-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GgUhJVQiviCsJ+HmDDYG+WSy0hXi5Au7ftyMuVWk2pbgA6+N4FQN8PF3mFY+WXT8 g4jCWclWC1SxhKnlnScDFA== 0000891618-99-004401.txt : 20000211 0000891618-99-004401.hdr.sgml : 20000211 ACCESSION NUMBER: 0000891618-99-004401 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: E LOAN INC CENTRAL INDEX KEY: 0001082337 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 770460084 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-25621 FILM NUMBER: 99721174 BUSINESS ADDRESS: STREET 1: 5875 ARNOLD RD., SUITE 100 CITY: DUBLIN STATE: CA ZIP: 94568 BUSINESS PHONE: 9252412402 10-Q/A 1 AMENDMENT #1 TO FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Amendment No. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 Commission File Number: 000-25621 E-LOAN, INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0460084 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5875 ARNOLD ROAD, SUITE 100, DUBLIN CALIFORNIA 94568 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (925) 241-2400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of July 1, 1999, 38,787,029 shares of the Registrant's Common Stock, $0.001 par value per share, were issued and outstanding 2 E-LOAN, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Balance Sheets as of June 30, 1999 and December 31, 1998.................................... 2 Statements of Operations for the three months and six months ended June 30, 1998 and June 30, 1999....................................................... 3 Statements of Cash Flows for the six months ended June 30, 1998 and June 30, 1999........................................................................... 4 Notes to Unaudited Financial Statements..................................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................................. 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................... 24 Item 2. Changes in Securities and Use of Proceeds................................................... 24 Item 3. Defaults Upon Senior Securities............................................................. 24 Item 4. Submission of Matters to a Vote of Security Holders......................................... 24 Item 5. Other Information........................................................................... 24 Item 6. Exhibits and Reports on Form 8-K............................................................ 25 Signature Index to Exhibits
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS E-LOAN, INC. BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1999 1998 (UNAUDITED) --------- --------- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 9,141 $ 931 Proceeds receivable from sale of common stock ................................. -- 64,840 Mortgage loans held-for-sale .................................................. 42,154 70,462 Accounts receivable, net ...................................................... 411 212 Prepaids and other current assets ............................................. 721 7,421 --------- --------- Total current assets ........................................................ 52,427 143,866 Furniture and equipment, net ........................................................ 2,366 3,688 Deposits and other assets ........................................................... 730 1,903 --------- --------- Total assets ................................................................ $ 55,523 $ 149,457 ========= ========= LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Warehouse lines payable ....................................................... $ 41,046 $ 69,106 Accounts payable, accrued expenses and other current liabilities .............. 2,655 12,841 Capital lease obligation ...................................................... 253 252 Notes payable ................................................................. 71 5,424 --------- --------- Total current liabilities ................................................... 44,025 87,623 Capital lease obligations ........................................................... 719 634 Notes payable ....................................................................... 570 1,073 --------- --------- Total liabilities ........................................................... 45,314 89,330 --------- --------- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Series C, 4,467,912 shares authorized; 4,069,936 and 4,269,936 shares issued, and 4,269,936 and 0 shares outstanding at December 31, 1998 and June 30, 1999 (aggregate liquidation preference $5,245,702 and $0 at December 31, 1998 and June 30, 1999) ................................ 5,526 -- Series C-1, 4,467,912 shares authorized; 0 shares issued and outstanding (liquidation preference $1.22852 per share) ................................. -- -- Series D, 1,950,000 shares authorized; 1,662,529 and 1,702,529 shares issued, and 1,662,529 and 0 shares outstanding at December 31, 1998 and June 30, 1999 (aggregate liquidation preference $15,400,006 and $0 at December 31, 1998 and June 30, 1999) ....................................... 15,867 -- --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Convertible preferred stock: Series A, 428,635 shares authorized; 428,635 shares issued, and 428,635 and 0 shares outstanding at December 31, 1998 and June 30, 1999 (aggregate liquidation preference $94,300 and $0 at December 31, 1998 and June 30, 1999) ........................................ 91 -- Series B, 450,708 shares authorized; 430,207 shares issued, and 430,207 and 0 shares outstanding at December 31, 1998 and June 30, 1999 (aggregate liquidation preference $412,999 and $0 at December 31, 1998 and June 30, 1999) ........................................ 411 -- Common stock, 50,000,000 shares authorized; 12,524,010 and 38,787,029 shares issued and outstanding at December 31, 1998 and June 30, 1999 ........ 13 39 Less: subscription receivable ....................................................... (4) (4) Unearned compensation ............................................................... (4,477) (31,839) Additional paid in capital .......................................................... 5,382 132,830 Accumulated deficit ................................................................. (12,600) (40,899) --------- --------- Total stockholders' equity (deficit) ........................................ (11,184) 60,127 --------- --------- Total liabilities, mandatorily redeemable convertible preferred stock and stockholders' equity $ 55,523 $ 149,457 ========= =========
The accompanying notes are an integral part of these financial statements. 2 4 E-LOAN, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1998 1999 1998 1999 -------- -------- -------- -------- Revenues .......................................... $ 1,233 $ 4,562 $ 1,759 $ 9,364 Operating expenses: Operations ................................... 1,157 4,835 2,022 9,274 Sales and marketing .......................... 890 7,574 1,414 11,272 Technology ................................... 392 749 567 1,279 General and administrative ................... 319 2,473 590 3,469 Amortization of unearned compensation ........ 211 5,785 255 12,339 -------- -------- -------- -------- Total operating expenses .............. 2,969 21,416 4,848 37,633 -------- -------- -------- -------- Loss from operations ........................ (1,736) (16,854) (3,089) (28,269) Other income, net ................................. 29 (66) 49 (31) -------- -------- -------- -------- Net loss .................................... (1,707) (16,920) (3,040) (28,300) Accretion of preferred stock ...................... (125) (525) (250) (1,042) -------- -------- -------- -------- Net loss applicable to common hareholders $ (1,832) $(17,445) $ (3,290) $(29,342) -------- -------- -------- -------- Net loss per share: Basic and diluted ............................. $ (0.15) $ (1.29) $ (0.27) $ (2.24) ======== ======== ======== ======== Weighed-average shares - Basic and diluted .......................... 12,368 13,546 12,346 13,072 ======== ======== ======== ======== Pro forma net loss per share: Basic and diluted .......................... $ (0.08) $ (0.52) $ (0.14) $ (0.88) ======== ======== ======== ======== Pro forma weighed-average shares - Basic and diluted .......................... 23,314 33,584 23,032 33,263 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 3 5 E-LOAN, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1998 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................. $ (3,040) $ (28,300) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of unearned compensation ................................... 255 12,339 Charitable contribution of common stock ................................. -- 900 Depreciation and amortization ........................................... 90 466 Change in operating assets and liabilities: Accounts receivable .................................................. (252) 202 Net change in mortgage loans held-for-sale ........................... -- (28,308) Prepaids, deposits and other assets .................................. (38) (7,377) Accounts payable, accrued expenses and other ......................... (79) 10,175 --------- --------- Net cash used in operating activities ............................. (3,064) (39,903) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment ....................................... (171) (1,788) --------- --------- Net cash used in investing activities ............................. (171) (1,788) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of issuance costs related to initial public offering .............. -- (1,351) Proceeds from issuance of common stock .................................... 22 153 Payments on obligations under capital leases .............................. -- (85) Proceeds from notes payable ............................................... -- 5,855 Repayments of notes payable ............................................... (79) -- Proceeds from warehouse lines payable ..................................... -- 583,315 Repayments of warehouse lines payable ..................................... -- (555,255) Proceeds from issuance of preferred stock, net ............................ -- 849 --------- --------- Net cash provided by (used in) financing activities ............... (57) 33,481 --------- --------- Net (decrease) in cash .................................................... (3,292) (8,210) --------- --------- Cash and cash equivalents at beginning of period .......................... 4,218 9,141 --------- --------- Cash and cash equivalents at end of period ................................ $ 926 $ 931 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .................................................... $ 12 $ 1,469 ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES: Furniture and equipment under capital leases .............................. $ 790 $ 0 ========= ========= Proceeds from sale of common stock, net (received July 2, 1999) ............... -- $ 64,480 ========= =========
The accompanying notes are an integral part of these financial statements. 4 6 E-LOAN, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. THE COMPANY: E-Loan, Inc. (the "Company") was incorporated on August 26, 1996 and began marketing its services in June 1997. Prior to that date, the Company conducted business through a predecessor company, Palo Alto Funding Group ("PAFG") which was established in 1992 as a mortgage broker. The Company is a provider of mortgage offerings online and is engaged in the brokerage, origination, and sale of mortgage loans collateralized by residential real estate. The Company serves U.S. consumers in the first and second home mortgage loan market over the internet. 2. BASIS OF PRESENTATION: Interim Financial Information (unaudited) The accompanying financial statements as of June 30, 1999 and 1998 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows as of June 30, 1999 and 1998. These financial statements and notes thereto are unaudited and should be read in conjunction with the Company's audited financial statements included in the Company's final Prospectus, dated June 28, 1999. The results for the three months and six months ended June 30, 1999 are not necessarily indicative of the expected results for the year ending December 31, 1999. Use Of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain amounts in the fiscal 1998 and first quarter 1999 financial statements have been reclassified to conform to the second quarter 1999 presentation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Initial Public Offering and Conversion of Mandatorily Redeemable Convertible Preferred Stock: The Company completed its initial public offering of 4,020,000 shares of its common stock on June 29, 1999, raising $52.3 million in net proceeds. Concurrently, the Company sold 960,061 shares of its common stock for $12.5 million in net proceeds in a private placement to Forum Holdings, Inc., an investment subsidiary of Group Arnault. Simultaneously with the closing of the initial public offering, all the convertible preferred stock, mandatorily redeemable convertible preferred stock and a warrant to purchase mandatorily redeemable preferred stock were automatically converted into an aggregate of 20,620,194 shares of common stock. The total proceeds of $64.8 million were received on July 2, 1999. 5 7 E-LOAN, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: Software Development Costs In 1999 the Company adopted SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" which required that the Company expense computer software costs as they are incurred in the preliminary project stage. Once the capitalization criteria of the SOP have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software and payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use computer software are capitalized. Capitalized costs are amortized over three years on a straight-line basis. As of June 30, 1999, the Company had capitalized approximately $0.6 million in software development costs. Net Income (Loss) Per Share The Company computes net loss per share in accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128 basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common and common equivalent shares outstanding during the period, to the extent such common equivalent shares are dilutive. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and warrants and upon conversion of Series A, B, C and Series D convertible preferred stock. Pro forma net loss per share has been computed by dividing net loss applicable to common shareholders by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares assume the conversion of all preferred stock (which were ultimately converted to common stock in conjunction with the initial public offering, as if the conversion occurred at the beginning of the period or at date of issuance, if later. 4. WAREHOUSE LINES PAYABLE As of June 30, 1999, the Company had a warehouse line of credit for borrowings up to $25 million, which includes a temporary overdraft limit of $15 million for interim financing of mortgage loans. The interest rate charged on borrowings against the warehouse line of credit is variable based on the commercial paper rate of the lender plus various percentage rates. Borrowings are collateralized by the mortgage loans held-for-sale. At June 30, 1999, approximately $23 million was outstanding under this line. On July 28, 1999 the warehouse line of credit increased to $50 million. Either the Company or the lender can terminate the agreement at any time. This agreement expires April 30, 2000. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. The Company was in compliance with these covenants at June 30, 1999. Additionally, the Company entered into an agreement with a lender to finance up to $35.0 million of mortgage loan inventory pending sale of these loans to mortgage loan purchasers. This additional loan inventory financing is secured by the related mortgage loans. The interest rate charged is LIBOR plus 1.25%. Either the Company or the lender can terminate the agreement at any time. At June 30, 1999 there was no outstanding balance under this financial 6 8 E-LOAN, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 4. WAREHOUSE LINES PAYABLE, continued: commitment. This agreement includes various non-financial negative and affirmative covenants. The Company was in compliance with these covenants at June 30, 1999. On May 21, 1999 the Company entered into an agreement with a lender for a $100 million committed line of credit. Concurrent with the initial public offering, the agreement was increased to include an additional $100 million in uncommitted funds. Interest accrues on these funds at LIBOR plus .95%. The line expires May 20, 2000. On January 15, 1999, the Company entered into a warehouse line of credit agreement for borrowings of up to $40 million for interim financing of mortgage loans. The interest rate charged on borrowings against the line is equal to LIBOR plus 1.85%. The line of credit expires on February 2, 2000. At June 30, 1999, approximately $39 million was outstanding under this line. Either the Company or the lender can terminate the agreement at anytime. This line of credit agreement generally requires the Company to comply with various financial and non-financial covenants. The Company was in compliance with these covenants as of June 30, 1999. Upon expiration of any of these lines, management believes it will either renew its existing lines or obtain sufficient additional lines. 5. NOTES PAYABLE During March 1999, the Company obtained a commitment of $5 million for a revolving line of credit capital facility. The interest rate is based on the prime rate and the facility expired on the closing of the Company's initial public offering. Two of the Company's founding stockholders have provided guarantees for the Company's obligation under this line of credit. At June 30, 1999, $5 million was outstanding under this revolving line of credit. Outstanding balance was paid in full in July 1999. 6. REVENUES AND OTHER INCOME, NET The following table provides the components of revenues ($000s):
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1998 1999 1998 1999 -------- -------- -------- -------- Brokerage Fees................. $1,220 $ 575 $1,746 $2,307 Gain on Sale of Loans.......... 13 3,004 13 5,247 Interest Income on Loans....... -- 983 -- 1,810 ------ ------ ------ ------ Total Revenues................. $1,233 $4,562 $1,759 $9,364 ====== ====== ====== ======
The following table provides the components of other income, net ($000s):
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1998 1999 1998 1999 -------- -------- -------- -------- Interest on short-term investments... $32 $ 23 $ 61 $ 85 Interest expense on non-warehouse facilities borrowings.............. (3) (89) (12) (116) --- ---- ---- ----- $29 $(66) $ 49 $ (31) === ==== ==== =====
7. OPERATING EXPENSES The following table provides detail of the Company's operating expenses classified by the following categories ($000s):
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1998 1999 1998 1999 -------- -------- -------- -------- Compensation and benefits...... $1,160 $ 4,270 $1,695 $ 7,884 Processing costs............... 203 453 554 639 Advertising and marketing...... 754 6,386 1,178 9,641 Professional services.......... 275 1,214 494 1,718 Occupancy costs................ 130 641 260 1,175 Computer and internet.......... 42 195 112 273 General and administrative..... 194 1,468 300 1,928 Interest expense on warehouse borrowings................... -- 1,004 -- 2,036 Amortization of unearned compensation................. 211 5,785 255 12,339 ------ ------ ------ ------- Total Operating Expenses....... $2,969 $21,416 $4,848 $37,633 ====== ======= ====== =======
