-----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, Ncv1JN+x0L1JjmdvW1gcYD1whdY99X1T4yu3pxY4U7KGlnkhrVK6AKmiUHUun9ha 725AVLTO7tmJZbftsPSvdA== 0000930413-02-000201.txt : 20020414 0000930413-02-000201.hdr.sgml : 20020414 ACCESSION NUMBER: 0000930413-02-000201 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20020131 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25621 FILM NUMBER: 02523951 BUSINESS ADDRESS: STREET 1: 5875 ARNOLD RD., SUITE 100 CITY: DUBLIN STATE: CA ZIP: 94568 BUSINESS PHONE: 9252412402 MAIL ADDRESS: STREET 1: 5875 ARNOLD RD., SUITE 100 CITY: DUBLIN STATE: CA ZIP: 94568 10-K/A 1 c23016_10-ka.txt FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 ON FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Commission File Number: 000-25621 E-LOAN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 5875 Arnold Road, Suite 100, Dublin, California 94568 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) DELAWARE 77-0460084 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) Registrant's telephone number, including area code: (925) 241-2400 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 16, 2001 is approximately $47,000,000. The total number of shares of common stock outstanding as of March 16, 2001 was 53,652,428. E-LOAN, INC. FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 2000 CONTENTS PART II. Item 7a. Quantitative and Qualitative Disclosures About Market Risk 3 Item 8. Financial Statements 4 Report of Independent Accountants 4 Balance Sheets 5 Statements of Operations 6 Statements of Stockholders' Equity (Deficit) 7 Statements of Cash Flows 8 Notes to Financial Statements 9 SIGNATURES 27 2 EXPLANATORY NOTE The Company is filing this Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2000 to add a new sentence to the end of the second paragraph in Item 7 (Quantitative and Qualitative Disclosures About Market Risk) and to align the discussion of revenues in Note 2 to the Company's Financial Statements to match with the tabular presentation of revenues in Note 12. This Amendment does not restate any of the financial statements contained in the Company's initial filing. Other than the aforementioned change, all other information included in the initial filing as amended by Amendment No. 1 on Form 10-K/A filed on April 23, 2001 is unchanged. PART II ITEM 7a. 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. E-LOAN attempts to minimize the interest rate risk associated with the time lag between when loans are rate-locked and when they are committed for sale or exchanged in the secondary market, through its hedging activities. Individual mortgage loan risks are aggregated by note rate, mortgage loan type and stage in the pipeline, and are then matched, based on duration, with the appropriate hedging instrument, thus mitigating basis risk until closing and delivery. E-LOAN currently hedges its mortgage pipeline through mandatory forward sales of Fannie Mae mortgage-backed securities and non-mandatory forward sale agreements with the ultimate investor. E-LOAN determines which alternative provides the best execution in the secondary market. In addition, E-LOAN does not believe its net interest income would be materially effected as a result of concurrent changes in long-term and short-term interest rates due to the short duration of time loans are held on the balance sheet prior to being sold to third party investors (on average fifteen to thirty days). E-LOAN believes that it has implemented a cost-effective hedging program to provide a level of protection against changes in the market value of its fixed-rate mortgage loans held for sale. However, an effective strategy is complex and no hedging strategy can completely insulate the Company against such changes. 3 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF E-LOAN, INC.: In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of E-Loan, Inc. (the Company) at December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California April 2, 2001 4 E-LOAN, INC. BALANCE SHEETS DECEMBER 31, 1999 AND 2000 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
1999 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 37,748 $ 28,459 Loans held-for-sale 35,140 22,745 Accounts receivable, prepaids and other current assets 6,462 10,360 --------- --------- Total current assets 79,350 61,564 Furniture and equipment, net 4,053 8,025 Deposits and other assets 1,686 2,010 Goodwill and intangible assets 67,878 28,144 --------- --------- Total assets $ 152,967 $ 99,743 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Warehouse lines payable $ 33,115 $ 17,678 Accounts payable, accrued expenses and other current liabilities 12,901 11,928 Capital lease obligation, current portion 252 396 Notes payable, current portion 1,167 1,167 --------- --------- Total current liabilities 47,435 31,169 Capital lease obligations, long term 483 213 Notes payable, long term 2,042 875 --------- --------- Total liabilities 49,960 32,257 --------- --------- Commitments and contingencies (Note 15): Stockholders' equity: Preferred stock, 5,000,000 $0.001 par value shares authorized at December 31, 1999 and December 31, 2000; 0 shares issued and outstanding at December 31, 1999 and December 31, 2000 -- -- Common stock, 70,000,000 and 150,000,000 $0.001 par value shares authorized at December 31, 1999 and December 31, 2000; 41,679,243 and 53,449,236 shares issued and outstanding at December 31, 1999 and December 31, 2000 42 53 Less: subscription receivable (4) (4) Marketing services receivable -- (5,970) Unearned compensation (21,195) (8,625) Additional paid-in capital 209,738 259,366 Accumulated deficit (85,574) (177,334) --------- --------- Total stockholders' equity 103,007 67,486 --------- --------- Total liabilities and stockholders' equity $ 152,967 99,743 ========= =========
5 E-LOAN, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
1998 1999 2000 ------------ ----------- ----------- Revenues (Note 12) $ 6,832 $ 22,097 $ 35,879 Operating expenses: Operations 8,257 22,779 31,747 Sales and marketing 5,704 30,286 28,506 Technology 1,346 3,595 6,207 General and administrative 1,619 6,859 6,840 Non-cash marketing costs -- -- 6,490 Amortization of unearned compensation 1,251 23,116 9,392 Amortization of goodwill and intangible assets -- 11,589 39,733 ------------ ----------- ----------- Total operating expenses 18,177 98,224 128,915 ------------ ----------- ----------- Loss from operations (11,345) (76,127) (93,036) Other income, net 173 3,152 1,276 ------------ ----------- ----------- Net loss $ (11,172) $ (72,975) $ (91,760) ============ =========== =========== Net loss attributable to common stockholders $ (12,185) $ (74,017) $ (91,760) ============ =========== =========== Net loss per share: (Note 2) Basic and diluted $ (0.98) $ (2.75) $ (1.91) ============ =========== =========== Weighted-average shares - basic and diluted 12,400,284 26,900,863 48,071,654 ============ =========== ===========
