action that we may bring to protect our proprietary information
could be expensive and distract management from day-to-day operations.
Other companies may own, obtain or claim trademarks that could prevent or
limit or interfere with use of the trademarks we use. The REALTOR.com web site
address, or domain name, and trademark and the REALTOR trademark are important
to our business and are licensed to us by the NAR. If we were to lose the
REALTOR.com domain name or the use of these trademarks, our business would be
harmed and we would need to devote substantial resources towards developing an
independent brand identity.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and evolving, and we can give no assurance regarding the future viability or
value of any of our proprietary rights.
We may not be able to protect the web site addresses that are important to
our business.
Our web site addresses, or domain names, are important to our business. The
regulation of domain names is subject to change. Some proposed changes include
the creation of additional top-level domains in addition to the current top-
level domains, such as ".com," ".net" and ".org." It is also possible that the
requirements for holding a domain name could change. Therefore, we may not be
able to obtain or maintain relevant domain names for all of the areas of our
business. It may also be difficult for us to prevent third parties from
acquiring domain names that are similar to ours, that infringe our trademarks
or that otherwise decrease the value of our intellectual property.
We could be subject to litigation with respect to our intellectual property
rights.
Other companies may own or obtain patents or other intellectual property
rights that could prevent or limit or interfere with our ability to provide
our products and services. Companies in the Internet market are increasingly
making claims alleging infringement of their intellectual property rights. For
example, in December 1997, we received a letter claiming that our map
technology infringes patents held by another person. We believe this person
may have instituted legal proceedings against two of our competitors. We have
received no further correspondence with respect to this issue and, after
discussions with our patent counsel, we do not believe any of our technology
infringes these patents. However, we could incur substantial costs to defend
against these or any other claims or litigation. If a claim were successful,
we could be required to obtain a license from the holder of the intellectual
property or redesign our advertising products and services.
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Real Estate Industry Risks:
Our business is dependent on the strength of the real estate industry, which
is both cyclical and seasonal.
The real estate industry traditionally has been cyclical. Recently, sales of
real estate in the United States have been at historically high levels.
Economic swings in the real estate industry may be caused by various factors.
When interest rates are high or general national and global economic
conditions are or are perceived to be weak, there is typically less sales
activity in real estate. A decrease in the current level of sales of real
estate and products and services related to real estate could adversely affect
demand for our family of web sites and our advertising products and services.
In addition, reduced traffic on our family of web sites would likely cause our
advertising revenues to decline, which would materially and adversely affect
our business.
We may experience seasonality in our business. The real estate industry
experiences a decrease in activity during the winter. However, because of our
limited operating history under our current business model, we do not know if
or when any seasonal pattern will develop or the size or nature of any
seasonal pattern in our business.
We may particularly be affected by general economic conditions.
Purchases of real property and related products and services are
particularly affected by negative trends in the general economy. The success
of our operations depends to a significant extent upon a number of factors
relating to discretionary consumer and business spending, and the overall
economy, as well as regional and local economic conditions in markets where we
operate, including:
. perceived and actual economic conditions;
. interest rates;
. taxation policies;
. availability of credit;
. employment levels; and
. wage and salary levels.
In addition, because a consumer's purchase of real property and related
products and services is a significant investment and is relatively
discretionary, any reduction in disposable income in general may affect us
more significantly than companies in other industries.
We have risks associated with changing legislation in the real estate
industry.
Real estate is a heavily regulated industry in the U.S., including
regulation under the Fair Housing Act, the Real Estate Settlement Procedures
Act and state advertising laws. In addition, states could enact legislation or
regulatory policies in the future which could require us to expend significant
resources to comply. These laws and related regulations may limit or restrict
our activities. For instance, we are limited in the criteria upon which we may
base searches of our real estate listings such as age or race. As the real
estate industry evolves in the Internet environment, legislators, regulators
and industry participants may advocate additional legislative or regulatory
initiatives. Should existing laws or regulations be amended or new laws or
regulations be adopted, we may need to comply with additional legal
requirements and incur resulting costs, or we may be precluded from certain
activities. For instance, SpringStreet.com was required to qualify and
register as a real estate agent/broker in the State of California. To date, we
have not spent significant resources on lobbying or related government issues.
Any need to significantly increase our lobbying or related activities could
substantially increase our operating costs.
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Internet Industry Risks
We depend on increased use of the Internet to expand our real estate related
advertising products and services.
If the Internet fails to become a viable marketplace for real estate content
and information, our business will not grow. Broad acceptance and adoption of
the Internet by consumers and businesses when searching for real estate and
related products and services will only occur if the Internet provides them
with greater efficiencies and improved access to information.
In addition to selling advertising products and services to real estate
professionals, we depend on selling other types of advertisements on our
family of web sites.
Our business would be adversely affected if the market for web advertising
fails to develop or develops more slowly than expected. Our ability to
generate advertising revenues from selling banner advertising and sponsorships
on our web sites will depend on, among other factors, the development of the
Internet as an advertising medium, the amount of traffic on our family of web
sites and our ability to achieve and demonstrate user demographic
characteristics that are attractive to advertisers. Most potential advertisers
and their advertising agencies have only limited experience with the Internet
as an advertising medium and have not devoted a significant portion of their
advertising expenditures to Internet-based advertising. No standards have been
widely accepted to measure the effectiveness of web advertising. If these
standards do not develop, existing advertisers might reduce their current
levels of Internet advertising or eliminate their spending entirely. The
widespread adoption of technologies that permit Internet users to selectively
block out unwanted graphics, including advertisements attached to web pages,
could also adversely affect the growth of the Internet as an advertising
medium. In addition, advertisers in the real estate industry, including real
estate professionals, have traditionally relied upon other advertising media,
such as newsprint and magazines, and have invested substantial resources in
other advertising methods. These persons may be reluctant to adopt a new
strategy and advertise on the Internet.
Government regulations and legal uncertainties could affect the growth of the
Internet.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities
and jurisdiction. Additionally, it is uncertain as to how existing laws will
be applied to the Internet. The adoption of new laws or the application of
existing laws may decrease the growth in the use of the Internet, which could
in turn decrease the usage and demand for our services or increase our cost of
doing business.
Some local telephone carriers have asserted that the increasing popularity
and use of the Internet have burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet
service providers and online service providers. If access fees are imposed,
the costs of communicating on the Internet could increase substantially,
potentially slowing the increasing use of the Internet. This could in turn
decrease demand for our services or increase our cost of doing business.
Taxation of Internet transactions could slow the use of the Internet.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and
local level and by various foreign governments to impose taxes on the sale of
goods and services and other Internet activities. Recently, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new
state and local taxes on Internet commerce. However, future laws may impose
taxes or other regulations on Internet commerce, which could substantially
impair the growth of electronic commerce.
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We depend on continued improvements to our computer network and the
infrastructure of the Internet.
Any failure of our computer systems that causes interruption or slower
response time of our web sites or services could result in a smaller number of
users of our family of web sites or the web sites that we host for real estate
professionals. If sustained or repeated, these performance issues could reduce
the attractiveness of our web sites to consumers and our advertising products
and services to real estate professionals, providers of real estate related
products and services and other Internet advertisers. Increases in the volume
of our web site traffic could also strain the capacity of our existing
computer systems, which could lead to slower response times or system
failures. This would cause the number of real property search inquiries,
advertising impressions, other revenue producing offerings and our
informational offerings to decline, any of which could hurt our revenue growth
and our brand loyalty. We may need to incur additional costs to upgrade our
computer systems in order to accommodate increased demand if our systems
cannot handle current or higher volumes of traffic.
The recent growth in Internet traffic has caused frequent periods of
decreased performance. Our ability to increase the speed with which we provide
services to consumers and to increase the scope of these services is limited
by and dependent upon the speed and reliability of the Internet. Consequently,
the emergence and growth of the market for our services is dependent on the
performance of and future improvements to the Internet.
Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, located at our corporate headquarters in Thousand Oaks, California
and our other offices in Dallas, Texas; Milwaukee, Wisconsin; Phoenix,
Arizona; and San Jose, California. Although we have not experienced any
material outages to date, we currently do not have a redundant system for our
family of web sites and other services at an alternate site. Therefore, our
systems are vulnerable to damage from break-ins, unauthorized access,
vandalism, fire, earthquakes, power loss, telecommunications failures and
similar events. Although we maintain insurance against fires 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.
We provide third-party content on our family of web sites, particularly real
estate listings. We could be exposed to liability with respect to this third-
party information. Persons might assert, among other things, that, by directly
or indirectly providing links to web sites operated by third parties, we
should be liable for copyright or trademark infringement or other wrongful
actions by the third parties operating those web sites. They could also assert
that our third party information contains errors or omissions, and consumers
could seek damages for losses incurred if they rely upon incorrect
information.
We enter into agreements with other companies under which we share with
these other companies revenues resulting from advertising or the purchase of
services through direct links to or from our family of web sites. These
arrangements may expose us to additional legal risks and uncertainties,
including local, state, federal and foreign government regulation and
potential liabilities to consumers of these services, even if we do not
provide the services ourselves. We cannot assure you that any indemnification
provided to us in our agreements with these parties, if available, will be
adequate.
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Even if these claims do not result in liability to us, we could incur
significant costs in investigating and defending against these claims. Our
general liability insurance may not cover all potential claims to which we are
exposed and may not be adequate to indemnify us for all liability that may be
imposed.
We face Year 2000 related risks.
Although we did not experience material Year 2000 problems in the period
since January 1, 2000, our computer systems could, at a later date, have
failures or miscalculations resulting from issues with respect to the Year
2000, causing disruptions of operations, including, among other things, a
temporary inability to process searches, post listings, track advertising or
engage in similar normal business activities. Any undetected significant Year
2000 failure could prevent us from operating our business, prevent users from
accessing our family of web sites or change the behavior of advertisers,
consumers or persons accessing our family of web sites. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
Risks Related to this Offering
Our officers and directors and stockholders affiliated with them own a large
percentage of our voting stock.
As of February 29, 2000, our 14 officers and directors named in this
prospectus and 5% or greater stockholders which are affiliates of these
officers and directors, beneficially owned or controlled, directly, or
indirectly, 32,071,453 shares of common stock, which in the aggregate
represented approximately 42.0% of the outstanding shares of common stock. As
a result, if these persons act together, they will have the ability to
influence all matters submitted to our stockholders for approval, including
(1) the election and removal of directors, other than the director appointed
by the NAR, and (2) any merger, consolidation or sale of all or substantially
all of our assets. So long as the NAR holds its one share of our Series A
preferred stock, it will be entitled to elect one member to our board of
directors.
Our certificate of incorporation and bylaws, Delaware law and other
agreements contain provisions that could discourage a takeover.
Delaware law, our certificate of incorporation and bylaws, our operating
agreement with the NAR and a stockholders agreement could have the effect of
delaying or preventing a third party from acquiring us, even if a change in
control would be beneficial to our stockholders. For example, we have a
classified board of directors. In addition, our stockholders are unable to act
by written consent or to fill any vacancy on the board of directors. Our
stockholders cannot call special meetings of stockholders for any purpose,
including to remove any director or the entire board of directors without
cause. In addition, the NAR could terminate the REALTOR.com operating
agreement if Homestore.com or RealSelect is acquired. These provisions and
other provisions of Delaware law could make it more difficult for a third
party to acquire us, even if doing so would benefit our stockholders.
There will be no market for the warrants and our common stock price may be
volatile, which could result in substantial losses for individual
stockholders.
We will not apply to list the warrants for trading on any securities
exchange. Therefore, there will be no public market for the warrants.
Furthermore, the market price for our common stock is likely to continue to be
highly volatile and subject to wide fluctuations in response to factors,
including the following, some of which are beyond our control:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new products or services
by us or our competitors;
. changes in financial estimates by securities analysts;
22
<PAGE>
. conditions or trends in the Internet and/or real estate and real estate-
related industries;
. changes in the economic performance and/or market valuations of other
Internet or online commerce companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
. additions or departures of key personnel;
. release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock;
and
. potential litigation.
If our stock price continues to be volatile, we could face securities class
action lawsuits.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock price to fall.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of common stock in the public market
could cause the market price of our common stock to decline. Of our shares of
common stock currently outstanding, approximately 43,070,678 shares became
available for sale on April 26, 2000 and an additional approximately 5,157,725
shares will become available for sale at various times from May 28, 2000
through October 22, 2000.
In addition, there are approximately 3,403,114 shares outstanding that are
subject to our right to repurchase which lapses ratably over the term of the
related option agreement, generally four years. Upon the lapse of this right
of repurchase, the shares will be become eligible for sale in the public
market. These shareholders have signed lock-up agreements with the
underwriters of our January 2000 public offering under which they have agreed
not the sell, transfer or dispose of, directly or indirectly, 3,208,730 shares
of common stock or any securities convertible into or exercisable or
exchangeable for shares of common stock without the prior written consent of
Morgan Stanley & Co. Incorporated through April 26, 2000.
In addition, as of March 31, 2000 there were outstanding options and
warrants to purchase up to 13,765,033 shares of common stock. See "Shares
Eligible for Future Sale."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," or the negative
of these terms or other comparable terminology. The forward-looking statements
contained in this prospectus involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, level
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these statements. These factors include those listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
23
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the warrants. We
estimate that our net proceeds from the sale of the 437,500 shares of common
stock that we are offering will be approximately $2,887,500, at the price of
$6.60 per share in this offering. In addition, we estimate we will receive
approximately $46,231,900 upon the exercise of warrants being offered in this
offering at a weighted average exercise price of $21.27 per share.
We intend to use the net proceeds for working capital, capital expenditures
and other general corporate purposes. We may also use a portion of the net
proceeds from this offering to acquire or invest in businesses, technologies
or products that are complementary to our business. Pending our use of the net
proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "HOMS" since August 5, 1999. Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the high and low sales prices per share of the common stock as
reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
1999
Third Quarter (from August 5, 1999)...................... $ 59 7/8 $19 3/4
Fourth Quarter........................................... 109 33
2000
First Quarter............................................ 138 34
Second Quarter (through May 4, 2000)..................... 49 14 1/16
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends in the foreseeable future,
except for an annual dividend of $.08 to be paid on the one share of our
Series A preferred stock held by the NAR.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
The pro forma as adjusted column reflects the sale of the 437,500 shares of
common stock that we are offering in this offering at a price of
$6.60 per share and the exercise of warrants for up to 2,173,845 shares we are
offering in this offering at a weighted average per share exercise price of
$21.27.
<TABLE>
<CAPTION>
December 31, 1999
----------------------
Pro Forma
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Notes payable, long-term and current portion ........... $ 38,576 $ 38,576
--------- ---------
Stockholders' equity:
Convertible preferred stock, $.001 par value per
share; actual and pro forma as adjusted--5,000,000
shares authorized and one share issued and
outstanding.......................................... -- --
Common stock, $.001 par value per share; actual--
500,000,000 shares authorized, 75,251,000 shares
issued and 70,189,000 shares outstanding; pro forma
as adjusted--500,000,000 shares authorized,
77,863,000 shares issued and 72,801,000 shares
outstanding ......................................... 70 72
Additional paid-in capital ........................... 413,244 462,362
Treasury stock ....................................... (13,676) (13,676)
Notes receivable from stockholders ................... (13,350) (13,350)
Deferred stock compensation .......................... (38,947) (38,947)
Accumulated other comprehensive income ............... 3,865 3,865
Accumulated deficit .................................. (155,733) (155,733)
--------- ---------
Total stockholders' equity ......................... 195,473 244,593
--------- ---------
Total capitalization ............................... $ 234,049 $ 283,169
========= =========
</TABLE>
The data in the table above excludes:
. 4,073,139 shares issued by us in our secondary public offering in
January 2000;
. 10,461,359 shares issuable upon the exercise of outstanding stock
options as of March 31, 2000, at a weighted average per share exercise
price of $18.18;
. 4,051,499 shares available as of March 31, 2000 for future grant under
our stock plans described in this prospectus;
. 3,303,674 shares issuable upon the exercise of warrants outstanding as
of March 31, 2000, at a weighted average per share exercise price of
$27.89;
. up to 712,375 additional shares subject to warrants that we are offering
in this offering, excluding shares issuable upon the exercise of
warrants previously issued to the MLSs, Norwest, and home builders as of
March 31, 2000;
. up to 520,749 shares subject to warrants issued in February 2000 at an
exercise price of $66.50 per share;
. 1,085,271 shares issued in March 2000 to BGI in exchange for entering
into a ten-year strategic alliance agreement;
. 589,426 shares issued in March 2000 in connection with the acquisition
of WyldFyre Technologies, Inc.; and
. 3,894,343 shares issued in April 2000 to America Online, Inc. in
exchange for entering into a distribution agreement.
You should read this table together with "Management-Director Compensation,"
"Management-Employee Benefit Plans," "Description of Capital Stock," Notes 11,
12, 13 and 20 of Homestore.com's Notes to Consolidated Financial Statements
and Unaudited Pro Forma Condensed Consolidated Financial Information.
25
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was $56.9 million or
$.81 per share. Net tangible book value per share is determined by dividing
the number of outstanding shares of common stock into our net tangible book
value, which is our total tangible assets less total liabilities. After giving
effect to the sale of 437,500 shares of common stock that we are offering in
this offering at a price of $6.60 per share and the receipt of the proceeds
from the exercise of warrants being offered in this offering, our pro forma
net tangible book value as of December 31, 1999 would have been approximately
$106.0 million, or $1.46 per share. This represents an immediate increase in
pro forma net tangible book value of $.65 per share to existing stockholders
and an immediate average dilution of $17.35 per share to new investors
purchasing shares in this offering, although actual dilution for any
particular investor would depend on the price that the investor paid for the
shares that the investor purchased pursuant to this prospectus. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Average public offering price per share.......................... $18.81
Net tangible book value per share as of December 31, 1999...... $.81
Increase per share attributable to new investors............... .65
----
Pro forma net tangible book value per share after offering....... 1.46
------
Dilution per share to new investors.............................. $17.35
======
</TABLE>
As of March 31, 2000, there were options and warrants outstanding to
purchase a total of 13,765,033 shares of common stock. In addition there are
up to 712,375 additional shares subject to warrants being offered in this
offering, excluding shares issuable upon the exercise of warrants previously
issued to the MLSs, Norwest, and builders as of March 31, 2000.
To the extent that any of these options or warrants are exercised or shares
are issued, there will be further dilution to new public investors. See
"Capitalization," "Management--Employee Benefit Plans," "Description of
Capital Stock," Notes 8, 9, 10 and 16 of Homestore.com's Notes to Consolidated
Financial Statements and Unaudited Pro Forma Condensed Consolidated Financial
Information.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999, and the
consolidated balance sheet data as of December 31, 1998 and 1999, are derived
from the audited consolidated financial statements of Homestore.com included
elsewhere in this prospectus. The consolidated statement of operations data
for the year ended December 31, 1995 and the consolidated balance sheet data
as of December 31, 1995 and 1996 have been derived from our unaudited
consolidated financial statements not included in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1996
and the consolidated balance sheet data as of December 31, 1997 have been
derived from our audited consolidated financial statements not included in
this prospectus. The unaudited consolidated financial statements have been
prepared on substantially the same basis as the consolidated audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the
financial position and results of operations for the period. The unaudited pro
forma data for the year ended December 31, 1999 is derived from unaudited pro
forma condensed consolidated rstatement by operations included elsewhere in
this prospectus.
As a result of the reorganization of our holding company structure and due
to the fact that our historical results of operations, financial condition and
cash flows were insignificant prior to December 4, 1996, management believes
that a pro forma presentation, which includes a comparison of results of
operations and financial condition of NetSelect, Inc., NetSelect, LLC,
Homestore.com and RealSelect on a combined basis for 1998 and 1999 is the only
meaningful basis of presentation for investors in evaluating our historical
financial performance. See the basis of presentation described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma condensed consolidated statement of operations data
assume that the following transactions occurred on January 1, 1999, including
preferred stock issued in connection with an acquisition. For preferred stock
not issued in connection with an acquisition, 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:
. conversion of preferred stock in connection with the initial public
offering;
. 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 in February 1999 by
merging NetSelect, Inc. and NetSelect, LLC with InfoTouch.
27
<PAGE>
The unaudited consolidated pro forma data may not, however, be indicative of
the consolidated results of operations of Homestore.com that actually would
have occurred had the transactions reflected in the unaudited consolidated pro
forma results of operations occurred at the beginning of the period presented,
or of the consolidated results of operations that we may achieve in the
future.
<TABLE>
<CAPTION>
Actual Pro-Forma
-------------------------------------- ------------
Year Ended December 31, Year Ended
-------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ----- ----- -------- ------------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues.................. $ 857 $1,360 $ 42 $ -- $ 62,580 $ 73,367
Cost of revenues
(excluding $1,432 in pro
forma non-cash equity
charges for the year
ended December 31,
1999).................... 58 42 6 -- 21,022 24,321
------ ------ ----- ----- -------- ---------
Gross profit............ 799 1,318 36 -- 41,558 49,046
------ ------ ----- ----- -------- ---------
Operating expenses:
Sales and marketing
(excluding $16,383 in
pro forma non-cash equity
charges for the year
ended December 31,
1999).................... 559 479 14 -- 70,384 82,003
Product development
(excluding $677 in pro
forma non-cash equity
charges for the year
ended December 31,
1999).................... 474 629 -- -- 4,933 6,704
General and administrative
(excluding $5,547 in pro
forma non-cash equity
charges for the year
ended December 31,
1999).................... 649 441 38 3 21,781 28,620
Amortization of intangible
assets................... -- -- -- -- 10,192 28,476
Stock-based charges....... -- -- -- -- 21,227 24,039
Litigation settlement..... -- -- -- -- 8,406 8,406
------ ------ ----- ----- -------- ---------
Total operating
expenses............. 1,682 1,549 52 3 136,923 178,248
------ ------ ----- ----- -------- ---------
Loss from operations...... (883) (231) (16) (3) (95,365) (129,202)
Interest and other income
(expense), net........... (30) (21) (1) -- 2,358 (2,844)
------ ------ ----- ----- -------- ---------
Net loss.................. (913) (252) (17) (3) (93,007) (132,046)
Accretion of redemption
value and dividends on
convertible preferred
stock.................... -- -- -- -- (2,299) --
------ ------ ----- ----- -------- ---------
Net loss applicable to
common stockholders...... $ (913) $ (252) $ (17) $ (3) $(95,306) $(132,046)
====== ====== ===== ===== ======== =========
Net loss per share
applicable to common
stockholder--basic and
diluted.................. $ (.37) $ (.07) $ -- $ -- $ (2.32) $ (2.11)
====== ====== ===== ===== ======== =========
Weighted average shares--
basic and diluted........ 2,435 3,477 8,650 9,173 41,142 62,474
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1995 1996 1997 1998 1999
----- ----- ----- ---- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................. $ 5 $ 36 $ 155 $ 71 $ 90,382
Working capital (deficiency)............... (200) (46) (37) 1 40,822
Total assets............................... 181 77 155 71 276,563
Notes payable, long term and current....... -- -- -- -- 38,576
Total stockholders' equity (deficit)....... (150) (116) (133) (95) 195,473
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the unaudited
pro forma condensed consolidated financial statements and the consolidated
financial statements and related notes of Homestore.com appearing elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risk and uncertainties, including, among other things, statements
regarding anticipated costs and expenses, mix of revenues and plans for
addressing Year 2000 issues. Our actual results could differ materially from
the results contemplated by these forward-looking statements as a result of
different factors, including those discussed below and elsewhere in this
prospectus.
Overview
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.
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. For a further
discussion relating to the accounting for the Reorganization, see Notes 1, 2
and 4 of Homestore.com's Notes to Consolidated Financial Statements. We
(InfoTouch) changed our corporate name to Homestore.com, Inc. in August 1999.
29
<PAGE>
The following chart illustrates our corporate structure immediately prior to
the Reorganization in February 1999:
[CHART OF THE CORPORATE STRUCTURE OF HOMESTORE.COM APPEARS HERE]
30
<PAGE>
The following chart illustrates our current corporate structure:
[CHART OF THE HOMESTORE.COM APPEARS HERE]
Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. For the years ended
December 31, 1997 and 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 twelve months
ended December 31, 1998 and 1999 has been presented to assist investors in
evaluating our historical financial performance. A comparison of the
historical results of operations of NSI for the years ended December 31, 1997
and 1998 has also 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 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. 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. 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 at the beginning of each period presented.
31
<PAGE>
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.
Accounting Policies
Revenues. We derive our revenues from the sale of marketing and advertising
products and services to real estate agents and brokers, home builders,
property owners and managers. We also sell advertising banners and traditional
Internet sponsorships on our web sites. Substantially all of our agent
advertising products and many of our property owner and manager advertising
products are sold in annual subscriptions and, accordingly, we defer these
revenues and recognize them ratably over the life of the contract, generally
12 months. These prepayments appear on our balance sheet as deferred revenues.
In addition, we sell banner advertising pursuant to contracts with terms
varying from three months to three years, which may include the guarantee of a
minimum number of impressions or times that an advertisement appears in pages
viewed by the users. This advertising revenue is recognized ratably based upon
the lesser of impressions delivered over the total number of guaranteed
impressions or ratably over the period in which the advertisement is
displayed. We also sell leads and referrals to companies in the relocation
industry pursuant to short-term contracts. Revenue from leads, referrals and
other performance-based arrangements is recognized as leads and referrals are
delivered or other performance criteria are met, provided no significant
obligations remain and collection of the related receivable is probable.
Cost of revenues. Cost of revenues consists of salaries, benefits, and
consulting fees related to our web site operations, credit card processing
fees, data aggregation costs and costs associated with printing our new home
directories. Cost of revenues also includes royalties paid to third-party real
estate listings providers. These royalties are capitalized and amortized over
the related contract period and are classified on our balance sheet as
deferred royalties.
Real estate listings providers generally receive 10% to 12% of the gross
revenues that we generate from their listings. Some real estate listings
providers have entered into national arrangements with us, under which we have
the exclusive right to list their properties on the Internet. The royalty rate
for agreements with these real estate listings providers is slightly higher
than for other providers. 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.
Sales and marketing. Sales and marketing expenses include salaries, sales
commissions, benefits, travel and related expenses for our direct sales force,
customer service, marketing, and sales support functions. Sales and marketing
expenses also include fees associated with our Internet portal distribution
agreements and marketing and listing agreements with real estate franchises.
These fees are amortized on a pro rata basis over the terms of the agreements.
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.
Product development. Product development costs include expenses for the
development of new or improved technologies designed to enhance the
performance of our family of web sites, including salaries and related
expenses for our web site design staff, as well as costs for contracted
services, content, facilities and equipment. 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.
32
<PAGE>
General and administrative. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, legal and human
resources personnel. In addition, general and administrative expenses include
occupancy costs, fees for professional service, and depreciation. 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. Amortization of intangible assets
consists of goodwill and other purchased intangibles resulting from the
acquisitions of The Enterprise, MultiSearch, SpringStreet and Homefair.
Goodwill and all other purchased intangibles are being amortized on a
straight-line basis over the estimated periods of benefit ranging from three
to five years. In addition, in connection with our formation, we entered into
an operating agreement with the NAR and received intellectual property. Under
the operating agreement with the NAR, we made various payments in which we
issued common stock to the NAR for the right to use the REALTOR.com trademark
and domain name and the "REALTOR" trademark and for the exclusive use of the
web site for real estate listings. The intellectual property, the stock issued
and payments made to the NAR, as well as milestone-based amounts subsequently
earned by the NAR have been recorded as intangible assets and are being
amortized on a straight-line basis over the estimated period of benefit of 15
years.
Stock-based charges. In connection with the grant of stock options to
employees during 1997, 1998 and 1999, we recorded deferred compensation
representing 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. In addition, we have incurred non-cash charges related
to the issuance of stock and warrants during 1998 and 1999.
We have only a limited operating history under our current business model.
Our prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as the Internet. To address these risks, we must, among other
things, be able to continue to respond to highly competitive developments,
attract, retain and motivate qualified personnel, implement and successfully
execute our marketing plans, continue to upgrade our technologies, develop new
distribution channels, and improve operational and financial systems. Although
our revenues have grown significantly in recent periods, we may be unable to
sustain this growth. Therefore, you should not consider our historical growth
indicative of future revenue levels or operating results. We may never achieve
profitability or, if we do, we may not be able to sustain it. A more complete
description of other risks relating to our business is set forth under the
caption "Risk Factors."
Pro Forma Results of Operations
The following tables set forth certain pro forma consolidated statement of
operations data for the periods indicated and assume that the following
transactions had occurred as of January 1, 1998:
. our acquisition of 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;
. 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 $3.6 million note payable 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;
. 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.
33
<PAGE>
The unaudited consolidated pro forma data may not, however, be indicative of
the consolidated results of operations of Homestore.com that actually would
have occurred had the transactions reflected in the unaudited consolidated pro
forma results of operations occurred at the beginning of the periods
presented, or of the consolidated results of operations that we may achieve in
the future.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1999
--------------------------------
(in thousands)
<S> <C> <C>
Pro Forma Consolidated Statement of Operations
Data:
Revenues...................................... $ 23,123 $ 73,367
Cost of revenues (excluding $141 and $1,432 in
non-cash equity charges for the years ended
December 31, 1998 and 1999, respectively).... 10,133 24,321
----------- ------------
Gross profit................................ 12,990 49,046
----------- ------------
Operating expenses:
Sales and marketing (excluding $506 and
$16,383 in non-cash equity charges for the
years ended December 31, 1998 and 1999,
respectively).............................. 34,560 82,003
Product development (excluding $78 and $677
in non-cash equity charges for the years
ended December 31, 1998 and 1999,
respectively).............................. 5,585 6,704
General and administrative (excluding $837
and $5,547 in non-cash equity charges for
the years ended December 31, 1998 and 1999,
respectively).............................. 11,608 28,620
Amortization of intangible assets........... 27,897 28,476
Stock-based charges......................... 20,455 24,039
Litigation settlement....................... -- 8,406
----------- ------------
Total operating expenses.................... 100,105 178,248
----------- ------------
Loss from operations.......................... (87,115) (129,202)
Interest and other expense, net............... (6,090) (2,844)
----------- ------------
Net loss $ (93,205) $ (132,046)
=========== ============
As a Percentage of Pro Forma Revenues:
Revenues...................................... 100% 100%
Cost of revenues.............................. 44 33
----------- ------------
Gross profit................................ 56 67
----------- ------------
Operating expenses:
Sales and marketing......................... 149 112
Product development......................... 24 9
General and administrative.................. 50 39
Amortization of intangible assets........... 121 39
Stock-based charges......................... 88 33
Litigation settlement....................... -- 11
----------- ------------
Total operating expenses.................... 432 243
----------- ------------
Loss from operations.......................... (376) (176)
Interest and other expense, net............... (27) (4)
----------- ------------
Net loss (403)% (180)%
=========== ============
</TABLE>
34
<PAGE>
Pro Forma for the Years Ended December 31, 1999 and 1998
Revenues
Pro forma revenues increased to $73.4 million in 1999 from $23.1 million in
1998. The increase was primarily due to increased revenue from professional
subscriptions, as well as an increase in advertising revenue. The growth in
revenue from professional subscriptions was due to an increase in the number
of subscribers on our family of web sites. The growth in advertising revenue
was primarily driven by increased sponsorships, including the GMAC Mortgage
and GMAC Home Services alliance agreements announced in November 1999 as well
as the Norwest Mortgage alliance announced in August 1999. Banner advertising
revenues also increased primarily as a result of increased traffic to our web
sites in 1999 as compared to 1998.
Cost of Revenues
Pro forma cost of revenues increased to $24.3 million in 1999 from $10.1
million in 1998. The increase was due primarily to our overall increased sales
volume and increased activity during 1999 as compared to 1998. Our pro forma
gross margin in 1999 was 67%, up from 56% for 1998, primarily due to increased
advertising revenue.
Operating Expenses
Sales and marketing. Pro forma sales and marketing expenses increased to
$82.0 million in 1999 from $34.6 million in 1998. The increase was primarily
attributable to a significant increase in costs associated with Internet
portal distribution agreements and marketing and listing agreements which we
entered into throughout 1998 and 1999. 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 expenses also contributed to the increase.
Product development. Pro forma product development expenses increased to
$6.7 million in 1999 from $5.6 million in 1998. The increase was primarily due
to costs associated with the launch of Remodel.com and the re-launch of the
Homestore.com web site, including salaries and related expenses for staff, as
well as contracted services.
General and administrative. Pro forma general and administrative expenses
increased to $28.6 million in 1999 from $11.6 million in 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.
Amortization of intangible assets. Pro forma amortization of intangible
assets was $28.5 million in 1999 as compared to $27.9 million in 1998.
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 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 non-cash charge of $18.9 million for the year ended December 31,
1998, 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.
35
<PAGE>
In addition, in 1999, we recorded as pro forma deferred compensation 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. We are amortizing
this amount ratably over the two-year term of the Broker Gold agreements,
resulting in a non-cash charge of $2.8 million in 1999.
Warrants. 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 $7.00 per share. We
incurred a total charge of $12.6 million which is being amortized over the
remaining term of the distribution agreement, approximately two years. The
non-cash charge for these warrants totaled approximately $3.0 million in 1999.
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
364,110 shares of our common stock with an exercise price of $20.00 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 charges for these warrants totaled
approximately $1.2 million in 1999.
Throughout 1999, we issued warrants to purchase 910,844 shares of common
stock at a weighted average exercise price of $21.18 per share to Multiple
Listing Services, or MLSs, that agreed to provide their real estate listings
to us for publication on the Internet on a national basis. All warrants issued
are fully vested, non-forfeitable and are immediately exercisable. We incurred
a total charge of approximately $11.2 million which is being recognized as
expense over the term of the applicable MLS agreement, approximately one to
two years. The non-cash charge for these warrants totaled approximately $3.6
million in 1999.
In August 1999, in connection with 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 is fully vested,
non-forfeitable and is immediately exercisable. We incurred a charge of
approximately $3.5 million which is being recognized over the two-year term of
the agreement. The non-cash charge for this warrant totaled approximately
$724,000 in 1999.
In October 1999, in connection with an advertising agreement with GMAC
Mortgage Corporation, we issued it a warrant to purchase 119,048 shares of our
common stock at an exercise price of $42.00 per share. This warrant is fully
vested, non-forfeitable and is immediately exercisable. We incurred a charge
of approximately $1.1 million which is being recognized as expense over the
two-year term of the agreement. The non-cash charge for this warrant totaled
approximately $88,000 in 1999.
In February 2000, we issued warrants to purchase up to 520,749 of our 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 at the end of their existing two-year term. All warrants issued are
fully vested, non-forfeitable and are immediately exercisable. We incurred a
charge of approximately $24.3 million which will be recognized as expense over
three years.
Litigation Settlement. On October 22, 1999, we announced a settlement of
litigation with Cendant Corporation. As part of the settlement, Cendant
received 250,000 shares of our common stock. 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 year ended December 31, 1999.
Interest and Other Expense, Net
Pro forma interest income consists of earnings on our cash and cash
equivalents, net of (1) imputed interest expense on the notes payable issued
in connection with our acquisitions of The Enterprise and MultiSearch and (2)
interest expense incurred on the note payable issued in connection with our
Homefair acquisition. Interest and other expense decreased to $2.8 million in
1999 from $6.1 million in 1998. The decrease was primarily due to interest
income earned on higher average cash balances as a result of our initial
public offering proceeds.
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<PAGE>
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 in 1999 and 1998. As of December 31, 1999, we had $116.7 million of net
operating loss carryforwards for federal income tax purposes, which expire
beginning in 2007. We have provided a full valuation allowance on our deferred
tax assets, consisting primarily of net operating loss carryforwards, due to
the likelihood that we may not generate sufficient taxable income during the
carry-forward period to utilize the net operating loss carryforwards.
Historical Results of Operations of NetSelect, Inc.
The following table sets forth certain historical data from NetSelect,
Inc.'s consolidated statement of operations. These results reflect NetSelect,
Inc.'s consolidation of RealSelect for the indicated periods prior to the
Reorganization. On February 4, 1999, NetSelect, Inc. entered into a non-
substantive share exchange and was merged into InfoTouch. The information for
the period from January 1, 1999 to February 4, 1999 has been derived from
NetSelect, Inc.'s unaudited consolidated financial statements, which, in
management's opinion, have been prepared on substantially the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with NetSelect, Inc.'s consolidated
financial statements and related notes contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended
October 28, 1996 December 31, January 1 to
(Inception) to ----------------- February 4,
December 31, 1996 1997 1998 1999
----------------- ------- -------- ------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues..................... $ -- $ 1,282 $ 15,003 $ 2,433
Cost of revenues (excluding
$51, $141 and $55 in
non-cash equity charges for
the years ended December 31,
1997 and 1998 and January 1,
1999 to February 4, 1999,
respectively)............... -- 335 7,338 798
----- ------- -------- -------
Gross profit............. -- 947 7,665 1,635
----- ------- -------- -------
Operating expenses:
Sales and marketing
(excluding $108, $506 and
$188 in non-cash equity
charges for the years
ended December 31, 1997
and 1998 and January 1,
1999 to February 4, 1999,
respectively )............ 9 3,200 25,560 4,064
Product development
(excluding $26, $78 and
$26 in non-cash equity
charges for the years
ended December 31, 1997
and 1998 and January 1,
1999 to February 4, 1999,
respectively)............. 4 506 4,139 174
General and administrative
(excluding $72, $837 and
$300 in non-cash equity
charges for the years
ended December 31, 1997
and 1998 and January 1,
1999 to February 4, 1999,
respectively)............. 348 2,687 6,929 1,053
Amortization of intangible
assets.................... 30 360 1,893 261
Stock-based charges........ -- 257 20,455 569
----- ------- -------- -------
Total operating
expenses................ 391 7,010 58,976 6,121
----- ------- -------- -------
Loss from operations......... (391) (6,063) (51,311) (4,486)
Interest and other income
(expense), net.............. 1 74 121 (5)
----- ------- -------- -------
Net loss before minority
interest.................... (390) (5,989) (51,190) (4,491)
Minority interest............ 213 1,239 222 --
----- ------- -------- -------
Net loss..................... $(177) $(4,750) $(50,968) $(4,491)
===== ======= ======== =======
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, January 1 to
--------------- February 4,
1997 1998 1999
------ ------ ------------
(unaudited)
<S> <C> <C> <C>
As a Percentage of Revenues:
Revenues......................................... 100 % 100 % 100 %
Cost of revenues................................. 26 49 33
------ ------ ----
Gross profit................................. 74 51 67
------ ------ ----
Operating expenses:
Sales and marketing............................ 250 170 167
Product development............................ 39 28 7
General and administrative..................... 211 46 43
Amortization of intangible assets.............. 28 13 11
Stock-based charges............................ 20 136 23
------ ------ ----
Total operating expenses..................... 548 393 251
------ ------ ----
Loss from operations............................. (474) (342) (184)
Interest and other income (expense), net......... 6 1 --
------ ------ ----
Net loss before minority interest................ (468) (341) (184)
Minority interest................................ 97 1 --
------ ------ ----
Net loss......................................... (371)% (340)% (184)%
====== ====== ====
</TABLE>
Years Ended December 31, 1998 and 1997 and the Period From October 28, 1996
(Inception) to December 31, 1996
Due to the fact that NetSelect, Inc.'s historical results of operations from
the period of October 28, 1996 (Inception) to December 31, 1996 are
insignificant, management believes that a comparison analysis between this
period and the comparable period in 1997 would not be meaningful.
Revenues
Revenues increased to $15.0 million in 1998 from $1.3 million in 1997. The
increase was primarily due to growth across our business, including the number
of agent and broker web site home pages sold and an increase in banner
advertising revenues primarily as a result of increased traffic to our web
sites in 1998.
Cost of Revenues
Cost of revenues increased to $7.3 million in 1998 from $335,000 in 1997.
The increase was primarily due to our overall increased sales volume and
activity during 1998.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased to $25.6 million
in 1998 from $3.2 million in 1997. The increase was primarily due to our
overall increased sales volume and activity during 1998. Specifically, sales
and marketing-related payroll, including commissions, increased as a result of
the increased sales volume and growth in our sales force in 1998. This
increase was also due to costs related to Internet portal distribution fees
and marketing and listing fees paid to real estate franchises. Increases in
public relations campaign, promotional material and trade show expenses also
contributed to the increase.
Product development. Product development expenses increased to $4.1 million
in 1998 from $506,000 in 1997. The increase was primarily due to increases in
site design expenses, including salaries and related expenses, as well as
costs for contracted services. In addition, costs incurred in the redesign of
our REALTOR.com web site, which began in June 1998 and was completed in
December 1998, contributed to the increase.
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<PAGE>
General and administrative. General and administrative expenses increased to
$6.9 million in 1998 from $2.7 million in 1997. The increase was primarily due
to hiring key management personnel and additional staff to manage and support
our significant growth during 1998. Personnel-related costs, including
recruiting costs, legal and, to a lesser extent, consulting fees also
contributed to the increase. We also incurred costs associated with the
relocation of our corporate office.
Amortization of intangible assets. Amortization of intangible assets was
$1.9 million in 1998 as compared to $360,000 in 1997 as a result of The
Enterprise and MultiSearch acquisitions in March and July of 1998.
Stock-based charges. During 1997 and 1998, we recorded total deferred
compensation of $10.5 million in connection with stock option grants. We are
amortizing this amount over the vesting periods of the applicable options,
resulting in expense of $1.6 million in 1998, as compared to $257,000 in 1997.
