Move, Inc. and its subsidiaries (the “Company”) operate an online network of web sites for real estate search, finance, moving and home enthusiasts and provide a comprehensive resource for consumers seeking the online information and connections they need regarding real estate. The Company’s flagship consumer web sites are REALTOR.com®, Move.com and Moving.com. Through its ListHub business, the Company is also an online real estate listing syndicator and provider of advanced performance reporting solutions for the purpose of helping to drive an effective online advertising program for brokers, real estate franchises, and individual agents. The Company also provides lead management software for real estate agents and brokers through its Top Producer® business.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation — The accompanying financial statements are consolidated and include the financial statements of Move, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has evaluated all subsequent events through the date the financial statements were issued.
Investments in private entities where the Company holds a 50% or less ownership interest and does not exercise control are accounted for using the equity method of accounting. The investment balance is included in investment in unconsolidated joint venture and the Company’s share of the investees’ results of operations is included in earnings of unconsolidated joint venture.
Use of Estimates — The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to provisions for doubtful accounts, legal contingencies, income taxes, revenue recognition, stock-based compensation, fair value of investments and the recoverability of goodwill and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents — All highly liquid instruments with an original maturity of three months or less are considered cash and cash equivalents, those with original maturities greater than three months and current maturities less than 12 months from the balance sheet date are considered short-term investments. The Company invests its excess cash in liquid money market and treasury bill investments.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company’s accounts receivable are derived primarily from revenue earned from customers located in the United States. The Company maintains an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
Fair Value — The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:
The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and line of credit are carried at cost, which approximates their fair value due to the short-term maturity of these instruments.
Prepaid Commissions — The Company prepays commissions to certain of its salespersons on the contract sale date and expenses the commission consistent with the revenue recognition term.
Property and Equipment — Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three to five years for computer software and equipment and five years for furniture, fixtures and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Construction in progress is primarily related to computer hardware, software licenses and capitalized costs not yet deployed. Depreciation for these assets commences once they are placed in service. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation and amortization are removed from the Company’s financial statements with the resulting gain or loss reflected in the Company’s results of operations.
Product and Web Site Development Costs — The Company capitalizes direct costs incurred in the development phase of software developed for internal use, web site development costs, and costs to develop its monthly subscription software products (“capitalized software costs”). The Company only capitalizes direct costs if there is new functionality being developed and the expected life is greater than one year. As the Company is constantly enhancing its products and adding new functionality, a significant portion of its product and web site development costs are expensed as incurred. Additionally, costs related to design or maintenance is expensed as incurred. The Company had $16.5 million and $14.7 million of capitalized software costs and $12.4 million and $10.6 million of accumulated amortization included in computer software and equipment and construction in progress which is included in Property and Equipment, net, at December 31, 2011 and 2010, respectively.
Identifiable Intangibles, Goodwill and other Long-Lived Assets — The Company has both indefinite and definite lived intangibles. Definite lived identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 3.0 to 15.5 years. The Company assesses the impairment of long-lived assets, which include property and equipment and identifiable intangible assets, on an annual basis or whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events and circumstances that may indicate that an asset is impaired may include significant decreases in the market value of an asset, a significant decline in actual and projected advertising and software license revenue, loss of key customer relationships or renegotiation of existing arrangements, a change in the extent or manner in which an asset is used, shifts in technology, loss of key management or personnel, changes in the Company’s operating model or strategy and competitive forces as well as other factors.
Impairment of goodwill is required to be tested at the reporting unit level which is determined through the use of the management approach. The management approach considers the internal organizational structure used by the Company’s chief operating decision maker for making operating decisions and assessing performance. The Company is aligned functionally with the management team focused and incentivized around the total company performance. The chief operating decision maker is provided with reports that show the company’s results on a consolidated basis with additional expenditure information by functional area, but there is no additional financial information provided at any further reporting unit level. Therefore the Company tests goodwill for impairment on a consolidated entity basis.
If events and circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. Goodwill has been recorded in connection with the Company’s various acquisitions. In testing for a potential impairment of goodwill, the Company will first compare the estimated fair value of the consolidated entity 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 is less than book value, then the Company is 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 its subscriber base, software and technology and patents and trademarks. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.
The following table summarizes the Company’s useful lives for significant intangible and long-lived assets:
|Content syndication agreements||5.0|
Revenue Recognition — Revenues are recognized from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. When a revenue agreement involves multiple elements, such as sales of various services in one arrangement or potentially multiple arrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when the revenue recognition criteria for each element is met. The Company determines the selling price of its deliverables based on the following hierarchy: (1) vendor-specific objective evidence ("VSOE") if available; (2) third-party evidence ("TPE") if VSOE is not available; and (3) best estimated selling price ("BESP") if neither VSOE nor TPE is available. The Company evaluates whether payments made to customers or revenues earned from vendors have a separate identifiable benefit and whether they are fairly valued in determining the appropriate classification of the related revenues and expense.
The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer. The Company does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes 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.
The Company derives its revenue primarily from two sources (i) advertising revenue for running online advertising on the Company’s web sites and (ii) software revenue, which represents software licenses. The Company derives all of its revenue from its operations in North America. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period.
Advertising Revenue — The Company primarily sells online advertising. Online advertising revenue includes three revenue streams: (i) impression based, (ii) fixed fee subscriptions, and (iii) variable, performance based agreements. The impression based agreements range from spot purchases to twelve 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. The Company measures performance related to advertising obligations on a monthly basis prior to the recording of revenue.
Software Revenue — The Company licenses its software on a monthly subscription basis. The Company’s hosting arrangements require customers to pay a fixed fee and receive service over a period of time, generally one year. Revenue is recognized ratably over the service period.
Taxes Collected from Customers — The Company reports taxes collected from customers on a net presentation basis.
Advertising Expense — Advertising costs from continuing operations, which consist primarily of online advertising, portal fees, keyword buys, e-mail campaigns, and other trade advertising, are expensed as incurred and totaled $13.1 million, $13.7 million, and $16.5 million during the years ended December 31, 2011, 2010 and 2009, respectively.
Stock-Based Compensation — The Company typically issues two types of stock-based awards to employees: restricted stock and stock options. Compensation expense associated with restricted stock is based on the fair value of the common stock on the date of grant. Compensation expense associated with stock options granted to employees is based on the estimated grant date fair value method using the Black-Scholes valuation model. Compensation expense is recognized using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation has been reduced for estimated forfeitures. When estimating forfeitures, the Company considers voluntary termination behaviors as well as trends of actual option forfeitures.
For stock options granted to non-employees, compensation expense is generally recognized over the vesting period of the award. At the end of each financial reporting period prior to vesting, the value of these options (as calculated using the Black-Sholes valuation model) is re-measured using the then-current fair value of the Company’s common stock. Stock options granted by the Company to non-employees vest over a four-year service period. The Company accounts for non-employee grants as an expense over the vesting period of the underlying options.
Income Taxes — Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred taxes to the amount expected to be realized.
The Company reports a liability, if applicable, for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Interest and penalties, if any, related to unrecognized tax benefits are recognized in income tax expense.
Net Income (Loss) Per Share — Net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of common shares outstanding. Shares associated with stock options and convertible preferred stock are not included to the extent they are anti-dilutive.
Foreign Currency Translation — The financial statements of the Company’s foreign subsidiary are measured using the local currency as the functional currency. Assets and liabilities of the subsidiary are translated at the rate of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange prevailing during the year. The resulting translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders’ equity.
Comprehensive Income — Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss, the change in the foreign currency translation adjustments during a period and the net unrealized gains or losses on short-term and long-term investments and marketable equity securities.
Segments — Segment reporting requires the use of the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance. The Company is aligned functionally with the management team focused and incentivized around the total company performance. The chief operating decision maker is provided with reports that show the company’s results on a consolidated basis with additional expenditure information by functional area, but there is no additional financial information provided at any further segment level. Based on this, the Company has determined that only one segment exists.
Recent Accounting Developments — In September 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and became effective during the first quarter of 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued an accounting standards update which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate, but consecutive statements. This update will be effective for public companies during interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this standards update will not have an impact on the Company’s consolidated financial statements as it only requires a change in the format of the current presentation.
