United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1999
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
Commission File Number 000-26787
Mortgage.com, Inc.
Exact name of registrant as specified in its charter
Florida 65-0435281
------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
8751 Broward Boulevard, Fifth Floor, Plantation, FL 33324
---------------------------------------------------------
(Address of principal executive offices)
(954) 452-0000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class On September 20, 1999
----- ---------------------
Common Stock, $ .01 par value 42,783,469
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<CAPTION>
MORTGAGE.COM, INC.
INDEX TO 10-Q
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998........................................................................3
Consolidated Statements of Operations for the three month and
six month periods ended June 30, 1999 and 1998 (Unaudited)...................................4
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1999 and 1998 (Unaudited).............................................5
Notes to Consolidated Financial Statements...................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................................20
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................................................22
ITEM 2. Changes in Securities and Use of Proceeds...................................................22
ITEM 3. Defaults Upon Senior Securities.............................................................22
ITEM 4. Submission of Matters to a Vote of Securities Holders.......................................22
ITEM 5. Other Information...........................................................................23
ITEM 6. Exhibits and Reports on Form 8-K............................................................23
Signatures ............................................................................................23
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<TABLE>
<CAPTION>
PART I - Financial Information
Item 1. Financial Statements
MORTGAGE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, June 30,
1998 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................... $ 3,412 $ 6,562
Mortgage loans available for sale, net .................................. 176,373 148,432
Accounts and notes receivable, net ...................................... 1,244 2,285
Accrued interest receivable ............................................. 197 327
Prepaid expenses, deposits and other assets.............................. 1,280 6,082
Property and equipment, net ............................................. 5,266 10,740
Capitalized software development costs .................................. 978 1,814
Goodwill and other intangible assets, net ............................... 4,688 7,084
---------------- ----------------
Total assets ....................................................... $ 193,438 $ 183,326
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Warehouse notes payable ................................................. $ 171,778 $ 124,923
Accounts payable, accrued expenses and other liabilities ................ 5,557 9,172
Other notes payable ..................................................... 289 386
Capital lease obligations ............................................... 1,566 2,835
Subordinated debt, net of discount ...................................... 100 40,040
Deferred revenue ........................................................ 1,012 --
---------------- ----------------
Total liabilities .................................................. 180,302 177,356
---------------- ----------------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 15,000,000 shares, issued
and outstanding 3,199,073 and 3,449,073 shares, respectively ....... 32 34
Common stock, $.01 par value. Authorized 210,000,000 shares, issued
and outstanding 9,398,270 and 9,589,279 shares, respectively ....... 94 96
Unearned compensation ................................................ (631) (15,671)
Additional paid-in capital ........................................... 31,531 51,410
Accumulated deficit .................................................. (17,890) (29,899)
---------------- ----------------
Total shareholders' equity ......................................... 13,136 5,970
---------------- ----------------
Total liabilities and shareholders' equity ......................... $ 193,438 $ 183,326
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
3
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<CAPTION>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1999 1998 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. $ 6,621 $ 9,946 $ 12,028 $ 18,546
Loan production and processing fees, net .......... 1,278 3,103 2,200 5,701
Management, technology and other fees ............. 648 967 1,195 2,958
Interest income ................................... 1,461 2,882 2,530 5,559
Interest expense on warehouse notes ............... (1,372) (2,552) (2,454) (5,101)
-------------- ------------- ------------- --------------
Net interest income from lending operations ..... 89 330 76 458
-------------- ------------- ------------- --------------
Total revenue ........................................ 8,636 14,346 15,499 27,663
-------------- ------------- ------------- --------------
Expenses:
Compensation and employee benefits ................ 5,892 12,713 10,820 22,358
Marketing ......................................... 258 3,043 343 4,580
Research and development .......................... 578 593 1,011 1,370
Depreciation and amortization ..................... 268 1,154 422 1,852
General and administrative ........................ 2,292 4,416 3,882 8,174
Other interest expense ............................ 111 984 154 1,085
-------------- ------------- ------------- --------------
Total expenses ....................................... 9,399 22,903 16,632 39,419
============== ============= ============= ==============
Net loss ............................................. $ (763) $ (8,557) $ (1,133) $ (11,756)
============== ============= ============= ==============
Net loss per share
Net loss .......................................... $ (763) $ (8,557) $ (1,133) $ (11,756)
Preferred stock dividends
Paid ............................................ -- (73) (15) (253)
Cumulative unpaid ............................... (397) (918) (718) (1,667)
-------------- ------------- ------------- --------------
Net loss attributable to common shareholders ...... $ (1,160) $ (9,548) $ (1,866) $ (13,676)
-------------- ------------- ------------- --------------
Weighted average shares - basic and diluted ....... 8,409 9,573 8,052 9,533
============== ============= ============= ==============
Net loss per share, basic and diluted ................ $ (.14) $ (1.00) $ (.23) $ (1.44)
============== ============= ============= ==============
</TABLE>
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<TABLE>
<CAPTION>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Net cash flows from operating activities:
Net loss ............................................................. $ (1,133) $ (11,756)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...................................... 422 1,852
Amortization of unearned compensation .............................. -- 1,029
Provision for losses ............................................... -- 500
Amortization of discount on subordinated debt ...................... -- 69
(Increase) decrease in mortgage loans available for sale, net ........ (45,359) 27,741
Changes in operating assets and liabilities:
Increase in accounts and notes receivable, net ..................... (525) (1,341)
Decrease in private placement receivables .......................... 2,000 --
(Increase) decrease in accrued interest receivable ................. 94 (130)
Increase in prepaid expenses, deposits and other assets ............ (456) (4,802)
Increase in accounts payable, accrued expenses and other liabilities 1,976 3,615
Decrease in deferred revenue ....................................... -- (1,012)
-------------- --------------
Net cash (used in) provided by operating activities ............ (42,981) 15,765
-------------- --------------
Cash flows from investing activities:
Additions to capitalized software development costs .................. (280) (1,207)
Additions to property and equipment .................................. (1,491) (5,471)
Purchase of companies, net of cash acquired .......................... (2,690) (519)
Purchase of intangible asset ......................................... -- (1,445)
-------------- --------------
Net cash used in investing activities .......................... (4,461) (8,642)
-------------- --------------
Cash flows from financing activities:
Proceeds from (repayment of) issuance of subordinated debentures ..... (200) 40,500
Payments of other notes payable ...................................... -- (3)
Proceeds from other notes payable .................................... 366 100
Proceeds from issuance of common stock ............................... -- 5
Proceeds from issuance of preferred stock ............................ 6,981 14,533
Dividends paid ....................................................... (15) (253)
Redemption of warrants ............................................... -- (12,000)
Proceeds from (reduction of ) warehouse notes payable ................ 43,087 (46,855)
-------------- --------------
Net cash provided by (used in) financing activities ............ 50,218 (3,973)
-------------- --------------
Net increase in cash and cash equivalents ............................... 2,776 3,150
Cash and cash equivalents at beginning of period ........................ 1,680 3,412
============== --------------
Cash and cash equivalents at end of period .............................. $ 4,456 $ 6,562
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................... $ 2,424 $ 5,273
-------------- --------------
Cash paid for income taxes ........................................... $ 8 $ 2
============== ==============
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5
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MORTGAGE.COM, INC.
Item 1. Notes To Unaudited Consolidated Financial Statements
1. Description of Business
-----------------------
Mortgage.com, Inc. (formerly known as First Mortgage Network, Inc.)
(the "Company"), is incorporated in Florida and provides online mortgage
services to consumers and to other businesses. The Company has developed
state-of-the-art technology to support its own loan origination, processing,
underwriting, closing and secondary marketing of mortgage loans and is using
this technology as a platform to enable other industry participants to improve
the efficiency and effectiveness of their operations.
The Company commenced operations in 1994 as a wholesale mortgage lender
providing independent mortgage brokers with various support services, including
processing and closing services, as well as a source of funding for their loans.
In 1995, the Company acquired a software system designed to support mortgage
origination, processing, underwriting and closing operations. This system, known
as CLOser, became the platform that supports all of the services provided. The
system provides management, processing and other back-office services to
realtors and homebuilders on an outsource basis and provides funding for the
mortgages originated by the Company. The system is marketed to other mortgage
industry participants, providing technology and technical support services,
including private label web sites, on an outsource basis to numerous banks and
real estate related entities.
