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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
Commission File Number 000-26659
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Homestore.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4438337
(State of Other Jurisdiction (I.R.S. Employer
Incorporation or of Organization) Identification Number)
30700 Russell Ranch Road
Westlake Village, California 91362
(Address of Principal Executive Office) (Zip Code)
(805) 557-2300
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
At April 30, 2001, the registrant had 107,490,834 shares of its common
stock outstanding.
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Homestore.com, Inc
Index
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Homestore.com, Inc. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets......................... 1
Unaudited Consolidated Statements of Operations............... 2
Unaudited Consolidated Statements of Cash Flows............... 3
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 18
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 19
Item 3. Defaults Upon Senior Securities................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
SIGNATURES.............................................................. 21
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HOMESTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 284,152 $ 180,985
Short-term investments............................ 19,078 75,295
Marketable equity securities...................... 4,459 247
Accounts receivable, net.......................... 59,227 44,472
Current portion of notes receivable............... 7,299 5,598
Current portion of prepaid distribution expense... 46,557 49,140
Other current assets.............................. 34,083 23,567
---------- ----------
Total current assets............................ 454,855 379,304
Prepaid distribution expense, net of current
portion............................................ 145,732 159,226
Property and equipment, net......................... 71,341 45,061
Intangible assets, net.............................. 991,052 194,742
Restricted cash..................................... 90,000 90,000
Other long-term assets.............................. 31,543 50,322
---------- ----------
Total assets.................................... $1,784,523 $ 918,655
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 35,257 $ 13,473
Accrued liabilities............................... 85,156 49,235
Deferred revenue.................................. 76,226 27,090
---------- ----------
Total current liabilities........................... 196,639 89,798
Distribution obligation............................. 193,551 189,848
Other............................................... 4,919 4,646
---------- ----------
Total liabilities............................... 395,109 284,292
---------- ----------
Commitments and contingencies (Note 11)
Stockholders' equity:
Convertible preferred stock.......................
Common stock...................................... 107 83
Additional paid-in capital........................ 1,867,616 1,027,423
Treasury stock.................................... (17,531) (16,556)
Notes receivable from stockholders................ (6,006) (7,938)
Deferred stock-based charges...................... (114,480) (97,724)
Accumulated other comprehensive loss.............. (2,242) (23)
Accumulated deficit............................... (338,050) (270,902)
---------- ----------
Total stockholders' equity...................... 1,389,414 634,363
---------- ----------
Total liabilities and stockholders' equity...... $1,784,523 $ 918,655
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
1
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Revenues................................................... $105,491 $ 38,599
Cost of revenues (including non-cash equity charges, see
note 8)................................................... 28,028 10,758
-------- --------
Gross profit............................................... 77,463 27,841
-------- --------
Operating expenses:
Sales and marketing (including non-cash equity charges,
see note 8)............................................. 67,013 39,208
Product development (including non-cash equity charges,
see note 8)............................................. 5,484 2,026
General and administrative (including non-cash equity
charges, see note 8).................................... 22,916 11,822
Amortization of intangible assets........................ 33,788 8,392
Acquisition and reorganization charges................... 7,065 --
-------- --------
Total operating expenses............................... 136,266 61,448
-------- --------
Loss from operations....................................... (58,803) (33,607)
Interest income, net....................................... 4,451 4,409
Other expense, net......................................... (12,796) (14)
-------- --------
Net loss................................................... $(67,148) $(29,212)
======== ========
Basic and diluted net loss per share....................... $ (.71) $ (.39)
======== ========
Shares used to calculate basic and diluted net loss per
share..................................................... 94,925 74,052
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
HOMESTORE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss................................................... $(67,148) $(29,212)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................... 4,486 675
Amortization of intangible assets.......................... 33,788 8,392
Accretion of distribution obligation....................... 3,703 --
Provision for doubtful accounts............................ 1,526 277
Stock-based charges........................................ 21,295 10,814
Write-down of investments.................................. 11,092 --
Other non-cash items....................................... (4,488) 32
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable...................................... 2,846 (13,222)
Prepaid distribution expense............................. 6,780 (13,608)
Other assets............................................. 3,113 (1,108)
Accounts payable and accrued liabilities................. 21,947 2,997
Deferred revenue......................................... 31,648 3,728
-------- --------
Net cash provided by (used in) operating activities........ 70,588 (30,235)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment........................ (11,757) (2,613)
Purchases of short-term investments........................ (20,229) --
Maturities of short-term investments....................... 75,492 --
Purchases of cost and equity investments................... -- (11,650)
Acquisitions, net of cash acquired......................... (38,562) (11,298)
Other...................................................... -- 754
-------- --------
Net cash provided by (used in) investing activities........ 4,944 (24,807)
-------- --------
Cash flows from financing activities:
Proceeds from payment of stockholders' notes............... 956 71
Proceeds from exercise of stock options, warrants and share
issuances under employee stock purchase plan.............. 29,597 4,927
Net proceeds from issuance of common and preferred stock... -- 428,943
Repayment of notes payable................................. (468) (37,525)
Issuance of notes receivable............................... (2,450) (1,000)
-------- --------
Net cash provided by financing activities.................. 27,635 395,416
-------- --------
Increase in cash and cash equivalents...................... 103,167 340,374
Cash and cash equivalents, beginning of period............. 180,985 90,382
-------- --------
Cash and cash equivalents, end of period................... $284,152 $430,756
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Homestore.com, Inc. ("Homestore.com" or the "Company") has created an
online marketplace that is the leading destination on the Internet for home
and real estate-related information, products and services, based on the
number of visitors, time spent on the web sites and number of property
listings. Through its network of web sites, the Company provides a wide
variety of information and tools for consumers, and is the leading supplier of
online media and technology solutions for 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, the Company has established relationships with key industry
participants. These participants include real estate market leaders such as
the National Association of REALTORS(R) ("NAR"), the National Association of
Home Builders ("NAHB"), the largest Multiple Listing Services ("MLSs"), the
NAHB Remodelors Council, the National Association of the Remodeling Industry
("NARI"), the American Institute of Architects ("AIA"), the Manufactured
Housing Institute ("MHI"), real estate franchises, brokers, builders and
agents. The Company also has distribution agreements with a number of leading
Internet portal web sites.