In September 2011, the FASB issued an accounting standards update which allows entities to use a qualitative approach to test goodwill for impairment. This update permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This update is effective for public companies during interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this standards update will not have an impact on the Company’s consolidated financial statements as it only requires a change in the possible approach taken to test goodwill for impairment.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.
3. Acquisitions and Disposals
In the third quarter of 2011, the Company acquired the assets of Peep.ly, LLC (“Social Bios”). The Social Bios assets include social media products that can compile and integrate a user’s social networking profiles from various social media properties to build a web site landing page that provides a profile of the user and allows the user to conduct a directory search for others whereby the user’s social profile is matched against the social profiles of others to determine social overlaps or commonalities. The acquisition did not have a material impact on our consolidated financial position, results of operation or cash flows.
In the third quarter of 2010, the Company acquired all of the outstanding shares of Threewide Corporation (“Threewide”) for approximately $13.1 million in cash. Threewide was the operator of ListHub, an online real estate listing syndicator and provider of advanced performance reporting solutions for the purpose of helping to drive an effective online advertising program for brokers, real estate franchises and individual agents. The total purchase price has been allocated to the assets acquired, including intangible assets and liabilities assumed, based on their respective fair values. The $13.1 million purchase price was allocated $0.5 million to net tangible assets (which included $0.7 million of cash acquired), $5.1 million to intangible assets with estimated useful lives of five years, $0.5 million to indefinite lived trade name and trademarks, and the remaining $7.0 million was allocated to goodwill. In connection with the purchase accounting, the Company recorded a net deferred tax liability of $0.2 million associated with the indefinite lived intangible and an income tax benefit of $0.3 million (see Note 20), resulting in additional goodwill of $0.5 million being recorded. As of December 31, 2011, the Company had goodwill of $7.5 million and net intangible assets of $4.3 million associated with the Threewide acquisition. The financial results of Threewide are included in the Company’s Consolidated Financial Statements from the date of acquisition. Pro forma information for this acquisition has not been presented because the effects were not material to the Company’s historical consolidated financial statements.
In the second quarter of 2008, the Company decided to divest its Welcome Wagon® business. In the second quarter of 2009, the Company closed the sale of the business for a sales price of $2.0 million. The Company received $1.0 million in cash and a $1.0 million promissory note. The principal balance of the note, which was originally due on or before October 1, 2010, was paid in full in July 2010. The outstanding principal bore an interest rate of 7% per annum, with quarterly interest payments due commencing on October 1, 2009. The transaction resulted in a gain on disposition of discontinued operations of $1.2 million for the year ended December 31, 2009.
As part of the sale in 2002 of the Company’s ConsumerInfo division to Experian Holding, Inc. (“Experian”), $10.0 million of the purchase price was put in escrow to secure the Company’s indemnification obligations (the “Indemnity Escrow”). Under the terms of the stock purchase agreement, the Company’s maximum potential liability for claims by Experian was capped at $29.3 million less the balance in the Indemnity Escrow, which amount was approximately $8.5 million. During 2008, Experian demanded $29.3 million in indemnity payments. The Company denied liability and a bifurcated arbitration proceeding ensued to resolve the dispute. Subsequent to the completion of the first phase of the arbitration proceedings, on April 20, 2009, the parties settled the dispute and entered into a full release of all claims under which Experian received $7.4 million from the Indemnity Escrow and the Company received the balance of the escrow of $1.1 million, which is included in gain on disposition of discontinued operations for the year ended December 31, 2009.
Pursuant to ASC 205-20 “Presentation of Financial Statements - Discontinued Operations” (formerly SFAS No. 144), the consolidated financial statements of the Company for all periods presented reflect the classification of its Welcome Wagon® division as discontinued operations. Accordingly, the revenue, operating expenses, and cash flows of these divisions have been excluded from the respective captions in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and have been reported as “Loss from discontinued operations,” net of applicable income taxes of zero; and as “Net cash provided by (used in) discontinued operations.” Total revenue and loss from discontinued operations for the year ended December 31, 2009 are as follows (in thousands):
|Total operating expenses||(9,050||)|
|Loss from discontinued operations||$||(486||)|
|Gain on disposition of discontinued operations||$||2,303|
In the third quarter of 2009, the Company sold certain product lines associated with the Enterprise business for a sale price of approximately $1.4 million in cash. The transaction resulted in a gain on sale of assets of $1.3 million which is reflected in other income, net in the Company’s Consolidated Statements of Operations for the year ended December 31, 2009.
4. Restructuring Charges
During the year ended December 31, 2008, the Company’s Board of Directors approved restructuring and integration plans with the objective of eliminating duplicate resources and redundancies and implementing a new operating structure to lower total operating expenses. As a result of these plans, the Company incurred a restructuring charge from continuing operations of $4.4 million for the year ended December 31, 2008 which included lease obligations and related charges of $3.0 million for the consolidation of the Company’s operations in Westlake Village, California and the vacancy of a portion of the leased facility. During the year ended December 31, 2009, the Company entered into a new lease agreement for its Westlake Village facility. The Company’s obligation under the old lease was terminated and, as a result, the remaining restructuring reserve was reversed, resulting in a $1.2 million credit to restructuring charges for the year ended December 31, 2009.
During the year ended December 31, 2009, the Company incurred an additional restructuring charge from discontinued operations of $1.1 million associated with lease termination charges and additional employee termination costs.
5. Investments in Joint Ventures
In August 2010, the Company entered into a joint venture agreement with a national mortgage banker d/b/a Mortgage Match and contributed an initial investment of $0.5 million in exchange for a 49.9% ownership in the joint venture. The Company recorded its initial investment in the joint venture at $0.5 million, reflecting such cash payment. In addition, the Company entered into an Interim Services Agreement in August 2010 with the joint venture partner, under which the Company hosted and operated the MortgageMatch.com web site, performed various supporting services and received a fixed monthly fee. At December 31, 2010, the Company’s carrying value of the joint venture investment was equal to its proportionate share in the underlying assets of the joint venture.
In July 2011, the Company and its joint venture partner decided to dissolve the joint venture and terminate the Interim Services Agreement. As a result of the dissolution, the Company received a distribution of $0.5 million which represented the refund of its initial investment. In addition, the Company incurred $0.6 million in costs related to the dissolution of the joint venture which are included in general and administrative expenses for the year ended December 31, 2011.
In October 2009, along with Builder Homesite, Inc. (“BHI”) the Company entered into an agreement to create Builders Digital Experience LLC (“BDX”), a joint venture dedicated to helping new home builders reach buyers with innovative online marketing solutions. Through this joint venture, and in part through operation of a new web site, www.theBDX.com, BDX operates the Move.com New Homes Channel, the NewHomeSource.com web site and other web sites focused on the new homes market. The BDX joint venture is located in Austin, Texas. The Company made cash payments of $6.5 million and contributed customer lists and other business assets in exchange for a 50% ownership in the joint venture. The Company recorded its initial investment in the joint venture at $6.5 million. The carrying value of the investment in BDX exceeds the Company’s proportionate share in the underlying assets of the joint venture by $2.5 million. This excess primarily related to differences in the cash payments and carrying value of the net assets contributed by the Company and BHI upon the formation of the joint venture and represented goodwill.
The Company accounts for its investments in the joint venture under the equity method of accounting. Under this method, the Company records its proportionate share of the joint venture’s net income or loss based on the monthly financial statements of the joint venture. The Company records its proportionate share of net income or loss one month in arrears. The Company recorded $1.0 million, $1.0 million and $0.1 million in undistributed earnings which is included in earnings of unconsolidated joint venture in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009, respectively. The Company received cash distributions of $1.9 million and $1.0 million from BDX during the years ended December 31, 2011 and 2010, respectively.
6. Impairment of Auction Rate Securities
Prior to April 2010, the Company had long-term investments which consisted of high-grade (primarily AAA rated) student loan auction rate securities issued by student loan funding organizations, which loans are 97% guaranteed under FFELP (Federal Family Education Loan Program). These auction rate securities (“ARS”) were intended to provide liquidity via an auction process that reset the interest rate, generally every 28 days, allowing investors to either roll over their holdings or sell them at par. In February 2008, auctions for the Company’s investments in these securities failed to settle on their respective settlement dates. Consequently, the investments were not liquid and the Company was not going to be able to access these funds until a future auction of these investments was successful, the securities matured or a buyer was found outside of the auction process. Maturity dates for these ARS investments ranged from 2030 to 2047 with principal distributions occurring on certain securities prior to maturity.
