UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

Commission file number: 000-26659

 

Move, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code:

(805) 557-2300

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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 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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

In accordance with General Instruction G(3) to Form 10-K, certain information in the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant’s 2007 Annual Meeting of Stockholders is incorporated by reference into Part III.

 

 

MOVE, INC.

 

FORM 10-K

For the Fiscal Year Ended December 31, 2006

 

INDEX

 

EXHIBIT 4.01

EXHIBIT 21.01

EXHIBIT 23.01

EXHIBIT 31.01

EXHIBIT 31.02

EXHIBIT 32.01

EXHIBIT 32.02

EXHIBIT 99.01

 

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on our current expectations, estimates and projections about our industry, beliefs, and certain assumptions made by us. Words such as “believes,” “anticipates,” “estimates,” “expects,” “projections,” “may,” “potential,” “plan,” “continue” and words of similar import constitute “forward-looking statements.” The forward-looking statements contained in this report involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by these statements. These factors include those listed under “Risk Factors,” “Business,” and elsewhere in this Form 10-K, and the other documents we file with the Securities and Exchange Commission, (“SEC”), including our reports on Form 8-K and Form 10-Q, and any amendments thereto. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

 

OVERVIEW

 

Move, Inc. (“Move”, “we”, “our”, or “us”) creates online resources and tools to help consumers throughout the moving process by providing real estate property listings and other content related to residential real estate, moving and settling into a new community.

 

In 2006, we changed the company’s name from Homestore, Inc. to Move, Inc. and successfully launched our new Move.com^tm web site. The name change symbolizes the scope and commitment we have for our corporate strategy and we believe will increase our brand awareness and better communicate to consumers and customers what we do. With the Move.com web site we introduced greatly expanded content, particularly for new homes and rental property listings and new tools to assist the consumer in the moving process. We believe making improvements in the consumer experience will help us to retain and expand the consumer audience for our web sites. We also introduced new product offerings designed to help improve the productivity and profitability of real estate professionals.

 

In addition to Move.com, we operate the following consumer web sites:

 

 

Our network of highly-visited industry web sites is the leading consumer destination on the Internet for residential real estate and move-related information based on number of visitors, time spent on our web sites and number of property listings. Collectively, the Move network of web sites attracted an average of 9.5 million unique users per month in 2006, according to data obtained from third-party Internet traffic auditor comScore Media Metrix. On average, visitors to the Move network visit us more than two times per month and spend approximately 27 minutes per month on one or more of our sites.

 

We are the exclusive provider of REALTOR^®-represented existing homes, new homes and rental listings across America Online, including AOL.com, Netscape, CompuServe and AOL City Guide and The Microsoft Network (“MSN”), and we are the exclusive provider of new homes and apartment listings on Yahoo! Other significant portal relationships for the Move network include Excite.com and iWon.com (both part of InterActiveCorp), Internet Broadcast Systems, Inc. and its web sites for 61 local and network-affiliated TV stations, and United Online through its NetZero and Juno brands.

 

In addition to our consumer web sites, our Welcome Wagon business provides movers with a customized gift book populated with merchant advertising as well as coupons and special offers from local and national advertisers delivered via offline direct mail. We also provide a variety of architects’ home plans to consumers considering building a new home through our Homeplans business, as well as software solutions to real estate agents to assist them in managing their client interactions through our TOP PRODUCER^® business.

 

Except for our Homeplans business, all of our services are free to consumers. We generate a substantial majority of our revenue from selling advertising and marketing solutions to real estate industry participants, including real estate agents, homebuilders and rental property owners, as well as to other local and national advertisers interested in reaching our consumer audience before, during or after a move.

 

Most of our revenue is derived from subscription-based services that allow our customers to easily budget for our services. With the launch of the Move.com web site in 2006, we broadened our offerings to include more

services for which customers only pay us when a specific action occurs (“performance-based solutions”) and plan to introduce additional performance-based solutions in 2007. Even with these new pricing models available, we still expect a majority of our revenue to be derived from subscription-based products. Our sales force consists of a combination of internal phone-based account executives and field sales personnel.

 

We were incorporated in the State of Delaware in 1993 under the name of InfoTouch Corporation. In February 1999, we changed our corporate name to Homestore.com, Inc. In May 2002, we changed our name to Homestore, Inc. In June 2006, we changed our name to Move, Inc. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further description of our history. Our corporate headquarters are in Westlake Village, California. Our phone number is (805) 557-2300. Our periodic and current reports are available, free of charge, on our web site, www.move.com, as soon as possible after such material is electronically filed with, or furnished to, the SEC.

 

OUR OPPORTUNITY

 

Our business is based on a simple objective: to connect consumers, at any point in their move cycle, with the content, tools, services and professional connections they need to make the move successful. This simple objective sits in the middle of a very large business opportunity because the process of moving by consumers is one that attracts a significant amount of marketing and advertising spend, by a very broad group of businesses.

 

Our analysis of industry data suggests real estate professionals, including agents, brokers, home builders and apartment managers, spend approximately $9 billion each year marketing to these consumers. In addition, other data we have gathered estimates that other advertisers, including local merchants, home improvement retailers, product manufacturers, home services providers and mortgage companies, spend between $10 to $14 billion attempting to reach the very same audience. Taken together, these businesses represent more than $20 billion in annual advertising and marketing spend specifically targeted at the mover audience.

 

This valuable consumer mover audience is already overwhelmingly on the Internet. In fact, the National Association of REALTORS^® 2006 Study of Home Buyers and Sellers found that 80% of all home buyers are using the Internet in their home search process. Yet, historically and still today, the overwhelming majority of the marketing dollars targeted towards these consumers is spent on newspaper ads, print guides, direct mail and other offline sources. These methods do not allow for interactivity and may use data that is incomplete or quickly becomes outdated. Additionally, these methods typically reach consumers only within specific local markets and are often distributed on a weekly or less frequent basis.

 

That disconnect between today’s inefficient advertising practices and the growing online presence of consumers is a market growth opportunity for online media and one on which we are focused. We believe the migration of this large, frequently inefficient marketing spend from offline venues to the Internet is starting to accelerate.

 

STRATEGY

 

We are introducing the Move^tm brand to consumers as the content rich, friendly, trusted and helpful resource they will want to use — whether they are thinking about a possible move, are in the midst of searching for their perfect place to live, or are attempting to connect with real estate professionals and service providers in a new community. In our efforts to execute on our vision and build a viable long-term business, we are focusing on the following elements:

 

Provide consumers the highest quality and deepest breadth of content possible.  We view the move process as a cycle beginning with thinking and searching; followed by buying, selling or renting; then financing, moving, settling in; and finally, nesting. We want to provide consumers with content, tools, services and professional connections relevant to every phase of the cycle:

 

 

 

Build durable and scaleable business models.  We believe a diverse base of customers, products and pricing models provides more stability during changes in economic cycles and allows customers more flexibility in their marketing programs. Our customer base includes both real estate professionals and other types of advertisers wishing to reach movers. Our products range from advertising services, including listing enhancements, graphical display ads, directories, and direct mail, to technology solutions. During 2006, we broadened our offerings to include more performance-based solutions; however, we still expect a majority of our revenue to be derived from subscription based products.

 

Maintain strong relationships with the real estate industry.  To provide consumers with timely and comprehensive real estate listings, access to real estate professionals and other home and real estate-related information and resources, we have established relationships with the following key industry participants and in many cases receive preferential promotion in their marketing activities:

 

 

 

PRODUCTS AND SERVICES

 

In the fourth quarter of 2005, we realigned our business to better ensure that each of our products and services directly support our strategy and target markets. We now operate under two business segments: Real Estate Services and Move-Related Services, which for the year ended December 31, 2006, represented approximately 72% and 28% of our revenue, respectively. For information regarding the results of operations of each of our segments, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” contained in Item 7 and Note 11 to our Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

 

REAL ESTATE SERVICES

 

Our Real Estate Services segment provides marketing solutions that allow real estate professionals to reach and connect with the highly targeted consumer audience we have attracted to our web sites. We do this by allowing our customers to customize the property listing information contained on our web sites and by allowing our customers to connect their personal or corporate web site directly to our database of property information, our professional directories and to traditional Internet advertising products such as banner ads. We also provide software applications to help real estate professionals manage relationships with their current and prospective customers.

 

Revenue from the Real Estate Services segment is derived from a variety of advertising and software services, including enhanced listings, display advertising, customer relationship management applications and web site development and hosting. These solutions have traditionally been offered on a subscription basis. With the launch of the Move.com web site in 2006, we introduced performance-based pricing models, in particular to our new home and rental customers.

 

REALTOR.com^®

 

The REALTOR.com^® web site offers consumers a comprehensive suite of services, tools and content for all aspects of the residential real estate transaction. We display on REALTOR.com^® listing content received from approximately 900 MLSs across the United States, resulting in a searchable database of approximately 3.5 million existing homes for sale. We also provide a directory of approximately 1.36 million REALTORS^® to help guide buyers and sellers through the real estate transaction process. The property listings on REALTOR.com^® typically provide information that is more detailed and timely than the information included in other media channels, such as newspaper classified advertisements and print magazines.

 

In addition to property listings and neighborhood profiles, we offer consumers information and tools designed to assist them in understanding the value of their home, preparing the home for sale, listing and advertising the home, home affordability, the offer process, applying for a loan and understanding the mortgage options available, closing the purchase and planning the move.

 

Since REALTOR.com^® is the official web site of NAR, as the operator of the web site we present basic MLS property listings on the REALTOR.com^® web site at no charge to real estate professionals. We also offer the

following services to enable real estate professionals to manage their online content and branding presence and better connect with home buyers and sellers:

 

Enhanced listings.  Enhanced listing products allow real estate professionals to promote their own listings by adding multiple photos, virtual tours and printable brochures to the basic listing. The product also provides real estate professionals opportunities for personal promotion in the form of custom copy, photographs, text effects, links to their home page and more. Enhanced listings are priced based on geographic market and number of annual listings, and are sold on an annual subscription basis. Historically, we have sold enhanced listings directly to individual real estate agents. During 2006, we experienced an increase in real estate brokers purchasing enhanced listings on behalf of their agents. However, we believe that the majority of our contracts will continue to be with individual agents for the foreseeable future. Our listing enhancement product represented approximately 25%, 22%, and 19% of our overall revenue for fiscal years 2006, 2005 and 2004, respectively;

 

Display ad products.  We provide numerous opportunities for real estate professionals to promote individual properties, themselves or their company brand. These products are priced based on geographic market and are sold on a three, six or twelve month subscription bases:

 

 

Our Featured Homes product represented 11% of our overall revenue for fiscal year 2006.