In connection with the August 1998 Series F financing, we recognized the
$18.9 million difference between the deemed fair value of the stock and the
price paid by investors as stock-based charges in 1998.
Interest and Other Income (Expense), Net
Interest income increased to $583,000 in 1998 from $98,000 in 1997. The
increase was primarily due to higher average cash balances. Interest expense
increased to $365,000 in 1998 from $24,000 in 1997.
Other expense in 1998 included a write-off or leasehold improvements and a
loss on disposal of certain office furniture and equipment relating to the
relocation of our corporate office.
Income Taxes
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 a 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, cash generated from the
sale of our products and services and, to a lesser extent, equipment lease
financing. At December 31, 1999, we had cash and cash equivalents of $90.4
million as compared to $14.8 million at December 31, 1998.
Net cash used in operating activities was $51.0 million in 1999 and $28.2
million in 1998. 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 depreciation, amortization and non-cash equity charges and
increases in accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $29.0 million in 1999, compared to
$5.3 million in 1998. To date, our investing activities have consisted of
acquisitions, purchases of property and equipment and strategic operating
agreements. In June 1999, we acquired SpringStreet for common stock and
convertible preferred stock and assumed $10.2 million in cash. In October
1999, we used $35.0 million in cash to fund part of the purchase price for
Homefair. 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. Capital expenditures for
property and equipment totaled $3.9 million and $4.0 million in 1998 and 1999,
respectively. During 1999, an additional $3.0 million of capital expenditures
were funded through an equipment lease financing arrangement.
39
<PAGE>
Net cash provided by financing activities was $155.6 million in 1999 and
$45.1 million in 1998. Cash was provided primarily from net proceeds from the
sale of our common and preferred stock. In April 1999, we issued convertible
preferred stock equivalent to 1,704,775 shares of common stock for $17.0
million. In August 1999, we completed our initial public offering in which we
sold 8,050,000 shares of our common stock at a price of $20.00 per share;
raising approximately $145.6 million, after deducting underwriting discounts
and commissions and offering expenses. We also repurchased shares of our
common and preferred stock in 1998 and 1999 and repaid notes payable.
On August 11, 1999, we 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 December 31, 1999, we had $90.4 million in cash and cash equivalents.
In January 2000, we completed a secondary public offering in which we sold
4,073,139 shares of our common stock at a price of $110.00 per share, raising
approximately $429.2 million, after deducting underwriting discounts and
commissions and offering expenses. We currently anticipate that our existing
cash and cash equivalents, any cash generated from operations, together with
net proceeds from our secondary public offering, 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, these equity securities might have rights, preferences
or privileges senior to those of our common and preferred stock.
Quantitative and Qualitative Disclosures About Market Risk
We do not currently hold any derivative instruments and we do not engage in
hedging activities. Also, we do not hold any variable interest rate debt or
lines of credit, and currently do not enter into any transaction denominated
in a foreign currency. Thus, our direct exposure to interest rate and foreign
exchange fluctuations is minimal.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. The adoption of this statement of position in the
first quarter of fiscal 1999 did not have a material impact on our financial
position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants issued
statement of position No. 98-5, "Reporting on the Costs of Start-Up
activities." This statement of position requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all
start-up costs that were capitalized in the past must be written off when this
statement of position is adopted. The adoption of this statement of position
in the first quarter of fiscal 1999 did not have a material impact on our
financial position, results of operations or cash flows.
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement
40
<PAGE>
of those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the planned use of the derivative and the
resulting designation. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we believe the impact of
adoption of SFAS No. 133 will not have a material impact on our financial
position, results of operations or cash flows. We will be required to
implement SFAS No. 133 in the first quarter of fiscal 2001.
Year 2000 Compliance
The Year 2000 Issue refers generally to the problems that some computer
systems may have in determining the correct century for the year. For example,
software with date-sensitive functions that 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 brief period since January 1, 2000. We
continue to monitor our systems for Year 2000 compliance.
Internal Infrastructure. As a result of building a new data center in our
Thousand Oaks, California facility, we believe that our computer network for
running our Homestore.com, REALTOR.com, and Remodel.com web sites is running
on Year 2000 compliant hardware and software purchased within the previous 10
months. Our primary Internet service providers have provided statements of
compliance for their networks.
We have been informed by our various vendors for our web site and for the
web site that we host that the material hardware and software components used
for the sites are Year 2000 compliant.
Internal Business Systems. Our primary management information and business
systems are running on third party software packages purchased and implemented
during the first quarter of 1999. The vendors of each of these packages have
provided Year 2000 compliance statements. For internally developed software,
we have supplemented our development staff with a third party consulting
company specializing in Year 2000 remediation. To date, all management
information and internal business systems have been certified as Year 2000
compliant. We also work with hundreds of MLSs to obtain listings data for the
REALTOR.com web site and have contacted and received confirmation that all
MLSs' data that is reliant on a two digit date field is Year 2000 compliant.
We have also continued with the process of contacting all available MLSs to
determine their internal state of readiness with respect to the Year 2000. To
date, we have had minimal response to our requests. The failure of an MLS's
system to be Year 2000 compliant would severely affect our ability to download
and receive listings data from them.
Suppliers and Vendors. During the inventory and assessment phases of our
Year 2000 Program, key vendors and suppliers were listed and prioritized based
on their importance to the business. We are validating compliance with all
vendors and have initiated communications to all priority suppliers and
vendors requesting compliance for their products and services. The failure of
a supplier or vendor to be Year 2000 compliant might have a material adverse
effect on our operations.
Our building and material internal systems and telephone, facsimile and
other communications systems have been certified as Year 2000 compliant.
Costs. We believe that the total cost of our Year 2000 compliance efforts
will not be material to our business. In addition, the majority of these costs
are attributable to employee time spent in our Year 2000 compliance efforts as
compared to cash outlays. However, if we encounter unexpected problems with
respect to the Year 2000 issue, we could incur additional costs, including
significant cash outlays, which could be material.
Year 2000 Risks. Despite our investigations of the Year 2000 issue, we have
not received certifications from all of our third party suppliers and vendors
and it is possible that those certifications as well as the other
representations we have obtained could be erroneous. Failures of our, our
content providers' or our customers' systems to operate properly with regard
to the Year 2000 could result in one or more of our web sites being
unavailable and our products and services not functioning properly.
Unavailability of our web sites due to a lack of Year 2000 compliance could
have a material adverse impact on our revenues and operating expenses.
41
<PAGE>
In addition, the Internet is a network of computer systems which depends on
the functioning of a number of parts such as communications connections,
Internet Service Providers and power supplies, all of which are beyond our
control. The failure of these companies to be Year 2000 compliant could result
in a variety of systems failures such as electrical outages, Internet outages
or slower response times or telecommunications failures. These events could
prevent users from accessing our products and services or prevent us from
updating our listings for a period of time, from delivering our services to
our subscribers or from selling advertising on our web sites for a period of
time. Any of these events could have a material adverse effect on our
business, operating results and financial condition.
42
<PAGE>
BUSINESS
Overview
Our family of web sites, consisting of Homestore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com, Remodel.com and Homefair.com, is the
leading destination on the Internet for home and real estate-related
information and advertising products and services, based on the number of
visitors, time spent on our web sites and number of property listings. As of
December 31, 1999, we had listings on our web sites for over 1.2 million of
the approximately 1.3 million homes that we estimate are listed nationally for
sale, over 130,000 new homes for sale and over 45,000 rental properties. Our
family of web sites also offer a wide variety of home-related information,
products, services and tools. We have relationships with the NAR, the NAHB,
MLSs, the NAHB Remodelors Council, the NARI, the AIA, the MHI, real estate
franchises, brokers, builders and agents. We also have distribution agreements
with a large number of leading Internet portal web sites.
Industry Background
The Real Estate Industry
The real estate industry accounts for approximately 15% of the gross
domestic product of the United States and is therefore one of the largest
sectors of the economy. The real estate industry is commonly divided into the
residential and commercial sectors. The residential sector includes the
purchase, sale, rental, remodeling and new construction of homes and
represents approximately $1.5 trillion per year.
The Residential Real Estate Market
Buying a home is the largest financial decision, and represents one of the
most difficult and complex processes, most consumers will ever undertake. The
process of finding a home begins a lifelong cycle which most consumers will
move through once every seven to eleven years. This cycle tracks major life
events such as employment, marriage, children and retirement and is
illustrated below:
[DIAGRAM APPEARS HERE]
A significant portion of the United States economy has evolved around
helping consumers as they navigate through this home and real estate cycle. An
enormous network of support services and products exists to assist consumers
in finding a home, building a home, renting or buying a home, moving,
maintaining and improving a home and selling a home.
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Find a Home. The following real estate professionals and organizations
assist consumers in finding a property:
. Real Estate Agents. Real estate agents are independent contractors that
are licensed to negotiate and transact the sale of real estate on behalf
of prospective buyers and sellers. There are over 1.0 million real
estate agents in the United States. Consumers spend in excess of $30
billion annually for assistance with the finding, buying and selling of
residential property.
. Real Estate Brokers. Real estate brokers are paid a commission to bring
buyers and sellers together and assist in negotiating contracts. Real
estate brokers often have their own independent offices and may employ
other licensed real estate agents. There are over 100,000 real estate
brokers in the United States.
. Residential Franchisers. There are six major residential franchisers in
the United States: Century 21, Coldwell Banker and ERA, which
collectively comprise the Cendant franchise; RE/MAX; Prudential; and
GMAC Home Services, formerly Better Homes and Gardens. These franchisers
together represent thousands of independently owned and operated real
estate offices and hundreds of thousands of real estate professionals in
the United States.
. Multiple Listing Services. MLSs operate proprietary networks that
provide real estate professionals with listings of properties for sale,
and are regulated by a governing body of local brokers and/or agents.
There are approximately 800 MLSs nationwide that aggregate local
property listings by geographic location.
. National Association of REALTORS. The NAR is the largest trade
association in the United States that represents real estate
professionals. The NAR consists of residential and commercial REALTORS,
including brokers, agents, property managers, appraisers, counselors and
others engaged in all aspects of the real estate industry. The NAR has
approximately 720,000 members.
Build a Home. In addition to the real estate professionals and organizations
involved in finding a home, the new home market is also served by a large
group of dedicated professionals including:
. Home Builders. New homes are built primarily by a limited number of
national home builders and a much larger number of local volume and
custom builders. In 1999, home builders built over 1.3 million homes,
generating over $250 billion in sales.
. National Association of Home Builders. The NAHB is the second largest
real estate trade association in the United States. As of December 31,
1999, the NAHB's members include approximately 200,000 firms.
Approximately one-third of the NAHB's members are home builders and/or
remodelors, and the remainder work in closely related fields within the
residential real estate industry, such as mortgage, finance, building
products, and building services including subcontractors.
. Manufactured Housing Institute. The MHI is a nonprofit national trade
association representing all segments of the manufactured housing
industry, including manufactured home producers, retailers, developers,
community owners and managers, suppliers, insurers and financial service
providers. As of December 31, 1999, the MHI and its affiliated state
associations had approximately 15,000 members.
Rent a Home. Today, over 30 million households in the United States reside
in rental housing. In addition to real estate agents and brokers who assist in
the leasing of residential rental units, professionals serving this segment of
the market include the following:
. Property Owners. Property owners include owners of individual apartment
units, multi-family apartment complexes, individual single family rental
homes or other residential rental properties. Property owners may lease
and operate their rental properties themselves or outsource those
functions to other real estate professionals, such as property managers.
The residential rental ownership market is highly fragmented, with the
50 largest owners of multi-family apartment complexes owning
approximately 10% of all apartment rental units in the United States.
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. Property Managers. Property managers are typically responsible for
leasing available rental units, collecting rents, and maintaining the
property. Property managers typically manage a number of apartment
complexes, and will employ third party leasing agents to assist them
with the leasing function. The property manager market is also highly
fragmented, with the 50 largest property managers, many of whom also own
their properties, managing approximately 10% of all apartment rental
units in the United States.
Buy and Sell a Home. Because of the complexity and size of the purchase or
sale transaction, consumers buying or selling a home typically rely upon a
series of professionals, including real estate agents and ancillary service
providers, such as mortgage brokers, title agents, escrow agents, attorneys,
inspectors and appraisers. These professionals and ancillary service providers
offer products and services, such as mortgages, title insurance, credit
reports, appraisals and inspections, that generated in excess of $49 billion
in transactional fees in 1999.
Move. Every time consumers buy, sell or rent a home, they need assistance
with various relocation related services, such as insurance and moving
supplies and services. We estimate that consumers spend over $20 billion each
year for home and apartment moves including moving services and related
product purchases. In addition, real estate transactions often lead to
significant lifestyle changes for consumers, including changing neighborhoods,
schools, shopping malls, banks, grocers, cleaners and other retail
relationships. As a result, consumers need information about the wide range of
available product and service alternatives relating to all aspects of their
relocation.
Maintain and Improve a Home. Ownership represents the longest portion of the
home and real estate life cycle. Homeowners purchase a large number of
household and home related products including furniture, appliances, hardware
and supplies. During this phase of the home life cycle, homeowners also
require a number of ancillary services, relating to such activities as home
maintenance and repairs, refinancing, remodeling and landscaping. Each year,
approximately 25 million homeowners undertake some type of home improvement
project. As a result, homeowners are continuously seeking sources of
information to assist them in locating providers of these products and
services.
Challenges in the Real Estate Market
Every participant in the home and real estate life cycle faces a unique set
of challenges:
Home Buyers. In order to dispel the fear of purchasing the wrong home or
paying too much for a home, consumers must be assured that they have
considered all available options. Therefore, home buyers require an extensive
amount of information and several decision tools to help bolster confidence
during the home buying process. To make an informed decision, consumers need
access to a comprehensive listing of homes for sale and require information
about specific neighborhoods and listed prices of comparable homes for sale in
a given geographic location.
Once a home has been selected, consumers must consider a broad range of
related services, including mortgage, title, escrow, insurance, moving and
relocation services as well as remodeling alternatives. As a result, consumers
are continually searching for additional information and resources to assist
them in every aspect of the real estate transaction and need a comprehensive,
convenient and integrated source of information that assists them in each step
of the process.
Real Estate Agents and Brokers. Real estate agents and brokers depend on
attracting and retaining customers in order to generate increasing numbers of
transactions. Due to its size and complexity, it is not uncommon for the real
estate transaction to take several months to complete. As a result, the job of
real estate agents and brokers is complicated by a variety of factors.
Therefore, real estate agents and brokers are looking for additional
opportunities to market their services, become more productive and compete
more effectively for transactions. In addition, they seek greater efficiency
in disseminating information to their prospective clients and are looking for
tools that can help them streamline their current practices.
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Home Builders. Home building and real estate professionals who focus on new
homes and new home developments also depend on attracting and retaining
customers in order to sell new properties in a timely manner. However, home
builders have not developed an infrastructure similar to an MLS to aggregate,
update and share data regarding available inventory. Nor do they have the
infrastructure to communicate this information to potential buyers. As a
result, home building and real estate professionals continue to seek new ways
to market their products and services and inform prospective home buyers of
the availability of new properties.
Renters, Property Managers and Owners. To make an informed decision, renters
need access to comprehensive information about available rental units,
specific neighborhoods and rental prices in a given geographic location.
Because of the high turnover rate in rental units, property managers and
owners must regularly attract new tenants to minimize their vacancy rates. We
estimate that approximately $1.8 billion was spent in 1999 to market
apartments and rental homes. The rental market has not developed a central
repository for comprehensive listings accessible by potential renters
nationwide and property managers and owners are continuously seeking to market
their available units in a cost-effective manner.
Contractors and Home Improvement Specialists. Similar to home buyers,
consumers who are looking to remodel or improve their homes require
information and decision making tools that enable them to feel confident the
work will get done right. They need access to comprehensive information about
different remodeling options and the related costs, as well as help in finding
specialists to provide the needed services. Contractors and home improvement
specialists look to provide guidance and quality work, ideally leading to a
long-term relationship with the homeowner. These contractors and specialists
would benefit from a centralized location where they could advertise their
offerings to a targeted group of consumers who are actively engaged in
searching for the types of services they offer.
Ancillary Service Providers. Consumers require a variety of products and
services throughout the home life cycle. The real estate transaction provides
service providers and retailers the opportunity to target consumers at a time
when they are shifting their buying patterns. Providers and retailers of these
products or services need an effective mechanism to reach consumers who are
most interested in their offerings. Ideally, these providers of products and
services would have a centralized location where they could advertise their
offerings to a target group of consumers who are engaged in the real estate
process.
The Internet and Real Estate
The emergence and acceptance of the Internet is fundamentally changing the
way that consumers and businesses communicate, obtain information, purchase
goods and services and transact business. Because of its size, fragmented
nature and reliance on the exchange of information, the home services and
residential real estate industry is particularly well suited to benefit from
the Internet. The real estate industry currently spends $3.5 billion a year on
advertising and print media. Traditional sources of advertising and print
media, including classifieds and other off-line sources, are not interactive
and are limited by incomplete and inaccurate data that is local in scope and
is typically disseminated on a weekly basis. These traditional sources also
lack content that can be searched based on specified terms, a centralized
database of information and the ability to conduct two-way communications. The
Internet offers a compelling means for consumers, real estate professionals,
home builders, renters, property managers and owners and ancillary service
providers to come together to improve the dissemination of information and
enhance communications.
Homestore.com
We are pioneering the use of the Internet to bring the home services and
real estate industry online as well as enabling real estate industry
participants to benefit from the Internet. We currently operate the most
frequently visited home and real estate-focused family of web sites, including
Homestore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com, Remodel.com and
Homefair.com, based on the number of our users, the time users spend on our
web sites and the number of listings. Our family of web sites allows searches
of
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information that previously had never been compiled as comprehensively in a
single location. The principal benefits of our advertising products and
services include the following:
Comprehensive Source of Real Estate Listings. Our family of web sites
provides the most comprehensive source of real estate listings on the web. As
of December 31, 1999, of the 1.3 million homes that we estimate are listed for
sale in the United States, our REALTOR.com web site had listings for over 1.2
million. As of December 31, 1999, we aggregated information on over 130,000
new homes for sale and planned developments throughout the United States on
our HomeBuilder.com web site. We also provide comprehensive rental property
related listing information through our SpringStreet.com web site, which
included listings for over 45,000 properties as of December 31, 1999.
Key Industry Relationships. We have a number of relationships with key real
estate industry participants. We believe that none of our competitors has as
many comparable relationships. Under our agreements with the NAR, the NAHB and
the MHI, we operate their official web sites and we receive preferential
promotion in their marketing activities. We also have content relationships
under which parties have given us the right to display their property listings
on our web sites for a period of time with approximately 70 of the 200 largest
brokers in the United States through our Broker Gold program, nine of the ten
largest home builders in the United States, each of the six largest real
estate franchises and over 750 of the approximately 800 MLSs in the United
States. Under our Broker Gold program, which was completed in February 1999,
participating real estate brokerage companies agreed to provide us with their
real estate listings for posting on the Internet on a national basis and not
to any of our direct competitors. These brokers signed written agreements with
us to provide us the real estate listings over which they have control for a
period of up to two years. They also agreed to use all reasonable efforts to
cause their employees and agents to provide us with their listings on an
exclusive basis. The brokers are permitted to display their listings on their
own web site. In exchange these brokers also purchased shares of our stock and
warrants at that time. In addition, we are the only site endorsed by the
remodeling industry's two leading professional organizations, the NAHB
Remodelors Council and the NARI, together representing more than 100,000
contractors and home improvement specialists.Our close working relationships
with these organizations allow us to keep pace with the complicated and
evolving real estate industry. In order to draw additional traffic to our
family of web sites, we also have distribution agreements with the following
Internet portals: America Online, Excite@Home and Go Network/Infoseek.
Provide Comprehensive Set of Products and Services for Consumers. We provide
consumers with access to accurate and timely nationwide listings and to real
estate professionals and home services providers. Through our family of web
sites, consumers can easily search through substantial amounts of information
at all stages of the home and real estate life cycle. For example, we provide
decision support information and tools, such as calculators and worksheets for
helping to select financing options and information about specific
neighborhoods, directories of real estate professionals and home services
providers. We believe that providing consumers with a comprehensive and
integrated information source for each stage of the home and real estate life
cycle allows them to be better informed and feel more confident about their
home decisions.
Enable Industry Professionals to Benefit from the Internet. Our services
allow real estate professionals and home service providers to utilize the
Internet to expand and grow their customer base. We design and maintain
personal home pages for real estate professionals and home service providers.
Real estate professionals can also have their listings displayed with detailed
information about a property and can have links from their real estate
listings to their personal home page. Through the reach of our family of web
sites, real estate professionals can significantly increase their visibility
among prospective buyers and sellers, especially those outside of their
region. In addition, we believe buyers and sellers that have used
Homestore.com to research their real estate transaction are more likely to
reach an informed purchase or sale decision in a shorter period of time.
Similarly, we offer home services providers their own personal web pages
promoting their services to a targeted audience.
Provide Attractive Demographic for Advertisers and Service Providers. Our
family of web sites draws an attractive target audience for advertisers and
providers of home-related products and services. Because we attract consumers
interested in real estate near the time of a transaction, we provide
businesses with an efficient way to
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find and communicate with potential customers. In addition, our audience tends
to use our family of web sites for extended periods of time. According to
Media Metrix, in January 2000, the average time spent per visit to REALTOR.com
was 17.5 minutes, ranking it second among the top 200 web sites as measured by
the number of unique visitors, or individual Internet users who visited our
web site at least once during the month.
Our Business Model Provides Multiple Revenue Opportunities. Our business
model is designed to support continued growth in the utilization of the
Internet as a tool for all phases of the home and real estate life cycle. We
currently generate revenues from selling our advertising products and services
to a number of different types of real estate industry participants, including
agents and brokers, home builders, rental property owners and other
advertisers.
Our Strategy
Our objective is to extend our position as the leading destination for home
and real estate-related information on the Internet. The key elements of our
strategy include:
Enhance Our Real Estate Content and Data. We will continue to focus on
connecting consumers and professional service providers by increasing the
content and relevant data available on our family of web sites. To achieve
this objective, we will seek to increase the number of new and existing homes
and rental properties listed on our family of web sites and we will also
display additional home service related content.
Increase Usage of Our Family of Web Sites. We seek to increase the number of
people using our family of web sites as well as the amount of time they spend
there. To expand our user base, we plan to strengthen our existing
distribution arrangements with Internet portals to apply across our family of
web sites. We also intend to pursue distribution relationships with other high
traffic web sites and web sites offering home and real estate-related
services. We also expect to significantly increase our marketing efforts in
traditional media, such as newspaper advertisements, radio and television
promotions. We also intend to add features and content to our web sites
designed to encourage users to spend more time on our web sites.
Continue to Pursue Relationships with Real Estate Industry Professionals. We
believe that our relationships with key real estate industry participants,
such as the NAR, the NAHB, MLSs, the NAHB Remodelors Council, the NARI, the
AIA, the MHI, brokers, builders and agents, provide us with a distinct
competitive advantage. These relationships provide us with opportunities to
market our services to their members. These relationships also allow us to
provide consumers with comprehensive information and resources related to all
aspects of the home and real estate life cycle, such as real estate listings
and neighborhood information, directories of REALTORS and real estate news. We
plan to pursue additional or broader listing and marketing relationships with
key industry participants.
Continue to Develop and Extend Our Brand Recognition. As more consumers and
real estate professionals utilize the Internet for their real estate needs, we
believe that brand awareness will provide us with a significant competitive
advantage. We plan to expand our marketing efforts with advertising campaigns
in traditional media as well as on the Internet in order to build greater
recognition for our family of web sites.
Incorporate Emerging Internet Technologies. We believe the evolution of the
Internet will provide us with the opportunity to move more home and real
estate-related information and activities onto the Internet. For example, in
1999 we introduced 360 degree panoramic video "tours" of homes listed for sale
and we offer REALTORS the enhanced ability to update their property listing
information, such as photos and text descriptions, from their computer
desktop. We also plan to incorporate new Internet technologies which we
believe will help us provide enhanced functionality and increase overall ease-
of-use of our family of web sites. We believe that continuing to incorporate
enhanced functionality will be a key element in increasing traffic and time
spent on our family of web sites.
Products and Services
We offer a family of web sites including Homestore.com, REALTOR.com,
HomeBuilder.com, SpringStreet.com, Remodel.com and Homefair.com.
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Homestore.com
Homestore.com is a gateway to our family of web sites providing links and
general information relating to each of our other web sites.
REALTOR.com
REALTOR.com enables potential home buyers to browse, free of charge, from
our searchable database of over 1.2 million homes as of December 31, 1999. We
have content arrangements with over 750 of the approximately 800 Multiple
Listing Services across the United States to provide the listings for
REALTOR.com. Our property listings typically provide information that is
significantly more detailed and timely than that included in alternative media
channels, such as newspaper classified advertisements. Many of these listings
are from MLSs that have agreed to provide listings exclusively to us for
publication on the Internet. We receive the balance of our listings on
REALTOR.com from real estate brokers. We do not provide "for sale by owner"
listings, as this is prohibited under terms of our agreement with the NAR.
Additionally, REALTOR.com provides decision support tools, such as mortgage
calculators and finance worksheets, information concerning the home buying and
selling process and features that aid users in evaluating the attributes of
particular neighborhoods or geographic locations.
Consumer Products
Our consumer products are offered free to REALTOR.com visitors and are
designed to help them throughout the home and real estate life cycle.
REALTOR.com has sections representing the various stages of the home and real
estate life cycle, including Getting Started, Buying, Selling, Offer/Closing,
Moving and Owning. For example, at the beginning of the home and real estate
life cycle we offer Find a Home, Find a Neighborhood and Personal Planner. In
addition, we offer information and tools regarding mortgages and home
affordability as well as a specific guide to the home buying process. When
users have made their home selection, they can find information about the
offer process, applying for a loan, closing the purchase or planning the move.
As homeowners, users can find information about remodeling, refinancing and
other aspects of owning a home. When users are ready to sell their home, they
can use Find a REALTOR to find information regarding relocation planning,
pricing, accepting an offer and closing the sale. In addition, while they are
in the process of selling their homes, sellers can use our Find a Home, Find a
Neighborhood and Personal Planner tools to begin the search for their next
home. At all stages, users can visit our MarketPlace, for links to a wide
variety of real estate information such as moving services, insurance, home
improvement and appliances.
Find a Home. Our Find a Home feature allows potential home buyers to search
our database of home listings. The user selects a geographic region or a
specific MLS property identification number. The user can refine the home
search by selecting neighborhood and home characteristics. Our search engine
returns a list of homes ranked by their conformity to the users' search
criteria. The search results provide pictures of the homes, if available,
descriptions of the properties, the name and contact information of the agent
that represents the home seller and, for certain homes, virtual tours. For
agents and offices purchasing our iLead products, the consumer's search
results also provide a direct link to their personalized web site displaying
each property listed by the agent or office.
Find a REALTOR. Our Find a REALTOR feature allows a user to contact a
REALTOR to buy or sell a home in a given geographic area. The user can search
our Yellow Pages Directory for REALTORS who specialize in the cities or zip
codes specified by the user. Users can also search by keyword and/or by office
name or name of the REALTOR. Our Yellow Pages Directory provides a list of
REALTORS meeting the search criteria, which includes a link to each REALTOR's
home page, their office name, phone and fax numbers, their e-mail address and
a brief description of their specialty. We also have a White Pages Directory
listing all REALTORS.
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MarketPlace. Our MarketPlace area provides potential home buyers access to
ancillary services that can be helpful at all stages of the home and real
estate life cycle. The services consist of:
. moving services, such as self-storage by Storage Locator, change of
address by Change My Address and moving tools by Homefair;
. home improvement services, such as Improvement Center at Home Depot,
Tool Dictionary by Sierra Home and Improvement Encyclopedia by Sierra
Home;
. insurance services, such as title insurance by Stewart Title;
. finance center, such as calculators from Quicken.com, employment by
Monster.com, interest rate information from Bankrate.com and credit
reports by Qspace;
. furniture and appliances, such as appliances by Whirlpool, furniture by
Cort and furniture and window coverings by JC Penney; and
. home and family, such as child and elderly care by CareGuide, health and
wellness by WebMD and bookstore by Amazon.com.
Through MarketPlace, companies can sponsor new services and buy targeted
advertising for their products and services.
Find a Neighborhood. Our Find a Neighborhood feature enables users to locate
desired neighborhoods by searching information such as quality of schools,
crime rate, average home cost, and urban/rural profiles. Once a profile has
been established, our search engine returns a map ranking geographic areas
according to the user's criteria.
Personal Planner. Users can use our Personal Planner feature to save search
results, search criteria, and articles and related content from all areas of
REALTOR.com. Users can create their Personal Planner account by registering
their e-mail address and can choose to be notified via e-mail whenever new
listings match their saved search criteria.
Advertising Products and Services for Real Estate Professionals
i-Lead. i-Lead, our primary offering for the REALTOR, is a personalizable
multi-page web site that links a REALTOR's professional biography and their
inventory of listings to their web page. This advertising product is sold on
an annual basis. The charge for this advertising product can vary based on the
features selected for the REALTOR's web site. The web site and property
listing pages can contain:
. customized textual descriptions and banners on the REALTOR's listed
properties;
. multiple photographs of the properties;
. a personalized voice message from the REALTOR;
. the REALTOR's professional information, including name, photograph,
telephone number, significant accomplishments and mailing and e-mail
addresses; and
. the REALTOR's listing in our Yellow Pages Directory, which is linked to
Find a REALTOR.
i-Lead Office. i-Lead Office is targeted to individual real estate brokerage
offices. i-Lead Office provides real estate brokers the opportunity to have
their entire inventory of real estate properties linked to the office's
personalizable web site, whether or not their agents purchase our i-Lead
product. The agents of the broker are listed on its web page with i-Lead
subscribers receiving placement above those who do not use i-Lead. An embedded
link to an office's web address is also available as an upgrade to i-Lead
Office users, as well as the display of their office logo on every one of
their listings for the entire year. i-Lead Office subscribers are also listed
in our Yellow Pages Directory of REALTORS. This advertising product is sold on
an annual basis.
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One Place. One Place integrates i-Lead Office with an interactive voice
response system, linked to a pager network. With One Place, REALTORS are
immediately paged when a potential home buyer or seller inquires about a
specific house. In addition, if the buyer sees the telephone number on the
"for sale" sign posted in front of the property and calls the interactive
voice response system, the REALTOR is also paged. The pager message includes a
display of the caller's telephone number and specific property information,
which allows the REALTOR to respond instantaneously and knowledgeably to
interested consumers. One Place is sold on an annual subscription basis, plus
additional upgrades. One Place is typically sold to brokers with at least 100
real estate professionals and/or brokers who commit to obtaining a minimum
agent participation rate.
HomeBuilder.com
HomeBuilder.com is our web site focused on builder information, including
new homes, subdivisions and developments. We have developed a nationwide
listing of builders' models, newly built homes, and housing plans, which we
aggregate directly from builders and organize in a similar fashion to listings
on REALTOR.com.
Consumer Products
HomeBuilder.com, like REALTOR.com, allows potential home buyers to browse,
free of charge, through our searchable database of new homes. Many of the
features available on the REALTOR.com web site, such as mapping and community
profiles, are also available on HomeBuilder.com. The site's Lead Generation
Program allows consumers to send the builder detailed requests via electronic
mail or facsimile for information on each property. Potential buyers can
search for new homes using the following features:
Find a New Home. Our Find a New Home feature allows potential home buyers to
search our database of new homes using criteria they select. A user initiates
a search by selecting Find a New Home on the HomeBuilder.com home page and may
refine the search by geographic location.
Market Level Searching. Users may search listings of models, newly built
homes and housing plans within a market as follows:
. New Homes. This feature enables the user to search by geographic
location with individual home details such as price, square footage and
number of bedrooms and bathrooms. Users can view other details about the
home such as the floor plan, elevation and picture along with maps,
school information and other demographic data pertaining to the
community. A text link from the builder's name to its web site is also
available.
. Builders. This feature enables users to search within the market for
homes built by a particular builder. The search offers the same criteria
as the New Homes search. By clicking on the builder's name, the user can
view a detailed list of the selected builder's homes.
. Custom Builders. This search produces a list of custom builders within a
specified geographic region. The list includes the name and phone number
of the builder, the price range of the builder's homes and a text link
to view the builder's inventory. Links to the builders' web site are
also available.
. Real Estate Agents. This search enables users desiring to find a REALTOR
to assist them in their new home search in a specified geographic area.
After entering search criteria, the results display a list of agents by
real estate office. By clicking on the agent's name, users go to the
selected agent's home page. Links to real estate offices are also
available.
Professional Basic Services Package. We collect, store and display the
builder's information and train the builder's salespeople how to respond to
sales leads generated from the Internet. This advertising product is sold on a
monthly or annual basis.
Our Basic Services Package includes the following:
. collection, entry and periodic updating of the builder's inventory of
models, newly built homes and floor plans and community information;
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. scanning and entry of the builder's floor plans, elevations and
available pictures;
. display detailed property profiles with floor plans, descriptions,
mapping, photographs, specifications, elevations and virtual tours;
. participation in our Home Builder Lead Generation Program;
. direct links to the builder's web sites and home pages through our
Builder Link feature; and
. advertising banners with direct links to the builder's web site.
SpringStreet.com
On our SpringStreet.com web site, potential renters have access to rental
property listings, free of charge, just as home buyers have to sale listings
on our REALTOR.com and HomeBuilder.com web sites. Potential renters can access
listing information from more than 45,000 properties located in over 6,000
cities nationwide. Users can develop their own lists of favorite properties
and store them on the site. They can also access our information resource
center which is designed to help make the relocation process easier, and
includes information relating to moving services, renter's insurance,
furnishings, and local content and statistics about a user's new neighborhood.
In addition, users can build and develop customized moving checklists, store
them on our site and receive reminders from us by electronic mail as each item
on the checklist is triggered over time.
SpringStreet.com, like our REALTOR.com and HomeBuilder.com web sites,
generates revenues primarily from advertising products and services offered to
real estate professionals. These products are targeted to property owners who
operate their own rental properties and to property managers.
Properties listed on our web site include large multi-family apartment
complexes as well as smaller properties.
Multi-Family Apartment Complexes. SpringStreet.com offers property owners
and managers of multi-family apartment complexes the opportunity to list basic
rental information free of charge. Basic listing information is a text-based
presentation of information which summarizes rental listings in a manner
similar to that which might be found in a local listing publication. We also
offer enhanced features to owners and managers for a monthly subscription fee.
These enhanced features can include:
. color photos and detailed property and rental unit descriptions for all
unit types, including monthly rental ranges;
. premium placement of listings at the top of rental search results
returned, as well as links to an owner's or manager's web page;
. maps and driving instructions to the property;
. inquiries from renters inquiring about specific properties sent by
electronic mail; and
. detailed monthly reports of web page and lead activity.
Single Family Homes. Owners of individual units or small buildings listed
with a REALTOR, and in some areas other real estate professionals, can list
their available rental units with the individual unit listing service. The
owner completes a form which contains up to 24 standard features about the
unit and its amenities. The owner can also designate special amenities about
the unit and have a photo of the unit posted for an additional fee. We offer
these services on a subscription basis.
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Remodel.com
Remodel.com, a comprehensive home improvement and maintenance site, is
designed for consumers seeking qualified professionals, do-it-yourselfers and
home service professionals. It enables users to find local, qualified
professionals through an extensive Find a Remodeler database. It also enables
professionals, for a fee, to purchase a customized web site linked to
Remodel.com and qualified lead referrals.
Remodel.com also features the following content areas:
Finance Center. Consumers can access information to help in the planning and
budgeting phase of their remodeling project. Consumers can research local
lenders in Find a Lender where they can view daily interest rates and use
interactive calculators to help them make informed financial decisions.
Room Designer. Users can use Room Designer to interactively design their
ideal floor plan, from room dimensions to furniture selection. Consumers can
rotate furniture 360 degrees or change the size, style or color of the
furniture. They can also change the room size and layout with the push of a
button.
Project Calculators. Our Project Calculators help consumers plan and budget
for a wide variety of the most common home improvement projects, including
wallpapering a room, carpeting a room, painting and insulating.
How-To Guides. These guides cover various aspects of renovation such as
plumbing, electrical, decks, phone and yard structures. A Tool Dictionary aids
individuals in differentiating various tools for their home improvement
projects.
The Featured Articles. This section includes interviews with celebrities
about their remodeling projects and chronicles real homeowners' remodeling
projects. The section also contains articles on home maintenance, repair and
decorating written by industry experts.
Homefair.com
Homefair.com provides interactive tools, calculators and reports from our
proprietary databases of information. These resources provide consumers
considering moving to a new location with the information they need most to
make decisions on whether to move, where to move, how much it may cost to move
and how to make the move less stressful and more successful. In addition,
Homefair.com content is syndicated to over 2,000 other web sites. These web
sites promote Homefair.com in a co-branded environment, extending the reach of
our content.
Interactive Tools and Calculators. Homefair.com offers a variety of
interactive tools and calculators, the most popular of which are:
. The Salary Calculator, which compares cost of living differences in
thousands of U.S. and international cities;
. The Moving Calculator, which offers instant estimates on shipping
household goods;
. The Relocation Wizard which prepares a custom timeline to help users
plan their move; and
. The Lifestyle Optimizer, which allows users to rank cities according to
their statistical preferences.
In-Depth Reports. Homefair.com provides in-depth reports compiled from
proprietary research databases. The City Reports detail demographic, crime and
lifestyle information on over 1,200 U.S. cities. The School Report provides
in-depth information on over 83,000 public schools.
Full-Service Customer Support Center. Homefair.com provides relocation
assistance for consumers and professionals via an off-line support center.
Trained relocation specialists work with consumers on an individual basis to
coordinate useful services for all facets of the moving process, including
pre-move, active move, and post-move services.
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Other Advertising Services
We currently offer the following traditional Internet advertising options on
our family of web sites that may be purchased individually or in packages:
Banner Advertising. Advertisers can purchase banner advertisements on
various content areas of our family of web sites to reach consumers interested
in specific regions or in specific products or services relating to the home
and real estate life cycle.
Sponsorships. Sponsorships allow advertisers to maximize their exposure on
our family of web sites by featuring fixed "buttons" or other prominent
placements on certain pages to gain fixed positions on our sites and present a
user with the opportunity to click-through directly to their site.
Sponsorships are typically sold for a fixed monthly fee over the life of the
contract and may include other advertising components such as content or
banner advertisements.
Content Centers. Advertisers can sponsor a page of content featuring their
products or services or purchase pop-up ads that appear in a new window when
the user enters the MarketPlace. Typically, these advertisers pay us a monthly
fee to sponsor the content page. These arrangements usually have a duration of
six to twelve months. We also offer Finance Centers and other content areas on
our sites on which advertisers can purchase banner advertisements or
sponsorship buttons. We typically charge premium rates for placement in these
areas because of the targeted nature of their content. Our operating agreement
with the NAR contains limitations on the types of advertisers from which we
can accept advertising for the real estate listings pages as well as the
manner in which advertisements can be displayed on the REALTOR.com web site.
Our agreement with the NAHB also contains limitations on the types of
advertisers from which we can accept advertising for the HomeBuilder.com web
site.
Real Estate Industry Relationships
We have relationships with a number of important participants in the real
estate industry. These include our relationships with the NAR, the NAHB, the
NAHB Remodelors Council, the NARI, the AIA, the MHI, our content relationships
with brokers, homebuilders and MLSs and our marketing relationships with major
real estate franchises.
National Association of REALTORS. The NAR is the largest trade association
in the United States that represents real estate professionals. We have an
exclusive agreement with the NAR to operate REALTOR.com as well as a license
to use the "REALTOR.com" domain name and trademark and the "REALTORS"
trademark. As a result of our close relationship with the NAR, we are also
featured prominently for Internet-based REALTOR services in the NAR's
marketing activities, conventions and conferences.
We are required to make quarterly payments to the NAR in 2000 and each year
after 2000 as follows:
We must pay the NAR annually the lesser of:
. 5% of RealSelect's operating revenues; or
. 15% of RealSelect's operating revenues less the percentage of our
operating revenues paid to the real property listing providers described
above.
This royalty payment is reduced by 2% to the extent earnings before interest
and taxes are less than 10% of revenue, for that quarter.
We must also pay the NAR an annual royalty equal to the lesser of (1) 5% of
SpringStreet.com's rental site's operating revenues or (2) 15% of the rental
site's operating revenues multiplied by the percentage of our rental property
listings provided by REALTORS less the percentage of our operating revenues
paid to rental property listings providers.
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National Association of Home Builders. The NAHB is the largest trade
organization of home builders in the United States. In 1998, we entered into
an agreement with the NAHB under which we became the exclusive provider of
Internet real estate related listing services to the NAHB and its members. We
also participate in their national trade shows.
Under our agreement, the NAHB agreed it would not engage in types of
activities that are competitive with HomeBuilder.com during the term of the
operating agreement and for the two year period after the agreement terminates
it would not:
. engage in the electronic display, other than through analog television,
of advertisements for new residential property;
. develop, maintain or house home pages for members of the NAHB; or
. create Internet sites for persons affiliated with the sale or marketing
of new residential real estate.
This agreement expires in June 2018 and automatically renews for successive
two year periods. However, if the NAR terminates our REALTOR.com operating
agreement, the NAHB can terminate the agreement within the six months
following such termination, if it provides us with three months' prior notice.
