Unassociated Document
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 000-51002
 
ZIPREALTY, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
94-3319956
(State of incorporation)
  
(IRS employer
   
identification number)
 
2000 POWELL STREET, SUITE 300
   
EMERYVILLE, CA
 
94608
(Address of principal executive offices)
 
(Zip Code)
 
(510) 735-2600
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if
a smaller reporting company)
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
We had 20,557,579 shares of common stock outstanding at July 28, 2011.
 

 
 

 

TABLE OF CONTENTS
 
   
Page
     
PART I — FINANCIAL INFORMATION
 
   
Item 1.
Unaudited Condensed Consolidated Financial Statements
4
     
 
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
4
     
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010
5
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
6
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
     
Item 4.
Controls and Procedures
28
     
PART II — OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
29
     
Item 1A.
Risk Factors
29
     
Item 5.
Other Information
29
     
Item 6.
Exhibits
29
     
SIGNATURE
30
   
EXHIBIT INDEX
31

 
2

 
 
Statement regarding forward-looking statements
 
This report includes forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and operations, and plans and objectives of management are forward-looking statements. The words “believe,” “may,” “will likely,” “should,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “aim,” “expect,” “plan,” “potential,” “predict,” “project,” “designed,” “provides,” “facilitates,” “assists,” “helps” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements relating to:
 
 
trends in the residential real estate market, the market for mortgages, and the general economy;
 
 
our future financial results;
 
 
our future growth;
 
 
our future advertising and marketing activities; and
 
 
our future investment in technology.
 
We have based these forward-looking statements principally on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement.
 
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2010, as such disclosure may be revised under “Risk Factors” in Item 1A of Part II of this report. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this report or in materials incorporated herein by reference or in our Form 10-K referenced above.
 
In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Except as otherwise required by law, we do not intend to update or revise any forward-looking statement contained in this report.
 
Trademarks
 
“ZipRealty” is one of our registered trademarks in the United States. We also own the rights to the domain name “www.Real-Estate.com.” “REALTOR” and “REALTORS” are registered trademarks of the National Association of REALTORS®. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners.
 
Internet site
 
Our Internet address is www.ziprealty.com. We make publicly available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information contained on our website is not a part of this report.
 
Where you can find additional information
 
You may review a copy of this report, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission’s Public Reference at Room 100 F Street NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as ZipRealty, that file electronically with the Securities and Exchange Commission.

 
3

 

PART I — FINANCIAL INFORMATION
 
Item 1.
Unaudited Condensed Consolidated Financial Statements:
 
ZIPREALTY, INC.
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

   
June 30,
2011
   
December 31,
2010
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 19,492     $ 13,393  
Short-term investments
    4,573       18,948  
Accounts receivable, net of allowance of $143 and $103, respectively
    1,939       1,959  
Prepaid expenses and other current assets
    1,994       2,123  
Total current assets
    27,998       36,423  
Restricted cash
    390       390  
Property and equipment, net
    2,577       2,712  
Intangible assets, net
    14       28  
Other assets
    268       252  
Total assets
  $ 31,247     $ 39,805  
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable
  $ 1,723     $ 2,275  
Accrued expenses and other current liabilities
    4,871       7,450  
Accrued restructuring charges
    653        
Total current liabilities
    7,247       9,725  
Other long-term liabilities
    111       179  
Total liabilities
    7,358       9,904  
Commitments and contingencies (Note 7)
               
Stockholders’ equity
               
Common stock: $0.001 par value; 100,000 shares authorized; 24,158 and 24,136 shares issued and 20,557 and 20,541 shares outstanding, respectively
    24       24  
Additional paid-in capital
    157,286       156,384  
Accumulated other comprehensive income (loss)
    (1 )     13  
Accumulated deficit
    (115,808 )     (108,925 )
Treasury stock at cost: 3,601 and 3,595 shares, respectively
    (17,612 )     (17,595 )
Total stockholders’ equity
    23,889       29,901  
Total liabilities and stockholders’ equity
  $ 31,247     $ 39,805  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
4

 
 
ZIPREALTY, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net transaction revenues
  $ 22,187     $ 36,415     $ 40,579     $ 61,256  
Marketing and other revenues
    1,388       1,169       2,741       2,116  
Net revenues
    23,575       37,584       43,320       63,372  
Operating costs and expenses
                               
Cost of revenues
    12,862       20,995       23,821       36,301  
Product development
    1,969       2,257       3,918       4,672  
Sales and marketing
    7,281       11,645       15,436       22,411  
General and administrative
    2,450       2,990       4,807       6,599  
Restructuring charges, net
                2,264        
Total operating costs and expenses
    24,562       37,887       50,246       69,983  
Loss from operations
    (987 )     (303 )     (6,926 )     (6,611 )
Interest income
    15       78       43       167  
Loss before income taxes
    (972 )     (225 )     (6,883 )     (6,444 )
Provision for income taxes
                       
Net loss
  $ (972 )   $ (225 )   $ (6,883 )   $ (6,444 )
Net loss per share:
                               
Basic and diluted
  $ (0.05 )   $ (0.01 )   $ (0.34 )   $ (0.32 )
Weighted average common shares outstanding:
                               
Basic and diluted
    20,549       20,338       20,530       20,381  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
5

 
 
ZIPREALTY, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Six Months Ended
June  30,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net loss
  $ (6,883 )   $ (6,444 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    959       1,156  
Amortization of intangible assets
    14       14  
Stock-based compensation expense
    837       1,738  
Non-cash restructuring charges
    54        
Provision for doubtful accounts
    40       54  
Amortization of short-term investment premium (discount)
    145       310  
                 
Changes in operating assets and liabilities
               
Accounts receivable
    (20 )     (1,467 )
Prepaid expenses and other current assets
    129       399  
Other assets
    (16 )     107  
Accounts payable
    (552 )     1,020  
Accrued expenses and other current liabilities
    (2,579 )     146  
Accrued restructuring charges
    653        
Other long-term liabilities
    (68 )     (85 )
Net cash used in operating activities
    (7,287 )     (3,052 )
                 
Cash flows from investing activities
               
Restricted cash
          20  
Purchases of short-term investments
    (4,575 )      
Proceeds from sale or maturity of short-term investments
    18,791       1,871  
Purchases of property and equipment
    (839 )     (919 )
Net cash provided by investing activities
    13,377       972  
                 
Cash flows from financing activities
               
Proceeds from stock option exercises
    26       58  
Acquisition of treasury stock
    (17 )     (203 )
Net cash provided by (used in) financing activities
    9       (145 )
Net increase (decrease) in cash and cash equivalents
    6,099       (2,225 )
Cash and cash equivalents at beginning of period
    13,393       23,737  
Cash and cash equivalents at end of period
  $ 19,492     $ 21,512  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
6

 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. BACKGROUND AND BASIS OF PRESENTATION
 
The accompanying unaudited interim condensed consolidated financial statements as of June 30, 2011 and 2010 and for the three and six months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for annual financial statements. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s financial position for the periods presented. The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011, or any other period. The unaudited condensed consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.
 
Principles of consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and reflect the elimination of intercompany accounts and transactions.
 
Seasonality
 
The Company’s net transaction revenues and income (loss) from operations have historically varied from quarter to quarter. Such variations are principally attributable to variations in home sales activity over the course of the calendar year. The Company has historically experienced lower net transaction revenues during the first quarter because holidays and adverse weather conditions in certain regions typically reduce the level of sales activity and listings inventories between the Thanksgiving and Presidents’ Day holidays. Net transaction revenues during the three months ended June 30, 2010 and 2009 accounted for approximately 32.0% and 26.3% of annual net transaction revenues in 2010 and 2009, respectively. Net transaction revenues during the six months ended June 30, 2010 and 2009 accounted for approximately 53.9% and 43.9% of annual net transaction revenues in 2010 and 2009, respectively.
 
Significant accounting policies
 
Revenue recognition
 
In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standard for multiple deliverable revenue arrangements, which provided updated guidance on whether multiple deliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. This standard eliminates the use of the residual method and will require arrangement consideration to be allocated based on the relative selling price for each deliverable. The selling price for each arrangement deliverable can be established based on vendor specific objective evidence (“VSOE”) or third-party evidence (“TPE”) if VSOE is not available. The new standard provides additional flexibility to utilize best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. BESP is generally based on the selling prices of the various elements when they are sold to customers of a similar nature and geography on a stand-alone basis or an estimated stand-alone pricing when the element has not previously been sold stand-alone. These estimates are generally based on pricing strategies, market factors and strategic objectives.
 