 

Web sites.  We design, host, and maintain personal and corporate web sites for real estate professionals. We offer a series of template web sites designed specifically for agents and brokers, which are sold on an annual subscription basis. The Enterprise, our media design and production business unit, designs and builds customized web sites for brokerage customers seeking web sites with specialized features and expanded functionality.

 

TOP PRODUCER^®

 

Our primary Top Producer product, “7i^tm”, is the leading customer relationship management (CRM) software specific to real estate agents. Top Producer’s 7i web-based application features client management, appointment and task scheduling, Internet lead distribution and follow-up, prospecting automation, comparative market analysis, customer presentations and mobile data synchronization. Products are co-branded for some of the country’s largest franchise brands, such as RE/MAX, Keller Williams, Coldwell Banker, Century 21, ERA, GMAC and Real Estate One. We believe that our ability to assist real estate professionals in managing relationships with their customers enables us to better distinguish the value of our media properties.

 

The Top Producer CRM software was sold exclusively as a desktop application until the fourth quarter of 2002. As of July 2006, Top Producer is offered exclusively as a web-based application that is purchased through an initial annual subscription. We currently have over 65,000 subscribers using the web-based CRM software.

 

During 2006, we launched Market Snapshot, a product that allows real estate professionals to effortlessly provide real-time MLS market updates and trend analysis to their online prospects and clients. Market Snapshot is currently purchased through an annual subscription and is available on a stand alone basis, or bundled with 7i and other Top Producer products.

 

Move^tm Rentals (formerly RENTNET^®)

 

Prior to the launch of the Move.com web site in the second quarter of 2006, our RENTNET web site included only content submitted by our rental property owner and manager customers who paid us to include it on our RENTNET web site. In some markets where we did not have a large customer base and thus there was limited content on our site relative to all available rental properties in that particular market, this led to a poor consumer experience on our RENTNET web site. With the launch of the Move.com web site in the second quarter of 2006, we began to index web sites featuring rental listing content and present the indexed listings to consumers based on their search criteria. With this new “vertical search” capability, we were able to substantially increase the available rental listing content that had been accessible through the RENTNET web site.

 

We display these listings at no charge to consumers or to rental owners and managers. We also offer the following services to enable rental property owners and managers to enhance, promote and supplement those listings:

 

Showcase Listings.  Showcase Listings allow rental property owners and managers to promote their listings by giving them priority placement, adding enhanced property descriptions, highlighting unique property amenities, displaying multiple photos, offering interactive floor plans and more. Showcase Listings are priced based on geographic market and are sold on a monthly subscription basis; and

 

Featured Listings.  Featured Listings allow rental property owners and managers to obtain priority placement for their listings on the search results page. The Featured Listings displayed in the top positions are based on consumer-defined criteria and the relevancy of listing detail to those criteria. Featured Listings are offered on a cost-per-click basis.

 

Move^tm New Homes (formerly HomeBuilder.com^®)

 

Prior to the launch of the Move.com web site in the second quarter of 2006, our HomeBuilder.com web site included only content that was submitted to us by our home builder customers who paid us to include it on our Homebuilder.com web site. In some markets where we did not have a large customer base and thus there was limited content on our site relative to all available new homes in that particular market, this led to a poor consumer experience on our HomeBuilder.com web site. With the launch of the Move.com web site in the second quarter of 2006, we began to index web sites featuring new home listing content and present the indexed listings to consumers based on their search criteria. With this new “vertical search” capability, we were able to substantially increase the new home listing content that had been accessible through the HomeBuilder.com web site.

 

We display these listings at no charge to consumers or to home builders. We also offer the following services to enable home builders to enhance, promote and supplement those listings:

 

Showcase Listings.  Showcase Listings allow home builders to promote their listings by giving them priority placement, adding enhanced property descriptions, highlighting unique property amenities, displaying multiple photos, elevations and plans, offering interactive floor plans and more. Showcase Listings are priced based on geographic market and are sold on a monthly subscription basis;

 

Featured Listings.  Featured Listings allow home builders to obtain priority placement for their listings on the search results page. The Featured Listings displayed in the top positions are based on consumer-defined criteria and the relevancy of listing detail to those criteria. Featured Listings are offered on a cost-per-click basis; and

 

Web sites.  For customers seeking web sites with specialized features and expanded functionality, we design and build feature rich customized web sites for home builders. In addition to the design and set-up of the web sites, we also offer hosting and maintenance services.

 

MOVE-RELATED SERVICES

 

Our Move-Related Services segment provides advertising products and lead generation tools including display, text-link and rich media advertising positions, directory products, price quote tools and content sponsorships on our Move.com^tm and other related web sites. In addition, it includes our Welcome Wagon^® new-mover

direct mail advertising products, sales of new home plans, and related magazines through our Homeplans business, and Moving.com lead generation products for professional moving, truck rental, and self storage businesses.

 

Welcome Wagon^®

 

Our Welcome Wagon business offers local and national merchants the opportunity to reach movers through targeted direct mail services. The Welcome Wagon “New Mover” program integrates local merchant and national advertiser information into a welcome gift delivered through the mail to new homeowners shortly after their move. The welcome gift contains a customized neighborhood address book with merchant advertiser listings as well as coupons and special offers from local and national advertisers. Advertisers in the local gift book also receive priority in WelcomeWagon.com’s new online Local Business Directory, which was launched in 2006. Advertisers typically pay for the product on an annual contract basis, but we recognize revenue when we deliver impressions by mailing the product. The Welcome Wagon gift book represented approximately 11%, 12% and 14% of our overall revenue for fiscal years 2006, 2005 and 2004, respectively.

 

Additionally, our Welcome Wagon business offers local merchants solo marketing opportunities through its Pinpoint Mail^tm product, which is sold on a per mailing basis. Launched in the fourth quarter of 2004, the Welcome Wagon Early Advantage^tm product is designed for advertisers who wish to reach new movers at their existing addresses prior to their actual move.

 

Retail Advertising

 

Our Retail Advertising business provides advertisers such as mortgage companies, home improvement retailers, moving service providers and other consumer product and service companies with an efficient way to target consumers in the move cycle. We offer these advertising customers a variety of products and services across the entire Move network of web sites, particularly in our Finance, Moving and Home & Garden content areas on Move.com. These products and services include graphical display advertisements, text links, sponsorships and directories. Pricing models include cost per thousand impressions (CPM), cost-per-click and subscription based sponsorships of specific content areas.

 

Homeplans (formerly Homestore Plans and Publications)

 

Our Homeplans business offers both consumers and building professionals the ability to browse our Homeplans.com web site and select, modify and purchase new home designs and project plans from one of the largest selections of home plans available. Homeplans has business relationships with many designers that provide us the right to sell the designers’ home plans directly to consumers and building professionals. These plans are sold not only through our Homeplans.com web site, but also through magazines that are distributed at leading retailers and newsstands nationwide. The Internet has become an increasingly important channel of distribution for the sale of home plans, and our Homeplans web site is one of the most heavily trafficked web sites in the home plans category, distributing its home plan content through approximately 400 affiliate partner sites.

 

Moving.com

 

In February 2006, we purchased Moving.com, which provides consumers with quotes from moving companies, truck rental companies and self-storage facilities, as well as other move-related information. The majority of revenue for Moving.com is derived from cost-per-lead products.

 

COMPETITION

 

We face competition in each segment of our business.

 

REAL ESTATE SERVICES

 

We compete with a variety of online companies and web sites providing real estate content that sell classified advertising opportunities to real estate professionals and sell advertising opportunities to other advertisers seeking to reach consumers interested in products and services related to the home and real estate. We also compete with

web sites that attract consumers by offering rebates for home purchases or rental leases, and then charge the real estate professional who performed the transaction a referral fee for the introduction. However, these sites generally have a limited amount of real estate content and an even more limited directory of qualified REALTORS^®.

 

Our primary competitors for online real estate advertising dollars include Lending Tree (a division of InterActiveCorp), HouseValues.com, AgentConnect.com (a division of Next Phase Media, Inc.), HomeGain (a division of Classified Ventures, LLC), Oodle, Trulia, Google and Zillow. In addition, our Move^tm Rentals web site faces competition from ApartmentGuide.com, Rent.com, ForRent.com and Apartments.com, and our Move^tm New Homes web site competes directly with NewHomeGuide.com, iNest (a division of InterActiveCorp) and NewHomeSource.com. Our Move.com web site also faces competition from general interest consumer web sites that offer home, moving and finance content, including ServiceMagic, Inc. (a division of InterActiveCorp), Gigamoves (a division of eBay), and Living Choices (a division of Network Communications, Inc.).

 

The barriers to entry for web-based services and businesses are low. In addition, parties with whom we have listing and marketing agreements could choose to develop their own Internet strategies or competing real estate sites. While we are the exclusive provider of all real estate content for America Online (AOL), The Microsoft Network (MSN) and we are the exclusive provider of new homes and apartment listings on Yahoo!, each of these businesses 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. The rapid pace of technological change constantly creates new opportunities for existing and new competitors and it can quickly render our existing technologies less valuable should one of these businesses decide to create online real estate businesses that are competitive with us. While we believe we would have an advantage on listing content for some time over other online businesses, we may not be able to maintain that advantage forever, and they could create other products and services that could be more attractive to consumers.

 

Newspapers and home/apartment guide publications are the two primary offline competitors of our media offerings. We compete with newspapers and home/apartment guide publications for the advertising dollars spent by real estate professionals to advertise their offerings. In addition, newspapers and the publishers of home/apartments guides, including Classified Ventures, Inc., PRIMEDIA Inc., and Network Communications, Inc., have extended their media offerings to include an Internet presence. We must continue to work to shift more real estate advertising dollars online if we are to successfully compete with newspapers and real estate guides.

 

Our TOP PRODUCER^® business faces competition from First American’s MarketLinx, Inc. subsidiary and Fidelity National Information Solutions, Inc. which offers competing solutions to real estate professionals. Top Producer also competes with horizontal customer relationship management offerings such as Microsoft Corporation’s Outlook solution, Best Software Inc.’s ACT! solution, Salesforce.com and FrontRange Solution, Inc.’s GoldMine product. Some providers of real estate web site solutions, such as A La Mode, Inc., are also offering contact management features which compete with products from Top Producer. Certain Internet media companies such as HomeGain and HouseValues, Inc. are providing drip marketing solutions that incorporate aspects of lead management, which, over time, could pose a competitive threat to Top Producer.