6 E-LOAN, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK COMMON STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- --------- --------- --------- ----------- -------- Balance at December 31, 1997 428,635 $ 91 430,207 $ 411 12,255,000 $ 12 Common stock issued for cash 136,488 1 Common stock issued for cash upon exercise of stock options 132,522 -- Accretion for preferred stock Series C Accretion for preferred stock Series D Issuance of warrants for capital lease Issuance of warrants in relation to marketing agreements Issuance of stock options for services rendered Unearned compensation Net loss ----------- --------- --------- --------- ----------- -------- Balance at December 31, 1998 428,635 $ 91 430,207 $ 411 12,524,010 $ 13 Common stock issued for cash upon exercise of stock options 687,763 1 Accretion for preferred stock Series C Accretion for preferred stock Series D Charitable Contribution 75,000 -- Issuance of warrant in relation to warehouse line Issuance of stock options for consulting services rendered Proceeds from Initial Public Offering and private placement, net of issuance costs of $2,281 4,980,061 5 Conversion of preferred stock (428,635) (91) (430,207) 411 20,493,921 20 Issuance of common stock in connection with acquisition 2,879,997 3 Obtained warrant and non-cash gain from settlement of dispute Issuance of common stock through ESPP 38,491 -- Unearned compensation Net loss ------------------------------------------------------------------------------- Balance at December 31, 1999 -- $ -- $ -- $ -- 41,679,243 $ 42 Common stock issued for cash upon exercise of stock options 915,287 1 Exercise of warrants issued for capital lease 43,148 -- Proceeds from Private Placement, net of issuance costs of $889 10,666,664 10 Issuance of common stock through ESPP 144,894 -- Marketing Services Receivable, net of amortization Unearned compensation Net loss ------------------------------------------------------------------------------- Balance at December 31, 2000 -- $ -- -- $ -- 53,449,236 $ 53 =========== ========= ======== ======== ========== ======== 7 TOTAL UNEARNED ADDITIONAL MARKETING ACCUMU- STOCKHOLDER'S SUBSCRIPTION COMPEN- PAID- SERVICES LATED EQUITY RECEIVABLE SATION IN CAPITAL RECEIVABLE DEFICIT (DEFICIT) - ------------- --------- ---------- ----------- ----------- ----------- $ (4) $ -- $ (49) $ -- $ (1,427) $ (966) 19 20 3 3 (500) (500) (513) (513) 29 29 640 640 24 24 (4,477) 5,728 1,251 (11,172) (11,172) - ----------- --------- ---------- ----------- ----------- ----------- $ (4) (4,477) $ 5,381 $ -- $ (12,599) (11,184) 207 208 (260) (260) (782) (782) 900 900 290 290 198 198 62,552 62,557 23,767 23,285 80,274 80,277 (3,081) (3,081) 458 458 (16,718) 39,834 23,116 (72,975) (72,975) - --------------------------------------------------------------------------------------------------- $ (4) $ (21,195) $ 209,738 $ -- $ (85,574) $ 103,007 616 617 30 30 39,100 39,110 600 600 12,460 (5,970) 6,490 12,570 (3,178) 9,392 (91,760) (91,760) - --------------------------------------------------------------------------------------------------- $ (4) $ (8,625) $ 259,366 $ (5,970) $ (177,334) $ 67,486 =========== ========== ========= ========== ============ =========
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 ($ IN THOUSANDS) - --------------------------------------------------------------------------------
1998 1999 2000 ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (11,172) $ (72,975) $ (91,760) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of unearned compensation 1,251 23,116 9,392 Charitable contribution of common stock -- 900 -- Non-cash gain on settlement of dispute -- (2,891) -- Amortization of goodwill and intangible assets -- 11,589 39,733 Non-cash marketing costs -- -- 6,490 Depreciation and amortization of fixed assets 513 1,188 2,351 Loss on disposal of furniture and equipment 41 -- -- Changes in operating assets and liabilities: Accounts receivable, prepaids, deposits and other assets (1,019) (5,973) (4,222) Net change in loans held for sale (42,154) 7,014 12,395 Accounts payable, accrued expenses and other payables 2,136 10,227 (973) ----------- ----------- ----------- Net cash used in operating activities (50,404) (27,805) (26,594) ----------- ----------- ----------- Cash flows from investing activities: Acquisition of furniture, equipment and software (1,609) (2,874) (6,187) Net cash received in connection with acquisition of CarFinance.com -- 813 -- ----------- ----------- ----------- Cash used in investing activities (1,609) (2,061) (6,187) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock, net 23 63,223 40,357 Payments on obligations under capital leases, net (27) (236) (262) Proceeds from notes payable 642 7,859 -- Payments on notes payable (79) (5,291) (1,167) Proceeds from warehouse lines payable 241,242 1,095,860 960,684 Repayments of warehouse lines payable (200,196) (1,103,791) (976,120) Proceeds from issuance of preferred stock, net 15,331 849 -- ----------- ----------- ----------- Net cash provided by financing activities 56,936 58,473 23,492 ----------- ----------- ----------- Net increase (decrease) in cash 4,923 28,607 (9,289) Cash and cash equivalents, beginning of period 4,218 9,141 37,748 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 9,141 $ 37,748 $ 28,459 =========== =========== =========== Supplemental cash flow information: Cash paid for interest $ 589 $ 5,335 $ 5,994 =========== =========== =========== Noncash investing and financing activities: Furniture, equipment and software under capital leases $ 999 $ -- $ 136 Acquisition of CarFinance.com for common stock -- 80,277 -- ----------- ----------- ----------- $ 999 $ 80,277 $ 136 =========== =========== ===========
8 E-LOAN, INC. NOTES TO FINANCIAL STATEMENTS 1. The Company E-LOAN, Inc. (the "Company") was incorporated on August 26, 1996 and began marketing its services in June 1997. The Company is a provider of first and second mortgage loans, home equity loans, auto loans, small business loans and credit card referrals. The Company operates as a single operating segment. The Company completed its initial public offering of 4,020,000 shares of its common stock on June 28, 1999, raising $52.3 million, net of underwriting discount. Concurrently, the Company sold 960,061 shares of its common stock for $12.5 million, net of underwriting discount, in a private placement to Forum Holdings, Inc., an investment subsidiary of Group Arnault. The net proceeds of $62.5 million were received on July 2, 1999. Simultaneous to the closing of the initial public offering, all the convertible preferred stock and mandatorily redeemable convertible preferred stock were automatically converted into an aggregate of 20,493,921 shares of common stock. On April 25, 2000, the Company entered into a Securities Purchase Agreement with six institutional investors to sell an aggregate of 10,666,664 shares of common stock at a purchase price of $3.75 per share in a private placement. The aggregate gross proceeds of $40.0 million were received on June 15, 2000. On September 17, 1999, the Company acquired Electronic Vehicle Remarketing, Inc. ("CarFinance.com"), a leading provider of online auto loans. Under the terms of the agreement, the Company issued 2,879,997 shares of common stock to five investors. As a result of the acquisition, the Company recorded $78.0 million in goodwill and $1.4 million of acquired intangible assets, which is being amortized on a straight-line basis over a two-year period. This acquisition was accounted for as a purchase transaction. The following is a proforma summary of the unaudited consolidated statement of operations of the Company for the years ended December 31, 1998 and 1999, assuming the above acquisition had taken place as of January 1, 1998 and 1999: DECEMBER 31, --------------------------------- 1998 1999 ------------- ------------- ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) UNAUDITED Revenues $ 8,648 $ 26,037 Net loss $ (52,292) $ (101,821) Net loss per share: Basic and diluted (1.74) (2.56) ============ ============ Weighted average number of shares 30,033,119 39,765,030 ------------ ------------ RECLASSIFICATION Certain amounts in the financial statements have been reclassified to conform to the 2000 presentation. 