As of December 31, 2009, the Company had recorded a temporary loss related to the ARS of $17.6 million that was included in Other Comprehensive Income on the Company’s Condensed Consolidated Balance Sheet. At a board meeting on March 24, 2010, the Board of Directors and Management discussed the recent passage of the Health Care Reform Bill that contained a provision eliminating FFELP, a significant change in student loan funding. In management’s opinion, this change, along with other market factors, created additional uncertainty in the student loan auction rate securities market. As a result, the Board of Directors and Management changed its intent, which had been to hold these securities, and decided to sell the entire portfolio of ARS and, thereafter, the Company began to actively market the sale to third parties. The Company reviews its potential investment impairments in accordance with ASC 320 “Investment – Debt and Equity Securities” and the related guidance issued by the FASB and SEC in order to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income (loss) component of stockholder’s equity. An other-than-temporary impairment charge is recorded as a realized loss in the Consolidated Statement of Operations and reduces net income or increases net loss for the applicable accounting period. The differentiating factors between temporary and other-than-temporary impairment are primarily the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, and the ability and intent of the holder to hold the investment until maturity or it value recovers. Prior to March 24, 2010, the Company had not intended to sell, nor was it not more likely than not that the Company would be required to sell before the recovery of its amortized cost basis and, as such, the loss was considered temporary. On March 24, 2010, as indicated above, the Company changed its intent to hold the ARS and, therefore, the impairment was reclassified to an other-than-temporary loss.
In April 2010, the Company completed a sale of the entire portfolio of ARS for $109.8 million (par value of $129.4 million) to a broker in a secondary market. As a result of the sale, an other-than-temporary loss of $19.6 million was recorded as Impairment of Auction Rate Securities in the Company’s Consolidated Statement of Operations for the year ended December 31, 2010. The transaction costs of approximately $1.0 million associated with this transaction were recorded as other expenses for the year ended December 31, 2010.
7. Fair Value Measurements
The following table presents the assets and liabilities included in the Company’s financial statements and measured at fair value on a recurring basis, all of which are classified as Level 1 in the fair value hierarchy:
|December 31,||December 31,|
|Cash and cash equivalents (1)||$||87,579||$||158,517|
|Total assets at fair value||$||87,579||$||158,517|
|(1)||Cash and cash equivalents consist primarily of treasury bills with original maturity dates of three months or less and money market funds for which the Company determines fair value through quoted market prices.|
Certain assets and liabilities are measured at fair value on a non-recurring basis. That is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g. when there is evidence of impairment). At December 31, 2011 and 2010, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition.
8. Revolving Line of Credit
On September 20, 2011, the Company entered into a revolving line of credit with a major financial institution, providing for borrowings of up to $20.0 million, available until August 31, 2013. At December 31, 2011, the Company had no borrowings outstanding under the revolving line of credit. The revolving line of credit requires interest payments based on the BBA LIBOR Rate plus 2.5%. There is an unused commitment fee of 0.2% on any unused portion of the line of credit, payable quarterly. Additionally, there is a 0.5% annual fee payable if the Company’s average aggregate monthly deposit and investment balances with the financial institution fall below $35.0 million. Among other financial and other covenants, the revolving line of credit provides that the Company must maintain tangible net worth of $50.0 million, a quick ratio of 1.50 to 1.0, and adjusted EBITDA of $17.0 million on a twelve month rolling basis. The Company was in compliance with these covenants as of December 31, 2011. The revolving line of credit is collateralized by the Company’s cash deposits, accounts receivable, investments, inventory, property and equipment and general intangibles it now or subsequently owns. In addition, the Company has pledged the capital stock in its current and future subsidiaries as further collateral for the revolving line of credit.
9. Property and Equipment
Property and equipment consists of the following (in thousands):
|Computer software and equipment||$||63,356||$||58,969|
|Furniture, fixtures and office equipment||2,602||3,247|
|Construction in progress||1,516||1,368|
|Less: accumulated depreciation and amortization||(56,389||)||(51,599||)|
|Property and equipment, net||$||20,487||$||21,934|
Depreciation expense, excluding discontinued operations, was $9.4 million, $10.1 million and $10.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. The amounts include amortization of fixed assets acquired under capital lease obligations of $0.3 million for the year ended December 31, 2009, and amortization of capitalized software costs of $1.8 million, $2.3 million and $2.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 and 2010, there were no assets purchased under capital leases.
10. Goodwill and Other Intangible Assets
The Company has goodwill of $24.5 million and no accumulated impairment losses as of December 31, 2011 and 2010. The Company also has both indefinite and definite lived intangibles. Indefinite-lived intangibles consist of $2.5 million of trade name and trademarks. Definite-lived intangible assets consist of certain trade names, trademarks, brand names, content syndication agreements, purchased technology, customer contracts and related customer relationships, non-contractual customer relationships, and other miscellaneous agreements. The definitive-lived intangibles are amortized over the expected period of benefit. There are no expected residual values related to these intangible assets. Intangible assets by category are as follows (in thousands):
|Trade names, trademarks, brand names, and domain names||$||3,060||$||520||$||3,060||$||518|
|Content syndication agreements||3,800||971||3,800||211|
|NAR operating agreement||1,578||1,503||1,578||1,352|
Amortization expense, excluding discontinued operations, for intangible assets for the years ended December 31, 2011, 2010 and 2009 was $1.5 million, $0.7 million and $0.5 million, respectively. Amortization expense for the next five years is estimated to be as follows (in thousands):
|Year Ended December 31,||Amount|
11. Accrued Expenses
Accrued expenses consist of the following (in thousands):
|Accrued payroll and related benefits||$||8,797||$||9,930|
12. Related-party Transactions
The Company provided product development services to NAR and recognized $0.8 million in revenues for the year ended December 31, 2011 and $2.4 million in revenues for the year ended December 31, 2009. The Company also makes payments to NAR through its operating agreement and other advertising agreements. Total amounts paid under these agreements were $2.0 million, $1.9 million and $1.9 million for each of the three years ended December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011, the Company had a balance of $0.5 million due to NAR under these agreements which is included in accounts payable. Additionally, future commitments to NAR are included within the commitment schedule in Note 22.
13. Stock Plans
In June 2011, the Board of Directors adopted, and the stockholders approved, the Move, Inc. 2011 Incentive Plan (“2011 Plan”). The 2011 Plan reserved 5,200,000 shares of common stock for future grants. The 2011 Plan contains a provision for an automatic increase in the number of shares available for grant, not to exceed 2,500,000, based on the number of shares underlying awards outstanding as of February 28, 2011 under prior plans that thereafter terminate or expire unexercised, or are cancelled, forfeited or lapse for any reason. We renounced the granting of further awards under all previous stock plans as part of our proposal of the Move, Inc. 2011 Incentive Plan for shareholder approval, which 2011 plan was approved by our shareholders at our Annual Meeting on June 15, 2011. As of December 31, 2011, common stock available for future issuance under equity compensation plans was 4.5 million shares.
In January 1999, the Board of Directors adopted, and in March 1999 the Company’s stockholders approved, the 1999 Equity Incentive Plan (“1999 Plan”) to replace a pre-existing stock option plan (“1996 Plan”). The 1999 Plan provided for the issuance of both non-statutory and incentive stock options to employees, officers, directors and consultants of the Company. The initial number of shares of common stock reserved for issuance under the 1999 Plan was 2,500,000. In April 1999 and June 1999, the Board of Directors authorized, and the stockholders approved, an increase in the number of shares reserved for issuance under the 1999 Plan by an additional 750,000 shares and 156,250 shares, respectively. This plan expired in April 2009. In June 1999, the Board of Directors adopted, and the stockholders approved, the 1999 Stock Incentive Plan (“SIP”) which was combined with the previous 1999 Plan. The SIP reserved 1,225,000 shares of common stock for future grants. The SIP contained a provision for an automatic increase in the number of shares available for grant starting January 1, 2000 and each January thereafter by an amount equal to 4.5% of the outstanding shares as of the preceding December 31; provided, however, that the aggregate number of shares that qualify as Incentive Stock Options (as defined in the plan) must not exceed 20.0 million shares. In accordance with the provisions of the SIP, the number of options available for grant was increased by 1,722,171 shares in January 2009. Pursuant to the terms of the plan, no person was eligible to receive more than 500,000 shares in any calendar year under the plan. This plan expired in July 2009.