 

MOVE-RELATED SERVICES

 

Our Welcome Wagon^® business competes with numerous direct marketing companies that offer advertising solutions to local and national merchants. Competitors include Imagitas, Inc., ADVO Inc., Valpak Direct Marketing Systems, Inc., Pennysaver and MoneyMailer, LLC. These competitors, like Welcome Wagon, target homeowners at various stages of the home ownership life cycle with advertising from third parties.

 

Our Homeplans business faces direct competition from several large publishing companies that print multiple publications, including home plan publications. Our major competitors include Hanley Wood, LLC and The Garlinghouse Company. We also face competition from other smaller companies offering home plans for sale over the Internet, such as coolhouseplans.com.

 

Our Moving.com business competes with other web sites that offer comparable products, such as 123movers.com and VanLines.com.

 

SEASONALITY

 

Our Welcome Wagon^® business in our Move-Related Services segment is the one most affected by seasonality. Our revenue in this line of business is significantly impacted by the number of household moves in the United States each year. Due to weather and school calendars, a disproportionate percentage of moves take place in the second and third calendar quarters relative to the first and fourth quarters. As a result, we distribute a larger number of our Welcome Wagon new mover gift books in the second and third quarters each year.

 

Also, traffic generally declines on all our web sites during the fourth quarter due to weather and the holiday season when consumers are less likely to search for real estate. Historically, this has caused revenue from our Retail Advertising business to decline in the fourth quarter, as this business includes revenue models that are directly tied to traffic levels.

 

GEOGRAPHIC REGIONS

 

We derive all of our revenue from our operations in North America.

 

INFRASTRUCTURE AND TECHNOLOGY

 

We seek to maintain and enhance our market position with consumers and real estate professionals by building proprietary systems and consumer features into our web sites, such as search engines for real estate listings and the technologies used to aggregate real estate content. We regard many elements of our web sites and underlying technologies as proprietary, and we attempt to protect these elements and underlying technologies by relying on trademark, service mark, patent, copyright and trade secret laws, restrictions on disclosure and other methods. See “— Intellectual Property” below.

 

Our web sites are designed to provide fast, secure and reliable high-quality access to our services, while minimizing the capital investment needed for our computer systems. We have made, and expect to continue to make, technological improvements designed to reduce costs and increase the attractiveness to the consumer and the efficiency of our systems. We expect that enhancements to our web sites, and our products and services, will come from internally and externally developed technologies.

 

Our systems supporting our web sites must accommodate a high volume of user traffic, store a large number of listings and related data, process a significant number of user searches and deliver frequently updated information. Significant increases in utilization of these services could potentially strain the capacity of our computers, causing slower response times or outages. During 2006, we relocated all of our data systems operations from a facility in Thousand Oaks, California to Phoenix, Arizona. We now host our Move.com^tm, REALTOR.com^®, SeniorHousingNet^tm.com, Welcome Wagon^®, and Homeplans.com web sites, as well as custom broker web pages and the on-line subscription product for TOP PRODUCER^® in Phoenix, Arizona. See “— Risk Factors — Internet Industry Risks” for a more complete description of the risks related to our computer infrastructure and technology.

 

INTELLECTUAL PROPERTY

 

We regard substantial elements of our web sites and underlying technology as proprietary. We attempt to protect our intellectual property by relying on a combination of trademark, service mark, patent, copyright and trade secret laws, restrictions on disclosure, and other methods.

 

Despite our precautions, our intellectual property is subject to a number of risks that may materially adversely affect our business, including, but not limited to:

 

 

 

See “— Risk Factors — Risks Related to Our Business” for a more complete description of the risks related to our intellectual property.

 

EMPLOYEES

 

As of December 31, 2006, we had 1,666 full-time equivalent employees. We consider our relations with our employees to be good. No employee is represented by a collective bargaining agreement and we have never had a work stoppage. We believe that our future success will depend in part on our ability to attract, integrate, retain and motivate highly qualified personnel and upon the continued service of our senior management and key technical personnel. See “Risk Factors — Risks Related to Our Business.”

 

AVAILABLE INFORMATION

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as our proxy statements and other information, with the Securities and Exchange Commission (“SEC”). In most cases, those documents are available, without charge, on our web site at http://investor.move.com as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available, without charge, from Move, Inc., Investor Relations, 30700 Russell Ranch Road, Westlake Village, CA 91362. You may also read and copy these documents at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549 under our SEC file number (000-26659), and you may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In most cases, these documents are available over the Internet from the SEC’s web site at http://www.sec.gov.

 

You should consider carefully the following risk factors and other information included or incorporated by reference in this Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we deem to be currently immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

 

Risks Related to our Business

 

Changes to our product offerings on our new home and apartment web sites may not be accepted by our customers.

 

In the past, we have charged homebuilders and rental owners to list their properties on our HomeBuilder.com^® and RENTNET^® web sites. When we launched the Move.com^tm web site on May 1, 2006, we replaced our new home site, HomeBuilder.com^®, and our apartment rental site, RENTNET^®, with Move.com^tm. In conjunction with this change, we began to display any new home and apartment listing for no charge. We seek revenue from enhanced listings, including our Showcase Listing and Featured Listing products, as well as other forms of advertising on the sites. We price subscriptions to Showcase Listings based on regional rate cards. Featured Listings, which appear above the algorithmically-generated search results, are priced on a fixed “cost-per-click” basis. We anticipate transitioning in the future to a real-time, auction based cost-per-click pricing for Featured Listings.

 

When we launched the Move.com^tm web site, existing listing subscription customers were transitioned into our new products having comparable value for the duration of their existing subscription. Although customers’ reaction

to these new products has been favorable, there can be no assurance that our current new home and apartment customers will continue to purchase these new offerings in amounts sufficient to both replace the listing subscription revenue we will be losing and provide a return on our costs and investments associated with our new brand and these new products.

 

We have a history of net losses and could incur net losses in the future.

 

Until recently, we had incurred net losses every year since 1993. Except for modest net income in 2005 and net income of $22.2 million in 2006, we incurred substantial operating losses including net losses of $7.9 million and $47.1 million, for the years ended December 31, 2004 and 2003, respectively. As of December 31, 2006, we have an accumulated deficit of approximately $2.0 billion. Although our annual net losses have been decreasing and we anticipate becoming consistently profitable in the future, we announced our new Move^tm brand and certain business model changes that required considerable investment with no assurances that our future financial performance will be enhanced by these new initiatives. Specifically, in February 2006, we introduced our new Move^tm brand, under which we promote three consumer offerings: REALTOR.com^®, Welcome Wagon^®, and a new web site, Move.com^tm, and on June 22, 2006, we changed our corporate name from Homestore, Inc. to Move, Inc. We will incur considerable costs in introducing and maintaining our new brand and there can be no assurances that these costs will produce the same or greater revenue than we have experienced in the past.

 

Move.com^tm, which we launched on May 2, 2006, replaced our Homestore.com^®, HomeBuilder.com^® and RENTNET^® web sites. In the past, we have charged homebuilders and rental owners to list their properties on our HomeBuilder.com^® and RENTNET^® web sites. With the launch of Move.com^tm, we provide the listings for no charge and offer enhanced listing products and traditional text advertisements. Pricing structures include a monthly fixed fee for our Showcase product and cost-per-click based pricing for the Featured Listing product. Due to the potential loss of revenue from paid listings that could result from our new pricing structures, our results of operations could be adversely affected, particularly through the end of 2007, as we continue to transition our customers to the new pricing model as well as other new products. In addition, over the longer term there can be no assurance that this new business model will produce sufficient revenue to cover the considerable investment we intend to make in these new initiatives or to replace the listings revenue.

 

The emergence of competitors for our services may adversely impact our business

 

Our existing and potential competitors include web sites offering real estate related content and services as well as general purpose online services, and traditional media such as newspapers, magazines and television that may compete for advertising dollars. The real estate search services market in which our Real Estate Services division operates is becoming increasingly competitive. A number of competitors have emerged, including RealEstate.com (a division of InterActive Corp), HouseValues.com, AgentConnect.com (a division of Next Phase Media, Inc.), HomeGain (a division of Classified Ventures, LLC), ApartmentGuide.com, Rent.com, ForRent.com, Apartments.com, NewHomeGuide.com, NewHomeSource.com and more recently Zillow.com, Trulia and Propsmart as well as general interest consumer web sites that offer home, moving and finance content, including ServiceMagic, Inc. (a division of InterActive Corp) and Gigamoves (a division of eBay).

 

The barriers to entry for web-based services and businesses are low. In addition, parties with whom we have listing and marketing agreements could choose to develop their own Internet strategies or competing real estate sites. 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. The rapid pace of technological change constantly creates new opportunities for existing and new competitors and it can quickly render our existing technologies less valuable. Developments in the real estate search services market may also encourage additional competitors to enter that market. See “We may not be able to continue to obtain more listings from Multiple Listing Services and real estate brokers than other web site operators” below.

 

We cannot predict how, if at all, our competitors may respond to our initiatives. We also cannot provide assurance that our new offerings will be able to compete successfully against these competitors or new competitors that enter our markets.

 

We may not be able to continue to obtain more listings from Multiple Listing Services and real estate brokers than other web site operators.

 

We believe that the success of REALTOR.com^® depends in large part on displaying a larger and more current listing of existing homes for sale than other web sites. We obtain these listings through agreements with MLSs that have fixed terms, typically 12 to 36 months. At the end of the term of each agreement, the MLS could choose not to renew their agreement with us. There are no assurances the MLSs will continue to renew their agreements to provide listing data to us. If they choose not to renew their relationship with us, then REALTOR.com^® could become less attractive to consumers and thus, less attractive to our advertising customers.

 

Internet Data Exchange (“IDX”) technology makes it possible for other real estate web site operators to display MLS or cooperating broker’s listings on their web sites. NAR has adopted guidelines for MLSs that allow a broker to prevent MLSs from providing such broker’s listing data to other brokers’ web sites. These guidelines do not apply to REALTOR.com^®. In a civil antitrust lawsuit brought against NAR in 2005, the United States Department of Justice (“DOJ”) challenged this policy by alleging that it is in violation of federal antitrust laws. It is possible that the ultimate resolution of this antitrust case, or independent initiatives by large brokers or others, could make it easier for other web sites to aggregate listing data for display over the Internet in a manner comparable to REALTOR.com^®. This could impact how consumers and customers value our content and product offerings on the REALTOR.com^® web site.

 

Our quarterly financial results are subject to significant fluctuations.