2. Unaudited Interim Consolidated Financial Statements
---------------------------------------------------
The consolidated financial statements as of June 30, 1999 and for the
three and six month periods ended June 30, 1999 and 1998 are unaudited. The
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and should be read in
conjunction with the Company's audited consolidated financial statements as of
and for the year ended December 31, 1998 as set forth in the Registration
Statement beginning on page F-1. In the opinion of management, all adjustments
of a recurring nature which are necessary to present a fair statement of results
for the interim periods have been made. The unaudited results of operations for
the interim periods are not necessarily indicative of the results for the full
year or any future period. Certain amounts in the financial statements for 1998
and the first quarter of 1999 have been reclassified to conform to the second
quarter 1999 presentation.
All share and per share amounts, and additional paid-in capital, have
been restated to reflect a seven-for-one common stock split effective August 11,
1999.
3. Use of Estimates
----------------
In preparation of the financial statements, management has considered
all events and/or transactions that are subject to reasonable and normal methods
of estimation, and the financial statements reflect that consideration.
6
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Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
4. Accounts and Notes Receivable, Net, and Deferred Revenue
--------------------------------------------------------
The Company entered into an agreement in 1996 to sell internally
developed software to an investment firm. As a condition to the agreement, the
Company entered into a ten-year distribution and profit sharing agreement for
the software with the same investment firm. The purchase price of the software
was $10,800,000 of which $1.61 million was received in cash. The proceeds from
the transaction, net of related costs, were recorded as deferred revenue. Due to
contract contingencies, whereby the deferred revenue could be refundable, the
Company recognized the revenue when the contingencies were satisfied.
The related note was included in accounts and notes receivable on the
balance sheet at December 31, 1998 at its discounted net present value and, due
to the contingencies affecting collectibility, was fully reserved for at
December 31, 1998.
On March 31, 1999, this software profit sharing agreement was sold to
an unrelated company as part of a sale of a subsidiary of the Company. The
Company has been relieved of any further obligations. As a result, the $1.01
million in deferred revenue was recorded as management, technology and other
fees income.
5. Intangible Asset
----------------
In January 1999, the Company purchased the Mortgage.com domain name
from an unrelated party for $200,000 in cash, 140,000 shares of common stock
valued at $645,000 and a contingent per loan charge that could have added $1.8
million more to the cost, and $887,000 was recorded as the cost of the
intangible asset. In July 1999, the contract was amended and an additional $1.5
million in cash was paid to eliminate the contingent portion of the contract.
The asset is being amortized over 10 years.
6. Subordinated Debt, Net Of Discount
----------------------------------
Subordinated debt, net of discount at June 30, 1999 of $40,040,000
consists of the following:
7
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<CAPTION>
Outstanding
Issue date Due date Description Balance Warrants
---------- -------- ----------- ------- --------
<S> <C> <C> <C> <C>
May 1999 May 2001 Subordinated note payable bearing interest $27,500,000 None
at 12% convertible in to common shares at
$8.57 per share
February 1999 February 2000 Senior subordinated notes bearing interest 2,000,000 46,676 shares
at 12% at $4.29 per
share
February 1999 February 2001 Senior subordinated notes bearing interest 8,000,000 373,338 shares
at 12% at $4.29 per
share
April 1999 April 2001 Senior subordinated notes bearing interest 3,000,000 140,028 shares
at 12% at $4.29 per
share
Unamortized discount (460,000)
--------------
$40,040,000
==============
</TABLE>
The number of shares covered by these warrants and their exercise price
were subject to adjustment upon the occurrence of an initial public offering of
the Company's shares prior to February 2000. Repayment of the senior
subordinated notes due in February and April 2001 prior to February and April
2000, respectively, would result in an additional reduction in the related
number of shares covered by the respective warrants. The value of the warrants
was recorded as a discount to the debt which has an unamortized balance of
$460,000 at June 30, 1999. All subordinated debt outstanding at June 30, 1999
was repaid with proceeds from the initial public offering in August 1999.
Subordinated debt at December 31, 1998 of $100,000 consisted of
convertible debentures, at a fixed rate of interest of 12%, which were converted
into common stock in 1999.
7. Shareholders' Equity
(a) Common Stock Transactions
During January 1999, the Company issued 140,000 shares of common stock
at a value of $4.61 per share in connection with the acquisition of the Internet
domain name www.mortgage.com as described in Note 5.
During April 1999, $100,000 of subordinated debt was converted into
46,667 shares of common stock.
Options to purchase 4,340 shares of common stock were exercised during
the three-month period ending June 30, 1999.
8
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(b) Preferred Stock Transactions
During May 1999, the Company issued 250,001 shares of $.01 par value
Series F preferred stock at a price of $60 per share. The Series F preferred
stock converted into 1,875,010 post-split shares of common stock in the initial
public offering in August 1999.
(c) Stock Warrant Transactions
During the six month period ending June 30, 1999, 175,000 common stock
warrants converted to common stock options at $0.71 per share and 373,408
warrants were issued in conjunction with subordinated debt, as described in Note
6.
(d) Initial Public Offering
On August 11, 1999, the Company completed an initial public offering in
which we sold 7,062,500 shares of common stock. The principal underwriters were
Credit Suisse First Boston, Deutsche Banc Alex Brown and U.S. Bancorp Piper
Jaffray. Subsequently, the underwriters of the public offering exercised an
option to purchase an additional 379,375 shares of common stock to cover
over-allotments of shares. The gross proceeds from these transactions were $59.5
million, or $55.4 million net of underwriter discounts. A portion of the
proceeds has been used to repay the $40.5 million of subordinated debt and
$433,000 was used to redeem certain warrants. Total expenses incurred in the
offering were expected to be $1.1 million.
(e) Unearned Compensation
Unearned compensation resulted when stock options were granted at
prices that were subsequently determined to be less than their estimated fair
value. The Company has recorded an estimate of the excess of fair value over the
issue price as unearned compensation as a separate component of shareholders'
equity.
As of June 30, 1999, the Company has recorded approximately $16.7
million in deferred compensation, and amortized approximately $836,000 and $1.03
million to compensation and employee benefits expense in the three and six month
periods ended June 30, 1999, respectively. As the Company's stock option plan
has a five-year vesting requirement, the remaining deferred compensation cost
will be amortized on a straight line basis over the vesting period. Subsequent
to June 30, 1999, certain vesting rights were accelerated resulting in an
acceleration of approximately $5.3 million of deferred compensation expense.
Such compensation expense will be recognized in the quarter ending September 30,
1999. Stock-based compensation is a non-cash expense.
8. Income Taxes
------------
No current or deferred provision for income taxes was recorded for the
three and six month periods ended June 30, 1999 and 1998 due to the Company's
operating losses in the respective periods.
9
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9. Commitments
-----------
The Company has entered into a 10 year lease for approximately 110,000
square feet in an existing facility in Sunrise, Florida and expects to
consolidate operations that are in three separate facilities near the end of
1999. Rental payments will be approximately $100,000 per month.
10. Segment Information
-------------------
The Company operates in two reportable business segments: the Direct to
Consumer reportable Segment, which includes the Mortgage.com internet web site
and retail mortgage brokerage operations, both of which originate mortgage loans
that are subsequently sold in the secondary market; and the Business to Business
reportable Segment, which includes back-office mortgage services for lenders,
realtors, homebuilders and software and internet conduits, technology platform
licenses to mortgage industry participants and the Openclose.com web site that
enables brokers, correspondents and insurance companies to conduct their
business through a neutral internet site with selected financial institutions
using automated underwriting capabilities provided by the Federal National
Mortgage Association. The Business to Business reportable Segment generates
revenues by charging fees for these services. These segments are characterized
by the nature of their customers and represent components of the Company about
which separate financial information is available that is evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Summarized financial information concerning the business segments
is shown in the following table: (Certain expenses that are not directly
attributable to the business channels have been reclassified to Overhead in
these tables.)