The Company adopted this accounting standard on January 1, 2011 on a prospective basis for applicable transactions originating or materially modified after December 31, 2010. The adoption of this standard did not have a significant impact on the Company’s revenue recognition for multiple deliverable arrangements, consolidated financial position, results of operations and cash flows for the six months ended June 30, 2011.
 
The Company derives the majority of its revenue from commissions earned as agents to buyers and sellers on purchase or sale transactions. Commission revenue is recognized upon closing of a transaction, net of any rebate or commission discount or transaction fee adjustment, as evidenced when the escrow or similar account has closed and funds have been disbursed to all appropriate parties. These transactions typically do not have multiple deliverables.
 
Non-commission revenues are derived primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, lead referral fees and other revenues. The Company classifies these revenues as marketing and other revenues. Marketing service revenues are recognized over the term of the agreements as the contracted services are delivered. Advertising revenues on contracts are recognized as impressions are delivered or as clicks are provided to advertisers. Advertising and marketing contracts may consist of multiple deliverables which generally include a blend of various impressions or clicks as well as other marketing deliverables. Revenues related to revenue sharing arrangements are recognized based on revenue reports received from our partners, provided that collectability is reasonably assured.

 
7

 
 
Revenue is recognized only when the price is fixed or determinable, persuasive evidence an arrangement exists, the service has been delivered and collectability of the resulting receivable is reasonably assured.
 
Recent accounting pronouncements
 
In May 2011, the FASB issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2011, and does not anticipate that adoption will have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.
 
In June 2011, the FASB issued new disclosure guidance, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  Instead,  entities will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  The Company will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2011.
 
2. SHORT-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTS
 
At June 30, 2011 and December 31, 2010, short-term investments were classified as available-for-sale securities and were reported at fair value as follows:
 
   
June 30, 2011
   
December 31, 2010
 
   
Gross
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
   
Gross
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
   
(In thousands)
   
(In thousands)
 
Money market funds
  $ 17,887     $ 1     $ (1 )   $ 17,887     $ 11,659     $ 1     $     $ 11,660  
Corporate obligations
    803             (1 )     802       5,238       8       (1 )     5,245  
US Government and agency obligations
                            9,086       6       (1 )     9,091  
Total
  $ 18,690     $ 1     $ (2 )   $ 18,689     $ 25,983     $ 15     $ (2 )   $ 25,996  
 
   
June 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Recorded as:
           
Cash equivalents
  $ 14,116     $ 7,048  
Short-term investments
    4,573       18,948  
Total
  $ 18,689     $ 25,996  
 
At June 30, 2011 and December 31, 2010, the Company did not have any investments with a significant unrealized loss position.

All of the investments at June 30, 2011 were due within one year or less.
 
Fair Value Measurements
 
The Company follows the accounting guidance establishing a fair value hierarchy to prioritize the inputs used in valuation techniques. There are three broad levels to the fair value hierarchy of inputs to fair value; Level 1 is the highest priority and Level 3 is the lowest priority. The three levels of the fair value hierarchy and are as follows:
 
 
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
 
 
Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means;

 
8

 
 
 
Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
 
The Company measures and reports certain financial assets at fair value on a recurring basis, including its investments in money market funds and available-for-sale securities. At June 30, 2011 there were no liabilities within the scope of the accounting guidance.
 
At June 30, 2011 and December 31, 2010, our available-for-sale short-term investments, measured at fair value on a recurring basis, by level within the fair value hierarchy were as follows:

   
June 30, 2011
   
December 31, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
   
(In thousands)
 
Money market funds
  $ 17,887     $     $     $ 17,887     $ 11,660     $     $     $ 11,660  
Corporate obligations
          802             802             5,245             5,245  
US Government and agency obligations
                                  9,091             9,091  
Total
  $ 17,887     $ 802     $     $ 18,689     $ 11,660     $ 14,336     $     $ 25,996  
 
3. NET LOSS PER SHARE
 
The following table sets forth the computation of basic and dilutive net loss per share for the periods indicated:
 
   
Three Months Ended
June  30,
   
Six Months Ended
June  30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands, except per share data)
 
Numerator:
                       
Net loss
  $ (972 )   $ (225 )   $ (6,883 )   $ (6,444 )
                                 
Denominator:
                               
Shares used to compute EPS basic and diluted:
    20,549       20,338       20,530       20,381  
Net loss per share basic and diluted:
  $ (0.05 )   $ (0.01 )   $ (0.34 )   $ (0.32 )
 
The following weighted-average outstanding options, warrants and non-vested common shares were excluded in the computation of diluted net loss per share for the periods presented because including them would be anti-dilutive:
 
   
Three Months Ended
June  30,
   
Six Months Ended
June  30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Options to purchase common stock
    4,541       4,596       4,417       4,446  
Warrants to purchase common stock
          3             3  
Nonvested common stock
    25       192       37       189  
Total
    4,566       4,791       4,454       4,638  
 
4. STOCK-BASED COMPENSATION EXPENSE
 
Valuation assumptions and stock-based compensation expense
 
The Company estimates the fair value of stock options on the day of grant using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock and consideration of other relevant factors such as the volatility of guideline companies. The expected life of options granted during the three and six months ended June 30, 2011 and 2010 was estimated by taking the average of the vesting term and the contractual term of the option. The risk-free interest rate estimate is based upon U.S. Treasury bond rates appropriate for the expected life of the options.

 
9

 
 
The assumptions used and the resulting estimates of weighted average fair value per share of options granted were as follows:
 
   
Three Months Ended
June  30,
   
Six Months Ended
June  30,
 
   
2011
   
2010
   
2011
   
2010
 
Expected volatility
    47 %     47 %     47 %     46 - 47 %
Risk-free interest rate
    1.7 - 2.0 %     2.0 - 2.4 %     1.7 - 2.7 %     2.0 - 2.7 %
Expected life (years)
    5.5 - 6.1       5.5 - 6.1       5.5 - 6.1       5.5 - 6.1  
Expected dividend yield
    0 %     0 %     0 %     0 %
Weighted-average fair value of options granted during the period
  $ 1.14     $ 1.62     $ 1.34     $ 2.23  
 
Stock-based compensation expense relating to stock options and restricted stock awards was as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Cost of revenues
  $ 48     $ 107     $ 108     $ 170  
Product development
    68       125       153       224  
Sales and marketing
    130       264       204       416  
General and administrative
    203       547       372       928  
Total stock-based compensation expense
    449       1,043       837       1,738  
Tax effect on stock-based compensation
                       
Net effect on net loss
  $ 449     $ 1,043     $ 837     $ 1,738  
 
The Company utilizes the hosted services of a third-party to automate the administration of its employee equity programs and calculate its stock-based compensation expense. The Company noted that stock-based compensation expense was incorrectly calculated and recorded an immaterial correction of an error of $246,000 relating to prior periods during the three months ended June 30, 2010.
 
The accounting standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimated expected forfeitures based on various factors including employee class and historical experience. The amount of stock-based compensation expense has been reduced for estimated forfeitures. As of June 30, 2011, there was $3.9 million of unrecorded stock-based compensation, after estimated forfeitures, related to unvested stock options. That cost is expected to be recognized over a weighted average remaining recognition period of 2.6 years. As of June 30, 2011, there was $43,000 of unrecorded stock-based compensation related to unvested restricted stock. That cost is expected to be recognized over a weighted average remaining recognition period of 0.8 years.
 
Stock option activity
 
A summary of the Company’s stock option activity for the period indicated was as follows:
 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Aggregate
Intrinsic Value
 
   
(In thousands)
               
(In thousands)
 
Outstanding at December 31, 2010
    4,197     $ 4.08       6.60     $ 383  
Options granted
    770       2.81                  
Options exercised
    (23 )     1.14                  
Options forfeited/cancelled/expired
    (396 )     4.55                  
Outstanding at June 30, 2011
    4,548     $ 3.84       6.68     $ 262  
Exercisable at June 30, 2011
    2,403     $ 4.33       5.08     $ 262  
 
Options generally vest over a four-year period with one-fourth (1/4) of the shares vesting one year after the vesting commencement date, and an additional one-forty eighth (1/48) of the shares vesting on the first day of each calendar month thereafter until all such shares are exercisable. Options generally expire after ten years. Options issued pursuant to the Company’s voluntary stock option exchange program, completed in July 2009, vest ratably over a 36 month period and expire after seven years.

