AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-79757
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MORTGAGE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 6162 65-0435281
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
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MORTGAGE.COM, INC.
8751 BROWARD BOULEVARD, FIFTH FLOOR
PLANTATION, FLORIDA 33324
(954) 452-0000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SETH S. WERNER
CHIEF EXECUTIVE OFFICER
MORTGAGE.COM, INC.
8751 BROWARD BOULEVARD, FIFTH FLOOR
PLANTATION, FLORIDA 33324
(954) 452-0000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
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LUTHER F. SADLER, JR., ESQ. JOHN M. HESSION, ESQ. MICHAEL BRENNER, ESQ.
JEFFREY M. MCFARLAND, ESQ. JOHN M. MUTKOSKI, ESQ. CHAN BRYANT ABNEY, ESQ.
FOLEY & LARDNER TESTA, HURWITZ & THIBEAULT, LLP MORTGAGE.COM, INC.
200 LAURA STREET 125 HIGH STREET 8751 BROWARD BOULEVARD, FIFTH FLOOR
JACKSONVILLE, FLORIDA 32202 BOSTON, MA 02110 PLANTATION, FLORIDA 33324
(904) 359-2000 (617) 248-7000 (954) 452-0000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / :
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / .
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 21, 1999
7,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------
Mortgage.com is selling shares of common stock. Prior to this offering,
there has been no public market for the common stock. We expect the price to be
between $10.00 and $12.00 per share. We have applied to list the common stock on
The Nasdaq Stock Market's National Market under the symbol "MDCM."
Mortgage.com has granted the underwriters an option to purchase a maximum
of 1,125,000 additional shares of common stock to cover over-allotments of
shares.
INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS. SEE "RISK FACTORS" ON
PAGE 6.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MORTGAGE.COM
<S> <C> <C> <C>
Per Share....................... $ $ $
Total........................... $ $ $
</TABLE>
We will deliver the shares of common stock on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
U.S. BANCORP PIPER JAFFRAY
PROSPECTUS DATED , 1999
<PAGE>
[The graphic appearing here represents the process through which a mortgage
loan is originated, funded and closed with Mortgage.com.
Beginning at the top of the picture, symbols represent the avenues through
which Mortgage.com receives applications. These applications flow through the
CLOser software system represented in the picture. Moving down the picture, a
series of boxes represent steps in the mortgage process and show the associated
Mortgage.com service.]
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY......................................................................................... 3
RISK FACTORS............................................................................................... 6
USE OF PROCEEDS............................................................................................ 16
DIVIDEND POLICY............................................................................................ 16
CAPITALIZATION............................................................................................. 17
DILUTION................................................................................................... 18
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 21
BUSINESS................................................................................................... 35
MANAGEMENT................................................................................................. 52
CERTAIN TRANSACTIONS....................................................................................... 60
PRINCIPAL STOCKHOLDERS..................................................................................... 62
DESCRIPTION OF CAPITAL STOCK............................................................................... 65
SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 69
UNDERWRITING............................................................................................... 71
NOTICE TO CANADIAN RESIDENTS............................................................................... 74
LEGAL MATTERS.............................................................................................. 75
EXPERTS.................................................................................................... 75
ADDITIONAL INFORMATION..................................................................................... 75
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
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Until , 1999 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the rest
of this prospectus. You should read the entire prospectus carefully. Except
where we state otherwise, all information in this prospectus assumes:
o the conversion of all shares of convertible preferred stock into an
aggregate of 24,321,973 shares of common stock upon completion of this
offering, assuming an initial public offering price of $11.00 per share;
o a 7-for-1 split of the common stock prior to completion of this offering;
o no exercise of the underwriters' over-allotment option; and
o redemption of the warrants held by Superior Bank and repayment of the
notes issued in February and April 1999, as described in "Use of
Proceeds."
MORTGAGE.COM
Mortgage.com is a leading provider of online mortgage services to consumers
and businesses. We have developed state-of-the-art technology called CLOser that
uses the Internet to offer origination, processing, underwriting, closing and
secondary marketing of mortgage loans. We offer these mortgage services directly
to consumers at our www.mortgage.com Web site and retail locations. We also use
our technology to provide online mortgage services to other businesses,
including mortgage brokers, mortgage banks, financial institutions, Realtors and
homebuilders. Through this multifaceted strategy, we aspire to "touch every
mortgage."
According to the Mortgage Banker's Association, approximately $1.5 trillion
in mortgage loans were originated in 1998. Despite its lengthy history and
numerous refinements, the mortgage borrowing process remains arduous for most
borrowers. Many borrowers are dissatisfied with:
o the complexity and inefficiency of the borrowing process,
o time delays related to the manual collection and transfer of information,
and
o the inability to monitor the status of loans.
Even though these are the types of bottlenecks that the Internet is
expected to alleviate, Forrester Research reported that less than 1% of
mortgages funded in 1998 were originated online. We believe that this is mainly
because traditional mortgage industry participants lack technological
capabilities and, until very recently, both borrowers and lenders have been
reluctant to embrace new online customer contact channels. In light of the
recent development of online mortgage services, Forrester Research expects that
by 2003, online mortgage loan volume will grow to nearly 10% of all mortgage
loans funded, exceeding $91 billion.
At Mortgage.com, we offer borrowers a more satisfying and efficient
mortgage borrowing experience, both directly to the consumer and through our
more than 50 business clients. Our business clients include:
o Intuit Lender Services, which generated $96.5 million in loans we
originated during the first 3 months of 1999;
o Mason-McDuffie Real Estate, Inc., which generated $55.9 million in loans
we originated during the first 3 months of 1999;
o GE Capital Mortgage Services, which generated $17.7 million in loans we
originated during the first 3 months of 1999;
o Fleet Mortgage, which generated $21.7 million in loans we originated
during the first 3 months of 1999; and
o Century 21 and Coldwell Banker offices in California, which generated
$146.7 million in loans we originated during the first 3 months of 1999.
Borrowers can select from a wide range of loan products at our Web site,
www.mortgage.com, at our branch office facilities and through our mortgage
professionals at locations where homes are purchased. Borrowers can also visit
any of our 22 client Web sites to satisfy their mortgage needs.
3
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Our mortgage financing services provide borrowers with widespread benefits,
including:
o Convenient access to the mortgage lending process--through the Internet,
by e-mail, by telephone, or at the locations where homes are sold;
o Interactive selection from a comprehensive suite of mortgage products and
services;
o Personalized services and products tailored to individual needs;
o Faster applications and preliminary indications of whether the borrower
qualifies for a particular loan;
o Ability to immediately lock-in an interest rate; and
o Constant monitoring of loan status.
For the year ended 1998, we originated and closed $2.0 billion of mortgage
loans, of which approximately 21% were originated online. For the three months
ended March 31,1999, we originated and closed $751.6 million of mortgage loans,
of which approximately 39% were originated online.
We are located at www.mortgage.com, our address is 8751 Broward Boulevard,
Plantation, FL 33324 and our telephone number is (954) 452-0000. We began
operations in April 1994 and changed our name to Mortgage.com in January 1999.
RECENT FINANCINGS
In May 1999 we issued a convertible note in the principal amount of
$27.5 million to Intuit. The note will be repaid upon completion of the
offering. The proceeds of the sale of the note allowed us to purchase technology
and redeem outstanding warrants.
Also in May 1999, we issued 250,001 shares of convertible non-voting
preferred stock for working capital purposes. The preferred stock will
automatically convert into 1,750,007 shares of common stock upon completion of
this offering. The common stock issued upon conversion of this series of
preferred stock will represent approximately 4.2% of the issued and outstanding
voting stock.
THE OFFERING
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Common stock offered............................................................. 7,500,000 shares
Common stock to be outstanding after the offering................................ 41,570,341 shares
Use of proceeds.................................................................. For working capital and other
general corporate purposes.
Proposed Nasdaq National Market symbol........................................... MDCM
</TABLE>
These share numbers are based on shares outstanding on June 30, 1999. The
share numbers exclude:
o 12,567,716 shares of common stock issuable upon exercise of options
outstanding under our stock option plan, 3,795,134 of which are presently
exercisable at a weighted average exercise price of approximately $.97
per share;
o 8,427,944 shares authorized but unissued under our stock option plan; and
o 6,991,730 shares of common stock issuable upon exercise of presently
exercisable options and warrants outstanding outside of our stock option
plan, 6,867,749 of which are exercisable at a weighted average exercise
price of approximately $.96 per share. Of the options and warrants
outstanding, warrants to purchase 123,981 shares of common stock become
exercisable upon completion of this offering at the offering price,
assuming an offering price of $11.00 per share.
4
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
We have calculated unaudited pro forma basic and diluted net loss per share
assuming the conversion of all outstanding preferred stock into common stock as
if the shares had converted immediately upon their issuance, but without
assuming undeclared cumulative dividends on preferred stock.
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THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------ -------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenue..................................................... $ 7,516 $16,474 $35,691 $6,819 $13,216
Total expenses.................................................... 11,534 20,006 41,768 7,189 16,414
Net loss.......................................................... (4,018) (3,532) (6,078) (370) (3,199)
Net loss attributable to common shareholders...................... (4,434) (4,485) (8,943) (691) (4,130)
Basic and diluted net loss per share.............................. (0.56) (0.55) (1.02) (0.09) (0.44)
Shares used in computation of basic and diluted net loss per
share........................................................... 7,924 8,162 8,729 7,686 9,492
Unaudited pro forma net loss attributable to common
shareholders.................................................... $(6,829) $(3,377)
Unaudited pro forma basic and diluted net loss per share.......... $ (0.21) $ (0.10)
Shares used in computation of unaudited pro forma basic and
diluted net loss per share...................................... 32,874 33,683
</TABLE>
The pro forma as adjusted balance sheet data as of March 31, 1999 gives
effect to:
o the receipt of cash proceeds from the issuance of the convertible
note issued in May 1999;
o the receipt of cash proceeds from the issuance of the preferred
stock after March 31, 1999;
o the conversion of all outstanding preferred stock into common stock;
o the sale of 7,500,000 shares of common stock offered at an assumed
initial public offering price of $11.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses; and
o the use of a portion of the offering proceeds to repay some of our
debt.
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MARCH 31, 1999
DECEMBER 31, -----------------------
------------------- PRO FORMA
1997 1998 ACTUAL AS ADJUSTED
------- -------- -------- -----------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 1,680 $ 3,412 $ 6,251 $ 86,876
Working capital (deficit)........................................... 1,353 2,204 6,142 89,144
Total assets........................................................ 81,927 193,438 188,805 269,430
Total long-term debt, net of current portion........................ -- -- 7,623 --
Convertible preferred stock......................................... 11,823 26,473 26,473 --
Stockholders' equity................................................ 3,797 13,136 10,993 101,618
</TABLE>
5
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the following risks relating to our business and our common stock, together with
the other information described elsewhere in this prospectus. If any of the
following risks actually occur, our business, results of operations and
financial condition could be materially affected, the trading price of our
common stock could decline, and you might lose all or part of your investment.
WE HAVE EXPERIENCED LOSSES SINCE INCEPTION, WE EXPECT FUTURE LOSSES AND WE MAY
NOT BECOME PROFITABLE.
We have incurred substantial net losses in every fiscal period since we
began operations. Although we have experienced strong revenue growth in the last
several quarters, we anticipate further quarterly and annual losses until at
least the latter half of 2002.
As of March 31, 1999, we had an accumulated deficit of approximately
$21.3 million. We incurred net losses of nearly $6.1 million for the year ended
December 31, 1998 and approximately $3.2 million for the three months ended
March 31, 1999. Net losses have increased for each fiscal year since 1996 and
this trend may continue. We may not become profitable. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. We expect to increase our research and development,
general and administrative, and marketing expenses. As a result, we will need to
generate significant additional revenues to achieve and maintain profitability.
WE HAVE ONLY OPERATED ONLINE SINCE 1997, SO YOU MAY EXPERIENCE DIFFICULTY IN
EVALUATING OUR PROSPECTS.
We began operations in April 1994 and did not begin our Internet-related
business until the summer of 1997. Our Web site was not identified as
"www.mortgage.com" until January 1999. Accordingly, we have a limited operating
history on which you can base your evaluation of our business and prospects. Our
prospects are subject to the risks, expenses and uncertainties frequently
encountered by companies in the early stages of development in new and evolving
markets for online financial services. These risks include:
o our ability to develop further our unproven online business model;
o our ability to further develop awareness and loyalty for our Mortgage.com
brand;
o our ability to maintain funding sources for mortgage loans;
o our ability to attract and retain qualified personnel; and
o our ability to anticipate and adapt to the changes in the evolving
electronic commerce market.
In addition, we have never operated our Internet-related business during a
downturn in the mortgage market and we cannot assure you we will be successful
in such a market.
WE WILL ORIGINATE AND FUND FEWER MORTGAGE LOANS IF INTEREST RATES RISE.
In periods of rising interest rates, demand for mortgage loans typically
declines. During those periods, we will likely originate and fund fewer mortgage
loans and our revenues will decline.
Demand for refinancing mortgages declines more significantly than for new
home purchase mortgages during periods of rising interest rates. During the last
three months of 1998, approximately 48.8% of the mortgage loans we funded were
refinancing mortgages. During the first five months of 1999, that percentage
declined to approximately 46.4%.
OUR GAINS AND LOSSES ON SALES OF MORTGAGE LOANS IN THE SECONDARY MARKET ARE
AFFECTED BY RISING INTEREST RATES AND ANY HEDGING STRATEGY WE IMPLEMENT MAY
NOT OFFSET THE RISK.
Our ability to generate net gains on the sale of loans in the secondary
market may be adversely affected by increases in interest rates. We typically
establish interest rates on mortgage loans we originate at the same time we
obtain commitments from the anticipated purchasers of the loans. The mortgage
loan purchase commitments we obtain are contingent upon delivery of the loans to
the purchasers within specified periods. If we are unable to deliver closed
loans on time and interest rates increase, we may experience no gain, or even a
loss, on the sale of these loans. We currently do not use derivative financial
instruments to hedge
6
<PAGE>
these risks and are therefore exposed to losses caused by rising interest rates.
Management is currently evaluating hedging strategies to protect us against
this risk. Hedging strategies involve buying and selling mortgage-backed
securities so that if interest rates increase 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. An effective hedging strategy is complex and no hedging
strategy can completely eliminate our risk. 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 loans we originate, our gains on
sales of mortgage loans may be reduced. See "Disclosures About Market Risk" in
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
IF WE ADOPT A HEDGING STRATEGY, WE MAY ALSO CHANGE THE WAY WE SELL LOANS IN THE
SECONDARY MARKET, WHICH WOULD EXPOSE US TO LOSSES IF INTEREST RATES DECLINE
SHARPLY.
If we adopt a hedging strategy to manage our risks, we may also begin
selling more 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
strategy potentially generates greater revenue for us because secondary market
investors are willing to pay more for this type of commitment. However, it also
exposes us to greater losses if interest rates decline sharply and borrowers
choose not to close on the higher interest rate loans that we promised them
prior to the decline in interest rates.
Any hedging strategy we adopt would help us manage the risk of selling
loans on a mandatory delivery basis. However, as with hedging strategies to
protect us against rising interest rates, no hedging strategy is perfect. To the
extent that we are unable to effectively match our purchases and sales of
mortgage-backed securities with the sale of the loans we originate, the greater
risks associated with loans sold on a mandatory delivery basis may cause us to
lose money on the sale of those loans. See "Disclosures About Market Risk" in
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR NET INTEREST INCOME MAY BE REDUCED BY FLUCTUATIONS IN INTERMEDIATE-TERM AND
SHORT-TERM INTEREST RATES.
When intermediate-term interest rates approach or sink below short-term
interest rates, our net interest income is reduced or we suffer net interest
losses. We earn net interest income or suffer net interest losses from the time
we fund a mortgage loan until it is delivered to an investor in the secondary
market. That time period generally consists of 25-40 days. Whether we earn net
interest income or suffer net interest losses depends on the difference between
the interest rates on mortgage loans we fund and the interest rates on the money
we borrow to fund those mortgage loans.
The interest rates on mortgage loans we fund are affected by
intermediate-term rates in the United States. The interest rates on the money we
borrow to fund mortgage loans are affected by short-term rates based on the
London Interbank Offered Rate (LIBOR). If the intermediate-term rates in the
United States approach the LIBOR rate, our net interest income is reduced or we
suffer net interest losses.
FLUCTUATIONS MAY OCCUR IN OUR OPERATING RESULTS DUE TO SEASONALITY AND OTHER
FACTORS, ANY OF WHICH MAY REDUCE THE PRICE OF OUR COMMON STOCK.
Our revenue is subject to seasonal and other fluctuations. Due to these
factors, our operating results during any given period may suffer, which could
result in a reduction in the trading price of our common stock.
Home sales typically peak during the spring and fall seasons and decline in
the summer and winter. Our operating results may fluctuate significantly as a
result of a variety of other factors, many of which are outside our control.
These factors include:
o a decline in residential home buying that decreases the demand for
purchase mortgage loans;
o an increase in interest rates that decreases the demand for refinancing
existing mortgage loans; and
o the number of applications generated through our Web site and those sites
we create and maintain for clients.
7
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OUR BUSINESS HAS GROWN SIGNIFICANTLY IN THE PAST 2 YEARS AND WE MAY HAVE
DIFFICULTY MANAGING THE GROWTH.
We have been experiencing a period of rapid growth that has been placing a
significant strain on our resources. If we fail to manage our growth
effectively, the quality of our services will be impaired and our financial
performance will suffer.
We have maintained a significant online presence only since April 1998. The
number of our employees increased from 255 on December 31, 1997, to 594 on
March 31, 1999. In addition, we recently hired a new chief financial officer and
other key members of management. To manage future growth effectively, we must
integrate these and other new personnel, manage our expanded operations, invest
in our technology infrastructure and obtain additional space to house our
operations.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES, OUR ABILITY TO
ORIGINATE AND FUND MORTGAGE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL
SUFFER.
Our ability to fund mortgage loans depends to a large extent upon our
ability to secure financing on acceptable terms. We currently fund most of the
loans we originate through large lines of credit known as warehouse lines of
credit, or under collateralized loan repurchase agreements. Several commercial
banks and institutional investors provide these funding sources. Most of these
financing arrangements have one-year terms and some are cancellable by the
lenders at any time.
If we are not successful in renewing our borrowings or in arranging new
financing with terms as favorable as the terms of our current financing
arrangements, we may have to curtail our origination and funding activities,
which would reduce our revenue.
All of the financing arrangements we use to fund mortgage loans are subject
to financial covenants and other restrictions. Because we are an early stage
company that is actively investing in growth, we are at times in default under
those covenants and restrictions and rely on waivers from the various lenders.
If we are unable to operate within the covenants or obtain waivers, all amounts
that we owe under the financing arrangements could become immediately payable.
The termination of a financing arrangement by a lender, or the acceleration of
our debt, would have a significant negative effect on our business.
LOSS OF OUR RELATIONSHIP WITH INTUIT LENDER SERVICES WOULD ADVERSELY AFFECT OUR
REVENUE.
During the first three months of 1999, our relationship with Intuit Lender
Services accounted for approximately 12% of the loans we originated. If Intuit
Lender Services terminated one or both of our agreements, it would have a
negative impact on our online originations and consequently, our revenue.
The processing, underwriting and funding services we provide to
participating lenders on www.quickenmortgage.com are subject to performance
standards relating to the number of applications and inquiries we convert to
funded loans and the level of customer service we provide. During portions of
the first half of 1999, we were not meeting the performance standards that
relate to converting applications and inquiries to closed loans. For
applications and inquiries we received in June, we expect to meet or exceed the
performance standards under our agreement. However, if we fail to meet the
performance standards in the future, Intuit Lender Services may terminate the
agreements.
OUR AGREEMENTS WITH INTUIT LENDER SERVICES RESTRICT US FROM MERGING WITH
ONE OF INTUIT LENDER SERVICES' CHIEF COMPETITORS, WHICH MAY PREVENT US FROM
ENTERING INTO BUSINESS COMBINATIONS THAT WOULD BENEFIT OUR BUSINESS.
Intuit Lender Services may terminate our agreements if there is a merger or
other change of control involving our company and one of Intuit Lender Services'
chief competitors. The list of chief competitors is subject to change, but
currently consists of Microsoft, E-Loan, HomeShark, Consumer Financial Network,
GetSmart, Monument, RealSelect and The Lending Tree. Intuit Lender Services'
right to terminate our agreements may prevent us from entering into business
combinations with other industry leaders that would benefit our operations and
financial performance.
THE INTERNET MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO SUCCESSFULLY
COMPETE AGAINST INCREASED COMPETITION IN THIS MARKET.
The market for Internet products and services is highly competitive and
there are no substantial barriers to entry. We expect that competition will
continue to intensify. Many of our Internet competitors have more experience
online and have greater brand recognition. We may not be able to successfully
compete in the Internet services
8
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market, which would prevent us from effectively executing our business strategy.
Recent significant entrants into the online mortgage market include E-Loan,
Countrywide and iOwn. In addition, some of our competitors are partnering with
Internet portals such as Yahoo! and America Online.
ADDITIONAL PRICING PRESSURES RESULTING FROM INCREASED ONLINE COMPETITION COULD
REDUCE OUR REVENUES.
Pricing of mortgage loans on the Internet is also highly competitive.
Increased competition in the online arena has forced us and other online
mortgage lenders to reduce our prices to borrowers, thus reducing our revenue.
Pricing to borrowers involves a number of factors, including the interest
rate on the loan, up-front origination fees and fees for processing,
underwriting and document preparation. We have seen the difference between the
price borrowers pay on 30-year mortgage loans and the price at which we expect
to sell the loan drop from approximately .80% of the principal amount of loans
originated in January to approximately .66% of the principal amount of loans
originated in May.
OUR COMPETITORS IN THE MORTGAGE BANKING MARKET ARE OFTEN LARGER, MORE
EXPERIENCED AND HAVE GREATER FINANCIAL RESOURCES THAN WE DO, WHICH WILL MAKE
IT DIFFICULT FOR US TO SUCCESSFULLY COMPETE.
We compete with other mortgage banking companies, commercial banks, savings
associations, credit unions, insurance companies and other financial
institutions in every aspect of our business. Many of these companies and
financial institutions are larger, more experienced and have greater financial
resources than we do. Accordingly, we may not be able to successfully compete in
the mortgage banking market. Our competitors may be able to respond more quickly
to take advantage of new or changing opportunities, technologies and customer
requirements. They also may be able to undertake more extensive promotional
activities, offer more attractive terms to borrowers and adopt more aggressive
pricing policies.
A DISCONTINUATION OR REDUCTION IN SECONDARY MARKET PROGRAMS WOULD HURT OUR
FINANCIAL PERFORMANCE.
Our ability to sell mortgage loans to institutional investors in the
secondary market is largely dependent upon the continuation of programs
administered by Fannie Mae, Freddie Mac, Ginnie Mae and private mortgage
investors. These entities facilitate the sale of mortgage loans and
mortgage-backed securities through the secondary market. Any discontinuation of
or reduction in the operation of those programs or any significant impairment of
our eligibility to participate in those programs would hurt our financial
performance. Also, any significant adverse change in the secondary market level
of activity or the underwriting criteria of Fannie Mae, Freddie Mac, Ginnie Mae
or other private mortgage investors would reduce our revenues.
THE LOSS OF OUR RELATIONSHIP WITH FANNIE MAE WOULD INTERRUPT OUR PLANS FOR
WWW.OPENCLOSE.COM.
We have an agreement with Fannie Mae that allows us to provide mortgage
brokers and mortgage bankers with use of Fannie Mae's Desktop Underwriter
software through www.openclose.com. This is a Web site where mortgage companies
can exchange product and pricing data and borrower information. If Fannie Mae
terminates the agreement, our plans for www.openclose.com would be interrupted,
and possibly discontinued, which could reduce our revenue. Our agreement with
Fannie Mae expires October 14, 2003 and is automatically renewed for one year
terms unless:
o we or Fannie Mae give notice of intention to terminate before the renewal
date;
o we or Fannie Mae terminate the agreement because of a breach by the other
party which remains uncured; or
o Fannie Mae terminates the agreement upon significant changes in our
management, our board of directors or the ownership of our company.
IF INTERNET GROWTH SLOWS OR BORROWERS ARE RELUCTANT TO CONDUCT FINANCIAL
BUSINESS THROUGH THE WEB, WE WILL GENERATE FEWER LOANS ONLINE.
Our ability to originate mortgage loans on the Internet and provide clients
with Internet-based mortgage services is dependent upon continued growth in
Internet usage. Web-based mortgage lending is relatively new, and we cannot
predict whether there will be growth in mortgage loans generated on the
Internet.
9
<PAGE>
The Internet may not prove to be a viable commercial marketplace for a
number of reasons, including lack of acceptable security technologies,
inadequate development of the Internet infrastructure or slow or inadequate
development of performance improvements.
Mortgage borrowers are accustomed to traditional means of obtaining
mortgage financing. For us to be successful, these borrowers must accept the use
of the Internet to conduct financial transactions and exchange information
online.
IF THE ECONOMIES OF FLORIDA AND CALIFORNIA EXPERIENCE A DOWNTURN, OUR BUSINESS
MAY BE SIGNIFICANTLY AFFECTED.
Although we expect our mortgage loan business to have a greater national
scope in the future, our short-term results of operations and financial
condition will be negatively affected by poor economic conditions in Florida and
California, particularly in their residential real estate markets.
Approximately 9.5% of our funded loan volume for the year ended
December 31, 1998 was derived from borrowers or properties in Florida and
approximately 72.3% was derived from borrowers or properties in California. From
January 1, 1999 through March 31, 1999, our funded loan volume from Florida
accounted for approximately 8.1% and our funded loan volume from California
accounted for approximately 63.0% of our total loan volume.
INTERNET SYSTEM FAILURES AND SECURITY CONCERNS COULD MAKE BORROWERS RELUCTANT TO
USE OUR ONLINE SERVICES.
The performance of our Web site and the Web sites we maintain for our
clients is important to our reputation, our ability to attract customers and our
ability to achieve market acceptance of our services. Any system failure that
causes an interruption or an increase in response time of our services could
result in fewer loan applications through our Web sites and those we maintain
for clients. System failures, if prolonged, could reduce the attractiveness of
our services to borrowers and clients.
Our primary Internet-related computer and communications hardware is
currently located in New Jersey. Although we plan to fully duplicate our New
Jersey hardware in a Florida plant, we currently do not have backup facilities
to prevent interruption of business in the event of any widespread power or
telecommunications outages in New Jersey.
In addition, despite our implementation of network security measures, our
servers are vulnerable to computer viruses, break-ins, and similar disruptions
from unauthorized tampering with our computer systems.
We do not carry sufficient insurance to compensate for losses that may
occur as a result of any of these events.
IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR
ABILITY TO ORIGINATE AND FUND MORTGAGE LOANS MAY BE RESTRICTED.
Our mortgage banking business is subject to the rules and regulations of
various federal, state and local regulatory agencies in connection with
originating, processing, underwriting and selling mortgage loans. These rules
and regulations, among other things, impose licensing obligations on us,
prohibit discrimination, establish underwriting guidelines and mandate
disclosures and notices to borrowers. We also are required to comply with each
regulatory entity's financial requirements. If we do not comply with these
rules, regulations and requirements, the regulatory agencies may restrict our
ability to originate and fund mortgage loans.
We also must comply with state usury laws. If we fail to comply with these
laws, the states can impose civil and criminal liability and restrict our
ability to operate in those states. In addition, secondary market investors may
demand indemnification or require us to repurchase loans sold in the secondary
market. We also may be subject to class action lawsuits. Any of these events
could impair our ability to originate and fund loans, which would reduce our
revenue.
CHANGES IN REGULATORY REQUIREMENTS OR THE INTERPRETATIONS OF THOSE REQUIREMENTS
COULD INCREASE OUR COSTS OF DOING BUSINESS OR OTHERWISE HURT OUR FINANCIAL
PERFORMANCE.
Regulatory and legal requirements are subject to change and may become more
restrictive, making our compliance more difficult or expensive or otherwise
restricting our ability to conduct our business as it is now conducted. Changes
in these regulatory and legal requirements could increase our costs of doing
business.
Many states prohibit non-employees of a licensed mortgage company from
conducting
10
<PAGE>
business under that licensed mortgage company's name. Our clients often hire us
to provide back office functions, such as processing and underwriting. Because
providing these back office services is a relatively new concept in the
industry, most state regulations do not specifically address the provision of
back office services. As state regulators become more familiar with these
practices, it is possible that they may interpret current regulations or enact
new regulations to restrict our ability to perform these back office services
for our clients, either of which would adversely affect our financial
performance.
IF WE FAIL TO MAINTAIN MORTGAGE BANKING AUTHORITY IN THE STATES WHERE WE DO
BUSINESS, WE MAY INCUR LIABILITY.
We are authorized to originate loans for first mortgages on homes in 48
states and the District of Columbia. If we fail to maintain our licensing
approvals and exemptions in those jurisdictions, we may incur liability and may
be unable to transact business in those jurisdictions.
Although our license applications are pending, we currently are not
licensed to originate mortgage loans in New York or New Jersey in our own name.
Loan applications and inquiries we receive from New Jersey and New York are
originated through NetB@nk. NetB@nk can terminate our arrangement at any time.
If NetB@nk terminates the arrangement, we will not be able to originate and fund
mortgage loans in New York and New Jersey unless we develop a similar
arrangement with another mortgage lender or become licensed.
For the year ended December 31, 1998, approximately 2.6% of the mortgage
loans we funded were from New York and New Jersey. For the three months ended
March 31, 1999, approximately 5.2% of the mortgage loans we funded were from New
York and New Jersey.
We have authority in 44 states to originate loans for mortgages that would
be subordinate to first mortgages in a foreclosure proceeding. In those states
in which we do not have authority, or in which our authority is limited, we do
not originate subordinate lien mortgage loans. If we were to originate a
subordinate lien mortgage loan in a state without authority to do so, we might
incur liability.
Some states require us to obtain prior approval before a change of control
of our company occurs. Because we will be a public company following this
offering, we may not have advance notice of a change of control occasioned by a
stockholder's purchase of our stock in the open market. We also will not be able
to control who purchases our voting stock in the open market. If any person
holding 10% or more of our stock fails to meet a state's criteria, or refuses to
comply with state regulatory requirements, we could lose our authority to
originate mortgage loans in that state, which could hurt our business, results
of operations and financial condition.
WE FACE LEGAL UNCERTAINTIES ASSOCIATED WITH THE INTERNET AND ELECTRONIC COMMERCE
WHICH COULD INCREASE OUR COSTS OR REDUCE DEMANDS FOR OUR SERVICES.
Our operations on the Internet are not currently subject to direct
regulation by any government agency in the United States beyond mortgage-related
regulations and regulations applicable to businesses generally. However, the
adoption of new laws or the application of existing laws may decrease the use of
the Internet, which would decrease the demand for our services and might
increase our cost of doing business.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including:
o online content;
o user privacy;
o taxation;
o access charges;
o liability for third-party activities; and
o jurisdiction.
In addition, the tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made that could impose
taxes on the sale of goods and services and other Internet activities. Recently,
the Internet Tax Information Act was signed into law placing a three-year
moratorium on new state and local taxes on Internet commerce. However, we cannot
assure you that future laws imposing taxes or other regulations would not
substantially impair the growth of our business and our financial condition.
Some local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and
11
<PAGE>
that many areas with high Internet use are experiencing interruptions in
telephone service. These carriers have petitioned the Federal Communications
Commission to impose access fees on Internet service providers. If these access
fees are imposed, the costs of communicating on the Internet could increase,
which could decrease demand for our services and increase our cost of doing
business.
IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES, OUR ABILITY TO COMPETE ON
THE INTERNET WILL BE IMPAIRED.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards, and frequent new
products and enhancements. If faster Internet access becomes more widely
available through cable modems or other technologies, we may be required to make
significant changes to the design and content of our Web site and the Web sites
we maintain for clients to compete effectively.
As the number of Web pages and users increase, we will need to modify the
Internet infrastructure, our Web site and the Web sites we maintain for our
clients to accommodate increased traffic. If we cannot modify our computer
systems, we may experience:
o system disruptions;
o slower response times;
o impaired quality and speed of application processing; and
o delays in reporting accurate interest rate information.
If we fail to effectively adapt to increased usage of the Internet or new
technological developments, we will be unable to successfully compete online.
OUR EFFORTS TO ENHANCE AWARENESS OF THE MORTGAGE.COM BRAND MAY BE UNSUCCESSFUL,
WHICH WOULD AFFECT OUR FINANCIAL PERFORMANCE.
We believe that establishing and maintaining the Mortgage.com brand name
and its reputation is an important aspect of our efforts to attract and expand
our technology services and mortgage lending business. We also believe that the
importance of brand recognition will increase due to the growing number of
Internet sites and the relatively low barriers to entry. If we fail to
adequately promote and maintain our brand name, our financial performance will
suffer.
To maintain and enhance the Mortgage.com brand, we must provide
high-quality products and services, particularly on the Internet. If any breach
or alleged breach of security or privacy involving our online services occurs,
or if we are unable to otherwise successfully promote and maintain our brand,
our business will suffer.
There are thousands of Internet Web site addresses, or "domain names,"
containing the word "mortgage," such as "mortgages.com" "1mortgage.com" and
"1mortgage1.com," that have been registered to other users. To the extent
consumers confuse other Web sites with ours, our reputation could be harmed and
our business could suffer.
ONLINE SECURITY RISKS MAY HARM OUR BUSINESS OPERATIONS.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. If any compromise of our security
occurs, it would injure our reputation, and could impact the success of our
business.
We rely on encryption and authentication technology licensed from third
parties to effect secure transmission of confidential information, such as that
required on a mortgage loan application. Advances in computer capabilities, new
discoveries in cryptography, or other developments may result in a breach of the
techniques we use to protect customer data.
OUR RELIANCE ON THIRD PARTIES FOR DEVELOPMENT AND MAINTENANCE OF INDUSTRY
STANDARD SOFTWARE MAY PUT US AT RISK FOR INTERRUPTIONS OR SLOW DOWNS IN OUR
BUSINESS.
Our products and services rely on software licensed to us by third parties.
If we have to replace third-party software, our business could suffer during the
replacement period.
We believe there are other sources for most of the specialized software we
use through these licenses and that we could replicate the functionality of this
software. However, because our products incorporate software developed and
maintained by third parties, and because we license from third parties industry
standard software
12
<PAGE>
products that cannot be replicated, we depend on those third parties to:
o deliver and support reliable products;
o enhance their current products;
o develop new products on a timely and cost-effective basis; and
o respond to emerging industry standards and other technological changes.
In addition, the third party software currently used in our products and
the delivery of our services may become obsolete or incompatible with the
products and services we offer in the future.
WE FACE RISKS THAT OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED AND
THAT WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR INFRINGEMENT.
Our copyrights, trademarks, trade dress, trade secrets, and similar
intellectual property are critical to our success. We have obtained federal
trademark registration for CLOser, and have registered the Web site domain names
we use, which prevents any other person from using those names for their Web
sites in the United States. However, we may not be able to adequately protect
our intellectual property against infringement, which could damage our
reputation or create brand confusion in the market. Either of those events could
injure our financial performance if it took place on a large enough scale.
We protect our internally-developed technology through a combination of
copyright, trade secret and trademark law. However, we have no patents issued or
applied for on our technology. Unauthorized parties may attempt to copy or to
otherwise obtain and use our services or technology and we cannot be certain
that the steps we have taken and will take in the future will prevent them from
misappropriating or infringing upon our technology. The costs associated with
enforcing our rights to technology could increase our losses and depress our
stock price.
Mortgage-related Internet technologies are rapidly being developed. As a
result, we believe that disputes regarding the ownership of these technologies
are likely to arise in the future. Third parties may assert infringement claims
against us. We may incur substantial costs in defending against third-party
infringement claims regardless of the merit of those claims. We also cannot
guarantee that we would be able to license comparable technology if our use was
found to infringe on someone else's rights. If we were unable to license
comparable technology, our business could suffer.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT TECHNICAL AND SUPPORT PERSONNEL
THAT WE NEED TO SUCCEED.
Competition for qualified technical and support personnel is intense, and
we may not be able to hire and retain sufficient numbers of qualified technical
and support personnel. If we fail to hire and retain sufficient numbers of
technical and support personnel, our business and results of operations would be
adversely affected.
EARLY MORTGAGE LOAN PAYMENT DEFAULTS MAY CAUSE LOSSES.
If borrowers default in the first few months after the loan is originated,
we may be required to repurchase those loans from the secondary market investors
to whom we sold those loans. We may not be able to resell those loans in the
secondary market. Our financial performance may be adversely affected during
economic downturns when the frequency of loan defaults tends to increase.
WE MAY BE REQUIRED TO REPURCHASE LOANS OR INDEMNIFY INVESTORS IF WE BREACH
REPRESENTATIONS AND WARRANTIES.
When we sell a mortgage loan to a secondary market investor, we make
representations and warranties about characteristics of the mortgage loan, the
borrower and the underlying property. If we breach any of these representations
and warranties, we may be required to repurchase the loan from the investor or
indemnify the investor for any damages caused by the breach.
With some loan sales, we may be required to return a portion of the premium
paid by the investor for the loan if the loan is prepaid within the first year
after its sale. If we are regularly required to repurchase loans, indemnify
investors or return loan premiums, it would have an adverse effect on our
financial performance.
A DELAY IN THE RECEIPT OF SERVICES FROM THIRD PARTIES MAY REDUCE OUR
REVENUES.
We rely on third party sources for some of the information used in the
mortgage loan underwriting process, including credit reports, appraisals and
title searches. Any interruptions or delays in obtaining
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<PAGE>
these services may cause delays in our processing and closing of mortgage loans,
which could create customer dissatisfaction and injure our market position.
OUR BUSINESS OPERATIONS MAY BE INTERRUPTED IF WE EXPERIENCE UNEXPECTED YEAR 2000
PROBLEMS.
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
data corruption, system failures or disruptions of operations. We are subject to
potential Year 2000 problems affecting our products and services, our internal
systems, and the systems of third parties on whom we rely. We believe that the
technology underlying our products and services is Year 2000 compliant. However,
we may discover errors or defects in our internal systems that may be
unresolvable or that may result in material costs to us. Internal Year 2000
problems could negatively affect our business, operating results and financial
condition.
We use third-party equipment, software and content that may not be Year
2000 compliant. Although we have received assurances from third parties that
they are Year 2000 compliant, we do not independently verify their Year 2000
compliance. If third parties on whom we rely are not Year 2000 compliant, our
business could be adversely affected later this year.
We have not yet fully developed a comprehensive contingency plan to address
situations that may result if we encounter Year 2000 problems. The cost of
developing and implementing a contingency plan may itself be material, and we
cannot assure you that our contingency plans will be adequate. For more
information on how we are addressing the Year 2000 problem, see "Management's
Discussion and Analysis--Year 2000 Readiness Disclosure Statement."
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADDITIONAL FINANCING MAY NOT BE
AVAILABLE.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the next 12
months. We may need to raise additional capital, however, to fund more rapid
expansion, to develop new and to enhance existing services to respond to
competitive pressures, and to acquire complementary business or technologies.
We may not be able to obtain additional financing on terms favorable to us,
if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
THE PRICE ESTABLISHED FOR OUR COMMON STOCK IN THIS OFFERING MAY NOT BE SUSTAINED
FOLLOWING THE OFFERING.
Prior to the offering, there has been no public market for our common
stock. After the offering, an active trading market may not develop or continue.
You will pay a price for the common stock that was not established in a
competitive market. Rather, you will pay a price that we negotiated with the
representatives of the underwriters. The price of the common stock that will
prevail in the market after the offering may be higher or lower than the price
you pay.
INITIAL PUBLIC OFFERINGS OF INTERNET COMPANIES HAVE BEEN PARTICULARLY
SUSCEPTIBLE TO FLUCTUATIONS IN STOCK MARKET PRICES.
The stock market in general has recently experienced extreme price and
volume fluctuations. The market prices of technology companies, particularly
Internet-related companies, have experienced fluctuations unrelated or
disproportionate to the operating performance of those companies. These broad
market fluctuations could depress the market price of our common stock.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If that were to happen to us, we could incur
substantial costs defending the lawsuit. The lawsuit also could divert the time
and attention of our management team. Both could have a negative impact on our
financial performance.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE
PER SHARE OF YOUR COMMON STOCK UPON COMPLETION OF THIS PUBLIC OFFERING.
The initial public offering price of our common stock is substantially
higher than the book value per outstanding share of common stock. Accordingly,
you will suffer an immediate and substantial dilution in net tangible book value
per
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<PAGE>
share of the common stock from the initial public offering price in the amount
of $8.68 per share, based upon an assumed initial offering price of $11.00 per
share. You will experience additional dilution upon exercise of outstanding
options and warrants.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have 41,570,341 shares of common stock
outstanding. Sales of a substantial number of shares of common stock in the
public market following this offering could cause a reduction in the market
price of our common stock. All the shares sold in this offering will be freely
tradable. The remaining shares of common stock outstanding after this offering
will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE SHARES
- ---------------------------------------- ----------
<S> <C>
Date of this prospectus................. 932,050
90 days after the date
of this prospectus.................... 692,675
180 days or more after the date of this
prospectus............................ 32,445,616
</TABLE>
The number of shares of common stock available for sale 180 days or more
after the date of this prospectus represents approximately 78% of the common
stock outstanding after the offering.
