Zillow Group, Inc.
ZILLOW INC (Form: 10-Q, Received: 08/25/2011 12:01:10)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended June 30, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35237

 

 

ZILLOW, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Washington   20-2000033
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

1301 Second Avenue, Floor 31, Seattle, Washington   98101
(Address of principal executive offices)   (Zip Code)

(206) 470-7000

(Registrant’s telephone number, including area code)

 

 

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   ¨     No   x

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 22, 2011, 18,029,431 shares of Class A common stock and 9,528,313 shares of Class B common stock were outstanding.

 

 

 


Table of Contents

ZILLOW, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended June 30, 2011

TABLE OF CONTENTS

 

          Page  
   PART I – FINANCIAL INFORMATION   
Item 1.    Financial Statements (unaudited)      2   
   Condensed Balance Sheets      2   
   Condensed Statements of Operations      3   
   Condensed Statements of Cash Flows      4   
   Notes to Condensed Financial Statements      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      31   
Item 4.    Controls and Procedures      32   
   PART II – OTHER INFORMATION   
Item 1.    Legal Proceedings      33   
Item 1A.    Risk Factors      34   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      48   
Item 6.    Exhibits      49   
   Signatures      52   

 

i


Table of Contents

As used in this Quarterly Report on Form 10-Q, the terms “the Company,” “we,” “us” and “our” refer to Zillow, Inc., unless the context indicates otherwise.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A (Risk Factors) of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. 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 and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

ZILLOW, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data, unaudited)

 

     June 30, 2011     Pro Forma
June 30, 2011
(Note 2)
    December 31, 2010  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 16,161        $ 12,278   

Short-term investments

     —            1,499   

Accounts receivable, net of allowance for doubtful accounts of $611 and $501 at June 30, 2011 and December 31, 2010, respectively

     5,307          3,984   

Prepaid expenses and other current assets

     670          410   
  

 

 

     

 

 

 

Total current assets

     22,138          18,171   

Property and equipment, net

     5,544          4,929   

Goodwill

     1,140          —     

Intangible assets, net

     1,934          888   

Other assets

     3,146          25   
  

 

 

     

 

 

 

Total assets

   $ 33,902        $ 24,013   
  

 

 

     

 

 

 

Liabilities and shareholders’ equity

      

Current liabilities:

      

Accounts payable

   $ 2,524        $ 750   

Accrued expenses and other current liabilities

     2,336          576   

Accrued compensation and benefits

     1,564          1,349   

Deferred revenue

     5,647          3,284   

Deferred rent, current portion

     285          271   
  

 

 

     

 

 

 

Total current liabilities

     12,356          6,230   

Deferred rent, net of current portion

     405          335   

Commitments and contingencies (Note 11)

      

Shareholders’ equity:

      

Convertible preferred stock, $0.0001 par value; 70,000,000 shares authorized, 31,353,797 shares issued and outstanding as of June 30, 2011 and December 31, 2010; no shares authorized, issued or outstanding, pro forma

     4      $ —          4   

Preferred stock, $0.0001 par value; 30,000,000 and no shares authorized as of June 30, 2011 and December 31, 2010, respectively; no shares issued and outstanding as of June 30, 2011 and December 31, 2010; 30,000,000 shares authorized, no shares issued or outstanding, pro forma

     —          —          —     

Class A common stock, $0.0001 par value; 600,000,000 and 200,000,000 shares authorized as of June 30, 2011 and December 31, 2010, respectively; 2,143,269 and 1,290,602 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively; 600,000,000 shares authorized, 13,725,439 shares issued and outstanding, pro forma

     —          1        —     

Class B common stock, $0.0001 par value; 15,000,000 and 35,000,000 shares authorized as of June 30, 2011 and December 31, 2010, respectively; 9,528,313 shares issued and outstanding as of June 30, 2011 and December 31, 2010; 15,000,000 shares authorized, 9,528,313 shares issued and outstanding, pro forma

     1        1        1   

Class C nonvoting common stock, $0.0001 par value; 50,000,000 shares authorized, 2,305,980 shares issued and outstanding as of June 30, 2011 and December 31, 2010; no shares authorized, issued or outstanding, pro forma

     —          —          —     

Additional paid-in capital

     99,095        99,098        96,152   

Accumulated other comprehensive loss

     (77,959     (77,959     (78,709
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     21,141        21,141        17,448   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 33,902      $ 33,902      $ 24,013   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

2


Table of Contents

ZILLOW, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2011      2010     2011      2010  

Revenues

   $ 15,845       $ 7,334      $ 27,105       $ 12,665   

Costs and expenses:

          

Cost of revenues (exclusive of amortization) (1)

     2,713         1,222        4,529         2,384   

Sales and marketing

     5,630         3,748        11,115         6,865   

Technology and development

     3,304         2,878        6,299         5,412   

General and administrative

     2,627         1,483        4,455         2,824   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     14,274         9,331        26,398         17,485   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     1,571         (1,997     707         (4,820

Other income

     5         25        43         42   

Net income (loss)

   $ 1,576       $ (1,972   $ 750       $ (4,778
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to common shareholders

   $ —         $ (1,972   $ —         $ (4,778

Net income (loss) per share attributable to common shareholders — basic and diluted

   $ —         $ (0.16   $ —         $ (0.38

Weighted-average shares outstanding — basic

     13,940         12,660        13,645         12,650   

Weighted-average shares outstanding — diluted

     24,106         12,660        23,604         12,650   

Pro forma net income per share attributable to common shareholders — basic (Note 2)

   $ 0.07         $ 0.03      

Pro forma net income per share attributable to common shareholders — diluted (Note 2)

   $ 0.07         $ 0.03      

Pro forma weighted-average shares outstanding — basic

     23,216           22,921      

Pro forma weighted-average shares outstanding — diluted

     24,106           23,604      

 

          

(1)    Amortization of website development costs and intangible assets included in technology and development is as follows:

   $ 1,234       $ 1,107      $ 2,457       $ 2,077   

See accompanying notes to condensed financial statements.

 

3


Table of Contents

ZILLOW, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

     Six Months Ended  
     June 30,  
     2011     2010  

Operating activities

    

Net income (loss)

   $ 750      $ (4,778

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     3,394        2,582   

Share-based compensation expense

     803        841   

Loss on disposal of property and equipment

     46        152   

Bad debt expense

     177        29   

Deferred rent

     84        (130

Accretion of bond discount

     (3     (1

Changes in operating assets and liabilities:

    

Accounts receivable

     (1,501     (1,141

Prepaid expenses and other assets

     (1,526     (358

Accounts payable

     1,774        454   

Accrued expenses

     1,975        270   

Deferred revenue

     2,363        1,021   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     8,336        (1,059

Investing activities

    

Proceeds from maturities of short-term investments

     5,250        8,407   

Purchases of short-term investments

     (3,748     (5,226

Purchases of property and equipment

     (3,235     (2,532

Purchases of intangible assets

     (875     (390

Acquisition, net of cash acquired

     (1,000     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (3,608     259   

Financing activities

    

Proceeds from exercise of Class A common stock options

     1,009        427   

Payments for deferred offering costs

     (1,854     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (845     427   

Net increase (decrease) in cash and cash equivalents during period

     3,883        (373

Cash and cash equivalents at beginning of period

     12,278        4,439   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 16,161      $ 4,066   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Noncash transactions:

    

Capitalized share-based compensation

   $ 222      $ 217   

Deferred offering costs not yet paid

   $ 1,194      $ —     

Class A common stock issued in connection with an acquisition

   $ 910      $ —     

See accompanying notes to condensed financial statements.

 

4


Table of Contents

ZILLOW, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Organization and Description of Business

Zillow, Inc. was incorporated as a Washington corporation effective December 13, 2004. We operate a real estate information marketplace dedicated to providing vital information about homes, real estate listings and mortgages and enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals.

Certain Significant Risks and Uncertainties

We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; engagement and usage of our products; scaling and adaptation of existing technology and network infrastructure; competition in our market; management of our growth; acquisitions and investments; qualified employees and key personnel; protection of our brand and intellectual property; changes in government regulation affecting our business; intellectual property infringement and other claims; protection of customers’ information and privacy concerns; and security measures related to our website, among other things.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Registration Statement on Form S-1 (File No. 333-173570), as filed with the SEC. The condensed balance sheet as of December 31, 2010, included herein, was derived from the audited financial statements as of that date but does not include all disclosures required by GAAP, including notes to the financial statements.

The unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2011, our results of operations for the three and six month periods ended June 30, 2011 and 2010 and our cash flows for the six months ended June 30, 2011 and 2010. The results of the three and six month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ended December 31, 2011 or for any other interim period or for any other future year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Estimates are used for revenue recognition, the allowance for doubtful accounts, website development costs, recoverability of intangible assets with definite lives and other long-lived assets and for share-based compensation. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

 

5


Table of Contents

Unaudited Pro Forma Consolidated Balance Sheet and Net Income Per Share Attributable to Common Shareholders

Upon the effectiveness of the Company’s registration statement on July 19, 2011, all of the outstanding shares of our convertible preferred stock and Class C common stock automatically converted into shares of Class A common stock. The June 30, 2011 unaudited pro forma balance sheet data has been prepared reflecting the conversion of the convertible preferred stock outstanding into 9,276,190 shares of Class A common stock and the conversion of the Class C common stock outstanding into 2,305,980 shares of Class A common stock.

Unaudited pro forma net income per share attributable to common shareholders for the three and six month periods ended June 30, 2011 have been computed to give effect to the automatic conversion of the convertible preferred stock and Class C common stock (using the if-converted method) into Class A common stock as though the conversion had occurred on the original dates of issuance. For the three and six month periods ended June 30, 2011, 889,893 and 682,362 shares of Class A common stock equivalents relating to options to purchase Class A common stock, respectively, were included in the computation of diluted net income per share attributable to common shareholders because the Class A common stock equivalents would have had a dilutive impact.

Reverse Stock Split

On June 16, 2011, our board of directors and shareholders approved a 3.38-for-1 reverse stock split of our outstanding Class A common stock, Class B common stock and Class C common stock that was effected on June 17, 2011. The conversion prices at which shares of our convertible preferred stock were automatically converted were adjusted to reflect the reverse stock split. All references to Class A common stock, Class B common stock and Class C common stock in the condensed financial statements and the notes thereto, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the reverse stock split retroactively. Previously awarded options to purchase shares of our Class A common stock have also been retroactively adjusted to reflect the reverse stock split.

Reclassifications

Certain reclassifications have been made to conform the prior period’s data to the current format.

Deferred Offering Costs

Deferred offering costs of $3.0 million are included in other assets in the condensed balance sheet as of June 30, 2011. Upon the consummation of our initial public offering on July 25, 2011, these amounts were offset against the proceeds of the offering. There were no amounts capitalized as of December 31, 2010.

Recently Issued Accounting Standards

In October 2009, the FASB issued guidance on revenue recognition to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. This guidance is effective beginning January 1, 2011 with earlier application permitted. We adopted this guidance prospectively starting on January 1, 2011. The adoption of this guidance did not and is not expected to have any impact on our financial position, results of operations, cash flows or disclosures based on the types of revenue arrangements we have historically entered into and currently have in place.

 

Note 3. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

6


Table of Contents

There are three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Assets

Cash equivalents — Cash equivalents include money market funds. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis and classified as Level 1 in the fair value hierarchy.

Short-term investments — Short-term investments consist of U.S. government agency securities. The fair value measurement of these assets is based on observable market-based Level 1 inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means and, therefore, is recorded at fair value on a recurring basis. There were no short-term investments outstanding at June 30, 2011. The balance of short-term investments was $1.5 million at December 31, 2010.

The following table presents the balances of assets measured at fair value on a recurring basis as of the dates presented (in thousands), all of which are classified as Level 1 in the fair value hierarchy:

 

     June 30,
2011
     December 31,
2010
 

Assets:

     

Cash equivalents:

     

Money market funds

   $ 13,020       $ 11,517   

Short-term investments:

     

U.S. Treasury securities

     —           1,499   
  

 

 

    

 

 

 

Total

   $ 13,020       $ 13,016   
  

 

 

    

 

 

 

We did not have any Level 2 or Level 3 assets measured at fair value on a recurring basis as of June 30, 2011 or December 31, 2010.

 

Note 4. Accounts Receivable, net

The following table presents the detail of accounts receivable as of the dates presented (in thousands):

 

     June 30,
2011
    December 31,
2010
 

Accounts receivable

   $ 5,918      $ 4,485   

Less: allowance for doubtful accounts

     (611     (501
  

 

 

   

 

 

 

Accounts receivable, net

   $ 5,307      $ 3,984   
  

 

 

   

 

 

 

 

Note 5. Property and Equipment, net

The following table presents the detail of property and equipment as of the dates presented (in thousands):

 

7


Table of Contents
     June 30,
2011
    December 31,
2010
 

Computer equipment

   $ 8,625      $ 8,072   

Website development costs

     21,412        18,921   

Leasehold improvements

     2,127        1,891   

Software

     1,271        1,153   

Construction-in-progress

     659        675   

Office equipment, furniture and fixtures

     540        511   
  

 

 

   

 

 

 

Property and equipment

     34,634        31,223   

Less: accumulated amortization and depreciation

     (29,090     (26,294
  

 

 

   

 

 

 

Property and equipment, net

   $ 5,544      $ 4,929   
  

 

 

   

 

 

 

We recorded amortization and depreciation expense related to property and equipment other than website development costs of $0.6 million and $0.3 million, respectively, during the three months ended June 30, 2011 and 2010, and $0.9 million and $0.5 million, respectively, during the six months ended June 30, 2011 and 2010.

We capitalized $1.4 million and $0.9 million, respectively, in website development costs during the three months ended June 30, 2011 and 2010, and $2.5 million and $1.9 million, respectively, during the six months ended June 30, 2011 and 2010. Amortization expense for website development costs included in technology and development expenses totaled $0.9 million and $1.0 million, respectively, during the three months ended June 30, 2011 and 2010, and $1.9 million and $1.8 million, respectively, during the six months ended June 30, 2011 and 2010.

Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.

 

Note 6. Intangible Assets

The following table presents the detail of intangible assets subject to amortization as of the dates presented (in thousands):

 

     June 30,
2011
    December 31,
2010
 

Purchased content

   $ 5,059      $ 4,184   

Developed technology

     630        —     

Customer relationships

     80        —     

Trademarks

     60        —     
  

 

 

   

 

 

 

Intangible assets

     5,829        4,184   

Less: accumulated amortization

     (3,895     (3,296
  

 

 

   

 

 

 

Intangible assets, net

   $ 1,934      $ 888   
  

 

 

   

 

 

 

Amortization expense recorded for intangible assets for the three months ended June 30, 2011 and 2010 was $0.3 million and $0.1 million, respectively. Amortization expense recorded for intangible assets for the six months ended June 30, 2011 and 2010 was $0.6 million and $0.3 million, respectively. These amounts are included in technology and development expenses.

 

Note 7. Income Taxes

We are subject to federal income taxes in the United States. During the three and six months ended June 30, 2011 and 2010, we did not have taxable income and, therefore, no tax liability or expense has been recorded in the

 

8


Table of Contents

financial statements. We have accumulated tax losses of approximately $64.0 million as of December 31, 2010, which are available to reduce future taxable income.

 

Note 8. Shareholders’ Equity

As described in Note 2, on June 16, 2011, our board of directors and shareholders approved a 3.38-for-1 reverse stock split of our outstanding Class A common stock, Class B common stock and Class C common stock that was effected on June 17, 2011. All references to Class A common stock, Class B common stock and Class C common stock in the condensed financial statements and the notes thereto, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the reverse stock split retroactively. Previously awarded options to purchase shares of our Class A common stock have also been retroactively adjusted to reflect the reverse stock split.

Upon the effectiveness of the Company’s registration statement on July 19, 2011, all of the outstanding shares of convertible preferred stock and all of the outstanding shares of Class C common stock automatically converted into 9,276,190 and 2,305,980 shares of Class A common stock, respectively.

On July 25, 2011, we closed our initial public offering (“IPO”) of 3,981,300 shares of Class A common stock at an offering price of $20.00 per share, including 519,300 Class A common shares pursuant to the underwriters’ option to purchase additional shares, and also closed the sale of 274,999 shares of our Class A common stock in a private placement at a price of $20.00 per share, resulting in net proceeds to us of $76.2 million after deducting underwriting discounts and commissions and estimated expenses payable in connection with the IPO.

Convertible Preferred Stock

In November 2005, we completed a private placement of $26.0 million, authorizing the issuance and sale of 17,931,034 shares of Series A convertible preferred stock (“Series A”) at $1.45 per share. In July 2006, we completed a private placement of $25.0 million, authorizing the issuance and sale of 6,933,103 shares of Series B convertible preferred stock (“Series B”) at $3.6059 per share. In October 2007, we completed a private placement of $30.0 million, authorizing the issuance and sale of 6,489,660 shares of Series C convertible preferred stock (“Series C”) at $4.62274 per share. The key terms of all issued convertible preferred stock as of June 30, 2011, which automatically converted into Class A common stock upon the effectiveness of our registration statement relating to the IPO on July 19, 2011, are summarized below:

(a) Dividends

The holders of Series A, B and C convertible preferred stock had preferential rights to dividends at the rate of $0.116, $0.28847 and $0.3698 per share per annum, respectively, when and if declared by our board of directors, over common shareholders. The right to receive dividends was not cumulative. As of June 30, 2011 and December 31, 2010, no dividends had been declared.

(b) Conversion

At any time after the date of issuance, each share of Series A, B and C convertible preferred stock, at the option of the holder, was convertible into Class A common stock using the formula provided in our articles of incorporation, or automatically upon the effectiveness of a registration statement filed for a firm commitment underwritten initial public offering of our Class A common stock with an aggregate offering price to the public of more than $40.0 million (which occurred on July 19, 2011), or with the approval of the holders of at least 70% of the outstanding shares of convertible preferred stock, respectively.

(c) Liquidation Preference

In the event of a deemed liquidation, as defined, the holders of Series A, B and C convertible preferred stock had preferential rights over common shareholders to liquidation payments of $1.45, $3.6059, and $4.62274 per share, respectively, plus all declared but unpaid dividends on such shares, if any. Upon completion of such a distribution, the remaining assets would have been distributed among the holders of all classes of common stock pro rata based on the number of shares of Class A common stock held by each (assuming the conversion of all shares of

 

9


Table of Contents

Class B and Class C common stock into shares of Class A common stock in the ratios provided). Series A, B and C convertible preferred shareholders did not have preferential rights over other preferred series holders and if there were insufficient funds to pay such preferences in full, then each preferred series holder would have liquidation rights that are proportionate to other preferred series holders.

We have classified the Series A, B and C convertible preferred stock within shareholders’ equity since the convertible preferred stock was not redeemable, and the Series A, B and C convertible preferred stockholders did not have the right to effect a deemed liquidation of the Company.

(d) Voting Rights

Holders of Series A, B and C convertible preferred stock were entitled to the number of votes equal to the number of shares of Class A common stock into which their preferred stock could be converted. As long as at least 20% of the Series A convertible preferred stock outstanding on the original issue date remained outstanding, the holders of Series A convertible preferred stock, voting as a separate class, were entitled to elect two of the seven members of our board of directors. The holders of Class A common stock, Class B common stock, Series B convertible preferred stock, and Series C convertible preferred stock, voting together as a single voting group, were entitled to elect four members of our board of directors, and the holders of all classes of common stock and all series of convertible preferred stock, voting together, were entitled to elect any remaining members.

Common Stock

Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to one vote for each share.

Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, shall be converted into one share of Class A common stock, or automatically converted upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. Holders of Class B common stock are entitled to 10 votes for each share.

Prior to the effectiveness of our registration statement on July 19, 2011, at which time all of the outstanding shares of Class C common stock automatically converted into shares of Class A common stock, our Class C common stock had no preferences or privileges and was not redeemable. Each share of Class C common stock, at the option of the holder thereof, was convertible into one share of Class A common stock, at any time after the consummation of the first firm commitment underwritten public offering of our securities. Each share of Class C common stock was automatically convertible into one share of Class A common stock upon the sale of the Company or upon the affirmative vote by holders of at least 65% of the shares of the Class C common stock. Holders of Class C common stock had no voting rights, except to the extent required by law.

 

Note 9. Share-Based Awards

In February 2005, our board of directors adopted, and our shareholders approved, the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”). Under the terms of the 2005 Plan, our board of directors may grant stock awards, including incentive and nonqualified stock options, to employees, officers, directors, consultants, agents, advisors, and independent contractors. Upon adoption of the 2005 Plan, an aggregate of 2,485,207 shares of Class A common stock was reserved for future issuance. Through June 30, 2011, our board of directors has subsequently approved increases to the number of shares of Class A common stock reserved for future issuance to 6,908,284 shares. As described below in Note 13, upon execution of the underwriting agreement related to the IPO on July 19, 2011, the 2011 Incentive Plan (the “2011 Plan”) became effective. After July 19, 2011, future equity awards will be granted under that plan, not the 2005 Plan. On August 5, 2011, we filed a registration statement on Form S-8 under the Securities Act to register 6,816,135 shares of our Class A common stock for issuance under our 2005 Plan and 2011 Plan.

We have granted nonqualified stock options under the 2005 Plan with exercise prices determined by our board of directors or the compensation committee of our board of directors. All stock options granted since inception have been nonqualified stock options. Options granted under the 2005 Plan are exercisable at such times and under such conditions as determined by our board of directors, but the term of the options and the right of exercise may not

 

10


Table of Contents

exceed seven years from the date of grant. Employees forfeit their rights to exercise vested options after 90 days or 12 months following the termination of their employment, depending on the cause of termination. Options have a seven-year term and generally vest 25% after 12 months, and the remaining 75% of the award vests ratably over the next 36 months.