2. BASIS OF PRESENTATION:
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation, have been included. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 2000 filed with the Securities and Exchange Commission ("SEC") on
April 2, 2001. The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
The Company has incurred operating losses since its inception. The Company
has funded operations primarily through the sale of equity securities and
revenues generated from operations. The Company anticipates that its existing
cash and cash equivalents will be sufficient to fund its operating activities,
capital expenditures and other obligations through at least the next 12
months.
3. RECENT ACCOUNTING DEVELOPMENTS:
Effective January 1, 2001, the Company adopted 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 adoption of SFAS No. 133 in the first quarter of 2001 did not
have an impact on the Company's financial position, results of operations or
cash flows.
4. STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS:
The increase in stockholders' equity during the first quarter of 2001 was
primarily the result of the acquisitions of Move.com, Inc. and Welcome Wagon
International, Inc., or collectively referred to as the Move.com Group in
which the Company issued approximately 21.4 million shares of its common stock
and assumed approximately 3.2 million outstanding stock options of Move.com,
Inc. The acquisition resulted in an increase to additional paid-in capital of
approximately $780.0 million.
4
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of comprehensive loss are as follows (in thousands):
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Net loss............................................... $(67,148) $(29,212)
Unrealized gains (losses) on marketable equity
securities............................................ (1,902) 4,437
Foreign currency translation........................... (317) --
-------- --------
Comprehensive loss..................................... $(69,367) $(24,775)
======== ========
In connection with a marketing agreement providing for a multi-faceted
marketing program, the Company issued 600,000 shares of its common stock, the
fair market value of which was $11.1 million on the date of issuance of the
shares. The $11.1 million was recorded as deferred stock-based charges and is
being amortized over the five-year term of the agreement. The counterparty to
the marketing agreement also entered into a marketing and web services
agreement with the Company for $10.5 million in cash which is payable over the
five-year term of the agreement. The Company is recording these transactions
on a net basis.
5. ACQUISITION AND REORGANIZATION CHARGES:
In the first quarter of 2001, the Company incurred one-time acquisition and
reorganization charges of $7.1 million from the acquisition of the Move.com
Group. Included in these charges were stay bonuses, severance, and facilities
shut-down costs associated with this acquisition. No accruals have been made
for expenses incurred beyond March 31, 2001.
6. WRITE-DOWN OF INVESTMENTS:
During the three-month period ended March 31, 2001, the Company recorded a
charge of approximately $11.1 million to write-down a portion of the Company's
portfolio of cost investments in accordance with SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The write-down of these investments to their net realizable values was
based on a review of the companies' financial conditions, cash flow
projections and operating performances.
7. ACQUISITIONS:
In January 2001, the Company acquired certain assets and licenses and
assumed certain liabilities from Internet Pictures Corporation ("iPIX") for
$13.6 million in cash and a note. The acquisition has been accounted for as a
purchase. The acquisition cost has been preliminarily allocated to the assets
acquired based on their respective fair values. The excess of purchase
consideration over net tangible assets acquired of approximately $13.7 million
has been preliminarily allocated to goodwill and other identifiable intangible
assets and is being amortized on a straight-line basis over the estimated
useful lives ranging from three to five years.
In January 2001, the Company acquired certain assets and assumed certain
liabilities from Computers for Tracts, Inc. ("CFT") for approximately $4.5
million in cash and 162,850 shares of the Company's common stock valued at
$5.0 million. The acquisition has been accounted for as a purchase. The
acquisition cost has been preliminarily allocated to the assets acquired based
on their respective fair values. The excess of purchase consideration over net
tangible assets acquired of approximately $8.9 million has been preliminarily
allocated to goodwill and other identifiable intangible assets and is being
amortized on a straight-line basis over the estimated useful lives ranging
from three to five years.
In February 2001, the Company acquired all the outstanding shares of
HomeWrite, Inc. ("HomeWrite") in exchange for 196,549 shares of the Company's
common stock valued at $5.6 million and assumed the HomeWrite Stock option
plan consisting of 196,200 stock options with an estimated fair value of $4.5
million.