After this offering, we intend to register approximately 20,995,660 shares
of our common stock that we may issue under our stock option plan. Once we
register these shares, they can be freely sold in the public market upon
issuance, subject to agreements which some shareholders have signed where they
agree not to sell their shares for a 90-day or 180-day period after this
offering.
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS FROM THIS OFFERING AND
ANY FAILURE TO APPLY THEM EFFECTIVELY COULD NEGATIVELY IMPACT OUR BUSINESS
PROSPECTS.
We expect to use the net proceeds from the sale of our common stock to
develop and market the brand name mortgage.com and for other corporate purposes.
We will have significant flexibility in applying the net proceeds of this
offering. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the net
proceeds. If we fail to apply the net proceeds effectively, our business could
be negatively affected.
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<PAGE>
USE OF PROCEEDS
We estimate that the proceeds we receive after deducting underwriting
discounts, commissions and estimated offering expenses from the sale of the
common stock will be approximately $75,625,000, assuming an initial public
offering price of $11.00 per share. If the underwriters' over-allotment option
is exercised in full, we estimate our net proceeds will be approximately
$87,133,750. The primary purposes of this offering are to obtain additional
capital, create a public market for our common stock and facilitate future
access to public capital markets.
We expect to use the net proceeds of this offering for corporate purposes,
including approximately $16 million to fund an advertising and promotional
campaign to enhance awareness of our Mortgage.com brand, and approximately
$4 million for technology research and development.
In addition, we expect to use approximately $13 million of the net proceeds
to redeem warrants to purchase 2,100,000 shares of common stock held by Superior
Bank, which we are required to redeem by September 30, 1999 under an agreement
with Superior Bank. We also expect to use the net proceeds to retire the
following debt:
o $2 million to retire 12% notes maturing February 9, 2000;
o $8 million to retire 12% notes maturing February 22, 2001;
o $3 million to retire 12% notes maturing April 19, 2001; and
o $27.5 million to retire 12% convertible notes maturing May 5, 2001.
We used the proceeds of the debt to purchase technology, redeem warrants
from Superior Bank and for general corporate purposes. The remaining
approximately $2.1 million to $13.6 million will be used to expand our funding
sources for mortgage loans, for working capital and for projects which will
enable us to grow our business.
Other than as described above, we have no present plans or commitments and
are not currently engaged in any negotiations with respect to the use of the net
proceeds of this offering. Until the net proceeds are used, we will invest them
in short-term, investment grade securities or money market instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has sole discretion to pay cash
dividends based on our financial condition, results of operation, capital
requirements, contractual obligations and other relevant factors.
Our warehouse lines of credit restrict our ability to pay dividends. Under
our financing arrangements with Bank United and Cooper River Funding, we are
prohibited from paying dividends if we are in default under the agreements or
are otherwise not complying with tangible net worth requirements. Under our
financing arrangement with Residential Funding Corporation, we are prohibited
from declaring and paying dividends in excess of our net after-tax income earned
in any fiscal year, as determined on a fiscal year-to-date basis.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999,
(1) on an actual basis, (2) on a pro forma basis giving effect to the conversion
of all outstanding shares of preferred stock into common stock, and (3) on a pro
forma as adjusted basis to reflect the sale of 7,500,000 shares of common stock
offered through this prospectus at an assumed initial offering price of $11.00
per share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses. The table does not include 20,995,660 shares of
common stock reserved for issuance under our stock option plan and does not
include common stock reserved for issuance upon exercise of options and warrants
outstanding outside of our stock option plan. All numbers are in thousands,
except share and per share data.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-term obligations, net of current portion and discount.................. $ 7,623 $ 7,623 $ 7,623
Notes payable, net of current portion....................................... 387 387 387
Stockholders equity (deficit):
Common stock, $.01 par value: 210,000,000 shares authorized; 9,539,110
shares issued and outstanding actual; 31,932,621 shares issued and
outstanding pro forma and 41,361,083 shares issued and outstanding pro
forma as adjusted...................................................... 95 319 414
Convertible preferred stock, $.01 par value: 15,000,000 shares authorized;
3,199,073 issued and outstanding actual; 0 shares issued and
outstanding pro forma and pro forma as adjusted........................ 32 0 0
Unearned compensation....................................................... (15,187) (15,187) (15,187)
Additional paid-in capital.................................................. 47,322 47,130 137,660
Accumulated deficit......................................................... (21,269) (21,269) (21,269)
-------- --------- ---------
Total stockholders' equity (deficit)........................................ 10,993 10,993 101,618
-------- --------- ---------
Total capitalization........................................................ $ 19,373 $ 19,373 $ 109,628
-------- --------- ---------
-------- --------- ---------
</TABLE>
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by calculating the total assets less intangible assets and total
liabilities, and dividing it by the number of outstanding shares of common
stock.
After giving effect to the conversion of all shares of preferred stock into
common stock as though it occurred on March 31, 1999, the net tangible book
value of our common stock as of March 31, 1999 would have been $20,434,474, or
approximately $0.60 per share. After giving effect to the sale of 7,500,000
shares of common stock at an assumed initial public offering price of $11.00 per
share, less estimated underwriting discounts and commissions and estimated
expenses, our pro forma net tangible book value as of March 31, 1999 would have
been $96,059,471, or $2.32 per share. This represents an immediate increase in
the pro forma as adjusted net tangible book value of $1.72 per share to existing
stockholders and an immediate dilution of $8.68 per share to you, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $11.00
Pro forma net tangible book value per share at March 31, 1999......................... $0.60
Increase per share attributable to new investors...................................... 1.72
-----
Pro forma net tangible book value per share after this offering....................... 2.32
------
Dilution per share to new investors................................................... $ 8.68
------
------
</TABLE>
The following table shows on a pro forma basis at March 31, 1999, the total
number of shares of common stock purchased, the total consideration paid to us
and the average price per share paid by existing stockholders and purchasers of
shares in this offering, assuming the conversion of all shares of preferred
stock into common stock, and assuming an initial public offering price of $11.00
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 33,861,083 81.9% $ 47,055,209 36.3% $ 1.39
New investors.................................... 7,500,000 18.1 82,500,000 63.7% 11.00
---------- ----- ------------ -----
Totals......................................... 41,361,083 100.0% $129,555,209 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
You will experience additional dilution upon exercise of outstanding
options and warrants. If all outstanding exercisable options and warrants were
exercised immediately following completion of this offering, as if the offering
occurred on March 31, 1999, our pro forma net tangible book value as of
March 31, 1999 would have been $107,716,771, or $2.07 per share. This would
represent an immediate dilution of $8.93 per share to you.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from our
consolidated financial statements. Our financial statements for the years ended
December 31, 1996, 1997 and 1998 have been audited by KPMG LLP, independent
auditors. Those financial statements and KPMG LLP's report on those financial
statements are included in this prospectus, and the information below for those
periods is qualified by reference to their report. The financial statements for
the periods ended March 31, 1995, December 31, 1995 and the three month periods
ended March 31, 1998 and 1999 are unaudited. The unaudited financial statements
have been prepared on the same basis as the audited financial statements. In the
opinion of management, all adjustments of a normal recurring nature which are
necessary to present a fair statement of the 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. Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock as if the shares had converted immediately upon their issuance, but
does not assume undeclared cumulative dividends on preferred stock.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
APR. 15, 1994 NINE MONTHS MARCH
(INCEPTION) ENDED YEAR ENDED DECEMBER 31, 31,
THROUGH DEC. 31, ----------------------------- ------
MAR. 31, 1995 1995 1996 1997 1998 1998
------------- ------------ ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Secondary marketing revenue, net.............. $ 77 $ 942 $ 4,101 $11,595 $28,598 $5,407
Loan production and processing fees, net...... 384 778 821 2,347 5,338 922
Management, technical and other fees.......... 40 1,422 2,577 2,032 1,868 546
Net interest (expense) income................. (17) (92) 17 500 (113) (56)
------- -------- ------- ------- ------- ------
Total revenue............................. 484 3,050 7,516 16,474 35,691 6,819
------- -------- ------- ------- ------- ------
Expenses:
Compensation and employee benefits............ 1,515 2,542 6,527 13,083 26,075 4,928
Marketing..................................... 33 36 94 238 1,335 85
Research and development...................... -- -- 497 1,079 2,888 433
Depreciation and amortization................. 235 296 652 480 1,873 154
General and administrative.................... 919 1,470 3,764 5,126 9,597 1,589
------- -------- ------- ------- ------- ------
Total expenses............................ 2,702 4,344 11,534 20,006 41,768 7,189
------- -------- ------- ------- ------- ------
Net loss........................................ $(2,218) $ (1,294) $(4,018) $(3,532) $(6,078) $ (370)
Net loss attributable to common shareholders.... $(2,218) $ (1,294) $(4,434) $(4,485) $(8,943) $ (691)
------- -------- ------- ------- ------- ------
Basic and diluted net loss per share............ $ (0.39) $ (0.16) $ (0.56) $ (0.55) $ (1.02) $(0.09)
Shares used in computation of basic and diluted
net loss per share............................ 5,726 7,924 7,924 8,162 8,729 7,686
Unaudited pro forma net loss attributable to
common shareholders........................... (6,829)
Unaudited pro forma basic and diluted net loss
per share attributable to common
shareholders.................................. $ (0.21)
-------
-------
Shares used in computation of unaudited pro
forma basic and diluted net loss per share.... 32,874
-------
-------
<CAPTION>
1999
-------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Secondary marketing revenue, net.............. $ 8,600
Loan production and processing fees, net...... 2,598
Management, technical and other fees.......... 1,991
Net interest (expense) income................. 26
-------
Total revenue............................. 13,216
-------
Expenses:
Compensation and employee benefits............ 9,645
Marketing..................................... 1,536
Research and development...................... 776
Depreciation and amortization................. 698
General and administrative.................... 3,759
-------
Total expenses............................ 16,414
-------
Net loss........................................ $(3,199)
Net loss attributable to common shareholders.... $(4,130)
-------
Basic and diluted net loss per share............ $ (0.44)
Shares used in computation of basic and diluted
net loss per share............................ 9,492
Unaudited pro forma net loss attributable to
common shareholders........................... (3,377)
Unaudited pro forma basic and diluted net loss
per share attributable to common
shareholders.................................. $ (0.10)
-------
-------
Shares used in computation of unaudited pro
forma basic and diluted net loss per share.... 33,683
-------
-------
</TABLE>
19
<PAGE>
The pro forma as adjusted balance sheet data as of March 31, 1999 reflects:
o the receipt of cash proceeds from the issuance of the convertible
note issued in May 1999;
o the receipt of cash proceeds from the issuance of the preferred
stock after March 31, 1999;
o the conversion of all outstanding preferred stock into common stock;
o the sale of 7,500,000 shares of common stock offered through this
prospectus at an assumed initial public offering price of $11.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses; and
o the use of a portion of the offering proceeds to repay some of our
debt.
<TABLE>
<CAPTION>
MARCH
31,
1999
DECEMBER 31, -------
DEC. 31, -----------------------------
MARCH 31, 1995 1995 1996 1997 1998 ACTUAL
-------------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 541 $ 222 $ 2,008 $ 1,680 $ 3,412 $ 6,251
Working capital.............................. 213 (850) 2,283 1,353 2,204 6,142
Total assets................................. 3,253 11,684 30,711 81,927 193,438 188,805
Total long-term debt, net of current
portion.................................... -- -- -- -- -- 7,623
Convertible preferred stock.................. 1,000 1,000 8,278 11,823 26,473 26,473
Stockholders' equity......................... 912 347 3,283 3,797 13,136 10,993
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 86,876
Working capital.............................. 89,144
Total assets................................. 269,430
Total long-term debt, net of current
portion.................................... --
Convertible preferred stock.................. --
Stockholders' equity......................... 101,618
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus includes "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, particularly those
risks identified in the "Risk Factors" section of this prospectus, 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.
21
<PAGE>
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.
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. We expect www.openclose.com to be 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
March 31, 1999, have an accumulated deficit of $21.3 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:
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
22
<PAGE>
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.
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.
As a result, we do not believe that our historical results are necessarily
indicative of results to be expected in any future period.
23
<PAGE>
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
YEAR ENDED DECEMBER 31, ENDED
MARCH 31,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Secondary marketing revenue, net.................................. 54.6% 70.4% 80.1% 79.3% 65.1%
Loan production and processing fees, net.......................... 10.9 14.2 15.0 13.5 19.7
Management and technical fees and other........................... 34.3 12.3 5.2 8.0 15.0
Interest, net..................................................... 0.2 3.1 (0.3) (0.8) .2
----- ----- ----- ----- -----
Total revenue.......................................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
EXPENSE:
Compensation and employee benefits................................ 86.8 79.4 73.1 72.3 73.0
Marketing......................................................... 1.3 1.4 3.7 1.2 11.6
Research and development.......................................... 6.6 6.6 8.2 6.4 5.9
Depreciation and amortization..................................... 8.7 2.9 5.2 2.2 5.3
General and administrative........................................ 50.1 31.1 26.9 23.3 28.4
----- ----- ----- ----- -----
Total expenses......................................................... 153.5 121.4 117.1 105.4 124.2
----- ----- ----- ----- -----
Net loss............................................................... (53.5)% (21.4)% (17.1)% (5.4)% (24.2)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUE
Total revenue increased 94% to $13.2 million for the three months ended
March 31, 1999 from $6.8 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 59% to
$8.6 million for the three months ended March 31, 1999 from $5.4 million in the
comparable period in 1998. This increase resulted primarily from the increase in
the total dollar amount of loans we originated, funded and sold. The total
dollar amount of closed loans that we originated increased to $751.6 million for
the three months ended March 31, 1999 from $348.3 million in the comparable
period in 1998. Of these originations, we funded and sold in the secondary
market $615.1 million in loans as compared to $241.8 million in the first
quarter of 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 in April 1998 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 189% to $2.6 million for the three months ended March 31, 1999 from
$0.9 million in the comparable period in 1998. This increase 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.
24
<PAGE>
Management, technology and other fees. Total revenue from management,
technology and other fees increased 300% to $2.0 million for the three months
ended March 31, 1999 from $0.5 million in the comparable period in 1998. The
1999 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 (expense) income. The net contribution of interest to revenue
increased to a net interest income of $26,000 for the three months ended
March 31, 1999 from a net interest expense of $56,000 in the comparable period
in 1998. This increase was 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 96% to
$9.6 million for the three months ended March 31, 1999, or 73.0% of revenue,
from $4.9 million in the comparable period in 1998, or 72.3% of revenue. The
dollar increase in total compensation and benefit costs resulted primarily from
an increase in personnel from 295 at March 31, 1998 to 594 at March 31, 1999 to
support our new Internet origination volumes and 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 quarter 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 March 31, 1999, we have recorded approximately $15.4 million in
deferred compensation and we amortized approximately $193,000 of that amount to
expense in the three months ended March 31, 1999. An additional $1.3 million
will be recorded in the second quarter of 1999. As our stock option plan has a
five-year vesting requirement, the remaining deferred compensation cost will be
amortized at approximately $837,000 per quarter through the fourth quarter of
2003. 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
$1.5 million for the three months ended March 31, 1999, or 11.6% of revenue,
from $85,000 in the comparable period in 1998, or 1.2% 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.
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 79% to $777,000 for the three
months ended March 31, 1999, or 5.9% of revenue, from $433,000 in the comparable
period in 1998, or 6.4% of revenue. 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.
Depreciation and amortization. Depreciation and amortization consists of
depreciation of capital equipment, amortization of goodwill related to
acquisitions and amortization of capitalized software
25
<PAGE>
development costs. Depreciation and amortization expenses increased to $698,000
for the three months ended March 31, 1999, or 5.3% of revenue, from $154,000 in
the comparable period in 1998, or 2.2% of revenue. 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
acquisition. We expect 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 our commitment to maintain
state-of-the-art technology to support 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 138% to $3.8 million for the three months
ended March 31, 1999, or 28.4% of revenue, from $1.6 million in the comparable
period in 1998, or 23.3% of revenue. 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.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUE
Total revenue increased 116% to $35.7 million in 1998 from $16.5 million in
1997. This growth resulted primarily from our acquisition of AFI in April 1998
and the loan volume generated by our Web sites, a full year of operations of
OnLine Capital acquired in the summer of 1997, strategic alliances with online
partners that generated increased loan volume for us and an increase in
refinancing activities resulting from relatively low interest rates.
Secondary marketing revenue, net. Gains and other revenue from the
origination and secondary marketing of mortgage loans increased 147% to
$28.6 million in 1998 from $11.6 million in 1997. This increase resulted
primarily from the increase in the total dollar amount of loans we originated,
funded and sold. The total dollar amount of loans that we originated increased
to $2.0 billion in 1998 from $808.7 million in 1997. We funded and sold in the
secondary market $1.5 billion of these loans in 1998 and $562.0 million in 1997.
The increase in loan volumes and related revenue resulted primarily from our
introduction of additional Internet origination channels in April 1998 and a
full year of operations of OnLine Capital. The increase was also attributable to
increased refinancing activity by borrowers resulting from relatively low
interest rates.
Loan production and processing fees, net. Total loan production and
processing fees, less amounts paid to third parties for processing services,
increased 130% to $5.3 million in 1998 from $2.3 million in 1997. This increase
in production and processing fees resulted from an overall increase in loan
volume.
Management, technology and other fees. Total revenue from management,
technology and other fees decreased 5% to $1.9 million in 1998 from
$2.0 million in 1997. This decrease was primarily attributable to the refocusing
of our resources in 1998 on internal development of expanded Internet
capabilities.
Net interest (expense) income. The net contribution of interest to revenue
declined to a net interest expense of $113,000 in 1998 as compared to net
interest income of $500,000 in 1997. This decline was primarily related to a
convergence of short and intermediate-term market interest rates. This results
in circumstances where the rates of some loans funded by us during the year were
equal to or less than our borrowing cost, producing a net interest loss during
the period of time we held these loans prior to delivery to secondary market
investors.
26
<PAGE>
EXPENSES
Compensation and employee benefits. Total compensation and benefit costs
increased 99% to $26.1 million in 1998, or 73.1% of revenue, from $13.1 million
in 1997, or 79.4% of revenue. The dollar increase in total compensation and
benefit costs resulted primarily from an increase in personnel from 158 at
December 31, 1997 to 486 at December 31, 1998 to support our new Internet
origination volumes and related technical 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 decreased as a
percentage of revenue.
Marketing. Marketing expenses also include fees paid to other Web sites
and business partners for lead generation. Marketing expenses increased 446% to
$1.3 million in 1998, or 3.7% of revenue, from $238,000 in 1997, or 1.4% of
revenue. These increases were directly related to new online distribution
agreements and online advertising designed to increase the exposure of our Web
site.
Research and development. Research and development expenses increased 164%
to $2.9 million in 1998, or 8.2% of revenue, from $1.1 million in 1997, or 6.6%
of revenue. 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 Internet platforms.
Depreciation and amortization. Depreciation and amortization expenses
increased 296% to $1.9 million in 1998, or 5.2% of revenue, from $480,000 in
1997, or 2.9% of revenue. These increases were a result of increased
expenditures for an expansion of our Internet infrastructure and acquisition of
capital equipment to support call center operations, and a shortening of the
period that we amortize capitalized software development costs from five years
to three years. We capitalized an additional $832,000 in software development
costs in 1998 and $518,000 in 1997.
General and administrative. General and administrative expenses increased
88% to $9.6 million in 1998, or 26.9% of revenue, from $5.1 million in 1997, or
31.1% of revenue. 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. These expenses declined as a percentage of revenue
due to increased mortgage loan originations.
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUE
Total revenue increased 120% to $16.5 million in 1997 as compared to
$7.5 million in 1996.
Secondary marketing revenue, net. Gains and other revenue from the
origination and secondary marketing of mortgage loans we originated increased
183% to $11.6 million for 1997 from $4.1 million in 1996. The total dollar
amount of loans we originated increased to $808.7 million in 1997 as compared to
$330.8 million in 1996, a 144% increase. We funded and sold in the secondary
market $562.0 million in loans in 1997 and $180.0 million in 1996. The increase
in loan volumes and related revenue resulted primarily from the acquisition of
OnLine Capital, as well as expansion of our member business.
Loan production and processing fees, net. Total loan production and
processing fees, less amounts paid to third parties for processing services,
increased 180% to $2.3 million in 1997 from $820,000 in 1996. This increase in
production and processing fees resulted from an overall increase in loan volume.
Management, technology and other fees. Total revenue from management,
technology and other fees decreased 23% to $2.0 million for 1997 from
$2.6 million in 1996. This decrease was primarily attributable to the refocusing
of our resources on the conversion of our technology platform from MS-DOS to
Windows 95.
Net interest (expense) income. The net contribution of interest to revenue
increased to $500,000 for 1997 as compared to $17,000 in 1996. This increase was
due primarily to higher loan volumes and an
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improvement in the difference between the interest revenue we received from
borrowers and our cost of funds.
EXPENSES
Compensation and employee benefits. Total compensation and benefit costs
increased 102% to $13.1 million in 1997, or 79.4% of revenue, from $6.5 million
in 1996, or 86.8% of revenue. The dollar increase was primarily attributable to
the acquisition of OnLine Capital.
Marketing. Marketing expenses increased 151% to $238,000 in 1997, or 1.4%
of revenue, from $95,000 in 1996, or 1.3% of revenue. These increases were
directly related to promotional activities and participation in trade shows
designed to increase brand awareness.
Research and development. Research and development expenses increased 121%
to $1.1 million in 1997, or 6.6% of revenue, from $497,000 in 1996, or 6.6% of
revenue. The dollar increase was primarily related to our decision to convert
CLOser to the Microsoft Windows 95 operating system.
Depreciation and amortization. Depreciation and amortization expenses
decreased 26% to $480,000 in 1997, or 3% of revenue, from $652,000 in 1996, or
9% of revenue. This decrease was primarily the result of the $263,000
amortization of the remaining organizational costs in 1996.
General and administrative. General and administrative expenses increased
34% to $5.1 million in 1997, or 31.1% of revenue, from $3.8 million in 1996, or
50.1% of revenue. The dollar increase was primarily related to the additional
rent, communication costs and equipment costs attributable to the OnLine Capital
operation, while the percentage decrease was attributable to the higher loan
volumes from those operations.
QUARTERLY RESULTS OF OPERATIONS
The following table contains unaudited quarterly consolidated statement of
operations data for each of the nine quarters ended March 31, 1999. This
information has been prepared substantially on the same basis as the audited
consolidated financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the quarterly
results. The quarterly data should be read in conjunction with our audited
consolidated financial statements and unaudited consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus. As a result of our limited operating history and numerous factors
beyond management's control, we may experience material fluctuations in revenue
and earnings in
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future quarters. Accordingly, the operating results of any quarter may not be
indicative of the results that may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Secondary marketing revenue,
net.......................... $ 997 $2,116 $ 4,052 $4,430 $5,407 $6,620 $ 7,632 $ 8,938 $ 8,600
Loan production and processing
fees, net.................... 300 521 685 842 922 1,278 1,329 1,809 2,598
Management, technology and
other fees................... 416 359 707 551 546 649 539 134 1,991
Net interest (expense)
income....................... 144 137 155 63 (56) (22) 108 (143) 26
-------- ------ ------- ------ ------ ------ ------- -------- -------
Total revenue................ 1,857 3,133 5,599 5,886 6,819 8,525 9,608 10,738 13,215
-------- ------ ------- ------ ------ ------ ------- -------- -------
Expenses:
Compensation and employee
benefits..................... 1,754 2,534 4,067 4,728 4,927 5,892 6,653 8,602 9,645
Marketing...................... 26 49 79 84 85 258 454 539 1,536
Research and development....... 162 216 269 432 434 578 722 1,155 776
Depreciation and
amortization................. 110 123 143 105 154 268 337 1,114 698
General and administrative..... 869 1,205 1,574 1,478 1,589 2,292 2,721 2,994 3,759
-------- ------ ------- ------ ------ ------ ------- -------- -------
Total Expenses............... 2,921 4,127 6,132 6,827 7,189 9,288 10,887 14,404 16,414
-------- ------ ------- ------ ------ ------ ------- -------- -------
Net loss......................... $(1,064) $ (994) $ (533) $ (941) $ (370) $ (763) $(1,279) $ (3,666) $(3,199)
-------- ------ ------- ------ ------ ------ ------- -------- -------
-------- ------ ------- ------ ------ ------ ------- -------- -------
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Secondary marketing revenue,
net.......................... 53.7% 67.5% 72.4% 75.3% 79.3% 77.7% 79.5% 83.3% 65.1%
Loan production and processing
fees, net.................... 16.2 16.6 12.2 14.3 13.5 15.0 13.8 16.8 19.7
Management, technology and
other fees................... 22.4 11.5 12.6 9.3 8.0 7.6 5.6 1.2 15.0
Net interest (expense) income.... 7.7 4.4 2.8 1.1 (0.8) (0.3) 1.1 (1.3) .2
-------- ------ ------- ------ ------ ------ ------- -------- -------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- ------ ------- ------ ------ ------ ------- -------- -------
Expenses:
Compensation and employee
benefits..................... 94.5 80.9 72.6 80.3 72.3 69.1 69.2 80.1 73.0
Marketing...................... 1.4 1.6 1.4 1.4 1.2 3.0 4.8 5.0 11.6
Research and development....... 8.7 6.9 4.8 7.4 6.4 6.8 7.5 10.8 5.9
Depreciation and
amortization................. 5.9 3.9 2.6 1.8 2.2 3.1 3.5 10.4 5.3
General and administrative..... 46.8 38.4 28.1 25.1 23.3 26.9 28.3 27.8 28.4
-------- ------ ------- ------ ------ ------ ------- -------- -------
Total expenses............... 157.3 131.7 109.5 116.0 105.4 108.9 113.3 134.1 124.2
-------- ------ ------- ------ ------ ------ ------- -------- -------
Net loss......................... (57.3)% (31.7)% (9.5)% (16.0)% (5.4)% (8.9)% (13.3)% (34.1)% (24.2)%
-------- ------ ------- ------ ------ ------ ------- -------- -------
-------- ------ ------- ------ ------ ------ ------- -------- -------
</TABLE>
Our quarterly growth in revenue has resulted from a growth in loan volumes.
The growth rate during the nine quarters has been significant enough to obscure
any seasonality that we may have experienced. However, the mortgage industry
usually experiences stronger demand in the summer than in the winter. Our
acquisition in June 1997 of OnLine Capital and our acquisition in March 1998 of
AFI boosted revenue growth in the subsequent quarters.
The following chart shows our total volume of loans originated, whether
funded by us or other mortgage lenders, for each of the nine quarters ended
March 31, 1999. As seen in the chart, our quarterly loan volume has grown by
958% over the last nine quarters, from approximately $71 million in the first
quarter of 1997 to more than $750 million in the first quarter of 1999.
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MORTGAGE.COM TOTAL LOAN VOLUME
(IN MILLIONS)
[Line Chart Appears Here]
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Ended Ended Ended Ended Ended Ended Ended Ended Ended
Mar. 1997 June 1997 Sept. 1997 Dec. 1997 Mar. 1998 June 1998 Sept. 1998 Dec. 1998 Mar. 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$71 $146 $262 $329 $348 $479 $512 $666 $752
</TABLE>
Apart from our amortization of unearned compensation, our compensation
costs reflect a general downward trend as a percentage of revenue over the nine
quarters due to efficiency of scale and the efficiency of originating loans
through the Internet. We have increased our marketing expense both in absolute
dollars and as a percentage of revenue in an effort to increase loan volumes
generated through the Internet. We intend to increase our marketing expenditures
further in 1999 as we continue to direct traffic to our Web site and embark on a
brand recognition program. Our general and administrative expenses have declined
as a percentage of revenue due to economies of scale.
LIQUIDITY AND CAPITAL RESOURCES
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. As of December 31, 1998, we had cash
and cash equivalents of $3.4 million. 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 is either payable, or convertible to common
stock, upon completion of this offering. We also received $15.0 million from the
sale of shares of Series F preferred stock in May.
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 25 days during 1998.
We have entered into a letter of intent with Telebanc Financial Corp. to
provide a committed $200.0 million repurchase agreement which will allow us to
sell our closed mortgage loans to Telebanc 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. In addition, the letter of intent
outlines the parameters for the development of an electronic mortgage conduit
with the intent of streamlining the financing process. Telebanc would work with
us to create a dedicated e-commerce platform that will enable the efficient
transmission of loan information from originators to the secondary market.
Although we expect this financing arrangement to become available by
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the end of July 1999, we cannot assure you that it will be available at that
time, if at all, nor can we assure you that the development of the e-commerce
platform will happen as anticipated.
Net cash used for operating activities for the year ended December 31, 1998
totaled $102.7 million. We used this cash primarily to fund loans held for sale
to investors, offset by reductions in other working capital requirements and
non-cash charges. For the quarter ended March 31, 1999, net cash provided by
operating activities totaled $6.1 million. This cash was generated primarily
from a reduction in mortgage loans held for sale, offset by operating losses.
Net cash used in investing activities for the year ended December 31, 1998
totaled $7.6 million, $2.7 million of which was used for the purchase of AFI. We
used the remaining $4.9 million primarily 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. Net cash used in investing activities for the quarter ended
March 31, 1999 totaled $1.6 million, $500,000 of which we used to purchase
computers and equipment and $700,000 of which we used for software development
costs.
Net cash provided by financing activities for the year ended December 31,
1998 totaled $112.1 million. Warehouse facilities provided $99.6 million of this
amount and we received an additional $12.4 million as proceeds from the sale of
Series D preferred stock. We repaid $200,000 in subordinated notes during the
year. Net cash used by financing activities for the quarter ended March 31, 1999
totaled $1.7 million, as $10.0 million in proceeds from the issuance of
subordinated notes were used for general corporate purposes.
As of December 31, 1998, we had net operating loss carryforwards of
approximately $16.1 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 this 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 this
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 twelve 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.
RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
On January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
securities and is presented in the consolidated statements of shareholders'
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect our
consolidated balance sheets or statements of operations. The adoption of SFAS
No. 130 has had no effect on our consolidated financial statements.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that a public enterprise reports information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, and requires restatement of earlier periods presented. The
adoption of SFAS No. 131 has not had a significant impact on our consolidated
financial statements.
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SOFTWARE REVENUE RECOGNITION
In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2". SOP 98-4 defers for one year the
application of some of the provisions of Statement of Position 97-2, "Software
Revenue Recognition". Different informal and unauthoritative interpretations of
the provisions of SOP 97-2 have arisen and, as a result, the AICPA is
deliberating amendments to SOP 97-2, so it can issue interpretations regarding
the applicability and the method of application of those provisions. We have
adopted SOP 97-2. The adoption of SOP 97-2 has not had a material impact on our
consolidated statements of operations, balance sheets or cash flows.
DERIVATIVES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. As we do not currently engage in derivative or hedging
activities, there has been no impact on our consolidated statements of
operations, balance sheets or cash flows upon the adoption of this standard. If
we engage in derivative or hedging activities in the future, we will apply SFAS
No. 133. The FASB has issued an Exposure Draft delaying the effective date of
Statement No. 133 to fiscal years beginning after June 15, 2000.
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.
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 already retain 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.
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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.
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 generally 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.
We have not completed a contingency plan. We expect to complete the
contingency plan by the end of September. However, we believe that our critical
suppliers and major customers are Year 2000 compliant.
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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.
34
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BUSINESS
MORTGAGE.COM
We are a leading provider of online mortgage services to consumers and
businesses. We have developed state-of-the-art technology to support the
origination, processing, underwriting, closing and secondary marketing of
mortgage loans. We use this proprietary technology to provide mortgage financing
directly to borrowers. We also enable our clients, such as mortgage brokers,
mortgage banks, financial institutions, Realtors and homebuilders, to improve
the efficiency and effectiveness of their mortgage operations.
We believe that borrowers are generally dissatisfied with the traditional
mortgage lending process. This dissatisfaction stems from the complexity of the
process, inefficiencies and delays related to the manual collection and transfer
of information and the borrower's inability to monitor the status of his loan.
Mortgage lending on the Internet can offer borrowers an easier, faster and less
expensive way to obtain mortgage loans and has the potential to eliminate many
of the borrower's frustrations found in traditional mortgage lending. We believe
companies that provide these benefits to borrowers will gain a competitive
advantage.
We offer borrowers a more satisfying, less frustrating mortgage experience.
We use our Internet platform and other proprietary technologies to make the
mortgage lending process more efficient, whether for our own direct-to-consumer
mortgage banking operation or in support of the mortgage operations of our
business-to-business clients.
In 1998, we originated and closed mortgage loans with a total principal
amount of $2.0 billion, of which approximately 21% were originated through the
Internet. We funded and sold $1.5 billion of those loans. For the three months
ended March 31, 1999, we originated and closed mortgage loans with a total
principal amount of $751.6 million, of which approximately 37% were originated
through the Internet. We funded and sold 82% of those loans.
As of April 30, 1999, we were providing private label and co-branded Web
sites for 22 clients, including NetB@nk and Southtrust Mortgage. We have enabled
non-lenders, such as Intuit through its Quickenmortgage Web site, to provide its
customers with access to efficient mortgage services. As of April 30, 1999, we
also were providing mortgage banking services to 23 mortgage brokerage
companies, mortgage bankers and financial institutions. At the point-of-sale of
homes, we have business relationships with 20 homebuilders and Realtors,
including franchisees of Century 21 and Prudential Real Estate, enabling
borrowers to obtain mortgage loans at the same locations at which they arrange
for the purchase or building of a home.
INDUSTRY BACKGROUND
Overview
The Mortgage Bankers Association of America, or MBA, estimates that the
mortgage industry originated approximately $1.5 trillion in mortgages in 1998
compared to $834.0 billion in 1997. The MBA estimates that another $1.2 trillion
in mortgages will be originated in 1999.
In traditional mortgage lending, a borrower obtains a mortgage loan by
contacting a mortgage originator, such as a mortgage banker, mortgage broker or
a financial institution. After a borrower has selected a mortgage originator, an
employee or commissioned loan officer of the mortgage originator collects
information about the borrower and completes a loan application by hand, while
the borrower waits. These mortgage originators often have business hours that
are not convenient for a borrower who works during the day, and a borrower may
have to make several trips to provide all of the information for the
application. In addition, these mortgage originators' offices may be located far
from the borrower's home. The borrower may have to wait weeks while credit
reports, appraisals and other third party verifications are ordered. For these
reasons, we believe that borrowers are generally dissatisfied with this process.
We also believe that borrowers lack knowledge about the mortgage process,
including the costs associated with obtaining a mortgage loan. Consequently, it
is difficult for a borrower to determine whether he is getting the right
mortgage loan, at the right cost, in a timely fashion. In addition, a borrower
must depend upon the mortgage loan originator to keep him informed about the
status of the loan application.
Some of a borrower's frustration and dissatisfaction stems from
inefficiencies and delays in the application, processing and underwriting phases
of the mortgage lending process. Manual collection and transfer of information
from the application process through the processing and underwriting phases
increases
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loan approval time and results in a greater number of human errors. Many
mortgage originators and mortgage lenders do not have the technical expertise or
financial resources to automate the origination, processing and underwriting of
mortgage loans to achieve greater efficiency. Continuing inefficiencies make it
difficult for mortgage originators and mortgage lenders to adequately keep
borrowers informed and satisfied.
GROWTH OF THE INTERNET AND ONLINE FINANCIAL SERVICES
The Internet has emerged as a global medium for communication, content
delivery and electronic commerce, and Internet use continues to increase
rapidly. International Data Corporation, or IDC, estimates that the number of
users worldwide will increase from 142 million in 1998 to over 400 million in
2002. As consumers have become increasingly adept at using the Internet for
evaluating and purchasing a wide variety of goods, the dollar volume of online
commerce transactions has risen dramatically. IDC estimates that the volume of
goods and services purchased through the Web will increase from $50 billion in
1998 to more than $734 billion in 2002.
The Internet provides companies with additional ways to reach potential
customers along with the opportunity to transact business with them in a more
efficient and low-cost manner than business transacted through traditional
channels. In addition, the Internet offers companies flexibility, permitting
them to adjust features, presentations and prices in response to competition.
Consumers benefit from improved overall convenience, low-cost access to
information regarding available products and services, ease of use, numerous
choices and often more competitive pricing.
Financial services is one of the more prominent industries that has taken
advantage of the Internet. The information potential of the Internet and the
potential lower costs associated with conducting business electronically
underlie the success of financial services Web sites. For example, Forrester
Research reports that 25% of all retail stock trades are now executed online.
Many of these financial services companies have undertaken aggressive marketing
campaigns to establish their online brands. We believe that consumers will
become more willing to conduct financial transactions online, including mortgage
transactions, as Internet use increases, Internet brands are established and
concerns about security and privacy are alleviated.
ONLINE MORTGAGE SERVICES
Online mortgage lending is particularly well-suited to the Internet
platform. Mortgage lending on the Internet can offer borrowers an easier,
faster, less expensive way to obtain mortgage loans and has the potential to
eliminate many of borrowers' frustrations found in traditional mortgage lending.
The same principles that make online mortgage lending an easier, faster and less
expensive process for the borrower can also benefit mortgage providers. Mortgage
providers can increase their access to borrowers by offering Web-enabled
services that are accessible at any time. Online mortgage lending can also
reduce costs and eliminate inefficiencies, resulting in a more satisfying
experience for borrowers.
Based on a recent report from Forrester Research, less than 1% of the $1.5
trillion in mortgages funded in 1998 were originated online. However, Forrester
Research estimates online mortgage loan volume will reach $91.2 billion by 2003,
constituting nearly 10% of all mortgage loans funded in 2003.
We believe that very few of the largest mortgage loan originators have
capitalized on the mortgage lending opportunities on the Internet. Most mortgage
originators lack the expertise to develop their own Internet technologies and
have been slow to address the online market. We believe the majority of the
prominent mortgage originators use the Internet primarily as an advertising
medium and to provide contact information. Even among originators that offer
online applications, we believe that many still have problems seamlessly
integrating their Internet applications with the systems that assist in
processing, underwriting and closing the mortgage loans. As a result, mortgage
originators have not been leveraging the Internet as a means to increase
borrowers' satisfaction and reduce overall costs.
We believe that to maximize the potential of computer-related technology in
the mortgage industry, a company must be able to provide borrowers with:
o numerous channels from which to obtain mortgage loans;
o faster loan applications and loan pre-qualifications;
o greater choice among numerous loan products and rates;
o the opportunity to obtain lower cost mortgages; and
o the ability to monitor the status of their loans from origination
through closing.
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We believe companies that are able to provide these benefits to borrowers
will gain a competitive advantage.
THE MORTGAGE.COM SOLUTION
We use our Internet platform and other internally-developed, proprietary
technologies to maximize efficiency in the mortgage lending process, whether for
our own mortgage banking operation or in support of the mortgage operations of
our clients, such as mortgage bankers, mortgage brokers, financial institutions,
Realtors and homebuilders. As a result of these efficiencies, borrowers find the
mortgage experience more satisfying and less frustrating because they benefit
from:
o convenient access to the mortgage lending process through the
Internet, by e-mail, by telephone or in person at location where
homes are sold;
o interactive selection from a comprehensive suite of mortgage
products and services;
o personalized services and products tailored to individual needs;
o faster applications and pre-qualifications;
o interest rate locks; and
o constant monitoring of loan status.
We provide these benefits to borrowers through both direct-to-consumer and
business-to-business channels. Our direct-to-consumer channels consist of our
Web site at www.mortgage.com and the loan counselors using our proprietary
CLOser technology in our OnLine Capital operations. Throughout the mortgage
process, borrowers are supported by customer service representatives in our call
centers or by our OnLine Capital loan counselors.
Through our business-to-business channels, we use our technology to enable
our clients to better satisfy their borrowers. Borrowers can access our clients
through customized "private label" mortgage lending Web sites we create and
maintain for clients who need technical expertise and other resources to
establish and maintain a comprehensive online presence. Borrowers also can get
efficient mortgage services at the point-of-sale of homes, where we enable
Realtors and homebuilders to enter the mortgage lending business with a minimum
initial investment and with low overhead. We also offer dedicated Internet-based
call center services to our clients so they can provide a high-level of customer
service for their borrowers.
When we process, underwrite and fund mortgage loans for our mortgage
banking operations or for our clients, borrowers have constant and convenient
access through the Internet to monitor the status of their loan applications.
After the mortgage loans close, we sell those mortgage loans in the secondary
market to investors who will be responsible for servicing the mortgage loans.
Servicing consists of collecting from the borrower debt service and escrow funds
for property taxes and insurance, paying debt service to loan investors, paying
property taxes and insurance premiums and supervising foreclosures for defaulted
loans.
MORTGAGE.COM STRATEGY
Our objective is to touch every mortgage, either directly or through our
business-to-business channels. We intend to do this by using the Internet and
our proprietary technology to efficiently originate, fund and sell mortgage
loans, and enable our clients to efficiently originate, fund and sell mortgage
loans. Key elements of our strategy are:
Establishing and Enhancing Brand Awareness. We seek to make Mortgage.com
the household name for mortgage services. We believe that our Mortgage.com brand
name will become synonymous with better, faster and more convenient mortgage
loans, which will bring potential borrowers to our Web site and will help
establish us as the premier technology enabler in the mortgage industry. We have
budgeted a significant amount of money for advertising and promotion of the
Mortgage.com brand name during 1999 and beyond, with a focus on advertising
through leading Web sites and other media, co-branding with leading financial
information sites and developing additional business alliances. We have also
planned a direct marketing campaign designed to attract additional borrowers to
www.mortgage.com, which will increase our share of the online mortgage business.
