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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to ____________
Commission file number 0-23835
HomeSeekers.com, Incorporated
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(Exact name of registrant as specified in its Charter)
Nevada 87-0397464
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2800 Saturn Street, Suite 200, Brea, CA 92821
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(Address of Principal Executive Offices) (Zip Code)
(714) 927-2200
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the 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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
State the aggregate market value of the voting and non-voting equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days: $2,447,728 (based on the average
bid and asked prices of the common stock on the Over-the-Counter Bulletin Board
on March 20, 2003).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 20, 2003: 48,954,561.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement (to be filed) accompanying the notice of annual meeting
of HomeSeekers.com, Incorporated's stockholders (Part III hereof).
PART I
Item 1. Description Of Business.
General
HomeSeekers.com, Incorporated (d/b/a Realigent, Inc.) is a provider of
real estate information and technology targeted for use by real estate
professionals, consumers and other parties who have an interest in the real
estate industry. One of the Company's major objectives is to enable
professionals, through the use of technology, to be better equipped to engage in
real estate transactions with consumers, who, through the use of the Company's
products and services, can be better educated and prepared for such
transactions. Unless otherwise indicated in this Form 10-K, references to "the
Company," "we" or "our" mean HomeSeekers.com, Incorporated.
The products and services offered by the Company can generally be
classified as technology services for real estate professionals, real estate
professional productivity tools or other products and services. The Company has
determined that during the year ended December 31, 2002, it operated in one
business segment. Current products and services are described below under the
heading "Products and Services."
The Company is a Nevada corporation that is the successor to a Utah
corporation originally organized in 1983. It has been engaged in the business of
marketing technology-based products to real estate professionals since 1987. The
Company operated as "NDS Software, Inc." prior to July 1998 when it changed its
name to "HomeSeekers.com, Incorporated." In March, 2002 the Company began doing
business as "Realigent, Inc." The Company's sole office is located at 2800
Saturn Street, Suite 200, Brea, California 92821, telephone (714) 927-2200.
Background
The Company has developed its product and service offerings through a
series of business acquisitions, asset purchases and strategic alliances. The
following is a summary description of significant acquisition transactions
completed in recent years:
o In August 1998 - the customer list and certain other assets of
Genstar Media, a company engaged in the development and sale of
Websites to real estate agents.
o In September 1999 - TDT, LLC ("Terradatum"), a provider of
technology-based solutions for the Multiple Listing Service
("MLS") market. Multiple Listing Services are aggregators of
real estate data for geographic areas.
o In September 1999 - Information Management Company, LLC
("IMCO"), an operator of MLSs in several states.
o In April 2000 - ISG Inc., an electronic forms and systems
integration company operating under the name of Formulator.
o In July 2000 - IRIS LLC, a provider of productivity software to
real estate professionals including the Lightning Software Suite
consisting of the Lightning MLS access connectivity products,
Lightning Flyers and Lightning Comparative Market Analysis (CMA)
Plus.
In December, 2001 the Company sold substantially all of the assets of
its MLS operating division (composed of the former Terradatum LLC and
Information Management Company, LLC) to Fidelity National Information Solutions,
Inc. ("FNIS"). See "Fidelity Transactions" below.
2
Products and Services
The Company provides a range of products and services that are designed
for consumers as well as real estate professionals. The Company generates
revenues from the following products and services:
Real Estate Portal. Consumer-based products are offered free to users
and enable potential buyers and sellers to browse our searchable database of
homes. We provide consumers with properties that are typically updated on a
daily basis and are available for viewing in several languages.
Our Website provides prospective homebuyers with access to listings of
homes for sale in a subscribing MLS geographical region. These products employ a
search engine with numerous searchable fields to allow both broadly and narrowly
defined searches. The systems will search, find and display listings that match
a prospective buyer's criteria, including a preferred location within a city or
state, number of bedrooms and baths and other desired features. Users are also
able to enter a search, save it and automatically search for updated inventory.
Internet Solutions for Real Estate Professionals. We provide Web-based
technologies for brokers, agents and other real estate professionals. These
customizable Web-based technologies are designed to enable real estate
professionals to reach their target audience and to increase the visibility of
their inventory of real estate listings.
Desktop Products. These software products are targeted at the broker
and agent market, with the objective being to deliver technologies to provide
products ranging from better communication, presentation and marketing to
improved efficiency in handling data in the transaction process.
Consulting and Development Services. We provide technical design and
support, on a project basis, to clients in need of technological services. These
services include Website development and hosting and other Internet/Intranet
solutions, including designing Internet strategies, architecture and planning.
Discontinued Businesses. Throughout the year ended December 31, 2001,
the Company discontinued a number of its businesses including its publishing
businesses whereby it published several magazines, principally in the Midwest,
the Northwest and Florida, under the HomeSeekers.com brand. Such publishing
businesses were acquired in May 1999 and February 2000.
Sales and Marketing
The Company sells its products to the real estate industry through
distributor networks, trade shows, direct sales and telemarketing efforts. In
the case of Website sales, these efforts are targeted at real estate industry
professionals interested in marketing their services through the Internet.
Marketing efforts are targeted to real estate professionals, consumers and other
real estate related service providers. The Company's sales force plays an
important role in the development of the Company's marketing strategy.
Product Development
The Company believes that it is critical to continually enhance the
performance and features of its product offerings. The development organization
focuses on developing products and services for consumers and real estate
professionals aimed at differentiating us from our competitors. The Company
seeks to enhance its 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.
3
Trademarks, Copyrights and Proprietary Rights
The Company has not sought patent protection for its proprietary
software systems and software products, although may apply for patents in the
future. The Company seeks to maintain its proprietary rights by trade secret
protection, copyright notices, non-competition and non-disclosure agreements
with its employees and, as appropriate, with its vendors. The Company will seek
formal copyright and/or patent protection for certain software program
applications and obtain patents where feasible. There can be no assurance that
meaningful proprietary protection can be attained as a result of any such
filing, and any proprietary rights that we might choose to protect through legal
action may involve substantial costs.
The Company believes that the technology edge it currently enjoys will
likely lessen over time and in order to be competitive, it must provide a high
quality, continually improving, complete solution to consumers, real estate
agents and other industry providers. The Company believes that its core
technical competence and knowledge of the real estate market will allow it to
maintain leading edge products and services that will have value in the
marketplace.
Employees
As of March 20, 2003, the Company had a total of 70 employees. Of this
total, 18 were in sales and marketing, 26 in product development and data
aggregation, 17 in technical services and customer support, and 9 in finance and
administration.
Fidelity Transactions
On October 25, 2001, Fidelity National Financial, Inc. ("Fidelity")
agreed to loan the Company up to $4,000,000, which was consummated on November
5, 2001. In return, Fidelity accepted (i) a convertible revolving promissory
note (the "Note") and (ii) a stock purchase warrant (the "Warrant"). The
aggregate potential equity represented in the Note and the Warrant is 25% of the
Company's outstanding Common Stock. To the extent the Note is not converted to a
number of shares of common Stock representing a 25% equity stake in the Company,
the Warrant is exercisable to bring Fidelity's beneficial ownership to as much
as 25% of the outstanding shares of Common Stock. Both the Note and the Warrant
were filed as exhibits to a Form 8-K filed on November 20, 2001.
The purpose of the Fidelity loan to the Company was to enable the
Company to pay off certain existing debt so as to release lenders' liens on
certain assets being purchased by FNIS as described above. Fidelity and the
Company entered into a Credit Agreement, pursuant to which Fidelity eventually
loaned the Company $3,000,000 for the purpose of paying off and canceling its
loan agreements with E-Home.com, Inc. d/b/a HomeMark ("HomeMark"), the repayment
of an earlier secured promissory note of $400,000, and for general working
capital purposes.
Short-term liabilities at December 31, 2002 include the $3,000,000 note
payable to Fidelity, which matured on April 24, 2003. On April 25, 2003, the
Company and Fidelity entered into a formal standstill agreement until June 30,
2003 to continue negotiations underway concerning the note. Unless payment is
made in full, the terms of the note re-negotiated, or the note is satisfied by
some other means, Fidelity may enter into foreclosure procedures on the note.
As an inducement to make the loan, Fidelity agreed to accept equity in
the Company in the form of the Note and Warrant described above. FNIS has no
rights to receive or control disposition of any of the shares of Common Stock.
Fidelity and the Company also executed a Security Agreement securing the
Company's obligations to Fidelity. The Security Agreement was filed as an
exhibit to the Form 8-K filed on November 20, 2001.
As a result of the issuance to Fidelity of the Note and the Warrant,
Fidelity has a currently exercisable right to purchase up to approximately
12,238,640 shares, or the equivalent of 25% of the outstanding shares of the
Company's common stock, calculated by applying Fidelity's right to acquire 25%
of the Company's outstanding shares to the total of 48,954,561 shares currently
issued and outstanding. The actual number of shares issuable to Fidelity is
likely to be greater than 12,238,640 because of the dilutive effect of
exercising the Note and Warrant. Fidelity has the sole right to receive or the
power to direct the receipt of dividends from, or proceeds from the sale of, the
shares of the Company's Common Stock issuable upon the exercise of the Note and
the Warrant.
On October 25, 2001, FNIS and the Company entered into an agreement
whereby FNIS would purchase certain assets of the Company representing
substantially all of the Company's MLS operations, such assets amounting to less
than twenty percent (20%) of the Company's total assets. FNIS and the Company
also entered into an agreement (the "Management Agreement") pursuant to which
FNIS would provide management services to the Company until the earlier to occur
between the close or the termination of the Asset Purchase Agreement. The Asset
Purchase Agreement and the Management Agreement were filed as exhibits on Form
8-K as filed on November 20, 2001.
4
On December 3, 2001, the agreement was consummated and FNIS acquired
substantially all of the assets, including corporate and trade names and
goodwill associated with the business, of the Company's XMLSweb(tm) division
(formerly Terradatum LLC and Information Management Company, LLC). The total
consideration paid was $2,000,000, of which $500,000 was advanced in November
and $1,275,000 was paid in December 2001. An additional amount of $225,000 was
for withheld for unpaid licensing obligations of the Company
Item 2. Description Of Property.
The Company has no owned real property either for its own use or for
investment purposes. The Company has one office facility in Brea, California
consisting of approximately 20,000 square feet of leased space. In connection
with the purchase of the Company's MLS operations, the original lease was
assumed by FNIS and the Company is subleasing the premises under an agreement
expiring on July 31, 2004 unless terminated earlier with sixty-days notice.
Item 3. Legal Proceedings.
The Company is involved in various legal proceedings arising out of its
operations in the ordinary course of its business, including various claims that
have been asserted or complaints that have been filed alleging patent and
copyright infringement, breach of employment and separation agreements, and
non-payment under various agreements. In addition, various claims have been made
against the Company in connection with certain of its acquisitions, including
breach of registration rights agreements. Management intends to contest each
case and in certain instances may attempt to reach a settlement of the issues
claimed. The Company does not believe that these proceedings will have a
material adverse effect on its business, financial condition, or result of
operations beyond the amounts recorded in the accompanying consolidated
financial statements for the estimated settlement of specific actions. However,
if settlement is not reached and the matters proceed to trial, an unfavorable
outcome could have a material adverse effect on the Company's financial position
and results of operations.
The Company has commitments to issue common stock in the form of
options, warrants and other agreements, that, if fulfilled, will cause the
Company to exceed its authorized number of shares of common stock. The Company
will require an amendment to its Articles of Incorporation increasing the number
of authorized shares of common stock in an amount necessary to accommodate these
agreements, options and warrant exercises. This amendment will require approval
by the Company's stockholders in a Meeting of Stockholders for which the meeting
date has not yet been established. The Company has also entered into business
purchase agreements that include requirements to register the shares of the
Company's common stock issued in connection with the purchase. The Company's
ability to register these shares is in question subject to the approval of the
increase in the authorized number of shares. Accordingly, the Company is
currently in violation of these registration rights agreements.
Item 4. Submission Of Matters To A Vote Of Security Holders.
None.
5
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.
The Company's common stock was traded on the Nasdaq SmallCap Market for
the period from September 16, 1999 through July 16, 2001 under the symbol
"HMSK." Effective July 17, 2001, the common stock was delisted from the Nasdaq
SmallCap Market due to a failure to maintain a minimum bid price of $1.00 per
share and trading commenced on the Over-the-Counter (OTC) Bulletin Board market.
The following table sets forth the high and low bid quotations for the common
stock for the periods indicated. The quotations subsequent to July 16, 2001, as
reported by North American Quotations, reflect prices between dealers, do not
include retail mark-ups, markdowns, commissions and may not necessarily
represent actual transactions.
Period High Low
First Quarter (ended March 31, 2001)................ $0.66 $0.13
Second Quarter (ended June 30, 2001)................ $1.04 $0.13
Third Quarter (ended September 30, 2001)............ $0.69 $0.25
Fourth Quarter (ended December 31, 2001)............ $0.26 $0.03
First Quarter (ended March 31, 2002)................ $0.25 $0.05
Second Quarter (ended June 30, 2002)................ $0.14 $0.05
Third Quarter (ended September 30, 2002)............ $0.09 $0.04
Fourth Quarter (ended December 31, 2002)............ $0.08 $0.03
As of December 31, 2002, there were approximately 570 holders of record
and approximately 5,500 beneficial holders of the 48,954,561 shares of common
stock that were issued and outstanding. The transfer agent for the shares is
Atlas Stock Transfer Co., 5899 South State Street, Salt Lake City, Utah 84107,
telephone (801) 266-7151.
The Company has never paid cash dividends on its common stock and does
not anticipate that any cash dividends will be paid in the foreseeable future.
The future dividend policy will depend on the Company's operating results,
capital requirements, expansion plans, financial condition and other relevant
factors.
6
Item 6. Selected Financial Data.
--------------------------------- --------------------------------------- -----------------------------------
(Amounts in thousands, except Year Ended Six-months Ended Year Ended June 30
per share data) December 31, 2002 December 31, 2001 2001 2000 1999
--------------------------------- ----------------- ----------------- --------- --------- ---------
Revenues $10,020 $6,035 $17,392 $11,090 $3,419
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Net income (loss) 2,814 (11,966) (51,627) (25,034) (4,842)
--------------------------------- ----------------- ----------------- --------- --------- ---------
Basic and diluted net income (0.25)
(loss) per common share 0.06 (1.66) (1.47) (0.53)
--------------------------------- ----------------- ----------------- --------- --------- ---------
Total assets 1,439 2,879 8,723 40,026 16,889
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Long-term liabilities 167 2,982 1,758 1,015 383
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Cash dividends declared None None None None None
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Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.
The following discussion of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report. This Form 10-K
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 that involves risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. When used in this Form 10-K, the words "expects," "anticipates,"
"intends" and "plans" and similar expressions are intended to identify
forward-looking statements. The cautionary statements made in this Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this document. Actual results could differ materially
from those discussed in or implied by this Form 10-K. The Company does not
intend to update any of the forward-looking statements after the date of this
filing to conform those statements to actual results. Factors that could cause
or contribute to such differences include those discussed below.
Overview
On February 13, 2002, the Company announced a change in its fiscal year
end from June 30 to December 31. The change was effective for the six-month
period ended December 31, 2001. Accordingly, the comparisons in this annual
report will be for the twelve-month period ended December 31, 2002, the
six-month period ended December 31, 2001 and the years ended June 30, 2001 and
2000.
As discussed elsewhere in this Form 10-K, the Company has a history of
recurring losses from operations and has an accumulated deficit of approximately
$101.7 million at December 31, 2002. Similarly, the Company has a significant
working capital deficit and limited cash reserves. Because of these factors, the
reports of the independent auditors on the Company's consolidated financial
statements for the year ended December 31, 2002, the six-months ended December
31, 2001 and the years ended June 30, 2001 and 2000 include an explanatory
paragraph indicating there is substantial doubt about the Company's ability to
continue as a going concern.
The Company began operating with a new management team in October 2001,
borrowing $3.0 million to pay off certain existing debt and for working capital
needs. In December 2001 the Company sold its MLS operating division generating
net cash available for working capital purposes of approximately $1.7 million.
The Company immediately commenced a significant restructuring of its operations,
reducing its fixed operating expenses, and consolidating its operations into one
location. By the end of its first quarter ending March 2002, the Company
announced that, for the first time in its history, it was generating revenues
and cash flows sufficient to cover current operating needs. Subsequently, the
Company announced operating profits and net income during each of its following
three quarterly periods ending December 2002. For the year ended December 31,
2002 the Company announced that its Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") was in excess of $1.6 million or 16% of
gross revenues and its net income, subject to gains recorded from the
re-negotiation of certain of its legacy debt, was $3.1 million.
7
Although the Company has recently experienced profitability for the
first time in its history, there can be no assurances of continued profitability
and the Company may record losses in the foreseeable future. The Company
continues to maintain a significant working capital deficit from its prior
operations and has inadequate cash reserves to fully satisfy its existing trade
debts. The Company is continuing in its efforts to further increase sales
revenues, reduce operating expenses, and develop methods for reducing its
existing trade debts and liabilities. (See "Liquidity and Capital Resources.")
The Company may consider obtaining additional debt or equity financing although
the Company's significant working capital deficit and limitations attributable
to its capital structure make it difficult to attract additional debt or equity
capital. The Company may consider entering into other arrangements or business
combinations that would provide the Company with incremental working capital,
increased sales opportunities, or redundant cost savings.
There can be no assurances that the Company will be able to sustain
profitable operations or that the Company can successfully continue with its
plan to satisfy its trade creditors and debt holders. If the Company is unable
to achieve these results or otherwise cannot obtain additional financing on
acceptable terms, it is possible that the Company would cease operations or
otherwise seek protection under Federal bankruptcy laws. (See "Risk Factors and
Cautionary Statement Regarding Forward-Looking Information.")
Results of Operations
Business acquisitions and comparability
The Company developed its family of products and services through a
series of business acquisitions, asset purchases and strategic alliances. Many
of these transactions were accomplished through the issuance of equity
securities during the fiscal year ended June 30, 1999, continuing through fiscal
2000, and into the first quarter of the year ended June 30, 2001. During the
year ended June 30, 2001, the Company expended efforts and financial resources
to combine and restructure the operations of its business acquisitions and its
ongoing businesses including the sale or closing of all publishing operations
during the latter part of the year. During the six-months ended December 31,
2001, the Company sold its MLS operating division, and revenues and expenses
recognized from that division do not extend across the entire six-month period.
Accordingly, certain categories of revenue and expense are dissimilar between
periods due to differing accounting systems between the entities acquired. The
Company changed its fiscal year end from June 30 to December 31, filing a
transitional report for the six-month period ended December 31, 2001.
Accordingly, the operating results for the year ended December 31, 2002, the
six-months ended December 31, 2001 and the years ended June 30, 2001 and 2000
are not comparable.