In connection with acquisitions prior to 2002, the Company assumed plans with authorized options of 2,003,285. Options outstanding pursuant to these plans were 654,328 and 838,114 as of December 31, 2011 and 2010, respectively, and the weighted average exercise price of those option shares was $14.41 and $14.32, respectively.
On January 15, 2002, the Board of Directors adopted the 2002 Stock Incentive Plan (“2002 SIP”). The 2002 SIP reserved 3,750,000 shares of common stock for future grants of nonqualified stock options to employees, consultants, contractors and advisors as to be determined by the Management Development and Compensation Committee of the Board of Directors. Pursuant to the terms of the plan, options granted to insiders (officers or directors of the Company who are subject to Section 16 of the Securities Exchange Act of 1934) may not exceed in the aggregate forty percent (40%) of all shares that are reserved for grant under the plan.
On July 20, 2009, the Company established, in reliance on NASDAQ Listing Rule 5635(c)(4), a reserve of 656,250 shares of common stock for future grants of equity awards as inducement to certain individuals entering into employment with the Company.
Stock-Based Compensation and Charges
The following chart summarizes the stock-based compensation and charges that have been included in the following financial statement captions for each of the periods presented (in thousands):
|For the Year Ended|
|Cost of revenue||$||221||$||175||$||181|
|Sales and marketing||1,351||1,598||1,736|
|Product and web site development||1,176||1,616||687|
|General and administrative||3,159||3,901||14,998|
|Total from continuing operations||5,907||7,290||17,602|
|Total from discontinued operations||—||—||64|
|Total stock-based compensation and charges||$||5,907||$||7,290||$||17,666|
Stock-based compensation and charges for the years ended December 31, 2011 and 2010 are comprised of employee-based and non-employee-based stock option expenses and restricted stock amortization. For the year ended December 31, 2009, stock-based compensation and charges are comprised of employee-based stock option expense and restricted stock amortization.
During the year ended December 31, 2009, the Company modified the vesting and extended the time to exercise certain option awards for several former executive employees. As a result, the Company recorded additional stock-based compensation expense of $9.1 million. There were no such modifications for the year ended December 31, 2011 and 2010.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of ASC 718 “Compensation – Stock Compensation” (formerly SFAS 123R), using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to January 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123; and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of ASC 718. Compensation costs are recognized using a straight-line amortization method over the vesting period.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the ranges of assumptions in the following table. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The expected term of stock options granted represents the weighted average period that the stock options are expected to remain outstanding. The risk-free interest rates are based on U.S. Treasury zero-coupon bonds for the periods in which the stock options were granted.
|For the Year Ended December 31,|
|Risk-free interest rates||0.83-2.30||%||1.13-2.43||%||0.11-2.54||%|
|Expected term (in years)||5.85||5.85||5.85|
|of Shares||Average||Contractual Term||Value|
|(in thousands)||Exercise Price||(Years)||(in thousands)|
|Outstanding at December 31, 2008||8,824||$||12.68||5.31||$||2,328|
|Outstanding at December 31, 2009||9,576||11.48||4.54||$||2,797|
|Outstanding at December 31, 2010||8,491||10.63||4.37||$||18,595|
|Outstanding at December 31, 2011||8,830||$||10.21||3.86||$||1,913|
|Exercisable at December 31, 2011||7,035||$||10.91||2.68||$||1,389|
Additional information with respect to the outstanding and exercisable options as of December 31, 2011 (shares in thousands):
|Options Outstanding||Options Exercisable|
|Prices||Of Shares||Exercise Price||of Shares||Exercise Price|
|$1.20 to 7.04||3,770||$||6.16||3,072||$||6.28|
|$7.24 to 8.88||2,032||8.41||1,093||8.55|
|$8.92 to 17.24||2,327||15.33||2,174||15.66|
|$17.28 to 25.52||701||20.19||696||20.18|
|$1.20 to 25.52||8,830||$||10.21||7,035||$||10.91|
The weighted-average fair value of options granted during the years ended December 31, 2011, 2010, and 2009 was $5.34, $5.08, and $5.48, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2010 and 2009 was $0.4 million, $1.1 million, and $1.1 million, respectively. The intrinsic value of options exercisable as of December 31, 2011, 2010 and 2009 was $1.4 million, $12.4 million, and $0.9 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
A summary of the Company’s non-vested stock options for the three years ended December 31, 2011 is as follows (shares in thousands):
|Non-vested options at December 31, 2008||2,318||$||12.09|
|Non-vested options at December 31, 2009||2,344||$||8.22|
|Non-vested options at December 31, 2010||1,875||$||7.40|
|Non-vested options at December 31, 2011||1,795||$||7.46|
As of December 31, 2011, there was $8.3 million of unrecognized compensation cost related to non-vested stock option awards granted under the Company’s plans. Substantially all of that cost is expected to be recognized over a weighted average period of 2.5 years. Non-vested shares relating to non-employees reflected in the table above include 36,286 and 48,375 non-vested shares as of December 31, 2011 and 2010, respectively.
Options Granted to Non-employees
During the year ended December 31, 2010, the Company granted 48,375 stock options to non-employees. The options vest over four years with an exercise price equal to the market value of the Company’s common stock on the grant date and expire after 10 years.
The Company used the Black-Sholes valuation model to estimate the fair value of the unvested shares of these options as of December 31, 2011 and 2010. The Company used a risk free interest rates of 0.83% and 1.13%, respectively, an expected life of 5.85 years, an annual volatilities of 75% and 80%, respectively, and no expected dividends to determine the fair value. The Company estimated the fair value of each option granted to be approximately $3.57 and $7.08 as of December 31, 2011 and 2010, respectively. The Company recorded stock-based charges in general and administrative expense of less than $0.1 million with respect to these options for each of the years ended December 31, 2011 and 2010, respectively.
Restricted Stock Awards
The Company grants restricted stock awards to non-employee members of its Board of Directors as compensation (except any director who is entitled to a seat of the Board of Directors on a contractual basis or has waived such compensation). During the year ended December 31, 2011, the Company granted 7,500 shares of common stock to the Chairman of the Board of Directors which was vested immediately. Also, during the year ended December 31, 2009, the Company granted 15,000 shares of restricted stock to the members of the ad hoc Executive Committee of its Board of Directors. Half of these shares vested on the grant date and half of the shares vested one year from the grant date. Additionally, during the years ended December 31, 2011, 2010, and 2009, the Company issued 32,729, 34,775 and 43,855 shares of restricted stock, respectively, to all non-employee members of its Board of Directors (except any director who is entitled to a seat on the Board of Directors on a contractual basis or has waived such compensation). These shares, subject to certain terms and restrictions, will vest on the third anniversary of their issuance. The total intrinsic value associated with the issuance of these shares was approximately $0.3 million, $0.3 million, and $0.4 million for the years ended December 31, 2011, 2010, and 2009, respectively, and is being recognized over their respective vesting period. During each of the years ended December 31, 2010 and 2009, a member of the Board of Directors resigned and forfeited 16,597 and 13,927 shares, respectively, of unvested restricted stock. Total cost recognized was approximately $0.3 million, $0.4 million and $0.4 million for the years ended December 31, 2011, 2010, and 2009, respectively, and is included in stock-based compensation and charges.
The Company also grants restricted stock awards to certain executives and key employees. Generally, these shares, subject to certain terms and restrictions, vest in four annual installments over the four year period following the grant dates. During the year ended December 31, 2011, the Company granted 440,850 shares with a grant date fair value of $3.4 million which is being amortized over the vesting periods. During the year ended December 31, 2009, the Company granted 537,500 shares of restricted stock with a grant date fair value of $3.7 million. The Company did not grant any restricted stock awards during the year ended December 31, 2010. Total costs recognized during the years ended December 31, 2011, 2010 and 2009 was $0.3 million, $1.0 million and $2.3 million, respectively, and is included in stock based compensation and charges.