8. COMMITMENTS AND CONTINGENCIES FINANCIAL INSTRUMENT CONTINGENCIES Upon receiving a locked commitment from a borrower, the Company simultaneously enters into a forward sale with the ultimate investor. At June 30, 1999, the Company was a party to commitments to fund loans at interest rates previously agreed (locked) by both the ultimate lender and the borrower for specified periods of time. Prior to originating loans under these commitments, the Company evaluates each customer's credit and collateral worthiness. The Company uses its best efforts to fund these locked loans within the agreed-upon locked period. If the loan cannot be funded within this period, or if the Company is unable to secure a rate lock from the ultimate lender equal to or less than the rate lock extended to the borrower, the Company will earn less revenue than it anticipated at the time it locked with the borrower. At June 30, 1999, the Company had provided locks to originate loans amounting to approximately $127.6 million (the "locked pipeline"). In addition, the Company had commitments at June 30, 1999, in its capacity as a broker, amounting to approximately $6.6 million. At June 30, 1999, the Company had entered into non-mandatory forward loan sale agreements, including commitments with lenders for brokered loans, amounting to approximately $204.7 million (this includes the mortgage loans held-for-sale at June 30, 1999, of approximately $70.5 million). The forward loan sale agreements do not subject the Company to mandatory delivery and there is no penalty if the Company does not deliver into the commitment. The Company is exposed to the risk that these counterparties may be unable to meet the terms of these sale agreements. The investors are well-established U.S. financial institutions; the Company does not require collateral to support these commitments, and there has been no failure on the part of the counterparties to meet the terms of these agreements to date. 7 9 E-LOAN, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 9. INVESTMENTS In May 1999, the Company acquired a 40% minority interest in E-LOAN Japan, K.K., a joint venture between E-LOAN, Inc. and Softbank Corp. E-LOAN Japan, K.K., will develop and market an online mortgage marketplace to serve consumers in Japan and the Republic of Korea. The Company accounts for these investments according to the equity method of accounting. 10. SUBSEQUENT EVENTS On July 2, 1999, the Company filed a restated Certificate of Incorporation that increased the authorized common shares to 70,000,000 and provided for 5,000,000 authorized shares of undesignated preferred stock. 8 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the related Notes thereto included elsewhere in this Form 10-Q. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under "Factors Affecting Future Operating Results." The Company disclaims any obligation to update information contained in any forward-looking statement. See "Forward-Looking Statements." OVERVIEW E-LOAN is a leading online provider of mortgages and is engaged in the brokerage, origination and sale of mortgage loans secured by residential real estate. E-LOAN's revenues are derived from the brokering of loans and the origination and sale of loans. Brokered loans are funded through lending partners and E-LOAN never takes title to the mortgage. Brokerage revenues are comprised of the mark-up to the lending partner's loan price, and processing and credit reporting fees. These revenues are recognized at the time a loan is closed. Originated and sold loans are loans that are funded through E-LOAN's own warehouse lines of credit and sold to mortgage loan purchasers. Loan origination and sale revenues consist of proceeds in excess of the carrying value of the loan, origination fees less certain direct origination costs, other processing fees and interest paid by borrowers on loans that E-LOAN holds for sale. These revenues are recognized at the time the loan is sold or, for interest income, as earned during the period from funding to sale. E-LOAN earns additional revenue from its loan origination and sale operations as compared to brokered loan operations because the sale of loans includes a service release premium. E-LOAN's loan origination and sale operations were initiated in June 1998 and represented 35% of total revenues for the year ended December 31, 1998 and 64% and 83% for the three months ended March 31, 1999 and June 30, 1999, respectively. E-LOAN expects revenues derived from its loan origination and sale operations to continue to increase as a percentage of total revenues in future quarters. E-LOAN's percentage of purchase mortgage business is increasing. Part of E-Loan's strategy is to become less reliant on refinance loans, which are more sensitive to changes in interest rates. Historically, purchase mortgages have demonstrated growth through a number of economic cycles. For the quarter ended June 30, 1999, approximately 18% of closed loans and 53% of application volumes were attributed to purchase mortgages. This compares to 5% and 28%, respectively, for the quarter ended March 31, 1999. For the quarter ended June 30, 1999, 63% of all loans were originated in California. This compares to 83% for the quarter ended December 31, 1998 and 69% for the quarter ended March 31, 1999. We expect that the percentage of loans originated outside of California will continue to increase because of our national branding and advertising programs. In generating revenues, E-LOAN relies on a number of strategic Internet distribution partners to direct a significant number of prospective customers to its website. E-LOAN considers its distribution partnerships with Yahoo!, E*Trade and CBS MarketWatch to be the most critical to its ability to generate revenues. Both Yahoo! and E*Trade have made equity investments in E-LOAN. As a result of our limited operating history and our recent growth, it will be necessary to implement new and expanded operational, financial and administrative systems and control procedures to enable us to expand, train and manage our employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and operations departments. For example, we intend to implement both a new financial reporting system and a loan production system by the end of 1999. 9 11 E-LOAN FOUNDATION STOCK ISSUANCE In May 1999, E-LOAN donated 75,000 shares of common stock in connection with its establishment of a charitable foundation. The shares donated had an estimated fair value of $900,000, which E-LOAN recorded as a general and administrative expense in the three-month period ending June 30, 1999. AMORTIZATION OF UNEARNED COMPENSATION As of December 31, 1998, E-LOAN had recorded unearned compensation in the amount of $5.7 million in connection with certain stock issuances and option grants, which were considered to be compensatory. E-LOAN recorded an additional $38.2 million in unearned compensation in the six months ended June 30, 1999. The amounts related to options are being amortized on an accelerated basis over the four-year vesting period associated with these options. E-LOAN amortized $5.8 million and $12.3 million for the three and six months ended June 30, 1999, respectively, compared to $0.2 million and $0.3 million for the three and six months ended June 30, 1998, respectively. RESULTS OF OPERATIONS The following table sets forth certain items from the Company's statements of operations as a percentage of total revenues for the periods indicated:
Three months ended Six months ended JUNE 30, JUNE 30, -------------------- -------------------- 1998 1999 1998 1999 ----- ----- ----- ----- Revenues ................................... 100.0% 100.0% 100.0% 100.0% Operating expenses: Operations .......................... 94 106 115 99 Sales and marketing ................. 72 166 80 120 Technology .......................... 32 16 32 14 General and administrative .......... 26 54 34 37 Amortization of unearned compensation 17 127 15 132 ----- ----- ----- ----- Total operating expenses ..... 241 469 276 402 ----- ----- ----- ----- Loss from operations ................ (141) (369) (176) (302) Other income, net .......................... 2 (1) 3 0 ----- ----- ----- ----- Net loss ................................... (139%) (370%) (173%) (302%) ===== ===== ===== =====
Three and Six Months Ended June 30, 1999 and 1998 REVENUES Revenues increased to $4.6 million for the three months ended June 30, 1999 from $1.2 million for the three months ended June 30, 1998 and increased to $9.4 million in the six months ended June 30, 1999 from $1.8 million in the six months ended June 30, 1998. These increases resulted primarily from growth in the number of loans closed. During the June 1999 quarter, the Company closed 2,006 loans compared to 1,057 loans in the June 1998 quarter. 10 12 OPERATING EXPENSES TOTAL OPERATING EXPENSES. Total operating expenses increased to $21.4 million for the three months ended June 30, 1999 from $3.0 million for the three months ended June 30, 1998 and increased to $37.6 million in the six months ended June 30, 1999 from $4.8 million in the six months ended June 30, 1998. These increases were primarily due to significant increases in compensation and benefits as a result of increased headcount and expanded advertising and promotional activity, including increased costs related to the addition of distribution partners. OPERATIONS. Operations expense is comprised of both fixed and variable expenses, including salaries, benefits and expenses associated with the brokering, origination and sale of mortgage loans, and interest expense paid by E-LOAN under the warehouse facilities it uses to fund loans held for sale. Operations expense increased to $4.8 million for the three months ended June 30, 1999 from $1.2 million for the three months ended June 30, 1998 and increased to $9.3 million in the six months ended June 30, 1999 from $2.0 million in the six months ended June 30, 1998. The increases in absolute dollars were primarily attributable to the significant increase in operations headcount from 72 at June 30, 1998 compared to 202 at June 30, 1999. In addition, E-LOAN has expanded its loan origination and sale business since initiating it in June 1998, which has resulted in additional headcount and an increase in interest expense due to an increase in the number of loans held for sale. Operations expense increased as a percentage of revenues from 94% for the three months ended June 30,1998 to 106% for the three months ended June 30, 1999, which is a direct result of the Company's growth during that time period. Operations expense decreased as a percentage of revenue from 115% to 99% in the six month periods ended June 30, 1998 and June 30, 1999, respectively, due to revenue growth exceeding growth in operations expense. E-LOAN expects operations expense to increase in absolute dollars over the next two years and intends to increase operations capacity in anticipation of an increase in the number of loans funded. SALES AND MARKETING. Sales and marketing expense is primarily comprised of expenses related to advertising, promotion and distribution partnerships and salaries, benefits and other expenses related to personnel. Sales and marketing expense increased to $7.6 million for the three months ended June 30, 1999 from $0.9 million for the three months ended June 30, 1998 and increased to $11.3 million in the six months ended June 30, 1999 from $1.4 million in the six months ended June 30, 1998. Sales and marketing expense increased as a percentage of revenues from 72% for the three months ended June 30, 1998 to 166% for the three months ended June 30, 1999 and increased from 80% in the six months ended June 30, 1998 to 120% in the six months ended June 30, 1999. Sales and marketing expense increased primarily due to increases in compensation associated with additional headcount and a substantial increase in expenses for advertising, promotion and distribution partnerships beginning in the third quarter of 1998 and continuing through the six months ended June 30, 1999. E-LOAN intends to significantly increase absolute dollar spending in sales and marketing activities over the next two years in an effort to increase origination volume and increase overall brand awareness. TECHNOLOGY. Technology expense includes salary, benefits and consulting fees related to website development, the introduction of new technologies and the support of E-LOAN's existing technological infrastructure. Technology expense increased to $0.8 million for the three months ended June 30, 1999 from $0.4 million for the three months ended June 30, 1998 and increased to $1.3 million in the six months ended June 30, 1999 from $0.6 million in the six months ended June 30, 1998. Technology expense decreased as a percentage of revenues from 32% for the three months ended June 30, 1998 to 16% for the three months ended June 30, 1999 and decreased from 32% in the six months ended June 30, 1998 to 14% in the six months ended June 30, 1999. The absolute dollar increases were primarily the result of the growth in engineering and management information systems personnel to support the expansion of online operations. E-LOAN intends to significantly increase absolute dollar spending on technology over the next two years in an effort to further improve the online mortgage origination process and implement new features and services to its website. GENERAL AND ADMINISTRATIVE General and administrative expense is primarily comprised of salary, benefits and professional services. General and administrative expense increased to $2.5 million for the three months ended June 30, 1999 from $0.3 million for the three months ended June 30, 1998 and increased to $3.5 million in the six months ended June 30, 1999 from $0.6 million in the six months ended June 30, 1998. General and administrative expense increased as a percentage of revenues from 26% for the three months ended June 30, 1998 to 54% for the three months ended June 30, 1999 and increased from 34% in the six months ended June 30, 1998 to 37% in the six months ended June 30, 1999. 11 13 The June 1999 quarter included a one-time charge of $0.9 million for the establishment of the E-LOAN foundation. In addition to the one-time charge, general and administrative expense increased primarily due to the addition of general and administrative headcount and increased professional services fees. General and administrative expenses are expected to increase in absolute dollars over the next two years as E-LOAN expands its management in anticipation of continued growth and as a result of additional reporting requirements imposed on E-LOAN as a publicly traded company. LIQUIDITY AND CAPITAL RESOURCES Since its inception, E-LOAN has financed its operations primarily through private placements of convertible preferred stock and borrowings under warehouse lines of credit and other credit facilities. In June 1999, E-LOAN completed its initial public offering and issued 4,020,000 shares of its common stock at a price of $14.00 per share. E-LOAN received approximately $52.3 million in cash, net of underwriting discounts from the initial public offering. Concurrently with the closing of the initial public offering, E-LOAN also sold 960,061 shares of its common stock in a private placement, receiving aggregate proceeds of approximately $12,500,000. As of December 31, 1998 and June 30, 1999, E-LOAN had approximately $9.1 million and $0.9 million in cash and cash equivalents, respectively. At June 30, 1999, E-LOAN had a $64.8 million proceeds receivable from the sale of common stock, which proceeds were received on July 2, 1999. E-LOAN's sources of cash flow include cash from the sale of mortgage loans, borrowings under warehouse lines of credit and other credit facilities, brokerage fees, interest income, and the sale of equity securities in both private and public transactions. E-LOAN's uses of cash include the funding of mortgage loans, repayment of amounts borrowed under warehouse lines of credit, operating expenses, payment of interest, and capital expenditures primarily comprised of furniture, fixtures, computer equipment, software and leasehold improvements. Net cash used in operating activities was ($3.0) million and ($39.9) million for the six months ended June 30, 1998 and 1999, respectively. Net cash used in operating activities was primarily due to an increase in net losses and an increase in mortgage loans held for sale. Net cash used in investing activities was ($0.2) million and ($1.8) million for the six months ended June 30, 1998 and 1999, respectively. Net cash used in investing activities during these periods was primarily for the purchase of software, furniture and equipment and leasehold improvements. Net cash (used in) and provided by financing activities was ($0.06) million and $33.5 million for the six months ended June 30, 1998 and 1999, respectively. Net cash provided in these periods was primarily from proceeds from notes payable, borrowings under E-LOAN's warehouse lines of credit and other credit facilities, partially offset by repayments of warehouse lines of credit and issuance costs related to the initial public offering. FORWARD LOOKING STATEMENTS The statements contained in this Report that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934), which can be identified by the use of forward-looking terminology such as "estimated," "projects," "anticipated," "expects," "intends," "believes," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as the Company's plans to increase the number of purchase loans, the relative importance of loans E-LOAN originates and sells and growth in the number of applications received, statements regarding development of E-LOAN's business, future operating results, anticipated capital expenditures, the expectations as to the use of the capital resource and the availability of additional financing, and other statements contain in this Report regarding matters that are not historical facts, are only estimates or predictions and cannot be relied upon. No assurance can be given that future results will be achieved; actual events or results may differ materially as a result of risks facing the company or actual results differing from the assumption underlying such statements. Such risks and assumptions include, but are not limited to, E-LOAN's ability to successfully promote and market its brand to current and new customers, generate customer demand for its products in regions of the country other than California, access additional debt or equity financing in the future, achieve acceptable pricing for its services, respond to increasing competition, manage growth of E-LOAN's operations, as well as regulatory, legislative, and judicial developments that could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. All written and oral forward-looking 12 14 statements made in connection with this Report which are attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the "Factors Affecting Future Operating Results" and other cautionary statements included herein. The Company disclaims any obligation to update information contained in any forward-looking statement. 