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. CASH AND CASH EQUIVALENTS The Company considers all highly liquid monetary instruments with an original maturity of three months or less from the date of purchase and documentary drafts, to be cash equivalents. Both cash equivalents and short term investments are considered available-for-sale securities and are carried at amortized cost, which approximates fair value. As more fully described in Note 17, the Company must maintain a minimum cash and cash equivalents balance of the higher of $20 million or the highest amount required by any other lender or agreement. The following summarizes cash and cash equivalents at December 31, 1999 and 2000 (in thousands): DECEMBER 31, 1999 2000 ---------- ----------- Cash ................. $ 4,651 $ 12,290 Commercial paper .... 33,097 8,524 Documentary drafts ... -- 7,645 ---------- ----------- $ 37,748 $ 28,459 ========== =========== DOCUMENTARY DRAFTS The Company originates auto loans directly to consumers through the use of a documentary draft process. This process requires the borrower and the auto dealer to provide a series of supporting documents in order to complete the loan. Examples of required supporting documentation include copies of the borrower's driver's license, bill of sale, proof of insurance, and application for title registration. Documentary drafts consist of cash allocated to satisfy documentary drafts presented by borrowers before the required supporting documents are received by the Company to complete the loan. If the required documentation is not provided as agreed to by the borrower and auto dealer, then the allocation of cash is reversed and the cash balance is restored. The Company's documentary draft process allows for at least two business days to process the required supporting documentation prior to determining whether to reverse or honor the original presentment by the auto dealer. Of the $7.6 million included in cash and cash equivalents at December 31, 2000, $6.3 million converted to loans in January 2001. LOANS HELD FOR SALE Mortgage loans held-for-sale consists of residential property mortgages having maturities up to 30 years. Pursuant to the mortgage terms, the borrowers have pledged the underlying real estate as collateral for the loans. It is the Company's practice to sell these loans to mortgage loan purchasers shortly after they are funded. Mortgage loans held-for-sale are recorded at the lower of cost or aggregate market value. Cost generally consists of loan principal balance adjusted for net deferred fees and costs. No valuation adjustment was required at December 31, 1999 or 2000. In May 2000, the Company began funding auto loans. Auto loans held-for-sale consists of automobile loans having 10 maturities up to 72 months. Pursuant to the loan terms, the borrowers have pledged the value of the automobile as collateral for the loan. It is the Company's practice to sell these loans to auto loan purchasers shortly after they are funded. Auto loans held-for-sale are recorded at the lower of cost or aggregate market value. No valuation adjustment was required at December 31, 2000. FURNITURE AND EQUIPMENT Furniture and equipment, including furniture and equipment under capital leases, are recorded at cost and depreciated using the straight-line method over their useful lives, which is generally three years for computers and five years for furniture and fixtures. Assets under capital leases are depreciated over the shorter of the useful life of the asset or the term of the lease. Leasehold improvements are amortized over the remaining life of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized. In 1999, the Company adopted SOP 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which requires 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 generally amortized over one to three years on a straight-line basis. As of December 31, 2000, the Company had capitalized approximately $1.8 million in internally developed software costs. GOODWILL AND INTANGIBLE ASSETS The Company recorded $78.0 million in goodwill and $1.4 million of acquired intangible assets resulting from the acquisition of Carfinance.com on September 17, 1999, which is being amortized on a straight-line basis over a two-year period. Amortization of goodwill and acquired intangible assets for the years ended December 31, 1999 and 2000 was $11.6 million and $39.7 million, respectively. IMPAIRMENT OF LONG LIVED ASSETS The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. There was no impairment charge in the Company's financial statements for the years ended December 31, 1999 and 2000. EQUITY INVESTMENTS The Company accounts for investments in entities where its ownership interest is between 20% and 50% under the equity method. These investments are recorded in deposits and other assets and the Company's proportionate share of income or loss is included in other income, net. REVENUE MORTGAGE REVENUES Mortgage revenues are derived from the origination and sale of self-funded loans and, to a lesser extent, from the brokering of loans. Brokered loans are funded through lending partners and the Company 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. Self-funded loans are funded through the Company's warehouse lines of credit and sold to mortgage loan 11 purchasers. Self-funded loan 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 the Company holds for sale. These revenues are recognized at the time the loan is sold. INTEREST INCOME ON MORTGAGE AND HOME EQUITY LOANS Interest income on mortgage and home equity loans is generated by the loan amount times the rate from time of funding through time of sale. HOME EQUITY LINE OF CREDIT In the fourth quarter of 2000, the Company began home equity loan origination and sale operations. Home equity revenues are derived from the origination and sale of self-funded loans. Self-funded loans are funded through the Company's warehouse lines of credit and sold to home equity loan purchasers. Self-funded loan 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 the Company holds for sale. These revenues are recognized at the time the loan is sold. AUTO REVENUES Auto revenues are derived from the origination and sale of self-funded loans and from the brokering of auto loans. Auto brokerage revenues are primarily comprised of the mark-up to the lending partner's loan price or a set origination fee. These revenues are recognized at the time a loan is closed. Self-funded loans are funded using the Company's balance sheet and sold to auto loan purchasers. Self-funded loan revenues also consist of the mark-up to the lending partner's loan price or a set origination fee. These revenues are recognized at the time the loan is sold. CREDIT CARD AND OTHER Credit card and other revenues are derived from