This direct marketing campaign will target all current and potential home buyers
in the United States.
Expanding Our Ability to Serve Borrowers and Clients. We intend to
continue to devote substantial resources to the development and acquisition of
innovative Internet and software solutions so that we can
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better serve our clients and mortgage borrowers. We are currently developing and
testing improvements to CLOser and its Internet interface that will increase its
versatility and automate additional portions of the mortgage process. For
example, we intend to implement automated underwriting systems to enhance the
sub-prime lending portion of www.mortgage.com. We intend to continually modify
and upgrade our software, Internet servers and high-speed transmission lines to
increase bandwidth, expand services and reduce costs. We are also continually
evaluating strategic acquisitions of technology leaders in ancillary service
areas, such as appraisal and credit report services. In this way we and our
clients will be able to provide borrowers with convenient, high-value and
low-cost services.
Addressing Underserved Markets. Because online commerce is still in its
infancy, there are a number of online markets for mortgage lending that are
currently underserved. We recently have developed a new segment of our
www.mortgage.com Web site specifically tailored to borrowers of sub-prime loans.
We also intend to continue to provide solutions to Realtors and homebuilders, so
that potential borrowers at the point-of-sale of homes have convenient access to
efficient, cost-effective mortgage financing. We believe that enhancing our
presence at the point-of-sale will strengthen our position in the purchase
mortgage market, which is less sensitive to changes in interest rates than the
refinancing mortgage market.
Reengineering the Mortgage Process with Advanced Technologies. CLOser was
one of the first portable computer software systems in the industry and remains
one of the most comprehensive systems for performing and linking all functions
in the mortgage process. We believe that our CLOser technology and its Internet
interface give us a competitive advantage in the mortgage banking industry. We
are currently testing www.openclose.com, which will serve as a virtual market
place for industry participants to communicate and exchange borrower and loan
information. We believe that www.openclose.com will provide yet another way to
more quickly and cost-effectively enhance the mortgage process. We intend to
continue to develop technological solutions that will reengineer and automate
the mortgage process and make our technology the easiest, most efficient and
most cost-effective way to facilitate mortgage transactions, whether through
online or offline channels.
PRODUCTS AND SERVICES
We make home financing easier, faster and less expensive for borrowers
through both direct-to-consumer channels and business-to-business channels. Our
direct-to-consumer channels include providing borrowers with access to low-cost
mortgage financing through the Internet and telephone and e-mail inquiries
generated by our Web site, and through loan counselors in our Florida and
California offices. We then process the mortgage loans to closing, provide
funding for the mortgages through our credit facilities, and sell the loans in
the secondary market to institutional investors.
Through our business-to-business channels we:
o create Web sites for our clients that borrowers can access 24 hours
a day, 7 days a week;
o provide automated processing, closing, underwriting and funding
services to mortgage industry participants;
o enable Realtors and homebuilders to provide borrowers with access to
mortgage financing at the point-of-sale of homes; and
o will administer a Web site that mortgage lenders and mortgage
brokers can use to communicate and share borrower and loan
information electronically.
We offer clients the opportunity to use our services at any stage of the
mortgage process, from marketing, to online applications, processing,
underwriting, closing and selling mortgage loans in the secondary market.
Our direct-to-consumer channels and business-to-business channels are
linked, enhanced and supported by our Internet platform and proprietary CLOser
software system which we develop and maintain. Use of this technology
streamlines the mortgage process by allowing us and our clients to
electronically obtain, analyze and transmit information. We believe this
ultimately results in a more satisfying experience for borrowers.
The financial statements included in this prospectus contain financial
information for the direct-to-consumer and business-to-business segments of our
business for the years ended December 31, 1996, 1997 and 1998, and the three
months ending March 31, 1998 and 1999.
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DIRECT-TO-CONSUMER CHANNELS
Our direct-to-consumer channels include our www.mortgage.com Web site,
which is linked to our call centers and our OnLine Capital operations. During
the three months ended March 31, 1999, our direct-to-consumer channel originated
and closed $171.2 million of mortgage loans, 34.9% of which were originated
through the Internet. We funded $128.8 million of those loans.
Online Mortgage Origination Through www.mortgage.com
Our flagship Internet Web site is www.mortgage.com, which serves as
our online origination source for mortgage loans. Borrowers can access our
Web site 24 hours a day, 7 days a week, to:
o research and evaluate mortgage products and services;
o select the most suitable mortgage loan with interactive assistance;
o apply for a mortgage loan;
o lock in an interest rate; and
o monitor the status of their loans.
Originating mortgage loans directly on the Internet results in reduced
costs and time to the borrower. The Internet also continues to provide us
with greater access to a tremendous number of potential borrowers, which
increases the number of mortgage loans that we expect to fund and sell in
the secondary market.
Prime Mortgage Loans. Prime mortgage loans include residential
mortgage loans that meet Fannie Mae's or Freddie Mac's secondary marketing
guidelines. These loans generally meet the agencies' guidelines because the
borrowers are credit-worthy and the loans have appropriate loan-to-value
ratios and principal amounts. Prime mortgage loans also include loans made
to credit-worthy borrowers that would otherwise meet Fannie Mae's or
Freddie Mac's underwriting guidelines, but have a principal amount which
exceeds the amounts permitted by Fannie Mae or Freddie Mac.
The prime mortgage loan portion of our Web site first provides a
borrower with knowledge about the mortgage lending process. It then
provides the borrower with the opportunity to use "SmartQuote," a loan
program search system we developed to make choosing a mortgage simple.
SmartQuote prompts the user for information and then searches the database
for all of the loan programs meeting the borrower's criteria. After
obtaining information on pricing and the right type of loan for the
borrower's situation, the borrower has an opportunity to securely apply
online for a mortgage loan in about 20 minutes. The borrower then can
monitor the progress of the loan through closing.
This portion of our Web site also includes a feature that allows a
user to specify the conditions under which he would be interested in
refinancing his mortgage loan. CLOser then stores this information and
provides the user with an automatic e-mail notification when a suitable
loan program becomes available.
To increase our access to borrowers, we participate as a mortgage
lender on high-profile multi-lender Web sites such as Intuit's
Quickenmortgage, Microsoft's Home Advisor and The Lending Tree. Our
presence on these sites provides borrowers with a convenient avenue to
access our technologically efficient mortgage services, which increases our
opportunity to originate, process and fund mortgage loans, and then sell
them in the secondary market.
Sub-prime Mortgage Loans. Sub-prime mortgage loans have
characteristics that make them generally ineligible for sale to Fannie Mae
or Freddie Mac in the secondary market for reasons other than an excessive
principal amount. Those characteristics might include the credit history of
the borrower, the debt-to-income ratio, the loan-to-value ratio, the
property type, the lien position or other factors. Because borrowers of
sub-prime loans have often been denied financing, they are more likely to
be dissatisfied with the traditional sub-prime lending process. Our goal is
to provide these borrowers with an unintimidating, informative and
confidential way to obtain a mortgage. Our Web site and customer service
representatives try to simplify the borrowing process and give borrowers
answers within a short period of time. In most cases, a borrower knows
within 3 hours whether he is approved for a mortgage loan.
Commensurate with the higher credit risk, we charge borrowers higher
interest rates on sub-prime mortgages, which allows us to generate higher
origination fees and higher gains on sale in the secondary
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market than prime mortgage loans. The higher interest rate also allows us
to generate a greater spread between the interest rate we charge the
borrower and the interest rate we pay to lenders for the financing
arrangements we use to fund the mortgage loans.
Call Center Support. Our call center operations are integrated with
our Web site to provide customer service to visitors to www.mortgage.com.
For those borrowers who have submitted a complete online application, our
automatic call distribution software, CLOserLink, electronically imports
all of the borrower's data into our CLOser software system. In addition,
artificial intelligence software that we license from a third party
provides an automated, customized e-mail response to confirm the
application and make immediate contact with the potential borrower. We then
follow up with frequent telephone calls and e-mails to keep the borrower
informed of the mortgage loan's approval status.
When a partial online application is submitted, or when a borrower
calls or e-mails us based on contact information on our Web site, a
customer service representative in our call center is assigned to that
potential borrower for the duration of the origination process. The
customer service representative works with the potential borrower to
explain portions of the mortgage lending process, provide rate and product
information and assist the borrower with obtaining a mortgage loan. The
customer service representative can enter data into an electronic loan
application through CLOser, which efficiently manages the remainder of the
mortgage transaction.
OnLine Capital Loan Counselors
In addition to our Internet site, we also maintain our own sales force
that originates prime and sub-prime mortgage loans directly with borrowers.
This sales force consists of loan counselors operating under the trade name
OnLine Capital in offices we have established in Florida and California. We
provide each loan counselor with a personalized Web page at
www.onlinecap.com which they use to extend their access to borrowers.
OnLine Capital loan counselors then use their personal Web sites and CLOser
on a portable computer to conduct the mortgage origination process more
efficiently.
Our proprietary CLOser software system operates on portable and
desktop computers connected through a secure nationwide communications
network. CLOser includes the following features:
o full integration with Web sites we have developed;
o automated loan applications and interest rate locks;
o daily updated loan rates and more than 100 loan products;
o in-depth loan tracking;
o high-speed dedicated connections to automated underwriting systems
at Fannie Mae and Freddie Mac;
o automatic generation of disclosure and closing documents tailored to
the loan product, property and local laws; and
o contact information, reminders of critical deadlines, e-mail, fax
services and custom printing of promotional material.
CLOser allows the user to input information from a prospective
borrower once, pre-qualify the borrower, and evaluate numerous loan
programs in light of the borrower's individual financial situation. It
automatically downloads credit reports and obtains other third party
verifications electronically. All information about a borrower and the
borrower's loan is electronically transferred through CLOser to third-party
automated underwriting systems or to our processing and underwriting
personnel over our secure wide area network. By automating virtually every
stage of the mortgage process, CLOser potentially reduces paperwork and the
time it takes the borrower to obtain a mortgage loan. Also, because CLOser
is fully integrated with our Web site, borrowers can monitor the status of
their loans on the Internet at any time.
BUSINESS-TO-BUSINESS CHANNELS
In addition to our direct-to-consumer channels, we enable mortgage bankers,
mortgage brokers, financial institutions, Realtors and homebuilders to
efficiently participate in the online mortgage industry at low cost. We have
developed an Internet platform integrated with our CLOser software system that
we license to other mortgage industry participants, as well as a Web site,
www.openclose.com, which is designed to permit mortgage bankers, mortgage
brokers, mortgage insurance companies and loan correspondents to communicate
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and exchange information more effectively. We also provide our CLOser software
system to clients who become network members. We automate the origination
process and provide support services to network members whose own processing and
underwriting systems are not as efficient as our systems. We also enable certain
network members to provide automated origination services at the point-of-sale
of homes. These products and services enable our clients to provide more
efficient mortgage services to borrowers.
The same call centers that we use to support our direct-to-consumer
channels are used to support our online business-to-business channels, including
clients for whom we have created private label Web sites, those with whom we
have co-branding relationships and Intuit Lender Services. This allows our
clients to provide their borrowers with remote counseling through e-mail and the
telephone and the ability to apply for a mortgage loan at a convenient time and
place. Accordingly, our services are often used in support of, or as a
replacement for, a traditional retail loan officer staff. When clients hire us,
they no longer need to manage data centers, maintain technology help desks,
purchase, install or develop software or hire and manage technical personnel. We
have an e-mail address and a toll-free number assigned to each client, so that
inquiries are answered in the name of the client by a group of customer service
representatives dedicated to that client's potential borrowers.
During 1998, our business-to-business channel originated and closed $1.2
billion of mortgage loans, 14% of which were originated through the Internet. We
funded $930.1 million of those loans. For the three months ended March 31, 1999,
our business-to-business channel originated and closed $579.5 million, 38% of
which were originated through the Internet. We funded $485.9 million of those
loans.
"Private Label" Web Sites for Mortgage Lenders
We create and maintain private label Web sites for mortgage lenders,
including banks, thrifts and credit unions of any size or sophistication.
These private label Web sites are operated in the name of the client, while
we provide the technology and management support in the background through
CLOser. We create and maintain prime and sub-prime private label Web sites
for such clients as SouthTrust Mortgage and NetB@nk, and the mortgage
companies owned by CPS Realty, Arvida Homebuilders and Keyes Realty.
The Web sites we create are custom-tailored to our clients and offer
online applications, full integration with processing and underwriting
systems and call center support. Just as with our own www.mortgage.com Web
site, the private label Web sites we create for clients allow borrowers the
opportunity to shop and apply for mortgage loans at their convenience. They
also allow borrowers constant access to the status of their loans.
"Co-Branded" Web Sites
We have entered into marketing agreements that provide for advertising
and promotion of our mortgage.com brand and Internet links to
www.mortgage.com, through established home and financial information Web
sites such as www.homefair.com, www.financenter.com and
www.homepricecheck.com. When a potential borrower is browsing one of these
sites for home buying or financial information, he is presented with an
opportunity to apply for a mortgage online, without having to search for a
separate Web site. The borrower can click on a link that takes him to a
version of our Web site that displays both our mortgage.com brand and the
brand of the information site that provided the link. We refer to these Web
sites as "co-branded."
Through these relationships, our co-branding partners can provide
their customers with more than mere home buying and financial information.
Those customers will gain access to convenient online mortgage financing
through www.mortgage.com, including our call center support and the ability
to monitor the status of their loans through closing. We process,
underwrite and fund the mortgage loans and then sell them in the secondary
market.
Relationship with Intuit Lender Services and Participating Lenders on
www.quickenmortgage.com
Some of our clients, such as First Union Capital Markets Group, Fleet
Mortgage and GE Capital Mortgage Services, are provided online marketing
and application capabilities through www.quickenmortgage.com, which is a
multi-lender Web site operated by Intuit Lender Services. These clients
recognize that we have the expertise to fully integrate the information
they receive online with their own call centers and internal processing and
underwriting systems. We provide them with call
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center support, as well as processing, underwriting, funding and secondary
marketing services as their back office solution.
The processing, underwriting and funding services we provide to
participating lenders on www.quickenmortgage.com are subject to performance
standards relating to the number of applications and inquiries we convert
to funded loans and the level of customer service we provide. During
portions of the first half of 1999, we were not meeting the performance
standards that relate to converting applications and inquiries to closed
loans. For applications and inquiries we received in June, we expect to
meet or exceed the performance standards under our agreement. However, if
we fail to meet the performance standards in the future, Intuit Lender
Services may terminate the agreements, which would have a negative effect
on our online originations and our business as a whole.
Our agreements also provide that Intuit Lender Services will send us a
minimum number of loans to process, underwrite and fund. During the last
six months of 1999, Intuit Lender Services will be obligated to transmit to
us at least 10,500 loans through quickenmortgage.com. The minimum number of
loans increases each quarter. However, Intuit Lender Services' obligation
to deliver a minimum number of loans is suspended during any period in
which we fail to meet the performance standards relating to converting
applications and inquiries to closed loans.
We are also a participating lender on www.quickenmortgage.com. After a
potential borrower on the www.quickenmortgage.com Web site chooses one of
our or our clients' loan products, the information collected about the
borrower is transferred to us through an electronic link to the CLOser
software system. Information about a potential borrower may come to us at
any stage of the process, from a mere inquiry initiated through
www.quickenmortgage.com, to a potential borrower that has pre-qualified on
the site, to a potential borrower that has filled out an application on the
site. Regardless of the stage at which borrower information is transferred
to us, our call center personnel complete the origination process. If the
borrower chooses one of our loan products, we process, underwrite, fund
with our own warehouse lending arrangements and close the loan in our name.
We then sell the loan in the secondary market. If the borrower chooses one
of our clients' loan products, we also fund the loan with our own warehouse
lending arrangements and close the loan in our name. Then, we immediately
sell the mortgage loan to our client along with the servicing rights.
Point-of-Sale Access to Borrowers
We have developed strategic alliances with Realtors and homebuilders
so that borrowers have access to efficient mortgage services at the
point-of-sale of homes, much like a car buyer can get financial services in
the showroom of an auto dealer. This saves borrowers the extra visits and
phone calls to lenders that are necessary in traditional mortgage lending.
It also allows us to increase our share of the more stable purchase
mortgage business and gives our clients the ability to offer home buyers
point-of-sale mortgage financing. We provide these services through a
membership structure.
Princeton Capital, Advantage Financial and Western America
Mortgage. A significant portion of our point-of-sale business operates
under the trade names Princeton Capital, Advantage Financial and Western
America Mortgage. In each case, our loan counselors are located in the
office of a network member. These loan counselors use CLOser to improve the
application and pre-qualification process. CLOser electronically handles
credit reports and other third party approvals and electronically transmits
the resulting information to our processing and underwriting departments,
saving time and reducing paperwork and errors. Because CLOser is integrated
with our Web site, point-of-sale borrowers have access to our Web site 24
hours a day, 7 days a week to monitor the status of their loans.
The network member for whom we employ our Western America Mortgage
loan counselors is Mason-McDuffie Real Estate, which does business in
northern California as Prudential California Realty. Our Western America
Mortgage loan counselors service 22 Prudential California Realty offices in
northern California. Immediately prior to completion of this offering, our
Western America Mortgage operations will be contained in Western America
Mortgage, Ltd., a partnership of which we will own 51%. Our partner in that
operation will be a wholly-owned subsidiary of Mason-McDuffie Real Estate,
Inc.
Through our Princeton Capital operations, we have loan counselors
stationed in 14 Century 21 real estate offices in the San Francisco Bay
area. Through our Advantage Financial operations, we have loan
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counselors positioned in 26 Coldwell Banker real estate offices. Our
ability to position Princeton Capital and Advantage Financial loan
counselors in those Century 21 and Coldwell Banker real estate offices is a
product of a relationship we have with Cendant Mortgage. Cendant has waived
its exclusive rights to market mortgage services in those offices in favor
of us. In the first 3 months of 1999, our relationship with Century 21 and
Coldwell Banker offices generated 19.5% of the loans we originated.
Relationship with Chase and the Prudential Real Estate Network. We
recently signed a joint marketing agreement with The Prudential Real Estate
Affiliates, Inc. and Chase Manhattan Mortgage Company that will designate
us as the exclusive recommended provider of Internet lending technology to
real estate brokers and sales associates in the Prudential Real Estate
Network. Chase will market its traditional mortgage services and our
technology-based services to the more than 600 member companies of the
Prudential Real Estate Network, which have more than 1,500 offices
throughout the country.
Each member of the Prudential Real Estate Network has the option of
whether or not to use our services. Some of these members already have
mortgage relationships with other companies and may not switch to our
services. However, members that select our services can use a centralized
private-label Web site which we will design and maintain for the Prudential
relationship. They also will have the benefit of our call centers and our
processing, underwriting and closing services. Chase will be the servicer
for many of the loans originated using our services. Under a separate
services agreement, we will receive a flat fee from Chase for each loan
closed through the Web site or the call centers.
The joint marketing agreement and the services agreement each lasts
for three years, subject to extension by the parties. Prudential and Chase
each have the right to cancel the joint marketing agreement after
18 months if Chase is unable to successfully market its services and our
services to members of the Prudential Real Estate Network or if borrower
satisfaction is low. We also have the right to cancel the joint marketing
agreement after 18 months on the same conditions. We have not yet begun
providing services under these agreements and we have generated no revenue
at this time from the relationships. We expect to begin providing services
under these agreements within the next 60 days.
Establishing Separate Mortgage Brokerage Entities for Clients. In
some cases, we assist Realtors and homebuilders in establishing separate
mortgage brokerage entities by providing them with licensing, recruiting,
formation and management services. These entities become network members
and use CLOser over a secure wide area network because they generally do
not have the expertise and financial resources to keep up with complex
mortgage lending regulations, to develop automated origination, processing
and underwriting systems or to handle all of the administrative and
managerial aspects of the mortgage business. We provide the expertise and
resources without requiring network members to disclose that we are the
provider for their mortgage services.
Major homebuilders and real estate companies that have formed mortgage
brokerage affiliates and have become network members include Arvida, one of
Florida's largest homebuilders, Keyes Realty, one of Florida's largest
realty firms, and CPS Realty, a California realty firm.
Technology Correspondent Member Relationships. We have additional
strategic alliances with one of 1998's top Prudential Real Estate
franchises in the nation, based on home sales, and a large mortgage broker
in San Diego. Under our agreements with these mortgage lenders, they will
process mortgage loans using CLOser, fund the loans in their own names and
then sell the loans to us, so that we can then resell them in the secondary
market. Technology correspondent member arrangements allow us to provide
mortgage companies fully automated point-of-sale services and support while
we incur very little overhead.
Openclose.com
We are developing, in cooperation with Fannie Mae, a new Web site where
participating mortgage lenders, brokers and loan correspondents can exchange
lender product and pricing information, automated underwriting data, mortgage
insurance certificates and borrower application information in a neutral
environment. This Web site, www.openclose.com, is designed to expand the
availability of important underwriting information, which results in faster
transactions, cost savings for borrowers, brokers and lenders by eliminating
unnecessary paperwork, and improved communications between lenders and their
customers. The site also offers lenders access to a greater number of brokers
and correspondents. The Web site is currently being tested and we expect to
expand its availability beginning in August 1999.
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As of June 30, 1999, eight mortgage banks have agreed to participate in the
www.openclose.com pilot program. We expect more will participate when we expand
www.openclose.com to a nationwide operation. Participating mortgage bankers will
pay us a fee for each mortgage loan sent to them through openclose.com for their
review, a loan transfer fee and an access fee for each of the mortgage brokerage
offices that access participating mortgage banker sections of the Web site. In
addition, participating mortgage bankers will pay us a fee for each sub-prime
mortgage loan transmitted through www.openclose.com for review. The fees we
charge participating mortgage bankers for each viewing of the mortgage banker's
page on the Web site by brokers are split equally between us and GHR Information
Systems, from whom we license some of the tools available on www.openclose.com.
Mortgage brokers will pay us a fee for each loan submitted to
www.openclose.com for review by lenders. There are no monthly participation fees
charged to mortgage brokers.
We pay Fannie Mae a licensing fee for Desktop Underwriter based on the
volume of mortgage loans submitted for automated underwriting.
CUSTOMERS
Our direct-to-consumer customers consist of borrowers who contact us
through www.mortgage.com and our OnLine Capital loan counselors. We provided
4,317 home buyers and home owners with mortgage financing totaling more than
$798 million in 1998 through these channels.
Our business-to-business client base consists of mortgage banks, mortgage
brokers, banks, thrifts, credit unions, Realtors and homebuilders throughout the
United States. Mortgage banks, mortgage brokers, banks, thrifts and credit
unions look to us primarily to establish an online presence or to provide
integrated call centers and back office support for their current online
systems. Realtors and homebuilders look to us primarily for turnkey solutions
that allow them to make mortgage services available to their customers with very
little cost. Through us our clients can get increased access to borrowers, call
center support and efficient processing, underwriting, funding, closing and
secondary marketing services. Among our representative clients and key
relationships are:
Arvida Home Builders
Cendant Mortgage
Consumer Finance Network
CPS Real Estate
First Union Capital Markets
Fleet Mortgage
GE Capital Mortgage Services
Intuit Lender Services
Mason-McDuffie Real Estate (doing business as
Prudential California Realty in northern
California)
Pickford Realty (doing business as Prudential
California Realty in southern California)
Southtrust Bank
Superior Bank FSB
Each of the listed clients accounted for at least $2.0 million in loan
originations in the first three months of 1999. Our relationship with
Mason-McDuffie Real Estate accounted for 10% or more of our loans originated in
the first three months of 1999. Our relationship with Intuit Lender Services
accounted for approximately 12.8% of the mortgage loans we originated in the
first three months of 1999. Through Cendant Mortgage we have developed
relationships with Century 21 and Coldwell Banker offices that in the aggregate
accounted for approximately 19.7% of the mortgage loans we originated in the
first three months of 1999. Superior Bank contributed $1.6 million in
management, technology and other fees in 1998.
The chart on the following page demonstrates a few of the ways that we can
solve the mortgage lending problems faced by our clients:
44
<PAGE>
SELECTED CLIENT APPLICATIONS
<TABLE>
<CAPTION>
CLIENTS PROBLEM SOLUTION
- ---------------------- -------------------------------------------- --------------------------------------------
<S> <C> <C>
Arvida Home Builders Arvida is one of Florida's largest We assisted Arvida in forming a mortgage
homebuilders. It wanted to offer its brokerage subsidiary which became a member
customers the opportunity to obtain mortgage of our network using CLOser at the
financing on-site. However, as a point-of-sale of Arvida homes in conjunction
homebuilder, Arvida had limited experience with loan counselor's personal Web sites. We
in the mortgage business and did not have perform all of the origination, processing,
the technical expertise to automate the underwriting, funding and secondary
mortgage process. marketing services they need to provide
Arvida home buyers with home financing.
Valley National Bank Valley National Bank is a Super Regional Valley National Bank engaged us to provide a
Community Bank with 105 branches private label prime loan Web site and the
concentrated in Northern New Jersey. Valley complete CLOser system package to support
National Bank supports multi-state mortgage its own call center and mortgage lending
origination through a marketing agreement systems.
with a national insurance company's
independent insurance agents. It is large
enough to attract a significant number of
potential mortgage loan borrowers, but too
small to carry out its own technical
development of mortgage banking systems.
</TABLE>
SALES AND MARKETING
We market our products and services to consumers through targeted online
advertising, such as mortgage and real estate banners on Internet portals and
Web site sponsorship opportunities, as well as through more traditional means,
such as direct mail. Our marketing efforts focus on what we believe customers
want most, namely:
o secure online transactions;
o the ability to compare rates and get current information;
o availability of human assistance through a toll-free number; and
o a trusted brand.
Our marketing campaigns have an overall goal of increasing the general awareness
of the Mortgage.com brand and the products and services we provide.
We have a sales team dedicated to marketing our online and call center
business-to-business services, including our private label Web sites. We have
licensed to GHR Information Systems the computer programming code that underlies
our prime mortgage loan Web site platform so that it can create private label
Web sites for lenders. We receive a portion of the installation, transaction,
software maintenance and other fees GHR receives from the creation of private
label Web sites based on our "prime" Web site product. GHR also markets our
other mortgage banking services.
We have a separate sales team dedicated solely to www.openclose.com. We are
developing a national marketing plan to build awareness among mortgage brokers,
mortgage lenders and mortgage insurance companies. The plan includes direct mail
advertising with promotional CD-Roms included, direct sales, lender
sponsorships, online advertising and free trial offers. We also intend to
participate in numerous industry trade
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<PAGE>
shows, including regional trade shows in Florida and California, and the trade
shows held for the National Association of Mortgage Brokers and the Mortgage
Bankers Association.
We currently rely primarily on management to market our services to
Realtors, homebuilders and other potential network members, such as financial
planners. We intend to hire an internal sales force so that our network and
technology correspondent memberships can expand geographically.
OPERATIONS
PRODUCTION OF MORTGAGE LOANS
At the initiation of the mortgage banking process is the generation of
leads and the completion of loan applications. We perform this function
(1) online, (2) through loan counselors that we employ, (3) through network
members and (4) through mortgage lenders acting as loan correspondents. In the
case of the first three, we evaluate the loan applications and fund those loans
that meet our underwriting criteria. We then sell the mortgage loans in the
secondary market. In the fourth case, we will underwrite and purchase mortgage
loans from loan correspondents and sell the mortgage loans in the secondary
market.
As a step to evaluating mortgage loan applications, our processing
department evaluates credit reports and property appraisals when required,
verifies borrowers' income and assets and obtains any additional third party
verifications relating to the borrowers and the mortgaged properties. We
maintain processing centers in Walnut Creek, California, Los Gatos, California
and Plantation, Florida, where as of March 31, 1999, 162 employees execute the
processing functions. Our operations managers approve and monitor third party
sources who have originated the loans, and third parties from whom we receive
credit reports, appraisals and similar verifications, based on criteria
established by our chief underwriter.
We underwrite mortgage loans based on criteria established by secondary
market investors. Underwriting criteria may include the borrower's credit
standing and repayment ability and the value and adequacy of the mortgaged
property as collateral. Our underwriting department consists of a team of
17 underwriters in Plantation, Florida, Walnut Creek, California and Los Gatos,
California. The underwriting evaluation is done primarily through our CLOser
software system and through links to the automated underwriting systems of
Fannie Mae and Freddie Mac.
CLOser acts as a pre-funding quality control department because it will not
generate closing documents for a mortgage loan that does not meet the
underwriting criteria. If a mortgage loan meets the underwriting criteria,
CLOser automatically generates closing documents tailored to the loan product,
the borrower, secondary marketing requirements and state laws and regulations.
SECONDARY MARKETING OF MORTGAGE LOANS
We originate all of our mortgage loans with the intent of selling those
loans in the secondary market. Our secondary marketing department monitors the
prices secondary market investors are willing to pay for various loan products.
We then add an appropriate profit margin to the interest rate for the loan and
publish our price for that loan on our Web site, in CLOser and on various
industry databases and price sheets. Our price includes a premium that we charge
investors for the value of the servicing rights associated with the mortgage
loans we sell 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 paid for the loans and the price at which the loans are
sold to secondary market investors.
We obtain commitments from secondary market investors for the purchase of
substantially all the prime mortgage loans we fund on the same day that we lock
in a rate for a borrower. This protects us against changes in interest rates
between the date we issue a loan commitment at a locked-in interest rate to the
borrower and the date we sell the loan in the secondary market. Our obligations
to sell to secondary market investors are generally on a "best efforts" basis,
which means we are required to sell the loan to a committed secondary market
investor only if the loan closes within an agreed upon time period. However,
occasionally a borrower will elect to not lock an interest rate until the
closing. In those cases, we may choose
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<PAGE>
to sell the loan on a short-term "mandatory" basis, which means we are required
to sell the loan to a secondary market investor within a specified number of
days after the closing.
We also accumulate sub-prime mortgage loans for sale in pools of between
$1 million and $3 million. While this entails additional credit risk because we
hold the mortgage loan for a longer period of time, sales of these pooled
sub-prime loans typically bring higher net gains than the net gains earned on
the sale of prime loans. If we are particularly concerned about the credit risk
on a sub-prime mortgage loan, we will obtain an investor commitment in advance,
which reduces our credit risk but decreases the amount we receive on the sale of
the mortgage loan to secondary market investors.
We are considering selling a greater number of loans in pools on a
mandatory delivery basis. If we do so, we will employ a hedging strategy to help
manage the additional risks associated with pooling loans and selling them on a
mandatory delivery basis.
The following list shows some of the secondary market investors who
commonly purchase mortgage loans from us:
<TABLE>
<S> <C>
Norwest Funding Fleet Mortgage
Cendant Mortgage GE Capital Mortgage Services
Residential Funding Corporation Interfirst Mortgage
Citicorp Mortgage
</TABLE>
In most cases when we sell a mortgage loan in the secondary market, there
is no recourse to us. However, inaccuracies in loan documents, information about
the borrower or information about the mortgaged property may require us to
repurchase the mortgage loans from the investors and indemnify them for any
damages caused by the inaccuracies. Since our inception, mortgage loans that we
have repurchased from investors have represented an insignificant percentage of
our total mortgage loan originations.
FUNDING MORTGAGE LOANS
After a mortgage loan has been approved for funding, we generally borrow
from one of our warehouse lines of credit or other financing vehicles to fund
and close the mortgage loan. We currently have warehouse lending or loan
repurchase arrangements with five large financial entities. Our aggregate
borrowing limits are currently set at approximately $220 million.
After we borrow funds to fund a mortgage loan, we must pledge the mortgage
loan to the lender as security for our repayment of the borrowed money. During
the time a mortgage loan is pledged to the lender, it is considered
"warehoused." A mortgage loan is warehoused until we sell it in the secondary
market, at which time we repay the lender and the pledge is released. Prime
mortgage loans are warehoused for an average of approximately 25 days. Sub-prime
mortgage loans are warehoused for an average of approximately 40 days. In cases
where we hold loans for more than 30 days, we perform some interim servicing on
those loans using computer software licensed from a third party.
We have entered into a letter of intent with Telebanc Financial Corp. to
provide a committed $200.0 million repurchase agreement which will allow us to
sell our closed mortgage loans to Telebanc 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 delivery to
investors. In addition, the letter of intent outlines the parameters for the
development of an electronic mortgage conduit with the intent of streamlining
the financing process. Telebanc would work with us to create a dedicated
e-commerce platform that will enable the efficient transmission of loan
information from originators to the secondary market. Although we expect this
financing arrangement to become available by the end of July 1999, we cannot
assure you that it will be available at that time, if at all.
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<PAGE>
POST-CLOSING QUALITY CONTROL
After we have funded and closed a mortgage loan, we submit 10% of funded
loans for a post-funding review. A post-funding review includes a
re-verification of credit, employment income and source of funds, as well as a
review of closing documentation. These reviews also include procedures designed
to detect evidence of fraudulent documentation or unacceptable activities during
the processing, funding or selling of the mortgage loan. We have hired an
independent third party to handle post-funding reviews and to recommend internal
corrective actions.
TECHNOLOGY
The CLOser software system encompasses an Internet platform, local and wide
area networks, back office modules for processing, underwriting, closing and
secondary marketing, automated call and e-mail distribution links and
computer-based training. As of March 31, 1999, we employed 35 software
developers who are continually working to develop new technological solutions
for the mortgage industry. As of that date, we employed 31 systems support and
operations personnel who provide communications and infrastructure support for
our direct-to-consumer and business-to-business channels and training services
for clients who use our technology. We also employed 15 customer service
employees who provide technical help desk services. Last year we spent
approximately $2.9 million on research and development and we intend to continue
devoting substantial resources toward that end.
TECHNOLOGY INFRASTRUCTURE AND SECURITY
We have 80 computer servers which house all of our computer-based
technology, from our Internet Web sites to our e-mail capabilities. All of our
server hardware is provided by Dell Computer Corp. and our routers and switches
are provided by Cisco Systems. Our servers run on the Microsoft Windows NT
operating system software. We have redundant high-speed data lines from multiple
vendors for Internet access. We stock additional hardware parts and have
designed system and power supply redundancies to ensure that there are no
interruptions in service based on hardware failures. In addition, we monitor our
servers to ensure that we have sufficient space to handle software upgrades and
that at least 35% of our disk drive space is free for performance
considerations. All software and data in the system is backed up to magnetic
tape each night, which is stored off-site.
Our technology security systems are designed to prevent unauthorized access
to internal systems and illegal third-party access to our data. Internally, log
in identifications and passwords are maintained for all systems, and personnel
have access only to those areas they are responsible for. We rely on encryption
and authentication technology licensed from third parties to provide secure
transmission of confidential information, such as employment and income items
submitted with online applications. Our servers are protected by firewalls and
no outside access is permitted.
Our technology must accommodate a large number of users and must deliver
frequently updated information. Some components of our technology have
experienced outages or slower response times in the past, but none have had a
material effect on our business.
OTHER LICENSED TECHNOLOGY
Our www.openclose.com Web site will use a wide range of internally
developed software, as well as the Desktop Underwriter software, which we
license from Fannie Mae. Our Desktop Underwriter license expires October 15,
2003, with provision for automatic year to year renewals. Fannie Mae can amend
our license by issuing a bulletin. If we object to the amendment, Fannie Mae can
terminate our license.
We license from GHR Information Systems, Inc. portions of their
PremierSuite software, which we use to publish our prices on quickenmortgage.com
and which we use to access pricing information for participating lenders on
quickenmortgage.com who are our clients. Our license for this software expires
February 29, 2000, with successive one year automatic renewals unless one party
decides not to renew.
48
<PAGE>
[The chart appearing here represents the types of customers in each of the
two segments of Mortgage.com's business across the top of the page. Down the
side of the page are the Mortgage and technology services Mortgage.com offers.
Dots in the table represent the specific services utilized the corresponding
customer.]
COMPETITION
Many of our business-to-business clients also compete with us for mortgage
loan originations. We compete with other mortgage bankers, mortgage brokers and
financial institutions such as Norwest Bank, Countrywide Mortgage, Chase
Mortgage, Headlands Mortgage, Cendant Mortgage, Citibank and Fleet Mortgage for
the origination and funding of mortgage loans directly with borrowers. Many of
our competitors have branch offices in the same areas where our loan counselors
and network members operate. We also compete with mortgage companies whose focus
is on telemarketing, such as The Money Store.
Our online competition also is substantial. In addition to the traditional
mortgage companies and financial institutions who have or are developing an
online presence, we compete with other online financial service providers, such
as Intuit's Quickenmortgage, iOwn, E-LOAN and Finet. Our primary competitors for
business-to-business mortgage banking technology solutions are FiServ, Inc. and
Alltel Corporation.
We believe that the principal competitive factors in our markets are:
o brand recognition;
o ability to attract borrowers;
o a broad selection of mortgage loan products;
o access to low cost financing arrangements;
o comprehensiveness of information services;
o quality and responsiveness of customer service; and
o ease of use of computer technology.
We must continue to enhance our mortgage.com brand and enhance our
technology to effectively compete. Many of our current and potential competitors
are profitable, have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial resources than we do. In
addition, other financial-related businesses with these characteristics are
likely to enter into the online mortgage
49
<PAGE>
origination business. We cannot be sure that we will be able to compete
successfully against current and future competitors.
INTELLECTUAL PROPERTY
We regard substantial elements of our Web sites and underlying technology
as proprietary and attempt to protect them by relying on trademark, service
mark, copyright and trade secret laws and restrictions on disclosure. We also
generally enter into confidentiality agreements with all technical employees and
consultants, and with third parties in connection with our license agreements.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without our authorization.
Third parties may also develop similar technology independently from us.
We have registered CLOser as a federal trademark. The mortgage.com logo,
"Openclose" and "SmartQuote" are also our trademarks and service marks. Other
trademarks and service marks in this prospectus are the property of their
holders. We also have registered the Internet domain names "mortgage.com,"
"openclose.com," "realoans.com" and other domain names we use. This gives us the
exclusive rights to use these names as the addresses for our Web sites in the
United States.
We may not be able to register "mortgage.com" and certain other of our
trade names as federal trademarks because those names may be too generic to
qualify for federal trademark protection. Accordingly, we may not be able to
prevent other people from using those names in their businesses. It is possible
that others could use "mortgage.com" and our other trade names in such a way as
to damage our reputation, which could ultimately affect our revenues.
Legal standards relating to the validity, enforceability and scope of
protection of our proprietary rights are uncertain and are still evolving,
especially as they relate to Internet-related rights. In addition, the laws of
some foreign countries may not protect our rights to the same degree as the
United States. For these reasons, we cannot be sure that the steps we take will
adequately protect our proprietary rights. We also may be required to litigate
to enforce our intellectual property rights or to determine the validity and
scope of the proprietary rights of others. This could create substantial costs
and a diversion of management's attention.
REGULATION
Our mortgage banking business is subject to the rules and regulations of
the Department of Housing and Urban Development, Federal Housing Administration,
Veteran's Administration, Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, Government National Mortgage Association and other
regulatory agencies in connection with originating, processing, underwriting and
selling mortgage loans. These rules and regulations, among other things, impose
licensing obligations on us, prohibit discrimination and establish underwriting
guidelines. We also are required to comply with each regulatory entity's
financial requirements.
Mortgage origination activities are further subject to the provisions of
various federal and state statutes including the Equal Credit Opportunity Act,
the Fair Housing Act, the Federal Truth-in-Lending Act, the Fair Credit
Reporting Act and the Real Estate Settlement Procedures Act. The Equal Credit
Opportunity Act and the Fair Housing Act prohibit us from discriminating against
applicants on the basis of race, color, religion, national origin, familial
status, sex, age, marital status or other prohibited characteristics. It also
requires us to disclose specific information to applicants, such as the reason
for any credit denial. The Truth-in-Lending Act requires us to provide borrowers
with uniform, understandable information about the terms and conditions of
mortgage loans so that they can compare credit terms. It also guarantees
borrowers a three-day right to cancel specified credit transactions. If we fail
to comply with Truth-in-Lending, aggrieved customers could have the right to
rescind their loan transaction with us and to demand the return of finance
charges paid to us. The Fair Credit Reporting Act requires us to supply loan
applicants with a name and address of the credit reporting agency we use when
the applicant is denied credit or when the rate or charge for a loan increases
as a result of information we obtained from a credit reporting agency.
Some of our client relationships are "affiliated business arrangements"
that must comply with complex limitations under the Real Estate Settlement
Procedures Act and to regulation by the Department of Housing and Urban
Development. Affiliated business arrangements permit companies to refer real
estate settlement business to us without violating the Real Estate Settlement
Procedures Act's prohibition on "kickbacks" to the referring company. There are
limitations on the types of payments that can be made to the referring company
and disclosures that are required to be made to borrowers. The Real Estate
Settlement Procedures
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Act also requires us to collect applicant information and file an annual report
with the Department of Housing and Urban Development. Failure to comply with the
Real Estate Settlement Procedures Act could result in administrative enforcement
actions which could eliminate important revenue sources for us and could lead to
demands for indemnification or loan repurchases.