 

Our quarterly results of operations have varied in the past and may vary significantly in the future. We have made significant investments in our businesses and incurred significant sales and marketing expenses and plan to continue this as we develop our new brand, Move^tm, and related new business initiatives. As we discontinue our paid inclusion model for new home and apartment listings and seek to replace that revenue with enhanced listing products and advertising offered under fixed fee, cost-per-click and auction pricing models, we could experience a decline in quarterly revenue. If revenue from these initiatives falls below our expectations, we will not be able to reduce our spending or change our pricing models rapidly in response to the shortfall. Fluctuations in our quarterly results could also adversely affect the price of our common stock.

 

Other factors that could affect our quarterly operating results include those described elsewhere in this Form 10-K, and include:

 

 

Continued obligations to Avis Budget Group, Inc. related to our settlement of our securities class action lawsuit could have an adverse effect on our financial condition.

 

We could be subject to potential claims by Avis Budget Group, Inc. (“Avis”) (formerly Cendant Corporation) for contribution or indemnity in connection with the securities class action lawsuit commenced against us following the December 2001 announcement of the discovery of accounting irregularities and the subsequent restatement of our 2000 and interim 2001 financial statements (the “Securities Class Action Lawsuit”). Although Avis was dismissed with prejudice as a defendant in the Securities Class Action Lawsuit, that dismissal was appealed to the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”). On June 30, 2006, the Ninth Circuit affirmed the dismissal, but remanded the case to the United States District Court, Central District of California (“District Court”) to determine whether it would be possible for the plaintiff to amend its complaint to state a claim against any of the dismissed defendants consistent with the Ninth Circuit’s opinion in the case. On December 19, 2006, the District Court denied plaintiff’s motion to amend the complaint to state a claim against Avis and other defendants. On January 18, 2007, the plaintiff filed a notice of appeal of the District Court’s decision with the Ninth Circuit. If

Avis is subsequently found liable or settles the claims against it in the Securities Class Action Lawsuit, Avis will likely seek indemnification, contribution or similar relief from us.

 

Although the settlement of the Securities Class Action Lawsuit, which became final on March 4, 2005, includes a bar order that may preclude Avis from seeking indemnification, contribution or similar relief from us in the event Avis is found liable or settles claims against it in the Securities Class Action Lawsuit, we have been advised by counsel that the law is unclear on whether Avis would be so precluded. Therefore, we would likely incur significant expenses in defending such an action by Avis and could ultimately be found liable to Avis or settle with Avis, notwithstanding the bar order. Such expenses, liability or settlement could have a material adverse effect on our results of operations and our financial position.

 

In addition, if Avis is not permitted to share in the settlement of the Securities Class Action Lawsuit (which would be the case if its dismissal as a defendant is reversed on appeal), we have agreed to pay or otherwise provide to Avis the amount of money and/or other consideration that Avis would have been otherwise entitled to receive from that portion of the class action settlement fund provided by us had Avis been a class member and Avis’ proof of claim in respect of its shares had been accepted in full. At this time, Avis is still a member of the class and has not been excluded, but is one of the members of the class whose dismissal as a defendant is pending appeal. As such, Avis has not yet received any of the $13.0 million cash or 20.0 million shares of stock we paid in the settlement. We estimate that Avis could be entitled to receive approximately $2.3 million in cash and approximately 3.79 million shares from us should Avis be prevented from participating in the settlement.

 

We could be required to expend substantial amounts in connection with continuing indemnification obligations to a purchaser of one of our businesses.

 

As part of the sale in 2002 of our ConsumerInfo division to Experian Holdings, Inc. (“Experian”), $10.0 million of the purchase price was put in escrow to secure our indemnification obligations (the “Indemnity Escrow”). The Indemnity Escrow was scheduled to terminate in the third quarter of 2003, but prior to the scheduled termination, Experian demanded indemnification from us for claims made against Experian or its subsidiaries by several parties and the Federal Trade Commission (“FTC”), including allegations of unfair and deceptive advertising in connection with ConsumerInfo’s furnishing of credit reports and providing “Advice for Improving Credit” that appeared on its web site both before, during and after our ownership of ConsumerInfo. Under the stock purchase agreement pursuant to which we sold ConsumerInfo to Experian, we could have elected to defend against the claims, but because the alleged conduct occurred both before and after our sale to Experian, we elected to rely on Experian to defend them. Accordingly, we have not made a complete evaluation of the underlying claims, but rather receive periodic updates from Experian and its counsel concerning their defense of the claims.

 

The FTC action against Experian has now been resolved by stipulated judgment that requires, among other things, that refunds be made available to certain customers who purchased ConsumerInfo products during the period November 2000 through September 2003. We are unable to determine at this time the amount which we may be obligated to pay Experian under our indemnity obligations in connection with the FTC matter, or any other matter.

 

Civil actions for which Experian demanded indemnification from us continue. Because those cases are continuing, the amounts to be paid by Experian arising from these actions for which Experian may seek indemnity from us cannot be reasonably estimated.

 

We have received information from Experian concerning the total expenses incurred by Experian to date in connection with all matters for which they claim indemnity, but those amounts have not yet been substantiated, allocated or reduced by offsets that we may be entitled to under the indemnification agreement. Under the terms of the stock purchase agreement, our maximum potential liability for claims by Experian is capped at $29.25 million less the balance in escrow. We anticipate that Experian may seek to recover from us an amount in excess of the Indemnity Escrow amount, which was $7.9 million on December 31, 2006.

 

We are and may continue to be involved in litigation and other disputes.

 

Our business and operations may subject us to claims, litigation and other proceedings brought by private parties and governmental authorities. We are currently involved in several matters, which are described in Note 21, “Commitments and Contingencies — Legal Proceedings,” to our Consolidated Financial Statements in Item 8 in this Form 10-K.

 

Litigation may also result from other companies owning or obtaining patents or other intellectual property rights that could prevent, limit or interfere with our ability to provide our products and services. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights, including in the Internet industry, and companies in the Internet market are increasingly making claims alleging infringement of their intellectual property rights. We have in the past and are currently involved in intellectual property-related disputes, and we may be involved in these and other disputes in the future, to protect our intellectual property or as a result of an alleged infringement of the intellectual property of others. Any such lawsuits, even if ultimately resolved in our favor, would likely be time-consuming and expensive to resolve and could divert management’s time and attention. Any potential intellectual property dispute could force us to do one or more of the following:

 

 

If we are forced to take any of the foregoing actions, such actions could have a material adverse effect on our results of operations and our financial position. Pursuant to our operating agreement with NAR, we may also be required to indemnify NAR for liabilities arising from the infringement or alleged infringement of third parties’ intellectual property rights, and these indemnification obligations could have a material adverse effect on our results of operations and our financial position.

 

We rely on intellectual property and proprietary rights.

 

We regard substantial elements of our web sites and underlying technology as proprietary. Despite our precautionary measures, third parties may copy or otherwise obtain and use our proprietary information without authorization, or develop similar technology independently. Any legal action that we may bring to protect our proprietary information could be unsuccessful, expensive and distract management from day-to-day operations.

 

Other companies may own, obtain or claim trademarks that could prevent or limit or interfere with use of the trademarks we use. The REALTOR.com^® web site address and trademark and the REALTOR^® trademark are important to our business and are licensed to us by NAR. If we were to lose the REALTOR.com^® domain name or the use of these trademarks, our business would be harmed and we would need to devote substantial resources toward developing an independent brand identity.

 

Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and evolving, and we can give no assurance regarding the future viability or value of any of these proprietary rights.

 

Our recently issued Series B Preferred Stock could make it more difficult for us to raise additional capital.

 

In November 2005, we sold to Elevation Partners, L.P. and Elevation Employee Side Fund, LLC (together, “Elevation”) an aggregate of 100,000 shares of our Series B Convertible Participating Preferred Stock (the “Series B Preferred Stock”) for an aggregate purchase price of $100 million. For so long as the holders of Series B Preferred Stock hold at least one-sixth of these 100,000 shares of Series B Preferred Stock, we are generally not permitted, without obtaining the consent of holders representing at least a majority of the then outstanding shares of Series B Preferred Stock, to create or issue any equity securities that rank senior or on a parity with the Series B Preferred Stock with respect to dividend rights or rights upon our liquidation. In addition, our stockholders agreement with Elevation limits the amount of debt we can incur. If we need to raise additional capital through public or private

financing, strategic relationships or other arrangements to execute our business plan, we would be restricted in the type of equity securities that we could offer and the amount of debt we can incur without the consent of Elevation. We cannot offer any assurances that we would be able to obtain that consent. If we were unable to obtain Elevation’s consent, we may not be able to raise additional capital in the amounts needed to fund our business or for terms that are desirable.

 

Our relationship with the National Association of REALTORS^® is an important part of our business plan and our business could be harmed if we were to lose the benefits of this agreement.

 

The REALTOR.com^® trademark and web site address and the REALTOR^® trademark are owned by NAR. NAR licenses these trademarks to our subsidiary RealSelect under a license agreement, and RealSelect operates the REALTOR.com^® web site under an operating agreement with NAR. Our operating agreement with NAR contains restrictions on how we can operate the REALTOR.com^® web site. For example, we can only enter into agreements with entities that provide us with real estate listings, such as MLSs, on terms approved by NAR. In addition, NAR can require us to include on REALTOR.com^® real estate related content that it has developed.

 

Our operating agreement with NAR, as amended, also contains a number of provisions that restrict how we operate our business. For example:

 

 

NAR also has significant influence over our RealSelect subsidiary’s corporate governance, including the right to have one representative as a member of our Board of Directors (out of a current total of 11) and two representatives as members of RealSelect’s Board of Directors (out of a current total of 8). RealSelect also cannot take certain actions, including amending its certificate of incorporation or bylaws, pledging its assets and making changes in its executive officers or Board of Directors, without the consent of at least one of NAR’s representatives on its Board of Directors.

 

Although the REALTOR.com^® operating agreement is a perpetual agreement and it does not contain provisions that allow us to terminate, NAR may terminate it for a variety of reasons. These include:

 

 

If our operating agreement with NAR were terminated, we would be required to transfer a copy of the software that operates the REALTOR.com^® web site and assign our agreements with data content providers, such as real estate brokers or MLSs, to NAR. NAR would then be able to operate the REALTOR.com^® web site itself or with another third party.

 

We must dedicate significant resources to market our subscription products and services to real estate professionals.

 

Real estate agents are generally independent contractors rather than employees of brokers and typically spend a majority of their time outside the office. As a result, it is often necessary for us to communicate with them on an individual basis. This results in relatively high fixed costs associated with our inside and field-based sales activities. In addition, since we offer services to both real estate brokers and agents, we are often required to contact them separately when marketing our products and services.