13 15 FACTORS AFFECTING FUTURE OPERATING RESULTS WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY We have not achieved profitability and expect to continue to incur operating losses for the foreseeable future. We incurred net losses of $3.0 million and $28.3 million for the six months ended June 30, 1998 and 1999, respectively. As of June 30, 1999, our accumulated deficit was $40.8 million. Given that we expect to continue to incur significant sales and marketing expenses and that our other operating costs will increase to accommodate expected growth in loan applications, we will need to generate significant revenues to achieve and maintain profitability. Even if we achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND UNCERTAINTIES We were incorporated in August 1996 and initiated our online mortgage operations in June 1997. As a result of our limited operating history, our recent growth and our reporting responsibilities as a public company, it will be necessary to implement new and expanded operational, financial and administrative systems and control procedures to enable us to expand, train and manage our employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and operations departments. OUR QUARTERLY FINANCIAL RESULTS ARE VULNERABLE TO SIGNIFICANT FLUCTUATIONS WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE Due to rising interest rates and other factors, it is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for detailed information on our quarterly operating results. As a result, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESS A high percentage of our customers use our services to refinance existing mortgages and are motivated to do so primarily when interest rates fall below the rates of their existing mortgages. In the event interest rates significantly increase, consumers' incentive to refinance will be greatly reduced and the number of loans that we originate could significantly decline. Our loan volume during the three months ended June 30, 1999 was lower than the prior quarter partly based on recent increases in interest rates. Our failure to successfully reduce this dependence on refinancings and increase the volume of our business derived from home purchases could have an adverse effect on our business. Our ability to engage in profitable secondary sales of loans may also be adversely affected by increases in interest rates. The mortgage loan purchase commitments we obtain are contingent upon our delivery of the relevant loans to the purchasers within specified periods. To the extent that we are unable to deliver the loans within the specified periods and interest rates increase, we may experience no gain or even a loss on the sale of these loans. In addition, any increase in interest rates will increase the cost of maintaining our warehouse and repurchase lines of credit which we depend on to fund the loans we originate. We currently do not use derivative financial instruments to hedge these risks and are therefore exposed to losses caused by fluctuations in interest rates. A sharp decrease in interest rates over a short period may cause customers who have interest rates on mortgages committed through E-LOAN to either delay closing their loans or refinance with another lender. If this occurs in significant numbers, it may have an adverse effect on our business or quarterly results of operations. 14 16 UNCERTAINTY WITH RESPECT TO THE TIME IT TAKES TO CLOSE LOANS CAN LEAD TO UNPREDICTABLE REVENUE AND PROFITABILITY The time between the date an application is received from a customer on our website and the date the loan closes can be lengthy and unpredictable. For instance, during the three months ended June 30, 1999, approximately 8% of our loans were funded after the loan commitment period had expired. The loan application and approval process is often delayed due to factors over which we have little or no control, including the timing of the customer's decision to commit to an available interest rate, the close of escrow date for purchase loans, the timeliness of appraisals and the adequacy of the customer's own disclosure documentation. This uncertain timetable can have a direct impact on our revenue and profitability for any given period. We may expend substantial funds and management resources supporting the loan completion process and never generate revenue from closed loans. Therefore, our results of operations for a particular period may be adversely affected if the loans applied for during that period do not close in a timely manner or at all. For example, we have experienced a significant increase in purchase loan applications during the three months ended June 30, 1999. Purchase loan applications generally take longer to close than refinancing applications as they are tied to the close of escrow date. We believe the decline in our loan volumes in the three months ended June 30, 1999 relative to the first three months of 1999 was partly based on the extended time it takes to close a purchase loan. WE HAVE ONLY OPERATED DURING PERIODS OF GROWTH IN THE HOME MORTGAGE MARKET AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND UNCERTAINTIES All of our operations have occurred during a period in which the home mortgage market has experienced rapid growth. Since we began our online mortgage operations, we have never operated during a sustained downturn in the mortgage business and we cannot assure you that we will be able to operate successfully if such a downturn occurs. WE HAVE RECENTLY EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS; IF WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE ADVERSELY AFFECTED Over the past eighteen months we have experienced a period of significant growth, which has placed a strain on our resources and will continue to do so in the future. If we do not manage this growth effectively, it could adversely affect our business. We may not be successful in managing or expanding our operations or maintaining adequate management, financial and operating systems and controls. Our headcount has grown substantially. At December 31, 1997, we had a total of 40 full-time employees and at June 30, 1999, we had a total of 274 full-time employees. IF ONLINE MORTGAGES AND OUR SERVICE OFFERINGS DO NOT ACHIEVE WIDESPREAD CONSUMER ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY AFFECTED Our success will depend in large part on widespread consumer acceptance of purchasing mortgages online. The development of an online market for mortgage loans has only recently begun, is rapidly evolving and likely will be characterized by an increasing number of market entrants. Our future growth, if any, will depend on the following critical factors: - the growth of the Internet as a commerce medium generally, and as a market for consumer financial products and services specifically; - our ability to successfully and cost-effectively market our services to a sufficiently large number of customers; and - our ability to overcome a perception among many real estate market participants that obtaining mortgages online is risky for consumers. There can be no assurance that the market for our services will develop, that our services will be adopted or that consumers will significantly increase their use of the Internet for obtaining mortgage loans. If the online market for 15 17 mortgage loans fails to develop, or develops more slowly than expected, or if our services do not achieve widespread market acceptance, our business, results of operations and financial condition would be adversely affected. BECAUSE A HIGH CONCENTRATION OF OUR BUSINESS IS IN CALIFORNIA, WE ARE PARTICULARLY VULNERABLE TO ECONOMIC AND OTHER FACTORS AFFECTING CALIFORNIA Approximately 89% and 63% of the loans we closed in the six months ending June 30, 1998 and 1999, respectively, were from borrowers located in California. No other state generated more than 10% of our closed loans during these periods. We are more likely to originate a significant amount of our loans in California for the foreseeable future because we are located there and we have advertised more heavily in California than in other states. There have been times in the past, most recently in 1991 - 1992, when the California economy has suffered a recession disproportionate with the rest of the country. Should a similar recession happen again in California, our business would be adversely affected. In addition, California historically has been vulnerable to natural disasters, including earthquakes and mudslides, which are not typically covered by standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact borrowers' ability to repay mortgage loans we originate and any sustained period of increased delinquencies or defaults could adversely affect the pricing of our future secondary loan sales and our overall ability to sell loans. The occurrence of natural disasters in California could have an adverse effect on our business, results of operations and financial condition. THE LOSS OF ONE OR MORE OF OUR SIGNIFICANT DISTRIBUTION PARTNERS WOULD ADVERSELY AFFECT OUR BUSINESS We rely on Internet distribution partners to direct a significant number of our prospective customers to our website. If we lose any of our significant distribution partners, we will likely fail to meet our growth objectives, both in terms of additional borrowers and increased brand awareness. In the aggregate, approximately 20% of our closed loans were derived from the websites of our distribution partners during the quarter ended June 30, 1999. Our agreements with our distribution partners are typically short-term, from one to three years in length, and can be terminated for any reason upon 30 to 60 day's prior written notice. We cannot assure you that any or all of these agreements will not be terminated or will be renewed or extended past their current expiration dates. If any of these agreements were to be terminated or were to lapse without extension, we could lose a considerable number of loan applications and our business would be adversely impacted. THE TERMINATION OF ONE OR MORE OF OUR FUNDING PARTNERSHIPS WOULD ADVERSELY AFFECT OUR BUSINESS We depend on GE Capital Mortgage Services, Inc. and Bank United to finance our internal loan funding activities through the warehouse credit facilities provided by each of these lenders. We also depend on Greenwich Capital Financial Products, Inc. to finance portions of our mortgage loan inventory pending ultimate sale to mortgage loan purchasers. If either of our warehouse credit facilities becomes unavailable or our relationship with Greenwich Capital is terminated, our business would be adversely affected. Under our agreements with each of these partners, we make extensive representations, warranties and various operating and financial covenants. A material breach of these representations, warranties or covenants could result in the termination of our agreements and an obligation to repay all amounts outstanding at the time of termination. In the past, we have had to obtain waivers from Greenwich Capital and GE Capital as a result of our failure to comply with covenants regarding the issuance of capital stock, excess asset purchases and the breach of financial ratios. Our agreement with Greenwich Capital expires in April 2000, our agreement with GE Capital expires in April 2000 and our agreement with Bank United expires in February 2000. Our agreement with GE Capital can be terminated at any time on 120 days prior written notice. We are continually seeking to obtain additional warehouse lending resources, but we may not be successful in this regard. 16 18 WE DEPEND ON THE TIMELY AND COMPETENT SERVICES OF VARIOUS COMPANIES INVOLVED IN THE MORTGAGE PROCESS; IF THESE COMPANIES FAIL TO TIMELY AND COMPETENTLY DELIVER THESE SERVICES, OUR BUSINESS AND REPUTATION WILL BE DIRECTLY AND ADVERSELY AFFECTED We rely on other companies to perform services related to the loan underwriting process, including appraisals, credit reporting and title searches. Any interruptions or delays in the provision of these services may cause delays in the processing and closing of loans for our customers. If we are unsuccessful in managing the timely delivery of these services we will likely experience increased customer dissatisfaction and our business and reputation could be adversely affected. WE DEPEND ON OUR AGREEMENTS WITH THIRD PARTIES TO FUND MORTGAGE LOANS OR FULFILL LOAN TRANSACTION PROCESSING IN 13 STATES; IF THESE AGREEMENTS ARE TERMINATED, OUR BUSINESS COULD BE ADVERSELY AFFECTED E-LOAN licenses its mortgage loan origination systems and proprietary marks to NetB@nk to enable NetB@nk to fund mortgage loans under the E-LOAN brand in nine states, and has agreements with PHH Mortgage Services Corporation and Prism Mortgage Company relating to the fulfillment of all aspects of loan transaction processing following origination in four states. Each of these agreements may be terminated by either party upon 30 days prior written notice. The termination of any or all of these agreements could have a material adverse effect on our business. THE LOSS OF OUR RELATIONSHIP WITH FANNIE MAE OR ANY OTHER SIGNIFICANT PROVIDER OF AUTOMATED UNDERWRITING WOULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS We expect to depend on automated underwriting and other services offered by government sponsored and other mortgage investors, including Fannie Mae and Freddie Mac, to help ensure that our mortgage services can be offered efficiently and on a timely basis. We currently have an agreement with Fannie Mae that authorizes our use of their automated underwriting services and enables us to sell qualified first mortgages to Fannie Mae. We cannot assure you that we will remain in good standing with Fannie Mae or that Fannie Mae will not terminate our relationship. We expect to process a significant portion of our conforming loans using the Fannie Mae system until we are able to obtain automated underwriting services from other providers. Our agreement with Fannie Mae can be terminated by either party. The termination of our agreement with Fannie Mae would adversely impact our business by reducing our ability to streamline the mortgage origination process. Additionally, we may not be able to successfully implement the automated underwriting services of Fannie Mae or other automated underwriting providers in a manner that will lead to substantial processing efficiencies. WE MAY INCUR LOSSES ON LOANS IF WE BREACH REPRESENTATIONS OR WARRANTIES TO MORTGAGE LOAN PURCHASERS In connection with the sale and exchange of loans, we make customary representations and warranties to mortgage loan purchasers relating to, among other things, compliance with laws and origination practices. In the event we breach any of these representations and warranties, we may be required to repurchase or substitute these mortgage loans and bear any subsequent losses on the repurchased loans. We may also be required to indemnify mortgage loan purchasers for these losses and claims with respect to mortgage loans for which there was a breach of representations and warranties. In addition, many of our agreements with mortgage loan purchasers prohibit our solicitation of borrowers with respect to the refinancing of loans we originate and sell. The mortgage loan purchasers under these agreements may construe our continuing mortgage monitoring service as violating these non-solicitation provisions, in which case they may elect to terminate their agreements with us or may seek recovery from us for damages sustained by them. Many of our agreements with mortgage loan purchasers prohibit us from refinancing mortgage loans for specified time periods, unless we pay penalties to the mortgage loan purchasers or obtain their consent. These agreements also require us to return any premiums paid by a mortgage loan purchaser if the mortgage loans purchased are prepaid in full during periods of up to 12 months following the date the mortgage loan is purchased. THE MORTGAGE LENDING INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE FAIL TO SUCCESSFULLY COMPETE IN THIS INDUSTRY, OUR MARKET SHARE AND BUSINESS WILL BE ADVERSELY AFFECTED 17 19 To compete successfully, we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors' innovations by continuing to enhance and expand our services, as well as our sales and marketing channels. Increased competition, particularly online competition, could result in price reductions, reduced margins or loss of market share, any of which could adversely affect our business. We may not be able to compete successfully in our market environment and our failure to do so could have an adverse effect on our business, results of operations and financial condition. IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN OUR INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED Our business must comply with extensive and complex rules and regulations of, and licensing and examination by, various federal, state and local government authorities. These rules impose obligations and restrictions on our residential loan brokering and lending activities. In particular, these rules limit the broker fees, interest rates, finance charges and other fees we may assess, require extensive disclosure to our customers, prohibit discrimination and impose on us multiple qualification and licensing obligations. We may not always have been and may not always be in compliance with these requirements. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registrations, loss of approved status, voiding of loan contracts or security interests, indemnification liability or the obligation to repurchase mortgage loans sold to mortgage loan purchasers, rescission of mortgage loans, class action lawsuits, administrative enforcement actions and civil and criminal liability. ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS We may acquire or make investments in complementary businesses, technologies, services or products. These acquisitions and investments could disrupt our ongoing business, distract our management and employees and increase our expenses. In the past, we have had discussions with companies regarding our acquiring, or investing in, their businesses, products, services or technologies and we expect to have additional discussions in the future. If we acquire a company, we could have difficulty in assimilating that company's personnel, operations, technology and software. In addition, the key personnel of the acquired company may decide not to work for us. We could also have difficulty in integrating the acquired products, services or technologies into our operations and we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE AN ADVERSE EFFECT ON OUR BUSINESS Our future success depends to a significant extent on the continued services of our senior management and other key personnel, particularly co-founders Chris Larsen, Chief Executive Officer, and Janina Pawlowski, President. Ms. Pawlowski, a licensed real estate broker, is responsible for all of our activities in California and several other states. If Ms. Pawlowski were to terminate her relationship with us for any reason we would not be able to conduct business in these states until a replacement is found. The loss of the services of Mr. Larsen, Ms. Pawlowski or other key employees, would also likely have an adverse effect on our business, results of operations and financial condition. We have not entered into employment agreements with any of our executives, except Joseph Kennedy, Senior Vice President, Marketing and Business Development, and do not maintain "key person" life insurance for any of our personnel. WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED Competition for personnel throughout our industry is intense. We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. Our future success depends on our continuing to attract, retain and motivate highly skilled employees, particularly with respect to our loan processing functions. We have in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining employees with appropriate qualifications. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business will be adversely affected. 18 20 OUR BUSINESS WILL BE IMPAIRED IF CONSUMERS DO NOT CONTINUE TO USE THE INTERNET Our business will be adversely affected if Internet usage does not continue to grow, particularly by homebuyers. A number of factors may inhibit Internet usage by consumers, including inadequate network infrastructure, security concerns, inconsistent quality of service, and lack of availability of cost-effective, high-speed service. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. In addition, many websites have experienced service interruptions as a result of outages and other delays occurring throughout the Internet infrastructure. If these outages or delays frequently occur in the future, Internet usage, as well as the usage of our website, could grow more slowly or decline. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO EXPAND AND PROMOTE OUR BRAND RECOGNITION Establishing and maintaining our brand is critical to attracting and expanding our customer base, solidifying our business relationships and successfully implementing our business strategy. We cannot assure you that our brand will be positively accepted by the market or that our reputation will be strong. Promotion and enhancement of our brand will also depend, in part, on our success in providing a high-quality customer experience. We cannot assure you that we will be successful in achieving this goal. To date we are aware of numerous customer complaints regarding the quality of our service. If these complaints persist they may significantly damage our reputation and offset the efforts we make in promoting and enhancing our brand and could have an adverse effect on our business, results of operations and financial condition. If visitors to our website do not perceive our existing services to be of high quality or if we alter or modify our brand image, introduce new services or enter into new business ventures that are not favorably received, the value of our brand could be diluted, thereby decreasing the attractiveness of our service to potential customers. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE THAT CHARACTERIZES OUR INDUSTRY Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of our services. We rely on third party software products and services, including software related to automated underwriting functions, which will enable us to realize processing efficiencies that are central to our operations. If we are unable to integrate this software in a fully functional manner, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, enhancements of our products and services must meet the requirements of our current and prospective customers and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our services or infrastructure to adapt to these changes. ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS Our communications hardware and certain of our other computer hardware operations are located at the facilities of Exodus Communications, Inc. in Santa Clara, California and Jersey City, New Jersey. The hardware for our internal loan and product database, as well as our loan processing operations is maintained in our Dublin, California facility. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our website. Our business could be adversely affected if our systems were affected by any of these occurrences. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. ANY OUTAGES, DELAYS OR OTHER DIFFICULTIES EXPERIENCED BY THE INTERNET SERVICE PROVIDERS, ONLINE SERVICE PROVIDERS OR OTHER WEBSITE OPERATORS ON WHICH OUR USERS DEPEND COULD ADVERSELY AFFECT OUR BUSINESS Our website has in the past and may in the future experience slower response times or decreased traffic for a variety of reasons. In addition, our users depend on Internet service providers, online service providers and other 19 21 website operators for access to our websites. Many of these providers have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Additionally, the Internet infrastructure may not be able to support continued growth in its use. Any of these problems could adversely affect our business by limiting access to our website. OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF OUR CUSTOMERS' FINANCIAL DATA Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by any breaches that occur. We also retain on our premises personal financial documents that we receive from prospective borrowers in connection with their loan applications. These documents are highly sensitive and if a third party were to misappropriate our customers' personal information, customers could possibly bring legal claims against us. We cannot assure you that our privacy policy will be deemed sufficient by our prospective customers or any federal or state laws governing privacy which may be adopted in the future. OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM THIRD PARTY CHALLENGES OR IF WE ARE INVOLVED IN LITIGATION Trademarks and other proprietary rights are important to our success and our competitive position. Although we seek to protect our trademarks and other proprietary rights through a variety of means, we cannot assure you that the actions we have taken are adequate to protect these rights. We may also license content from third parties in the future and it is possible that we could face infringement actions based upon the content licensed from these third parties. We have received notice from EduCap, Inc., a provider of educational loans, that it believes that our use of the name "E-LOAN" infringes EduCap's trademark "THE E-LOAN." EduCap has demanded that we cease and desist our use of the name E-LOAN and has threatened legal action if we are unable to reach an amicable solution. Any claims brought against us, regardless of their merit, could result in costly litigation and the diversion of our financial resources and technical and management personnel. Further, if any of these claims are proved valid, through litigation or otherwise, we may be required to change our trademarks and pay financial damages, which could adversely affect our business. In particular, if the claim by EduCap is upheld, we would no longer be permitted to use the name E-LOAN. IF OUR INTERNAL SYSTEMS, OR THE INTERNAL SYSTEMS OF OUR SUPPLIERS, ARE NOT YEAR 2000 COMPLIANT, OUR BUSINESS COULD BE SERIOUSLY DISRUPTED Many currently installed computer systems and software products only accept two digits to identify the year in any date. Thus, the year 2000 will appear as "00", which the system might consider to be the year 1900 rather than the year 2000. This could result in system failures, delays or miscalculations. Computer systems and software that have not been developed or enhanced recently may need to be upgraded or replaced to comply with Year 2000 requirements. We believe that each of our software systems on a stand-alone basis is currently Year 2000 compliant. However, we rely on software components acquired from third parties which may not be Year 2000 compliant. The Internet operations of many of our customers and suppliers may also be affected by Year 2000 complications. The failure of our customers or suppliers to ensure that their systems are Year 2000 compliant could have an adverse effect on our customers and suppliers, resulting in decreased Internet usage or our inability to obtain necessary data communication and telecommunication capacity, which in turn could have an adverse effect on our business, results of operations and financial condition. OUR STOCK PRICE COULD BE HIGHLY VOLATILE The market prices for stocks of Internet-related and technology companies, particularly following an initial public offering, frequently increase to levels that bear no relationship to the operating performance of such companies. Such market prices generally are not sustainable and are subject to wide variations. If E-LOAN's common stock trades to such levels, it likely will thereafter experience a material decline. 20 22 In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of their securities. E-LOAN may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. In addition, the market price of our common stock may be subject to significant fluctuations in response to numerous factors, including: - Variations in our annual or quarterly financial results or those of our competitors; - Changes by financial research analysts in their estimates of our earnings or our failure to meet such estimates; - Conditions in the economy in general or in the Internet or mortgage lending industries; - Announcements of key developments by competitors; Growth of the Internet; Announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - Loss of key personnel; - Unfavorable publicity affecting our industry or us; - Adverse legal events affecting us; and - Sales of E-LOAN common stock by stockholders THE AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE COULD ADVERSELY AFFECT ITS MARKET PRICE If our stockholders begin to sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. A substantial number of sales, or the perception that such sales might occur, also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of July 2, 1999, we had 38,787,029 shares outstanding. Of these shares, the 4,020,000 shares sold in our initial public offering are freely tradable in the public market without restriction unless held by our affiliates. The remaining 34,767,029 shares of common stock available for sale in the public market are limited by restrictions under the securities laws and lock-up agreements applicable to such shares and will be available for sale in the public market as follows:
Date of Availability For Sale Number December 29, 1999 32,340,964 shares
(180th day after the date of the prospectus for our initial public offering) In addition, we have 10,500,000 shares of our common stock reserved for issuance pursuant to our 1997 Stock Plan, of which 6,104,087 shares were subject to outstanding options at June 30, 1999. All of such outstanding options are also subject to the 180-day lockup. We intend to register, prior to December 29, 1999, the shares of common stock reserved for issuance under our 1997 Stock Plan and the 1,500,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. Accordingly, shares underlying vested options will be eligible for resale in the public market beginning on December 29, 1999. Goldman, Sachs & Co. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. We have granted registration rights to certain of our stockholders. Those rights enable these stockholders to require that we register, at our expense, resales of their shares of common stock. The holders of these rights beneficially own in the aggregate approximately 17.8 million shares of our common stock. If they sell a large portion of their shares on the open market and at one time, our market price per share may decline. 21 23 ITEM 4. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest rate movements significantly impact E-LOAN's volume of closed loans and represent the primary component of market risk to E-LOAN. In a higher interest rate environment, consumer demand for mortgage loans, particularly refinancing of existing mortgages, declines. Interest rate movements affect the interest income earned on loans held for sale, interest expense on the warehouse lines payable, the value of mortgage loans held for sale and ultimately the gain on sale of mortgage loans. In addition, in an increasing interest rate environment, E-LOAN's mortgage loan brokerage volume is adversely affected. E-LOAN originates mortgage loans and manages the market risk related to these loans by pre-selling them on a best efforts basis to the anticipated purchaser at the same time that E-LOAN establishes the borrowers' interest rates. If E-LOAN can process loans within the applicable purchasers' commitment timeframes E-LOAN has no interest rate risk exposure on the loans. However, if E-LOAN cannot process the loan within this timeframe and interest rates increase, E-LOAN may experience a reduced gain or may even incur a loss on the sale of the loan. With the exception of pre-selling loans through best-efforts commitments, E-LOAN currently does not engage in any hedging activities. E-LOAN currently does not maintain a trading portfolio. As a result, E-LOAN is not exposed to market risk as it relates to trading activities. The majority of E-LOAN's portfolio is held for sale which requires E-LOAN to perform market valuations of its pipeline, its mortgage portfolio held for sale and related forward sale commitments in order to properly record the portfolio and the pipeline at the lower of cost or market. Therefore, E-LOAN monitors the interest rates of its loan portfolio as compared to prevailing interest rates in the market. Because E-LOAN pre-sells its mortgage loan commitments forward, E-LOAN believes that a 100 basis point increase or decrease in long-term rates would not have a significant adverse effect on E-LOAN's earnings from its interest rate sensitive assets. E-LOAN pays off the warehouse lines payable when the loan is sold and consequently 22 24 would not be expected to incur significant losses from an increase in interest rates on the line due to the short timeframe that the line is drawn down. However, since a high percentage of E-LOAN's closed loan volume is from refinancings, E-LOAN's future operating results are more sensitive to interest rate movements than a mortgage lender who has a lower proportion of refinancings. In the future, if E-LOAN does not pre-sell the mortgage commitments, its market risk could change significantly. 23 25 PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds The Company issued 126,273 shares of unregistered common stock upon the net exercise of a warrant. The common stock issued upon the net exercise of the warrant was exempt from registration under the Securities Act of 1933, as amended (the "Act") pursuant to Section 3(a)(9) thereof, as securities exchanged by an issuer with existing security holders. Since March 31, 1999, the Company has issued and sold unregistered securities as follows: Between March 31, 1999 and June 30, 1999, an aggregate of 357,115 shares of Common Stock were issued to employees upon exercise of options. The aggregate consideration received for such shares was $127,045. On July 2, 1999, E-LOAN completed an initial public offering in which it sold 4,020,000 shares of its common stock and 5,000 shares was sold by a selling stockholder. The managing underwriters in the offering were Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC, DLJdirect Inc. and E*TRADE Securities, Inc. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-74945) that was declared effective by the Securities and Exchange Commission on June 28, 1999. All 4,025,000 shares of common stock registered under the Registration Statement were sold at a price of $14.00 per share for gross proceeds to E-LOAN of $56.2 million and gross proceeds to the selling stockholder of $70,000. Offering proceeds to E-LOAN, net of underwriter discounts, were approximately $52.3 million. Concurrent with the company's initial public offering, the company sold 960,061 shares of its common stock for $12.5 million in net proceeds in a private placement. The private placement was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Act") as a transaction not involving any public offerings. As of June 30, 1999, E-LOAN's balance sheet reflected a receivable of $64.8 million in respect of the offering proceeds it received on July 2, 1999. The net proceeds from the initial public offering will be used for general corporate purposes, including working capital to fund anticipated operating losses, expenses associated with its advertising campaigns, brand-name promotions and other marketing efforts and capital expenditures. E-LOAN also may use a portion of the net proceeds, currently intended for general corporate purposes, to acquire or invest in businesses, technologies, products or services, although no specific acquisitions are planned and no portion of the net proceeds has been allocated for any acquisition. None of the net offering proceeds of E-LOAN have been or will be paid directly or indirectly to any director, officer, general partner of E-LOAN or their associates, persons owning 10% or more of any class of E-LOAN's equity securities, or an affiliate of E-LOAN. Simultaneous with the effectiveness of the registration statement relating to the initial public offering, each outstanding share of E-LOAN's Series A and Series B convertible preferred stock and Series C and Series D mandatorily redeemable convertible preferred stock was automatically converted into three shares of E-LOAN's common stock without payment of additional consideration. The common stock issued upon conversion of the preferred stock was exempt from registration under Section 3(a)(9) of the Act, as Securities exchanged by an issuer with existing security holders. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on April 27, 1999 in Palo Alto, California. Proxies for the meeting were solicited. At the Company's Annual Meeting, the stockholders approved the following resolutions:
1) Election of the following persons as directors. Director In Favor Withheld Ira M. Ehrenpreis 25,552,191 7,556,268 Robert C. Kagle 25,552,191 7,556,268 Tim Koogle 25,552,191 7,556,268 Chris Larsen 25,552,191 7,556,268 Janina Pawlowski 25,552,191 7,556,268 Wade Randlett 25,552,191 7,556,268 2) Approval of an amendment to the Company's Certificate of Incorporation to effect a 3 for 1 stock split of the Company's common stock. For: 25,582,191 Against: Abstain: 3) Adoption of the Company's 1999 Employee Stock Purchase Plan and reservation of 1,500,000 shares of the commons stock under the Plan. For: 25,535,316 Against: Abstain: 46,875 4) Approval of an amendment of the Company's 1997 Stock Plan to increase the number of shares reserved for issuance under the Plan to a total of 10,500,000 shares of common stock. For: 25,580,541 Against: Abstain: 1,650 5) Approval of the Company's Restated Certificate of Incorporation filed upon the closing of its Initial Public Offering. For: 25,582,191 Against: Abstain: 6) Approval of the Company's Restated Bylaws effective upon the closing of its Initial Public Offering. For: 25,582,191 Against: Abstain: 7) Ratification of the appointment of PricewaterhouseCoopers, L.L.P., as independent auditors of the Company for the fiscal year ended December 31, 1999. For: 25,460,541 Against: Abstain: 121,650
Item 5. Other Information None 24 26 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.41 Material Contracts 27.1* Financial Data Schedule ------------ * Previously filed with Form 10-Q (b) Reports on Form 8-K There have been no reports on Form 8-K filed during the three months ended June 30, 1999. 