Industry participants are frequently named as defendants in class-action
and other litigation involving alleged violations of federal and state consumer
lending laws and regulations. Some of the practices which have been the subject
of lawsuits against other companies include:
o "add on" fees;
o truth in lending calculations and disclosures;
o escrow and adjustable rate mortgage calculations;
o private mortgage insurance calculations and disclosures;
o forced-placed hazard, flood and optional insurance; and
o unfair lending practices.
If a significant judgment were rendered against us in connection with any
litigation, it could have a material adverse effect on our business and results
of operations.
Although our operations on the Internet are not currently regulated by any
government agency in the United States beyond the mortgage-related regulations
described above and regulations applicable to businesses generally, it is likely
that a number of laws and regulations may be adopted governing the Internet. In
addition, existing laws may be interpreted to apply to the Internet. There may
be claims that our services violate those laws.
Regulatory and legal requirements are subject to change and may become more
restrictive, making our compliance more difficult or expensive or otherwise
restricting our ability to conduct our business as it is now conducted. Such
changes could hurt our business.
EMPLOYEES
At June 30, 1999, we had 720 full-time employees. Our success depends upon
our ability to attract, train and retain qualified personnel. We have a
comprehensive training program which explains our customer service philosophies
and techniques, and we have developed a sophisticated computer-based training
program for CLOser and its Internet component. Approximately one-half of the
people who enter the training program become permanent hires. To date, our
attrition rate has been low for personnel who emerge from the training program.
However, as we develop new business alliances that increase the mortgage loan
volumes we handle through our call centers and processing centers, finding
personnel to participate in and graduate from these training programs may become
more difficult. Although our training program is designed to allow us to
implement qualified personnel quickly, we cannot be sure that we will be able to
find qualified personnel who can be trained in sufficient time to handle
increased mortgage loan volumes.
None of our employees are represented by a union. We believe we have a good
relationship with our employees.
FACILITIES
We are headquartered in Plantation, Florida, where we currently lease
approximately 53,300 square feet of space. Our lease for the building which
houses our executive offices and a portion of our call centers expires in 2007.
A second building houses the remainder of our call centers under a lease that
expires in 2002. Our California operations are contained in several locations in
the San Jose/San Francisco metropolitan area, totaling approximately 29,200
square feet. A majority of our technology personnel reside primarily in
approximately 15,000 square feet of space in Montvale, New Jersey. Our Montvale
office sub-lease expires in 2002 and without provision for extension and
renewal. We also have a 2,500 square foot office in Santa Rosa, California and a
1,000 square foot office in Reno, Nevada.
We have entered into a lease agreement to obtain approximately 110,000
square feet of additional office space in Sunrise, Florida. Our executive
offices and call centers will be relocated to this new facility in
November 1999 at a cost of approximately $1 million.
LEGAL PROCEEDINGS
We are not a party to any material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Each member of our board of directors serves for a one-year term and until
their successors are elected and qualified. Our executive officers and directors
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Seth S. Werner(1)(2)............................ 53 Chairman of the Board; President; and Chief
Executive Officer
John J. Hogan(1)................................ 37 Executive Vice President and Director
David W. Larson................................. 49 Executive Vice President and Director
John Buscema.................................... 42 Executive Vice President
Stephen L. Green(2)(3).......................... 48 Director
Edwin Johnson................................... 42 Chief Financial Officer and Senior Vice
President
Michael K. Lee(2)(3)............................ 42 Director
George A. Naddaff............................... 69 Vice Chairman of the Board
C. Toms Newby, III(4)........................... 32 Nominated Director
John T. Rodgers................................. 37 Executive Vice President
B. Anderson Young............................... 48 Chief Information Officer and Senior Vice
President
</TABLE>
- ------------------
(1) The employment agreement for this officer requires us to nominate him for
election to the board of directors at each annual meeting.
(2) Member of the Compensation Committee.
(3) Mr. Green and Mr. Lee have been elected to the board of directors under the
terms of the Series B Preferred Stock. Those terms provide that each holder
or affiliated group of holders of 363,000 or more shares of Series B
Preferred Stock have the right to elect one director to our board of
directors. All of the outstanding shares of Series B Preferred Stock will
automatically convert to common stock upon completion of this offering, at
which time the rights to elect one director cease.
(4) Mr. Newby has been nominated for election as a director and we anticipate he
will be elected later this year.
Seth S. Werner founded our company in September 1993, has served as
Chairman of the Board and Chief Executive Officer since the company's inception,
and as President from 1993 to 1997 and again in 1999. From 1973 to 1995,
Mr. Werner was the President and Chief Executive Officer of Werner Capital
Corporation, a Miami-based real estate investment banking firm which served as a
consultant to some of the largest financial institutions in the United States
and to the United States government on matters concerning its real estate
portfolios. He also was founder, Chairman and Chief Executive Officer of First
Capital Financial Corporation, a national real estate investment banking firm,
from 1974 through 1984. He is a director and President of SSW, Inc., general
partner of Kendall Racquetball Investments, Ltd., and a director, President,
Secretary and Treasurer of Harbour Real Estate Corporation.
John J. Hogan has been an Executive Vice President and a member of our
board of directors since July 1997. Mr. Hogan heads our mortgage banking group.
From February 1995 to June 1997, he served as the President of OnLine Capital,
which merged into our company in June 1997. From March 1986 to February 1995,
Mr. Hogan served in several capacities, including Vice President of Loan
Administration, Senior Vice President of Mortgage Operations and Senior Vice
President and Chief Financial Officer of First Franklin Financial Corporation in
San Jose, California.
David W. Larson has been a member of our board of directors since 1997 and
served as President from June 1997 through December 1998. Mr. Larson now is an
Executive Vice President who heads our broker services group. From January 1989
to October 1996, Mr. Larson served as the President and Chief Executive Officer
of
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B.F. Saul Mortgage Company, a $10 billion mortgage bank in Chevy Chase,
Maryland. Prior to that, Mr. Larson was the President of San Jacinto Savings and
Loan in Houston, Texas.
John Buscema has been an Executive Vice President since April 1995, and
heads our advanced technology group. Mr. Buscema was responsible for developing
the ParEx software module, an integral part of our CLOser software system. From
1990 to April 1995, he served as President of Morbank Financial Systems, Inc.,
the company which developed the ParEx module, and also oversaw all MIS-related
issues for Globe Mortgage Company.
Stephen L. Green has been a director since March 1996. Since 1991,
Mr. Green has served as a general partner of Canaan Partners, a principal
shareholder in our company. He serves on the boards of directors of Advance
Paradigm, Inc., a provider of pharmacy benefit management services, Chartwell Re
Corporation, an insurance holding company, and Suiza Foods Corporation, a
manufacturer and distributor of dairy products and plastic packaging, as well as
a number of private companies.
Edwin D. Johnson has been Senior Vice President and Chief Financial Officer
since November 1998. From June 1998 through October 1998, Mr. Johnson was a
principal in JR Capital, Inc., an acquisition firm. From March 1996 to June
1998, Mr. Johnson was Chief Financial Officer of MasTec, Inc., a
telecommunications infrastructure company. From January 1995 to March 1996, he
was a private real estate consultant and from October 1984 to January 1995
Mr. Johnson was worldwide Chief Financial Officer for Attwoods, plc, an
international services company.
Michael K. Lee has been a director since March 1996. In 1985 Mr. Lee
founded Dominion Ventures, Inc., a venture capital firm specializing in emerging
growth companies, and has served as its President and Chief Executive Officer
since its founding. Affiliates of Dominion Ventures, Inc. are principal
stockholders in our company, and Mr. Lee is the managing general partner of
those affiliates. He serves on the boards of directors of Advanced Access,
Gateway Insurance Co., Online Resources & Communications Corp., a provider of
financial e-commerce hubs, Paragon Acceptance Corp. and Relax the Back Corp.
George A. Naddaff is Vice Chairman of our board of directors and has been a
director since September 1995. Mr. Naddaff is the controlling shareholder and a
director of Business Expansion Capital Corporation, a venture capital firm he
founded in 1987. From 1994 to 1996, he served as a director and Chairman of Food
Trends Acquisition Corporation, a publicly-traded corporation. Mr. Naddaff also
is the Chairman and Chief Executive Officer of Ranch 1, Inc. which has operated
a chain of sandwich shops since November 1997, and since June 1997, Mr. Naddaff
has been Chairman of Frame King Express, Inc. which sells framed art. He
currently is a consultant to Jreck Subs Group, Inc. Mr. Naddaff also is a
consultant to, and a director of, numerous private companies.
C. Toms Newby, III has been nominated for election as a director.
Mr. Newby has been a general partner in Technology Crossover Ventures, one of
our principal stockholders, since July 1998. From April 1996 to June 1998,
Mr. Newby was an associate at Technology Crossover Ventures. From July 1994
through April 1996, he was an investment banker at Montgomery Securities.
Mr. Newby currently serves on the boards of directors of several private
companies.
John T. Rodgers has been an Executive Vice President since April 1998 and
heads our consumer services group. In 1993 Mr. Rodgers co-founded American
Finance and Investment and served as its President until April 1998 when it was
merged into our company. He also serves as a member of Microsoft's Real Estate
Advisory Board.
B. Anderson Young will begin his duties as Chief Information Officer and
Senior Vice President in August of this year. From September 1998 through July
1999, Mr. Young was the New Product Manager at London Bridge Group, Ltd., a firm
that provides mortgage software systems. From May 1997 to September 1998, he was
a Vice President, Mortgage Servicing Systems, and a Vice President, Development,
at Checkfree Software Systems, before its mortgage unit was sold to London
Bridge. From March 1994 to May 1997, Mr. Young was Senior Vice President of
Front End Systems and InterChange Architecture at Alltel Information Systems
(formerly Computer Power, Inc.). Prior to that he was a private consultant for
such companies as General Electric and Temple-Inland Mortgage.
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COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee of the board of directors will be established
immediately following the completion of this offering and will consist of three
directors, Michael Lee, Stephen Green and George Naddaff, two of whom are
independent directors. The audit committee will review and recommend outside
auditors and compensation paid to outside auditors, review results and
recommendations in each external audit, assist external auditors in connection
with the preparation of financial statements, review the procedures we use to
prepare financial statements and related management commentary and meet
periodically with management to review our major financial risk exposures.
The compensation committee of the board of directors will be re-constituted
immediately following the completion of this offering and will consist of two
non-employee directors, Stephen Green and George Naddaff. The compensation
committee will oversee and review all decisions regarding the compensation of
executive officers and directors and the granting of stock options under our
stock option plan.
DIRECTORS' COMPENSATION
After this offering, each non-employee director will be reimbursed for
expenses incurred in attending the meetings. No director who is an employee will
receive separate compensation for services rendered as a director. Non-employee
directors are eligible to participate in our stock option plan.
EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid or accrued for
services rendered for the year ended December 31, 1998, to our Chief Executive
Officer and each of the four other most highly compensated executive officers
who earned more than $100,000 in salary and bonus for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION NUMBER OF
------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ---------------------------------------------------------- -------- -------- ------------------- ------------
<S> <C> <C> <C> <C>
Seth S. Werner, Chief Executive Officer................... $190,000 $100,000 350,000 $ 26,165(1)
David Larson, Executive Vice President.................... 190,000 100,000 350,000 53,841(2)
John J. Hogan, Executive Vice President................... 161,347 100,000 140,000 22,248(3)
John Buscema, Executive Vice President.................... 161,465 10,000 38,500 3,925(4)
John T. Rodgers, Executive Vice President................. 142,536 -- -- 6,576(5)
</TABLE>
- ------------------
(1) Consists of an $18,000 car allowance, $5,000 in matching company
contributions to the 401(k) plan and $3,165 in life insurance premiums.
(2) Consists of an $18,000 car allowance, $3,633 in matching company
contributions to the 401(k) plan, $1,808 in life insurance premiums and a
$30,400 relocation allowance.
(3) Consists of an $18,000 car allowance and $4,248 in matching company
contributions to the 401(k) plan.
(4) Consists of $3,925 in matching company contributions to the 401(k) plan.
(5) Consists of a $4,500 car allowance and $2,076 in matching company
contributions to the 401(k) plan.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with most of our executive
officers. Each employment agreement entitles the executive officer to
participate in our company's benefits plans, including health insurance plans,
401(k) plan and stock option plan. Each also prohibits the executive officer
from making any unauthorized disclosures of our confidential information.
Mr. Werner's employment agreement requires him to be our President and
Chief Executive Officer and also requires us to nominate him for the board of
directors at each annual meeting. His employment agreement expires December 31,
2003, with provision for annual one year renewals. Effective January 1, 1999,
his base salary is $350,000 per year, subject to annual increases. He is
entitled to bonuses based on merit and on the financial performance of our
company. We also pay premiums on a life insurance policy of which Mr. Werner is
the
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beneficiary. If Mr. Werner is terminated without cause or if he quits for good
reason, we must pay him a lump sum cash severance amount.
Mr. Werner's employment agreement contains provisions to provide him
economic security after a change of control. Mr. Werner may terminate his
employment for good reason any time within two years after a change of control.
If that happens, or if we terminate him without cause within two years after a
change of control, or in some circumstances, prior to a change of control,
Mr. Werner is entitled to a lump sum cash payment equal to three times his base
salary and three times his bonuses. Mr. Werner also may terminate his employment
for any reason after 120 days have passed since the change of control. If that
happens, Mr. Werner is entitled to a lump sum cash payment equal to his base
salary and his average bonus over the three prior years or his bonus for the
current year. In either case, he is entitled to immediate vesting of all of his
stock options and the deadline for exercise of those options may be extended. To
the extent Mr. Werner incurs any federal excise taxes on the severance amount or
the value of the accelerated stock options, Mr. Werner is entitled to be
reimbursed by us for those tax consequences.
If we terminate Mr. Werner for cause or if he terminates his employment
without good reason he is prohibited from competing with the company for three
years following the date of his termination. If we terminate Mr. Werner without
cause, or if he terminates his employment for good reason he is prohibited from
competing with the company for one year following the date of his termination.
In addition, if we terminate Mr. Werner for cause or if he leaves voluntarily,
he is prohibited from soliciting our employees or any of the businesses with
whom we have business relationships for a period of two years after the date of
termination.
Mr. Hogan's employment agreement requires him to be an executive vice
president and to head our mortgage banking group. The agreement also requires us
to nominate him for the board of directors at each annual meeting during the
term of his employment agreement. His employment agreement expires by its terms
on December 31, 2001, with provision for annual one year renewals. Effective
January 1, 1999, Mr. Hogan's base salary is $250,000 per year, subject to annual
increases. Mr. Hogan is entitled to merit bonuses at the discretion of the board
of directors. We also pay premiums on a life insurance policy of which he is the
beneficiary. If Mr. Hogan is terminated without cause or if he quits for good
reason, we must pay him a lump sum cash severance amount.
Mr. Hogan's employment agreement contains change of control provisions
substantially similar to the change of control provisions in Mr. Werner's
employment agreement. In addition, the non-competition and non-solicitation
provisions in Mr. Hogan's agreement are substantially similar to Mr. Werner's
agreement.
Mr. Larson's employment agreement requires him to head our broker services
group, which administers openclose.com. His employment agreement expires
February 28, 2002, with provision for annual one year renewals. Mr. Larson is
entitled to merit bonuses based on the number of lenders and brokers who have
committed to openclose.com. We also pay premiums on a life insurance policy of
which he is the beneficiary. If Mr. Larson is terminated without cause, we must
pay him a lump sum cash severance amount and all of Mr. Larson's stock options
become fully vested.
As additional incentive compensation, Mr. Larson is entitled to receive,
beginning on January 1, 2001, a portion of the pre-tax net profits earned by
openclose.com. His percentage interest peaks at 10% on January 1, 2004.
Mr. Larson may, for 90 days after the earlier of January 1, 2001 or the date his
employment is terminated by us, elect to trade his interest in openclose.com for
(1) cash or common stock in an amount equal to the then current market price of
the common stock less the aggregate exercise price of options to purchase
350,000 shares of common stock which Mr. Larson has foregone in consideration of
receiving a portion of the pre-tax net profits of openclose.com or (2) cash or
common stock equal to the amount of the appraised value of his interest in
openclose.com. After that 90 day period, he may elect to trade his interest in
openclose.com for cash or stock equal to the appraised value of his interest in
openclose.com. Until December 31, 2001, or in the event we sell the assets of
openclose.com, we may redeem his interest in openclose.com for cash equal to the
appraised value of his interest in openclose.com. Mr. Larson's employment
agreement further provides that (1) if the openclose.com assets are distributed
to a separate entity controlled by us and such entity raises money in a debt or
equity financing from unaffiliated third parties, then Mr. Larson will be
entitled to the same percentage of the net proceeds as he is entitled to of the
pre-tax net profits earned by openclose.com and (2) if we discontinue operating
openclose.com, he may elect to have us assign to him all broker and lender
contracts for openclose.com, as well as the then current contract with Fannie
Mae.
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<PAGE>
Vesting of the unvested stock options Mr. Larson has been granted under the
stock option plan accelerate to 20% vesting each 6 months following the initial
public offering. If Mr. Larson is terminated for any reason, except without
cause or by constructive discharge, he is prohibited from competing with the
company for one year following the date of his termination. In addition, if
Mr. Larson is terminated for cause or if he quits voluntarily, he is prohibited
from soliciting our employees or any of the businesses with whom we have
business relationships for a period of one year after the date of termination.
In connection with the acquisition of our CLOser software system, we
entered into employment terms with John Buscema. Mr. Buscema is required to be
the president of a division of the company. If we fail to renew his employment
each year, we are required to purchase Mr. Buscema's stock options for 175,000
shares of common stock at a price of approximately $.71 per share. If
Mr. Buscema is terminated for any reason, he is prohibited from competing with
the company for one year following the date of his termination. In addition, if
Mr. Buscema is terminated for any reason, he is prohibited from soliciting our
employees or any of the businesses with whom we have business relationships for
a period of one year after the date of termination.
Our employment arrangement with John T. Rodgers makes him an executive vice
president and the head of our consumer services group. Effective April 1, 1999,
his base salary is $200,000. Mr. Rodgers is entitled to bonuses based on merit
and on the financial performance of our company. If Mr. Rodgers is terminated
for any reason, he is prohibited from competing with the company for one year
following the date of his termination. In addition, if Mr. Rodgers is terminated
for any reason, he is prohibited from soliciting our employees or any of the
businesses with whom we have business relationships for a period of one year
after the date of termination.
Our employment arrangement with B. Anderson Young makes him chief
information officer effective in July 1999. His base salary is $175,000. He is
entitled to annual bonuses based merit. In connection with beginning employment
with us, he received a relocation advance and a sale of residence allowance. If
he voluntarily leaves or is terminated for cause within three years of beginning
employment, he is required to repay to us a pro rata portion of the advance and
the allowance. Also, if he is terminated for any reason, he is prohibited from
competing with us or soliciting our employees or any of our clients for a period
of one year after the date of termination.
STOCK OPTION PLAN
We have adopted a stock option plan as of April 24, 1996 to assist us in
attracting and retaining highly competent people to serve as employees,
directors and advisors who will contribute to our success and the success of the
members of our network. We also seek to motivate those people to achieve
long-term objectives which will benefit our stockholders. The following groups
of people are eligible to receive options under the stock option plan:
o employees
o directors
o advisors and consultants, including former employees who have become
members of our network or have become employees of members of our
network, at our request
The compensation committee administers the stock option plan and has wide
discretion to award options. Subject to the provisions of the stock option plan,
the compensation committee determines who will be granted options, the type and
timing of options to be granted, vesting schedules and other terms and
conditions of options, including the exercise price. All of our employees are
granted options. The number of options awarded to a person is based on the
person's potential ability to contribute to our company's success, the person's
position with our company and sometimes length of service. The compensation
committee makes its granting decisions monthly.
The compensation committee may award "incentive" options or "non-qualified"
options. We have granted both incentive and non-qualified options under the
stock option plan. If the holder of an incentive option exercises the option and
holds the shares of common stock he receives for the holding periods required by
the Internal Revenue Code, the exercise of the option does not result in taxable
income to the holder. We are therefore not entitled to a corresponding tax
deduction. The incentive options we grant under the stock option plan are
designed to meet the requirements of the Internal Revenue Code, including a
requirement that the
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<PAGE>
exercise price is at least 100% of the fair market value of our common stock on
the date we grant the option and that the option has a term no longer than ten
years.
During the period from October 1998 to May 1999, the compensation committee
granted options with exercise prices subsequently determined to be below fair
market value at the date of grant. To determine the fair market value of the
stock, Mortgage.com's management analyzed equity financing transactions, recent
value-creating events and activities, and relevant market and industry
developments. Management assigned weighting factors to each event on a scale of
1 through 10 to create a distribution of value-creating events over the period
from October 1998 through May 1999. It combined these events with its growth in
Internet loan orginations to determine the fair market value of the common stock
for each of the months analyzed. The difference between the estimated fair
market value and the exercise price of these options has been classified as
unearned compensation in the stockholders equity section of our balance sheet
and is amortized as compensation expense over the vesting period.
By contrast, if the holder of a non-qualified option exercises the option,
the holder will be required to recognize taxable income on the date of exercise.
The taxable income is equal to the difference between the fair market value of
the shares acquired by exercising the option and the exercise price of the
option. We are then entitled to a corresponding tax deduction.
We have reserved 20,995,660 shares of common stock for issuance through our
stock option plan. Only options that are vested may be exercised. The options
terminate after a period of time following the termination of employment.
Options that expire unexercised or that are forfeited become available again for
issuance under the stock option plan. All of the option agreements contain
customary anti-dilution adjustments which provide for adjustments to the
exercise price and number of shares subject to the warrants upon events such as
stock splits, stock dividends and consolidations. The vesting of many of the
options accelerates upon a change of control of the company.
The compensation committee may not grant options if the granting of the
options would make the total number of shares issuable upon exercise of all
outstanding options exceed 30% of the then outstanding shares of common stock,
including any convertible preferred on an "as if converted" basis. However, a
higher percentage may be approved by at least two-thirds of the outstanding
shares entitled to vote.
We have awarded the following options under the stock option plan during
the last fiscal year to the executive officers named in the summary compensation
table:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
% OF TOTAL ASSUMED
OPTIONS MARKET POTENTIAL REALIZABLE VALUE AT
GRANTED TO VALUE ASSUMED RATES OF STOCK PRICE
SHARES EMPLOYEES IN ON APPRECIATION FOR OPTION TERM(3)
COVERED BY FISCAL EXERCISE GRANT EXPIRATION --------------------------------
NAME OPTIONS(1) YEAR(2) PRICE DATE DATE 0%($) 5%($) 10%($)
- ----------------------------- ---------- ------------ -------- ------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Seth Werner.................. 350,000 8.0% $ 1.64 $1.64 5/20/08 -- $ 361,614 $ 916,402
David Larson................. 350,000 8.0 1.64 1.64 5/20/08 -- 361,614 916,402
John J. Hogan................ 140,000 3.2 1.64 2.14 10/31/08 $ 70,000 258,668 548,123
John Buscema................. 21,000 0.5 1.07 1.64 5/20/08 12,000 33,697 66,984
John Buscema................. 17,500 0.4 1.64 2.14 10/31/08 8,750 32,334 68,515
John T. Rodgers.............. -- -- -- -- -- -- -- --
</TABLE>
(Footnotes on next page)
57
<PAGE>
(Footnotes from previous page)
- ------------------
(1) All options are either incentive stock options or nonqualified stock options
and generally vest over five years at the rate of 20% of the shares on each
anniversary of the date of grant. Options expire ten years from the date of
grant.
(2) Based on options to purchase a total of 4,400,669 shares of common stock
granted under the stock option plan in 1998.
(3) Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by the assumed market value
on the date of grant, (2) assuming that the aggregate stock value derived
from that calculation compounds at the annual 0%, 5% or 10% rates shown in
the table for the entire ten-year term of the option and (3) subtracting
from that result the aggregate option exercise price. The 0%, 5% and 10%
assumed annual rates of stock price appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent our estimate
or projection of future common stock prices.
In February 1999, we granted to named executive officers options to
purchase an additional 1,050,000 shares of common stock at an exercise price of
approximately $2.14 per share. In April 1999, we granted to a named executive
officer options to purchase 105,000 shares of common stock at an exercise price
of approximately $4.29 per share. The Board of Directors increased the exercise
price based on Mortgage.com's increased online presence, the price associated
with a recently completed financing and other value-adding business
developments.
None of the named executive officers or directors who have been granted
options under the stock option plan exercised any of the options in fiscal year
1998. The following table sets forth information regarding exercisable and
unexercisable stock options held as of December 31, 1998 by the named executive
officers. There was no public trading market for the common stock as of December
31, 1998. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, the value of unexercised in-the-money options has been calculated by
determining the difference between the exercise price per share payable upon
exercise of such options and anassumed initial public offering price of $11.00.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR END
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Seth Werner.............................................. 350,000 350,000 $ 3,575,000 $ 3,275,000
David Larson............................................. 210,000 1,190,000 2,085,000 11,615,000
John J. Hogan............................................ 175,000 140,000 1,737,500 1,310,000
John Buscema............................................. 73,500 87,500 738,750 864,750
John T. Rodgers.......................................... -- -- -- --
</TABLE>
401(K) SAVINGS PLAN
We maintain a 401(k) savings plan which is intended to satisfy the tax
qualification requirements of the Internal Revenue Code of 1986, as amended. All
of our employees aged 18 or older are eligible to participate in the
401(k) plan after two months of service with us. The 401(k) plan permits
participants to contribute up to 15% of their annual compensation. We match up
to 50% of an employee's contributions to the 401(k) plan, not to exceed 2.5% of
their annual compensation. We contributed $341,000 to the 401(k) plan in 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, the compensation committee of the board of
directors consisted of Seth S. Werner, Stephen Green and Michael Lee. Seth
Werner is our President and Chief Executive Officer. Mr. Green and Mr. Lee are
each partners in one or more of our principal stockholders. For more information
on Mr. Green's and Mr. Lee's transactions with us, please see the next page.
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<PAGE>
The compensation committee historically recommended to the board of
directors appropriate executive officer compensation and the granting of stock
options under the stock option plan. Mr. Werner did not participate in making
recommendations to the board of directors when his compensation was being
reviewed and approved. The board of directors historically made all final
decisions regarding executive officer compensation and the granting of stock
options under the stock option plan.
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CERTAIN TRANSACTIONS
VENTURE CAPITAL FINANCINGS
Each share of preferred stock described in this section will be converted
to common stock upon completion of this offering, and will receive seven shares
of common stock upon conversion.
In January 1998, we sold $2,000,000 of Senior Subordinated Convertible
Notes due January 31, 2003 to Canaan Equity, L.P. and Dominion Fund III. Each of
these entities is a principal shareholder. Director Stephen Green is a principal
in Canaan and director Michael K. Lee is a principal in Dominion. In connection
with this sale, we issued warrants to purchase an aggregate of 466,669 shares of
our common stock at an exercise price of approximately $1.07 per share. In May
1998, the principal of the Senior Subordinated Convertible Notes was converted
into an aggregate of 173,912 shares of Series D Preferred Stock based on a
conversion value of $11.50 per share.
Also in May 1998, we sold an aggregate of 6,520 shares of Series D
Preferred Stock to directors Stephen Green and Michael K. Lee individually for
$11.50 per share. The aggregate consideration was $74,980. In August 1998,
Stephen Green purchased an additional 8,695 shares of Series D Preferred Stock
for $11.50 per share, for aggregate consideration of $99,992.50.
In April 1998, we entered into a settlement agreement with FMN Associates
Limited Partnership. FMN Associates was the sole holder of the Series A
Preferred Stock, which will convert to common stock upon the closing of this
offering. Under an earlier agreement with FMN Associates, we agreed to become a
licensed insurance agent and pay FMN Associates a portion of the profits we
generated from that business. In consideration of foregoing this right,
FMN Associates received in the settlement agreement warrants to purchase 252,000
shares of our common stock at an exercise price of approximately $1.64 per
share. FMN Associates has since distributed those warrants to its partners.
In February 1999, we sold $2,000,000 of Senior Subordinated Notes due
February 9, 2000 to Canaan Equity, L.P., Intuit, Inc., Dominion Fund IV, which
is an affiliate of Dominion Fund III, and Technology Crossover Ventures, each of
whom are principal shareholders. C. Toms Newby, III, a nominee for election as a
director, is a principal in Technology Crossover Ventures. In connection with
that sale we issued warrants to purchase an aggregate of 46,676 shares of common
stock at an exercise price equal to the initial public offering price in this
offering. Later the same month, we sold $8,000,000 of Senior Subordinated Notes
due February 26, 2001 to Intuit, Dominion Fund IV and Technology Crossover
Ventures. In connection with that sale we issued warrants to purchase an
aggregate of 373,408 shares of common stock at an exercise price equal to the
initial public offering price in this offering. The number of shares subject to
the warrants described in this paragraph will be reduced to an aggregate of
90,928 shares in accordance with formulas contained in the warrants.
In May 1999, we sold $27.5 million of Senior Subordinated Convertible Notes
due May 5, 2001 to Intuit Inc. The Notes are convertible at Intuit's option into
common stock upon completion of this initial public offering at a conversion
value of approximately $8.57 per share, but we intend to retire the notes with a
portion of the proceeds of this offering.
In May 1999, we sold 250,001 shares of Series F Preferred Stock to Dominion
Fund IV, L.P., Canaan Equity, L.P., and Technology Crossover Ventures. The
Series F Preferred Stock was sold for $60 per share, for aggregate consideration
of $15.0 million. Each of the purchasers is a principal stockholder of our
company.
We believe that each of these transactions were completed on terms no less
favorable to us than would have been obtained from unrelated third parties.
TRANSACTIONS WITH SUPERIOR BANK FSB
We are a party to a sales and marketing agreement with Superior Bank FSB,
which beneficially owns more than 5% of our outstanding securities prior to the
offering. In 1998, we earned approximately $1.6 million in management,
technology and other fees under this sales and marketing agreement.
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<PAGE>
In May 1999, we agreed with Superior Bank to redeem its warrants to
purchase 2,800,000 shares of common stock with exercise prices of approximately
$.71 per share and a warrant to purchase 700,000 shares of common stock with an
exercise price of approximately $1.07 per share. The aggregate redemption price
for the warrants is $25 million. On May 10, 1999 we paid the first $6 million
installment for the warrants and on June 30, 1999 paid another $6 million. The
remainder is due upon the closing of this offering. We also agreed to purchase
from Superior certain rights to CLOser and the related intellectual property for
an aggregate purchase price of $3.5 million. This purchase was completed on
May 10, 1999.
We believe that the terms of these transactions are no less favorable to us
than would have been obtained in arm's length transactions.
TRANSACTIONS WITH DOMINION VENTURES, INC.
We have obtained a lease line of credit from Dominion Ventures, Inc., an
affiliate of two of our principal stockholders: Dominion Fund III and Dominion
Fund IV, L.P. Dominion Ventures has agreed to acquire computer and office
equipment when we request it, and to lease the equipment to us. Upon signing the
agreement we were required to pay Dominion Ventures advance rent of
approximately $89,667. In addition, each time Dominion Ventures leases us
equipment, we are required to make monthly rental payments equal to 2.81% of the
cost of the equipment. Prior to the end of the lease term on each piece of
equipment, we have an option to purchase the equipment for its fair market
value. The total value of the equipment leased under the lease line of credit
cannot exceed $1,595,500.
In consideration of Dominion Ventures providing us with the lease line of
credit, we issued to Dominion Fund III a warrant to purchase 9,800 shares of our
Series D Preferred Stock at an exercise price of $11.50 per share and issued to
Dominion Capital Management LLC a warrant to purchase 8,850 shares of our
Series D Preferred Stock at an exercise price of $11.50 per share. Upon closing
of this offering, those warrants will become warrants to purchase 130,550 shares
of our common stock at an exercise price of approximately $1.64 per share. We
believe that the lease line of credit we obtained from Dominion Ventures
contains rental rates and terms no less favorable to us than would have been
obtained in an arm's length transaction with another lease line of credit
provider.
TRANSACTIONS WITH INTUIT LENDER SERVICES
On May 26, 1999, we entered into a distribution, marketing, facilities and
services agreement with Intuit Lender Services, a wholly-owned subsidiary of
Intuit Inc., which is a principal stockholder in our company. Under the
agreement, we will provide sub-prime mortgage support services to Intuit Lender
Services and will pay it fees for services and facilities. We also will pay an
exclusivity fee on August 10, 1999 if Intuit Lender Services has begun sub-prime
services by that date, and will pay an additional annual exclusivity fee. We
believe this agreement contains terms no less favorable to us than would have
been obtained in an arm's-length transaction.
TRANSACTIONS WITH EXECUTIVE OFFICERS
In 1997, we merged OnLine Capital into our company and paid for the merger
with a combination of cash and common stock for an approximate aggregate
purchase price of $793,000. We accounted for this acquisition under the purchase
method of accounting. In addition, we entered into an employment agreement with
John Hogan, who was the sole shareholder of OnLine Capital and who is now an
executive vice president and a member of our board of directors. In 1998, we
revised Mr. Hogan's compensation. In consideration of the revisions, Mr. Hogan,
or any entity designated by Mr. Hogan, is entitled to receive cash in an amount
equal to a percentage of the quarterly pre-tax profits of our mortgage services
group and Mr. Hogan received 700,000 shares of common stock. The amount of cash
which can be earned is capped at $3,400,000 and Mr. Hogan's right to earn the
cash consideration ends on June 30, 2001. Mr. Hogan has designated
J.J.H. Financial, LLC, a company principally owned by him, as the recipient of
the cash consideration. Through the date of this prospectus, we have paid
J.J.H. Financial $1,634,000. We believe that the revised terms are no less
favorable to us than would have been obtained in an arm's length transaction.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted as if all of
the preferred stock had converted to common stock and the sale of the common
stock we are offering had already taken place. As of that date, there were 45
holders of record of our common stock. We have listed each person that
beneficially owns more than 5% of the outstanding common stock, each of our
directors and executive officers identified in the executive compensation table
who beneficially owns any common stock and all directors and executive officers
as a group. Unless otherwise indicated, each of the stockholders has sole voting
and investment power with respect to the shares beneficially owned. Unless
otherwise noted in the footnotes, the address for each principal stockholder is
8751 Broward Boulevard, Fifth Floor, Plantation, FL 33324.
For purposes of calculating amounts beneficially owned before the offering,
the number of shares deemed outstanding includes
o 9,748,368 shares of common stock outstanding as of June 30, 1999;
o 24,321,973 shares of common stock issuable upon conversion of the
preferred stock; and
o the shares of common stock subject to options or warrants held by that
person that are currently exercisable within 60 days after June 30, 1999.
For purposes of calculating the percentage beneficially owned after the
offering, the number of shares deemed outstanding includes (1) all shares deemed
to be outstanding before the offering, (2) shares being sold in this offering,
assuming no exercise of the underwriters' overallotment option and
(3) application of the net proceeds of this offering as described in this
prospectus.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
NUMBER OF SHARES OF ---------------------------------
NAME AND ADDRESS COMMON STOCK BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Stephen Green(1),(2)......................................... 8,578,482 22.7% 17.1%
Canaan Partners(2)........................................... 8,502,406 22.5 17.0
Intuit Inc.(3)............................................... 6,910,516 18.5 8.2
Michael K. Lee(4),(5)........................................ 6,192,237 16.4 13.0
Dominion Ventures(5)......................................... 6,161,808 16.4 12.9
Technology Crossover Ventures(6)............................. 4,814,983 12.9 10.4
Superior Bank, FSB(7)........................................ 2,100,000 5.3 *
Seth S. Werner(8)............................................ 1,802,500 4.8 4.2
George A. Naddaff(9)......................................... 1,627,185 4.2 3.8
John Hogan(10)............................................... 1,163,176 3.1 2.7
David Larson(11)............................................. 490,000 1.3 1.2
John T. Rodgers(12).......................................... 248,927 * *
John Buscema(13)............................................. 242,200 * *
C. Toms Newby, III(6)(14).................................... 4,814,983 12.9 10.4
B. Anderson Young............................................ 0 * *
All directors and executive officers as a group
(11 persons)............................................... 25,159,692 61.7 37.7
</TABLE>
- ------------------
* Represents less than 1%.
(1) Mr. Green is a member of our board of directors and is a partner in Canaan
Partners. Mr. Green has shared voting power with respect to the shares
owned by Canaan Partners and shared investment power with respect to the
shares and warrants owned by Canaan Partners. See footnote (2).
(2) Includes 390,383 shares beneficially owned by Canaan Capital Limited
Partnership; 3,258,108 shares beneficially owned by Canaan Capital Offshore
Limited Partnership, C.V.; 362,131 shares beneficially owned by Canaan
Ventures II Limited Partnership; 571,200 shares beneficially owned by
Canaan Ventures II Offshore, C.V.; and 3,332,707 shares beneficially owned
by Canaan Equity, L.P. Canaan
(Footnotes continued on next page)
62
<PAGE>
(Footnotes continued from previous page)
Equity, L.P. also holds warrants to purchase common stock in the following
amounts and at the following prices: (a) 4,546 at the initial public
offering price; and (b) 583,331 at approximately $1.07 per share. The
address for each of these entities is 105 Rowayton Avenue, Rowayton,
Connecticut 06853.
(3) Includes 3,652,173 shares of common stock beneficially owned by Intuit Inc.
and warrants to purchase 50,010 shares of common stock at the initial
public offering price. The number of shares of common stock and the
percentage of common stock before the offering includes 3,208,333 shares of
common stock issuable to Intuit upon conversion of a convertible note. A
portion of the net proceeds of this offering is expected to be used to
retire the convertible note for the outstanding principal amount of
$27.5 million and Intuit has declared an intention not to convert the note.
The address for Intuit Inc. is 2535 Garcia Avenue, Mountain View,
California 94043.
(4) Mr. Lee is a member of our board of directors and is a principal in the
general partner of the Dominion Ventures entities. Mr. Lee has sole voting
power with respect to the shares owned by Dominion Ventures and has shared
investment power with respect to the shares and warrants owned by Dominion
Ventures. See footnote (5).
(5) Includes 5,366,851 shares beneficially owned by Dominion Fund III and
408,338 shares beneficially owned by Dominion Fund IV, L.P. Dominion Fund
III holds a warrant to purchase 9,800 shares of Series D Preferred Stock at
$11.50 per share and Dominion Capital Management LLC holds a warrant to
purchase 8,850 shares of Series D Preferred Stock at $11.50 per share.
Those warrants will become warrants to purchase 130,550 shares of common
stock at approximately $1.64 per share upon closing of this offering.
Dominion Fund III also holds warrants to purchase 233,338 shares of common
stock at approximately $1.07 per share. Dominion Fund IV, L.P. holds
warrants to purchase 22,731 shares of common stock at the initial public
offering price. The address for Dominion Fund III, Dominion Capital
Management LLC and Dominion Fund IV, L.P. is 44 Montgomery Street, #4200,
San Francisco, California 94104.
(6) Consists of 1,802,913 shares beneficially owned by Technology Crossover
Ventures II, L.P. and warrants to purchase 6,524 shares of common stock at
the initial public offering price; 58,569 shares beneficially owned by TCV
II, V.O.F. and warrants to purchase 213 shares of common stock at the
initial public offering price; 1,386,105 shares beneficially owned by TCV
II (Q), L.P. and warrants to purchase 5,016 shares of common stock at the
initial public offering price; 245,987 shares beneficially owned by TCV II
Strategic Partners, L.P. and warrants to purchase 892 shares of common
stock at the initial public offering price; 275,268 shares beneficially
owned by Technology Crossover Ventures II, C.V. and warrants to purchase
996 shares of common stock at the initial public offering price (the
foregoing five entities, collectively, the "TCV II Funds"); 7,497 shares
beneficially owned by TCV III (GP); 35,609 shares beneficially owned by
TCV III L.P.; 946,526 shares beneficially owned by TCV III (Q), L.P.; and
42,868 shares beneficially owned by TCV III Strategic Partners, L.P. (the
latter four entities, collectively, the "TCV III Funds" and, together with
the TCV II Funds, the "TCV Funds"). The TCV II Funds also have an option to
purchase from the underwriters at the initial public offering price per
share, 272,727 shares of our common stock. Jay C. Hoag and Richard H.
Kimball are the sole managing members of Technology Crossover Management
II, L.L.C. ("TCM II"), the general partner of each of the TCV II Funds, and
Technology Crossover Management III, L.L.C. ("TCM III"), the general
partner of each of the TCV III Funds. Consequently, TCM II may be deemed to
beneficially own all shares held by the TCV II Funds, TCM III may be deemed
to beneficially own all shares held by the TCV III Funds and Messrs. Hoag
and Kimball may each be deemed to beneficially own all of the shares held
by the TCV Funds. TCM II, TCM III and Messrs. Hoag and Kimball each
disclaim beneficial ownership of such shares, except to the extent of their
respective pecuniary interests in those shares. The address for each of
these entities is 575 High Street, Suite 400, Palo Alto, California 94301.
(Footnotes continued on next page)
63
<PAGE>
(Footnotes continued from previous page)
(7) Consists of 2,100,000 shares of common stock issuable pursuant to presently
exercisable warrants. A portion of the net proceeds of this offering is
expected to be used to repurchase the remaining warrants for an aggregate
price of $13 million. The address for Superior Bank, FSB is One Lincoln
Centre, Oakbrook Terrace, Illinois 60181.