<TABLE>
<CAPTION>
(In Thousands) Direct to Business to
Total Consumer Business
--------------- -------------- --------------
<S> <C> <C> <C>
Three months ended June 30, 1999
Revenue $ 14,346 $ 3,207 $ 11,139
Expenses allocated to segments 18,583 4,166 14,417
--------------- -------------- --------------
Segment loss (4,237) $ (959) $ (3,278)
============== ==============
Expenses not allocated to Segments (4,320)
---------------
Net Loss $ (8,557)
===============
Three months ended June 30, 1998
Revenue $ 8,636 $ 3,793 $ 4,843
Expenses allocated to segments 7,703 3,842 3,861
--------------- -------------- --------------
Segment (loss)/income 933 $ (49) $ 982
============== ==============
Expenses not allocated to Segments (1,696)
---------------
Net Loss $ (763)
===============
Six Months ended June 30, 1999
Revenue $ 27,667 $ 6,139 $ 21,528
Expenses allocated to segments 32,019 7,615 24,404
--------------- -------------- --------------
Segment loss (4,352) $ (1,476) $ (2,876)
============== ==============
Expenses not allocated to Segments (7,404)
---------------
Net Loss $ (11,756)
===============
Six Months ended June 30, 1998
Revenue $ 15,499 $ 6,874 $ 8,625
Expenses allocated to segments 13,591 6,565 7,026
--------------- -------------- --------------
Segment income 1,908 $ 309 $ 1,599
============== ==============
Expenses not allocated to Segments (3,041)
---------------
Net Loss $ (1,133)
===============
Segment Assets at June 30, 1999 $ 148,432 42,727 $ 105,705
=============== ============== ==============
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial conditions and results of
operations of Mortgage.com, Inc. should be read in conjunction with the
Financial Statements and the related Notes included in this Form 10-Q. This
discussion contains, in addition to historical information, "forward-looking"
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipate," "believe," "expect,"
"future," "plan" and "intend," and similar expressions, to identify
forward-looking statements. You should be aware that actual results may differ
materially from our expressed expectations because of risks and uncertainties
inherent in future events, and you should not unduly rely on these forward
looking statements.
Overview
We are a provider of mortgage services to consumers and to other
businesses and a leading provider of such services on the Internet. We have
developed state-of-the-art technology to support the origination, processing,
underwriting, closing and secondary marketing of mortgage loans. We use this
technology as a platform to provide mortgage financing directly to borrowers and
to enable our clients, such as mortgage brokers, mortgage banks, Realtors and
homebuilders, to improve the efficiency and effectiveness of their operations.
We began operations in April 1994 in Florida as First Mortgage Network,
a wholesale mortgage lender providing independent mortgage brokers with various
support services, including processing, closing and funding services for their
loans. In April 1995, we acquired a software system from Morbank Financial
Systems that was designed to automate mortgage origination, processing,
underwriting and closing functions in traditional mortgage lending operations.
We enhanced this software and named it CLOser, our proprietary technology
platform that supports all of the services we provide. By the end of 1995, we
were using the CLOser software system to enable financial institutions and
non-traditional mortgage originators, such as Realtors and homebuilders, to
originate mortgages as an ancillary service. These "network members" paid
monthly membership fees for the use of the CLOser software system and
transaction fees for our other services.
In the summer of 1996, we expanded our membership network by acquiring
Western American Mortgage, the mortgage affiliate of Mason-McDuffie Real Estate,
a major real estate brokerage company in northern California. Western America
Mortgage originated $37 million in mortgage loans in the first full quarter
after our acquisition. In June 1997, we acquired OnLine Capital, a mortgage
lender also located in northern California, with more than 25 loan counselors at
the point-of-sale of homes, three Realtor business-to-business relationships and
requisite back office personnel. OnLine Capital originated $100 million in
mortgage loans in the quarter before our acquisition. We deployed these acquired
resources to support and expand our member business in California.
In the spring of 1998, we acquired American Finance and Investment
(AFI), a former subsidiary of Virginia First Savings Bank, and moved its
operations to Florida. AFI was one of the first companies to originate mortgages
through the Internet. We integrated this acquired Internet technology with our
CLOser software system, enabling us to establish various relationships with
other Internet-based businesses and to originate mortgage applications online on
a national basis. In January 1999, we acquired the Internet Web address
www.mortgage.com and changed our corporate name to Mortgage.com, Inc. We believe
this name change more accurately reflects our business of re-engineering the
mortgage process through technology such as the Internet.
We currently provide origination, processing, underwriting, closing,
funding and post-closing services for mortgages originated directly with
borrowers through our direct-to-consumer channels. We originate mortgages
directly with borrowers through www.mortgage.com and several other Web sites and
through loan counselors stationed at the point-of-sale of homes. We also provide
one or more of these services, or the technology to support these services, to
other mortgage industry participants through our business-to-business channels.
We enable these business clients to efficiently conduct the mortgage
process by providing them with:
o private label mortgage services, where we provide mortgage services
that our clients can market under their own brand names;
o co-branded mortgage services, where we provide mortgage services that
we and our clients jointly market under both of our brand names;
o back office services, where we provide the behind-the-scenes
administrative and operational portions of the mortgage process for our
clients; and
o licenses of our proprietary technology, including CLOser and its
Internet interface.
11
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We have also developed www.openclose.com, a Web site where
participating mortgage lenders, brokers and loan correspondents pay us for the
opportunity to exchange lender product and pricing information, automated
underwriting data, mortgage insurance certificates and borrower application
information in an online environment. www.openclose.com became available for
commercial use in August 1999.
Loans that we originate directly from borrowers or through one of our
business clients generate loan origination fees. Loans that we fund, including
loans originated by our business partners and clients, generate gains or losses
when we sell the loans to independent mortgage investors in the secondary
market. When we sell a loan in the secondary market we achieve a net gain or
suffer a net loss equal to the difference between the amount we funded or paid
for the loan and the price at which the loan is sold to the secondary market
investor. Typically, we obtain commitments from investors to buy loans on a
loan-by-loan basis at the same time we lock an interest rate for the borrower.
We have sold, and intend to continue to sell, all loans, together with the
associated servicing rights, in the secondary market. Origination fees, or
"points", and secondary marketing gains or losses are included in "Secondary
marketing revenue, net" in our financial statements.
Other services, including loan underwriting and processing, and
obtaining appraisals and credit reports, generate fees payable by the borrower
at closing. These fees are offset against amounts paid to third parties for the
provision of some of these services and, along with underwriting and closing
fees, are reflected in "Loan production and processing fees, net" in our
financial statements.
Fees for the use of our technology and related support services,
including technology licensing and maintenance fees and fees earned from
creating and maintaining private label Web sites, are reflected in "Management,
technical and other fees" in our financial statements.
The cost of funds under our financing arrangements is based on
short-term interest rates, while in today's market the interest rates we charge
borrowers on mortgage loans are based generally on intermediate-term interest
rates. We generate net interest income on mortgage loans if the
intermediate-term interest rate paid by the borrower on the mortgage loan
exceeds the short-term interest rate we are charged under our financing
arrangements. Conversely, we suffer net interest losses if the short-term
interest rate under our financing arrangements exceeds the intermediate-term
interest rate paid by the borrower on the mortgage loan. We try to minimize the
length of time between closing of the loan and delivery of the loan to secondary
market investors, which is especially important when intermediate-term rates
have declined to the levels of short-term rates. The difference between the
interest we earn on the loans we fund and the interest we pay under our
financing arrangements, along with other net interest income or expense, is
recorded as "Net interest (expense) income" in our financial statements. "Net
interest (expense) income" also includes interest expense related to
subordinated debt.
We have experienced substantial losses since inception and, as of June
30, 1999, have an accumulated deficit of $29.9 million. These net losses and the
accumulated deficit are a result of investments in our technology infrastructure
and personnel in anticipation of growth in loan volumes from both our
direct-to-consumer and business-to-business channels. We do not expect to be
profitable until at least the latter half of 2002. Our plan to achieve
profitability includes:
12
<PAGE>
o a reduction in our costs per loan through economies of scale we
achieve from higher loan volumes;
o increased automation of the loan process; and
o improved terms of sale on loans we sell in the secondary market.
We will be able to realize improved terms on sales in the secondary
market because our negotiating leverage increases as our loan volumes increase.
We also are working to improve our risk management and are considering hedging
strategies to help manage the risk.
We plan to extend our brand position and use our technology
infrastructure as we scale up loan production volumes. Accordingly, we intend to
invest heavily in branding programs, marketing and promotional campaigns, new
partnerships and strategic alliances, our operating infrastructure and launching
www.openclose.com. Our operations have historically been centered in Florida and
California. This is partially due to the state of our incorporation and the
states where we have acquired businesses, and partially because Florida and
California represent two of the largest real estate markets in the United
States. We intend to use the Internet to expand our geographic scope to every
potential mortgage borrower in the United States.
We will incur a non-cash expense over the next five years for the
amortization of unearned stock-based compensation resulting from granting stock
options to employees from October 1998 through April 1999. These deferred
compensation costs represent the difference between the exercise price of the
options and the deemed fair market value of the underlying common stock at the
time of grant of the options. Unearned stock-based compensation is amortized in
accordance with the vesting of the underlying options to which it pertains.