 
10

 
 
Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $2.30 on June 30, 2011, and the exercise price for the options that were in-the-money at June 30, 2011. The total number of in-the-money options exercisable as of June 30, 2011 was 224,000. Total intrinsic value of options exercised was $38,000 and $74,000 for the six months ended June 30, 2011 and 2010, respectively.  The Company settles employee stock option exercises with newly issued common shares.

Restricted Stock
 
The Company expenses the cost of restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restriction lapse. Stock-based compensation expense related to restricted stock for the three and six months ended June 30, 2011 was $14,000 and $56,000, respectively. Stock-based compensation expense related to restricted stock for the three and six months ended June 30, 2010 was $180,000 and $364,000, respectively.
 
A summary of the Company’s nonvested restricted stock for the period indicated was as follows:
 
   
Number of
Shares
   
Weighted
Average Grant
Date Fair Value
Per Share
 
   
(In thousands)
       
Nonvested at December 31, 2010
    49     $ 4.90  
Shares granted
             
Shares vested
    (25 )        
Shares forfeited
             
Nonvested at June 30, 2011
    24     $ 4.90  
 
5. INCOME TAXES
 
At the end of each interim period, the Company calculates an effective tax rate based on the Company’s best estimate of the tax provision (benefit) that will be provided for the full year, stated as a percentage of estimated annual pre-tax income (loss). The tax provision (benefit) for the interim period is determined using this estimated annual effective tax rate.
 
The Company has concluded that a full valuation allowance should be maintained against its net deferred tax assets at June 30, 2011. The Company considers its ongoing performance, recent historical losses and expectations for the foreseeable future, among other things, in determining the need for a valuation allowance.
 
Based on the full valuation allowance and the loss for the three and six months ended June 30, 2011, the Company has not recorded a tax provision or benefit.
 
6. COMPREHENSIVE INCOME (LOSS)
 
Comprehensive income (loss) includes net income (loss) and unrealized gains (losses) on investments. Comprehensive loss for the periods indicated is comprised of the following:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Net loss
  $ (972 )   $ (225 )   $ (6,883 )   $ (6,444 )
Other comprehensive income (loss):
                               
Change in accumulated unrealized gain (loss) on available-for-sale securities, net of tax
    (7 )     71       (14 )     145  
Comprehensive loss
  $ (979 )   $ (154 )   $ (6,897 )   $ (6,299 )

 
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7. COMMITMENTS AND CONTINGENCIES
 
The Company leases office space under non-cancelable operating leases with various expiration dates through December 2016. Future gross and net lease commitments under non-cancelable operating leases at June 30, 2011 were as follows, in thousands:
 
   
Gross
Operating
Lease
Commitments
   
Sublease
Income
   
Net
Operating
Lease
Commitments
 
Remainder of 2011
  $ 1,308     $ (57 )   $ 1,251  
2012
    1,544       (103 )     1,441  
2013
    820       (3 )     817  
2014
    492             492  
2015
    231             231  
Thereafter
    89             89  
Total minimum lease payments
  $ 4,484     $ (163 )   $ 4,321  
 
Legal proceedings
 
On March 26, 2010, the Company was named as one of fourteen defendants in a lawsuit filed in United States District Court for the District of Delaware, Smarter Agent LLC v. Boopsie, Inc., et al., by plaintiff, Smarter Agent LLC. The complaint alleges that the defendants have each infringed on patents owned by Smarter Agent relating to mobile device application technology and seeks unspecified damages and injunctive relief. After completing its initial investigation of this matter, the Company does not currently believe that it has infringed on any patent, or that it has any liability for the claims alleged, and it intends to vigorously defend against this lawsuit.
 
The Company is not currently subject to any other material legal proceedings. From time to time, the Company has been, and it currently is, a party to litigation and subject to claims incidental to the ordinary course of the business. The amounts in dispute in these matters are not material to the Company, and management believes that the resolution of these proceedings will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.
 
Indemnifications
 
The Company has entered into various indemnification agreements in the ordinary course of our business. Pursuant to these agreements, the Company has agreed to indemnify, hold harmless and reimburse the indemnified parties, which include certain of our service providers as well as others, in connection with certain occurrences. In addition, the corporate charter documents require the Company to provide indemnification rights to the Company’s directors and officers to the fullest extent permitted by the Delaware General Corporation Law, and permit the Company to provide indemnification rights to our other employees and agents, for certain events that occur while these persons are serving in these capacities. The Company’s charter documents also protect each of its directors, to the fullest extent permitted by the Delaware General Corporation Law, from personal liability to the Company and its stockholders from monetary damages for a breach of fiduciary duty as a director. The Company has also entered into indemnification agreements with the Company’s directors and each of our officers with a title of Vice President or higher.
 
The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unspecified. The Company is not aware of any material indemnification liabilities for actions, events or occurrences that have occurred to date. The Company maintains insurance on some of the liabilities the Company has agreed to indemnify, including liabilities incurred by the Company’s directors and officers while acting in these capacities, subject to certain exclusions and limitations of coverage.

 
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8. RESTRUCTURING CHARGES, NET
 
During the three months ended March 31, 2011, the Company implemented a cost reduction initiative, including closing brokerage operations in twelve underperforming markets and a workforce reduction in sales support and administration functions. The associated restructuring charges include employee severance pay and related expenses, non-cancelable lease obligations and other exit costs. For the three months and six months ended June 30, 2011, restructuring charges were comprised of the following (in thousands):

   
Three Months Ended
June  30,
   
Six Months Ended
June  30,
 
   
2011
   
2011
 
Employee severance and related expenses
  $     $ 1,405  
Lease obligations and other exit costs
          805  
Non-cash charges
          54  
Total restructuring charges, net
  $     $ 2,264  
 
 The activity in accrued restructuring charges for the six months ended June 30, 2011 follows (in thousands):
 
   
Employee
Severance and
Related Expense
   
Lease Obligations
and Other Exit
Costs
   
Total
 
Balance at December 31, 2010
  $     $     $  
Charges
    1,405       859       2,264  
Payments
    (1,366 )     (191 )     (1,557 )
Non-cash adjustments
          (54 )     (54 )
Adjustments
                 
Balance at June 30, 2011
  $ 39     $ 614     $ 653  
 
Of the $653,000 accrued restructuring charge as of June 30, 2011, $39,000 relates to employee severance and related expenses which the Company expects to pay out by the end of the third quarter 2011, and $614,000 relates primarily to non-cancelable lease obligations and related facility costs which the Company expects to pay over the remaining terms of the obligations, which extend to  2016.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
The following discussion should be read together with our financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including but not limited to those described under “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2010. Those reasons include, without limitation, those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements.
 
OVERVIEW
 
General
 
We are a leading full-service residential real estate brokerage focused on finding better, faster ways to connect home buyers and sellers with the information, tools and professional services they value to complete their residential real estate transactions. We offer a combination of a leading online presence, robust proprietary technology and knowledgeable local real estate professionals in the field. Our award-winning, user-friendly website and mobile applications give our users on-the-go access to comprehensive local Multiple Listing Services home listings data, as well as other relevant market and neighborhood information and tools. Our proprietary technology, including our agent productivity platform, helps increase the efficiency of real estate agents while reducing customer acquisition and management costs, allowing us to invest in making our value proposition differentiated and more attractive both to home buyers and sellers and to agents.
 
In 2010, our website received more traffic than any other residential real estate brokerage website in the nation, according to Hitwise, an information services company. As of July 25, 2011, we had approximately 2.2 million active registered users who had accessed our website within the last year. We have wholly owned operations in 23 major markets, serviced by our team of over 2,100 local, licensed sales agents, all of whom are independent contractors. We also have referral arrangements with third-party brokerages in two markets where we do not conduct our own brokerage operations.

 
13

 
 
Until 2010, our agents were typically employees. In February 2010, we began transitioning our agents to an independent contractor model in some of our markets, and we completed that transition in the remainder of our markets by January 2011. Through that modified business model, we hope both to empower our local offices and agents to make decisions that are better tailored to the dynamics of their particular markets, thereby increasing productivity and customer service levels, and to minimize management oversight of day-to-day agent activities, thereby reducing costs for field sales support, corporate sales support and corporate administration. As we convert a greater portion of our cost structure from fixed to variable, we should have greater leverage to attract and retain agents and to incentivize productivity.
 