(8) Consists of 1,382,500 shares of common stock beneficially owned by The Seth
Werner Revocable Trust dated October 1, 1996, presently exercisable options
to purchase 350,000 shares of common stock at approximately $.79 per share
and presently exercisable options to purchase 70,000 shares of common stock
at approximately $1.64 per share.
(9) Consists of 509,089 shares of common stock, presently exercisable warrants
to purchase 350,000 shares of common stock at approximately $.71 per share,
presently exercisable warrants to purchase 256,032 shares of common stock
at approximately $1.14 per share, presently exercisable warrants to
purchase 256,032 shares of common stock at $1.50 per share and presently
exercisable warrants to purchase 256,032 shares of common stock at
approximately $1.86 per share, each held by FirstMN, LLC, of which George
A. Naddaff, a member of our board of directors, is 50% owner.
(10) Consists of 988,176 shares of common stock and presently exercisable
options to purchase 175,000 shares of common stock at approximately $1.07
per share.
(11) Consists of presently exercisable options to purchase 420,000 shares of
common stock at approximately $.79 per share and presently exercisable
options to purchase 70,000 shares of common stock at approximately $1.64
per share.
(12) Consists of 192,780 shares of common stock and presently exercisable
warrants to purchase 56,147 shares of common stock at approximately $1.07
per share.
(13) Consists of presently exercisable warrants to purchase 140,000 shares of
common stock at approximately $.71 per share, presently exercisable options
to purchase 42,000 shares of common stock at approximately $.79 per share
and presently exercisable options to purchase 60,200 shares of common stock
at approximately $1.07 per share.
(14) Mr. Newby has been nominated for election as a director. He is a member of
TCM II, which is the general partner of the TCV II Funds and a member of
TCM III, which is the general partner of the TCV III Funds. Mr. Newby has
neither voting nor dispositive power over shares held by the TCV Funds.
Mr. Newby disclaims beneficial ownership of those shares. Nevertheless,
through his respective interests in TCM II and TCM III, Mr. Newby has a
pecuniary interest in the shares held by the TCV Funds.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue up to 210,000,000 shares of common stock, $.01
par value per share, and 15,000,000 shares of preferred stock, $.01 par value
per share. At the date of this prospectus, 9,748,368 shares of common stock and
3,449,074 shares of preferred stock were issued and outstanding. All of the
outstanding capital stock is and will be, fully paid and non-assessable.
COMMON STOCK
Holders of common stock are entitled to one vote per share. All actions
submitted to a vote of stockholders are voted on by holders of common stock
voting together as a single class. Holders of common stock are not entitled to
cumulative voting in the election of directors.
Holders of common stock are entitled to receive dividends in cash or in
property on an equal basis, if and when dividends are declared on the common
stock by our board of directors, subject to any preference in favor of
outstanding shares of preferred stock, if there are any.
In the event of liquidation of our company, all holders of common stock
will participate on an equal basis with each other in our net assets available
for distribution after payment of our liabilities and payment of any liquidation
preferences in favor of outstanding shares of preferred stock, if there are any.
Holders of common stock are not entitled to preemptive rights and the
common stock is not subject to redemption.
The rights of holders of common stock are subject to the rights of holders
of any preferred stock which we designate or have designated. The rights of
preferred stockholders may adversely affect the rights of the common
stockholders.
PREFERRED STOCK
Our board of directors has the ability to issue up to 15,000,000 shares of
preferred stock in one or more series, without stockholder approval. The board
of directors may designate for the series
o the number of shares and name of the series,
o the voting powers of the series, including the right to elect
directors, if any,
o the dividend rights and preferences, if any,
o redemption terms, if any,
o liquidation preferences and the amounts payable on liquidation or
dissolution,
o the terms upon which such series may be converted into any other
series or class
of our stock, including the common stock and
o any other terms that are not prohibited by law.
It is impossible for us to state the actual effect it will have on common
stock holders if the board of directors designates a new series of preferred
stock. The effects of such a designation will not be determinable until the
rights accompanying the series have been designated. The issuance of preferred
stock could adversely affect the voting power, liquidation rights or other
rights held by owners of common stock or other series of preferred stock. The
board of directors' authority to issue preferred stock without shareholder
approval could make it more difficult for a third party to acquire control of
our company, and could discourage any such attempt. We have no present plans to
issue any additional shares of preferred stock.
All outstanding shares of preferred stock will automatically convert into
an aggregate of 24,321,973 shares of common stock upon closing of this offering.
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<PAGE>
OPTIONS AND WARRANTS
As of June 30, 1999, 12,567,716 options were outstanding under our stock
option plan and 8,427,944 options were available for issuance under our stock
option plan. Management intends to issue 1,000,000 options under the stock
option plan prior to completion of this offering, with exercise prices equal to
the initial public offering price. These options will vest 20% per year
beginning on the first anniversary of their grant.
In addition to options granted through the stock option plan, the following
options and warrants were outstanding as of June 30, 1999 and except as noted
below are presently exercisable for shares of common stock:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF SHARES PURCHASABLE PRICE(4)
- ---------------------------- ----------------
<S> <C>
3,307,500(1) $ 0.71
437,388 0.79
1,972,215(2) 1.07
256,032 1.14
256,032 1.50
382,550(3) 1.64
256,032 1.86
123,981 11.00(5)
</TABLE>
- ------------------
(1) Includes warrants to purchase 1,400,000 shares of common stock held by
Superior Bank which we will redeem from the net proceeds of this offering.
(2) Includes warrants to purchase 700,000 shares of common stock held by
Superior Bank which we will redeem from the net proceeds of this offering.
(3) Includes warrants to purchase 18,650 shares of Series D Preferred Stock at
$11.50 per share which will become warrants to purchase 130,550 shares of
common stock at approximately $1.64 per share upon closing of this offering.
(4) Rounded to the nearest cent.
(5) Assuming the mid-point of the price range. The number and exercise price of
options and warrants in
this category float with the initial public offering price.
Holders of options and warrants do not have any of the rights or privileges
of our stockholders, including voting rights, prior to exercise of the options
and warrants. We have reserved sufficient shares of authorized common stock to
cover the issuance of common stock subject to the options and warrants.
STATUTORY PROVISIONS AND PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
The following provisions of the Florida Business Corporation Act and our
articles of incorporation and bylaws could have the effect of preventing or
delaying a person from acquiring or seeking to acquire a substantial equity
interest in, or control of, our company.
STATUTORY PROVISIONS
We are subject to several anti-takeover provisions under Florida law that
apply to public corporations organized under Florida law unless the corporation
has elected to opt out of those provisions in its articles of incorporation or
its bylaws. We have not elected to opt out of these provisions.
The Florida Business Corporation Act prohibits the voting of shares in a
publicly held Florida corporation that are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
approve the granting of voting rights to the acquiring party. A "control share
acquisition" is defined as an acquisition that
66
<PAGE>
immediately thereafter entitles the acquiring party, directly or indirectly, to
vote in the election of directors within any of the following ranges of voting
power:
o 1/5 or more but less than 1/3
o 1/3 or more but less than a majority
o a majority or more
There are some exceptions to the "control share acquisition" rules.
The Florida Business Corporation Act also contains an "affiliated
transaction" provision that prohibits a publicly-held Florida corporation from
engaging in a broad range of business combinations or other extraordinary
corporate transactions with an "interested shareholder" unless
o the transaction is approved by a majority of disinterested directors
before the person becomes an interested shareholder
o the corporation has not had more than 300 stockholders of record
during the past three years
o the interested shareholder has owned at least 80% of the
corporation's outstanding voting shares for at least five years
o the interested shareholder is the beneficial owner of at least 90%
of the voting shares (excluding shares acquired directly from the
corporation in a transaction not approved by a majority of the
disinterested directors)
o consideration is paid to the holders of the corporation's shares
equal to the highest amount per share paid by the interested
shareholder for the acquisition of the corporation's shares in the
last two years or fair market value, and other specified conditions
are met or
o the transaction is approved by the holders of two-thirds of the
Company's voting shares other than those owned by the interested
shareholder.
An "interested shareholder" is defined as a person who, together with
affiliates and associates, beneficially owns more than 10% of a company's
outstanding voting shares. The Florida Business Corporation Act defines
"beneficial ownership" in more detail.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Florida Business Corporation Act authorizes Florida corporations to
indemnify any person who was or is a party to any proceeding other than an
action by, or in the right of, the corporation, by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation. The indemnity
also applies to any person who is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation or
other entity. The indemnification applies against liability incurred in
connection with such a proceeding, including any appeal thereof, if the person
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation. To be eligible for indemnity
with respect to any criminal action or proceeding, the person must have had no
reasonable cause to believe his conduct was unlawful.
In the case of an action by or on behalf of a corporation, indemnification
may not be made if the person seeking indemnification is found liable, unless
the court in which the action was brought determines such person is fairly and
reasonably entitled to indemnification.
The indemnification provisions of the Florida Business Corporation Act
require indemnification if a director, officer, employee or agent has been
successful in defending any action, suit or proceeding to which he was a party
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation. The indemnity covers expenses actually and reasonably
incurred in defending the action.
The indemnification authorized under Florida law is not exclusive and is in
addition to any other rights granted to officers and directors under the
articles of incorporation or bylaws of the corporation or any agreement between
officers and directors and the corporation. Each of our directors and executive
officers,
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<PAGE>
other than John Buscema, has signed an indemnification agreement. The
indemnification agreements provide for full indemnification under Florida law.
The indemnification agreements also provide that we will indemnify the officer
or director against liabilities and expenses incurred in a proceeding to which
the officer or director is a party or is threatened to be made a party, or in
which the officer or director is called upon to testify as a witness or
deponent, in each case arising out of actions of the officer or director in his
official capacity. Exceptions to this additional indemnification include
criminal violations by the officer or director, transactions involving an
improper personal benefit to the officer or director, unlawful distributions of
our assets under Florida law and wilful misconduct or conscious disregard for
our best interests.
Our bylaws provide for the indemnification of directors, former directors
and officers to the maximum extent permitted by Florida law and for the
advancement of expenses incurred in connection with the defense of any action,
suit or proceeding that the director or officer was a party to by reason of the
fact that he is or was a director or officer of our corporation, or at our
request, a director, officer, employee or agent of another corporation. Our
bylaws also provide that we may purchase and maintain insurance on behalf of any
director against liability asserted against the director in such capacity.
Under the Florida Business Corporation Act, a director is not personally
liable for monetary damages to us or to any other person for acts or omissions
in his capacity as a director except in certain limited circumstances. Those
circumstances include violations of criminal law and transactions in which the
director derived an improper personal benefit. As a result, stockholders may be
unable to recover monetary damages against directors for actions taken by them
which constitute negligence or gross negligence or which are in violation of
their fiduciary duties, although injunctive or other equitable relief may be
available.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is Continental Stock Transfer &
Trust Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect the market price of our common stock. Furthermore, since only a
limited number of shares will be available for sale shortly after this offering
because of certain contractual and legal restrictions on resale, sales of
substantial amounts of common stock in the public market after the restrictions
lapse could adversely affect the market price of our common stock and our
ability to raise capital in the future.
Upon completion of this offering, we will have outstanding 41,570,341
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants, based on shares
outstanding as of June 30, 1999. Of these shares, the 7,500,000 shares of common
stock sold in this offering will be freely tradable, unless shares are purchased
by an existing "affiliate". Our affiliates are people or entities that directly
or indirectly control our company, are controlled by our company, or are under
common control with our company. For instance, our directors, executive officers
and principal stockholders are deemed to control our company, and thus are
affiliates.
The remaining 34,070,341 outstanding shares of common stock will be
"restricted" securities within the meaning of Rule 144 under the Securities Act
of 1933, as amended, and may not be sold in the absence of registration under
the securities laws unless an exemption from registration is available.
One of those exemptions is Rule 144. In general, Rule 144 allows a
shareholder (including an affiliate) who has beneficially owned restricted
shares for at least one year to sell within any three-month period shares which
do not exceed the greater of 1% of the outstanding shares of common stock of the
company or the average weekly trading volume during the four calendar weeks
preceding the sale. Sales under Rule 144 also must be sold through brokers or
"market makers" and there must be current public information about the company
available. Shares properly sold in reliance on Rule 144 to persons who are not
affiliates become freely tradable without restriction or registration under the
securities laws. The Rule 144 restrictions are not applicable to a person who
has beneficially owned shares for at least two years (including "tacked on"
holding periods) and who is not an affiliate of the company.
Another exemption is Rule 701 of the Securities Act of 1933. Subject to
certain limitations on the aggregate offering price of a transaction and other
conditions, Rule 701 may be relied upon by stockholders with respect to the
resale of securities originally purchased by employees, directors, officers and
consultants under stock options issued under our stock option plan. To be
eligible for resale under Rule 701, shares must have been issued pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, including exercises after the date of this
offering. Securities issued in reliance on Rule 701 are restricted securities.
Subject to the contractual restrictions described below, securities may be sold
under Rule 701 beginning 90 days after the date of this prospectus by affiliates
if they comply with Rule 144, other than the holding period requirement, and by
non-affiliates, subject only to the manner of sale provisions of Rule 144.
All of the executive officers and directors and a large number of stock
holders and option holders have signed lock-up agreements in favor of the
underwriters which prohibit them from selling or otherwise disposing of any
shares of common stock or convertible securities for a period of 180 days after
the date of this prospectus. Credit Suisse First Boston currently has no plans
to release any portion of the securities subject to these lock-up agreements.
When determining whether or not to release shares from lock-up agreements,
Credit Suisse First Boston will consider, among other factors, the stockholder's
reasons for requesting the release, the number of shares for which the release
is being requested and market conditions at the time.
69
<PAGE>
The 34,070,341 shares that are "restricted securities" will be available
for sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE SHARES
- -------------------------------------------------------------------------------- ----------
<S> <C>
Date of this prospectus......................................................... 932,050
90 days after the date
of this prospectus............................................................ 692,675
180 days or more after the date of this prospectus.............................. 32,445,616
</TABLE>
After this offering, we intend to file registration statements covering
approximately 20,995,660 shares of common stock issued pursuant to the exercise
of stock options issued under our stock option plan. Accordingly, shares to be
registered in this manner will be available for sale in the open market, except
to the extent the shares are subject to the lock-up agreements. Affiliates will
still be required to comply with Rule 144.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , the underwriters named below for whom Credit
Suisse First Boston Corporation, Deutsche Bank Securities Inc. and U.S. Bancorp
Piper Jaffray Inc. are acting as representatives, have severally but not jointly
agreed to purchase from Mortgage.com the following respective numbers of shares
of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Deutsche Bank Securities Inc.....................................................
U.S. Bancorp Piper Jaffray Inc...................................................
---------
Total....................................................................... 7,500,000
---------
---------
</TABLE>
The underwriting agreement provides that the underwriters are subject to
certain conditions and that the underwriters will be obligated to purchase all
of the shares of the common stock offered hereby (other than those shares
covered by the over-allotment option described below) if any are purchased. The
underwriting agreement provides that, in the event of a default by an
underwriter, in certain circumstances the purchase commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
Mortgage.com has granted to the underwriters an option, expiring on the
30th day after the date of this prospectus, to purchase up to 1,125,000
additional shares of common stock at the initial public offering price, less
underwriting discounts and commissions, all as set forth on the cover page of
this prospectus. Such option may be exercised only to cover over-allotments in
the sale of shares of common stock. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
Mortgage.com has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to certain dealers (who may include the
underwriters) at such price less a concession of $ per share, and the
underwriters and such dealers may allow a discount of $ per share on sales
to certain other dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
71
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by Mortgage.com and the expenses payable by Mortgage.com. The
expenses are estimates except for the Securities and Exchange Commission filing
fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions....................
Expenses payable:
Securities and Exchange Commission filing fee........... $ .00 $ 31,171 $ 31,171
National Association of Securities Dealers, Inc. fee.... .00 11,713 11,713
Nasdaq Listing fee...................................... .00 5,000 5,000
Printing and engraving.................................. .03 200,000 200,000
Accountants' fees and expenses.......................... .05 375,000 375,000
Legal fees and expenses................................. .06 425,000 425,000
Transfer agent expenses and fees........................ .00 15,000 15,000
Miscellaneous........................................... .00 37,116 37,116
---------- ---------- ----------
Total................................................ $ .15 $1,100,000 $1,100,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The representatives have informed Mortgage.com that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
Mortgage.com, its officers and directors, and certain other existing
stockholders and optionholders of Mortgage.com have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or, in the case of Mortgage.com, file with the Securities and
Exchange Commission, a registration statement relating to any shares of common
stock or securities exhangeable or exercisable for or convertible into shares of
common stock or publicly disclose the intention to do any of the foregoing
without the prior written consent of Credit Suisse First Boston for a period of
180 days after the date of this prospectus, except under certain circumstances.
Of the 7,500,000 shares of common stock to be sold in this offering, the
underwriters have reserved for sale, at the price to public set forth on the
cover page of this prospectus, up to 647,727 shares as follows: (1) at
Mortgage.com's request, up to 375,000 shares for Mortgage.com's directors,
officers, employees and business associates and (2) up to an additional 272,727
shares for a holder of Mortgage.com's preferred stock in connection with a
pre-existing contractual agreement between Mortgage.com and such holder. As a
result, the number of shares of common stock available for sale to the general
public will be reduced to the extent such persons purchase the reserved shares.
The underwriters will offer to the general public, on the same basis as the
other shares to be sold in this offering, any reserved shares that are not so
purchased.
Mortgage.com has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the underwriters may be required to make in respect thereof.
Mortgage.com has applied to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "MDCM."
Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between Mortgage.com and the representatives. The principal factors considered
in determining the public offering price will include:
o the information set forth in this prospectus and otherwise available to
the representatives;
o the history of, and the prospects for, Mortgage.com and the mortgage
banking industry;
o an assessment of Mortgage.com's management;
o the prospects for, and the timing of, future earnings of Mortgage.com;
o the present state of Mortgage.com's development and its current financial
condition;
72
<PAGE>
o the general condition of the securities markets at the time of the
offering;
o the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of Mortgage.com;
o market conditions for initial public offerings; and
o other relevant factors.
There can be no assurance that an active trading market will develop for
the common stock or that the common stock will trade in the market subsequent to
the offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed to cover syndicate short positions. Penalty bids permit the
underwriters' representatives to reclaim a selling concession from a syndicate
when shares of the common stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
73
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis and is exempt from the requirement that we prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
o such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws,
o where required by law, such purchaser is purchasing as principal and not
as agent, and
o such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named in
this prospectus may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the issuer or such persons. All or a substantial portion of the assets of the
issuer and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
74
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock issued in this offering will be
passed upon for us by the law firm of Foley & Lardner, Jacksonville, Florida. An
individual attorney at Foley & Lardner beneficially owns 4,347 shares of our
preferred stock which will convert into 30,429 shares of common stock upon
completion of this offering. That attorney has not participated in the
preparation of this prospectus. Securities law matters in connection with this
offering will be passed upon for the underwriters by the law firm of Testa,
Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
Our financial statements as of December 31, 1997 and 1998, and for each of
the three years in the period ended December 31, 1998, have been included in
this prospectus and in the Registration Statement filed with the Securities and
Exchange Commission in reliance upon the report of KPMG LLP, independent
certified public accountants, upon its authority as experts in accounting and
auditing. KPMG LLP's report on the financial statements can be found at the end
of this prospectus and in the Registration Statement.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement (of which this prospectus is a part) under the Securities Act of 1933,
as amended, relating to the common stock we are offering. This prospectus does
not contain all the information that is in the Registration Statement. Portions
of the Registration Statement have been omitted as allowed by the rules and
regulations of the Securities and Exchange Commission. Statements in this
prospectus which summarize documents are not necessarily complete, and in each
case you should refer to the copy of the document filed as an exhibit to the
Registration Statement. For further information regarding our company and our
common stock, please see the Registration Statement and its exhibits and
schedules. You may examine the Registration Statement free of charge at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York
10048. Copies of the Registration Statement may also be obtained from the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed rates.
In addition, the Registration Statement and other public filings can be obtained
from the Commission's Web site at http://www.sec.gov.
We intend to furnish our stockholders written annual reports containing
audited financial statements certified by an independent public accounting firm.
75
<PAGE>
MORTGAGE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................... F-3
Consolidated Balance Sheets as of December 31, 1998, 1997 and March 31, 1999 (unaudited)................... F-4
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996, and for the
three months ended March 31, 1999 (unaudited) and 1998 (unaudited)....................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and
1996, and for the three months ended March 31, 1999
(unaudited).............................................................................................. F-6
Consolidated Statements of Cash Flow for the years ended December 31, 1998, 1997 and 1996, and for the
three months ended March 31, 1999 (unaudited) and 1998 (unaudited)....................................... F-7
Notes to Consolidated Financial Statements................................................................. F-10
</TABLE>
F-1
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
AND
MARCH 31, 1999 AND 1998 (UNAUDITED)
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Mortgage.com, Inc.
We have audited the accompanying consolidated balance sheets of Mortgage.com,
Inc. (formerly known as First Mortgage Network, Inc.) (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in note 12 to the accompanying consolidated financial statements,
the Company is currently in discussions with a number of venture-capital firms
to provide additional capital for the operations and growth of the Company. The
Company's ability to function at or beyond their current level and achieve their
growth strategy may be affected by the amount of capital available to it.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Mortgage.com, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Ft. Lauderdale, Florida
March 26, 1999
except for
notes 2 and 1(c)
which are as of
May 26, 1999 and
July 12, 1999, respectively
F-3
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ------------
1998 1997 1999
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 3,412,283 $ 1,679,722 $ 6,250,720
Mortgage loans available for sale, net.................. 176,372,516 73,737,933 166,149,185
Accounts and notes receivable, net...................... 1,243,571 1,228,762 1,939,110
Private placement receivables........................... -- 2,000,000 --
Accrued interest receivable............................. 196,943 197,659 231,041
Prepaid expenses and deposits........................... 1,280,133 639,100 1,761,451
Property and equipment, net............................. 5,265,877 1,339,237 5,597,006
Capitalized software development costs.................. 978,261 639,123 1,317,903
Intangible asset........................................ -- -- 873,630
Goodwill, net........................................... 4,688,125 465,434 4,685,117
------------ ----------- ------------
Total assets....................................... $193,437,709 $81,926,970 $188,805,163
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse notes payable................................. $171,777,572 $72,223,912 $159,650,534
Accounts payable, accrued expenses and other
liabilities........................................... 5,538,021 1,908,303 5,957,345
Notes payable........................................... 288,701 70,833 386,980
Capital lease obligations............................... 1,565,778 -- 2,074,831
Lines of credit......................................... -- 395,899 --
Subordinated debt, net of discount...................... 100,000 2,500,000 9,722,774
Deferred revenue........................................ 1,011,987 1,011,987 --
Deferred rent........................................... 19,481 19,481 19,481
------------ ----------- ------------
Total liabilities.................................. 180,301,540 78,130,415 177,811,945
------------ ----------- ------------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 15,000,000
shares, issued and outstanding 3,199,073, 1,925,175
and 3,199,073 shares at December 31, 1998 and 1997,
and March 31, 1999, respectively................... 31,991 19,252 31,991
Common stock, $.01 par value. Authorized 210,000,000
shares, issued and outstanding 9,398,270, 7,690,270
and 9,539,110 shares at December 31, 1998 and 1997
and March 31, 1999, respectively................... 93,983 76,903 95,391
Unearned compensation................................. (631,000) -- (15,187,000)
Additional paid-in capital............................ 31,531,555 14,762,575 47,321,589
Accumulated deficit................................... (17,890,360) (11,062,175) (21,268,753)
------------ ----------- ------------
Total shareholders' equity......................... 13,136,169 3,796,555 10,993,218
------------ ----------- ------------
Commitments and contingencies...........................
------------ ----------- ------------
Total liabilities and shareholders' equity......... $193,437,709 $81,926,970 $188,805,163
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1998 1997 1996 1999 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net... $28,597,825 $11,594,660 $ 4,101,341 $ 8,599,974 $ 5,407,489
Loan production and processing
fees, net....................... 5,337,625 2,347,321 820,469 2,598,337 921,584
Management, technology and other
fees............................ 1,868,202 2,032,428 2,577,296 1,991,360 545,795
Interest income.................... 6,998,242 3,549,599 921,825 2,676,232 1,068,976
Interest expense................... (7,111,344) (3,049,591) (904,622) (2,650,395) (1,125,060)
----------- ----------- ----------- ----------- -----------
Net interest (expense) income... (113,102) 500,008 17,203 25,837 (56,084)
----------- ----------- ----------- ----------- -----------
Total revenue........................ 35,690,550 16,474,417 7,516,309 13,215,508 6,818,784
----------- ----------- ----------- ----------- -----------
Expenses:
Compensation and employee
benefits........................ 26,074,914 13,083,250 6,527,303 9,645,103 4,927,394
Marketing.......................... 1,335,494 237,868 94,541 1,536,187 85,295
Research and development........... 2,888,159 1,079,257 496,568 776,565 433,224
Depreciation and amortization...... 1,873,119 480,338 652,136 697,759 153,633
General and administrative......... 9,596,652 5,125,570 3,763,936 3,758,804 1,589,398
----------- ----------- ----------- ----------- -----------
Total expenses....................... 41,768,338 20,006,283 11,534,484 16,414,418 7,188,944
----------- ----------- ----------- ----------- -----------
Net loss............................. $(6,077,788) $(3,531,866) $(4,018,175) $(3,198,910) $ (370,160)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss per share, basic and
diluted............................ $ (1.02) $ (0.55) $ (0.56) $ (0.44) $ (0.09)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN UNEARNED ACCUMULATED TREASURY
STOCK STOCK CAPITAL COMPENSATION DEFICIT STOCK TOTAL
--------- ------- ----------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(unaudited)................... $ 2,252 $72,233 $ 3,784,305 $ -- $(3,512,134) $ -- $ 346,656
Issuance of preferred stock... 12,273 -- 6,698,413 -- -- -- 6,710,686
Issuance of common stock...... -- 7,000 527,024 -- -- -- 534,024
Issuance of common stock
warrants.................... -- -- 260,000 -- -- -- 260,000
Purchase of treasury stock.... -- -- -- -- -- (550,000) (550,000)
Net loss...................... -- -- -- -- (4,018,175) -- (4,018,175)
------- ------- ----------- ------------ ------------ --------- ------------
Balance at December 31, 1996.... 14,525 79,233 11,269,742 -- (7,530,309) (550,000) 3,283,191
Issuance of preferred stock... 4,727 -- 3,495,273 -- -- -- 3,500,000
Issuance of common stock...... -- 5,020 532,490 -- -- -- 537,510
Issuance of common stock
warrants.................... -- -- 7,720 -- -- -- 7,720
Retirement of treasury
stock....................... -- (7,350) (542,650) -- -- 550,000 --
Net loss...................... -- -- -- -- (3,531,866) -- (3,531,866)
------- ------- ----------- ------------ ------------ --------- ------------
Balance at December 31, 1997.... 19,252 76,903 14,762,575 -- (11,062,175) -- 3,796,555
Issuance of preferred stock... 12,739 -- 14,208,914 -- -- -- 14,221,653
Issuance of common stock...... -- 17,080 1,812,921 -- -- -- 1,830,001
Issuance of common stock
warrants.................... -- -- 87,145 -- -- -- 87,145
Stock option plan
compensation................ -- -- 660,000 (660,000) -- -- --
Amortization of unearned
compensation................ -- -- -- 29,000 -- -- 29,000
Dividends paid................ -- -- -- -- (750,397) -- (750,397)
Net loss...................... -- -- -- -- (6,077,788) -- (6,077,788)
------- ------- ----------- ------------ ------------ --------- ------------
Balance at December 31, 1998.... $31,991 93,983 31,531,555 (631,000) (17,890,360) -- 13,136,169
Costs ascribed to issuance of
preferred stock............. -- -- (1,538) -- -- -- (1,538)
Issuance of common stock...... -- 1,408 645,492 -- -- -- 646,900
Issuance of common stock
warrants.................... -- -- 397,080 -- -- -- 397,080
Stock option plan
compensation................ -- -- 14,749,000 (14,749,000) -- -- --
Amortization of unearned
compensation................ -- -- -- 193,000 -- -- 193,000
Dividends paid................ -- -- -- -- (179,483) -- (179,483)
Net loss...................... -- -- -- -- (3,198,910) -- (3,198,910)
------- ------- ----------- ------------ ------------ --------- ------------
Balance at March 31, 1999
(unaudited)................... $31,991 $95,391 $47,321,589 $(15,187,000) $(21,268,753) $ -- $ 10,993,218
------- ------- ----------- ------------ ------------ --------- ------------
------- ------- ----------- ------------ ------------ --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ------------------------------
1998 1997 1996 1999 1998
------------- ------------- ------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash flows from operating activities:
Net loss................................... $ (6,077,788) $ (3,531,866) $ (4,018,175) $ (3,198,910) $ (370,160)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 1,873,119 480,338 652,136 697,759 153,633
Amortization of unearned compensation.... 29,000 -- -- 193,000 --
Provision for losses..................... 898,593 133,499 27,170 111,278 --
Amortization of discount on subordinated
debt................................... -- -- -- 19,854 --
(Increase) decrease in mortgage loans
available for sale, net.................. (102,703,406) (36,490,196) (15,972,647) 10,211,703 6,232,290
Changes in operating assets and
liabilities:
(Increase) decrease in accounts and notes
receivable, net........................ (939,570) 684,498 (1,473,091) (795,180) 27,558
Decrease in private placement
receivables............................ 2,000,000 1,000,000 -- -- 2,000,000
(Increase) decrease in accrued interest
receivable............................. (53,403) 247,382 (49,350) (34,098) 101,026
Increase in prepaid expenses and
deposits............................... (644,710) (86,233) (59,521) (481,318) (1,978,785)
Increase (decrease) in accounts payable,
accrued expenses and other
liabilities............................ 2,911,531 (4,263,100) 1,802,139 419,324 434,650
(Decrease) increase in deferred
revenue................................ -- (20,078) 1,032,065 (1,011,987) --
(Decrease) increase in deferred rent..... -- (169,329) 188,812 -- --
------------- ------------- ------------ ------------- -----------
Net cash (used in) provided by
operating activities............... (102,706,634) (42,015,085) (17,870,462) 6,131,425 6,600,212
------------- ------------- ------------ ------------- -----------
Cash flows from investing activities:
Additions to capitalized software
development costs........................ (831,559) (517,955) (218,745) (500,776) (133,724)
Additions to property and equipment........ (4,146,001) (1,065,482) (146,522) (767,367) (197,622)
Purchase of companies, net of cash
acquired................................. (2,650,321) 366,035 -- (91,455) --
Purchase of intangible asset............... -- -- -- (233,563) --
------------- ------------- ------------ ------------- -----------
Net cash used in investing
activities......................... (7,627,881) (1,217,402) (365,267) (1,593,161) (331,346)
------------- ------------- ------------ ------------- -----------
Cash flows from financing activities:
Proceeds from and cost ascribed to common
stock warrants........................... -- 7,720 260,000 -- --
(Repayment of) proceeds from issuance of
subordinated debentures.................. (200,000) 1,500,000 (1,134,625) 10,000,000 --
Payment of notes payable................... (70,832) (31,095) -- (1,721) --
Proceeds from notes payable................ -- -- -- 100,000 --
Proceeds from issuance of common stock..... -- -- 534,424 900 --
Proceeds from issuance of preferred
stock.................................... 12,364,766 2,000,000 6,582,411 (1,538) 15,440
Proceeds from capital lease obligations.... 1,565,778 -- -- 509,053 --
(Payment of) proceeds from lines of
credit................................... (395,899) 395,899 -- -- (21,667)
Dividends paid............................. (750,397) -- -- (179,483) (15,438)
Purchase of treasury stock................. -- -- (550,000) -- --
Proceeds from (reduction of) warehouse
notes payable............................ 99,553,660 39,031,320 14,330,094 (12,127,038) (6,924,374)
------------- ------------- ------------ ------------- -----------
Net cash provided by (used in)
financing activities............... 112,067,076 42,903,844 20,022,304 (1,699,827) (6,946,039)
------------- ------------- ------------ ------------- -----------
Net increase (decrease) in cash and
cash equivalents................... 1,732,561 (328,643) 1,786,575 2,838,437 (677,173)
Cash and cash equivalents at beginning of
year....................................... 1,679,722 2,008,365 221,790 3,412,283 1,679,722
------------- ------------- ------------ ------------- -----------
Cash and cash equivalents at end of year..... $ 3,412,283 $ 1,679,722 $ 2,008,365 $ 6,250,720 $ 1,002,549
------------- ------------- ------------ ------------- -----------
------------- ------------- ------------ ------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1998 1997 1996 1999 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.......... $6,731,503 $2,749,196 $1,125,753 $2,738,066 $1,094,177
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash paid during the period for income taxes...... $ 26,356 $ -- $ 1,986 $ 827 $ 4,941
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During the three months ended March 31, 1999 (unaudited), in
conjunction with the issuance of subordinated debt of $2,000,000 and
$8,000,000, the Company issued 46,676 and 186,704, respectively, of common
stock warrants which are convertible to common stock at $4.29 per share.
During the three months ended March 31, 1999 (unaudited), in
conjunction with the Internet domain name purchase of www.mortgage.com, the
Company issued 140,000 shares of common stock at $4.61 per share.
During the three months ended March 31, 1999 (unaudited), an employee
exercised stock options for 840 shares of common stock at $1.07 per share.
During June 1998, the Company issued 308,000 shares of common stock at
a value of $1.07 to a brokerage firm in payment for the facilitation of
capital investments in the Company by unaffiliated firms.
During April 1998, the Company purchased all of the outstanding common
stock of RM Holdings, Inc. In conjunction with the acquisition, fair value
of assets acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets....................................... $ 427,219
Goodwill................................................... 2,112,629
Accounts payable and accrued expenses...................... (1,230,101)
-----------
Cash paid, net of cash received............................ $ 1,309,747
-----------
-----------
</TABLE>
In conjunction with this purchase, the Company issued 700,000 shares of
common stock at a price of $1.07 to the shareholders of RM Holdings, Inc.
During 1997, the Company purchased all of the outstanding common stock
of Online Capital. In conjunction with the acquisition, fair value of assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets...................................... $ 13,799,201
Goodwill.................................................. 325,696
Accounts payable and accrued expenses..................... (13,758,862)
------------
Cash received, net of cash paid........................... $ 366,035
------------
------------
</TABLE>
In conjunction with this purchase, the Company issued 501,676 shares of
common stock at a price of $1.07 to the sole shareholder of Online Capital
during 1997. As an adjunct to this purchase, the Company entered into an
earnout agreement in 1998 providing for payments to the shareholder of a
percentage of the profits over the next three years of the division of the
Company that he directs and the issuance of 700,000 shares of common stock
at a price of $1.07. The payments under the earnout agreement will cease
once a maximum of $3,400,000 is paid. The payments and stock issuance during
1998 were:
<TABLE>
<S> <C>
Additions to goodwill....................................... $2,402,694
Stock issued................................................ (750,000)
Accounts payable............................................ (312,120)
----------
Cash paid under earnout agreement........................... $1,340,574
----------
----------
</TABLE>
F-8
<PAGE>
MORTGAGE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Land and building was acquired in satisfaction of a note receivable
owed to the Company. The book value of assets acquired was $419,800 at
December 31, 1998. The building is subject to a mortgage of $288,701 at
December 31, 1998.
In the fourth quarter of 1998, the board of directors granted incentive
stock options for 1,134,182 shares of common stock to employees at a price
of $1.64 per share. The fair value of stock options was esimated to be
greater than the issue price of $1.64. Accordingly, the Company recorded
unearned compensation as the excess of fair value over the issuance price.
The Company is recognizing unearned compensation as compensation expense
over the vesting period of the options.
During 1998 and 1997, $2,200,000 and $1,500,000 of subordinated debt
converted to 193,471 and 206,000 shares of Series D and C preferred stock at
a price of $11.50 and $7.50, respectively.
On December 31, 1997, the Company entered into a subscription
receivable agreement with a venture capital firm, where the venture-capital
firm subscribed for the purchase of $2,000,000 of the Company's 12% senior
subordinated convertible notes due January 31, 2003. The proceeds were
received in January 1998.
During 1997, the Company retired 735,000 shares of outstanding treasury
stock.
On December 31, 1996, the Company sold $1,000,000 of 12% cumulative
Series C preferred stock in a private placement offering. The Company
received final payment from this sale in March 1997.
During 1996, the Company sold $5,150,000 of 12% cumulative Series B
preferred stock in a private placement offering. Net proceeds from this
transaction were $4,581,600. In addition, $127,875 of subordinated debt was
converted to Series B preferred stock. The remaining $1,134,625 of
subordinated debt was redeemed for cash in 1996.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) Consolidation
The consolidated financial statements of the Company include all of its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Basis of Presentation
The financial statements of the Company have been prepared on the accrual
basis of accounting. A summary of the major accounting policies followed in the
preparation of the accompanying financial statements, which conform to generally
accepted accounting principles, is presented below.
All share and per share amounts have been restated to reflect a
seven-for-one common stock split.
(d) Unaudited Interim Consolidated Financial Statements
The consolidated financial statements for the three month periods ended
March 31, 1999 and 1998 are unaudited. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements. 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.
(e) Acquisitions
On January 7, 1999, the Company purchased the Internet domain name of
www.Mortgage.com from an unaffiliated party and has changed the name of the
Company to Mortgage.com, Inc. The purchase price of the transaction was $200,000
in cash and 140,000 shares of common stock at a value of $4.61 per share.
Effective April 1, 1998, the Company purchased RM Holdings, Inc., an
internet-based mortgage lender and call center and merged its operations into a
division of the Company. The fair market value of assets acquired was $427,219.
Under the terms of the agreement, the stockholders of RM Holdings, Inc. received
700,000 shares of common stock at $1.07 per share and $1,471,000 in cash. This
transaction was accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price is
F-10
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values. Goodwill recorded in conjunction with this purchase
was $2,112,629.
Effective June 2, 1997, the Company purchased Online Capital, a mortgage
lender located in San Jose, California, with net assets of $268,755. Under the
terms of the agreement, the sole shareholder of Online Capital received 250,838
shares of common stock and $255,672 in cash. An additional 250,838 shares of
common stock were issued to the shareholder during December 1997, based on
certain profitability criteria being met. In 1998, the Company finalized certain
contingent payment terms related to the transaction. An additional 700,000
shares of common stock were issued to the seller, and an agreement was entered
into which provides for contingent consideration of up to $3,400,000 as
calculated based upon a percentage of the profits of the division, payable
quarterly until the limit is reached or until June 30, 2001, whichever comes
first. Contingent consideration is added to the purchase price as earned. These
transactions were accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price is allocated to the respective
assets acquired and liabilities assumed based on their estimated fair values.
Goodwill recorded under the 1998 contingent consideration agreement and the 1997
purchase of Online Capital was $2,402,694 and $476,475, respectively, through
December 31, 1998. An additional $91,455 of goodwill was recorded under the
contingent consideration agreement during the three months ended March 31, 1999.
(f) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(g) Mortgage Loans Available For Sale, Net
Mortgage loans available for sale, net of discounts and deferred fees, are
carried at the lower of cost or market as determined by outstanding commitments
from investors or current investor yield requirements calculated on the
aggregate loan basis. The net deferred fees and costs are credited to income
when the related loans are sold. The loans are secured by one to four family
residential real estate located throughout the United States.
(h) Accounts and Notes Receivable, Net
The Company entered into an agreement on December 5, 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 $1,080,000 was received as of December 31,
1996, and $533,222 was received as of March 31, 1997. 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 elected to recognize the revenue when the contingencies were satisfied.
These contract contingencies also affect the ultimate collectibility of the
note. The note becomes due on or before November 30, 2006 and bears interest at
5% and interest payments have been collected as due. The note is included in
accounts and notes receivable on the balance sheet at December 31, 1998 and 1997
at its discounted net present value and, due to the contingencies affecting
collectibility, has been fully reserved for at December 31, 1998 and 1997.
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.
(i) Private Placement Receivables
Private placement receivables at December 31, 1997, consisted of a
subscription agreement between the Company and a venture-capital firm. Under
this agreement, the venture-capital firm subscribed for and purchased $2,000,000
of the Company's 12% senior subordinated convertible notes due January 31, 2003,
F-11
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
and warrants to purchase up to an aggregate of 466,669 shares of the Company's
common stock at a price of $1.07 per share. Net proceeds of $2,000,000 were
received during January 1998.
(j) Property and Equipment, Net
Property and equipment, consisting of computer hardware and software,
furniture and fixtures, assets under capital leases and telephone equipment are
recorded at cost. Depreciation is recorded on the straight-line method over the
estimated useful lives of the assets, which are 3 to 30 years.
(k) Capitalized Software Development Costs
Costs incurred internally in creating computer software products are
charged to expense when incurred as research and development costs, until
technological feasibility has been established for the product. Thereafter,
software production costs are capitalized and subsequently reported at the lower
of cost or net realizable value. Capitalized costs are amortized based on
current and future revenue for each product over three years. Prior to 1998,
capitalized costs were amortized over five years. Amortization of the
capitalized costs commences when individual products become available for
general release.