Our limited operating history makes it difficult to forecast future
operating results. Although our revenue has grown significantly in recent
quarters, we cannot assure you that we will be able to sustain revenue growth or
achieve and maintain profitability. Even if we were to achieve profitability, we
expect material fluctuations in quarterly revenue and earnings to result from a
number of factors, including:
o changes in interest rates;
o loss of strategic relationships;
o changes in competitive pressures on pricing or quality of service;
o seasonal variations in demand for mortgages;
o general economic conditions;
o system failures or Internet down time;
o changes in state or federal government regulations and their
interpretations, especially with respect to the mortgage and
Internet industries;
o our ability to enhance our information technology to keep pace with
changes in the industry; and
o changes in attitudes of consumers doing business over the Internet.
13
<PAGE>
As a result, we do not believe that our historical results are
necessarily indicative of results to be expected in any future period.
Results of Operations
- ---------------------
The following table sets forth the percentage of total revenue of
selected line items included in our statement of operations for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
------------------------------ ------------------------------
1998 1999 1998 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. 76.7 % 69.3 % 77.6 % 67.0 %
Loan production and processing fees, net .......... 14.8 21.6 14.2 20.6
Management, technology and other fees ............. 7.5 6.8 7.7 10.7
Interest, net, on lending operations .............. 1.0 2.3 0.5 1.7
-------------- ------------- ------------- --------------
Total revenue ........................................ 100.0 100.0 100.0 100.0
-------------- ------------- ------------- --------------
Expenses:
Compensation and employee benefits ................ 68.2 88.6 69.8 80.8
Marketing ......................................... 3.0 21.2 2.2 16.6
Research and development .......................... 6.7 4.1 6.5 5.0
Depreciation and amortization ..................... 3.1 8.0 2.7 6.7
General and administrative ........................ 26.5 30.8 25.2 29.5
Other interest expense ............................ 1.3 6.9 1.0 3.9
-------------- ------------- ------------- --------------
Total expenses ....................................... 108.8 159.6 107.3 142.5
-------------- ------------- ------------- --------------
Net loss ............................................. (8.8) % (59.6) % (7.3)% (42.5) %
============== ============= ============= ==============
</TABLE>
Comparison of Three and Six Months Ended June 30, 1998 and 1999
---------------------------------------------------------------
Revenue
- -------
Total revenue increased 66% to $14.3 million for the three months ended
June 30, 1999 from $8.6 million in the comparable period in 1998 and increased
79% to $27.7 million for the six months ended June 30, 1999 from $15.5 million
in the comparable period in 1998. This growth resulted primarily from our
acquisition of AFI in April 1998, the related loan volume generated by our web
sites and from new strategic alliances with online partners and Realtors.
Secondary marketing revenue, net. Gains and other revenue from the
origination and secondary marketing of mortgage loans increased 50% and 54% to
$9.9 million and $18.5 million for the three month and six month periods,
respectively, ended June 30, 1999 from $6.6 million and $12.0 million in the
comparable periods in 1998. These increases resulted primarily from the
increases in the total dollar amount of loans we originated, funded and sold.
The total dollar amount of closed loans that we originated increased to $848.2
million and $1.60 billion for the three month and six month periods,
14
<PAGE>
respectively, ended June 30, 1999 from $478.6 million and $826.9 million in the
comparable periods in 1998. Of these originations, we funded and sold in the
secondary market $645.3 million and $1.26 billion in loans for the three month
and six month periods, respectively, as compared to $327.2 million and $569
million in the comparable periods last year. Loans that we originated but chose
not to fund were funded by other mortgage lenders. The increase in loan volumes
and related revenue resulted primarily from our introduction of additional
Internet origination channels and an increase in Realtor affiliations.
Loan production and processing fees, net. Total loan production and
processing fees, less amounts paid to third parties for processing services,
increased 143% and 159% to $3.1 million and $5.7 million for the three and six
month periods, respectively, ended June 30, 1999 from $1.3 million and $2.2
million in the comparable periods in 1998. These increases in production and
processing fees resulted from an overall increase in loan volume and from new
strategic alliances that produced fees for processing loans for third parties
and other mortgage lenders. A significant portion of these fees comes from
Intuit Lender Services, which provides us with a minimum number of loans so long
as we comply with the performance standards under our agreements with them.
During the first 6 months of 1999, Intuit Lender Services was obligated to
transmit to us 2,400 loans for processing and funding.
Management, technology and other fees. Total revenue from management,
technology and other fees increased 49% and 148% to $1.0 million and $3.0
million for the three month and six month periods, respectively, ended June 30,
1999 from $648,000 and $1.2 million in the comparable periods in 1998. The 1999
six month amount includes recognition of $1.0 million in previously deferred
revenue from the sale of software that we no longer use in our business. The
remaining increase was primarily attributable to fees earned from business
affiliations for management services and technology.
Net interest income. The net interest income increased to $330,000 and
$458,000 for the three month and six month periods, respectively, ended June 30,
1999 from a net interest income of $89,000 and $76,000 in the comparable periods
in 1998. These increases were primarily related to higher net cash positions
resulting from equity investments we received in the last three quarters of
1998, and from an improvement in the difference between the interest revenue we
received from borrowers and our cost of funds.
Expenses
- --------
Compensation and employee benefits. Compensation and employee benefits
consist primarily of management and employee salaries, bonuses and commissions
and related costs as well as the cost of consultants and personnel from
temporary agencies. Total compensation and benefit costs increased 116% and 107%
to $12.7 million and $22.4 million for the three month and six month periods,
respectively, ended June 30, 1999 from $5.9 million and $10.8 million in the
comparable periods in 1998. Compensation and benefits represents 80.8% of
revenues in the six months ended June 30, 1999 and 69.8% of revenues in the
comparable period in 1998. The dollar increase in total compensation and benefit
costs resulted primarily from an increase in personnel from 367 at June 30, 1998
to 728 at June 30, 1999 to support our new Internet origination volumes and
15
<PAGE>
related technical and administrative support services. The increase was also a
result of increased commissions paid to loan originators commensurate with
increased loan volumes. We expect total compensation and employee benefits to
increase in absolute dollars as we continue to expand our business by hiring
additional personnel. Total compensation and benefit costs increased as a
percentage of revenue due to training periods involved in expanding our call
center capacity to meet increasing Internet loan demand.
Included in "Compensation and employee benefits" is the amortization of
unearned compensation which resulted when stock options we granted during 1998
and the first and second quarters of 1999 were subsequently deemed to have
exercise prices less than the estimated fair market value of our common stock at
the time of grant. As of June 30, 1999, we have recorded approximately $16.7
million in deferred compensation, and we amortized approximately $836,000 and
$1.03 million of that amount to expense in the three month and six month
periods, respectively, ended June 30, 1999. Subsequent to June 30, 1999, the
vesting of certain options has been accelerated. Accordingly, approximately $5.3
million of deferred compensation relating to these options will be accelerated
and recognized in the quarter ended September 30, 1999. The remaining balance
will be amortized on a straight line basis over the remaining vesting periods of
the underlying options. Stock-based compensation is a non-cash expense.
Marketing. Marketing expenses consist primarily of the cost of leads
generated through Internet marketing and distribution agreements or co-branding
arrangements, as well as the cost of direct advertising and trade-show
participation. Marketing expenses also include fees paid to other Web sites and
business partners for lead generation. Marketing expenses increased to $3.0
million and $4.6 million for the three month and six month periods,
respectively, ended June 30, 1999, or 21.2% and 16.6% of revenue, from $258,000
and $343,000 in the respective comparable periods in 1998, or 3.0 % and 2.2% of
revenue. These increases were directly related to new online distribution
agreements and online advertising designed to increase the exposure of our Web
site. We believe that marketing expenses will increase, both in absolute dollars
and as a percentage of revenue, as we expand our strategic partnerships with
other Web sites to drive more traffic to our Web site and to increase brand
awareness. During the three months ended June 30, 1999, we initiated a national
advertising campaign to brand the Mortgage.com name with the public and incurred
the initial $498,000 of an expected approximately $9 million in expenses during
1999.
Research and development. Research and development costs consist
primarily of compensation and benefit costs of development personnel, materials,
computer equipment and supplies consumed in software development and related
facility costs. Research and development expenses increased 3% to $593,000 for
the three months ended June 30, 1999, or 4.1% of revenue, from $578,000 in the
comparable period in 1998, or 6.7% of revenue. For the six months ended June 30,
1999, research and development expenses increased 36% to $1.4 million, or 5.0%
of revenue, from $1.0 million, or 6.5% of revenue, in the comparable period in
1998. These increases were primarily due to the addition of product development
personnel to integrate CLOser with newly-acquired Internet technology and
third-party software and Web platforms. We believe additional investment in
research and development is essential to our success and we expect these
expenses will increase in future periods.