the fees paid by various partners in exchange for consumer loan referrals. The current loan programs offered include credit card and small business loans. ADVERTISING AND MARKETING COSTS Advertising and marketing costs related to various media content advertising such as television, radio and print are charged to operating expenses as incurred. These costs include the cost of production as well as the cost of any air time. MARKETING SERVICES RECEIVABLE The marketing services receivable relates to the issuance of two warrants issued in connection with a strategic marketing agreement (see Note 10). The fair value of these warrants has been recorded as a contra equity account called marketing services receivable and is being amortized on a straight-line basis over one-year. In association with this marketing agreement, there are a series of cash payments to be made over the course of the agreement, which are not included in the marketing services receivable. Amounts payable under this agreement are included within the future minimum payments table under marketing agreements disclosed in Note 15. INCOME TAXES The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be 12 realized. The provision for income tax expense represents taxes payable for the current period, plus the net change in deferred tax assets and liabilities. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations, and complies with the disclosure requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Under APB No. 25, compensation expense is based on the excess of the estimated fair value of the Company's stock over the exercise price, if any, on the date of grant. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus in Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO NON-EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES. NET 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 potential dilutive shares outstanding during the period, to the extent such potential dilutive shares are dilutive. Potential dilutive shares are composed of incremental common shares issuable upon the exercise of stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (dollars in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, ----------------------------- ----------- 1998 1999 2000 ------------- ----------- ----------- Numerator: Net loss .................................. $ (11,172) $ (72,975) $ (91,760) Accretion of Series C and D mandatorily redeemable convertible preferred stock to redemption value ............. (1,013) (1,042) -- ------------- ----------- ----------- Net loss available to common stockholders ............................ $ (12,185) $ (74,017) $ (91,760) ============= =========== =========== Denominator: Weighted average common shares - basic and diliuted ...................... 12,400,284 26,900,863 48,071,654 ------------- ----------- ----------- Net loss per share: Basic and diliuted ...................... $ (0.98) $ (2.75) $ (1.91) ============= =========== ===========
13
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1999 2000 ------------ ------------- -------------- ($ IN THOUSANDS) Numerator: Net loss $ (11,172) $ (72,975) $ (91,760) Accretion of Series C and D mandatorily redeemable convertible preferred stock to redemption value (1,013) (1,042) -- ------------ ------------- -------------- Net loss available to common stockholders $ (12,185) $ (74,017) $ (91,760) ============ ============= ============== Denominator: Weighted average common shares basic and diluted 12,400,284 26,900,863 48,071,654 ------------ ------------- -------------- Net loss per share: Basic and diluted $ (0.98) $ (2.75) $ (1.91) ============ ============= ==============
COMPREHENSIVE INCOME The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, during 1998. The Company classifies items of "other comprehensive income" by their nature in the financial statements and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. To date, the Company has not had any transactions that are required to be reported in other comprehensive income. DERIVATIVE INSTRUMENTS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted SFAS 133 on January 1, 2001. Adoption of this pronouncement will result in a transition adjustment of a $0.2 million gain, which will be recorded as a cumulative effect of a change in accounting principle. The FASB is currently reviewing certain implementation guidance which could affect the transition adjustment amounts for commitments to purchase and originate loans. 3. LOANS HELD-FOR-SALE The inventory of mortgage loans consists primarily of first trust deed mortgages on residential properties located throughout the United States. As of December 31, 1999 and 2000, the Company had net mortgage loans held-for-sale of $35.1 million and $22.7 million, all of which are on accrual basis. All mortgage loans held-for-sale are pledged as collateral for borrowings at December 31, 1999 and 2000 (see Note 8). The inventory of auto loans consists primarily of loans against new and used automobiles located throughout the United States. As of December 31, 1999 and 2000, the Company had loans held-for-sale of $0 and $4.1 14 million, all of which are on accrual basis. None of the auto loans held-for-sale at December 31, 2000 were pledged as collateral. 4. ACCOUNTS RECEIVABLE, PREPAIDS AND OTHER CURRENT ASSETS Accounts receivable, prepaids and other current assets as of December 31, 1999 and 2000, was $6.5 million and $10.4 million, respectively. This balance consists primarily of the receivable due to the Company from sales of mortgage loans on its gestation warehouse line facility in the amounts of $1.8 million and $6.6 million at December 31, 1999 and 2000, respectively. 5. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK Cash and cash equivalents totaling $4.7 million and $19.9 million at December 31, 1999 and 2000, respectively, is held by federally insured financial institutions and exceeds existing federal deposit insurance coverage limits at each institution. Commercial paper totaling $33.0 million and $8.5 million at December 31, 1999 and 2000, respectively, is deposited with high credit quality financial institutions and has original maturities of three months or less. Approximately 41% and 20% of all mortgage loans sold during the years ended December 31, 1999 and 2000, respectively, were sold to one mortgage loan purchaser and approximately 87% of all auto loans sold during the year ended December 31, 2000 were sold to one auto loan purchaser. All brokered auto loans in 2000 were brokered to one lender. 6. FURNITURE AND EQUIPMENT Furniture and equipment are recorded at cost and consist of the following: DECEMBER 31, --------------------------- 1999 2000 ----------- ----------- ($ IN THOUSANDS) Computer equipment and software $ 3,408 $ 7,629 Furniture and fixtures 871 1,556 Equipment and software under capital leases 999 1,133 Leasehold improvements 317 1,600 ----------- ----------- 5,595 11,918 Accumulated depreciation and amortization (1,542) (3,893) ----------- ----------- $ 4,053 $ 8,025 =========== =========== Depreciation and amortization expense for the years ended December 31, 1999 and 2000 was $1.2 million and $2.4 million respectively. 15 As of December 31, 1999 and 2000, respectively, the accumulated amortization for equipment under capital leases was $0.5 million and $0.7 million. All equipment under capital lease serves as collateral for the related lease obligations (see Note 15). 