A summary of the Company’s non-vested restricted stock awards for the three years ended December 31, 2011 is as follows (shares in thousands):
|Non-vested restricted stock awards at December 31, 2008||100||$||14.30|
|Non-vested restricted stock awards at December 31, 2009||462||$||7.99|
|Non-vested restricted stock awards at December 31, 2010||298||$||8.04|
|Non-vested restricted stock awards at December 31, 2011||484||$||7.73|
The total fair value of restricted stock awards vested during the years ended December 31, 2011, 2010 and 2009, was $1.9 million, $1.4 million and $1.3 million, respectively. As of December 31, 2011, the weighted average recognition term for these awards is 3.16 years.
Performance Based Restricted Stock Units
The Company also grants performance-based restricted stock units to members of the management team. These awards are generally earned on the attainment of certain performance goals defined by the Management Development and Compensation Committee of the Board of Directors (the “Compensation Committee”) relating to the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a specified fiscal year. The Board of Directors did not award any new performance-based restricted stock awards during the year ended December 31, 2011. During the year ended December 31, 2010, the Board of Directors awarded 187,500 shares of performance-based restricted stock units to be earned on the attainment of performance goals relating to the Company’s EBITDA for the fiscal year ended December 31, 2011. The performance goals for these awards were not attained, therefore no stock-based compensation was recognized and the shares were forfeited as of December 31, 2011. During the year ended December 31, 2009, the Company awarded 268,750 shares of performance-based restricted stock units to be earned based on the attainment of certain performance goals relating to the Company’s EBITDA for the fiscal years ended December 31, 2010 and 2011. Based on the attainment of the performance goals for the fiscal year ended December 31, 2010, a portion of these shares were vested and the Company recognized $0.2 million in stock-based compensation costs during the year ended December 31, 2010. Based on the attainment of the performance goals for the fiscal year ended December 31, 2011, another portion of these shares were vested and the Company recognized $0.7 million in stock-based compensation costs during the year ended December 31, 2011.
A summary of the Company’s non-vested performance-based restricted stock units for the three years ended December 31, 2011 is as follows (shares in thousands):
|Non-vested stock units at December 31, 2008||507||$||18.15|
|Non-vested stock units at December 31, 2009||269||$||7.48|
|Non-vested stock units at December 31, 2010||425||$||9.27|
|Non-vested stock units at December 31, 2011||—||$||—|
The total fair value of performance-based restricted stock units vested during the year ended December 31, 2011 and 2010 was $0.7 million and $0.2 million, respectively. No performance-based restricted stock units vested during the year ended December 31, 2009.
14. Series B Convertible Preferred Stock
On November 6, 2005, the Company entered into a Preferred Stock Purchase Agreement (“Agreement”) with Elevation Partners, L.P. and such affiliates as Elevation designated (the “Purchasers”) to sell to the Purchasers 100,000 shares of its Series B Convertible Participating Preferred Stock (“Series B Preferred Stock”) for an aggregate purchase price of $100 million. The transaction was exempt from the registration requirements of the Securities Act of 1933, as amended. The transaction closed on November 29, 2005. The net proceeds of $94.1 million from the issuance of the Series B Preferred Stock are net of issuance costs of $5.9 million, and are classified as mezzanine equity due to certain change of control provisions which provide for redemption outside the control of the Company. The Company determined that due to those change of control provisions, the Series B Preferred Stock should be recorded on the Company’s financial statements as though it consisted of two components: (i) convertible preferred stock (the “Host Contract”) with a 3.5% annual dividend, and (ii) an embedded derivative (the “Embedded Derivative”) which reflected the right of the holders of the Series B Preferred Stock to receive additional guaranteed dividends in the event of a change of control. The Series B Preferred Stock reported on the Company’s consolidated balance sheet consists only of the value of the Host Contract (less issuance costs) plus the amount of accretion for issuance costs and accrued dividends. Such discount and issuance costs are being accreted over the life of the Series B Preferred Stock with such accretion being recorded as a reduction in retained earnings. During each of the three years ended December 31, 2011, the Company recorded accretion on the issuance costs of approximately $2.0 million, $1.3 million and $1.3 million, respectively. Due to the expiration of the change of control provisions as of November 30, 2010, there was no fair value associated with the Embedded Derivative as of December 31, 2011 and 2010. As a result of a reduction in fair value of the embedded derivative for the year ended December 31, 2009, the Company recognized other income of $0.6 million.
The Series B Preferred Stock had an original aggregate liquidation preference of $100 million plus all accrued and unpaid dividends. The Series B Preferred Stock is convertible into the Company’s common stock at a conversion price of $16.80 per share, subject to certain adjustments upon certain events. In February 2011, the Company reached an agreement with the Purchasers to redeem 70,000 shares of the Company’s Series B Preferred Stock, at a total redemption price of $70.4 million, including approximately $0.4 million in associated cash dividends accrued through the date immediately prior to the redemption. As a result of the redemption, the Company accelerated a proportionate share of the unamortized discount resulting in an additional charge of $1.4 million for the year ended December 31, 2011. Immediately after the completion of the redemption, Elevation continued to be the sole holder of the Company’s outstanding Series B Preferred Stock and holds approximately 49,044 shares of such stock as of December 31, 2011, which stock is held under the same terms as applied to the original purchase of Series B Preferred Stock. As a result of the redemption, Elevation’s entitlement to representation on the Company’s Board of Directors fell from two board seats to one. However, the Company’s Board of Directors waived the obligation of one of the Elevation-appointed directors to resign as a result of the above-described (partial) redemption and both Elevation-appointed directors continued as directors through the date of the Company’s Annual Meeting on June 15, 2011. The Company’s Board of Directors, in the Company’s Proxy Statement filed with the SEC on April 28, 2011, nominated for election to the Company’s Board of Directors at the Company’s 2011 Annual Meeting Roger B. McNamee, a prior Elevation-appointed director. The shareholders accepted the Board’s recommendation that they elect Mr. McNamee as a director during the Company’s 2011 Annual Meeting. The Purchasers are required to vote their shares in the manner recommended by the Board with respect to the election or removal of directors, other than any directors designated by the Purchasers.
The Series B Preferred Stock pays a quarterly dividend of 3.5% per annum of the original price per share, which were payable in additional Series B Preferred Stock until November 29, 2010, after which such dividends are paid only in cash. The dividend the Company is obligated to pay on the remaining unredeemed Series B Preferred Stock pursuant to the original purchase terms is $0.4 million per quarter. As of December 31, 2011 and 2010, the Company had recorded a liability for dividends payable in cash of $0.4 million which is included in accrued expenses on the Company’s Consolidated Balance Sheet. Under the terms of the Agreement, in November 2012, the Company is obligated to redeem the remaining outstanding shares of 49,044 at a total redemption price of $49 million. In the event of a change of control, the Company will be required to offer to repurchase all of the outstanding shares of Series B Preferred Stock for total cash equal to 101% of the liquidation preference. Based on the number of shares of common stock outstanding as of December 31, 2011, if all shares of Series B Preferred Stock were converted they would represent 7% of the Company’s outstanding common stock.
The Series B Preferred Stock ranks senior to the common stock of the Company and junior to the Company’s Series A Preferred Stock, and votes as a single class with the common stock on any matter to come before the stockholders of the Company, with each share of Series B Preferred Stock being entitled to cast a number of votes equal to the number of shares of Common Stock into which it is then convertible. The Agreement contains customary anti-dilution provisions.
The Stockholders Agreement dated November 29, 2005 between the Company and Elevation Partners, L.P. and Elevation Employee Side Fund, LLC (“Stockholders Agreement”) requires the consent of the holders of the Series B Preferred Stock before the Company may engage in the following: (i) incurrence of certain additional indebtedness; (ii) certain divestitures, acquisitions or other business reorganizations; (iii) filing for bankruptcy protection; (iv) transactions with affiliates in excess of $100,000; and (v) payment of any dividend on, or the redemption or repurchase of, common stock in aggregate amounts of $10 million or more. The Stockholders Agreement also provides the Purchasers with certain rights to register shares of common stock upon conversion of the Series B Preferred Stock. The Purchasers are entitled to three demand registration rights, which may include shelf registration beginning two years from date of issuance, subject to certain dollar and share number thresholds. The Purchasers are also entitled to piggyback registration rights.