Revenues
For the year ended December 31, 2002, desktop software sales and
related revenues were $3.6 million or 36.3% of total revenues. Website hosting
revenues accounted for $2.5 million or 24.7% of total revenue. Programming and
custom development revenues were $2.9 million or 28.7% of total revenues.
Included in custom development revenues was the one-time recognition of $1.2
million associated with the delivery of one custom software project. Web portal
advertising and other revenues were $1.0 million or 10.3% of total revenues.
For the six-months ended December 31, 2001, software sales and license
revenues (including $1.5 million in revenues attributable to the Company's
discontinued MLS operations) were $3.2 million or 53.8% of total revenues.
Website hosting revenues, programming, custom development, portal revenues, and
other revenues were $2.8 million or 46.2% of total revenues.
Revenues increased from $11.1 million in fiscal 2000 to $17.4 million
in fiscal 2001. Growth in revenues resulted from significant increases in two
areas: (1) programming and licensing and (2) Web page development and
Website-related revenues. Programming and licensing revenues increased from $3.1
million in fiscal 2000 to $7.5 million in fiscal 2001, principally due to the
acquisitions of ISG in April 2000 and IRIS in July 2000. Also contributing to
this increase in fiscal 2001 was approximately $371,000 in additional revenues
recognized from XMLS Web contracts. Web page development and Website-related
revenues increased from $4.6 million in fiscal 2000 to $5.7 million in fiscal
2001 primarily due to continued growth of our telemarketing and field sales
programs. We also experienced an increase in publishing revenues of
approximately $702,000 in fiscal 2001, primarily due to inclusion in operations
of HomeSeekers Magazines, Inc., which was acquired in February 2000, for most of
fiscal 2001. However, all publishing operations were sold or closed during the
latter part of fiscal 2001, and no publishing revenues are anticipated in the
future.
8
Cost of revenues
Cost of revenues during the year ended December 31, 2002 totaling $1.8
million was primarily composed of salary costs incurred attributable for
production and customer services, computer systems hosting costs, and
third-party royalties. Cost of revenues totaling $2.0 million during the
six-months ended December 31, 2001 was primarily composed of salary costs and
royalties. The noticeable variance between periods is attributable to the lack
of costs associated with the discontinued MLS operations and a significant
decrease in personnel and related salary costs between periods.
Cost of revenues decreased from $13.6 million during the year ended
June 30, 2001 to $2.0 million during the six-months ended December 31, 2001 as
the Company ceased or was unable to allocate financial resources to its sales
efforts. Similarly, the Company discontinued its printing operations between
periods which had a significantly higher cost of sale. Cost of revenues
increased from $9.4 million in fiscal 2000 to $13.6 million in fiscal 2001, due
primarily to the increase in business in fiscal 2001.
Operating expenses
Operating expenses recognized during the year ended December 31, 2002
totaled $7.7 million. Of this total, $1.1 million was recorded for depreciation
and amortization expenses. General operating expenses totaled $6.7 million and
included $4.4 million attributable to salary and compensation expenses, $750,000
for professional and consulting fees (including accounting and legal services),
$683,000 for facilities and communications expenses, $244,000 for travel and
lodging expenses, and $174,000 for insurance expenses.
Operating expenses recognized during the six-months ended December 31,
2001 totaled $15.6 million. Of this total, $1.7 million was recorded for
depreciation and amortization expenses. After careful assessment of various
factors, management determined it was appropriate to write down the remaining
value of its intangible assets. Accordingly, such assets were written down by a
total of $1.0 million during the six-months ended December 31, 2001.
General operating expenses incurred during the six-months ended
December 31, 2001 totaled $12.9 million which included $5.2 million attributable
to separation and settlement agreements with three of the Company's former
officers and directors which were subsequently re-negotiated during the year
ended December 31, 2002. (See "Other income (expense)" below). The remaining
expenses included $4.3 million attributable to salary and compensation expenses,
$1.2 million for facilities and communications expenses, $1.1 million for
professional, consulting and outside service fees, $318,000 for advertising and
marketing, and $246,000 for travel and lodging.
Operating expenses increased from $27.2 million in fiscal 2000 to $53.1
million in fiscal 2001 in part because of additional operating expenses
associated with acquisitions completed near the end of fiscal 2000 and the first
month of fiscal 2001. In addition, the Company was involved in restructuring
activities during the third and fourth quarters of fiscal 2001 including the
discontinuance of its publishing operations, the closing of certain operating
locations and consolidation of operating divisions.
The Company recorded a $20.1 million write-down of investments and
purchased intangible assets during fiscal year 2001. After careful assessment of
various factors relating to its intangible assets, including the Company's
decision to discontinue its publishing operations in the third quarter and
consolidation and restructuring of other acquired businesses primarily in the
fourth quarter, management determined it was appropriate to write down the value
of these assets. Accordingly, such assets were written down by a total of $13.3
million for the year to estimated fair value based on estimated discounted net
cash flows for the operating entities that had separately identifiable cash
flows in accordance with SFAS No. 121. The cash flow periods used were 3 years
with a discount rate of 15 percent which are assumptions that reflect
management's best estimates. The Company wrote off its remaining investment in
its foreign affiliate during the third and fourth quarters of fiscal 2001 as a
result of its affiliate's inability to raise capital or generate profitable
operations. The Company also wrote off the remaining $1.7 million of its
investment in the common stock of BuySellBid.com during fiscal 2001 due to its
continuing losses and the uncertainty of further recovery on the investment.
9
For the years ended June 30, 2001 and 2000, compensation expense and
related costs increased from $9.6 million in fiscal 2000 to $15.9 million in
fiscal 2001, primarily because of the additional personnel associated with the
acquisitions completed near the end of fiscal 2000 and during the first month of
fiscal 2001. Employee headcount included in operating expenses was approximately
231 at the beginning of fiscal 2001. Restructuring efforts during 2001 and into
2002 included headcount reductions as facilities were closed and divisions
combined. As a result of these efforts, employee headcount included in operating
expenses was 82 as of March 20, 2002. In connection with these headcount
reductions, significant severance and employee termination costs were incurred
during fiscal 2001 and the Company recognized a non-cash expense of $2.3 million
in the fourth quarter of fiscal 2001 due to the repricing of employee stock
options.
For the years ended June 30, 2001 and 2000, facilities expenses
increased from $1.8 million in 2000 to $2.7 million in 2001 because of
acquisitions between periods. Travel, trade shows and related expenses decreased
from $4.1 million in 2000 to $1.6 million in 2001 and promotion and marketing
expenses decreased from $2.9 million in 2000 to $2.1 million in 2001 primarily
due to the limited operating funds available for these activities. For the
six-months ended December 31, 2001, expenses attributable to these activities
were less than $600,000.
For the years ended June 30, 2001 and 2000, depreciation and
amortization expense increased from $2.4 million in fiscal 2000 to $5.4 million
in fiscal 2001 because of the property and equipment and purchased intangible
assets acquired late in fiscal 2000 and early fiscal 2001. A substantial portion
of the assets attributable to these acquisitions were disposed of or written
down between periods.
Other income (expense)
Net other income at December 31, 2002 totaled $2.3 million. Included in
this amount was $2.2 million recognized upon the re-negotiation of separation
agreements with three of the Company's former officers, as well as $1.1 million
recognized as gain from the extinguishment of debt (primarily from trade
creditors) at less than face value. The Company is continuing with its attempts
to re-negotiate its past due obligations under more favorable payment terms or
otherwise at less than face value in full satisfaction of the claim. Interest
expense of $1.3 million at December 31, 2002, $1.1 million during the six-months
ended December 31, 2001 and $944,000 and $77,000 for the years ended June 30,
2001 and 2000 was attributable to notes payable with stated interest bearing
rates, interest expense valuations associated with the issuance of warrants or
amortization of debt discount during these periods.
Commitments
Payments Due by Period
-----------------------------------------------------------------------
Less than 1 to 4 to After
Total one year 3 years 5 years 5 years
----------- ----------- ----------- ----------- -----------
Long-term debt $ 3,615,654 $ 3,610,110 $ 5,544 $ - $ -
Employment Contract - Mr. Chaffee 647,014 360,000 287,014 - -
Employment Contract - Mr. Crane 606,667 260,000 346,667 - -
Other Employment Contracts - Non-Officers 444,542 212,542 232,000
Capital Lease Obligations 72,956 68,743 4,213 - -
Operating Lease 467,611 292,380 175,231 - -
----------- ----------- ----------- ----------- -----------
Total Cash Commitments $ 5,854,444 $ 4,803,775 $ 1,050,669 $ - $ -
=========== =========== =========== =========== ===========
10
Liquidity and Capital Resources
The Company has limited cash reserves and a working capital deficit of
$11.7 million at December 31, 2002. Although the Company experienced
profitability for the first time in its history, there can be no assurances of
continued profitability and the Company may record losses in the foreseeable
future. The Company has inadequate cash reserves to fully satisfy its trade
debts, the majority of which are significantly past due. The Company is
considering entering into other arrangements or business combinations that would
provide the Company with incremental working capital, increased sales
opportunities, or redundant cost savings. Similarly, the Company is considering
obtaining additional debt or equity financing. However, the Company's
significant working capital deficit and the limitations attributable to its
current capital structure make it exceedingly difficult, or in many cases
impossible, to attract business partners, additional debt or equity capital.
If additional funds can be raised through the issuance of equity or
convertible securities, the percentage ownership of the current stockholders
will be reduced and the new securities may have rights, preferences or
privileges senior to those of the existing stockholders. It is also likely that
the Company may be required to issue warrants for the purchase of common stock
in any such financing, which may result in additional dilution. Furthermore,
there can be no assurance that additional financing will be available when
needed or that, if available, such financing will include terms favorable to the
Company or its stockholders. If such financing is not available when required or
is not available on acceptable terms, the Company may not be able to meet its
operating obligations and the Company may be forced to cease operations or
otherwise seek protection under Federal bankruptcy laws. (See "Risk Factors and
Cautionary Statement Regarding Forward-Looking Information.")
The Company's note agreement with Fidelity contains conversion features
that, if converted, would significantly reduce the percentage ownership of the
current stockholders. Additionally, Fidelity has a currently exercisable right
to purchase up to approximately 12,238,640 shares, or the equivalent of 25% of
the outstanding shares of the Company's common stock, calculated by applying
Fidelity's right to acquire 25% of the Company's outstanding shares to the total
of 48,954,561 shares currently issued and outstanding. The actual number of
shares issuable to Fidelity is likely to be greater than 12,238,640 because of
the dilutive effect of exercising the Note and Warrant. Fidelity has the sole
right to receive or the power to direct the receipt of dividends from, or
proceeds from the sale of, the shares of the Company's Common Stock issuable
upon the exercise of the Note and the Warrant.
Although the Company significantly reduced its overall liabilities
between periods, there can be no assurances that the Company can successfully
continue its plan to satisfy its trade creditors and debt holders. If the
Company is unable to achieve these results or otherwise cannot obtain additional
financing on acceptable terms, it is possible that the Company would cease
operations or otherwise seek protection under Federal bankruptcy laws.
Accordingly, because of the Company's significant history of net losses, working
capital deficit, accumulated deficit and uncertainty as to its ability to secure
additional financing or satisfy its existing trade creditors, the reports of the
independent auditors on the consolidated financial statements contains an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. This uncertainty is further discussed in
Note 1 of the notes to the consolidated financial statements.
During the year ended December 31, 2002, the Company successfully
reduced its total liabilities by $4.8 million or 27.6% while using $797,000 of
its cash reserves from the prior period. Much of this reduction came as a result
of re-negotiating past due sums or settling accounts payable obligations for
less than face value. However, at the end of the period, current liabilities
exceeded current assets by $11.7 million and total liabilities exceeded total
assets by $11.5 million. Although the Company generated operating profits and
net income for the first time in its history, the Company maintained an
accumulated deficit of approximately $101.7 million at the end of the period.
Included in current liabilities at December 31, 2002 are significant amounts of
past due accounts payable and short-term debt from prior periods (the "legacy"
debt) of which the Company is continuing in its attempts to settle in full or
re-negotiate the payment terms with its creditors. The Company is currently in
default under a $500,000 note payable to one of its former officers that became
due in April 2001. Pursuant to the note, the Company is obligated to issue
warrants to purchase 100,000 shares of common stock each week until all
principal and interest is repaid. Short-term liabilities at December 31, 2002
also include the $3 million note payable to Fidelity, which matured on April 24,
2003. On April 25, 2003, the Company and Fidelity entered into a formal
standstill agreement until June 30, 2003 to continue negotiations underway
concerning the note. Unless payment is made in full, the terms of the note
re-negotiated, or the note is satisfied by some other means, Fidelity may enter
into foreclosure procedures on the note.
11
The Company has a history of generating negative cash flows and,
although it is generating positive cash flows sufficient to cover current
operating expenses, the Company's settlements of legacy debt obligations caused
it to record a net use of cash in operating activities during the year ended
December 31, 2002 in the amount of $310,000. Net cash used for capital
expenditures during 2002 was $134,000 and repayments of note payable obligations
totaled $353,000. Net cash provided from investing activities during the
six-months ended December 31, 2001 was $1.7 million of which virtually all of
this was from the sales of the Company's MLS operation to FNIS. Net cash
provided from investing activities during fiscal 2001 was $786,000, with $1.3
million provided by the sale of investments, $354,000 from the sale of
intangible assets, $157,000 from payments on notes receivable, and $200,000
received from our foreign affiliate, net of $1.0 million used to acquire
property and equipment and $212,000 used to acquire technology and other
intangible assets.
During the six-months ended December 31, 2001, the operations of the
Company were partly funded through the issuance of equity securities and by
increased accounts payable and accrued expenses. Subject to these activities,
the net cash used in operating activities during the six-months ended December
31, 2001 was $3.7 million compared to $10.3 million in fiscal 2001 and $12.5
million in fiscal 2000. As shown in the statements of cash flows for the
six-months ended December 31, 2001 and for the year ended June 30, 2001, a
significant portion of the operating expenses were non-cash, including write
down of assets, compensation expense from option repricings and common stock and
warrants issued for services and interest. On October 25, 2001 the Company
entered into a loan agreement with Fidelity securing $3 million in net proceeds.
The loan enabled the Company to pay off certain existing debt so as to release
lenders' liens on certain assets being purchased by FNIS and provided the
Company with a limited amount of working capital that was quickly absorbed in
operations. Subject to these transactions, net cash provided by financing
activities was $1.8 million during the six-months ended December 31, 2001.
Simultaneous with the execution of the note, the Company entered into an
agreement with FNIS whereby FNIS would acquire certain assets of the Company
representing its MLS operations for a total purchase price of $2 million. The
purchase was consummated on December 3, 2001 generating net cash available for
working capital purposes of approximately $1.7 million (see above). Operations
were partially funded in fiscal 2001 from the net proceeds of $7.5 million from
the sale of common stock and warrants and the exercise of options and warrants
and from proceeds of debt of approximately $2.0 million. The Company repaid debt
of $569,000 during fiscal 2001, much of which was assumed from business
acquisitions.
Risk Factors and Cautionary Statement Regarding Forward-Looking Information
Investors are cautioned that this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties, including the following: (1) the
Company's plans, strategies, objectives, expectations and intentions are subject
to change at any time at the discretion of management and the Board of
Directors; (2) the Company's plans and results of operations will be affected by
its ability to manage any growth and working capital and its ability to finance
future operations, none of which is assured; and (3) the Company's business is
highly competitive and the success of existing or new competitors in the markets
in which the Company competes could adversely affect the Company's plans and
results of operations. In addition, the Company identifies the risk factors
discussed below that may affect the Company's actual results and may cause
actual results to differ materially from that expressed in or implied by any
forward-looking statement. The factors represented below are not represented to
be an exhaustive list. Additional factors are discussed from time to time in the
Company's filings with the Securities and Exchange Commission.
12
The reports of our independent auditors express substantial doubt about the
Company's ability to continue as a going concern, and indicates the Company may
have to consider curtailing or ceasing operations, including the possibility of
filing bankruptcy.
The Company has limited cash reserves and a working capital deficit of
$11.7 million at December 31, 2002. Although the Company experienced
profitability for the first time in its history, there can be no assurances of
continued profitability and the Company may record losses in the foreseeable
future. The Company has inadequate cash reserves to fully satisfy its trade
debts, the majority of which are significantly past due. The Company is
considering entering into other arrangements or business combinations that would
provide the Company with incremental working capital, increased sales
opportunities, or redundant cost savings. Similarly, the Company is considering
obtaining additional debt or equity financing. However, the Company's
significant working capital deficit and the limitations attributable to its
current capital structure make it exceedingly difficult, or in many cases
impossible, to attract business partners, additional debt or equity capital.
Accordingly, because of the Company's history of net losses, working
capital deficit, accumulated deficit and uncertainty as to its ability to secure
additional financing, the reports of the independent auditors on the
consolidated financial statements contain an explanatory paragraph indicating
there is substantial doubt about the Company's ability to continue as a going
concern. This uncertainty is further discussed in Note 1 of the notes to the
consolidated financial statements.
The Company may not be able to obtain additional financing for its current and
future operating and capital needs.
Historic operations have consumed substantial amounts of capital. The
business is capital intensive, particularly with respect to product development
costs associated with the design and creation of software and web based
products. Public or private financing may not be available when needed or may
not be available on terms favorable or acceptable to us, if at all. If the
Company is unable to obtain financing in the near future, or it is not available
on acceptable terms, it will be severely limited in its ability to implement any
operating plans for the growth of the Company. In fact, should the Company be
unable to obtain financing, it may not be able to meet necessary operating
obligations and it is possible that it may cease operations.
The stockholders have experienced and may continue to experience significant
dilution.
In order to fund its operations, the Company issued a substantial
number of equity securities. Coupled with a decreasing stock price, these
issuances had a substantial dilutive effect on the stockholders. Any future
issuances would continue to reduce the percentage ownership of the stockholders
and the stockholders will experience material dilution.
Sales of a substantial number of shares of common stock into the public
market, or the perception that those sales could occur, could adversely affect
the Company's stock price or could impair its ability to obtain capital through
an offering of equity securities. The Company has experienced a significant
decline in its stock price. Accordingly, any issuances of equity securities
necessary for the Company to fund its business would result in even greater
dilution to our stockholders.
13
The number of authorized shares of common stock is not sufficient to meet
outstanding obligations to issue common stock and does not permit the Company to
raise additional capital through the issuance of common stock.