7. INCOME TAXES There was no benefit for income taxes for the years ended December 31, 1998, 1999 and 2000 due to the Company's inability to recognize the benefit of net operating losses. At December 31, 2000 the Company had net operating loss carryforwards of approximately $89.1 million for federal purposes and $65.0 million for state tax purposes. The federal carryforwards expire in the years 2012 through 2020. For federal and state tax purposes, a portion of the Company's net operating loss may be subject to certain limitations on annual utilization in case of changes in ownership, as defined by federal and state tax laws. The primary components of temporary differences, which give rise to deferred taxes are as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1999 2000 ---------- ----------- ----------- ($ IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards $ 4,193 $ 16,660 $ 34,102 Other 228 1,258 600 ---------- ----------- ----------- Total deferred tax assets 4,421 17,918 34,702 ---------- ----------- ----------- Valuation allowance (4,421) (17,918) (34,702) $ -- $ -- $ -- ========== =========== ===========
Management evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a valuation allowance against its net deferred tax assets at December 31, 1998, 1999 and 2000. At such time as it is determined that it is more likely than not that the deferred tax asset will be realizable, the valuation allowance will be reduced. 8. WAREHOUSE LINES PAYABLE As of December 31, 2000, the Company had a warehouse line of credit for borrowings of up to $50 million for the interim financing of mortgage loans. The interest rate charged on borrowings against these funds 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. The committed line of credit expires on June 30, 2001. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. At December 31, 1999 and 2000 approximately $31.7 million and $17.2 million was outstanding under this line, respectively. 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 during the year ended and at December 31, 2000. 16 The Company has an agreement to finance up to $200 million of mortgage loan inventory pending sale of these loans to the ultimate mortgage loan investors. Of this amount, $100 million is available in committed funds. This loan inventory financing is secured by the related mortgage loans. The interest rate charged on borrowings against these funds is based on LIBOR plus various percentage points. The line expires February 23, 2002. Upon expiration, management believes it will either renew its existing line or obtain sufficient additional lines. At December 31, 1999 and 2000 there were no outstanding amounts under this financial commitment. This agreement includes various financial and non-financial covenants. The Company was not in compliance with certain of these covenants during the year ended December 31, 2000 and subsequently obtained a waiver from the lender. The Company was in compliance with these covenants at December 31, 2000. 9. NOTES PAYABLE In December 1998, the Company entered into a credit facility in the principal amount of $3 million for equipment financing, which has an interest rate of prime plus 0.50%. At December 31, 2000, $2.0 million was outstanding under this credit facility. This credit facility requires the Company to meet various financial covenants. The Company was not in compliance with certain of these covenants during the year ended December 31, 2000 and subsequently obtained a waiver from the lender. The Company was in compliance with these covenants at December 31, 2000. 10. STOCKHOLDERS' EQUITY COMMON AND PREFERRED STOCK At December 31, 1999 and 2000, the Company was authorized to issue 70,000,000 and 150,000,000 shares of common stock and 5,000,000 shares of preferred stock, respectively. As of December 31, 2000 the 5,000,000 shares of preferred stock are undesignated. On June 28, 1999, the Company completed its initial public offering, upon which all outstanding convertible preferred shares automatically converted into 20,493,921 shares of common stock. WARRANTS In March 1998, the Company issued a warrant to purchase up to 15,000 shares of Series C convertible preferred stock at an exercise price of $2.00 per share to a lender in connection with a capital lease. In February 2000, this warrant was net exercised for 43,148 shares of common stock. In connection with two separate strategic alliance agreements, the Company issued a warrant to purchase 200,000 shares of Series C convertible preferred stock at an exercise price of $2.40 per share in March 1998 and a warrant to purchase 53,996 shares of Series D convertible preferred stock at an exercise price of $9.26 per share in September 1998. In January 1999, the warrant to purchase 200,000 shares of Series C convertible preferred stock was exercised. These shares converted into 600,000 shares of common stock upon the Company's initial public offering on June 28, 1999. In October 1999, the warrant to purchase 53,996 shares of Series D convertible preferred stock was returned as part of a negotiated settlement. In May 1999, the Company issued a warrant to purchase 75,000 shares of common stock at an exercise price of $13.33 per share to a lender in connection with a warehouse agreement. In May 2000, this warrant expired. In connection with a strategic marketing agreement signed in July 2000, the Company issued two warrants to purchase a total of 13.1 million shares of common stock. The first warrant to purchase 6.5 million shares 17 of common stock has a three year term and is exercisable at $3.75 per share. The second warrant to purchase 6.6 million shares of common stock has a three and a quarter year term and is exercisable at $15.00 per share. The fair value of the warrants, as determined at the date of grant using the Black-Scholes option pricing model was $12.5 million and was recorded as a contra-equity account called marketing services receivable. The marketing services receivable is being amortized on a straight-line basis over a one-year term. At December 31, 2000 both of these warrants remained outstanding. In February 2001, the Company issued a warrant to purchase 300,000 shares of common stock at an exercise price of $1.55 per share to a lender in connection with a warehouse agreement. 11. EMPLOYEE BENEFIT PLANS 401(K) SAVINGS PLAN The Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating employees may defer a percentage (not to exceed 20%) of their eligible pretax earnings up to the Internal Revenue Service's annual contribution limit. All employees on the United States payroll of the Company age 21 years or older are eligible to participate in the 401(k) Plan. The Company did not match employee contributions during the years ended December 31, 1999 or 2000. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS As of December 31, 2000, the Company had reserved up to 12,100,000 shares of common stock issuable upon exercise of options issued to certain employees, directors, and consultants pursuant to the Company's 1997 Stock Option Plan. Such options were exercisable at prices established at the date of grant, and have a term of ten years. Initial optionee grants have a vested interest in 25% of the option shares upon the optionee's completion of one year of service measured from the grant date. The balance will vest in equal successive monthly installments of 1/48 upon the optionee's completion of each of the next 36 months of service. If an option holder ceases to be employed by the Company, vested options held at the date of termination may be exercised within three months. Options under the plan may be either Incentive Stock Options, as defined under Section 422 of the Internal Revenue Code, or Nonstatutory Options. During the years ended December 31, 1998, 1999 and 2000, 3,084,627, 4,961,910 and 6,458,404 options had been granted and 888,133 options were still available for grant under the Company's stock option plan at December 31, 2000. Options granted during the years ended December 31, 1998, 1999 and 2000 resulted in unearned compensation of $5.7 million, $38.2 million and $0, respectively. The amounts recorded represented the difference between the exercise price and the deemed fair value of the Company's common stock for shares subject to the options granted. The amortization of unearned compensation is being charged to operations on an accelerated basis over the four-year vesting period of the options. For the years ended December 31, 1998, 1999 and 2000, the amortization of unearned compensation related to stock options was $1.3 million, $21.6 million and $11.9 million, respectively. In addition, unearned compensation in stockholders' equity was reduced by $2.5 million for terminated employees during the year ended December 31, 2000. In February 1999, the Company sold 40,000 shares of Series D mandatorily redeemable convertible preferred stock at a price of $9.26 per share for aggregate proceeds of $0.4 million to an Officer of the Company in connection with his employment by the Company. This price was below the deemed fair market value of the common stock and resulted in a compensation charge in the amount of $1.5 million which was equal to the difference between the deemed fair market value of the Series D mandatorily redeemable convertible preferred stock and the price paid for these shares. 18 In March 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan") under which 1,500,000 shares of common stock were reserved for issuance. Employees who participate in the Purchase Plan may have up to 15% of their earnings withheld and used to purchase shares of common stock on specified dates as determined by the Board. The price of common stock purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the common stock, at the commencement date or the ending date of each 24-month offering period. Each offering period includes four six-month purchase periods. No compensation expense is recorded in connection with this plan. Sales under the Purchase Plan for the years ended December 31, 1999 and 2000 were 38,491 and 144,894 shares of common stock at an average price of $11.90 and $4.14, respectively. As of December 31, 2000, 1,316,615 shares of the Company's common stock are reserved and available for issuance under this plan. The following information concerning the Company's stock option plan and employee stock purchase plan was provided in accordance with Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). As permitted by SFAS 123, the Company accounted for such plans in accordance with APB No. 25 and related interpretations. The fair value of each stock option was estimated on the date of grant using the minimum value and fair value option-pricing models with the following weighted average assumptions. YEARS ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 ------ ------- ------ Stock option plan: Expected stock price volatility 0.00% 80.00%(1) 80.00% Risk-free interest rate 5.00% 6.54% 5.88% Expected life of options (years) 5 5 5 Stock purchase plan: Expected stock price volatility 0.00% 80.00% 80.00% Risk-free interest rate 0.00% 6.54% 6.34% Expected life of options (years) -- 2 2 (1) Prior to the Company's initial public offering on June 28, 1999, the fair value of each option grant was determined using the minimum value method using a zero volatility. Subsequent to the offering, the fair value was determined using the Black-Scholes option pricing model. As a result of the above assumptions, the weighted average fair value of options granted during the years ending December 31, 1998, 1999 and 2000 was $2.02, $5.20, and $3.33, respectively. The weighted average fair value of stock purchased during the three years ending December 31, 1998, 1999 and 2000 was $0.00, $8.42, and $6.05, respectively. 19 The following pro forma net loss information has been prepared as if the Company had followed the provisions of SFAS No. 123: YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1999 2000 ------------ ------------ ------------ ($ IN THOUSANDS) Net loss: As reported $ (11,172) $ (72,975) $ (91,760) Pro forma $ (11,210) $ (75,483) $ (99,535) Net loss per share: As reported $ (0.98) $ (2.75) $ (1.91) Pro forma $ (0.99) $ (2.80) $ (2.07) A summary of the status of the Company's stock option plan and changes during those periods is presented below:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1998 1999 2000 ------------------------------ ----------------------------- ------------------------------- NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE ------------ ---------------- ----------- ---------------- ---------- ---------------- Outstanding at beginning of year 1,835,649 $0.05 - $0.32 3,746,118 $0.05 - $1.33 7,375,614 $0.05 - $46.00 Granted 3,084,627 $0.05 - $1.33 4,961,910 $2.00 - $46.00 6,458,404 $0.375 - $16.75 Exercised (132,522) $0.05 - $0.22 (687,763) $0.05 - $2.00 (915,287) $0.05 - $10.00 Terminated/forfeited (1,041,636) $0.05 - $1.33 (644,651) $0.05 - $46,00 3,442,436 $0.05 - $46.00 ------------ ---------------- ----------- ---------------- ---------- ---------------- Outstanding, at end of year 3,746,118 $0.05 - $1.33 7,375,614 $0.05 - $46.00 9,476,295 $0.05 - $46.00 ============ ================ =========== ================ ========== =============== Options exercisable at end of year 496,437 $0.05 - $1.00 932,779 $0.05 - $23.38 2,067,531 $0.05 - $46.00 ============ ================ =========== ================ ========== ===============
20 The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ -------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE ------------------ ------------- -------------- ---------------- ----------- --------------- $0.05 - $2.00 5,036,067 $1.22 8.75 852,650 $0.64 $10.00 - $19.31 1,805,122 $15.23 9.43 79,629 $11.49 $20.00 - $26.25 481,425 $22.55 9.82 500 $23.38 $31.06 - $46.00 53,000 $34.60 9.69 -- -- ------------- -------- 7,375,614 932,779 ============= ========
The following table summarizes information about stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ -------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE ----------------- ------------- -------------- ---------------- ------------- --------------- $0.05 - $2.00 5,252,429 $1.36 8.64 1,629,449 $1.39 $2.06 - $19.13 3,915,535 $7.12 9.29 344,868 $14.22 $20.44 - $26.25 284,331 $22.27 8.80 85,553 $22.20 $32.63 - $46.00 24,000 $35.11 8.68 7,661 $35.35 ------------- ------------ 9,476,295 2,067,531 ============= ============
21 12. REVENUES AND OTHER INCOME, NET The following table provides the components of revenues:
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 --------- ----------- ---------- ($ IN THOUSANDS) Revenues: Mortgage revenues $ 6,166 $ 13,569 $ 16,400 Interest income on mortgage and home equity loans 666 5,049 5,448 Home equity line of credit -- -- 192 Auto revenues -- 2,887 13,019 Credit card and other -- 592 820 --------- ---------- ---------- Total revenues $ 6,832 $ 22,097 $ 35,879 ========= ========== ==========
The following table provides the components of other income, net: YEARS ENDED DECEMBER 31, ---------------------------- 1998 1999 2000 ------- -------- -------- ($ IN THOUSANDS) Interest on short-term investments $ 237 $ 1,104 $ 1,707 Interest expense on non-warehouse facility borrowings (64) (311) (314) Equity investment loss -- (132) (117) Non-cash gain on settlement of dispute -- 2,891 -- Settlement of trademark dispute -- (400) -- ---------------------------- $ 173 $ 3,152 $ 1,276 ======= ======== ======= In October 1999, the Company negotiated a settlement regarding one of the Company's strategic alliance agreements. Pursuant to the agreement, the Company obtained a warrant to purchase 53,996 shares of the Company's Series D convertible preferred stock. The Company recorded the warrant at fair value on the date the settlement was reached, and accordingly, the Company recognized a one-time non-cash gain of $2.9 million. In March 2000, the Company reached an agreement to settle a previously existing trademark dispute regarding the use of the Company's name. Accordingly, the Company accrued a one-time expense of $0.4 million as at December 31, 1999. 22 13. OPERATING EXPENSES
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ---------- ($ in thousands) Compensation and benefits $ 7,387 $ 17,423 $ 22,119 Processing costs 1,220 2,495 5,171 Advertising and marketing 5,119 26,937 25,323 Professional services 308 4,356 6,075 Occupancy costs 375 2,715 3,978 Computer and internet 249 704 843 General and administrative 1,510 3,470 4,356 Interest expense on warehouse borrowings 758 5,419 5,435 Amortization of unearned compensation 1,251 23,116 9,392 Amortization of goodwill and intangible assets -- 11,589 39,733 Non-cash marketing costs -- -- 6,490 ---------- ---------- ---------- Total operating expenses $ 18,177 $ 98,224 $ 128,915 ========== ========== ==========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount for which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Fair value estimates are subjective in nature and involve uncertainties and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. At December 31, 1999 and 2000, the fair value of mortgage loans held-for-sale including the related commitments to sell those mortgage loans exceeds the carrying value of the mortgage loans held-for-sale by approximately $0.5 million and $0.4 million, respectively. At December 31, 1999 and 2000, the fair value of commitments to originate mortgage loans and the related commitments to sell those loans resulted in an unrecognized gain of approximately $0.5 million and $0.2 million, respectively. The fair value of mortgage loans held-for-sale are estimated using quoted market prices for similar loans or prices for mortgage backed securities backed by similar loans and the fair value of the commitments to originate and commitments to sell mortgage loans are estimated using quoted market prices. At December 31, 2000, the fair value of auto loans held-for-sale including the related commitments to sell those auto loans exceeds the carrying value of the auto loans held-for-sale by approximately $0.1 million. The carrying value of the Company's other financial instruments, including cash and cash equivalents, accounts receivable and all other financial assets and liabilities approximate their fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. 23 15. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office space under two operating leases, which provide for renewal in November 2004 and May 2005, respectively. Rent expense under operating leases amounted to $0.4 million, $1.1 million and $1.3 million for the years ended December 31, 1998, 1999 and 2000, respectively. The Company's lease obligations under capital and operating leases are as follows:
YEARS ENDING DECEMBER 31, CAPITAL OPERATING -------- ----------- ($ IN THOUSANDS) 2001 $ 513 $ 1,641 2002 179 1,598 2003 -- 1,637 2004 -- 1,557 2005 and thereafter -- 178 -------- ----------- Total minimum lease payments 692 $ 6,611 =========== Less amount representing interest (83) -------- Present value of minimum lease payments 609 Less current portion of capital lease obligations (396) -------- Long-term portion $ 213 =======
Under the terms of the office leases, the Company maintains stand-by letters of credit in favor of the lessors, in the amounts of $1.3 million and $0.5 million, respectively. LEGAL In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. After reviewing pending and threatened actions and proceedings with counsel, management believes that the outcome of such actions or proceedings is not expected to have a material adverse effect on the financial position or results of operation or liquidity of the Company. MORTGAGE BANKERS' BLANKET BOND At December 31, 1999 and 2000, the Company carried a mortgage bankers' blanket bond and errors and omissions insurance coverage for $3.0 million and $5.0 million, respectively. The premiums for the bond and insurance coverage are paid through September 2001. MARKETING AGREEMENTS The Company has entered into several marketing agreements with third parties. Under these agreements the third parties will display the Company's logo and loan information on their internet websites and provide 24 related marketing services. The Company pays for these services in minimum monthly and quarterly installments plus, in some cases, a per view charge for each time the information is displayed. Future minimum payments under these agreements are as follows: YEARS ENDING DECEMBER 31, ($ IN THOUSANDS) 2001 $ 2,737 2002 7,713 2003 12,316 2004 6,678 ----------- $ 29,444 =========== Two of these marketing agreements are with stockholders of the Company. The Company has incurred approximately $4.4 million and $3.1 million in marketing expenses under these agreements during the years ended December 31, 1999 and December 31, 2000, respectively. LOAN COMMITMENTS AND HEDGING ACTIVITIES Upon receiving a lock commitment from a borrower ("rate lock"), the Company simultaneously enters into either a mandatory sell forward agreement with certain institutional counterparties or a non-mandatory forward sale agreement with the ultimate investor. At December 31, 2000, the Company was a party to commitments to fund loans at interest rates previously agreed (locked) by both the Company and the borrower for specified periods of time. Rate locks with the borrowers are on a best effort basis, borrowers are not obligated to enter into the loan agreement. A rate lock, which does not result in a funded loan, is referred to as fallout. As the Company is exposed to movements in interest rates after entering into rate locks, the Company must estimate fallout if interest rate risk is to be hedged with a mandatory sell forward agreement. At December 31, 2000, the Company had provided locks to originate loans amounting to approximately $57.2 million (the "locked pipeline"). The Company originates mortgage