In addition, the NAHB can terminate the agreement within 30 days of a change
of control of Homestore.com.
National Association of Home Builders Remodelors Council and National
Association of the Remodeling Industry. In September 1999, we extended our
agreement with the NAHB to include the NAHB Remodelors Council. They have
agreed to exclusively endorse and market Remodel.com, as it relates to:
. the electronic display of their members on the Remodel.com web site;
. web sites and home pages for remodeling contractors and manufacturers;
and
. the provision of leads to contractors.
In July 1999, we entered into an agreement with the NARI under which
Remodel.com is the sole officially-endorsed web site of the NARI, as well as
the exclusive provider of web sites, home pages and electronic mail services.
In addition, the NARI membership database is displayed on Remodel.com. The
NARI is a not-for-profit national trade association with nearly 6,000 member
companies and more than 60 chapters representing professionals in the
remodeling industry. This agreement expires in September 2006 and can be
extended for an additional five-year term upon mutual agreement.
Multiple Listing Services. As of December 31, 1999, we had agreements with
approximately 750 of the approximately 800 MLSs. These agreements allow us to
aggregate and display the MLS's property listings on our REALTOR.com web site.
As of that date, these agreements gave us access to over 1.2 million of the
approximately 1.3 million homes that we estimate are listed nationally. We
have exclusive national Internet listing rights in key real estate markets
such as Boston, Cleveland, Dallas, Denver, Philadelphia and St. Louis. We also
have agreements in many key markets including Chicago, Detroit, Long Island,
many portions of the greater Los Angeles area, many portions of the New York
City metropolitan area, Pittsburgh and Washington, D.C. under which the
respective MLSs agreed to promote REALTOR.com as its preferred Internet site.
Under each of these agreements, the MLS gives us the right to display their
property listings for an agreed to period of time. In exchange, we pay each
MLS royalties based on revenues received from banner advertisements sold on
our web site pages that contain listings from those MLSs. In addition, we pay
royalties based on any revenues received from advertising products and
services, such as customized web pages, sold to that MLS's members. These
royalty rates range from 10% to 12% of these revenues.
Residential Franchisers. We have agreements with each of the six major
residential franchisers Century21; Coldwell Banker; ERA; RE/MAX; GMAC Home
Services, formerly Better Homes and Gardens; and Prudential, which together
represent over 300,000 real estate professionals in over 17,000 offices. These
agreements are marketing relationships and typically provide that
Homestore.com will be featured as the real estate franchise's
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preferred vendor of Internet products and services to its members. In many
cases, we agree to operate a web site for these companies. These agreements
have terms of varying lengths, from two to five years. In addition, these
agreements typically provide that the broker franchise will receive a royalty
based on a percentage of sales of our advertising products and services, such
as customized web pages, to its members.
Real Estate Brokers and Agents. We have relationships with approximately 70
major brokers which allow us to exclusively list their properties on the
Internet on a national basis. The brokers gave us the right to display their
property listing for an agreed to period of time. Brokers who participated in
our Broker Gold Program agreed to do so on an exclusive basis and also
purchased shares of our preferred stock, common stock and warrants to purchase
common stock. We do not make any payments to these brokers. We also operate
over 200 web sites for brokers. We market to these group's members and promote
our products and services in their publications and at their conferences.
Home Builders. We have agreements with 27 of the 30 largest home builders in
the United States including Centex, Pulte Home, The Ryland Group and US Home.
These agreements allow us to aggregate a large number of new home listings.
You should read the risk factors on pages 11 through 14 which more fully
describe risks relating to these relationships in more detail.
Sales and Marketing
An important element of our business strategy is to build brand recognition
around our family of web sites and our products and services.
Consumer Marketing. We employ a variety of methods to promote our brands. In
addition to our distribution arrangements with a number of web portals and our
online advertising efforts, we have an internal public relations staff. We
also engage in other off-line advertising efforts, such as advertisements in
targeted real estate industry publications, on radio and television stations
and in other traditional media. The NAR currently highlights REALTOR.com in
its television commercials as part of its ongoing consumer awareness campaign.
We also conduct focus group studies, consumer surveys and usability testing to
help us in designing new products and services.
Real Estate Professional Marketing. Our sales and marketing group markets
our advertising products and services to the real estate professional market,
including residential and commercial REALTORS and home builders. With our
relationships with leading trade organizations, as well as our relationships
with major real estate franchisers and brokers, we market to these group's
members and promote our advertising products and services in their
publications and at their conferences.
In addition to our advertising campaigns, our sales force is involved in our
marketing process. Our account executives host office-based seminars and
events coordinated with local real estate associations. We also promote our
advertising products and services in local real estate professional
publications and at real estate conventions and functions.
Web Portals. We believe that our Internet distribution relationships are an
important means of generating traffic on our family of web sites and building
brand recognition. For example, we have an agreement with America Online which
provides that our branding and content will be placed within primary real
estate related areas on AOL.com, CompuServe, America Online's Digital City and
America Online's proprietary service and that we will receive a number of
guaranteed impressions. We also have distribution agreements with other
Internet portal sites, including Excite@Home and Go Network/Infoseek. These
agreements typically provide that our web sites will, for a fee, be featured
through links on portions of these portals and affiliated portals dedicated to
real estate. Often we provide customized versions of our web sites to these
web portal sites in exchange for featuring our web sites and sharing
advertising revenues. These agreements typically require us to pay a
significant annual fee for these arrangements.
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Advertising. A group of our sales and marketing staff focuses on selling
traditional Internet advertising, such as banner advertising, on our web
sites. In instances where we develop co-branded content for a web portal site,
the portal's internal sales force is typically responsible for selling
advertisements on the co-branded areas. Under our advertising agreement,
America Online will act as our exclusive advertising sales agent on the
REALTOR.com and HomeBuilder.com web sites through March 2000. In connection
with this arrangement, America Online has agreed to pay us minimum quarterly
payments, subject to adjustments based on the number of page views delivered
on these web sites.
Since January 1, 1997, more than 130 companies have purchased advertising on
our family of web sites. Norwest, GMAC, General Motors, Home Depot, IBM, Kmart
and Stewart Title have each purchased in excess of $100,000 of advertising on
our family of web sites since January 1, 1997. No single advertising customer
accounted for more than 10% of our total revenues during the years ended
December 31, 1997 and 1998. During the year ended December 31, 1999, one
customer accounted for approximately 11% of our net revenues.
Product Development
We believe that it is important for us to continually enhance the
performance of, and features on, our family of web sites. Our development team
is focused on developing products and services for consumers and real estate
professionals that differentiate us from our competitors. We seek to maintain
and enhance our market position by building proprietary systems and features,
such as search engines for real estate listings and the technologies used to
aggregate real estate content. We expect that enhancements to our family of
web sites and to our products and services will come from both internally and
externally developed technologies.
Our current development activities relate to improving the functionality and
performance of our family of web sites, enhancing the ability of our sites to
handle larger numbers of users, and extending our custom developed web sites
and other advertising products and services, as well as the development of web
sites supporting new business opportunities. Future delays or unforeseen
problems in these development efforts could delay the introduction of new
products, services or features on our family of web sites.
Our market is characterized by rapid technological developments, new
products and services and evolving industry standards. We will be required to
continually and timely improve the performance and features of our products
and services, particularly in response to competitive offerings. If we do not
develop new features, products or services in a timely manner or if our
introductions are not commercially successful, our web sites and products and
services might not be as attractive to consumers or real estate industry
professionals. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or standards or other
technological changes could render our products and services obsolete.
Infrastructure and Technology
Our family of web sites is designed to provide fast, secure and reliable,
high-quality access to our services, while minimizing the capital investment
needed for our computer systems. Our systems supporting our family of web
sites must accommodate a high volume of user traffic, store a large amount of
listings and other related data, process a significant number of user searches
and deliver frequently updated information. Any significant increases in these
could strain the capacity of our computers, causing slower response times or
outages. We intend to pursue the development of a duplicate web site for each
of our web sites' server computers to be located at a third party service
provider in order to help insure maximum disaster recovery and business
continuity. We host our Homestore.com, REALTOR.com and Remodel.com web sites
in Thousand Oaks, California and custom broker web pages in our Milwaukee,
Wisconsin facility. Our HomeBuilder.com web site is located at a third party's
facility in Dallas, Texas. The SpringStreet.com web site is located in San
Jose, California and our Homefair.com web site is located in Phoenix, Arizona.
Because substantially all of our computer and communications hardware for each
of our web sites is located at one location, our systems are vulnerable to
fire, floods, telecommunications failures, break-ins, earthquakes and similar
events. You should read the risk factors on pages 20 and 21 which more fully
describe risks relating to our computer infrastructure and technology.
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Customer Care
Our success depends in part on our ability to provide efficient and
personalized customer support for the real estate professional and the
consumer. Our customer support process has been designed to have a member of
our staff respond to customer calls in person. We believe this is critical as
typical real estate professionals primarily work outside of their offices and
are difficult to reach. We have also developed a call tracking system to
provide personalized and timely customer care. In addition, customer care
representatives respond to inquiries on how to update and edit a real estate
professional's web page. They also accept inquiries from real estate
professionals by electronic mail and attempt to answer them within 24 hours.
Competition
We believe that the principal competitive factors in attracting consumers to
our family of web sites are:
. the total number of listings and the number of listings for the
consumer's specific geographic area of interest available on our web
sites;
. the parties with which web site operators have listing, marketing or
distribution relationships;
. the quality and comprehensiveness of general real estate related,
particularly home-buying, information available on our web sites;
. the availability and quality of other real estate related products and
services available through our web sites; and
. the ease of use of our web sites.
We believe that the principal competitive factors in attracting advertisers,
content providers and real estate professionals to our family of web sites
are:
. the number of visitors to our web sites;
. the average length of time these visitors spend viewing pages on our web
sites;
. our relationships with, and support for our services by, the NAR, the
NAHB, the NAHBs Remodelors Council, the NARI, the AIA and the MHI; and
. our relationships and national contracts with the major home builders
and rental property owners and managers in the United States.
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 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; and
. traditional print media such as newspapers and magazines.
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Our main existing and potential competitors for advertisements may 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.
Intellectual Property
We regard substantial elements of our family of web sites and underlying
technology as proprietary. We attempt to protect these elements and underlying
technology by relying on trademark, service mark, patent, copyright and trade
secret laws, restrictions on disclosure and other methods. We have been issued
a patent with respect to the technology we use to enable searches of the real
estate listings posted on our family of web sites. Despite our precautions, it
may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar technology
independently.
Our REALTOR.com domain name and the REALTOR trademark are licensed to us by
the NAR. If we were to lose the use of these trademarks or the "REALTOR.com"
domain name, our business would suffer, and we would need to devote
substantial resources towards developing an independent brand identity.
We also hold other domain names that are important to our business. The
regulation of domain names is subject to change. Some proposed changes include
the creation of additional top-level domains in addition to the current top-
level domains, such as ".com," ".net" and ".org." It is also possible that the
requirements for holding a domain name could change. Therefore, we may not be
able to obtain or maintain relevant domain names for all of the areas of our
business. It may also be difficult for us to prevent third parties from
acquiring domain names that are similar to ours, that infringe our trademarks
or that otherwise decrease the value of our intellectual property.
We currently license from third parties technologies and information
incorporated into our family of web sites. As we continue to introduce new
services that incorporate new technologies and information, we may be required
to license additional technology and information from others.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving, and we can give no assurance regarding the future
viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine
the validity and scope of the proprietary rights of others. Litigation could
result in substantial costs and diversion of resources and management
attention. Furthermore, other parties may assert infringement claims against
us, including claims that arise from directly or indirectly providing
hypertext links to web sites operated by third parties or claims based on the
content on our site. These claims and any resultant litigation, should it
occur, might subject us to significant liability for damages, might result in
invalidation of our proprietary rights and, even if not meritorious, might
result in substantial costs and diversion of resources and management
attention.
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Employees
As of December 31, 1999, we had approximately 993 full-time equivalent
employees. We consider our relations with our employees to be good. We have
never had a work stoppage, and none of our employees is represented by
collective bargaining agreements. We believe that our future success will
depend in part on our ability to attract, integrate, retain and motivate
highly qualified personnel, and upon the continued service of our senior
management and key technical personnel. None of our key personnel are bound by
employment agreements that prohibit them from ending their employment at any
time. Competition for qualified personnel in our industry and geographical
locations is intense. We cannot assure you that we will be successful in
attracting, integrating, retaining and motivating a sufficient number of
qualified employees to conduct our business in the future.
Facilities
<TABLE>
<CAPTION>
Square Lease
Location Feet Expiration
-------- ------ ----------
<S> <C> <C> <C>
Principal executive and corporate
offices.............................. Thousand Oaks, CA 51,000 2003
HomeBuilder.com offices............... Dallas, TX 11,500 2000
SpringStreet.com offices.............. San Francisco, CA 16,000 2004
Broker web site facilities............ Milwaukee, WI 16,800 2003
Homefair.com offices.................. Fairfield, CT 3,500 2001
Operations center and offices......... Scottsdale, AZ 14,000 2001
</TABLE>
Legal Proceedings
From time to time, we are involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this prospectus
we are not a party to any litigation or other legal proceeding that, in our
opinion, could have a material adverse effect on our business, operating
results or financial condition.
In July 1999, Cendant Corporation filed a complaint against us claiming that
we fraudulently induced it into entering the Listings License Agreement by
failing to fulfill a promise to use reasonable good faith efforts to give
Cendant the opportunity to invest in our company prior to our initial public
offering. On October 22, 1999, we announced a settlement of the Cendant
litigation, under which Cendant received 250,000 shares of our common stock
and agreed to take various actions to reaffirm the various alliance agreements
it has with us.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of March 31, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stuart H. Wolff, Ph.D... 36 Chairman of the Board and Chief Executive Officer
Michael A Buckman....... 52 President and Chief Operating Officer
John M. Giesecke, Jr.... 38 Executive Vice President, Chief Financial Officer and Secretary
Peter B. Tafeen......... 30 Executive Vice President, Business Development
M. Jeffrey Charney...... 40 SeniorVice President, Corporate Marketing and Communications
Catherine Kwong Giffen.. 34 SeniorVice President, Human Resources and Administration
David M. Rosenblatt..... 35 SeniorVice President, General Counsel
Joseph J. Shew.......... 34 Vice President, Finance
Nigel D.T. Andrews(1)... 52 Director
L. John Doerr(2)........ 48 Director
Joe F. Hanauer(2)....... 61 Director
Richard R. Janssen...... 50 Director
William E. Kelvie(1).... 52 Director
Kenneth K. Klein(1)..... 56 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation and Nominations Committees.
Our executive officers and directors are also executive officers and
directors of our subsidiary RealSelect. Under the terms of our stockholders
agreement relating to RealSelect, the NAR has the right to appoint two members
to the RealSelect board of directors. See "Related Party Transactions." The
two directors of RealSelect appointed by the NAR are Mr. Hanauer and Mr.
Terrence M. McDermott, Executive Vice President of the NAR.
Stuart H. Wolff, Ph.D. joined Homestore in November 1996 as Chairman and
Chief Executive Officer. From September 1994 to September 1996, Dr. Wolff was
Vice President of Business Services at TCI Interactive and at AND Interactive,
subsidiaries of TCI Communications, Inc., a cable company. Prior to his tenure
at TCI Communications, Inc. Dr. Wolff was an engineer at IBM and a research
scientist at AT&T Bell Labs. In 1986 he was recognized by the Japanese
Ministry of Education and awarded the Monbushu Fellowship at the Tokyo
Institute of Technology. Dr. Wolff received a B.S. in electrical engineering
from Brown University and an M.E.E. and Ph.D. in electrical engineering from
Princeton University.
Michael A. Buckman joined Homestore in February 1999 as President and Chief
Operating Officer. Prior to joining Homestore, Mr. Buckman served as Chief
Executive Officer for Worldspan Travel Information Services, a worldwide
travel reservation and airline support services organization, since June 1995.
From January 1992 to June 1995, Mr. Buckman was Executive Vice President of
American Express Company. Prior to his tenure at American Express, he was
Chief Operating Officer of Lifeco Services Corporation, a travel services
company, and President of the Sabre Travel Information Network, a travel
distribution company. Mr. Buckman received a B.B.A. from the University of
Texas and an M.B.A. from the University of Missouri.
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John M. Giesecke, Jr. joined Homestore in June 1998 as Vice President of
Finance, was appointed as Secretary in August 1998 and was promoted to
Executive Vice President and Chief Financial Officer in December 1998. From
March 1994 to March 1998, Mr. Giesecke was Vice President of Corporate
Controllership in charge of worldwide controllership activities for The Walt
Disney Company. Prior to his tenure at The Walt Disney Company, Mr. Giesecke
spent eight years as a certified public accountant with Price Waterhouse LLP,
most recently as Senior Manager. Mr. Giesecke received a B.S. in business and
public administration from the University of Arizona.
Peter B. Tafeen joined Homestore in September 1997 as Executive Vice
President of Business Development. From June 1995 to September 1997, Mr.
Tafeen served as Director of Business Development for PointCast Incorporated,
an Internet software company. Prior to his tenure at PointCast, from March
1993 to June 1995, Mr. Tafeen served as an Area Director for the Gartner
Group, Inc., a technology consulting company. Mr. Tafeen received a B.S. in
political science from the University of Massachusetts at Amherst.
M. Jeffrey Charney joined Homestore in June 1999 as Senior Vice President of
Marketing and Communications. From June 1994 to June 1999, Mr. Charney served
as Senior Vice President of Marketing and Communications for Kaufman and Broad
Home Corporation, a real estate development company. Prior to joining Kaufman
and Broad, Mr. Charney served as Director of Advertising and Employee
Communications for Rockwell International from 1988 through 1994. Earlier,
from 1982 through 1988, he managed public relations at Raytheon Corporation.
Mr. Charney received his B.A. in Journalism (Advertising/Public Relations)
from the University of South Carolina and his M.A. in Journalism from Ohio
State University.
Catherine Kwong Giffen joined Homestore in April 1998 as Senior Vice
President of Human Resources and Administration. Prior to joining Homestore,
Ms. Giffen served from April 1994 to April 1998 as Vice President of Human
Resources and Administration of Iwerks Entertainment, Inc., an entertainment
company. Previously she has served as Vice President of Human Resources for
the Real Estate Industries Division of BankAmerica Corporation and Vice
President of Human Resources for the Securities Lending and Mortgage-Backed
Securities Division of Security Pacific National Bank. Ms. Giffen received a
B.A. in political science from the University of California at Los Angeles.
David M. Rosenblatt joined Homestore in October 1998 as Senior Vice
President, General Counsel. Prior to joining Homestore, Mr. Rosenblatt was
Senior Product Manager for Intuit Inc.'s QuickenMortgage from August 1997 to
October 1998. Prior to his tenure at Intuit, Mr. Rosenblatt founded and served
as President of CyberSports, Inc., a software company, from January 1995 to
February 1999. He practiced corporate law for Weil, Gotshal & Manges LLP and
for Chadbourne & Parke LLP from 1990 to January 1996. Mr. Rosenblatt received
an M.B.A. from the Harvard University Graduate School of Business, a J.D. from
Northwestern University School of Law and a B.A. in accounting from
Pennsylvania State University.
Joseph J. Shew joined Homestore in August 1998 as Controller and was
promoted to Vice President of Finance in January 1999. From October 1994 to
August 1998, Mr. Shew was Director of Corporate Controllership for The Walt
Disney Company. Prior to his tenure at Disney, Mr. Shew spent six years as a
certified public accountant with Price Waterhouse LLP, most recently as
Manager. Mr. Shew received a B.S. in accounting from Villanova University.
Nigel D. T. Andrews has served as a director of Homestore since July 1999.
He is an Executive Vice President of General Electric Capital Corporation, or
GE Capital, where he has served since August 1993. Prior to his present
position with GE Capital, from August 1990 to August 1993, Mr. Andrews was
Vice President and General Manager of GE Plastics Americas. Earlier, he was
Vice President and General Manager of GE Silicones. He joined General Electric
in 1987 as Vice President of Corporate Business Development and Planning after
nearly 10 years with Booz, Allen & Hamilton, a management consulting firm. He
serves on the boards of directors of Penske Corporation, Consumer Financial
Network, and Weatherford Global. Mr. Andrews received a B.S. from the
University of Sheffield, England and an M.B.A. from the London Business
School.
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L. John Doerr has served as a director of Homestore since August 1998. He
has been a general partner of Kleiner Perkins Caufield & Byers since September
1980. Prior to his tenure at Kleiner Perkins, Mr. Doerr was employed by Intel
Corporation for five years. He serves on the boards of directors of
Amazon.com, Inc., @Home Corporation, Intuit Inc., Platinum Software
Corporation and Sun Microsystems, Inc. Mr. Doerr received a B.S.E.E and an
M.E.E from Rice University and an M.B.A. from the Harvard University Graduate
School of Business.
Joe F. Hanauer has served as a director of Homestore since November 1996.
Since 1988, Mr. Hanauer, through Combined Investments, L.P., has directed
investments in companies primarily involved in real estate and financial
services. Mr. Hanauer is former Chairman of Grubb & Ellis Company and former
Chairman of Coldwell Banker Residential Group, Inc. Mr. Hanauer is a director
of Grubb & Ellis Company, MAF Bancorp, Inc. and Regit, Inc., a national
insurance broker. Mr. Hanauer is a member of the Executive Committees of the
National Association of REALTORS. Mr. Hanauer received a B.S. in business
administration from Roosevelt University.
Richard R. Janssen served as President and Chief Operating Officer of
Homestore from December 1996 through March 1999. Mr. Janssen was a founder of
InfoTouch Corporation ("InfoTouch"), which was a predecessor entity of the
Company. He served as President and Chief Executive Officer, and was a
director of InfoTouch from July 1993 until February 1999, when InfoTouch
merged with NetSelect, Inc., which was also a predecessor entity of the
Company. Previously, Mr. Janssen was President of Janssen & Associates, a
consulting firm specializing in strategic planning, and co-founded Delphi
Information Systems, Inc., an insurance software company, holding various
positions, including Chairman of the Board, Chief Executive Officer and
President. Mr. Janssen received a B.S. in mathematics and computer science and
in economics from the University of California at Los Angeles.
William E. Kelvie has served as a director of Homestore since August 1998.
He is Chief Information Officer responsible for information technology systems
at Fannie Mae, including its technology business and its internal systems. Mr.
Kelvie joined Fannie Mae in 1990 as Senior Vice President and Chief
Information Officer. Prior to his tenure at the Federal National Mortgage
Association, Mr. Kelvie was a partner with Nolan, Norton & Co., a management
consulting company specializing in information technology strategies and plans
and served in various capacities with The Dexter Corporation, a specialized
manufacturing company, and The Travelers Insurance Company, an insurance and
financial services company. Mr. Kelvie received a B.S. in English literature
from Tufts University and an M.S. in English literature from Trinity College.
Kenneth K. Klein has served as a director of Homestore since August 1998. He
has served as President and Chief Executive Officer of Kleinco Construction
Services, Inc., a general contracting company, since 1980. Mr. Klein is
National Vice President and a member of the Executive Committee of the
National Association of Home Builders. Mr. Klein is a past Chairman of the
Board of the Home Builders Institute, a national organization that teaches
building-craft skills. Mr. Klein received a B.S. in accounting from Oklahoma
State University.
The NAR is entitled to appoint one member to the Board of Directors of
Homestore.com through its ownership of the one share of our Series A preferred
stock.
Our bylaws provide for our board of directors to be divided into three
classes as nearly equal in size as possible with staggered three-year terms.
The term of office of our Class I directors will expire at the annual meeting
of stockholders to be held in 2000; the term of office of our Class II
directors will expire at the annual meeting of stockholders to be held in
2001; and the term of office of our Class III directors will expire at the
annual meeting of the stockholders to be held in 2002. The classification of
our board of directors could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring,
control of Homestore.com.
Messrs. Andrews and Janssen are Class I directors; Messrs. Kelvie and Klein
are Class II directors; and Messrs. Wolff, Doerr, and Hanauer are Class III
directors. Messrs. Andrews and Janssen were re-elected at the annual meeting
of stockholders held in 2000.
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Board Committees
Our board has three committees, the audit committee, the compensation
committee and the nominations committee. The audit committee consists of
Messrs. Andrews, Kelvie and Klein. Mr. Klein serves as chairman of the audit
committee. The compensation committee and nominations committee each consists
of Messrs. Doerr and Hanauer. The audit committee reviews our financial
statements and accounting practices, makes recommendations to the board
regarding the selection of independent auditors and reviews the results and
scope of the audit and other services provided by our independent auditors.
The compensation committee makes recommendations to the board concerning
salaries and incentive compensation for our officers and employees and
administers our stock plans and employee benefit plans. The nominations
committee makes recommendations to the board concerning board composition and
recruiting of new members.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since the
formation of Homestore.com been an officer or employee of Homestore.com. No
executive officer of Homestore.com serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee.
Director Compensation
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses in
attending board and committee meetings.
During 1999, each non-employee director was granted an option to purchase
15,000 shares of the Company's common stock under the 1999 Stock Incentive
Plan with the exception of Messrs. Hanauer and Klein, who each received
options to purchase 40,000 shares of the Company's common stock. Immediately
following each annual meeting of stockholders, each non-employee director will
automatically be granted an additional option to purchase 7,500 shares under
that plan if the director has served continuously as a member of the Board for
a period of at least one year since the date of the director's initial grant.
The Board may, in its discretion, grant an additional number of options
depending on the level of additional services performed by any particular
member of the Board. Each option will have an exercise price equal to the fair
market value of the Company's common stock on the date of grant and will have
a ten-year term, but will terminate within a specified time, as defined in the
1999 Stock Incentive Plan, following the date the option holder ceases to be a
director or consultant. Except as otherwise provided by the Board of
Directors, each of these options will be immediately exercisable and fully
vested.
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Executive Compensation
The following table sets forth all compensation paid or accrued during 1999
and 1998 to the Company's Chief Executive Officer and the four other most
highly compensated executive officers whose salary and bonus for 1999 and 1998
was more than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------- ------------
Securities
Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options (#)
- --------------------------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
Stuart H. Wolff, Ph.D. .................. 1999 197,308 250,000 500,000
Chairman of the Board and Chief
Executive Officer 1998 185,538 100,000 1,475,000
Michael A. Buckman....................... 1999 127,019 250,000 750,000
President and Chief Operating Officer(1) 1998 -- -- --
John M. Giesecke, Jr..................... 1999 157,846 100,000 100,000
Executive Vice President, Chief 1998 71,417 29,000 375,000
Financial Officer and Secretary(2)
Peter B. Tafeen.......................... 1999 157,846 100,000 134,375
Executive Vice President, Business
Development 1998 156,442 52,500 125,000
David M. Rosenblatt...................... 1999 152,077 48,000 175,000
Senior Vice President, General
Counsel(3) 1998 31,124 14,000 175,000
</TABLE>
- --------
(1) Mr. Buckman commenced his employment in February 1999.
(2) Mr. Giesecke commenced his employment in June 1998.
(3) Mr. Rosenblatt commenced his employment in October 1998.
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Option Grants in 1999
The following table sets forth grants of stock options to our Chief
Executive Officer and our four other most highly compensated executive
officers in 1999.
All options granted to these executive officers are immediately exercisable,
to the extent they qualify as incentive stock options, and are either
incentive stock options or nonqualified stock options. Shares acquired upon
exercise of immediately exercisable options are subject to repurchase by
Homestore, at the original exercise price paid per share, if the optionee
ceases service with Homestore before those shares are vested. Some of these
options are subject to acceleration upon a change of control of Homestore or
termination of the optionee's employment. See "--Employment-Related
Agreements." The options expire ten years from the date of grant and were
granted at an exercise price equal to the fair market value of our common
stock on the date of grant, as determined by the Board of Directors.
Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the exercise price per
share, (b) assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rates shown in the table for the
entire ten year term of the option and (c) subtracting from that result the
aggregate option exercise price. The 5% and 10% assumed annual rates of stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock prices.
<TABLE>
<CAPTION>
Potential Realizable
Percentage Value at Assumed
Number of of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration ---------------------
Name Granted (#) in 1999 ($/Shr) Date 5% 10%
- ---- ----------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stuart H. Wolff, Ph.D... 500,000 4.9% $ 9.00 7/6/09 $2,830,026 $7,171,841
Michael A. Buckman...... 750,000 7.3 2.00 2/19/09 943,342 2,390,614
John M. Giesecke, Jr.... 100,000 1.0 9.00 7/6/09 566,005 1,434,368
Peter B. Tafeen......... 134,375 1.3 8.00 4/22/09 676,062 1,713,273
David M. Rosenblatt..... 125,000 1.2 2.00 1/21/09 157,224 398,436
50,000 .5 34.50 10/21/09 1,084,843 2,749,206
</TABLE>
The percentage of total options granted to employees is based on options to
purchase a total of 10,214,114 shares of common stock of Homestore granted
during 1999.
Dr. Wolff's option vests monthly over five years commencing on January 1,
2002. Mr. Buckman's option vests over four years with 25% vesting on the first
anniversary of the date of grant and 2.083% vesting each subsequent month. Mr.
Giesecke's option vests with respect to 50,000 shares monthly over five years
and with respect to the remaining 50,000 shares monthly over five years
commencing on January 1, 2002. Mr. Rosenblatt's January 21, 1999 option vests
monthly over four years and his October 21, 1999 option vests monthly over
five years. Mr. Tafeen's option vests monthly over five years.
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Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares
of common stock subject to exercisable and unexercisable stock options held as
of December 31, 1999 by our Chief Executive Officer and each of our four most
highly compensated executive officers. Also reported are values of "in-the-
money" options, which represent the positive spread between the exercise
prices of outstanding stock options and the fair market value of $74
1/4 per share, based on the closing price of our common stock on December 31,
1999.
The value realized equals the fair market value of the purchased shares on
the option exercise date, less the exercise price paid for those shares. The
heading "Vested" refers to shares that are no longer subject to repurchase;
the heading "Unvested" refers to shares subject to repurchase as of December
31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired December 31, 1999 at December 31, 1999
on Value ----------------------- ----------------------
Name Exercise Realized Vested Unvested Vested Unvested
- ---- --------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stuart H. Wolff, Ph.D... 1,671,445 $3,328,634 -- 500,000 $ -- $32,625,000
Michael A. Buckman...... 750,000 -- -- -- -- --
John M. Giesecke, Jr.... 166,660 299,988 54,167 254,173 3,904,377 17,759,860
Peter B. Tafeen......... 375,000 895,350 17,917 116,458 1,186,975 7,715,368
David M. Rosenblatt..... 229,545 340,381 -- 120,455 -- 7,107,038
</TABLE>
Employee Benefit Plans
1996 Stock Incentive Plan. As of December 31, 1999, options to purchase
4,756,276 shares of common stock granted under the plan had been exercised,
and options to purchase 2,058,750 shares of common stock at a weighted average
exercise price of $1.07 per share were outstanding. This plan terminated on
August 4, 1999. As a result, no options will be granted under the plan after
August 4, 1999. However, the termination of this plan will not affect any
outstanding options, all of which will remain outstanding until exercised or
until they terminate or expire. Options granted under this plan are subject to
terms substantially similar to those described below with respect to options
to be granted under the 1999 Stock Incentive Plan.
1999 Equity Incentive Plan. As of December 31, 1999, options to purchase
2,043,059 shares of common stock granted under the plan had been exercised,
and options to purchase 6,041,796 shares of common stock at a weighted average
exercise price of $8.23 per share were outstanding. This plan terminated on
August 4, 1999, at which time Homestore.com's 1999 Stock Incentive Plan became
effective. As a result, no options will be granted under this plan after
August 4, 1999. However, the termination of this plan will not affect any
outstanding options, all of which will remain outstanding until exercised or
until they terminate or expire. Options granted under the plan are subject to
terms substantially similar to those described below with respect to options
granted under the 1999 Stock Incentive Plan.
1999 Stock Incentive Plan. As of December 31, 1999, no option had been
exercised, and options to purchase 1,796,565 shares of common stock at a
weighted average exercise price of $42.20 were outstanding under this plan and
1,819,669 shares of common stock remain available for issuance in the future
under this plan. The number of shares reserved under this plan will be
increased automatically on January 1 of each year by an amount up to 4.5% of
the total outstanding shares as of the immediately preceding December 31,
unless the board of directors determines prior to such automatic increase that
the increase shall not occur for such year. Also reserved under this plan are
shares reserved under the 1996 Stock Incentive Plan and the 1999 Equity
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Incentive Plan not issued or subject to outstanding grants on the date of this
prospectus and any shares issued under these plans that are forfeited or
repurchased by Homestore.com or that are issuable upon exercise of options
that expire or become unexercisable for any reason without having been
exercised in full. Shares that:
. are subject to issuance upon exercise of an option granted under the
1999 Stock Incentive Plan that cease to be subject to that option for
any reason other than exercise of the option;
. have been issued pursuant to the exercise of an option granted under the
1999 Stock Incentive Plan that are subsequently forfeited or repurchased
by Homestore.com at the original purchase price;
. are subject to an award granted pursuant to a restricted stock purchase
agreement under the 1999 Stock Incentive Plan that are subsequently
forfeited or repurchased by Homestore.com at the original issue price;
or
. are subject to stock bonuses granted under the 1999 Stock Incentive Plan
that otherwise terminate without shares being issued,
will again be available for grant and issuance under the 1999 Stock Incentive
Plan.
This plan will terminate after ten years, unless it is terminated earlier by
the board. The plan authorizes the award of options, restricted stock and
stock bonuses. No person is eligible to receive more than a specified number
of shares in any calendar year under the plan other than a new employee of
Homestore.com who is eligible to receive no more than a specified number of
shares in the calendar year in which the employee commences employment.
The plan is administered by the compensation committee, which currently
consists of Messrs. Doerr and Hanauer, all of whom are "non-employee
directors" under applicable federal securities laws and "outside directors" as
defined under applicable federal tax laws. The compensation committee will
have the authority to construe and interpret the plan, grant awards and make
all other determinations necessary or advisable for the administration of the
plan. Each non-employee director was granted an option to purchase 15,000
shares of our common stock, with the exception of Messrs. Hanauer and Klein
who received options to purchase 40,000 shares of our common stock, and each
director will receive automatic annual grants of fully vested options to
purchase 7,500 shares of our common stock, as described under "Management--
Director Compensation."
The plan provides for the grant of both incentive stock options that qualify
under Section 422 of the Internal Revenue Code, and nonqualified stock
options. Incentive stock options may be granted only to employees of
Homestore.com or of a parent or subsidiary of Homestore.com. All other awards
other than incentive stock options may be granted to employees, officers,
directors, consultants, independent contractors and advisors of Homestore.com
or any parent or subsidiary of Homestore.com, provided the consultants,
independent contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must be at least
equal to the fair market value of Homestore.com's common stock on the date of
grant. The exercise price of incentive stock options granted to 10%
stockholders must be at least equal to 110% of that value. The exercise price
of nonqualified stock options must be at least equal to 85% of the fair market
value of Homestore.com's common stock on the date of grant.
Options may be exercisable only as they vest or immediately exercisable with
the shares issued subject to our right of repurchase that lapses as the shares
vest. In general, options will vest over a five-year period.
The maximum term of options granted under the plan is ten years.
Awards other than nonqualified stock options granted under the plan may not
be transferred in any manner other than by will or by the laws of descent and
distribution. Awards other than nonqualified stock options may be exercised
during the lifetime of the optionee only by the optionee. The compensation
committee could determine otherwise and provide for these provisions in the
award agreement, but only with respect to awards that are not incentive stock
options. Options granted under the plan generally may be exercised for a
period of
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time after the termination of the optionee's service to Homestore.com or a
parent or subsidiary of Homestore.com. Options will generally terminate no
later than one month after termination of employment for cause.
The purchase price for restricted stock will be determined by the
compensation committee. Stock bonuses may be issued for past services or may
be awarded upon the completion of services or performance goals.
In the event of Homestore.com's dissolution or liquidation or a "change in
control" transaction, outstanding awards may be assumed or substituted by the
successor corporation, if any. In the discretion of the compensation
committee, the vesting of these awards may accelerate upon one of these
transactions.
Employee Stock Purchase Plan. We initially reserved 750,000 shares for
issuance under the Employee Stock Purchase Plan. On each January 1, the
aggregate number of shares reserved for issuance under the plan will increase
automatically by a number of shares equal to .5% of our outstanding shares on
the preceding December 31. The aggregate number of shares reserved for
issuance under the plan may not exceed a number of shares specified by the
board of directors. The plan is administered by the compensation committee.
The compensation committee has the authority to construe and interpret the
plan, and its decision is final and binding. The plan became effective on
August 5, 1999.
Employees generally are eligible to participate in the plan if they are
employed ten days before the beginning of an offer period and they are
customarily employed by Homestore.com, or its parent or any subsidiaries that
we designate, for more than 20 hours per week and more than five months in a
calendar year and are not, and would not become as a result of being granted
an option under the plan, 5% stockholders of Homestore.com or its designated
parent or subsidiaries.
Under the plan, eligible employees are permitted to acquire shares of our
common stock through payroll deductions. Eligible employees may select a rate
of payroll deduction up to 15% of their compensation as defined in the plan
and, provided, however, that compensation may not exceed an aggregate amount
of $100,000 per calendar year and eligible employees subject to certain
maximum purchase limitations described in the plan. Participation in the plan
ends automatically upon termination of employment for any reason.
Each offering period under the plan is for two years and consists of four
six-month purchase periods. The first offering period began on August 5, 1999
the day on which price quotations for our common stock began. Subsequent
offering periods and purchase periods will begin on February 1 and August 1 of
each year.
The plan provides that, in the event of the proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event shall continue for the duration of the offering period,
provided that the compensation committee may fix a different date for
termination of the plan. The purchase price for our common stock purchased
under the plan is 85% of the lesser of the fair market value of our common
stock on the Offering Date or the Purchase Date, as defined in the plan. The
compensation committee will have the power to change the duration of offering
periods without stockholder approval, if the change is announced at least 15
days prior to the beginning of the affected offering period.
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. Rights granted under the plan are
not transferable by a participant other than by will or the laws of descent
and distribution.
The plan terminates on the date ten years following its inception, unless it
is terminated earlier under the terms of the plan. The board has the authority
to amend, terminate or extend the term of the plan, except that no action may
adversely affect any outstanding options previously granted under the plan.
Except for the annual increase of shares due to the automatic increase
provision described above, stockholder approval is required to increase the
number of shares that may be issued or to change the terms of eligibility
under the plan. The board may make the amendments to the plan as it determines
to be advisable if the financial accounting treatment for the plan is
different from the financial accounting treatment in effect on the date the
plan was adopted by the board.
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<PAGE>
401(k) Plan. Homestore.com sponsors the Homestore.com, Inc. 401(k)
Retirement Plan, a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code. Employees who are at least 21 years old and
who have been employed with us for at least 90 days are generally eligible to
participate and may enter the Plan as of the first day of any calendar
quarter. Participants may make pre-tax contributions to the plan of up to 15%
of their eligible earnings, subject to a statutorily prescribed annual limit.
Each participant is fully vested in his or her contributions and the
investment earnings. We may make matching contributions on a discretionary
basis to the plan, but we have not done so to date. Contributions by the
participants or Homestore.com to the plan, and the income earned on these
contributions, are generally not taxable to the participants until withdrawn.
Contributions by us, if any, are generally deductible by Homestore.com when
made. Participant and company contributions are held in trust as required by
law. Individual participants may direct the trustee to invest their accounts
in authorized investment alternatives.
Employment-Related Agreements
Dr. Wolff
In August 1998, the Company entered into a three-year employment agreement
with Stuart H. Wolff, Ph.D. Under this agreement:
Compensation. Dr. Wolff initially received a base salary equal to $200,000
per year for the first year of the agreement. His salary can be increased by
the board in subsequent years. Dr. Wolff is also eligible to receive a target
bonus of 100% of his base salary for that year. He also receives an automobile
and cellular phone allowance of up to $4,800 per year.
Acceleration of stock option vesting. If the Company is acquired or if a
change in control of Homestore occurs, 50% of his then unvested options will
immediately become vested.
Termination of employment. If Dr. Wolff's employment is terminated without
cause or if Dr. Wolff resigns for "good reason," he will be entitled to
receive an amount equal to his annual base salary and his stock options will
continue to vest for another 12 months. Good reason includes a material
reduction in his duties or responsibilities or a reduction in his salary.
"Cause" is defined as: (a) the executive's material breach of the agreement,
(b) conviction of the executive for any crime constituting a felony or moral
turpitude, or any other criminal act against Homestore, or (c) willful
misconduct which damages Homestore.
Mr. Buckman
In February 1999, the Company entered into an at-will employment agreement
with Michael A. Buckman. Under this agreement:
Compensation. Mr. Buckman initially received a base salary equal to $200,000
per year. Mr. Buckman may also be eligible to receive an annual bonus in an
amount up to 125% of his base salary with a guaranteed first year bonus of
$250,000. In addition, the Company granted Mr. Buckman an option to purchase
750,000 shares of our common stock, subject to vesting requirements. Mr.
Buckman will also be entitled to receive a supplemental cash bonus based upon
the market price of our common stock during (1) the eight week period
following the anniversary of his employment agreement and (2) the year
following the anniversary of his employment agreement. The total amount of
this supplemental cash bonus will in no event exceed $450,000 for the first
year or $700,000 for the second year and is subject to downward adjustment for
the first year based on specified events occurring during the second year. Mr.