 

A failure to establish and maintain strategic online relationships that generate a significant amount of traffic could limit the growth of our business.

 

We have established strategic relationships with Internet portals that generate a significant amount of online traffic for our web sites. Failure to maintain these relationships and create new ones could limit the growth of our business. Although we expect that a significant portion of our online customers will continue to come to our web sites directly, we also continue to rely on third-party web sites with which we have relationships, including web sites operated by AOL, Yahoo!, MSN, Excite, iWon.com, Internet Broadcast Systems, United Online through its Juno and NetZero brands, and Google. We may also be required to pay significant fees to establish, maintain and expand our existing online relationships. As a result, our revenue may suffer if we fail to enter into new relationships or maintain existing relationships, or if these relationships do not result in online traffic sufficient to justify their costs.

 

Delaware law, our certificate of incorporation and bylaws, and other agreements contain provisions that could discourage a takeover.

 

Delaware law, our certificate of incorporation and bylaws, our operating agreement with NAR, other agreements with business partners and a stockholders agreement could have the effect of delaying or preventing a third party from acquiring us, even if a change in control would be beneficial to our stockholders. For example, we currently have a classified Board of Directors, although our certificate of incorporation has been amended to provide for the annual election of all directors beginning at our annual meeting of our shareholders in 2008. In addition, our stockholders are unable to act by written consent or to fill any vacancy on the Board of Directors. Our stockholders cannot call special meetings of stockholders for any purpose, including to remove any director or the entire Board of Directors without cause. Certain terms of the Series B Preferred Stock could also discourage a third party from acquiring us. Upon a change in control, we would be required to make an offer to repurchase all of the outstanding shares of Series B Preferred Stock for total cash consideration generally equal to 101% of the liquidation preference ($100 million plus all accrued and unpaid dividends) plus, under certain circumstances, 101% of a portion of the dividends which would have accrued had the Series B Preferred Stock remained outstanding. In addition, NAR could terminate the REALTOR.com^® operating agreement if we are acquired and they do not consent to the acquisition.

 

Real Estate Industry Risks

 

Our business is dependent on the strength of the real estate industry, which is both cyclical and seasonal and is affected by general economic conditions.

 

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 is typically less sales activity in real estate. A decrease in the current level of sales of real estate and products and services related to real estate could adversely affect demand for our products and services. In addition, reduced traffic on our web sites could cause our subscription and advertising revenue to decline, which would materially and adversely affect our business.

 

During recessionary periods, there tends to be a corresponding decline in demand for real estate, generally and regionally, that could adversely affect certain segments of our business. Such adverse effects typically are a general decline in rents and sales prices, a decline in leasing activity, a decline in the level of investments in, and the value of real estate, and an increase in defaults by tenants under their respective leases. All of these, in turn, adversely affect

revenue for fees and brokerage commissions, which are derived from property sales, annual rental payments, and property management fees which may or may not influence advertising.

 

Purchases of real property and related products and services are particularly affected by negative trends in the general economy. The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer and business spending, and the overall economy, as well as regional and local economic conditions in markets where we operate, including interest rates, taxation policies, availability of credit, employment levels, wage and salary levels and fears of terrorist attacks or threats of war.

 

We could experience seasonality in our business as we offer new products and new pricing models. The real estate industry, in most areas of the United States, generally experiences a decrease in activity during the winter months.

 

We have risks associated with changing legislation in the real estate industry.

 

Real estate is a heavily regulated industry in the U.S., including regulation under the Fair Housing Act, the Real Estate Settlement Procedures Act and state advertising laws. In addition, states could enact legislation or regulatory policies in the future, which could require us to expend significant resources to comply. These laws and related regulations may limit or restrict our activities. As the real estate industry evolves in the Internet environment, legislators, regulators and industry participants may advocate additional legislative or regulatory initiatives. Should existing laws or regulations be amended or new laws or regulations be adopted, we may need to comply with additional legal requirements and incur resulting costs, or we may be precluded from certain activities. For instance, RENTNET^® was required to qualify and register as a real estate agent/broker in the State of California. To date, we have not spent significant resources on lobbying or related government issues. Any need to significantly increase our lobbying or related activities could substantially increase our operating costs.

 

Internet Industry Risks

 

Our internal network infrastructure could be disrupted as a result of our move to a new data center or other problems.

 

Our operations depend upon our ability to maintain and protect our computer systems, located at our corporate headquarters in Westlake Village, California and our technology facility in Phoenix, Arizona. During 2005, we began the process of upgrading a facility we have leased in Phoenix, Arizona, to which we relocated our Thousand Oaks data center operations during 2006.

 

Temporary or permanent outages of our computers or software equipment could have an adverse effect on our business. Although we have not experienced any material outages to date, we currently do not have fully redundant systems for our web sites and other services at an alternate site. Therefore, our systems are vulnerable to damage from break-ins, unauthorized access, vandalism, fire, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires, earthquakes and general business interruptions, the amount of coverage, while adequate to replace assets and compensate for losses incurred, may not be adequate to compensate for the disruption it causes our customers and consumers, which could affect our future revenues and traffic.

 

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, if a hacker were to penetrate our network security, they 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 depend on continued improvements to our computer network.

 

Any failure of our computer systems that causes interruption or slower response time of our web sites or services could result in a smaller number of users of our web sites or the web sites that we host for real estate

professionals. If sustained or repeated, these performance issues could reduce the attractiveness of our web sites to consumers and our subscription products and services to real estate professionals, providers of real estate-related products and services and other Internet advertisers. Increases in the volume of our web site traffic could also strain the capacity of our existing computer systems, which could lead to slower response times or system failures. This would cause the number of real property search inquiries, advertising impressions, other revenue producing offerings and our informational offerings to decline, any of which could hurt our revenue growth and our brand loyalty. We may need to incur additional costs to upgrade our computer systems in order to accommodate increased demand if our systems cannot handle current or higher volumes of traffic. We may not be able to project accurately the rate, timing or cost of any increases in our business, or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

 

We could face liability for information on our web sites and for products and services sold over the Internet.

 

We provide third-party content on our web sites, particularly real estate listings. We could be exposed to liability with respect to this third-party information. Persons might assert, among other things, that by directly or indirectly providing a link to web sites operated by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by the third parties operating those web sites. They could also assert that our third-party information contains errors or omissions, and consumers could seek damages for losses incurred if they rely upon incorrect information.

 

We enter into agreements with other companies under which we share with these other companies’ revenue resulting from advertising or the purchase of services through direct links to or from our web sites. These arrangements may expose us to additional legal risks and uncertainties, including local, state, federal and foreign government regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves. We cannot offer any 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.

 

None.

 

We maintain the following principal facilities:

 

 

We believe that our existing facilities and office space are adequate to meet current requirements.

 

From time to time, we are party to various litigation and administrative proceedings relating to claims arising from our operations in the ordinary course of business. See the disclosure regarding litigation included in Note 20, “Settlements of Disputes and Litigation — Settlement of Securities Class Action Lawsuit and Potential Obligations,” and Note 21, “Commitments and Contingencies — Legal Proceedings,” to our audited Consolidated Financial Statements contained in Item 8 of this Form 10-K, which are incorporated herein by reference. As of the date of this Form 10-K and except as set forth herein, we are not a party to any other litigation or administrative proceedings that management believes will have a material adverse effect on our business, results of operations, financial condition or cash flows.

 

We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2006.

 

Market Information

 

Our common stock was traded on The NASDAQ National Market under the symbol “HOMS” from January 2, 2004 until May 2, 2006. On May 3, 2006, we changed our symbol to “MOVE.” We are now listed on the NASDAQ Global Select Market. The following table shows the high and low sale prices of the common stock as reported by The NASDAQ Stock Market for the periods indicated.

 

 

As of February 26, 2007, there were approximately 3,183 record holders of our common stock. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future, except for an annual dividend of $0.08 to be paid on the one share of our Series A preferred stock held by NAR. We are obligated to pay dividends on our Series B Preferred Stock of 3.5% per year, paid quarterly. For the first five years the Series B Preferred Stock is outstanding, the dividend will be paid “in-kind” in shares of Series B Preferred Stock. See Note 14, “Series B Convertible Preferred Stock,” to our Consolidated

Financial Statements contained in Item 8 of the Form 10-K for information regarding restrictions on our ability to pay dividends.

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered equity securities by Move, Inc. during the year ended December 31, 2006 that have not previously been reported in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information as of December 31, 2006 regarding compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

 

 

Equity Compensation Plan Information

 

Each of the above plans provides that the number of shares with respect to which options may be granted, and the number of shares of common stock subject to an outstanding option, shall be proportionately adjusted in the event of a subdivision or consolidation of shares or the payment of a stock dividend on common stock, and the purchase price per share of outstanding options shall be proportionately revised.

 

The Move, Inc. 1999 Stock Incentive Plan, a security-holder approved plan, contains a provision for an automatic increase in the number of shares available for issuance each January 1 (until January 1, 2009) by an amount equal to 4.5% of the total number of outstanding shares as of the preceding December 31; provided that the aggregate number of shares that qualify as Incentive Stock Options (as defined in the plan) must not exceed 20.0 million shares.

 

Non-Shareholder Approved Plans

 

Options are granted from the Move, Inc. 2002 Stock Incentive Plan, a plan established in January 2002 to attract and retain qualified personnel. No more then 40% of the available securities granted under this plan may be awarded to our directors or executive officers. Option grants under this plan are non-qualified stock options and generally have a four-year vesting schedule and a 10-year life.

 

Other non-shareholder approved plans include the following plans assumed in connection with prior acquisitions: The 1997-1998 Stock Incentive Plan of Cendant Corporation, the Cendant Corporation Move.com Group 1999 Stock Option Plan, as amended and restated effective as of March 21, 2000, the Move.com, Inc. 2000 Stock Incentive Plan, the HomeWrite Incorporated 2000 Equity Incentive Plan, the ConsumerInfo.com, Inc. 1999 Stock Option Plan, the iPlace 2000 Stock Option Plan, the eNeighborhoods, Inc. 1998 Stock Option Plan, the Qspace, Inc. 1999 Stock Option Plan, the iPlace, Inc. 2001 Equity Incentive Plan and The Hessel Group, Inc. 2000 Stock Option Plan. Each of these plans (i) was intended to attract, retain and motivate employees, (ii) was administered by the Board of Directors or by a committee of the Board of Directors of such entities, and (iii) provided that options granted thereunder would be exercisable as determined by such Board or committee, provided that no option would be exercisable after the expiration of 10 years after the grant date. We did not grant options under any of these plans

in 2006 and 2005, and we do not plan to do so in the future. Options outstanding as of December 31, 2006 pursuant to compensation plans assumed in connection with prior acquisitions, in the aggregate, total 100,214 and the weighted average exercise price of those option shares is $22.41.