A summary of activity related to the Series B Preferred Stock is as follows (in thousands):
|Costs and expenses of issuance||(5,924||)|
|Embedded derivative liability||(3,137||)|
|Net convertible preferred stock at issuance||90,939|
|Accretion of discount||99|
|Net convertible preferred stock at December 31, 2005||91,349|
|Accretion of discount||1,302|
|Costs and expenses of issuance||4|
|Net convertible preferred stock at December 31, 2006||96,212|
|Accretion of discount||1,294|
|Net convertible preferred stock at December 31, 2007||101,189|
|Accretion of discount||1,294|
|Net convertible preferred stock at December 31, 2008||106,297|
|Accretion of discount||1,294|
|Net convertible preferred stock at December 31, 2009||111,541|
|Accretion of discount||1,294|
|Net convertible preferred stock at December 31, 2010||116,564|
|Accretion of discount||1,991|
|Partial redemption of convertible preferred stock||(70,000||)|
|Net convertible preferred stock at December 31, 2011||$||48,555|
Reverse Stock Split
At the close of business on November 18, 2011, the Company effected a 1-for-4 reverse split of its common stock, which was previously authorized by its stockholders. All common stock share and per share information has been retroactively adjusted to reflect the reverse stock split for all periods presented, except for par value, which was not affected by the reverse stock split.
Series A Preferred Stock
As of December 31, 2004, the Company had authorized the issuance of one share of Series A Preferred Stock. As of December 31, 2011 and December 31, 2010, one share of Series A Preferred Stock was issued and outstanding and held by NAR. The holder of Series A Preferred Stock has the following rights:
Voting — Except as provided in this paragraph, the Series A preferred stockholder is not entitled to notice of any stockholders’ meetings and shall not be entitled to vote on any matters with respect to any question upon which holders of common stock or preferred stock have the right to vote, except as may be required by law (and, in any such case, the Series A Preferred Stock shall have one vote per share and shall vote together with the common stock as a single class). The holder of Series A Preferred Stock is entitled to elect one director of the Company. If there is any vacancy in the office of a director elected by the holder of the Series A Preferred Stock, then a director to hold office for the unexpired term of such directorship may be elected by the vote or written consent of the holder of the Series A Preferred Stock. The provisions dealing with preferred stockholders rights included in the Certificate of Incorporation may not be amended without the approval of the holder of the Series A Preferred Stock.
Dividends — In each calendar year, the holder of the Series A Preferred Stock is entitled to receive, when, as and if declared by the Board, non-cumulative dividends in an amount equal to $0.08 per share (as appropriately adjusted for stock splits, stock dividends, recapitalizations and the like), prior and in preference to the payment of any dividend on the common stock in such calendar year. If, after dividends in the full preferential amounts specified in this section for the Series A Preferred Stock have been paid or declared and set apart in any calendar year of the Company, the holder of Series A Preferred Stock shall have no further rights to receive any further dividends that the Board may declare or pay in that calendar year.
Liquidation — In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the Series A Preferred Stockholder is entitled to receive, prior and in preference to any payment or distribution on any shares of common stock, an amount per share equal to $1.00 per share of Series A Preferred Stock. After payment of such amount, any further amounts available for distribution shall be distributed among the holders of common stock and the holders of preferred stock other than Series A Preferred Stock, if any, entitled to receive such distributions.
Redemption — Upon the earlier to occur of (i) termination of that certain operating agreement dated November 26, 1996, as the same may be amended from time to time (the “operating agreement”), or (ii) NAR ceases to own at least 37,445 shares of common stock of the Company, or (iii) the existence and continuance of a material breach by NAR of that certain Joint Ownership Agreement, dated as of November 26, 1996, between NAR, and subsidiaries of the Company, or the Trademark License dated as of November 26, 1996, by and between NAR and the Company, at any time thereafter the Company may, at the option of the Board, redeem the Series A Preferred Stock. The redemption price for each share of Series A Preferred Stock shall be $1.00 per share.
Conversion — Each share of Series A Preferred Stock shall automatically be converted into one share of common stock upon any sale, transfer, pledge, or other disposition of the share of Series A Preferred Stock to any person or entity other than the initial holder of such share of Series A Preferred Stock, or any successor by operation of law that functions as a non-profit trade association for REALTORS® under Section 501(c)(6) of Internal Revenue Code of 1986, as amended, that owns the REALTOR® trademark, or any wholly-owned affiliate of such holder as long as the holder continues to own such affiliate.
Issuance of Common Stock
The Company recognized $0.3 million, $0.4 million and $0.4 million in stock-based charges in connection with the issuance of common stock to members of its Board of Directors for the years ended December 31, 2011, 2010 and 2009, respectively.
16. Common Stock Repurchases
In February 2011, the Company’s Board of Directors authorized a stock repurchase program. The program authorizes, in one or more transactions taking place during a two year period, the repurchase of the Company’s outstanding common stock utilizing surplus cash in the amount of up to $25 million. Under the program, the Company may repurchase shares of common stock in the open market or in privately negotiated transactions. The timing and amount of any repurchase transaction under this program will depend upon market conditions, corporate considerations, and regulatory requirements. Shares repurchased under the program shall be retired to constitute authorized but unissued shares of the Company’s common stock. As of December 31, 2011, the Company had repurchased 1,483,169 shares of its common stock for a total price of $9.6 million.
18. Supplemental Cash Flow Information
During the year ended December 31, 2011:
During the year ended December 31, 2010:
During the year ended December 31, 2009:
19. Defined Contribution Plan
The Company has a savings plan (“Savings Plan”) that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a percentage (not to exceed 75%) of their eligible pretax earnings up to the Internal Revenue Service’s annual contribution limit. All full-time employees on the payroll of the Company are eligible to participate in the Plan. The Company pays all general and administrative expenses of the plan and may make contributions to the plan. The Company made matching contributions of approximately $1.2 million, $1.1 million, and $1.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.
20. Income Taxes
For the year ended December 31, 2011, the Company recorded a deferred tax provision of $0.2 million related to amortization of certain indefinite lived intangibles assets and a current state tax expense of $0.1 million For the year ended December 31, 2010, the Company recorded an income tax benefit of $0.3 million as a result of a change in the valuation allowance resulting from the deferred tax liability established for the amortizable intangible assets acquired as part of a business combination, partially offset by $0.1 million of state income tax expenses and a deferred tax provision related to amortization of certain indefinite lived intangible assets. For the year ended December 31, 2009, the Company recorded a deferred tax provision of $0.2 million related to amortization of certain indefinite lived intangible assets partially offset by a current tax benefit of $0.1 million for a federal alternative minimum tax refund resulting from a net operating loss carryback available under new tax laws.
Significant components of the provision for income taxes from continuing operations are as follows (in thousands):
|For the Year Ended|
|Total current provision||114||67||(134||)|
|Total deferred provision||159||(220||)||171|
|Income tax (benefit) expense||$||273||$||(153||)||$||37|
The components of the deferred tax assets and liabilities and related valuation allowance are as follows (in thousands):
|For the Year Ended|
|Deferred tax assets:|
|Net operating loss carryforwards||$||278,031||$||276,055|
|Net deferred tax assets||$||—||$||—|
|Deferred tax liabilities:|
|Amortization of acquired intangible assets||(1,054||)||(895||)|
|Net deferred tax liability||$||(1,054||)||$||(895||)|
Based on management’s assessment, the Company has placed a valuation reserve against its otherwise recognizable deferred tax assets due to the likelihood that the Company may not generate sufficient taxable income during the carryforward period to utilize the net operating loss carryforwards. The deferred tax liability is included in other non-current liabilities on the Company’s balance sheet.