5
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition has been accounted for as a purchase. The acquisition cost has
been preliminarily allocated to the assets acquired based on their respective
fair values. The excess of purchase consideration over net tangible assets
acquired of approximately $12.3 million has been preliminarily allocated to
goodwill and other identifiable intangible assets and is being amortized on a
straight-line basis over the estimated useful lives ranging from three to five
years. The results of operations for HomeWrite for periods prior to the
acquisition were not material to the Company and accordingly, pro forma
results of operations have not been presented.
In February 2001, the Company acquired certain assets and assumed certain
liabilities from Homebid.com, Inc. ("Homebid") for approximately $3.5 million
in cash. The acquisition has been accounted for as a purchase. The acquisition
cost has been preliminarily allocated to the assets acquired based on their
respective fair values. The excess of purchase consideration over net tangible
assets acquired of approximately $2.5 million has been preliminarily allocated
to goodwill and other identifiable intangible assets and is being amortized on
a straight-line basis over the estimated useful lives ranging from three to
five years.
In February 2001, the Company completed the acquisitions of the Move.com
Group from Cendant Corporation ("Cendant") in an all stock transaction valued
at $757.3 million. In connection with the acquisition, the Company issued an
aggregate of 21.4 million shares of the Company's common stock in exchange for
all the outstanding shares of capital stock of the Move.com Group and assumed
approximately 3.2 million outstanding stock options of Move.com, Inc. Cendant
is restricted in its ability to sell the Homestore.com shares it received in
the acquisition and has agreed to vote such shares on all corporate matters in
proportion to the voting decisions of all other stockholders. In addition,
Cendant has agreed to a ten-year standstill agreement that, under most
conditions, prohibits Cendant from acquiring additional Homestore.com shares.
The acquisition has been accounted for as a purchase. The acquisition cost has
been preliminarily allocated to assets acquired and liabilities assumed based
on estimates of their respective fair values. The excess of purchase
consideration over net tangible assets acquired of $801.2 million has been
preliminarily allocated to goodwill and other identifiable intangible assets
and is being amortized on a straight-line basis over estimated lives ranging
from two to fifteen years.
The following summarized unaudited pro forma financial information includes
the acquisition of the Move.com Group as if it had occurred at the beginning
of each period (in thousands, except per share amounts):
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Revenues................................................ $118,438 $ 57,640
Net loss................................................ (94,597) (102,387)
Net loss per share:
Basic and diluted..................................... $ (.89) $ (1.07)
Weighted average shares............................... 105,843 95,414
8. 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 No. 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 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") No. 96-18 "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods and Services."
6
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following chart summarizes the stock-based charges that have been
included in the following captions for each of the periods presented (in
thousands):
Three Months
Ended March 31,
---------------
2001 2000
------- -------
Cost of revenues............................................ $ 105 $ 198
Sales and marketing......................................... 20,556 9,423
Product development......................................... 99 186
General and administrative.................................. 535 1,007
------- -------
$21,295 $10,814
======= =======
9. NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Numerator:
Net loss.............................................. $(67,148) $(29,212)
======== ========
Denominator:
Weighted average shares outstanding................... 94,925 74,052
======== ========
Basic and diluted net loss per share.................... $ (.71) $ (.39)
======== ========
10. SEGMENT INFORMATION
Segment information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenue and
operating expenses based upon internal accounting methods. The Company
operates in two principal business segments, which is consistent with the data
that is made available to the Company's management to assess performance and
make decisions. The two business segments consist of professional
subscriptions and advertising. The expenses presented below for the two
business segments exclude an allocation of certain significant operating
expenses that the Company views as inseparable, including marketing expenses,
such as Internet portal distribution and off-line branding; new product
development costs; web site design and maintenance; listings content
aggregation; customer care operations; billing and collections; data center
hosting costs; corporate expenses, such as finance, legal, internal business
systems, human resources and sales; amortization of intangible assets; stock-
based charges; and acquisition and reorganization related charges. There are
no inter-segment revenues. Assets and liabilities are not allocated to
segments for internal reporting purposes.
7
HOMESTORE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized information by segment as excerpted from the internal management
reports is as follows (in thousands):
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Revenues:
Professional subscriptions............................ $ 65,372 $ 22,892
Advertising........................................... 40,119 15,707
-------- --------
105,491 38,599
-------- --------
Operating expenses:
Professional subscriptions............................ 30,447 11,429
Advertising........................................... 12,012 1,340
Unallocated........................................... 121,835 59,437
-------- --------
164,294 72,206
-------- --------
Loss from operations.................................... $(58,803) $(33,607)
======== ========
The Company has two separate customers within its professional subscription
and advertising segments, respectively, each representing approximately
fourteen percent of total revenues.
11. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the Company's
business, results of operations, financial condition or cash flows.
The Company has entered into various agreements for the sale of its
subscription-based products for cash with an independent trust, which has
received irrevocable contributions from Cendant.