25 27 SIGNATURE 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. E-LOAN, INC. Date: September 30, 1999 /s/ Frank Siskowski ------------------------------ Frank Siskowski Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 26 28 Exhibit Index 10.41 Material Contracts 27.1* Financial Data Schedule ---------- * Previously filed with Form 10-Q 27 EX-10.41 2 MATERIAL CONTRACTS 1 EXHIBIT 10.41 EXECUTION COPY MARKETING, PROMOTION, LICENSING, COMPUTER SERVICES AND RELATED SERVICES AGREEMENT BETWEEN FCC NATIONAL BANK AND E-LOAN DATED AS OF MAY 3, 1999 2 MARKETING, PROMOTION, LICENSING, COMPUTER SERVICES, AND RELATED SERVICES AGREEMENT This Services Agreement (the "Agreement") is entered into and made effective as of this 3rd day of May, 1999 (the "Effective Date"), by and between E-LOAN, Inc. ("E-LOAN"), a Delaware corporation with its principal office at 5875 Arnold Road, Dublin, California 94568 and FCC National Bank ("FCC National"), a national bank with its principal office at 300 King Street, Wilmington, Delaware 19801. All references in this document to FCC National shall mean the Internet-based financial institution currently being created by FCC National, and, upon assignment, nothing in this Agreement shall obligate FCC National to take any actions or create any liability on the part of FCC National. RECITALS WHEREAS, FCC National has informed E-LOAN that it is working towards the creation of a full service, fully-integrated, Internet-based financial institution (the "Project"), which Project may be assigned to another bank prior to or after completion, or which Project may be separated from FCC National in some other way; WHEREAS, E-LOAN provides certain services including mortgage and related services to consumers on the Internet, via E-LOAN's website currently at www.eloan.com; WHEREAS, FCC National and E-LOAN wish to develop a program utilizing technological interconnectivies, joint trademark and tradename identification for FCC National to offer more services, including access to multiple mortgage lenders, to its customers, to provide those customers hyperlink connectivity to E-LOAN's website using state of the art technology, and for E-LOAN to obtain increased name recognition and to provide services to a greater number of customers and in particular customers and potential customers of FCC National who have an interest or experience in conducting financial transactions on-line; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, FCC National and E-LOAN agree as follows: ARTICLE I DEFINITIONS Section 1.1 Defined Terms. Unless the context requires otherwise, capitalized terms in this Agreement shall have the meaning set forth herein or in Schedule A attached hereto. Section 1.2 Interpretation. References to Articles, Sections, Exhibits and Schedules are to be construed as references to the Articles or Sections of, and Exhibits or Schedules to, this Agreement, unless otherwise indicated, and terms such as "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to this entire Agreement rather than any particular part of the same. ARTICLE II SCOPE OF SERVICES Section 2.1 E-LOAN Services. During the term of the Agreement, E-LOAN will provide to FCC National the software, personnel, and ongoing support necessary for purposes of implementing certain lending services to FCC National customers and other visitors to FCC National's website for the Project described and 1 3 in conformance with the technical specifications and performance standards set forth in the Statement of Work attached hereto as Schedule B, and will provide to FCC National the related services (the "Services") described and in conformance with the technical specifications and performance standards set forth in the Statement of Work for use by FCC National, its Partners and its electronic banking customers ("Users") in accordance with the terms and provisions set forth in this Agreement. Section 2.2 FCC National Obligations. FCC National shall market, promote and advertise E-LOAN to Internet users through various means, including through the creation and maintenance of a link on the FCC National website to the E-LOAN website, shall work with E-LOAN to establish mortgage lending pages (the "E-LOAN Pages") on FCC National's internet website, and shall give its customers and other visitors to the internet website access to the E-LOAN Pages. FCC National shall provide various computer services and internet access for customers. FCC National shall have complete discretion regarding the use and placement of promotional materials and access buttons related to the E-LOAN Pages. Section 2.3 Independent Contractor Status. The relationship of E-LOAN to FCC National is that of an independent contractor and nothing herein shall constitute or be deemed to constitute a joint venture, association, partnership, agency or other relationship between the parties or to impose any obligation or liability upon either of the parties based on such relationship. Section 2.4 Branding. The E-LOAN Pages will be co-branded in the manner determined by FCC National in FCC National's sole discretion, and E-LOAN shall make all commercially reasonable changes to its software to comply with FCC National's web page requirements, except that E-LOAN shall not be required to make material changes to the content of its web pages; provided, however, that only E-LOAN Pages containing E-LOAN functionalities shall be co-branded. "E-LOAN functionalities" means webpages that provide specialized E-LOAN feedback to customer inputted data, including loan qualification analysis and the listing of loan products appropriate for a customer's profile. "E-LOAN functionalities" shall not mean webpages that involve only mathematical calculators or generalized loan information, unless such loan information was developed or collected by E-LOAN. FCC National shall not be required to mention E-LOAN or any co-brand name on any other page of its internet website. ARTICLE III PROJECT OBLIGATIONS Section 3.1 Performance Reporting. E-LOAN shall report promptly to FCC National (a) all malfunctions or delays in its performance of the Services or the failure to accomplish timely any of the responsibilities of E-LOAN, as set forth in the Statement of Work or otherwise in this Agreement or as required by the Project Manager, (b) any knowledge of circumstances that could reasonably result in malfunction or lead to delay in the performance of the Services or other responsibilities of E-LOAN, as set forth in the Statement of Work or otherwise in this Agreement or as required by the Project Manager, and (c) E-LOAN's proposed solution to items (a) and (b), including a detailed description in writing of all solutions to such problems (a "Performance Report"). FCC National shall have the right to receive and review all Performance Reports produced by E-LOAN. Notwithstanding anything to the contrary in this Section 3.1, E-LOAN shall be required to report to FCC National only those malfunctions, delays, or other failures which could reasonably impact the Services that E-LOAN provides to FCC National. Section 3.2 Internet Traffic Reporting. (a) Within fifteen (15) days after the last day of each calendar month, FCC National will, to the extent possible, provide E-LOAN with a monthly report of aggregate user traffic accessing the E-LOAN related portion of the FCC National website. FCC National shall have no obligation to calculate user traffic under this Section 3.2 until July 1, 1999. (b) Within fifteen (15) days after the last day of each calendar month, E-LOAN will provide FCC National with a monthly report of the number of page views on the E-LOAN pages on the FCC National website. In addition, E-LOAN will provide FCC National with a report of users, rate watches, loan monitors, rate searches, 2 4 completed applications and closed loans that are originated from the FCC National website. Section 3.3 Technical Support and Personnel. (a) FCC National and E-LOAN shall designate acceptable and appropriately trained technical personnel to serve as the technical contacts to communicate regarding all requests or aspects of technical support necessitated by this Agreement. These contacts are set forth on Schedule C attached hereto. FCC National or E-LOAN, as applicable, shall promptly notify the other in writing of any changes to such contacts during the term of this Agreement. Among other responsibilities, these technical contacts shall meet periodically to review whether E-LOAN is maintaining the personnel and resources, pursuant to subsection 3.3(b) below, necessary to perform E-LOAN's obligations under this Agreement (which, both parties acknowledge, will change from time to time). (b) E-LOAN shall maintain personnel (i) adequate to perform its obligations under this Agreement and (ii) possessing such qualification, knowledge and experience in the provision of the tasks to which they are assigned as would be required for comparable positions and tasks in competitive businesses. Section 3.4 Insurance. At all times during the term of this Agreement, E-LOAN shall maintain in force comprehensive general liability insurance. Such insurance shall include contractual liability insurance for the indemnification obligations contained in Article X, products hazard and catastrophe coverage, and coverage for negligent acts, errors and omissions in the provision of the Services under this Agreement. Except to the extent prohibited by law, all insurance provided herein shall name FCC National and all its assignees as additional insureds and as loss payees. The required coverages referred to and set forth in this Section 3.4 shall in no way affect, nor are they intended as a limitation of, E-LOAN's liability with respect to the performance of its obligations under this Agreement. E-LOAN further releases, assigns and waives any and all rights of recovery against FCC National and its Affiliates, employees, successors and permitted assigns which E-LOAN may otherwise have or acquire in or from or are in any way connected with any loss covered by policies of insurance maintained or required to be maintained by E-LOAN pursuant to this Agreement or because of deductible clauses in or inadequacy of limits of any such policies of insurance. Section 3.5 Subcontracting Rights. E-LOAN shall not enter into any contract or arrangement pursuant to which any third party shall have responsibility for providing any of the Services without the prior written consent of FCC National, which consent shall not be unreasonably withheld. Section 3.6 Export Controls. E-LOAN acknowledges and agrees that both (a) certain equipment, software and technical data which may be provided or utilized in connection with the furnishing of the Services; and (b) any activities in connection with the provision of the Services and related technology, may be subject to export, re-export or import controls under the U.S. Export Administration Regulations or similar regulations of the United States or of any other countries now in effect or enacted hereafter. E-LOAN agrees that neither it nor any agents, contractors, subcontractors or Affiliates shall export, re-export or import any such equipment, software, technical data or any direct product thereof in violation of any such laws. Section 3.7 Modifications to Achieve Regulatory Approval. (a) E-LOAN acknowledges that the performance of the Services under this Agreement is subject to the examination and regulatory authority of the Office of the Comptroller of the Currency (the "OCC") and any other applicable Federal or state banking agency (each, an "Agency") pursuant to 12 U.S.C. Section 1867(c). E-LOAN shall perform the Services in such a manner which will enable FCC National to achieve compliance with all applicable federal, state and local laws, government rules and regulations, and Agency supervisory issuances ("Applicable Law") and shall comply with (and cause E-LOAN's Affiliates, representatives and employees to comply with) all applicable FCC National Policies in an effort to achieve and maintain compliance with such Applicable Law. All FCC National Policies that apply to E-LOAN as of the Effective Date shall be provided to E-LOAN prior to the Effective Date. (b) If FCC National determines that modification to the Services is necessary to achieve 3 5 compliance with Applicable Law and/or to satisfy the recommendations of an Agency, and/or if FCC National determines that modification to the Services is necessary to address a change in Applicable Law and/or a change in any FCC National Policy necessary to more fully comply with Applicable Law, FCC National must notify E-LOAN of such determination in writing and direct E-LOAN to make specific modification(s) to the Services that address FCC National's regulatory concerns. E-LOAN shall promptly implement such proposed modification(s), or if FCC National's proposed modification(s) would result in significant additional cost, material disruption or additional burden to E-LOAN, E-LOAN may (i) suggest alternative modifications designed to address FCC National's concerns with less cost or disruption to E-LOAN and/or (ii) propose to FCC National that FCC National bear a stated portion of the costs involved with the modification(s). If FCC National, in its reasonable determination, concludes that the suggested alternative modifications do not allow FCC National to achieve compliance with Applicable Law or FCC National Policy, or that the proposed costs to be paid by FCC National are, in FCC National's sole discretion, unacceptable, E-LOAN may elect to (x) implement the modifications proposed by FCC National, as the same may have been modified by mutual agreement of the parties, or (y) terminate the Agreement without penalty upon ninety (90) days' written notice to FCC National. Any termination pursuant to this Section 3.8(b)(ii)(y) shall be subject to the transition obligations set forth in Section 9.4 of this Agreement. Section 3.8 Integration. E-LOAN shall make all commercially reasonable modifications that are necessary, in FCC National's reasonable discretion, to ensure compatibility of E-LOAN's systems with all other systems being used to implement the Project. Section 3.9 End-User Agreements. E-LOAN shall comply with all applicable and reasonable terms in any End-User Agreement. FCC National shall provide to E-LOAN by the Effective Date the form of all End-User Agreements in existence as of that date. Section 3.10 Project Manager. E-LOAN shall fully cooperate with the Project Manager and shall respond promptly to all requests of the Project Manager, including, without limitation, requests for any written or oral performance or other reports reasonably related to E-LOAN's participation in the Project. ARTICLE IV PAYMENT OBLIGATIONS Section 4.1 Service Charges; Payment Terms. (a) In consideration of FCC National's advertising, promotion, marketing, and computer services on behalf of E-LOAN, and the grant by FCC National to E-LOAN of the right to use FCC National's proprietary marks in connection with E-LOAN's promotional activities, E-LOAN agrees to pay FCC National the fees set forth on Schedule D, which the parties agree represent the fair and reasonable value of the marketing and promotional activities, computer services, and the use of proprietary marks of FCC National, including, but not limited to (i) the advertising and publicity value to E-LOAN created by the association of E-LOAN with FCC National; (ii) FCC National's obligations to report to E-LOAN the results of FCC National's marketing efforts; (iii) the computer services, including the weblink and the efforts to establish E-LOAN Pages on FCC National's website that FCC National will provide to E-LOAN; and (iv) the delivery of customers with interest and/or experience in conducting financial transactions on the internet. E-LOAN shall not compensate FCC National for any services duplicative of those provided by E-LOAN, and shall be disclosed to the customer as required by RESPA or any other applicable law. (b) E-LOAN's payment obligations to FCC National shall be as set forth on Schedule D attached hereto. E-LOAN shall compensate FCC National on terms no less favorable than the terms on which it compensates any other Person providing identical or similar marketing, advertising, and computer services; provided, however that E-LOAN shall be obligated to review payments to each of its distribution sources no more than once annually. If such review shows that FCC National was underpaid at any time during the year prior to such review because an identical or similar distribution source was compensated on terms more favorable than FCC National, E-LOAN shall pay to FCC National in arrears all such amounts. All invoices shall be accompanied by a report in such form and format and containing such information as is reasonably required by E-LOAN to evidence the manner in which 4 6 the amounts due hereunder were calculated and which permit E-LOAN to verify such amounts. (c) Within 30 days after the end of each month, E-LOAN shall remit payment to FCC National at FCC National's principal office designated in the preamble to this Agreement (or such other place designated by FCC National in accordance with the notice provisions of Section 13.8) for its payment obligations as set forth on Schedule D. Each payment shall be accompanied by a report in such form and format and containing such information as is reasonably required by FCC National to evidence the manner in which the amounts due hereunder were calculated and which permit FCC National to verify such amounts. (d) This Agreement and the compensation hereunder will be subject to change by mutual agreement of the parties, to the extent necessary to comply with federal and state laws and regulations, including the Real Estate Settlement Procedures Act (RESPA). If, in the reasonable discretion of either party, the compensation arrangements or any other provision of this Agreement fail to comply with any applicable law, or either party is advised by counsel or a regulatory body with jurisdiction over its activities to terminate or modify the Agreement or compensation arrangements to achieve compliance, the other party shall cooperate to the extent necessary to achieve compliance, including, but not limited to, executing any appropriate amendments to the Agreement. If any Agency determines that the compensation paid in consideration of the activities conducted hereunder violates or would violate Applicable Law, the parties agree that appropriate adjustments (including retroactive adjustments) will be made to the compensation structure to resolve the violation as determined by the Agency. The amount of any retroactive adjustments shall not exceed amounts actually paid or owing. ARTICLE V E-LOAN REPRESENTATIONS AND WARRANTIES E-LOAN represents and warrants as of the date hereof as follows: Section 5.1 Organization and Qualification. E-LOAN is duly organized and existing in good standing under the laws of the jurisdiction in which it is organized, is duly qualified and in good standing as a foreign corporation in every state in which the character of its business requires such qualifications, and has the power to own its property and to carry on its business as now being conducted. Section 5.2 Due Authorization. The execution and delivery of this Agreement and compliance by E-LOAN with all provisions of this Agreement (a) are within the corporate power and authority of E-LOAN, and (b) have been duly authorized by all requisite corporate proceedings. The Agreement has been duly executed and delivered by E-LOAN and constitutes a valid and binding agreement of E-LOAN, enforceable in accordance with its terms. Section 5.3 Conflicting Agreements. The execution and delivery of this Agreement shall not conflict with or result in a breach of the terms, conditions or provisions of, give rise to a right of termination under, constitute a default under, or result in any violation of, the organizational documents of E-LOAN or any mortgage, agreement, contract, instrument, order, judgment, decree, statute, law, rule or regulation to which E-LOAN or any of its respective properties is subject. Section 5.4 Consents. No authorizations or other consents, approvals or notices of or to any Person are required in connection with (a) the performance by E-LOAN of its obligations under this Agreement, (b) the development and implementation of the systems necessary to perform the Services in accordance with the applicable provisions of this Agreement and in compliance with all applicable laws, (c) the validity and enforceability of this Agreement; or (d) the execution, delivery and performance by E-LOAN of this Agreement. Section 5.5 Performance Warranty. E-LOAN represents and warrants that the Services shall conform in all material respects to the technical specifications and performance standards set forth in the Statement of Work and to general industry standards for the Services and products offered by E-LOAN pursuant to this 5 7 Agreement. E-LOAN further warrants that it has developed or will develop and implement in a timely manner, all necessary internal technical systems and procedures to ensure that the Services conform and continue to conform to such specifications and standards, and to standards at all times reasonably acceptable to FCC National or as otherwise required to assure compliance by E-LOAN or FCC National with any law or regulation. FCC National shall have the right at any time and in a reasonable manner to review and inspect E-LOAN's operational and security standards and E-LOAN shall cooperate with such reviews and inspections in accordance with Section 8.2 of this Agreement. Notwithstanding any other provision in this Agreement, in the event FCC National notifies E-LOAN that the Services are failing to conform to the above warranties, FCC National may, in its sole discretion, (a) immediately terminate this Agreement pursuant to Section 9.2 or (b) request that E-LOAN, without charge, promptly repair or replace the cause of such failure in accordance with the response times set forth in the Statement of Work. If E-LOAN fails to repair or replace promptly the cause of such failure, FCC National may immediately terminate the Agreement pursuant to Section 9.2. In no event shall a termination of the Agreement by FCC National pursuant to this Section 5.5 constitute an Early Termination by FCC National under Section 9.3 hereof. Section 5.6 Disaster Recovery. E-LOAN represents and warrants that it currently maintains, and shall continue to maintain throughout the term of this Agreement, offsite disaster recovery capabilities (further described in Section 8.4) that permit E-LOAN to recover from a disaster and continue providing the Services within a commercially reasonable period not to exceed 48 hours from the occurrence of such disaster. E-LOAN maintains, and shall continue to maintain throughout the term of this Agreement, a back-up power supply system to guard against electrical outages. Section 5.7 "Year 2000" Warranty. E-LOAN represents and warrants that all computer systems, software, and hardware provided by E-LOAN and to be used in the provision of the Services or otherwise for the Project, including, without limitation, all Custom Work Product developed by E-LOAN (as