A summary of stock option activity for the year ended December 31, 2010 and the six months ended June 30, 2011 is as follows:

 

     Options
Available
for Grant
    Number
of Shares
    Weighted-
Average

Exercise
Price Per
Share
     Weighted-
Average

Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2009

     1,015,008        4,394,807      $ 4.04         

Authorized increase in 2005 Plan shares

     1,109,467        —          —           

Granted

     (1,440,227     1,440,227        3.47         

Exercised

     —          (487,401     1.95         

Forfeited or cancelled

     337,323        (337,323     4.79         
  

 

 

   

 

 

         

Outstanding at December 31, 2010

     1,021,571        5,010,310        4.03         4.48       $ 3,843,806   

Authorized increase in 2005 Plan shares

     177,514        —          —           

Granted

     (1,279,903     1,279,903        4.24         

Exercised

     —          (645,567     1.56         

Forfeited or cancelled

     103,257        (103,257     5.16         
  

 

 

   

 

 

         

Outstanding at June 30, 2011

     22,439        5,541,389        4.34         4.64         14,868,345   

Vested and exercisable at June 30, 2011

       2,675,221        4.70         3.46         6,339,136   

The fair value of options granted is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends and with the following assumptions for the periods presented:

 

     Three Months Ended
June  30,
   Six Months Ended
June 30,
     2011    2010    2011    2010

Expected volatility

   52%    47%    52%    47%-53%

Expected dividend yields

           

Risk-free interest rate

   1.46%-1.73%    1.59%-2.20%    1.46%-2.00%    1.59%-2.31%

Weighted-average expected life

   4.58 years    4.58 years    4.58 years    4.58 years

Weighted-average fair value of options granted

   $3.28    $1.47    $2.29    $1.63

Since July 2006 and up until May 23, 2011, which was the last date options were granted prior to the effectiveness of our IPO, we have obtained valuation analyses prepared by an independent third-party valuation firm to assist us in determining the fair value of our Class A common stock. The valuations used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , or the AICPA Practice Guide. In obtaining third-party valuations of our Class A common stock, our management provided the third-party valuation firm with projections for revenue and expenses on a cash basis, and information about our prospects, our performance and economic and financial market conditions, which the valuation firm used, along with other information, to perform its valuation analysis. These valuations were reviewed by management and either the board of directors or the compensation committee of the board of directors in conjunction with share-based compensation grants. In determining the fair value of our Class A common stock, the board of directors and the compensation committee of our board of directors considered these valuation reports, and other qualitative and quantitative factors that they considered relevant, including but not limited to: (i) key employee hirings and terminations; (ii) the seasonality of our business; (iii) general market conditions in the technology, media and real estate markets; (iv) our operating performance and competitive position within the online real estate space; (v) revenue and income projections; (vi) our cash burn rate; (vii) the market value of stock of our peer companies; (viii) present value of possible future cash flows; and (ix) the likelihood of various liquidity scenarios. These determinations of fair value

 

11


Table of Contents

were used for purposes of determining the Black-Scholes-Merton fair value of our stock option awards and related share-based compensation expense.

The following table presents the effects of share-based compensation on our statements of operations during the periods presented (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Cost of revenues

   $ 46       $ 53       $ 87       $ 107   

Sales and marketing

     67         111         174         215   

Technology and development

     90         106         176         201   

General and administrative

     210         159         366         318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 413       $ 429       $ 803       $ 841   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011, there was a total of $4.4 million in unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 2.97 years.

 

Note 10. Net Income (Loss) Per Share Attributable to Common Shareholders

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares (including Class A common stock, Class B common stock and Class C common stock) outstanding during the period. In the calculation of basic net income (loss) per share, undistributed earnings are allocated assuming all earnings during the period were distributed. Net income is first allocated to the Series A, B and C convertible preferred shareholders, as the convertible preferred stock is a participating security and the preferred shareholders have contractual preferential rights to distributions. As a result, for the three and six month periods ended June 30, 2011, there is no income attributable to common shareholders, as all income would be allocated to the Series A, B and C convertible preferred shareholders. No losses are allocated to Series A, B and C convertible preferred shareholders, as these shareholders do not have contractual obligations to share in or fund the losses of the Company. For the three and six month periods ended June 30, 2010, the net loss is allocated entirely to the Class A common stock, Class B common stock and Class C common stock.

Diluted net income (loss) per share attributable to common shareholders is computed by dividing net income (loss) by the weighted-average number of common shares (including Class A common stock, Class B common stock and Class C common stock) outstanding during the period and potentially dilutive Class A common stock equivalents, except in cases where the effect of the Class A common stock equivalent would be antidilutive. The Class A common stock equivalents consist of Class A common stock issuable upon exercise of stock options using the treasury stock method and Class A common stock issuable upon conversion of our Series A, B and C convertible preferred stock.

For the periods presented, the following Class A common stock equivalents were included in the computation of diluted net income (loss) per share attributable to common shareholders because they had a dilutive impact:

 

     Three Months Ended
June 30, 2011
     Six Months Ended
June 30, 2011
 
     (in thousands)  

Convertible preferred stock upon conversion to Class A common stock

     9,276         9,276   

Options to purchase Class A common stock

     890         682   
  

 

 

    

 

 

 

Total Class A common stock equivalents

     10,166         9,958   
  

 

 

    

 

 

 

For the three and six month periods ended June 30, 2010, 5,013,311 shares underlying stock options and 9,276,190 shares of Class A common stock issuable upon conversion of our convertible preferred stock have been excluded from the calculations of diluted net income (loss) per share attributable to common shareholders because their effect would have been antidilutive.

 

12


Table of Contents

In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of all classes of common stock have equal rights to receive all the assets of the Company after the rights of the holders of the preferred stock have been satisfied. We have not presented net income (loss) per share attributable to common shareholders under the two-class method for our Class A common stock, Class B common stock and Class C common stock because it would be the same for each class due to equal dividend and liquidation rights for each class.

 

Note 11. Commitments and Contingencies

Lease Commitments

We have various operating leases for office space and equipment. Our current headquarters is under an operating lease expiring in February 2013. We have also entered into an operating lease for our new headquarters in Seattle, Washington, under which we will be obligated to make escalating lease payments beginning in December 2012 through November 2022. Future minimum payments for all operating leases as of June 30, 2011 are as follows (in thousands):

 

2011

   $ 807   

2012

     1,725   

2013

     2,107   

2014

     1,839   

2015

     1,799   

All future years

     14,234   
  

 

 

 

Total future minimum lease payments

   $ 22,511   
  

 

 

 

Rent expense for the three months ended June 30, 2011 and 2010 was $0.5 million and $0.3 million, respectively. Rent expense for the six months ended June 30, 2011 and 2010 was $0.9 million and $0.6 million, respectively.

Purchase Commitments

As of June 30, 2011, we have purchase commitments for data that is used to populate our website totaling $3.6 million. The amount due for this content is as follows (in thousands):

 

2011

   $ 1,050   

2012

     812   

2013

     520   

2014

     520   

2015

     520   

All future years

     130   
  

 

 

 

Total future purchase commitments

   $ 3,552   
  

 

 

 

Letters of Credit

We have three outstanding letters of credit totaling $0.6 million at June 30, 2011 and December 31, 2010, payable to the landlord of our headquarters office in the event we default on our lease. The letters of credit are secured by our cash and cash equivalents and are effective until 60 days after the expiration date of the lease.

Legal Proceedings

In October 2009, Mortgage Grader LLC filed a complaint against us for patent infringement in the Eastern District of Texas. The complaint alleged, among other things, that our website technology infringes one patent owned by Mortgage Grader, and sought injunctive relief, monetary damages, costs and attorneys’ fees. We denied Mortgage Grader’s allegations and asserted counterclaims seeking declarations that we were not infringing the

 

13


Table of Contents

Mortgage Grader patent, and that the Mortgage Grader patent was unenforceable and invalid. In April 2010, Zillow and Mortgage Grader signed a patent license and settlement agreement for an insubstantial payment.

In May 2010, Source Search Technologies, LLC (SST) filed an action in the U.S. District Court, District of New Jersey alleging that we infringed certain patent rights. In March 2011, we signed a settlement agreement with SST, and Zillow paid a small one-time license fee. As a result of the settlement, effective from January 1, 2010 for as long as the related patent is valid and enforceable in the U.S., we must pay to SST insubstantial royalties on a quarterly basis under the terms of the agreement.

In March 2010, Smarter Agent, LLC filed a complaint against us for patent infringement in the U.S. District Court for the District of Delaware. The complaint seeks, among other things, a judgment that we may have infringed certain patents held by Smarter Agent, an injunctive order against the alleged infringing activities and an award for damages. In November 2010, the U.S. Patent Office granted our petition for re-examination of the three patents-in-suit, and in an initial office action rejected all claims. In March 2011, the court granted a stay of the litigation pending the completion of the re-examination proceedings. We were granted a stay against the patent infringement complaint. We have not recorded an accrual related to this complaint as of June 30, 2011 or December 31, 2010 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In April 2010, First American CoreLogic filed a complaint against us, for patent infringement in the U.S. District Court for the Eastern District of Texas. The complaint seeks, among other things, a judgment that we may have infringed certain patents held by CoreLogic, an injunctive order against the alleged infringing activities and an award for damages. We have not recorded an accrual related to this complaint as of June 30, 2011 or December 31, 2010 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In September 2010, LendingTree, LLC filed a complaint against us, for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint seeks, among other things, a judgment that we may have infringed certain patents held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. We have not recorded an accrual related to this complaint as of June 30, 2011 or December 31, 2010 as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In addition to the aforementioned, from time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any litigation and claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Note 12. Segment Information and Revenues

We have one reportable segment. Our reportable segment has been identified based on how our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information on an entity-wide basis. We have one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components. Accordingly, we have determined that we have a single reporting segment and operating unit structure.

The chief executive officer reviews information about revenue categories for purposes of allocating resources and evaluating financial performance. The following table presents our revenue categories during the periods presented (in thousands):

 

14


Table of Contents
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Marketplace revenues

   $ 9,723       $ 2,632       $ 16,604       $ 4,486   

Display revenues

     6,122         4,702         10,501         8,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,845       $ 7,334       $ 27,105       $ 12,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 13. Subsequent Events

On July 25, 2011, we closed our initial public offering (“IPO”) of 3,981,300 shares of Class A common stock at an offering price of $20.00 per share, including 519,300 shares of Class A common stock pursuant to the underwriters’ option to purchase additional shares, and also closed the purchase of 274,999 shares of our Class A common stock in a private placement at a price of $20.00 per share, resulting in aggregate net proceeds to us of $76.2 million after deducting underwriting discounts and commissions and estimated expenses payable in connection with the IPO. Upon the effectiveness of the Company’s registration statement on July 19, 2011, all of our outstanding shares of convertible preferred stock and Class C common stock automatically converted into 9,276,190 and 2,305,980 shares of Class A common stock, respectively.

In connection with the IPO, the 2011 Plan became effective upon execution of the underwriting agreement related to the IPO. On August 5, 2011, we filed a Registration Statement on Form S-8 with the SEC whereby we registered 6,816,135 shares of our Class A common stock, of which (i) 5,467,729 shares were registered with respect to the 2005 Plan and (ii) 1,348,406 shares were registered with respect to the 2011 Plan.

 

15


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors.”

Overview

We are the leading real estate information marketplace. We provide vital information about homes, real estate listings and mortgages through our website and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals best suited to meet their needs. We are transforming the way consumers make home-related decisions.

Our living database of more than 100 million U.S. homes – homes for sale, homes for rent and homes not currently on the market – attracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 29 million homes and added more than 65 million home photos, creating exclusive home profiles available nowhere else. These profiles include rich detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it, both through our website and through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes. Using industry-leading automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million U.S. homes. Our products and services present residential real estate data in novel ways that have revolutionized the way consumers search for, find and understand home-related information and make real estate decisions.

We generate revenues from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals and brand advertisers. Our revenues include marketplace revenues, consisting of subscriptions sold to real estate agents and advertising sold on a cost per click, or CPC, basis to mortgage lenders, and display revenues consisting of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended June 30, 2011, we generated revenue of $15.8 million, as compared to $7.3 million in the three months ended June 30, 2010, an increase of 116%. We believe this increase is primarily the result of the 180% increase in our Premier Agent Subscribers to 13,385 as of June 30, 2011 from 4,777 as of June 30, 2010, as well as a significant growth in traffic to our websites and mobile applications. There were approximately 20.8 million average monthly unique users of our websites and mobile applications for the three months ended June 30, 2011 compared to 10.8 million average monthly unique users for the three months ended June 30, 2010, representing year-over-year growth of 93%.

Beginning in February 2011, we began to recognize revenues related to our strategic relationship with Yahoo! Real Estate. Under this strategic relationship, we provide real estate listings to Yahoo! Real Estate and have exclusive rights to sell real estate agent advertising and certain graphical advertising for display on the Yahoo! Real Estate site. We anticipate this partnership will have a positive impact on our future results of operations, primarily due to an increase in marketplace revenues as we expect the partnership will continue to drive greater demand for our Premier Agent product.

As of June 30, 2011, we had 264 full-time employees, compared to 216 full-time employees as of December 31, 2010, an increase of 22%.

 

16


Table of Contents

Key Growth Drivers

To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we frequently review the following key growth drivers:

Unique Users

Measuring unique users is important to us because our marketplace revenues depend in part on our ability to enable our users to connect with real estate and mortgage professionals, and our display revenues depend in part on the number of impressions delivered. Furthermore, our community of users improves the quality of our living database of homes with their contributions. We measure unique users with Omniture analytical tools. Zillow counts a unique user the first time an individual accesses our website using a web browser during a calendar month, and the first time an individual accesses Zillow’s mobile applications using a mobile device during a calendar month. If an individual accesses Zillow’s website using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses Zillow’s mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user.

 

     Average Monthly Unique
Users for the Three

Months Ended June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands)         

Unique Users

     20,758         10,751         93

Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth because each subscribing agent pays us a monthly fee to participate in the program. We define a Premier Agent subscriber as an agent with a paid subscription at the end of a period.

 

     At June 30,      2010 to 2011
% Change
 
     2011      2010     

Premier Agent Subscribers

     13,385         4,777         180

Basis of Presentation

Revenues

We generate revenues from the sale of advertising services to businesses and professionals primarily associated with the real estate and mortgage industries. These professionals include local real estate professionals, primarily on an individual subscription basis, and mortgage professionals and brand advertisers. Our revenues include marketplace revenues and display revenues.

Marketplace Revenues. Marketplace revenues consist of subscriptions sold to real estate agents under our Premier Agent program and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders and financial institutions.

Our Premier Agent program allows local real estate agents to establish a persistent online and mobile presence on Zillow in the zip codes they serve. We present contact information for each Premier Agent alongside home profiles and home listings within the agent’s zip code, assisting consumers in evaluating and selecting the real estate

 

17


Table of Contents

agent best suited for them. Pricing for our Premier Agent subscriptions varies by zip code. Subscription advertising revenues are recognized on a straight-line basis during the contractual period over which the advertising is delivered. Typical terms of our Premier Agent subscription contracts are six months. Growth in our subscription advertising product is based on our ability to continue to attract agent subscribers and drive consumer traffic to those agents on our website and through our mobile applications.

In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click on their links for more information regarding a mortgage loan quote. Mortgage lenders who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace.

Display Revenues. Display revenues primarily consist of graphical web and mobile advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize these revenues as impressions are delivered to users interacting with our website or mobile applications. Growth in display revenues depends on continuing growth in traffic to our website and mobile applications, migration of advertising spend online from traditional broadcast and print media and our development of new advertising products.

Costs and Expenses

Cost of Revenues. Our cost of revenues consists of expenses related to operating our website and mobile applications, including associated headcount expenses, such as salaries and benefits and share-based compensation and bonuses. Cost of revenues also includes credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships and facilities costs allocated on a headcount basis.

Sales and Marketing. Sales and marketing expenses consist of headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees. Sales and marketing expenses also include other sales expenses related to promotional and marketing activities and facilities costs allocated on a headcount basis.

Technology and Development. Technology and development expenses consist of headcount expenses, including salaries and benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our website. Technology and development expenses also include equipment and maintenance costs and facilities costs allocated on a headcount basis. Technology and development expenses also include amortization costs related to capitalized website and development activities and amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our website.

General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting and administrative support. General and administrative expenses also include legal, accounting and other third-party professional service fees, bad debt and facilities costs allocated on a headcount basis.

Other Income. Other income consists of interest income earned on our cash and cash equivalents and short-term investments.

Income Taxes

We are subject to U.S. federal income taxes. As of December 31, 2010 we did not have taxable income, and as of June 30, 2011, we did not have any projected taxable income and, therefore, no tax liability or expense has been recorded in the financial statements. We have provided a full valuation allowance against our net deferred tax assets as of December 31, 2010 and June 30, 2011, because there is significant uncertainty around our ability to realize the

 

18


Table of Contents

deferred tax assets in the future. We have accumulated tax losses of approximately $64.0 million as of December 31, 2010, which are available to reduce current future taxable income.

Results of Operations

The following tables present our results of operations for the periods indicated and as a percentage of total revenues.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011      2010     2011      2010  
     (in thousands, except per share data, unaudited)  

Statements of Operations Data:

          

Revenues

   $ 15,845       $ 7,334      $ 27,105       $ 12,665   

Costs and expenses:

          

Cost of revenues (exclusive of amortization) (1) (2)

     2,713         1,222        4,529         2,384   

Sales and marketing (1)

     5,630         3,748        11,115         6,865   

Technology and development (1)

     3,304         2,878        6,299         5,412   

General and administrative (1)

     2,627         1,483        4,455         2,824   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     14,274         9,331        26,398         17,485   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     1,571         (1,997     707         (4,820

Other income

     5         25        43         42   

Net income (loss)

   $ 1,576       $ (1,972   $ 750       $ (4,778
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to common shareholders

   $ —         $ (1,972   $ —         $ (4,778

Net income (loss) per share attributable to common shareholders — basic and diluted

   $ —         $ (0.16   $ —         $ (0.38

Weighted-average shares outstanding — basic

     13,940         12,660        13,645         12,650   

Weighted-average shares outstanding — diluted

     24,106         12,660        23,604         12,650   

Pro forma net income per share attributable to common shareholders — basic

   $ 0.07         $ 0.03      

Pro forma net income per share attributable to common shareholders — diluted

   $ 0.07         $ 0.03      

Pro forma weighted-average shares outstanding — basic

     23,216           22,921      

Pro forma weighted-average shares outstanding — diluted

     24,106           23,604      

Other Financial Data:

          

Adjusted EBITDA (3)

   $ 3,852       $ (202   $ 4,904       $ (1,397

 

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (in thousands, unaudited)  

(1) Includes share-based compensation as follows:

              

Cost of revenues

   $ 46       $ 53       $ 87       $ 107   

Sales and marketing

     67         111         174         215   

Technology and development

     90         106         176         201   

General and administrative

     210         159         366         318   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 413       $ 429       $ 803       $ 841   
     

 

 

    

 

 

    

 

 

    

 

 

 

(2) Amortization of website development costs and intangible assets included in technology and development is as follows:

   $ 1,234       $ 1,107       $ 2,457       $ 2,077   

 

(3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

 

19


Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (unaudited)  

Percentage of Revenues:

        

Revenues

     100     100     100     100

Costs and expenses:

        

Cost of revenues (exclusive of amortization)

     17        17        17        19   

Sales and marketing

     36        51        41        54   

Technology and development

     21        39        23        43   

General and administrative

     17        20        16        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     90        127        97        138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     10        (27     3        (38

Other income

     0        0        0        0   

Net income (loss)

     10     (27 %)      3     (38 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA within this Quarterly Report on Form 10-Q, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key metric used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and

 

   

Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods presented.

 

20


Table of Contents
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2011     2010     2011     2010  
     (in thousands, unaudited)  

Reconciliation of Adjusted EBITDA to Net Income (Loss):

        

Net income (loss)

   $ 1,576      $ (1,972   $ 750      $ (4,778

Income tax expense (benefit)

     —          —          —          —     

Other income

     (5     (25     (43     (42

Depreciation and amortization expense

     1,868        1,366        3,394        2,582   

Share-based compensation expense

     413        429        803        841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 3,852      $ (202   $ 4,904      $ (1,397
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2011 and 2010

Revenues

 

     Three Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Revenues:

        

Marketplace revenues

   $ 9,723       $ 2,632         269

Display revenues

     6,122         4,702         30
  

 

 

    

 

 

    

Total

   $ 15,845       $ 7,334         116
  

 

 

    

 

 

    

 

     Three Months Ended
June 30,
 
     2011     2010  

Percentage of Revenues:

    

Marketplace revenues

     61     36

Display revenues

     39     64
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

Overall revenues increased by $8.5 million, or 116%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Marketplace revenues increased by 269% and display revenues increased by 30%.

Marketplace revenues grew to $9.7 million for the three months ended June 30, 2011, from $2.6 million for the three months ended June 30, 2010, an increase of $7.1 million. Marketplace revenues represented 61% of total revenues for the three months ended June 30, 2011 compared to 36% of total revenues for the three months ended June 30, 2010. The increase in marketplace revenues was primarily attributable to growth in the number of subscribers in our Premier Agent program to 13,385 as of June 30, 2011 from 4,777 as of June 30, 2010, representing growth of 180%, and was also the result of existing Premier Agent subscribers purchasing additional inventory. In addition, revenues during the three months ended June 30, 2011 were positively impacted as a result of our strategic relationship with Yahoo! Real Estate, which launched in February 2011. This relationship has contributed to the increase in Premier Agent subscribers and has positively impacted our marketplace revenues for the period.

 

21


Table of Contents

Display revenues increased to $6.1 million for the three months ended June 30, 2011, from $4.7 million for the three months ended June 30, 2010, primarily as a result of an increase in our unique users, which grew to 20.8 million average monthly unique users for the three months ended June 30, 2011 from 10.8 million average monthly unique users for the three months ended June 30, 2010, representing year-over-year growth of 93%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory.

Cost of Revenues

 

     Three Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Cost of revenues

   $ 2,713       $ 1,222         122

Cost of revenues increased by $1.5 million, or 122%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. The increase in cost of revenues is primarily attributable to revenue sharing costs related to the strategic relationship with Yahoo! Real Estate, which launched in February 2011, as well as increases in credit card fees and other costs related to revenue growth.

We expect that our cost of revenues will increase in total in future years as we continue to incur more expenses associated with growth in revenues.

Sales and Marketing

 

     Three Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Sales and marketing

   $ 5,630       $ 3,748         50

Sales and marketing expenses increased by $1.9 million, or 50%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. The increase is primarily related to growth in headcount expenses of $1.2 million, primarily for our sales team to promote our Premier Agent program and increases in advertising and related travel expenses of $0.4 million. The remaining increase of $0.3 million is primarily the result of additional depreciation expense.

We expect our sales and marketing expenses will increase in future years as we continue to invest more resources in growing our sales team and invest in marketing and advertising to promote our brand. Although these expenses may increase as a percentage of revenues in the near term, we expect these expenses will decrease as a percentage of revenues in the long term.

Technology and Development

 

     Three Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Technology and development

   $ 3,304       $ 2,878         15

 

22


Table of Contents

Technology and development expenses, which include research and development costs, increased by $0.4 million, or 15%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Approximately $0.2 million of the increase is the result of growth in headcount expenses. Additionally, we recorded approximately $0.1 million of amortization expense during the three months ended June 30, 2011 related to intangible assets acquired in the March 2011 acquisition of the operating assets of a real estate agent and rental property manager marketing service company.

Amortization expense included in technology and development expenses for website development costs and intangible assets was $1.2 million and $1.1 million, respectively, for the three months ended June 30, 2011 and 2010.

While we expect our technology and development expenses to increase in the future as we invest in new website and mobile functionality, we expect these expenses will decrease as a percentage of revenue.

General and Administrative

 

     Three Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

General and administrative

   $ 2,627       $ 1,483         77

General and administrative expenses increased by $1.1 million, or 77%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. The fluctuation was driven by an increase of $0.5 million in headcount-related costs driven by growth in headcount, an increase of $0.3 million in professional services and consulting fees and an increase of $0.3 million in rent expense, primarily related to rent expense recorded for our new corporate headquarters in Seattle, Washington.

Our current headquarters in Seattle, Washington is under an operating lease expiring in February 2013, and we have entered into an operating lease for our new headquarters in Seattle, Washington, under which we will be obligated to make lease payments beginning in December 2012 through November 2022. We currently expect to vacate our current office space during the second half of 2011, and we are in the process of evaluating sublease opportunities. At the time we vacate our current office space, we may be required to record a liability for costs that will continue to be incurred under the contract for the remaining term, which we estimate could range from $1.4 million to $1.7 million.