On April 25, 2000, the Company received a request for information
pertaining to its business from the Antitrust Division of the U.S. Department
of Justice, ("DOJ"). The request sought information about the Company's
business as it relates to Internet realty sites in the United States, and the
Company has responded to that request. Following their review under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 of the Company's acquisition
of the Move.com Group from Cendant, the DOJ notified the Company in February
2001 that it would not oppose the closing of the acquisition, but intended to
continue its investigation of certain Homestore.com agreements, including
certain agreements between the Company and Cendant. The Company is continuing
to cooperate with the DOJ with respect to that investigation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so
long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could
cause actual results to differ from the projected results. All statements
other than statements of historical fact that we make in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and our future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed in
our annual report on Form 10-K for the year ended December 31, 2000.
Overview
Homestore.com, Inc., or Homestore.com or Homestore, has created an online
marketplace that is the leading destination on the Internet for home and real
estate-related information, products and services, based on the number of
visitors, time spent on the web sites and number of property listings. Through
our family of web sites, Homestore provides a wide variety of information and
tools for consumers, and is the leading supplier of online media and
technology solutions for 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, we have
established relationships with key industry participants. These participants
include real estate market leaders such as the National Association of
REALTORS(R), 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(R), or NARI, the
American Institute of Architects, or AIA, the Manufactured Housing Institute,
or MHI, real estate franchises, brokers, builders and agents. We also have
distribution agreements with a number of leading Internet portal web sites.
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(R) 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.
9
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(R), 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 3 of Homestore.com's Notes to the Consolidated Financial Statements
included in the annual report on Form 10-K for the year ended December 31,
2000. We (InfoTouch) changed our corporate name to Homestore.com, Inc. in
August 1999.
Acquisitions. In January 2001, we acquired certain assets and licenses and
assumed certain liabilities from Internet Pictures Corporation, or iPIX for
$13.6 million in cash and a note. In January 2001, we acquired certain assets
and assumed certain liabilities from Computers for Tracts, Inc. for
approximately $4.5 million in cash and 162,850 shares of the our common stock
valued at approximately $5.0 million. In February 2001, we acquired all the
outstanding shares of HomeWrite, Inc. in exchange for 196,549 shares of our
common stock valued at $5.6 million and assumed the HomeWrite stock option
plan consisting of 196,200 stock options with an estimated fair value of $4.5
million. In February 2001, we acquired certain assets and assumed certain
liabilities from Homebid.com, Inc. for approximately $3.5 million in cash. In
February 2001, we completed the acquisitions of Move.com, Inc. and Welcome
Wagon International, Inc, or collectively referred to as the Move.com Group,
from Cendant Corporation, or Cendant, in an all stock transaction valued at
approximately $757.3 million. In connection with the acquisitions, we issued
an aggregate of 21.4 million shares of our common stock in exchange for all
the outstanding shares of capital stock of the Move.com Group, and assumed
approximately 3.2 million outstanding stock options of Move.com, Inc. Cendant
is restricted in its ability to sell the Homestore.com shares it received in
the acquisition and has agreed to vote such shares on all corporate matters in
proportion to the voting decisions of all other stockholders. In addition,
Cendant has agreed to a ten-year standstill agreement that, under most
conditions, prohibits Cendant from acquiring additional Homestore.com shares.
The acquisitions described above have been accounted for as purchases in
accordance with generally accepted accounting principles.
We anticipate an increase in absolute dollars for revenues, cost of
revenues, operating expenses and amortization of intangibles in connection
with the Move.com Group acquisition.
We may 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.
Revenues
Revenues increased to $105.5 million for the three months ended March 31,
2001 from revenues of $38.6 million for the three months ended March 31, 2000.
The increase was primarily due to increased revenue from professional
subscriptions as well as an increase in advertising revenue.
Subscription revenues, which represented approximately 62% of total
revenues for the three months ended March 31, 2001, grew 186% from the three
months ended March 31, 2000. The growth in revenue from professional
subscriptions was due to increases in the number of professionals on the
Homestore.com family of web sites, including sales of subscription-based
products related to an independent trust. The number of professional
subscriptions increased by 237% to approximately 359,000 compared to totals
for the three months ended March 31, 2000 and was driven, in part by the
acquisitions of the Move.com Group and iPIX.
10
Advertising revenues, which represented approximately 38% of total revenues
for the three months ended March 31, 2001, grew 155% from the three months
ended March 31, 2000. The increase was driven primarily by increases in
advertising and sponsorship arrangements. Although our advertising revenue has
grown significantly in recent periods, we may be unable to sustain growth, as
there has been a softening in the online advertising market in general. If
this softening continues or worsens, our advertising revenues could be
adversely affected.
Cost of Revenues
Cost of revenues, including non-cash stock-based charges, increased to
$28.0 million for the three months ended March 31, 2001 from cost of revenues
of $10.8 million for the three months ended March 31, 2000. The increase was
due primarily to our overall increased sales volume, increased salaries,
increase in royalties, and hosting costs during the three months ended March
31, 2001 as compared to the three months ended March 31, 2000. We anticipate
continuing increases in cost of revenues in absolute dollars as our revenues
increase and we continue to make capital investments to increase the capacity
of our family of web sites in order to accommodate traffic increases.