16
<PAGE>
Depreciation and amortization. Depreciation and amortization consists
of depreciation of capital equipment, amortization of goodwill related to
acquisitions, amortization of the Mortgage.com domain name intangible asset and
amortization of capitalized software development costs. Depreciation and
amortization expenses increased to $1.2 million for the three months ended June
30, 1999, or 8.0% of revenue, from $268,000 in the comparable period in 1998, or
3.1% of revenue. For the six months ended June 30, 1999, depreciation and
amortization increased to $1.9 million, or 6.7% of revenues, from $422,000, or
2.7% of revenues, in the comparable period in 1998. These increases were a
result of increased expenditures for an expansion of our Internet
infrastructure, acquisition of capital equipment to support call center
operations, additions to goodwill from the AFI acquisition and payments relating
to the Online Capital and Mortgage.com name acquisitions. During the six months
ended June 30, 1999, $131,000 was amortized on the intangible asset. These
expenses will increase in absolute dollars as a result of our exercise of an
option to repurchase our CLOser software system from a third party in May 1999
for $3.5 million and planned expenditures to maintain state-of-the-art
technology in support of our Internet operations.
General and administrative. General and administrative costs include
telephone and communication costs, rent and other occupancy costs, equipment
leases, loan transfer fees and consulting and professional expenses. General and
administrative expenses increased 93% to $4.4 million for the three months ended
June 30, 1999, or 30.8% of revenue, from $2.3 million in the comparable period
in 1998, or 26.5% of revenue. For the six months ended June 30, 1999, general
and administrative expenses increased 111% to $8.2 million, or 29.5% of revenue,
from $3.9 million, or 25.2% of revenue, in the comparable period of 1998. The
increase in general and administrative expenses resulted from additional rent,
communication costs and other expenses related to call center operations and the
addition of administrative personnel in anticipation of becoming a public
company. We expect general and administrative expenses to increase in absolute
dollars as we continue to grow but decrease as a percentage of revenue as
mortgage loan volume increases.
Other interest expense. Other interest expense, which includes interest
on subordinated debt and on capital lease obligations, increased to $984,000 and
$1.1 million in the three month and six month periods, respectively, ended June
30, 1999 compared to $111,000 and $154,000 in the comparable periods in 1998.
These increases were a result of the $40.5 million in subordinated debt issued
in the February through May 1999 period.
Liquidity And Capital Resources
- -------------------------------
On August 11, 1999, we completed an initial public offering in which we
sold 7,062,500 shares of common stock. Subsequently, the underwriters of the
public offering exercised an option to purchase an additional 379,375 shares of
common stock to cover over-allotments of shares. The gross proceeds from these
transactions were $59.5 million, or $55.4 million net of underwriter discounts.
A portion of the proceeds has been used to repay the $40.5 million of
subordinated debt and $433,000 was used to redeem certain warrants. All
preferred stock outstanding converted to common stock when the public offering
was completed.
17
<PAGE>
Since inception, we have funded operations primarily through net cash
proceeds from private issuances of preferred stock of approximately $26.5
million through December 31, 1998. In February and April 1999, we received gross
proceeds from the issuance of subordinated notes totaling $13.0 million. In May
1999, we received an additional $27.5 million from the issuance of a convertible
subordinated note, which was payable upon completion of the initial public
offering. We also received $15.0 million from the sale of shares of Series F
preferred stock in May. As of June 30, 1999, we had cash and cash equivalents of
$6.6 million.
Our primary need for operating capital is for the funding of mortgage
loans between closing and eventual delivery to secondary market investors. We
fund these loans through warehouse lines of credit and collateralized loan
purchase agreements with banks and other financial institutions. We have a $75.0
million warehouse line of credit with Residential Funding Corporation, a $60.0
million warehouse line of credit with Bank United and a $25.0 million warehouse
line of credit with Cooper River Funding. We also have loan purchase agreements
with Superior Bank FSB and Greenwich Capital. Our aggregate borrowing limits are
currently set at approximately $220.0 million. These financing arrangements
generally provide from 97% to 99% of the principal amounts needed to fund
mortgage loans and are collateralized by the underlying mortgages. The average
time between funding closed mortgages and receipt of loan sale proceeds from
investors was approximately 22 days during the six months ended June 30, 1999.
We are currently negotiating a $160.0 million repurchase agreement
which will allow us to sell our closed mortgage loans instead of holding them in
our warehouse lines of credit. The net effect of this arrangement should be to
provide us with lower financing costs between closing and ultimate sale and
delivery to investors in the secondary market. Although we expect this financing
arrangement to become available in October 1999, we cannot assure you that it
will be available at that time, if at all.
Net cash provided by operating activities for the six months ended June
30, 1999 totaled $15.8 million. This cash was generated primarily from a
reduction in mortgage loans available for sale, offset by operating losses.
Net cash used in investing activities for the six months ended June 30,
1999 totaled $8.6 million, $6.7 million of which was used for the purchase of
computers, workstations, servers and other equipment to support our growth in
technology support services and call center operations and costs related to
software development. Included in these purchases was the $3.5 million
repurchase of our CLOser software system from an unrelated party.
Net cash used by financing activities for the six months ended June 30,
1999 totaled $4.0 million, as $55.0 million in proceeds from the issuance of
subordinated notes and preferred stock were used to reduce warehouse notes
payable and redeem warrants as well as for general corporate purposes.
18
<PAGE>
As of December 31, 1998, we had net operating loss carryforwards of
approximately $15.8 million available to reduce future taxable income, which
carryforwards expire on various dates from 2010 to 2014.
Since inception, we have significantly increased our operating costs
and we anticipate that we will continue to experience significant increases in
our operating costs for the foreseeable future. In addition, we may use cash
resources, including a portion of the net proceeds of our initial public
offering, to fund acquisitions or investments in joint ventures, businesses,
technologies and products or services complementary to our business. Increased
loan volume also requires additional cash to fund the loans. We believe that net
proceeds of our initial public offering coupled with the expected increase of
our warehouse credit lines and mortgage repurchase facilities will be sufficient
to meet anticipated cash requirements over the next six months. If cash
generated from operations in future periods remains insufficient to satisfy our
liquidity requirements, we may sell additional equity or debt securities, or
obtain additional credit facilities. The issuance of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
Year 2000 Readiness Disclosure Statement
- ----------------------------------------
Many currently installed computer systems and software products are
designed to accept only two digit entries in the date code field. As a result,
they may have problems properly recognizing 1/1/00 as January 1, 2000. In less
than a year, computer systems and software may need to be upgraded to comply
with "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
the Year 2000 issue on business operations.
In early 1998, we began reviewing the Year 2000 compliance status of
our technology platforms licensed to others, the software and systems used in
our internal business processes and other systems and services on which we rely.
We have completed the assessment phase and the research and strategy phases of
the program and are beginning to implement these strategies, which will include
developing contingency plans for potential third party Year 2000 compliance
problems that we deem critical to our business continuity. We cannot assure you
that the program will anticipate or identify all potential Year 2000 effects on
our business or that our contingency plans will be effective.
We have fully integrated Year 2000 testing into the development of our
own software. We believe that the entire technology platform on which we operate
and which we provide to clients is Year 2000 compliant. Accordingly, the use or
occurrence of dates on or after January 1, 2000 and the occurrence of leap years
will not affect the performance of our systems with respect to their ability to
correctly create, store, process and output information related to such data.
We have contacted all of our major customers and suppliers of critical
components, equipment and services to determine whether products and services we
obtain from them are Year 2000 compliant. We have been satisfied with their
responses and believe that all critical suppliers and customers comply with Year
2000 requirements. In addition, we have tested critical systems provided by
these suppliers and the systems used by our major clients to provide us with
additional assurance about their Year 2000 readiness. These tests have not
revealed any significant Year 2000 problems.
19
<PAGE>
The Company's contingency plan is substantially completed. However, we
believe that our critical suppliers and major customers are Year 2000 compliant.
Our contingency plans will focus on disruption of third party services which are
key to our operations, particularly telecommunications and electric utility
services. We have inquired of the providers of these services about their Year
2000 readiness and have been satisfied with their responses. Nevertheless, if a
critical supplier or major customer turns out not to be Year 2000 compliant, we
could incur substantial costs and experience a disruption of our business, which
potentially would have a negative effect on our results of operations.