defined in Section 7.3) are, at the time of delivery and thereafter and in all subsequent modifications, able to accurately process date data, including calculating, comparing, and sequencing from, into and between the twentieth century (through year 1999), the year 2000 and the twenty-first century, including leap year calculations. If, at any time, any such system, software or hardware are found by FCC National or any other of E-LOAN's customers, not to function in any material respect as specified in this Section as a result of the date changes from December 31, 1999 to January 1, 2000 and beyond, including appropriate leap year calculations, E-LOAN shall at no additional charge to FCC National and in accordance with the Statement of Work, immediately upon receipt of a report of a material defect, correct any such defect so as to enable the systems, software or hardware to fully function in accordance with this Section and with the Statement of Work. In doing so, FCC National shall cooperate reasonably with E-LOAN; provided that E-LOAN shall not require FCC National to make any changes to the systems, software or hardware (except to install changes provided by E-LOAN) unless the defect is caused solely by a modification thereto not made or authorized by E-LOAN. Section 5.8 Intellectual Property Rights. E-LOAN represents and warrants that it owns, or has the right to use under valid and enforceable agreements, all Intellectual Property Rights reasonably necessary for and related to the operation of the Services. The operation of the Services as presently conducted or proposed to be conducted by E-LOAN does not infringe or violate any Intellectual Property Rights of any other person, and E-LOAN has not received any charge, complaint, claim, demand or notice alleging any such infringement or violation. No other Person has any right to or interest in any inventions, improvements, discoveries or other confidential information utilized by E-LOAN that relate to the operation of the Services. In the event it is determined that E-LOAN is infringing upon any Intellectual Property Right, E-LOAN shall, as soon as practicable, (a) obtain for FCC National the right to continue using the infringing item or (b) replace the infringing item or modify it such that it becomes non-infringing. Section 5.9 Compliance. E-LOAN represents and warrants that E-LOAN's business is in compliance with all Applicable Law. E-LOAN further represents and warrants that (a) E-LOAN's performance under the Agreement and (b) the Services, including, without limitation, all processing performed as part of the 6 8 Services, will comply with all Applicable Law. Section 5.10 Network Access. E-LOAN controls access to its network through the utilization of security measures that restrict access. FCC National has no ability to modify such security methods and is in total reliance upon E-LOAN for the protection of FCC National's internal system against access through the use of E-LOAN's network. E-LOAN represents that its security measures are designed, consistent with best industry practices, in an effort to (i) ensure that FCC National's internal system cannot be accessed without FCC National's express authorization; (ii) enable E-LOAN to immediately terminate any unauthorized access; and (iii) enable E-LOAN to identify the entity making such unauthorized access. E-LOAN will make no changes to its security measures that would increase the risk of an unauthorized access. ARTICLE VI FCC NATIONAL REPRESENTATIONS AND WARRANTIES FCC National represents and warrants as of the date hereof as follows: Section 6.1 Organization and Qualification. FCC National is duly organized and existing in good standing under the laws of the jurisdiction in which it is organized, is duly qualified and in good standing as a foreign corporation in every state in which the character of its business requires such qualifications, and has the power to own its property and to carry on its business as now being conducted. Section 6.2 Due Authorization. The execution and delivery of this Agreement and compliance by FCC National with all provisions of this Agreement (a) are within the corporate power and authority of FCC National, and (b) have been duly authorized by all requisite corporate proceedings. The Agreement has been duly executed and delivered by FCC National and constitutes a valid and binding agreement of FCC National, enforceable in accordance with its terms. Section 6.3 Conflicting Agreements. The execution and delivery of this Agreement shall not conflict with or result in a breach of the terms, conditions or provisions of, give rise to a right of termination under, constitute a default under, or result in any violation of, the organizational documents of FCC National or any mortgage, agreement, contract, instrument, order, judgment, decree, statute, law, rule or regulation to which FCC National or any of its respective properties is subject. Section 6.4 Consents. No authorizations or other consents or approvals or notices of or to any Person are required in connection with (a) the performance of FCC National's obligations under this Agreement, (b) the validity and enforceability of this Agreement, and (c) the execution, delivery and performance by FCC National of this Agreement. Section 6.5 Compliance. FCC National represents and warrants that FCC National's business is in compliance with all applicable federal, state and local laws and government rules and regulations. FCC National further represents and warrants that (a) FCC National's performance under the Agreement and (b) the Services, including, without limitation, all processing performed as part of the Services, will comply with all applicable federal, state and local laws and government rules and regulations. ARTICLE VII PROPRIETARY RIGHTS Section 7.1 Customer Data. [*] 7 [*] Confidential treatment requested. 9 Section 7.2 Trademarks. (a) FCC National grants to E-LOAN, for the term of this Agreement, a non-exclusive, non-transferable, royalty-free, revocable license to use, at FCC National's direction and in FCC National's sole discretion, any trademark of FCC National or its Affiliates, in connection with the Services (each, a "FCC National Trademark"). (b) E-LOAN shall use all FCC National Trademarks in accordance with the standard policies and guidelines adopted by FCC National, as such standards, policies, and guidelines may be amended by FCC National from time to time. FCC National shall have the right to proscribe any use by E-LOAN of a FCC National Trademark including any use that is not in accordance with any and all of FCC National's standards, policies and/or guidelines. E-LOAN shall replace any FCC National Trademark upon ninety (90) days' prior written notice from FCC National; provided however that E-LOAN may continue to use any previously printed material still containing such FCC National Trademark until reasonable use of such materials is exhausted; provided further however that FCC National shall have the right to acquire such previously printed materials upon payment to E-LOAN of E-LOAN's printing and out-of-pocket expenses associated with such materials. (c) E-LOAN shall not engage in any action associated with a FCC National Trademark that adversely affects the good name, goodwill, image or reputation of FCC National. All uses of a FCC National Trademark hereunder shall inure to the benefit of FCC National. (d) E-LOAN grants to FCC National, for the term of this Agreement, a non-exclusive, non-transferable, royalty-free, revocable license to use, at E-LOAN's direction and in E-LOAN's sole discretion, any trademark of E-LOAN or its Affiliates, in connection with the links to or from or in conjunction with FCC National's website. E-LOAN's trademarks, as used herein, are E-LOAN, ELOAN, E-LOAN Express, E-LOAN Ltd., E-Track, e-loan.com and eloan.com (the "E-LOAN Marks"). FCC National may not use the E-LOAN Marks, including its service marks, trade names, logos or other commercial or product designations for any other purpose without the prior written consent of E-LOAN. (e) In addition, FCC National shall not engage in any action associated with any E-LOAN Mark that adversely affects the good name, goodwill, image or reputation of E-LOAN. All uses of an E-LOAN Mark hereunder shall inure to the benefit of E-LOAN. Section 7.3 Intellectual Property Rights. (a) For the purposes of this Section 7.3, (i) "Intellectual Property" shall mean any patents, inventions, invention disclosures, Marks (as defined below), material trade secrets, know-how, formulae and processes, software programs (except for programs purchased off the shelf), proprietary data and databases, copyrights and all other similar items of intellectual property, whether registered or unregistered, including any rights created by use thereof, all proceeds thereof (such as by way of example, licenses, royalties and proceeds of current infringements), and the right to sue for past, present and future infringements; (ii) "Marks" shall mean all right, title and interest in and to any United States or foreign trademarks, service marks and trade names, including any registration or application for registration of any trademarks and services marks in the United States Patent and Trademark Office or the equivalent thereof in any state of the United States or in any foreign country, as well as any unregistered marks, and any trade dress (including logos, designs, company names, business names, fictitious names and other business identifiers) in the United States or any foreign country; and (iii) 8 10 "Custom Work Product" shall mean the resulting work product (including functional and technical designs, interfaces, test items, test definitions, programs, modules, code, flowcharts, data diagrams, specifically, documentation and the like) developed by E-LOAN after the Effective Date of the Agreement on behalf of FCC National and at FCC National expense in furtherance of the Statement of Work. (b) Each party shall retain the rights in and title to its respective Marks, and any other Intellectual Property previously or generally developed by such party or its Affiliates that may be adapted or used by the other party in connection with the Project. (c) Neither party shall copy, use, display, distribute or transfer the other party's Marks, or other Intellectual Property owned by such other party or its Affiliates except as expressly contemplated by this Agreement. Notwithstanding the foregoing sentence, each party hereto agrees that the other party shall be free to use and employ the general skills, know-how, methods and techniques, or skills gained or learned during the course of the Project, so long as such party does not disclose Confidential Information of the other party. (d) Upon termination of this Agreement, E-LOAN shall transfer to FCC National and FCC National shall own all right, title and interest to all Custom Work Product, if any. E-LOAN expressly acknowledges and agrees that, conditioned on final payment of the expenses related thereto, all such Custom Work Product constitutes "work made for hire" under the Federal copyright laws (17 U.S.C. Section 101) owned exclusively by FCC National and, alternatively, E-LOAN shall irrevocably assign all ownership or other rights it may have in Custom Work Product to FCC National. Further, FCC National shall own, or E-LOAN shall irrevocably assign to FCC National, all right title and interest to all rights, including copyrights, in materials, written documents, concepts, techniques, know-how and ideas embodied in such "work made for hire" or otherwise developed by E-LOAN for FCC National and at FCC National's expense, with the exception of pre-existing works of authorship and materials. ARTICLE VIII GENERAL COVENANTS Section 8.1 Disclosures. The parties shall cooperate fully with each other in providing all required notices and disclosures to the appropriate governmental or regulatory authorities and to affected Users concerning the initiation or termination of this Agreement or of the Services, or of any substantial changes in the Services being provided to FCC National or Users. Section 8.2 Cooperation with Examinations. E-LOAN shall provide to the internal and external auditors and personnel of FCC National and FCC National's Affiliates, and any examiners or agents from any regulatory body asserting jurisdiction over the business of FCC National or any of FCC National's Affiliates, all third party audit and examination reports prepared by regulatory examiners and independent public accountants of E-LOAN, and shall grant such auditors, personnel, examiners and agents reasonable access to E-LOAN (including, without limitation, to E-LOAN's records, systems, controls, processes and procedures) and to the data center from which E-LOAN provides the Services for the purpose of performing audits or examinations of E-LOAN or E-LOAN's Affiliates, including, without limitation, any Agency examination under 12 U.S.C. Section 1867(c). E-LOAN shall fully cooperate and provide to such auditors, personnel, examiners and agents, in a timely manner, all such assistance as they may reasonably require in connection with any such audit or examination. Section 8.3 Year 2000 Due Diligence. (a) E-LOAN understands and acknowledges that FCC National shall be required to represent to the OCC that FCC National will perform requisite due diligence to ensure that all third-party data processing service providers or purchased applications or systems that FCC National utilizes as part of the Project are Year 2000 compliant in accordance with OCC issuances. E-LOAN further understands and acknowledges that, as part of this due diligence, FCC National will determine whether E-LOAN is taking or has taken appropriate action to achieve Year 2000 readiness and has adopted contingency plans for mission-critical products and services. E-LOAN shall cooperate fully with any due diligence and monitoring 9 11 activities conducted by FCC National as part of its oversight and review of E-LOAN's Year 2000 procedures, including, without limitation, compliance with FCC National's audit procedures as described in Section 8.2 above. (b) E-LOAN further understands and acknowledges that FCC National must develop a contingency plan related to Year 2000 compliance in accordance with Agency recommendations prior to the launch date of the Project. E-LOAN shall cooperate fully with the development of such contingency plan. Section 8.4 Disaster Recovery Plan. Throughout the term of this Agreement, E-LOAN hall maintain a disaster recovery plan (the "Disaster Recovery Plan") and the capacity to execute such plan, which plan, at a minimum, shall conform to the standards set by the Federal Financial Institutions Examination Council. A copy of the executive summary of E-LOAN's current Disaster Recovery Plan is attached hereto, for reference purposes only, as Schedule E. On an annual basis and as otherwise requested by FCC National, E-LOAN shall provide FCC National with an executive summary of E-LOAN's most current Disaster Recovery Plan and a detailed description of the Disaster Recovery Plan test results, which Disaster Recovery Plan shall be performed by E-LOAN at least annually. Upon the occurrence of any disaster requiring use of E-LOAN's Disaster Recovery Plan, E-LOAN shall promptly notify FCC National of same, and E-LOAN shall provide to FCC National equal access as E-LOAN's other customers in the provision of the products or services contemplated by this Agreement. If FCC National reasonably determines that E-LOAN has not or cannot put its Disaster Recovery Plan in place quickly enough to meet FCC National's needs or is otherwise unable to provide equal access to such products or services, E-LOAN shall promptly assist and support FCC National in seeking such products or services from an alternative source and provide transition assistance as described in Section 9.4 of this Agreement. ARTICLE IX TERM AND TERMINATION Section 9.1 Term. This Agreement shall be effective as of the Effective Date and shall remain in force for a period of [*] (the "Initial Term"). The Initial Term shall automatically renew and extend for successive one (1) year terms, commencing at the conclusion of the Initial Term or any renewal term, unless contrary notice in writing is given by FCC National or E-LOAN at least 90 days prior to termination of the then current term. Upon termination, the parties' obligations of a continuing nature shall continue to be binding and in full force and effect. Section 9.2 Termination. Either party may, at its option, terminate the Agreement in the event of a material breach of this Agreement by the other party. Such termination may be effected only through written notice to the breaching party, which notice shall specify the breach on which termination is based. Following receipt of such notice, the breaching party shall have thirty (30) days to cure such breach; the Agreement shall terminate in the event such cure is not effected by the end of such period. Section 9.3 Early Termination by FCC National. [*] Section 9.4 Transition Services. Notwithstanding any other provision of this Agreement, including, without limitation, Sections 9.2 and 9.3 above and Sections 9.5 and 9.6 below, if, upon termination of this Agreement, FCC National chooses to continue to offer the Services (or any services that replace the Services or part thereof) itself or through a provider other than E-LOAN, which other provider may be an Affiliate of FCC 10 [*] Confidential treatment requested. 