Gross margin percentage for the three months ended March 31, 2001 was
73.4%, up from gross margin percentage of 72.1% for the three months ended
March 31, 2000. The increase in gross margin percentage was primarily due to
increase and renewal of subscriptions as well as the continuing effort to
leverage our existing web site operations.
Operating Expenses
Sales and marketing. Sales and marketing expenses, including non-cash
stock-based charges, increased to $67.0 million for the three months ended
March 31, 2001 from sales and marketing of $39.2 million for the three months
ended March 31, 2000. The increase was due to a significant increase in costs
associated with Internet portal distribution agreements, and marketing and
listing agreements. The increase was also due to increased salaries and
commissions. Stock-based charges increased by $11.2 million to $20.6 million
for the three months ended March 31, 2001 from $9.4 million for the three
months ended March 31, 2000 primarily due to amortization of stock-based
charges relating to Internet portal distribution agreements.
Product development. Product development expenses, including non-cash
stock-based charges, increased to $5.5 million for the three months ended
March 31, 2001 from product development of $2.0 million for the three months
ended March 31, 2000. The increase in product development costs was due to
increased costs associated with the continuing expansion of the Homestore.com
web sites and the integration of our acquisitions into our family of web
sites.
General and administrative. General and administrative expenses, including
non-cash stock-based charges, increased to $22.9 million for the three months
ended March 31, 2001 from general and administrative expenses of $11.8 million
for the three months ended March 31, 2000. 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
well as increases in legal and other professional fees. Facility costs
increased primarily due to our new corporate and central service offices.
Amortization of intangible assets. Amortization of intangible assets was
$33.8 million for the three months ended March 31, 2001 from amortization of
$8.4 million for the three months ended March 31, 2000. The increase in
amortization was due to the acquisitions in subsequent quarters of fiscal year
2000, primarily the acquisition of the Move.com Group.
Acquisition and reorganization charges. One-time acquisition and
reorganization charges were $7.1 million for the three months ended March 31,
2001 and they relate to the stay bonuses, severance and facilities shut-down
costs associated with the acquisition of the Move.com Group. No accruals have
been made for expenses incurred beyond March 31, 2001.
11
Stock-based charges. The following chart summarizes the stock-based charges
that have been included in the following captions for each of the periods
presented (in thousands):
Three Months
Ended March 31,
----------------
2001 2000
-------- -------
Cost of revenues........................................... $ 105 $ 198
Sales and marketing........................................ 20,556 9,423
Product development........................................ 99 186
General and administrative................................. 535 1,007
-------- -------
$ 21,295 $10,814
======== =======
Stock-based charges increased by $10.5 million to $21.3 million for the
three months ended March 31, 2001 from $10.8 million for the three months
ended March 31, 2000 primarily as a result of amortization relating to
Internet portal distribution agreements.
Other Expense, Net
Other expense, net, increased to $12.8 million for the three months ended
March 31, 2001 from other expense, net of $14,000 for the three months ended
March 31, 2000. The increase primarily related to an $11.1 million write-down
of a portion, of our portfolio of cost investments to reflect their net
realizable values based on our review of the companies' financial conditions,
cash flow projections and operating performances. It also includes the
accretion of a marketing and distribution agreement of $3.7 million, offset by
miscellaneous other income.
Income Taxes
As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes for the three months ended March 31, 2001 and 2000. As of December 31,
2000, we had $189.6 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.
Segment Information
We currently operate in two principal business segments, which is
consistent with the data that is made available to our management to assess
performance and make decisions. The two business segments consist of
professional subscriptions and advertising. For further information regarding
segments, refer to Note 10 of the Notes to the Unaudited Condensed
Consolidated Financial Statements included elsewhere in this Form 10-Q.
Segment revenues. Subscription revenues, which represented approximately
62% of total revenues for the three months ended March 31, 2001, grew 186%
from the three months ended March 31, 2000. The growth in revenue from
professional subscriptions was due to increases in the number of professionals
on the Homestore.com family of web sites, including sales of subscription-
based products related to an independent trust. The number of professional
subscriptions increased by 237% to approximately 359,000 compared to totals at
three months ended March 31, 2000 and was driven, in part by the acquisitions
of the Move.com Group and iPIX.
Advertising revenues, which represented approximately 38% of total revenues
for the three months ended March 31, 2001, grew 155% from the three months
ended March 31, 2000. The increase was driven primarily by increases in
advertising and sponsorship arrangements.
12
Segment expenses. Subscription expenses increased to $30.4 million for the
three months ended March 31, 2001 from subscription expenses of $11.4 million
for the three months ended March 31, 2000. The increase was primarily due to
an overall increase in sales volume, increased marketing to our professional
customers such as REALTORS and an increase in staffing levels to support our
growth. In addition, our acquisitions of Top Producer Systems, Inc. and the
Move.com Group also contributed to the increase.
Advertising expenses increased to $12.0 million for the three months ended
March 31, 2001 from advertising expenses of $1.3 million for the three months
ended March 31, 2000. The increase was due to an increase in salaries and
commissions relating to the increase in advertising sales.