In January 2011, we announced plans to heighten our focus on our core strengths in technology, online marketing and our most attractive local real estate markets, where our financial performance, productivity and market presence have been strongest and where local population, economic and housing trends appear most favorable long-term. To that end, we closed twelve offices in the first quarter of 2011, including Tucson, AZ, and Atlanta, GA. In the Atlanta and Tucson markets, we entered into our first local referral agreements, under which we provide tools enhancing the online sales channel to deliver customers leads to leading local brokerages in those markets, and we have transitioned our local operations to the same brokerages.
 
Our net revenues are composed primarily of commissions earned as agents for buyers and sellers in residential real estate transactions, and we operate in one reportable segment. We record commission revenues net of any rebate, commission discount or transaction fee adjustment. Our net revenues are principally driven by the number of transactions we close and the average net revenue per transaction. Average net revenue per transaction is a function of the home sales price and percentage commission we receive on each transaction and varies significantly by market. For our clients who are selling homes, we typically represent them at commissions that are competitive in our markets. Our seller clients typically pay a total brokerage fee of 4.5% to 5.0% of the transaction value, of which 2.5% to 3.0% is paid to agents representing buyers.
 
Until recently, for clients who were buying homes, we typically shared 20% of our commissions with them in the form of a cash rebate, where permitted by law. On July 1, 2011, we announced that we were discontinuing our commission rebate program, although clients who entered into a contract to purchase a home by July 15, 2011, and who close escrow on the transaction by August 31, 2011, will remain eligible to receive the rebate, subject to certain additional restrictions. We expect that the termination of our rebate program will increase our average net revenue per transaction, but it may negatively impact our transaction volume. Also, net revenue increases resulting from the termination of the rebate program may be offset by increases in our agent compensation programs. For full year 2011, we expect that the termination of our rebate program will have a modest impact on our financial results.
 
We also receive revenues from certain marketing arrangements, such as with mortgage lenders to whom we provide access through the mortgage center on our website, who pay us a flat marketing fee that is established on a periodic basis, as well as from relationships with advertisers. Historically, non-commission revenues represented less than 5% of our net revenues during any period, although they topped 5% in the fourth quarter of 2010 and the first and second quarters of 2011 given relatively weak real estate sales in the quarters. We routinely explore opportunities to grow our non-commission revenues through marketing and other business arrangements for offering services related to the purchase, sale and ownership of a home, and as we develop these opportunities, our non-commission revenues may represent a greater percentage of our net revenues in future periods than historically.
 
We believe that customer acquisition is one of our core competencies, and although the difficulty of acquiring a sufficient number of leads online could increase over time, we expect that we can mitigate some of that impact with repeat and referral business, as well as by increasing our visibility and credibility to potential clients over time. Because our aggregate transaction volume market share in our markets has averaged less than 1% historically, we believe that there is an opportunity to increase our market share and grow our business over the long term, even if the overall level of sales do not grow due to macroeconomic conditions.
 
Market conditions and trends in our business
 
Macroeconomic forces. For the past few years, the residential real estate market has been negatively impacted by macroeconomic conditions. We believe that conditions such as tight lending criteria, high numbers of distressed properties, and high unemployment continue to exert negative pressure on the residential real estate market, and may continue to do so for some time. For 2011, we currently believe that the health of the residential housing market will continue to be significantly affected by the availability of credit, shadow inventory levels, and interest rates, as well as any significant change in unemployment levels. We cannot predict any changes in those macroeconomic forces, nor can we predict the combined impact of those changes on the residential real estate market.
 
Foreclosure delays. In late 2010, given the large volume of distressed properties being handled by banks, concern grew that mortgage lenders were possibly not fulfilling all the legal requirements for valid foreclosure proceedings. Consequently, many large lenders temporarily halted foreclosure proceedings either nationwide or in the 23 states where the foreclosure process required approval by a judge. Most of those lenders have since lifted the freezes, but we perceive that banks are nonetheless processing foreclosures slowly and with caution. We cannot assess what impact, if any, this situation will have on the residential real estate market.

 
14

 
 
Federal action. The federal government, state governments and related agencies have acted repeatedly to address the decline in the residential real estate market and the availability of home mortgage credit. Some of those efforts, such as the federal first-time home buyer tax credit, which is discussed below under “Fluctuations in quarterly profitability,” temporarily boosted home sales in earlier periods, but often by accelerating home purchase decisions from later periods, not by creating new housing demand. When such programs ended, the residential real estate market was left once again to suffer the pressures of poor macroeconomic conditions. In addition, the federal Housing and Economic Recovery Act of 2008 sought to ease the tightness in mortgage lending in certain higher-priced markets by increasing the cap on loans guaranteed by federally insured mortgage programs from a maximum of $625,500 to a maximum of $729,750. This increase is set to expire on October 1, 2011, and unless it is extended, its expiration may negatively impact the availability of mortgages and the housing market in certain higher-priced markets.
 
Also, federal regulators have acted to discourage risky home mortgage lending practices. For example, under the Dodd-Frank Wall Street Reform Act, federal regulators must develop rules to require lenders to retain 5% of the risk in the mortgages they originate, other than qualified residential mortgages, also known as QRMs, and other than mortgages that are backed by federally insured mortgage programs. Mortgages that do not meet these exemptions could carry higher interest rates or be less available to home buyers, which could dampen the housing market, particularly if the definition of a QRM is drawn narrowly. It is too soon to tell what the final rules will require and what impact they will have on the residential real estate market.
 
To the extent that governments and related agencies take future actions to address the residential real estate market or the home mortgage market, there can be no assurance that those activities will have a positive, meaningful and lasting impact on either market, or that they will not result in unintended consequences.
 
Current residential real estate market conditions. Recent indicators of national residential real estate market conditions include the following:
 
 
Volume: According to the National Association of REALTORS®, or NAR, existing home sales nationwide in June 2011 were down 8.8% year-over-year, with declines in all major regions of the country. Those declines were due in large part to the positive impact in the first half of 2010 of the federal first-time home buyer tax credit, which is discussed below under “Fluctuations in quarterly profitability,” and the market continues to be impacted by the lingering economic pressures discussed above.
 
 
Price: According to NAR, in June 2011, the national median existing home sales price was relatively stable year-over-year, increasing by 0.8%. We perceive that overall prices continue to be negatively impacted by the tight lending criteria for non-conforming “jumbo” loans and the resulting constriction of the market for higher-priced homes.
 
 
Inventory: According to NAR, in June 2011, inventory levels decreased by 5.5% year-over-year. We are unable at the present time to tell what impact, if any, the foreclosure processing delays instituted by many major mortgage lenders will have on future inventory levels.
 
 
Distressed Properties: Currently, a significant percentage of our sales transaction volume is composed of distressed properties. Distressed properties are homes that are in foreclosure, are bank owned (or REO), or are “short sales,” meaning a sale where the sale price is less than the loans or debt secured by the home listed for sale. In the second quarter of 2011, the percentage of our sales transactions composed of distressed properties in our same markets (excludes markets closed in the first quarter of 2011) was approximately 39%, which was less than the 44% realized in the previous quarter but higher than the 30% realized in the second quarter of 2010. Distressed properties not only tend to sell at reduced prices, but they also tend to put downward pressure on the values of other homes for sale in the same and nearby neighborhoods. We expect distressed properties to continue to represent a significant portion of the residential real estate market and of our business for the foreseeable future.
 
 
Shadow Inventory: “Shadow inventory” refers to distressed and other properties that have not yet been listed for sale, as well as properties that homeowners wish to sell, but will not sell at current market prices. Shadow inventory can occur when lenders put REO properties (properties that have been foreclosed or forfeited to lenders) on the market gradually, rather than all at once, or delay the foreclosure process. They may choose to do so because of regulations and foreclosure moratoriums, because of the additional costs and resources required to process and sell foreclosed properties, or because they want to avoid depressing housing prices further by putting many distressed properties up for sale at the same time. It is difficult to assess the current volume of shadow inventory and its future impact on the residential real estate market, particularly given the uncertainty surrounding the foreclosure processing delays instituted by many major mortgage lenders, discussed above.
 