As of March 20, 2003 the Company had 48,954,561 shares of common stock
outstanding. In addition, as of that date there were options to purchase
2,538,582 shares of common stock and warrants to purchase 36,761,096 shares of
common stock outstanding. Similarly, in connection with the note from Fidelity,
Fidelity has a currently exercisable right to purchase up to approximately
12,238,640 shares, or the equivalent of 25% of the outstanding shares of the
Company's common stock, calculated by applying Fidelity's right to acquire 25%
of the Company's outstanding shares to the total of 48,954,561shares of common
stock issued and outstanding. The actual number of shares issuable to Fidelity
is likely to be greater than 12,238,640 because of the dilutive effect of
exercising the Note and Warrant. The Company also has a number of other
commitments to issue common stock and securities convertible into common stock
in the future. The Company's Articles of Incorporation currently authorize the
issuance of 50,000,000 shares of common stock. Therefore, before it can issue
common stock upon the exercise of options or warrants or in accordance with
other obligations, the Company must increase the number of authorized shares of
common stock.
Any increase in the authorized capital requires an amendment to the
Articles of Incorporation, which must be approved by the stockholders. The
Company anticipates it will seek approval to increase the authorized number of
shares of common stock in a Meeting of Stockholders for which the meeting date
has not yet been established. If the Company does not receive approval of this
increase, it will be forced to default on its obligations. Similarly, the
Company relied heavily on the issuance of common stock in the past for funding
of its operations. If it does not increase the number of shares available for
issuance, the Company will not be able to issue stock for the purpose of funding
its current operation or for raising additional capital necessary for the growth
of the Company.
The Company has only recently achieved profitability and may record losses in
the foreseeable future.
The Company recorded net income of $2.8 million for the year ended
December 31, 2002 whereas the net loss for the six-months ended December 31,
2001 was $12.0 million. The Company had an accumulated deficit as of December
31, 2002 of $101.7 million. Although it has significantly reduced its fixed
operating expenses, the Company may record net losses in the future due to
unexpected shortfalls in sales activity. By necessity, future expenses will
include additional product development expenses, sales and marketing costs,
general and administrative expenses. The Company may incur additional
acquisition costs and additional restructuring costs. There can be no assurance
that the Company will maintain sufficient revenues to offset anticipated
operating and acquisition costs. The Company may not achieve sustained
profitability. If it fails to sustain or increase profitability, its business,
operating results and financial condition will be materially harmed and the
Company could be forced to cease operations.
Market competition among existing and potential competitors may adversely affect
our business.
The market for on-line real estate content and e-commerce providers is
rapidly evolving and highly competitive, and competition is expected to
intensify in the future. Our failure to maintain and enhance our competitive
position could seriously harm our business. The technological and other
requirements to remain competitive are changing continually, and we must be able
to respond to changes in the industry in order to remain competitive. Our
competitors vary in size and in the scope and breadth of products and services
they offer.
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, and thus could respond more
quickly to changing opportunities, technology and consumer demands. Also, some
of our current and potential competitors have better name recognition and more
extensive customer bases that may allow them to gain additional market share to
our detriment. These competitors may be able to undertake more extensive
promotional activities and adopt more competitive pricing policies for
advertising and goods and services than we can. In addition, our competitors,
especially those with greater resources than we have, could significantly
enhance their product offerings by developing improved technology solutions or
offering daily updates of listings. This could significantly reduce or eliminate
any competitive advantage we currently might have and, accordingly, could
significantly harm our business.
14
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 the original
agreements with the MLSs, brokers and agents to display their property listings
had fixed fees per listing and fixed terms, typically 12 to 30 months. The
Company is currently delinquent on payments to many of these providers and they
may choose not to continue to provide the listing information to us. The Company
is in the process of developing and entering into new agreements with these
providers that are intended to satisfy past claims, provide more flexibility in
the payment terms, and deliver more value to the providers for the listing data.
However, there can be no assurance that the Company will be successful in these
efforts or that the listing data providers will accept the new terms and
provisions of these agreements. Accordingly, our business would be harmed.
In addition, some providers of listing data may choose to provide their
listings to one or more competitors on an exclusive basis. In particular, at
least one competitor has entered into exclusive listing arrangements with a
significant number of MLSs and, in order for us to display listings covered by
this arrangement, we must seek the consent of the individual broker who provided
these listings to the MLS. These listings can be more difficult to obtain and
involve more recruiting costs to acquire them and our use of these listings
could potentially subject us to claims by the parties to these exclusive listing
arrangements. If our competitors are successful in increasing the number of
exclusive listing arrangements with MLSs or large groups of brokers, we may be
limited in the number of listings we are able to display on our Website and our
business may be harmed. We have expended significant amounts to secure
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 Website could become less attractive to other
real estate industry participants or consumers.
Quarterly financial results are subject to significant fluctuations.
Our results of operations could vary significantly from quarter to
quarter. The Company is substantially dependent on sales of its software and
website 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 customers purchasing our products and services as well as sales and
marketing expenses for a particular period. If revenues fall below our
expectations, we may not be able to reduce our spending rapidly in response to
the shortfall. Accordingly, we believe that period-to-period comparisons of our
operating results may not be meaningful, and you should not rely on these
comparisons as an indication of our future performance.
Our success will depend on the continuing contribution of key management
personnel and the attraction and retention of qualified employees.
Our operations depend on the continuing contribution of key personnel.
Our future success and continued viability depends on the continued services of
our senior strategic, technical and operations personnel. Their near-term
departure could have a significant adverse effect on our business, financial
condition and results of operations.
15
The Company must attract and retain personnel while competition for
personnel in the industry is intense. Given the Company's financial condition,
it may be unable to retain its key employees or to attract, assimilate or retain
other highly qualified employees. If we do not increase the number of authorized
and issuable shares to accommodate employee incentive stock options, we may have
significant difficulty in attracting and retaining highly qualified employees
and executive officers. We have from time to time in the past experienced, and
we expect in the future to again experience, difficulty in hiring and retaining
highly skilled employees with appropriate qualifications as a result of growth
and expansion. Attracting and retaining qualified personnel with experience in
the real estate industry, a complex industry that requires a unique
knowledgebase, is an additional challenge for us. If we do not succeed in
retaining and motivating our current personnel, our business, financial
condition and results of operations will be adversely affected.
The Company may not be able to adapt to evolving technologies and customer
demands, which could cause our business to suffer.
The Company maintains and operates complex network data and hosting
systems, which the Company believes are technologically superior to its
competition. The Company must continually upgrade and enhance these systems
while continuing to develop its real estate portal content and desktop product
and service offerings. To remain competitive, the Company must expend necessary
capital on development efforts, which 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
business could be expensive and time consuming. Any new features, functions or
services so developed 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 customers and may be unable to retain our existing users. Furthermore, we
may not succeed in incorporating new technologies into our products and services
even though, in order to do so, we may incur substantial expenses.
Our prior business acquisitions and any future acquisitions may not result in
achieving the desired benefits of the transactions.
A significant part of the Company's business strategy from 1999 and
into the earlier part of 2001 was the acquisition of businesses and
technologies. A number of these acquisitions were not successful for various
reasons. The success of acquisitions is subject to many risks, and the reasons
for failure include:
The inability to assimilate the operations of the acquired
businesses;
The disruption of the existing businesses;
The addition of significant additional expenses;
The assumption of unknown liabilities and litigation;
The inability to integrate, train, retain and motivate personnel
of the acquired businesses;
The diversion of existing management from day-to-day operations;
The inability to incorporate acquired products, services and
technologies successfully into existing product lines;
The difficulty in identifying good acquisitions;
The potential impairment of relationships with employees,
customers and strategic partners; and
The inability to maintain uniform standards, controls procedures
and policies.
16
The Company's inability to successfully address these risks adversely
affected its business, financial condition and results of operations. Up until
December 31, 2001, the Company incurred significant expenses relating to the
discontinuance of various operations, the impairment and write-down of
intangible assets, and the restructuring and consolidation of other operating
divisions.
The Company depends upon a number of third-party relationships, many of which
are short-term or terminable, to provide the Company with content to generate
revenue.
The Company depends on a number of third-party relationships to provide
content and increase traffic on HomeSeekers.com and ultimately generate
revenues. Outside parties include unrelated Website operators that provide links
to HomeSeekers.com and providers of real estate content. Many relationships with
third-party Websites and other third-party service providers are not exclusive
and are short-term or may be terminated at the convenience of either party. The
Company is not assured that third parties regard the relationship with them as
important to their respective businesses and operations. They may reassess their
commitment at any time in the future and may develop competitive services or
products.
The Company cannot assure that it will be able to maintain
relationships with third parties that supply content, related products, or
services that are crucial to our success, or that such content, products or
services will be able to sustain any third-party claims or rights against their
use. The Company is currently in default of many of its contracts with third
parties that are considered crucial to its business. Also, the Company cannot
assure that the content, products or services of those companies that provide
access or links to our Website will achieve market acceptance or commercial
success. Accordingly, there is no assurance that existing relationships will
result in sustained business partnerships, successful product or service
offerings or the generation of revenues.
There are substantial risks associated with the protection of our intellectual
property and the infringement of the intellectual property rights of third
parties.
Our success is dependent upon the intellectual property that we use in
our business. We regard our Internet domain name, copyrights, service marks,
trademarks, trade secrets and similar intellectual property that we use in our
business as critical to our success. We rely on a combination of copyright,
trademark and trade secret laws, confidentiality procedures, contractual
provisions and license and other agreements with employees, customers and others
to protect our intellectual property rights. In addition, we may also rely on
the third party owners of the intellectual property rights we license to protect
those rights. Effective Internet domain name, copyright, service mark, trademark
and trade secret protection may not be available in every country in which our
products and services are made available online. The steps taken by us and other
third parties to protect our intellectual property rights may not be adequate,
and third parties may infringe upon or misappropriate the intellectual property
and similar proprietary rights used in our business, which could have an adverse
effect on our business, financial condition and results of operations.
We are also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights we use. The resolution
of any infringement claims may result in lengthy and costly litigation.
Moreover, resolution of a claim may require us to obtain a license to use those
intellectual property rights or possibly to cease using those rights altogether.
Any of those events could have a material adverse effect on our business,
financial condition and results of operations.
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. 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 typically is less sales activity in real
estate. Recent reports indicate that the real estate industry may be adversely
affected by a general economic decline and a concern regarding terrorism in the
United States. Purchases of real property and related products and services are
particularly affected by negative trends in the general economy. A decrease in
the current level of sales of real estate and products and services related to
real estate will adversely affect our business, financial condition and results
of operations.
17
Additionally, the Company has experienced seasonality in its business.
The real estate industry generally experiences a decrease in activity during the
winter. However, it is difficult for us to fully assess the impact of seasonal
factors on our business. If we are unable to effectively manage our resources in
anticipation of any seasonality of revenues and the increased costs we may incur
during periods of lower revenues, our business will be harmed.
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.
Regulations and laws applicable to the real estate industry could have an
adverse impact on our business.
We have risks associated with changing legislation in the real estate
industry. Real estate is a heavily regulated industry in the U.S. These
regulations include 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 that could require us to expend significant
resources to comply. These laws and related regulations may limit or restrict
our activities. 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. 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.
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, information and e-commerce, our real estate portal 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. Internet usage and growth in the real estate industry may be
inhibited for a number of reasons, including: inadequate network infrastructure;
security concerns; uncertainty of legal and regulatory issues concerning the use
of the Internet; inconsistent quality of service; lack of availability of
cost-effective, reliable, high-speed service; and failure of Internet use to
expand internationally.
We depend on continued improvements to our computer network and the
infrastructure of the Internet.
In order to further assure the dependability and rapid response times
of its networks, in March 2002 the Company migrated its systems to a hosting
facility designed and maintained by Qwest Communications International, Inc.
("Qwest"). Although the hosting facility further assures the integrity and
availability of the Company's systems, there can be no guarantees against
failure and any failure of our computer systems that cause interruption or
slower response times on our Website or hosting systems could result in a loss
of Website users and real estate professional customers. If sustained or
repeated, these performance issues could reduce the attractiveness of our
Website to consumers, advertisers, real estate professionals, and other
providers of real estate related products and services. Increases in the volume
of our Website 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.
The Company anticipates incurring additional costs to upgrade its computer
systems in order to accommodate increased demand.
18
To a certain extent, 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.
We could experience system failures and security breaches that could harm our
business and reputation.
Our operations depend upon our ability to maintain and protect our
computer systems, most of which are now located at the Qwest CyberCenter
facilities in Burbank, California. Our systems are vulnerable to damage from
break-ins, unauthorized access, terrorism, vandalism, fire, floods, 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 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 Website and for products and
services sold over the Internet.
We provide third-party content on our Website, 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 Websites operated by third parties, we should be
liable for copyright or trademark infringement or other wrongful actions by the
third parties operating those Websites. 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 Website. 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. There can
be no assurance that any indemnification provided to us in our agreements with
these parties, if available, will be adequate.
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.
Our common stock has been delisted from the NASDAQ National Market.
In July 2001, our common stock was delisted from trading on the NASDAQ
National Market because our common stock did not meet the requirements for
continued listing. Delisting may negatively impact the value of our common stock
as securities trading on the over the counter market are typically less liquid
and trade with larger variations between the bid and ask price.
19
The market price for our common stock has been adversely affected by the general
depression of stock prices of Internet-related companies.
The trading prices of many technology and Internet-related companies'
stocks are currently at historical lows. A rise in the market price of our
common stock is partially dependent upon a recovery in the markets for
technology companies. If stock prices for technology companies do not generally
increase, it is likely that our stock price will remain at low levels. During
the same period, these companies' stocks also have recorded lows well below
historical highs. There can be no assurance that our stock will trade at the
same levels of other Internet stocks or that we can sustain our common stock's
trading price.
Many of the factors that might cause volatility in the market price of
our common stock are beyond our control. These factors may materially and
adversely affect the market price of our common stock, regardless of how we
operate.
Critical accounting policies and estimates.
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Continually, management evaluates its estimates and
judgments, including those related to bad debt reserves, revenue recognition
including deferred revenue, liabilities related to warrants, financing
operations, and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and conditions; however, management
believes that the estimates, including those for the above-described items, are
reasonable.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
As of December 31, 2002 the Company was not a party to any significant
financing arrangements that are subject to significant interest rate risk. In
addition, the Company had no material investments as of December 31, 2002, and
therefore was not subject to significant market risks.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this Form 10-K appear herein
commencing on page F-1.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosures.
(a) Previous independent auditors
(1) On November 12, 2002, Corbin & Wertz were dismissed as
independent accountants for HomeSeekers.com, Incorporated.
(2) The report of Corbin & Wertz for the six-month period ended
December 31, 2001 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to audit scope or accounting
principle. However, the report contained a paragraph expressing
substantial doubt about the Registrant's ability to continue as a going
concern. Corbin & Wertz did not serve as independent accountants for
the Registrant during any prior periods.
(3) The decision to change accountants was approved by the
Registrant's board of directors.
(4) In connection with its audit for the six-month period ended
December 31, 2001 and through November 12, 2002 there had been no
disagreements with Corbin & Wertz on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope and procedure, which disagreements if not resolved to the
satisfaction of Corbin & Wertz, would have caused them to make
reference thereto in their report on the consolidated financial
statements for such years.
20
(5) On October 16, 2001, Ernst & Young LLP resigned as
independent accountants for HomeSeekers.com, Incorporated.
(6) The reports of Ernst & Young LLP for both the fiscal year
ended June 30, 2000 and 2001 contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to audit scope or
accounting principle. However, both reports contained a paragraph
expressing substantial doubt about the Registrant's ability to continue
as a going concern.
(7) In connection with its audits for the two most recent fiscal
years and through October 16, 2001 there have been no disagreements
with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope and
procedure, which disagreements if not resolved to the satisfaction of
Ernst & Young LLP, would have caused them to make reference thereto in
their report on the consolidated financial statements for such years.
(8) Ernst & Young LLP furnished us with a letter addressed to
the SEC stating whether or not it agrees with the above statements. A
copy of such letter was filed as Exhibit 16.2 to a Form 8-K filed on
October 24, 2001.
(b) New independent auditors
(1) The Company engaged Stonefield Josephson, Inc. as its new
independent accountants as of November 15, 2002. During the two most
recent years and through November 15, 2002, the Registrant has not
consulted with Stonefield Josephson, Inc. on items regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion which might be
rendered on the Registrant's consolidated financial statements.
(2) The Company requested that Corbin & Wertz furnish it with a
letter addressed to the SEC stating whether or not it agreed with the
above statements. A copy of such letter was filed as Exhibit 16.3 to
Form 8-K dated November 18, 2002.
PART III
Item 10. Directors and Executive Officers, Promoters and Control Persons.
The following sets forth information concerning the directors and
executive officers of the Company:
Name Age Position Held
---- --- -------------
Thomas A. Chaffee, Jr................ 38 Chairman of the Board and Chief
Executive Officer
Steven M. Crane...................... 47 President, Chief Operating
Officer, and Director
James Sherry......................... 60 Director
Fred R. Deluca....................... 52 Director
The Company's directors will serve in such capacity until the next
meeting of the stockholders of the Company. The officers serve at the discretion
of the Company's directors.
Thomas Chaffee was appointed to the Board of Directors in June 2001 and
has served as the Company's Chairman of the Board and Chief Executive Officer
since October 2001. Mr. Chaffee is the founder and Chief Executive Officer of
Chaffee Interactive, Inc., a fully-integrated Internet professional services
company. Since 1988, he and his company have served as advisers and consultants
to large and middle market organizations seeking to maximize resources by
creating quantifiable results in the Internet space. He also is a highly
requested speaker and industry expert on e-commerce, focusing on the fragmented
real estate industry and its need for change.
21
Steven Crane was appointed to the Board of Directors in July 2002 and
has served as the Company's President and Chief Operating Officer since December
2001. Since May 2000 Mr. Crane has been a Partner with Tatum CFO Partners, LLP,
a professional provider of financial and information technology services. For
six years prior to this, Mr. Crane was the President of Adler Communications
Group, a marketing and sales support service provider specializing in technology
products and businesses. Prior to this, Mr. Crane was the President, Chief
Operating Officer, and Director for RGB Computer & Video, Inc. (NASDAQ) a
provider of personal computer-based video editing systems. Mr. Crane also served
as the Senior Vice President - Finance and Administration, and Chief Financial
Officer for CompuTrac, Inc (AMEX), a provider of integrated turnkey computer
systems designed specifically for the legal marketplace. Mr. Crane began his
career in 1979 with Price Waterhouse, an international public accounting firm.
James Sherry was appointed to the Board of Directors in July 2002. For
the past four and one-half years, Mr. Sherry has lead Innovative Solutions,
Inc., a consulting firm providing the real estate industry expert assistance in
navigating the changing business environment. For three years prior to joining
Innovative Solutions, Inc., he was President and Chief Executive Officer of
Interealty, the nation's largest MLS services vendor. He has been active in the
real estate industry and an industry consultant for over twenty years.