Unallocated expenses increased to $121.9 million for the three months ended
March 31, 2001 from unallocated expenses of $59.4 million for the three months
ended March 31, 2000. The increase was due to an increase in amortization of
intangible assets due to acquisitions, an increase in the stock-based charges
primarily relating to the Internet portal distribution agreements and a one-
time charge for acquisition and reorganization charges. Also contributing to
the increase in unallocated expenses were increases in costs associated with
the continuing expansion of our web sites, increases in legal and professional
fees, increases in costs relating to marketing and listing agreements, and
increases in salaries and staffing levels required to support our significant
growth, expanded operations and infrastructure.
Liquidity and Capital Resources
Cash provided by operating activities of $70.6 million for the quarter
ended March 31, 2001 was attributable to the net loss, offset by non-cash
expenses including depreciation, amortization of intangible assets, accretion
of distribution obligation, provision for doubtful accounts, stock-based
charges, non-cash items related to the acquisition and reorganization and the
write-down of investments, aggregating to $71.4 million. Also contributing to
cash provided by operations were the changes in balance sheet accounts, net of
acquisitions, of $66.3 million. Net cash used in operating activities was
$30.2 million for the quarter ended March 31, 2000. Net cash used in operating
activities was the result of the net operating loss, offset by non-cash
expenses including depreciation, amortization and stock-based charges,
aggregating to $20.2 million. Adding to the cash used in operations were the
changes in balance sheet accounts, net of acquisitions, of $21.2 million.
Cash provided by investing activities of $4.9 million for the quarter ended
March 31, 2001 was attributable to maturities of short-term investments of
$75.5 million offset by purchases of short-term investments of $20.2 million,
capital expenditures of $11.8 million and cash paid for acquisitions of $38.6
million including acquisition-related costs. Net cash used in investing
activities was $24.8 million for the quarter ended March 31, 2000 was
attributable to the purchase of cost and equity investments of $11.7 million,
capital expenditures of $2.6 million and cash paid for acquisitions of $11.3
million including acquisition-related costs.
Cash provided by financing activities of $27.6 million for the quarter
ended March 31, 2001 was attributable to the proceeds from exercise of stock
options, warrants and share issuances under employee stock purchase plan of
$29.6 million offset by the issuance of notes receivable of $2.5 million. Cash
provided by financing activities of $395.4 million for the quarter ended March
31, 2000 was attributable to the our follow-on public offering of common stock
of $428.9 million, proceeds from exercise of stock options, warrants and share
issuances under employee stock purchase plan of $4.9 million offset by the
repayment of notes payable of $37.5 million and issuance of notes receivable
of $1.0 million. In January 2000, we completed our follow-on public offering
to the public in which we sold 4,073,139 shares of our common stock at a price
of $110 per share, raising approximately $428.9 million, after deducting
underwriting discounts, commissions and offering expenses.
In March 2000, we issued 1,085,271 shares of our common stock with an
estimated fair value of approximately $70.0 million to Budget, Inc., or BGI,
in connection with entering into a ten-year strategic alliance agreement that
allows us to participate in online and offline BGI marketing activities. In
this agreement, we have guaranteed that the price of the shares issued to BGI
will be $64.50 per share on any trading day during the six month period after
the second anniversary of the agreement. BGI has the right, during this
period, to require us, with respect to each share as to which the right is
exercised, in our discretion, to i) pay to BGI an amount in
13
cash equal to the excess of the guaranteed price over the average price of the
period ("the Put Amount"), ii) issue and deliver to BGI the number of common
stock with a value per share equal to the Put Amount, or iii) repurchase all
of the shares of the stock at the guaranteed price.
In April 2000, we entered into a five-year marketing and distribution
agreement with America Online, Inc., or AOL. In exchange for entering into
this agreement, we paid AOL $20.0 million in cash and issued to AOL
approximately 3.9 million shares of our common stock. In the agreement, we
have guaranteed that the 30-day average closing price, related to 60%, 20% and
20% of the shares we issued, will be $68.50 per share on the third, fourth and
fifth anniversaries of the agreement, respectively. This guarantee only
applies to shares that continue to be held by AOL at the end of each
respective year. At March 31, 2001, we recorded $193.6 million in other non-
current liabilities, which represents the fair market value of the 3.9 million
shares of our stock issued upon entering the agreement and the guarantee of
the stock. The difference between the total guaranteed amount and the
liability recorded is being recorded as other expense over the term of the
agreement. In connection with the guarantee, we have established a $90.0
million letter of credit and are required to pledge an amount equal to the
unused portion of the letter of credit. As of March 31, 2001, we have pledged
$90.0 million in cash equivalents towards this letter of credit which is
classified as restricted cash on the balance sheet. AOL can draw against this
letter of credit in the event that our 30-day average closing price is less
than $68.50 at the end of each respective guarantee date. The letter of credit
will be reduced to $50.0 million at the end of the third anniversary of the
agreement. The term of the agreement may be reduced if AOL draws more than
$40.0 million from the letter of credit at the end of the third year
anniversary of the agreement.
As of March 31, 2001, we had cash and cash equivalents of $284.2 million,
short-term investments of $19.1 million and restricted cash of $90.0 million.