12 National, (a "Transition"), FCC National may request an extension of this Agreement, and E-LOAN shall continue to perform hereunder for a period of up to six (6) months from the effective date of the termination (the "Transition Period") in order to allow the orderly migration and transition of the Services to FCC National and/or a third party vendor designated by FCC National; provided, however, that E-LOAN shall not be required to provide Transition Services to FCC National if (i) FCC National has terminated this Agreement pursuant to Section 9.2, 9.3, 9.5, or 9.6 and (ii) the third-party vendor operates any other multi-vendor site providing home mortgage loans from multiple lenders. E-LOAN shall, upon FCC National's request, provide reasonable assistance to FCC National to complete any such Transition. The payment obligations set forth in Schedule D shall remain effective during the Transition Period. "Reasonable assistance" shall include, as requested by FCC National, any reasonable technical and technical training support required to complete the Transition in a smooth and orderly fashion and without interruption of the electronic banking services being provided by FCC National to Users, including, without limitation, assistance with porting data, revising interfaces and training FCC National and/or any third party designated by FCC National with respect to all technologies necessary to conduct the Services as part of the Project. Section 9.5 Termination to Achieve Regulatory Approval. E-LOAN acknowledges that, to expedite and secure regulatory approval for the Project or otherwise respond to recommendations of any Agency, FCC National may determine, in its reasonable discretion, that FCC National should perform the Services internally (or through an Affiliate) rather than through a third-party vendor. In the event FCC National makes such a determination, FCC National shall have the right to terminate the Agreement. Any termination pursuant to this Section 9.5 shall be subject to the transition obligations set forth in Section 9.4 of this Agreement. Section 9.6 Termination Upon Bankruptcy, Liquidation or Dissolution of E-LOAN. FCC National, reserving all other rights available to it at law or in equity, subject to the terms of this Agreement, shall have the right to immediately terminate this Agreement with respect to any portion of this Agreement upon the occurrence of any one of the following: (1) any voluntary proceeding of E-LOAN under the bankruptcy laws or proceeding for the appointment of a trustee in bankruptcy for E-LOAN, which proceeding is not dismissed or discharged within thirty (30) days thereafter, or the entry by E-LOAN into an assignment for the benefit of E-LOAN's creditors; (2) liquidation, execution or seizure of substantially all of the assets of E-LOAN, or (3) corporate dissolution of E-LOAN. Section 9.7 Termination Upon Bankruptcy, Liquidation or Dissolution of FCC National. E-LOAN, reserving all other rights available to it at law or in equity, subject to the terms of this Agreement, shall have the right to immediately terminate this Agreement with respect to any portion of this Agreement upon the occurrence of any one of the following: (1) any voluntary proceeding of FCC National under the bankruptcy laws or proceeding for the appointment of a trustee in bankruptcy for FCC National, which proceeding is not dismissed or discharged within thirty (30) days thereafter, or the entry by FCC National into an assignment for the benefit of FCC National's creditors; (2) liquidation, execution or seizure of substantially all of the assets of FCC National, or (3) corporate dissolution of FCC National. ARTICLE X INDEMNIFICATION, PROCEDURES AND LIABILITY Section 10.1 E-LOAN Indemnification. E-LOAN hereby agrees to indemnify and hold harmless FCC National and its Affiliates, and their successors and assigns, from any loss, liability, claim, damage or expense: (a) incurred as a result of the breach of any of E-LOAN's representations and warranties as set forth in this Agreement; or (b) incurred as a result of the negligence, gross negligence or willful misconduct of E-LOAN, a breach of any obligation of E-LOAN to FCC National under this Agreement, or claims against FCC National brought by Users arising out of any material deviation by E-LOAN from the technical specifications 11 13 performance standards set forth in the Statement of Work. Section 10.2 FCC National Indemnification. FCC National hereby agrees to indemnify and hold harmless, as permitted by law, E-LOAN and its Affiliates, and their successors and assigns, from any loss, liability, claim, damage or expense: (a) incurred as the result of the breach of any of FCC National's representations and warranties as set forth in this Agreement; or (b) incurred as a result of the negligence, gross negligence or willful misconduct of FCC National or a breach of an obligation of FCC National to E-LOAN under this Agreement. Section 10.3 Procedure for Indemnification. If a party (the "Indemnified Party") seeks indemnification under this Article X, (a) the Indemnified Party shall notify the indemnifying party (the "Indemnifying Party") within thirty (30) days after learning of the occurrence of any event that is asserted to be an indemnifiable event pursuant to this Agreement. If such event involves the claim of any third party and the Indemnifying Party confirms in writing its responsibility for such liability, if established, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, assume control over (in which case the Indemnifying Party shall assume all expense with respect to) the defense, settlement, adjustment or compromise of such claim. (b) The Indemnified Party shall have the right to employ separate counsel in any action or claim and to participate in the defense thereof at the expense of the Indemnifying Party (i) if the retention of such counsel has been specifically authorized by the Indemnifying Party, or (ii) if the counsel is retained because the Indemnifying Party does not notify the Indemnified Party within twenty (20) days after receipt of a claim notice that it elects to undertake the defense thereof. The Indemnified Party shall have the right to employ counsel at the Indemnified Party's own expense and to participate in such action or claim, including settlement or trial, so long as such participation does not substantially interfere in the Indemnifying Party's defense of such claim or action. (c) The Indemnifying Party shall obtain the prior written approval of the Indemnified Party before entering into any settlement, adjustment, or compromise of such claim or ceasing to defend against such claim, if pursuant to or as a result of such settlement, adjustment, compromise, or cessation, injunctive or other relief would be imposed against the Indemnified Party. (d) If the Indemnifying Party does not assume control over the defense of such claim as provided in Section 10.3(a), the Indemnified Party shall have the right to defend the claim in such manner as it may deem appropriate at the cost and expense of the Indemnifying Party, and with the consent of the Indemnifying Party, to settle, adjust, or compromise such claim. The Indemnified Party may settle, adjust, or compromise any such claim without the consent of the Indemnifying Party if the Indemnified Party waives indemnification for such claim. (e) The Indemnifying Party shall remit payment for the amount of a valid and substantiated claim for indemnification hereunder promptly upon receipt of a claim notice therefor. Upon the payment in full of any claim hereunder, the Indemnifying Party shall be subrogated to the rights of the Indemnified Party against any person with respect to the subject matter of such claim. (f) In the event that the Indemnifying Party reimburses the Indemnified Party for any third party claim, the Indemnified Party shall remit to the Indemnifying Party any reimbursement that the Indemnified Party 12 14 subsequently receives for such third party claim. Section 10.4 Limitation of Liability. [*] ARTICLE XI CONFIDENTIAL INFORMATION Section 11.1 Protection. All information disclosed by a party hereto to any other party hereto in the course of performing under this Agreement or to which a party hereto gains access in connection with this Agreement, including, without limitation, any information that is related in any way to either party's customers ("Customer Information"), shall be deemed to be the property of the disclosing party and confidential (such information shall come under the definition of, and hereinafter be referred to as "Confidential Information"). For the term of this Agreement and for five (5) years thereafter (and, for purposes of Customer Information, for the term of this Agreement and indefinitely thereafter), the receiving party shall: (a) receive such Confidential Information in confidence; (b) use reasonable efforts to maintain the confidentiality of such Confidential Information and not disclose such Confidential Information to third parties (except for the receiving party's representatives, agents and contractors who have a need to know, are under a duty of non-disclosure, and are acting for the sole benefit of the receiving party), which efforts shall accord such Confidential Information at least the same level of protection against unauthorized use and disclosure that the receiving party customarily accords its own information of a similar nature; (c) use or permit the use of such Confidential Information solely in accordance with the terms of this Agreement; and (d) promptly notify the disclosing party in writing of any loss or unauthorized use or disclosure of or access to the disclosing party's Confidential Information of which it becomes aware. The parties hereto shall each abide by and reproduce and include any restrictive legends or confidential rights notices (although such restrictive legends or confidential rights notices are not required for Confidential Information to be afforded the protection required by this Article) that appear in or on any Confidential Information of the other party hereto that it is authorized to reproduce. Each party shall also not remove, alter, cover or distort any confidential rights notices, legends, symbols or labels appearing in any Confidential Information of any other party hereto. For purposes of this Agreement, a "need to know" means that the employee requires the Confidential Information to perform his or her responsibilities in connection with the Project. Section 11.2 Exclusions. The restrictions on disclosure set forth in Section 11.1 shall not apply when, and to the extent that, the Confidential Information: (a) is or becomes generally available to the public through no fault of the receiving party (or any Person acting on its behalf); (b) was previously rightfully known to the receiving party free of any obligation to keep it confidential; (c) is subsequently disclosed to the receiving party by a third party who may rightfully transfer and disclose such information without restriction and free of any obligation to keep it confidential; (d) is independently developed by the receiving party or a third party without reference to the disclosing party's Confidential Information; or (e) is required to be disclosed by the receiving party 13 [*] Confidential treatment requested. 15 as a matter of law, provided that the receiving party uses all reasonable efforts to provide the disclosing party with at least ten (10) days' prior written notice of such disclosure and the receiving party discloses only that portion of the Confidential Information that is legally required to be furnished pursuant to the opinion of legal counsel of the receiving party. Notwithstanding the foregoing, FCC National retains the right, in its sole discretion, to disclose any Confidential Information to (x) any Agency, whether pursuant to an audit by such Agency or otherwise, or (y) to its Affiliates (provided that such Affiliates agree to be bound by the confidentiality provisions of this Agreement). Section 11.3 Return or Destruction of Confidential Information Upon Termination or Expiration of Agreement. Upon the termination or expiration of this Agreement, each party shall promptly return or destroy (and certify as to the destruction thereof, without retaining any copies) all materials subject to Intellectual Property Rights of the other party, all Confidential Information of the other party, and other information, documents, manuals and other materials belonging exclusively to the other party, except as may be otherwise provided in this Agreement. Section 11.4 Public Statements. Without the prior written consent of the other, neither party will make any public statement regarding the existence of this Agreement or the terms hereof, or regarding the Project, and the parties will cause their representatives not to make any such public statement. Without the prior written consent of the other, neither party will make any statement to any employee (other than employees who have a need to know about the Services Agreement and/or the Project), competitor, customer, client or supplier of either party, or any other person, with respect to the Project, the nature or identity of FCC National, E-LOAN or FCC National's involvement in the Project, or the existence or contents of this Agreement. The execution of this Agreement by a party shall not be construed as written consent for a public disclosure. Notwithstanding the foregoing, both parties will endeavor to create and issue a press release announcing their relationship at a time, in a form, and in a forum acceptable to both parties. Section 11.5 Equitable Relief. The parties acknowledge that the breach of any portion of this Article XI would cause the disclosing party irreparable harm for which monetary damages would be inadequate. Accordingly, the disclosing party shall be entitled to seek injunctive or other equitable relief to remedy any threatened or actual breach of any portion of this Article XI by the receiving party. ARTICLE XII DISPUTE RESOLUTION Any dispute, controversy, claim or disagreement between the parties hereto arising from, relating to or in connection with this Agreement, any agreement, certificate or other document referred to herein or delivered in connection herewith, or the relationships of the parties hereunder or thereunder, including questions regarding the interpretation, meaning or performance of this Agreement, and including claims based on contract, tort, common law, equity, statute, regulation, order or otherwise ("Dispute") shall be resolved in accordance with Schedule F. ARTICLE XIII GENERAL TERMS AND CONDITIONS Section 13.1 Force Majeure. (a) For the purposes of this Agreement, "Force Majeure Event" means an event, condition or circumstance set forth in the following sentence; provided that such even, condition or circumstance is beyond the control of the party affected (the "Affected Party") and that, despite all efforts of the Affected Party to prevent it or mitigate its effects, such event, condition or circumstance prevents the performance by such Affected Party of its obligations hereunder. Only the following events may be considered Force Majeure Events: (i) explosion and fire; (ii) flood, earthquake, storm, or other natural calamity or act of God; (iii) strike or other labor dispute; (iv) war, insurrection or riot; (v) acts of or failure to act by any governmental authority; and (vi) changes in law. (b) Obligations Under Force Majeure. 14 16 (i) If an Affected Party is rendered unable, wholly or in part, by a Force Majeure Event, to carry out some or all of its obligations under this Agreement, then, during the continuance of such inability, the obligation of such Affected Party to perform the obligations so affected shall be suspended. (ii) The Affected Party shall give written notice of the Force Majeure Event to the other party (the "Unaffected Party") as soon as practicable after such event occurs, which notice shall include information with respect to the nature, cause and date of commencement of the occurrence(s), and the anticipated scope and duration of the delay. Upon the conclusion of a Force Majeure Event, the Affected Party shall, with all reasonable dispatch, take all necessary steps to resume the obligation(s) previously suspended. (iii) Notwithstanding the foregoing, an Affected Party shall not be excused under this Section 13.1 for (1) any non-performance of its obligations under this Agreement having a greater scope or longer period than is justified by the Force Majeure Event, or (2) for the performance of obligations that arose prior to the Force Majeure Event. Nothing contained herein shall be construed as requiring an Affected Party to settle any strike, lockout or other labor dispute in which it may be involved. Notwithstanding the foregoing, E-LOAN's performance of any of its obligations under this Agreement shall not be suspended or excused pursuant to this Article XIII unless E-LOAN has, at all times during the term of this Agreement, maintained acceptable disaster recovery capabilities as required by Section 8.4 of this Agreement. (c) Continued Payment Obligation. Either party's obligation to make payments already owing shall not be suspended by Force Majeure Events. (d) Extended Force Majeure. Either party may terminate this Agreement upon thirty (30) days prior written notice to the other party if a Force Majeure Event prevents the other party from substantially performing its obligations hereunder for a cumulative period of 365 days or more; provided that strikes or other labor disputes shall be disregarded in determining such cumulative period. Section 13.2 Severability. If any term, provision, or restriction of this Agreement and any appendix, exhibit, or schedule hereto is held by a court or panel of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement and such exhibits shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such terms, provisions, covenants or restrictions which may be hereafter declared invalid, void or unenforceable. Section 13.3 Assignment of Agreement. No party shall assign, sublicense or otherwise transfer (voluntarily, by operation of law or otherwise) this Agreement or any right, interest or benefit under this Agreement, without the prior written consent of the other party, which consent shall not be unreasonably withheld, and any attempted assignment, sublicense or transfer in derogation hereof shall be null and void; provided however that FCC National may, without the prior consent of E-LOAN, assign, sublicense or transfer the Agreement to (a) any Affiliate of FCC National, with reasonably comparable resources to FCC National; (b) any new entity created for purposes of operating the financial institution being created by FCC National as part of the Project as of the date of this Agreement; or (c) any Person or entity that acquires or succeeds to all or substantially all of FCC National's business or assets; and provided, that E-LOAN may, without the prior consent of FCC National, assign, sublicense 15 17 or transfer the Agreement to any Person or entity that acquires or succeeds to all or substantially all of E-LOAN's business or assets. Subject to the foregoing, this Agreement shall be fully binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. Section 13.4 Obligation to Notify Upon Knowledge of Event or Circumstance Giving Rise to Claim, Liability, Etc. Each party hereto shall reasonably endeavor to promptly inform the other party hereto of any event or circumstance and provide all information related to its respective information, properties or products which could reasonably lead to a claim, demand, or liability of or against the other party and/or its Affiliates by any third party. Section 13.5 Amendment and Modification of Agreement. No change, amendment or modification of any provision of this Agreement or waiver of any of its terms shall be valid unless set forth in writing and signed by both parties. Section 13.6 Choice of Law and Venue. This Agreement shall be interpreted, construed and enforced in all respects in accordance with the laws of the state of Delaware (without regard to any principles of conflicts of laws thereof). Section 13.7 Waiver of Compliance or Enforcement. The failure of any party hereto to insist upon or enforce strict performance by the other party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as a waiver or relinquishment to any extent of such party's right to assert or rely upon any such provision or right in that or any other instance; rather the same shall be and remain in full force and effect. Section 13.8 Notices. Any notice, approval, request, authorization, direction or other communication under this Agreement shall be given in writing, shall reference this Agreement and shall be deemed to have been delivered and given (a) when delivered personally; (b) three (3) business days after having been sent by registered or certified U.S. mail, return receipt requested, postage and charges prepaid, whether or not actually received; or (c) one (1) business day after deposit with a commercial overnight courier, with written verification of receipt. All communications shall be sent to the addresses set forth on Schedule G or to such other address as may be designated by a party by giving written notice to the other party pursuant to this Section 13.8. 