Buckman will also receive customary employee benefits and reimbursement of
relocation and travel expenses.
Termination of employment. If the Company terminates Mr. Buckman's
employment without cause prior to the first anniversary of his employment
agreement, he will be entitled to receive $250,000 and 187,500 shares of our
common stock subject to his option will immediately become vested. If the
Company terminates Mr. Buckman's employment without cause on or after the
first anniversary of his employment agreement, he
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will be entitled to receive a cash bonus based upon the price of our common
stock on the date of termination that will in no event exceed $300,000.
Change in Control. In the event of a change in control of Homestore, an
additional 30% of the then unvested shares subject to Mr. Buckman's stock
option will immediately become vested.
Mr. Giesecke
In June 1998, the Company entered into an at-will employment agreement with
John M. Giesecke, Jr. Under this agreement:
Compensation. Mr. Giesecke initially received a base salary of $130,000 per
year. Mr. Giesecke's current base salary is $160,000 per year. He is also
eligible to receive a target bonus of 30% of his base salary.
Termination of employment. Upon termination other than for cause, Mr.
Giesecke will receive a severance payment equal to four months base salary.
Mr. Tafeen
In September 1997, the Company entered into an at-will employment agreement
with Peter B. Tafeen. Under this agreement:
Compensation. Mr. Tafeen initially received a base salary of $140,000 per
year. Mr. Tafeen's current base salary is $160,000 per year. He is also
eligible to receive a target bonus of 30% of his base salary.
Termination of employment. Upon termination other than for cause, death or
disability, Mr. Tafeen will receive a severance payment equal to three months
base salary.
Mr. Rosenblatt
In September 1998, the Company entered into an at-will employment agreement
with David M. Rosenblatt. Under this agreement:
Compensation. Mr. Rosenblatt initially received a base salary of $140,000
per year. Mr. Rosenblatt's current base salary is $160,000 per year. He is
also eligible to receive a target bonus of 30% of his base salary.
Mr. Charney
In June 1999, the Company entered into an at-will employment agreement with
M. Jeffrey Charney. Under this agreement:
Compensation. Mr. Charney received a base salary of $160,000 per year. Mr.
Charney may also be eligible to receive a target bonus of 30% of his base
salary. Mr. Charney's bonus may exceed 30% of his base salary at the
discretion of the Chief Executive Officer. In addition, the Company granted
Mr. Charney an option to purchase 250,000 shares of our common stock, subject
to vesting requirements.
Termination of employment. If the Company terminates Mr. Charney's
employment without cause prior to the first anniversary of his employment
agreement, he will be entitled to receive six months severance pay, plus any
earned bonus payment and a total of one year or 20% accelerated option
vesting.
Ms. Giffen
In March 1998, the Company entered into an at-will employment agreement with
Catherine Kwong Giffen. Under this agreement:
Compensation. Ms. Giffen initially received a base salary equal to $120,000
per year. Ms. Giffen's current salary is $160,000. She is also eligible to
receive a target bonus of 30% of her base salary.
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Indemnification of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to Homestore.com or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our certificate of incorporation, our bylaws or agreements to which we
are party; and
. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to limited exceptions.
We entered into indemnification agreements with each of our current
directors and officers to give them additional contractual assurances
regarding the scope of the indemnification set forth in our certificate of
incorporation and bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is sought. We are
not aware of any threatened litigation that may result in claims for
indemnification.
We currently have liability insurance for our directors and officers,
including coverage for public securities matters.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
Stock Financings
The share numbers and per share prices below are adjusted to reflect the
conversion of convertible preferred stock into common stock at a ratio of one
share of preferred stock to five shares of common stock.
Series A Preferred Stock Financing
In December 1996, we sold 8,235,295 shares of Series A preferred stock for
approximately $.57 per share. The purchasers of the Series A preferred stock
included, among others:
. CDW Internet, LLC--2,058,825 shares;
. J.H. Whitney & Co., Inc.--1,647,055 shares; and
. Whitney Equity Partners, L.P.--2,470,590 shares.
Stuart H. Wolff, Ph.D., our Chairman of the Board and Chief Executive
Officer as well as our promoter, was a co-manager of CDW Internet, LLC.
Michael C. Brooks, a former director, is a managing member of Whitney
Equity Partners, L.P. and a general partner of J.H. Whitney & Co., Inc.
J. H. Whitney & Co., Inc. subsequently transferred all of its Series A
preferred stock to Whitney Equity Partners, L.P., an affiliated entity.
Series B Preferred Stock Financing
In December 1996, we sold 1,764,705 shares of Series B preferred stock for
approximately $1.32 per share. The purchasers of the Series B preferred stock
included, among others:
. Daniel A. Koch--138,655 shares.
Daniel A. Koch holds more than 5% of our outstanding common stock on an
as-converted basis.
Series C Preferred Stock Financing
In September 1997, we sold 3,071,870 shares of Series C preferred stock for
approximately $1.46 per share. The purchasers of the Series C preferred stock
included, among others:
. CDW Internet, LLC--375,450 shares;
. Ingleside Interests, L.P.--477,845 shares; and
. Whitney Equity Partners, L.P.--614,375 shares.
Joe F. Hanauer, one of our directors, is a general partner of Ingleside
Interests, L.P.
Series D Preferred Stock Financing
In January 1998, we sold 3,406,005 shares of our Series D preferred stock
for approximately $2.94 per share to GE Capital. Nigel D. T. Andrews, one of
our directors, is an Executive Vice President of GE Capital.
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Bridge Financing
In July 1998, we borrowed a principal amount of $12.0 million from, among
others, venture capital funds affiliated with Kleiner Perkins Caufield &
Byers. The lenders included:
. Kleiner Perkins Caufield & Byers VIII L.P.--$6,635,520;
. KPCB VIII Founders Fund L.P.--$384,480; and
. KPCB Information Sciences Zaibatsu Fund II, L.P.--$180,000.
All of these bridge loans, together with accrued interest, which accrued at
a rate of six percent per year, were converted into shares of our Series F
preferred stock as part of the purchase price for the Series F preferred stock
and the common stock described below. Kleiner Perkins Caufield & Byers VIII,
KPCB VIII Founders Fund and KPCB Information Sciences Zaibatsu Fund are
affiliated entities. L. John Doerr, one of our directors, is a general partner
of these funds.
Series F Preferred Stock Financing
In August 1998, we sold 8,320,245 shares of Series F preferred stock at
$4.80 per share and 8,369,955 shares of common stock at a purchase price of
$1.26 per share. These shares were sold to a number of venture capital funds
as well as other corporate investors. The purchasers in this financing
included, among others:
<TABLE>
<CAPTION>
Series F
Preferred Common Aggregate
Shares Shares Purchase
Purchaser Purchased Purchased Price
- --------- --------- --------- -----------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers VIII.......... 1,131,405 6,650,750 $13,823,990
KPCB VIII Founders Fund........................ 65,560 385,370 801,025
KPCB Information Sciences Zaibatsu Fund II..... 30,690 180,410 374,989
Whitney Equity Partners, L.P................... 184,075 400,535 1,389,035
General Electric Capital Corporation........... 132,495 288,300 999,811
Fannie Mae..................................... 2,083,335 -- 10,000,008
National Association of REALTORS............... 132,520 288,355 1,000,000
Ingleside Interests, L.P....................... 18,590 40,445 140,274
</TABLE>
William Kelvie, one of our directors, is the Chief Information Officer of
Fannie Mae.
The shares received by the NAR were issued in satisfaction of our obligation
to make a payment of $1.0 million as our share of advertising costs for the
association's advertising program which also features our web site. In
addition, the NAR received 297,620 shares of RealSelect common stock to
satisfy one of our payment obligations to the NAR under the operating
agreement discussed below.
Operating Agreement with the National Association of REALTORS
In November 1996, we entered into an operating agreement with the NAR which
governs how our RealSelect subsidiary operates the REALTOR.com web site on
behalf of the NAR. The agreement may be terminated if:
. the number of real estate listings on REALTOR.com falls below 500,000;
. we breach any of our obligations under the agreement and do not cure
that breach within 30 days;
. a third party acquires more than 50% of Homestore.com's or RealSelect's
voting stock; or
. the individuals on RealSelect's board of directors, as it was
constituted on November 1996, cease to constitute a majority of our
board of directors without the approval of the board or directors
approved by the board.
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Restrictions on How We Operate the REALTOR.com Web Site
The operating agreement contains a number of restrictions on how our
RealSelect subsidiary can operate the REALTOR.com web site. These include:
. it cannot display any "for sale by owner" real estate listings;
. it can only enter into agreements with parties that provide us with real
estate listings, such as MLSs, on terms approved by the NAR;
. there are specific provisions as to the types of information that the
real property listings may contain as well as the manner in which they
may be displayed;
. the NAR has the right to approve the design and layout of the
REALTOR.com home page;
. the NAR can require RealSelect to include on REALTOR.com real estate
related content it develops;
. RealSelect cannot provide links from listings of existing real property
listings to rental or new home listings with exceptions for our
HomeBuilder.com and SpringStreet.com web sites;
. we cannot market any data or information received from data content
providers such as real estate agents or brokers other than aggregate
statistical data without its consent; and
. although we can collect fees for enhanced Internet services, we cannot
charge fees to brokers or agents who provide us only basic real property
listing information.
We Are Subject to Noncompetition Provisions
The REALTOR.com operating agreement with the NAR requires that our
REALTOR.com site be our exclusive web site for displaying real property
listings. This required us to obtain the consent of the NAR prior to our
acquisition of the SpringStreet.com web site and the launch of our
HomeBuilder.com web site. In the future, if we were to acquire or develop
another service which provides real estate listings on an Internet site or
through other electronic means, we will need to obtain the prior consent of
the NAR in order to complete the acquisition. Any future consents from the
NAR, if obtained, could be conditioned on our restricting the operations of
the new web site or service. These conditions could include paying fees to the
NAR, limiting the types of content or listings on the web sites or service or
other terms and conditions. Our business could be adversely affected if we do
not obtain consents from the NAR, or if a consent we obtain contains
restrictive conditions.
Performance Requirements for the REALTOR.com Web Site
RealSelect must maintain adequate computer systems, communications and
capacity to accommodate all the real property listings on the REALTOR.com web
site. The computer system must also meet a number of other performance
requirements. If another means of displaying electronic advertisements for
real property emerges, and we do not adequately provide for the electronic
display of these advertisements in the new medium, the NAR is entitled to
select another real property listing provider for that new medium.
Restrictions on the Types of Advertising We May Display on the REALTOR.com
Site
RealSelect cannot display advertisements in connection with a real property
listing from many types of advertisers. For example, RealSelect cannot include
advertisements related to political issues, religion, alcoholic beverages or
adult-oriented products and services. Also, there are restrictions as to how
RealSelect displays advertisements from banks, loan brokers, mortgage bankers
and other participants in the real estate lending industry. For example, none
of these advertisers can occupy or reserve more than 25% of the available
advertising space for a geographic location or be given an exclusive right to
advertise with respect to a particular business on the REALTOR.com web site.
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Compensation to the NAR
As consideration for entering into the operating agreement with respect to
REALTOR.com, we are obligated to pay the amounts described below to the NAR.
Fixed Fees. We paid the NAR $1.0 million to fund advertising activities of
the NAR. This amount was paid by issuing shares of our Series F convertible
preferred stock and common stock described above. We also paid the NAR an
additional $1.0 million for advertising and for exceeding 1,300,000 real
property listings, as specified in the operating agreement. This amount was
paid by issuing the NAR shares of RealSelect common stock.
Additional Payment. On May 28, 1999, we issued 187,500 shares of common
stock to the NAR in cancellation of $600,000 of our $1.2 million outstanding
obligation to the NAR. The remaining $600,000 was repaid in August 1999.
Variable Fees. Beginning in 1999, we are required to make quarterly payments
to the NAR based on RealSelect's operating revenues.
In 2000 and each year after 2000, RealSelect must pay the NAR annually the
lesser of:
. 5% of RealSelect's operating revenues;
. 15% of RealSelect's operating revenues less the percentage of our
operating revenues paid to parties that provide us with real estate
listings; or
This royalty payment is reduced by 2% to the extent earnings before interest
and taxes are less than 10% of revenue, for that quarter.
For 1999, we paid the NAR $99,288 in royalties. These operating revenues are
RealSelect's consolidated gross revenues as defined under this agreement, less
sales commissions paid to third parties related to those revenues, less any
revenues from permitted marketing of information or data.
Protective Provisions in Agreements with Respect to RealSelect
The board of directors of our RealSelect subsidiary consists of seven
members, two of whom are appointed by the NAR under the RealSelect
stockholders agreement. Without the consent of the approval of six of its
seven board members, RealSelect cannot (1) enter into a merger or
consolidation transaction, (2) sell substantially all of its assets, or (3)
change its business purpose from that specified in its certificate of
incorporation, which purpose is the operation of the REALTOR.com web site and
real property advertising programming for electronic display and related
businesses.
It also cannot engage in a number of transactions without the approval of a
majority of its board members and at least one member nominated by the NAR.
These include:
. amending its certificate of incorporation or bylaws;
. establishing, or appointing any members to, a board committee;
. approving transactions with affiliates, stockholders or employees in
excess of $100,000;
. changing its executive officers;
. pledging its assets;
. issuing more than 10 shares of RealSelect stock; and
. declaring dividends or making other distributions to its stockholders.
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The RealSelect bylaws also contain protective provisions which could
restrict portions of RealSelect's operations or require us to incur additional
expenses. For instance, if the RealSelect board of directors cannot agree on
an annual budget for RealSelect, it would use as its budget that from the
prior year adjusted for inflation. Any expenditures in excess of that budget
would have to be funded by Homestore.com. In addition, if RealSelect desired
to incur debt or invest in assets in excess of $2.5 million or review salaries
for or award bonuses to executive officers of RealSelect without the approval
of a majority of its board, including an NAR representative, we would also
need to fund those expenditures.
Conversion of RealSelect Stock into Homestore.com Stock
Effective immediately prior to our initial public offering on August 4,
1999, the NAR converted all of its shares of RealSelect except for one half of
one share of RealSelect common stock into an aggregate of 3,917,265 shares of
our common stock. The NAR can require that we convert the remaining one half
of one share of Real Select into an aggregate of 124,815 shares of our common
stock if we merge Homestore.com and RealSelect by August 4, 2000.
Restrictions on How We Operate the SpringStreet.com Web Site
We were required to obtain the consent of the NAR in connection with our
SpringStreet acquisition. In agreeing to the acquisition, the NAR imposed a
number of important restrictions on how we can operate the SpringStreet.com
web site. We must pay the NAR an annual royalty equal the lesser of (1) 5% of
the rental site's operating revenues and (2) 15% of the rental site's
operating revenues multiplied by the percentage of our real estate listings
for REALTORS less the percentage of our operating revenues paid to data
content providers.
Under the consent, in addition to the SpringStreet.com web address, we must
use a REALTOR-branded rental web address. If the consent is terminated we
could be required to operate our rental properties web site at a different web
address.
Unless the consent is terminated as a result of a breach by the NAR, the NAR
would be entitled to use the REALTOR-branded web address. As a result, we
would face competition from the NAR. Other important restrictions include:
. we cannot display advertisements from the same types of advertisers that
we are prohibited from displaying on our REALTOR.com web site;
. we are subject to the same restrictions as we are on the REALTOR.com
site as to how we display advertisements from banks, loan brokers,
mortgage brokers and other participants in the real estate industry on
pages containing listings by a REALTOR;
. the site will be owned by or through our RealSelect subsidiary;
. we must offer REALTORS preferred pricing for home pages or enhanced
advertising on the rental web site;
. we must use our best efforts to ensure that operating the rental site
will not impact the quality or timeliness of how we perform our
obligations under the operating agreement for REALTOR.com;
. without the consent of the NAR, prior to the time we are using only the
REALTOR-branded web address, we cannot provide a link on the
SpringStreet.com web site linking the REALTOR.com web site to the
SpringStreet.com web site and vice versa;
. we cannot display listings for rental of units in smaller properties
unless those units are listed with a REALTOR or listed on a REALTOR-
controlled MLS, unless the NAR agrees that in a particular market, fewer
than 50% of the listings are listed through REALTORS, in which case
these properties must be listed with other non-REALTOR real estate
professionals; and
. we cannot list properties for sale on this site for the duration of our
REALTOR.com operating agreement and for an additional two years.
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Trademark License and Joint Ownership of Software
Under a trademark license agreement with the NAR, we are exclusively
authorized to use the NAR's federally registered REALTOR membership mark, the
domain name REALTOR.com and a NAR logo in conjunction with our REALTOR.com web
site. Under a joint ownership agreement, the software we use to run the
REALTOR.com web site and any enhancements to that software are jointly owned
by the NAR and us. If the agreement under which we operate REALTOR.com is
terminated, we must transfer a copy of this software and assign our agreements
with data content providers, including MLSs, to the NAR. The NAR would then be
entitled to use the software for "real estate related businesses" and could
operate the REALTOR.com web site itself or through a third party. Following
any termination of the operating agreement, the NAR could also terminate the
trademark license agreement.
Right of First Refusal
RealSelect has a stockholders agreement with the NAR which provides that we
must give RealSelect a right of first refusal to invest in "real estate
related" business opportunities prior to our entry into any of these
businesses. "Real estate related" businesses include real estate brokerage,
real estate management, mortgage financing, appraising, counseling, land
development and building, title insurance, escrow services, franchising,
operation of an association comprised of real estate licensees and operation
of a Multiple Listing Service.
Board Representation
On August 4, 1999, we issued to the NAR one share of our Series A preferred
stock. As long as the REALTOR.com operating agreement is in effect and the NAR
continues to hold at least 20% of the shares of common stock it owned prior to
our initial public offering on August 4, 1999, the NAR will be entitled to
nominate one member to our board, through its ownership of the one share of
our Series A preferred stock. See "Description of Capital Stock." Under our
RealSelect stockholders agreement, so long as our operating agreement remains
in effect, the NAR will have the right to nominate two members to RealSelect's
board of directors.
Mr. Hanauer, the NAR designee to our board, is a member of the Executive
Committee of the National Association of REALTORS.
Agreements with the National Association of Home Builders
Operating Agreement
In June 1998, we entered into an operating agreement with the NAHB. Under
this agreement, we agreed to display electronic ads for new residential
property.
The NAHB's agreement not to compete. The NAHB agreed it would not, during
the term of the operating agreement and for the one year period after the
agreement terminates:
. engage in the electronic display, other than through analog television,
of advertisements for new residential property;
. develop, maintain or house home pages for members of the NAHB; or
. create Internet sites for persons affiliated with the sale or marketing
of new residential real estate.
Term of the agreement. This agreement runs through June 2018 and
automatically renews for successive two year periods. However, if the NAR
terminates our REALTOR.com operating agreement, the NAHB can terminate the
agreement within the six months following such termination, for any reason if
it provides us with three months' prior notice. If the NAHB chooses to
terminate the agreement in this manner prior to June 2008, however, its non-
competition obligation described above will last for a period of two years
after the agreement
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<PAGE>
terminates. In addition, the NAHB can terminate the agreement within 30 days
of a change of control of Homestore.com. The operating agreement may also be
terminated if either of us materially breaches a term of the agreement or
becomes bankrupt or insolvent.
Warrant
In June 1998, we issued a warrant to purchase 566,440 shares of our common
stock to the NAHB at an exercise price of $.0002 per share. This warrant has
been exercised.
Restrictions on the NAHB's Ability to Sell Shares
The NAHB cannot transfer any of the shares it received upon exercise of the
warrant until June 2003. It cannot sell more than 50% of the shares unless the
transferee agrees to be bound by the surrender provisions described above.
Repurchase of Mr. Janssen's InfoTouch Stock
In February 1999, we repurchased 1,054,015 shares of InfoTouch common stock
held by Mr. Janssen, for cash at a purchase price of $4.10 per share, under a
stock redemption agreement that we entered into in August 1998.
Loans to Executive Officers
In April 1999, Dr. Wolff exercised options to acquire 1,671,445 shares, Mr.
Buckman exercised options to acquire 750,000 shares, Mr. Giesecke exercised
options to acquire 166,660 shares, Mr. Rosenblatt exercised options to acquire
229,545 shares, Mr. Tafeen exercised options to acquire 375,000 shares and Ms.
Giffen exercised options to acquire 189,615 shares of our common stock. The
aggregate exercise price of these stock option exercises in April 1999 was
$1.7 million for Dr. Wolff, $199,992 for Mr. Giesecke, $348,254 for
Mr. Rosenblatt, $229,650 for Mr. Tafeen and $194,994 for Ms. Giffen. Mr.
Buckman paid $1.5 million, Mr. Giesecke paid $199,959, Mr. Rosenblatt paid
$348,208, Mr. Tafeen paid $229,575 and Ms. Giffen paid $199,956 of the
purchase price with promissory notes. Dr. Wolff issued promissory notes of
$2.8 million to us in connection with the April 1999 exercise for the purchase
price and related expenses. In July 1999, Mr. Charney exercised options to
acquire 83,333 shares and paid $749,959 of the purchase price with a
promissory note.
Acquisition of SpringStreet
In June 1999, we acquired SpringStreet. Kleiner Perkins Caufield & Byers
VIII L.P., KPCB VIII Founders Fund L.P. and KPCB Information Sciences Zaibatsu
Fund II, L.P., who are stockholders of Homestore, were also stockholders of
SpringStreet. In the merger, Kleiner Perkins Caufield & Byers VIII L.P.
received convertible preferred stock equivalent to 1,135,465 shares of our
common stock, KPCB VIII Founders Fund L.P. received convertible preferred
stock equivalent to 65,730 shares of our common stock and KPCB Information
Sciences Zaibatsu Fund II, L.P. received convertible preferred stock
equivalent to 30,795 shares of our common stock.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information relating to beneficial ownership
of the Company's common stock as of February 29, 2000, by (1) each stockholder
known by the Company to be the beneficial owner of 5% or more of the Company's
common stock, (2) each of the Company's directors, (3) each executive officer
listed in the summary compensation table and (4) all directors and executive
officers as a group.
Beneficial ownership is determined under rules of the Securities and
Exchange Commission (the "SEC") and generally includes voting or investment
power with respect to securities. The information is not necessarily
indicative of beneficial ownership for any other purpose. Unless otherwise
indicated below, to the Company's knowledge, the persons and entities named in
the table have sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Shares of common
stock subject to options that are currently exercisable or exercisable within
60 days of February 29, 2000 are deemed to be outstanding and to be
beneficially owned by the person holding the options for the purpose of
computing the percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person. Unless otherwise noted, the address for each stockholder listed is
c/o Homestore.com, Inc., 225 West Hillcrest Drive, Suite 100, Thousand Oaks,
California 91360.
The number of shares of common stock outstanding after this offering
includes 437,500 shares of common stock being offered in this prospectus. The
percentage of common stock outstanding before this offering is based on
74,999,185 shares of common stock outstanding on February 29, 2000.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
L. John Doerr(1)............................... 9,691,195 12.9% 12.8%
Kleiner Perkins Caufield & Byers
Whitney Equity Partners, L.P.(2)............... 4,519,171 6.0 6.0
Joe F. Hanauer(3)(4)........................... 4,521,988 6.0 6.0
Ingleside Interests, L.P.
National Association of REALTORS(4)............ 4,025,640 5.4 5.3
Nigel D. T. Andrews(5)......................... 3,554,300 4.7 4.7
General Electric Capital Corporation and an
affiliated entity
Stuart H. Wolff, Ph.D.(6)...................... 3,373,090 4.5 4.4
William E. Kelvie(7)........................... 2,098,335 2.8 2.8
Fannie Mae
Richard R. Janssen(8).......................... 1,267,030 1.7 1.7
Michael A. Buckman(9).......................... 713,163 1.0 *
Kenneth K. Klein(10)........................... 545,796 * *
National Association of Home Builders 459,826 * *
Peter B. Tafeen(11)............................
John M. Giesecke, Jr.(12)...................... 451,648 * *
David M. Rosenblatt(13)........................ 275,656 * *
All 14 directors and executive officers as a
group(14)..................................... 32,071,453 42.0 41.7
</TABLE>
- --------
*Represents beneficial ownership of less than 1%
(1) Includes 8,917,630 shares held by Kleiner Perkins Caufield & Byers VIII,
516,665 shares held by KPCB VIII Founders Fund and 241,900 shares held by
KPCB Information Sciences Zaibatsu Fund II. L. John Doerr is a general
partner of the general partner of these funds. Mr. Doerr disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest in these entities. Also includes 15,000
shares subject to options that are held by Mr. Doerr that are vested and
exercisable. The address of Kleiner Perkins Caufield & Byers is 2750 Sand
Hill Road, Menlo Park, CA 94025.
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(2) The address of Whitney Equity Partners, L.P. is 177 Broad Street,
Stamford, CT 06901.
(3) Includes the shares held by the NAR, of which Mr. Hanauer is a member of
the Executive Committees. Mr. Hanauer disclaims beneficial ownership of
shares held by this association. Also includes 456,348 shares held by
Ingleside Interests, L.P. Mr. Hanauer is a general partner of this
entity. Mr. Hanauer disclaims beneficial ownership of shares held by this
entity except to the extent of his pecuniary interest in this entity.
Also includes 40,000 shares subject to options that are held by Mr.
Hanauer that are vested and exercisable.
(4) The address of the NAR is 430 North Michigan Avenue, Chicago, IL 60611.
(5) Includes 3,539,300 shares held by General Electric Capital Corporation
and an affiliated entity, GE Capital Equity Investments, Inc. Mr. Andrews
is an Executive Vice President of GE Capital. Mr. Andrews disclaims
beneficial ownership of these shares. Also includes 15,000 shares subject
to options that are held by Mr. Andrews that are vested and exercisable.
The address of General Electric Capital Corporation is 260 Long Ridge
Road, Stamford, CT 06927.
(6) Includes 2,873,090 shares held by Dr. Wolff, of which 828,125 are subject
to our right to repurchase these shares. This right of repurchase lapses
with respect to 30,728 shares per month. Also includes 500,000 shares
subject to options that are exercisable as of April 29, 2000.
(7) Includes 2,083,335 shares held by Fannie Mae. Mr. Kelvie is the Chief
Information Officer of Fannie Mae. Mr. Kelvie disclaims beneficial
ownership of any shares held by Fannie Mae. Also includes 15,000 shares
subject to options that are held by Mr. Kelvie that are vested and
exercisable. The address of Fannie Mae is 3900 Wisconsin Ave. NW,
Washington, DC 20016.
(8) Includes 15,000 shares subject to options that are held by Mr. Janssen
that are vested and exercisable.
(9) Includes 713,163 shares held by Mr. Buckman, of which 562,500 are subject
to our right to repurchase these shares. This right of repurchase lapses
with respect to 15,625 shares per month.
(10) Includes 509,796 shares held by NAHB, of which Mr. Klein is a member of
the Executive Committee. Mr. Klein disclaims beneficial ownership of all
shares held by this association. Also includes 36,000 shares subject to
options that are held by Mr. Klein that are vested and exercisable.
(11) Includes 345,602 shares held by Mr. Tafeen, of which 178,126 are subject
to our right to repurchase these shares. This right of repurchase lapses
with respect to 7,811 shares per month. Also includes 114,224 shares
subject to options that are exercisable as of April 29, 2000.
(12) Includes 167,058 shares held by Mr. Giesecke, of which 93,744 are subject
to our right to repurchase these shares. This right of repurchase lapses
with respect to 3,645 shares per month. Also includes 284,590 shares
subject to options that are exercisable as of April 29, 2000.
(13) Includes 200,201 shares held by Mr. Rosenblatt, of which 137,358 are
subject to our right to repurchase these shares. This right lapses with
respect to 6,249 shares per month. Also includes 75,455 shares subject to
options that are exercisable as of April 29, 2000.
(14) Includes the shares beneficially owned by the persons and entities
described in footnotes (1)-(13). Also includes an additional 294,294
shares held by other officers and 357,473 shares subject to options held
by those other officers that are exercisable as of April 29, 1999.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Homestore.com consists of 500,000,000 shares
of common stock, $.001 par value per share, and 5,000,000 shares of
undesignated preferred stock, $.001 par value per share. As of December 31,
1999, there were outstanding 70,189,086 shares of common stock and one share
of Series A preferred stock issued to the NAR. As of March 31, 2000, there
were outstanding options to purchase 10,461,359 shares of common stock and
warrants to purchase 3,303,674 shares of common stock.
Common Stock
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as the board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of
the shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Preferred Stock
We have authorized and outstanding one share of our Series A preferred stock
which is held by the NAR. The rights of this stock are identical to our common
stock, except:
. it is non-voting, except that for so long as our operating agreement
with the NAR has not been terminated and the NAR holds 20% of its stock
owned prior to our initial public offering on August 4, 1999, the NAR
will be entitled to elect one director;
. the holder of this stock is entitled to receive a non-cumulative, non-
mandatory dividend preference of $.08 per annum and liquidation
preference of $1.00 per share;
. this stock is automatically converted to one share of common stock upon
sale, transfer, pledge or other disposition of the share of Series A
preferred stock;
. this stock is subject to a right of first refusal at $1.00 in our favor
upon any proposed transfer by the NAR; and
. this stock is redeemable by us at $1.00 if the operating agreement is
terminated or if the NAR fails to hold 20% of its stock owned prior to
the initial public offering on August 4, 1999.
Homestore.com is authorized, subject to limitations prescribed by Delaware
law, to issue preferred stock in one or more series, to establish from time to
time the number of shares to be included in each series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and
any of its qualifications, limitations or restrictions. The board can also
increase or decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any further vote or
action by the stockholders. The board may authorize the issuance of preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of the common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of
Homestore.com and may adversely affect the market price of the common stock
and the voting and other rights of the holders of common stock. We have no
current plan to issue any shares of preferred stock.
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Other Warrants
For a description of the terms of the warrants being offered by this
prospectus see "Description of Warrants." Warrants to purchase 3,303,674
shares of common stock were outstanding as of March 31, 2000.
America Online. In connection with entering into a distribution agreement
with America Online in April 1998, we issued a warrant to purchase 566,475
shares of our common stock at an exercise price of $1.26 per share. America
Online also holds warrants to acquire 75,000 shares of common stock with an
exercise price of $20.00 per share, 25,000 shares with an exercise price of
$30.00 per share and 18,750 shares with an exercise price of $40.00 per share.
Original MLSs. Throughout 1999, we issued warrants to purchase up to 910,844
shares of common stock at a weighted average price of $21.18 per share to MLSs
that agreed to provide their real estate listings to us for publication on the
Internet on a preferred national basis. These warrants will expire at various
times from May 2000 to January 2001.
Broker Gold. In February 1999, we closed a private equity offering to real
estate brokers under our Broker Gold program. We also agreed to issue warrants
to purchase up to 364,110 shares of our common stock at an exercise price of
$20.00 per share.
GMAC Mortgage Corporation. In October 1999, we issued a warrant to purchase
up to 119,048 shares of common stock at an exercise price of $42.00 per share
to GMAC Mortgage Corporation in connection with an advertising agreement.
Additional Broker Warrants. In February 2000 we issued warrants to purchase
up to 520,749 warrants at an exercise price at $66.50 per share to the Broker
Gold program members who elected to renew their existing listing agreements
with us for an additional two years at the end of their existing two-year
term.
Other. There are additional outstanding warrants to purchase 25,000 shares
of our common stock at an exercise price of $4.80 per share.
Registration Rights
The holders of approximately 41,346,689 shares of common stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.
Demand Registration
Right to demand registration. At any time after February 5, 2000, these
stockholders can request that we file a registration statement so they can
publicly sell their shares.
Who may make a demand. Either General Electric Capital Corporation or funds
affiliated with Kleiner Perkins Caufield & Byers can require that we file a
registration statement. Otherwise, holders of at least 10% of the shares
having registration rights must demand that we file a registration statement.
Number of times holders can make demands. We will only be required to file
two registration statements for General Electric Capital Corporation and no
more than four total. However, if we are eligible to file a registration
statement on Form S-3, there is no limit to the number of registration
statements we could be asked to file so long as the aggregate amount of
securities to be sold in each registration exceeds $1.0 million.
Postponement. We may postpone the filing of a registration statement for up
to 180 days once in a 12 month period if we determine that the filing would
interfere with corporate transactions or would require premature disclosure of
them.
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Expenses. We will pay only the expenses for two registrations effected on
Form S-1 and two registrations effected on Form S-3. However, even with
respect to these registrations, we are not obligated to pay the sellers'
underwriting discounts or commissions.
Piggyback Registration
If we register any securities for public sale, these stockholders will have
the right to include their shares in the registration statement. However, this
right does not apply to a registration relating to securities to be sold under
one of our stock plans or to be issued in a merger, consolidation or
reorganization transaction. The underwriters of any underwritten offering will
have the right to limit the number of shares to be so included in a
registration statement.
We will pay all of the expenses relating to any piggyback registration,
other than underwriting discounts and commissions.
Expiration of Registration Rights
The registration rights described above will expire on August 11, 2004, or
earlier with respect to a particular stockholder if that holder can resell all
of its securities in a three month period under Rule 144 of the Securities Act
or another exemption from the registration requirements of the Securities Act.
In addition to these registration rights, America Online will have the right
to demand the registration of the shares of common stock issuable upon the
exercise of warrants held by it. See "--Warrants."
Additional Registration Rights
In connection with the marketing and distribution agreement that we entered
into in April 2000 with AOL, see "Recent Developments," we entered into a
registration rights agreement pursuant to which we granted AOL registration
rights with respect to the 3,894,343 shares of common stock that we issued to
them. At any time after the earlier of the date on which we are eligible to
use a Form S-3 registration statement or December 31, 2000, AOL, or other
holders of at least 25% of the securities issued pursuant to the AOL
distribution and marketing agreement, can request that we file a registration
statement so they can publicly sell their shares. However, we will be required
to register only that amount of shares described above for which AOL may sell
at the time they request us to register their shares. We may postpone the
filing of a registration statement for up to 60 days once in a 12 month period
if we determine that the filing would be seriously detrimental to us or our
stockholders. We will pay all expenses, other than underwriters discounts and
commissions, if any, relating to any registration of the shares issued under
the AOL agreement.
If we register any securities for public sale, AOL will have the right to
include their shares in the registration statement in a manner similar to
other stockholders with such registration rights. However, this right does not
apply to a registration relating to securities to be sold under one of our
stock plans or to be issued in a merger, consolidation or reorganization
transaction. The underwriters of any underwritten offering will have the right
to limit the number of shares to be so included in a registration statement.
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation, our
bylaws, the NAR operating agreement and our stockholders agreement may have
the effect of delaying, deferring or discouraging another person from
acquiring control of our company. Our certificate of incorporation and bylaws
contain provisions that could have the effect of delaying, preventing or
discouraging a change of control of our company. These include:
. We will have a classified board, which is divided into three classes
with staggered three-year terms;
. Our stockholders are unable to fill any interim vacancy on our board of
directors;
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. Any action required or permitted to be taken by our stockholders at an
annual meeting or a special meeting of the stockholders may only be
taken if it is properly brought before that meeting and may not be taken
by written consent;
. Our stockholders are limited in their ability to remove any director or
the entire board of directors without cause;
. Our bylaws provide that special meetings of the stockholders may be
called at any time by the board of directors, and must be called upon
the request of the chairman of the board of directors, the chief
executive officer, the president, or by a majority of the members of the
board of directors and may not be called by stockholders; and
. Stockholders must follow specified procedures in order to properly
submit any business before a stockholder meeting.
These provisions are designed to reduce the vulnerability of Homestore.com
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of Homestore.com. These provisions are also intended to discourage tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for our shares and,
consequently, may also inhibit fluctuations in the market price for our shares
that could result from actual or rumored takeover attempts. These provisions
may also have the effect of preventing changes in our management. See "Risk
Factors--Our certificate of incorporation and bylaws, Delaware law and other
agreements contain provisions that could discourage a takeover."
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging in a "business combination," which includes a
merger or sale of more than 10% of the corporation's assets with any
"interested stockholder," or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates
of stockholder, for three years following the date that stockholder became an
"interested stockholder" unless:
. the transaction is approved by the board prior to the date the
"interested stockholder" attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced; or
. on or subsequent to such date the "business combination" is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the "interested stockholder."
A Delaware corporation may "opt out" of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not "opted out" of this provision. The statute could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
NAR Operating Agreement
The NAR operating agreement is subject to termination if:
. a third party acquires 50% or more of our voting stock; or
. a majority of our board ceases to serve on that board and their
replacements have not been approved by the board or replacements
approved by them.
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Stockholder Agreement
The stockholder agreement entered into among stockholders holding
approximately 61.1% of our outstanding capital stock at December 31, 1999, the
NAR and us, will restrict a change of control or a sale of all or
substantially all of our assets. Under the agreement, without the prior
consent of the NAR, which may not unreasonably be withheld:
. the stockholders who are party to the agreement, including various
entities affiliated with Kleiner Perkins Caufield & Byers and Whitney
Equity Partners, are restricted from transferring in non-public market
sales, other than to any other stockholder party to the agreement or in
an underwritten public offering, their shares to any transferee whose
primary business is real estate related or who will become a holder of
more than 5% of our capital stock; and
. we may not sell, lease or exchange all or substantially all of our
assets.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We intend to enter
into separate indemnification agreements with our directors and executive
officers that provide them indemnification protection in the event the
certificate of incorporation is subsequently amended.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they may incur in investigations
and legal proceedings resulting from their services to us, which may include
services in connection with takeover defense measures. These provisions may
have the effect of preventing changes in the management.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
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DESCRIPTION OF WARRANTS OFFERED
MLS Warrants
The warrants being offered under this prospectus to MLSs provide the holder
of the warrant the right to purchase a specified number of shares of our
common stock. As of March 31, 2000, warrants to purchase up to 936,470 shares
have been issued to the MLSs. The warrants will be subject to the following
terms:
. the exercise price will equal the per share price of such common stock
to the public in our underwritten initial public offering of common
stock of $20.00 per share if the particular MLS enters into a data
content provider agreement. If the MLS enters into a data content
provider agreement after our common stock becomes publicly traded on the
Nasdaq National Market, the exercise price will equal the Nasdaq
National Market closing price for our common stock on the day that the
particular MLS enters into a data content provider agreement;
. the warrants may be exercised, or converted to common stock, on a "net
exercise" or "cashless" basis as described below;
. the warrants can be exercised at any time from the date of the related
data content provider agreement until the applicable resale restrictions
have fully lapsed;
. the number of shares issuable upon exercise or conversion of the warrant
shall be subject to customary adjustments in the event of any stock
split, combination or other similar event affecting the number of
outstanding shares of our common stock;
. in the event of a reorganization or recapitalization of Homestore.com,
upon subsequent exercise or conversion of the warrant, the holder will
receive the stock, other securities or property to which the holder
would be entitled to receive if the warrant were exercised immediately
prior to the reorganization or recapitalization; and
. the warrant may not be transferred or assigned without our prior written
consent.
Home Builder Warrants
The warrants being offered under this prospectus to home builders provide
the holder of the warrant the right to purchase a specified number of shares
of our common stock. As of March 31, 2000 warrants to purchase up to 25,000
shares have been issued to the home builders. The warrants will be subject to
the following terms:
. the exercise price will equal the per share price our common stock to
the public in our initial public offering of common stock of $20.00 per
share;
. the warrants may be exercised, or converted to common stock, on a "net
exercise" or "cashless" basis;
. the warrants can be exercised by the holder for a period of 18 months;
. the number of shares issuable upon exercise or conversion of the warrant
shall be subject to customary proportional adjustments in the event of
any stock split, combination or other similar event affecting the number
of outstanding shares of our common stock;
. in the event of a reorganization or recapitalization of Homestore.com,
upon subsequent exercise or conversion of the warrant, the holder will
receive the stock, other securities or property to which the holder
would be entitled to receive if the warrant were exercised immediately
prior to the reorganization or recapitalization; and
. the warrant may not be transferred or assigned by the holder without our
prior written consent.
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How To Exercise Warrants On A "Net Exercise" or "Cashless" Basis
The warrants may be converted at the election of the holder, without the
payment by the holder of any additional consideration, into shares of our
common stock having a value equal to the fair market value of the total number
of shares subject to the warrant less the exercise price for that number of
shares. If upon any conversion of the warrant a fraction of a share results,
in lieu of issuing of the fractional share, we will pay to the cash value of
any such fractional share, calculated on the basis of the exercise price.
Norwest Mortgage, Inc. Warrant
The warrant being offered under this prospectus to Norwest Mortgage will
provide the holder of the warrant the right to purchase up to 500,000 shares
of our common stock with an exercise price of $20.00 per share. The warrant
was issued in August 1999 and is subject to the following terms:
. the warrant can be exercised for a period of 12 months;
. the number of shares issuable upon exercise of the warrant shall be
subject to customary proportional adjustments in the event of any stock
split, combination or similar event affecting the number of outstanding
shares of our common stock;
. in the event of a reorganization or recapitalization of Homestore.com,
upon subsequent exercise of the warrant, the holder will receive the
stock, other securities or property to which the holder would be
entitled to receive if the warrant were exercised immediately prior to
the reorganization or recapitalization; and
. the warrant may not be transferred or assigned without our prior written
consent.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock, including shares issued upon
exercise of outstanding warrants or options in the public market after this
offering, could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through sale of equity
securities. Furthermore, as described below, certain shares currently
outstanding will be available for sale after the expiration of contractual
restrictions on resale with us and/or the underwriters of our January 2000
secondary public offering. Sales of substantial amounts of our common stock in
the public market after contractual restrictions lapse could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.