We have no material commitments other than those under operating lease
agreements. We currently anticipate that our existing cash and cash
equivalents and any cash generated from operations will be sufficient to fund
our operating activities, capital expenditures and other obligations through
at least the next 12 months. However, we may need to raise additional funds in
order to fund more rapid expansion, to expand our marketing activities, to
develop new or enhance existing services or products, to satisfy our
obligations to BGI or AOL as described above, 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.
14
Risk Factors
In addition to the factors discussed in the "Liquidity and Capital
Resources" section above and in our Form 10-K for the year ended December 31,
2000 under the caption "Risk Factors" and elsewhere, the following additional
factors may affect our future results:
Risks Related to our Business:
. Our agreement with the National Association of REALTORS(R) could be
terminated by it.
. Our agreement with the NAR contains a number of provisions that could
restrict our operations.
. If our operating agreement for REALTOR.com(R) terminates, the NAR would
be able to operate the REALTOR.com(R) web site.
. We are subject to noncompetition provisions with the NAR which could
adversely affect our business.
. Our agreement with the National Association of Home Builders contains
provisions that could restrict our operations.
. Our SpringStreet.com web site is subject to a number of restrictions on
how it may be operated.
. The NAR could revoke its consent to our operating SpringStreet.com.
. The National Association of REALTORS(R) has significant influence over
aspects of our RealSelect subsidiary's corporate governance.
. The NAR can restrict a change of control of Homestore.com.
. We have a history of net losses and expect net losses for the
foreseeable future.
We have experienced operating losses in each quarterly and annual period
since 1993, and we incurred an operating losses of $58.8 million and $33.6
million for the three months ended March 31, 2001 and 2000, respectively. As
of March 31, 2001, we had an accumulated deficit of $338.1 million, and we may
continue to incur additional net losses. The size of these net losses will
depend, in part, on the rate of growth in our revenues from broker, agent,
home builder and rental property owner, web hosting fees, advertising sales
and sales of other products and services. The size of our future net losses
will also be impacted by non-cash stock-based charges relating to deferred
compensation, stock and warrant issuances, and amortization of intangible
assets. As of March 31, 2001, we had approximately $1,103.8 million of
deferred stock-based charges and intangible assets to be amortized.
It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web sites as
well as for any other products and services we may add. To accomplish this, we
will continue to develop our content and expand our marketing and promotion
activities, direct sales force and other services. As a result, we expect that
our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will
need to generate significant additional revenues to achieve profitability. As
a result, we may never achieve or sustain profitability, and, if we do achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
. We must continue to obtain listings from real estate agents, brokers,
homebuilders, Multiple Listing Services and property owners.
We believe that our success depends in large part on the number of real
estate listings received from agents, brokers, homebuilders, 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
15
us on an exclusive basis or at all and may choose to provide this information
to one or more of our competitors instead. We have expended significant
amounts to secure both our exclusive and non-exclusive agreements for listings
of real estate for sale and may be required to spend additional large amounts
or offer other incentives in order to renew these agreements. If owners of
large numbers of property listings, such as large brokers, MLSs, or property
owners in key real estate markets choose not to renew their relationship with
us, our family of web sites could become less attractive to other real estate
industry participants or consumers.
. We must dedicate significant resources to market our advertising
products and services to real estate professionals.
. It is important to our success that we support our real estate
professional customers.
Since many real estate professionals are not sophisticated computer users
and often spend limited amounts of time in their offices, it is important that
these customers find that our products and services significantly enhance
their productivity and are easy to use. To meet these needs, we provide
customer training and have developed a customer support organization that
seeks to respond to customer inquiries as quickly as possible. If our real
estate professional customer base grows, we may need to expand our support
organization further to maintain satisfactory customer support levels. If we
need to enlarge our support organization, we would incur higher overhead
costs. If we do not maintain adequate support levels, these customers could
choose to discontinue using our service.
. Our quarterly financial results are subject to significant fluctuations.
Our results of operations could vary significantly from quarter to quarter.
In the near term, we expect to be substantially dependent on sales of our
subscription products and services. We also expect to incur significant sales
and marketing expenses to promote our brand and services. Therefore, our
quarterly revenues and operating results are likely to be particularly
affected by the number of persons purchasing advertising products and services
as well as sales and marketing expenses for a particular period. If revenues
fall below our expectations, we will not be able to reduce our spending
rapidly in response to the shortfall.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this Form 10-Q:
. The amount of advertising sold on our family of web sites and the timing
of payments for this advertising;
. The level of renewals for our subscription products and services by real
estate agents, brokers and rental property owners and managers;
. The amount and timing of our operating expenses and capital
expenditures;
. The amount and timing of non-cash stock-based charges, such as charges
related to deferred compensation or warrants issued to real estate
industry participants; and
. Costs related to acquisitions of businesses or technologies.
. Because we have expanded our operations, our success will depend on our
ability to manage our growth.
. We depend on distribution agreements with a number of Internet portals
to generate traffic on our family of web sites.
. Our family of web sites may not achieve the brand awareness necessary to
succeed.
16
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.