We expect our general and administrative expenses to increase in the near term as we invest in headcount expenses and expenses associated with being a public company, but expect these costs to remain flat or decline as a percentage of revenues over the long term.

 

23


Table of Contents

Six Months Ended June 30, 2011 and 2010

Revenues

 

     Six Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Revenues:

        

Marketplace revenues

   $ 16,604       $ 4,486         270

Display revenues

     10,501         8,179         28
  

 

 

    

 

 

    

Total

   $ 27,105       $ 12,665         114
  

 

 

    

 

 

    

 

     Six Months Ended
June 30,
 
     2011     2010  

Percentage of Revenues:

    

Marketplace revenues

     61     35

Display revenues

     39     65
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

Overall revenues increased by $14.4 million, or 114%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Marketplace revenues increased by 270% and display revenues increased by 28%.

Marketplace revenues grew to $16.6 million for the six months ended June 30, 2011 from $4.5 million for the six months ended June 30, 2010. Marketplace revenues represented 61% of total revenues for the six months ended June 30, 2011 compared to 35% of total revenues for the six months ended June 30, 2010. The increase in marketplace revenues was primarily attributable to growth in the number of subscribers in our Premier Agent program to 13,385 as of June 30, 2011 from 4,777 as of June 30, 2010, representing growth of 180%, and was also the result of existing Premier Agent subscribers purchasing additional inventory. In addition, we began to recognize revenues during the six months ended June 30, 2011 related to our strategic relationship with Yahoo! Real Estate, which launched in February 2011, which contributed to the increase in Premier Agent subscribers and positively impacted our marketplace revenues for this period.

Display revenues increased to $10.5 million for the six months ended June 30, 2011, from $8.2 million for the six months ended June 30, 2010, primarily as a result of an increase in our unique users, which grew to 20.8 million average monthly unique users for the three months ended June 30, 2011 from 10.8 million average monthly unique users for the three months ended June 30, 2010, representing year-over-year growth of 93%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory.

 

24


Table of Contents

Cost of Revenues

 

     Six Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Cost of revenues

   $ 4,529       $ 2,384         90

Cost of revenues increased by $2.1 million, or 90%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increase in cost of revenues is primarily attributable to revenue sharing costs related to the strategic relationship with Yahoo! Real Estate, which launched in February 2011, as well as increases in credit card fees and other costs related to revenue growth.

Sales and Marketing

 

     Six Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Sales and marketing

   $ 11,115       $ 6,865         62

Sales and marketing expenses increased by $4.3 million, or 62%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increase is primarily related to growth in headcount-related costs of $3.0 million, primarily for our sales team to promote our Premier Agent program, and increases in advertising, tradeshows, conferences and related travel expenses of $0.8 million. The remaining increase of $0.5 million is primarily the result of additional depreciation expense recorded.

Technology and Development

 

     Six Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

Technology and development

   $ 6,299       $ 5,412         16

Technology and development expenses, which include research and development costs, increased by $0.9 million, or 16%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Approximately $0.4 million of the increase is the result of amortization of intangible assets, including website development costs, purchased content and intangible assets acquired in our March 2011 acquisition of a real estate agent and rental property manager marketing service company. The remaining increase is primarily the result of growth in headcount-related costs of $0.4 million and increases in various other miscellaneous expenses.

Amortization expense included in technology and development expenses for website development costs and intangible assets was $2.5 million and $2.1 million, respectively, for the six months ended June 30, 2011 and 2010.

 

25


Table of Contents

General and Administrative

 

     Six Months Ended
June 30,
     2010 to 2011
% Change
 
     2011      2010     
     (in thousands, unaudited)         

General and administrative

   $ 4,455       $ 2,824         58

General and administrative expenses increased by $1.6 million, or 58%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The fluctuation was driven by an increase of $0.9 million in professional services and consulting fees, an increase of $0.7 million in headcount-related costs driven by growth in headcount, an increase of $0.3 million in rent expense primarily related to rent expense recorded for our new corporate headquarters in Seattle, Washington, and a $0.4 million increase in various other miscellaneous expenses. The increases were partially offset by a $0.7 million decrease in local, business and occupational and gross receipts taxes, approximately $0.3 million of which was the result of a tax credit we received relating to a refund of certain state and local taxes from 2006 to 2009.

Liquidity and Capital Resources

Prior to our IPO, we funded our operations since inception primarily from the issuance of common and preferred stock, and for the six months ended June 30, 2011 from cash generated from operations. Through 2007, we raised approximately $81.0 million through various offerings of our convertible preferred stock and approximately $5.9 million from the sale of our common stock.

On July 25, 2011, we sold and issued 3,981,300 shares of our Class A common stock, including 519,300 shares of Class A common stock pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $20.00 per share, and we sold and issued 274,999 shares of our Class A common stock at a price of $20.00 per share in a private placement. As a result of the offerings, we received net proceeds of approximately $76.2 million, after deducting underwriting discounts and commissions of approximately $5.6 million and additional offering-related expenses estimated at $3.4 million, for total expenses estimated at $9.0 million. The net offering proceeds have been invested into short-term investment-grade securities and money market funds.

As of June 30, 2011 and December 31, 2010, we had cash and cash equivalents and short-term investments of $16.2 million and $13.8 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with our financial institutions and money market funds. Short-term investments as of December 31, 2010 consisted of U.S. Treasury securities. There were no short-term investments outstanding as of June 30, 2011. Amounts on deposit with third-party financial institutions exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. We believe that cash from operations, cash and cash equivalent balances and the net proceeds we received in connection with our initial public offering will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.

During March 2011, we entered into a loan and security agreement with a financial institution to establish a line of credit of $4.0 million, secured by substantially all our assets other than our intellectual property, to be used for general business purposes. The line of credit contains financial and non-financial covenants. As of June 30, 2011, we were in compliance with all covenants. The line of credit is available through March 2013. During March 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our new Seattle offices and reserved this amount against the line of credit, which reduces the available line to $2.5 million. As of June 30, 2011, there were no other amounts outstanding under the line of credit.

The following table presents selected cash flow data for the six months ended June 30, 2011 and 2010:

 

26


Table of Contents
     Six Months Ended
June 30,
 
     2011     2010  
     (in thousands, unaudited)  

Cash Flow Data:

    

Cash flows provided by (used in) operating activities

   $ 8,336      $ (1,059

Cash flows provided by (used in) investing activities

     (3,608     259   

Cash flows provided by (used in) financing activities

     (845     427   

Cash Flows Provided By (Used In) Operating Activities

For the six months ended June 30, 2011, net cash provided by operating activities was $8.3 million compared to net cash used in operating activities of $1.1 million for the six months ended June 30, 2010.

Cash flows provided by operating activities of $8.3 million for the six months ended June 30, 2011 was driven by net income of $0.8 million, adjusted by depreciation and amortization expense and share-based compensation expense of $3.4 million and $0.8 million, respectively. Changes in operating assets and liabilities increased cash provided by operating activities for the six months ended June 30, 2011 by $3.1 million.

Cash flows used in operating activities of $1.1 million for the six months ended June 30, 2010 was driven by net loss of $4.8 million, adjusted by depreciation and amortization expense and share-based compensation expense of $2.6 million and $0.8 million, respectively. Changes in operating assets and liabilities increased cash provided by operating activities for the six months ended June 30, 2010 by $0.2 million.

Cash Flows Provided By (Used In) Investing Activities

Our primary investing activities include the purchase and maturity of short-term investments and the purchase of property and equipment and intangible assets.

For the six months ended June 30, 2011, we used $3.6 million of net cash in investing activities. This was the result of $4.1 million of purchases for property and equipment and intangible assets and $1.0 million paid in connection with our March 2011 acquisition of the operating assets of a real estate agent and rental property manager marketing service company, partially offset by $1.5 million of net proceeds from maturities of short-term investments.

For the six months ended June 30, 2010, net cash provided by investing activities was approximately $0.3 million. This was the result of approximately $3.2 million of net proceeds from maturities of short-term investments, partially offset by approximately $2.9 million of purchases for property and equipment and intangible assets.

Cash Flows Provided By (Used In) Financing Activities

Our financing activities have primarily resulted from the exercise of employee non-qualified stock options and for the six months ended June 30, 2011, also consisted of payments for deferred offering costs.

For the six months ended June 30, 2011, net cash used in financing activities was approximately $0.8 million, which was primarily the result of approximately $1.9 million in payments for deferred offering costs, partially offset by proceeds from the issuance of Class A common stock from the exercise of stock options of $1.0 million.

For the six months ended June 30, 2010, net cash provided by financing activities was approximately $0.4 million, which was due to proceeds from the issuance of Class A common stock from the exercise of stock options.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2011 or December 31, 2010.

 

27


Table of Contents

Contractual Obligations

We have various operating leases for office space and equipment. Our current headquarters in Seattle, Washington is under an operating lease expiring in February 2013 and we have entered into an operating lease for our new headquarters in Seattle, Washington under which we will be obligated to make payments beginning in December 2012 through November 2022. We also have purchase obligations for content related to our website. We do not have any debt or capital lease obligations. The following table provides a summary of our operating lease obligations and purchase obligations as of June 30, 2011 (unaudited):

 

     Payment Due By Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands)  

Operating lease obligations

   $ 22,509       $ 1,601       $ 4,007       $ 3,597       $ 13,304   

Purchase obligations

     3,552         1,602         1,040         910         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,061       $ 3,203       $ 5,047       $ 4,507       $ 13,304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, the allowance for doubtful accounts, website and software development costs, recoverability of intangible assets with definite lives and other long-lived assets and share-based compensation have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Revenue Recognition

Our revenue is primarily derived from advertising services. In general, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation reflecting the terms and conditions under which products will be provided to be persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash.

Our marketplace revenues consist of subscriptions sold to real estate agents under our Premier Agent program, and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders. Subscription advertising revenues are recognized on a straight-line basis during the contractual period over which the advertising is delivered. Typical terms of our Premier Agent subscription contracts are six months. For Zillow Mortgage Marketplace, we recognize revenue when a user clicks on a mortgage advertisement or on a link to obtain additional information about a mortgage loan quote.

Display revenues primarily consist of graphical advertising sold on a CPM basis to advertisers. We recognize

 

28


Table of Contents

these revenues as impressions are delivered to users interacting with our website or mobile applications.

Allowance for Doubtful Accounts

We review accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole.

Website and Software Development Costs

The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized in property and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs (including those costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website (or software) that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives.

Capitalized development activities placed in service are amortized over the expected useful lives of those releases, currently estimated at one year. Estimated useful lives of website and software development activities are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality.

Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets

We evaluate intangible assets and other long-lived assets for impairment whenever events or circumstances indicate they may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. If this comparison indicates impairment, the amount of impairment to be recognized is calculated as the difference between the carrying value and the fair value of the asset group.

Share-Based Compensation

We measure compensation expense for all share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. We use the Black-Scholes-Merton option-pricing model to determine the fair-value for awards and recognize compensation expense on a straight-line basis over the awards’ vesting periods. Management has determined the Black-Scholes-Merton fair value of our stock option awards and related share-based compensation expense with the assistance of third-party valuations. Determining the fair value of share-based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated Class A common stock fair value as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. In valuing our options, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives, including estimated forfeiture rates, of the options.

Risk-free rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date.

Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date.

Volatility. Absent a historical public market for our shares, we have estimated volatility of our share price based on the published historical volatilities of industry peers in the online publishing market (primarily the financial and real estate services industries) representing the verticals in which we operate.

 

29


Table of Contents

Expected term. We estimate the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since, due to the limited period of time share-based awards have been exercisable, we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The term of the award is estimated using the simplified method as the awards granted are plain vanilla share options.

Forfeiture rate. Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least quarterly and any change in compensation expense is recognized in the period of the change. 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 in which the estimates are revised. We consider many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates.

 

30


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.

We do not have any long-term borrowings as of June 30, 2011 or December 31, 2010.

Under our current investment policy, we invest our excess cash in money market funds, FDIC-insured certificates of deposits and U.S. Treasury securities. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk.

Our cash and cash equivalents are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield or the fair value. As our cash and cash equivalent portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our results of operations or cash flows to be materially affected by a sudden change in market interest rates.

 

31


Table of Contents
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, 2011. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of June 30, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

32


Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

In March 2010, Smarter Agent, LLC, a provider of mobile real estate applications, filed a complaint against us and multiple other defendants for patent infringement in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that our mobile technology infringes three patents held by Smarter Agent purporting to cover: a “Global positioning-based real estate database access device and method,” a “Position-based information access device and method” and a “Position-based information access device and method of searching,” and seeks an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are invalid. In November 2010, the U.S. Patent and Trademark Office granted our petition for re-examination of the three patents-in-suit and its first office action found all claims invalid. In March 2011, the court stayed the litigation pending the completion of the re-examination proceedings.

In April 2010, First American CoreLogic, a provider of information and analytic services, filed a complaint against us and multiple other defendants for patent infringement in the U.S. District Court for the Eastern District of Texas. The complaint alleges, among other things, that our website technology infringes a patent purporting to cover a “Real estate appraisal using predictive modeling,” and seeks an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patent, and that the patent is unenforceable and invalid.

In September 2010, LendingTree, LLC, a provider of an online lending marketplace, filed a complaint against us, and other defendants, for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint alleges, among other things, that our website technology infringes two patents purporting to cover a “Method and computer network for coordinating a loan over the internet,” and seeks an injunctive order against the alleged infringing activities and an award for damages. We have denied the allegations and asserted counterclaims seeking declarations that we are not infringing the patents and that the patents are unenforceable and invalid.

Although the results of litigation cannot be predicted with certainty, we currently believe we have substantial and meritorious defenses to these claims and that the final outcome of these litigation matters will not have a material effect on our business, financial position, results of operations or cash flow.

From time to time, we are involved in litigation and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

33


Table of Contents
Item 1A. Risk Factors

Our business is subject to numerous risks. You should carefully consider the following risk factors and all other information contained in this Quarterly Report on Form 10-Q and in our registration statement filed with the SEC in connection with our IPO. Any of these risks could harm our business, results of operations, and financial condition and our prospects. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

Risks Related to Our Business

We have incurred significant operating losses in the past and we may not be able to generate sufficient revenue to be profitable over the long term.

Since our inception in December 2004, we have incurred significant net operating losses and, as of June 30, 2011, we had an accumulated deficit of $78.0 million. Although we have experienced significant revenue growth, we expect that our revenue growth rate will decline in the future as a result of a variety of factors, including the maturation of our business. At the same time, we also expect our costs to increase in future periods as we continue to expend substantial financial resources to develop and expand our business, including on:

 

   

product development;

 

   

sales and marketing;

 

   

our technology infrastructure;

 

   

strategic opportunities, including commercial relationships and acquisitions; and

 

   

general administration, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business and to manage our expenses, we may continue to incur significant losses in the future and not be able to achieve or maintain profitability.

If real estate and mortgage professionals or other advertisers reduce or end their advertising spending with us and we are unable to attract new advertisers, our business would be harmed.

Our current financial model depends on advertising revenues generated almost entirely through sales to real estate agents and brokerages, mortgage lenders and advertisers in categories relevant to real estate. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors, including:

 

   

increasing the number of consumers of our products and services;

 

   

competing effectively for advertising dollars with other online media companies;

 

   

continuing to develop our advertising products and services;

 

   

keeping pace with changes in technology and with our competitors; and

 

   

offering an attractive return on investment to our advertisers for their advertising spending with us.

 

34


Table of Contents

While real estate agents participating in our subscription-based Premier Agent program generally commit to contract terms of six months, we do not have long-term contracts with most of our other advertisers. Those advertisers could choose to modify or discontinue their relationships with us with little or no advance notice. In addition, as existing subscriptions for our Premier Agent program expire, we may not be successful in renewing these subscriptions, securing new subscriptions or increasing the amount of revenue we earn for a given subscription over time. We may not succeed in capturing a greater share of our advertisers’ spending if we are unable to convince advertisers of the effectiveness or superiority of our products as compared to alternatives, including traditional offline advertising media such as television and newspapers. If current advertisers reduce or end their advertising spending with us and we are unable to attract new advertisers, our advertising revenues and business, results of operations and financial condition would be harmed. In addition, if we do not realize the benefits we expect from our relationship with Yahoo! Real Estate and other strategic relationships we may enter into, including for example, the generation of additional advertising revenue opportunities, our business could be harmed.

If we do not innovate and provide products and services that are attractive to our users and to our advertisers, our business could be harmed.

Our success depends on our continued innovation to provide products and services that make our website and mobile applications useful for consumers and real estate and mortgage professionals and attractive to our advertisers. As a result, we must continually invest significant resources in research and development in order to improve the attractiveness and comprehensiveness of our products and services and effectively incorporate new Internet and mobile technologies into them. If we are unable to provide products and services that users, including real estate professionals, want to use, then users may become dissatisfied and use competitors’ websites and mobile applications. If we are unable to continue offering innovative products and services, we may be unable to attract additional users and advertisers or retain our current users and advertisers, which could harm our business, results of operations and financial condition.

We may be unable to increase awareness of the Zillow brand cost-effectively, which could harm our business.

We rely heavily on the Zillow brand, which we believe is a key asset of our company. Awareness and perceived quality and differentiation of the Zillow brand are important aspects of our efforts to attract and expand the number of consumers who use our website and mobile applications. Should the competition for awareness and brand preference increase among online real estate information providers, we may not be able to successfully maintain or enhance the strength of our brand. If in the future we choose to engage in a paid advertising campaign to further promote the Zillow brand, such efforts may not be successful. If we are unable to maintain or enhance user and advertiser awareness of our brand cost-effectively, our business, results of operations and financial condition could be harmed.

We are dependent on the real estate industry, and changes to that industry, or declines in the real estate market or increases in mortgage interest rates, could reduce the demand for our products and services.

Our financial prospects are significantly dependent on real estate shoppers using our services. Real estate shopping patterns depend on the overall health of the real estate market. Changes to the regulation of the real estate industry, including mortgage lending, may negatively impact the prevalence of home ownership. Changes to the real estate industry, declines in the real estate market or increases in mortgage interest rates could reduce demand for our services. Real estate markets also may be negatively impacted by a significant natural disaster, such as earthquake, fire, flood or other disruption.

We may be unable to maintain or establish relationships with real estate brokerages, real estate listing aggregators, multiple listing services, apartment management companies, home builders and other third-party listing providers, which could limit the information we are able to provide to our users.

Our ability to attract users to our website and mobile applications depends to some degree on providing a robust number of for sale and rental listings. To provide these listings, we maintain relationships with real estate brokerages, real estate listing aggregators, multiple listing services, apartment management companies, home builders, other third-party listing providers, and homeowners and their real estate agents to include listing data in our

 

35


Table of Contents

services. Many of our agreements with real estate listing providers are short-term agreements that may be terminated with limited notice. The loss of some of our existing relationships with listing providers, whether due to termination of agreements or otherwise, or an inability to continue to add new listing providers, may cause our listing data to omit information important to users of our products and services. This could reduce user confidence in the sale and rental data we provide and make us less popular with consumers, which could harm our business, results of operations and financial condition.

We may be unable to maintain or establish relationships with data providers, which could limit the information we are able to provide to our users and impair our ability to attract or retain users.

We obtain real estate data, such as sale transactions, property descriptions, tax-assessed value and property taxes paid, under licenses from third-party data providers. We use this data to enable the development, maintenance and improvement of our information services, including Zestimates and Rent Zestimates and our living database of homes. We have invested significant time and resources to develop proprietary algorithms, valuation models, software and practices to use and improve upon this specific data. We may be unable to renew our licenses with these data providers, or we may be able to do so only on terms that are less favorable to us, which could harm our ability to continue to develop, maintain and improve these information services and could harm our business, results of operations and financial condition.

We may in the future be subject to disputes regarding the accuracy of our Zestimates and Rent Zestimates.

We provide our users with Zestimate and Rent Zestimate home and rental valuations. A Zestimate is our estimated current market value of a home based on proprietary automated valuation models that apply advanced algorithms to analyze our data; it is not an appraisal. A Rent Zestimate is our estimated current monthly rental price of a home, using similar automated valuation models that we have designed to address the unique attributes of rental homes. Revisions to our automated valuation models, or the algorithms that underlie them, may cause certain Zestimates or Rent Zestimates to vary from our expectations for those Zestimates or Rent Zestimates. In addition, from time to time, users disagree with our Zestimates and Rent Zestimates. Any such variation in Zestimates or Rent Zestimates or disagreements could result in distraction from our business or potentially harm our reputation and could result in legal disputes.

We face competition to attract consumers to our website and mobile applications, which could impair our ability to continue to grow the number of users who use our website and mobile applications, which would harm our business, results of operations and financial condition.

Our success depends on our ability to continue to attract additional consumers to our website and mobile applications. Our existing and potential competitors include companies that operate, or could develop, national and local real estate and mortgage websites. These companies could devote greater technical and other resources than we have available, have a more accelerated time frame for deployment and leverage their existing user bases and proprietary technologies to provide products and services that consumers might view as superior to our offerings. Any of our future or existing competitors may introduce different solutions that attract consumers or provide solutions similar to our own but with better branding or marketing resources. If we are unable to continue to grow the number of consumers who use our website and mobile applications, our business, results of operations and financial condition would be harmed.

We may be unable to compete successfully against our existing or future competitors in attracting advertisers, which could harm our business, results of operations and financial condition.

We compete to attract advertisers with media sites, including websites dedicated to providing real estate and mortgage information and services to real estate professionals and consumers, and major Internet portals, general search engines and social media sites, as well as other online companies. We also compete for a share of advertisers’ overall marketing budgets with traditional media such as television, magazines, newspapers and home/apartment guide publications, particularly with respect to advertising dollars spent at the local level by real estate professionals to advertise their qualifications and listings. Large companies with significant brand recognition have large numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic, which may provide a competitive advantage. To compete successfully for advertisers against future and existing competitors, we must

 

36


Table of Contents

continue to invest resources in developing our advertising platform and proving the effectiveness and relevance of our advertising products and services. Pressure from competitors seeking to acquire a greater share of our advertisers’ overall marketing budget could adversely affect our pricing and margins, lower our revenue, and increase our research and development and marketing expenses. If we are unable to compete successfully against our existing or future competitors, our business, financial condition or results of operations would be harmed.

Our dedication to making decisions based primarily on the best interests of consumers may cause us to forgo short-term gains.