Upon completion of our secondary public offering, we had outstanding
74,262,225 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, the 8,300,000 shares sold in the secondary offering and the
8,050,000 shares sold in our initial public offering will be freely tradable
without restriction under the Securities Act unless purchased by our
"affiliates." Based on shares outstanding as of December 31, 1999, the
remaining shares will become eligible for public sale as follows:
<TABLE>
<CAPTION>
Approximate
Number of
Shares
Eligible
For Future
Date Sale Comment
---- ----------- -------
<C> <C> <S>
April 26, 2000................ 43,070,678 Lock-up released. These shares may
be sold under Rules 144, 144(k) or
701.
May 28, 2000.................. 187,500 Restricted securities held for at
least one year that may be sold
under Rule 144.
June 30, 2000................. 458,722 Restricted securities held for at
least one year that may be sold
under Rule 144.
August 4, 2000................ 3,838,140 Restricted securities held for at
least one year that may be sold
under Rule 144.
August 12, 2000............... 107,525 Restricted securities held for at
least one year that may be sold
under Rule 144.
Beginning on October 22,
2000......................... 565,838 Restricted securities held for at
least one year that may be sold
under Rule 144.
</TABLE>
In addition, there are 3,403,114 shares outstanding that are subject to our
right to repurchase which lapses ratably over the term of the related option
agreement, generally four years. Upon the lapse of this right of repurchase,
the shares will become eligible for the sale in the public market.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which
equals approximately 812,000 shares as of the date of this prospectus;
or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
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Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about Homestore.com.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, 144(k) shares may be sold immediately upon the completion of this
offering.
Rule 701
Any employee, officer or director of, or consultant to, Homestore.com who
purchased his or her shares under a written compensatory plan or contract may
be entitled to sell their shares in reliance on Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell these shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144.
Registration Rights
Upon completion of our secondary public offering, the holders of 41,346,689
shares of common stock, or their transferees, are entitled to certain rights
with respect to the registration of those shares under the Securities Act. See
"Description of Capital Stock-Registration Rights." After these shares were
registered, they became freely tradable without restriction under the
Securities Act.
Stock Options
As of March 31, 2000, options to purchase 10,461,359 shares of common stock
were issued and outstanding. Subject to vesting provisions, and in some cases,
Rule 144 volume limitations applicable to our affiliates, shares issuable upon
exercise of these options will be available for sale in the open market.
Warrants
As of March 31, 2000, we had outstanding warrants to purchase 3,303,674
shares of common stock. If these warrants are exercised and the exercise price
is paid in cash, the shares must be held for one year before they can be sold
under Rule 144.
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PLAN OF DISTRIBUTION
How We Are Offering the Warrants
We are offering the securities described in this prospectus to home
builders, MLSs and Norwest Mortgage. We have not entered into, and do not
intend to enter into, any agreement, arrangement or understanding with any
underwriter or any broker or market maker with respect to the securities
offered by us under this prospectus.
It is anticipated that we will obtain indications of interest from potential
investors for the amount of the offering and confirm orders after the
Registration Statement of which this prospectus is a part has been declared
effective. We may sell less than all of the securities offered under this
prospectus. There is no required minimum number of shares that must be sold as
a condition to completion of the offering. Confirmations containing requests
for written commitments from investors purchasing in the offering and final
prospectuses will be distributed to all investors as soon as practicable after
the Registration Statement of which this prospectus is a part has been
declared effective. After that time, investors will be asked to execute and
deliver an agreement covering the purchase of the securities in conjunction
with a related data content provider agreement. No investor funds will be
accepted prior to the effective date of the Registration Statement of which
this prospectus is a part. Upon closing, we will deliver to each investor the
number of shares of common stock and/or warrants to purchase shares of our
common stock purchased by the investor according to instructions delivered by
or on behalf of the investors. Each investor will also deliver to us
immediately available funds in an amount equal to the aggregate purchase price
of the securities being sold to the investor and/or the related data content
provider agreement.
Terms Of The Data Agreements The MLSs Must Enter Into With Us
Multiple Listing Services will be eligible to purchase warrants if they
enter into, or extend their existing, data content provider agreements with
us. The principal terms of these agreements are:
. the MLS must grant to us the exclusive or preferred right to publish
their listing data on the Internet on a national basis for an additional
one to three year term;
. the MLS will be limited in the number of shares of our common stock
issued upon exercise or conversion of the warrant that may be sold. This
restriction will typically lapse ratably over a two to three year period
as further described beginning on page 92.
We will offer warrants to purchase an aggregate of 1,236,345 shares of our
common stock to Multiple Listing Services. The number of shares subject to
each MLS' warrant will represent the particular MLS's proportional share of
70% of all MLS home listings nationally determined as of September 30, 1998,
including existing warrants held by the MLS, if any, subject to uniform
cutback if MLSs participating in this offering exceed 70% of MLS listings
nationally. There is no difference in the number of warrants for which MLSs
are eligible based on whether the MLS grants preferred or exclusive rights to
us. If the particular MLS entered into a data content provider agreement at
the time of our underwritten initial public offering, the exercise price will
be $20.00 per share which is equal to the price to the public in our
underwritten initial public offering of common stock. Otherwise, the exercise
price will equal the Nasdaq National Market closing price for our common stock
on the day that the particular MLS enters into a data content provider
agreement.
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Description On The Restrictions On Transfer For MLSs
Group 1: Approximately 25 MLSs that have existing data content provider
agreements, which provide for 18 months of exclusivity, that provide warrants
without restrictions, or the "First Tranche". This group will have three
choices, either of which will impose new restrictions on their existing First
Tranche warrants but will provide for additional warrants, or the "Second
Tranche":
<TABLE>
<CAPTION>
Additional
Exclusivity Timing of First Tranche Resale Second Tranche Resale Exercise
Period Election Restrictions Restrictions Price
- ----------- --------- -------------------- --------------------- --------
<S> <C> <C> <C> <C>
1 Year Pre Initial The shares issued upon The shares issued upon $20.00 per
Public exercise of the warrant exercise of the warrant share
Offering would be subject to a would be subject to a
resale restriction that resale restriction that
would lapse with respect would lapse with respect
to 10% to 6.25%
at the start of each new at the start of each new
three month period over three month period over
a period of 2 1/2 years. a period of four years.
2 Years Pre Initial The shares issued upon Same as First Tranche $20.00 per
Public exercise of the warrant share
Offering would be subject to a
resale restriction that
would lapse with respect
to 10% at the start of
each new three month
period over a period of
2 1/2 years.
2 Years Post Initial The shares issued upon Same as First Tranche Fair Market
Public exercise of the warrant Value on day
Offering, up would be subject to a of Agreement
to 180 days. resale restriction that
would lapse with respect
to 10% at the start of
each new three month
period over a period of
2 1/2 years.
</TABLE>
Group 2: Approximately 160 MLSs that have existing data content provider
agreements without warrants which provide for eighteen months of exclusivity.
This group will have three choices:
<TABLE>
<CAPTION>
Timing of Exercise
Consideration Election Resale Restrictions Price
------------- --------- ------------------- --------
<C> <C> <S> <C>
2 Years Pre Initial The shares issued upon exercise of the warrant $20.00 per
Additional Public would be subject to a resale restriction that share
Exclusivity Offering would lapse with respect to 10%
at the start of each new three month period over
a period of 2 1/2 years.
2 Years Post Initial The shares issued upon exercise of the warrant Half at
Additional Public would be subject to a resale restriction that $20.00 per
Exclusivity Offering, up would lapse with respect to 10% share and
to 180 days. at the start of each new three month period over half at Fair
a period of 2 1/2 years. Market Value
on day of
Agreement
Publicity Pre Initial The shares issued upon exercise of the warrant $20.00 per
Rights Public would be subject to a resale restriction that share
Offering would lapse with respect to 10% at the start
of each new three month period over a period of
2 1/2 years.
</TABLE>
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Group 3: Approximately 140 MLSs that have existing data content provider
agreements without warrants and without exclusivity, but which have
historically provided listings to us exclusively. This group will have two
choices:
<TABLE>
<CAPTION>
Exclusivity Timing of Exercise
Period Election Resale Restrictions Price
----------- --------- ------------------- --------
<S> <C> <C> <C>
3 Years Pre Initial The shares issued upon exercise of the warrant $20.00 per
Public would be subject to a resale restriction that share
Offering would lapse with respect to 8.33% at the start
of each new three month period over a period of
three years.
3 Years Post Initial The shares issued upon exercise of the warrant Fair Market
Public would be subject to a resale restriction that Value on day
Offering, up would lapse with respect to 8.33% at the start of Agreement
to 180 days. of each new three month period over a period of
three years.
</TABLE>
Terms Of The Data Agreement The Home Builders Must Enter Into With Us
The securities offered under this prospectus will be offered to home
builders in units consisting of shares of our common stock and/or a warrant to
purchase shares of our common stock, aggregating up to shares. Home builders
will be eligible to purchase units of our securities if they enter into data
content provider agreements with us. The principal terms of these agreements
are:
. the home builder must grant to us the exclusive right to publish their
listing data on the Internet on a national basis for a three year term;
and
. the home builder will be limited in the number of shares of our common
stock issued upon exercise or conversion of the warrant that may be
sold. This restriction will lapse ratably over a three year period.
Each unit of securities offered to home builders consists of 12,500 shares
of common stock at a purchase price of $6.60 per share and, if eligible, a
warrant to purchase up to 12,500 shares at an exercise price of $20.00 per
share which was equal to the price to the public in our underwritten initial
public offering of common stock. The precise number of shares subject to
warrants offered to home builders will be determined based upon the number of
subdivisions covered by the data content agreements. Those home builders with
fewer than 50 subdivisions are not offered a warrant.
93
<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus.
EXPERTS
The consolidated financial statements of Homestore.com, Inc. and
subsidiaries as of December 31, 1998 and 1999 and for the years ended December
31, 1997, 1998 and 1999 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of NetSelect, Inc. and subsidiaries as
of December 31, 1997 and 1998 and for the period from October 28, 1996
(Inception) to December 31, 1996 and the years ended December 31, 1997 and
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of NetSelect, LLC and subsidiaries as
of December 31, 1997 and 1998 and for the period from October 28, 1996
(Inception) to December 31, 1996 and the years ended December 31, 1997 and
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of The Enterprise of America, Ltd. as of December
31, 1997 and March 31, 1998 and for the year ended December 31, 1997 and the
three months ended March 31, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of MultiSearch Solutions, Inc. and
subsidiary as of December 31, 1997 and June 30, 1998 and for the year ended
December 31, 1997 and the six months ended June 30, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of SpringStreet, Inc. at December 31,
1998 and 1997, and for the year ended December 31, 1998 and for the period
from August 21, 1997 (commencement of operations) through December 31, 1997,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Homebuyer's Fair, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for the years ended December
31, 1997 and 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of FAS-Hotline, Inc. and The Center for
Mobility Resources, Inc. as of December 31, 1997 and 1998 and for the years
ended December 31, 1997 and 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of National School Reporting Services, Inc. as of
December 31, 1997 and for the year ended December 31, 1997 and the period from
January 1, 1998 through September 9, 1998 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
94
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 21, 1999, PricewaterhouseCoopers LLP was engaged as our
independent accountants. Prior to January 21, 1999, Deloitte & Touche LLP had
been our independent accountants. The decision to change independent
accountants was approved by our board of directors.
For the period from October 28, 1996 through December 31, 1998 and for the
period from January 1, 1999 through January 21, 1999, we and Deloitte & Touche
LLP did not have any disagreement on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
The report of Deloitte & Touche LLP on our financial statements for the
periods from October 28, 1996 through December 31, 1996 and January 1, 1997
through December 31, 1997 did not contain an adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and the common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, we
refer you to the copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document filed as an
exhibit is qualified in all respects by the filed exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any
part of it may be obtained from that office after payment of fees prescribed
by the SEC. The SEC maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data
for the first three quarters of each year.
95
<PAGE>
HOMESTORE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview................................................................ F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations...... F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................ F-5
Homestore.com, Inc. Consolidated Financial Statements
Report of Independent Accountants....................................... F-6
Consolidated Balance Sheets............................................. F-7
Consolidated Statements of Operations................................... F-8
Consolidated Statements of Stockholders' Equity (Deficit)............... F-9
Consolidated Statements of Cash Flows................................... F-10
Notes to Consolidated Financial Statements.............................. F-11
NetSelect, Inc. Consolidated Financial Statements
Report of Independent Accountants....................................... F-30
Consolidated Balance Sheets............................................. F-31
Consolidated Statements of Operations................................... F-32
Consolidated Statements of Stockholders' Equity......................... F-33
Consolidated Statements of Cash Flows................................... F-34
Notes to Consolidated Financial Statements.............................. F-35
NetSelect, LLC Consolidated Financial Statements
Report of Independent Accountants....................................... F-47
Consolidated Balance Sheets............................................. F-48
Consolidated Statements of Operations................................... F-49
Consolidated Statements of Stockholders' Equity......................... F-50
Consolidated Statements of Cash Flows................................... F-51
Notes to Consolidated Financial Statements.............................. F-52
The Enterprise of America, Ltd. Financial Statements
Report of Independent Accountants....................................... F-65
Balance Sheets.......................................................... F-66
Statements of Operations................................................ F-67
Statements of Stockholders' Deficit..................................... F-68
Statements of Cash Flows................................................ F-69
Notes to Financial Statements........................................... F-70
MultiSearch Solutions, Inc. Consolidated Financial Statements
Report of Independent Accountants....................................... F-73
Consolidated Balance Sheets............................................. F-74
Consolidated Statements of Operations................................... F-75
Consolidated Statements of Stockholders' Deficit........................ F-76
Consolidated Statements of Cash Flows................................... F-77
Notes to Consolidated Financial Statements.............................. F-78
SpringStreet, Inc. Financial Statements
Report of Independent Auditors.......................................... F-81
Balance Sheets.......................................................... F-82
Statements of Operations................................................ F-83
Statements of Shareholders' Equity (Deficit)............................ F-84
Statements of Cash Flows................................................ F-85
Notes to Financial Statements........................................... F-86
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
The Homebuyer's Fair, Inc. Consolidated Financial Statements
Report of Independent Accountants................................... F-96
Consolidated Balance Sheets......................................... F-97
Consolidated Statements of Operations............................... F-98
Consolidated Statements of Shareholders' Equity (Deficit)........... F-99
Consolidated Statements of Cash Flows............................... F-100
Notes to Consolidated Financial Statements.......................... F-101
FAS-Hotline, Inc. and The Center for Mobility Resources, Inc. Combined
Financial Statements
Report of Independent Accountants................................... F-108
Combined Balance Sheets............................................. F-109
Combined Statements of Operations................................... F-110
Combined Statements of Shareholders' Equity (Deficit)............... F-111
Combined Statements of Cash Flows................................... F-112
Notes to Combined Financial Statements.............................. F-113
National School Reporting Services, Inc. Financial Statements
Report of Independent Accountants................................... F-116
Balance Sheet....................................................... F-117
Statements of Operations............................................ F-118
Statements of Shareholders' Deficit................................. F-119
Statements of Cash Flows............................................ F-120
Notes to Financial Statements....................................... F-121
</TABLE>
F-2
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
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.
See Note 1 of Homestore.com, Inc. Notes to Consolidated Financial Statements
for further discussion about the Reorganization.
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 are 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" or "Homefair Group") 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 are 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 year ended December 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 financial statements of the Company, NSI, The Enterprise,
MultiSearch, SpringStreet, The Homebuyer's Fair, Inc., FAS-Hotline, Inc. and
The Center For Mobility Resources, Inc. and National School Reporting
Services, Inc. are included elsewhere in this Prospectus. The unaudited pro
forma condensed consolidated financial information presented herein should be
read in conjunction with those financial statements and related notes.
F-3
<PAGE>
HOMESTORE.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Homestore NSI Adjustments Homestore SpringStreet Homefair Adjustments Forma
--------- ------- ----------- --------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 62,580 $ 2,433 $ -- $ 65,013 $ 2,346 $6,159 $ (151)(1) $ 73,367
Cost of revenues
(excluding $1,432 in
non-cash equity
charges)............... 21,022 798 21,820 1,675 826 24,321
-------- ------- ------ -------- -------- ------ -------- ---------
Gross profit............ 41,558 1,635 -- 43,193 671 5,333 (151) 49,046
-------- ------- ------ -------- -------- ------ -------- ---------
Operating expenses:
Sales and marketing
(excluding $16,383 in
non-cash equity
charges).............. 70,384 4,064 74,448 5,506 2,200 (151)(1) 82,003
Product development
(excluding $677 in
non-cash equity
charges).............. 4,933 174 5,107 1,134 463 6,704
General and
administrative
(excluding $5,547 in
non-cash equity
charges).............. 21,781 1,053 22,834 4,416 1,370 28,620
Amortization of
intangible assets..... 10,192 261 10,453 1,810 (1,810)(2) 28,476
18,023 (3)
Stock-based charges.... 21,227 569 21,796 2,243 24,039
Litigation settlement.. 8,406 -- -- 8,406 -- -- -- 8,406
-------- ------- ------ -------- -------- ------ -------- ---------
Total operating
expenses.............. 136,923 6,121 143,044 13,299 5,843 16,062 178,248
-------- ------- ------ -------- -------- ------ -------- ---------
Loss from operations.... (95,365) (4,486) (99,851) (12,628) (510) (16,213) (129,202)
Other income (expense),
net.................... 2,358 (5) 2,353 44 (89) (5,152)(4) (2,844)
-------- ------- ------ -------- -------- ------ -------- ---------
Net loss................ (93,007) (4,491) (97,498) (12,584) (599) (21,365) (132,046)
Accretion of redemption
value and dividends on
convertible preferred
stock.................. (2,299) (207) 2,506(5) -- --
-------- ------- ------ -------- -------- ------ -------- ---------
Net loss applicable to
common stockholders.... $(95,306) $(4,698) $2,506 $(97,498) $(12,584) $ (599) $(21,365) $(132,046)
======== ======= ====== ======== ======== ====== ======== =========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (2.32)
========
Shares used in the
calculation of
historical basic and
diluted net loss per
share applicable to
common stockholders.... 41,142
========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (2.11)
=========
Shares used in the
calculation of pro
forma basic and diluted
net loss per share
applicable to common
stockholders........... 62,474 (6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
F-4
<PAGE>
HOMESTORE.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
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 purchased intangible assets on a
straight-line basis
(4) Reduction in interest income related to cash paid as part of the purchase
price, 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
(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 the IPO.
(6) 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, 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>
Year ended
December 31,
1999
------------
<S> <C>
SpringStreet acquisition.......................................... 2,725
Homefair acquisition.............................................. 208
NSI Reorganization................................................ 1,163
Conversion of preferred stock in connection with IPO.............. 14,918
Conversion of NAR's RealSelect shares into HomeStore.com shares... 2,318
</TABLE>
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Homestore.com, 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
Homestore.com, Inc. and subsidiaries (the "Company") at December 31, 1998 and
1999 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 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.
/s/ PricewaterhouseCoopers LLP
Century City, California
January 14, 2000
F-6
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 71 $ 90,382
Marketable equity security............................... 4,230
Accounts receivable, net of allowance for doubtful
accounts of $1,627 at December 31, 1999................. 13,428
Current portion of prepaid distribution expense.......... 7,868
Deferred royalties....................................... 2,032
Other current assets..................................... 3,339
------- ---------
Total current assets....................................... 71 121,279
Prepaid distribution expense............................... 6,167
Property and equipment, net................................ 6,305
Intangible assets, net..................................... 138,612
Other assets............................................... 4,200
------- ---------
Total assets........................................... $ 71 $ 276,563
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ -- $ 5,349
Accrued liabilities...................................... 23,687
Due to related party..................................... 70
Deferred revenue......................................... 13,478
Current portion of notes payable......................... 37,943
------- ---------
Total current liabilities.................................. 70 80,457
Notes payable.............................................. 633
Other non-current liabilities.............................. 96
------- ---------
166 81,090
------- ---------
Commitments and contingencies (Note 19)
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value
Common stock, $.001 par value; 10,000 authorized at
December 31, 1997 and 1998, 500,000 shares authorized at
December 31, 1999; 8,650, 9,980 and 75,251 shares issued
at December 31, 1997 and 1998, and December 31, 1999,
respectively; 8,650, 9,980 and 70,189 outstanding at
December 31, 1997 and 1998, and December 31, 1999,
respectively............................................ 10 70
Additional paid-in capital............................... 3,312 413,244
Treasury stock, at cost; 5,062 shares at December 31,
1999.................................................... (13,676)
Notes receivable from stockholders....................... (551) (13,350)
Deferred stock charges................................... (38,947)
Accumulated other comprehensive income................... 3,865
Accumulated deficit...................................... (2,866) (155,733)
------- ---------
Total stockholders' equity (deficit)................... (95) 195,473
------- ---------
Total liabilities and stockholders' equity (deficit)... $ 71 $ 276,563
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998 1999
----- ----- --------
<S> <C> <C> <C>
Revenues............................................... $ 42 $ -- $ 62,580
Cost of revenues (excluding $943 in non-cash equity
charges for the year ended December 31, 1999)......... 6 21,022
----- ----- --------
Gross profit........................................... 36 -- 41,558
----- ----- --------
Operating expenses:
Sales and marketing (excluding $14,726 in non-cash
equity charges for the year ended December 31,
1999)............................................... 14 70,384
Product development (excluding $447 in non-cash
equity charges for the year ended December 31,
1999)............................................... 4,933
General and administrative (excluding $5,111 in non-
cash equity charges for the year ended December 31,
1999)............................................... 38 3 21,781
Amortization of intangible assets.................... 10,192
Stock-based charges.................................. 21,227
Litigation settlement................................ 8,406
----- ----- --------
Total operating expenses............................... 52 3 136,923
----- ----- --------
Loss from operations................................... (16) (3) (95,365)
Interest income........................................ 3,060
Interest and other expense............................. (1) (702)
----- ----- --------
Net loss............................................... (17) (3) (93,007)
Accretion of redemption value and dividends on
convertible preferred stock........................... (2,299)
----- ----- --------
Net loss applicable to common stockholders............. $ (17) $ (3) $(95,306)
===== ===== ========
Basic and diluted net loss per share applicable to
common stockholders................................... $ -- $ -- $ (2.32)
===== ===== ========
Shares used to calculate basic and diluted net loss per
share applicable to common stockholders............... 8,650 9,173 41,142
===== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes
Stock Common Stock Additional Receivable Deferred Other
-------------- -------------- Paid-in Treasury From Stock Comprehensive Accumulated
Shares Amount Shares Amount Capital Stock Stockholders Charges Income Deficit
------ ------ ------ ------ ---------- -------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997.. -- -- 8,650 9 2,721 -- -- -- (2,846)
Net loss......... (17)
------ ---- ------ --- -------- -------- -------- -------- ----- ---------
Balance at
December 31,
1997............. -- -- 8,650 9 2,721 -- -- -- (2,863)
Exercise of stock
options.......... 1,330 1 591 (551)
Net loss......... (3)
------ ---- ------ --- -------- -------- -------- -------- ----- ---------
Balance at
December 31,
1998............. -- -- 9,980 10 3,312 -- (551) -- (2,866)
Reorganization
(Note 1)......... 4,528 5 12,480 12 98,119 (1,770) (3,230) (10,079) (60,860)
Comprehensive
income (loss):
Net loss ....... (93,007)
Unrealized gain
on marketable
security........ 3,865
------ ---- ------ --- -------- -------- -------- -------- ----- ---------
Comprehensive
income (loss)...
------ ---- ------ --- -------- -------- -------- -------- ----- ---------
Issuance of
common stock and
Series F
preferred stock
................. 96 643 3,553
Issuance of
common stock to
minority
interest......... 1,000
Exercise of stock
options ......... 5,959 5 12,906 (11,465)
Other notes
receivable from
shareholders..... (1,521)
Repurchase of
common stock .... (2,903) (11,906) 3,630
Issuance of
common stock .... 660 15,767 (238)
Repayment from
shareholder ..... 25
Issuance of
Series G
preferred stock.. 341 17,007
Issuance of
Series H
preferred stock.. 845 1 365 51,433
Deferred stock
charges ......... 44,095 (50,095)
Stock-based
charges ......... 6,000 21,227
Accretion of
Series E
redemption
value............ (159)
Conversion of
convertible
preferred stock.. (5,810) (6) 29,050 29 (23)
Conversion of
redeemable
convertible
preferred stock
................. 1,625 2 5,122
Conversion of NAR
shares .......... 3,917 4 (4)
Issuance of
common stock in
initial public
offering ........ 8,050 8 145,585
Exercise of
warrants ........ 113 2,125
Litigation
settlement ...... 250 8,406
------ ---- ------ --- -------- -------- -------- -------- ----- ---------
Balance at
December 31, 1999
................. -- $ -- 70,189 $70 $413,244 $(13,676) $(13,350) $(38,947) 3,865 $(155,733)
====== ==== ====== === ======== ======== ======== ======== ===== =========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance at
January 1, 1997.. (116)
Net loss......... (17)
-------------
Balance at
December 31,
1997............. (133)
Exercise of stock
options.......... 41
Net loss......... (3)
-------------
Balance at
December 31,
1998............. (95)
Reorganization
(Note 1)......... 22,197
Comprehensive
income (loss):
Net loss ....... (93,007)
Unrealized gain
on marketable
security........ 3,865
-------------
Comprehensive
income (loss)... (89,142)
-------------
Issuance of
common stock and
Series F
preferred stock
................. 3,553
Issuance of
common stock to
minority
interest......... 1,000
Exercise of stock
options ......... 1,446
Other notes
receivable from
shareholders..... (1,521)
Repurchase of
common stock .... (8,276)
Issuance of
common stock .... 15,529
Repayment from
shareholder ..... 25
Issuance of
Series G
preferred stock.. 17,007
Issuance of
Series H
preferred stock.. 51,434
Deferred stock
charges ......... (6,000)
Stock-based
charges ......... 27,227
Accretion of
Series E
redemption
value............ (159)
Conversion of
convertible
preferred stock.. --
Conversion of
redeemable
convertible
preferred stock
................. 5,124
Conversion of NAR
shares .......... --
Issuance of
common stock in
initial public
offering ........ 145,593
Exercise of
warrants ........ 2,125
Litigation
settlement ...... 8,406
-------------
Balance at
December 31, 1999
................. $195,473
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
HOMESTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31
---------------------
1997 1998 1999
---- ----- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(17) $ (3) $(93,007)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 11,579
Provision for doubtful accounts........................ 1,121
Amortization of discount on notes payable.............. 581
Litigation settlement.................................. 6 8,406
Stock-based charges.................................... 21,227
Other non-cash items................................... 544
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. 2 (10,025)
Prepaid distribution expense......................... (3,481)
Deferred royalties................................... (634)
Other assets......................................... 14 (3,146)
Accounts payable and accrued liabilities............. 107 (122) 12,668
Deferred revenue..................................... 6,030
---- ----- --------
Net cash provided by (used in) operating activities.... 112 (125) (48,137)
---- ----- --------
Cash flows from investing activities:
Purchases of property and equipment.................... (3,941)
Proceeds from sale of property and equipment........... 19
Cash assumed from the acquisition of SpringStreet...... 10,186
Acquisition of Homefair, net........................... (34,031)
Other assets........................................... (2,390)
---- ----- --------
Net cash provided by (used in) investing activities.... 19 -- (30,176)
---- ----- --------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes........... 3,655
Proceeds from exercise of stock options and warrants... 1,570
Net proceeds from issuance of common and preferred
stock................................................. 41 167,596
Repurchases of common stock............................ (11,906)
Repayment of notes payable............................. (4,578)
Repayment of capital lease obligation.................. (12)
Issuance of note receivable............................ (750)
---- ----- --------
Net cash provided by (used in) financing activities.... (12) 41 155,587
---- ----- --------
Change in cash and cash equivalents.................... 119 (84) 77,274
Cash assumed from NetSelect, Inc....................... 13,037
Cash and cash equivalents, beginning of period ........ 36 155 71
---- ----- --------
Cash and cash equivalents, end of period............... $155 $ 71 $ 90,382
==== ===== ========
Supplemental disclosure of cash flow activities
Cash paid for interest................................. $ 1 $ -- $ 79
==== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. ("Homestore.com" or "Company") operates a family of web
sites that includes: Homestore.com, a home portal; REALTOR.com, for existing
homes; HomeBuilder.com, for new homes; SpringStreet.com, for rental
properties; Remodel.com, for home improvement activities; and Homefair.com,
which was acquired in October 1999, for moving and relocation activities.
Through its network of web sites, the Company provides a wide variety of
information and communications tools for consumers, real estate industry
professionals, advertisers and providers of home and real estate related
products and services. The Company has strategic relationships with key
industry participants, including real estate market leaders such as the
National Associate 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--Homestore.com, Inc. (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 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
website 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
the 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 ownership interests of the
Company and the NAR.
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. For further
discussion about accounting for the non-substantive exchange, see Note 4.
F-11
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation--The Company's consolidated financial statements
reflect the financial position, results of operations and cash flows of
Homestore.com, Inc., formerly InfoTouch. Accordingly, the operations up
through December 4, 1996, reflect operations prior to the formation of
RealSelect. The consolidated financial statements for 1997 and 1998 primarily
reflect the Company's investment in LLC accounted for under the equity method
(Note 3). The consolidated financial statements following the date of the
Reorganization include the accounts of RealSelect and its wholly owned
subsidiaries, in which the Company held a 99% ownership interest at December
31, 1999. Minority stockholder's interest has been eliminated to the extent of
the minority stockholder's investment in the Company. All material
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could 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.
Marketable Equity Security--The Company's marketable equity security
consists of equity instruments of a publicly-held company and is classified as
available-for-sale and reported at fair value. Unrealized gains and losses are
reported as a component of stockholders' equity within accumulated other
comprehensive income. Unrealized losses are charged against income when a
decline in fair value is determined to be other than temporary.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents 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.
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 value
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably, over the term of the agreement, generally two to five years.
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 years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill and other
purchased intangibles resulting from the acquisitions of The Enterprise of
America, Ltd. ("The Enterprise"), MultiSearch Solutions, Inc.
F-12
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
("MultiSearch") acquired by NSI prior to the Reorganization, SpringStreet,
Inc. ("SpringStreet") and Homebuyer's Fair, Inc. and FAS-Hotline, Inc.
("Homefair"). Goodwill and all other purchased intangibles are being amortized
on a straight-line basis over the estimated periods of benefit ranging from
three to five years (Note 5). In addition, in connection with its formation,
RealSelect made various payments and issued common stock to the NAR for the
right to use the REALTOR.com trademark and domain name, the "REALTORS"
trademark and the exclusive rights to use the web site for real estate
listings under an exclusive lifetime operating agreement. The stock issued and
payments made to the NAR, as well as certain milestone-based amounts
subsequently earned by the NAR are being amortized on a straight-line basis
over the estimated period of benefit of 15 years.
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--Following the Reorganization, the Company's revenues
are derived principally from the sale of marketing and advertising products
and services to real estate agents and brokers, home builders, property owners
and managers. Revenues associated with the sale of such products and services
are recognized ratably over the term of the contract, generally 12 months.
Royalties directly associated with these revenues are deferred and amortized
over the same period. The Company also sells banner advertising pursuant to
contracts with terms varying from three months to three years, which may
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. This advertising revenue is recognized ratably based upon the
lesser of impressions delivered over the total number of guaranteed
impressions or ratably over the period in which the advertisement is
displayed. The Company also sells leads and referrals to companies in the
relocation industry pursuant to short-term contracts. Revenue from leads,
referrals and other performance-based arrangements is recognized as leads and
referrals are delivered or other performance criteria are met, provided that
no significant Company obligations remain and collection of the related
receivable is probable. Prior to the formation of RealSelect, the Company
recognized revenue from customers of its kiosk business at the time of the
advertisement placement.
Product Development Costs--Costs incurred by the Company to develop,
enhance, manage, monitor and operate the Company's web sites are generally
expensed as incurred, except for certain costs relating to the acquisition and
development of internal-use software that are capitalized and depreciated over
estimated economic useful lives, generally 3 years or less.
Advertising Expense--Advertising costs are expensed as incurred and totalled
$10.8 million during the year ended December 31, 1999. No advertising costs
were incurred during the years ended December 31, 1997 and 1998.
Stock-Based Charges--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 Statement of
Financial Accounting Standards ("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.
F-13
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes--Income taxes are accounted for under 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.
Net Loss Per Share--Net loss per share is computed by dividing the net loss
applicable to common stockholders 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.
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. The only items
of comprehensive income (loss) that the Company currently reports are
unrealized gains (losses) on marketable equity securities.
Segments--The Company operates in one principal business segment, an
Internet destination for home and real estate-related information and
advertising products and services. Substantially all of the Company's
operating results and identifiable assets are in the United States.
During the years ended December 31, 1997 and 1998, no customers accounted
for more than 10% of net revenues or net accounts receivable. During the year
ended December 31, 1999, one customer accounted for approximately 11% of the
Company's net revenues. As of December 31, 1999, no customer accounted for
more than 10% of net accounts receivable.
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
planned use of the derivative and the resulting designation. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the impact of adoption of SFAS No. 133 is not currently
expected to have a material impact on financial position, results of
operations or cash flows. The Company will be required to implement SFAS
No. 133 in the first quarter of fiscal 2001.
3. EQUITY INVESTMENT IN NETSELECT, LLC:
At the formation of RealSelect the Investors agreed to invest $7.0 million
through NSI, which in turn was invested in LLC. For this investment, NSI
received an ownership interest of 54% in LLC. The Company received a 46%
interest in LLC for the transfer of substantially all 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 agreed to transfer $5.8 million and the
assets, liabilities and intellectual property
F-14
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contributed by the Company to RealSelect, for an ownership interest of 85%.
The NAR received a 15% ownership interest in RealSelect. RealSelect received
from the NAR the right to use certain trademarks and an agreement not to
compete. As part of this transaction, RealSelect and the NAR entered into an
operating agreement for the Internet site REALTOR.com, and RealSelect paid the
NAR and its creditors $3.4 million and forgave debt of approximately $266,000.
Pursuant to the terms contained in the RealSelect agreement, the Company has
ceased all operations other than it's LLC ownership interest.
The investment in LLC prior to the Reorganization is accounted for under the
equity method. The Company's share of losses is limited to the extent of its
investment since there are no obligations to support or provide further
financial assistance to LLC. Since these amounts exceed the equity in common
stock of LLC, based upon the historical cost of the technology and assets
contributed, the investment has been recorded at no value.
Summarized consolidated financial data for NetSelect, LLC and its
subsidiary, RealSelect at December 31, 1997 and 1998 and for the period from
October 28, 1996 (Inception of RealSelect) to December 31, 1996 and the years
ended December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Current assets......................................... $ 3,671 $ 23,632
Total assets........................................... 8,728 54,908
Current liabilities.................................... 2,580 20,685
Total liabilities...................................... 2,727 23,921
Redeemable preferred stock............................. 4,939
Accumulated deficit.................................... (5,380) (56,390)
Stockholders' equity................................... 6,001 26,048
</TABLE>
<TABLE>
<CAPTION>
October 28,
1996
(Inception) Year Ended
to December 31,
December 31, -----------------
1996 1997 1998
------------ ------- --------
<S> <C> <C> <C>
Revenues................................ $ -- $ 1,282 $ 15,003
Loss from operations.................... (391) (6,031) (51,278)
Net loss applicable to common
stockholders........................... (248) (5,132) (60,396)
</TABLE>
As a result of additional capital issued by NSI and NSI shares issued in
connection with certain acquisitions, all of which were invested in RealSelect
through LLC, the Company's ownership interest in LLC decreased to 34%, 21% and
21% (unaudited) at December 31, 1997, 1998 and February 4, 1999, respectively.
Immediately following the Reorganization, the Company's ownership interest in
RealSelect was 92%.
F-15
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. REORGANIZATION OF REALSELECT:
As described in Note 1, on February 4, 1999, RealSelect was reorganized
through a non-substantive exchange of the Company's capital stock for all of
the outstanding capital stock of NSI including the assumption of warrants and
options to acquire common stock. Accordingly, the Company issued the following
capital stock to NSI stockholders in exchange for an equivalent number of
shares (in thousands, unaudited):
<TABLE>
<S> <C>
Common Stock.......................................................... 12,480
Series A Convertible Preferred Stock.................................. 1,378
Series B Convertible Preferred Stock.................................. 191
Series C Convertible Preferred Stock.................................. 614
Series D Convertible Preferred Stock.................................. 681
Series E Redeemable Convertible Preferred Stock....................... 325
Series F Convertible Preferred Stock.................................. 1,664
Options to purchase Common Stock...................................... 6,560
Warrants to purchase Common Stock..................................... 775
Warrants to purchase Preferred Stock.................................. 5
</TABLE>
Because the exchange did not affect the economic interests of NSI and
Company stockholders, the Reorganization has been accounted for as a
combination of the historical assets and liabilities of the two individual
companies at February 4, 1999. At the date of the Reorganization, NSI assets,
liabilities and stockholders' equity were as follows (in thousands):
<TABLE>
<CAPTION>
February 4,
1999
-----------
(unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $13,037
Other current assets........................................... 8,952
-------
Total current assets............................................. 21,989
Prepaid distribution expense..................................... 7,072
Property and equipment, net...................................... 2,373
Intangible assets, net........................................... 19,463
Other............................................................ 286
-------
$51,183
=======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................... $12,473
Deferred revenue............................................... 6,065
Current portion of notes payable............................... 1,746
-------
Total current liabilities........................................ 20,284
Notes payable.................................................... 3,265
-------
Total liabilities................................................ 23,549
-------
Redeemable convertible preferred stock........................... 4,963
-------
Convertible preferred stock...................................... 5
Common stock..................................................... 5
Additional paid-in capital....................................... 98,126
-------
Treasury stock at cost........................................... (1,770)
Notes receivable from stockholders............................... (3,230)
Deferred stock charges........................................... (10,079)
Accumulated deficit.............................................. (60,386)
-------
Total stockholders' equity................................... 22,671
-------
$51,183
=======
</TABLE>
F-16
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ACQUISITIONS:
The following acquisitions were consummated by NSI prior to the
Reorganization.
TouchTech Corporation
Effective December 31, 1997, NSI acquired all the outstanding stock of
TouchTech Corporation, a Canadian company, in exchange for 146,910 shares of
common stock with an estimated fair value of $53,000, which is based on the
terms and preferences of the shares issued in the transaction relative to the
value received by the Company in its most recent financing prior to the
acquisition. The acquisition has been accounted for as a purchase. The excess
of fair value of purchase consideration over net tangible assets has been
allocated to goodwill and is being amortized on a straight-line basis over
five years.
The Enterprise
Effective March 31, 1998, NSI acquired all the outstanding stock of The
Enterprise in exchange for aggregate consideration consisting of 525,000
shares of common stock with an estimated fair value of $525,000, which is
based on the terms and preferences of the shares issued in the transaction
relative to the value received by the Company in its most recent financing
prior to the acquisition, a note payable in the amount of $2.2 million,
$705,000 in cash and other acquisition-related expenses and the assumption of
$946,000 of net liabilities. The acquisition has been accounted for as a
purchase. The excess of purchase consideration over net tangible assets of
$3.9 million has been allocated to goodwill which is being amortized on a
straight-line basis over five years. The purchase agreement also provides for
certain contingent payments in the event that predetermined levels of sales
are achieved. Such payments, if any, will be accounted for as compensation
expense in the period earned and in no event shall such aggregate payments
exceed $1.0 million. For the years ended December 31, 1998 and 1999, no
contingent payments were required under the terms of the agreement.
MultiSearch
Effective July 1, 1998, NSI acquired all the outstanding stock of
MultiSearch, in exchange for issuing 1,625,000 shares of Series E redeemable
convertible preferred stock with an estimated fair value of $4.8 million,
which is based on the terms and preferences of the shares issued in the
transaction relative to the value received by the Company in its most recent
financing prior to the acquisition, a note payable in the amount of $3.6
million, $875,000 in cash and other acquisition-related expenses and the
assumption of $657,000 of net liabilities. The acquisition has been accounted
for as a purchase. The excess of total purchase consideration over net
tangible assets acquired of $9.4 million has been allocated to goodwill which
is being amortized on a straight-line basis over five years. The purchase
agreement also provides for certain contingent payments in the event that
predetermined levels of sales and earnings are achieved. Such payments, if
any, will be accounted for as compensation expense in the period earned. For
the year ended December 31, 1998, $360,000 of expense was recognized under the
terms of the agreement.
SpringStreet
In June 1999, the Company acquired SpringStreet for common stock and
convertible preferred stock equivalent to an aggregate of 5,309,058 shares of
common stock. The acquisition costs aggregated approximately $51.7 million and
were based on the privileges and preferences of the shares issued in the
transaction relative to the value received by the Company in its April 1999
Series G financing and certain acquisition expenses. The SpringStreet
acquisition was accounted for using the purchase method of accounting. The
excess of total purchase consideration over net tangible assets acquired of
$41.3 million has been allocated to goodwill and other purchased intangible
assets which are being amortized on a straight-line basis over estimated lives
ranging from three to five years.
F-17
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1999, the Company acquired 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.