Fred Deluca was appointed to the Board of Directors in July 2002. Since
December 2000 Mr. Deluca has been the Chairman of Aristotle Broadcasting
Networks, a multimedia communications corporation. From 1982 and continuing to
this day, Mr. Deluca has served in various capacities with the American
Institute of Architects, including its Chief Financial, Chief Operating, and
Chief Executive Officer. Prior to this, Mr. Deluca served in a financial
management capacity with both the American Petroleum Institute and the American
Association of Retired Persons.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of the Company's outstanding Common
Stock, to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and report changes in ownership of Common Stock. Such
persons are required by SEC regulations to furnish the Company with copies of
all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
reports furnished to the Company, all Section 16(a) filing requirements
applicable to our officers, directors and greater than ten percent (10%)
beneficial owners have been complied with.
Item 11. Executive Compensation
The following table sets forth, for the six-months ended December 31,
2001 and the twelve-months ended December 31, 2002 the aggregate compensation
awarded to, earned by, or paid to Mr. Chaffee, the Company's Chief Executive
Officer and Mr. Crane, the Company's President and Chief Operating Officer. The
Company did not grant any bonus, restricted stock awards or stock appreciation
rights nor make any long-term incentive plan payouts or payments of other
compensation to any of the Named Executive Officers during these periods.
Salary
Name and Principal Position Period Compensation (1)
- --------------------------- ------------------- ----------------
Six-months ended
Thomas A. Chaffee, Jr. December 31, 2001 $ 40,000
Chief Executive Officer Twelve-months ended
December 31, 2002 $ 360,000
Six-months ended
Steven M. Crane December 31, 2001 $ 73,846
President, Chief Operating Twelve-months ended
Officer December 31, 2002 $ 235,529
(1) Although earned and accrued, none of Mr. Chaffee's salary compensation has
been paid to-date.
22
Compensation of Directors
The Company reimburses all members of the Board of Directors for their
expenses incurred in connection with their activities as Directors of the
Company.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Thomas Chaffee is employed by the Company as its Chairman and Chief
Executive Officer pursuant to an employment agreement with a term of three years
dated October 18, 2001. Under the terms of the agreement, Mr. Chaffee is
entitled to a base salary of $360,000 per annum, an annual incentive
compensation bonus based upon established performance and goals, and the
reimbursement of expenses incurred in connection with his employment by the
Company. Mr. Chaffee is eligible to participate in any employment benefit plans
established by the Company. Mr. Chaffee is indemnified by the Company against
actions or proceedings resulting from his capacity as an officer and director of
the Company and, upon termination, including termination attributable to a
"Change in Control" as set forth in federal securities law, Mr. Chaffee is
entitled to receive severance compensation equivalent to twelve-months of his
base salary.
Steven Crane is employed by the Company as its President and Chief
Operating Officer pursuant to an employment agreement with a term of three years
dated May 1, 2002. Under the terms of the agreement, Mr. Crane is entitled to a
base salary of $260,000 per annum, an annual incentive compensation bonus based
upon established performance and goals, and the reimbursement of expenses
incurred in connection with his employment by the Company. Mr. Crane is eligible
to participate in any employment benefit plans established by the Company. Mr.
Crane is indemnified by the Company against actions or proceedings resulting
from his capacity as an officer and director of the Company and, upon
termination, including termination attributable to a "Change in Control" as set
forth in federal securities law, Mr. Crane is entitled to receive severance
compensation equivalent to twelve-months of his base salary.
Compensation Committee Interlocks and Insider Participation
James Sherry and Fred Deluca serve as the Compensation Committee for
the Company. Neither individual is an officer of the Company
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee")
is responsible for establishing and administering the policies for the Company's
compensation programs and for approving the compensation levels of the executive
officers of the Company, including its Chief Executive Officer. In making its
determination, the Committee considers various factors, including the base
compensation levels offered by competing companies and the need to attract and
retain the qualified individuals necessary to manage the Company's operations
and the difficulties incurred due to the distressed financial condition of the
Company.
Performance Graph
The following graph sets forth the cumulative total shareholder return
on the Company's Common Stock over the last six calendar years, as compared to
the total returns of the Nasdaq Composite Index and a group of peer companies
(the "Peer Group"). The graph assumes $100 was invested on December 31, 1997.
The Peer Group includes the Company, Fidelity National Information
Solutions Inc., and Homestore, Inc. The Peer Group consists of companies that
are engaged in providing technology products and services in the residential
real estate industry.
23
Assumes $100 Invested on December 31, 1997
12/97 12/98 12/99 12/00 12/01 12/02
------ ------ ------- ------ ------ ------
Homeseekers.com, Inc. 100.00 233.18 604.61 24.42 2.76 2.30
SIC Code Index 100.00 205.78 1007.26 230.19 148.53 194.50
Nasdaq Composite Index 100.00 139.63 259.13 157.32 124.44 85.05
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 20, 2003, the number of
shares of Common Stock of the Company which were owned beneficially by (i) each
person who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director and nominee for director, (iii) the executive
officers of the Company, and (iv) all directors and officers as a group. Unless
otherwise indicated, the address of each beneficial owner is 2800 Saturn, Suite
200, Brea, California 92821.
Name and Address Amount and Nature of Percentage of
Of Beneficial Owner Beneficial Ownership (1) (2) Shares Owned (1)
------------------- ---------------------------- ----------------
Thomas A. Chaffee, Jr. 0 (3) *
Steven M. Crane 825,000 (4) 1.66%
James Sherry 0 *
Fred R. Deluca 400,000 *
All directors and executive officers 1,225,0000 2.4%
as a group (4 persons)
--------------------------
* Indicates less than 1% of outstanding shares owned.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 20, 2003 upon
exercise of options, warrants and convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such
person (but not those held by any other person) and that are
exercisable within 60 days from March 20, 2003 have been exercised.
(2) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(3) Does not include options to purchase 6,000,000 shares of the Company's
Common Stock at an exercise price of $.03 per share pursuant to Mr.
Chaffee's employment agreement for which the grant is subject to an
increase in the authorized number of common shares issuable by the
Company which must be approved by the Company's stockholders.
(4) Does not include options to purchase 3,600,000 shares of the Company's
Common Stock at an exercise price of $.09 per share pursuant to Mr.
Crane's employment agreement for which the grant is subject to an
increase in the authorized number of common shares issuable by the
Company, which must be approved by the Company's stockholders.
Item 13. Certain Relationships and Related Party Transactions
Due to its inability to establish credit, the Company subleases its
computer-hosting site in Burbank, California through Chaffee Interactive, a
company wholly owned by Thomas Chaffee, the Company's Chairman and Chief
Executive Officer for $30,000 on a month-to-month basis. Similarly, the Company
contracts with Chaffee Interactive for web site design and marketing services
for which the Company does not have available in-house expertise. The total
lease expense and cost of design services recognized during the year ended
December 31, 2002 attributable to this arrangement was $362,879 of which
$133,380 was unpaid and was included in accounts payable at the end of the year.
24
PART IV
Item 14. Controls and Procedures
Based on the evaluation of the Company's disclosure controls and
procedures by Thomas Chaffee, the Company's Chief Executive Officer, and Steven
M. Crane, the Company's President and Chief Financial Officer, as of a date
within 90 days of the filing date of this report, our Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time period specified by the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) and (2) All required financial statements and financial
statement schedules appear herein commencing on page F-1.
(3) See Exhibit Index following the signature page of this Form
10-K.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on November 18,
2002 reporting a change in its certifying accountants effective
November 12, 2002.
25
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Stonefield Josephson, Independent Auditors .................... F-1
Report of Corbin & Wertz, Independent Auditors .......................... F-2
Report of Ernst & Young LLP, Independent Auditors ....................... F-3
Consolidated Balance Sheets at December 31, 2002 and 2001 ............... F-4
Consolidated Statements of Operations for the Year Ended
December 31, 2002, the Six-months Ended December 31, 2001
and for the Years Ended June 30, 2001 and 2000 ....................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the Year Ended December 31, 2002, the Six-months Ended
December 31, 2001, and for the Years Ended June 30, 2001 and 2000 .... F-6
Consolidated Statements of Cash Flows for the Year Ended December
31, 2002, the Six-months Ended December 31, 2001 and for the
Years Ended June 30, 2001 and 2000 ................................... F-8
Notes to Consolidated Financial Statements .............................. F-10
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
HomeSeekers.com, Incorporated
We have audited the accompanying balance sheet of HomeSeekers.com, Incorporated
(hereinafter referred to as the "Company") as of December 31, 2002, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year then ended. 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 in accordance with auditing standards generally accepted
in the United States of America. 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 that our audit provides 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 the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses, has
significant negative cash flows from operations for the year ended December 31,
2002, and has working capital deficit of $10,358,000 and accumulated deficit of
$101,739,000 at December 31, 2002. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's current plans and actions in regards to these matters are discussed
in Note 1. The financial statements do not include any adjustments relating to
the recoverability and classification of assets carrying amounts or the amounts
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II in Item 14 listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
STONEFIELD JOSEPHSON, INC.
Irvine, California
April 25, 2003
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
HomeSeekers.com, Incorporated
We have audited the accompanying consolidated balance sheet of HomeSeekers.com,
Incorporated (hereinafter referred to as the "Company") as of December 31, 2001,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the six-month period then ended. In connection with
our audit, we have also audited the related consolidated financial statement
schedule for the six-month period ended December 31, 2001. These consolidated
financial statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the related consolidated
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001, and the results of their operations and their cash flows for
the six-month period then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses, has
significant negative cash flows from operations for the six-month period ended
December 31, 2001, and has a working capital deficit of $12,935,000 and an
accumulated deficit of $104,553,000 at December 31, 2001. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's current plans and actions in regards to these
matters are discussed in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.
CORBIN & WERTZ
Irvine, California
March 20, 2002
F-2
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders
HomeSeekers.com, Incorporated
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended June 30, 2001
and 2000. Our audit also included the financial statement schedule listed in the
Index at Item 15. (a) (2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 that 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 consolidated results of its operations and its cash
flows for the years ended June 30, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents faily in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming
HomeSeekers.com, Incorporated will continue as a going concern. As discussed in
Note 1, the Company's significant net losses, working capital deficit,
accumulated deficit and uncertainty as to the Company's ability to secure
additional financing raise substantial doubt about the Company's ability to
continue as a going concern and indicates the Company may have to consider
curtailing or ceasing operations, including the possibility of filing
bankruptcy. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Reno, Nevada
September 19, 2001
F-3
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(Amounts in thousands, except share and per share data)
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 435 $ 1,232
Accounts receivable, net of allowance for doubtful
accounts of $40 and $190, respectively 516 57
Accounts and notes receivable, related parties -- 92
Other assets 85 86
------------ ------------
Total current assets 1,036 1,467
Investments, net -- 20
Property and equipment, net 396 1,337
Purchased intangible assets, net -- 5
Other assets 7 50
------------ ------------
$ 1,439 $ 2,879
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,935 $ 3,945
Accrued payroll and other liabilities 2,294 4,704
Liability under purchase agreement 500 500
Accrued liabilites related to warrants 1,555 1,485
Long-term obligations, current portion, net of unamortized
discount of $165 and $0, respectively 3,610 1,046
Deferred revenue, current portion 1,849 2,722
------------ ------------
Total current liabilities 12,743 14,402
Long-term liabilities
Long-term obligations, net of unamortized discount
of $0 and $689, respectively 6 2,399
Deferred revenue 161 583
------------ ------------
Total long-term liabilities 167 2,982
Stockholders' equity (deficit)
Common stock, $.001 par; 50,000,000 shares authorized;
48,954,561 shares issued and outstanding 49 49
Additional paid-in capital 90,419 90,179
Accumulated other comprehensive loss (200) (180)
Accumulated deficit (101,739) (104,553)
------------ ------------
Total stockholders' equity (deficit) (11,471) (14,505)
------------ ------------
$ 1,439 $ 2,879
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-4
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002, SIX-MONTHS ENDED DECEMBER 31, 2001
AND YEARS ENDED JUNE 30, 2001 AND 2000
(Amounts in thousands, except per share data)
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Revenue, net $ 10,020 $ 6,035 $ 17,392 $ 11,090
Cost of revenue 1,755 1,976 13,559 9,404
------------ ------------ ------------ ------------
Gross profit 8,265 4,059 3,833 1,686
------------ ------------ ------------ ------------
Operating expenses
Operating expenses 6,653 12,905 27,520 22,002
Depreciation and amortization 1,075 1,658 5,442 2,403
Impairment of intangible assets 5 1,034 20,130 2,793
------------ ------------ ------------ ------------
7,733 15,597 53,092 27,198
------------ ------------ ------------ ------------
Income (loss) from operations 532 (11,538) (49,259) (25,512)
Other income (expense)
Interest expense (1,286) (1,127) (944) (77)
Interest income 7 3 74 290
Debt forgiveness income 1,101 -- -- --
Gain on reduction in fair value of
warrant liabilities 279 98 -- --
Renegotiation of separation agreements 2,227 -- -- --
Other, net (46) 598 (1,498) 265
------------ ------------ ------------ ------------
2,282 (428) (2,368) 478
------------ ------------ ------------ ------------
Net Income (loss) 2,814 (11,966) (51,627) (25,034)
Other comprehensive income (loss) (20) (10) 483 (653)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ 2,794 $ (11,976) $ (51,144) $ (25,687)
============ ============ ============ ============
Net income (loss) per common share
Basic $ 0.06 $ (0.25) $ (1.66) $ (1.47)
============ ============ ============ ============
Diluted $ 0.06 $ (0.25) $ (1.66) $ (1.47)
============ ============ ============ ============
Weighted average shares outstanding
Basic 48,954,561 48,622,383 31,145,564 17,031,852
============ ============ ============ ============
Diluted 49,094,561 48,622,383 31,145,564 17,031,852
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-5
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2002, SIX-MONTHS ENDED DECEMBER 31, 2001
AND YEARS ENDED JUNE 30, 2001 AND 2000
(Amounts in thousands, except share data)
Accumulated
Other Note Stock-
Additional Invest- Compre- Receivable holders'
Common Stock Paid in ment hensive Accumulated from Equity
Shares Amount Capital in LLC Loss Deficit Officer (Deficit)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 14,946,283 $ 15 $ 29,051 $ (450) $ -- $ (15,926) $ -- $ 12,690
Securities acquired in settlement
of investment in LLC -- -- 793 450 -- -- -- 1,243
Shares issued for services 277,969 -- 3,282 -- -- -- -- 3,282
Warrants issued for services -- -- 463 -- -- -- -- 463
Exercises of stock options 677,497 -- 1,495 -- -- -- -- 1,495
Exercises of of warrants 1,026,039 1 3,033 -- -- -- -- 3,034
Shares issued for cash 917,407 1 5,436 -- -- -- -- 5,437
Shares issued for asset and
investment purchases 341,077 -- 3,838 -- -- -- -- 3,838
Compensation charge for option
exercise -- -- 156 -- -- -- -- 156
Shares issued in business
acquisitions 1,608,188 2 16,846 -- -- -- -- 16,848
Shares and warrants issued for
investment in foreign affiliate 1,638,750 2 7,720 -- -- -- -- 7,722
Issuanace of note receivable to
officer for option exercise -- -- -- -- -- -- (320) (320)
Net loss -- -- -- -- -- (25,034) -- (25,034)
Net unrealized loss on investments -- -- -- -- (653) -- -- (653)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2000 21,433,210 $ 21 $ 72,113 $ -- $ (653) $ (40,960) $ (320) $ 30,201
Shares issued for services 2,977,960 3 838 -- -- -- -- 841
Shares issued for interest
expense 75,000 -- 38 -- -- -- -- 38
Warrants issued for services -- -- 563 -- -- -- -- 563
Warrants issued for interest
expense -- -- 765 -- -- -- -- 765
Exercises of stock options 3,334 -- 2 -- -- -- -- 2
Compensation expense from
option repricings -- -- 2,270 -- -- -- -- 2,270
Exercises of warrants 200,000 1 37 -- -- -- -- 38
Shares issued for cash 14,378,746 14 7,466 -- -- -- -- 7,480
Shares issued in payment of
liabilities 1,417,196 1 1,032 -- -- -- -- 1,033
Shares issued in business
acquisitions 6,606,151 7 2,178 -- -- -- -- 2,185
Reduction of note receivable
from officer -- -- -- -- -- -- 312 312
Net loss -- -- -- -- -- (51,627) -- (51,627)
Net unrealized gain on investments -- -- -- -- 483 -- -- 483
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2001 47,091,597 $ 47 $ 87,302 $ -- $ (170) $ (92,587) $ (8) $ (5,416)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of
these consolidated financial statements
F-6
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 2002, SIX-MONTHS ENDED DECEMBER 31, 2001
AND YEARS ENDED JUNE 30, 2001 AND 2000
(Amounts in thousands, except share data)
Accumulated
Other Note Stock-
Additional Invest- Compre- Receivable holders'
Common Stock Paid in ment hensive Accumulated from Equity
Shares Amount Capital in LLC Loss Deficit Officer (Deficit)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2001 47,091,597 $ 47 $ 87,302 $ -- $ (170) $ (92,587) $ (8) $ (5,416)
Shares issued for notes receivable 1,020,834 1 499 -- -- -- -- 500
Exercises of stock options 54,000 -- 10 -- -- -- -- 10
Shares issued for separation
agreements 788,130 1 403 -- -- -- -- 404
Warrants issued for services -- -- 44 -- -- -- -- 44
Warrants issued for interest expense -- -- 1,659 -- -- -- -- 1,659
Warrants issued under separation
and settlement agreements -- -- 1,845 -- -- -- -- 1,845
Reclassification to warrant
liabilities -- -- (1,583) -- -- -- -- (1,583)
Reduction of note receivable from
officer -- -- -- -- -- -- 8 8
Net loss -- -- -- -- -- (11,966) -- (11,966)
Net unrealized loss on investments -- -- -- -- (10) -- -- (10)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 48,954,561 $ 49 $ 90,179 $ -- $ (180) $ (104,553) $ -- $ (14,505)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Renegotiation of separation
agreements -- -- 240 -- -- -- -- 240
Net income -- -- -- -- -- 2,814 -- 2,814
Net unrealized loss on investments -- -- -- -- (20) -- -- (20)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 48,954,561 $ 49 $ 90,419 $ -- $ (200) $ (101,739) $ -- $ (11,471)
========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-7
HOMESEEKERS.COM, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002, SIX-MONTHS ENDED DECEMBER 31, 2001
AND THE YEARS ENDED JUNE 30, 2001 AND 2000
(Amounts in thousands)
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Cash flows from operating activities
Net income (loss) $ 2,814 $ (11,966) $ (51,627) $ (25,034)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation 1,075 685 1,670 793
Amortization -- 973 9,670 4,519
Impairment of intangible assets 5 1,034 20,130 2,793
Equity in loss in foreign affiliate -- -- 283 81
Compensation expense from option repricings -- -- 2,270 --
(Gain) loss on sale of investments -- -- 974 (46)
Settlement of accounts payable and other liabilitites (1,101) -- -- --
Renegotiation of separation agreements (2,227) -- -- --
Gain on sale of assets -- (524) -- --
Other -- (52) 405 (39)
Common stock and warrants issued for services -- 2,293 1,404 653
Common stock, warrants and amortization of debt
discount issued for interest 873 970 803 --
Gain on reduction in fair value of warrant liabilities (279) (98) -- --
Changes in assets and liabilities net of effect from acquisitions
Accounts receivable (459) 143 735 1,090
Other assets, current 1 516 626 (550)
Other assets 43 164 (111) (86)
Accounts payable 91 1,328 1,279 383
Accrued payroll and other liabilities 149 2,095 661 1,090
Deferred revenue (1,295) (1,241) 496 1,864
------------ ------------ ------------ ------------
Net cash used in operating activities (310) (3,680) (10,332) (12,489)
Cash flows from investing activities
Purchase of property and equipment (134) (54) (1,008) (2,238)
Purchase of intangible assets -- -- (212) (1,114)
Issuance of notes receivable -- -- -- (440)
Payments of notes receivable -- 8 157 190
Business acquisitions, net of cash -- -- -- (1,441)
Proceeds from sales of securities -- -- 1,291 101
Proceeds from sales of property and equipment -- -- 4 343
Proceeds from sales of intangibles -- -- 354 --
Payment from foreign affiliate -- -- 200 200
Proceeds from sale of business entities -- 1,725 -- --
Investment in foreign affiliate -- -- -- (387)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (134) 1,679 786 (4,786)
Cash flows from financing activities
Proceeds from notes payable--related parties -- 1,035 -- --
Payments on notes payable--related parties -- (2,085) -- --
Proceeds from notes payable -- 3,000 1,950 --
Repayments of debt (353) (160) (569) (1,232)
Net proceeds from sale/exercise of common stock,
options and warrants -- 10 7,520 9,968
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (353) 1,800 8,901 8,736
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (797) (201) (645) (8,539)
Cash and cash equivalents at beginning of year 1,232 1,433 2,078 10,617
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 435 $ 1,232 $ 1,433 $ 2,078
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-8
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Cash paid for interest.................................................... $ 413 $ 25 $ 69 $ 77
Cash paid for income taxes................................................ $ - $ - $ - $ -
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Common stock issued for advertising/exclusive provider arrangement........ $ - $ - $ - $ 3,091
Common stock issued for investment........................................ - - - 3,000
Investment acquired for advertising arrangement........................... - - - 2,000
Investment acquired as settlement of investment in LLC.................... - - - 1,243
Property and equipment acquired by capital lease obligations.............. - - 141 -
Net change in investments and accumulated other comprehensive loss........ (20) (10) 483 (653)
Common stock and warrants issued for investment in foreign affiliate...... - - - 7,722
Common stock issued for purchased intangible assets....................... - - - 838
Warrants issued in renegotiation of separation and settlement agreements. 240 - - -
Note receivable canceled in renegotiation of separation and settlement
agreements............................................................. 92 - - -
Investment acquired through reduction of accounts and notes receivable,
related party.......................................................... - - - 208
Common stock issued for payment of liabilities............................ - - 1,033 -
Note receivable issued for common stock.................................. - (500) - -
Reclassification of warrant liabilities.................................. - 1,583 - -
Other..................................................................... - - 348 -
BUSINESS ACQUISITIONS
Shares issued in business acquisitions...................................... $ - $ - $ (2,185) $ (16,848)
Cash paid................................................................... - - - (1,441)
Liability under purchase agreement.......................................... - - - (1,500)
Accounts receivable, net.................................................... - (400) 145 550
Prepaid expenses............................................................ - 91 30 37
Property and equipment...................................................... - (362) 298 1,932
Purchased intangible assets................................................. - (1,252) 2,907 19,727
Other assets................................................................ - (20) - -
Note receivable............................................................. - (500) - -
------------ ------------ ------------ ------------
Liabilities assumed (assets sold)........................................... $ - $ (2,443) $ 1,195 $ 2,457
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
HOMESEEKERS.COM, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002, SIX-MONTHS ENDED DECEMBER 31, 2001 AND
FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
HomeSeekers.com, Incorporated (the "Company"), a successor to various
companies through mergers, was originally incorporated under the laws of Utah on
January 31, 1983. The Company is a provider of web-based and other information
and technology targeted for use by professionals, consumers, and other parties
involved in the real estate industry.