Our guiding principle is to build our business by making decisions based primarily upon the best interests of consumers, which we believe has been essential to our success in increasing our user growth rate and engagement and has served the long-term interests of our company and our shareholders. In the past, we have forgone, and we will in the future forgo, certain expansion or short-term revenue opportunities that we do not believe are in the best interests of consumers, even if such decisions negatively impact our results of operations in the short term. In addition, our philosophy of putting consumers first may negatively impact our relationships with our existing or prospective advertisers. This could result in a loss of advertisers which could harm our revenue and results of operations. For example, we believe that some real estate agents have chosen not to purchase our Premier Agent subscriptions because we display a Zestimate on their for sale listings. However, we believe it is valuable to consumers to have access to a valuation starting point on all homes and so we display a Zestimate on every home in our database for which we have sufficient data to produce the Zestimate. Similarly, we gather and make available to our consumers reviews on real estate and mortgage professionals, even if those reviews are unfavorable. Although real estate and mortgage professionals who receive unfavorable reviews may be less likely to purchase our advertising products and services, we continue to post favorable and unfavorable reviews because we believe the reviews are useful to consumers in finding the right professional. Our principle of making decisions based primarily upon the best interests of consumers may not result in the long-term benefits that we expect, in which case our user traffic and engagement, business and results of operations could be harmed.

If we fail to manage our growth effectively, our brand, results of operations and business could be harmed.

We have experienced rapid growth in our headcount and operations, which places substantial demand on management and our operational infrastructure. Most of our employees have been with us for fewer than two years. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the beneficial aspects of our company culture. In particular, we intend to pursue strategic opportunities and make substantial investments in our technology and development and sales and marketing organizations. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which could harm our brand, results of operations and overall business.

If use of the Internet and mobile technology, particularly with respect to online real estate products and services, does not continue to increase as rapidly as we anticipate, our business could be harmed.

Our future success is substantially dependent on the continued use of the Internet and mobile technology as effective media of business and communication by our consumers. Internet and mobile technology use may not continue to develop at historical rates, and consumers may not continue to use the Internet or mobile technology as media for information exchange. Further, these media may not be accepted as viable long-term outlets for information for a number of reasons, including actual or perceived lack of security of information and possible disruptions of service or connectivity. If consumers begin to access real estate information through other media and we fail to innovate, our business may be negatively impacted.

We rely on the performance of highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, our business could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of our management and our highly skilled team of employees, including our software engineers, statisticians, marketing professionals and advertising sales staff. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. The loss of any of our senior management or key employees could

 

37


Table of Contents

materially adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be harmed.

Any significant disruption in service on our website or in our network could damage our reputation and result in a loss of users of our products and services and of advertisers, which could harm our business, results of operations and financial condition.

Our brand, reputation and ability to attract users and advertisers depend on the reliable performance of our network infrastructure and content delivery processes. We have experienced minor interruptions in these systems in the past, including server failures that temporarily slowed the performance of our website and mobile applications, and we may experience interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our products and services on our website and mobile applications and prevent or inhibit the ability of users to access our services. Problems with the reliability or security of our systems could harm our reputation, result in a loss of users of our products and services and of advertisers and result in additional costs, any of which could harm our business, results of operations and financial condition.

Substantially all of the communications, network and computer hardware used to operate our website are located at facilities in the area. We do not own or control the operation of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur.

A failure of our systems at one site could result in reduced functionality for our users, and a total failure of our systems could cause our website or mobile applications to be inaccessible. Problems faced by our third-party web hosting providers with the telecommunications network providers with which they contract or with the systems by which they allocate capacity among their customers, including us, could adversely affect the experience of our users. Our third-party web hosting providers could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy reorganization, faced by our third-party web hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web hosting providers are unable to keep up with our growing needs for capacity, this could harm our business.

We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our service as a result of system failures. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and harm our business, results of operations and financial condition.

We may make acquisitions and investments, which could result in operating difficulties, dilution and other harmful consequences.

We expect to evaluate a wide array of potential strategic opportunities. For example, in March 2011, we acquired the operating assets of a real estate agent and rental property manager marketing service. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

   

diversion of management time and focus from operating our business to acquisition integration challenges;

 

   

implementation or remediation of controls, procedures and policies at the acquired company;

 

38


Table of Contents
   

coordination of product, engineering and sales and marketing functions;

 

   

retention of employees from the acquired company;

 

   

liability for activities of the acquired company before the acquisition;

 

   

litigation or other claims arising in connection with the acquired company; and

 

   

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.

We are subject to a variety of federal and state laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

We are subject to a variety of federal and state laws that are continuously evolving and developing, including laws regarding the real estate and mortgage industries, Internet-based businesses and businesses that rely on advertising. These laws can be costly to comply with, can require significant management time and effort, and can subject us to claims or other remedies. These laws may conflict with each other and if we comply with the laws of one jurisdiction, we may find that we are violating laws of another jurisdiction. Additionally, our ability to provide a specific target audience to advertisers is a significant competitive advantage. Any legislation reducing this ability would have a negative impact on our business and results of operations.

If we are unable to comply with these laws or regulations, if we become liable under these laws or regulations or if unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies are implemented, we could be directly harmed and forced to implement new measures to reduce our exposure to this liability and it could cause the development of product or service offerings in affected markets to become impractical. This may require us to expend substantial resources or to discontinue certain products or services, limit our ability to expand our product and services offerings or expand into new markets or otherwise harm our business, results of operations and financial condition. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and results of operations.

We assist with the processing of customer credit card transactions which results in us receiving personally identifiable information. This information is increasingly subject to legislation and regulation in the United States. This legislation and regulation is generally intended to protect the privacy and security of personal information, including credit card information, that is collected, processed and transmitted. We could be adversely affected if government regulations require us to significantly change our business practices with respect to this type of information.

We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks.

We have registered domain names for our website that we use in our business, such as Zillow.com. If we lose the ability to use a domain name, we may incur significant expenses to market our products and services under a new domain name, which could harm our business. In addition, our competitors could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the

 

39


Table of Contents

United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and diversion of management’s attention.

We may be unable to adequately protect our intellectual property, which could harm the value of our brand and our business.

We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and contracts to protect our proprietary rights. If we are not successful in protecting our intellectual property, the value of our brand and our business, results of operations and financial condition could be harmed.

While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that our operations do not, or will not, infringe valid, enforceable patents of third parties or that competitors will not devise new methods of competing with us that are not covered by our patents or patent applications. There also can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, that such patents will not be challenged by third parties or found to be invalid or unenforceable or that our patents will be effective in preventing third parties from utilizing a “copycat” business model to offer the same products or services. Moreover, we rely on intellectual property and technology developed or licensed by third parties, and we may not be able to obtain licenses and technologies from these third parties on reasonable terms or at all.

Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect intellectual property and our proprietary technology adequately against unauthorized third-party copying or use, which could harm our competitive position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation, even if we have agreements prohibiting such activity. To the extent third parties are obligated to indemnify us for breaches of our intellectual property rights, these third parties may be unable to meet these obligations. Any of these events could harm our business, results of operations or financial condition.

Intellectual property disputes are costly to defend and could harm our business, results of operations, financial condition and reputation.

From time to time, we face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties. We are currently subject to patent infringement claims. These claims allege, among other things, that aspects of our technology infringe upon the plaintiffs’ patents. If we are not successful in defending ourselves against these claims, we may be required to pay damages and may be subject to injunctions, each of which could harm our business, results of operations, financial condition and reputation. We may be subject to future claims or allegations relating to our intellectual property rights. As we grow our business and expand our operations we expect that we will continue to be subject to intellectual property claims and allegations. Patent and other intellectual property disputes or litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products, services or features, purchase licenses which may be expensive to procure or modify our products or services. In addition, patent or other intellectual property disputes or litigation may result in significant settlement costs. Any of these events could harm our business, results of operations, financial condition and reputation.

In addition, we use open source software in our services and will continue to use open source software in the future. From time to time, we may be subject to claims brought against companies that incorporate open source software into their products or services, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a

 

40


Table of Contents

costly license or require us to devote additional research and development resources to changing our products or services, any of which would have a negative effect on our business and results of operations.

Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, results of operations, financial condition and reputation.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our technologies and processes, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. To the extent that our employees, contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations, reputation and competitive position.

We may be unable to halt the operations of websites that aggregate or misappropriate our data.

From time to time, third parties have misappropriated our data through website scraping, robots or other means and aggregated this data on their websites with data from other companies. In addition, copycat websites have misappropriated data on our network and attempted to imitate our brand or the functionality of our website. When we have become aware of such websites, we have employed technological or legal measures in an attempt to halt their operations. However, we may be unable to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly in the case of websites operating outside of the United States, our available remedies may not be adequate to protect us against the impact of the operation of such websites. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations or financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business could be harmed.

If our security measures are compromised, consumers may curtail use of our products and services and advertisers may reduce their advertising on our website.

Our products and services involve the storage and transmission of users’ information, some of which may be private, and security breaches could expose us to a risk of loss or exposure of this information, which could result in potential liability and litigation. For example, a hacker could steal a user’s profile password and manipulate information about that user’s home or post to a forum while posing as that user. Like all websites, our website is vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personal or other confidential information. If we experience compromises to our security that result in website performance or availability problems, the complete shutdown of our website, or mobile applications, or the loss or unauthorized disclosure of confidential information, our users and advertisers may lose trust and confidence in us, and users may decrease the use of our website or stop using our website in its entirety, and advertisers may decrease or stop advertising on our website. Further, outside parties may attempt to fraudulently induce employees, users or advertisers to disclose sensitive information in order to gain access to our information or our users’ or advertisers’ information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage

 

41


Table of Contents

systems change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new users and increase engagement by existing users, cause existing users to curtail or stop use of our products or services or close their accounts, cause existing advertisers to cancel their contracts, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our business, results of operations and financial condition.

We are subject to a number of risks related to credit card and debit card payments we accept.

We accept payments through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge or suffer an increase in our operating expenses, either of which could harm our business, financial condition and results of operations.

We depend on processing vendors to complete credit and debit card transactions. If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.

We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors. Any failure to comply fully also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, card holders and transactions.

If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.

If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.

We have pledged substantially all of our assets to secure indebtedness.

In March 2011, we entered into an agreement with a financial institution to establish a $4.0 million line of credit to be used for general business purposes. Indebtedness we incur under this agreement is secured by substantially all our assets other than our intellectual property. If we default on our obligations under this agreement, the financial institution may foreclose on our assets, which would materially and adversely impact our business. On March 22, 2011, we executed a standby letter of credit of $1.5 million in connection with the lease of our new Seattle offices and reserved this amount against the line of credit, which subsequently reduced the available line to $2.5 million. As of June 30, 2011, there were no other amounts outstanding under the line of credit.

We expect our results of operations to fluctuate on a quarterly and annual basis.

Our revenue and results of operations could vary significantly from period to period and may fail to match expectations as a result of a variety of factors, some of which are outside our control. The other risk factors discussed in this “Risk Factors” section may contribute to the variability of our quarterly and annual results. In addition, our results may fluctuate as a result of fluctuations in the quantity of, and the price at which we are able to

 

42


Table of Contents

sell, our remnant advertising and the size and seasonal variability of our advertisers’ marketing budgets. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not be meaningful and the results of any one period should not be relied upon as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price.

Risks Related to Ownership of Our Class A Common Stock

Our stock price may be volatile, and the value of an investment in our common stock may decline.

Shares of our Class A common stock were sold in our initial public offering on July 20, 2011 at a price of $20.00 per share. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market, or how liquid that market might become. An active public market for our Class A common stock may not develop or be sustained. If an active public market does not develop or is not sustained, it could depress the trading price of our Class A common stock and it may be difficult for you to sell your shares of Class A common stock at a price that is attractive to you.

The market price of our Class A common stock could be subject to wide fluctuations in response to many of the risk factors discussed in this Quarterly Report on Form 10-Q and others beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition and results of operations;

 

   

changes in projected operational and financial results;

 

   

addition or loss of significant customers;

 

   

actual or anticipated changes in our growth rate relative to that of our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

   

announcements of technological innovations or new offerings by us or our competitors;

 

   

additions or departures of key personnel;

 

   

changes in laws or regulations applicable to our services;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

issuance of new or updated research or reports by securities analysts;

 

43


Table of Contents
   

sales of our Class A common stock by us or our shareholders;

 

   

stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

the expiration or waiver of contractual lock-up provisions; and

 

   

general economic and market conditions.

Furthermore, the stock markets in recent years have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of the equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. If the market price of our Class A common stock declines, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert management’s attention from other business concerns, which could harm our business, results of operations or financial condition.

The dual class structure of our common stock as contained in our charter documents has the effect of concentrating voting control with our founders, and limits your ability to influence corporate matters.

Since Zillow’s inception, our capital structure has had authorized Class B common stock and authorized Class A common stock. Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. All shares of Class B common stock have been and are held by our founders, Richard Barton and Lloyd Frink. As of immediately after the closing of our initial public offering on July 25, 2011, Mr. Barton’s holdings and Mr. Frink’s holdings represented approximately 46.8% and 37.8%, respectively, of the voting power of our outstanding capital stock.

Therefore, for the foreseeable future, Mr. Barton and Mr. Frink will have significant control over our management and affairs and will be able to control all matters requiring shareholder approval, including the election or removal (with or without cause) of directors and approval of any significant corporate transaction, such as a merger or other sale of us or our assets. This concentrated control could delay, defer or prevent a change of control, merger, consolidation, takeover or other business combination involving us that you, as a shareholder, may otherwise support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the market price of our Class A common stock.

Future sales of our Class A common stock in the public market could cause our stock price to decline.

Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. Of our 18,029,431 shares of Class A common stock outstanding and 9,528,313 shares of Class B common stock outstanding as of July 31, 2011, all of the shares of Class A common stock sold in our initial public offering are freely tradeable, except that (1) any shares held or acquired by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, are subject to the volume limitations and certain other restrictions of Rule 144 and (2) any shares purchased through the directed share program are subject to a 180-day lock-up. The shares of our Class A common

 

44


Table of Contents

stock sold in the concurrent private placement are subject to the holding period requirements of Rule 144 and are, therefore, subject to a minimum six-month holding requirement before such shares can be sold in a non-registered transaction. Of our shares of Class A common stock outstanding as of July 31, 2011, 14,188,381 shares are restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers until January 15, 2012, subject to certain extensions and subject to certain earlier releases if certain conditions are met. In addition, the lead underwriter of our initial public offering may, in its sole discretion, release all or some portion of the shares subject to lock-up agreements prior to expiration of the lock-up period. As of July 31, 2011, the holders of 10,885,085 shares of Class A common stock and 9,528,313 shares of Class B common stock, or 74.1% of our total outstanding Class A common stock (calculated on an as-if-converted basis), will be entitled to rights with respect to registration of these shares under the Securities Act pursuant to an investors’ rights agreement. If the holders of our Class A common stock and Class B common stock entitled to registration rights elect to exercise such rights and sell a large number of shares, they could adversely affect the market price of our Class A common stock. If we file a registration statement for the purposes of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. On August 5, 2011, we filed a registration statement on Form S-8 under the Securities Act to register 6,816,135 shares of our Class A common stock for issuance under our 2005 Plan and 2011 Plan. Shares of our Class A common stock issued under the S-8 can be freely sold in the public market when the options underlying the shares are exercised, subject to the lock-up period and other restrictions provided under the terms of the applicable plan, option agreements or lock-up agreements entered into with the option holders.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about our company. If few or no securities or industry analysts cover our company, the market price of our Class A common stock could be negatively impacted. If securities or industry analysts cover us and if one or more of such analysts downgrades our Class A common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts covering us fail to publish reports on us regularly, demand for our Class A common stock could decline, which could cause our stock price and trading volume to decline.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business.

We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements can be time-consuming and results in increased costs to us and could harm our business, results of operations and financial condition.

As a public company, we are subject to the reporting requirements of the Exchange Act. These requirements could strain our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Exchange Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have committed significant resources, hire additional staff and provide additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join us and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns and could make it difficult to manage our business, which could harm our business, results of operations, financial condition and cash flows. In addition, if we find any material weakness in our internal control, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the market price of our Class A common stock to decline.

 

45


Table of Contents

Anti-takeover provisions in our charter documents and under Washington law could make an acquisition of us more difficult, limit attempts by shareholders to replace or remove our management and affect the market price of our Class A common stock.

Provisions in our articles of incorporation and bylaws, as amended and restated, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated articles of incorporation or amended and restated bylaws include provisions, some of which will become effective only after the date, which we refer to as the threshold date, on which the Class B common stock controlled by our founders represents less than 7% of the aggregate number of shares of the outstanding Class A common stock and Class B common stock, that:

 

   

set forth the dual class structure of our common stock, which concentrates voting control of matters submitted to a vote of our shareholders with the holders of our Class B common stock, which is held by our founders;

 

   

authorize our board of directors to issue, without further action by our shareholders, up to 30,000,000 shares of undesignated preferred stock, subject, prior to the threshold date, to the approval rights of our holders of Class B common stock;

 

   

establish that our board of directors will be divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;

 

   

prohibit cumulative voting in the election of directors;

 

   

provide that, after the threshold date, our directors may be removed only for cause;

 

   

provide that, after the threshold date, vacancies on our board of directors may be filled only by the affirmative vote of a majority of directors then in office or by the sole remaining director;

 

   

provide that only our board of directors may change the size of our board of directors;

 

   

specify that special meetings of our shareholders can be called only by the chair of our board of directors, our board of directors, our chief executive officer, our president or, prior to the threshold date, holders of at least 25% of the combined voting power of our outstanding Class A common stock and Class B common stock;

 

   

establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders, including proposed nominations of persons for election to our board of directors;

 

   

require the approval of our board of directors or the holders of two-thirds of the voting power of our outstanding Class A common stock and Class B common stock, voting together as a single group, to amend or repeal our bylaws; and

 

   

require the approval of two-thirds of the outstanding voting power of our Class A common stock and Class B common stock, voting together as a single group, to amend certain provisions of our articles of incorporation.

Prior to the threshold date, our directors can be removed with or without cause by holders of our Class A common stock and Class B common stock, voting together as a single group, and vacancies on the board of directors may be filled by such shareholders, voting together as a single group. Given the dual class structure of our common stock, our founders, Richard Barton and Lloyd Frink, who hold our Class B common stock, will have the ability for the foreseeable future to control these shareholder actions. See the risk factor above titled “The dual class structure

 

46


Table of Contents

of our common stock as contained in our charter documents has the effect of concentrating voting control with our founders and limits your ability to influence corporate matters.”

The provisions described above, after the threshold date, may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing our management. In addition, because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change of control of our company, even if this change of control would benefit our shareholders.

 

47


Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the quarterly period ending June 30, 2011, we granted stock options to purchase an aggregate of 186,631 shares of our Class A common stock at exercise prices of $6.33 per share to employees and consultants under our Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”). During the quarterly period ending June 30, 2011, we issued to our employees and consultants an aggregate of 80,689 shares of our Class A common stock at exercise prices ranging from $2.01 to $8.96 pursuant to exercises of options granted under our 2005 Plan, as amended.

These transactions were exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and

 

48


Table of Contents

appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about Zillow.

Use of Proceeds

On July 25, 2011, we sold and issued 3,981,300 shares of our Class A common stock, including 519,300 shares of Class A common stock pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $20.00 per share. The aggregate gross proceeds for all shares sold by us in the IPO were $79,626,000. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-173570), which was declared effective by the SEC on July 19, 2011, and a prospectus filed pursuant to Rule 424(b) of the Securities Act. Citigroup Global Markets Inc. acted as sole book-running manager. Allen & Company LLC acted as the senior co-manager, and Pacific Crest Securities LLC, ThinkEquity LLC and First Washington Corporation acted as co-managers.

Concurrent with the closing of the IPO, on July 25, 2011, we completed a private placement offering to funds affiliated with Technology Crossover Ventures and PAR Investment Partners, L.P., for 274,999 shares of our Class A common stock at a price of $20.00 per share.

As a result of the offering and the concurrent private placement, we raised a total of $85,125,980 in gross proceeds, and we received aggregate net proceeds of approximately $76.2 million, after deducting underwriting discounts and commissions of approximately $5.6 million and additional offering-related expenses estimated at $3.4 million, for total expenses estimated at $9.0 million. The net offering proceeds have been invested into short-term investment-grade securities and money market funds. None of these payments were direct or indirect payments to any of our directors or officers or their associates or to persons owning 10 percent or more of our capital stock or to any of our affiliates, and none of such payments were direct or indirect payments to others.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

Pursuant to the current terms of our loan and security agreement with a financial institution, we cannot pay dividends unless specified financial covenants are satisfied.

 

49


Table of Contents
Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

  

Description

  3.1    Amended and Restated Articles of Incorporation, dated July 20, 2011. (1)
  3.2    Amended and Restated Bylaws, dated July 25, 2011. (2)
  4.3    Common Stock Purchase Agreement among the Registrant and certain of its security holders. (3)
10.1    Form of Indemnification Agreement between Zillow, Inc. and each of its directors and executive officers. (4)
10.2    Office Lease between The Northwestern Mutual Life Insurance Company and Zillow, Inc. dated March 22, 2011. (5)
10.3    Executive Employment Agreement by and between Spencer M. Rascoff and Zillow, Inc. (6)
10.4    Executive Employment Agreement by and between Chad M. Cohen and Zillow, Inc. (7)
10.5    Executive Employment Agreement by and between Kathleen Philips and Zillow, Inc. (8)
31.1    Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act

 

50


Table of Contents
   of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1) As filed version of Form of Amended and Restated Articles of Incorporation originally filed as Exhibit 3.2 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 20, 2011.
(2) Final effective version of Amended and Restated Bylaws originally filed as Exhibit 3.4 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 20, 2011.
(3) Filed as Exhibit 4.3 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2011, and incorporated herein by reference.
(4) Filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on April 18, 2011, and incorporated herein by reference.
(5) Filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on April 18, 2011, and incorporated herein by reference.
(6) Filed as Exhibit 10.1 to Amendment No. 1 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 23, 2011, and incorporated herein by reference.
(7) Filed as Exhibit 10.1 to Amendment No. 1 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 23, 2011, and incorporated herein by reference.
(8) Filed as Exhibit 10.1 to Amendment No. 1 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 23, 2011, and incorporated herein by reference.
* Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Exchange Act of 1934 and otherwise are not subject to liability.

 

51


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 25, 2011     ZILLOW, INC.
      By:   /s/    C HAD M. C OHEN        
      Name:   Chad M. Cohen
      Title:  

Chief Financial Officer and Treasurer (Principal

Financial and Accounting Officer) and Duly

Authorized Signatory

 

52

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

of

ZILLOW, INC.

ARTICLE 1. NAME

The name of this corporation is Zillow, Inc.

ARTICLE 2. SHARES

 

2.1 Authorized Capital

The total number of shares which this corporation is authorized to issue is 645,000,000, consisting of three classes of shares to be designated, respectively, “ Class A Common Stock ,” “ Class B Common Stock ” (collectively the Class A Common Stock and the Class B Common Stock are referred to herein as the “ Common Stock ”) and “ Preferred Stock .” The total number of shares of Class A Common Stock that this corporation shall have authority to issue is 600,000,000 shares, each with a par value of $0.0001. The total number of shares of Class B Common Stock that this corporation shall have authority to issue is 15,000,000 shares, each with a par value of $0.0001. The total number of shares of Preferred Stock that this corporation shall have authority to issue is 30,000,000 shares, each with a par value of $0.0001.