We sometimes warrant to customers that the use or occurrence of dates
on or after January 1, 2000 will not adversely affect the performance of our
systems with respect to the ability to create, store, process and output
information related to such data. If any of these customers experience Year 2000
problems in connection with use of our systems, they could assert claims for
damages against us.
We have budgeted $600,000 for investigating and remedying issues
related to Year 2000 compliance, including the cost of developing contingency
plans. To date, we have spent $400,000 of that budget. To the extent we have not
adequately assessed our Year 2000 compliance deficiencies, additional and
possibly significant resources may be spent on investigating and remedying Year
2000 issues. The expenditure of such resources may have a material adverse
effect on our business, financial condition and results of operations.
Item 3. Disclosures About Market Risk
Interest rate movements significantly impact our volume of closed
loans. Interest rate movements represent the primary component of market risk to
us. In a higher interest rate environment, borrower demand for mortgage loans,
particularly refinancing of existing mortgages, declines. Interest rate
movements affect the interest income earned on loans we hold for sale in the
secondary market, interest expense on our warehouse lines, the value of mortgage
loans we hold for sale in the secondary market and ultimately the gain on the
sale of those mortgage loans. In addition, in an increasing interest rate
environment, the volume of mortgage loans that our clients originate declines.
We originate mortgage loans and manage the market risk related to these
loans by pre-selling them on a best efforts basis to the anticipated secondary
market investors at the same time that we establish the borrowers' interest
rates. If we can deliver mortgage loans within the time frames established by
the secondary market investors, we have no interest rate risk exposure on those
loans. However, if the loan closes but we cannot deliver the loan within those
time frames, and if interest rates increase, we may experience a reduced gain or
may even incur a loss on the sale of the loan.
20
<PAGE>
Management is currently evaluating hedging strategies to protect us
against the risk we incur with sales of mortgage loans in the secondary market
when interest rates rise and fall. We have retained Tuttle & Co., an
unaffiliated advisory firm, to help us manage our interest rate risks. We are
considering engaging Tuttle to also assist us with a hedging strategy. Hedging
strategies involve buying and selling mortgage-backed securities so that if
interest rates increase or decrease sharply and we expect to suffer a loss on
the sale of those loans, our buying and selling of mortgage-backed securities
will offset the loss. We would analyze the probability that a group of loans we
have originated will not close, and try to match our purchases and sales of
mortgage-backed securities to the amount we expect will close.
An effective hedging strategy is complex and no hedging strategy can
completely eliminate our risk. Part of this is because the prices of
mortgage-backed securities do not necessarily move in tandem with the prices of
loans we originate and close. To the extent the two prices do not move in
tandem, our hedging strategy may not work, and we may experience losses on our
sales of mortgage loans in the secondary market. The other key factor is whether
our probability analysis properly estimates the number of loans that will
actually close. To the extent that we implement a hedging strategy but are
unable to effectively match our purchases and sales of mortgage-backed
securities with the sale of the closed loans we have originated, our gains on
sales of mortgage loans will be reduced, or we will experience a net loss on
those sales.
We currently sell more than 90% of the loans we sell through best
efforts commitments, which means we do not suffer a penalty if the loans do not
close. We sell some loans, including sub-prime loans, on a mandatory delivery
basis. Selling on a mandatory delivery basis means we are required to sell the
loans to a secondary market investor at a price we agree upon, regardless of
whether the loans close. This potentially generates greater revenue for us
because secondary market investors are willing to pay more for a mandatory
delivery commitment from us. However, it also exposes us to greater losses if
the loans do not close.
Management is considering selling a greater number of loans on a
mandatory delivery basis so that we can generate greater gains on the sales of
loans. Our hedging strategy of buying and selling mortgage-backed securities
would help us manage the additional risk we would incur when more loans are sold
on a mandatory delivery basis. However, because hedging strategies are not
perfect, our hedging strategy may not completely offset the additional risk, and
we may suffer losses on loans sold on a mandatory delivery basis.
We also do not currently maintain a trading portfolio. As a result, we
are not exposed to market risk as it relates to trading activities. Our entire
loan portfolio is held for sale. Accordingly, we must perform market valuations
of our pipeline, our mortgage portfolio held for sale and the related sale
commitments in order to properly record the portfolio and the pipeline at the
lower of cost or market. Therefore, we measure the interest rates of our loan
portfolio against prevailing interest rates in the market.
Because we pre-sell our mortgage loan commitments, we believe that a 1%
increase or decrease in long-term interest rates would not have a significant
adverse effect on our earnings from interest rate sensitive assets. We pay off
warehouse lines when the loans are sold in the secondary market. Because the
loans are held in the warehouse lines for a short period of time, we do not
expect to incur significant losses from an increase in interest rates on the
warehouse lines. However, since a significant percentage of our closed loan
volume is from refinancing mortgage loans, our future operating results may be
more sensitive to interest rate movements.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
See Note 7(d) to the Consolidated Financial Statements in
Part I, Item. 1 hereof.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
On June 28, 1999, prior to the Company's initial public offering, the
Board of Directors solicited the written consent of shareholders in lieu of an
annual meeting. The only matter submitted for shareholder approval was election
of directors for the ensuing year. The Board's nominees for director and the
voting results are as follows:
<TABLE>
<CAPTION>
Nominee For Against Authority Withheld
------- --- ------- ------------------
<S> <C> <C> <C>
Seth S. Werner 26,929,376 0 0
John Hogan 26,929,376 0 0
David Larson 26,929,376 0 0
George Naddaff 26,929,376 0 0
</TABLE>
The holders of the Company's Series B and Series C Preferred Stock
voting together as a class had the right to elect two additional directors
designated as Series B Directors to the Board. The Series B Director nominees
and voting results are as follows:
<TABLE>
<CAPTION>
Nominee For Against Authority Withheld
------- --- ------- ------------------
<S> <C> <C> <C>
Stephen Green 11,137,427 0 0
Michael Lee 11,137,427 0 0
</TABLE>
22
<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Second Amendment to Warehousing Credit and Security Agreement and
Amendment of Promissory Note dated July 1, 1999 with Bank United.
Letter Agreement dated August 23, 1999 to the First Amended and
Restated Warehousing Credit and Security Agreement with
Residential Funding Corporation.
First Modification Agreement dated September 15, 1999 among
Cooper River Funding, Inc. as lender and GE Capital Mortgage
Services, Inc. as agent for lender.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORTGAGE.COM, INC.
Registrant
Dated: September 24, 1999
/s/ Edwin D. Johnson
---------------------
Edwin D. Johnson, its duly authorized officer,
Senior Vice President & Chief Financial Officer
23
GE Capital
- --------------------------------------------------------------------------------
GE Capital Mortgage Services, Inc.
A unit of GE Capital Mortgage Corporation
Three Executive Campus, P.0. Box 5260
Cherry Hill, NJ 08034-0455
856 657-6100, 800 257-7878
FIRST MODIFICATION AGREEMENT
September 15, 1999
Mr. Seth Warner
Chairman and CEO
Mortgage.com, Inc.
8751 Broward Boulevard, 5th Floor
Plantation, FL 33324
Re: Cooper River Funding Inc. - Warehouse Line of Credit
----------------------------------------------------
Dear Mr. Warner:
Reference is made to the Warehouse Credit Agreement, dated as of August
7, 1998 (the "Warehouse Credit Agreement") among Cooper River Funding Inc., as
lender (the "Lender"), GE Capital Mortgage Services, Inc. (the "Agent"), as
agent for the Lender, and Mortgage.com, Inc., as borrower (the "Borrower"). All
capitalized terms used in this letter and not otherwise defined shall have the
meanings set forth in the Warehouse Credit Agreement.
The Lender and the Agent hereby agree that the definition of "Expiry
Date" contained in Section 1.01 of the Warehouse Credit Agreement is amended to
read in full as follows:
"Expiry Date" shall mean the earlier of (i)
November 30, 1999 as such date may be extended upon mutual
agreement among the Borrower, the Lender and the Agent from
time to time, (ii) the date which is fifteen days prior to the
Liquidity Termination Date in effect from time to time and
(iii) the date that is 120 days after the date on which the
Lender shall have given the Borrower the notice referred to in
Section 9.13 hereof."
Except as expressly provided above, the Warehouse Credit Agreement, the
Note, and the Warehouse Security Agreement shall remain unaltered and in full
force and effect and are hereby ratified and confirmed. The agreements contained
in this letter are limited
<PAGE>
as expressly provided herein and shall not constitute an agreement of the Lender
or the Agent to give their consent at any time to any other agreement,
amendment, or modification in respect of any term or provision of the Warehouse
Credit Agreement, the Note, or the Warehouse Security Agreement, nor constitute
a waiver of any right, power or remedy of the Lender or the Agent under the
Warehouse Credit Agreement, the Note, or the Warehouse Security Agreement.