Basis of Presentation
For the period ended December 31, 2001 and the years ended June 30,
2001 and 2000, the consolidated financial statements include the accounts of
HomeSeekers.com, Incorporated and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
For the year ended December 31, 2002, the Company's operations were rolled into
one legal entity. Certain reclassifications have been made to the prior period
consolidated financial statements to conform to the current year's presentation
and had no impact on loss from operations or net loss. On February 13, 2002, the
Company announced a change in its fiscal year end from June 30 to December 31.
The change was effective for the six-months ended December 31, 2001.
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company has a history of losses, reporting net income for the first
time of approximately $2,814,000 during the year ended December 31, 2002 while
incurring a loss of $11,966,000 during the six-months ended December 31, 2001.
At December 31, 2002 the Company had a working capital deficit of approximately
$11,707,000 and an accumulated deficit of approximately $101,739,000. The
Company used cash of approximately $310,000 and $3,680,000 to fund operations
during the year ended December 31, 2002 and six-months ended December 31, 2001,
respectively. Accordingly, the reports of independent auditors on the Company's
December 31, 2002 and 2001 and June 30, 2001 and 2000 consolidated financial
statements include an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. As of the
filing of this Form 10-K, all outstanding note obligations were in default.
The Company has taken steps and continues to develop plans it believes
will be sufficient to provide the Company with the ability to continue in
existence. In October 2001, under a new management team, the Company borrowed
$3.0 million to pay off existing debt and for working capital needs. In December
2001, the Company sold an operating division, generating net cash of
approximately $1.7 million. The Company reduced its fixed operating expenses and
consolidated its operations into one location. The Company is continuing in its
efforts to further increase sales revenues, reduce operating expenses, and
develop methods for reducing its existing trade debts and liabilities. The
Company may consider obtaining additional debt or equity financing. Similarly,
the Company may consider entering into other arrangements or business
combinations that would provide the Company with incremental working capital,
increased sales opportunities, or redundant cost savings. The Company has
recently experienced profitability and as of December 31, 2002, has successfully
reduced its overall liabilities by $4.8 million or 27.6% from the prior period.
However, there can be no assurances that the Company will be able to sustain
profitable operations or that the Company can continue with its plan to satisfy
its trade creditors and debt holders. The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
F-10
Segment Reporting
The Company has determined that for the year ended December 31, 2002,
the six-months ended December 31, 2001 and for the years ended June 30, 2001 and
2000, it operated in one business segment, real estate technology and
information. In addition, through December 31, 2002, the Company's operations
were conducted primarily in the United States.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101"). The Company adopted SAB 101 during the fourth quarter of fiscal year 2001
and such adoption did not have a material impact on its consolidated financial
statements.
The Company has also derived revenue from technology services provided
and productivity and information tools sold to real estate professionals and
consumers and from the sale of software licenses. The Company recognizes such
revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", as amended. Revenue from license fees is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. The Company recognizes revenue allocated to maintenance fees for
ongoing customer support and product updates ratably over the period of the
maintenance contract. Payments for maintenance fees are generally made in
advance, are non-refundable and have terms of one to two years.
The Company also sells banner advertising pursuant to contracts with
terms varying from 3 to 5 years, which may include the guarantee of a minimum
number of click-throughs or links by the users of the Company's online
properties. Arrangements where the Company receives up front fees associated
with advertising services are deferred and recognized as revenue on the
straight-line method over the terms of the respective contracts. The Company
also sells leads, referrals and data matching services pursuant to certain
contracts. Revenue from leads, referrals, data matching services and other
performance-based arrangements is recognized as such services are delivered or
other performance criteria are met, provided that no significant Company
obligations remain and collection of the related receivable is probable.
Revenues from the sale of advertising placed in real estate
publications are recognized upon the distribution of real estate publications in
their individual market areas. Advance payments received for real estate
publications advertising are shown as deferred revenues in the accompanying
balance sheets. Direct expenses related to the production and distribution of
real estate publications (including listings, production, printing and
distribution costs) are recognized concurrently with the related revenues upon
real estate publications distribution.
Concentrations
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to credit risk consist primarily of cash and trade
receivables. At December 31, 2002 substantially all trade receivables are due
from customers within the real estate and related industries.
Concentrations of Operations -- All of the Company's current products
are designed for operation in the national and international real estate
markets. Any recessionary pressures or other disturbances in those markets could
have an adverse effect on the Company's operations.
During the year ended December 31, 2002, Fidelity National Information
Solutions, Inc. ("FNIS") accounted for $2,068,496 or 20.6% of the Company's
gross revenues. At December 31, 2002 total receivables from FNIS included in
accounts receivable totaled $196,110. During the six-months ended December 31,
2001 and the years ended June 30, 2001 and 2000, no single customer accounted
for over 10% of the Company's revenues.
F-11
Fair Value of Financial Instruments
The Company's financial instruments include capital lease obligations,
long-term debt, cash and cash equivalents, accounts receivable and accounts
payable. The carrying amounts of capital lease obligations approximate their
fair values, which have been determined by the use of discounted cash flow
analyses. The carrying values of the Company's long-term debt approximated their
fair values, based on current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value, based upon
their short-term nature.
Financial Statements Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by management
are, among others, the realizability of property and equipment, the valuation of
deferred tax assets and warrant liabilities, royalty expenses to which it may be
obligated, and the outcome of any litigation to which it may be a party. Actual
results could differ from these estimates and it is reasonably possible that a
change in the estimates presented will occur in the near term.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash balances and instruments with
maturities of three months or less at the time of purchase.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on historical
collection experience and a review of the current status of trade accounts
receivable. It is reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change in the near term.
Product Development Costs
Costs incurred by the Company to develop, enhance, manage, monitor and
operate the Company's web site are expensed as incurred. The Company accounts
for the costs of developing software products to be sold in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", which
requires the capitalization of costs only during the period from the
establishment of technological feasibility to the time at which the product is
available for general release to customers. In addition, the Company is involved
in activities to continually improve existing products. These costs have been
charged to operating expenses in the accompanying statements of operations in
the amounts of $0, $0, $1,389,930 and $1,413,186 for the year ended December 31,
2002, the six-months ended December 31, 2001 and for the years ended June 30,
2001 and 2000, respectively.
Investments
At December 31, 2002 and 2001, the Company's entire portfolio of
marketable securities is classified as available-for-sale. These securities are
stated at fair market value, determined based on quoted market prices, with the
unrealized gains and losses reported in a separate component of stockholders'
equity (deficit) as accumulated other comprehensive loss. Realized gains or
losses are included in other income (expense) in the statement of operations.
The cost of securities sold is based on the specific identification method. At
December 31, 2002, the investments are recorded with no net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is calculated using the straight-line method over estimated useful
lives of 3 to 5 years, or the lease term, whichever is shorter.
F-12
Purchased Intangible Assets
At December 31, 2002 and 2001, the Company had no significant recorded
intangible assets on the books. In previous periods, intangible assets primarily
purchased in business acquisitions, were stated at cost and are amortized on a
straight-line basis over periods ranging from 3 to 15 years.
Advertising
The Company accounts for advertising costs as expenses in the period in
which they are incurred. Total advertising costs for the year ended December 31,
2002, the six-months ended December 31, 2001 and for the years ended June 30,
2001 and 2000, were $91,001, $70,444, $2,097,361 and $1,854,212, respectively.
Asset Impairment
During the year ended December 31, 2002, the Company adopted SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In
accordance with SFAS No. 144, the Company recorded impairment losses of $5,018
during the year ended December 31, 2002. In accordance with then applicable SFAS
121, the Company recorded $1,033,982 and $13,307,860 of impairment losses during
the six-months ended December 31, 2001 and year ended June 30, 2001,
respectively. (See Note 6 - Purchased Intangible Assets.)
Debt Forgiveness Income
The Company recognizes the forgiveness of debt as ordinary income in
the period in which it was forgiven. In general, income forgiveness is
attributable to the renegotiation of payment terms and amounts for past due
trade credit obligations of the Company.
Income Taxes
The Company accounts for income taxes by the asset/liability approach
in accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes". Under this pronouncement, deferred income taxes, if any, reflect the
estimated future tax consequences when reported amounts of assets and
liabilities are recovered or paid. Deferred income tax assets and liabilities
are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that are scheduled to be in effect when the differences are expected to
reverse. The provision for income taxes, if any, represents the total income
taxes paid or payable for the current year, plus the change in deferred taxes
during the year. The tax benefits related to operating loss carry forwards are
recognized if management believes, based on available evidence, that it is more
likely than not that they will be realized.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share is presented in
conformity with SFAS No. 128, "Earnings per Share".
Basic net income (loss) per share has been determined using net income
(loss) divided by the weighted average shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average shares outstanding, assuming all dilutive potential common
shares were issued. At December 31, 2002, the dilutive effect on the basic net
income per share resulted in no change. Since the Company incurred losses for
the six-months ended December 31, 2001 and for the years ended June 30, 2001 and
2000, basic and diluted net losses per share are the same for these periods.
Accordingly, options to purchase common stock outstanding at the end of the
six-months ended December 31, 2001 and the years ended June 30, 2001 and 2000 of
3,004,493 shares, 6,853,580 shares and 7,068,446 shares, respectively, and
warrants to purchase common stock in the six-months ended December 31, 2001 and
the years ended June 30, 2001 and 2000 of 16,745,556 shares, 8,624,685 shares
and 2,557,088 shares, respectively, were not included in the calculation of
diluted loss per share for these periods.
F-13
Stock Options
The Company accounts for employee stock options under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has disclosed the proforma net loss and net loss per
share effect in Note 9, as if the Company had used the fair value based method
prescribed under SFAS No. 123, "Accounting for Stock Based Compensation."
Accrued Liabilities Related to Warrants
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
Issue No. 00-19 ("EITF 00-19"), "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
does not have sufficient authorized shares available to settle its open
stock-based contracts, the initial fair value of the applicable contracts
(consisting primarily of nonemployee stock warrants - see Note 8) has been
classified as "accrued liabilities related to warrants" and measured
subsequently at fair value, with gains and losses included in the statement of
operations. For the year ended December 31, 2002 and for the six-month period
ended December 31, 2001, the Company recorded a gain on the reduction in the
fair value of warrant liabilities of $279,000 and $98,000, respectively. At
December 31, 2002 and 2001, the balance of accrued liabilities related to
warrants was $1,555,000 and $1,485,000, respectively.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its components in the
consolidated financial statements.
New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The adoption of this Statement by the Company on January 1,
2003 did not have a material impact on the Company's financial position or
results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. In accordance with the statement, the
Company recorded impairment losses of $5,018 during the year ended December 31,
2002.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. In accordance with this statement, the Company recorded a gain of
approximately $2.2 million and $1.1 million from the renegotiation of separation
and settlement agreements (see Note 13) and debt forgiveness from vendors,
respectively, for the year ended December 31, 2002.
F-14
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of this Statement did not have a material impact on the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9," which removes acquisitions of financial
institutions from the scope of both Statement No. 72 and Interpretation No. 9
and requires that those transactions be accounted for in accordance with
Statements No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." In addition, this Statement amends SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," to include in its scope
long- term customer-relationship intangible assets of financial institutions
such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets. The requirements relating to acquisitions of
financial institutions are effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions related to accounting
for the impairment or disposal of certain long-term customer-relationship
intangible assets are effective on October 1, 2002. This pronouncement does not
currently apply to the Company.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock- based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement No. 148 are effective for fiscal years ending after
December 15, 2002, with earlier application permitted in certain circumstances.
The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this Statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation 46 changes the criteria by which
one company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
NOTE 2--BUSINESS ACQUISITIONS AND DISPOSITIONS
The Company has completed the asset and business acquisitions discussed
below, all of which were accounted for by the purchase method of accounting.
Accordingly, results of operations for the acquired businesses have been
included in the consolidated statements of operations from their respective
dates of acquisition. The purchase price of each acquisition has been allocated
to the assets acquired and the liabilities assumed based on the estimated fair
market value at the date of acquisition.
F-15
Genstar Media
On August 4, 1998, the Company purchased substantially all of the
assets of Genstar Media, a sole proprietorship engaged in the business of
offering websites and e-mail to realtors. These assets included the customer
base, computers and other media equipment, and the business name. The purchase
price consisted of 50,000 shares of the Company's common stock issued to the
seller. The Company valued the securities issued at approximately $225,000 based
on the fair market value of the common stock on the date of acquisition. In
addition, the Company committed to the contingent issuance of common stock
having an aggregate value of $400,000 if certain revenue thresholds were met.
During the years ended June 30, 2000 and 1999, the revenue levels were met and
the additional common stock was issued and the Company allocated the additional
$400,000 to the customer base. During the year ended June 30, 2000, the net
remaining unamortized balance of the customer base relating to these increases
of approximately $267,000 was written off (see Note 6).
Holloway Publications, Inc. ("HPI")
During the year ended June 30, 2001, the Company discontinued the
operations of HPI and accordingly wrote off the $1,145,000 net remaining
unamortized balance of this intangible asset. Revenues recognized during the
years ended June 30, 2001 and 2000 totaled $1,437,000 and $1,540,000,
respectively.
TDT, LLC ("Terradatum")
On September 30, 1999, the Company acquired 100% of Terradatum, a
developer, marketer, and licensor of Internet-based multiple listing service
systems. Consideration consisted of 640,000 shares of the Company's common stock
valued at approximately $7,960,000 based on the fair market value of the
Company's common stock at the date of acquisition and $200,000 in cash. The
acquisition agreement called for the issuance of additional shares of the
Company's common stock and additional cash consideration of $1,500,000 if the
market price of the Company's common stock was below certain levels prior to the
first anniversary of the closing date. The Company recorded $1,500,000 as a
current liability as of June 30, 2000 because the market price of the Company's
common stock was projected to be below the stipulated level. The purchase price,
including the additional payment, was allocated primarily to purchased
technology in the approximate amount of $7,966,000, which was being amortized
over 3 years. The market price of the Company's common stock was below the
levels stipulated by the acquisition agreement, and during the year ended June
30, 2001, the Company issued a total of 1,984,146 shares of the Company's common
stock for the fair market value adjustment and in payment of $1,000,000 of the
liability, with no further value recorded to the purchased technology for the
issuance of these shares. During the latter part of the year ended June 30,
2001, the Company restructured the operations of this entity and recorded an
impairment charge of approximately $2,730,000 during the fourth quarter (see
Note 6). On December 3, 2001, the Company sold substantially all the assets of
its MLS operating division including the business unit to which Terradatum was a
component to FNIS (See Note 14).