 

2.2 Preferred Stock

This corporation’s board of directors (the “ Board of Directors ”) shall have the full authority permitted by law to divide the authorized and unissued shares of Preferred Stock into series, and to provide for the issuance of such shares (in an aggregate amount not exceeding the aggregate number of shares of Preferred Stock authorized by this corporation’s articles of incorporation (as amended or restated from time to time) (the or these “ Articles ”)), as determined from time to time by the Board of Directors and stated, before the issuance of any shares thereof, in the resolution or resolutions providing for the issuance thereof. The Board of Directors shall have the authority to fix and determine and to amend the number of shares of any series of Preferred Stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of Preferred Stock that is wholly unissued or to be established, including, without limiting the generality of the foregoing, the voting rights relating to shares of such series of Preferred Stock, the rate of dividend to which holders of shares of such series of Preferred Stock may be entitled, the rights of holders of shares of such series of Preferred Stock in the event of liquidation, dissolution or winding up of the affairs of this corporation, the rights of holders of shares of


such series of Preferred Stock to convert or exchange shares of such series of Preferred Stock for shares of any other capital stock or for any other securities, property or assets of this corporation, and whether or not the shares of such series of Preferred Stock shall be redeemable and, if so, the term and conditions of such redemption.

Before this corporation shall initially issue shares of a series of Preferred Stock created under RCW 23B.06.020 (or any successor provision thereto) of the Washington Business Corporation Act, articles of amendment setting forth the terms of such series in a form meeting the requirements of RCW 23B.06.020 shall be filed with the Secretary of State of the State of Washington in the manner prescribed by the Washington Business Corporation Act, and shall be effective without shareholder approval. Unless otherwise specifically provided in the resolution establishing any series of Preferred Stock, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding.

Notwithstanding the foregoing provisions of this Section 2.2, prior to the Threshold Date, this corporation shall not, without the approval of the holders of at least a majority of the outstanding shares of Class B Common Stock, considered as a separate voting group, or the written agreement of the holders of at least a majority of the outstanding shares of Class B Common Stock: (i) initially issue any series of Preferred Stock, or any other security convertible into or exercisable for any such series of Preferred Stock, including by merger or otherwise, or (ii) amend the designation, preferences, voting powers and limitations, or rights, of any series of Preferred Stock, or any other security convertible into or exercisable for any such series of Preferred Stock, unless, in the case of either clause (i) or (ii) above, such action is approved by the Board of Directors including at least one of the Founders (as defined in Section 2.3(g) of these Articles) acting in his capacity as a director of this corporation.

 

2.3 Common Stock

The preferences, limitations, voting powers and relative rights of the Class A Common Stock and the Class B Common Stock (subject to the preferences and rights of the Preferred Stock as determined by the Board of Directors pursuant to Section 2.2 of these Articles) are as follows:

(a) Voting Rights .

(i) Except as otherwise provided in these Articles, or except as required by applicable law (subject to Article 11 of these Articles), the holders of Class A Common Stock and the holders of Class B Common Stock shall vote together as a single voting group on all matters submitted to a vote of this corporation’s shareholders.

(ii) Except as otherwise expressly provided in these Articles or required pursuant to RCW 23B.07.210(2), each holder of Class A Common Stock shall be entitled to

 

-2-


one (1) vote for each share of Class A Common Stock held as of the applicable record date on any matter that is submitted to a vote of the shareholders of this corporation (including, without limitation, any matter voted on at a shareholders’ meeting), and

(iii) Except as otherwise expressly provided in these Articles or required pursuant to RCW 23B.07.210(2), each holder of Class B Common Stock shall be entitled to ten (10) votes for each share of Class B Common Stock held as of the applicable record date on any matter that is submitted to a vote of the shareholders of the corporation (including, without limitation, any matter voted on at a shareholders’ meeting).

(b) Dividends and Distributions . Subject to the preferences applicable to any series of Preferred Stock, if any, outstanding at any time, shares of Class A Common Stock and Class B Common Stock shall be treated equally, identically and ratably, on a per share basis, with respect to any Distribution as may be declared by the Board of Directors from time to time with respect to the Common Stock, unless different treatment of the shares of each such class is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and the holders of a majority of the outstanding shares of Class B Common Stock, each voting separately as a separate voting group; provided , however , that in the event any such Distribution declared by the Board of Directors with respect to the Common Stock is paid in the form of Class A Common Stock or Class B Common Stock (or Rights to acquire such class of stock), then holders of Class A Common Stock shall receive Class A Common Stock (or Rights to acquire such stock, as the case may be) and holders of Class B Common Stock shall receive Class B Common Stock (or Rights to acquire such stock, as the case may be). Subject to the preferences applicable to any series of Preferred Stock, the shares of Class A Common Stock and the shares of Class B Common Stock are entitled to the net assets of this corporation upon dissolution in accordance with Chapter 23B.14 of the RCW.

(c) Subdivision or Combination . If this corporation in any manner subdivides or combines the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class will be subdivided or combined in the same proportion and manner, unless different treatment of the shares of each such class is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and the holders of a majority of the outstanding shares of Class B Common Stock, each voting separately as a separate voting group.

(d) Equal Status . Except as otherwise expressly provided in these Articles or required by applicable law, shares of Class A Common Stock and shares of Class B Common Stock shall have the same rights and privileges and rank equally, share ratably and be identical in all respects as to all matters. Without limiting the generality of the foregoing sentence, in connection with a Change of Control Transaction, shares of Class A Common Stock and Class B Common Stock shall be treated equally, identically and ratably, on a per share basis, with respect to any consideration into which such shares are converted or any consideration paid or otherwise distributed in respect of such shares to shareholders of this corporation, unless different treatment of the shares of each such class is approved by the

 

-3-


affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and the holders of a majority of the outstanding shares of Class B Common Stock, each voting separately as a separate voting group.

(e) Conversion of Class B Common Stock .

(i) Voluntary Conversion . Each share of the Class B Common Stock shall be convertible into one fully paid and nonassessable share of Class A Common Stock at the option of the holder thereof at any time upon either (A) written notice to the Secretary and compliance with the procedures for voluntary conversion as set forth in Section 2.3(e)(v) of Article 2, or (B) if the holders of a majority of the outstanding shares of Class B Common Stock and the corporation have entered into a written agreement to amend the procedures, or adopt other procedures, governing the voluntary conversion of the Class B Common Stock, upon compliance with such procedures as amended or adopted in such written agreement.

(ii) Automatic Conversion . Each share of Class B Common Stock shall automatically, without any further action, convert into one fully paid and nonassessable share of Class A Common Stock upon a Transfer of such share, other than a Transfer:

(A) from a Founder, or any Permitted Entity of such Founder, to the other Founder, or any Permitted Entity of such other Founder.

(B) by a Founder to any of the entities, accounts, plans or trusts listed in clauses (1) through (6) below (each, a “ Permitted Entity ” and, collectively, “ Permitted Entities ”), and from any such Permitted Entity back to such Founder and/or any other Permitted Entity established by or for such Founder:

(1) a trust for the benefit of such Founder or persons other than such Founder so long as such Founder has sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such trust; provided such Transfer does not involve any payment of cash, securities, property or other consideration (other than an interest in such trust) to such Founder, and provided , further , that in the event such Founder no longer has sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such trust, each share of Class B Common Stock then held by such trust shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock;

(2) a trust under the terms of which such Founder has retained a “qualified interest” within the meaning of Section 2702(b)(1) of the Internal Revenue Code and/or a reversionary interest so long as such Founder has sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such trust; provided , however , that in the event such Founder no longer has sole dispositive power and exclusive Voting Control with

 

-4-


respect to the shares of Class B Common Stock held by such trust, each share of Class B Common Stock then held by such trust shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock;

(3) an Individual Retirement Account, as defined in Section 408(a) of the Internal Revenue Code, or a pension, profit sharing, stock bonus or other type of plan or trust of which such Founder is a participant or beneficiary and which satisfies the requirements for qualification under Section 401 of the Internal Revenue Code; provided that in each case such Founder has sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held in such account, plan or trust, and provided , further , that in the event such Founder no longer has sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such account, plan or trust, each of such Founder’s shares of Class B Common Stock then held by such account, plan or trust shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock;

(4) a corporation in which such Founder directly, or indirectly through one or more Permitted Entities, owns shares with sufficient Voting Control in the corporation, or otherwise has legally enforceable rights, such that such Founder retains sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such corporation; provided that in the event such Founder no longer owns sufficient shares or no longer has sufficient legally enforceable rights to enable such Founder to retain sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such corporation, each share of Class B Common Stock then held by such corporation shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock;

(5) a partnership in which such Founder directly, or indirectly through one or more Permitted Entities, owns partnership interests with sufficient Voting Control in the partnership, or otherwise has legally enforceable rights, such that such Founder retains sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such partnership; provided that in the event such Founder no longer owns sufficient partnership interests or no longer has sufficient legally enforceable rights to enable such Founder to retain sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such partnership, each share of Class B Common Stock then held by such partnership shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock; or

(6) a limited liability company in which such Founder directly, or indirectly through one or more Permitted Entities, owns membership interests with sufficient Voting Control in the limited liability company, or otherwise has legally enforceable rights, such that such Founder retains sole dispositive power

 

-5-


and exclusive Voting Control with respect to the shares of Class B Common Stock held by such limited liability company; provided that in the event such Founder no longer owns sufficient membership interests or no longer has sufficient legally enforceable rights to enable such Founder to retain sole dispositive power and exclusive Voting Control with respect to the shares of Class B Common Stock held by such limited liability company, each share of Class B Common Stock then held by such limited liability company shall automatically convert into one (1) fully paid and nonassessable share of Class A Common Stock.

(iii) Conversion Upon Death or Mental Disability . Each share of Class B Common Stock held of record by a Founder, or by any of such Founder’s Permitted Entities, shall automatically, without any further action, convert into one fully paid and nonassessable share of Class A Common Stock upon the death or Mental Disability of such Founder; provided, however, that:

(A) If a Founder or such Founder’s Permitted Entity (in either case, the “ Transferring Founder ”) transfers exclusive Voting Control (but not ownership) of shares of Class B Common Stock to the other Founder (the “ Transferee Founder ”) which transfer of Voting Control is contingent or effective upon the death or Mental Disability of the Transferring Founder, then each share of Class B Common Stock that is the subject of such transfer shall automatically convert into one fully paid and nonassessable share of Class A Common Stock upon that date which is the earlier of: (a) nine months after the earlier of the date upon which the Transferring Founder died or the date upon which Mental Disability in respect of such Transferring Founder occurred, as the case be, or (b) the date upon which the Transferee Founder ceases to hold exclusive Voting Control over such shares of Class B Common Stock; provided , further , that if the Transferee Founder shall die or suffer Mental Disability within nine months following the death or Mental Disability, as the case may be, of the Transferring Founder, then a trustee designated by the Transferee Founder and approved by the Board of Directors may exercise Voting Control over: (x) such shares of Class B Common Stock of the Transferring Founder or the Transferring Founder’s Permitted Entity and, in such instance, each such share of Class B Common Stock shall automatically convert into one fully paid and nonassessable share of Class A Common Stock upon that date which is the earlier of (1) nine months after the earlier of the date upon which the Transferring Founder died or the date upon which Mental Disability in respect of such Transferring Founder occurred, as the case be, or (2) the date upon which such trustee ceases to hold exclusive Voting Control over such shares of Class B Common Stock; and (y) the Transferee Founder’s shares of Class B Common Stock (or shares of Class B Common Stock held of record by any Permitted Entity of the Transferee Founder) and, in such instance, each such share of Class B Common Stock shall automatically convert into one fully paid and nonassessable share of Class A Common Stock upon that date which is the earlier of: (1) nine

 

-6-


months after the earlier of the date upon which the Transferee Founder died or the date upon which Mental Disability in respect of such Transferee Founder occurred, as the case be, or (2) the date upon which such trustee ceases to hold exclusive Voting Control over such shares of Class B Common Stock; and

(B) If one Founder dies or Mental Disability in respect of such Founder occurs simultaneously with when the other Founder dies or Mental Disability in respect of such other Founder occurs (such simultaneous occurrence, a “ Simultaneous Event ”), a trustee designated by the Founders and approved by the Board of Directors may exercise Voting Control over the Founders’ shares of Class B Common Stock (or shares of Class B Common Stock held of record by any of the Permitted Entities of either of the Founders) and, in such instance, each such share of Class B Common Stock shall automatically convert into one fully paid and nonassessable share of Class A Common Stock upon that date which is the earlier of (a) nine months after the date of the Simultaneous Event or (b) the date upon which such trustee ceases to hold exclusive Voting Control over such shares of Class B Common Stock.

(iv) Procedures . This corporation may, from time to time, establish such policies and procedures relating to the administration of the dual class structure, including, without limitation, the issuance of stock certificates or procedures with respect to book entry systems, as it deems necessary or advisable. This corporation may request that holders of shares of Class B Common Stock furnish affidavits, certificates or other proof to this corporation as it deems necessary to verify the ownership of Class B Common Stock and to confirm that a conversion to Class A Common Stock has not occurred. A determination by the Secretary of this corporation (the “ Secretary ) with respect to whether a Transfer results in a conversion to Class A Common Stock shall be conclusive and binding.

(v) Mechanics of Conversion . Before any holder of Class B Common Stock shall be entitled to convert voluntarily some or all shares of such holder’s Class B Common Stock into shares of Class A Common Stock pursuant to Section 2.3(e)(i) of this Article 2, such holder shall give signed written notice (the “ Conversion Notice ”) to the Secretary at the office of this corporation that such holder elects to convert the same, shall state therein the number of shares to be converted into shares of Class A Common Stock, and shall surrender the certificate or certificates evidencing the shares of Class B Common Stock of which all or a portion are to be converted, at the office of this corporation (and accompanied by all transfer taxes (or proof of payment thereof), if any); provided , however , that if the certificate or certificates evidencing the shares to be converted have been lost, stolen, or destroyed, the holder may, in lieu of delivering such certificate or certificates, notify the Secretary that such certificate or certificates have been lost, stolen, or destroyed and execute and deliver an agreement satisfactory to this corporation (the “ lost certificate agreement ”) to indemnify this corporation from any loss incurred by it in connection with such certificate or certificates. If requested by such holder, this corporation shall, as soon as practicable thereafter, provide for the issuance and delivery to such holder, at the address for delivery indicated in the

 

-7-


Conversion Notice, of a certificate or certificates for the number of shares of Class A Common Stock into which such holder has elected to convert the applicable shares of Class B Common Stock and to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately before the close of business on the later of (A) the date of receipt by the Secretary of the Conversion Notice and (B) the date of either (i) the surrender to the Secretary of the certificate or certificates evidencing the shares of Class B Common Stock to be converted or (ii) the delivery of the lost certificate agreement, as the case may be (the later of the dates under clause (A) or clause (B), the “ Voluntary Conversion Date ”), and the holder entitled to receive the shares of Class A Common Stock upon such conversion shall be treated for all purposes as the record holder of such shares of Class A Common Stock on such Voluntary Conversion Date. Notwithstanding anything to the contrary in this Section 2.3, upon the written agreement of the holders of a majority of the outstanding shares of Class B Common Stock and the corporation, this corporation may amend the procedures, or adopt other procedures, governing the voluntary conversion of the Class B Common Stock. Notwithstanding anything to the contrary in this Section 2.3, automatic conversion of the shares of Class B Common Stock pursuant to Section 2.3(e)(ii) or Section 2.3(e)(iii) of this Article 2 shall be effective without any further action on the part of the holder of such shares and shall be effective whether or not the certificates for such shares are surrendered to this corporation. Upon any conversion of shares of Class B Common Stock to Class A Common Stock, all rights of the holder (as of immediately prior to such conversion) of such shares of Class B Common Stock shall cease and the person, persons, entity or entities entitled to receive the shares of Class A Common Stock upon such conversion shall be treated for all purposes as having become the record holder or record holders of such shares of Class A Common Stock. Shares of Class B Common Stock that are converted into shares of Class A Common Stock as provided in this Section 2.3(e) shall be retired and may not be reissued.

(f) Reservation of Stock . This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of Class B Common Stock, such number of its shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Common Stock into shares of Class A Common Stock.

(g) Definitions .

As used in these Articles, including this Article 2, the following terms shall have the following meanings:

Change of Control Transaction means the occurrence of any of the following events:

(a) the sale, lease, exchange or other disposition (other than liens, encumbrances and the grant of security interests in the ordinary course of business and non-exclusive licenses in the ordinary course of business) by this corporation of

 

-8-


all or substantially all of this corporation’s property and assets (which shall for such purpose include the property and assets of any direct or indirect subsidiary of this corporation); provided that any sale, lease, exchange or other disposition of property or assets exclusively between or among this corporation and any direct or indirect subsidiary or subsidiaries of this corporation shall not be deemed a “Change of Control Transaction”; or

(b) the merger or consolidation of this corporation with or into any other corporation or entity, or the acquisition of this corporation by means of a share exchange, other than a merger, consolidation or share exchange that would result in the voting securities of this corporation outstanding immediately prior thereto continuing to represent, or being converted into, cancelled in consideration of obtaining the right to receive, or exchanged for, voting securities that represent, immediately following such merger, consolidation or share exchange, more than fifty percent (50%) of the total voting power of the capital stock of (i) this corporation or the surviving entity or (ii) if this corporation or the surviving entity is a subsidiary of another entity immediately following such merger, consolidation or share exchange, the parent entity of this corporation or the surviving entity.

Conversion Notice ” has the meaning ascribed to such term in Section 2.3(e)(v) of Article 2.

Distribution ” means (i) any dividend or distribution of cash, property or shares of this corporation’s capital stock; and (ii) any distribution following or in connection with any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary.

Fifth Trading Day ” has the meaning ascribed to such term in Section 9.2 of Article 9.

Founder ” means either Richard Barton or Lloyd Frink, each as a natural living person, and “ Founders ” means both of them.

Mental Disability ” means, with respect to a Founder, permanent and total disability such that such Founder is unable to engage in any substantial gainful activity by reason of any medically determinable mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months as determined by a licensed medical practitioner. In the event of a dispute as to whether a Founder has suffered a Mental Disability, no Mental Disability of the Founder shall be deemed to have occurred unless and until an affirmative ruling regarding such Mental Disability has been made by a court of competent jurisdiction, and such ruling has become final and non-appealable.

Permitted Entity ” and “ Permitted Entities ” have the meanings ascribed to such terms in Section 2.3(e)(ii)(B) of Article 2.

 

-9-


RCW ” means the Revised Code of Washington and “ RCW 23B ” means Title 23B of the Revised Code of Washington (also known as the Washington Business Corporation Act).

Rights ” means any option, warrant, conversion right or contractual right of any kind to acquire shares of this corporation’s authorized but unissued capital stock.

Secretary ” has the meaning ascribed to such term in Section 2.3(e)(iv) of Article 2, except that such meaning does not apply to the use of the term “Secretary” in Section 2.2 of Article 2.

Securities Exchange ” means, at any time, the registered national securities exchange on which this corporation’s equity securities are then principally listed or traded, which shall be either the New York Stock Exchange or The Nasdaq Global Market (or similar national quotation system of The Nasdaq Stock Market) (“ Nasdaq ”) or any successor exchange of either the New York Stock Exchange or Nasdaq.

Threshold Date ” means 5:00 p.m. in New York City, New York on the first Trading Day falling on or after the first date on which the outstanding shares of Class B Common Stock represent less than seven percent (7%) of the aggregate number of shares of the outstanding Class A Common Stock and Class B Common Stock.

Trading Day ” means any day on which the Securities Exchange is open for trading.

Transfer ” of a share of Class B Common Stock shall mean any sale, assignment, transfer, conveyance, hypothecation or other transfer or disposition of such share or any legal or beneficial interest in such share, whether or not for value and whether voluntary or involuntary or by operation of law. A “Transfer” shall also include, without limitation, (i) a transfer of a share of Class B Common Stock to a broker or other nominee, regardless of whether or not there is a corresponding change in beneficial ownership (provided however that any such transfer to a broker or other nominee that is determined by the Secretary to have been unintended by the transferor shall not be considered a “Transfer” if no shareholder vote has occurred since such unintended transfer to the broker or nominee and such transfer to the broker or nominee is rescinded, revoked or reversed within 15 days after the transferor first becomes aware of such unintentional transfer) or (ii) the transfer of, or entering into a binding agreement with respect to, Voting Control over a share of Class B Common Stock by proxy or otherwise; provided , however , that the following shall not be considered a “Transfer”:

(a) the grant of a proxy to officers or directors of this corporation at the request of the Board of Directors of this corporation in connection with actions to be taken at an annual or special meeting of shareholders;

 

-10-


(b) the entering into a voting trust, agreement or arrangement (with or without granting a proxy) solely with shareholders who are Founders or one or more Permitted Entities of Founders, that (1) is disclosed either in a Schedule 13D filed with the Securities and Exchange Commission or in writing to the Secretary, (2) either has a term not exceeding one (1) year or is terminable by the Founders or one or more Permitted Entities of Founders at any time, and (3) does not involve any payment of cash, securities, property or other consideration to a Founder or any Permitted Entity of a Founder other than the mutual promise to vote shares in a designated manner;

(c) the transfer of exclusive Voting Control with respect to shares of Class B Common Stock of one or more of the Founders or one or more Permitted Entities of a Founder permitted in Section 2.3(e)(iii) of Article 2;

(d) the entering by any of a Founder or one or more Permitted Entities of a Founder into a voting trust, agreement or arrangement (with or without granting a proxy) with any of the other Founder, one or more Permitted Entities of a Founder or a trustee that is entered into to provide for transfer of Voting Control contingent upon the death or Mental Disability of a Founder in accordance with Section 2.3(e)(iii) of Article 2; provided that (i) the parties to such voting trust, agreement or arrangement shall agree that the provisions of Section 2.3(e)(iii) of Article 2 apply in respect of such voting trust, agreement or arrangement, and (ii) if a voting trust, (A) the transfer of shares of Class B Common Stock by a Transferring Founder or such Transferring Founder’s Permitted Entities to the Transferee Founder in his capacity as trustee of such voting trust shall be deemed not to be a transfer of ownership for purposes of the second parenthetical of Section 2.3(e)(iii)(A) of Article 2, and (B) the transfer of shares of Class B Common Stock to the trustee of such voting trust in such trustee’s capacity as trustee of the voting trust shall be deemed not to be a Transfer;

(e) the pledge of shares of Class B Common Stock by a Founder or a Permitted Entity of a Founder that creates a mere security interest in such shares pursuant to a bona fide loan or indebtedness transaction so long as the Founder continues to exercise exclusive Voting Control over such pledged shares; provided , however , that a foreclosure on such shares of Class B Common Stock or other similar action by the pledgee shall constitute a “Transfer”; or

(f) the fact that the spouse of any Founder possesses or obtains a community property interest in such Founder’s shares of Class B Common Stock arising solely by reason of the application of the community property laws of any jurisdiction, so long as no other event or circumstance shall exist or have occurred that constitutes a “Transfer” of such shares of Class B Common Stock.

Transferee Founder ” has the meaning ascribed to such term in Section 2.3(e)(iii)(A) of Article 2.

 

-11-


Transferring Founder ” has the meaning ascribed to such term in Section 2.3(e)(iii)(A) of Article 2.