The valuation reserve for net deferred taxes increased by $1.9 million primarily as a result of adjusting net operating loss carryforwards associated with employee stock option exercises, partially offset by the utilization of net operating losses due to income generated for the current year, and the reduction of the deferred tax assets due to expiration of net operating loss carryovers.
The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards (“NOL”) resulting from excess tax benefits. As of December 31, 2011, deferred tax assets do not include $52.3 million of these excess tax benefits from employee stock option exercises that are a component of the Company’s net operating loss carry forwards. Additional paid in capital will be increased up to an additional $52.3 million if and when such excess tax benefits are realized.
The reconciliation between the Company’s effective tax rate and the federal statutory rate is as follows (in thousands):
|For the Year Ended December 31,|
|Amount||Tax Rate||Amount||Tax Rate||Amount||Tax Rate|
|Statutory rate applied to income before income taxes||$||2,561||34||%||$||(5,313||)||34||%||$||(2,967||)||34||%|
|State taxes, net of federal tax benefit||560||7||(1,025||)||7||(514||)||6|
|Change in state effective tax rate||(443||)||(6||)||3,811||(24||)||—||—|
|Canadian Tax Credit||—||—||—||—||(6,634||)||76|
|Change in valuation allowance||1,851||25||3,520||(23||)||9,940||(114||)|
|Total tax provision (benefit)||$||273||4||%||$||(153||)||1||%||$||37||0||%|
At December 31, 2011, the Company had gross NOLs for federal and state income tax purposes of approximately $923.9 million and $321.7 million, respectively. The federal NOLs will begin to expire in 2018. Approximately $34.7 million of the state NOLs expired in 2011 and the state NOLs will continue to expire from 2012 until 2030. Gross net operating loss carry forwards for both federal and state tax purposes may be subject to an annual limitation under relevant tax laws. Currently, the NOLs have a full valuation allowance recorded against them. At December 31, 2011, the Company had $35.3 million of capital loss for federal and state income tax purposes, which will begin to expire in 2013. The Company also had approximately $6.7 million of Canadian tax credit available to offset Canadian tax liabilities. The Canadian tax credit will begin to expire in 2015.
Approximately $150.1 million of the $923.9 million federal NOLs may belong to members of the Company’s group that cannot be consolidated for federal income tax purposes. Consequently, those NOLs would not be available to the Company to offset taxable income in the future. The NOLs indicated above are subject to a full valuation allowance.
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign limitations. These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.
The Company has completed a significant portion of its study to assess whether an ownership change has occurred that would materially impact the utilization of NOLs. The work performed to date does not indicate a material limitation of any NOLs. There may also be additional ownership changes in the future, and any future change of its current market capitalization would severely limit the annual use of these NOLs going forward. Such limitation could also result in expiration of a portion of the NOLs before utilization. Further, until the study is completed and any limitations known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any NOLs that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
As of December 31, 2011 and 2010, the Company does not have any uncertain tax positions or accrued interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in provision for income tax. The Company does not have any interest or penalties related to uncertain tax positions in provision for income tax during the years ended December 31, 2011, 2010, and 2009. The tax years 1993-2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.
21. Settlements of Disputes and Litigation
As part of the sale in 2002 of the Company’s ConsumerInfo division to Experian Holdings, Inc. (“Experian”), $10.0 million of the purchase price was put in escrow to secure the Company’s indemnification obligations (the “Indemnity Escrow”). Prior to the termination of the Indemnity Escrow, Experian demanded indemnification from the Company for claims made against Experian or its subsidiaries by several parties in civil actions and by 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 the Company’s ownership of ConsumerInfo. On April 20, 2009, the parties settled the dispute and entered into a full release of all claims under which Experian received $7.4 million from the Indemnity Escrow and the Company received the balance of the escrow of $1.1 million which was included in Gain on disposition of discontinued operations in the Consolidated Statement of Operations for the year ended December 31, 2009.
In June 2002, Tren Technologies Holdings LLC., (“Tren”) sued the Company, the National Association of REALTORS® (“NAR”) and the National Association of Home Builders (“NAHB”) in the United States District Court, Eastern District of Pennsylvania for patent infringement based on the Company’s operation of the REALTOR.com® and HomeBuilder.com® web sites.
In October 2003, Kevin Keithley (“Keithley”) sued the Company, NAR and NAHB in the United States District Court for the Northern District of California (the “District Court”) asserting that he was the exclusive licensee of a patent involved in the case brought by Tren, and alleging the same infringement and seeking the same relief as in the Tren action. On May 24, 2006, the court in Pennsylvania dismissed the Tren case without prejudice. On November 19, 2008, the District Court judge issued an order granting the Company’s motion for summary judgment and on March 4, 2009, the District Court entered final judgment in favor of the Company. Keithley and Tren appealed the District Court’s judgment with the U.S. Court of Appeals for the Federal Circuit and the Company cross-appealed. On May 22, 2009, the parties entered into an agreement resolving the patent infringement claims brought against the Company, NAR and NAHB. Pursuant to the agreement, the Company received a paid up worldwide license to the patent at issue in the case for consideration as recorded in the Consolidated Statements of Operations for the year ended December 31, 2009. The District Court dismissed with prejudice all claims against the Company, NAR and NAHB.
In December 2005, CIVIX-DDI, LLC (“CIVIX”) filed suit against NAR, the Company, Hotels.com, L.P. and Hotels.com GP LLC in the United States District Court for the Northern District of Illinois, Eastern Division. The complaint alleged that the Company and NAR infringed U.S. Patents 6,385,622; 6,408,307; 6,415,291; and 6,473,692 by offering, providing, using and operating location-based searching services through the REALTOR.com® web site and requested an unspecified amount of damages (including treble damages for willful infringement and attorneys’ fees) and an injunction. On December 30, 2009, CIVIX and the Company entered into an agreement resolving the patent infringement claims brought against the Company and NAR. Pursuant to the agreement, the Company received a paid up worldwide license to the patents at issue in the case, and NAR received a sublicense for use of the patents at issue in the case on web sites operated by the Company, for consideration as recorded in the Consolidated Statements of Operations for the year ended December 31, 2009. The District Court dismissed with prejudice all claims against the Company and NAR.
On November 12, 2008, Patricia Ramirez on behalf of herself and all other similarly situated California account executives filed a purported class action lawsuit in the Los Angeles Superior Court against Move, Inc., and its subsidiary Move Sales, Inc. asserting failure to fully reimburse business expenses, unlawful wage deductions, failure to timely pay wages due at termination, failure to timely furnish accurate itemized wage statements, unfair business practices and declaratory relief. Subsequent to December 31, 2009, the Company and plaintiff’s attorneys agreed to a tentative settlement of all claims brought by Ramirez on behalf of herself and all others in the purported class action. The amount of the settlement was accrued as of December 31, 2009 and was recorded in the Consolidated Statements of Operations for the year ended December 31, 2009. On August 24, 2010, the court entered Judgment of Final Approval of Settlement of Class Action Settlement. The settlement did not have a material effect on the Company's results of operations or cash flows for the year ended December 31, 2009.
22. Commitments and Contingencies
Operating and Capital Leases
The Company leases certain facilities and equipment under non-cancelable operating leases with various expiration dates through 2016. The leases generally contain renewal options and payments that may be adjusted for increases in operating expenses. Leasehold improvement incentives are recorded as deferred obligations and amortized as a reduction in rent expense through the life of the lease. As of December 31, 2011 and 2010, there were no assets or liabilities arising from capital leases obligations. Future minimum lease payments under operating leases as of December 31, 2011 are as follows (in thousands):
|Year Ended December 31,||Leases|
|2016 and thereafter||1,569|
Rental expense from continuing operations for the Company for operating leases was $4.5 million, $5.1 million, and $5.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Rental expense from discontinued operations was $0.2 million for the year ended December 31, 2009.
Subsequent to December 31, 2011, the Company entered into an amendment to its existing Scottsdale facility lease which extends the lease expiration to March 2019 in exchange for a reduction in the monthly rental costs. The amendment increases the operating lease obligations by $5.5 million over the lease term.