The barriers to entry for web-based services and businesses are low, making
it possible for new competitors to proliferate rapidly. In addition, parties
with whom we have listing and marketing agreements could choose to develop
their own Internet strategies or competing real estate sites upon the
termination of their agreements with us. Many of our existing and potential
competitors have longer operating histories in the Internet market, greater
name recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do.
. We must attract and retain personnel while competition for personnel in
our industry is intense.
. We need to continue to develop our content and our product and service
offerings.
. We may experience difficulty in integrating our recent acquisitions.
. Our business is dependent on our key personnel.
. We rely on intellectual property and proprietary rights.
. We may not be able to protect the web site addresses that are important
to our business.
. We could be subject to litigation with respect to our intellectual
property rights.
. We may expand into international markets which may expose us to
relatively higher costs and greater risks.
Real Estate Industry Risks:
. Our business is dependent on the strength of the real estate industry,
which is both cyclical and seasonal.
. We may particularly be affected by general economic conditions.
. We have risks associated with changing legislation in the real estate
industry.
Internet Industry Risks:
. We depend on increased use of the Internet to expand our real estate
related advertising products and services.
. Government regulations and legal uncertainties could affect the growth
of the Internet.
. Taxation of Internet transactions could slow the use of the Internet.
. We depend on continued improvements to our computer network and the
infrastructure of the Internet.
. Our internal network infrastructure could be disrupted.
Our operations depend upon our ability to maintain and protect our computer
systems, located at our corporate headquarters in Westlake Village, California
and our other offices in Thousand Oaks, California; 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
17
access, vandalism, fire, earthquakes, power loss, telecommunications failures
and similar events. Although we maintain insurance against fires, earthquakes
and general business interruptions, the amount of coverage may not be adequate
in any particular case.
Experienced computer programmers, or hackers, may attempt to penetrate our
network security from time to time. Although we have not experienced any
material security breaches to date, a hacker who penetrates our network
security could misappropriate proprietary information or cause interruptions
in our services. We might be required to expend significant capital and
resources to protect against, or to alleviate, problems caused by hackers. We
do not currently have a fully redundant system for our family of web sites. We
also may not have a timely remedy against a hacker who is able to penetrate
our network security. In addition to purposeful security breaches, the
inadvertent transmission of computer viruses could expose us to litigation or
to a material risk of loss.
. We could face liability for information on our web sites and for
products and services sold over the Internet.
. Our common stock price may be volatile, which could result in
substantial losses for individual stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We invest our excess cash in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, this limits the amount of credit exposure to
any one issuer.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall.
18
PART II. OTHER INFORMATION
ITEM 1. 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 Form 10-Q
and except as set forth herein, 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.
On April 25, 2000, we received a request for information pertaining to our
business from the Antitrust Division of the U.S. Department of Justice, or
DOJ. The request sought information about our business as it relates to
Internet realty sites in the United States, and we have responded to that
request. Following its review under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 of our acquisition of the Move.com Group from Cendant
Corporation, the DOJ notified us in February 2001 that it would not oppose the
closing of the acquisition, but intended to continue its investigation of
certain Homestore.com agreements, including certain agreements between
Homestore.com and Cendant. Homestore.com is continuing to cooperate with the
DOJ with respect to that investigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Homestore.com made the following unregistered sales of the Company's common
stock during the quarter ended March 31, 2001:
Aggregate
Date of Title of Number of Purchase
Class of Purchaser Sale Securities Securities Price Form of Consideration
------------------ ------- -------------- ---------- --------- ---------------------
Bank of America 1/2/01 Common Stock(1) 600,000 -- As part of a marketing
Corporation agreement
Hartski, Inc. 1/31/01 Common Stock(1) 162,850 -- Exchange of shares in
connection with the
asset purchase of
Computers for Tracts,
Inc.
Stockholders of 2/9/01 Common Stock(1) 196,549 -- Exchange of shares in
HomeWrite, Inc. as a connection with the
group acquisition of
HomeWrite, Inc.
Cendant Corporation 2/16/01 Common Stock(1) 21,361,605 -- Exchange of shares in
connection with the
acquisition of the
Move.com Group
- --------
(1) Sales made in reliance on Section 4 (2) of the Securities Act and/or Rule
506 of Regulation D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of Homestore.com, Inc. was convened on
January 11, 2001. There were present at the meeting, in person or by proxy,
the holders of 60,268,922 shares, representing 73% of the total number of
shares outstanding and entitled to vote at the meeting, such percentage
representing a quorum. At the meeting the stockholders voted on a proposal to
issue shares of common stock of Homestore.com in connection with the
acquisitions of Move.com, Inc. and Welcome Wagon International, Inc.
60,174,754 votes were cast for the proposal, 74,571 votes against and
19,597 votes were withheld.
19
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
On March 1, 2001, the Company filed a report on Form 8-K announcing the
completion of the Move.com Group acquisition from Cendant Corporation.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Homestore.com, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 15, 2001
Homestore.com, Inc
/s/ Stuart H. Wolff
By: _________________________________
Stuart H. Wolff
Chairman of the Board and
Chief Executive Officer
/s/ Joseph J. Shew
By: _________________________________
Joseph J. Shew
Senior Vice President,
Chief Financial Officer
and Assistant Secretary
21