Voluntary Conversion Date ” has the meaning ascribed to such term in Section 2.3(e)(v) of Article 2.

Voting Control ” with respect to a share of Class B Common Stock means the power (whether exclusive or shared) to vote or direct the voting of such share of Class B Common Stock by proxy, voting agreement, or otherwise.

 

2.4 No Further Issuance

Except for the issuance or payment of Class B Common Stock pursuant to and in accordance with Section 2.3(b) of Article 2, this corporation shall not issue any additional shares of Class B Common Stock, unless such issuance is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and the holders of a majority of the outstanding shares of Class B Common Stock, each voting separately as a separate voting group.

ARTICLE 3. REGISTERED OFFICE AND AGENT

The name of the initial registered agent of this corporation and the address of its initial registered office are as follows:

CT Corporation

520 Pike Street

Seattle, WA 98101

ARTICLE 4. PREEMPTIVE RIGHTS

No preemptive rights shall exist with respect to shares of stock or securities convertible into shares of stock of this corporation, except to the extent provided by written agreement with this corporation.

ARTICLE 5. CUMULATIVE VOTING

The right to cumulate votes in the election of directors shall not exist with respect to shares of stock of this corporation.

 

-12-


ARTICLE 6. DIRECTORS

 

6.1 Board Size

Except as otherwise provided in these Articles, the total number of authorized directors constituting the Board of Directors shall be fixed from time to time solely by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors.

 

6.2 Classified Board Structure

From and after the effectiveness of these Amended and Restated Articles of Incorporation (the “ Effective Time ”), the directors, other than any who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall be divided into three (3) classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The Board of Directors may assign members of the Board of Directors already in office to such classes at the time such classification becomes effective. The term of office of the initial Class I directors shall expire at the first regularly-scheduled annual meeting of the shareholders following the Effective Time, the term of office of the initial Class II directors shall expire at the second annual meeting of the shareholders following the Effective Time, and the term of office of the initial Class III directors shall expire at the third annual meeting of the shareholders following the Effective Time. At each annual meeting of shareholders, commencing with the first regularly-scheduled annual meeting of shareholders following the Effective Time, each of the persons elected as a director of the Class of directors whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election. Notwithstanding the foregoing provisions of this Article 6, despite the expiration of a director’s term, a director shall continue to serve until his or her successor is duly elected and qualified or until there is a decrease in the size of the Board of Directors. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

6.3 Removal

(a) Prior to Threshold Date . Prior to the Threshold Date, at a meeting of shareholders called expressly for that purpose, one or more directors, including the entire Board of Directors, may be removed with or without cause by the holders of the shares entitled to elect the director or directors whose removal is sought if, with respect to a particular director, the number of votes cast to remove the director exceeds the number of votes cast to not remove the director.

 

-13-


(b) After Threshold Date . After the Threshold Date, at a meeting of shareholders called expressly for that purpose, one or more directors, including the entire Board of Directors, may be removed only for cause by the holders of the shares entitled to elect the director or directors whose removal is sought if, with respect to a particular director, the number of votes cast to remove the director exceeds the number of votes cast to not remove the director.

 

6.4 Vacancies

Any vacancies on the Board of Directors resulting from death, resignation, removal or other causes and any newly created directorships resulting from any increase in the number of directors may be filled as follows:

(a) prior to the Threshold Date, by the shareholders, by the Board of Directors or, if the directors in office constitute less than a quorum, by the affirmative vote of a majority of the remaining directors or the sole remaining director; and

(b) after the Threshold Date, only by the Board of Directors or, if the directors in office constitute less than a quorum, by the affirmative vote of a majority of the remaining directors or the sole remaining director.

The term of a director elected to fill a vacancy expires at the next election of directors by the shareholders.

ARTICLE 7. LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION

(a) To the full extent that the Washington Business Corporation Act, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of this corporation shall not be liable to this corporation or its shareholders for monetary damages for conduct as a director.

(b) This corporation shall, to the maximum extent permitted by applicable law, indemnify any individual made a party to a proceeding because that individual is or was a director of this corporation and shall advance or reimburse the reasonable expenses incurred by such individual in advance of final disposition of the proceeding, without regard to the limitations in RCW 23B.08.510 through 23B.08.550 of the Washington Business Corporation Act, or any other limitation which may hereafter be enacted to the extent such limitation may be disregarded if authorized by these Articles.

(c) Any amendments to or repeal of this Article 7 shall not adversely affect any right or protection of a director of this corporation for or with respect to any acts or omissions of such director occurring before such amendment or repeal.

 

-14-


ARTICLE 8. SHAREHOLDER ACTIONS

Any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting or a vote if the action is taken by written consent of all shareholders entitled to vote on the action.

ARTICLE 9. AUTHORITY TO AMEND ARTICLES OF INCORPORATION

This corporation reserves the right to amend or repeal any of the provisions contained in these Articles in any manner now or hereafter permitted by the Washington Business Corporation Act or by these Articles and the rights of the shareholders of this corporation are granted subject to this reservation.

 

9.1 Supermajority Voting

Except as provided in Section 9.2, the amendment or repeal of provisions in any of the following Articles or sections listed in this Section 9.1 shall require the affirmative vote of the holders of not less than two-thirds of all the votes entitled to be cast thereon by the shareholders of this corporation, voting together as a single voting group:

Article 6 (“Directors”)

Article 7 (“Limitation of Director Liability and Indemnification”)

Sections 9.1 and 9.2 of Article 9 (“Authority to Amend Articles of Incorporation”)

Article 12 (“Special Meeting of Shareholders”)

Article 14 (“Bylaws”)

 

9.2 Majority Voting

Notwithstanding the provisions of Section 9.1, an amendment or repeal of provisions in an Article or section identified in Section 9.1 that is approved by a majority of the Continuing Directors (as defined below), voting separately and as a subclass of directors, shall require the affirmative vote of the holders of not less than a majority of all the votes entitled to be cast thereon by the shareholders of this corporation, voting together as a single voting group.

As used in this Article 9, “ Continuing Director ” means any member of the Board of Directors who was a member of the Board of Directors on the fifth Trading Day after the closing of this corporation’s initial public offering of common stock (the “ Fifth Trading Day ”) or who is elected to the Board of Directors after the Fifth Trading Day upon the recommendation of a majority of the Continuing Directors.

 

-15-


9.3 Other Special Voting Requirements

The provisions in the following sections or Articles listed in this Section 9.3 may be amended or repealed only upon the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and the holders of a majority of the outstanding shares of Class B Common Stock, each voting separately as a separate voting group:

Sections 2.3 and 2.4 of Article 2 (“Shares”)

Section 9.3 of Article 9 (“Authority to Amend Articles of Incorporation”)

Article 13 (“No Reliance on Controlled Company Exemption”)

ARTICLE 10. SHAREHOLDER VOTE REQUIRED ON CERTAIN MATTERS

With respect to any proposal or matter presented to shareholders for approval under RCW 23B.11.030, RCW 23B.12.020 or RCW 23.B.14.020, in accordance with RCW 23B.07.270, this corporation’s shareholders may approve the proposal or matter by a majority of the voting group comprising all the votes entitled to be cast on such proposal or matter. This Article 10 is intended to reduce the voting requirements otherwise prescribed by the Washington Business Corporation Act with respect to the foregoing matters.

ARTICLE 11. LIMITATION OF SEPARATE CLASS VOTING TO EXTENT PERMITTED BY LAW

Except (a) to the extent otherwise expressly provided in these Articles with respect to voting or approval rights of a particular class or series of capital stock, (b) as may be fixed or determined with respect to any series of Preferred Stock, or (c) to the extent otherwise provided pursuant to RCW 23B.10.030(3) or RCW 23.B.11.030(3), the holders of each outstanding class or series of shares of this corporation shall not be entitled to vote as a separate voting group (1) on any amendment to these Articles with respect to which such class or series would otherwise be entitled under RCW 23B.10.040(1)(a), (e), or (f) to vote as a separate voting group, or (2) on any plan of merger or share exchange with respect to which such class or series would otherwise be entitled under RCW 23B.11.035 to vote as a separate voting group.

ARTICLE 12. SPECIAL MEETING OF SHAREHOLDERS

The Chairperson of the Board of Directors, the Chief Executive Officer of this corporation, the President of this corporation or the Board of Directors may call special meetings of the shareholders. Further, prior to the Threshold Date, a special meeting of the shareholders may be called upon request by holders of not less than twenty-five percent (25%) of all the votes entitled to be cast on any issue proposed to be considered at such special meeting, provided the request is in proper form as prescribed by the Bylaws of this corporation and as otherwise required by applicable laws. After the Threshold Date, special

 

-16-


meetings of the shareholders may not be called by the shareholders or any other person or persons, other than as set forth in the first sentence of this Article 12.

ARTICLE 13. NO RELIANCE ON CONTROLLED COMPANY EXEMPTION

At any time during which shares of capital stock of this corporation are listed for trading on the Securities Exchange, this corporation shall not rely upon the exemptions from the corporate governance rules and requirements of the Securities Exchange available to any company that constitutes a “controlled company” within the meaning of the corporate governance rules and requirements of the Securities Exchange.

ARTICLE 14. BYLAWS

The Bylaws of this corporation may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors, except that the Board of Directors may not amend or repeal any Bylaw that the shareholders have expressly provided, in amending or repealing the Bylaw, may not be amended or repealed by the Board of Directors. The shareholders may also alter, amend and repeal the Bylaws of this corporation or adopt new Bylaws; provided , however , that the affirmative vote of the holders of at least two-thirds of all the votes entitled to be cast by the shareholders of this corporation generally in the election of directors, voting together as a single voting group, shall be required for the shareholders of this corporation to alter, amend or repeal any provision of the Bylaws of this corporation or adopt new Bylaws.

 

-17-


ARTICLE 15. SAVINGS CLAUSE

If any provision of these Articles is declared by a court of competent jurisdiction to be invalid, unenforceable or contrary to applicable law, the remainder of these Articles shall be enforceable in accordance with its terms.

Dated:                      , 2011

 

   
Kathleen Philips, Corporate Secretary

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

OF

ZILLOW, INC.

Originally adopted June 16, 2011, effective July 25, 2011

Amendments are listed on page i


AMENDMENTS

 

Section

   Effect of Amendment    Date of Amendment

 

-i-


CONTENTS

 

SECTION 1. DEFINITIONS

     1   

SECTION 2. SHAREHOLDERS

     2   

2.1      Annual Meetings

     2   

2.2      Special Meetings

     2   

2.3      Meetings by Communications Equipment

     3   

2.4      Date, Time and Place of Meetings

     3   

2.5      Notice to Shareholders

     3   

2.5.1  Type of Notice

     3   

2.5.2  Effectiveness of Notice

     4   

2.5.3  Notice of Meetings

     5   

2.5.3.1  Number of Days’ Notice

     5   

2.5.3.2  Adjourned Meetings

     5   

2.5.4  Waiver of Notice

     5   

2.5.4.1  Waiver by Delivery of a Record

     5   

2.5.4.2  Waiver by Attendance

     6   

2.5.4.3  Waiver of Objection

     6   

2.6      Notice of Nominations and Shareholder Business

     6   

2.6.1  Annual Meetings

     6   

2.6.2  Special Meetings

     8   

2.6.3  General

     9   

2.6.4  Notice or Request to Corporation

     10   

 

-ii-


2.7      Fixing of Record Date for Determining Shareholders Entitled to Notice of or to Vote at a Meeting or to Receive Payment of a Dividend

     10   

2.7.1   Record Date for Meeting of Shareholders

     10   

2.7.2   Record Date to Receive Payment of Dividend or Distribution

     10   

2.8      Voting Record

     10   

2.9      Quorum

     11   

2.10    Manner of Acting

     11   

2.10.1  Matters Other Than the Election of Directors

     11   

2.10.2  Election of Directors

     11   

2.11    Proxies

     11   

2.11.1  Written Authorization

     11   

2.11.2  Recorded Telephone Call, Voice Mail or Other Electronic Transmission

     12   

2.11.3  Effectiveness of Appointment of Proxy

     12   

2.11.4  Revocability of Proxy

     12   

2.11.5  Death or Incapacity of Shareholder Appointing a Proxy

     13   

2.11.6  Acceptance of Proxy’s Vote or Action

     13   

2.11.7  Meaning of Sign or Signature

     13   

2.12    Voting of Shares

     13   

2.13    Voting for Directors

     13   

2.14    Action by Shareholders Without a Meeting

     13   

2.14.1  Unanimous Written Consent

     13   

 

-iii-


2.14.2  General Provisions

     14   

2.15    Inspectors of Election

     14   

2.15.1  Appointment

     14   

2.15.2  Duties

     14   

SECTION 3. BOARD OF DIRECTORS

     15   

3.1      General Powers

     15   

3.2      Number and Tenure

     15   

3.3      Regular Meetings

     16   

3.4      Special Meetings

     16   

3.5      Meetings by Communications Equipment

     16   

3.6      Notice of Special Meetings

     16   

3.6.1   Number of Days’ Notice

     16   

3.6.2   Type of Notice

     16   

3.6.3   Effectiveness of Written Notice

     17   

3.6.4   Effectiveness of Oral Notice

     18   

3.7      Waiver of Notice

     18   

3.7.1   Waiver by Delivery of a Record

     18   

3.7.2   Waiver by Attendance

     18   

3.8      Quorum

     19   

3.8.1   Board

     19   

3.8.2   Committees

     19   

3.9      Manner of Acting

     19   

3.10    Presumption of Assent

     19   

 

-iv-


3.11    Action by Board or Committees Without a Meeting

     19   

3.12    Resignation of Directors and Committee Members

     20   

3.13    Removal of Directors and Committee Members

     20   

3.13.1  Removal of Directors

     20   

3.13.2  Removal of Committee Members

     20   

3.14    Vacancies

     20   

3.15    Executive and Other Committees

     21   

3.15.1  Creation of Committees

     21   

3.15.2  Authority of Committees

     21   

3.15.3  Minutes of Meetings

     21   

3.16    Compensation of Directors and Committee Members

     22   

SECTION 4. OFFICERS

     22   

4.1      Appointment and Term

     22   

4.2      Resignation of Officers

     22   

4.3      Removal of Officers

     22   

4.4      Contract Rights of Officers

     22   

4.5      Chairperson of the Board

     23   

4.6      Chief Executive Officer

     23   

4.7      President

     23   

4.8      Vice President

     23   

4.9      Secretary

     24   

4.10    Treasurer

     24   

4.11    Salaries

     24   

 

-v-


SECTION 5. CERTIFICATES FOR SHARES AND THEIR TRANSFER

     24   

5.1      Issuance of Shares

     24   

5.2      Certificates for Shares

     24   

5.3      Issuance of Shares Without Certificates

     25   

5.4      Stock Records

     25   

5.5      Restriction on Transfer

     25   

5.6      Transfer of Shares

     26   

5.7      Lost, Destroyed or Damaged Certificates

     26   

SECTION 6. INDEMNIFICATION

     26   

6.1      Right to Indemnification

     26   

6.2      Restrictions on Indemnification

     27   

6.3      Advancement of Expenses

     27   

6.4      Right of Indemnitee to Bring Suit

     27   

6.5      Procedures Exclusive

     27   

6.6      Nonexclusivity of Rights

     28   

6.7      Insurance, Contracts and Funding

     28   

6.8      Indemnification of Employees and Agents of the Corporation

     28   

6.9      Persons Serving Other Entities

     28   

SECTION 7. GENERAL MATTERS

     29   

7.1      Accounting Year

     29   

7.2      Amendment or Repeal of Bylaws

     29   

7.3      Books and Records

     29   

 

-vi-


7.4      Contracts, Loans, Checks and Deposits

     30   

7.4.1  Contracts

     30   

7.4.2  Loans to the Corporation

     30   

7.4.3  Checks, Drafts, etc.

     30   

7.4.4  Deposits

     30   

7.5      Corporate Seal

     30   

 

-vii-


Amended and Restated Bylaws

of

Zillow, Inc.

SECTION 1. DEFINITIONS

As used in these Bylaws, the following terms shall have the following meanings:

Articles of Incorporation ” means the corporation’s Articles of Incorporation and all amendments as filed with the Washington Secretary of State.

Board ” means the Board of Directors of the corporation.

Electronic transmission ” means an electronic communication not directly involving the physical transfer of a record in a tangible medium that may be retained, retrieved and reviewed by the sender and the recipient and that may be directly reproduced in a tangible medium by the sender and recipient.

Execute ,” “ executes ” or “ executed ” means signed with respect to a written record or electronically transmitted along with sufficient information to determine the sender’s identity with respect to an electronic transmission.

RCW ” means the Revised Code of Washington and “ RCW 23B ” means Title 23B of the Revised Code of Washington (also known as the Washington Business Corporation Act).

Record ” means information inscribed on a tangible medium or contained in an electronic transmission.

Tangible medium ” means a writing, copy of a writing or facsimile, or a physical reproduction, each on paper or on other tangible material.

Threshold Date ” has the meaning given such term in the Articles of Incorporation.

Washington Business Corporation Act ” means the Washington Business Corporation Act, as it exists now or may be amended.

Writing ” or “ written ” means embodied in a tangible medium, and excludes an electronic transmission.


SECTION 2. SHAREHOLDERS

 

2.1 Annual Meetings

The annual meeting of shareholders shall be held at such place and time and on such date as determined by the Board for the purpose of electing directors and transacting such other business as may properly come before the meeting.

 

2.2 Special Meetings

 

  2.2.1   General

A special meeting of shareholders may be called at any time by the Board, or by any of the following persons: the Chairperson of the Board, the Chief Executive Officer or the President.

 

  2.2.2   Shareholder Requested Special Meetings

(a) Prior to the Threshold Date, a special meeting of shareholders shall be called by the Board upon request to the Secretary, in accordance with Section 2.6.4, of one or more record holders of shares of the corporation representing in the aggregate not less than 25% of all the votes entitled to be cast on any issue proposed to be considered at such special meeting. A request to the Secretary shall be executed by each shareholder, or a duly authorized agent of such shareholder, requesting the special meeting and shall set forth: (i) a brief description of each matter of business desired to be brought before the special meeting and the reasons for conducting such business at the special meeting, (ii) the name and address, as they appear on the corporation’s books, of each shareholder requesting the special meeting, (iii) the class and number of shares of the corporation that are owned by each shareholder requesting the special meeting, including shares beneficially owned and shares held of record, (iv) any material interest of each shareholder in the business desired to be brought before the special meeting, and (v) any other information that is required to be set forth in a shareholder’s notice required pursuant to Section 2.6.1.

(b) A special meeting requested by shareholders shall be held at such date, time and place within or without the State of Washington as may be fixed by the Board and the record date for shareholders entitled to notice of and to vote at the special meeting shall be determined in accordance with Section 2.7.1; provided, however, that the date of any such special meeting shall be not more than 90 days after the request to call the special meeting that complies with Section 2.2.2(a) is delivered to and received by the Secretary. Notwithstanding the foregoing, a special meeting requested by shareholders shall not be held if (i) the special meeting request relates to an item of business that is not a proper subject for shareholder action under applicable law or (ii) the Board has called or calls for an annual meeting of shareholders to be held within 90 days after the Secretary receives the request for the special meeting and the Board determines in good faith that the business of such annual meeting includes (among any other matters properly brought before the annual meeting) the

 

-2-


business specified in the request. A shareholder may revoke a request for a special meeting at any time by notice delivered to and received by the Secretary, and if, following such revocation, there are unrevoked requests from shareholders holding shares of the corporation representing in the aggregate less than the requisite number of votes entitling the shareholders to request a special meeting, the Board, in its discretion, may cancel the special meeting.

(c) Business transacted at a special meeting requested by shareholders shall be limited to the purposes stated in the request for the special meeting; provided, however, that nothing herein shall prohibit the Board from submitting additional matters to shareholders at any such special meeting.

(d) After the Threshold Date, a special meeting of shareholders may not be called by the shareholders or any other person or persons, other than as set forth in Section 2.2.1.

 

2.3 Meetings by Communications Equipment

Shareholders may participate in any meeting of the shareholders by any means of communication by which all persons participating in the meeting can hear each other during the meeting, and participation in this manner shall constitute presence in person at a meeting.

 

2.4 Date, Time and Place of Meetings

Except as otherwise provided in these Bylaws, all meetings of shareholders, including those held pursuant to request by shareholders as provided herein, shall be held on a date and at a time and place, within or without the State of Washington, designated by or at the direction of the Board.

 

2.5 Notice to Shareholders

Any notice to shareholders required or permitted under these Bylaws, the Articles of Incorporation or the Washington Business Corporation Act shall be provided in accordance with this Section 2.5.

 

  2.5.1   Type of Notice

(a) Notice Provided in a Tangible Medium. Notice may be provided in a tangible medium and may be transmitted by mail, private carrier, personal delivery, telegraph, teletype, telephone or wire or wireless equipment that transmits a facsimile of the notice.

(b) Notice Provided in an Electronic Transmission. Notice may be provided in an electronic transmission and be electronically transmitted.

 

-3-


(1) Consent to Receive Notice by Electronic Transmission. Notice to shareholders in an electronic transmission is effective only with respect to shareholders that have consented, in the form of a record, to receive electronically transmitted notices and designated in the consent the address, location or system to which these notices may be electronically transmitted. Notice provided in an electronic transmission includes material required or permitted to accompany the notice by the Washington Business Corporation Act or other applicable statute or regulation.

(2) Revocation of Consent to Receive Notice by Electronic Transmission. A shareholder that has consented to receipt of electronically transmitted notices may revoke the consent by delivering a revocation to the corporation in the form of a record. The consent of a shareholder to receive notice by electronic transmission is revoked if the corporation is unable to electronically transmit two consecutive notices given by the corporation in accordance with the consent, and this inability becomes known to the Secretary, the transfer agent or any other person responsible for giving the notice. The inadvertent failure by the corporation to treat this inability as a revocation does not invalidate any meeting or other action.

(3) Posting Notice on an Electronic Network. Notice to shareholders that have consented to receipt of electronically transmitted notices may be provided by posting the notice on an electronic network and delivering to the shareholder a separate record of the posting, together with comprehensible instructions regarding how to obtain access to the posting on the electronic network.

 

  2.5.2   Effectiveness of Notice

(a) Notice by Mail. Notice given by mail is effective when deposited in the United States mail, first-class postage prepaid, properly addressed to the shareholder at the shareholder’s address as it appears in the corporation’s current record of shareholders.

(b) Notice by Telegraph, Teletype or Facsimile Equipment. Notice given by telegraph, teletype or facsimile equipment that transmits a facsimile of the notice is effective when dispatched to the shareholder’s address, telephone number or other number appearing on the records of the corporation.

(c) Notice by Air Courier. Notice given by air courier is effective when dispatched, if prepaid and properly addressed to the shareholder at the shareholder’s address as it appears in the corporation’s current record of shareholders.

(d) Notice by Ground Courier or Other Personal Delivery. Notice given by ground courier or other personal delivery is effective when received by a shareholder.

(e) Notice by Electronic Transmission. Notice provided in an electronic transmission, if in comprehensible form, is effective when it (i) is electronically transmitted to an address, location or system designated by the recipient for that purpose or (ii) has been posted on an electronic network and a separate record of the posting has been delivered to the

 

-4-


recipient together with comprehensible instructions regarding how to obtain access to the posting on the electronic network.