Fluctuations in quarterly profitability. We have experienced fluctuations in profitability from period to period. Our profitability has been impacted by various factors, including ongoing market challenges, government intervention, seasonality, and, in previous years, new market expansion and legal settlements.

 
15

 
 
For example, in 2009, the federal government introduced a program to provide a tax credit of up to $8,000 to first-time home buyers, meaning buyers who had not owned a home in the preceding three years, and a tax credit of up to $6,500 to repeat home buyers, meaning buyers who had lived in their current homes for five consecutive years in the past eight years. To take advantage of the program, buyers must have entered into a home purchase contract by April 30, 2010, and must have completed the purchase by September 30, 2010. We believe that this program had a positive effect on home sales volume in 2009 and the first half of 2010, particularly in the second quarter of 2010. However, we also believe that the program accelerated the decision to purchase a home for some buyers, which resulted in fewer sales in the second half of 2010, and possibly later. Also, during the first half of 2011, the year-over-year comparisons in financial results were distorted because of the positive impact of the federal tax credit program during the first half of 2010.
 
Industry seasonality and cyclicality. The residential real estate brokerage market is influenced both by seasonal factors and by overall economic cycles. While individual markets vary, transaction volume nationally tends to increase progressively from January through the summer months, then to slow gradually over the last three to four months of the calendar year. Revenues in each quarter are significantly affected by activity during the prior quarter, given the typical 30- to 45-day time lag between contract execution and closing for traditional home purchases. For non-traditional sales, the time lag from contract execution to closing can be longer. We have been, and believe we will continue to be, influenced by overall market activity and seasonal forces. We generally experience the most significant impact in the first and fourth quarters of each year, when our revenues are typically lower relative to the second and third quarters as a result of traditionally slower home sales activity and reduced listings inventory between Thanksgiving and Presidents’ Day.
 
The impact of seasonality can be masked by the general health of the residential real estate market at any given point in time, whether affected by macroeconomic events (such as the federal tax credit program discussed above), periodic business cycles or other factors. Generally, when economic conditions are fair or good, the housing market tends to perform well. If the economy is weak, if interest rates dramatically increase, if mortgage lending standards tighten, or if there are disturbances such as terrorist attacks or threats, the outbreak of war or geopolitical uncertainties, the housing market likely would be negatively impacted.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, our actual results may differ from these estimates under different assumptions or conditions.
 
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements contained in our Form 10-K for the year ended December 31, 2010, and of those policies, we believe that the following accounting policies are the most critical to understand and evaluate our financial condition and results of operations.
 
Revenue recognition
 
We derive the majority of our revenue from commissions earned as agents to buyers and sellers in residential real estate transactions. Commission revenue is recognized upon closing of a transaction, net of any rebate or commission discount or transaction fee adjustment, as evidenced when the escrow or similar account has closed and funds have been disbursed to all appropriate parties. These transactions typically do not have multiple deliverable arrangements.
 
Non-commission revenues are derived primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, lead referral fees and other revenues. We classify these revenues as marketing and other revenues. Marketing service revenues are recognized over the term of the agreements as the contracted services are delivered. Advertising revenues on contracts are recognized as impressions are delivered or as clicks are provided to advertisers. Advertising and marketing contracts may consist of multiple deliverables which generally include a blend of various impressions or clicks as well as other marketing deliverables. Revenues related to revenue sharing arrangements are recognized based on revenue reports received from our partners, provided that collectability is reasonably assured.
 
Revenue is recognized only when the price is fixed or determinable, persuasive evidence an arrangement exists, the service has been delivered and collectability of the resulting receivable is reasonably assured.
 
Internal-use software and website development costs
 
We account for internal-use software and website development costs, including the development of our ZipRealty Agent Platform (“ZAP”) in accordance with the guidance set forth in the related accounting standards. We capitalize internal costs consisting of payroll and direct payroll-related costs of employees who devote time to the development of internal-use software, as well as any external direct costs. We amortize these costs over their estimated useful lives, which typically range between 15 to 24 months. Our judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. The estimated life is based on management’s judgment as to the product life cycle.

 
16

 
 
Stock-based compensation
 
We follow the provisions of accounting standards for share-based payments, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors, including employee stock options and employee stock purchases, based on estimated fair values. Under the fair value recognition provisions of the accounting standards, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense using the straight-line method over the requisite service period of the award.
 
We estimate the fair value of stock options using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock and consideration of other relevant factors such as the volatility of guideline companies. The expected life of options is estimated by taking the average of the vesting term and the contractual term of the option. We estimate expected forfeitures based on various factors including employee class and historical experience. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised.
 
Income taxes
 
Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period adjusted for the change during the period in deferred tax assets and liabilities.
 
The accounting guidance for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent historical results and our expectations for the future. Historically, we have recorded a valuation allowance on our deferred tax assets, the majority of which relate to net operating loss carryforwards and we maintain that a full valuation allowance should be accounted for against our net deferred tax assets at June 30, 2011.
 
Recent accounting pronouncements

See Note 1 “Background and Basis of Presentation” of our Notes to Unaudited Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

 
17

 

RESULTS OF OPERATIONS
 
The following table summarizes certain financial data related to our operations for the periods indicated:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Consolidated statements of operations data (unaudited)
 
2011
   
2010
   
2011
   
2010
 
   
(In thousands, except per share data)
 
Net transaction revenues
  $ 22,187     $ 36,415     $ 40,579     $ 61,256  
Marketing and other revenues
    1,388       1,169       2,741       2,116  
Net revenues
    23,575       37,584       43,320       63,372  
                                 
Operating costs and expenses
                               
Cost of revenues
    12,862       20,995       23,821       36,301  
Product development
    1,969       2,257       3,918       4,672  
Sales and marketing
    7,281       11,645       15,436       22,411  
General and administrative
    2,450       2,990       4,807       6,599  
Restructuring charges, net
                2,264        
Total operating costs and expenses
    24,562       37,887       50,246       69,983  
Loss from operations
    (987 )     (303 )     (6,926 )     (6,611 )
Interest income
    15       78       43       167  
Loss before income taxes
    (972 )     (225 )     (6,883 )     (6,444 )
Provision for income taxes
                       
Net loss
  $ (972 )   $ (225 )   $ (6,883 )   $ (6,444 )
                                 
Net loss per share:
                               
Basic and diluted
  $ (0.05 )   $ (0.01 )   $ (0.34 )   $ (0.32 )
Weighted average common shares outstanding:
                               
Basic and diluted
    20,549       20,338       20,530       20,381  
 
The following table presents our operating results as a percentage of net revenues for the periods indicated:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Consolidated statements of operations data (unaudited)
 
2011
   
2010
   
2011
   
2010
 
Net transaction revenues
    94.1 %     96.9 %     93.7 %     96.7 %
Marketing and other revenues
    5.9       3.1       6.3       3.3  
Net revenues
    100.0       100.0       100.0       100.0  
                                 
Operating costs and expenses
                               
Cost of revenues
    54.6       55.9       55.0       57.3  
Product development
    8.4       6.0       9.0       7.4  
Sales and marketing
    30.9       31.0       35.6       35.4  
General and administrative
    10.4       8.0       11.1       10.4  
Restructuring charges, net
                5.2        
Total operating costs and expenses
    104.3       100.9       115.9       110.5  
Loss from operations
    (4.3 )     (0.9 )     (15.9 )     (10.5 )
Interest income
    0.1       0.2       0.1       0.3  
Loss before income taxes
    (4.2 )     (0.7 )     (15.8 )     (10.2 )
Provision for income taxes
                       
Net loss
    (4.2 )%     (0.7 )%     (15.8 )%     (10.2 )%
 
 
18

 
 
Comparison of the three months ended June 30, 2011 and 2010
 
Other operating data
 
   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
                         
Number of markets  - same markets (1)
    23       23              
Number of markets  - total markets
    23       35       (12 )      
                               
Number of transactions closed during the period – same markets (2)
    3,992       5,626       (1,634 )     (29.0 )%
Number of transactions closed during the period – total markets (2)
    3,992       7,100       (3,108 )     (43.8 )%
                                 
Average net revenue per transaction – same markets (3)
  $ 5,558     $ 5,422     $ 136       2.5 %
Average net revenue per transaction – total markets (3)
  $ 5,558     $ 5,129     $ 429       8.4 %
                                 
Number of agents at end of the period – same markets
    2,197       2,573       (376 )     (14. 6 )%
Number of agents at end of the period – total markets
    2,197       3,251       (1,054 )     (32.4 )%


(1)
Same markets operating data excludes markets closed as the result of a restructuring announced in January, 2011.  The restructuring included closing our owned and operated brokerage offices in twelve markets and eliminating additional positions in field sales support, corporate sales support and administration. The restructuring was substantially completed during the quarter ended March 31, 2011 and our operations in Fresno/Central Valley, Charlotte, Naples, Jacksonville, Miami, Palm Beach, Tampa, Hartford, Minneapolis, Virginia Beach, Atlanta and Tucson were closed.