Please indicate your acceptance of the terms of this letter by
executing the enclosed duplicate original and returning it to the undersigned
via overnight delivery.
Sincerely,
GE CAPITAL MORTGAGE SERVICES, INC.
By: /s/ Kenneth F. Blume
------------------------
Name: Kenneth F. Blume
Title: Vice President
Approved and agreed to:
COOPER RIVER FUNDING INC.
By: /s/ Kenneth F. Blume
------------------------
Name: Kenneth F. Blume
Title: Assistant Treasurer
MORTGAGE.COM, INC.
By: /s/ Seth Werner
-------------------
Name: Seth Werner
Title: Chairman/CEO
<PAGE>
GMAC RFC Worldwide Capital Partner
- --------------------------------------------------------------------------------
August 23, 1999
Mortgage.com, Inc.
8751 Broward Blvd., 5hFloor
Plantation, FL 33324
Attention: Edwin Johnson, CEO
Re: First Amended and Restated Warehousing Credit and Security
Agreement dated as of June 8, 1998, (as amended, the
"Agreement") by and between RESIDENTIAL FUNDING
CORPORATION ("Lender") and MORTGAGE.COM, INC., f/k/a
FIRST MORTGAGE NETWORK, INC ("Company")
Dear Mr. Johnson:
All capitalized terms used in this letter that are not otherwise
defined below are defined in the Agreement.
The Company has requested the Lender to extend the Maturity Date of
the Agreement to October 15, 1999, and the Lender has agreed to this
extension in consideration of the mutual covenants, agreements and
conditions set forth herein and in the Agreement, and for other good and
valuable consideration.
Except as expressly modified in this letter, the Agreement is
unchanged and remains in full force and effect.
The Company will pay a documentation production fee of $100.00 in
connection with the preparation and negotiation of this letter.
This extension of the Maturity Date will be effective only upon
receipt by the Lender of a copy of this letter acknowledged by the Company
and the Guarantors.
Very truly yours,
RESIDENTIAL FUNDING CORPORATION
By: /s/ [ILLEGIBLE]
-------------------------
Its: Director
-------------------------
- --------------------------------------------------------------------------------
4800 Montgomery Lane, Suite 300 Bethesda, MD 20814 (301) 215-6200
<PAGE>
The Company represents, warrants and agrees that (a) there exists no
Default or Event of Default under the Loan Documents, (b) the Loan Documents
continue to be the legal, valid and binding agreements and obligations of the
Company enforceable in accordance with their terms, as modified herein, (c) the
Lender is not in default under any of the Loan Documents and the Company has no
offset or defense to its performance or obligations under any of the Loan
Documents, (d) the representations contained in the Loan Documents remain true
and accurate in all respects, and (e) there has been no material adverse change
in the financial condition of the Company from the date of the Agreement to the
date of this letter.
ACKNOWLEDGED AND ACCEPTED THIS
25 DAY OF AUGUST, 1999
MORTGAGE.COM, INC.,
f/k/a FIRST MORTGAGE NETWORK, INC.
a Florida corporation
By: /s/ [ILLEGIBLE]
-------------------------
Its: Chief Financial Officer
-------------------------
<PAGE>
SECOND AMENDMENT TO WAREHOUSING
CREDIT AND SECURITY AGREEMENT
-----------------------------
This Second Amendment to Warehousing Credit and Security Agreement and
Amendment of Promissory Note (this "Amendment"), is entered into as of the 1st
day of July, 1999, by and between MORTGAGE.COM, INC., a Florida corporation,
formerly known as FIRST MORTGAGE NETWORK, INC. ("Borrower"), and BANK UNITED, a
federal savings bank ("Lender"). Capitalized terms used but not defined herein
have the meanings assigned to them in that certain Warehousing Credit and
Security Agreement (Single-Family Mortgage Loans) (the "Credit Agreement") dated
effective as of July 1, 1998, by and between Borrower and Lender, as the same
has been or may be amended or supplemented from time to time (the "Credit
Agreement").
Section 1. Recital. Borrower and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore,
Borrower and Lender hereby agree as follows, intending to be legally bound.
Section 2. Amendments. The Credit Agreement is hereby amended and
supplemented as follows:
(a) Section 1.1 of the Credit Agreement is amended by the modification
and addition of the following definition:
"Termination Date" shall mean September 30, 1999, or such
earlier date upon which Lender's obligation to fund shall be
terminated pursuant to the terms of this Agreement.
(b) The promissory note ("Credit Note") dated as of July 1, 1999, in
the original principal amount of $60,000,000, executed by Borrower and
payable to the order of Lender, is given to Lender in replacement of
the promissory note dated as of December 31, 1998, in the original
principal amount of $70,000,000, executed by Borrower and payable to
the order of Lender (the "12/98 Note"), which 12/98 Note was given to
Lender in replacement of the promissory note dated as of July 1, 1998,
in the original principal amount of $60,000,000, executed by Borrower
and payable to the order of Lender (the "Original Note"), and not in
novation or discharge thereof. The definition of the term "Note" in the
Credit Agreement is hereby amended to mean the Credit Note and all
renewals, extensions, modifications, increases, rearrangements, and
replacements thereof.
Section 3. Representations. Borrower represents and warrants that all
of the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby
are true and correct in all material respects on and as of this date.
Section 4. Continued Force and Effect. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement, the Note, and
all other Loan Documents are and
Page 1
<PAGE>
remain in full force and effect in accordance with their respective terms. All
of the terms used herein have the same meanings as set out in the Credit
Agreement, unless amended hereby or unless the context clearly requires
otherwise. References in the Credit Agreement to the "Agreement", the "Loan
Agreement," "hereof," "herein" and words of similar import shall be deemed to be
references to the Credit Agreement as amended hereby. Any reference in the other
Loan Documents to the "Agreement," the "Line of Credit Agreement," "Warehouse
Agreement," or the "Loan Agreement" shall be deemed to be references to the
Credit Agreement as amended through the date hereof. The term "Note," as used
herein and in the Credit Agreement shall mean the Credit Note.
Section 5. Representations and Release of Claims. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of Borrower or any third
party to Lender, as evidenced by the Loan Documents. Borrower hereby
acknowledges, agrees, and represents that (i) Borrower is indebted to Lender
pursuant to the terms of the Note; (ii) the liens, security interests and
assignments created and evidenced by the Loan Documents are, respectively,
first, prior, valid and subsisting liens, security interests and assignments
against the Collateral and secure all indebtedness and obligations of Borrower
to Lender under the Note, the Credit Agreement, all other Loan Documents, as
modified herein; (iii) there are no claims or offsets against or defenses or
counterclaims to, the terms or provisions of the Loan Documents, and the other
obligations created or evidenced by the Loan Documents; (iv) Borrower has no
claims, offsets, defenses or counterclaims arising from any of the Lender's acts
or omissions with respect to the Loan Documents, or the Lender's performance
under the Loan Documents; (v) the representations and warranties contained in
the Loan Documents are true and correct representations and warranties of
Borrower, as of the date hereof; (vi) Borrower promises to pay to the order of
Lender the indebtedness evidenced by the Note according to the terms thereof,
and (vii) Borrower is not in default and no event has occurred which, with the
passage of time, giving of notice, or both, would constitute a default by
Borrower of Borrower's obligations under the terms and provisions of the Loan
Documents. In consideration of the modification of certain provisions of the
Loan Documents, all as herein provided, and the other benefits received by
Borrower hereunder, Borrower hereby RELEASES, RELINQUISHES and forever
DISCHARGES Lender, its predecessors, successors, assigns, shareholders,
principals, parents, subsidiaries, agents, officers, directors, employees,
attorneys and representatives (collectively, the "Lender Released Parties"), of
and from any and all claims, demands, actions and causes of action of any and
every kind or character, whether known or unknown, present or future, which
Borrower has, or may have against Lender Released Parties, arising out of or
with respect to any and all transactions relating to the Credit Agreement, the
Note, and the other Loan Documents occurring prior to the date hereof, including
any other loss, expense and/or detriment, of any kind or character, growing out
of or in any way connected with or in any way resulting from the acts, actions
or omissions of the Lender Released Parties, and including any loss, cost or
damage in connection with any breach of fiduciary duty, breach of any duty of
fair dealing; breach of competence, breach of financing commitment, undue
influence, duress, economic coercion, conflict of interest, negligence, bad
faith, malpractice, violations of the Racketeer Influence and Corrupt
Organizations Act intentional or negligent infliction of emotional or mental
distress, tortious interference with corporate governments or prospective
business advantage, tortious interference with contractual relations, breach of
contract, deceptive trade practices, libel, slander, conspiracy, the charging,
contracting for, taking, reserving, collecting or receiving of interest in
excess of the highest lawful rate applicable to the Loan Documents (i.e.,
Page 2
<PAGE>
usury), any violations of federal or state law, any violations of federal or
state banking rules, laws or regulations, including, but not limited to, any
violations of Regulation B, Equal Credit Opportunity, bank tying act claims, any
violation of the Texas Free Enterprise Antitrust Act or any violation of federal
antitrust acts.