(l) Goodwill, Net
Upon the Company's acquisitions of Online Capital in 1997 and RM Holdings,
Inc. in 1998, the purchase price exceeded the fair value of the assets acquired
less liabilities assumed, thereby creating goodwill. In addition, payments due
under the contingent consideration agreement described in Note 1(c) above are
added to goodwill when incurred. Goodwill is being amortized using the
straight-line method over 15 years.
(m) Income Taxes
The Company records income taxes using the method required by Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Accordingly, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. SFAS 109 requires companies to set up a valuation
allowance for that component of net deferred tax assets which does not meet the
more likely than not criterion for realization.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(n) Allowance for Losses
The Company provides for losses relating to the origination and sale of
mortgage loans and accounts receivable. The allowance for losses is based on
management's evaluation of various factors, including potential for
repurchase-related expenses and contractual recourse obligations relating to
loans sold in the secondary market. While management uses the information
available to make evaluations, future adjustments to the allowance may be
necessary if future economic conditions differ substantially from the
assumptions used in making the evaluations. Management has considered all events
and/or transactions that are subject to reasonable and normal methods of
estimations, and the financial statements reflect that consideration.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective interest rate.
Impairment losses are included in the allowance for losses through a charge to
the provision.
F-12
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
The Company has agreements with several unaffiliated investors, whereby all
loans that are originated and funded are sold on an individual loan basis. The
agreements include clauses whereby loans that fail to meet specific criteria
require repurchase by the Company. Loans that are repurchased are usually resold
to other investors once the specific deficiencies are resolved. The impact of
such repurchases has not been significant to date.
(o) Secondary Marketing Revenue, Net
Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans. Loan origination fees and direct loan origination costs on one
to four family residential mortgage loans are deferred until the loans are sold
to permanent investors and are considered part of the carrying value of a loan.
Deferred origination fees and expenses, net of commitment fees paid in
connection with the sale of the loans, are recognized when the related loans are
sold.
(p) Loan Production and Processing Fees, Net
Loan production and processing fees, which are received for underwriting,
processing and preparing documents for loans originated, are recorded when the
loans are closed. Any disbursements incurred in originating the loans, such as
for credit reports, appraisals and flood certifications, are charged as an
offset against this revenue.
(q) Management, Technology and Other Fees
Revenue from software sales to unaffiliated third parties is recorded as
revenue in the period during which the sale occurs, when there are no further
obligations on behalf of the Company and no right of return exists. Maintenance
fees are recorded as revenue in the period when services are rendered.
Software sales, development, maintenance and user fees of approximately
$1,638,000, $1,854,000 and $1,966,800 were earned from one customer for the
years ended December 31, 1998, 1997 and 1996, respectively. (See note 13 for
warrants issued in conjunction with revenue generated by the Company.)
Research and development expenses are charged to operations in the year
incurred and are comprised of the compensation and general and administrative
expenses directly related to such activities.
(r) 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.
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.
F-13
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(s) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell.
(t) Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
(u) Stock-Based Compensation
In 1997, the Company adopted the disclosure provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation." The Company has
elected to continue accounting for stock-based compensation issued to employees
using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, pro forma disclosures required under
SFAS No. 123 have been presented (See Note 15). Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant, between
the fair value of the Company's stock and the exercise price. Stock issued to
non-employees has been accounted for in accordance with SFAS No. 123 and valued
using the Black-Scholes model.
(v) 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.
(w) Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, 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 for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of unvested restricted
common stock and incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of Special Preferrred Stock (Northern
California Division), Series B, Series C, and Series D convertible preferred
stock, are included in the diluted net loss per share computation to the extent
such shares are dilutive.
F-14
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------- MARCH 31, MARCH 31,
1998 1997 1996 1999 1998
------- ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER (UNAUDITED)
SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Numerator:
Net Loss................................................ $(6,078) $(3,532) $(4,018) $(3,199) $ (370)
Dividends paid on special preferred stock............... (751) -- -- (178) --
Cumulative dividends on Series B convertible
preferred stock.................................... (618) (618) (413) (153) (155)
Cumulative dividends on Series C convertible
preferred stock.................................... (665) (335) (3) (164) (166)
Cumulative dividends on Series D convertible
preferred stock.................................... (831) -- -- (436) --
------- ------- ------- ------- -------
Net loss attributable to common shareholders............ $(8,943) $(4,485) $(4,434) $(4,130) $ (691)
------- ------- ------- ------- -------
Denominator:
Weighted average shares--basic and diluted.............. 8,729 8,162 7,924 9,492 7,686
------- ------- ------- ------- -------
Net loss per share--basic and diluted................... $ (1.02) $ (0.55) $ (0.56) $ (0.44) $ (0.09)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
Since the Company reported a net loss, the computation does not consider
the convertible preferred stock, common stock options and warrants due to the
anti-dilutive effect on net loss per share.
(x) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of shareholders' equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's consolidated balance sheets or statements of
operations. The adoption of SFAS No. 130 has had no effect on the Company's
consolidated financial statements.
(y) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that a public enterprise reports information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, and requires restatement of earlier periods presented.
Segment information is presented in note 21.
(z) Software Revenue Recognition
In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"). SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"). Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as result, the AICPA is deliberating amendments to SOP 97-2, so they can
issue interpretations regarding the applicability and the method of application
of those provisions. The adoption of SOP 97-2 has not had a material impact on
the Company's consolidated statements of operations, balance sheets or cash
flows.
F-15
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(aa) Derivatives
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Financial Accounting Standards Board has
issued an exposed draft to delay the implementation of the Standard, however, it
is not presently known if such implementation will be delayed. As the Company
does not currently engage or plan to engage in derivative or hedging activities,
there will be no impact to the Company's consolidated statements of operations,
balance sheets or cash flows upon the adoption of this standard.
(2) RESTATEMENT
In preparation of the consolidated financial statements, management
considered all events and/or transactions that were subject to reasonable and
normal methods of estimation to determine a fair value of the Company's common
stock in order to estimate the unearned compensation amounts.
Subsequent to the issuance of the Company's financial statements as of and
for the year ended December 31, 1998, certain transactions were executed which
caused the Company's estimate of the fair value of its common stock to decrease.
Accordingly, the Company's 1998 financial statements have been restated to
reflect the impact of this decrease in fair value. The effect of this
restatement is a reclass between additional paid-in capital and unearned
compensation, thus having no effect on total shareholder's equity. In addition,
the amortization related to unearned compensation was decreased to reflect this
change.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
AS
PREVIOUSLY
REPORTED RESTATED
------------ ------------
<S> <C> <C>
Consolidated Balance Sheet:
Unearned compensation....................................... $ (6,095,000) $ (631,000)
Additional paid-in capital.................................. $ 37,352,112 $ 31,162,112
Accumulated deficit......................................... $(18,166,360) $(17,890,360)
Total shareholder's equity.................................. $ 13,136,169 $ 13,136,169
Consolidated Statement of Operations:
Compensation and benefits................................... $ 26,350,914 $ 26,074,914
Net loss.................................................... $ (6,353,788) $ (6,077,788)
</TABLE>
(3) MORTGAGE LOANS AVAILABLE FOR SALE, NET
Mortgage loans available for sale, net are carried on the books at lower of
cost or market and consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Mortgage loans available for sale............................. $175,683,013 $73,037,135
Loan broker premiums, origination points and
discounts, net.............................................. 185,933 572,618
Deferred loan origination costs............................... 503,570 128,180
------------ -----------
Mortgage loans available for sale, net........................ $176,372,516 $73,737,933
------------ -----------
------------ -----------
</TABLE>
F-16
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACCOUNTS AND NOTES RECEIVABLE, NET
Accounts and notes receivable, net, consist of the following at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Notes receivable................................................ $ 6,158,654 $ 5,898,901
Broker fee receivables.......................................... 672,209 669,235
Other........................................................... 880,409 598,310
----------- -----------
Subtotal................................................... 7,711,272 7,166,446
Less: allowance for losses...................................... (6,467,701) (5,937,684)
----------- -----------
$ 1,243,571 $ 1,228,762
----------- -----------
----------- -----------
</TABLE>
The activity in the allowance for losses account was as follows at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Allowance at beginning of period.................................. $5,937,684 $5,893,929
Recoveries, transfers and charge offs, net........................ (299,753) (89,744)
Provision for losses.............................................. 829,770 133,499
---------- ----------
Allowance at end of period........................................ $6,467,701 $5,937,684
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Land............................................................. $ 132,000 $ --
Building......................................................... 287,800 --
Computer hardware and software................................... 3,515,647 1,523,408
Furniture and fixtures........................................... 729,222 295,939
Assets under capital leases...................................... 2,058,436 310,231
Leasehold improvements........................................... 346,056 148,579
Telephone equipment.............................................. 216,034 --
Vehicle.......................................................... 12,063 --
----------- ----------
7,297,258 2,278,157
----------- ----------
Less accumulated depreciation.................................... (2,031,381) (938,920)
----------- ----------
Property and equipment, net...................................... $ 5,265,877 $1,339,237
----------- ----------
----------- ----------
</TABLE>
Useful lives for property and equipment are as follows:
<TABLE>
<S> <C>
Building....................................................... 30 years
Computer hardware and software................................. 3 years
Furniture and fixtures, telephone equipment and vehicle........ 5 years
</TABLE>
The land and building were acquired in satisfaction of a note receivable
owed to the Company by an individual who subsequently became an employee of the
Company. The building is occupied by, and leased to, an auto maintenance
franchise that pays the Company rent of $4,000 monthly under a lease that
expires in 2015, with three subsequent five-year renewal periods. During 1998,
$24,000 in revenue was recorded under the lease.
Depreciation expense for the years ended 1998, 1997 and 1996 $1,092,000,
$331,000 and $573,000, respectively.
(6) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software costs at December 31, 1998, 1997 and 1996, were net of
accumulated amortization of $666,253, $173,832 and $250,000, respectively.
Information related to net capitalized software costs is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of year.......................................... $639,123 $250,000
Capitalized costs..................................................... 831,559 517,955
Amortization.......................................................... (492,421) (128,832)
-------- --------
$978,261 $639,123
-------- --------
-------- --------
</TABLE>
F-18
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) GOODWILL, NET
Goodwill, net consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- --------
<S> <C> <C>
Online Capital, Inc. acquisition.................................... $ 476,475 $476,475
RM Holdings, Inc. acquisition....................................... 2,112,629 --
Online Capital, Inc. earnout agreement.............................. 2,402,694 --
---------- --------
4,991,798 476,475
Less accumulated amortization....................................... (303,673) (11,041)
---------- --------
Goodwill, net....................................................... $4,688,125 $465,434
---------- --------
---------- --------
</TABLE>
Goodwill is amortized on a straight-line basis over 15 years. The
amortization of goodwill in the years ended 1998, 1997 and 1996 was $293,000,
$21,000 and $0, respectively.
(8) WAREHOUSE NOTES PAYABLE
Under the terms of the Company's warehouse agreements, all mortgage loans
available for sale are pledged as collateral for the warehouse notes payable.
The Company had warehouse lines of credit totaling $205,000,000,
$90,000,000 and $195,000,000 at December 31, 1998 and 1997 and March 31, 1999
(unaudited), respectively, from unaffiliated entities. These lines are used to
support the funding of mortgage loans as follows:
(a) The Company has a $75,000,000 credit line at March 31, 1999. This
credit line was $65,000,000 at December 31, 1998, and was
temporarily increased from $45,000,000 to $75,000,000 during 1998.
At December 31, 1998 and 1997 and March 31, 1999 (unaudited),
$71,918,148, $37,890,528 and $69,432,892, respectively, were
outstanding on this facility, with a weighted average interest
rate of 7.60%, 8.47% and 7.01%, respectively. The line of credit
is collateralized by a portion of the Company's mortgage loans
available for sale, which amounted to $73,931,690, $48,120,268 and
$72,300,119 at December 31, 1998 and 1997 and March 31, 1999,
respectively. The line of credit requires the Company to maintain
certain financial covenants, which were not met at December 31,
1998. The lender has provided the Company with a waiver of this
default pending the receipt of additional capital, which was
received in February and March 1999. The Company met the financial
covenants at March 31, 1999.
(b) The Company has a $60,000,000 credit line with an entity, which
temporarily was increased to $70,000,000 for December 31, 1998.
This credit line was increased from $35,000,000 during 1998. At
December 31, 1998 and 1997 and March 31, 1999 (unaudited),
$62,486,268, $20,209,540 and $55,298,564, respectively, was
outstanding on this facility, with a weighted average interest
rate of 7.33%, 8.65% and 6.82%, respectively. The line of credit
is collateralized by a portion of the Company's mortgage loans
available for sale, which amounted to $67,518,557, $19,551,770 and
$60,390,766 at December 31, 1998 and 1997 and March 31, 1999
(unaudited), respectively. The line of credit requires the Company
to maintain certain financial covenants, which were not met at
December 31, 1998 or March 31, 1999. The lender has provided the
Company with a waiver of this default pending the receipt of
additional capital, which was received in February, March and
April 1999.
(c) The Company received a $25,000,000 credit line with an entity
during 1998. At December 31, 1998 and March 31, 1999 (unaudited),
$24,417,181 and $25,628,993, respectively, was outstanding on this
facility, with a weighted average interest rate of 7.29% and
6.74%, respectively. The line of credit is collateralized by a
portion of the Company's mortgage loans
F-19
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) WAREHOUSE NOTES PAYABLE--(CONTINUED)
available for sale, which amounted to $26,320,308 and $26,690,321
at December 31, 1998 and March 31, 1999 (unaudited), respectively.
The line of credit requires the Company to maintain certain
financial covenants, which were not met at December 31, 1998. The
lender has provided the Company with a waiver of this default
pending the receipt of additional capital, which was received in
February and March 1999. The Company met the financial covenants
at March 31, 1999.
(d) The Company received a $25,000,000 repurchase credit line from an
entity during 1998. At December 31, 1998 and March 31, 1999
(unaudited), there was no outstanding amount on this facility.
(e) Since 1996, the Company has had a $10,000,000 line of credit by an
entity. The line of credit bears interest at prime less 0.25% and
has no maturity date. At December 31, 1998 and 1997 and March 31,
1999 (unaudited), $7,367,831, $5,123,845 and $6,422,858,
respectively, were outstanding on this facility. This line of
credit is collateralized by a portion of the Company's mortgage
loans available for sale, which amounted to $7,067,801, $5,167,405
and $6,300,955 at December 31, 1998 and 1997 and March 31, 1999
(unaudited), respectively. Under the terms of the Company's
warehouse agreements, all mortgage loans available for sale are
pledged as collateral for the warehouse notes payable.
The warehouse lines of credit described in (a) through (c) above were in
default as to requirements for ratios of tangible net worth and leverage at
December 31, 1998. The creditors have given the Company waivers on these
requirements pending receipt of additional capital, which was received as
described in note 13. The additional capital received in the form of
Subordinated Debt eliminated the defaults as of February 28, 1999. However, the
line of credit described in (b) above was in default again at March 31, 1999.
The creditor has given the Company a waiver on these requirements due to the
receipt of additional capital.
(9) NOTE PAYABLE
A note payable in the amount of $291,456 with an interest rate of 9.25% was
assumed through the acquisition of the land and building described in note 4. At
December 31, 1998, this note payable has an outstanding balance of $288,701 and
matures on April 10, 2002.
The note payable in the amount of $70,833 at December 31, 1997, arose
through the Online Capital acquisition in the amount of $99,999 and had an
interest rate of 10%. The note was paid in full when it matured in 1998.
(10) LINES OF CREDIT
The Company has three lines of credit with entities under which furniture
and equipment are leased. One line of credit is with the unaffiliated financing
subsidiary of a computer manufacturer and is accounted for as an operating
lease. No equipment at December 31, 1998, was under lease in this line of
credit. The Company accounts for the other two lease lines as capital leases.
One of these lease credit lines is with an affiliated entity and has an
available limit of $1,595,000 in equipment value, bears interest at
approximately 10% per annum and had an outstanding balance of $996,610 at
December 31, 1998. The other lease credit line is with an unaffiliated entity
and has no stated limit, bears interest at varying rates according to the
purchase amount of the underlying equipment and had an outstanding balance of
$520,167 at December 31, 1998. (See note 19 for capital lease obligation).
During 1998 and 1997, the Company had a line of credit of $110,000 from an
unaffiliated financial institution for the use of purchasing equipment, which
had an outstanding balance of $49,001 and $85,668 at
F-20
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) LINES OF CREDIT--(CONTINUED)
December 31, 1998 and 1997, respectively. The note matures on August 18, 2002,
and bears interest at the prime rate, which was 8.25% at December 31, 1998.
During 1997, the Company opened a $200,000 working capital line of credit
with an unaffiliated financial institution. At December 31, 1998 and 1997, there
was no balance outstanding.
(11) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable.................................................. $3,225,450 $1,143,321
Accrued expenses.................................................. 1,488,223 471,637
Profit distribution payable....................................... 312,120 160,958
Warehouse line interest payable................................... 512,228 132,387
---------- ----------
Total accounts payable and accrued expenses.................. $5,538,021 $1,908,303
---------- ----------
---------- ----------
</TABLE>
(12) LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded operations primarily through net
cash proceeds from private placements of preferred and common stock totaling
$36 million through December 31, 1998. As of December 31, 1998, the Company had
cash and cash equivalents of $3.4 million. During the three month period ended
March 31, 1999 (unaudited), the Company has raised an additional $10 million in
cash through the issuance of senior subordinated debentures, and is currently in
discussion with various potential investors to provide additional capital for
the operations and growth of the Company. The Company's primary need for
operating capital is for the funding of mortgage loans between closing and
eventual sale to investors, which is accomplished through the use of warehouse
lines of credit and the funding of operating losses. There can be no assurance
that the Company will be able to continue raising capital sufficient to fund its
operations or obtain sufficient warehouse borrowing capacity to maintain current
operating levels.
(13) SUBORDINATED DEBT, NET OF DISCOUNT
Subordinated debt, net of discount at March 31, 1999 (unaudited), of
$9,622,774, consists of convertible debentures at a fixed rate of interest of
12%, $2,000,000 of which matures on February 9, 2000 and $8,000,000 matures on
February 26, 2001. The holders of these notes received 46,676 and 186,704,
respectively of common stock warrants that are convertible to common stock at
$4.29 per share at any time prior to or upon maturity.
Subordinated debt at December 31, 1998 of $100,000 consists of convertible
debentures, at a fixed rate of interest of 12%, which mature May 1, 1999.
Interest is due and payable monthly through maturity. At the option of the
holders, the debt can be converted to equity at the rate of $2.14 per share in
multiples of $15,000 at any time prior to or upon maturity. The debentures are
subordinated to any future indebtedness of the Company that is wholly secured by
first mortgage loans.
During December 1997, the Company issued $2,400,000 of convertible
subordinated debt, of which $2,200,000 subsequently converted to preferred stock
at $11.50 per share during 1998. The remaining $200,000 was redeemed for cash
during 1998.
During August 1997, the Company issued $1,500,000 of convertible
subordinated debt, which subsequently converted to preferred stock at $7.50 per
share during December 1997.
F-21
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) 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 1(c).
Options to purchase 840 shares of common stock were exercised during the
three-month period ending March 31, 1999.
During April 1998, the Company issued 700,000 shares of common stock at a
value of $1.07 per share in connection with the acquisition of RM Holdings, Inc.
as described in note 1(c).
During March 1998, the Company issued 700,000 shares of common stock at a
value of $1.07 per share in accordance with the contingent consideration
agreement as described in note 1(c).
During June 1998, the Company issued 308,000 shares of common stock at a
value of $1.07 per share to a brokerage firm in consideration for the
facilitation of capital investments in the Company by unaffiliated firms.
During 1997, the Company issued 501,676 shares of common stock at a value
of $1.07 per share in connection with the acquisition of Online Capital as
described in note 1(c).
(b) Preferred Stock Transactions
During 1998, the Company issued 1,273,898 shares of $.01 par value Series D
preferred stock at a price of $11.50 per share. Of these shares, 191,301 were
issued upon conversion of $2,200,000 of subordinated debt. Net proceeds from the
issuance of preferred stock, other than those converted from subordinated debt,
were $12,224,971. All Series D preferred stock will automatically convert into
common stock if the Company sells shares of its stock in an initial public
offering meeting certain specific criteria and the shareholders have not
redeemed their shares or upon the consent of holders of two-thirds of the
outstanding Series D preferred shares. These shares are entitled to voting
rights equal to those of the common stock of the Company and have liquidation
preference to all other shares of stock.
During 1997 and 1996, the Company issued 472,668 and 133,333 shares,
respectively, of $.01 par value Series C preferred stock at a price of $7.50 per
share. Of these shares, 206,000 were issued upon conversion of $1,500,000 of
subordinated debt. Net proceeds from the issuance of preferred stock, other than
those converted from subordinated debt, were $2,000,000. All Series C preferred
stock will automatically convert into common stock if the Company sells shares
of its stock in an initial public offering meeting certain specific criteria and
the shareholders have not redeemed their shares or upon the consent of holders
of two-thirds of the outstanding Series C preferred shares. These shares are
entitled to voting rights equal to those of the common stock of the Company and
have liquidation preference to all other shares of stock.
F-22
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) SHAREHOLDERS' EQUITY--(CONTINUED)
During 1996, the Company sold $5,150,000 of 12% cumulative Series B
preferred stock in a private-placement offering. Net proceeds from this
transaction were $4,581,600. In addition, $127,875 of the 14% subordinated debt
was converted to Series B preferred stock. The remaining $1,134,625 of the 14%
subordinated debt was subsequently redeemed for cash in May 1996. All Series B
preferred stock will convert into common stock if the Company sells it's stock
in an initial public offering. These shares are also redeemable, at the
discretion of the holders, if the Company sells shares of its stock in an
initial public offering or private offering meeting certain specified criteria.
These shares are entitled to voting rights equal to those of the common stock of
the Company and have liquidation preference to all other shares of stock.
Pursuant to the acquisition of Western American Mortgage, Inc. ("WAM") in
1996, the Company issued a class of preferred stock with special dividend
requirements equal to 50% of the net profits, as defined, of the WAM operations.
In July 1997, in conjunction with the acquisition of Online Capital, Inc., the
operations of WAM were integrated with other California operations of the
Company and the dividend requirements were amended to 20% of the net profit of
the Company's Northern California Division. Dividends paid for the year ending
December 31, 1998 and 1997 and the three month period ending March 31, 1999
(unaudited) to holders of this class of preferred stock amounted to $750,397, $0
and $179,483, respectively.
Cumulative dividends, not declared, on the Series B preferred stock totaled
$1,649,129, $1,031,129 and $1,801,513 as of December 31, 1998 and 1997 and
March 31, 1999 (unaudited), respectively. Cumulative dividends, not declared, on
the Series C preferred stock totaled $1,002,924, $337,522 and $1,166,996 as of
December 31, 1998 and 1997 and March 31, 1999 (unaudited), respectively.
Cumulative dividends, not declared, on the Series D preferred stock totaled
$831,342, $-0- and $1,264,816 as of December 31, 1998 and 1997 and March 31,
1999 (unaudited), respectively. No liability has been established for the
cumulative dividends, inasmuch as they have not been declared.
The Company's preferred stock has a liquidation preference to common stock.
(c) Stock Warrant Transactions
During the three month period ending March 31, 1999, 175,000 common stock
warrants converted to common stock options at $0.71 per share.
In connection with certain operational and capital transactions, the
Company issued 1,117,650, 350,000, 2,541,000 and 233,380 common and preferred
stock warrants during 1998, 1997 and 1996 and the three months ended March 31,
1999 (unaudited), respectively. Total warrants outstanding as of December 31,
1998 and March 31, 1999 were 8,143,298 and 8,201,678 shares, respectively, with
exercise prices on the warrants ranging from $0.71 to $4.29 per share. The
Company has agreed to repurchase 3,500,000 of these warrants in the event that
the Company issues equity rights, either through a public or private placement
of shares, of 25% or more of the then outstanding total equity of the Company or
if the Company sells substantially all of its assets. Subsequent to March 31,
1999, under this agreement the Company repurchased 700,000 of these warrants and
expects to repurchase the remaining 2,800,000 warrants by June 30, 1999.
(d) Other
During 1997, the Company retired 735,000 shares of outstanding treasury
stock.
F-23
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) SHAREHOLDERS' EQUITY--(CONTINUED)
The following summarizes the activity in the number of shares outstanding
at December 31, 1998 and 1997 and March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
COMMON PREFERRED
COMMON PREFERRED STOCK STOCK
STOCK STOCK WARRANTS WARRANTS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................................... 7,923,594 1,452,507 6,675,648 --
Issuance of common stock...................................... 501,676 -- -- --
Issuance of preferred stock................................... -- 472,668 -- --
stock warrants granted........................................ -- -- 350,000 --
Preferred stock warrants granted.............................. -- -- -- --
Retirement of treasury stock.................................. (735,000) -- -- --
--------- --------- --------- -------
Balance at December 31, 1997.................................... 7,690,270 1,925,175 7,025,648 --
Issuance of common stock...................................... 1,708,000 -- -- --
Issuance of preferred stock................................... -- 1,273,898 -- --
Common stock warrants granted................................. -- -- 1,099,000 --
Preferred stock warrants granted.............................. -- -- -- 18,650
--------- --------- --------- -------
Balance at December 31, 1998.................................... 9,398,270 3,199,073 8,124,648 18,650
Issuance of common stock...................................... 140,840 -- -- --
Common stock warrants granted................................. -- -- 233,380 --
Warrants converted to options................................. -- -- (175,000) --
--------- --------- --------- -------
Balance at March 31, 1999 (unaudited)........................... 9,539,110 3,199,073 8,183,028 18,650
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
(15) STOCK OPTION PLANS
The Company's 1996 Employee Stock Option Plan (the "Plan") covered
2,450,000 shares of the Company's common stock and has been amended in 1997 and
1998 to include a total of 8,330,000 shares. Subsequent to 1998, the Plan was
amended to increase the total shares to 11,130,000. Under the terms of the Plan,
officers, directors, key employees and consultants of the Company are eligible
to receive incentive as well as nonqualified stock options. Incentive stock
options granted under the Plan vest 40% on the second anniversary from the date
of grant and 20% in each of three years thereafter, except that California
residents vest 20% on the first anniversary. The options are exercisable for a
period of up to ten years from the date of grant at an exercise price which is
not less than the fair market value of the Company's common stock on the date of
the grant. For any stockholder owning more than 10% of the outstanding common
stock, incentive stock options are exercisable for a period of up to ten year
exercise price which is not less than 110% of the fair market value of the
Company's common stock on the date of the grant. Nonqualified options vest at
40% after the second anniversary of the date of first service as an employee or
consultant to the Company and then equally over three years on the anniversary
date of service, and are granted on terms determined by the Company's board of
directors.
The Company's Directors' 1996 Stock Option Plan (the "Directors' Plan")
covers 420,000 shares of the Company's common stock and provides for the grant
of nonqualified stock options to the Company's nonemployee directors. Stock
options granted under the Directors' Plan vest 66.67% on the second anniversary
of the date of first service as a director of the Company and entirely on the
third anniversary and are exercisable for a period of up to 3 1/2 years from the
date of grant at an exercise price which is not less than the fair market value
of the Company's common stock on the date of grant. The Directors' Plan is
administered by the board of directors or a committee appointed by the board of
directors consisting of at least three of its members.
F-24
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) STOCK OPTION PLANS--(CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee and non-employee directors' stock options.
Accordingly, no compensation expense has been recognized for the options, as the
exercise price equals or exceeds the market price of the underlying stock on the
date of grant.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1995.............................................. -- $ --
Granted..................................................................... 2,744,000 0.79
Exercised................................................................... -- --
Forfeited................................................................... (122,500) 0.79
---------- -------
Outstanding at December 31, 1996.............................................. 2,621,500 0.79
Granted..................................................................... 1,631,000 1.07
Exercised................................................................... -- --
Forfeited................................................................... (343,700) 0.91
---------- -------
Outstanding at December 31, 1997.............................................. 3,908,800 0.90
Granted..................................................................... 4,400,739 1.47
Exercised................................................................... -- --
Forfeited................................................................... (462,875) 1.16
---------- -------
Outstanding at December 31, 1998.............................................. 7,846,664 1.21
Granted..................................................................... 4,545,072 2.16
Exercised................................................................... (840) 1.07
Forfeited................................................................... (103,320) 1.95
---------- -------
Outstanding at March 31, 1999 (unaudited)..................................... 12,287,576 $ 1.53
---------- -------
---------- -------
</TABLE>
Weighted-average fair value of options granted during 1998, 1997, 1996 and
1999 (unaudited) were $2.56, $0.69, $0.26 and $22.70, respectively.
F-25
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) STOCK OPTION PLANS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICE 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.79-1.64 7,846,664 9.26 years $ 1.21 2,799,419 $ 0.89
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICE 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.79-1.07 3,908,800 9 years $ 0.90 1,631,000 $ 0.91
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICE 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.79 2,621,500 7.8 years $ 0.79 1,039,514 $ 0.79
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICE 3/31/99 CONTRACTUAL LIFE EXERCISE PRICE 3/31/99 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.79 2,299,500 7.4 years $ 0.79 2,132,900 $ 0.79
1.07 2,805,152 8.5 years 1.07 1,284,500 1.07
1.64 3,068,352 9.0 years 1.64 125,104 1.64
2.14 4,044,572 9.9 years 2.14 3,780 2.14
4.29 70,000 9.9 years 4.29 -- 4.29
</TABLE>
Aggregate proceeds realizable upon the exercise of all options outstanding
at December 31, 1998, 1997, 1996 and March 31, 1999 (unaudited) approximates
$9.5 million, $3.5 million, $2.1 million and $18.8 million, respectively.
F-26
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) STOCK OPTION PLANS--(CONTINUED)
Pro forma information regarding results of operations had compensation
expense been recorded at the grant date for awards consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") has been determined as if the Company had
accounted for the employee and nonemployee directors' stock options granted
during the years ended December 31, 1998 and 1997, under the fair value method
of SFAS No. 123. The fair value of each employee stock option grant has been
estimated on the date of grant with the following assumptions for the years
ended December 31, 1998, 1997 and 1996 and the three month period ending
March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------- ------------
1998 1997 1996 1999
------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted-average risk-free interest rate........ 4.42-5.74% 6.12-6.73% 6.46% 4.63%-5.30%
Dividend yield.................................. -- -- -- --
Weighted-average expected option life........... 6 years 5 years 4-10 years 5 years
Fair market value of the common stock........... $1.07-3.63 $0.71 $0.71 $4.61-6.06
</TABLE>
The Black-Scholes Model was used in estimating the fair market value of
options and warrants. An expected volatility of .001 was used and a discount for
lack of marketability was used as the warrants and options are not traded on a
public market. Management of the Company has reviewed both internal and external
factors which influence the value of the warrants and options. Internal factors
include, among other things, the Company's financial position, results of its
operations and the size and marketability of the interest being valued. External
factors include, among other things, the status of the industry, the position of
the Company relative to the industry and the local, national and international
economic environment. For the purposes of pro forma disclosure, the estimated
fair value of the options is amortized over the options' vesting period.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1998, 1997 and 1996 and
the three month period ending March 31, 1999 (unaudited), consistent with the
provisions of SFAS 123, the Company's net loss and basic and diluted net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS
----------------------------- ENDED
1998 1997 1996 MARCH 31, 1999
------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Loss--attributable to common shareholders........... $(8,943) $(4,485) $(4,433) $ (4,133)
Net Loss--atrributable to common shareholders--as
adjusted.............................................. $(9,077) $(4,524) $(4,445) $ (4,488)
Basic and diluted net loss per share--as reported....... $ (1.02) $ (0.55) $ (0.56) $ (0.44)
Basic and diluted net loss per share--as adjusted....... $ (1.04) $ (0.55) $ (0.56) $ (0.47)
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
(16) INCOME TAXES
No current or deferred provision for income taxes was recorded for the
years ended December 31, 1998 and 1997, due to the Company's operating losses in
the respective periods.
F-27
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) INCOME TAXES--(CONTINUED)
At December 31, 1998, the Company had approximately $16.1 million of tax
net operating loss carryforwards. The net operating loss carryforwards will
expire as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------------------------------------------- -----------
<S> <C>
2010....................................................... $ 2,200,000
2011....................................................... 2,900,000
2012....................................................... 1,900,000
2013....................................................... 3,100,000
2018....................................................... 6,000,000
-----------
Total...................................................... $16,100,000
-----------
-----------
</TABLE>
Utilization of these carryforwards is dependent on the future profitability
of the Company and may be limited if certain changes in ownership occur. If
certain substantial changes in the Company's ownership should occur, or have
already occurred, there would be an annual limitation in the amount of tax net
operating loss carryforwards which could be utilized.
The composition of net deferred tax assets at December 31, 1998 and 1997,
is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforward.... $ 6,052,874 $ 3,568,212
Software sale.......................... 607,055 607,055
Organization costs..................... 29,881 59,682
Provision for losses................... 181,969 71,340
Property and equipment................. 37,650 57,533
Other.................................. 10,915 67,042
----------- -----------
6,920,344 4,430,864
Valuation allowance......................... (6,479,601) (4,190,362)
----------- -----------
Net deferred tax asset................. 440,743 240,502
Deferred tax liabilities:
Capitalized software development
costs................................ 440,743 240,502
----------- -----------
Total............................. $ -- $ --
----------- -----------
----------- -----------
</TABLE>
A 100 percent valuation allowance was established against the net deferred
tax asset at December 31, 1998 and 1997.
(17) RELATED PARTIES
The Company has a consulting agreement with a consulting firm of which the
two principle owners are shareholders of the Company. Total consulting fees
expensed related to this consulting firm were $604,600, $300,100 and $266,000
for the years ended December 31, 1998, 1997 and 1996, respectively. As of
December 31, 1998, total unpaid fees for services rendered during 1998 under
such agreement totaled $115,000.
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value.
F-28
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Financial instruments include such items as mortgage loans available for
sale, warehouse notes payable and other instruments.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgements made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumption used to estimate fair value, the Company's fair values should not be
compared to those of other companies.
Under the Statement, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amount presented
does not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemental with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount reported in the balance sheet approximates fair
value.
Mortgage Loans Available For Sale, Net
Fair values are based on the estimated value at which the loans could
be sold in the secondary market. These loans are priced to be sold with
servicing rights released, as is the Company's normal business practice.
Accounts and Notes Receivable, Net
Carrying amounts are considered to approximate fair value. All amounts
that are assumed to be uncollectible within a reasonable time are written
off and or reserved.
Warehouse Notes Payable
The carrying amount of warehouse notes payable reported in the balance
sheet approximates its fair value.
Note Payable
Fair value of note payable is estimated by discounting estimated
future cash flows using a rate commensurate with the risks involved.
Subordinated Debt
Fair value is estimated using the estimated fair value of the
preferred stocks into which the subordinated debt can be converted.
Lines of Credit
The carrying amount of amounts outstanding on lines of credit is
estimated by discounting estimated future cash flows using a rate
commensurate with the risks involved.
F-29
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The estimated fair values of the Company's financial investments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 3,412,283 $ 3,412,283 $ 1,679,722 $ 1,679,722
Mortgage loans available for sale, net.. 176,372,516 177,167,458 73,737,933 74,316,028
Accounts and notes receivable, net...... 1,243,571 1,243,571 1,228,762 1,228,762
LIABILITIES
Warehouse notes payable................. $171,777,572 $171,777,572 $72,223,912 $72,223,912
Note payable............................ 288,701 295,934 70,833 70,833
Lines of credit......................... 1,565,778 1,565,778 395,899 395,899
Subordinated debt....................... 100,000 333,350 2,500,000 2,500,000
</TABLE>
(19) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company is obligated under various operating lease agreements relating
to branch and executive offices and equipment. Lease terms expire during the
years 1998 to 2003, subject to renewal options. The following is a schedule of
future minimum rental payments under non-cancelable operating leases for office
space and equipment as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
1999........................................................ $2,342,000
2000........................................................ 1,940,000
2001........................................................ 1,449,000
2002........................................................ 1,089,000
2003 and thereafter......................................... 896,000
----------
Total minimum payments................................. $7,716,000
----------
----------
</TABLE>
Beginning in 1998, the Company is obligated under various capital lease
agreements relating to computer equipment, furniture and leasehold improvements.
Lease terms are from 36 to 42 months and expire from 1999 to 2002, subject to
renewal options.
At December 31, 1998 and 1997, the gross amount of equipment, furniture and
leasehold improvements and related accumulated amortization recorded under
capital leases is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- --------
<S> <C> <C>
Computer hardware and software...................................... $1,101,804 $310,231
Furniture and fixtures.............................................. 322,420 --
Telephone equipment................................................. 526,947 --
Leasehold improvements.............................................. 107,265 --
---------- --------
2,058,436 310,231
Less: accumulated amortization...................................... (397,089) --
---------- --------
$1,661,347 $310,231
---------- --------
---------- --------
</TABLE>
F-30
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The following is a schedule of future minimum rental payments under capital
leases as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
1999........................................................ $ 829,000
2000........................................................ 704,000
2001........................................................ 447,000
2002........................................................ 70,000
2003 and thereafter......................................... --
----------
Total minimum lease payments................................ 2,050,000
Less amount representing interest at 12%.................... (502,000)
----------
Present value of net minimum capital lease payments......... 1,548,000
Less current installments of obligations under capital
leases.................................................... (665,000)
----------
Obligations under capital leases excluding current
installments.............................................. $ 883,000
----------
----------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$1,343,053, $739,805 and $453,029, respectively. Included in the rent for 1998
is $647,577 relating to the capital leases.
(b) Litigation
The Company is a defendant in various lawsuits arising during the ordinary
course of business. Management has consulted with legal counsel and is of the
opinion, based on legal counsel's advice, that none of these matters will have a
material adverse effect on the financial position of the Company. Where
appropriate, the Company has adequately reserved for fees and costs.
(c) Software Rights
The Company sold its CLOser software to a customer under a financing
arrangement whereby the Company retained licensing rights to the software and a
repurchase option. Under certain events, including a public offering of stock in
the Company, the Company is required to repurchase the CLOser software for $3.5
million.
(d) Other
On December 3, 1996, the Company entered into a partnership agreement whose
primary function is the ownership of rental office space in Plantation, Florida.
The Company had a 25% interest in this partnership and entered into a ten-year
lease for approximately 22% of the rentable space in the partnership's office
building. In addition, the partnership committed to reimburse the Company for
approximately $146,000 in rental expense in 1997 attributable to the Company's
prior leased headquarters. During 1997, the Company sold its investment in the
partnership for $247,000.
The Company has entered into arrangements with certain employees and third
parties which provide for profit sharing based on results of operations of
specified products or divisions of the Company. In conjunction with these
arrangements, the Company has also entered into employment and noncompetitive
agreements with certain individuals.
F-31
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(20) SUBSEQUENT EVENTS
During the three month period ended March 31, 1999 (unaudited), the
Company's Board of Directors authorized management of the Company to file a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public.
(21) YEAR 2000
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/or software used by many companies may need to
be upgraded to comply with "Year 2000" or "Y2K" requirements. Significant
uncertainty exists concerning the potential effects associated with the Year
2000 issue on business operations.
In early 1998, the Company commenced a program to review the Y2K compliance
status of the software and systems used in its internal business processes, its
technology platforms licensed to others and other systems and services provided
by third-party vendors on which the Company is reliant. The assessment and the
research and strategy phases of the program have been completed and strategies
are being implemented, including the development of contingency plans for
potential third-party Y2K compliance problems that management believes could
affect business continuity. There can be no assurance that all potential Y2K
effects on the Company's business will be anticipated or identified by the
program or that contingency plans developed will be effective.
The Company has fully integrated Y2K testing into the development process
for all of its own software. The Company believes that the entire technology
platform on which it operates and which provides for use by clients is generally
Y2K compliant. In certain circumstances, the Company has warranted to customers
that the use or occurrence of dates on or after January 1, 2000, will not
adversely affect the performance of the Company's systems with respect to the
ability to create, store, process and output information related to such data.
If any of these customers experience Y2K problems, such customers could assert
claims for damages against the Company.
The Company has contacted all major customers and critical suppliers of
components, equipment and services to determine whether their products and
services are Year 2000 compliant. In addition, the Company has performed testing
of the systems of critical suppliers and major customers to provide additional
assurance of their readiness. These tests have not revealed any significant
problems handling dates after December 31, 1999. Based on the results of this
testing and responses to inquiries, management believes that critical suppliers
to and major customers of the Company are Year 2000 compliant. However, should
one or more of these entities prove not to be compliant, it could have a
significant adverse effect on the Company's operations. Accordingly, management
is currently in the process of developing contingency plans which are expected
to be complete by the end of September. These contingency plans will focus on
disruption of third party services which are key to the Company's operations,
particularly telecommunications and electric utility services.
The Company has budgeted $600,000 for investigating and remedying issues
related to Year 2000 compliance, including the cost of developing contingency
plans. To date, the Company has spent $400,000 on these efforts and plans to
meet their original budget estimates.
To the extent the Company has not adequately assessed its Y2K compliance
deficiencies, additional and possibly significant Company resources may be spent
on investigating and remedying Y2K issues. The expenditure of such resources may
have a material adverse effect on the Company's business, financial condition
and results of operations.