(2)
The term “transaction” refers to each representation of a buyer or seller in a real estate purchase or sale.

(3)
Average net revenue per transaction equals net transaction revenues divided by number of transactions with respect to each period.
 
Net transaction revenues
 
Net transaction revenues consist primarily of commissions earned as agents to buyers and sellers on the purchase or sale of real estate transactions, net of any rebate, commission discount or transaction fee adjustment.
 
   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Net transaction revenues
                       
Same markets
  $ 22,187     $ 30,504     $ (8,317 )     (27.3 )%
Closed markets
          5,911       (5,911 )     (100.0 )%
Total
  $ 22,187     $ 36,415     $ (14,228 )     (39.1 )%
 
The decrease in our net transaction revenues of $14.2 million or 39.1% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was driven primarily by a decrease in the number of transactions closed during the quarter of 3,108 or 43.8%. Transactions closed during the quarter on a same market basis were 3,992 compared to 5,626 last year, a decrease of 1,634 or 29.0%. The decrease in same market transaction volume was primarily caused by the expiration of a federal tax credit program in June 2010, which we believe accelerated home purchases into the second quarter of 2010. Same market average net revenue per transaction for the quarter was $5,558 compared to $5,422 last year, an increase of $136 or 2.5%. The increase in average net revenue per transaction was primarily attributable to lower cash rebates paid during the quarter which increased the net transaction revenue retained. Average net revenue per transaction continues to be impacted by a combination of factors including overall decreases in housing prices, the impact of foreclosure, bank real estate owned (“REO”) and short sale transactions, typically at further reduced sales prices, and ongoing tightening in the availability of consumer mortgage financing particularly impacting the sale of higher priced housing and the amounts of cash rebates paid.
 
 
19

 
 
We expect our net transaction revenues will decrease in 2011, compared to 2010, driven by a decrease in the overall number of transactions closed, primarily as a result of closing twelve of our markets in the first quarter of 2011.  Average net revenue per transaction is expected to continue to be impacted by factors including overall decreases in housing prices, the volume of distressed sales, including foreclosure, bank REO and short sale transactions, and ongoing pressure on the availability of consumer mortgage financing particularly impacting the sale of higher priced housing. On July 1, 2011, we announced that we were discontinuing our commission rebate program and expect that the termination of the rebate program will increase our average net revenue per transaction, but it may negatively impact our transaction volume.  We expect that the termination of the rebate program will have a modest impact on net transaction revenues for the remainder of 2011.
 
Marketing and other revenues
 
Marketing and other revenues consist primarily of market level transaction referrals and corporate marketing agreements, lead generation and advertising.

   
Three Months Ended
June 30,
   
Increase)
   
Percent
 
   
2011
   
2010
   
(Decrease
   
Change
 
   
(In thousands)
 
Referral and other revenues
                       
Market level - same markets
  $ 189     $ 85     $ 104       123.5 %
Market level - closed markets
          33       (33 )     (100.0 )%
Corporate
    1,199       1,051       148       14.0 %
Total
  $ 1,388     $ 1,169     $ 219       18.7 %
 
The increase in corporate marketing and other revenues for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily attributable to advertising and broker referral transaction fees.
 
We expect our marketing and other revenue will increase in 2011, compared to 2010, primarily attributable to increased advertising, lead referral fees and transaction referral fees earned from local broker referral agreements.
 
Cost of revenues
 
During the three months ended March 31, 2011, we completed the transition of our agent force from an employee model to an independent contractor model. Under the employee model, our cost of revenues consists principally of commissions, payroll taxes, benefits including health insurance, performance and tenure based award programs, agent expense reimbursements and amortization of internal-use software and website development costs which relate primarily to our ZAP technology. Under the independent contractor model, our cost of revenues consists principally of commissions and amortization of internal-use software and website development costs which relate primarily to our ZAP technology. Agent commissions are generally paid on market net revenues which include net transaction revenues plus referral and other revenues generated by our agents.
 
   
Three Months Ended
June 30,
     
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Cost of revenues
                       
Same markets
  $ 12,862     $ 17,740     $ (4,878 )     (27.5 )%
Closed markets
          3,255       (3,255 )     (100.0 )%
Total
  $ 12,862     $ 20,995     $ (8,133 )     (38.7 )%
 
The decrease in cost of revenues for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily related to the overall decrease in net revenues on which we pay agent commissions. Same market cost of revenues for the three months ended June 30, 2011 were $12.8 million compared to $17.7 million for the three months ended June 30, 2010. Agent commissions decreased by approximately $2.8 million or 18.0%. Agent performance and tenure based programs, benefits and expense reimbursements decreased by approximately $2.1 million or 98.1% attributable to the transition of our agents to independent contractors who do not qualify for benefits and expense reimbursements and to the elimination of performance and tenure based programs as a component of agent compensation. Same market cost of revenues as a percentage of market net revenues was 57.5% for the three months ended June 30, 2011 compared to 58.0% for the three months ended June 30, 2010.
 
 
20

 
 
We expect our cost of revenues will decrease in 2011, compared to 2010, because of the decrease in market net revenues attributable primarily to the market closures in the first quarter of 2011.  Our cost of revenues primarily moves in relation to the market net revenues on which commissions are based and also increase or decrease as a result of the mix of commission rates paid to our agents.  We also expect the termination of the rebate program will increase our agent commissions although we expect the impact on cost of revenues will be modest for the remainder of 2011.
 
 Product development
 
Product development expenses include our information technology costs relating to the maintenance of our website, proprietary technology platforms and system infrastructure. These costs consist primarily of compensation and benefits for our product development and infrastructure personnel, depreciation of software and equipment and infrastructure costs consisting primarily of facilities, communications and other operating expenses.
 
   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Product development
  $ 1,969     $ 2,257     $ (288 )     (12.7 )%
 
The decrease in product development expenses for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was due primarily to decreases in salaries and benefits of $0.2 million attributable to reductions in headcount resulting from our restructuring and technology infrastructure costs of $0.1 million. As a percentage of net revenues, product development expenses increased by 2.4 percentage points for the three months ended June 30, 2011 compared to the three months ended June 30, 2010.
 
We expect that our product development expenses will decrease in dollar amount in 2011, compared to 2010, but increase as a percentage of net revenues as a result of lower anticipated net revenues for the year.
 
Sales and marketing
 
Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in sales, sales support and customer service as well as promotional, advertising and client acquisition costs. These expenses have been categorized below between those incurred in our market offices and those expenses which are incurred by the regional and corporate support functions.

   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Sales and marketing
                       
Market level
  $ 5,906     $ 9,885     $ (3,979 )     (40.3 )%
Regional/corporate sales support and marketing
    1,375       1,760       (385 )     (21.8 )%
Total
  $ 7,281     $ 11,645     $ (4,364 )     (37.5 )%
 
Market level sales and marketing expenses decreased for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 as a result of closing twelve markets and eliminating positions in our remaining markets during our restructuring in the first quarter. The decrease was primarily attributable to decreases in salaries and benefits of $1.6 million, customer acquisition and marketing costs of $1.8 million, facilities and operating expenses of $0.4 million, travel of $0.1 million and recruiting and training of $0.1 million. Approximately $2.1 million of the overall decrease was attributable operations of the closed markets.  As a percentage of market net revenues, market sales and marketing expenses were 30.9% in the current quarter compared to 31.0% in the same quarter last year.
 
Regional/corporate sales support and marketing expenses decreased by approximately $0.4 million and consisted primarily of decreases in salary and benefits of $0.3 million and facilities and operating expenses of $0.1 million.  The decrease in expenses was primarily attributable to the elimination of positions and other expenses resulting from our restructuring in the first quarter of 2011, as well as positions eliminated in the last half of 2010. As a percentage of net revenues, regional/corporate sales support and marketing expenses were approximately 5.8% in the three months ended June 30, 2011 compared to 4.7% in the three months ended June 30, 2010.
 