Section 6. Severability. In the event any one or more provisions
contained in the Credit Agreement, this Amendment, or any of the Loan Documents
should be held to be invalid, illegal or unenforceable in any respect, the
validity, enforceability and legality of the remaining provisions contained
herein and therein shall not be affected in any way or impaired thereby and
shall be enforceable in accordance with their respective terms.
Section 7. Expenses. Borrower agrees to pay all out-of-pocket costs and
expenses (including reasonable fees and expenses of legal counsel) of Lender in
connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 8. Acknowledgment. Except as amended hereby, Borrower ratifies
and confirms that the Loan Documents are and remain in full force and effect in
accordance with their respective terms and that all Collateral is unimpaired by
this Amendment and secures the payment and performance of all indebtedness and
obligations of Borrower under the Note, the Credit Agreement, and an other Loan
Documents, as modified hereby. The undersigned officer of Borrower executing
this Amendment represents and warrants that he has full power and authority to
execute and deliver this Amendment on behalf of Borrower, that such execution
and delivery has been duly authorized, and that the resolutions and affidavits
previously delivered to Lender, in connection with the execution and delivery of
the Credit Agreement, are and remain in full force and effect and have not been
altered, amended or repealed in anywise.
Section 9. No Waiver. Borrower agrees that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by
Lender, and any such Default or Event of Default heretofore arising and
currently continuing shall continue after the execution and delivery hereof.
Section 10. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 11. Counterparts. This Amendment may be executed in any number
of counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
Section 12. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS, ALL AS MODIFIED HEREBY,
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMTORANEOUS OR ORAL AGREEMENTS OF THE PARTIES.
Page 3
<PAGE>
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXCUTED and affective as of the dates first written above.
BORROWER: LENDER:
MORTGAGE.COM, INC. BANK UNITED, a federal savings bank
a Florida corportion
By: /s/ John Hogan By: /s/ John D. West
------------------- --------------------
Name: John Hogan JOHN D. WEST, Regional Director,
------------------- Mortgage Banker Finance
Title: EVP
Page 4
<PAGE>
PROMISSORY NOTE
---------------
$60,000,000 Houston, Texas As of July 1, 1999
(Replaces December 31, 1998 Note)
FOR VALUE RECEIVED, the undersigned, MORTGAGE.COM, INC., a Florida
corporation, formerly known as FIRST MORTGAGE NETWORK, INC. (herein called the
"Borrower", hereby promises to pay to the order of BANK UNITED, a federal
savings bank (the "Lender" or, together with its successors and assigns, the
"Holder") whose principal place of business is 3200 Southwest Freeway, Suite
2702, Houston, Texas 77027, ATTN: Mortgage Banker Finance, or at such other
place as the Holder may designate from time to time, the principal sum of SIXTY
MILLION AND N0/100 DOLLARS ($60,000,000.00) or so much thereof as may be
outstanding from time to time pursuant to the Warehousing Credit and Security
Agreement (the "Agreement") dated as of July 1, 1998, between the Borrower and
the Lender, as the same has been amended and supplemented or may be amended or
supplemented from time to time, and to pay interest on said principal sum or
such part thereof as shall remain unpaid from time to time, from the date of
each Advance until repaid in full, and all other fees and charges due under the
Agreement, at the rate and at the times set forth in the Agreement. All payments
hereunder shall be made in lawful money of the United States and in immediately
available funds.
This Note is given in replacement of that certain December 31, 1998,
promissory note executed by Borrower and payable to Lender in the original
principal sum of $70,000,000, which was given in replacement of that certain
July 1, 1998, promissory note executed by Borrower and payable to Lender in the
original principal sum of $60,000,000. This Note is given to evidence an actual
warehouse line of credit in the above amount and is the Note referred to in the
Agreement, and is entitled to the benefits thereof. Reference is hereby made to
the Agreement (which is incorporated herein by reference as fully and with the
same effect as if set forth herein at length) for a description of the
Collateral, required payments of principal and interest on this Note, a
statement of the covenants and agreements, a statement of the rights and
remedies and securities afforded thereby and other matters contained therein.
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings given them in the Agreement.
The entire unpaid principal balance of this Note plus all accrued and
unpaid interest shall be due and payable in full on September 30, 1999.
This Note may be prepaid in whole or in part at any time without
premium or penalty.
Should this Note be placed in the hands of attorneys for collection,
the Borrower agrees to pay, in addition to principal and interest; fees and
charges due under the Agreement, and all costs of collecting this Note,
including reasonable attorneys' fees and expenses.
This Note shall be construed and enforced in accordance with the laws
of the State of Texas, without reference to its principles of conflicts of law,
and applicable federal laws of the United States of America.
This Note is secured by all security agreements, collateral
assignments, deeds of trust and lien instruments executed by the Borrower in
favor of Lender, or executed by any other Person as security for this Note,
including any executed prior to, simultaneously with, or after the date of this
Note and including, without limitation, the Security Documents,
<PAGE>
The Borrower and any and each co-maker, guarantor, accommodation party,
endorser or other Person liable for the payment or collection of this Note
expressly waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent
to accelerate, notice of intent to demand, bringing of suit, and diligence in
taking any action to collect amounts called for hereunder and in the handling of
Collateral at anytime existing as security in connection herewith, and shall be
directly and primarily liable for the payment of all sums owing and to be owing
hereon, regardless of and without any notice, diligence, act or omission as or
with respect to the collection of any amount called for hereunder or in
connection with any Lien at any time had or existing as security for any amount
called for hereunder.
It is the intention of the parties hereto to conform strictly to usury
laws applicable to the Lender. Accordingly, if the transactions contemplated
hereby would be usurious under applicable law (including the laws of the United
States of America and the State of Texas), then, in that event, notwithstanding
anything to the contrary herein or in the Agreement or in any other Loan
Document or agreement entered into in connection with or as security for this
Note, it is agreed as follows: (i) the aggregate of all consideration which
constitutes interest under law applicable to the Lender that is contracted for,
taken, reserved, charged, or received herein or under the Agreement or under any
of the other aforesaid Loan Documents or agreements or otherwise in connection
herewith shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be credited by the Lender on the principal
amount of the Obligations (or, if the principal amount of the Obligations shall
have been paid in full, refunded by the Lender to the Borrower, as required);
and (ii) in the event that the maturity of this Note is accelerated by reason of
an election of the required or permitted prepayment, then such consideration
that constitutes interest under law applicable to the Lender may never include
more than the maximum amount allowed by such applicable law, and excess
interest, if any, provided for in the Agreement or otherwise shall be canceled
automatically as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by the Lender on the principal amount of the
Obligations (or, if the principal amount of the Obligations shall have been paid
in full, refunded by the Lender to the Borrower, as required). Without limiting
the foregoing, all calculations of the rate of interest taken, reserved,
contracted for, charged, received or provided for under this Note or any of the
Loan Documents which are made for the purpose of determining whether the
interest rate exceeds the Maximum Rate shall be made, to the extent allowed by
law, by amortizing, prorating, allocating and spreading in equal parts during
the period of the full stated term of the loan evidenced hereby, all interest at
any time taken, reserved, contracted for, charged, received, or provided for
under this Note or any of the Loan Documents. To the extent that the Texas
Credit Title is relevant for purposes of determining the Maximum Rate, the
Lender hereby elects to determine the applicable rate ceiling under such Article
by the indicated (weekly) rate ceiling from time to time in effect, subject to
the Lender's right subsequently to change such method in accordance with
applicable law.
MORTGAGE.COM, INC.,
a Florida corporation
By: /s/ John J. Hogan
--------------------------------
Name: John J. Hogan
--------------------------------
Title: EVP
--------------------------------
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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