Information Management Company, Inc. ("IMCO")
On September 30, 1999, the Company completed its acquisition of IMCO, a
provider of electronic publishing and software development for the real estate
listing management industry. The purchase price consisted of 341,151 shares of
the Company's common stock valued at $1,000,000, based on the fair market value
of the stock given in the acquisition. The acquisition agreement provides for
additional consideration of $1,000,000 payable in the Company's common stock on
the first and second anniversaries of the agreement. This amount was recorded as
additional purchase price and included as additional paid in capital. The
purchase price was allocated primarily to purchased technology in the
approximate amount of $1,918,000, which was being amortized over 3 years. During
the year ended June 30, 2001, the Company issued 199,203 additional shares of
its common stock to the prior owners of IMCO for the first anniversary
installment, with no further value recorded to the purchased technology for the
issuance of these shares. During the latter part of the year ended June 30,
2001, the Company restructured the operations of this entity, discontinued the
use of the purchased technology, and recorded an impairment charge of
approximately $866,000 (see Note 6).
On December 3, 2001, the Company sold substantially all the assets of
its MLS operating division including the business unit to which IMCO was a
component to FNIS (See Note 14). As noted above, the Company was obligated to
make a common stock payment of $500,000 on the second anniversary of the
original purchase agreement, which was not made. In connection with the sale of
IMCO to FNIS, and in lieu of the original agreement, the Company entered into a
settlement agreement to issue $437,000 of common stock to the original
principals of IMCO, not to exceed 3.5 million shares, at such time as the
Company has sufficient shares authorized make the issuance. The settlement
amount was reclassified to accrued liabilities related to warrants and reduced
to fair value at December 31, 2002 and 2001 under EITF 00-19 (see Note 1).
F-16
Home Seekers Magazines, Inc. ("HMI")
On February 8, 2000, the Company completed the acquisition of HMI, a
real estate magazine publication company, for approximately $1,053,000 in cash
and the assumption of approximately $1,189,000 in liabilities. The excess cost
over the fair market value of the net assets acquired was approximately
$1,858,000, which was being amortized over 15 years. During the year ended June
30, 2001, the Company sold the magazine publication businesses comprising of HMI
to four separate buyers and recognized a loss of $1,347,000, including the
write-off of the $1,267,000 net remaining balance of the intangible asset.
Revenues recognized during the years ended June 30, 2001 and 2000 totaled
$1,551,000 and $746,000, respectively.
Information Solutions Group, Inc ("ISG")
On April 3, 2000, the Company acquired ISG, a real estate electronic
forms provider. The purchase price consisted of 279,400 shares of the Company's
common stock valued at approximately $4,238,000, based upon the average closing
price of the stock on specified days preceding the date of acquisition, the
assumption of liabilities of approximately $849,000 and other costs aggregating
$346,000. The original acquisition agreement provided for additional
consideration payable in the Company's common stock depending upon the closing
prices of the Company's common stock on specified days preceding the first
anniversary of the closing date and if certain revenue targets were met, for
which the Company recorded an additional $1,000,000 at June 30, 2000. The
purchase price was allocated partially to intangible assets in the amount of
approximately $1,500,000, which were being amortized over 3 years. The excess of
cost over the fair market value of the net assets acquired was approximately
$4,705,000, which was being amortized over 5 years. During the year ended June
30, 2001, the acquisition agreement was amended, and the Company issued
2,200,000 additional shares of the Company's common stock as final payment of
further consideration due under the agreement with no further value recorded to
the purchased intangible assets for the issuance of the shares. The amended
agreement required the Company to register the additional shares by February 28,
2001. As of April 25, 2003, the Company had not completed the registration.
During the latter part of the year ended June 30, 2001, the Company
restructured the operations of this entity and recorded an impairment charge of
approximately $4,112,000 (see Note 6).
Connect2Call ("C2C")
On June 9, 2000, the Company acquired C2C, a developer of
voice-over-internet protocol and web-enabled, interactive voice communication
technologies. The purchase price consisted of 347,639 shares of the Company's
common stock valued at approximately $1,434,000 based on the fair market value
of the Company's common stock at the date of acquisition. The acquisition
provided for additional consideration payable in the Company's common stock
depending upon the closing prices of the Company's common stock on specified
days preceding effective registrations and certain earnings targets. The
purchase price was allocated primarily to purchased technology and a covenant
not to compete in the approximate amounts of $699,000 and $675,000,
respectively, and was being amortized over 3 years. During the year ended June
30, 2001, the Company issued 106,948 additional shares of the Company's common
stock to the prior owners of C2C, with no further value recorded to the
purchased intangible assets for the issuance of shares. During the six-months
ended December 31, 2001 the Company wrote-down its remaining investment in C2C
for a total expense of approximately $170,000.
Immediate Results Through Intuitive Systems, LLC ("IRIS")
On July 21, 2000, the Company completed the acquisition of IRIS, a
provider of productivity software to real estate professionals, through payment
of $25,000 cash, the issuance of 500,000 shares of the Company's common stock
and the assumption of liabilities of $1,195,000. The purchase agreement provided
for additional consideration of up to 2,900,000 shares of the Company's common
stock on specified dates within the first year of the agreement, which the
Company issued during the year ended June 30, 2001. The 3,400,000 total shares
of the Company's common stock issued in the acquisition were valued at
$2,587,000, based on an average of closing prices per share of the Company's
common stock just prior to and after the dates the shares were issued. The
purchase price was allocated primarily to purchased technology and a covenant
not to compete in the approximate amounts of $2,809,000 and $500,000,
respectively, and was being amortized over 3 years. The purchase agreement
required the Company to register any shares issued as additional consideration
by September 19, 2001. As of April 25, 2003, the Company had not completed the
registration.
F-17
During the latter part of the year ended June 30, 2001, the Company
restructured the operations of this entity and recorded an impairment charge of
approximately $1,747,000 (see Note 6).
NOTE 3 -- INVESTMENTS
At December 31, 2002 and 2001, the Company owned 500,000 shares of
common stock with a market value of $0 and $20,000, respectively, in Webquest,
Inc., a company considered a related party as a former officer and two former
members of the Company's Board of Directors also served on the Webquest board.
The Company's investment is being held for an indefinite period of time
and is classified as available for sale. Investments in marketable securities at
December 31, 2002 and 2001 are summarized as follows:
December 31, 2002 December 31, 2001
------------------------------- ----------------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Cost Loss Value Cost Loss Value
Common stock, related party........ $200,000 $(200,000) None $200,000 $(180,000) $ 20,000
======== ========== ===== ======== ========== ========
Common stock
During the year ended June 30, 1999, the Company was an investor in an
LLC with Finet.com, a publicly held mortgage company, and the Company entered
into a license agreement with Finet.com in place of this agreement and agreed to
dissolve the LLC. At June 30, 1999 the investment in the LLC had been accounted
for as an offset to stockholders' equity as the primary asset of the LLC was the
Company's common stock.
During the year ended June 30, 2000, the Company sold its 50% interest
in the LLC to Finet.com for 600,000 common shares of Finet.com. The Company
recorded its investment based on the Finet.com quoted market price less a
discount of 15%, as the shares were unregistered. The offset to equity was
eliminated as a result of the sale of the Company's interest. In addition, the
Company entered into a settlement agreement and release with Finet.com whereby
both parties are effectively released from the licensing agreement. The Company
received total cash payments of $753,000, which was recorded as $410,000 in
revenue associated with click-throughs provided and $343,000 for a refund of the
unamortized portion of purchased technology acquired from Finet.com during
fiscal 1999. The Company sold the 600,000 common shares of Finet.com and
recognized a loss of $822,000 during the year ended June 30, 2001, which is
included in other expense on the accompanying statement of operations, and
substantially all of which was included as a part of accumulated other
comprehensive loss at June 30, 2000.
Common stock, related party
In prior years, the Company was given 700,000 shares of Webquest common
stock in lieu of cash payment for the license of technology. During the year
ended June 30, 2000, the Company received an additional 400,000 shares of
Webquest common stock in payment of notes and accounts receivable due and as
consideration for the termination of certain operating agreements. At various
dates during the year ended June 30, 2000, the Company sold 54,300 shares of the
common stock recognizing a gain on sale included in other income of
approximately $46,000. During the year ended June 30, 2001, the Company sold
245,700 shares of the common stock recognizing a loss on sale included in other
expense of approximately $152,000. At December 31, 2002, the Company owned
500,000 shares of common stock with no net realizable value.
F-18
During the year ended December 31, 2002, the six-months ended December
31, 2001 and the years ended June 30, 2001 and 2000, the Company recorded
revenues from the above related party of $0, $0, $0 and $370,000, respectively,
related to the technology licensing and custom programming fees.
Investment in non-public company-related party
The Company owns common stock of BuySellBid.com; a company considered a
related party as a former Company officer and former member of the Board of
Directors is also on the BuySellBid.com board.
During the year ended June 30, 2000, the Company entered into certain
agreements with BuySellBid.com, a non-public company. These agreements consisted
of an exclusive provider arrangement where the Company provides all of
BuySellBid.com's real estate information, and certain advertising contracts
whereby the Company and BuySellBid.com provide banner advertising on their
respective websites. As a result of these agreements, the Company received a
total of 2,000,000 shares of BuySellBid.com common stock in exchange for 507,615
shares of the Company's common stock and a $1,000,000 cash payment. Valuation of
the common stock acquired was based on the offering price of shares being sold
in a private placement offering at the time the agreements were entered into,
resulting in a total value of $5,000,000 for BuySellBid.com common stock. The
advertising agreements were treated as a non-monetary exchange resulting in the
advertising revenue being netted with advertising expense over their respective
terms. At June 30, 2000, the Company reserved $2,500,000 of the value of the
investment due to the impairment resulting from continuing losses of
BuySellBid.com and the uncertainties of recovery.
During the year ended June 30, 2001, the Company sold 310,800 shares of
BuySellBid.com common stock for proceeds of $777,000, which was recorded as an
offset to the carrying value of the remaining investment in the common stock.
Because of continuing losses of BuySellBid.com and uncertainties of recovery,
the remaining investment in the common stock of BuySellBid.com was written off,
resulting in a loss of $1,723,000, of which $861,000 was written off during the
fourth quarter.
NOTE 4--INVESTMENT IN FOREIGN AFFILIATE
In May 2000, the Company completed an agreement to acquire an equity
interest in, and enter into an operating agreement with the property portal!
Limited, a Hong Kong company that operates an Asian Internet real estate portal
("pp.com").
In the transaction, the Company issued 1,638,750 of its common shares,
valued at approximately $6,452,000, in exchange for 1,613,000 shares of pp.com,
representing approximately a 23% ownership of pp.com. In addition, the Company
issued to the stockholders of pp.com fully vested warrants to purchase an
aggregate of 1,000,000 shares of the Company's common stock at $7 per share. The
warrants were exercisable for one year after the date of issue. The estimated
fair value of the warrants, $1,270,000, was recorded as a component of the
investment in pp.com, and valued using the Black-Scholes valuation method using
a volatility of 1.226.
The operating agreement was a technology consulting and license
agreement whereby the Company granted a license to its products for sales in the
territory of the People's Republic of China (including Hong Kong and Taiwan),
Malaysia, Singapore and Thailand. Pursuant to the agreement, the Company was to
be paid an initial fee of $1,800,000. The Company received $200,000 in May 2000
and was to receive $1,600,000 following the completion of a defined trial
period. After the first anniversary date of the agreement, pp.com was to pay the
Company a royalty equal to 14% of all revenue derived from the commercial use by
pp.com of any services or technology provided by the Company. The agreement was
for a period of ten years, subject to earlier termination by the parties under
certain terms of the agreement.
F-19
The investment in pp.com was accounted for using the equity method of
accounting, with inter-company accounts and transactions eliminated. The
Company's equity in the net loss of pp.com for the year ended June 30, 2001 and
for the period May 16 to June 30, 2000 was $282,914 and $81,308, respectively,
which was included in other expense. The excess of the Company's cost of the
investment over the Company's equity in the net assets of pp.com was being
amortized over a period of three years. Amortization expense for the years ended
June 30, 2001 and 2000 was $1,934,393 and $310,988, respectively. Payments
received from pp.com under the operating agreement were to be applied as a
reduction of the investment until such time as the investment was fully
recovered, then recognized as other income thereafter.
During the third quarter of the year ended June 30, 2001, the Company
wrote its remaining investment in pp.com down to $1,000,000 and restructured its
agreement with pp.com. pp.com elected to merge with iShowFlat in a
stock-for-stock exchange pursuant to which the Company owns approximately 11% of
the merged company and terminated pp.com's exclusive agreement for the
development and marketing of the Company's technology in Asia. iShowFlat paid
the Company $200,000 cash in May 2001 for non-exclusive agency rights to the
Company's technology in Asia. Because of iShowFlat's inability to raise
necessary capital and its ongoing operating losses, the Company wrote off the
$732,000 balance of its investment during the fourth quarter of the year ended
June 30, 2001. On April 4, 2002 iShowFlat announced it was considering a buyout
offer for the company and that, if it did not receive bridge financing in
connection with the buyout, it would have to consider other financing sources or
cease doing business.
NOTE 5-- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2002
and 2001:
December 31, December 31,
2002 2001
------------ ------------
Computer equipment............................... $ 2,954,663 $ 3,029,965
Computer software................................ 224,698 266,821
Furniture and office equipment................... 255,761 258,126
Leasehold improvements........................... 307,168 307,169
------------ ------------
3,742,290 3,862,081
Less: accumulated depreciation and amortization.. (3,345,813) (2,524,629)
------------ ------------
$ 396,477 $ 1,337,452
============ ============
The Company has computer equipment and software with a net book value
of $98,831 and $141,404, respectively (accumulated depreciation of $184,390 and
$110,730, respectively) under capital leases at December 31, 2002 and 2001.
The Company recorded depreciation expense for the year ended December
31, 2002, the six-months ended December 31, 2001 and for the years ended June
30, 2001 and 2000 of $1,075,000, $685,000, $1,670,000 and $793,000,
respectively.
NOTE 6 -- PURCHASED INTANGIBLE ASSETS
Purchased intangible assets consist of the following at December 31,
2002 and 2001:
Estimated December 31, December 31,
Useful Lives 2002 2001
------------ ------------ ------------
Trademark........................ 1-2 years - 9,651
------------ ------------
- 9,651
Less: accumulated amortization... - (4,633)
------------ ------------
$ - $ 5,018
============ ============
Amortization expense on purchased intangible assets was $0, $972,767,
$7,734,956 and $4,209,218 for the year ended December 31, 2002, the six-months
ended December 31, 2001 and the years ended June 30, 2001 and 2000,
respectively. During the year ended December 31, 2002, the Company adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In
accordance with SFAS No. 144, the Company recorded impairment losses of $5,018
during the year ended December 31, 2002.
During the six-months ended December 31, 2001, the Company performed an
assessment of the carrying value of its long-lived assets to be held and used,
including significant amounts of purchased intangible assets recorded in
connection with its various acquisitions. This assessment was performed pursuant
to SFAS 121 due to significant negative industry and economic trends affecting
both the Company's current and future operations, as well as the general decline
of technology valuations. Management concluded that the decline in market
conditions within the Company's industry was significant and other than
temporary. As a result of this assessment, along with the Company's decision to
discontinue its publishing operations during April 2001 and consolidation and
restructuring of other acquired businesses primarily during June of 2001, the
Company wrote down $1,033,982 and $13,307,860 of impaired purchased intangible
assets for the six-months ended December 31, 2001 and the year ended June 30,
2001. Such assets were written down based on the amount by which the carrying
amount exceeded their fair value. Fair value was determined based on discounted
future cash flows for the operating divisions that had separately identifiable
cash flows. The cash flow periods used were three years with a discount rate of
15%, which are assumptions that reflect management's best estimates.
F-20
NOTE 7 -- LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002 and
2001:
December 31, December 31,
2002 2001
------------ ------------
Note payable to Fidelity National Financial, Inc.
("Fidelity"), net of unamortized discount of
$165,000 and $689,000, respectively, with stated
interest at prime plus 2% (totaling 6.25% at
December 31, 2002), secured by certain assets of
the Company, due April 24, 2003, convertible into
shares of the Company's common stock at $0.10 per
share at the option of the holder........................ $ 2,835,000 $ 2,311,000
Note payable to a former Director of the Company,
with interest at 9%, secured by certain assets of
the Company, subordinate to the Fidelity note, due
April 9, 2001, convertible into shares of the
Company's common stock at $0.10 per share................ 500,000 500,000
Note payable to a former Director of the Company,
with stated interest at 10%, secured by certain
assets of the Company, subordinate to the Fidelity
note, payable in four equal installments, due
December 31, 2002........................................ 110,000 200,000
Notes payable to individuals, with interest at 9%,
unsecured, due December 13, 2002......................... 72,000 162,000
Capital lease obligations (Note 10)...................... 72,956 180,907
Other.................................................... 25,698 90,793
------------ ------------
Total.................................................... 3,615,654 3,444,700
Less current portion..................................... (3,610,110) (1,045,679)
------------ ------------
Long-term portion........................................ $ 5,544 $ 2,399,021
============ ============
Future maturities of long-term debt at December 31, 2002 are as follows:
Years ending December 31:
2003.................................................... $ 3,610,110
2004.................................................... 5,544
2005.................................................... -
2006.................................................... -
------------
Total $ 3,615,654
============
F-21
The Company entered into a Warrant Purchase Agreement simultaneous with
the note payable to Fidelity such that the aggregate potential equity
represented in the note payable to Fidelity and the Warrant is 25% of the
Company's outstanding common stock. To the extent the note is not converted to a
number of shares of common stock representing at least a 25% equity stake in the
Company, the Warrant is exercisable to bring Fidelity's beneficial ownership to
as much as 25% of the outstanding shares of Common Stock. The warrants are not
dependent on conversion of the note and are detachable from the note. Based on
the current outstanding number of common shares, the warrants can be exercised
for up to 12,238,640 shares. The Company has recorded the value of the
detachable warrant, totaling $768,000 to debt discount and is amortizing that
amount over the life of the note. For the year ended December 31, 2002 and the
six-months ended December 31, 2001, $524,376 and $97,592, respectively, have
been amortized to interest expense.