 

For additional information regarding our equity compensation plans, see Note 12, “Stock Plans,” to our Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

You should read the following selected consolidated financial data together with the Consolidated Financial Statements and related notes included in “Part II — Item 8. Financial Statements and Supplementary Data” and “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The consolidated statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006 and 2005 are derived from our audited Consolidated Financial Statements included in “Part II — Item 8. Financial Statements and Supplementary Data.” The consolidated statement of operations data for the years ended December 31, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004, 2003 and 2002 have been derived from audited Consolidated Financial Statements not included in this Form 10-K.

 

 

 

 

 

 

You should read the following discussion in conjunction with our audited Consolidated Financial Statements for the years ended December 31, 2006, 2005 and 2004 and related notes included in “Part II — Item 8. Financial Statements and Supplementary Data.”

 

Overview

 

Our History

 

We were incorporated in 1993 under the name of InfoTouch Corporation with the objective of establishing an interactive network of real estate “kiosks” for consumers to search for homes. In 1996, we began to develop the technology to build and operate real estate related Internet sites. In 1996, we entered into a series of agreements with NAR and several investors and transferred technology and assets to a newly-formed subsidiary, which ultimately became RealSelect, Inc. RealSelect, Inc. in turn entered into a number of formation agreements with, and issued cash and common stock representing a 15% ownership interest in RealSelect, Inc. to, NAR in exchange for the rights to operate the REALTOR.com^® web site and pursue commercial opportunities relating to the listing of real estate on the Internet. That 15% ownership in RealSelect, Inc. was exchanged for stock in a new parent company, Homestore.com, Inc., in August 1999. Our initial operating activities primarily consisted of recruiting personnel, developing our web site content and raising our initial capital and we began actively marketing our advertising products and services to real estate professionals in January 1997. We changed our name to Homestore, Inc. in May 2002 and to Move, Inc. in June 2006.

 

Our Business

 

We have created an online service that enables consumers to find real estate listings and other content related to residential real estate, moving and relocation. Our web sites collectively have become the leading consumer destination on the Internet for home and real estate-related information based on the number of visitors, time spent on our web sites and number of property listings. We generate most of our revenue from selling advertising and marketing solutions to both real estate industry participants, including real estate agents, homebuilders, and rental property owners, and other local and national advertisers interested in reaching our consumer audience before, during or after a move. We also provide software solutions to real estate agents to assist them in managing their client interactions and architects’ home plans to consumers considering building a new home. We derive all of our revenues from our North American operations.

 

During the second quarter of 2006, we launched Move.com^tm as a real estate listing and move-related search site. Shortly after its launch, Move.com replaced HomeBuilder.com^®, RENTNET^® and Homestore.com^® and we began promoting those services under the Move brand. Our primary consumer web site is now Move.com which provides new home, apartment, corporate housing, and self-storage listings and is a home information resource site with an emphasis on content related to mortgage financing, moving and storage, and home and garden activities. Our web sites also include REALTOR.com^®, the official site of the National Association of REALTORS^® (“NAR”); SeniorHousingNet^tm.com, a comprehensive resource for seniors; and Moving.com which connects consumers with moving companies, van lines, truck rental providers and self storage facilities.

 

Business Trends and Conditions

 

In recent years, our business has been, and we expect will continue to be, influenced by a number of macroeconomic, industry-wide and product-specific trends and conditions:

 

 

Beginning in the second half of 2005, the market dynamics seemed to reverse. Interest rates rose and mortgage options began to decline. The housing market became saturated with new home inventory in many large metropolitan markets and the available inventory of resale homes began to climb as demand softened. The impact of the rise in interest rates caused demand for homes to decline into 2006 and the rental market improved. The change in economic factors created uncertainty on job creation and made it difficult to gauge whether these trends would continue. While interest rates appear to have stabilized as we enter 2007, housing starts and sales of existing homes have slowed considerably in 2006 and this is projected to continue into early 2007.

 

During the difficult period for rentals prior to 2006, we saw many rental owners reduce their overall advertising spending and shift their dollars from conventional offline channels, such as newspapers and real estate guides, to the Internet. Because of this trend, we believe a slowdown in the sale of new and existing homes could lead to increased spending on the Internet by home builders, real estate agents and brokers. This trend was confirmed in the first half of 2006. We saw many brokers move their spending online and many home builders increased their marketing spend to move existing inventory, even as they slowed their production and our business grew as a result. However, as the slow market continues into 2007, it is possible that a continued slowdown could cause our rate of growth to decline. While the advertising spend by many of the large home builders, agents and brokers appears strong, some of the medium and smaller businesses may have to reduce expenses to remain in business and this could cause our growth rate to decline.

 

 

Real Estate Services segment:  Our Real Estate Services segment evolved as a business providing Internet applications to real estate professionals. In recent years, it became apparent that our customers valued the media exposure that the Internet offered them, but not all of the “technology” that we were offering. Many of our customers objected to our proposition that they purchase our templated web site in order to gain access to our networks. In addition, we were charging a fixed price to all customers regardless of the market they operated in or the size of their business. Our Top Producer^® product was a desktop application that required some knowledge of the operations of a desktop computer.

 

In 2003, we responded to our customers’ needs and revamped our service offerings. We began to price our services based on the size of the market and the number of properties the customer displayed. For many of our customers this change led to substantial price increases over our former technology pricing. This change has been reasonably well-accepted by our customers.

 

In late 2002, Top Producer introduced a monthly subscription model of an online application. This had a negative impact on our revenues over the first 18 months of this offering as we attempted to build the subscriber base. While our desktop product was still attractive to some real estate professionals, our customer base has shifted to the online application and has completely replaced our desktop product as of the end of 2006.

 

Move-Related Services segment:  Continued uncertainty in the economy has had an adverse effect on our Welcome Wagon^® business. Our primary customers are small local merchants trying to reach new movers and economic conditions have negatively impacted small businesses more than other businesses. These economic conditions have caused the decline in our revenue in this segment to continue. We have seen some improvement in market conditions in some geographic areas in 2006, but it could take considerable time before this segment yields meaningful growth, if at all. Significant growth will require that we introduce new products that are responsive to advertisers’ demands and are presented to consumers much more timely.

 

 

Acquisitions and Dispositions

 

On February 21, 2006, we acquired certain assets and assumed certain liabilities of Moving.com, Inc. from TMP Directional Marketing, LLC for approximately $9.6 million in cash. Moving.com connects consumers with moving companies, van lines, truck rental providers and self storage facilities. The acquisition has been accounted for as a purchase. The acquisition cost has been allocated to the assets acquired based on their respective fair values. We integrated Moving.com’s product offering into our new Move offering in 2006.

 

On December 21, 2004, we entered into an Asset Purchase Agreement with Newstar Systems, Inc. (“Newstar”) pursuant to which we agreed to sell our Computer for Tracts (“CFT”) software business, which at the time had been reported as part of our software segment, for a purchase price of approximately $2.5 million in cash. The transaction closed on December 21, 2004, resulting in a gain on disposition of discontinued operations of approximately $1.6 million.

 

On October 6, 2004, we entered into an Asset Purchase Agreement with Wyld Acquisition Corp. (“Wyld”), a wholly owned subsidiary of Siegel Enterprises, Inc., pursuant to which we agreed to sell our Wyldfyre software business, which at the time had been reported as part of our software segment, for a purchase price of $8.5 million in cash. The transaction closed on October 6, 2004, resulting in a gain on disposition of discontinued operations of $5.7 million for the year ended December 31, 2004. The sale generated net proceeds of approximately $7.0 million after transaction fees and monies placed in escrow pursuant to the Asset Purchase Agreement. In the fourth quarter of 2005, the entire amount of the escrow fund, $855,000, was released and recognized as “Gain on disposition of discontinued operations” for the year ended December 31, 2005.

 

Pursuant to SFAS No. 144, our Consolidated Financial Statements for all periods presented reflect the disposition of our Wyldfyre and CFT divisions as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of these divisions have been excluded from the respective captions in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and have been reported as “Loss from discontinued operations,” net of applicable income taxes of zero; and as “Net cash provided by (used in) discontinued operations.” Total revenue and loss from discontinued operations for the year ended December 31, 2004 are reflected below (in thousands):

 

The calculation of the gain on the sale of discontinued operations is as follows (in thousands):

 

 

Critical Accounting Policies, Estimates and Assumptions

 

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts; valuation of goodwill, identified intangibles and other long-lived assets; and legal contingencies.

 

Management has discussed the development and selection of the following critical accounting policies, estimates and assumptions with the Audit Committee of our Board of Directors and the Audit Committee has reviewed these disclosures.

 

Revenue Recognition — We derive our revenue primarily from two sources:

 

 

As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period.

 

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”, and Emerging Issues Task Force Issue (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables”. Revenue is recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

 

We assess collection based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Cash received in advance is recorded as deferred revenue until earned.

 

Software Revenue — We generally license our software products in two ways:

 

 

Our hosting arrangements require customers to pay a fixed fee and receive service over a period of time, generally one year.

 

We apply the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” to all transactions involving the sale of software. Software license revenue is recognized upon all of the following criteria being satisfied:

 

 

For arrangements containing multiple elements, such as software license fees, consulting services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method” prescribed by SOP 98-9. For arrangements in which VSOE does not exist for the undelivered element, including specified upgrades, revenue is deferred and not recognized until either VSOE is established or delivery of the element without VSOE has occurred. Our arrangements generally do not include acceptance clauses. However, if an arrangement includes an acceptance clause, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. Revenue for maintenance services are recognized ratably over the contract term. Certain software products are sold as subscriptions, and accordingly, revenue is deferred and recognized ratably over the term of the contract which is typically based on a one-year renewable term.

 

Advertising Revenue — We sell online and offline advertising. Online advertising revenue includes three revenue streams:

 

 

The impressions based agreements range from spot purchases to 12 month contracts. The impression based revenue is recognized based upon actual impressions delivered and viewed by a user in a period. The fixed fee subscription revenue is recognized ratably over the period in which the services are provided. We measure performance related to advertising obligations on a monthly basis prior to the recording of revenue. Offline advertising revenue is recognized when the publications in which the advertising is displayed are shipped.