F-32
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(22) 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 website 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. 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.)
F-33
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(22) SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
DIRECT TO BUSINESS TO
TOTAL CONSUMER BUSINESS
------------ ----------- -----------
<S> <C> <C> <C>
Year ended December 31, 1998
Revenue:
Secondary marketing revenue, net................................. $ 28,597,825 $12,571,230 $16,026,595
Loan production and processing fees, net......................... 5,337,625 1,826,050 3,511,575
Management, technology and other fees............................ 1,868,202 -- 1,868,202
Net interest (expense) income.................................... (113,102) (217,118) 104,016
------------ ----------- -----------
Total revenue...................................................... 35,690,550 14,180,162 21,510,388
------------ ----------- -----------
Expenses:
Compensation and employee benefits............................... 23,640,569 10,732,442 12,908,127
Marketing........................................................ 1,324,760 613,465 711,295
Depreciation and amortization.................................... 742,661 240,424 502,237
General and administrative....................................... 7,997,176 3,007,596 4,989,580
------------ ----------- -----------
Total segment expenses........................................... 33,705,166 14,593,927 19,111,239
----------- -----------
Segment (loss)/income............................................ $ (413,765) $ 2,399,149
----------- -----------
Research and development not allocated to segments............... 2,888,159
Overhead expenses not allocated to segments...................... 5,175,013
------------
Total expenses..................................................... 41,768,338
------------
Net loss........................................................... $ (6,077,788)
------------
------------
Segment assets..................................................... $176,372,516 $93,324,622 $83,047,894
------------ ----------- -----------
------------ ----------- -----------
Year ended December 31, 1997
Revenue:
Secondary marketing revenue, net................................. $ 11,594,660 $ 4,997,935 $ 6,596,726
Loan production and processing fees, net......................... 2,347,321 788,358 1,558,963
Management, technology and other fees............................ 2,032,428 90 2,032,338
Net interest (expense) income.................................... 500,008 58,022 441,985
------------ ----------- -----------
Total revenue...................................................... 16,474,417 5,844,405 10,630,012
------------ ----------- -----------
Expenses:
Compensation and employee benefits............................... 12,057,725 4,781,058 7,276,667
Marketing........................................................ 57,586 51,007 6,579
Depreciation and amortization.................................... 318,704 91,236 227,468
General and administrative....................................... 3,258,339 714,118 2,544,221
------------ ----------- -----------
Total segment expenses........................................... 15,692,354 5,637,419 10,054,935
----------- -----------
Segment income................................................... $ 206,986 $ 575,077
----------- -----------
Research and development not allocated to segments............... 1,079,257
Overhead expenses not allocated to segments...................... 3,234,672
------------
Total expenses..................................................... 20,006,283
------------
Net loss........................................................... $ (3,531,866)
------------
------------
Segment assets..................................................... $ 73,737,933 $31,243,110 $42,494,823
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-34
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(22) SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
DIRECT TO BUSINESS TO
TOTAL CONSUMER BUSINESS
------------ ----------- ------------
<S> <C> <C> <C>
Year ended December 31, 1996
Revenue:
Secondary marketing revenue, net............................... $ 4,101,341 $ 1,466,111 $ 2,635,230
Loan production and processing fees, net....................... 820,469 256,766 563,703
Management, technology and other fees.......................... 2,577,296 (2,250) 2,579,546
Net interest (expense) income.................................. 17,203 18,826 (1,623)
------------ ----------- ------------
Total revenue.................................................... 7,516,309 1,739,453 5,776,855
------------ ----------- ------------
Expenses:
Compensation and employee benefits............................. 5,810,129 1,538,761 4,271,368
Marketing...................................................... 17,795 4,162 13,633
Depreciation and amortization.................................. 42,728 2,361 40,367
General and administrative..................................... 2,224,406 394,214 1,830,192
------------ ----------- ------------
Total segment expenses......................................... 8,095,058 1,939,498 6,155,560
----------- ------------
Segment loss................................................... $ (200,045) $ (378,705)
----------- ------------
Research and development not allocated to segments............. 496,568
Overhead expenses not allocated to segments.................... 2,942,858
------------
Total expenses................................................... 11,534,484
------------
Net loss......................................................... $ (4,018,175)
------------
------------
Segment assets................................................... $ 24,701,486 $ 3,705,223 $ 20,996,263
------------ ----------- ------------
------------ ----------- ------------
Three months ended March 31, 1999 (unaudited)
Revenue:
Secondary marketing revenue, net............................... $ 8,599,974 $ 2,421,061 $ 6,178,913
Loan production and processing fees, net....................... 2,598,337 533,640 2,064,697
Management, technology and other fees.......................... 1,991,360 -- 1,991,360
Net interest (expense) income.................................. 25,837 12,362 13,475
------------ ----------- ------------
Total revenue.................................................... 13,215,508 2,967,063 10,248,445
------------ ----------- ------------
Expenses:
Compensation and employee benefits............................. 8,753,356 2,507,748 6,245,608
Marketing...................................................... 1,349,337 350,964 998,373
Depreciation and amortization.................................. 384,764 91,277 293,487
General and administrative..................................... 2,987,684 505,815 2,481,869
------------ ----------- ------------
Total segment expenses......................................... 13,475,141 3,455,804 10,019,337
----------- ------------
Segment (loss)/income.......................................... $ (448,741) $ 229,108
----------- ------------
Research and development not allocated to segments............. 776,565
Overhead expenses not allocated to segments.................... 2,162,712
------------
Total expenses................................................... 16,414,418
------------
Net loss......................................................... $ 3,198,910
------------
------------
Segment assets................................................... $166,149,185 $52,436,683 $113,712,502
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
F-35
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(22) SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------ ------------
1998 1997 1996 1999
Total Assets ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total assets for reportable segments.............. $176,372,516 $73,737,933 $24,701,486 $166,149,185
Other assets not allocated to segments............ 17,065,193 8,189,037 6,009,641 22,655,978
------------ ----------- ----------- ------------
Total consolidated assets......................... $193,437,709 $81,926,970 $30,711,127 $188,805,163
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Assets not allocated to reportable segments include all assets other than
mortgage loans available for sale, net. All segment revenues are from external
customers. Expenses not allocated to reportable segments include corporate
overhead related to facilities, general and administrative costs and executive
salaries. Certain costs are allocated between segments based on either the
number of loans processed and/or originated. Research and development costs are
not allocated as the development efforts are primarily related to the technology
platform which is used to support activities conducted by all segments.
F-36
<PAGE>
MORTGAGE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(23) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the Company's statements of operation on a
quarterly basis for the years ended December 31, 1998 and 1997 (amounts in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED: MARCH JUNE SEPTEMBER DECEMBER
- ----------------------------------------------------------- ------- ------ ---------- ---------
<S> <C> <C> <C> <C>
1998:
Revenue:
Secondary marketing revenue, net...................... $ 5,407 $6,620 $ 7,632 $ 8,938
Loan production and processing fees, net.............. 922 1,278 1,329 1,809
Management, technology and other fees................. 546 649 539 134
Net interest (expense) income......................... (56) (22) 108 (143)
------- ------ -------- -------
Total revenue....................................... 6,819 8,525 9,608 10,738
------- ------ -------- -------
Expenses:
Compensation and employee benefits.................... 4,927 5,892 6,653 8,602
Marketing............................................. 85 258 454 539
Research and development.............................. 434 578 722 1,155
Depreciation and amortization......................... 154 268 337 1,114
General and administrative............................ 1,589 2,292 2,721 2,994
------- ------ -------- -------
Total expenses...................................... 7,189 9,288 10,887 14,404
------- ------ -------- -------
Net loss................................................. $ (370) $ (763) $ (1,279) $(3,666)
------- ------ -------- -------
------- ------ -------- -------
Net loss per share, basic and dilutive................... $ (0.12) $(0.16) $ (0.23) $ (0.51)
------- ------ -------- -------
------- ------ -------- -------
1997:
Revenue:
Secondary marketing revenue, net...................... $ 997 $2,116 $ 4,052 $ 4,430
Loan production and processing fees, net.............. 300 521 685 842
Management, technology and other fees................. 416 359 707 551
Net interest (expense) income......................... 144 137 155 63
------- ------ -------- -------
Total revenue....................................... 1,857 3,133 5,599 5,886
------- ------ -------- -------
Expenses:
Compensation and employee benefits.................... 1,754 2,534 4,067 4,728
Marketing............................................. 26 49 79 84
Research and development.............................. 162 216 269 432
Depreciation and amortization......................... 110 123 143 105
General and administrative............................ 869 1,205 1,574 1,478
------- ------ -------- -------
Total expenses...................................... 2,921 4,127 6,132 6,827
------- ------ -------- -------
Net loss................................................. $(1,064) $ (994) $ (533) $ (941)
------- ------ -------- -------
------- ------ -------- -------
Net loss per share, basic and dilutive................... $ (0.16) $(0.15) $ (0.10) $ (0.14)
------- ------ -------- -------
------- ------ -------- -------
</TABLE>
F-37
<PAGE>
[The graphic appearing here is a picture of the real estate section of a
newspaper with the Mortgage.com logo and slogan in the middle of the page.]
<PAGE>
[LOGO]
mortgage.com
THE EASIEST WAY HOME
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale of
the common stock being registered. All amounts are estimates, except for the
Securities and Exchange Commission registration fee, the NASD filing fee and the
Nasdaq listing fee. All of these costs and expenses will be borne by the
registrant.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 31,171
NASD filing fee............................................. 11,713
Nasdaq listing fee.......................................... 5,000
Blue Sky fees and expenses.................................. 5,000
Transfer agent expenses and fees............................ 15,000
Printing and engraving...................................... 200,000
Accountants' fees and expenses.............................. 375,000
Legal fees and expenses..................................... 425,000
Miscellaneous............................................... 32,116
----------
TOTAL.................................................. $1,100,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850 of the Florida Business Corporation Act authorizes a court
to award, or permits a Florida corporation to grant, indemnity to present or
former directors and officers, as well as certain other persons serving at the
request of the corporation in related capacities. This permitted indemnity is
sufficiently broad to permit indemnification for liabilities arising under the
Securities Act of 1933, including reimbursement for expenses incurred.
The indemnification authorized under Florida law is not exclusive and is in
addition to any other rights granted to officers and directors under the
Articles of Incorporation or Bylaws of the corporation or any agreement between
officers and directors and the corporation. The registrant's Bylaws provide for
the indemnification of directors, former directors and officers to the maximum
extent permitted by Florida law. The registrant's Bylaws also provide that it
may purchase and maintain insurance on behalf of a director or officer against
liability asserted against the director or officer in such capacity. In
addition, the registrant has entered into Indemnification Agreements (Exhibits
10.32, 10.33 and 10.34 hereto) with each officer and director, other than John
Buscema. The Underwriting Agreement (Exhibit 1.1) also provides for
cross-indemnification among the registrant and the Underwriters with respect to
certain matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, the registrant has sold the following
securities which were not registered under the Securities Act. The purchases and
sales were exempt pursuant to Section 4(2) of the Securities Act (and/or
Regulation D promulgated thereunder) as transactions by an issuer not involving
a public offering, where the purchasers represented their intention to acquire
the securities for investment only, not with a view to distribution, and
received or had access to adequate information about the registrant. The
information in this Item has not been adjusted for the proposed 7-for-1 stock
split of the common stock.
1. Between December 24, 1996 and June 30, 1997, the registrant issued
533,336 shares of Series C Preferred Stock to six accredited institutional
investors, Canaan Equity, L.P., Canaan Ventures II Limited Partnership, Canaan
Ventures II Offshore CV, Canaan Capital Limited Partnership, Canaan Capital
Offshore Limited Partnership, CV, and Dominion Fund III, for aggregate
consideration of approximately $4,000,000. We undertook this transaction to
raise funds for general working capital purposes. In connection with this
issuance and sale, between December 24, 1996 and March 10, 1997, the registrant
also issued warrants to purchase 14,952 shares of common stock at $7.50 per
share to Raymond James and Associates, Inc. in consideration for its
II-1
<PAGE>
services as placement agent in the sale of Series C Preferred Stock. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
were accredited investors, represented their intention to acquire the securities
for investment only, not with a view to distribution, and received or had access
to adequate information about the registrant.
2. As of June 30, 1997, the registrant issued 35,834 shares of common stock
to John Hogan in consideration for the merger of OnLine Capital into the
registrant. On January 1, 1998, the registrant issued an additional 35,834
shares of common stock to John Hogan pursuant to a clause in the OnLine Capital
merger agreement. As of January 1, 1998, the registrant issued 100,000 shares of
common stock to John Hogan in consideration of changing John Hogan's
compensation plan.
3. As of August 31, 1997, the registrant issued $1,500,000 in face amount
of 12% Senior Subordinated Convertible Notes due September 30, 2002 and warrants
to purchase 50,000 shares of common stock at $7.50 per share to two accredited,
institutional investors, Canaan Equity, L.P. and Dominion Fund III. We undertook
this transaction to raise funds for general working capital purposes. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
were accredited investors, represented their intention to acquire the securities
for investment only, not with a view to distribution, and received or had access
to adequate information about the registrant.
4. As of December 31, 1997, the registrant issued 206,000 shares of Series
C Preferred Stock to two accredited, institutional investors, Canaan Equity,
L.P. and Dominion Fund III, upon their conversion of $1,500,000 in face amount
of 12% Senior Subordinated Convertible Notes due September 30, 2002. We
undertook this transaction to raise funds for general working capital purposes
and to retire debt. The purchases and sales were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers were accredited investors, represented their intention to acquire
the securities for investment only, not with a view to distribution and received
or had access to adequate information about the registrant.
5. As of January 30, 1998, the registrant issued $2,000,000 of 12% Senior
Subordinated Convertible Notes due January 31, 2003 and warrants to purchase
66,667 shares of common stock at $7.50 per share to two accredited,
institutional investors, Canaan Equity, L.P. and Dominion Fund III. We undertook
this transaction to raise funds for general working capital purposes. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
were accredited investors, represented their intention to acquire the securities
for investment only, not with a view to distribution, and received or had access
to adequate information about the registrant.
6. As of March 31, 1998, the registrant issued 100,000 shares of common
stock to John Rodgers, Andrew Heller and Kyle Meyer as consideration for the
merger of RM Holdings, Inc. into the registrant. The merger agreement also
contained an earn-out provision which provided for the issuance of warrants to
purchase 100,000 shares of common stock at $7.50 per share, pursuant to a
formula. On December 31, 1998, the registrant issued warrants to purchase 29,126
shares of common stock at $7.50 per share to John Rodgers, Andrew Heller and
Kyle Meyer pursuant to the earn-out provision.
7. As of April 1, 1998 the registrant issued a warrant to purchase 300,000
shares of common stock at $5.00 per share and a warrant to purchase 100,000
shares of common stock at $7.50 per share to an accredited, institutional
investor, Superior Bank, FSB, in consideration of services under the Sale and
Marketing Agreement between the registrant and Superior Bank dated as of
April 28, 1995, as amended.
8. As of April 15, 1998, the registrant issued a warrant to purchase 36,000
shares of common stock with an exercise price of $11.50 per share to FMN
Associates Limited Partnership in consideration for the settlement of a dispute.
9. As of April 15, 1998, the registrant issued warrants to purchase 21,000
shares of common stock with an exercise price of $7.50 per share and 44,000
shares of common stock to an accredited, institutional investor, Raymond James &
Associates, Inc., in settlement of a dispute regarding services as a placement
agent in connection with the sale of Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock.
II-2
<PAGE>
10. As of April 1, 1998, the registrant issued a warrant to purchase 9,800
shares of Series D Preferred Stock with an exercise price of $11.50 per share to
an accredited, institutional investor, Dominion Fund III, as consideration for
the establishment of an equipment lease line of credit with an affiliate of
Dominion Fund III. As of November 20, 1998, the registrant issued a warrant to
purchase 8,850 shares of Series D Preferred Stock with an exercise price of
$11.50 per share to Dominion Capital Management, LLC, an affiliate of the
lessor, for an aggregate price of $672.60 in connection with an increase of
$925,000 in the equipment lease line of credit.
11. Between May 29, 1998 and August 31, 1998, the registrant issued
1,273,898 shares of Series D Preferred Stock to sixteen investors in exchange
for the retirement of $200,000 in face amount of 12% Senior Subordinated Notes
due January 31, 2003 and $14,900,000 in cash. We undertook this transaction to
raise funds for general working capital purposes and to retire debt. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
represented their intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant.
12. As of January 1, 1999, the registrant issued 20,000 shares of common
stock to Credit.Com, LLC as partial consideration for the acquisition of the
domain name "www.mortgage.com".
13. As of February 9, 1999, the registrant issued an aggregate amount of
$2,000,000 of 12% Senior Subordinated Notes due February 9, 2000 and warrants to
purchase 6,668 shares common stock with an adjustable exercise price (initially
$30 per share) to eight accredited, institutional investors. We undertook this
transaction to raise funds for general working capital purposes in the event
funds were unavailable in the public market. The purchases and sales were exempt
pursuant to Rule 506 and Regulation D as transactions by an issuer not involving
a public offering, where the purchasers were accredited investors, represented
their intention to acquire the securities for investment only, not with a view
to distribution, and received or had access to adequate information about the
registrant.
14. As of February 26, 1999, the registrant issued an aggregate amount of
$8,000,000 of 12% Senior Subordinated Notes due February 26, 2001 and warrants
to purchase 53,334 shares of common stock with an adjustable exercise price
(initially $30 per share) to seven accredited, institutional investors. We
undertook this transaction to raise funds for general working capital purposes
in the event funds were unavailable in the public market. The purchases and
sales were exempt pursuant to Rule 506 and Regulation D as transactions by an
issuer not involving a public offering, where the purchasers were accredited
investors, represented their intention to acquire the securities for investment
only, not with a view to distribution, and received or had access to adequate
information about the registrant.
15. As of April 5, 1999, the registrant issued an aggregate amount of
$3,000,000 of 12% Senior Subordinated Notes due April 5, 1999 and a warrant to
purchase 20,004 shares of common stock with an adjustable exercise price
(initially $30 per share) to an accredited, institutional investor, TeleBanc
Capital Markets, Inc. We undertook this transaction to raise funds for general
working capital purposes in the event funds were unavailable in the public
market. The purchase and sale was exempt pursuant to Rule 506 and Regulation D
as a transaction by an issuer not involving a public offering, where the
purchaser was an accredited investor, represented its intention to acquire the
securities for investment only, not with a view to distribution, and received or
had access to adequate information about the registrant.
16. As of April 15, 1999, the registrant issued warrants to purchase an
aggregate of 4,000 shares of common stock with an exercise price equal to the
initial public offering price of the common stock in consideration for the
waiver by First Capital Corporation of Los Angeles and Mortgage Loan
Specialists, Inc. of their respective conversion rights pursuant to Technology
Member Correspondent Agreements dated as of November 1, 1998.
17. As of April 30, 1999, the registrant issued 6,667 shares of common
stock to Harris Friedman in conversion of a 12% Convertible Subordinated
Debenture with a principal amount of $100,000 due May 1, 1999. We undertook this
transaction to retire debt.
18. As of May 6, 1999, the registrant issued $27,500,000 in face amount of
12% Senior Subordinated Convertible Debentures, due May 6, 2001, convertible in
certain circumstances to common stock or Series E Preferred Stock, to an
accredited, institutional investor, Intuit Inc. We undertook this transaction
for general working capital purposes and to purchase technology and redeem
warrants. The purchase and sale was exempt
II-3
<PAGE>
pursuant to Rule 506 and Regulation D as a transaction by an issuer not
involving a public offering, where the purchaser was an accredited investor,
represented its intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant.
19. As of May 28, 1999, the registrant issued 250,001 shares of its
Series F Preferred Stock to three accredited institutional investors, consisting
of affiliates of Dominion Fund III, Canaan Equity, L.P. and Technology Crossover
Ventures, for aggregate consideration of $15,000,000. We undertook this
transaction to raise funds for general working capital purposes in the event
funds were unavailable in the public market. The purchases and sales were exempt
pursuant to Rule 506 and Regulation D as transactions by an issuer not involving
a public offering, where the purchasers were accredited investors, represented
their intention to acquire the securities for investment only, not with a view
to distribution, and received or had access to adequate information about the
registrant.
20. Since May 1996, the registrant granted stock options to purchase
1,766,583 shares of common stock with exercise prices ranging from $5.50 to
$60.00 per share, to employees, directors, and consultants pursuant to the
registrant's employee stock option plan. As of May 1, 1997, the Registrant also
granted an option outside of the plan to an employee for 6,000 shares of common
stock with an exercise price of $5.50 per share as part of a severance
arrangement. Of these options, 625 have been exercised for an aggregate
consideration of $4,678.50. The issuance of common stock upon exercise of the
options was exempt either pursuant to Rule 701, as a transaction pursuant to a
compensatory benefit plan, or pursuant to Section 4(2) as a transaction by an
issuer not involving a public offering.
No underwriters were employed in any of the above transactions. Appropriate
legends were affixed to the share certificates and warrants issued in the
transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------
<S> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Fourth Amended and Restated Articles of Incorporation
*(a) Form of Amendment to Fourth Amended and Restated Articles of Incorporation
3.2* -- Amended and Restated Bylaws
4.1* -- $27,500,000 Note Purchase Agreement dated as of May 5, 1999
4.2* -- $8,000,000 Note Purchase Agreement dated as of February 26, 1999
4.3* -- $3,000,000 Note Purchase Agreement dated as of April 19, 1999
4.4* -- Registration Rights Agreement dated March 15, 1996, between the Registrant and Mason-McDuffie Real
Estate, Inc.
4.5* -- Registration Rights Agreement dated May 1, 1996, between the Registrant and Raymond James &
Associates, Inc.
4.6* -- Registration Rights Agreement dated as of January 1, 1998, between the Registrant and Credit.com, LLC
4.7* -- Series B Preferred Stock Purchase Agreement dated as of March 29, 1996 among the Registrant,
purchasers of the Series B Preferred Stock, Purchasers of the Series C Preferred Stock, Purchasers of
the Series D Preferred Stock, Andrew Heller, Kyle Meyer, John T. Rodgers, TeleBanc Capital Markets,
Inc. and Dominion Fund IV, L.P.
(a) First Amendment to Series B Purchase Agreement
(b) Second Amendment to Series B Purchase Agreement
(c) Third Amendment to Series B Purchase Agreement
(d) Fourth Amendment to Series B Purchase Agreement
(e) Fifth Amendment to Series B Purchase Agreement
(f) Sixth Amendment to Series B Purchase Agreement
(g) Seventh Amendment to Series B Purchase Agreement
4.8* -- Specimen certificate for shares of the Registrant's common stock
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------
<S> <C>
4.9* -- Recapitalization Agreement and Plan of Reorganization between the Registrant and Mason-McDuffie Real
Estate, Inc.
5.1* -- Legal Opinion of Foley & Lardner as to legality of securities
10.1* -- Employment Agreement between the Registrant and Seth S. Werner dated January 1, 1999
10.2* -- Employment Agreement between the Registrant and John J. Hogan dated May 28, 1999
10.3* -- Amended and Restated Employment Agreement between the Registrant and David Larson dated May 28,
1999
10.4* -- Letter re Employment of John T. Rodgers dated May 26, 1999
(a) Noncompetition Agreement between the Registrant and John T. Rodgers dated May 26, 1999
10.5* -- Noncompetition Agreement between the Registrant and John Buscema dated May 24, 1999
10.6* -- Purchase and Sale Agreement dated April 7, 1995 among the Registrant, Morbank Financial Systems,
Inc., Globe Mortgage Company, John Buscema, and Financial Resources Group (a) Waiver of Rights to
Software
10.7* -- Amended and Restated Stock Option Plan (as of March 24, 1999)
10.8* -- Form of Stock Option Agreements under Employee Stock Option Plan
(a) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Non-Qualified Stock Option Agreement
(b) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Non-Qualified Stock Option Agreement (For
Employees of Network Members)
(c) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Incentive Stock Option Agreement
(d) Mortgage.com, Inc. Non-Qualified Stock Option Agreement (Revised April 26, 1999)
(e) Mortgage.com, Inc. Non-Qualified Stock Option Agreement (For Employees of Network Members Revised
April 26, 1999)
(f) Mortgage.com, Inc. Incentive Stock Option Agreement (Revised April 26, 1999)
10.9* -- Superior Bank Warrant Repurchase Agreement between Registrant and Superior Bank, FSB dated May 4,
1999
10.10* -- Agreement between Registrant and Superior Bank, FSB dated as of April 1, 1998
10.11* -- Common Stock Warrant dated April 1, 1998 to Superior Bank, FSB to purchase 200,000 shares of Common
Stock at $5.00 per share
10.12* -- Common Stock Warrant dated April 1, 1998 to Superior Bank, FSB to purchase 100,000 shares of Common
Stock at $7.50 per share
10.13+* -- Amended and Restated Desktop Underwriter Seller/Servicer Software License and Subscription Agreement
between Registrant and Fannie Mae executed October 15, 1998
10.14+ -- Distribution, Marketing, Facilities and Service Agreement between Registrant and Intuit Lender
Services, Inc. dated as of May 31, 1998, as amended
10.15+* -- Mortgage Loan Processing Agreement between the Registrant and Atlanta Internet Bank, FSB dated as of
April 1, 1998
10.16* -- Atlanta Internet Bank Mortgage Center Mortgage Loan Origination, Processing, Purchase and Sale
Agreement between Registrant and Atlanta Internet Bank dated as of April 1, 1998
10.17+* -- License, Staffing, Purchase and Sale Agreement between Registrant and Atlanta Internet Bank, FSB
dated as of April 1, 1998
10.18* -- Letter Agreement dated May 20, 1999, between the Registrant and NetBank
10.19* -- $2,000,000 Note Purchase Agreement dated as of February 9, 1999
10.20* -- Form of Common Stock Warrant dated August 31, 1997 with an exercise price of $7.50 per share
(50,000 shares)
10.21* -- Form of Common Stock Warrant dated January 30, 1998 with an exercise price of $7.50 per share
(66,667 shares)
10.22* -- Form of Warrant dated February 9, 1999 with an exercise price of $30.00 per share (6,668 shares)
10.23* -- Form of Warrant dated February 26, 1999 with an exercise price of $30.00 per share (53,334 shares)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------
<C> <S>
10.24* -- Form of Warrant dated April 19, 1999 with an exercise price of $30.00 per share (20,004 shares)
10.25+* -- Warehousing Credit and Security Agreement (Single-Family Mortgage Loans) between Registrant and Bank
United dated as of July 1, 1998
(a) Second Amendment to Warehousing Credit and Security Agreement dated as of July 1, 1999
10.26+* -- First Amended and Restated Warehousing Credit and Security Agreement (Single Family Mortgage Loans)
between Registrant and Residential Funding Corporation dated as of June 8, 1998
(a) First Amendment to First Amended and Restated Warehousing Credit and Security Agreement (Single
Family Mortgage Loans)
(b) Second Amendment to First Amended and Restated Warehousing Credit and Security Agreement (Single
Family Mortgage Loans)
(c) Third Amendment to First Amended and Restated Warehousing Credit and Security Agreement (Single
Family Mortgage Loans)
(d) Fourth Amendment to First Amended and Restated Warehousing Credit and Security Agreement (Single
Family Mortgage Loans)
(e) Letter dated July 9, 1999
10.27* -- Master Lease Agreement between Dominion Ventures, Inc. and Registrant dated as of April 1, 1998
10.28+* -- $25,000,000 Warehouse Credit Agreement among Registrant, Cooper River Funding, Inc. and GE Capital
Mortgage Services, Inc. dated as of August 7, 1998
10.29* -- Agreement Regarding Creation of Western America Mortgage, Ltd. dated as of July 8, 1999, among the
Registrant, FMN Management Company, Inc., Western America Mortgage, Ltd., Amcalfund, Inc. and
Mason-McDuffie Real Estate, Inc.
(a) Western America Mortgage, Ltd. Limited Partnership Agreement among FMN Management Company, Inc.
and Amcalfund, Inc.
(b) Office Use and Services Agreement between Mason-McDuffie Real Estate, Inc. and Western America
Mortgage, Ltd.
(c) Noncompetition and Option Agreement between Western America Mortgage, Ltd., Amcalfund, Inc., FMN
Management Company, Inc. and Mason-McDuffie Real Estate, Inc.
10.30* -- Domain Name Assignment Agreement dated as of January 1, 1999, between the Registrant and Credit.com,
LLC
(a) Amendment Number One to Domain Name Assignment Agreement dated June 30, 1999.
10.31+ -- Intuit Lender Services, Inc. Subprime Agreement for Distribution, Marketing, Facilities and Services
dated as of May 26, 1999, between the Registrant and Intuit Lender Services, Inc.
10.32* -- Form of Director Indemnification Agreement dated as of April 15, 1999
10.33* -- Form of Director/Officer Indemnification Agreement dated as of April 15, 1999
10.34* -- Form of Officer Indemnification Agreement dated as of April 15, 1999
10.35* -- Waiver Agreement dated December 28, 1998, between Cendant Mortgage and Mortgage.com.
10.36* -- B. Anderson Young--Terms of Offer of Employment
(a) Non-Competition Agreement for B. Anderson Young
21.1* -- List of Subsidiaries
23.1 -- Consent of KPMG LLP
23.2* -- Consent of Foley & Lardner (included in Exhibit 5.1)
24.1* -- Power of Attorney (included on signature page hereto)
27.1* -- Financial Data Schedule (for SEC use only)
99.1 -- Consent of C. Toms Newby, III
</TABLE>
- ------------------
* Previously filed.
+ Some portions of these exhibits are omitted pursuant to a confidential
treatment request filed with the SEC.
II-6
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securites and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against such public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the final adjudication
of such issues.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF PLANTATION, STATE OF FLORIDA, ON JULY 21, 1999.
MORTGAGE.COM, INC.
By: ________/s/ SETH S. WERNER________
Seth S. Werner
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ SETH S. WERNER Chairman of the Board, President and Chief July 21, 1999
- ------------------------------------------ Executive Officer
Seth S. Werner
/s/ JOHN HOGAN* Executive Vice President and Director July 21, 1999
- ------------------------------------------
John Hogan
/s/ DAVID W. LARSON* Executive Vice President and Director July 21, 1999
- ------------------------------------------
David W. Larson
/s/ GEORGE A. NADDAFF* Vice-Chairman of the Board July 21, 1999
- ------------------------------------------
George A. Naddaff
/s/ EDWIN JOHNSON* Senior Vice President, Chief Financial July 21, 1999
- ------------------------------------------ Officer and Chief Accounting Officer
Edwin Johnson
/s/ STEPHEN GREEN* Director July 21, 1999
- ------------------------------------------
Stephen Green
/s/ MICHAEL K. LEE* Director July 21, 1999
- ------------------------------------------
Michael K. Lee
</TABLE>
- ------------------
*By Seth S. Werner, attorney-in-fact.
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Fourth Amended and Restated Articles of Incorporation
*(a) Form of Amendment to Fourth Amended and Restated Articles of Incorporation
3.2* -- Amended and Restated Bylaws
4.1* -- $27,500,000 Note Purchase Agreement dated as of May 5, 1999
4.2* -- $8,000,000 Note Purchase Agreement dated as of February 26, 1999
4.3* -- $3,000,000 Note Purchase Agreement dated as of April 19, 1999
4.4* -- Registration Rights Agreement dated March 15, 1996, between the Registrant and
Mason-McDuffie Real Estate, Inc.
4.5* -- Registration Rights Agreement dated May 1, 1996, between the Registrant and
Raymond James & Associates, Inc.
4.6* -- Registration Rights Agreement dated as of January 1, 1998, between the Registrant and
Credit.com, LLC
4.7* -- Series B Preferred Stock Purchase Agreement dated as of March 29, 1996 among the
Registrant, purchasers of the Series B Preferred Stock, Purchasers of the Series C
Preferred Stock, Purchasers of the Series D Preferred Stock, Andrew Heller, Kyle Meyer,
John T. Rodgers, TeleBanc Capital Markets, Inc. and Dominion Fund IV, L.P.
(a) First Amendment to Series B Purchase Agreement
(b) Second Amendment to Series B Purchase Agreement
(c) Third Amendment to Series B Purchase Agreement
(d) Fourth Amendment to Series B Purchase Agreement
(e) Fifth Amendment to Series B Purchase Agreement
(f) Sixth Amendment to Series B Purchase Agreement
(g) Seventh Amendment to Series B Purchase Agreement
4.8* -- Specimen certificate for shares of the Registrant's common stock
4.9* -- Recapitalization Agreement and Plan of Reorganization between the Registrant and
Mason-McDuffie Real Estate, Inc.
5.1* -- Legal Opinion of Foley & Lardner as to legality of securities
10.1* -- Employment Agreement between the Registrant and Seth S. Werner dated January 1, 1999
10.2* -- Employment Agreement between the Registrant and John J. Hogan dated May 28, 1999
10.3* -- Amended and Restated Employment Agreement between the Registrant and David Larson dated
May 28, 1999
10.4* -- Letter re Employment of John T. Rodgers dated May 26, 1999
(a) Noncompetition Agreement between the Registrant and John T. Rodgers dated May 26,
1999
10.5* -- Noncompetition Agreement between the Registrant and John Buscema dated May 24, 1999
10.6* -- Purchase and Sale Agreement dated April 7, 1995 among the Registrant, Morbank Financial
Systems, Inc., Globe Mortgage Company, John Buscema, and Financial Resources Group
(a) Waiver of Rights to Software
10.7* -- Amended and Restated Stock Option Plan (as of March 24, 1999)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
10.8* -- Form of Stock Option Agreements under Employee Stock Option Plan
(a) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Non-Qualified Stock Option
Agreement
(b) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Non-Qualified Stock Option
Agreement (For Employees of Network Members)
(c) Mortgage.com, Inc. (f/k/a First Mortgage Network, Inc.) Incentive Stock Option
Agreement
(d) Mortgage.com, Inc. Non-Qualified Stock Option Agreement (Revised April 26, 1999)
(e) Mortgage.com, Inc. Non-Qualified Stock Option Agreement (For Employees of Network
Members Revised April 26, 1999)
(f) Mortgage.com, Inc. Incentive Stock Option Agreement (Revised April 26, 1999)
10.9* -- Superior Bank Warrant Repurchase Agreement between Registrant and Superior Bank, FSB
dated May 4, 1999
10.10* -- Agreement between Registrant and Superior Bank, FSB dated as of April 1, 1998
10.11* -- Common Stock Warrant dated April 1, 1998 to Superior Bank, FSB to purchase 200,000 shares
of Common Stock at $5.00 per share
10.12* -- Common Stock Warrant dated April 1, 1998 to Superior Bank, FSB to purchase 100,000 shares
of Common Stock at $7.50 per share
10.13+* -- Amended and Restated Desktop Underwriter Seller/Servicer Software License and
Subscription Agreement between Registrant and Fannie Mae executed October 15, 1998
10.14+ -- Distribution, Marketing, Facilities and Service Agreement between Registrant and Intuit
Lender Services, Inc. dated as of May 31, 1998, as amended
10.15+* -- Mortgage Loan Processing Agreement between the Registrant and Atlanta Internet Bank, FSB
dated as of April 1, 1998
10.16* -- Atlanta Internet Bank Mortgage Center Mortgage Loan Origination, Processing, Purchase and
Sale Agreement between Registrant and Atlanta Internet Bank dated as of April 1, 1998
10.17+* -- License, Staffing, Purchase and Sale Agreement between Registrant and Atlanta Internet
Bank, FSB dated as of April 1, 1998
10.18* -- Letter Agreement dated May 20, 1999, between the Registrant and NetBank
10.19* -- $2,000,000 Note Purchase Agreement dated as of February 9, 1999
10.20* -- Form of Common Stock Warrant dated August 31, 1997 with an exercise price of $7.50 per
share (50,000 shares)
10.21* -- Form of Common Stock Warrant dated January 30, 1998 with an exercise price of $7.50 per
share (66,667 shares)
10.22* -- Form of Warrant dated February 9, 1999 with an exercise price of $30.00 per share
(6,668 shares)
10.23* -- Form of Warrant dated February 26, 1999 with an exercise price of $30.00 per share
(53,334 shares)
10.24* -- Form of Warrant dated April 19, 1999 with an exercise price of $30.00 per share
(20,004 shares)
10.25+* -- Warehousing Credit and Security Agreement (Single-Family Mortgage Loans) between
Registrant and Bank United dated as of July 1, 1998
(a) Second Amendment to Warehousing Credit and Security Agreement dated as of July 1,
1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
10.26+* -- First Amended and Restated Warehousing Credit and Security Agreement (Single Family
Mortgage Loans) between Registrant and Residential Funding Corporation dated as of
June 8, 1998
(a) First Amendment to First Amended and Restated Warehousing Credit and Security
Agreement (Single Family Mortgage Loans)
(b) Second Amendment to First Amended and Restated Warehousing Credit and Security
Agreement (Single Family Mortgage Loans)
(c) Third Amendment to First Amended and Restated Warehousing Credit and Security
Agreement (Single Family Mortgage Loans)
(d) Fourth Amendment to First Amended and Restated Warehousing Credit and Security
Agreement (Single Family Mortgage Loans)
(e) Letter dated July 9, 1999
10.27* -- Master Lease Agreement between Dominion Ventures, Inc. and Registrant dated as of
April 1, 1998
10.28+* -- $25,000,000 Warehouse Credit Agreement among Registrant, Cooper River Funding, Inc. and
GE Capital Mortgage Services, Inc. dated as of August 7, 1998
10.29* -- Agreement Regarding Creation of Western America Mortgage, Ltd. dated as of July 8, 1999,
among the Registrant, FMN Management Company, Inc., Western America Mortgage, Ltd.,
Amcalfund, Inc. and Mason-McDuffie Real Estate, Inc.
(a) Western America Mortgage, Ltd. Limited Partnership Agreement among FMN Management
Company, Inc. and Amcalfund, Inc.
(b) Office Use and Services Agreement between Mason-McDuffie Real Estate, Inc. and
Western America Mortgage, Ltd.
(c) Noncompetition and Option Agreement between Western America Mortgage, Ltd.,
Amcalfund, Inc., FMN Management Company, Inc. and Mason-McDuffie Real Estate, Inc.
10.30* -- Domain Name Assignment Agreement dated as of January 1, 1999, between the Registrant and
Credit.com, LLC
(a) Amendment Number One to Domain Name Assignment Agreement dated June 30, 1999.
10.31+ -- Intuit Lender Services, Inc. Subprime Agreement for Distribution, Marketing, Facilities
and Services dated as of May 26, 1999, between the Registrant and Intuit Lender Services,
Inc.
10.32* -- Form of Director Indemnification Agreement dated as of April 15, 1999
10.33* -- Form of Director/Officer Indemnification Agreement dated as of April 15, 1999
10.34* -- Form of Officer Indemnification Agreement dated as of April 15, 1999
10.35* -- Waiver Agreement dated December 28, 1998, between Cendant Mortgage and Mortgage.com.
10.36* -- B. Anderson Young--Terms of Offer of Employment
(a) Non-Competition Agreement for B. Anderson Young
21.1* -- List of Subsidiaries
23.1 -- Consent of KPMG LLP
23.2* -- Consent of Foley & Lardner (included in Exhibit 5.1)
24.1* -- Power of Attorney (included on signature page hereto)
27.1* -- Financial Data Schedule (for SEC use only)
99.1 -- Consent of C. Toms Newby, III
</TABLE>
- ------------------
* Previously filed.
+ Some portions of these exhibits are omitted pursuant to a confidential
treatment request filed with the SEC.
FOURTH AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF MORTGAGE.COM, INC.
This corporation was incorporated on September 3, 1993, under the name
First Mortgage Network, Inc. Pursuant to Section 607.1007, Florida Business
Corporation Act, the Board of Directors approved the amendments to and the
restatement of the articles of incorporation (including the addendum thereto) as
of May 27, 1999. Approval of the amendments by stockholders of the Corporation's
Common Stock and Special Preferred Stock (Northern California Division) was not
required. Holders of the Corporation's Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, each
voting as a separate class, approved the amendments as of May 27, 1999. In each
case in which a voting group was required to approve the amendments, the number
of votes cast for the amendments by such voting group was sufficient for
approval of the amendments.
The Articles of Incorporation of Mortgage.com, Inc. (including the
addendum thereto) are hereby amended and restated in their entirety as follows:
ARTICLE 1
NAME AND ADDRESS
Section 1.1 Name. The name of the corporation is Mortgage.com, Inc.
(the "Corporation").
Section 1.2 Address. The address of the principal office of the
Corporation is 8751 Broward Boulevard, Fifth Floor, Plantation, Florida 33324.
ARTICLE 2
DURATION
Section 2.1 Duration. The term of existence of the Corporation is
perpetual.
ARTICLE 3
PURPOSE
Section 3.1 Purpose. The Corporation is organized for the purpose of
transacting any and all lawful business permitted under the laws of the United
States and of the State of Florida.
<PAGE>
ARTICLE 4
CAPITAL STOCK
Section 4.1 Authorized Capital. The maximum number of shares of stock
which the Corporation is authorized to have outstanding at any one time is
forty-five million (45,000,000) shares divided in classes as follows:
(a) Fifteen million (15,000,000) shares of Preferred
Stock having a par value of $0.01 per share and which may be issued in
one or more classes or series as further described in Section 4.2; and
(b) Thirty million (30,000,000) shares of Common
Stock having a par value of $0.01 per share and having the voting and
other rights described in Section 4.3.