(f) Notice by Publication. Notice given by publication is effective five days after first publication.

 

  2.5.3   Notice of Meetings

Notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be provided in the form of a record by or at the direction of the Board, the Chairperson of the Board, the President or the Secretary to each shareholder entitled to notice of or to vote at the meeting, as provided below.

 

  2.5.3.1   Number of Days’ Notice

(a) Normal Business. Except as provided in Section 2.5.3.1(b), notice of the meeting shall be provided not less than 10 or more than 60 days before the meeting.

(b) Amendment to Articles of Incorporation; Merger or Share Exchange; Sale of Assets or Dissolution. Notice of a meeting held for the purpose of considering an amendment to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the corporation’s assets other than in the regular course of business or the dissolution of the corporation shall be provided not less than 20 or more than 60 days before the meeting.

 

  2.5.3.2   Adjourned Meetings

If an annual or special meeting of shareholders is adjourned to a different date, time or place, no notice of the new date, time or place is required if this information is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or must be fixed, notice of the adjourned meeting must be provided to shareholders entitled to notice of or to vote as of the new record date.

 

  2.5.4   Waiver of Notice

 

  2.5.4.1   Waiver by Delivery of a Record

A shareholder may waive any notice required by these Bylaws, the Articles of Incorporation or the Washington Business Corporation Act before or after the date and time of the meeting that is the subject of the notice. The waiver must be (a) delivered by the shareholder entitled to notice to the corporation for inclusion in the minutes or filing with the corporate records, and (b) set forth either in an executed and dated written record or, if the corporation has designated an address, location or system to which the waiver may be electronically transmitted and the waiver is electronically transmitted to the designated address, location or system, in an executed and dated electronically transmitted record.

 

-5-


  2.5.4.2   Waiver by Attendance

Notice of the time, place and purpose of any meeting will be waived by any shareholder by attendance in person or by proxy, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.

 

  2.5.4.3   Waiver of Objection

A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the notice of the meeting unless the shareholder objects to considering the matter when it is presented.

 

2.6 Notice of Nominations and Shareholder Business

 

  2.6.1   Annual Meetings

(a) Nominations of persons for election to the Board or the proposal of other business to be transacted by the shareholders at an annual meeting of shareholders may be made only (i) pursuant to the corporation’s notice of meeting (or any supplement thereto), (ii) by or at the direction of the Board or any authorized committee thereof or (iii) by any shareholder of the corporation who is a shareholder of record both at the time the notice required by Section 2.6.1(b) is delivered to the Secretary and at the time of the annual meeting, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 2.6.1. Except for proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, and the rules and regulations thereunder (as so amended and inclusive of such rules and regulations, the “ Exchange Act ”), and included in the corporation’s notice of meeting, the foregoing clause (iii) shall be the exclusive means for a shareholder to propose business to be brought before an annual meeting of shareholders.

(b) For nominations or other business to be properly brought before an annual meeting of shareholders by a shareholder pursuant to Section 2.6.1(a)(iii), the shareholder must have delivered timely notice thereof, in accordance with Section 2.6.4, to the Secretary and any such proposed business (other than the nominations of persons for election to the Board) must constitute a proper matter for shareholder action. Without qualification, to be timely, a shareholder’s notice must be delivered to and received by the Secretary not less than 90 days or more than 120 days prior to the first anniversary of the preceding year’s annual meeting of shareholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting is advanced more than 30 days prior to such anniversary date or delayed more than 70 days after such anniversary date, then to be timely such notice must be delivered to and received by the Secretary no earlier than 120 days prior to such annual meeting and no later than the later of 70 days prior to the date of the meeting or the 10th day following the day on which a Public Announcement of the date of the meeting was first made. In no event shall the Public Announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above. “ Public Announcement ” shall mean disclosure in a press release reported by the Dow Jones News

 

-6-


Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(c) A shareholder’s notice to the Secretary shall set forth

(i) as to each person (a “ nominee ”) whom the shareholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of the nominee, (B) the principal occupation or employment of the nominee, (C) the class and number of shares of the corporation that are held of record or are beneficially owned by the nominee and any derivatives positions held or beneficially held by the nominee, (D) a description of any agreement, arrangement or understanding (including, regardless of the form of settlement, any derivative, long or short positions, profit interests, forwards, futures, swaps, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions and borrowed or loaned shares) that has been entered into by or on behalf of, or any other agreement, arrangement or understanding that has been made, the effect or intent of which is to create or mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, any such nominee with respect to the corporation’s securities, (E) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the shareholder, and (F) any other information relating to the nominee that would be required to be disclosed about such nominee if proxies were being solicited for the election or re-election of the nominee as a director, or that is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, the nominee’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected or re-elected, as the case may be);

(ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend these Bylaws, the text of the proposed amendment), the reasons for conducting such business and any material interest in such business of such shareholder and the Shareholder Associated Person (as defined below), if any, on whose behalf the proposal is made; and

(iii) as to the shareholder giving the notice and the Shareholder Associated Person, if any, on whose behalf the proposal or nomination is made: (A) the name and address, as they appear on the corporation’s books, of the shareholder proposing such business and any Shareholder Associated Person, (B) the class and number of shares of the corporation that are held of record or are beneficially owned by the shareholder or any Shareholder Associated Person and any derivative positions held or beneficially held by the shareholder or any Shareholder Associated Person, (C) a description of any agreement, arrangement or understanding (including, regardless of the form of settlement, any derivatives, long or short positions, profit interests, forwards, futures, swaps, options,

 

-7-


warrants, convertible securities, stock appreciation or similar rights, hedging transactions and borrowed or loaned shares) that has been entered into by or on behalf of, or any other agreement, arrangement or understanding that has been made, the effect or intent of which is to create or mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such shareholder or any such Shareholder Associated Person with respect to the corporation’s securities, (D) any material interest of the shareholder or a Shareholder Associated Person in such business, and (E) a statement whether either such shareholder or any Shareholder Associated Person will deliver a proxy statement and form of proxy to holders of at least the percentage of the votes entitled to be cast on the proposal or nomination required under applicable law to carry the proposal or to elect the director.

In addition, to be in proper form under this Section 2.6.1, a shareholder’s notice to the Secretary must be supplemented not later than 10 days following the record date for notice of the meeting to disclose the information contained in Sections 2.6.1(c)(i)(C), (D) and (E) and 2.6.1(c)(iii)(B) and (C) as of the record date for notice of the meeting.

(iv) For purposes of this Section 2.6, the term “ Shareholder Associated Person ” of any shareholder shall mean (A) any person controlling, directly or indirectly, or acting in concert with, such shareholder, (B) any beneficial owner of shares of stock of the corporation owned of record or beneficially by such shareholder and on whose behalf the proposal or nomination, as the case may be, is being made, and (C) any person controlling, controlled by or under common control with such Shareholder Associated Person.

 

  2.6.2   Special Meetings

Only such business shall be conducted at a special meeting of shareholders as shall have been specified in the corporation’s notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of shareholders (a) by or at the direction of the Board or any authorized committee thereof (or, prior to the Threshold Date, upon the request of shareholders pursuant to Section 2.2.2) or (b) provided that the Board (or, prior to the Threshold Date, shareholders pursuant to Section 2.2.2) has determined that directors shall be elected at such special meeting, by any shareholder of the corporation who is a shareholder of record both at the time the notice required by Section 2.6.1 is delivered to and received by the Secretary and at the time of the special meeting, who is entitled to vote at the special meeting and in such election of directors, and who complies with the notice procedures set forth in Section 2.6.1 as to such nomination. In the event the corporation calls a special meeting for the purpose of electing one or more directors to the Board, any such shareholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as are specified in the corporation’s notice of meeting, if the shareholder’s notice required by Section 2.6.1 is delivered to and received by the Secretary no earlier than the close of business on the 120th day prior to such special meeting and no later than the close of business on the later of the 90th day prior to such special meeting and the 10th day following the day on which a Public Announcement of the date of the special meeting was first made and of the nominees proposed by the Board to be elected at such special meeting. In no event shall the Public Announcement of an

 

-8-


adjournment or postponement of a special meeting as to which notice has been sent to shareholders commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above.

 

  2.6.3   General

(a) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.6 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.6. Except as otherwise provided by law, the Articles of Incorporation or these Bylaws, the chairperson of the meeting shall have the power and duty (i) to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.6 (including whether the shareholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group that solicited) or did not so solicit, as the case may be, proxies in support of such shareholder’s nominee or proposal in compliance with such shareholder’s statement as required by Section 2.6.1(c)(iii)(E)) and (ii) if any proposed nomination or business was not made or proposed in compliance with this Section 2.6, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.6, unless otherwise required by law, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or special meeting of shareholders of the corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the corporation. For purposes of this Section 2.6, to be considered a qualified representative of the shareholder, a person must be a duly authorized officer, manager or partner of such shareholder or must be authorized by a written record executed by such shareholder or an electronically transmitted record executed by such shareholder to act for such shareholder as proxy at the annual or special meeting and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the annual or special meeting.

(b) Without limiting the foregoing provisions of this Section 2.6, a shareholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.6; provided, however, that any references in these Bylaws to the Exchange Act or such rules and regulations are not intended to and shall not limit any requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 2.6, and compliance with Sections 2.6.1 and 2.6.2 shall be the exclusive means for a shareholder to make nominations or submit other business. Nothing in these Bylaws shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act or (ii) of the corporation to omit a proposal from the corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act, or (iii) of the holders of

 

-9-


any series of Preferred Stock, if any, to the extent provided for under law, the Articles of Incorporation or these Bylaws.

 

  2.6.4   Notice or Request to Corporation

Any notice or request required to be delivered by a shareholder to the corporation pursuant to Section 2.2 or this Section 2.6 must be either (a) set forth in an executed written record given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the corporation’s principal executive offices or (b) set forth in an executed electronically transmitted record, if the corporation has designated an address, location or system to which such notice or request may be electronically transmitted and the notice or request is electronically transmitted to that designated address, location or system.

 

2.7 Fixing of Record Date for Determining Shareholders Entitled to Notice of or to Vote at a Meeting or to Receive Payment of a Dividend

 

  2.7.1   Record Date for Meeting of Shareholders

For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment of a meeting, the Board may fix a future date as the record date for the determination. The record date shall be not less than 10 or more than 70 days prior to the date of the meeting. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting, the record date shall be the day immediately preceding the date on which notice of the meeting is first given to shareholders. The determination of the record date shall apply to any adjournment of the meeting unless the Board fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.

 

  2.7.2   Record Date to Receive Payment of Dividend or Distribution

For the purpose of determining shareholders entitled to receive payment of any dividend or distribution (including a dividend or distribution in connection with a stock split), the Board may fix a future date as the record date for the dividend or distribution. The record date shall be not more than 70 days prior to the date on which the dividend or distribution is payable. If no record date is set for the determination of shareholders entitled to receive payment of any stock dividend or distribution (other than one involving a purchase, redemption or other acquisition of the corporation’s shares), the record date shall be the date the Board authorizes the stock dividend or distribution.

 

2.8 Voting Record

At least 10 days before each meeting of shareholders, an alphabetical list of the shareholders entitled to notice of the meeting shall be made, arranged by voting group and by each class or series of shares, with the address of and number of shares held by each shareholder. This record shall be kept at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held for 10 days prior to

 

-10-


the meeting, and shall be kept open at the meeting, for the inspection of any shareholder or any shareholder’s agent or attorney-in-fact.

 

2.9 Quorum

A majority of the votes entitled to be cast on a matter by the holders of shares that, pursuant to the Articles of Incorporation or the Washington Business Corporation Act, are entitled to vote on the matter, represented in person or by proxy, shall constitute a quorum of those shares at a meeting of shareholders, including a majority of the votes entitled to be cast by the holders of any class or series of shares entitled to vote as a separate voting group. If less than a quorum of votes is represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice if the new date, time and place are announced at the meeting before adjournment. Any business may be transacted at a reconvened meeting that might have been transacted at the meeting as originally called, if a quorum is present or represented at the meeting. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business, it is deemed present for quorum purposes for the remainder of the meeting and any adjournment (unless a new record date is or must be set for the adjourned meeting) notwithstanding the withdrawal of holders of shares representing enough votes entitled to be cast to leave less than a quorum.

 

2.10 Manner of Acting

 

  2.10.1   Matters Other Than the Election of Directors

If a quorum is present, action on a matter other than the election of directors shall be approved if the votes cast in favor of the action by shares entitled to vote on the matter exceed the votes cast against the action by shares entitled to vote thereon, unless the Articles of Incorporation or the Washington Business Corporation Act requires a greater number of affirmative votes or approval by separate voting groups.

 

  2.10.2   Election of Directors

Directors shall be elected in the manner set forth in Section 2.13.

 

2.11 Proxies

A shareholder or the shareholder’s agent or attorney-in-fact may appoint a proxy to vote or otherwise act for the shareholder by an executed writing or by a recorded telephone call, voice mail or other electronic transmission.

 

  2.11.1   Written Authorization

Execution of a writing authorizing another person or persons to act for the shareholder as proxy may be accomplished by the shareholder or the shareholder’s authorized officer, director, employee or agent signing the writing or causing his or her signature to be

 

-11-


affixed to the writing by any reasonable means, including, but not limited to, by facsimile signature.

 

  2.11.2   Recorded Telephone Call, Voice Mail or Other Electronic Transmission

Authorizing another person or persons to act for the shareholder as proxy may be accomplished by transmitting or authorizing the transmission of a recorded telephone call, voice mail or other electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive the transmission, provided that the transmission must either set forth or be submitted with information, including any security or validation controls used, from which it can reasonably be determined that the transmission was authorized by the shareholder. If it is determined that the transmission is valid, the inspectors of election or, if there are no inspectors, any officer or agent of the corporation making that determination on behalf of the corporation shall specify the information upon which he or she relied. The corporation shall require the holders of proxies received by transmission to provide to the corporation copies of the transmission, and the corporation shall retain copies of the transmission for a reasonable period of time after the election, provided that they are retained for at least 60 days.

 

  2.11.3   Effectiveness of Appointment of Proxy

An appointment of a proxy is effective when a signed appointment form or telegram, cablegram, recorded telephone call, voice mail or other transmission of the appointment is received by the inspectors of election or the officer or agent of the corporation authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is expressly provided in the appointment. A proxy with respect to a specified meeting shall entitle its holder to vote at any reconvened meeting following adjournment of the meeting but shall not be valid after the final adjournment.

 

  2.11.4   Revocability of Proxy

An appointment of a proxy is revocable by the shareholder unless the appointment indicates that it is irrevocable and the appointment is coupled with an interest. Appointments coupled with an interest include the appointment of a pledgee, a person who purchased or agreed to purchase the shares, a creditor of the corporation who extended it credit under terms requiring the appointment, an employee of the corporation whose employment contract requires the appointment or a party to a voting agreement created under RCW 23B.07.310. An appointment made irrevocable is revoked when the interest with which it is coupled is extinguished. A transferee for value of shares subject to an irrevocable appointment may revoke the appointment if the transferee did not know of its existence when the transferee acquired the shares and the existence of the irrevocable appointment was not noted conspicuously on the certificate representing the shares or on the information statement for shares without certificates.

 

-12-


  2.11.5   Death or Incapacity of Shareholder Appointing a Proxy

The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy’s authority unless notice of the death or incapacity is received by the officer or agent of the corporation authorized to tabulate votes before the proxy exercises the proxy’s authority under the appointment.

 

  2.11.6   Acceptance of Proxy’s Vote or Action

Subject to RCW 23B.07.240 and to any express limitation on the proxy’s authority stated in the appointment form or recorded telephone call, voice mail or other electronic transmission, the corporation is entitled to accept the proxy’s vote or other action as that of the shareholder making the appointment.

 

  2.11.7   Meaning of Sign or Signature

For the purposes of this Section 2.11, “signing” or “signature” includes any manual, facsimile, conformed or electronic signature.

 

2.12 Voting of Shares

Unless otherwise provided in the Articles of Incorporation, each outstanding share entitled to vote with respect to a matter submitted to a meeting of shareholders shall be entitled to one vote upon the matter.

 

2.13 Voting for Directors

Each shareholder entitled to vote at an election of directors may vote, in person or by proxy, the number of shares owned by the shareholder for as many persons as there are directors to be elected and for whose election the shareholder has a right to vote. Unless otherwise provided in the Articles of Incorporation, the candidates elected shall be those receiving the largest number of votes cast, up to the number of directors to be elected. Directors may be elected by consent in lieu of an annual or special meeting in accordance with Section 2.14.

 

2.14 Action by Shareholders Without a Meeting

Any action that may or is required to be taken at a meeting of shareholders may be taken without a meeting or a vote, pursuant to the provisions of this Section 2.14.

 

  2.14.1   Unanimous Written Consent

Action may be taken by unanimous consent if (a) one or more consents, each in the form of a record, describing the action taken are executed by all the shareholders entitled to vote with respect to the matter and (b) the executed consents are delivered to the corporation for filing with the corporate records.

 

-13-


  2.14.2   General Provisions

(a) Form of Consent. The consent shall be set forth either in an executed written record or, if the corporation has designated an address, location or system to which the consent may be electronically transmitted and the consent is electronically transmitted to the designated address, location or system, in an executed electronically transmitted record.

(b) Record Date. If not otherwise fixed by the Board, the record date for determining shareholders entitled to take action without a meeting is the date the first shareholder consent is executed.

(c) Withdrawal of Consent. A shareholder may withdraw a consent only by delivering a notice of withdrawal in the form of a record to the corporation prior to the time that consents sufficient to authorize taking the action have been delivered to the corporation.

(d) Date of Signature. Every consent shall bear the date of execution of each shareholder that executes the consent.

(e) Time Allowed to Complete Execution of Consents. A consent is not effective to take the action referred to in the consent unless, within 60 days of the date of the earliest dated consent that is delivered to the corporation, consents executed by a sufficient number of shareholders to take action are delivered to the corporation.

(f) Effective Date of Consent Action. Unless the consent specifies a later effective date, actions taken by consent of the shareholders are effective when consents sufficient to authorize taking the action are in possession of the corporation.

(g) Inclusion in Corporate Records. The consent shall be inserted in the minute book as if it were the minutes of a meeting of the shareholders.

 

2.15 Inspectors of Election

 

  2.15.1   Appointment

In advance of any meeting of shareholders, the Board shall appoint one or more persons to act as inspectors of election at such meeting and to make a written report thereof. The Board may designate one or more persons to serve as alternate inspectors to serve in place of any inspector who is unable or fails to act. If no inspector or alternate is able to act at a meeting of shareholders, the chairperson of such meeting shall appoint one or more persons to act as inspectors of election at such meeting.

 

  2.15.2   Duties

The inspectors of election shall

(a) ascertain the number of shares of the corporation outstanding and the voting power of each such share;

 

-14-


(b) determine the shares represented at the meeting and the validity of proxies and ballots;

(c) count all votes and ballots;

(d) determine and retain for a reasonable period of time a record of the disposition of any challenges to any determination made by them; and

(e) certify their determination of the number of shares represented at the meeting and their count of the votes and ballots.

The validity of any proxy or ballot shall be determined by the inspectors of election in accordance with the applicable provisions of these Bylaws and the Washington Business Corporation Act as then in effect. In determining the validity of any proxy transmitted by telephone call, voice mail or other electronic transmission, the inspectors shall record in writing the information upon which they relied in making such determination. Each inspector of elections shall, before entering upon the discharge of his or her duties, take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors of election may appoint or retain other persons or entities to assist them in the performance of their duties.

SECTION 3. BOARD OF DIRECTORS

 

3.1 General Powers

All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board, except as may be otherwise provided in these Bylaws, the Articles of Incorporation or the Washington Business Corporation Act.

 

3.2 Number and Tenure

The Board shall be composed of not less than two directors, the specific number to be set from time to time solely by resolution of the Board in accordance with the provisions of the Articles of Incorporation. No decrease in the number of authorized directors shall have the effect of shortening the term of any incumbent director. Unless a director dies, resigns or is removed, such director shall hold office until the expiration of the term for which elected and until such director’s successor is elected and qualified or until there is a decrease in the authorized number of directors. In accordance with the provisions of the Articles of Incorporation, the directors of the corporation shall be divided into three classes. Directors need not be shareholders of the corporation or residents of the State of Washington.

 

-15-


3.3 Regular Meetings

By resolution, the Board, or any committee designated by the Board, may specify the time and place, within or without the State of Washington, for holding regular meetings without notice other than the resolution.

 

3.4 Special Meetings

Special meetings of the Board or any committee designated by the Board may be called by or at the request of the Chairperson of the Board, the Chief Executive Officer, the President, the Secretary or, in the case of special Board meetings, any director and, in the case of any special meeting of any committee designated by the Board, by the committee’s chairperson. The person or persons authorized to call special meetings may fix any place, within or without the State of Washington, for holding any special Board or committee meeting called by such person or persons.

 

3.5 Meetings by Communications Equipment

Members of the Board or any committee designated by the Board may participate in a meeting of the Board or committee by, or conduct the meeting through the use of, any means of communication by which all directors participating in the meeting can hear one another during the meeting, and participation in this manner shall constitute presence in person at a meeting.

 

3.6 Notice of Special Meetings

Notice of a special Board or committee meeting stating the place, day and hour of the meeting shall be provided to each director on the Board or committee, as applicable, in the form of a record or orally, as provided below. Neither the business to be transacted at nor the purpose of any special meeting need be specified in the notice of the meeting.

 

  3.6.1   Number of Days’ Notice

Notice of the meeting shall be given at least two days before the meeting.

 

  3.6.2   Type of Notice

(a) Oral Notice. Oral notice may be communicated in person, by telephone, wire or wireless equipment that does not transmit a facsimile of the notice, or by any electronic means that does not create a record.

(b) Notice Provided in a Tangible Medium. Notice may be provided in a tangible medium and may be transmitted by mail, private carrier, personal delivery, telegraph, teletype, telephone or wire or wireless equipment that transmits a facsimile of the notice.

 

-16-


(c) Notice Provided in an Electronic Transmission . Notice may be provided in an electronic transmission and be electronically transmitted.

(1) Consent to Receive Notice by Electronic Transmission. Notice to directors in an electronic transmission is effective only with respect to directors who have consented, in the form of a record, to receive electronically transmitted notices and designated in the consent the address, location or system to which these notices may be electronically transmitted. Notice provided in an electronic transmission includes material required or permitted to accompany the notice by the Washington Business Corporation Act or other applicable statute or regulation.

(2) Revocation of Consent to Receive Notice by Electronic Transmission. A director who has consented to receipt of electronically transmitted notices may revoke the consent by delivering a revocation to the corporation in the form of a record. The consent of a director to receive notice by electronic transmission is revoked if the corporation is unable to electronically transmit two consecutive notices given by the corporation in accordance with the consent, and this inability becomes known to the Secretary or any other person responsible for giving the notice. The inadvertent failure by the corporation to treat this inability as a revocation does not invalidate any meeting or other action.