16 18 Section 13.9 Further Assurances. Each party hereto agrees to take, or cause to be taken, all such further or other actions as shall reasonably be necessary to make effective, to consummate and to perform the undertakings and obligations contemplated by this Agreement. Section 13.10 Headings. The headings used in this document are for convenience only and are not to be construed to have any legal significance. Section 13.11 Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall be considered one and the same agreement, and shall become effective when both of the counterparts have been signed by each party and delivered to the other. Section 13.12 Entire Agreement. This Agreement, including all Schedules attached hereto, constitutes the entire agreement among the parties hereto and supersedes any and all prior agreements or understandings among the parties with respect to the subject matter hereof. No party hereto shall be bound by, and each party hereto specifically objects to, any term, condition or other provision or other condition which is different from or in addition to the provisions of this Agreement (whether or not it would materially alter this Agreement) and which is proffered by any other party hereto in any correspondence or other document, unless the party to be bound thereby specifically agrees to such provision in writing. [signature page follows] 17 19 IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed on its behalf as of the date first above written. FCC NATIONAL By: /s/ Kurt M. Campisano -------------------------------------- Name: Kurt M. Campisano Title: Senior Vice President E-LOAN By: /s/ Doug Galen -------------------------------------- Name: Doug Galen Title: VP Bus Dev 18 20 SCHEDULE A DEFINITIONS "AAA" shall have the meaning set forth in Schedule F. "AAA Rules" shall have the meaning set forth in Schedule F. "Affected Party" shall have the meaning given to it in Section 13.1. "Affiliate" shall mean any Person that, directly or indirectly, through one or more intermediaries, (a) owns or controls another Person, (b) is owned or controlled by another Person, or (c) is under common control or ownership with another Person. As used herein, "control" means the power to direct the management or affairs of a Person, and "ownership" means the direct or indirect beneficial ownership of more than 50% of the equity securities of a Person, or, in the case of a Person which is not a corporation, more than 50% of the voting and/or equity interest. "Agency" shall have the meaning set forth in Section 3.7(a). "Applicable Law" shall have the meaning set forth in Section 3.7(a). "Arbitrators" shall have the meaning set forth in Schedule F. "Basic Qualifications" shall have the meaning set forth in Schedule F. "Confidential Customer Financial Information" shall mean information submitted by a customer, acquired from a third party, or generated or developed by either party hereto to the extent such information relates to such customer's application for any credit card or loan, credit bureau data or other information or analysis used to determine whether such customer will be issued any credit card or loan, the credit limit for any credit card issued to a customer, E-LOAN's internal credit scoring, payment history, customer service and customer dispute information, or any information that bears on a consumer's credit-worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living that is collected or used (or expected to be collected or used) as a factor in establishing the consumer's eligibility for credit, insurance, employment, or any other purpose permissible under the Fair Credit Reporting Act. "Confidential Information" shall mean any and all information, whether written or oral, relating to or disclosed in this Agreement that is or should be reasonably understood to be confidential or proprietary to the disclosing party. Confidential Information includes, without limitation, all information relating to the Project, information about either party's customers or prospective customers(including, without limitation, Customer Data), policies and procedures, operations and future business plans, technical processes and formulas, product designs, sales, performance, costs, know-how and other unpublished financial information, business plans, projections and marketing data. The terms and conditions of this Agreement (as well as all information regarding the negotiation of this Agreement) and the relationship between the parties that this Agreement represents shall be deemed to be Confidential Information of the parties hereto. The nature and identity of FCC National and its involvement in the Project shall also be deemed to be Confidential Information. "Customer Data" shall mean the information developed through customer use of the Services, or obtained in the course of providing the Services, and through analysis of such information, including without limitation all demographic, psychographic, behavioral and financial data. "Dispute" shall have the meaning set forth in Article XII. "Early Termination" shall have the meaning set forth in Section 9.3. "End-User Agreement " shall mean any agreement entered into between FCC National and a User. "Force Majeure Event" shall have the meaning given to it in Section 13.1(a). 19 21 "FCC National Policies" shall mean the internal policies and procedures of FCC National provided in writing to E-LOAN or otherwise made known to E-LOAN by FCC National or its authorized representatives, as supplemented from time to time. "FCC National Trademark" shall have the meaning set forth in Section 7.2. "Indemnified Party" shall have the meaning set forth in Section 10.3. "Indemnifying Party" shall have the meaning set forth in Section 10.3(a). "Initial Term" shall have the meaning set forth in Section 9.1. "Intellectual Property Rights" shall mean, to the extent that any of the following are recognized in any country or jurisdiction in the world: intellectual property and or proprietary rights, whether registered or unregistered, including, without limitation, copyrights; patent rights (including without limitation applications for patent protection); publicity rights; trade secret rights; registered or otherwise protected trademarks, trade names and service marks and protections from trademark dilution. "Level 1 Dispute Review" shall have the meaning set forth in Schedule F. "Level 1 Dispute Termination Date" shall have the meaning set forth in Schedule F. "Level 2 Dispute Review" shall have the meaning set forth in Schedule F. "Level 2 Dispute Termination Date" shall have the meaning set forth in Schedule F. "OCC" shall have the meaning set forth in Section 3.7. "Panel" shall have the meaning set forth in Schedule F. "Partner" shall mean any vendor providing services or products to FCC National for the purpose of implementing a function, or part thereof, of the Project. "Performance Report" shall have the meaning set forth in Section 3.1. "Person" shall mean any individual, firm, corporation, business trust, partnership, or other entity and shall include any successor (by merger or otherwise) of such entity. "Project" shall mean have the meaning set forth in the recitals to this Agreement. "Project Manager" shall mean any individual(s) or entity designated by FCC National, in its sole discretion, to manage the Project. "Services" shall have the meaning set forth in Section 2.1. "Transition" shall have the meaning set forth in Section 9.4. "Transition Period" shall have the meaning set forth in Section 9.4. "Unaffected Party" shall have the meaning given to it in Section 13.1(b)(ii). "Users" shall have the meaning given to it in Section 2.1. 20 22 SCHEDULE B STATEMENT OF WORK TIMING (1) E-LOAN shall deliver, by the close of business on Friday, April 2, 1999, a beta version of the webpages for FCC National testing, comment, and approval. (2) E-LOAN shall deliver complete functionality and integration of E-LOAN Pages onto the FCC National website by the close of business on Friday, May 7, 1999. TASKS (1) E-LOAN shall provide the URLs necessary to link to the FCC National website. (2) E-LOAN shall provide one or more internet web pages for use on FCC National's website to offer loan solutions to FCC National's customers and other visitors to the FCC National website. E-LOAN shall use FCC National style guides and make all commercially reasonable efforts to comply with other FCC National requirements in the construction and modification of the web pages, except that E-LOAN shall not be required to make material changes to the content of its web pages. The number, content, and format of such web pages shall be determined in the sole discretion of FCC National, and E-LOAN shall make all commercially reasonable changes to its software to comply with FCC National's web page requirements, except that E-LOAN shall not be required to make material changes to the content of its web pages. (3) E-LOAN shall provide FCC National with technical assistance reasonably requested by FCC National to allow FCC National to incorporate mortgage-related evaluation tools within its website, allowing customers to calculate, among other things, the dollar value of the mortgage for which they would likely qualify, the monthly payments that they could reasonably afford and their actual monthly payments. (4) E-LOAN shall use commercially reasonable efforts to ensure that all pages of the E-LOAN website linked from any part of the FCC National website comply with the scale, speed and performance equivalent to that provided by the FCC National website, and E-LOAN shall use its best efforts to ensure that the scale, speed and performance of all pages of the E-LOAN website linked from any part of the FCC National website be no less than the current speed, scale and performance of the E-LOAN website. (5) E-LOAN shall ensure that all information provided by users of the co-branded site is maintained, accessed and transmitted in a secure environment and in compliance with security specifications equal to those provided on the E-LOAN website as of the date the site is made available to the public. (6) E-LOAN shall maintain the web pages related to its products. (7) E-LOAN shall, for the term of this Agreement, continue to offer loan solutions involving multiple lenders and shall ensure the integrity of E-LOAN's system to present the customer with multiple lender options and to identify the most competitive loan options. 21 23 (8) E-LOAN shall offer loans to applicants referred by FCC National on terms not less favorable, and with no additional fees, than the terms and fees on loans offered by E-LOAN to any other loan applicant. (9) E-LOAN shall cooperate with FCC National to develop and execute mutually agreed upon promotional offers; provided, however that nothing in this Section (9) shall require E-LOAN or FCC National to enter into any promotional offer which would have a negative financial impact on such party. (10) E-LOAN will ensure that customers accessing E-LOAN through the FCC National site will have no links to outside sites that E-LOAN does not host. ACCEPTANCE (1) Acceptance will be based upon satisfactory completion of all of the TASK and TIMING items. (2) After E-LOAN has completed internal testing on the any of the above items, individually or as a group, it shall deliver such items to FCC National for testing. FCC National will then be responsible for testing the completed items. (3) Once all testing has been completed by FCC National and all bugs reported have been resolved, a formal acceptance letter will be issued by E-LOAN to FCC National for signature. (4) The FCC National executive with the authority to sign off on the acceptance letter is Chip Weldon, VP, Interactive. 22 24 SCHEDULE C TECHNICAL SUPPORT AND PERSONNEL FCC National technical personnel contact information: c/o First USA Bank, N.A. Three Christina Centre 201 North Walnut Street Wilmington, DE 19801 Attn: Evan Tso Tele.: 302-985-8317 E-mail:evantso@firstusa.com E-LOAN technical personnel contact information: E-LOAN, Inc. 5875 Arnold Road Dublin, California 94568 Attn: Matthew Murray, Partner Integration Manager Tele.: (925) 560-2617 E-mail:matthew@eloan.com 23 25 SCHEDULE D PAYMENT OBLIGATIONS Section 1. Marketing Fee. [*] Section 2. Transition Fee. [*] Section 3. Right to Renegotiate. [*] 24 [*] Confidential treatment requested. 26 SCHEDULE E DISASTER RECOVERY E-Loan maintains a formal disaster recovery and contingency plan ("DRCP") under which the co-branded Loan Center created for FCC National will operate. E-Loan has an internal detailed procedural DRCP document containing contingency actions for various levels of outage and system failures. This DCRP consists of the information and procedures required to enable rapid recovery from any event that would prevent the operation of the co-branded Loan Center and the E-Loan website. The DCRP has been distributed to all employees who have responsibilities under the plan. Management employees have a second copy for storage at home. 25 27 SCHEDULE F DISPUTE RESOLUTION Level 1 Dispute Review. Upon the written request of either party, FCC National and E-LOAN shall each appoint a designated representative whose task shall be to meet the other party's designated representative (by conference telephone call or in person at a mutually agreeable site) in an endeavor to resolve any Dispute ("Level 1 Dispute Review"). The designated representatives shall meet as often as the parties reasonably deem necessary to discuss the Dispute and negotiate in good faith in an effort to resolve the Dispute without the necessity of any formal proceeding. Level 2 Dispute Review. If resolution of the Dispute cannot be resolved within the earlier of (a) fifteen (15) days of the first Level 1 Dispute Review meeting and (b) such time as when either party gives the other notice of an impasse ("Level 1 Dispute Termination Date"), a chief executive officer (or a functional equivalent) of each of FCC National and E-LOAN shall meet (by conference telephone call or in person at a mutually agreeable site) within 72 hours after the Level 1 Dispute Termination Date for the purpose of resolving such unresolved Dispute ("Level 2 Dispute Review"). Submission of Dispute to Mediation. If the parties are unable to resolve the Dispute within a reasonable period after commencement of the Level 2 Dispute Review, the parties shall give each other notice of the existence of a continuing impasse (the date on which both parties are in receipt of such notice, the "Level 2 Dispute Termination Date") and shall thereafter immediately submit the Dispute to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association ("AAA") and shall bear equally the costs of the mediation. The parties will act in good faith to jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the AAA within fifteen (15) days of the Level 2 Termination Date. The parties agree to participate in good faith in the mediation and negotiations related thereto for a period of thirty (30) days commencing with the selection of the mediator and any extension of such period as mutually agreed to by the parties. Arbitration. (a) If the parties cannot agree to a mediator within fifteen (15) days of the Level 2 Dispute Termination Date or if the Dispute is not resolved within thirty (30) days after the beginning of the mediation and any extension of such periods as mutually agreed to by the parties, the Dispute shall be submitted to, and finally determined by, binding arbitration in accordance with the following provisions of this Schedule, regardless of the amount in controversy or whether such Dispute would otherwise be considered justiciable or ripe for resolution by a court or arbitration panel. (b) Any such arbitration shall be conducted by the AAA in accordance with its current Commercial Arbitration Rules (the "AAA Rules"), except to the extent that the AAA Rules conflict with the provisions of this Schedule, in which event the provisions of this Section shall control. (c) The arbitration panel (the "Panel") shall consist of three neutral arbitrators ("Arbitrators"), each of whom shall be an attorney having five or more years experience in the primary area of law as to which the Dispute relates, and shall be appointed in accordance with the AAA Rules (the "Basic Qualifications"). (d) Should an Arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section 12.5, a substitute Arbitrator possessing the Basic Qualifications shall be appointed by the AAA. If an Arbitrator is replaced after the arbitration hearing has commenced, then a rehearing shall take place in accordance with the provisions of this Schedule and the AAA Rules. (e) The arbitration shall be conducted in Philadelphia, Pennsylvania; provided that the Panel may from time to time convene, carry on hearings, inspect property or documents and take evidence at any location which the Panel deems appropriate. (f) The Panel may in its discretion order a pre-exchange of information including 26 28 production of documents, exchange of summaries of testimony or exchange of statements of position and shall schedule promptly all discovery and other procedural steps and otherwise assume case management initiative and control to effect an efficient and expeditious resolution of the Dispute. (g) At any oral hearing of evidence in connection with any arbitration conducted pursuant to this Schedule, each party and its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of the other party. No testimony of any witness shall be presented in written form unless the opposing parties shall have the opportunity to cross-examine such witness, except as the parties otherwise agree in writing and except under extraordinary circumstances where, in the opinion of the Panel, the interests of justice require a different procedure. (h) Within fifteen (15) days after the closing of the arbitration hearing, the Panel shall prepare and distribute to the parties a written award, setting forth the Panel's findings of facts and conclusions of law relating to the Dispute, including the reasons for the giving or denial of any requested remedy or relief. The Panel shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, and shall award interest on any monetary award from the date that the loss or expense was incurred by the successful party. In addition, the Panel shall have the authority to decide issues relating to the interpretation, meaning or performance of this Agreement, any agreement, certificate or other document referred to herein or delivered in connection herewith, or the relationships of the parties hereunder or thereunder, even if such decision would constitute an advisory opinion in a court proceeding or if the issues would otherwise not be ripe for resolution in a court proceeding, and any such decision shall bind the parties in their performance of this Agreement and such other documents. (i) Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, no party nor any arbitrator shall disclose the existence, content or results of any arbitration conducted hereunder without the prior written consent of the other parties. (j) To the extent that the relief or remedy granted in an award rendered by the Panel is relief or a remedy on which a court could enter judgment, a judgment upon the award rendered by the Panel may be entered in any court having jurisdiction thereof. Otherwise, the award shall be binding on the parties in connection with their obligations under this Agreement and in any subsequent arbitration or judicial proceedings among any of the parties. (k) The parties agree to share equally the cost of any arbitration, including the administrative fee, the compensation of the arbitrators and the costs of any neutral witnesses or proof produced at the direct request of the Panel. (l) Notwithstanding the choice of law provision set forth in Section 13.6, The Federal Arbitration Act, 9 U.S.C. Sections 1 to 14, except as modified hereby, shall govern the enforcement of Article XII and this Schedule. Recourse to Courts and Other Remedies. Notwithstanding the Dispute resolution procedures contained in this Schedule, any party may apply to any court having jurisdiction (a) to enforce this Agreement to arbitrate, (b) to seek provisional injunctive relief so as to maintain the status quo until the arbitration award is rendered or the Dispute is otherwise resolved, (c) to avoid the expiration of any applicable limitation period, (d) to preserve a superior position with respect to other creditors, or (e) to challenge or vacate any final judgment, award or decision of the Panel that does not comport with the express provisions of Schedule. Attorneys' Fees. If any action, suit, or proceeding is commenced to establish, maintain, or enforce any right or remedy under this Agreement, the party not prevailing therein shall pay, in addition to any damages or other award, all reasonable attorneys' fees and litigation expenses incurred therein by the prevailing party. Affiliates. Each party hereto agrees that for purposes of Article XII and this Schedule, references 27 29 to the parties shall also include their respective Affiliates, who shall be subject to the Dispute resolution procedures of Article XII and this Schedule to the same extent as the parties. 28 30 SCHEDULE G NOTICES If to FCC National: FCC National Bank c/o First USA Bank, N.A. Three Christina Centre 201 North Walnut Street Wilmington, DE 19801 Attn: Bill Wallace with a copy to: FCC National Bank c/o First USA Bank, N.A. Three Christina Centre 201 North Walnut Street Wilmington, DE 19801 Attn: Clint Walker If to E-LOAN: E-LOAN, Inc. 5875 Arnold Road Dublin, California 94568 Attn: Doug Galen with a copy to: E-LOAN, Inc. 5875 Arnold Road Dublin, California 94568 Attn: Chief Financial Officer 29 -----END PRIVACY-ENHANCED MESSAGE-----