The note payable of $500,000 to a former Director contains a late
payment penalty clause requiring the Company to issue warrants to purchase
100,000 shares of the Company's common stock on April 9, 2001, the original due
date, and additional warrants to purchase 100,000 shares of the Company's common
stock each week thereafter until the note is repaid. In accordance with this
late payment penalty clause, the Company is obligated under the terms of the
note to issue warrants to purchase a total of 9,100,000 shares of the Company's
common stock at exercise prices ranging from $0.03 to $0.80 per share to the
former Director as of December 31, 2002. The former director was issued a
warrant to purchase 375,000 shares of the Company's common stock at an exercise
price of $0.19 per share at the time the loan was made. The Company recognized
interest expense of $349,000, $631,000 and $605,169 attributable to the value of
these warrants (under SFAS 123) for the year ended December 31, 2002, the
six-months ended December 31, 2001 and the year ended June 30, 2001,
respectively. Any warrants issued vest immediately and expire three years from
the date of issuance.
The Company issued warrants to purchase 100,000 shares of the Company's
common stock on November 22, 2000, at an exercise price of $0.43 per share in
connection with the loan of $250,000 from a former Director of the Company. In
addition, the Company issued a total of 75,000 shares of the Company's common
stock to the former Director to extend the due date of the loan. The loan
balance outstanding as of December 31, 2002 was $110,000 and the Company was in
default of the payment terms of the note at December 31, 2002. The Company is
making periodic payments on the note as cash flows permit. The Company
recognized interest expense of $87,000 and $38,000 attributable to these
warrants and shares, respectively, for the year ended June 30, 2001. The Company
did not recognize any interest expense attributable to these warrants or shares
during the year ended December 31, 2002 and the six-months ended December 31,
2001. The warrants vest immediately and expire three years from the date of
issuance.
During the year ended June 30, 2001 the Company issued warrants to
purchase a total of 250,000 shares of the Company's common stock at an exercise
price of $0.25 per share to the individuals who loaned the Company $200,000. The
warrants vest immediately and expire three years from the date of issuance. The
loan balance outstanding as of December 31, 2002 was $72,000 and the Company was
in default of the payment terms of the note at December 31, 2002. The Company is
making periodic payments on the notes as cash flows permit. The Company
recognized interest expense of $0, $241,000 and $72,500 attributable to the
warrants for the year ended December 31, 2002, the six-months ended December 31,
2001 and the year ended June 30, 2001, respectively. These notes payable also
include a late payment penalty clause whereby the Company issued 100,000
warrants per week for each note payable (with a cap of one million warrants),
which was reached as of December 31, 2001. The due dates of these notes were
extended to December 13, 2002.
The interest rate on capitalized leases varies from 12.0% to 32.1% and
is imputed based on the lessor's implicit rate of return.
NOTE 8 -- STOCKHOLDERS' EQUITY (DEFICIT)
The Company is authorized to issue 50,000,000 shares of common stock,
par value $.001 per share, 5,000,000 shares of Class A preferred stock, par
value $.001 per share, of which 5,000 have been designated as Class A, Series 1,
200,000 shares of Class B preferred stock, par value $10.00 per share, and
4,800,000 shares of undesignated preferred stock, par value $.001 per share.
Terms of the Class A, Class B and undesignated preferred stock are to be
prescribed by resolution of the Board of Directors. At December 31, 2002 and
2001, there were no outstanding shares of preferred stock.
F-22
Common Stock
As of December 31, 2002 the Company had 48,954,561 common shares issued
and outstanding, 2,538,582 outstanding options issued pursuant to the Company's
Amended and Restated 1996 Stock Option Plan, as amended (the "1996 Plan") and
36,761,096 outstanding warrants. The Company will require an increase in the
number of authorized shares of common stock to enable the future exercises of
the outstanding options and warrants (see Note 1).
During the six-months ended December 31, 2001, options to purchase
54,000 common shares were exercised at prices ranging from $0.16 to $0.59 per
share. During the year ended June 30, 2001, warrants to purchase 200,000 common
shares were exercised at a price of $0.19 per share and options to purchase
3,334 common shares were exercised at a price of $0.59 per share. During the
year ended June 30, 2000, warrants to purchase 1,026,039 common shares were
exercised at prices averaging $2.96 per share and options to purchase 677,497
common shares were exercised at an average price of $2.21 per share. No options
or warrants were exercised during the year ended December 31, 2002.
In August 2001, the Company issued a total of 1,020,834 unrestricted
common shares with a combined value of $500,000 to EntrePort Corporation
("EntrePort") as an advance against the purchase price of the existing business
of EntrePort. Subsequent to this issuance, the Company entered into a Business
Separation and Settlement Agreement with HomeMark and HomeSeekers Management,
Inc. In accordance with the terms of the agreement, the companies terminated and
released any and all obligations under all agreements between the parties. In
connection with the settlement, and in addition to other terms and conditions,
the Company paid HomeMark $1,875,000 and assigned to HomeMark its Loan Agreement
and the Security Agreement and Financing Agreement dated July 16, 2001 between
EntrePort Corporation and the Company in the total principal amount of $500,000.
In addition, the Company issued a total of 788,130 unrestricted shares
of its common stock to former officers and directors as part of separation and
settlement agreements, including 600,000 shares issued to three such individuals
in July and August 2001 (See Note 13).
Common Stock Warrants
Warrants for the purchase of common shares that were issued and
outstanding as of December 31, 2002 are summarized below:
Number of Exercise
Warrants Price Expiration
---------- ----------- ----------
23,785,140 $0.03-$0.12 2003-2005
8,207,371 0.13-0.49 2003-2006
3,808,075 0.50-0.80 2003-2004
233,334 1.50 2003
607,899 2.38-2.50 2003-2004
119,277 3.00 2003-2004
----------
36,761,096
During the year ended December 31, 2002, a total of 8,300,000 warrants
expiring on various dates in 2005 to purchase common shares at exercise prices
of $0.03 to $0.17 were issued to officers of the Company, consultants and
investors. During the six-months ended December 31, 2001, a total of 9,390,871
warrants expiring on various dates in 2002 through 2004 to purchase common
shares at exercise prices of $0.03 to $0.67 were issued to officers of the
Company, consultants and investors (See Note 9 for disclosure of the impact on
net loss and loss per share had the warrants issued to the officers of the
Company been valued pursuant to SFAS No. 123).
During the year ended December 31, 2002 and the six-months ended
December 31, 2001, a total of 523,100 and 1,270,000 warrants, respectively,
issued to consultants and investors expired and were canceled. In connection
with the note issued to Fidelity, the Company entered into a Warrant Purchase
Agreement such that as a result of the issuance to Fidelity of the note and the
warrant, Fidelity has a currently exercisable right to purchase up to
approximately 12,238,640 shares (included in the table above), or the equivalent
of 25% of the outstanding shares of the Company's common stock, calculated by
applying Fidelity's right to acquire 25% of the Company's outstanding shares to
the total of 48,954,561 shares currently issued and outstanding. The actual
number of shares issuable to Fidelity is likely to be greater than 12,238,640
because of the dilutive effect of exercising the note and warrant. Fidelity has
the sole right to receive or the power to direct the receipt of dividends from,
or proceeds from the sale of, the shares of the Company's Common Stock issuable
upon the exercise of the note and the warrant.
F-23
NOTE 9 -- STOCK OPTIONS
On October 9, 1996, the Company's Board of Directors ratified a stock
option plan (the "1996 Plan") under which the Company may grant qualified and
non-qualified incentive stock options to employees, directors, and consultants.
As part of the provisions of the plan, the Company may grant, but is not
obligated to grant, options that include reload features.
Options granted generally have terms from one to five years from the
date of grant and generally vest immediately or ratably over their terms. The
exercise price of incentive stock options granted under the plan may not be less
than 100% of the fair market value of the Company's common stock on the date of
the grant. For a person who at the time of the grant owns stock representing 10%
of the voting power of all classes of the Company's stock, the exercise price of
the incentive stock options granted under the plan may not be less than 110% of
the fair market value of the common stock on the date of the grant. During the
year ended June 30, 1999, the Company amended and restated the 1996 Plan to
allow employees 90 days after separation from the Company to exercise all vested
options. In addition, during the year ended June 30, 2000, the stockholders
approved an amendment to increase the authorized shares under the plan from
5,500,000 shares to 11,500,000 shares.
In January 2001, the Company's Board of Directors approved the
repricing of all outstanding employee stock options to $0.593 per share. Prior
vesting schedules and the number of shares underlying the options remained
unchanged. In April 2001, the Company's Board of Directors approved the
repricing of all outstanding options of certain officers and managers of the
Company to $0.13 per share in consideration for reductions in salary. These
options now require variable accounting treatment, with appropriate charges to
compensation expense in future reporting periods as the market price of the
Company's common stock fluctuates. The market price of the Company's common
stock on December 31, 2002 and December 31, 2001 was $0.05 and $0.06 per share,
respectively, which is lower than previously issued option prices resulting in
no additional compensation expense being recorded.
The Company applies APB Opinion No. 25 in accounting for its fixed
stock option plan and warrants granted to employees. Accordingly, since the
market value and the option price of the Company's stock were equal on the
measurement date, no compensation cost has been recognized for new issuances
under the plan. During the six-months ended December 31, 2001, the Company
recorded $1.8 million of compensation expense to reflect the differences in the
warrant exercise price and the market value on the date of issuance attributable
to warrants issued to three former officers under separation agreements which
were voided during the following year and new agreements entered into. (See Note
13.) No similar compensation expense was recorded during the years ended
December 31, 2002, June 30, 2001 and 2000. Had compensation cost been determined
on the basis of fair value pursuant to SFAS No. 123, net loss and loss per share
would have been impacted as follows:
(Amounts in Thousands, Except Per Share Data)
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Net Income (loss)
As reported........................... $ 2,814 $ (11,966) $ (51,627) $ (25,034)
============ ============ ============ ============
Pro forma............................. $ 2,654 $ (12,456) $ (61,201) $ (28,280)
============ ============ ============ ============
Basic and Diluted Loss Per Share
As reported........................... $ 0.06 $ (0.25) $ (1.66) $ (1.47)
============ ============ ============ ============
Pro forma............................. $ 0.05 $ (0.26) $ (1.96) $ (1.66)
============ ============ ============ ============
F-24
The pro forma amounts were estimated using the Black-Scholes
option-pricing model with the following assumptions for the year ended December
31, 2002, the six-months ended December 31, 2001and the years ended June 30,
2001 and 2000:
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
------------ ------------ ------------ ------------
Dividend Yield......................... 0% 0% 0% 0%
Risk-Free Interest Rate................ 4.0% 4.0% 5.0% 5.5-6.9%
Expected Life.......................... 3-4 years 3-4 years 3-4 years 3-7 years
Expected Volatility.................... 293.95% 227.20% 121.1-166.4% 121.1%
Expected lives are equal to the remaining option terms for each period.
Following is a summary of the status of options outstanding during the
year ended December 31, 2002, the six-months ended December 31, 2001 and the
years ended June 30, 2001 and 2000:
Weighted
Number of Exercise average
shares under price exercise
options range price
------------ ------------ ------------
Outstanding at July 1, 1999............ 4,082,874 $1.47-9.97 $2.58
Granted................................ 4,310,038 2.31-22.50 7.14
Canceled............................... (646,969) 1.47-21.13 9.62
Exercised.............................. (677,497) 1.47-9.44 2.21
------------
Outstanding at June 30, 2000........... 7,068,446 1.47-22.50 4.95
============
Options exercisable at June 30, 2000... 3,179,159 2.54
Outstanding at July 1, 2000............ 7,068,446 1.47-22.50 4.95
Granted................................ 2,003,250 0.13-3.34 1.96
Canceled............................... (2,214,782) 0.34-21.94 5.06
Exercised.............................. (3,334) 0.59 0.59
------------
Outstanding at June 30, 2001........... 6,853,580 0.13-1.04 0.31
============
Options exercisable at June 30, 2001... 5,806,672 0.28
Outstanding at July 1, 2001............ 6,853,580 0.13-1.04 0.31
Granted................................ 825,000 0.07-0.49 0.11
Canceled............................... (4,620,087) 0.13-1.04 0.26
Exercised.............................. (54,000) 0.13-0.59 0.16
------------
Outstanding at December 31, 2001 3,004,493 0.07-1.04 0.34
============
Options exercisable at December 31, 2001 1,816,942 $0.38
Outstanding at January 1, 2002......... 3,004,493 0.07-1.04 0.34
Granted................................ 2,000,000 0.08 0.08
Canceled............................... (2,465,911) 0.08-1.04 0.29
Exercised.............................. - - -
------------
Outstanding at December 31, 2002 2,538,582 0.07-1.04 0.18
============
Options exercisable December 31, 2002 2,428,989 0.17
F-25
The weighted average grant date fair value of options granted in the
year ended December 31, 2002, the six-months ended December 31, 2001 and the
years ended June 30, 2001 and 2000 was $0.08, $0.11, $1.49 and $5.57,
respectively.
The following table summarizes information regarding stock options
outstanding at December 31, 2002:
Outstanding Exercisable
--------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Exercise Contractual Average Average
Price Range Number Life (In Years) Exercise Price Number Exercise Price
----------- ----------- --------------- -------------- --------- --------------
$0.07-0.13 2,001,500 2.00 $0.08 1,946,086 $0.08
0.16-0.56 91,500 1.59 0.45 84,518 0.47
0.59-1.04 445,582 0.59 0.59 398,385 0.59
----------- --------------- -------------- --------- --------------
2,538,582 $0.18 2,428,989 $0.17
=========== ============== ========= ==============
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company has property and equipment under capital leases with
maturity dates to February 2004. Certain of the leases are secured by the
personal guarantee of a shareholder. The Company has an operating lease for its
facilities from a related party expiring in July 2004 unless terminated earlier
with sixty-days notice. The Company also has service agreements with Internet
access providers. Future minimum payments under all capital and operating leases
as of December 31, 2002 are as follows:
Years Ending Operating Capital
December 31: Leases Leases
------------ --------- --------
2003 $ 292,380 $ 90,094
2004 175,231 4,344
Thereafter - -
--------- --------
Total minimum lease payments $ 467,611 94,438
=========
Less: amount representing interest (21,482)
--------
Present value of future minimum lease payments 72,956
Less: current portion 68,743
--------
Long-term portion $ 4,213
========
During the year ended December 31, 2002 and the six-months ended
December 31, 2001, the Company terminated numerous leased facilities and
recorded lease termination costs of approximately $0 and $75,000, respectively.
The Company believes that any obligations that might be remaining attributable
to the closure of these facilities are minimal. Rental expense for all leases
was $233,758, $583,461, $1,229,834 and $559,370 for the year ended December 31,
2002, the six-months ended December 31, 2001 and the years ended June 30, 2001
and 2000, respectively.
F-26
Employment Agreements
The Company has employment agreements with certain of its officers
calling for annual salaries and cash bonuses attributable to the attainment of
certain performance objectives. Due to its limited cash reserves, the Company
has been unable to fully fund the salary obligations of these agreements
totaling $423,924, which were accrued at December 31, 2002. The officers waived
any bonuses that might otherwise have been earned during December 31, 2002 under
the terms of the agreements. The Company is obligated to issue stock options to
the officers pursuant to the terms of the agreements, which it has not done. The
Company's ability to issue these stock options is subject to the approval, by
the stockholders of the Company, of an amendment to the Company's Articles of
Incorporation to increase the number of authorized common shares.
Claims and Litigation
The Company is involved in various legal proceedings arising out of its
operations in the ordinary course of its business, including various claims that
have been asserted or complaints that have been filed alleging patent and
copyright infringement, breach of employment and separation agreements, and
non-payment under various agreements. In addition, various claims have been made
against the Company in connection with certain of its acquisitions, including
breach of registration rights agreements. Management intends to contest each
case and in certain instances may attempt to reach a settlement of the issues
claimed. The Company does not believe that these proceedings will have a
material adverse effect on its business, financial condition, or result of
operations beyond the amounts recorded in the accompanying consolidated
financial statements for the estimated settlement of specific actions. However,
if settlement is not reached and the matters proceed to trial, an unfavorable
outcome could have a material adverse effect on the Company's financial position
and results of operations. The Company has currently reserved $350,000 for
future possible claims and litigation.
Registration Rights Agreements
The Company is in violation of registration rights agreements including
those associated with certain of its acquisition purchase agreements and certain
amendments thereto. The required registration of the shares, issued as
additional consideration to the former owners of these companies, is subject to
the approval by the stockholders of the Company of an amendment to the Company's
Articles of Incorporation to increase the number of authorized common shares.
NOTE 11 -- INCOME TAXES
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes were as
follows at December 31, 2002 and 2001:
December 31, December 31,
2002 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforwards....... $ 22,796,586 $ 23,098,985
Deferred revenue....................... 440,501 1,123,743
Accrued expenses and other............. 213,860 1,003,340
------------ ------------
23,450,947 25,226,068
Deferred tax liabilities:
Depreciation........................... - (5,081)
------------ ------------
23,450,947 25,220,987
Less: Valuation allowance................. (23,450,947) (25,220,987)
------------ ------------
Net deferred taxes..................... $ - $ -
============ ============
F-27
A valuation allowance has been established due to the Company's
accumulated losses. The increase (decrease) in the valuation allowance was
$(1,770,040), $3,924,680, $9,559,612 and $6,898,526 for the year ended December
31, 2002, the six-months ended December 31, 2001 and the years ended June 30,
2001 and 2000, respectively. In addition, the Company has available at December
31, 2002, approximately $67 million of unused Federal and State net operating
loss carryforwards that may be applied against future taxable income and that
expire in various years from 2008 to 2021. The utilization of these loss
carryforwards may be limited by certain events including an ownership change as
defined by the Internal Revenue Code.
The principal reasons for the difference between the effective income
tax rate and the federal statutory income tax rate are as follows:
(Twelve Months) (Six-Months) (Twelve Months) (Twelve Months)
December 31, December 31, June 30, June 30,
2002 2001 2001 2000
--------------- --------------- --------------- ---------------
Federal utilization (benefit) expected at statutory
rate.............................................. $ 956,760 $ (4,068,440) $ (17,552,559) $ (8,511,560)
Valuation allowance.................................. (1,770,040) 3,924,680 9,559,612 6,898,526
Write-down of intangible assets...................... - 5,337,836 -
Write-down of investment............................. - - 585,820 850,000
Deferred revenue..................................... 440,501 - - -
Accrued expenses and other........................... 352,779 - - -
Goodwill amortization................................ - 123,760 2,054,192 739,862
Non-deductible expenses.............................. 20,000 20,000 15,099 23,172
--------------- --------------- --------------- ---------------
$ - $ - $ - $ -
=============== =============== =============== ===============
NOTE 12 -- HOMEMARK TRANSACTIONS
On June 6, 2001, the Company entered into a Securities Purchase
Agreement with HomeMark. HomeMark agreed to purchase 5,000,000 shares of the
Company's Series A convertible preferred stock, subject to certain terms and
conditions including satisfactory completion of due diligence procedures and the
approval by the Company's stockholders of a proposed amendment to the Company's
Articles of Incorporation to increase the number of authorized common shares.