We expect our sales and marketing expenses will decrease in absolute dollars and as a percentage of net revenues in 2011, compared to 2010, primarily as a result of our first quarter 2011 restructuring and positions eliminated the last half of 2010. We expect this decrease in expenses to consist of office operating expenses and customer acquisition and marketing cost in the closed markets as well as staff reductions in our remaining markets and in regional and corporate sales support and marketing operations.
 
 
21

 
 
General and administrative
 
General and administrative expenses consist primarily of compensation and related costs for personnel and facilities related to our executive, finance, human resources, facilities and legal organizations, and fees for professional services. Professional services are principally comprised of outside legal, audit and tax services.
 
   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
General and administrative
  $ 2,450     $ 2,990     $ (540 )     (18.1 )%
 
General and administrative expenses for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 decreased by approximately $0.5 million or 18.1% and were primarily attributable to decreased salaries and benefits of $0.6 million attributable to positions eliminated during the last half of 2010 and the restructuring, as well as reductions in travel and operating expenses of $0.1 million partially offset by an increase in professional fees of $0.1 million.  As a percentage of net revenues, general and administrative expenses were 10.4% for the quarter compared to 8.0% in the three months ended June 30, 2010.
 
We expect our general and administrative expenses will decrease in absolute dollars and as a percentage of net revenues in 2011, compared to 2010, primarily as a result of positions eliminated during the last half of 2010 and our first quarter 2011 restructuring, which included eliminating expenses as well as administrative activities required in the employee agent model.
 
Interest income
 
Interest income relates to interest we earn on our money market deposits and short-term investments.
 
   
Three Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Interest income
  $ 15     $ 78     $ (63 )     (80.4 )%
 
Interest income fluctuates as our cash equivalents and short-term investment balances change and applicable interest rates increase or decrease. The decrease in interest income for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 was due primarily to lower interest rates earned on lower average balances. The lower interest rates were primarily attributable to overall decreases in market interest rates combined with maintaining higher money market account balances yielding lower interest rates as we decreased our short-term investments positions. The lower average balances were primarily attributable to cash used in our operating activities as a result of the losses incurred and our restructuring.
 
Comparison of the six months ended June 30, 2011 and 2010
 
Other operating data

   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
                         
Number of markets  - same markets (1)
    23       23              
Number of markets  - total markets
    23       35       (12 )      
                               
Number of transactions closed during the period – same markets (2)
    7,420       9,530       (2,110 )     (22.1 )%
Number of transactions closed during the period – total markets (2)
    7,628       12,003       (4,375 )     (36.4 )%
                                 
Average net revenue per transaction – same markets (3)
  $ 5,374     $ 5,399     $ (25 )     (0.5 )%
Average net revenue per transaction – total markets (3)
  $ 5,320     $ 5,103     $ 217       4.2 %
                                 
Number of agents at end of the period – same markets
    2,197       2,573       (376 )     (14.6 )%
Number of agents at end of the period – total markets
    2,197       3,251       (1,054 )     (32.4 )%


(1)
Same markets operating data excludes markets closed as the result of a restructuring announced in January, 2011.  The restructuring included closing our owned and operated brokerage offices in twelve markets and eliminating additional positions in field sales support, corporate sales support and administration. The restructuring was substantially completed during the quarter ended March 31, 2011 and our operations in Fresno/Central Valley, Charlotte, Naples, Jacksonville, Miami, Palm Beach, Tampa, Hartford, Minneapolis, Virginia Beach, Atlanta and Tucson were closed.
 
 
22

 
 
(2)
The term “transaction” refers to each representation of a buyer or seller in a real estate purchase or sale.

(3)
Average net revenue per transaction equals net transaction revenues divided by number of transactions with respect to each period.
 
Net transaction revenues
 
Net transaction revenues consist primarily of commissions earned as agents to buyers and sellers on the purchase or sale of real estate transactions, net of any rebate, commission discount or transaction fee adjustment.

   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Net transaction revenues
                       
Same markets
  $ 39,872     $ 51,449     $ (11,577 )     (22.5 )%
Closed markets
    707       9,807       (9,100 )     (92.8 )%
Total
  $ 40,579     $ 61,256     $ (20,677 )     (33.8 )%
 
The decrease in our net transaction revenues of $20.7 million or 33.8% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was driven primarily by a decrease in the number of transactions closed during the period of 4,375 or 36.4%. Transactions closed during the period on a same market basis were 7,420 compared to 9,530 last year, a decrease of 2,110 or 22.1%. This decrease in same market transaction volume was primarily caused by the expiration of a federal tax credit program in June 2010, which we believe accelerated home purchases into the first half of 2010. Same market average net revenue per transaction for the period was $5,374 compared to $5,399 last year, a decrease of $25 or 0.5%. Average net revenue per transaction continue to be impacted by a combination of factors including overall decreases in housing prices, the impact of foreclosure, bank real estate owned (“REO”) and short sale transactions, typically at further reduced sales prices, ongoing tightening in the availability of consumer mortgage financing particularly impacting the sale of higher priced housing and the amounts of cash rebates paid.
 
Marketing and other revenues
 
Marketing and other revenues consist primarily of market level transaction referrals and corporate marketing agreements, lead generation and advertising.
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Referral and other revenues
                       
Market level - same markets
  $ 384     $ 168     $ 216       129.4 %
Market level - closed markets
    13       54       (41 )     (76.5 )%
Corporate
    2,344       1,894       450       23.8 %
Total
  $ 2,741     $ 2,116     $ 625       29.6 %
 
The increase in corporate marketing and other revenues for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily attributable to advertising and broker referral transaction fees.
 
Cost of revenues
 
During the three months ended March 31, 2011, we completed the transition of our agent force from an employee model to an independent contractor model. Under the employee model, our cost of revenues consists principally of commissions, payroll taxes, benefits including health insurance, performance and tenure based award programs, agent expense reimbursements and amortization of internal-use software and website development costs which relate primarily to our ZAP technology. Under the independent contractor model, our cost of revenues consists principally of commissions and amortization of internal-use software and website development costs which relate primarily to our ZAP technology. Agent commissions are generally paid on market net revenues which include net transaction revenues plus referral and other revenues generated by our agents.
 
 
23

 
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Cost of revenues
                       
Same markets
  $ 23,299     $ 30,745     $ (7,446 )     (24.2 )%
Closed markets
    522       5,556       (5,034 )     (90.6 )%
Total
  $ 23,821     $ 36,301     $ (12,480 )     (34.4 )%
 
The decrease in cost of revenues of $12.5 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was primarily related to the overall decrease in net revenues on which we pay agent commissions.  Cost of revenues on a same market basis for the six months ended June 30, 2011 was $23.3 million compared to $30.7 million for the six months ended June 30, 2010.   Agent performance and tenure based programs, benefits and expense reimbursements decreased by approximately $4.2 million or 93.9% attributable to the transition of our agents to independent contractors who do not qualify for benefits and expense reimbursements and to the elimination of performance and tenure based programs as a component of agent compensation. Same market cost of revenues as a percentage of market net revenues for the three months ended June 30, 2011 was 57.9%, a decrease of 1.7 percentage points from 59.6% for the six months ended June 30, 2010.
 
Product development
 
Product development expenses include our information technology costs relating to the maintenance of our website, proprietary technology platforms and system infrastructure. These costs consist primarily of compensation and benefits for our product development and infrastructure personnel, depreciation of software and equipment and infrastructure costs consisting primarily of facilities, communications and other operating expenses.
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Product development
  $ 3,918     $ 4,672     $ (754 )     (16.1 )%
 
The decrease in product development expenses for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was due primarily to decreases in salaries and benefits of $0.4 million attributable to reductions in headcount resulting from our restructuring, technology infrastructure costs of $0.3 million and depreciation of $0.1 million.  As a percentage of net revenues, product development expenses increased by 1.6 percentage points for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.
 
Sales and marketing
 
Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in sales, sales support and customer service as well as promotional, advertising and client acquisition costs. These expenses have been categorized below between those incurred in our market offices and those expenses which are incurred by the regional and corporate support functions.