 

  Allowance for Doubtful Accounts

 

Our estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount to be reserved. First, we evaluate specific accounts where we have information that the customer may have an inability to meet its financial obligations. In these cases, we use our judgment, based on the best available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, an additional reserve is established for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major

customer’s ability to meet its financial obligation to us) our estimates of the recoverability of amounts due to us could be reduced or increased by a material amount.

 

  Valuation of Goodwill, Identified Intangibles and Other Long-lived Assets

 

Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant declines in our stock price for a sustained period or significant underperformance relative to expected historical or projected future operating results.

 

In testing for a potential impairment of goodwill, we first compare the estimated fair value of each reporting unit with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the respective reporting unit is less than book value, then we are required to compare the carrying amount of the goodwill with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our subscriber base, software and technology and patents and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.

 

  Stock Based Compensation

 

On January 1, 2006, the Company adopted the provision of SFAS 123R, which requires that compensation expense be measured and recognized at an amount equal to the fair value of share-based payments granted under compensation arrangements. The Company calculates the fair value of stock options by using the Black-Scholes option-pricing model. The determination of the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock-price volatility over the term of the awards, the expected dividend yield and the expected stock option exercise behavior. Additionally, judgment is also required in estimating the number of share-based awards that are expected to forfeit. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Due to the unusual volatility of the Company’s stock price around the time of the restatement of its financial statements in 2002 and several historical acquisitions that changed the Company’s risk profile, historical data was more heavily weighted toward the most recent two years of stock activity. The expected term of options granted was derived by averaging the vesting term with the contractual term.

 

If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The Company believes the accounting for stock-based compensation is a critical accounting policy because it requires the use of complex judgment in its application.

 

  Legal Contingencies

 

We are currently involved in certain legal proceedings, as discussed in Note 21, “Commitments and Contingencies — Legal Proceedings” to our Consolidated Financial Statements in Item 8 of this Form 10-K. For those matters where we have reached agreed-upon settlements, we have estimated the amount of those settlements and accrued the amount of the settlement in our financial statements. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

 

Results of Operations

 

We have a limited operating history, and our business model has been modified over the past three years and we expect additional changes to our business model in 2007. Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as the Internet. To address these risks, we must, among other things, be able to continue to:

 

 

Although our revenue grew significantly in our early history, only recently have we been able to again generate growth. Therefore, you should not consider our historical growth indicative of future revenue levels or operating results. We have achieved net income in a few recent quarters, but we may not be able to sustain it. A more complete description of other risks relating to our business is set forth in “Part I — Item 1A. Risk Factors.”

 

 

 

 

 

For the Years Ended December 31, 2006 and 2005

 

Revenue

 

Revenue increased approximately $37.8 million, or 15%, to $290.4 million for the year ended December 31, 2006 from revenue of $252.6 million for the year ended December 31, 2005. The increase in revenue was due to increases of $27.0 million in the Real Estate Services segment and $10.8 million in the Move-Related Services segment. These increases by segment are explained in the segment information below.

 

Cost of Revenue

 

Cost of revenue, including non-cash stock-based compensation and charges, increased approximately $9.1 million, or 16%, to $65.3 million for the year ended December 31, 2006 from $56.2 million for the year ended December 31, 2005. The increase was primarily due to increases in personnel related costs of $4.8 million, increases in material and shipping costs of $3.0 million, increases in depreciation of $0.9 million and other cost increases of $0.4 million.

 

Gross margin percentage stayed constant at 78% for the years ended December 31, 2006 and December 31, 2005.

 

Operating Expenses

 

We have provided the major categories of changes in each of our operating expenses so our investors can better understand our operating expense structure.

 

Sales and Marketing.  Sales and marketing expenses, including non-cash stock-based compensation and charges, increased approximately $19.2 million, or 21%, to $110.3 million for the year ended December 31, 2006 from $91.1 million for the year ended December 31, 2005. The overall increase was primarily due to increases in online distribution costs of $9.6 million, increases in personnel related costs of $5.3 million, an increase of $1.7 million in expense for non-cash stock-based compensation associated with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment,” (“SFAS 123R”) as of January 1, 2006 and increased marketing costs of $2.5 million associated with the launch of the new Move brand and other cost increases of $0.1 million.

 

Product and Web Site Development.  Product and web site development expenses, including non-cash stock-based compensation and charges, increased approximately $11.8 million, or 54%, to $33.9 million for the year ended December 31, 2006 from $22.1 million for the year ended December 31, 2005. There was an increase of $1.5 million in expense for non-cash stock-based compensation due to the adoption of SFAS 123R in 2006 with the remaining increase of $10.3 million due to an increase in consulting and personnel related costs to develop the new Move^tm web site and to improve our product offerings in our REALTOR.com^® and Top Producer^® businesses.

 

General and Administrative.  General and administrative expenses, including non-cash stock-based compensation and charges, decreased approximately $1.3 million, or 2%, to $81.2 million for the year ended December 31, 2006 from $82.5 million for the year ended December 31, 2005. The decrease was primarily due to a $15.6 million decrease in legal fees resulting from our obligation to advance legal fees to certain former officers in 2005, a decrease of $1.2 million due to an insurance refund, a decrease in outside legal and accounting fees of $1.0 million, decreases in personnel related costs of $0.8 million and other cost decreases of $0.2 million. These decreases were partially offset by an increase of $12.0 million in expense for non-cash compensation primarily associated with the adoption of SFAS 123R in 2006 and the award of restricted stock units to certain executive officers, an increase of $2.1 million in consulting costs due to the relocation of our data center, an increase of $1.9 million in depreciation expense, and an increase of $1.5 million in bad debt expense primarily due to one customer and the acquisition of Moving.com.

 

Amortization of Intangible Assets.  Amortization of intangible assets was $2.3 million for the year ended December 31, 2006 compared to $3.6 million for the year ended December 31, 2005. The decrease in amortization was due to certain intangible assets becoming fully amortized during 2006.

 

Restructuring Charges.  We recorded a $0.3 million reduction to our restructuring charges for the year ended December 31, 2006 as a result of the early buy-out of the remaining lease obligation in Canada. The $1.3 million reduction in the restructuring charges for the year ended December 31, 2005 resulted primarily from a decrease in the estimate for charges related to our San Francisco office space and a change in the exchange rates decreasing our Canadian lease obligation as well as other revisions of estimated contractual liabilities.

 

Litigation Settlement.  We recorded litigation settlement charges of $1.8 million for the year ended December 31, 2005. There were no litigation settlement charges for the year ended December 31, 2006. These settlements

are discussed in Note 21, “Settlements of Disputes and Litigation” to our audited Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

Stock-based Compensation and Charges.  The following chart summarizes the stock-based compensation and charges that have been included in the following captions for each of the periods presented (in thousands):

 

 

Stock-based compensation and charges increased for the year ended December 31, 2006, primarily due to the adoption of SFAS 123R as of January 1, 2006 and the issuance of restricted stock units to certain executive officers.

 

Interest Income, Net

 

Interest income, net, increased $4.9 million to $7.3 million for the year ended December 31, 2006 compared to $2.4 million for the year ended December 31, 2005, primarily due to increases in short-term investment balances and higher interest rates on those balances.

 

Other Income, Net

 

Other income, net, increased $16.8 million to $17.4 million for the year ended December 31, 2006 compared to $0.6 million for the year ended December 31, 2005 primarily due to a realized gain on sale of investments of $15.7 million resulting from the sale of certain securities that had previously been permanently impaired and written off during the year ended December 31, 2001. In addition, there was other income of $1.1 million recognized as a result of the revaluation of an embedded derivative liability resulting from the sale of convertible preferred stock in December 2005. There was no sale of assets of similar magnitude during the year ended December 31, 2005.

 

Income Taxes

 

As a result of historical net operating losses, we have generally not recorded a provision for income taxes. However, during the year ended December 31, 2006, we recorded certain indefinite lived intangible assets as a result of the purchase of Moving.com which creates a permanent difference as the amortization can be recorded for tax purposes but not for book purposes. A tax provision in the amount of $134,000 was recorded during the year ended December 31, 2006 as a result of this permanent difference which cannot be offset against net operating loss carryforwards due to its indefinite life. As of December 31, 2006, we had $942.0 million of net operating loss carryforwards for federal and foreign income tax purposes, which begin to expire in 2008. We have provided a full valuation allowance on our deferred tax assets, consisting primarily of net operating loss carryforwards, due to the likelihood that we may not generate sufficient taxable income during the carry-forward period to utilize the net operating loss carryforwards. A deferred tax liability was established in 2006 for the difference between tax amortization for financial statement purposes and for tax purposes.

 

Segment Information

 

Segment information is presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This standard is based on a management approach, which requires segmentation based upon our internal organization and disclosure of revenue and operating expenses based upon internal accounting methods. During the fourth quarter of 2005, we revised our business segments to align with the way we are approaching the market: Real Estate Services for those products and services offered to industry professionals trying to reach consumers and Move-Related Services for those products and services offered to other advertisers

who are trying to reach those consumers in the process of a move. As a result of these changes, we evaluate performance and allocate resources based on these two segments. We have reclassified previously reported segment data to conform to the current period presentation. This is consistent with the data that is made available to our management to assess performance and make decisions.

 

The expenses presented below for each of the business segments include an allocation of certain corporate expenses that are identifiable and benefit those segments and are allocated for internal management reporting purposes. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses, such as finance, legal, internal business systems, and human resources; amortization of intangible assets; litigation settlement charges; impairment charges; stock-based charges; and acquisition and restructuring charges. There is no inter-segment revenue. Assets and liabilities are not fully allocated to segments for internal reporting purposes.

 

Summarized information by segment as excerpted from internal management reports is as follows (in thousands):

 

 

Real Estate Services

 

Real Estate Services consists of products and services that promote and connect real estate professionals to consumers through our REALTOR.com^®, New Homes and Rentals on Move.com^tm and SeniorHousingNet^tm.com web sites, in addition to our customer relationship management applications for REALTORS^® offered through our TOP PRODUCER^® business. During the second quarter of 2006, we launched Move.com as a real estate listing and move-related search site. Shortly after its launch, Move.com replaced HomeBuilder.com^® and RENTNET^®.com and we began promoting those under the Move^tm brand. Our revenue is derived from a variety of advertising and software services, including enhanced listings, company and property display advertising, customer relationship management applications and web site sales which we sell to those businesses interested in reaching our targeted audience or those professionals interested in being more effective in managing their contact with consumers.