Under the Company’s operating agreement with NAR, the Company has an exclusive arrangement to operate REALTOR.com® as well as a license to use the REALTOR.com® domain name and trademark and the REALTORS® trademark in exchange for minimum annual royalty payments. Commitments for the years ending 2012 and beyond will be calculated based on amounts paid in the prior year adjusted for the Annual Consumer Price Index for the period ending in the prior calendar year.
The Company also has a data access agreement with Real Estate Business Services, Inc. (“REBS”), which provides the Company with a perpetual license to use data related to California real property included in REBS’s database on the Company’s web sites. In addition, the Company also has various other web services and content agreements providing data for the Company’s web sites.
The following presents the Company’s future minimum commitments under the above agreements (in thousands):
|Year Ending December 31,|
Commitments for the purchase of property, plant and equipment and software maintenance were approximately $0.3 million as of December 31, 2011.
On February 28, 2007, in a patent infringement action against a real estate agent, Diane Sarkisian, pending in the U.S. District Court for the Eastern District of Pennsylvania (“the Sarkisian case”), Real Estate Alliance, Limited (“REAL”), moved to certify two classes of defendants: subscribers and members of the MLS of which Sarkisian was a member, and customers of the Company who had purchased enhanced listings from us. The U.S. District Court in the Sarkisian case denied REAL’s motion to certify the classes on September 24, 2007. On March 25, 2008, the U.S. District Court in the Sarkisian case stayed that case, and denied without prejudice all pending motions, pending the U.S. District Court of California’s determination in the Move California Action (see below) of whether the Company’s web sites infringe the REAL patents.
On April 3, 2007, in response to REAL’s attempt to certify the Company’s customers as a class of defendants in the Sarkisian case, the Company filed a complaint in the U.S. District Court for the Central District of California (“District Court”) against REAL, and its licensing agent, Equis Technology Development, LLC, and its principal, Scott Tatro (“the Move California Action”) seeking a declaratory judgment that the Company does not infringe U.S. Patent Nos. 4,870,576 and 5,032,989 (“the REAL patents”), that the REAL patents are invalid and/or unenforceable, and alleging several business torts and unfair competition. On August 8, 2007, REAL denied the Company’s allegations, and asserted counterclaims against the Company for infringement of the REAL patents seeking compensatory damages, punitive damages, treble damages, costs, expenses, reasonable attorneys’ fees and pre- and post-judgment interest. On February 28, 2008, REAL filed a motion for leave to amend its counter-claims, and to include NAR and the NAHB as individual defendants, as well as various brokers including RE/Max International (“RE/Max”), agents, MLSs, new home builders, rental property owners, and technology providers and indicated that it intended to seek to certify certain defendant classes. On March 11, 2008, REAL filed a separate suit in the District Court (“the REAL California Action”) alleging infringement of the REAL patents against the same defendants it sought to include in its proposed amended counter-claims in the Move California Action, and also indicated that it intended to seek to certify the same defendant classes. The Company is not named as a defendant in the REAL California Action; however, the Company is defending NAR, NAHB and RE/Max in the REAL California Action. In September, 2008, the court coordinated both cases and issued an order dividing the issues into two phases. Phase 1 addresses issues of patent validity and enforceability, whether Move web sites infringe the REAL patents, damages, and liability of Move, NAR and NAHB. Phase 2 will address REAL’s infringement claims related to the web sites owned or operated by the remaining defendants and whether those defendants infringe the Real patents by using the Move web sites. The District Court has stayed Phase 2 pending resolution of the issues in Phase 1.
On November 25, 2009, the court entered its claim construction order in the Move California Action. On January 27, 2010, upon joint request of the parties, the District Court entered a final judgment of non-infringement. In July 2010, REAL filed its brief appealing the District Court’s claim construction with the Circuit Court, and in October 2010, the Company filed its opposition. On March 22, 2011, the Circuit Court concluded that the District Court erred in certain of its claim construction and vacated and remanded the case for further proceedings. On October 18, 2011, the parties filed a Joint Brief on Summary Judgment Motions, each side putting forth its arguments requesting the District Court to enter summary judgment in its favor. On January 26, 2012, the District Court entered an order granting the Company’s motion for summary judgment of non-infringement of the patent. The Company intends to vigorously defend all claims. At this time, however, the Company is unable to express an opinion on the outcome of these cases.
In March 2010, Smarter Agent, LLC (“Smarter Agent”) filed suit against Move, Inc., against our affiliate, RealSelect, Inc. (“RealSelect”), and also against other co-defendants Boopsie, Inc., Classified Ventures, LLC, Hotpads, Inc., IDX, Inc., Multifamily Technology Solutions, Inc., D/B/A MyNewPlace, Primedia, Inc., Consumer Source, Inc., Trsoft, Inc., D/B/A PlanetRE, Trulia, Inc., Zillow, Inc., and ZipRealty, Inc. in the United States District Court for the District of Delaware. The complaint alleges that the Company and RealSelect, Inc. infringe U.S. Patents 6,385,541; 6,496,776; and 7,072,665 (“Patents in Suit”) by offering an iPhone application for the REALTOR.com® web site and requested an unspecified amount of damages (including enhanced damages for willful infringement and attorneys’ fees) and an injunction. On August 31, 2010, co-defendants Boopsie, Inc., Classified Ventures, LLC, Hotpads, Inc., IDX, Inc., Multifamily Technology Solutions, Inc., Primedia, Inc., Consumer Source, Inc., Trsoft, Inc., Trulia, Inc., Zillow, Inc., and ZipRealty, Inc., filed requests for interpartes reexamination of the Patents in Suit with the U.S. Patent and Trademark Office (“PTO”). On September 30, 2010, the Company filed an answer and counter claims on behalf of Move and RealSelect. On October 22, 2010, SmarterAgent filed its answer to such counter claims. The PTO accepted the Patents in Suit for reexamination and on December 21, 2010, issued an office action rejecting all claims in the Patents in Suit. On March 2, 2011, all parties agreed to stipulate to stay the lawsuit pending the completion of all re-examination proceedings at the USPTO and on March 7, 2011, the court so ordered the stay as requested. The Company intends to vigorously defend all claims. At this time, however, the Company is unable to express an opinion on the outcome of this case.
From time to time, the Company is party to various other litigation and administrative proceedings relating to claims arising from its operations in the ordinary course of business. As of the date of this Form 10-K and except as set forth herein, the Company is not a party to any other litigation or administrative proceedings that management believes would have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.
23. Quarterly Financial Data (unaudited)
Provided below is the selected unaudited quarterly financial data for 2011 and 2010:
|Three Months Ended|
|Mar. 31,||June 30,||Sept. 30,||Dec. 31,||Mar. 31,||June 30,||Sept. 30,||Dec. 31,|
|(in thousands, except per share amounts)|
|Cost of revenue||10,783||10,461||9,959||9,166||10,928||11,088||10,766||10,337|
|Sales and marketing||18,316||17,927||16,281||16,090||18,332||18,872||18,631||17,902|
|Product and web site development||9,463||8,999||8,437||7,833||8,526||8,136||8,855||8,803|
|General and administrative||10,064||9,465||10,823||10,115||10,689||10,800||10,877||10,291|
|Amortization of intangibles assets||355||356||397||397||105||104||139||348|
|Interest income (expense), net||18||17||(2||)||18||556||178||33||143|
|Earnings of unconsolidated joint venture||211||140||367||267||106||193||342||376|
|Impairment of auction rate securities||—||—||—||—||(19,559||)||—||—||—|
|Other income (expense)||429||(52||)||(99||)||182||(33||)||(1,069||)||(42||)||177|
|Income (loss) before income taxes||752||1,812||835||4,134||(18,867||)||(7||)||1,321||1,928|
|Income tax expense (benefit)||18||74||31||150||63||28||(404||)||160|
|Net income (loss)||734||1,738||804||3,984||(18,930||)||(35||)||1,725||1,768|
|Convertible preferred stock dividend and related accretion||(2,382||)||(562||)||(562||)||(563||)||(1,333||)||(1,341||)||(1,350||)||(1,359||)|
|Net income (loss) applicable to common stockholders||$||(1,648||)||$||1,176||$||242||$||3,421||$||(20,263||)||$||(1,376||)||$||375||$||409|
|Basic net income (loss) applicable to common|
|Diluted net income (loss) applicable to common|