   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Sales and marketing
                       
Market level
  $ 12,844     $ 18,672     $ (5,828 )     (31.2 )%
Regional/corporate sales support and marketing
    2,592       3,739       (1,147 )     (30.7 )%
Total
  $ 15,436     $ 22,411     $ (6,975 )     (31.1 )%
 
Market level sales and marketing expenses decreased for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 as a result of closing twelve markets and eliminating positions in our remaining markets during our restructuring in the first quarter. The decrease was primarily attributable to decreases in salaries and benefits of $2.7 million, customer acquisition and marketing costs of $2.3 million, facilities and operating expenses of $0.6 million, travel of $0.1 million and recruiting and training of $0.1 million.  Approximately $3.4 million of the overall decrease was attributable operations of the closed markets. As a percentage of market net revenues, market sales and marketing expenses were 29.6% in the current period compared to 29.5% in the same period last year.
 
 
24

 
 
Regional/corporate sales support and marketing expenses decreased by approximately $1.1 million and consisted primarily of decreases in salary and benefits of $0.7 million, facilities and operating expenses of $0.3 million and travel of $0.1 million.  The decrease in expenses was primarily attributable to the elimination of positions and other expenses resulting from our restructuring in the first quarter of 2011, as well as positions eliminated in the last half of 2010. As a percentage of net revenues, regional/corporate sales support and marketing expenses were approximately 6.0% in the six months ended June 30, 2011 compared to 5.9% in the six months ended June 30, 2010.
 
 General and administrative
 
General and administrative expenses consist primarily of compensation and related costs for personnel and facilities related to our executive, finance, human resources, facilities and legal organizations, and fees for professional services. Professional services are principally comprised of outside legal, audit and tax services.
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
General and administrative
  $ 4,807     $ 6,599     $ (1,792 )     (27.2 )%
 
General and administrative expenses for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 decreased by approximately $1.8 million or 27.2% and were primarily attributable to decreased salaries and benefits of $1.5 million attributable to positions eliminated during the last half of 2010 and the restructuring, as well as reductions in travel of $0.1 million, professional fees of $0.1 million and operating expenses of $0.2 million partially offset by an increase in recruiting fees of $0.1 million.  As a percentage of net revenues, general and administrative expenses were 11.1% for the quarter compared to 10.4% in the six months ended June 30, 2010.
 
Restructuring charges, net
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Restructuring charges, net
  $ 2,264     $     $ 2,264       100.0 %
 
During the six months ended June 30, 2011, we implemented a cost reduction initiative, including closing brokerage operations in twelve markets and reducing our workforce in remaining market brokerage operations as well as in our corporate sales support and administrative functions. The restructuring charge includes lease obligation costs and other non-cash charges relating to lease terminations of approximately $0.9 million and severance pay and related expenses of approximately $1.4 million. Adjustments to non-cash stock-based compensation expense resulting from expense reversals for unvested stock awards that were forfeited were not significant. At June 30, 2011, the aggregate outstanding restructuring liability was approximately $0.7 million, most of which relates to non-cancelable lease costs we expect to pay over the remaining term of the leases, which end by the third quarter of 2016.
 
We expect that substantially all expenses relating to the restructuring have been recognized in the six months ended June 30, 2011. Some expenses required estimates, particularly those related to our ability and the timing of generating sublease income and terminating lease obligations, and may require future adjustments to the amount of the restructuring charge recorded.
 
Interest income
 
Interest income relates to interest we earn on our money market deposits and short-term investments.
 
   
Six Months Ended
June 30,
   
Increase
   
Percent
 
   
2011
   
2010
   
(Decrease)
   
Change
 
   
(In thousands)
 
Interest income
  $ 43     $ 167     $ (124 )     (74.2 )%
 
 
25

 
 
Interest income fluctuates as our cash equivalents and short-term investment balances change and applicable interest rates increase or decrease. The decrease in interest income for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was due primarily to lower interest rates earned on lower average balances. The lower interest rates were primarily attributable to overall decreases in market interest rates combined with maintaining higher money market account balances yielding lower interest rates as we decreased our short-term investments positions. The lower average balances were primarily attributable to cash used in our operating activities as a result of the losses incurred and our restructuring.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our principal sources of liquidity for 2011 are our cash, cash equivalents and short-term investments. As of June 30, 2011, we had cash, cash equivalents and short-term investments at fair value of $24.1 million and no bank debt, line of credit or equipment facilities.
 
Operating activities
 
Our operating activities used cash in the amount of $7.3 and $3.1 million in the six months ended June 30, 2011 and 2010, respectively. Cash used in the six months ended June 30, 2011 resulted primarily from a net loss of $6.9 million and net changes in operating assets and liabilities of $2.5 million offset by non-cash adjustments. Cash used of $2.5 million from the net change in operating assets and liabilities included a $0.7 million restructuring charge accrual and were mainly driven by timing differences in accounts receivable, accounts payable and accrued expenses relating to agent compensation and customer acquisition expenses.  The non-cash adjustments resulted primarily from $1.0 million of depreciation and amortization and $0.8 million of stock-based compensation expense. Cash used in the six months ended June 30, 2010 resulted primarily from a net loss of $6.4 million and net changes in operating assets and liabilities of $0.1 million offset by non-cash adjustments including $1.2 million of depreciation and amortization and $1.7 million of stock-based compensation expense.
 
Our primary source of operating cash flow is the collection of net commission income from escrow companies, or similar intermediaries in the real estate transaction closing process, plus marketing and other revenues. These cash collections are offset by cash payments for operating expenses including agent commissions and related expenses, as well as for employee compensation, benefits, client acquisition costs and other expenses. Due to the structure of our commission arrangements, our accounts receivable are settled in cash on a short-term basis and our accounts receivable balances at period end have historically been significantly less than one month’s net revenues.
 
Investing activities
 
Our investing activities provided cash of $13.4 million and $1.0 million in the six months ended June 30, 2011 and 2010, respectively. Cash provided for in the six months ended June 30, 2011 primarily represents the net proceeds from the sale, maturity and purchases of short-term investments of $14.2 million less the purchase of property and equipment, including amounts for website development and internal use software. Cash provided for the six months ended June 30, 2010 represent the net proceeds from the sales and maturity of short-term investments of $1.9 million less the purchase of property and equipment, including amounts for website development and internal use software.
 
We typically maintain a minimum amount of cash and cash equivalents for operational purposes and invest the remaining amount of our cash in investment grade, highly liquid interest-bearing securities which allows for flexibility in the event our cash needs change. During the current economic slowdown, we have reinvested the proceeds from maturing short-term investments in money market securities and, therefore, maintained higher balances of cash and cash equivalents.
 
Currently, we expect our remaining 2011 capital expenditures to be approximately $1.4 million primarily attributable to amounts capitalized for internal-use software and website development as well as expenditures for increased server capacity and software. In the future, our ability to make significant capital investments may depend on our ability to generate cash flow from operations and to obtain adequate financing, if necessary and available.
 
Financing activities
 
Our financing activities were not significant in the six months ended June 30, 2011 and used cash of $0.1 million in the six months ended June 30, 2010. The use of cash for the six months ended June 30, 2010 represents primarily the repurchase of shares of our common stock in connection with the payment of withholding and payroll taxes due upon vesting of employee restricted stock awards partially offset by the proceeds from stock option exercises.
 
Future needs
 
We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund cash used in our operations, restructuring and capital expenditures for at least the next twelve months. Our future capital requirements will depend on many factors, including our level of investment in technology and advertising initiatives, our rate of growth in our geographic markets and possible repurchases of our common stock. In addition, if the current macroeconomic environment and depressed state of the residential real estate market continues or worsens, we may have a greater need to fund our business by using our cash reserves, which could not continue indefinitely without our raising additional capital.
 
 
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 We currently have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operations and results will likely suffer.
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
We lease office space under non-cancelable operating leases with various expiration dates through December 2016. The following table provides summary information concerning our future contractual obligations and commitments at June 30, 2011.
 
   
Payments due by period
 
   
Less than
1 year
   
1 to 3 years
   
3 to 5 years
   
More than
5 years
   
Total
 
   
(In thousands)
 
Minimum lease payments
  $ 2,219     $ 1,742     $ 494     $ 29     $ 4,484  
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off balance-sheet arrangements, other than the indemnification agreements discussed in Note 7 “Commitments and Contingencies” of the Notes to Unaudited Condensed Consolidated Financial Statements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.