The following summarized unaudited pro forma financial information assumes
the Reorganization and The Enterprise, MultiSearch, SpringStreet and Homefair
acquisitions occurred at the beginning of each period (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Revenues................................... $ 10,756 $ 23,123 $ 73,367
Net loss applicable to common
stockholders.............................. (42,801) (100,932) (132,046)
Net loss per share applicable to common
stockholders:
Basic and diluted.......................... $ (3.70) $ (6.41) $ (2.92)
Weighted average shares.................... 11,558 15,737 45,238
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Computer software and equipment.............................. $ 5,522
Furniture and fixtures....................................... 1,588
Leasehold improvements....................................... 1,421
--------
8,531
Less: Accumulated depreciation............................... (2,226)
--------
$ 6,305
========
</TABLE>
Depreciation expense for the year ended December 31, 1999 was $1.4 million.
The Company held no depreciable assets in 1997 and 1998.
7. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Purchased content............................................ $ 64,680
Goodwill..................................................... 56,642
Porting relationships........................................ 10,000
Purchased technology......................................... 5,000
NAR operating agreement...................................... 7,405
Other........................................................ 7,614
--------
151,341
Less: Accumulated amortization............................... (12,729)
--------
$138,612
========
</TABLE>
F-18
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortization expense for the year ended December 31, 1999 was $10.2 million.
The Company had no intangible assets in 1997 and 1998.
8. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
-------- -------
<S> <C> <C>
Accrued payroll and related benefits....................... $ -- $ 7,306
Accrued distribution fees.................................. 5,724
Accrued royalties.......................................... 3,091
Other...................................................... 7,566
----- -------
$ -- $23,687
===== =======
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
In March 1999, the NAR received shares of RealSelect common stock
convertible into 297,620 shares of Company common stock in satisfaction of
certain obligations under the NAR operating agreement totaling $1.0 million.
In connection with a 1998 stock redemption agreement, NSI loaned $3.1
million to a stockholder. The non-interest bearing note, which is full
recourse and collateralized by shares of common stock was repaid in February
1999 following the Reorganization. At December 31, 1998, the note was
classified as a component of stockholders' equity.
At December 31, 1998, the Company and NSI held notes receivable from
employees and directors totalling $702,000 for the exercise of stock options.
The notes bear interest at 5.3% per annum and are due on or before August 21,
2003. The notes, which are classified as a component of stockholders' equity,
are full recourse and collateralized by shares of common stock owned by the
employees and directors. Following the Reorganization in February 1999,
$551,000 of the notes were repaid.
During the year ended December 31, 1999, the Company issued promissory notes
to employees of the Company totaling $13.0 million for the exercise of stock
options and related expenses. These notes are full recourse and collateralized
by common stock of the Company and bear a weighted average interest of 5.13%
per annum. These notes are classified as a component of stockholders' equity.
Approximately $126,000 and $12.8 million of these notes are due in 2003 and
2004, respectively. In addition, the Company issued a collateralized full
recourse promissory note to an employee for purchase of restricted common
stock for $238,000. The note bears interest at 4.62% and is due in April 2004.
10. NOTES PAYABLE:
As part of the acquisition of The Enterprise, NSI issued a $2.2 million non-
interest bearing note payable which has been discounted at 10%. The note is
payable in four installments, and matures March 31, 2001. In August 1999, the
Company used $900,000 of the net proceeds from the initial public offering for
the partial repayment of the note.
As part of the acquisition of MultiSearch, NSI issued a $3.6 million non-
interest bearing note payable which has been discounted at 10%. The note was
repaid in full in 1999.
F-19
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the acquisition of Homefair, the Company issued a $37.5 million
note payable that bears interest at 10.875% and due in October 2000.
As of December 31, 1999, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending Principal
December 31, Payments
------------ ---------
<S> <C>
2000........................................................... $38,158
2001........................................................... 633
-------
38,791
Less: Discount.................................................. (215)
-------
Present value of notes payable.................................. 38,576
Less current portion............................................ 37,943
-------
Long-term portion............................................... $ 633
=======
</TABLE>
11. STOCK OPTIONS:
Prior to the Reorganization, the Company granted stock options under the
InfoTouch 1994 Stock Incentive Plan. In connection with the formation of
RealSelect, options to purchase 1,326,000 shares of common stock, representing
all outstanding options granted prior to December 4, 1996, became fully
vested. In December 1996, the Company granted options to purchase 275,000
shares of common stock with an exercise price per share of $.06. In 1997,
options to purchase 258,000 shares at $.45 per share were canceled. In 1998,
options to purchase 1,328,000 shares at a weighted average exercise price of
$.45 were exercised. Accordingly, at December 31, 1998 and up through the date
of the Reorganization, options to purchase 15,000 shares were outstanding with
a weighted average exercise price of $.64 per share.
In connection with the Reorganization, the Company assumed the NSI 1996
Stock Incentive Plan (the "Plan") which provides for the grant of options to
purchase up to 10,000,000 common shares. Under the terms of the plan, options
and other equity incentive awards may be granted to employees, officers,
directors and consultants at the then-current market value of the Company's
common shares, as determined by the Board of Directors. Options granted
generally vest over four years, 25% for the first year and monthly thereafter
over the remaining three years, and expire 10 years after the date of grant.
In January 1999, the Board of Directors adopted, and in March 1999 the
Company's stockholders approved, the 1999 Equity Incentive Plan (the "Plan")
to replace the 1996 Stock Incentive Plan ("1996 Plan"). The Plan provides for
the issuance of both non-statutory and incentive stock options to employees,
officers, directors and consultants of the Company. The total number of shares
of common stock reserved for issuance under the Plan is equal to that number
previously reserved and available for grant under the 1996 Plan. The Company
will not issue new options under the 1996 Plan. In April 1999 and June 1999,
the Board of Directors authorized, subject to stockholder approval, an
increase in the number of shares reserved for issuance under the Plan by an
additional 3,000,000 shares and 625,000 shares, respectively.
In June 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.
F-20
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan (including the
InfoTouch and Spring Street options) for the years ended December 31, 1997,
1998 and 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Shares Share Price
--------- -------------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1997................ 3,275 $ .05 to .90 $ .25
Granted..................................... 1,434 .30 .30
Canceled.................................... (256) .45 .45
------
Outstanding at December 31, 1997.............. 4,453 .05 to .90 .26
Granted..................................... 4,782 1.00 to 1.60 1.21
Exercised................................... (2,434) .06 to 1.00 .31
Canceled.................................... (426) .30 to 1.00 .78
------
Outstanding at December 31, 1998.............. 6,375 .05 to 1.60 .91
SpringStreet options assumed................ 719 .36 to 9.83 3.36
Granted..................................... 10,214 2.00 to 69.63 13.52
Exercised................................... (5,967) .05 to 9.83 2.20
Canceled.................................... (1,072) .30 to 50.50 4.29
------
Outstanding at December 31, 1999.............. 10,269 .30 to 69.63 12.60
======
</TABLE>
NSI options granted during the years ended December 31, 1997 and 1998 and
options granted by the Company during the year ended December 31, 1999
resulted in total compensation of $1.0 million, $9.5 million and $13.4
million, respectively, and were recorded as deferred stock compensation in
stockholders' equity. This deferred compensation represented the difference
between the deemed fair value of the Company's common stock for accounting
purposes and the exercise price of these options at the date of grant. The
deferred stock compensation is recognized as stock-based charges in the
consolidated statement of operations over the related vesting period of the
options. Common stock available for future grants at December 31, 1999 was
1,819,669 shares.
Additional information with respect to the outstanding options as of
December 31, 1999 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------------------ ---------------------
Number Weighted Average Average Number Average
of Remaining Exercise of Exercise
Prices: Shares Contractual Life Price Shares Price
------- ------ ---------------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$.30 to 1.26 1,795 8.34 $ .90 1,286 $ .87
1.43 to 3.57 1,098 9.08 2.21 715 2.27
8.00 to 9.83 5,580 9.48 8.88 2,816 8.77
20.00 to 34.50 1,025 9.78 32.31 155 20.00
48.00 to 69.63 771 9.87 55.35 -- --
------ -----
10,269 4,972
====== =====
</TABLE>
F-21
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1997, 1998 and 1999, the pro forma
amounts of the Company's net loss and net loss per share for the years ended
December 31, 1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ---------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported........................................ $(17) $ (3) $ (95,306)
Pro forma.......................................... $(17) $ (3) $(104,669)
Net loss per share--basic and diluted:
As reported........................................ $ -- $ -- $ (2.32)
Pro forma.......................................... $ -- $ -- $ (2.54)
</TABLE>
The fair value for each option granted was estimated at the date of grant
using a Black-Scholes option pricing model, assuming no expected dividends and
the following weighted-average assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates...................................... 6% 5% 6%
Expected lives (in years)..................................... 5 4 5
Dividend yield................................................ 0% 0% 0%
Expected volatility........................................... 0% 0% 85%
</TABLE>
Options granted prior to the Company's initial public offering were valued
using the minimum value method and therefore volatility was not applicable.
The weighted-average fair value of options granted during the years ended
1997, 1998 and 1999 was $0.00, $0.97 and $6.74, respectively.
12. WARRANTS:
In connection with the Reorganization, the Company assumed warrants to
purchase common stock. The following describes the terms of and accounting for
the warrants assumed in the Reorganization and issued subsequently.
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued warrants to purchase 792,752 shares
of the Company's common stock at a weighted average exercise price of $7.00
per share. In August 1999, a warrant to purchase 107,527 shares of common
stock was excercised at an exercise price of $18.60. The Company 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 $3.0
million for the year ended December 31, 1999.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 566,440 shares of common
stock at an exercise price $0.0002 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
In January 1999, NSI entered into an equipment leasing arrangement which
provided for the sale and leaseback of certain existing equipment and lease
financing for additional equipment needs. As of December 31, 1999, the Company
had leased $3.0 million of equipment, which covers the total availability
under the
F-22
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement. In addition, the agreement provides the lessor with warrants to
purchase up to 5,000 shares of Series F preferred stock at an exercise price
of $24.00 per share, which currently represent warrants to purchase
25,000 shares of common stock at an exercise price of $4.80 per share. The
Company determined that the fair value of the warrants approximated $115,000
on the date of grant.
In February 1999, the Company closed a private equity offering to real
estate brokers under our Broker Gold program. The Company also issued warrants
to purchase up to 364,110 shares of our common stock with an exercise price of
$20.00 per share. All warrants issued are fully vested, non-forfeitable and
are immediately exercisable. The Company incurred a non-cash 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 $1.2 million for the
year ended December 31, 1999.
Throughout 1999, the Company issued warrants to purchase 910,844 shares of
common stock at a weighted average price of $21.18 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. The Company
incurred a total non-cash charge of approximately $11.2 million which is being
recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. The non-cash charge for these warrants totaled
approximately $3.6 million for the year ended December 31, 1999.
In August 1999, in connection with an advertising agreement with Norwest
Mortgage, the Company issued to it a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $20.00 per share. The Company
incurred a non-cash charge of $3.5 million which is being recognized as
expense over the two-year term of the advertising agreement. All warrants
issued were fully vested, non-forfeitable and were immediately exercisable
upon the closing of the IPO. The non-cash charges for this warrant totaled
approximately $724,000 for the year ended December 31, 1999.
In October 1999, in connection with an advertising agreement with GMAC
Mortgage Corporation, the Company issued to it a warrant to purchase 119,048
shares of the Company's common stock at an exercise price of $42.00 per share.
The Company incurred a non-cash charge of $1.1 million which is being
recognized as expense over the two-year term of the advertising agreement. All
warrants issued were fully vested, non-forfeitable and were immediately
exercisable. The non-cash charges for this warrant totaled approximately
$88,000 for the twelve months ended December 31, 1999.
In February 2000, the Company issued warrants to purchase up to 520,749 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 at the end of their existing two-year
term. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. The non-cash charge for the warrants totaled
approximately $24.3 million which will be recognized as expense over three
years.
13. CAPITALIZATION:
On April 5, 1999, the Board of Directors effected a two-for-one stock split
of the outstanding shares of common stock. All share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect this stock split.
On August 4, 1999, the Board of Directors effected a five-for-two stock
split of the outstanding shares of common stock. All share and per share
information included in these consolidated financial statements have been
retroactively adjusted to reflect this stock split.
F-23
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible preferred stock immediately prior to the initial public offering
on August 4, 1999 was composed of the following (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A............................... 1,647 1,378 $ 4,561
Series B............................... 353 191 1,379
Series C............................... 614 614 5,054
Series D............................... 681 681 10,991
Series F............................... 2,100 1,760 44,686
Series G............................... 341 341 17,231
Series H............................... 845 845 42,358
Undesignated........................... 3,094 -- --
----- ----- --------
9,675 5,810 $126,260
===== ===== ========
</TABLE>
On August 4, 1999, the Company completed its initial public offering of
common stock. At that time, all issued and outstanding shares of the Company's
convertible preferred stock, except for one share of Series A preferred stock
issued to the NAR, were converted into an aggregate of 29,049,369 shares of
common stock.
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion from the date of the
Reorganization of $2.1 million for the year ended December 31, 1999 related to
the Series D and Series F dividends. No dividends have been declared or paid
from inception.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
F-24
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion from the
date of the Reorganization of $154,000 for the year ended December 31, 1999
related to the Series E redeemable preferred stock redemption value.
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
five-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $9.97 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
Repurchase of Common Stock
In February 1999, the Company repurchased 2,903,865 shares of common stock
for $11.9 million.
Sale of Common Stock and Series F Convertible Preferred Stock
In February 1999, the Company closed a private equity offering to real
estate brokers under its Broker Gold program. In the aggregate, the Company
sold 94,248 shares of Series F convertible preferred stock and 628,760 shares
of common stock for approximately $3.5 million. The Company recorded the $6.0
million difference between the deemed fair value of the stock for accounting
purposes and the price paid by the brokers as deferred compensation, which is
being amortized ratably over the two-year term of the Broker Gold agreement,
resulting in a non-cash charge of $2.0 million for the year ended December 31,
1999. Under the terms of the Broker Gold agreement, brokers provide the
Company with the right to display their property listings on an exclusive
basis.
14. NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders per share for the periods
indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Historical Presentation Numerator:
Net loss....................................... $ (17) $ (3) $(93,007)
Accretion of redemption value and dividends on
convertible preferred stock................... (2,299)
------ ------ --------
Net loss applicable to common stockholders..... $ (17) $ (3) $(95,306)
====== ====== ========
Denominator:
Weighted average shares........................ 8,650 9,173 41,142
====== ====== ========
Basic and diluted net loss per share applicable
to common stockholders.......................... $ -- $ -- $ (2.32)
====== ====== ========
</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 computation were 1,342,500, 15,000 and 12,892,571
for the years ended December 31, 1997, 1998 and 1999, respectively.
F-25
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. SUPPLEMENTAL CASH FLOW INFORMATION:
During the year ended December 31, 1999:
. The Company issued shares of RealSelect common stock convertible into
297,620 shares of Company common stock to the NAR in satisfaction of
certain obligations under the operating agreement totalling $1.0
million.
. The Company issued notes receivable to stockholders for $12.1 million in
connection with exercising stock options and issuing restricted common
stock.
. The Company issued 364,000 shares of common stock valued at $3.3
million, 844,569 shares of Series H convertible preferred stock valued
at $42.1 million and assumed net assets of $10.1 million as part of the
SpringStreet acquisition.
. The Company issued 187,500 shares of common stock to the NAR in
satisfaction of certain obligations under the operating agreement
totaling $1.3 million.
. The Company issued 162,500 shares of common stock totaling $488,000 to
an employee for cash of $250,000 and a note receivable of $238,000.
. The Company converted all of the shares of RealSelect held by the NAR
into 3,917,265 shares of its common stock.
. The Company issued 250,000 shares of common stock valued at $11.2
million, a $37.5 million promissory note, and assumed $911,000 net
liabilities as part of the Homefair acquisition.
. The Company funded $3.0 million of capital expenditures through an
equipment lease financing arrangement.
. The Company issued 250,000 shares of common stock in satisfaction of the
Cendant Litigation.
. The Company issued 18,604 shares of common stock in exchange for a $1.0
million investment in a company.
During the year ended December 31, 1998:
. The Company issued notes receivable to stockholders for $551,000 in
connection with the exercise of stock options.
16. DEFINED CONTRIBUTION PLAN:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
F-26
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. INCOME TAXES:
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 839 $ 44,571
Equity compensation............................. -- 5,106
Other........................................... 90 1,723
----- --------
929 51,400
Less: valuation allowance....................... (929) (16,570)
----- --------
Net deferred tax assets........................... -- 34,830
----- --------
Deferred tax liabilities:
Amortization of acquired intangible assets...... -- (34,830)
----- --------
Total gross deferred tax liabilities.............. -- (34,830)
----- --------
Net deferred tax asset (liability)................ $ -- $ --
===== ========
</TABLE>
Based on management's assessment, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets due to the
likelihood that the Company may not generate sufficient taxable income during
the carryforward period to utilize the net operating loss carryforwards. The
valuation allowance for net deferred taxes was increased by $15,641,000 in
1999. The increase was the result of net changes in temporary differences as
well as adjustments attributable to acquisitions and consolidation of the
financial statements following the date of the Reorganization.
At December 31, 1999, the Company had net operating losses for federal and
state income tax purposes of approximately $116.7 million and $63.3 million,
respectively, which begin to expire in 2007 for federal and 2001 for state
income tax purposes. The net operating losses can be carried forward to offset
future taxable income. Utilization of the above carryforwards may be subject
to utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
18. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and increases in the Consumer Price Index.
In connection with the Reorganization, the Company assumed noncancellable
operating leases. Future minimum lease payments under these operating leases
as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ 5,166
2001.............................................................. 4,616
2002.............................................................. 3,619
2003.............................................................. 2,287
2004 and thereafter............................................... 619
-------
Total........................................................... $16,307
=======
</TABLE>
F-27
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total NSI rental expense for operating leases was $149,000 and $749,000 for
the years ended December 31, 1997 and 1998, respectively. Rental expense for
the Company for operating leases was $3.8 million for the year ended December
31, 1999.
Distribution Agreements
In connection with the Reorganization, the Company assumed various Internet
portal distribution agreements and marketing and listing agreements with real
estate franchises. Payments remaining over the next five years for these
agreements as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $26,166
2001.............................................................. 15,242
2002.............................................................. 6,050
2003.............................................................. 500
-------
Total........................................................... $47,958
=======
</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.
Litigation
On March 19, 1999, John D. Molinare filed a lawsuit against the Company,
among other parties, in which Mr. Molinare was seeking damages of not less
than $2.1 million, plus punitive damages, as well as his costs incurred, among
other things. On August 4, 1999, the lawsuit was settled for an immaterial
amount.
On July 28, 1999, Cendant Corporation, the parent company of the Century21,
ERA and Coldwell Banker real estate franchisers, filed a complaint against the
Company in the Supreme Court of the State of New York in the County of New
York, Cendant's claims arise out of a letter signed by Cendant and by the
Company, and a Listings License Agreement and other agreements entered into
with Cendant, in June 1998. Cendant claims that the Company fraudulently
induced it to enter into the Listings License Agreement by promising in the
letter to use reasonable good faith efforts to give Cendant the opportunity to
invest in equity securities of the Company and that the Company breached an
alleged agreement to offer Cendant the opportunity to make such an investment.
Cendant also asserts claims for unjust enrichment and promissory estoppel
relating to this alleged offer of an opportunity to invest.
On October 22, 1999, the Company and Cendant Corporation announced a
settlement of the pending litigation between the two companies. 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 in 1999.
F-28
<PAGE>
HOMESTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SUBSEQUENT EVENTS (UNAUDITED):
On January 27, 2000, the Company filed a registration statement on Form S-1
which was declared effective by the Securities and Exchange Commission. 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, generating gross proceeds of $465.0 million
for the account of selling stockholders. In connection with this offering, the
Company incurred $17.9 million in underwriting discounts and commissions, and
approximately $900,000 in other related expenses.
In February 2000, the Company issued warrants to purchase up to 520,749 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 at the end of their existing two-year
term. All warrants issued are fully vested, non-forfeitable and are
immediately exercisable. The non-cash charge for the warrants totaled
approximately $24.3 million which will be recognized as expense over three
years.
In February 2000, the Board of Directors authorized an increase in the
number of shares reserved for issuance under the 1999 Stock Incentive Plan and
the 1999 Employee Stock Purchase Plan by an additional 3,158,509 and 350,945
shares, respectively.
On March 6, 2000, the Company entered into a ten-year strategic alliance
agreement with Budget Group, Inc. ("BGI") which will allow the Company to
participate in online and offline BGI marketing activities. In exchange for
entering into this agreement, the Company will issue to BGI 1,085,000 shares
of its common stock with a value of approximately $70 million.
20. QUARTERLY FINANCIAL DATA (UNAUDITED):
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Revenues...................... $ 5,570 $ 11,016 $ 18,625 $ 27,369
Gross profit.................. 2,821 6,655 12,728 19,354
Loss from operations.......... (10,415) (18,317) (35,534) (31,099)
Net loss...................... $(10,486) $(18,280) $(34,226) $(30,015)
Net loss applicable to common
stockholders................. $(10,900) $(19,343) $(35,048) $(30,015)
Basic and diluted net loss per
share applicable to common
stockholders................. $ (0.66) $ (0.79) $ (0.66) $ (0.43)
1998
Revenues...................... $ -- $ -- $ -- $ --
Gross profit.................. -- -- -- --
Loss from operations.......... -- (1) $ (1) $ (1)
Net loss...................... $ -- $ (1) $ (1) $ (1)
Net loss applicable to common
stockholders................. $ -- $ (1) $ (1) $ (1)
Basic and diluted net loss per
share applicable to common
stockholders................. $ -- $ -- $ -- $ --
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders NetSelect, 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
NetSelect, Inc. and its subsidiaries (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.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-30
<PAGE>
NETSELECT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------- February 4,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 3,094 $14,690 $ 13,037
Accounts receivable, net of allowance for
doubtful accounts of $42, $378 and $455 at
December 31, 1997, 1998 and February 4, 1999,
respectively.................................. 282 2,070 2,333
Current portion of prepaid distribution
expense....................................... 3,830 3,482
Deferred royalties............................. 137 1,327 1,398
Other current assets........................... 158 1,674 1,739
------- ------- --------
Total current assets............................ 3,671 23,591 21,989
Prepaid distribution expense.................... 7,742 7,072
Property and equipment, net..................... 397 4,118 2,373
Intangible assets, net.......................... 5,019 19,724 19,463
Other assets.................................... 169 187 286
------- ------- --------
Total assets................................. $ 9,256 $55,362 $ 51,183
======= ======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 494 $ 5,499 $ 4,117
Accrued liabilities............................ 772 5,801 6,156
Due to related party........................... 2,200 2,200
Deferred revenue............................... 1,314 5,439 6,065
Current portion of notes payable............... 1,746 1,746
------- ------- --------
Total current liabilities....................... 2,580 20,685 20,284
Notes payable................................... 3,236 3,265
Minority interest............................... 222
------- ------- --------
2,802 23,921 23,549
======= ======= ========
Commitments and contingencies (Note 16)
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; 2,614, 4,959 and
4,959 shares issued at December 31, 1997 and
1998 and February 4, 1999, respectively;
2,614, 4,528 and 4,528 shares outstanding at
December 31, 1997 and 1998 and February 4,
1999, respectively; liquidation preference of
$62,048 at December 31, 1998.................. 3 5 5
Common stock, $.001 par value; 90,000
authorized; 383, 2,496 and 2,496 issued and
outstanding at December 31, 1997 and 1998 and
February 4, 1999, respectively................ 2 2
Additional paid-in capital..................... 12,117 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 charges......................... (739) (8,676) (10,079)
Accumulated deficit............................ (4,927) (55,895) (60,386)
------- ------- --------
Total stockholders' equity................... $ 6,454 $26,502 $ 22,671
------- ------- --------
$ 9,256 $55,362 $ 51,183
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended January 1
December 31, to
----------------- February 4,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues........................................ $ 1,282 $ 15,003 $ 2,433
Cost of revenues (excluding $141 in non-cash
equity charges for the year ended December 31,
1998).......................................... 335 7,338 798
------- -------- -------
Gross profit.................................... 947 7,665 1,635
------- -------- -------
Operating expenses:
Sales and marketing (excluding $506 in non-
cash equity charges for the year ended
December 31, 1998)........................... 3,200 25,560 4,064
Product development (excluding $78 in non-cash
equity charges for the year ended December
31, 1998).................................... 506 4,139 174
General and administrative (excluding $837 in
non-cash equity charges for the year ended
December 31, 1998)........................... 2,687 6,929 1,053
Amortization of intangible assets............. 360 1,893 261
Stock-based charges........................... 257 20,455 569
------- -------- -------
Total operating expenses........................ 7,010 58,976 6,121
------- -------- -------
Loss from operations............................ (6,063) (51,311) (4,486)
Other income (expense), net..................... 74 121 (5)
------- -------- -------
Net loss before minority interest............... (5,989) (51,190) (4,491)
Minority interest............................... 1,239 222
------- -------- -------
Net loss........................................ (4,750) (50,968) (4,491)
Accretion of redemption value and dividends on
convertible preferred stock.................... (1,659) (207)
Repurchase of convertible preferred stock....... (7,727)
------- -------- -------
Net loss applicable to common stockholders...... $(4,750) $(60,354) $(4,698)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Deferred Total
------------------ ------------- Paid-in Treasury from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stock Stockholders Charges Deficit Equity
-------- ------- ------ ------ ---------- -------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1997........... 1,160 1 353 3,879 -- -- -- (177) 3,703
Issuance of Series
A preferred....... 729 1 2,064 2,065
Issuance of Series
B preferred....... 111 686 686
Issuance of Series
C preferred....... 614 1 4,439 4,440
Issuance of common
stock for
acquisition of
TouchTech, Inc. .. 30 53 53
Deferred stock
charges........... 996 (996) --
Stock-based
charges........... 257 257
Net loss........... (4,750) (4,750)
-------- ------ ----- --- ------- ------- ------- -------- -------- --------
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 of
America, Ltd. .... 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
charges........... 9,497 (9,497) --
Issuance of
warrants and
common stock...... 2,637 2,637
Stock-based
charges........... 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
charges
(unaudited)....... 1,972 (1,972)
Stock-based charges
(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.
F-33
<PAGE>
NETSELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended January 1 to
December 31, February 4,
----------------- ------------
1997 1998 1999
------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(4,750) $(50,968) $(4,491)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 472 2,551 339
Provision for doubtful accounts............... 416 68
Amortization of discount on notes payable..... 215 29
Other non-cash items.......................... 961 206
Minority interest in loss..................... (1,239) (222)
Stock-based charges........................... 257 20,455 569
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable........................... (91) (1,638) (330)
Prepaid distribution expense.................. (11,228) 1,018
Deferred royalties............................ (137) (1,190) (71)
Due from affiliated company................... (119) 74 (6)
Other assets.................................. (241) (3) 178
Accounts payable and accrued liabilities...... 441 8,350 (1,026)
Deferred revenue.............................. 1,290 4,125 626
------- -------- -------
Net cash provided by (used in) operating
activities................................... (4,117) (28,102) (2,891)
------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment........... (372) (3,853) (61)
Acquisition of The Enterprise, net of cash
acquired..................................... (705)
Acquisition of MultiSearch, net of cash
acquired..................................... (761)
Proceeds from sale of fixed assets............ 1,299
Payments made in connection with operating
agreement.................................... (1,260)
------- -------- -------
Net cash provided by (used in) investing
activities................................... (1,632) (5,319) 1,238
------- -------- -------
Cash flows from financing activities:
Repayment of notes payable.................... (1,490)
Proceeds from bridge loan..................... 12,000
Repayments on bridge loan..................... (1,325)
Note receivable from stockholder.............. (3,079)
Net proceeds from issuance of common stock.... 9 8,066
Net proceeds from issuance of preferred
stock........................................ 7,191 40,342
Repurchase of preferred stock................. (9,497)
------- -------- -------
Net cash provided by financing activities..... 7,200 45,017 --
------- -------- -------
Change in cash and cash equivalents........... 1,451 11,596 (1,653)
Cash and cash equivalents, beginning of
period....................................... 1,643 3,094 14,690
------- -------- -------
Cash and cash equivalents, end of period...... $ 3,094 $ 14,690 $13,037
======= ======== =======
Supplemental disclosure of cash flow
activities
Cash paid during the year for interest........ $ -- $ 170 $ --
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<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 has been
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, which 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited Interim Financial Information--The interim consolidated financial
information of the Company for the nine months ended September 30, 1998 and
the period from January 1, 1999 to February 4, 1999 is unaudited. The
unaudited interim consolidated 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 at and for the period from January 1, 1999 to
February 4, 1999.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. As a result
of net losses, minority stockholders' interests have been eliminated to the
extent of such minority stockholders' investments. All material intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles 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 could 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 cash
equivalents 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. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable
are collected upon processing of credit card transactions. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
During the years ended December 31, 1997 and 1998, and the period from
January 1, 1999 to February 4, 1999 (unaudited), no customers accounted for
more than 10% of net revenues or net accounts receivable.
F-35
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 value
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably over the term of the agreements, generally two to five years.
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 years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill resulting
from the acquisitions of The Enterprise of America, Ltd. ("The Enterprise")
and MultiSearch Solutions, Inc. ("MultiSearch"). This goodwill is being
amortized on a straight-line basis over the estimated periods of benefit of
five years. In addition, in connection with its formation, the Company entered
into an exclusive lifetime operating agreement with the NAR and received
intellectual property from InfoTouch. Pursuant to an operating agreement, the
Company made various payments and issued RealSelect common stock to the
National Association of REALTORS (the "NAR") for the right to use the
REALTOR.com trademark and domain name, the "REALTORS" trademark and the
exclusive use of the web site for real estate listings. The InfoTouch
intellectual property, the stock issued and payments made to the NAR, as well
as certain milestone-based amounts subsequently earned by the NAR have been
recorded as intangible assets and are being amortized on a straight-line basis
over the estimated period of benefit of 15 years.
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's revenues are derived principally from the
sale of advertising products and services to real estate agents and brokers,
home builders, property owners and managers. Revenues associated with the sale
of agent products are recognized ratably over the term of the contract,
generally 12 months. Royalties directly associated with these revenues are
deferred and amortized over the same period. The Company also sells banner
advertising pursuant to short-term contracts, which may 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. This advertising
revenue is recognized ratably based upon the lesser of impressions delivered
over the total number of guaranteed impressions or ratably over the period in
which the advertisement is displayed.
Product Development Costs--Costs incurred by the Company to develop,
enhance, manage, monitor and operate the Company's web sites are generally
expensed as incurred, except for certain costs relating to the acquisition and
development of internal-use software that are capitalized and depreciated over
estimated economic lives, generally three years or less.
Advertising Expense--Advertising costs, including co-operative advertising
costs, are expensed as incurred and totalled $818,000 and $3.3 million during
the years ended December 31, 1997 and 1998, respectively.
Stock-Based Charges--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 Statement of
Financial Accounting
F-36
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standards ("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 fair value of the
Company's stock and the exercise price. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and EITF
96-18.
Income Taxes--Income taxes are accounted for under 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.
Segments--The Company operates in one principal business segment, an
Internet destination for home and real estate-related information and
advertising products and services. Substantially all of the Company's
operating results and identifiable assets are in the United States.
During the years ended December 31, 1997 and 1998 and for the period from
January 1 through February 4, 1999, no customer accounted for more than 10% of
net revenues or net accounts receivable.
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 during the first quarter of 1999 did not have a
significant impact on 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 financial position, results of operations or cash flows.
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
which in turn was 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 transfered $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.
F-37
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
4. ACQUISITIONS:
TouchTech Corporation
Effective December 31, 1997, the Company acquired all the outstanding stock
of TouchTech Corporation, a Canadian company, in exchange for 29,382 shares of
common stock with a value of $53,000. The acquisition has been accounted for
as a purchase. The excess of fair value of purchase consideration over net
tangible assets has been allocated to goodwill and is being amortized on a
straight-line basis over five years.
The Enterprise
Effective March 31, 1998, the Company acquired The Enterprise in exchange
for aggregate consideration consisting of 105,000 shares of Company common
stock with an estimated fair value of $525,000, a note payable in the amount
of $2.2 million, $705,000 in cash and the assumption of $946,000 of net
liabilities. Included in liabilities assumed were $836,000 of demand notes
payable that were paid by the Company on the effective date of the
acquisition. The acquisition has been accounted for as a purchase. The excess
of purchase consideration over net tangible assets acquired of $3.9 million
has been allocated to goodwill which is being amortized on a straight-line
basis over five years. The purchase agreement also provides for certain
contingent payments in the event that predetermined levels of sales are
achieved. Such payments, if any, will be accounted for as compensation expense
in the period earned and in no event shall such aggregate payments exceed $1.0
million. For the year ended December 31, 1998, no contingent payments were
required under the terms of the agreement.
MultiSearch
Effective July 1, 1998, the Company acquired MultiSearch, in exchange for
aggregate consideration consisting of 325,000 shares of Series E convertible
preferred stock with a value of $4.8 million, a note payable in the amount of
$3.6 million, $875,000 in cash and the assumption of $657,000 of net
liabilities. Included in liabilities assumed were $654,000 of demand notes
payable that were paid by the Company on the effective date of the
acquisition. The acquisition has been accounted for as a purchase. The excess
of total purchase consideration over net tangible assets acquired of $9.4
million has been allocated to goodwill which is being amortized on a straight-
line basis over five years. The purchase agreement also provides for certain
contingent payments in the event that predetermined levels of sales and
earnings are achieved. Such payments, if any, will be accounted for as
compensation expense in the period earned. For the year ended December 31,
1998, $360,000 of expense was recognized under the terms of the agreement.
The following summarized unaudited pro forma financial information assumes
The Enterprise and MultiSearch acquisitions occurred at the beginning of each
period (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Revenues........................................... $ 8,505 $ 18,026
Net loss applicable to common stockholders......... (9,470) (61,969)
</TABLE>
F-38
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment................................. $ 394 $2,903
Furniture and fixtures............................. 77 1,337
Leasehold improvements............................. 50 700
----- ------
521 4,940
Less: Accumulated depreciation..................... (124) (822)
----- ------
$ 397 $4,118
===== ======
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1998 was
$119,000 and $659,000, respectively.
6. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Goodwill........................................... $ $13,243
RIN operating agreement............................ 4,745 6,745
Other.............................................. 656 2,012
------ -------
5,401 22,000
Less: Accumulated amortization..................... (382) (2,276)
------ -------
$5,019 $19,724
====== =======
</TABLE>
Amortization expense for the years ended December 31, 1997 and 1998 was
$360,000 and $1.9 million, respectively.
7. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued payroll and related benefits............... $442 $1,973
Accrued distribution fees.......................... 1,366
Accrued royalties.................................. 979
Other.............................................. 330 1,483
---- ------
$772 $5,801
==== ======
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
At December 31, 1997 and 1998, the Company was indebted to an officer for
$168,000 and $188,000, respectively. The loan is due on demand and bears
interest at 10% per annum.
F-39
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1998, the Company issued 57,671 shares of common stock and 26,504
shares of Series F convertible preferred stock to the NAR in satisfaction of a
$1.0 million obligation for the Company's share of advertising costs for a co-
operative advertising program with the NAR. At December 31, 1998, the Company
was indebted to the NAR for $2.2 million pursuant to certain provisions of the
operating agreement.
In connection with a 1998 stock redemption agreement, the Company loaned
$3.1 million to a stockholder of InfoTouch. The note is non-interest bearing,
full recourse and collateralized by the shares of common stock. At December
31, 1998, the note was classified as a component of stockholders' equity.
At December 31, 1998, the Company held promissory notes from employees and
directors totaling $151,000 for the exercise of stock options. The notes bear
interest at 5.3% per annum and are due on or before August 21, 2003. The
notes, which are classified as a component of stockholders' equity, are full
recourse and collateralized by shares of common stock of the Company owned by
the employees and directors.
9. NOTES PAYABLE:
As part of the acquisition of The Enterprise, the Company issued a $2.2
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $354,000. The
note is payable in four installments, and matures on March 31, 2001.
As part of the acquisition of MultiSearch, the Company issued a $3.6 million
non-interest bearing note payable which has been discounted at 10%. The
unamortized balance of the discount at December 31, 1998 was $453,000. The
note is payable in three installments, and matures on April 1, 2001.
As of December 31, 1998, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Principal
Year Ending December 31, Payments
------------------------ ---------
<S> <C>
1999............................................................. $2,097
2000............................................................. 1,797
2001............................................................. 1,895
------
5,789
Less: Discount................................................... (807)
------
Present value of notes payable................................... 4,982
Less: Current portion............................................ 1,746
------
Long-term portion................................................ $3,236
======
</TABLE>
10. STOCK OPTIONS:
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the grant
of options to employees, officers, directors and consultants at the then-
current market value of the Company's common stock, as determined by the Board
of Directors. Options granted generally vest over four years, 25% on the first
anniversary and monthly thereafter over the remaining three years, and expire
10 years from the date of grant.
F-40
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan for the years ended
December 31, 1997 and 1998, and for the period from January 1, 1999 to
February 4, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Exercise
Shares Per Share Price
--------- ------------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1997............ 335 .28 .28
Granted.................................. 287 1.50 1.50
-----
Outstanding at December 31, 1997.......... 622 .28 to 1.50 .84
Granted.................................. 956 5.00 to 8.00 6.02
Exercised................................ (221) .28 to 5.00 .68
Canceled................................. (85) 1.50 to 5.00 3.90
-----
Outstanding at December 31, 1998.......... 1,272 .28 to 8.00 4.56
Granted (unaudited)...................... 40 10.00 10.00
-----
Outstanding at February 4, 1999
(unaudited).............................. 1,312 .28 to 10.00 4.74
=====
</TABLE>
Options granted during the years ended December 31, 1997 and 1998 resulted
in total compensation of $1.0 million and $9.5 million, respectively and were
recorded as deferred stock compensation in stockholders' equity. This deferred
compensation represented the difference between the deemed fair value of the
Company's common stock for accounting purposes and the exercise price of these
options at the date of grant. The deferred stock compensation amount will be
recognized as stock-based compensation over the related vesting period of the
options. During the years ended December 31, 1997 and 1998, such stock-based
compensation was $257,000 and $1.6 million, respectively. Options outstanding
at December 31, 1998 were exercisable for 144,000 shares of common stock.
Common stock available for future grants at December 31, 1998 was 507,000
shares.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- ------------------
Weighted Average Average Average
Number of Remaining Exercise Number of Exercise
Prices: Shares Contractual Life Price Shares Price
------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .28................ 113 7.90 $ .28 8 $ .28
1.50................ 250 8.70 1.50 67 1.50
5.00................ 224 9.20 5.00 18 5.00
6.00................ 181 9.50 6.00 23 6.00
6.32................ 421 9.70 6.32 27 6.32
8.00................ 83 9.90 8.00 1 8.00
----- ---
1,272 144
===== ===
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rates.............. 6% 6% 5%
Expected lives (in years)............. 4 5 4
Dividend yield........................ 0% 0% 0%
Expected volatility................... 0% 0% 0%
</TABLE>
F-41
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The compensation expense associated with the stock-based compensation plans
did not result in a material difference from the reported net loss for the
years ended December 31, 1997 and 1998.
11. WARRANTS:
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued a warrant to purchase 113,295 shares
of the Company's common stock at an exercise price of $6.32 per share. America
Online will also hold warrants to acquire $3.0 million of common stock with a
weighted average exercise price of 137.5% of the initial public offering
price. If warrants are purchased in connection with an IPO, the fair value
will be measured at the date of the IPO and amortized to sales and marketing
expense over the remaining term of the distribution agreement.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 113,288 shares of common
stock at an exercise price $.001 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
During 1998, the Company issued warrants to purchase up to 41,876 shares of
common stock to Multiple Listing Services ("MLSs") that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis over an initial term of 18 months. The issuance of
these warrants is contingent upon completion of an IPO. The exercise price
will be equal to the IPO per share price. The fair value of issuable warrants
will be measured at the date an IPO is deemed to be probable and recognized as
expense over the terms of the applicable MLS agreement.
12. CAPITALIZATION:
Convertible preferred stock at December 31, 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A.................................. 1,647 1,378 $ 4,416
Series B.................................. 353 191 1,334
Series C.................................. 614 614 4,884
Series D.................................. 681 681 10,543
Series F.................................. 2,100 1,664 40,871
Undesignated.............................. 4,280
----- ----- -------
9,675 4,528 $62,048
===== ===== =======
</TABLE>
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any,
F-42
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
will not be payable and will lapse. The holders of the Series D and Series F
convertible preferred stock are entitled to dividends at their stated rate
whether or not earned which are payable upon conversion provided the Company's
public offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion of $1.5 million for the year
ended December 31, 1998 related to the Series D and Series F dividends.
No dividends have been declared or paid from inception through December 31,
1998.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion of
$171,000 for the year ended December 31, 1998 related to the Series E
redeemable preferred stock redemption value.
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
two-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $24.93 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
Repurchase of Preferred Stock--In November 1998, the Company repurchased
431,664 shares of Series A and Series B convertible preferred stock for $9.5
million. The difference of $7.7 million between the carrying value of the
preferred stock prior to repurchase and the price paid has been included in
net loss for the year ended December 31, 1998 in the computation of net loss
applicable to common stockholders.