loans and sells them primarily through whole loan sales. The market values of mortgage loans are sensitive to changes in market interest rates. If interest rates rise between the time the Company enters into a rate lock with the borrower, the subsequent funding of the loan and the time the mortgage loans are committed for sale, there may be a decline in the market value of the mortgage loans. To protect against such possible declines, the Company has adopted a hedging strategy. The Company retains the services of Tuttle Decision Systems ("TDS"), an unaffiliated advisory firm specializing in mortgage loan pipeline management to assist the Company in minimizing the interest rate risk associated with the time lag between when loans are rate-locked and when they are committed for sale or exchanged in the secondary market. Individual mortgage loan risks are aggregated by note rate, mortgage loan type and stage in the pipeline, and are then matched, based on duration, with the appropriate hedging instrument, thus mitigating basis risk until closing and delivery. The Company currently hedges its mortgage pipeline through mandatory forward sales of Fannie Mae mortgage-backed securities and non-mandatory forward sale agreements with the ultimate investor. The Company determines which alternative provides the best execution in the secondary market. As a managed account of TDS, the Company is able to take advantage of Tuttle's reporting services, including pipeline, mark-to-market, commitment and position reporting. The Company believes that it has implemented a cost-effective hedging program to provide a level of protection against changes in the market value of its fixed-rate mortgage loans held for sale. However, an effective strategy is complex and no hedging strategy can completely insulate the Company against such changes. 25 At December 31, 2000, the Company had entered into mandatory sell forward commitments amounting to approximately $44.7 million. The Company adjusts the amount of mandatory sell forward commitments held to offset changes in the locked pipeline and changes in the market. At December 31, 2000, the Company had entered into non-mandatory forward loan sale agreements amounting to approximately $31.5 million. These 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. 16. RISKS AND UNCERTAINTIES The Company has a limited operating history and its prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for internet products and services. These risks include the failure to develop and extend the Company's online service brands, the rejection of the Company's services by consumers, vendors and/or advertisers, the inability of the Company to maintain and increase the levels of traffic on its online services, as well as other risks and uncertainties. Additionally, in the normal course of business, companies in the mortgage banking and auto finance industries encounter certain economic and regulatory risks. Economic risks include interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company will generally experience a decrease in loan production, which may negatively impact the Company's operations. Credit risk is the risk of default, primarily in the Company's loan portfolio that result from borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans held-for-sale and in commitments to originate loans. Regulatory risks include administrative enforcement actions and/or civil or criminal liability resulting from the Company's failure to comply with the laws and regulations applicable to the Company's business. The Company depends on two warehouse credit facilities to finance the mortgage loan inventory pending ultimate sale to mortgage loan investors. Both of these warehouse facilities have operating and financial covenants including the requirement that the Company maintain two facilities (with minimum borrowing capacity limits) and the maintenance of certain financial ratios. In particular, the Company must maintain a minimum cash and cash equivalents balance of $20 million and the highest amount required by any other lender or agreement. Failure to comply with these covenants on either or both lines could result in the obligation to repay all amounts outstanding at the time of termination. In the past, the Company has obtained waivers from these lenders due to failure to comply with certain covenants. The Company sells loans to loan purchasers on a servicing released basis without recourse. As such, the risk of loss or default by the borrower has been assumed by these purchasers. However, the Company is usually required by these purchasers to make certain representations relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase the loans and indemnify these purchasers for any losses from borrower defaults. For the years ended December 31, 1999 and 2000, the Company had not repurchased any loans. The Company has sustained net losses and negative cash flows from operations since its inception. The Company's ability to meet its obligations in the ordinary course of business is dependent upon its ability to establish profitable operations or raise additional financing through public or private equity financings, collaborative or other arrangements with corporate sources, or other sources of financing to fund operations. However, there can be no assurance that the Company will be able to achieve profitable operations. If the Company is not successful in generating sufficient cashflow from operations, or in raising additional funds 26 when required in sufficient amounts and on terms acceptable to the Company, such failure could have a material adverse effect on the Company's business, results of operations and financial condition. Management believes that its cash and cash equivalents held at December 31, 2000 and additional funds raised through April 2, 2001 will be sufficient to fund its operating activities and capital expenditures, and meet all other obligations including its minimum cash and cash equivalent covenants through at least December 31, 2001. 17. SUBSEQUENT EVENTS On March 31, 2001, the Company obtained $5 million in interim financing through the issuance of promissory notes to two existing stockholders. The borrowings have an interest rate of 8%. These borrowings are due and payable in full by April 15, 2001. On April 2, 2001, the Company entered into an agreement for a $25 million line of credit for the interim financing of auto loans. The interest rate charged on this line is based on LIBOR plus 2.5%. The committed line expires on April 1, 2002. This line includes various financial and non-financial covenants. These covenants are no more restrictive than those on the Company's existing credit facilities. On April 2, 2001, the Company entered into a loan agreement with an officer and stockholder of the Company that provides the Company with the ability to draw funds up to an aggregate of $7.5 million upon demand. The borrowings have an interest rate of the lower of 12% or the maximum legal rate allowed. Any amounts outstanding under this agreement are due and payable no earlier than January 5, 2002. 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: January 31, 2002 /s/ MATTHEW ROBERTS ------------------------------------ Matthew Roberts Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 27 -----END PRIVACY-ENHANCED MESSAGE-----