The cash considerations for the preferred stock was $20.0 million, to be paid
upon closing to the Company in a series of transactions, the number and timing
of which were to be determined. In addition to the cash purchase price, HomeMark
was to assign to the Company $80.0 million of prepaid advertising owned by
HomeMark in a national print publication.
F-28
Concurrent with the Securities Purchase Agreement, the Company and
HomeMark entered into a Loan Agreement, providing for a non-contingent loan of
up to $1.0 million. These funds were advanced to the Company by HomeMark during
June 2001, and were payable $500,000 on September 30, 2001 and $500,000 on
December 31, 2001. HomeMark also advanced the Company an additional $920,000 in
the form of short-term loans during July, August and September 2001. The
Securities Purchase Agreement and the transactions contemplated by the agreement
with HomeMark were subject to the approval and ratification of a majority of the
stockholders of the Company.
On November 1, 2001 the Company entered into a Business Separation and
Settlement Agreement with HomeMark and HomeSeekers Management, Inc., which was
consummated on November 5, 2001. In accordance with the terms of the agreement,
the companies terminated, and released any and all obligations under, all
agreements between the parties including the Loan Agreement, Security Agreement
and Financing Statement, and the Securities Purchase Agreement dated June 6,
2001; the Security Agreement and Financing Statement dated June 19, 2001, the
Intercorporate Services Agreement dated July 1, 2001; the Loan Agreement,
Security Agreement and Financing Statement dated July 17, 2001; all promissory
notes including, without limitation, those issued in connection with the June
Loan Agreements and the June Security Agreement. In connection with the
settlement, and in addition to other terms and conditions, the Company paid
HomeMark $1,875,000 and assigned to HomeMark its Loan Agreement and the Security
Agreement and Financing Agreement dated July 16, 2001 between EntrePort
Corporation and the Company in the total principal amount of $500,000.
NOTE 13 - SEPARATION AND SETTLEMENT AGREEMENTS
In July and September 2001, and in connection with the transactions
with HomeMark, the Company entered into separation and settlement agreements
with three of its former officers and directors. These individual agreements
provided for the termination of the officers' employment with the Company.
Pursuant to the agreements, the Company agreed to the following: (1) pay all
final salary, unpaid personal time off and other sums due, which totaled
approximately $50,000 combined; (2) pay a combined $59,000 cash to two of the
officers in July, and $20,000 cash to the other officer each month from
September 2001 through January 2002; (3) issue each officer 200,000 unrestricted
shares of the Company's common stock; (4) cancel all vested employee stock
options of the officers with an exercise price of $0.13 per share and issue to
them a total of 4,078,996 three-year warrants to purchase shares of the
Company's common stock at an exercise price of $0.13 per share; and (5) issue to
the officers over a 36 month period shares of the Company's common stock with a
combined value each month of approximately $72,000, with the number of shares to
be delivered to be determined by dividing the monthly payment amount by the
average closing price of one share of the Company's common stock for the ten
trading days immediately preceding the 15th day of each month. One of the
officers entered into a one-year consulting agreement with the Company for
$5,000 per month commencing in February 2002, and a note payable to the Company
by this officer of $70,000 was forgiven along with approximately $10,000 of
accrued interest. Each of the agreements contained mutual releases of certain
claims, liabilities or causes of actions that one party might have against the
other party. During the six-months ended December 31, 2001, the Company recorded
compensation expense of approximately $5,246,000 relating to these agreements.
The Company did not issue any stock to any of the officers under the
36-month provision called for by the agreements. Similarly, the Company did not
make any cash payments called for beyond September 2001. On April 23, 2002 the
Company and the former officers entered into new agreements that, among other
features, voided the 36-month stock issuance provision as well as all remaining
cash obligations under the old agreements. The Company agreed to issue a total
of 1 million shares of stock to each of two of the officers and warrants to
purchase 1 million shares of the Company's common stock to each of the three
officers exercisable during a 5 year period at an exercise price of $.10 per
share. The Company agreed to forgive certain indebtedness totaling approximately
$90,000 from one officer. Any issuances of common stock or any exercise of
warrants to purchase common stock as contemplated by the new agreements are
subject to an increase in the authorized number of common shares available which
must be approved by the Company's stockholders. The gain on the settlement of
these agreements totaled approximately $2.2 million, which was recorded in the
quarter ended June 30, 2002.
F-29
NOTE 14 - FIDELITY TRANSACTIONS
On October 25, 2001, Fidelity National Financial, Inc. ("Fidelity")
agreed to loan the Company up to $4,000,000, which was consummated on November
5, 2001. In return, Fidelity accepted (i) a convertible revolving promissory
note (the "Note") and (ii) a stock purchase warrant (the "Warrant"). The
aggregate potential equity represented in the Note and the Warrant is 25% of the
Company's outstanding Common Stock. To the extent the Note is not converted to a
number of shares of common Stock representing a 25% equity stake in the Company,
the Warrant is exercisable to bring Fidelity's beneficial ownership to as much
as 25% of the outstanding shares of Common Stock (see Note 7).
The purpose of the Fidelity loan to the Company was to enable the
Company to pay off existing debt so as to release lenders' liens on certain
assets being purchased by FNIS as described above. Fidelity and the Company
entered into a Credit Agreement, pursuant to which Fidelity eventually loaned
the Company $3,000,000 for the purpose of paying off and canceling its loan
agreements with HomeMark, the repayment of an earlier secured promissory note of
$400,000, and for general working capital purposes.
Short-term liabilities at December 31, 2002 include the $3,000,000 note
payable to Fidelity, which matured on April 24, 2003. On April 25, 2003, the
Company and Fidelity entered into a formal standstill agreement until June 30,
2003 to continue negotiations underway concerning the note. Unless payment is
made in full, the terms of the note re-negotiated, or the note is satisfied by
some other means, Fidelity may enter into foreclosure procedures on the note.
As an inducement to make the loan, Fidelity agreed to accept equity in
the Company in the form of the Note and Warrant described above. FNIS has no
rights to receive or control disposition of any of the shares of Common Stock.
Fidelity and the Company also executed a Security Agreement securing the
Company's obligations to Fidelity.
As a result of the issuance to Fidelity of the Note and the Warrant,
Fidelity has a currently exercisable right to purchase up to approximately
12,238,640 shares, or the equivalent of 25% of the outstanding shares of the
Company's common stock, calculated by applying Fidelity's right to acquire 25%
of the Company's outstanding shares to the total of 48,954,561 shares currently
issued and outstanding. The actual number of shares issuable to Fidelity is
likely to be greater than 12,238,640 because of the dilutive effect of
exercising the Note and Warrant. Fidelity has the sole right to receive or the
power to direct the receipt of dividends from, or proceeds from the sale of, the
shares of the Company's Common Stock issuable upon the exercise of the Note and
the Warrant.
On October 25, 2001, FNIS and the Company entered into an agreement
whereby FNIS would purchase certain assets of the Company representing
substantially all of the Company's MLS operations, such assets amounting to less
than twenty percent (20%) of the Company's total assets. FNIS and the Company
also entered into an agreement (the "Management Agreement") pursuant to which
FNIS would provide management services to the Company until the earlier to occur
between the close or the termination of the Asset Purchase Agreement.
On December 3, 2001, the agreement was consummated and FNIS acquired
substantially all of the assets, including corporate and trade names and
goodwill associated with the business, of the Company's XMLSweb(tm) division
(formerly Terradatum LLC and Information Management Company, LLC). The total
consideration paid was $2,000,000, of which $500,000 was advanced in November
and $1,275,000 was paid in December 2001. An additional amount of $225,000 was
withheld for unpaid licensing obligations of the Company.
F-30
NOTE 15 --TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the year
ended December 31, 2002 and the twelve-months ended December 31, 2001
(unaudited).
(Amounts in Thousands)
December 31, 2002 December 31, 2001
----------------- -----------------
(Unaudited)
Revenues............................ $ 10,020 $ 14,130
Income (loss) from operations....... 532 (46,336)
Other income (expense), net......... 2,282 (1,029)
----------------- -----------------
Net income (loss)...................... $ 2,814 $ (47,365)
================= =================
NOTE 16 --QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial information for the year ended
December 31, 2002, the six-months ended December 31, 2001 and the years ended
June 30, 2001 and 2000 are noted below (in thousands, except per share amounts):
3rd Quarter 4th Quarter
1st Quarter 2nd Quarter (1) (2)
----------- ----------- ----------- -----------
December 31, 2002
Revenues $ 1,817 $ 2,607 $ 3,451 $ 2,145
Income (loss) from operations $ (476) $ 220 $ 584 $ 204
Net income (loss) $ (532) $ 2,479 $ 884 $ (17)
Basic and diluted net income
(loss) per share $ (0.01) $ 0.05 $ 0.02 $ 0.00
December 31, 2001
Revenues $ 3,403 $ 2,632 - -
Income (loss) from operations $ (5,512) $ (6,026) - -
Net income (loss) $ (6,115) $ (5,851) - -
Basic and diluted net income
(loss) per share $ (0.13) $ (0.12) - -
June 30, 2001
Revenues $ 4,414 $ 4,883 $ 4,412 $ 3,683
Income (loss) from operations $ (7,841) $ (6,620) $ (14,930) $ (19,868)
Net income (loss) $ (8,664) $ (7,564) $ (14,746) $ (20,653)
Basic and diluted net income
(loss) per share $ (0.39) $ (0.31) $ (0.45) $ (0.51)
June 30, 2000
Revenues $ 1,443 $ 2,574 $ 3,396 $ 3,677
Income (loss) from operations $ (2,751) $ (4,923) $ (5,786) $ (12,052)
Net income (loss) $ (2,638) $ (4,787) $ (5,684) $ (11,925)
Basic and diluted net income
(loss) per share $ (0.17) $ (0.28) $ (0.32) $ (0.70)
(1) Loss from operations and net loss include the impact of charges related
to asset impairment and investments, totaling $7,852 in the fiscal year
ended June 30, 2001.
(2) Loss from operations and net loss include the impact of charges related
to asset impairment and investments, totaling $11,816 in the fiscal
year ended June 30, 2001.
F-31
NOTE 17 - RELATED PARTY TRANSACTIONS
The Company subleases its computer-hosting site in Burbank, California
through Chaffee Interactive, a company wholly owned by Thomas Chaffee, the
Company's Chairman and Chief Executive Officer for $30,000 on a month-to-month
basis. Similarly, the Company contracts with Chaffee Interactive for web site
design and marketing services for which the Company does not have available
in-house expertise. The total lease expense and cost of design services
recognized during the year ended December 31, 2002 attributable to this
arrangement was $362,879 of which $133,380 was unpaid and was included in
accounts payable at the end of the year.
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Operating Balance at
of Year Expenses Deductions End of Year
---------- ---------- ---------- -----------
For the year ended June 30, 2000
Allowance for doubtful accounts $ 37,896 $ 554,091 $ (450,534) $ 141,453
========== ========== ========== ===========
For the year ended June 30, 2001
Allowance for doubtful accounts $ 141,453 $ 429,715 $ (282,766) $ 288,402
========== ========== ========== ===========
Reserve for contingencies $ -- $ 436,500 $ -- $ 436,500
========== ========== ========== ===========
For the six-months ended December 31, 2001
Allowance for doubtful accounts $ 288,402 $ 112,443 $ (210,555) $ 190,290
========== ========== ========== ===========
Reserve for contingencies $ 436,500 $ -- $ -- $ 436,500
========== ========== ========== ===========
For the year ended December 31, 2002
Allowance for doubtful accounts $ 190,290 $ -- $ (150,769) $ 39,521
========== ========== ========== ===========
Reserve for contingencies $ 436,500 $ -- $ (86,500) $ 350,000
========== ========== ========== ===========
F-32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HOMESEEKERS.COM, INCORPORATED
By: /S/ Thomas Chaffee
----------------------
Thomas Chaffee
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
immediately below constitutes and appoints Thomas Chaffee his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K and to file the
same with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
------------------- ------------------------------- ------------
/S/ Thomas Chaffee Chairman of the Board, Director May 22, 2003
------------------- and Chief Executive Officer
Thomas Chaffee
/S/ Steven M. Crane President, Chief Operating May 22, 2003
-------------------- Officer and Director
Steven M. Crane
58
CERTIFICATION
I, Thomas Chaffee, Chairman of the Board and Chief Executive Officer, certify
that:
1. I have reviewed this Annual Report on Form 10-K of HomeSeekers.com,
Incorporated;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us by
others within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 22, 2003
/s/ Thomas Chaffee
---------------------
Thomas Chaffee
Chairman of the Board
and Chief Executive Officer
59
CERTIFICATION
I, Steven M. Crane, President, Chief Operating Officer, and Director certify
that:
1. I have reviewed this Annual Report on Form 10-K of HomeSeekers.com,
Incorporated;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us by
others within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 22, 2003
/s/ Steven M. Crane
-------------------
Steven M. Crane
President and Chief Operating Officer
60
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------- -------------------
2.1 Purchase Agreement, dated as of July 21, 2000, by and among
HomeSeekers.com and the Members of Immediate Results Through
Intuitive Systems, LLC (incorporated by reference to the
Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission (the "Commission") on August
7, 2000).
2.2 First Amendment to Agreement and Plan of Merger, dated as of
February 15, 2001, by and among HomeSeekers.com and the
Shareholders of Information Solutions Group, Inc.
2.3 First Amendment to Conditional Promissory Note, dated as of
February 15, 2001, by and among HomeSeekers.com and the Members
of Immediate Results Through Intuitive Systems, LLC.
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-3, as amended (Commission File No. 333-32586), as filed
with the Commission on March 15, 2000 (the "S-3").
3.2 Amended and Restated Bylaws of HomeSeekers.com, Incorporated
(incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K, as filed with the Commission on May
23, 2000).
4.1 Form of Common Stock Warrant (incorporated by reference to
Exhibit 4.3 to the S-3).
4.2 Registration Rights Agreement, dated as of July 21, 2000, by and
among HomeSeekers.com and the Members of Immediate Results
Through Intuitive Systems, LLC (incorporated by reference to the
Company's Current Report on Form 8-K, as filed with the
Commission on August 7, 2000).
4.3 Form of Common Stock Warrant (Exhibit D to the Equity Line of
Credit Agreement (as defined below)) (incorporated by reference
to Exhibit 1.1 to the Company's Current Report on Form 8-K, as
filed with the Commission on December 19, 2000 (the December
8-K")).
4.4 Registration Rights Agreement, dated as of January 25, 2001,
between the Company and Bradley N Rotter Self Employed Pension
Plan and Trust (incorporated by reference to the Company's
Quarterly Report on Form 10-Q, as filed with the Commission on
May 15, 2001 (the "May 10-Q")).
4.5 Registration Rights Agreement, dated as of February 15, 2001, by
and among HomeSeekers.com and the Shareholders of Information
Solutions Group, Inc.
4.6 Warrant Agreement, dated as of March 15, 2001, between the
Company and Bradley N Rotter Self Employed Pension Plan and Trust
(incorporated by reference to the May 10-Q).
10.1 Settlement Agreement, dated as of November 21, 2000, by and among
Terradatum, LLC, Steven Hightower, Peter Krause and William D.
Biggs (incorporated by reference to the Company's Quarterly
Report on Form 10-Q, as filed with the Commission on February 14,
2001 (the "February 10-Q")).
61
10.2 Settlement Agreement, dated as of November 28, 2000, by and among
the Company, Alpenglow, Inc., Mark Stephens and Greg Hubly
(incorporated by reference to the February 10-Q).
10.3 Equity Line of Credit Agreement (the "Equity Line of Credit
Agreement"), dated as of December 4, 2000, between the Company
and Alpha Venture Capital, Inc. ("AVC") (incorporated by
reference to Exhibit 1.1 to the December 8-K).
10.4 Letter Agreement, dated as of December 15, 2000, between the
Company and AVC, amending the Equity Line of Credit Agreement
(incorporated by reference to Exhibit 1.2 to the December 8-K).
10.5 Promissory Note between the Company and Bradley N Rotter Self
Employment Pension Plan and Trust dated January 25, 2001
(incorporated by reference to the May 10-Q).
10.6 Security Agreement, dated January 15, 2001, between the Company
and Bradley N Rotter Self Employed Pension Plan and Trust
(incorporated by reference to the May 10-Q).
10.7 Securities Purchase Agreement, dated as of June 6, 2001, between
the Company and E-Home.com, Inc. d/b/a HomeMark ("HomeMark")
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the Commission on June 11, 2001 (the "June
2001 8-K").
10.8 Loan Agreement, dated June 6, 2001, between the Company and
HomeMark (incorporated by reference to the June 2001 8-K).
10.9* Amended and Restated 1996 Stock Option Plan (incorporated by
reference to Exhibit 6.1 to the Company's 10-K (Commission File
No. 000-23825) for the year ended June 30, 1999 (the "1999
10-K")).
10.10* Amendment No. 1 to HomeSeekers.com, Incorporated Amended and
Restated 1996 Stock Option Plan (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Commission File No. 333-44786), as filed with the Commission on
August 30, 2000).
10.11* Employment Agreement between the Company and John Giaimo dated
March 9, 1999 (incorporated by reference to Exhibit 6.6 to the
1999 10-K).
10.12* Employment Agreement between the Company and Greg Johnson dated
March 9, 1999 (incorporated by reference to Exhibit 6.7 to the
1999 10-K).
10.13* Employment Agreement between the Company and Doug Swanson dated
March 9, 1999 (incorporated by reference to Exhibit 6.8 to the
1999 10-K).
10.14* Employment Agreement between the Company and Greg Costley dated
August 23, 1999 (incorporated by reference to Exhibit 6.11 to the
1999 10-K).
62
10.15 Promissory Note between the Company and William Tomerlin dated
November 22, 2000.
10.16 Security Agreement between the Company and William Tomerlin dated
November 22, 2000.
16.1 Letter on Change in Certifying Accountant (incorporated by
reference to the Company's Annual Report on Form 10-K filed with
the Commission on October 6, 2001).
23.1 Consent of Stonefield Josephson, Inc., Independent Auditors
(filed herewith)
23.2 Consent of Corbin & Wertz, Independent Auditors (filed herewith)
23.3 Consent of Ernst & Young LLP, Independent Auditors (filed
herewith)
24.1 Powers of Attorney (contained in the signature page of this Form
10-K).
99.1(a) and 99.1(b)
Certification pursuant to 18 U.S.C. ss.1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Press Release related to Securities Purchase Agreement with
HomeMark (incorporated by reference to the June 2001 8-K).
------------
* Management contract or compensatory arrangement.
63