Sale of Common Stock--In connection with the August 1998 Series F financing,
the Company sold an aggregate of 1,673,991 shares of common stock to certain
investors and received gross proceeds of approximately $10.6 million. The
Company recognized the $18.9 million difference between the estimated fair
value of the stock and the price paid by investors as stock-based compensation
in 1998.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
During the period from January 1, 1999 to February 4, 1999 (unaudited):
. In connection with an equipment lease financing arrangement, the Company
sold $749,000 of net property and equipment in exchange for assumption
of third party payables.
F-43
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998:
. The Company issued common and convertible preferred stock valued at $1.9
million in connection with an advertising agreement.
. The Company incurred a $2.0 million payable to a related party in
connection with certain obligations under a lifetime operating
agreement.
. Convertible notes in the amount of $10.7 million, plus $64,000 in
accrued interest, were converted into Series F convertible preferred
stock.
. The Company issued notes receivable to stockholders for $151,000 in
connection with the exercise of stock options.
. The Company issued warrants with a fair value of $1.4 million.
. The Company issued 105,000 shares of common stock valued at $525,000, a
note payable of $2.2 million and assumed net liabilities of $946,000 as
part of the acquisition of The Enterprise.
. The Company issued 325,000 shares of Series E redeemable convertible
preferred stock valued at $4.8 million, a note payable of $3.6 million
and assumed net liabilities of $657,000 as part of the acquisition of
MultiSearch.
During the year ended December 31, 1997:
. The Company issued 29,382 shares of common stock with a value of $53,000
as part of the acquisition of TouchTech.
14. DEFINED CONTRIBUTION PLAN:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
15. INCOME TAXES:
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 2,036 $ 12,807
Other................................................... 348 1,078
------- --------
2,384 13,885
Less: valuation allowance............................... (2,384) (13,885)
------- --------
Net deferred taxes........................................ $ -- $ --
======= ========
</TABLE>
F-44
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to the uncertainty surrounding the timing of the realization of the
benefits from its favorable tax attributes in future tax returns, the Company
has placed a valuation allowance against its otherwise recognizable deferred
tax assets.
NSI, LLC and RealSelect do not file income tax returns on a consolidated
basis. As a result, net operating losses of one entity may not be available to
offset future taxable income of another entity. NSI has net operating loss
carryforwards for federal and state income tax purposes of approximately
$161,000 and $80,000, respectively, which begin to expire in 2018 for federal
and 2003 for state purposes. RealSelect has net operating loss carryforwards
for federal and state purposes of approximately $34.4 million and $18.1
million, respectively, which begin to expire in 2007 for federal and 2001 for
state purposes. LLC is treated as a partnership for federal and state
purposes. As a result, all income and loss items flow through to its
investors. Utilization of the above carryforwards may be subject to
utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
16. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and the Consumer Price Index. Future minimum
lease payments under noncancellable operating leases at December 31, 1998 are
(in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 2,295
2000............................................................... 2,686
2001............................................................... 2,553
2002............................................................... 1,636
2003............................................................... 1,365
--------
Total............................................................ $10,535
========
</TABLE>
Total rental expense for operating leases was $149,000 and $749,000 for the
years ended December 31, 1997 and 1998, respectively.
Distribution Agreements
The Company has entered into various Internet portal distribution and
marketing and listing agreements with real estate franchises. Payments
remaining over the next five years for these agreements are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................................... $23,643
2000............................................................... 21,536
2001............................................................... 14,646
2002............................................................... 4,250
2003............................................................... 500
-------
Total............................................................ $64,575
=======
</TABLE>
F-45
<PAGE>
NETSELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
17. SUBSEQUENT EVENTS (UNAUDITED):
Equipment Leasing Arrangement
In January 1999, the Company entered into an equipment leasing arrangement
which provided for the sale and leaseback of certain of the Company's existing
equipment and lease financing for additional equipment needs. The total
availability under the agreement is $3.0 million. In addition, the agreement
provides the lessor with warrants to purchase up to 5,000 shares of Series F
convertible preferred stock at an exercise price of $24.00 per share. The
Company determined that the fair value of the warrants approximated $115,000
on the date of grant.
Stock Options
In January 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan (the "Plan") to replace the 1996 Stock Incentive Plan ("1996 Plan"). The
Plan provides for the issuance of both non-statutory and incentive stock
options to employees, officers, directors and consultants of the Company. The
total number of shares of common stock reserved for issuance under the Plan is
equal to that number previously reserved and available for grant under the
1996 Plan. The Company will not issue new options under the 1996 Plan.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NetSelect, LLC
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
NetSelect, LLC and its subsidiaries (the "Company") at December 31, 1997 and
1998 and the results of their operations and their cash flows for the period
from October 28, 1996 (Inception) to December 31, 1996 and 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.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-47
<PAGE>
NETSELECT, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, February 4,
----------------- -----------
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 3,094 $ 14,690 $ 13,037
Accounts receivable, net of allowance for
doubtful accounts of $42, $378 and $455 at
December 31, 1997, 1998 and February 4, 1999,
respectively................................. 282 2,070 2,333
Current portion of prepaid distribution
expense...................................... 3,830 3,482
Deferred royalties............................ 137 1,327 1,398
Other current assets.......................... 158 1,715 1,780
------- -------- --------
Total current assets........................... 3,671 23,632 22,030
Prepaid distribution expense................... 7,742 7,072
Property and equipment, net.................... 397 4,118 2,373
Intangible assets, net......................... 4,491 19,229 18,989
Other assets................................... 169 187 286
------- -------- --------
Total assets................................. $ 8,728 $ 54,908 $ 50,750
======= ======== ========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 494 $ 5,499 $ 4,117
Accrued liabilities........................... 772 5,801 6,156
Due to related party.......................... 2,200 2,200
Deferred revenue.............................. 1,314 5,439 6,065
Current portion of notes payable.............. 1,746 1,746
------- -------- --------
Total current liabilities...................... 2,580 20,685 20,284
Notes payable.................................. 3,236 3,265
Minority Interest.............................. 147
------- -------- --------
2,727 23,921 23,549
------- -------- --------
Commitments and contingencies (Note 15)........
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; 2,614, 4,959 and
4,959 shares issued at December 31, 1997 and
1998 and February 4, 1999, respectively;
2,614, 4,528 and 4,528 shares outstanding at
December 31, 1997 and 1998 and February 4,
1999, respectively; liquidation preference of
$62,048 at December 31, 1998................. 3 5 5
Common stock, $.001 par value; 90,000
authorized; 2,113, 4,492 and 4,492 issued and
outstanding at December 31, 1997 and 1998 and
February 4, 1999, respectively............... 3 3
Additional paid-in capital.................... 12,117 96,657 98,720
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............ (3,781) (3,781)
Deferred stock charges........................ (739) (8,676) (10,079)
Accumulated deficit........................... (5,380) (56,390) (60,860)
------- -------- --------
Total stockholders' equity................... $ 6,001 $ 26,048 $ 22,238
------- -------- --------
$ 8,728 $ 54,908 $ 50,750
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
NETSELECT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
October 28, Three
1996 Year Ended Months January 1
(Inception) to December 31, Ended to
December 31, ----------------- March 31, February 4,
1996 1997 1998 1998 1999
-------------- ------- -------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 1,282 $ 15,003 $ 1,244 $ 2,433
Cost of revenues
(excluding $141 in non-
cash equity charges for
the year ended December
31, 1998).............. 335 7,338 735 798
----- ------- -------- ------- -------
Gross profit............ -- 947 7,665 509 1,635
----- ------- -------- ------- -------
Operating expenses:
Sales and marketing
(excluding $506 in
non-cash equity
charges for the year
ended December 31,
1998)................ 9 3,200 25,560 2,110 4,064
Product development
(excluding $78 in
non-cash equity
charges for the year
ended December 31,
1998)................ 4 506 4,139 366 174
General and
administrative
(excluding $837 in
non-cash equity
charges for the year
ended December 31,
1998)................ 348 2,687 6,929 708 1,053
Amortization of
intangible assets.... 30 328 1,860 81 240
Stock-based charges... 257 20,455 104 569
----- ------- -------- ------- -------
Total operating
expenses........... 391 6,978 58,943 3,369 6,100
----- ------- -------- ------- -------
Loss from operations.... (391) (6,031) (51,278) (2,860) (4,465)
Interest income......... 1 98 583 126 51
Interest expense........ (24) (365) (3) (31)
Other expense........... (97) (25)
----- ------- -------- ------- -------
Net loss before Minority
Interest............... $(390) $(5,957) $(51,157) $(2,737) $(4,470)
Minority Interest....... 142 825 147 147
----- ------- -------- ------- -------
Net loss................ (248) (5,132) (51,010) (2,590) (4,470)
Accretion of redemption
value and stock
dividends on
convertible preferred
stock.................. (1,659) (406) (207)
Repurchase of preferred
stock.................. (7,727)
----- ------- -------- ------- -------
Net loss applicable to
common stockholders.... $(248) $(5,132) $(60,396) $(2,996) $(4,677)
===== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
NETSELECT, LLC
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 Charges Deficit Equity
------ ------ ------ ------ ---------- -------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October
28, 1996............ $-- $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock............... 2,083 1 1
Issuance of Series A
preferred........... 918 1 2,353 2,354
Issuance of Series B
preferred........... 242 1,525 1,525
Net loss............. (248) (248)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at December
31, 1996............ 1,160 1 2,083 3,879 -- -- -- (248) 3,632
Issuance of Series A
preferred........... 729 1 2,064 2,065
Issuance of Series B
preferred........... 111 686 686
Issuance of Series C
preferred........... 614 1 4,439 4,440
Issuance of common
stock for
acquisition of
TouchTech, Inc...... 30 53 53
Deferred stock
charges............. 996 (996) --
Stock-based charges.. 257 257
Net loss............. (5,132) (5,132)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at December
31, 1997............ 2,614 3 2,113 12,117 -- -- (739) (5,380) 6,001
Issuance of Series D
preferred........... 681 1 9,999 10,000
Issuance of common
stock for
acquisition of The
Enterprise of
America, Ltd........ 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.......... 487 1 742 (702) 41
Note receivable from
stockholder......... (3,079) (3,079)
Exercise of
warrants............ 113
Deferred stock
charges............. 9,497 (9,497) --
Issuance of warrants
and common stock.... 2,637 2,637
Stock-based charges.. 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............. (51,010) (51,010)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at December
31, 1998............ 4,528 5 4,492 3 96,657 (1,770) (3,781) (8,676) (56,390) 26,048
Issuance of warrants
(unaudited)......... 115 115
Deferred stock
charges
(unaudited)......... 1,972 (1,972) --
Stock-based charges
(unaudited)......... 569 569
Accretion of Series E
redemption value
(unaudited)......... (24) (24)
Net loss
(unaudited)......... (4,470) (4,470)
----- --- ----- --- ------- ------- ------- -------- -------- --------
Balance at February
4, 1999
(unaudited)......... 4,528 $ 5 4,492 $ 3 $98,720 $(1,770) $(3,781) $(10,079) $(60,860) $ 22,238
===== === ===== === ======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
NETSELECT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended Three Months
October 28, 1996 December 31, Ended January 1 to
(Inception) to ----------------- March 31, February 4,
December 31, 1996 1997 1998 1998 1999
----------------- ------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (248) $(5,132) $(51,010) $(2,590) $(4,470)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 35 440 2,518 141 317
Provision for doubtful
accounts............... 267 416 68
Amortization of discount
on notes payable....... 215 29
Other non-cash items.... 961
Minority interest in
loss................... (142) (825) (147) (147)
Stock-based charges..... 257 20,455 104 569
Changes in operating
assets and liabilities,
net of acquisitions:
Accounts receivable.... 149 (91) (1,638) (110) (330)
Prepaid distribution
expense............... (11,228) (518) 1,018
Deferred royalties..... (137) (1,190) (71)
Due from affiliated
company............... 7 (119) 74 2
Other assets........... (18) (241) (3) (321) (82)
Accounts payable and
accrued liabilities... 282 441 8,350 1,771 (565)
Deferred revenues...... 24 1,290 4,125 741 626
------- ------- -------- ------- -------
Net cash provided by
(used in) operating
activities............. 356 (4,117) (28,102) (927) (2,891)
------- ------- -------- ------- -------
Cash flows from
investing activities:
Purchases of property
and equipment.......... (72) (372) (3,853) (217) (61)
Acquisition of The
Enterprise of America
Ltd., net of cash
acquired............... (705) (705)
Acquisition of
MultiSearch Solutions,
Inc., net of cash
acquired............... (761)
Proceeds from sale of
property and
equipment.............. 1,299
Payments made in
connection with
operating agreement.... (2,371) (1,260)
------- ------- -------- ------- -------
Net cash provided by
(used in) investing
activities............. (2,443) (1,632) (5,319) (922) 1,238
------- ------- -------- ------- -------
Cash flows from
financing activities:
Repayment of notes
payable................ (1,490) (836)
Proceeds from bridge
loan................... 12,000
Repayments on bridge
loan................... (1,325)
Note receivable from
stockholder............ (3,079)
Net proceeds from
issuance of common
stock.................. 9 8,066
Net proceeds from
issuance of preferred
stock.................. 3,730 7,191 40,342 9,995
Repurchase of preferred
stock.................. (9,497)
------- ------- -------- ------- -------
Net cash provided by
financing activities... 3,730 7,200 45,017 9,159 --
------- ------- -------- ------- -------
Change in cash and cash
equivalents............ 1,643 1,451 11,596 7,310 (1,653)
------- ------- -------- ------- -------
Cash and cash
equivalents, beginning
of period.............. 1,643 3,094 3,094 14,690
------- ------- -------- ------- -------
Cash and cash
equivalents, end of
period................. $ 1,643 $ 3,094 $ 14,690 $10,404 $13,037
======= ======= ======== ======= =======
Supplemental disclosure
of cash flow activities
Cash paid during the
year for interest...... $ -- $ -- $ 170 $ -- $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business:
NetSelect, LLC ("LLC" or the "Company") is a Delaware limited liability
corporation that was incorporated on October 28, 1996 between two corporate
partners, NetSelect, Inc. ("NSI") and InfoTouch Corporation ("InfoTouch"). The
Company's sole business activity has been managing its investment in
RealSelect, Inc. ("RealSelect"), a Delaware corporation. RealSelect is an
operating company created to establish an Internet-based marketing service for
real estate.
The RealSelect Venture--Effective December 4, 1996, InfoTouch entered into a
series of agreements with the National Association of Realtors and its wholly
owned subsidiary Realtors Information Network (together referred to as the
"NAR") and several investors (the "Investors"). Under these agreements,
InfoTouch transferred its recently developed technology and assets relating to
advertising the listing of residential real estate on the Internet into the
Company in exchange for a 46% ownership interest, including outstanding stock
options. The Investors contributed capital to NSI. The Company received
capital funding from NSI and in-turn contributed the InfoTouch assets,
intellectual property and the NSI capital to RealSelect 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
website REALTOR.com and to pursue commercial opportunities relating to the
listing of real estate on the internet.
Pursuant to the agreements governing RealSelect, InfoTouch was required to
terminate its remaining activities, which were insignificant, and dispose of
its remaining assets and liabilities. Accordingly, following the formation,
NSI and InfoTouch were only shell companies as they had no liabilities and no
assets other than their respective investments in the Company. In addition,
under the agreements, NSI was the only entity permitted to raise capital to
support RealSelect which, once invested, increased NSI's ownership interest in
the Company and RealSelect and diluted the ultimate ownership interests of
InfoTouch and the NAR.
Reorganization of 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 InfoTouch (the
"Reorganization"). The Company was dissolved into InfoTouch in connection with
the Reorganization.
2. Summary of Significant Accounting Policies:
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
As a result of additional capital raised by NSI and NSI shares issued in
connection with certain acquisitions, all of which was invested in RealSelect
through the Company, the Company's ownership interest in RealSelect increased
to 87%, 93% and 93% (unaudited) at December 31, 1997, 1998 and February 4,
1999, respectively. Minority interest of the NAR in RealSelect net losses have
been eliminated to the extent of the NAR's net investment as the NAR has no
future funding commitment.
Unaudited Interim Financial Information--The interim financial information
of the Company for the three months ended March 31, 1998 and the period from
January 1 to February 4, 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 at
and for the period from January 1 to February 4, 1999 and for the three months
ended March 31, 1998.
F-52
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles 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 could 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 cash
equivalents 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. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable
are collected upon processing of credit card transactions. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
During the period from October 28, 1996 (Inception) to December 31, 1996,
the years ended December 31, 1997 and 1998, and the three months ended March
31, 1998 (unaudited) and the period from January 1, 1999 to February 4, 1999
(unaudited), no customers accounted for more than 10% of net revenues or 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 value
because of the short-term maturity of these instruments and the relatively
stable interest rate environment.
Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably over the term of the agreements, generally two to five years.
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 years or less,
or the shorter of the lease term or the estimated useful lives of the assets,
if applicable.
Intangible Assets--Intangible assets primarily consist of goodwill resulting
from the acquisitions of The Enterprise of America, Ltd. ("The Enterprise")
and MultiSearch Solutions, Inc. ("MultiSearch"). This goodwill is being
amortized on a straight-line basis over the estimated periods of benefit of
five years. In addition, in connection with its formation, the Company entered
into an exclusive lifetime operating agreement with the NAR. Pursuant to our
operating agreement, the Company made various payments and issued RealSelect
common stock to the NAR for the right to use the REALTOR.com trademark and
domain name, the "REALTORS" trademark and the exclusive use of the web site
for real estate listings. The RealSelect common stock issued and payments made
to the NAR, as well as certain milestone-based amounts subsequently earned by
the NAR have been recorded as intangible assets and are being amortized on a
straight-line basis over the estimated period of benefit of 15 years.
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.
F-53
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition--The Company's revenues are derived principally from the
sale of advertising products and services to real estate agents and brokers,
home builders, property owners and managers. Revenues associated with the sale
of agent products are recognized ratably over the term of the contract,
generally 12 months. Royalties directly associated with these revenues are
deferred and amortized over the same period. The Company also sells banner
advertising pursuant to short-term contracts, which may 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. This advertising
revenue is recognized ratably based upon the lesser of impressions delivered
over the total number of guaranteed impressions or ratably over the period in
which the advertisement is displayed.
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.
Advertising Expense--Advertising costs, including co-operative advertising
costs, are expensed as incurred and totalled $5,000, $818,000 and $3.3 million
during the period from October 28, 1996 (Inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, respectively.
Stock-Based Charges--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 Statement of
Financial Accounting Standards ("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 fair value of the Company's stock and the exercise price. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and EITF 96-18.
Income Taxes--Income taxes are accounted for under 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.
Segments--Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it does
not have any separately reportable business segments as of December 31, 1998
and February 4, 1999.
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 during the first quarter of 1999 did not have a
significant impact on financial position, results of operations or cash flows.
F-54
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 financial position, results of operations or cash flows.
3. Acquisitions:
TouchTech Corporation
Effective December 31, 1997, the Company acquired all the outstanding stock
of TouchTech Corporation, a Canadian company, in exchange for 29,382 shares of
common stock with a value of $53,000, which is based on the terms and
preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition.
The acquisition has been accounted for as a purchase. The excess of fair value
of purchase consideration over net tangible assets has been allocated to
goodwill and is being amortized on a straight-line basis over five years.
The Enterprise
Effective March 31, 1998, the Company acquired The Enterprise in exchange
for aggregate consideration consisting of 105,000 shares of Company common
stock with an estimated fair value of $525,000, which is based on the terms
and preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition,
a note payable in the amount of $2.2 million, $705,000 in cash and the
assumption of $946,000 of net liabilities. Included in liabilities assumed
were $836,000 of demand notes payable that were paid by the Company on the
effective date of the acquisition. The acquisition has been accounted for as a
purchase. The excess of purchase consideration over net tangible assets
acquired of $3.9 million has been allocated to goodwill which is being
amortized on a straight-line basis over five years. The purchase agreement
also provides for certain contingent payments in the event that predetermined
levels of sales are achieved. Such payments, if any, will be accounted for as
compensation expense in the period earned and in no event shall such aggregate
payments exceed $1.0 million. For the year ended December 31, 1998, no
contingent payments were required under the terms of the agreement.
MultiSearch
Effective July 1, 1998, the Company acquired MultiSearch, in exchange for
aggregate consideration consisting of 325,000 shares of Series E convertible
preferred stock with a value of $4.8 million, which is based on the terms and
preferences of the shares issued in the transaction relative to the value
received by the Company in its most recent financing prior to the acquisition,
a note payable in the amount of $3.6 million, $875,000 in cash and the
assumption of $657,000 of net liabilities. Included in liabilities assumed
were $654,000 of demand notes payable that were paid by the Company on the
effective date of the acquisition. The acquisition has been accounted for as a
purchase. The excess of total purchase consideration over net tangible assets
acquired of $9.4 million has been allocated to goodwill which is being
amortized on a straight-line basis over five years. The purchase agreement
also provides for certain contingent payments in the event that predetermined
levels of sales and earnings are achieved. Such payments, if any, will be
accounted for as compensation expense in the period earned. For the year ended
December 31, 1998, $360,000 of expense was recognized under the terms of the
agreement.
The following summarized unaudited pro forma financial information assumes
The Enterprise and MultiSearch acquisitions occurred at the beginning of each
period (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1997 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
Revenues............................... $ 8,505 $ 18,026 $ 3,182
Net loss applicable to common
stockholders.......................... (9,470) (61,969) (3,922)
</TABLE>
F-55
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment................................. $ 394 $2,903
Furniture and fixtures............................. 77 1,337
Leasehold improvements............................. 50 700
----- ------
521 4,940
Less: Accumulated depreciation..................... (124) (822)
----- ------
$ 397 $4,118
===== ======
</TABLE>
Depreciation expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$5,000, $119,000 and $659,000, respectively.
5. Intangible Assets:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Goodwill........................................... $ -- $13,243
NAR operating agreement............................ 4,745 6,745
Other.............................................. 96 1,452
------ -------
4,841 21,440
Less: Accumulated amortization..................... (350) (2,211)
------ -------
$4,491 $19,229
====== =======
</TABLE>
Amortization expense for the period from October 28, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 was
$30,000, $328,000 and $1.9 million, respectively.
6. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued payroll and related benefits.................. $ 442 $1,973
Accrued distribution fees............................. 1,366
Accrued royalties..................................... 979
Other................................................. 330 1,483
----- ------
$ 772 $5,801
===== ======
</TABLE>
7. Related-Party Transactions:
At December 31, 1997 and 1998, the Company was indebted to an officer for
$168,000 and $188,000, respectively. The loan is due on demand and bears
interest at 10% per annum.
F-56
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1998, the Company issued 57,671 shares of common stock and 26,504
shares of Series F convertible preferred stock to the NAR in satisfaction of a
$1.0 million obligation for the Company's share of advertising costs for a co-
operative advertising program with the NAR. At December 31, 1998, the Company
was indebted to the NAR for $2.2 million pursuant to certain provisions of the
operating agreement.
In connection with a 1998 stock redemption agreement, the Company loaned
$3.1 million to a stockholder of InfoTouch. The note is non-interest bearing,
full recourse and collateralized by the shares of common stock. At December
31, 1998, the note was classified as a component of stockholders' equity.
At December 31, 1998, the Company held promissory notes from employees and
directors totaling $702,000 for the exercise of stock options. The notes bear
interest at 5.3% per annum and are due on or before August 21, 2003. The
notes, which are classified as a component of stockholders' equity, are full
recourse and collateralized by shares of common stock of the Company owned by
the employees and directors.
8. Notes Payable:
As part of the acquisition of The Enterprise, the Company issued a $2.2
million non-interest bearing note payable which has been discounted at 10%.
The unamortized balance of the discount at December 31, 1998 was $354,000. The
note is payable in four installments, and matures on March 31, 2001.
As part of the acquisition of MultiSearch, the Company issued a $3.6 million
non-interest bearing note payable which has been discounted at 10%. The
unamortized balance of the discount at December 31, 1998 was $453,000. The
note is payable in three installments, and matures on April 1, 2001.
As of December 31, 1998, future payments under the notes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Payments
------------ ---------
<S> <C>
1999.......................................................... $2,097
2000.......................................................... 1,797
2001.......................................................... 1,895
------
5,789
Less: Discount................................................. (807)
------
Present value of notes payable................................. 4,982
Less: Current portion.......................................... 1,746
------
Long-term portion.............................................. $3,236
======
</TABLE>
9. Stock Options:
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the grant
of options to employees, officers, directors and consultants at the then-
current market value of the Company's common shares, as determined by the
Board of Directors. Options granted generally vest over four years, 25% for
the first year and monthly thereafter over the remaining three years, and
expire 10 years from the date of grant.
In connection with the 1996 formation of the Company, options to purchase
265,000 shares of common stock at a weighted average exercise price of $2.68
per share from the former InfoTouch stock option plan were assumed and fully
vested.
F-57
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan (including the
InfoTouch options assumed) for the period from October 28, 1996 (Inception) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the period
from January 1, 1999 to February 4, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Shares Share Price
--------- ------------- --------
<S> <C> <C> <C>
Outstanding at October 28, 1996 -- $ -- $ --
Assumed................................. 265 2.26 to 4.50 2.68
Granted................................. 390 .28 .28
-----
Outstanding at December 31, 1996.......... 655 .28 to 4.50 1.26
Granted................................. 287 1.50 1.50
Canceled................................ (52) 2.26 2.26
-----
Outstanding at December 31, 1997.......... 890 .28 to 4.50 1.28
Granted................................. 957 5.00 to 8.00 6.02
Exercised............................... (487) .28 to 5.00 1.52
Canceled................................ (85) 1.50 to 5.00 3.90
-----
Outstanding at December 31, 1998.......... 1,275 .28 to 8.00 4.56
Granted (unaudited)..................... 40 10.00 10.00
-----
Outstanding at February 4, 1999
(unaudited)............................... 1,315 .28 to 10.00 4.72
=====
</TABLE>
Options granted during the years ended December 31, 1997 and 1998 resulted
in total compensation of $1.0 million and $9.5 million, respectively, and were
recorded as deferred stock compensation in stockholders' equity. This deferred
compensation represented the difference between the deemed fair value of the
Company's common stock for accounting purposes and the exercise price of these
options at the date of grant. The deferred stock compensation will be
recognized as stock-based compensation over the related vesting period of the
options. During the years ended December 31, 1997 and 1998, such stock-based
compensation was $257,000 and $1.6 million, respectively. Common stock
available for future grants at December 31, 1998 was 507,000 shares.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows (shares in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Prices: Shares Life Price Shares Price
------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ .28............................ 113 7.90 $ .28 8 $ .28
1.50............................ 260 8.70 1.50 67 1.50
4.50 to 5.00.................... 217 9.20 5.00 21 4.92
6.00............................ 181 9.50 6.00 23 6.00
6.32............................ 421 9.70 6.32 27 6.32
8.00............................ 83 9.90 8.00 1 8.00
----- ---
1,275 147
===== ===
</TABLE>
F-58
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rates.............. 6% 6% 5%
Expected lives (in years)............. 4 5 4
Dividend yield........................ 0% 0% 0%
Expected volatility................... 0% 0% 0%
</TABLE>
The compensation expense associated with the stock-based compensation plans
did not result in a material difference from the reported net loss for the
period from October 28, 1996 (inception) to December 31, 1996 or years ended
December 31, 1997 and 1998.
10. Warrants:
In connection with entering into a distribution agreement with America
Online in April 1998, the Company issued a warrant to purchase 113,295 shares
of the Company's common stock at an exercise price of $6.32 per share. America
Online will also hold warrants to acquire $3.0 million of common stock with a
weighted average exercise price of 137.5% of the initial public offering
price. If warrants are purchased in connection with an IPO, the fair value
will be measured at the date of the IPO and amortized to sales and marketing
expense over the remaining term of the distribution agreement.
Under the terms of an operating agreement entered into in 1998, the Company
issued an immediately exercisable warrant to purchase 113,288 shares of common
stock at an exercise price $.001 per share. The Company determined that the
fair value of the warrant approximated $1.4 million at the date of issuance
which is included in amortization of intangible assets over the estimated
useful life of the operating agreement. The warrant was exercised in November
1998.
During 1998, the Company issued warrants to purchase up to 41,736 shares of
common stock to Multiple Listing Services ("MLSs") that agreed to provide
their real estate listings to us for publication on the Internet on a
preferred national basis over an initial term of 18 months. The issuance of
these warrants is contingent upon completion of an IPO. The exercise price
will be equal to the IPO per share price. The fair value of issuable warrants
will be measured at the date an IPO is deemed to be probable and recognized as
expense over the terms of the applicable MLS agreement.
F-59
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Capitalization:
Convertible preferred stock at December 31, 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Authorized Outstanding Amount
---------- ----------- -----------
<S> <C> <C> <C>
Series A................................. 1,647 1,378 $ 4,416
Series B................................. 353 191 1,334
Series C................................. 614 614 4,884
Series D................................. 681 681 10,543
Series F................................. 2,100 1,664 40,871
Undesignated............................. 4,280
----- ----- -------
9,675 4,528 $62,048
===== ===== =======
</TABLE>
Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.
Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion of $1.5 million for the year
ended December 31, 1998 related to the Series D and Series F dividends.
No dividends have been declared or paid from inception through December 31,
1998.
Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.
After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.
Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company has recorded accretion of
$171,000 for the year ended December 31, 1998 related to the Series E
redeemable preferred stock redemption value.
F-60
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
two-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $24.93 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.
Repurchase of Preferred Stock--In November 1998, the Company repurchased
431,664 shares of Series A and Series B convertible preferred stock for $9.5
million. The difference of $7.7 million between the carrying value of the
preferred stock prior to repurchase and the price paid has been included in
net loss for the year ended December 31, 1998 in the computation of net loss
applicable to common stockholders.
Sale of Common Stock--In connection with the August 1998 Series F financing,
the Company sold an aggregate of 1,673,991 shares of common stock to certain
investors and received gross proceeds of approximately $10.6 million. The
Company recognized the $18.9 million difference between the estimated fair
value of the stock and the price paid by investors as stock-based compensation
in 1998.
12. Supplemental Cash Flow Information:
During the period from January 1, 1999 to February 4, 1999 (unaudited):
. In connection with an equipment lease financing arrangement, the Company
sold $749,000 of net property and equipment in exchange for assumption
of third party payables.
During the year ended December 31, 1998:
. The Company issued common and convertible preferred stock valued at $1.9
million in connection with an advertising agreement.
. The Company incurred a $2.0 million payable to a related party in
connection with certain obligations under a lifetime operating
agreement.
. Convertible notes in the amount of $10.7 million, plus $64,000 in
accrued interest, were converted into Series F convertible preferred
stock.
. The Company issued notes receivable to stockholders for $702,000 in
connection with the exercise of stock options.
. The Company issued warrants with a fair value of $1.4 million.
. The Company issued 105,000 shares of common stock valued at $525,000, a
note payable of $2.2 million and assumed net liabilities of $946,000 as
part of the acquisition of The Enterprise.
. The Company issued 325,000 shares of Series E redeemable convertible
preferred stock valued at $4.8 million, a note payable of $3.6 million
and assumed net liabilities of $657,000 as part of the acquisition of
MultiSearch.
During the year ended December 31, 1997:
. The Company issued 29,382 shares of common stock with a value of $53,000
as part of the acquisition of TouchTech.
F-61
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the period from October 28, 1996 (Inception) to December 31, 1996:
. The Company issued common stock valued at $1.1 million in connection
with the right to use certain trademarks and an operating agreement.
. The Company assumed net liabilities totalling $1.2 million in exchange
for trademarks and an operating agreement.
13. Defined Contribution Plan:
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.
14. Income Taxes:
LLC is treated as a partnership for federal and state income tax purposes.
Consequently, all income and loss items flow through to its investors.
Accordingly, the provision for income taxes is based on the operating results
of RealSelect.
As a result of net operating losses, RealSelect has not recorded a provision
for income taxes. The components of the deferred tax assets and related
valuation allowance at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 2,036 $ 12,747
Other.................................................. 348 1,078
------- --------
2,384 13,825
Less: valuation allowance.............................. (2,384) (13,825)
------- --------
Net deferred taxes...................................... $ -- $ --
======= ========
</TABLE>
Due to the uncertainty surrounding the timing of the realization of the
benefits from its favorable tax attributes in future tax returns, RealSelect
has placed a valuation allowance against its otherwise recognizable deferred
tax assets.
At December 31, 1998, RealSelect has net operating losses for both federal
and state income tax purposes of approximately $34.4 million and $18.1
million, respectively, which begin to expire in 2007 for federal and 2001 for
state income tax purposes. The net operating losses can be carried forward to
offset future taxable income. Utilization of the above carryforwards may be
subject to utilization limitations, which may inhibit RealSelect's ability to
use carryforwards in the future.
F-62
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Commitments and Contingencies:
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2003. 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 noncancellable operating leases at
December 31, 1998 are (in thousands):
<TABLE>
<S> <C>
1999............................................................. $ 2,295
2000............................................................. 2,686
2001............................................................. 2,553
2002............................................................. 1,636
2003............................................................. 1,365
-------
Total.......................................................... $10,535
=======
</TABLE>
Total rental expense for operating leases was $7,000, $149,000 and $749,000
for the period from October 28, 1996 (Inception) to December 31, 1996 and the
years ended December 31, 1997 and 1998, respectively.
Distribution Agreements
The Company has entered into various distribution and preferred alliance
agreements. Payments remaining over the next five years for the distribution
and preferred alliance agreements are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................. $21,143
2000............................................................. 19,036
2001............................................................. 14,646
2002............................................................. 4,250
2003............................................................. 500
-------
Total.......................................................... $59,575
=======
</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.
16. Subsequent Events (unaudited):
Equipment Leasing Arrangement
In January 1999, the Company entered into an equipment leasing arrangement
which provided for the sale and leaseback of certain of the Company's existing
equipment and lease financing for additional equipment needs. The total
availability under the agreement is $3.0 million. In addition, the agreement
provides the lessor with warrants to purchase up to 5,000 shares of Series F
convertible preferred stock at an exercise price of $24.00 per share. The
Company determined that the fair value of the warrants approximated $115,000
on the date of grant.
F-63
<PAGE>
NETSELECT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
In January 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan (the "Plan") to replace the 1996 stock Incentive Plan ("1996 Plan"). The
Plan provides for the issuance of both non-statutory and incentive stock
options to employees, officers, directors and consultants of the Company. The
total number of shares of common stock reserved for issuance under the Plan is
equal to that number previously reserved and available for grant under the
1996 Plan. The Company will not issue new options under the 1996 Plan.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Enterprise of America, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of The Enterprise of America,
Ltd. (the "Company") at December 31, 1997 and March 31, 1998, and the results
of its operations and its cash flows for the year ended December 31, 1997 and
the three months ended March 31, 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.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-65
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash............................................... $ 3,214 $ 414
Accounts receivable, net of allowance for doubtful
accounts of $100,000 for December 31, 1997 and
$125,000 for March 31, 1998....................... 367,607 429,402
----------- -----------
Total current assets................................. 370,821 429,816
Property and equipment, net.......................... 529,534 763,057
Other assets......................................... 34,533 16,394
----------- -----------
Total assets..................................... $ 934,888 $ 1,209,267
=========== ===========
Liabilities and Stockholders' Deficit:
Current liabilities:
Cash overdraft..................................... $ -- $ 126,332
Accounts payable................................... 355,631 544,305
Accrued liabilities................................ 333,764 334,230
Current portion of capital lease obligation........ 43,832 51,747
Related party notes payable........................ 809,678 821,468
----------- -----------
Total current liabilities............................ 1,542,905 1,878,082
Capital lease obligation............................. 122,279 108,503
Commitments (Note 6)
Stockholders' deficit:
Common stock, $1 par value; authorized 9,000
shares, issued and outstanding 100 shares at
December 31, 1997 and March 31, 1998.............. 100 100
Additional paid-in capital......................... 606,337 606,337
Note receivable from stockholder................... (294,108) (305,597)
Accumulated deficit................................ (1,042,625) (1,078,158)
----------- -----------
Total stockholders' deficit...................... (730,296) (777,318)
----------- -----------
Total liabilities and stockholders' deficit...... $ 934,888 $ 1,209,267
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues.......................................... $4,182,776 $969,138
Cost of revenues...................................... 2,226,698 524,418
---------- --------
Gross profit...................................... 1,956,078 444,720
---------- --------
Operating expenses:
Sales and marketing................................. 551,183 174,094
General and administrative.......................... 1,428,630 273,905
Loss on disposal of assets.......................... 34,750
---------- --------
Total operating expenses.......................... 2,014,563 447,999
---------- --------
Loss from operations.................................. (58,485) (3,279)
Interest expense...................................... (29,227) (32,254)
---------- --------
Net loss.............................................. $ (87,712) $(35,533)
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Note
------------- Paid-In Receivable Accumulated
Shares Amount Capital Stockholder Deficit Total
------ ------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 100 $100 $606,337 $ -- $ (954,913) $(348,476)
Note receivable issued
to stockholder......... (294,108) (294,108)
Net loss................ (87,712) (87,712)
--- ---- -------- --------- ----------- ---------
Balance at December 31,
1997................... 100 100 606,337 (294,108) (1,042,625) (730,296)
Note receivable issued
to stockholder......... (11,489) (11,489)
Net loss................ (35,533) (35,533)
--- ---- -------- --------- ----------- ---------
Balance at March 31,
1998................... 100 $100 $606,337 $(305,597) $(1,078,158) $(777,318)
=== ==== ======== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (87,712) $ (35,533)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization....................... 206,269 46,245
Provision for doubtful accounts..................... 65,684 25,000
Loss on sale of fixed assets........................ 34,750
Changes in operating assets and liabilities:
Accounts receivable............................... 33,996 (86,795)
Other assets...................................... (22,677) 18,139
Cash overdraft.................................... (75,064) 126,332
Accounts payable.................................. (24,153) 187,808
Accrued liabilities............................... 109,430 1,332
--------- ---------
Net cash provided by operating activities........... 240,523 282,528
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment................. (124,105) (279,768)
Proceeds from sale of fixed asset................... 223,632
--------- ---------
Net cash provided by (used in) investing
activities......................................... 99,527 (279,768)
--------- ---------
Cash flows from financing activities:
Note receivable from stockholder.................... (294,108) (11,489)
Repayment of line of credit......................... (852,855)
Proceeds from related party notes payable........... 809,678 11,790
Payments on capital lease obligation................ (5,861)
--------- ---------
Net cash used in financing activities............... (337,285) (5,560)
--------- ---------
Change in cash...................................... 2,765 (2,800)
Cash, beginning of period........................... 449 3,214
--------- ---------
Cash, end of period................................. $ 3,214 $ 414
========= =========
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest.............. $ 29,312 $ 32,254
========= =========
Cash paid during the year for income taxes.......... $ 807 $ 510
========= =========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1997, the Company acquired $166,110 of production equipment through a
capital lease.
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS
1. The Company:
The Enterprise of America, Ltd. (the "Company") is a Wisconsin corporation
that was formed on November 1, 1990. The Company's primary business activity
is an Internet-based marketing service for real estate and television
production and editing of home real estate shows.
On March 31, 1998, NetSelect, Inc. acquired all of the Company's outstanding
shares of Common Stock, at which time the Company became a wholly owned
subsidiary of NetSelect, Inc. which was subsequently renamed Homestore.com,
Inc.
2. Summary of Significant Accounting Policies:
Use Of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles 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 these estimates.
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 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 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's revenues are derived principally from the
sale of Internet-based marketing services and tools for real estate
professionals and production and editing of home real estate programs.
Revenues from Internet-based marketing services are recognized as such
services are rendered. Revenues associated with production and editing are
recognized upon delivery of the completed program to the television station.
Advertising Expense--Advertising costs are expensed as incurred and totalled
$9,000 during the year ended December 31, 1997 and $52,500 for the three
months ended March 31, 1998.
Income Taxes--Income taxes are accounted for under 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.
Concentration Of Credit Risk--Financial instruments that potentially subject
the Company to a concentration of credit 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 receivable based upon the expected collectibility of
accounts receivable.
During the year ended December 31, 1997 and the three months ended March 31,
1998, no customers accounted for more than 10% of net revenues or net accounts
receivable.
F-70
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segments--Statement of Financial Accounting Standards No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
business segments.
3. Property And Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ----------
<S> <C> <C>
Computer and production equipment................... $ 607,033 $ 607,033
Office furniture and fixtures....................... 439,127 451,062
Leasehold improvements.............................. 36,616 304,449
---------- ----------
1,082,776 1,362,544
Accumulated depreciation............................ (553,242) (599,487)
---------- ----------
$ 529,534 $ 763,057
========== ==========
</TABLE>
4. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Accrued revenue sharing............................... $151,159 $142,583
Accrued compensation.................................. 80,484 81,314
Accrued legal......................................... 62,000 62,000
Accrued other......................................... 40,121 48,333
-------- --------
$333,764 $334,230
======== ========
</TABLE>
5. Related Party Notes Payable:
At December 31, 1997 and March 31, 1998, the Company was indebted to a
related party for $96,568 and $108,358, respectively.
At December 31, 1997 and March 31, 1998, the Company was indebted to a
related party for $713,110.
Notes payable and accrued interest to the related parties were subsequently
repaid in April of 1998 when the Company was acquired by NetSelect, Inc. (see
Note 1). Therefore, all amounts due to related parties are classified as
current liabilities.
6. Commitments:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. The operating leases generally contain renewal options and
payments that may be adjusted for increases in operating expenses and
increases in the Consumer Price Index. The Company also leases production
equipment which is being accounted for as a capital lease.