 

Real Estate Services revenue increased approximately $27.0 million, or 15%, to $208.3 million for the year ended December 31, 2006, compared to $181.3 million for the year ended December 31, 2005. The revenue increase was primarily generated by an increase in our REALTOR.com^® business driven by increased customer count and higher average spending per customer on our Enhanced Listing Product, increased Featured Home revenue, and revenue associated with the new Featured CMA Product that was launched in the second quarter of 2006. Additionally, there was an increase in our Top Producer business primarily due to continued growth in our 7i^tm subscriber base. These increases were partially offset by a decrease in revenue from our New Homes and Rentals businesses as a result of the transition to the new Move.com web site with the introduction of free content and our new Featured Listing product. Real Estate Services revenue represented approximately 72% of total revenue for the years ended December 31, 2006 and December 31, 2005.

 

Real Estate Services expenses increased $31.7 million, or 25%, to $158.4 million for the year ended December 31, 2006 from $126.7 million for the year ended December 31, 2005. We incurred $5.6 million in expense for non-cash stock-based compensation during the year ended December 31, 2006 associated with the adoption of SFAS 123R as of January 1, 2006. The remaining increase was due to a $16.5 million increase in consulting and personnel related costs primarily related to increased product development efforts, a $7.0 million increase in online distribution costs, and other operating cost increases of $2.6 million.

 

Real Estate Services generated operating income of $49.9 million for the year ended December 31, 2006 compared to $54.6 million for the year ended December 31, 2005 primarily due to the increased expenses discussed above. We have announced plans for additional investments in our New Homes and Rentals businesses to introduce auction pricing and self-serve products and this change could negatively impact our operating income in this segment for the near future. We will continue to seek increased revenue through new product offerings and new market opportunities.

 

Move-Related Services

 

Move-Related Services consists of advertising products and lead generation tools including display, text-link and rich advertising positions, directory products, price quote tools and content sponsorships on Move.com^tm, Moving.com, and other related sites which we sell to those businesses interested in reaching our targeted audience. In addition, it includes our Welcome Wagon^® new-mover direct mail advertising products and the sale of new home plans and related magazines through our Homeplans business.

 

Move-Related Services revenue increased $10.8 million, or 15%, to $82.1 million for the year ended December 31, 2006, compared to $71.3 million for the year ended December 31, 2005. There was a $6.9 million increase in revenue as a result of the acquisition of Moving.com on February 22, 2006. Additionally, there was an increase in the Welcome Wagon business through improved local book revenue and continued growth in our Pinpoint product and an increase in our on-line advertising revenue. These increases were partially offset by a decline in revenues from our Homeplans business. Move-Related Services revenue represented approximately 28% of total revenue for the years ended December 31, 2006 and December 31, 2005.

 

Move-Related Services expenses increased $13.2 million, or 18%, to $85.8 million for the year ended December 31, 2006 from $72.6 million for the year ended December 31, 2005. We incurred $1.8 million in expense for non-cash stock-based compensation during the year ended December 31, 2006 associated with the adoption of SFAS 123R as of January 1, 2006. The remaining increase was due to a $6.2 million increase in expenses as a result of the acquisition of Moving.com, increased personnel related costs in sales and marketing of $3.1 million, increased online distribution costs of $0.9 million, increased bad debt expense of $0.9 million primarily due to one customer, and other cost increases of $0.3 million.

 

Move-Related Services generated an operating loss of $3.7 million for the year ended December 31, 2006 compared to an operating loss of $1.3 million for the year ended December 31, 2005 primarily due to factors outlined above. We have announced plans for additional investments in our Welcome Wagon business that could negatively impact our operating results in this segment in the near future. We continue to seek increased revenue through new product offerings and new market opportunities.

 

Unallocated

 

Unallocated expenses decreased $8.0 million, or 14%, to $48.6 million for the year ended December 31, 2006 from $56.6 million for the year ended December 31, 2005. The decrease was primarily due to a $15.6 million decrease in legal fees resulting from our obligation to advance legal fees to certain former officers in 2005, a decrease in personnel related costs of $1.3 million, a decrease of $1.2 million due to an insurance refund, and other cost decreases of $0.7 million. These decreases were partially offset by an increase of $8.0 million in expense for non-cash compensation primarily associated with the adoption of SFAS 123R in 2006, and the award of restricted stock units to certain executive officers and an increase of $2.8 million in depreciation expense.

 

For the Years Ended December 31, 2005 and 2004

 

Revenue

 

Revenue increased approximately $35.8 million, or 16%, to $252.6 million for the year ended December 31, 2005 from revenue of $216.8 million for the year ended December 31, 2004. The increase in revenue was due to increases of $33.0 million in the Real Estate Services segment and $2.8 million in the Move-Related Services segment. These increases by segment are explained in the segment information below.

 

Cost of Revenue

 

Cost of revenue increased approximately $5.4 million, or 11%, to $56.2 million for the year ended December 31, 2005 from $50.8 million for the year ended December 31, 2004. The increase was primarily due to increases in personnel related costs of $2.1 million, increases in material and shipping costs of $2.7 million, increases in hosting and imaging costs of $1.0 million, and other cost increases of $1.1 million, offset by a $1.5 million decrease in royalties resulting from renegotiated contracts.

 

Gross margin percentage for the year ended December 31, 2005 was 78%, compared to 77% for the year ended December 31, 2004. The increase in gross margin percentage was primarily due to the factors mentioned above.

 

Operating Expenses

 

We have provided the major categories of changes in each of our operating expenses so our investors can better understand our operating expense structure.

 

Sales and Marketing.  Sales and marketing expenses, including non-cash stock-based charges, increased approximately $2.7 million, or 3%, to $91.1 million for the year ended December 31, 2005 from $88.4 million for the year ended December 31, 2004. The overall increase was primarily due to increases in personnel related costs of $5.0 million and increased offline marketing costs of $1.2 million, offset by reduced online distribution costs of $2.9 million due to renegotiated agreements and other cost reductions of $0.6 million.

 

Product and Web Site Development.  Product and web site development expenses increased approximately $6.7 million, or 44%, to $22.1 million for the year ended December 31, 2005 from $15.4 million for the year ended December 31, 2004. The increase was primarily due to an increase in consulting and personnel related costs to improve our product offerings in our HomeBuilder.com^®, RENTNET^®, TOP PRODUCER^®, and Welcome Wagon^® businesses.

 

General and Administrative.  General and administrative expenses, including non-cash stock-based charges, increased approximately $14.1 million, or 21%, to $82.5 million for the year ended December 31, 2005 from $68.4 million for the year ended December 31, 2004. As a result of our obligation to advance expenses (including attorneys’ fees) to, and in certain cases indemnify, our former officers and the resulting settlement agreements with certain of these former officers as discussed in Note 20 “Settlements of Disputes and Litigation” and Note 21 “Commitments and Contingencies”, to our audited Consolidated Financial Statements contained in Item 8 of this Form 10-K, we recorded $15.6 million in expenses during the year ended December 31, 2005 compared to $7.2 million during the year ended December 31, 2004, an increase of $8.4 million. There were also increases in personnel related costs of $4.5 million and consulting costs of $3.7 million resulting from various corporate projects including the implementation of a new enterprise resource planning system and the planning of the relocation of our data center. These increases were offset by a $1.6 million reduction in accounting fees as the cost of compliance with Section 404 of Sarbanes-Oxley and associated audit costs were reduced during our second year of compliance and other cost decreases of $0.9 million.

 

Amortization of Intangible Assets.  Amortization of intangible assets was $3.6 million for the year ended December 31, 2005 compared to $7.9 million for the year ended December 31, 2004. The decrease in amortization was due to certain intangible assets becoming fully amortized during 2005.

 

Restructuring Charges.  We recorded a $1.3 million reduction to our restructuring charges for the year ended December 31, 2005 as a result of changes in estimates for previous restructuring plans. These changes resulted primarily from a decrease in the estimate for charges related to our San Francisco office space and a change in the

exchange rates decreasing our Canadian lease obligation as well as other revisions of estimated contractual liabilities.

 

Restructuring charges were $1.3 million for the year ended December 31, 2004 as a result of revisions to estimates of our sublease assumptions of our remaining San Francisco office space and changes in the exchange rates for our Canadian lease. There were no new restructuring plans approved during the years ended December 31, 2005 and 2004.

 

Litigation Settlement.  We recorded litigation settlement charges of $1.8 million and $2.2 million for the years ended December 31, 2005 and December 31, 2004, respectively. These settlements are discussed in Note 21, “Settlements of Disputes and Litigation” to our audited Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

Stock-based Charges.  The following chart summarizes the stock-based charges that have been included in the following captions for each of the periods presented (in thousands):

 

 

Stock-based charges remained relatively consistent, increasing by $0.3 million, to $1.1 million for the year ended December 31, 2005 compared to $0.8 million for the year ended December 31, 2004.

 

Interest Income, Net

 

Interest income, net, increased $1.7 million to $2.4 million for the year ended December 31, 2005 from $0.7 million for the year ended December 31, 2004, primarily due to increases in short-term investment balances and higher interest rates on those balances.

 

Other Income, Net

 

Other income, net, decreased $1.7 million to $0.6 million for the year ended December 31, 2005 compared to $2.4 million for the year ended December 31, 2004 primarily due to a $1.4 million gain realized on the sale of an office building owned by the Company during the year ended December 31, 2004. There was no sale of assets of similar magnitude during the year ended December 31, 2005.

 

Gain on Disposition of Discontinued Operations and Loss from Discontinued Operations

 

On October 6, 2004, we sold our Wyldfyre division for $8.5 million in cash and recorded a gain on disposition of discontinued operations of $5.7 million for the year ended December 31, 2004. On December 21, 2004, we sold our Computers for Tracts division for $2.5 million and recorded a gain on disposition of discontinued operations of $1.6 million for the year ended December 31, 2004. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our Consolidated Financial Statements reflect these as discontinued operations. The results of operations for the Wyldfyre and Computer for Tracts divisions included operating losses of $0.7 million for the year ended December 31, 2004. During the year ended December 31, 2005, we recorded a gain on disposition of discontinued operations of $0.9 million as a result of the release of escrowed funds related to the sale of Wyldfyre.

 

Income Taxes

 

As a result of operating losses and our inability to recognize a benefit from our deferred tax assets, we have not recorded a provision for income taxes for the years ended December 31, 2005 and December 31, 2004. We have provided a full valuation allowance on our deferred tax assets, consisting primarily of net operating loss carryforwards, due to the likelihood that we may not generate sufficient taxable income during the carry-forward period to utilize the net operating loss carryforwards.

 

Segment Information

 

Summarized information by segment as excerpted from internal management reports is as follows (in thousands):