(3) Posting Notice on an Electronic Network. Notice to directors who have consented to receipt of electronically transmitted notices may be provided by posting the notice on an electronic network and delivering to the director a separate record of the posting, together with comprehensible instructions regarding how to obtain access to the posting on the electronic network.

 

  3.6.3   Effectiveness of Written Notice

(a) Notice by Mail. Notice given by mail is effective five days after its deposit in the United States mail, as evidenced by the postmark, if mailed with first-class postage prepaid and correctly addressed to the director at his or her address shown on the records of the corporation.

(b) Notice by Registered or Certified Mail. Notice is effective on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee.

(c) Notice by Telegraph, Teletype or Facsimile Equipment. Notice sent to the director’s address, telephone number or other number appearing on the records of the corporation is effective when dispatched by telegraph, teletype or wire or wireless equipment that transmits a facsimile of the notice.

(d) Notice by Private Carrier. Notice given by private carrier is effective when received by the director.

 

-17-


(e) Personal Notice. Notice given by personal delivery is effective when received by the director.

(f) Notice by Electronic Transmission. Notice provided by electronic transmission, if in comprehensible form, is effective when it (i) is electronically transmitted to an address, location or system designated by the recipient for that purpose or (ii) has been posted on an electronic network and a separate record of the posting has been delivered to the recipient together with comprehensible instructions regarding how to obtain access to the posting on the electronic network.

 

  3.6.4   Effectiveness of Oral Notice

(a) Notice in Person or by Telephone. Oral notice is effective when received by the director.

(b) Notice by Wire or Wireless Equipment. Notice given by wire or wireless equipment that does not transmit a facsimile of the notice or by any electronic means that does not create a record is effective when communicated to the director.

 

3.7 Waiver of Notice

 

  3.7.1   Waiver by Delivery of a Record

A director may waive any notice required to be given to any director under the provisions of these Bylaws, the Articles of Incorporation or the Washington Business Corporation Act, before or after the date and time stated in the notice, and the waiver shall be equivalent to the giving of notice. The waiver must be delivered to the corporation by the director entitled to the notice for inclusion in the minutes or filing with the corporate records. The waiver shall be set forth either in an executed written record or, if the corporation has designated an address, location or system to which the waiver may be electronically transmitted and the waiver has been electronically transmitted to the designated address, location or system, in an executed electronically transmitted record. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Board or any committee designated by the Board need be specified in the waiver of notice of the meeting.

 

  3.7.2   Waiver by Attendance

A director’s attendance at or participation in a Board or committee meeting shall constitute a waiver of notice of the meeting, unless the director at the beginning of the meeting, or promptly upon his or her arrival, objects to holding the meeting or transacting business at the meeting and does not vote for or assent to action taken at the meeting.

 

-18-


3.8 Quorum

 

  3.8.1   Board

A majority of the number of directors fixed by or in the manner provided in these Bylaws shall constitute a quorum for the transaction of business at any Board meeting but, if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

 

  3.8.2   Committees

A majority of the number of directors composing any committee of the Board, as established and fixed by resolution of the Board, shall constitute a quorum for the transaction of business at any meeting of the committee but, if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

 

3.9 Manner of Acting

If a quorum is present when the vote is taken, the act of the majority of the directors present at a Board or committee meeting shall be the act of the Board or the committee, unless the vote of a greater number is required by these Bylaws, the Articles of Incorporation or the Washington Business Corporation Act.

 

3.10 Presumption of Assent

A director of the corporation who is present at a Board or committee meeting at which any action is taken shall be deemed to have assented to the action taken unless (a) the director objects at the beginning of the meeting, or promptly upon his or her arrival, to holding the meeting or transacting any business at the meeting, (b) the director’s dissent or abstention from the action taken is entered in the minutes of the meeting, or (c) the director delivers notice of the director’s dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation within a reasonable time after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken.

 

3.11 Action by Board or Committees Without a Meeting

Any action that could be taken at a meeting of the Board or of any committee created by the Board may be taken without a meeting if one or more consents setting forth the action so taken are executed by all the directors or by all the members of the committee either before or after the action is taken and delivered to the corporation, each of which shall be set forth in an executed written record or, if the corporation has designated an address, location or system to which the consent may be electronically transmitted and the consent is electronically transmitted to the designated address, location or system, in an executed electronically transmitted record. Action taken by consent of directors without a meeting is

 

-19-


effective when the last director executes the consent, unless the consent specifies a later effective date. The consent shall be inserted in the minute book as if it were the minutes of a Board or a committee meeting.

 

3.12 Resignation of Directors and Committee Members

Any director may resign from the Board or any committee of the Board at any time by delivering an executed notice to the Chairperson of the Board, the President, the Secretary or the Board. The resignation is effective upon delivery unless the notice of resignation specifies a later effective date, and unless otherwise specified, the acceptance of the resignation shall not be necessary to make it effective.

 

3.13 Removal of Directors and Committee Members

 

  3.13.1   Removal of Directors

(a) Prior to Threshold Date. Prior to the Threshold Date, at a meeting of shareholders called expressly for that purpose (in accordance with the procedures set forth in Sections 2.2 and 2.6), one or more directors, including the entire Board, may be removed with or without cause by the holders of the shares entitled to elect the director or directors whose removal is sought if, with respect to a particular director, the number of votes cast to remove the director exceeds the number of votes cast to not remove the director.

(b) After Threshold Date. After the Threshold Date, at a meeting of shareholders called expressly for that purpose (in accordance with the procedures set forth in Sections 2.2 and 2.6), one or more directors, including the entire Board, may be removed only for cause by the holders of the shares entitled to elect the director or directors whose removal is sought if, with respect to a particular director, the number of votes cast to remove the director exceeds the number of votes cast to not remove the director.

 

  3.13.2   Removal of Committee Members

The Board may remove any member of any committee elected or appointed by it by the affirmative vote of the greater of a majority of the directors then in office and the number of directors required to take action in accordance with these Bylaws.

 

3.14 Vacancies

Unless the Articles of Incorporation provide otherwise, any vacancies on the Board resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors may be filled as follows:

(a) prior to the Threshold Date, by the shareholders (in accordance with the procedures set forth in Sections 2.2 and 2.6), by the Board or, if the directors in office

 

-20-


constitute less than a quorum, by the affirmative vote of a majority of the remaining directors or the sole remaining director; and

(b) after the Threshold Date, only by the Board or, if the directors in office constitute less than a quorum, by the affirmative vote of a majority of the remaining directors or the sole remaining director.

The term of a director elected to fill a vacancy expires at the next election of directors by the shareholders.

 

3.15 Executive and Other Committees

 

  3.15.1   Creation of Committees

The Board, by resolution, may create standing or temporary committees, including an Executive Committee, Audit Committee, Compensation Committee and Nominating and Governance Committee, and appoint members from its own number and invest the committees with powers as it may see fit, subject to conditions as may be prescribed by the Board, the Articles of Incorporation, these Bylaws and applicable law. The resolution must be adopted by the greater of a majority of all the directors then in office or the number of directors required to take action in accordance with these Bylaws. Each committee must have two or more members, who shall serve at the pleasure of the Board.

 

  3.15.2   Authority of Committees

Each committee shall have and may exercise all the authority of the Board to the extent provided in the resolution of the Board creating the committee and any subsequent resolutions adopted in like manner, except that no committee shall have the authority to: (a) authorize or approve a distribution, except according to a general formula or method prescribed by the Board, (b) approve or propose to shareholders actions or proposals required by the Washington Business Corporation Act to be approved by shareholders, (c) fill vacancies on the Board or any committee of the Board, (d) amend the Articles of Incorporation pursuant to RCW 23B.10.020, (e) adopt, amend or repeal Bylaws, (f) approve a plan of merger not requiring shareholder approval, or (g) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board may authorize a committee or a senior executive officer of the corporation to do so within limits specifically prescribed by the Board.

 

  3.15.3   Minutes of Meetings

All committees shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose.

 

-21-


3.16 Compensation of Directors and Committee Members

By Board resolution, directors and committee members may be paid for their service as directors and committee members in such amounts and form as specified in such resolution, which may include, without limitation, their expenses, if any, of attendance at each Board or committee meeting, a fixed sum for attendance at each Board or committee meeting or a stated salary as director or a committee member, and such other compensation as the Board may determine (including, without limitation, stock options or other equity compensation). No payment for expenses or compensation as a director or committee member shall preclude any director or committee member from serving the corporation in any other capacity and receiving compensation for his or her services.

SECTION 4. OFFICERS

 

4.1 Appointment and Term

The officers of the corporation shall be those officers appointed from time to time by the Board or by any other officer empowered to do so. The Board shall have sole power and authority to appoint any executive officer and shall have the authority to appoint any other officers and to prescribe the respective terms of office, authority and duties of the executive officers or other officers. As used in these Bylaws, the term “executive officer” shall mean the President, any Vice President in charge of a principal business unit, division or function or any other officer who performs a policymaking function. The Board may delegate to any executive officer the power to appoint any subordinate officers and to prescribe their respective terms of office, authority and duties. Any two or more offices may be held by the same person. Unless an officer dies, resigns or is removed from office, he or she shall hold office until his or her successor is appointed.

 

4.2 Resignation of Officers

Any officer may resign at any time by delivering a notice to the corporation either in an executed written record or in an executed electronically transmitted record. The resignation is effective upon delivery unless the notice of resignation specifies a later effective date, and unless otherwise specified, the acceptance of the resignation shall not be necessary to make it effective.

 

4.3 Removal of Officers

Any officer may be removed by the Board at any time, with or without cause. An officer or assistant officer, if appointed by another officer, may be removed by any officer authorized to appoint officers or assistant officers.

 

4.4 Contract Rights of Officers

The appointment of an officer does not itself create contract rights.

 

-22-


4.5 Chairperson of the Board

If appointed, the Chairperson of the Board shall perform the duties assigned to him or her by the Board from time to time, and shall preside over meetings of the Board and shareholders unless another officer is appointed or designated by the Board as chairperson of the meetings.

 

4.6 Chief Executive Officer

If appointed, the Chief Executive Officer shall be the chief executive officer of the corporation, shall preside over meetings of the Board and shareholders in the absence of a Chairperson of the Board, and, subject to the Board’s control, shall supervise and control all of the assets, business and affairs of the corporation. The Chief Executive Officer may sign, with the Secretary or an Assistant Secretary or with the Treasurer or an Assistant Treasurer, certificates for shares of the corporation, deeds, mortgages, bonds, contracts or other instruments, except when the signing and execution thereof have been expressly delegated by the Board or by these Bylaws to some other officer or agent of the corporation or are required by law to be otherwise signed or executed by some other officer or in some other manner. In general, the Chief Executive Officer shall perform all duties incident to the office of Chief Executive Officer and such other duties as are prescribed by the Board from time to time.

 

4.7 President

In the event of the death of the Chief Executive Officer or a vacancy in the office of the Chief Executive Officer, or his or her inability to act, the President, if appointed, shall perform the duties of the Chief Executive Officer, except as may be limited by resolution of the Board, with all the powers of and subject to all the restrictions upon the Chief Executive Officer. The President may sign, with the Secretary or an Assistant Secretary or with the Treasurer or an Assistant Treasurer, certificates for shares of the corporation. In general, the President shall perform all duties incident to the office of President and other duties prescribed by the Board from time to time.

 

4.8 Vice President

In the event of the death of the President or a vacancy in the office of the President, or his or her inability to act, the Vice President shall, if appointed, perform the duties of the President, except as may be limited by resolution of the Board, with all the powers of and subject to all the restrictions upon the President. If there is more than one Vice President, the Vice President who was designated by the Board as the successor to the President, or if no Vice President is so designated, the Vice President first elected to the office of Vice President, shall perform the duties of the President, except as may be limited by resolution of the Board, with all the powers of and subject to all the restrictions upon the President. Any Vice President may sign, with the Secretary or an Assistant Secretary or with the Treasurer or an Assistant Treasurer, certificates for shares of the corporation. Vice Presidents shall perform other duties as from time to time may be assigned to them by the Chief Executive Officer or the President or by or at the direction of the Board.

 

-23-


4.9 Secretary

If appointed, the Secretary shall be responsible for preparation of minutes of the meetings of the Board and shareholders, maintenance of the corporation records and stock registers, and authentication of the corporation’s records and shall in general perform all duties incident to the office of Secretary and other duties as from time to time may be assigned to him or her by the President or by or at the direction of the Board. In the absence of the Secretary, an Assistant Secretary may perform the duties of the Secretary.

 

4.10 Treasurer

If appointed, the Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation, receive and give receipts for funds due and payable to the corporation from any source whatsoever, and deposit funds in the name of the corporation in banks, trust companies or other depositories selected in accordance with the provisions of these Bylaws, and in general shall perform all duties incident to the office of Treasurer and other duties as from time to time may be assigned to him or her by the President or by or at the direction of the Board. In the absence of the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer.

 

4.11 Salaries

The salaries of the officers shall be fixed from time to time by the Board or by any person or persons to whom the Board has delegated authority to set salaries of officers. No officer shall be prevented from receiving a salary by reason of the fact that he or she is also a director of the corporation.

SECTION 5. CERTIFICATES FOR SHARES AND THEIR TRANSFER

 

5.1 Issuance of Shares

No shares of the corporation shall be issued unless authorized by the Board or by a committee designated by the Board to the extent the committee is empowered to do so.

 

5.2 Certificates for Shares

Certificates representing shares of the corporation shall be signed, either manually or in facsimile, (a) by any two officers designated by the Board or (b) if no specific designation is made, by the Chairperson of the Board, the Chief Executive Officer, the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary and shall include on their face written notice of any restrictions that may be imposed on the transferability of the shares. All certificates shall be consecutively numbered or otherwise identified.

 

-24-


5.3 Issuance of Shares Without Certificates

The Board may authorize the issuance of some or all of the shares of any or all of the corporation’s classes or series without certificates. The authorization does not affect shares already represented by certificates until they are surrendered to the corporation. Within a reasonable time after the issuance or transfer of shares without certificates, the corporation shall send the shareholder a complete record containing the information required on certificates by applicable Washington law.

 

5.4 Stock Records

The stock transfer books shall be kept at the principal office of the corporation or at the office of the corporation’s transfer agent or registrar. The name and address of each person to whom certificates for shares are issued, together with the class and number of shares represented by the certificate and the date of issuance of the certificate, shall be entered on the stock transfer books of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner for all purposes.

 

5.5 Restriction on Transfer

Except to the extent that the corporation has obtained an opinion of counsel acceptable to the corporation that transfer restrictions are not required under applicable securities laws, or has otherwise satisfied itself that transfer restrictions are not required, all certificates representing shares of the corporation shall bear a legend on the face of the certificate, or on the reverse of the certificate if a reference to the legend is contained on the face, that reads substantially as follows or that substantially effects the same purpose:

The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state securities laws, and no interest may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (a) there is an effective registration statement under the Act and applicable state securities laws covering the transaction involving these securities, (b) the corporation receives an opinion of legal counsel for the holder of these securities satisfactory to the corporation stating that the transaction is exempt from registration, or (c) the corporation otherwise satisfies itself that the transaction is exempt from registration.

If any securities of the corporation are issued pursuant to Regulation S (“ Regulation S ”) of the Securities Act of 1933, as amended (the “ 1933 Act ”), the corporation will refuse to register any subsequent transfer of such securities if such transfer is not made in accordance with Regulation S, pursuant to registration under the 1933 Act or pursuant to an available exemption from registration under the 1933 Act.

 

-25-


5.6 Transfer of Shares

The transfer of shares of the corporation shall be made only on the stock transfer books of the corporation pursuant to authorization or document of transfer made by the holder of record or by the holder’s legal representative, who shall furnish proper evidence of authority to transfer, or by the holder’s attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificates for a like number of shares have been surrendered and canceled.

 

5.7 Lost, Destroyed or Damaged Certificates

In the case of a lost, destroyed or damaged certificate, a new certificate may be issued in its place upon terms and indemnity to the corporation as the Board may prescribe.

SECTION 6. INDEMNIFICATION

 

6.1 Right to Indemnification

Each person who was, is or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit, claim or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (a “ proceeding ”), by reason of the fact that he or she is or was a director or officer of the corporation or, that being or having been a director or officer of the corporation, he or she is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (an “ indemnitee ”), whether the basis of a proceeding is alleged action in an official capacity or in any other capacity while serving as a director, officer, partner, trustee, employee or agent, shall be indemnified and held harmless by the corporation against all losses, claims, damages (compensatory, exemplary, punitive or otherwise), liabilities and expenses (including attorneys’ fees, costs, judgments, fines, ERISA excise taxes or penalties, amounts to be paid in settlement and any other expenses) actually and reasonably incurred or suffered by the indemnitee in connection with the proceeding, and the indemnification shall continue as to an indemnitee who has ceased to be a director or officer of the corporation or a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. Except as provided in Section 6.4 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify the indemnitee in connection with a proceeding (or part of a proceeding) initiated by the indemnitee only if a proceeding (or part of a proceeding) was authorized or ratified by the Board. The right to indemnification conferred in this Section 6 shall be a contract right.

 

-26-


6.2 Restrictions on Indemnification

No indemnification shall be provided to any indemnitee for acts or omissions of the indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the indemnitee finally adjudged to be in violation of RCW 23B.08.310, for any transaction with respect to which it was finally adjudged that the indemnitee personally received a benefit in money, property or services to which the indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying indemnification. Notwithstanding the foregoing, if RCW 23B.08.560 is amended, the restrictions on indemnification set forth in this Section 6.2 shall be as set forth in the amended statutory provision.

 

6.3 Advancement of Expenses

The right to indemnification conferred in this Section 6 shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition (an “ advancement of expenses ”). An advancement of expenses shall be made upon delivery to the corporation of an undertaking (an “ undertaking ”), by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that the indemnitee is not entitled to be indemnified.

 

6.4 Right of Indemnitee to Bring Suit

If a claim under Section 6.1 or 6.3 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part, in any such suit or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of litigating the suit. The indemnitee shall be presumed to be entitled to indemnification under this Section 6.4 upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, when the required undertaking has been tendered to the corporation), and thereafter the corporation shall have the burden of proof to overcome the presumption that the indemnitee is so entitled.

 

6.5 Procedures Exclusive

Pursuant to RCW 23B.08.560(2) or any successor provision, the procedures for indemnification and the advancement of expenses set forth in this Section 6 are in lieu of the procedures required by RCW 23B.08.550 or any successor provision.

 

-27-


6.6 Nonexclusivity of Rights

Except as set forth in Section 6.5, the right to indemnification and the advancement of expenses conferred in this Section 6 shall not be exclusive of any other right that any person may have or hereafter acquire under any statute, provision of, the Articles of Incorporation or Bylaws of the corporation, general or specific action of the Board or shareholders, contract or otherwise. Notwithstanding any amendment or repeal of this Section 6, or of any amendment or repeal of any of the procedures that may be established by the Board pursuant to this Section 6, any indemnitee shall be entitled to indemnification in accordance with the provisions of these Bylaws and those procedures with respect to any acts or omissions of the indemnitee occurring prior to the amendment or repeal.

 

6.7 Insurance, Contracts and Funding

The corporation may maintain insurance, at its expense, to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss, whether or not the corporation would have the authority or right to indemnify the person against the expense, liability or loss under the Washington Business Corporation Act or other law. The corporation may enter into contracts with any director, officer, partner, trustee, employee or agent of the corporation in furtherance of the provisions of this Section 6 and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of the amounts as may be necessary to effect indemnification as provided in this Section 6.

 

6.8 Indemnification of Employees and Agents of the Corporation

In addition to the rights of indemnification set forth in Section 6.1, the corporation may, by action of the Board, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (a) with the same scope and effect as the provisions of this Section 6 with respect to indemnification and the advancement of expenses of directors and officers of the corporation, (b) pursuant to rights granted or provided by the Washington Business Corporation Act, or (c) as are otherwise consistent with law.

 

6.9 Persons Serving Other Entities

Any person who, while a director or officer of the corporation, is or was serving (a) as a director, officer, employee or agent of another corporation of which a majority of the shares entitled to vote in the election of its directors is held by the corporation or (b) as a partner, trustee or otherwise in an executive or management capacity in a partnership, joint venture, trust, employee benefit plan or other enterprise of which the corporation or a majority owned subsidiary of the corporation is a general partner or has a majority ownership, shall conclusively be deemed to be so serving at the request of the corporation and entitled to indemnification and the advancement of expenses under Sections 6.1 and 6.3, respectively.

 

-28-


SECTION 7. GENERAL MATTERS

 

7.1 Accounting Year

The accounting year of the corporation shall be the calendar year, but if a different accounting year is at any time selected by the Board for purposes of federal income taxes, or any other purpose, the accounting year shall be the year so selected.

 

7.2 Amendment or Repeal of Bylaws

These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board, except that the Board may not amend or repeal any Bylaw that the shareholders have expressly provided, in amending or repealing the Bylaw, may not be amended or repealed by the Board. The shareholders may also alter, amend and repeal these Bylaws or adopt new Bylaws (in accordance with the procedures set forth in Section 2.2, as applicable, and Section 2.6); provided, however, that the affirmative vote of the holders of at least two-thirds of all the votes entitled to be cast by the shareholders of the corporation generally in the election of directors, voting together as a single voting group, shall be required for the shareholders of the corporation to alter, amend or repeal any provision of these Bylaws or adopt new Bylaws.

 

7.3 Books and Records

The corporation shall:

(a) keep as permanent records minutes of all meetings of its shareholders and the Board, a record of all actions taken by shareholders or the Board without a meeting, and a record of all actions taken by a committee of the Board exercising the authority of the Board on behalf of the corporation;

(b) maintain appropriate accounting records;

(c) maintain or hire an agent to maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each;

(d) maintain its records in written form or in another form capable of conversion into written form within a reasonable time; and

(e) keep a copy of the following records at its principal office;

(i) the Articles of Incorporation and all amendments thereto as currently in effect;

(ii) these Bylaws and all amendments thereto as currently in effect;

(iii) the minutes of all meetings of shareholders and records of all actions taken by shareholders without a meeting for the past three years;

 

-29-


(iv) the financial statements described in RCW 23B.16.200(1) for the past three years;

(v) all communications in the form of a record to shareholders generally within the past three years;

(vi) a list of the names and business addresses of the current directors and officers; and

(vii) the most recent annual report delivered to the Washington Secretary of State.

 

7.4 Contracts, Loans, Checks and Deposits

 

  7.4.1   Contracts

The Board may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. The authority may be general or confined to specific instances.

 

  7.4.2   Loans to the Corporation

No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. The authority may be general or confined to specific instances.

 

  7.4.3   Checks, Drafts, etc.

All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by the officer or officers, or agent or agents, of the corporation and in the manner from time to time determined by resolution of the Board.

 

  7.4.4   Deposits

All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in banks, trust companies or other depositories selected by the Board.

 

7.5 Corporate Seal

The Board may provide for a corporate seal that shall consist of the name of the corporation, the state of its incorporation and the year of its incorporation.

 

-30-

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13-14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Spencer M. Rascoff, certify that:

1. I have reviewed this report on Form 10-Q of Zillow, Inc. for the fiscal quarter ended June 30, 2011;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control