F-71
<PAGE>
THE ENTERPRISE OF AMERICA, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancellable capital and operating
leases as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999..................................................... $ 75,329 $127,634
2000..................................................... 75,329 137,854
2001..................................................... 50,219 137,859
2002..................................................... 141,135
2003..................................................... 141,135
Thereafter............................................... 5,678
-------- --------
Total minimum obligations............................ 200,877 $691,295
========
Less interest............................................ (40,627)
--------
Present value of minimum obligations..................... 160,250
Less current portion..................................... (51,747)
--------
Long-term obligations at March 31, 1998.................. $108,503
========
</TABLE>
Total rental expenses for operating leases was $13,159 for the three months
ended March 31, 1998 and $227,762 for the year ended December 31, 1997.
7. Note Receivable from Stockholder:
At December 31, 1997 and March 31, 1998, the Company held a note receivable
from its stockholder totaling $294,108 and $305,597, respectively. The note,
which is classified as a component of stockholders' equity, was forgiven by
NetSelect, Inc. (Note 1) as part of the purchase price of the acquisition.
8. Income Taxes:
The Company is a Subchapter S corporation for federal and state income tax
purposes. In accordance with federal and state provisions, corporate earnings
flow through to the stockholder and are taxed at the stockholder level.
Deferred income tax assets and liabilities are not considered material to the
financial position of the Company at December 31, 1997 and March 31, 1998. The
provision for income taxes is comprised of the minimum Wisconsin franchise tax
and is not material for the year ended December 31, 1997 and the three months
ended March 31, 1998. Due to the acquisition of the Company by NetSelect, Inc.
on March 31, 1998, the Company's Subchapter S status terminated (Note 1).
F-72
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MultiSearch Solutions, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' deficit and of cash flows
present fairly, in all material respects, the financial position of
MultiSearch Solutions, Inc. and its subsidiary (the "Company") at December 31,
1997 and June 30, 1998, and the results of their operations and their cash
flows for the year ended December 31, 1997 and the six months ended June 30,
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.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 31, 1999
F-73
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Assets:
Current assets:
Cash................................................. $ 43,141 $ 113,861
Accounts receivable, net of allowance for doubtful
accounts of $170,000 and $82,475 for December 31,
1997 and June 30, 1998, respectively................ 185,293 139,867
Prepaid expenses..................................... 10,664 922
---------- ----------
Total current assets.................................. 239,098 254,650
Property and equipment, net........................... 145,682 130,200
Other assets.......................................... 3,212 93,400
---------- ----------
Total assets....................................... $ 387,992 $ 478,250
========== ==========
Liabilities and Stockholders' Deficit:
Current liabilities:
Accounts payable..................................... $ 394,810 $ 322,125
Accrued liabilities.................................. 237,621 210,570
Due to stockholders and related parties.............. 322,637 454,390
Customer deposit..................................... 100,000 100,000
---------- ----------
Total current liabilities............................. 1,055,068 1,087,085
Commitments (Note 4)
Stockholders' deficit:
Common stock, $1.00 par value; authorized 1,000,000
shares, 1,000 shares issued and 409 shares
outstanding at December 31, 1997 and June 30, 1998.. 409 409
Additional paid-in capital........................... 138,180 138,180
Treasury stock....................................... (409,409) (409,409)
Accumulated deficit.................................. (396,256) (338,015)
---------- ----------
Total stockholders' deficit........................ (667,076) (608,835)
---------- ----------
Total liabilities and stockholders' deficit........ $ 387,992 $ 478,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Net revenues........................................... $3,040,162 $2,054,055
Cost of revenues....................................... 1,563,969 947,265
---------- ----------
Gross profit........................................... 1,476,193 1,106,790
---------- ----------
Operating expenses:
Sales and marketing.................................. 725,478 543,853
Product development.................................. 73,519 23,621
General and administrative........................... 980,862 456,705
---------- ----------
Total operating expenses........................... 1,779,859 1,024,179
---------- ----------
Income (loss) from operations.......................... (303,666) 82,611
Interest expense....................................... (28,973) (24,370)
Other income........................................... 222,617 --
---------- ----------
Net income (loss)...................................... $ (110,022) $ 58,241
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------- Paid-In ---------------- Accumulated
Shares Amount Capital Shares Amount Deficit Total
------ ------ ---------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.. 580 $580 $138,180 420 $(349,580) $(286,234) $(497,054)
Repurchase of stock........... (171) (171) 171 (59,829) (60,000)
Net loss...................... (110,022) (110,022)
---- ---- -------- --- --------- --------- ---------
Balance at December 31, 1997.. 409 409 138,180 591 (409,409) (396,256) (667,076)
Net income.................... 58,241 58,241
---- ---- -------- --- --------- --------- ---------
Balance at June 30, 1998...... 409 $409 $138,180 591 $(409,409) $(338,015) $(608,835)
==== ==== ======== === ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-76
<PAGE>
MULTISEARCH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $(110,022) $ 58,241
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization......................... 69,312 51,575
Provision for doubtful accounts....................... 170,000 (87,525)
Settlement of implied agreement....................... (200,000)
Gain on sale of assets................................ (5,100)
Changes in operating assets and liabilities:
Accounts receivable................................. (150,421) 132,951
Prepaid expenses.................................... (10,664) 9,742
Other assets........................................ 10,371 (90,188)
Accounts payable.................................... 38,564 (72,685)
Accrued liabilities................................. 144,651 (27,051)
--------- --------
Net cash used in operating activities................. (43,309) (24,940)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment................... (146,799) (36,093)
Proceeds from sale of assets.......................... 5,100
--------- --------
Net cash used in investing activities................. (141,699) (36,093)
--------- --------
Cash flows from financing activities:
Net advances under line of credit agreement from
stockholders......................................... 153,553 158,004
Loan repayments to related parties.................... (33,815) (26,251)
--------- --------
Net cash provided by financing activities............. 119,738 131,753
--------- --------
Change in cash........................................ (65,270) 70,720
Cash, beginning of period............................. 108,411 43,141
--------- --------
Cash, end of period................................... $ 43,141 $113,861
========= ========
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest................ $ 24,153 $ 24,340
========= ========
Cash paid during the year for income taxes............ $ 800 $ 800
========= ========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1997, the Company utilized $60,000 of its line of credit agreement
with its stockholders to repurchase 171 shares of its common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
F-77
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies:
The Company--MultiSearch Solutions, Inc. (the "Company") is a Texas
corporation that was formed on May 27, 1993. The Company's primary business
activity is an Internet-based marketing and publishing service for newly
constructed real estate.
Effective June 30, 1998, NetSelect, Inc. acquired all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of NetSelect, Inc. which was subsequently renamed
Homestore.com, Inc.
Summary Of Significant Accounting Policies
Principles Of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiary. All intercompany transactions
and balances have been eliminated in consolidation.
Use Of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles 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 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 the six months ended June 30,
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 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 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's revenues are derived principally from the
sale of advertising in its publications and web site hosting for new home
builders. Revenues are recognized ratably over the periods in which
advertisements are displayed and web site hosting and other services are
provided.
Product Development Costs--Product development costs include expenses
incurred by the Company to develop, enhance, manage, monitor and operate the
Company's web sites. Product development costs are expensed as incurred.
Advertising Expenses--Advertising costs are expensed as incurred and
totalled $44,000 during the year ended December 31, 1997 and $23,000 for the
six months ended June 30, 1998.
F-78
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes--Income taxes are accounted for under 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.
Segments--Statement of Financial Accounting Standards No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
business segments.
2. Property And Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment................................... $ 189,148 $ 189,148
Office furniture and fixtures........................ 267,686 303,452
--------- ---------
456,834 492,600
Less: Accumulated depreciation....................... (311,152) (362,400)
--------- ---------
Total.............................................. $ 145,682 $ 130,200
========= =========
</TABLE>
3. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Accrued compensation.................................. $ 62,070 $158,499
Accrued sales taxes................................... 51,329 52,071
Accrued revenue sharing............................... 31,795
Accrued legal......................................... 92,427
-------- --------
$237,621 $210,570
======== ========
</TABLE>
4. Commitments:
The Company leases certain facilities and equipment. 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 noncancellable operating leases with original terms of
more than one year as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $335,447
2000............................................................ 262,737
2001............................................................ 58,411
--------
$656,595
========
</TABLE>
Rent expense was $128,500 for the year ended December 31, 1997 and $86,000
for the six months ended June 30, 1998.
F-79
<PAGE>
MULTISEARCH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Other Income:
During 1997, $200,000 in other income was recognized in connection with the
settlement of an implied agreement entered into in 1996.
6. Due to Stockholders and Related Parties:
At December 31, 1997 and June 30, 1998, the Company was indebted to certain
of its stockholders under a revolving line of credit agreement in the amounts
of $213,852 and $371,856, respectively. The line of credit is due on demand
and bears interest at 12% per annum.
At December 31, 1997 and June 30, 1998, the Company was indebted to a
related party for $28,315 and $10,956, respectively. The loan was made in
connection with the repurchase of the Company's common stock and is payable in
24 monthly installments of $2,307, bears interest at 10% per annum, and is due
on March 1, 1999.
At December 31, 1997 and June 30, 1998, the Company was indebted to a
related party for $80,470 and $71,578, respectively. The loan is payable in 48
monthly installments, bears interest at 5.25% per annum, and is due on March
1, 2001.
The amounts due to stockholders and related parties were subsequently repaid
in July of 1998 in connection with the acquisition of the Company by
NetSelect, Inc. (Note 1). Therefore, all amounts due to stockholders and
related parties have been classified as current liabilities.
7. Income Taxes:
As a result of the net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 1997 and June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
Net operating loss carryforwards.................... $ 37,000 $ 49,000
Other............................................... 47,000 12,000
-------- --------
Deferred tax assets................................. 84,000 61,000
Valuation allowance................................. (84,000) (61,000)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has recorded a
valuation allowance against its otherwise recognizable deferred tax assets.
At June 30, 1998, the Company has net operating losses for both federal and
state income tax purposes of approximately $120,000 expiring beginning in the
years 2007 for federal and 1998 for state purposes. The net operating losses
can be carried forward to offset future taxable income. Utilization of the
above carryforwards may be subject to utilization limitations, which may
inhibit the Company's ability to use carryforwards in the future.
F-80
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
SpringStreet, Inc.
We have audited the accompanying balance sheets of SpringStreet, Inc., as of
December 31, 1997 and 1998, and the related statements of operations,
shareholders' deficit and cash flows for the period from August 21, 1997
(commencement of operations) through December 31, 1997 and for the year ended
December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpringStreet, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from August 21, 1997 (commencement of operations) through December 31,
1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
April 12, 1999
F-81
<PAGE>
SPRINGSTREET, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 2,805 $ 4,686 $ 16,738
Accounts receivable, net of allowance for
doubtful accounts of $50 at December 31, 1998
and $88 at March 31, 1999..................... -- 970 491
Other current assets........................... 40 225 743
------- ------- --------
Total current assets............................. 2,845 5,881 17,972
Fixed assets, net................................ 280 721 910
Other assets..................................... 33 43 466
------- ------- --------
Total assets................................. $ 3,158 $ 6,645 $ 19,348
======= ======= ========
Liabilities, convertible preferred stock subject
to redemption and shareholders' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses.......... $ 178 $ 236 $ 824
Accrued compensation and related expenses...... 158 729 1,094
Advance from shareholder....................... 245 -- --
Deferred revenue................................. -- 1,092 1,169
------- ------- --------
Total current liabilities........................ 581 2,057 3,087
Convertible preferred stock subject to
redemption:
Series B--no par value; 3,684,210 shares
authorized, issued and outstanding as of
December 31, 1997, 1998 and March 31, 1999.... 3,500 3,500 3,500
Series C--no par value; 4,850,000 shares
authorized and 4,689,080 shares issued and
outstanding as of December 31, 1998 and March
31, 1999...................................... -- 10,274 10,274
------- ------- --------
Total convertible preferred stock subject to
redemption...................................... 3,500 13,774 13,774
Shareholders' equity (deficit):
Convertible preferred stock Series A--no par
value; 3,750,000 shares authorized, issued and
outstanding as of December 31, 1997, 1998 and
March 31, 1999................................ 202 202 202
Convertible preferred stock Series D--no par
value; 3,153,846 shares authorized and
2,430,772 issued and outstanding as of March
31, 1999...................................... -- -- 15,800
Common stock--no par value; 20,000,000 and
25,000,000 shares authorized, 1,250,000,
1,281,562 and 1,298,374 shares issued and
outstanding as of December 31, 1997, 1998 and
March 31, 1999, respectively.................. 1 1,959 4,031
Deferred stock compensation.................... -- (1,630) (3,275)
Accumulated deficit............................ (1,126) (9,717) (14,271)
------- ------- --------
Total shareholders' equity (deficit)......... (923) (9,186) 2,487
------- ------- --------
Total liabilities, convertible preferred
stock subject to redemption and
shareholders' equity (deficit).............. $ 3,158 $ 6,645 $ 19,348
======= ======= ========
</TABLE>
See accompanying notes.
F-82
<PAGE>
SPRINGSTREET, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period through Year ended Three months ended March 31,
December 31, December 31, ----------------------------
1997 1998 1998 1999
-------------- ------------ -------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Net revenue............. $ 82 $ 1,099 $ 75 $ 869
Cost of net revenue..... 73 721 118 341
------- ------- -------------- --------------
Gross profit............ 9 378 (43) 528
------- ------- -------------- --------------
Operating expenses:
Selling and
marketing............ 641 6,509 910 3,054
General and
administration....... 340 1,578 214 1,073
Research and
development.......... 173 1,089 137 994
------- ------- -------------- --------------
Total operating
expenses........... 1,154 9,176 1,261 5,121
------- ------- -------------- --------------
Loss from operations.... (1,145) (8,798) (1,304) (4,593)
Interest income......... 19 207 34 39
------- ------- -------------- --------------
Net loss................ $(1,126) $(8,591) $ (1,270) $ (4,554)
======= ======= ============== ==============
Net loss per share--
basic and diluted...... $ (1.77) $(11.00) $ (1.81) $ (4.78)
======= ======= ============== ==============
Number of shares used in
net loss per share
calculation--basic and
diluted................ 636,837 780,830 700,404 951,908
======= ======= ============== ==============
</TABLE>
See accompanying notes.
F-83
<PAGE>
SPRINGSTREET, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Shareholders' Equity (Deficit)
Convertible ----------------------------------------------------------------------
Preferred Convertible
Stock Subject Preferred
to Redemption Stock Common Stock Total
-------------- -------------- ------------- Deferred Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Compensation Deficit Equity (Deficit)
------ ------- ------ ------- ------ ------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- -- $ -- 1,250 $ 1 $ -- $ -- $ 1
Issuance of Convertible
Preferred Stock--Series
A...................... -- -- 3,750 202 -- -- -- -- 202
Issuance of Convertible
Preferred Stock--Series
B, subject to
redemption............. 3,684 3,500 -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- -- (1,126) (1,126)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balances at December 31,
1997................... 3,684 3,500 3,750 202 1,250 1 -- (1,126) (923)
Issuance of common stock
upon exercise of stock
options................ -- -- -- -- 32 3 -- -- 3
Issuance of Convertible
Preferred Stock--Series
C, subject to
redemption............. 4,689 10,274 -- -- -- -- -- -- --
Deferred stock
compensation........... -- -- -- -- -- 1,955 (1,955) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 325 -- 325
Net loss................ -- -- -- -- -- -- -- (8,591) (8,591)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balances at December 31,
1998................... 8,373 13,774 3,750 202 1,282 1,959 (1,630) (9,717) (9,186)
Issuance of common stock
upon exercise of stock
options (unaudited).... -- -- -- -- 16 1 -- -- 1
Issuance of Convertible
Preferred Stock--Series
D (unaudited).......... -- -- 2,431 15,800 -- -- -- -- 15,800
Deferred stock
compensation
(unaudited)............ -- -- -- -- -- 2,071 (2,071) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 426 -- 426
Net loss (unaudited).... -- -- -- -- -- -- -- (4,554) (4,554)
----- ------- ----- ------- ----- ------ ------- -------- -------
Balance at March 31,
1999 (unaudited)....... 8,373 $13,774 6,181 $16,002 1,298 $4,031 $(3,275) $(14,271) $ 2,487
===== ======= ===== ======= ===== ====== ======= ======== =======
</TABLE>
See accompanying notes.
F-84
<PAGE>
SPRINGSTREET, INC.
For the period from August 21, 1997 (commencement of operations)
through December 31, 1997 and for the year ended December 31, 1998
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months
Period through Year ended ended March 31,
December 31, December 31, ----------------
1997 1998 1998 1999
-------------- ------------ ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Cash used in operating
activities
Net loss........................ $(1,126) $(8,591) $(1,270) $(4,554)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization... 17 161 26 62
Amortization of deferred stock
compensation................... -- 325 8 426
Expenses paid through advance by
a shareholder.................. 232 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable............. -- (970) (31) 479
Other assets.................... (74) (201) (93) (572)
Accounts payable and accrued
expenses....................... 178 58 (87) 578
Accrued compensation and related
expenses....................... 158 571 144 365
Deferred revenue................ -- 1,092 -- 77
------- ------- ------- -------
Net cash used in operating
activities..................... (615) (7,555) (1,303) (3,139)
------- ------- ------- -------
Cash used in investing
activities
Purchases of fixed assets....... (93) (596) (116) (220)
Business purchase, net of broker
fees........................... -- -- -- (390)
------- ------- ------- -------
Net cash used in investing
activities..................... (93) (596) (116) (610)
------- ------- ------- -------
Cash provided in financing
activities
Proceeds from issuance of
Convertible Preferred Stock--
Series B....................... 3,500 -- -- --
Proceeds from issuance of
Convertible Preferred Stock--
Series C, net of issuance
costs.......................... -- 10,274 -- --
Proceeds from issuance of
Convertible Preferred Stock--
Series D, net of issuance
costs.......................... -- -- -- 15,800
Proceeds from exercise of common
stock options.................. -- 3 -- 1
Proceeds from advance from
shareholder.................... 100 -- -- --
Repayment of advance from
shareholder.................... (87) (245) (245) --
------- ------- ------- -------
Net cash provided by financing
activities..................... 3,513 10,032 (245) 15,801
------- ------- ------- -------
Net increase in cash and cash
equivalents.................... 2,805 1,881 (1,664) 12,052
Cash and cash equivalents at
beginning of period............ -- 2,805 2,805 4,686
------- ------- ------- -------
Cash and cash equivalents at end
of period...................... $ 2,805 $ 4,686 $ 1,141 $16,738
======= ======= ======= =======
Supplemental disclosure: non-
cash transaction
Issuance of Convertible
Preferred Stock--Series A in
exchange for fixed assets...... $ 202 $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-85
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company:
SpringStreet Inc. (the "Company"), formerly AllApartments, Inc., provides a
comprehensive selection of rental listings throughout the United States as
well as links to relocation services including on-line change of address,
truck rental, insurance and credit reports on the Company's Web site,
www.springstreet.com. These services are packaged to assist individuals locate
and transition into new rental residences.
The Company commenced operations in its current form on October 13, 1997
upon the issuance of 1,250,000 shares of common stock to its two founding
officers and 3,750,000 shares of Series A Convertible Preferred Stock to
Marcus & Millichap Company ("M&M"). For the period from August 21, 1997
(commencement of operations) through October 12, 1997, the initial planning
and development activities of the business were conducted by M&M as a separate
division along with M&M's other businesses and such activity has been included
in these revenues and expenses for 1997. Activity prior to August 21, 1997 was
not separate or discrete and is not included here-in.
Consideration for the common and preferred stock issued on October 13, 1997
was in the form of fixed assets, assignments of technology and cancellation of
indebtedness which had stated values of $125,000 and $1,301,000, respectively.
For the purposes of these financial statements, the basis of the technology
and fixed assets transferred was the underlying basis to the shareholders:
$1,250 for the common shares and $202,000 for the preferred shares.
The Company has experienced operating losses to date and had an accumulated
deficit at December 31, 1998. Increasing and significant net losses are
expected for the foreseeable future. Since its formation, the Company has
raised significant capital through private placements of equity securities. At
March 31, 1999, the Company had $16,738,000 (unaudited) in cash and cash
equivalents. Future capital requirements are primarily dependent upon the
Company's ability to execute its business plan. There can be no assurance that
the Company, if necessary, will be able to raise additional financing, or that
such financing will be available on terms satisfactory to the Company. Failure
to raise additional funding when needed could adversely affect the ability of
the Company to implement its current business plan.
The financial statements of the Company reflect those of M&M's subsidiary
prepared on a stand alone basis until the issuance of preferred shares to
third party investors in amounts sufficient to provide for de-consolidation.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information--The interim financial information
of the Company for the three months ended March 31, 1998 and 1999 are
unaudited. The unaudited interim financial information have been prepared on
the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position at March 31,
1999 and the results of operations and cash flows for the three months ended
March 31, 1998 and 1999.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
the accompanying notes. These estimates are based upon information available
as of the date of the financial statements; therefore, actual results could
differ from these estimates, although management does not believe that any
differences would materially affect Springstreet's financial position or
results of operations.
Cash and Cash Equivalents--Cash and cash equivalents, which consist of cash
and highly liquid short-term investments with insignificant interest rate risk
and original maturities of three months or less at the date of purchase are
stated at cost which approximates fair value.
F-86
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk and Credit Risk Evaluations--Financial
instruments which subject the Company to concentrations of credit risk consist
primarily of temporary cash investments and trade accounts receivable. Cash
equivalents consist principally of money market funds held with domestic
financial institutions with high credit standing.
The Company performs ongoing credit evaluations of its corporate customers
and generally does not require collateral. Reserves are maintained for
potential credit issues, and such losses to date have been within management's
expectations.
For the period August 21, 1997 (commencement of operations) through December
31, 1997 and for the year ended December 31, 1998, no single customer
accounted for greater than 10% of net revenue.
Fixed Assets--Fixed assets are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, which range from three to five
years. Leasehold improvements are amortized over the shorter of the assets'
useful life or the remaining lease term.
Other Long-lived Assets, including Intangible 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.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in
accounting for income taxes. Under FAS 109, deferred tax assets and
liabilities are measured based on differences between the financial reporting
and tax bases 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--Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), encourages but
does not require companies to record compensation expense for stock-based
employee compensation plans at fair value. The Company has chosen to account
for stock-based compensation under the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and has adopted the disclosure-only alternative
provided by FAS 123.
Revenue Recognition--The Company's revenues are derived primarily from the
sale of "electronic brochure" listings to property owners, banner advertising
sales and transaction fees generated from on-line referrals.
The terms of electronic brochure contracts range from one month to one year.
Revenue on these contracts is recognized ratably over the contract term.
Deferred revenue is comprised of billings in excess of recognized revenue
related to these contracts.
Banner advertising revenue is recognized over the period in which the
advertisement is displayed, provided that no significant Company obligations
remain at the end of the period and collections are probable. To the extent
minimum guaranteed "impressions" are not met, the Company defers recognition
of the corresponding revenues until the remaining impression levels are
achieved.
F-87
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Referral services generally involve Web site linking arrangements between
the Company and its strategic business partners. Revenues from referral
arrangements are recognized at the time the referral is completed or upon
notification from the partner that revenues have been earned by the Company.
Computation of Net Loss per Share--Basic and diluted net loss per common
share are presented in conformity with Financial Accounting Standards Board
Statement No. 128, "Earning Per Share", ("FAS 128") for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. For the
purposes of this computation, shares issued to the founders and to the Series
A preferred shareholders are assumed to be outstanding from the date of
commencement of operations. Shares associated with stock options and
convertible preferred stock are not included in the computation of diluted net
loss per share because their inclusion would be antidilutive. The total number
of shares excluded from the calculations of diluted net loss per common share
are 4,567,309, 11,250,219 and 14,338,909 for the period from August 21, 1997
through December 31, 1997, for the year ended December 31, 1998 and for the
quarter ended March 31, 1999, respectively.
<TABLE>
<CAPTION>
Three
Period Months
through Year ended Ended
December 31, December 31, March 31,
1997 1998 1999
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Net loss.......................... $(1,126,000) $(8,591,000) $(4,554,000)
=========== =========== ===========
Weighted-average shares of common
stock outstanding................ 1,250,000 1,258,000 1,295,467
Less: weighted-average shares
subject to repurchase............ (613,163) (477,170) (343,559)
----------- ----------- -----------
Weighted-average shares used in
computing basic and diluted net
loss per share................... 636,837 780,830 951,908
=========== =========== ===========
Basic and diluted net loss per
share............................ $ (1.77) $ (11.00) $ (4.78)
=========== =========== ===========
</TABLE>
Recent Accounting Pronouncements--As of January 1, 1998 the Company adopted
Financial Accounting Standards Board Statement No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in full set of general-
purpose financial statements. The Company had no material components of
comprehensive income. The adoption of this standard has had no impact on the
Company's financial position, shareholders' equity (deficit), results of
operations or cash flows. Accordingly, the Company's comprehensive loss for
the year ended December 31, 1998 is equal to its reported loss.
Additionally, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS 131") "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. The
Company adopted FAS 131 in 1998. The Company operates in a single segment.
In March 1998, The American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for accounting for the costs of all computer software developed or obtained
for internal use. The Company was required to adopt SOP 98-1 effective January
1, 1999. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
Fair Value of Financial Instruments--As of December 31, 1997 and 1998, the
respective carrying values of the Company's financial instruments approximated
their fair values. These financial instruments include cash
F-88
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and certain other assets and liabilities that are considered financial
instruments. Carrying values were estimated to approximate fair value for
these financial instruments as they are short term in nature and are
receivable or payable on demand.
3. Fixed Assets:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment......................... $179,000 $ 430,000 $ 442,000
Computer software.......................... 93,000 166,000 200,000
Leasehold improvements..................... -- 95,000 119,000
Furniture and equipment.................... 23,000 200,000 380,000
-------- --------- ----------
Total...................................... 295,000 891,000 1,141,000
Less: Accumulated depreciation............. (15,000) (170,000) (231,000)
-------- --------- ----------
Fixed assets, net.......................... $280,000 $ 721,000 $ 910,000
======== ========= ==========
</TABLE>
4. Line of Credit:
At December 31, 1998 the Company has a line of credit agreement with a
financial institution for $750,000 bearing interest on the outstanding balance
at the bank's prime rate plus one half percent, which was 8.25% at
December 31, 1998. The Company has an outstanding letter of credit for a lease
of office space for $350,000 which reduces the availability of the line of
credit. The net amount available under the line of credit is $400,000 as of
December 31, 1998.
5. Income Taxes:
The provision for income taxes results in an effective tax rate that differs
from the federal statutory rate primarily due to net operating losses for
which a valuation allowance has been established.
The following is a summary of deferred tax assets:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................... $ 420,000 $ 3,500,000
Accruals and reserves.............................. 40,000 260,000
Other.............................................. -- 100,000
--------- -----------
Total deferred tax assets............................ 460,000 3,860,000
--------- -----------
Valuation allowance.................................. (460,000) (3,860,000)
--------- -----------
Net deferred tax assets.............................. $ -- $ --
========= ===========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,700,000 which expire beginning
in the tax year 2012.
Realization of net operating losses is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance in an amount equal to the deferred tax assets as of December 31,
1997 and 1998 has been established to reflect these uncertainties. The
valuation allowance increased by $460,000 and $3,400,000 during the period
through December 31, 1997 and the year ended December 31, 1998, respectively.
F-89
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. As a result of the
annual limitation, a portion of these carryforwards may expire before
ultimately becoming available to reduce future income tax liabilities.
6. Commitments and Related Party Transactions:
The Company has entered into operating leases for certain office space and
equipment. Minimum lease payments by year and in the aggregate under lease
obligations with initial or remaining terms of one year or more consist of the
following:
<TABLE>
<S> <C>
1999.............................................................. $1,228,000
2000.............................................................. 1,352,000
2001.............................................................. 1,235,000
2002.............................................................. 489,000
2003.............................................................. 489,000
Thereafter........................................................ 40,000
----------
Total............................................................. $4,833,000
==========
</TABLE>
Rent expense for the period August 21, 1997 (commencement of operations)
through December 31, 1997 and for the year ended December 31, 1998 was $15,000
and $358,000, respectively.
The Company entered into an agreement with a shareholder to co-brand a Web
site and to share related revenue. This activity resulted in net revenues for
1998 of $58,000 and net receivables from the shareholder of $58,000 at
December 31, 1998.
7. Shareholders' Equity (Deficit):
The Company has two classes of authorized stock: common stock and preferred
stock.
Common Stock
The Company has authorized 20,000,000 and issued 1,250,000 and 1,281,562
shares of common stock as of December 31, 1997 and 1998, respectively. Of the
total shares, 1,250,000 shares were sold to founders of the Company on October
13, 1997 and are subject to the Company's right, but not its obligation, to
repurchase the shares at $.10, if certain events occur. Fifty percent of this
right lapsed in October 1997 and the remaining portion lapses ratably over a
36 month period ending November 2000. In addition, these rights lapse in full
at such time as the Company merges with or is sold to another company. As of
December 31, 1997 and 1998, 590,278 and 381,946 shares, respectively were
subject to repurchase by the Company.
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 convertible preferred stock 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,
-------------------- March 31,
1997 1998 1999
--------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Conversion of Convertible Preferred
Stock.................................... 7,434,210 12,123,290 14,554,062
Outstanding stock options................. 623,634 1,642,801 2,047,779
Additional shares available for grant
under the Company's stock option plan.... 1,001,366 450,637 28,847
--------- ---------- ----------
Total common stock reserved for issuance.. 9,059,210 14,216,728 16,630,688
========= ========== ==========
</TABLE>
F-90
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Preferred Stock
The Company is authorized to issue 12,284,210 shares of convertible
preferred stock in one or more series. Dividends on each series of convertible
preferred stock are non cumulative and are payable when and if declared by the
Company.
Convertible preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 March 31, 1999
---------------------- ----------------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Series A................ 3,750,000 $ 202,000 3,750,000 $ 202,000 3,750,000 $ 202,000
Series B................ 3,684,210 3,500,000 3,684,210 3,500,000 3,684,210 3,500,000
Series C................ -- -- 4,689,080 10,274,000 4,689,080 10,274,000
Series D................ -- -- -- -- 2,430,772 15,800,000
--------- ---------- ---------- ----------- ---------- -----------
Total................... 7,434,210 $3,702,000 12,123,290 $13,976,000 14,554,062 $29,776,000
========= ========== ========== =========== ========== ===========
</TABLE>
Holders of Series B and C Convertible Preferred Stock are entitled to
receive a liquidation preference prior and in preference to any distribution
to the holders of Series A Convertible Preferred Stock and the common
shareholders in the amount equal to all declared but unpaid dividends, if any,
attributable to the Series B and C Convertible Preferred Stock, plus $.95 and
$2.20 per share, respectively, adjusted for any combinations, consolidations,
stock distributions or dividends. The liquidation preference for the holders
of Series B Convertible Preferred Stock was $3,500,000 at December 31, 1997
and 1998. The liquidation preference for the holders of Series C Convertible
Preferred Stock was $10,315,800 at December 31, 1998.
After payment of the prior liquidation preference to Series B and C
Convertible Preferred Stock, holders of Series A Convertible Preferred Stock
are entitled, prior and in preference to any distribution to the common
shareholders to receive an amount equal to all declared but unpaid dividends,
if any, attributable to the Series A Convertible Preferred Stock plus $.347
per share, as adjusted for any combinations, consolidations, stock
distributions or dividends. The aggregate liquidation preference for holders
of Series A Convertible Preferred Stock at December 31, 1997 and 1998 was
$1,301,250.
If the distributable assets are insufficient to permit payment to the Series
B and C preferred shareholders of their preferential amount, then the entire
amount of distributable assets shall be distributed pro rata among the Series
B and C preferred shareholders in proportion to their respective preferential
amounts. Similarly, if the remaining distributable assets after payment of the
Series B and C preferred shareholders' initial liquidation amount is
insufficient to permit payment to the Series A preferred shareholders of their
preferred amount, then the remaining distributable assets shall be distributed
pro rata among the Series A preferred shareholders in proportion to their
respective preferential amounts.
Following payment of such liquidation preference, the remaining assets, if
any, will be available for distribution to the holders of the Company's common
stock and convertible preferred stock pro ratably based the number of shares
of common stock and common stock into which the shares of convertible
preferred stock could be converted at the time the remaining assets are
distributed. However, the holders of the Series B and C Convertible Preferred
Stock are not entitled to participate with the holders of the Company's common
stock after holders of Series B Convertible Preferred Stock have received a
total of $3.80 per share and the holders of Series C Convertible Preferred
Stock have received a total of $8.80 per share. The holders of Series A
Convertible Preferred Stock are not entitled to participate with the holders
of common stock after the holders of Series A Convertible Preferred Stock have
received an aggregate amount per share of Series A Convertible Preferred Stock
equal to the Series A preference discussed above plus eighteen percent of the
Series A preference, compounded annually from the date of issuance through the
fifth anniversary of the date of issuance.
F-91
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of Series A, B and C Convertible Preferred Stock ("Voting
Preferred") carries voting rights. Each holder of Voting Preferred is entitled
to the number of votes equal to the number of shares of common stock into
which such shares of Voting Preferred held by such preferred shareholder could
then be converted.
Each share of Voting Preferred is convertible at the option of the holder
into shares of common stock equal to the number of preferred shares multiplied
by the then effective Conversion Rate. At December 31, 1997 and 1998, the
conversion rate for each series of Convertible Preferred Stock was one share
of common stock for each share of preferred stock.
In addition, each share of Voting Preferred 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, provided that the price per share (prior to
underwriter's discounts or commissions and offering expenses) is not less than
$6.60 (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 after deduction of
underwriters' commissions and expenses.
Series B and C Convertible Preferred Stock are redeemable after September
30, 2002 by the holders of Series B and C Convertible Preferred Stock at such
time that sixty-six and two-thirds percent of the then outstanding Series B
Convertible Preferred Stock and fifty percent of the then outstanding Series C
Convertible Preferred Stock provide written notice to the Company. The
redemption price shall be an amount equal to $.95 and $2.20 per share, plus
any dividends declared but unpaid, for the Series B and C Convertible
Preferred Stock, respectively. In the event that the funds of the Company are
insufficient to redeem the total number of shares of Series B and C
Convertible Preferred Stock, those funds which are legally available will be
used to ratably redeem the Series B and C Convertible Preferred Stock.
Stock Option Plan
Under the 1997 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 1,625,000 shares of common stock for
issuance through the Plan. At December 31, 1998 and March 31, 1999 (unaudited)
the Company had reserved 2,125,000 shares of common stock for issuance through
the Plan.
The following summarizes stock option activity and related information since
the Company's inception:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price per Share
--------- ---------------
<S> <C> <C>
Granted (exercise price of $.10)................ 623,634 $.10
--------- ----
Outstanding at December 31, 1997................ 623,634 .10
Granted (exercise price ranging from $.10 to
$.20)........................................ 1,486,005 .17
Exercised..................................... (31,562) .10
Canceled...................................... (435,276) .12
--------- ----
Outstanding at December 31, 1998................ 1,642,801 .15
Granted (exercise price ranging from $.20 to
$1.00) (unaudited)........................... 503,000 .43
Exercised (unaudited)......................... (16,812) .11
Canceled (unaudited).......................... (81,210) .30
--------- ----
Outstanding as of March 31, 1999 (unaudited).... 2,047,779 $.21
========= ====
Options exercisable at December 31, 1997........ -- $ --
========= ====
Options exercisable at December 31, 1998........ 138,328 $.10
========= ====
Options exercisable at March 31, 1999........... 182,566 $.10
========= ====
</TABLE>
F-92
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Exercise prices for stock options outstanding as of December 31, 1997 and
1998 and March 31, 1999 (unaudited) and the weighted-average remaining
contractual life are as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
December 31, 1997
$.10............................. 623,634 9.9 years --
December 31, 1998
$.10............................. 744,196 9.0 years 138,328
$.20............................. 898,605 9.7 years --
--------- --------- -------
Total.............................. 1,642,801 9.3 years 138,328
========= ========= =======
March 31, 1999 (unaudited)
$.10............................. 712,274 8.7 years 182,566
$.20............................. 1,019,005 9.5 years --
$.40............................. 244,500 9.9 years --
$1.00............................ 72,000 9.9 years --
--------- --------- -------
Total.............................. 2,047,779 9.3 years 182,566
========= ========= =======
</TABLE>
As discussed in Note 2, the Company has elected to follow APB Opinion No. 25
and related interpretations in accounting for its employee stock-based awards
because, as discussed below, the alternative fair value accounting provided
for under FAS 123 requires use of option valuation models that were not
developed for use in valuing employee stock-based awards. Under APB Opinion
No. 25, the Company does not recognize compensation expense with respect to
such awards if the exercise price equals or exceeds the fair value of the
underlying security on the date of grant and other terms are fixed.
The fair value of these awards for the purpose of the alternative fair value
disclosures required by FAS 123 was estimated as of the date of grant using
the minimum value option pricing model. This model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected life of the
options. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.
For the purposes of the Company's pro forma disclosures, the fair value of
options granted during the period ended December 31, 1997, and the year ended
December 31, 1998 was determined using the minimum value method with a risk-
free interest rate of approximately 6.0%, an expected life of four years, and
a dividend yield of zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Period
through Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss, as reported (in thousands)............. $(1,126) $(8,591)
Net loss, pro forma (in thousands)............... (1,126) (8,600)
Net loss per share--basic and diluted, as
reported........................................ (1.77) (11.00)
Net loss per share--basis and diluted, pro
forma............................................ (1.77) (11.01)
</TABLE>
F-93
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The compensation expense associated with the Company's stock-based
compensation plans determined using the minimum value method prescribed above
did not result in a material difference from the reported net income for the
period from August 21, 1997 (commencement of operations) through December 31,
1997 and the year ended December 31, 1998. Future pro forma statement of
operations results may be materially different from actual amounts reported.
Deferred Compensation
The Company has recorded deferred stock compensation charges of $1,955,000
for the year ended December 31, 1998 for the difference between the exercise
price and the deemed fair value of certain stock options granted by the
Company. Such amount is included as an increase in shareholders' deficit and
is being amortized by charges to operations, using an accelerated method, over
the vesting periods of the individual stock options, which range from one
month to four years. Amortization of deferred stock compensation totaled
$325,000 for the year ended December 31, 1998.
8. Retirement Plan:
The Company established a 401(k) Profit Plan (the "401(k) Plan") which is
available to all employees who meet the Plan's eligibility requirements.
Employees may elect to contribute up to 15% of their eligible earnings to the
401(k) Plan subject to certain limitations. This defined contribution plan
provides that the Company may, at its discretion, make contributions to the
401(k) Plan on a periodic basis.
9. Subsequent Events:
In March 1999, the Company authorized 3,153,846 shares of Series D
Convertible Preferred Stock and issued 2,430,772 shares at $6.50 per share for
net proceeds of $15,800,000 to new and existing investors. In addition, the
Company authorized an additional 5,000,000 shares of common stock.
In February and March 1999, the Company entered into co-branding agreements
with several Internet services companies under which the Company is obligated
to pay approximately $1,630,000 over a twelve month period.
In March 1999, the Company entered into an Asset Purchase Agreement to
purchase the assets of a rental listing service for $420,000.
10. Year 2000 Risks (Unaudited):
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. We are in the process of reviewing the Year 2000
compliance of our internally developed proprietary software, which includes
substantially all of the systems for the operation of our website, such as our
instant online approval system, customer interaction and transaction systems
and our security, monitoring and back-up capabilities, including development
of contingency plans. Our information technology systems also depend on
information technology and services supplied by third parties. We are
currently assessing the Year 2000 readiness of these third party vendors. Year
2000 problems experienced by us or any of such third parties could materially
adversely affect our business. Additionally, the Internet could face serious
disruptions arising from the Year 2000 problem.
F-94
<PAGE>
SPRINGSTREET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Event Subsequent to Date of Auditors' Report (Unaudited):
On June 30, 1999, Homestore.com, Inc. acquired all of the Company's
outstanding shares of common stock, at which time the Company became a wholly-
owned subsidiary of Homestore.com, Inc.
F-95
<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 (deficit) 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 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 audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Century City, California
November 22, 1999
F-96
<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.
F-97
<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.
F-98
<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.
F-99
<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.
F-100
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-101
<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. Although the
Company was a subsidiary of CNI, the provision for income taxes has been
prepared on a stand alone basis as if the Company were to file a separate tax
return.
F-102
<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
F-103
<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>
F-104
<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)
------- -----------
$59,296 $ 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.
F-105
<PAGE>
THE HOMEBUYER'S FAIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CNI acquired 80% of the Company 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.
F-106
<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.
F-107
<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.
/s/ PriceWaterhouseCoopers LLP
Century City, California
November 22, 1999
F-108
<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.
F-109
<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.
F-110
<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.
F-111
<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.
F-112
<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
F-113
<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>
F-114
<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).
F-115
<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.
/s/ PricewaterhouseCoopers LLP
Century City, California
November 22, 1999
F-116
<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, $.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, $.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.
F-117
<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.
F-118
<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.
F-119
<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.
F-120
<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.
F-121
<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.
F-122
<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).
F-123
<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>
F-124
<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.
F-125
<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....... 1,180,796 $ .11
========= =====
</TABLE>
F-126
<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 rates............................................. 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.
F-127
<PAGE>
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