All such shares shall be issued fully paid and nonassessable.
Section 4.2 Preferred Stock.
----------------------------
(a) Blank-Check Preferred. The Board of Directors is
authorized to provide for the issuances of the Preferred Stock in one
or more classes and in one or more series within a class by filing the
appropriate Articles of Amendment with the Secretary of State of
Florida, which shall be effective without shareholder action, subject
to Section 4.2.6 hereof, and is authorized to establish the number of
shares to be included in each class and in each series, and the
preferences, limitations and relative rights of each class and in each
series, including but not limited to dividend, liquidation, voting,
redemption and conversion rights. Such preferences must include the
preferential right to receive distributions of dividends or the
preferential right to receive distributions of assets upon the
dissolution of the Corporation before shares of Common Stock are
entitled to receive such distributions.
(b) Designation. Notwithstanding the foregoing, there
are hereby outlined seven series of Preferred Stock, designated
"Special Preferred Stock (Northern California Division)" (the "Special
Preferred"), the "Series A Preferred Stock" (the "Series A Preferred"),
the "Series B Preferred Stock" (the "Series B Preferred"), the "Series
C Preferred Stock" (the "Series C Preferred"), the "Series D Preferred
Stock" (the "Series D Preferred"), the "Series E Preferred Stock" (the
"Series E Preferred"), and the "Series F Preferred Stock" (the "Series
F Preferred"). The Special Preferred shall consist of one thousand
(1,000) shares, the Series A Preferred shall consist of two hundred
twenty five thousand, two hundred and twenty five (225,225) shares, the
Series B Preferred shall consist of one million, one hundred seventy
one thousand one hundred ninety one (1,171,191) shares, the Series C
Preferred shall consist of one million one hundred seven thousand
(1,107,000) shares, the Series D Preferred shall consist of one million
three
2
<PAGE>
hundred fifty thousand (1,350,000) shares, the Series E Preferred shall
consist of seven hundred fifty-one thousand (751,000) shares and the
Series F shall consist of two hundred fifty-one thousand (251,000)
shares. The relative preferences, rights, and limitations of the
Special Preferred are set forth in Addendum 1 hereto. The relative
preferences, rights, and limitations of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred are set forth herein.
Section 4.2.1 Dividends.
------------------------
(a) Dividend Amounts. The holders of Series A
Preferred shall be entitled to receive dividends in the same amount per
share as shall be paid to holders of Common Stock, when, if and to the
extent dividends shall be paid to holders of Common Stock. The holders
of Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, and Series F Preferred shall be entitled to receive, out of
any funds legally available therefor, cumulative dividends at the
annual rates per share of $0.66, $0.90, $1.38, $7.20, and $7.20,
respectively. The dividend rights of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, and Series F
Preferred shall be on parity. The dividend rights of the Series A
Preferred shall be junior to the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, and Series F
Preferred.
(b) Computation of Cumulative Dividends. Dividends on
the Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred, and Series F Preferred shall accrue from day to day on
each share of such series from the date of original issuance of such
share, whether or not earned or declared, and shall accrue until paid
(i) if, as and when declared by the Board of Directors of the
Corporation, (ii) upon liquidation, dissolution or winding up of the
Corporation pursuant to Section 4.2.2 hereof, (iii) upon conversion
pursuant to Section 4.2.4 hereof (unless cancelled pursuant to the last
sentence of the immediately following paragraph) or (iv) upon
redemption pursuant to Section 4.2.5 hereof.
All numbers relating to calculation of cumulative
dividends shall be subject to equitable adjustment in the event of any
stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event involving a
change in the capital structure of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred or Series F
Preferred. Such dividends on the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, and Series F
Preferred shall be cumulative so that if such dividends in respect of
any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum
sufficient for the payment thereof set apart, the deficiency shall
first be fully paid before any dividend or other distribution shall be
paid or declared and set apart for the Corporation's Common Stock, the
Series A Preferred, the Special Preferred (except with
3
<PAGE>
respect to dividends on the Special Preferred payable solely out of Net
Profits (as defined in the designation of the Special Preferred
attached hereto as Addendum 1)) or any other class or series of capital
stock of the Corporation designated in the future to be junior to the
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred. Upon the conversion of all shares of
the Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred or Series F Preferred under Section 4.2.4(e)(i) hereof or
upon the conversion of any such shares in anticipation of a
liquidation, dissolution or winding up of the Corporation pursuant to
Section 4.2.2 hereof or in anticipation of a Qualified Public Offering,
all such accrued and unpaid cumulative dividends on such shares of
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred to and until the date of such
conversion shall be canceled and shall not be due and payable.
(c) Restrictions on Distributions. Except as
otherwise consented to by the holders of at least a majority of the
then outstanding shares of Series B Preferred (voting as a separate
class), the holders of at least a majority of the then outstanding
shares of Series C Preferred (voting as a separate class), the holders
of at least a majority of the then outstanding shares of Series D
Preferred (voting as a separate class), the holders of at least a
majority of the then outstanding shares of Series E Preferred (voting
as a separate class), and the holders of at least a majority of the
then outstanding shares of the Series F Preferred (voting as a separate
class) the Corporation shall not declare or pay any dividends, or
purchase, redeem, retire or otherwise acquire for value any shares of
its capital stock (or any rights, options or warrants to purchase such
shares) now or hereafter outstanding, return any capital to its
stockholders as such, or make any distribution of assets to its
stockholders as such, or permit any subsidiary of the Corporation to do
any of the foregoing.
Notwithstanding the foregoing, subsidiaries of the
Corporation may declare and make payment of cash and stock dividends,
return capital and make distributions of assets to the Corporation, and
nothing herein contained shall prevent the Corporation from (i)
effecting a stock split or declaring or paying any dividend consisting
of shares of any class of capital stock paid to the holders of shares
of such class of capital stock; (ii) complying with the provisions of
the Special Preferred, the Superior Bank Purchase and Sale Agreement
(as defined in the Series B Stock Purchase Agreement dated as of March
29, 1996 as it may be amended, referred to herein as the "Series B
Purchase Agreement") or the conversion letter agreement dated May 29,
1998 between the Corporation and certain Purchasers (as defined in the
Series B Purchase Agreement); and (iii) complying with any specific
provision of the terms of the Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F Preferred, as set
forth herein (including, without limitation, redemption of the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred in accordance with their terms).
4
<PAGE>
(d) Participating Dividends. In the event that the
Board of Directors of the Corporation shall declare a dividend payable
upon the then outstanding shares of Common Stock (other than a stock
dividend on the Common Stock distributed solely in the form of
additional shares of Common Stock), each holder of shares of Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
and Series F Preferred shall be entitled to the amount of dividends as
would be declared payable on the largest number of whole shares of
Common Stock into which such shares of Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or Series F
Preferred held by such holder could be converted pursuant to the
provisions of Section 4.2.4 hereof, such number determined as of the
record date for the determination of holders of Common Stock entitled
to receive such dividend, on a parity with the Common Stock and Series
A Preferred.
Section 4.2.2 Liquidation, Dissolution or Winding Up.
-----------------------------------------------------
(a) Series A Preferred. Cash and property
distributable to stockholders upon liquidation of the Corporation
remaining after distribution of any liquidation preferences to any
other series of the Corporation's Preferred Stock shall be distributed
pro rata to the holders of Series A Preferred and the holders of Common
Stock on a share for share basis; provided, however, that the shares of
Series A Preferred shall be entitled to a liquidation preference over
the Common Stock of $4.44 per share, so that in the event the cash and
property distributable to the holders of the Series A Preferred upon
liquidation of the Corporation, based on a pro rata distribution to all
holders of Series A Preferred and all holders of Common Stock, shall be
less than $4.44 per share, the distribution to the holders of the
Series A Preferred shall be increased to the extent required to cause
such holders to receive $4.44 per share, and the distribution to the
holders of Common Stock shall be proportionately reduced to the extent
necessary to give effect to such liquidation preference.
(b) Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred and Series F Preferred. In the event of
any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, or in the event of its insolvency, before any
distribution or payment is made to any holders of Common Stock, Series
A Preferred, or Special Preferred (except for distributions or payments
made to holders of the Special Preferred Stock which are limited to the
Liquidation Price (as defined in the designation of the Special
Preferred attached herein as Addendum 1)) or any other class or series
of capital stock of the Corporation designated to be junior to the
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred and subject to the liquidation rights
and preferences of any class or series of Preferred Stock designated in
the future to be senior to, or on a parity with, the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred with respect to liquidation preferences, the
holders of each such share of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F
5
<PAGE>
Preferred shall be entitled to be paid first out of the assets of the
Corporation available for distribution to holders of the Corporation's
capital stock of all classes, whether such assets are capital, surplus
or earnings ("Available Assets"), an amount equal to the sum of:
(i) in priority to any other distributions
of available assets after providing for the
liquidation preference of the Special Preferred with
respect to assets of the Northern California
Division, $5.50, $7.50, $11.50, $60.00, and $60.00
per share of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, and Series F
Preferred, respectively, plus all accrued but unpaid
dividends thereon, whether or not earned or declared
up to and including the date full payment shall be
tendered to the holders of the Series B Preferred,
Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred, respectively, with
respect to such liquidation, dissolution or winding
up; plus
(ii) after payment from available assets
under subsection (i) above, an amount equal to the
amount per share of Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or
Series F Preferred, respectively, as would have been
payable (after reducing the Available Assets by the
distribution provided for in (i) above and after
providing for the liquidation preference of the
Series A Preferred over the Common Stock) had each
share of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F
Preferred (but, with respect to the Series E
Preferred, only if clause (B) below does not apply),
and all other outstanding shares of any class or
series of capital stock of the Corporation, if any,
which are convertible into Common Stock and which are
senior to the Common Stock with respect to
liquidation preferences, been converted to Common
Stock immediately prior to such event of liquidation,
dissolution or winding up.
The rights of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, and Series F
Preferred shall be on parity in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, or in the event of its insolvency.
Notwithstanding the foregoing,
(A) if the amount payable per share of Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred under subsection (ii) above (without making the
distribution described in subsection (i) above) would exceed $16.50,
$16.50, $34.50, $60.00 or $60.00 respectively, then the holders of each
share of
6
<PAGE>
the series of Preferred Stock which exceeded such applicable number
shall only be entitled to be paid pursuant to subsection (ii) above;
and
(B) if the amount payable per share of Series E
Preferred or Series F Preferred under subsection (ii) above (without
making the distribution provided for in subsection (i) above) would be
less than or equal to $60.00, then the holder of each share of the
Series E Preferred or Series F Preferred shall only be entitled to be
paid pursuant to subsection (i) above.
The amounts set forth above and throughout this
Section 4.2.2(b) shall be subject to equitable adjustment whenever
there shall occur a stock dividend, stock split, combination,
reorganization, recapitalization, reclassification or other similar
event involving a change in the capital structure of the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
or Series F Preferred.
If, upon liquidation, dissolution or winding up of
the Corporation, the Available Assets shall be insufficient to pay the
holders of Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, or Series F Preferred the full amount to which they
otherwise would be entitled to receive under subsection (i) above, the
holders of Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, and Series F Preferred shall share ratably in any
distribution of Available Assets pro rata in proportion to the
respective liquidation preference amounts to which they would otherwise
be entitled to receive upon liquidation if all liquidation preference
dollar amounts owing to the holders of such insufficiently paid stock
were paid in full.
If at any time or from time to time there shall be a
capital reorganization of the Common Stock, or a merger or
consolidation of the Corporation with or into another corporation,
unless the Corporation shall be the surviving corporation, or the sale
of all or substantially all of the Corporation's capital stock or
assets to any other person or entity, or any form of business
combination or reorganization in which Control of the Corporation is
transferred (a "Reorganization"), such Reorganization shall be regarded
as a liquidation, dissolution or winding up of the affairs of the
Corporation within the meaning of this Section 4.2.2(b); provided,
however, that each holder of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F Preferred shall
have the right to elect the benefits of the provisions of Section
4.2.4(g) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section
4.2.2(b). "Control" shall be deemed to have been transferred in a
transaction or series of transactions in which any person, or group of
related persons, shall have acquired beneficial ownership of more than
25% of the Common Stock of the Corporation (assuming all rights,
options, warrants or convertible or exchangeable securities entitling
the holders thereof to subscribe for or purchase or
7
<PAGE>
otherwise acquire shares of Common Stock ("Common Stock Equivalents")
have been fully exercised or converted) or of substantially all of the
assets of the Corporation.
Whenever the distribution provided for in this
Section 4.2.2(b) shall be payable in property other than cash, the
value of such distribution shall be the fair market value of such
property as determined in good faith by the Board of Directors of the
Corporation. All distributions (including distributions other than
cash) made hereunder shall be made pro rata with respect to each share
of Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, and Series F Preferred in accordance with the liquidation
preference amounts described in this Section 4.2.2(b). In the event of
any dispute between the holders of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or Series F
Preferred and the Corporation regarding the determination of the fair
market value of non-cash distributions, at the election of the holders
of at least a majority of the then outstanding shares of the disputing
series (voting as a separate class), the Corporation shall engage a
consulting or investment banking firm selected by the Board of
Directors and approved by the holders of at least a majority of the
then outstanding shares of that disputing class (voting as a separate
class) to prepare an independent appraisal of the fair market value of
such property to be distributed. The expenses of any appraisal by such
consulting or investment banking firm shall be borne by the
Corporation.
Section 4.2.3 Voting Power.
---------------------------
(a) Series A Preferred. Except as otherwise required
by law, the holders of Series A Preferred and the holders of Common
Stock shall vote together as a single voting group and not separately
by class on all matters required by Florida law to be approved by the
Stockholders, with the holders of Series A Preferred having one vote
for each share of such series held by them and the holders of Common
Stock having one vote for each share of such class held by them.
(b) Series B Preferred, Series C Preferred, Series D
Preferred, and Series E Preferred. Except as otherwise expressly
provided in this Section 4.2.3(b), or as otherwise required by law,
each holder of Series B Preferred, Series C Preferred, Series D
Preferred, or Series E Preferred shall be entitled to vote on all
matters and shall be entitled to that number of votes equal to the
largest number of whole shares of Common Stock into which such holder's
shares of Series B Preferred, Series C Preferred, Series D Preferred,
or Series E Preferred could be converted, pursuant to the provisions of
Section 4.2.4 hereof, at the record date for the determination of
stockholders entitled to vote on such matter or, if no such record date
is established, at the date such vote is taken or any written consent
of stockholders is solicited. Except as otherwise expressly provided in
this Section 4.2.3(b) or Section 4.2.6 hereof or as otherwise required
by law or under the Articles of Incorporation, the holders of shares of
Series A Preferred, Series B Preferred,
8
<PAGE>
Series C Preferred, Series D Preferred, Series E Preferred, and Common
Stock shall vote together (or render written consents in lieu of a
vote) as a single class on all matters submitted to the stockholders of
the Corporation.
Any holder or affiliated group of holders which owns
an aggregate of 363,000 or more shares of Series B Preferred and/or
Series C Preferred shall be entitled to elect one director (all such
directors shall be collectively referred to herein as the "Series B
Directors"). At any annual or special meeting of the Corporation (or in
a written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or by written consent)
of any such holder or affiliated group of holders shall be necessary
for there to be a quorum for the election of the Series B Directors.
Any Series B Director may be removed during his or
her term of office, without cause, by and only by, the affirmative vote
or written consent of the holder or affiliated group of holders (or
their successors and assigns) which elected such director (voting as a
separate class). A vacancy in a seat held by any Series B Director
shall be filled by vote or written consent of any holder or affiliated
group of holders which owns an aggregate of 363,000 or more outstanding
shares of Series B Preferred and/or Series C Preferred which is not
currently represented by a Series B Director present in person at any
meeting (calculated after the determination of a quorum) or by written
consent.
Without the written consent of the holders of at
least a majority of the then outstanding shares of Series B Preferred
(voting as a separate class) and Series C Preferred (voting as a
separate class), the number of directors of the Corporation shall not
exceed ten in number.
Holders of a majority of the outstanding shares of
Series D Preferred shall be entitled to elect one director (the "Series
D Director"). At any annual or special meeting of the Corporation (or
in a written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or by written consent)
of any such holders of a majority of the outstanding shares of the
Series D Preferred shall be necessary for there to be a quorum for the
election of the Series D Director. Any Series D Director may be removed
during his or her term of office, without cause, by and only by, the
affirmative vote or written consent of a majority of the holders of the
Series D Preferred. A vacancy in a seat held by any Series D Director
shall be filled by vote or written consent of the holders of a majority
of the outstanding shares of Series D Preferred present in person at
any meeting (after the determination of a quorum) or by written
consent.
9
<PAGE>
(c) Series F Preferred. Except as otherwise required
by law, or as provided in Section 4.2.6 hereof, no holder of Series F Preferred
shall be entitled to vote on matters submitted to the stockholders of the
Corporation.
Section 4.2.4 Conversion Rights.
--------------------------------
(a) General. Subject to and in compliance with the
provisions of this Section 4.2.4, all shares of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, and Series F Preferred may, at the option of any holder, be
converted at any time and from time to time into fully-paid and
non-assessable shares of Common Stock and all shares of the Series F
Preferred may, at the option of any holder, be converted at any time
and from time to time into an equal number of fully-paid non-assessable
shares of Series E Preferred. The Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
and Series F Preferred shall be automatically converted into fully-paid
and non-assessable shares of Common Stock upon a Qualified Public
Offering, as defined herein. The number of shares of Common Stock to
which a holder of the Series A Preferred shall be entitled to receive
upon conversion shall be equal to the number of shares of Series A
Preferred so converted by the holder. The number of shares of Common
Stock to which a holder of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F Preferred shall be
entitled to receive upon conversion shall be the product obtained by
multiplying the respective Applicable Conversion Rates (determined as
provided in Section 4.2.4(b)) by the number of shares of Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred being converted at any time.
(b) Applicable Conversion Rate. The conversion rate
in effect at any time for the Series B Preferred (the "Series B
Applicable Conversion Rate"), Series C Preferred (the "Series C
Applicable Conversion Rate"), Series D Preferred (the "Series D
Applicable Conversion Rate"), Series E Preferred (the "Series E
Applicable Conversion Rate"), and Series F Preferred (the "Series F
Applicable Conversion Rate") shall be the quotient obtained by dividing
5.50, 7.50, 11.50, 60.00, or 60.00 respectively, by the Series B
Applicable Conversion Value, Series C Applicable Conversion Value, the
Series D Applicable Conversion Value, the Series E Applicable
Conversion Value, or Series F Applicable Conversion Value,
respectively, each calculated as provided in Section 4.2.4(c).
(c) Applicable Conversion Value. The Series B
Applicable Conversion Value, Series C Applicable Conversion Value, the
Series D Applicable Conversion Value, the Series E Applicable
Conversion Value and Series F Applicable Conversion Value in effect
from time to time, shall be $5.50 (the "Series B Applicable Conversion
Value"), $7.50 (the "Series C Applicable Conversion Value"), $11.50
(the "Series D Applicable Conversion Value"), $60.00 (the "Series E
Applicable Conversion Value"), or $60.00 (the
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<PAGE>
"Series F Applicable Conversion Value") respectively, except as
adjusted in accordance with Section 4.2.4(d) hereof.
(d) Adjustments to Respective Applicable Conversion
---------------------------------------------------
Value of Series B Preferred, Series C Preferred, Series D Preferred,
--------------------------------------------------------------------
Series E Preferred and Series F Preferred.
------------------------------------------
(i) (A) Upon Dilutive Issuances of
Common Stock or Common Stock Equivalents. Except as
hereinafter provided, if the Corporation shall, (i)
while there are any shares of Series B Preferred,
Series C Preferred, or Series D Preferred
outstanding, or, (ii) with respect to the Series E
Preferred or the Series F Preferred, after May 5,
1999 (whether or not there are shares of Series E
Preferred or Series F Preferred outstanding), issue
or sell shares of its Common Stock or Common Stock
Equivalents (as defined in Section 4.2.2(b) without
consideration or at a price per share less than the
respective Series B, Series C, Series D, Series E or
Series F Applicable Conversion Values in effect
immediately prior to such issuance or sale (a
"Diluting Issue"), and, as to Series D Preferred, if
such Diluting Issue shall occur on or after May 30,
1999, or, as to Series E Preferred or Series F
Preferred, if such Diluting Issue shall occur on or
after September 30, 1999, then in each such case the
Series B, Series C, Series D, Series E or Series F
Applicable Conversion Value, except as hereinafter
provided, shall be lowered so as to be equal to an
amount determined by multiplying such Applicable
Conversion Value by a fraction:
(1) the numerator of which shall be
(a) the number of shares of Common Stock
outstanding immediately prior to the
issuance of such additional shares of Common
Stock or Common Stock Equivalents
(calculated on a fully-diluted basis
assuming the conversion of all then
presently exercisable options, warrants,
purchase rights or convertible securities
whose exercise or conversion price is less
than the Applicable Conversion Value then in
effect), plus (b) the number of shares of
Common Stock or Common Stock Equivalents
which the net aggregate consideration, if
any, received by the Corporation for the
total number of such additional shares of
Common Stock or Common Stock Equivalents so
issued in such Diluting Issue, would
purchase at the Applicable Conversion Value
in effect immediately prior to such
issuance, and
(2) the denominator of which shall
be (a) the number of shares of Common Stock
outstanding immediately prior to the
issuance of such additional shares of Common
Stock or Common
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Stock Equivalents (calculated on a
fully-diluted basis assuming the exercise or
conversion of all then presently exercisable
options, warrants, purchase rights or
convertible securities whose exercise or
conversion price is less than the Applicable
Conversion Value then in effect), plus (b)
the number of such additional shares of
Common Stock or Common Stock Equivalents so
issued in such Diluting Issue.
However, as to Series D Preferred, if such Diluting
Issue shall occur on or prior to May 29, 1999, or, as to Series E
Preferred or Series F Preferred, if such Diluting Issue shall occur
after May 5, 1999, but on or prior to September 29, 1999, then in each
such case, the Series D Applicable Conversion Value, the Series E
Applicable Conversion Value, or the Series F Applicable Conversion
Value, except as hereinafter provided, shall be lowered so as to be
equal to the price per share at which such Diluting Issue was issued.
The provisions of this paragraph 4.2.4(d)(i)(A) as
they may apply to the Series B Preferred may be waived in any instance
(without the necessity of convening any meeting of stockholders of the
Corporation) upon the written agreement of at least a majority of the
then outstanding shares of the Series B Preferred (voting as a separate
class). The provisions of this paragraph 4.2.4(d)(i)(A) as they may
apply to the Series C Preferred may be waived in any instance (without
the necessity of convening any meeting of stockholders of the
Corporation) upon the written agreement of at least a majority of the
then outstanding shares of Series C Preferred (voting as a separate
class). The provisions of this paragraph 4.2.4(d)(i)(A), as they may
apply to the Series D Preferred, may be waived in any instance (without
the necessity of convening any meeting of stockholders of the
Corporation) upon the written agreement of at least two-thirds (2/3) of
the then outstanding shares of Series D Preferred (voting as a separate
class). The provisions of this paragraph 4.2.4(d)(i)(A), as they may
apply to the Series E Preferred, may be waived in any instance (without
the necessity of convening any meeting of stockholders of the
Corporation) upon the written agreement of at least a majority of the
then outstanding shares of Series E Preferred or the Series F Preferred
and of the then outstanding securities of the Company which are
convertible into Series E Preferred (voting together as a separate
class). The provisions of this paragraph 4.2.4(d)(i)(A) as they apply
to the Series F Preferred, may be waived in any instance (without the
necessity of convening any meeting of the stockholders of the
Corporation) upon the written agreement of at least a majority of the
then outstanding shares of the Series F Preferred (voting as a separate
class).
(i) (B) Additional Rules with Respect to Common Stock
Equivalents:
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<PAGE>
(1) TREATMENT OF COMMON STOCK
EQUIVALENTS. For the purposes of this
Section 4.2.4(d)(i), the issuance of any
Common Stock Equivalent shall be deemed an
issuance of Common Stock with respect to
adjustments in the respective Applicable
Conversion Values if the Net Consideration
Per Share (as hereinafter determined) which
may be received by the Corporation for such
Common Stock shall be less than the
respective Applicable Conversion Values in
effect at the time of such issuance. Any
obligation, agreement or undertaking to
issue Common Stock Equivalents at any time
in the future shall be deemed to be an
issuance at the time such obligation,
agreement or undertaking is made or arises.
No adjustment of the respective Applicable
Conversion Value shall be made under this
Section 4.2.4(d)(i) upon the issuance of any
shares of Common Stock which are issued
pursuant to the exercise, conversion or
exchange of any Common Stock Equivalents if
any adjustment shall previously have been
made upon the issuance of any such Common
Stock Equivalents as above provided.
(2) ADJUSTMENTS FOR CANCELLATION OR
EXPIRATION OF COMMON STOCK EQUIVALENTS.
Should the Net Consideration Per Share of
any such Common Stock Equivalents be
decreased or increased from time to time,
then, upon the effectiveness of each such
change, the respective Applicable Conversion
Values will be that which would have been
obtained (x) had the adjustments made upon
the issuance of such Common Stock
Equivalents been made upon the basis of the
actual Net Consideration Per Share of such
securities, and (y) had the adjustments made
to the respective Applicable Conversion
Values since the date of issuance of such
Common Stock Equivalents been made to such
Applicable Conversion Value as adjusted
pursuant to clause (x) above. Any adjustment
of the respective Applicable Conversion
Values with respect to this Section
4.2.4(d)(i) which relates to any Common
Stock Equivalent shall be disregarded if,
as, and when such Common Stock Equivalent
expires or is canceled without being
exercised, or is repurchased by the
Corporation at a price per share at or less
than the original purchase price, so that
the respective Applicable Conversion Values
effective immediately upon such cancellation
or expiration shall be equal to the
respective Applicable Conversion Values that
would have been in effect had the expired or
canceled Common Stock Equivalent not been
issued.
NET CONSIDERATION PER SHARE. For
purposes of this paragraph 4.2.4(d)(i)(B),
the "Net Consideration Per Share" which may
be received by the Corporation shall be
determined as follows:
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<PAGE>
(a) The "Net Consideration
Per Share" shall mean the amount
equal to the total amount of
consideration, if any, received by
the Corporation for the issuance of
such Common Stock Equivalents, plus
the minimum amount of consideration,
if any, payable to the Corporation
upon exercise, or conversion or
exchange thereof, divided by the
aggregate number of shares of Common
Stock that would be issued if all
such Common Stock Equivalents were
exercised, exchanged or converted.
(b) The "Net Consideration
Per Share" which may be received by
the Corporation shall be determined
in each instance as of the date of
issuance of Common Stock Equivalents
without giving effect to any
possible future upward price
adjustments or rate adjustments
which may be applicable with respect
to such Common Stock Equivalents.
(i) (C) Stock Dividends for Holders
of Capital Stock Other Than Common Stock. In the
event that the Corporation shall make or issue, or
shall fix a record date for the determination of
holders of any capital stock of the Corporation other
than holders of Common Stock entitled to receive a
dividend or other distribution payable in Common
Stock or securities of the Corporation convertible
into or otherwise exchangeable for shares of Common
Stock of the Corporation, then such Common Stock or
other securities issued in payment of such dividend
shall be deemed to have been issued for no
consideration, except for (1) dividends payable in
shares of Common Stock payable pro rata to holders of
Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, and Series F Preferred
to holders of any other class of stock (whether or
not paid to holders of any other class of stock), or
(2) with respect to the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or
Series F Preferred dividends payable in shares of
Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, or Series F Preferred;
provided, however that holders of any shares of
Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, or Series F Preferred
shall be entitled to receive in lieu of such Series B
Preferred, Series C Preferred, Series D Preferred,
Series E
14
<PAGE>
Preferred, or Series F Preferred shares, the shares
of Common Stock for which the shares of Series B
Preferred, Series C Preferred, Series D Preferred,
Series E Preferred or Series F Preferred are then
convertible.
(i) (D) Issuances for Consideration
Other than Cash. For purposes of this Section
4.2.4(d)(i), if a part or all of the consideration
received by the Corporation in connection with the
issuance of shares of the Common Stock or the
issuance of any of the securities described in this
Section 4.2.4(d)(i) consists of property other than
cash, such consideration shall be deemed to have a
fair market value as is reasonably determined in good
faith by the Board of Directors of the Corporation.
In the event of any dispute between the holders of
the Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred or Series F Preferred
and the Corporation regarding the determination of
fair market value, on the request of the holders of
at least a majority of the then outstanding shares of
such disputing series (voting as a separate class),
the Corporation shall engage a consulting firm or
investment banking firm, selected by the Board of
Directors and approved by the holders of at least a
majority of the outstanding shares of such disputing
series (voting as a separate class), to prepare an
independent appraisal of the fair market value of
such property to be distributed. The expenses of any
appraisal by such consulting or investment banking
firm shall be borne by the Corporation.
(i) (E) Exceptions to Anti-Dilution
Adjustments. This Section 4.2.4(d)(i) shall not apply
with respect to (1) any of the circumstances which
would constitute an Extraordinary Common Stock Event
(as described below), (2) 3,000,000 shares of Common
Stock, or options exercisable therefor, issued or to
be issued under an incentive stock option plan of the
Corporation and any additional shares required to be
issued thereunder to adjust for any stock split,
stock dividend or combination of Common Stock, (3)
shares of Common Stock issuable upon conversion of
the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred,
Series F Preferred, Special Preferred Stock (Northern
California Division) or the 12% Senior Subordinated
Convertible Note due May 5, 2001 (the "May 5, 2001
Note"), shares of Series E Preferred Stock issuable
upon conversion of the May 5, 2001 Note, and shares
of Series E Preferred issued upon conversion of the
Series F Preferred, (4) 6,000 shares of Common Stock
issuable upon exercise of the warrants held by Frank
Trifeletti and any additional shares required to be
issued thereunder to adjust for any stock split,
stock dividend or combination of Common Stock, (5)
247,500 shares of Common Stock issuable upon exercise
of warrants held by the former holders of the
15
<PAGE>
Corporation's 14% Subordinated Debentures and any
additional shares required to be issued thereunder to
adjust for any stock split, stock dividend or
combination of Common Stock, (6) 400,000 shares of
Common Stock issuable upon exercise of warrants held
by Superior Bank, FSB, pursuant to a Sale and
Marketing Agreement dated as of April 28, 1995, as
amended, between the Corporation and Superior Bank,
FSB and any additional shares required to be issued
thereunder to adjust for any stock split, stock
dividend or combination of Common Stock, (7) 25,000
shares of Common Stock issuable upon exercise of
options held by John Buscema and Glen Letizia, and
any additional shares required to be issued
thereunder to adjust for any stock split, stock
dividend or combination of Common Stock, (8) shares
of Common Stock issuable in conversion of the
interests of John Tomko, Jason Massey and Dennis
Brunelle in the Realeads Group pursuant to an
Agreement for the Operation of First Realty Network,
Inc. dated as of December 5, 1996, as amended, (9)
109,728 shares of Common Stock issuable upon exercise
of warrants held by FirstMN, LLC (other than as a
former holder of the Corporation's 14% Subordinated
Debentures), and any additional shares required to be
issued thereunder to adjust for any stock split,
stock dividend or combination of Common Stock, (10)
92,436 shares of Common Stock issuable upon exercise
of warrants held by Raymond James & Associates, Inc.
and any additional shares required to be issued
thereunder to adjust for any stock split, stock
dividend or combination of Common Stock, (11) 50,000
shares of Common Stock issuable upon exercise of
warrants held by former holders of 12% Senior
Subordinated Convertible Notes dated August 31, 1997,
and any additional shares required to be issued
thereunder to adjust for any stock split, stock
dividend or combination of Common Stock, (12) 66,667
shares of Common Stock issuable upon exercise of
warrants held by former holders of 12% Senior
Subordinated Convertible Notes dated January 30,
1998, and any additional shares required to be issued
thereunder to adjust for any stock split, stock
dividend or combination of Common Stock, (13)
warrants to purchase 100,000 shares of Common Stock
issuable pursuant to the Agreement and Plan of Merger
dated January 28, 1998, between the Corporation and
RM Holdings, Inc., any shares of Common Stock
issuable upon the exercise of such warrants, and any
additional shares required to be issued thereunder to
adjust for any stock split, stock dividend or
combination of Common Stock, (14) 6,668 shares of
Common Stock issuable upon the exercise of warrants
held by holders of 12% Senior Subordinated Notes
dated February 9, 1999, and any additional shares
required to be issued thereunder to adjust for any
stock split, stock dividend or combination of Common
Stock, (15) 53,344 shares of Common Stock issuable
upon the exercise of warrants held by holders of 12%
Senior
16
<PAGE>
Subordinated Notes dated February 26, 1999, and any
additional shares required to be issued thereunder to
adjust for any stock split, stock dividend or
combination of Common Stock, (16) 20,004 shares of
Common Stock issuable upon the exercise of warrants
held by holders of 12% Senior Subordinated Notes
dated April 18, 1999, and any additional shares
required to be issued thereunder to adjust for any
stock split, stock dividend or combination of Common
Stock, (17) 4,000 shares of Common Stock issuable
upon exercise of warrants held by Mortgage Loan
Specialists, Inc. and First Capital Corporation of
Los Angeles, and any additional shares required to be
issued thereunder to adjust for any stock split,
stock dividend or combination of Common Stock, (18)
36,000 shares of Common Stock issuable upon the
exercise of warrants held by Richard A. Swartz,
Michael E. Rubin and Samuel S. Perlman and any
additional shares required to be issued thereunder to
adjust for any stock split, stock dividend or
combination of Common Stock, (19) 18,650 shares of
Series D Preferred Stock issuable upon the exercise
of warrants held by Dominion Fund III and Dominion
Capital Management, L.L.C., any shares of Common
Stock issuable upon conversion of the Series D
Preferred Stock received upon exercise of such
warrants and any additional shares required to be
issued thereunder to adjust for any stock split,
stock dividend or combination of Common Stock, (20)
shares of Common Stock required to be issued under
the Domain Name Assignment Agreement dated as of
January 1, 1999, between the Company and Credit.com,
LLC and (21) shares of Common Stock or Common Stock
Equivalents required to be issued pursuant to rights
of first offer contained in the Series B Preferred
Stock Purchase Agreement dated as of March 29, 1996,
as amended, among the Corporation and the
"Purchasers" listed therein as a result of the
issuance of the shares identified in items (1)
through (21) of this Section 4.2.4(d)(i)(E).
(i) (F) Additional Stock Purchase
Requirement. This Section 4.2.4(d)(i) shall cease to
apply to all shares of Series B Preferred held by a
particular holder who, at the time of a Diluting
Issue does not purchase its pro-rata share
(determined on the basis of its proportional interest
in the Corporation based on the number of shares of
Common Stock held by such holder (including for
purposes of such determination the number of shares
of Common Stock issuable upon conversion of the
Series B Preferred or conversion or exercise of other
Common Stock Equivalents)) of such Diluting Issue
(the "Additional Stock Purchase Requirement"). The
Additional Stock Purchase Requirement shall apply
only with respect to Diluting Issues in which the
holders of Series B Preferred Stock are afforded the
right to participate to the extent of their
17
<PAGE>
respective Additional Stock Purchase Requirements and
do not waive their right to participate at the
request of the Corporation. The adjustment provided
in this Section 4.2.4(d)(i) shall not be made with
respect to such shares either in the case of the
Diluting Issue in which such holder fails to satisfy
the Additional Stock Purchase Requirement or any
subsequent Diluting Issue occurring after such holder
has failed to satisfy the Additional Stock Purchase
Requirement (without regard to who owns such shares
at such time). Any holder of a share of Series B
Preferred shall be entitled, at any time upon written
request to the Corporation, to receive a statement
from the Corporation setting forth the Series B
Applicable Conversion Value then in effect with
respect to such shares and stating whether or not
such shares would be entitled to adjustment of such
Series B Applicable Conversion Value under this
Section 4.2.4(d)(i) in the event of a subsequent
Diluting Issue.
(d) (ii) Upon Extraordinary Common Stock Event. Upon
the happening of an Extraordinary Common Stock Event (as hereinafter
defined), the respective Applicable Conversion Values and all other
conversion values set forth in Section 4.2.4(d)(i) above shall,
simultaneously with the happening of such Extraordinary Common Stock
Event, be adjusted by multiplying the respective Applicable Conversion
Values by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such
Extraordinary Common Stock Event and the denominator of which shall be
the number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock Event, and the product so obtained shall
thereafter be the Applicable Conversion Value. The respective
Applicable Conversion Values, as so adjusted, shall be readjusted in
the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.
An "Extraordinary Common Stock Event" shall mean (i)
the issue of additional shares of Common Stock as a dividend or other
distribution on outstanding shares of Common Stock, (ii) a subdivision
of outstanding shares of Common Stock into a greater number of shares
of Common Stock, or (iii) a combination or reverse stock split of
outstanding shares of Common Stock into a smaller number of shares of
the Common Stock.
(e) Automatic Conversion Upon Qualified Public
Offering or Election of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred, Series E Preferred or Series F
Preferred.
(i) Automatic Conversion. In the event that --
18
<PAGE>
(A) as to the Series A Preferred,
Series B Preferred, Series C Preferred and Series D
Preferred immediately upon the closing of an
underwritten public offering on a firm commitment
basis pursuant to an effective registration statement
filed pursuant to the Securities Act of 1933, as
amended, covering the offer and sale of shares of
Common Stock for the account of the Corporation in
which the aggregate price paid for such shares by the
public is equal to or greater than $20,000,000 and in
which the price per share of Common Stock paid by the
public equals or exceeds 300% of the Series D
Applicable Conversion Value (initially $11.50,
adjusted for Extraordinary Common Stock Events) (a
"Qualified Public Offering");
(B) as to the Series E Preferred and
the Series F Preferred, immediately upon the closing
of an underwritten public offering on a firm
commitment basis pursuant to an effective
registration statement filed pursuant to the
Securities Act of 1933, as amended, covering the
offer and sale of shares of Common Stock for the
account of the Corporation in which the aggregate
price paid for such shares by the public is equal to
or greater than $20,000,000 and in which the price
per share of Common Stock paid by the public equals
or exceeds 120% of the Series E Applicable Conversion
Value (initially $60.00, adjusted for Extraordinary
Common Stock Events) (a "Qualified Public Offering");
(C) as to the Series A Preferred,
Series B Preferred, Series C Preferred, Series E
Preferred, and Series F Preferred immediately upon
the approval of the holders of at least 50% of the
outstanding shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series E Preferred,
and Series F Preferred, respectively, set forth in a
written notice to the Corporation and all record
holders of such electing series of an election by the
Series A Preferred, Series B Preferred, Series C
Preferred, Series E Preferred, or Series F Preferred
to convert the respective electing series into Common
Stock; or
(D) as to the Series D Preferred,
immediately upon approval of the holders of at least
two-thirds (2/3) of the outstanding shares of Series
D Preferred set forth in a written notice to the
Corporation and all record holders of Series D
Preferred, of an election to convert the Series D
Preferred into Common Stock;
then all outstanding shares of the converting series shall be converted
automatically into the number of shares of Common Stock into which such
shares of the respective series are then convertible pursuant to
Section 4.2.4 hereof, all as of the closing and consummation
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<PAGE>
of such Qualified Public Offering, or the stated date of approval of
such holders of the respective series, without any further action by
the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its
transfer agent.
(ii) Surrender of Certificates Upon
Automatic Conversion. Upon the occurrence of the
conversion event specified in the immediately
preceding subparagraph (i), the holders of the series
of converting stock shall, upon notice from the
Corporation, surrender the certificates representing
such shares at the office of the Corporation or of
its transfer agent for the Common Stock. Thereupon,
there shall be issued and delivered to such holder a
certificate or certificates for the number of shares
of Common Stock into which the shares of the series
so surrendered were convertible on the date on which
such conversion occurred. The Corporation shall not
be obligated to issue such certificates unless
certificates evidencing the shares of the series
being converted are either delivered to the
Corporation or any such transfer agent, or the holder
notifies the Corporation that such certificates have
been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by
it in connection therewith.
(f) Dividends to Holders of Common Stock.
-------------------------------------
(i) As to the holders of Series B Preferred
and Series C Preferred. As to the holders of the
Series B Preferred and Series C Preferred only, in
the event the Corporation shall make or issue, or
shall fix a record date for the determination of
holders of Common Stock entitled to receive a
dividend or other distribution (other than a
distribution in liquidation or other distribution
otherwise provided for herein) with respect to the
Common Stock payable in (i) securities of the
Corporation other than shares of Common Stock, or
(ii) other assets (excluding cash dividends or
distributions), then and in each such event provision
shall be made so that the holders of the Series B
Preferred and Series C Preferred shall receive upon
conversion thereof in addition to the number of
shares of Common Stock receivable upon conversion,
the number of securities or such other assets of the
Corporation which they would have received had their
Series B Preferred or Series C Preferred been
converted into Common Stock on the date of such event
and had they thereafter, during the period from the
date of such event to and including the Conversion
Date (as that term is hereafter defined in Section
4.2.4(i) below), retained such securities or such
other assets receivable by them during such period,
giving application to all
20
<PAGE>
other adjustments called for during such period under
this Section 4.2.4 with respect to the rights of the
holders of the Series B Preferred or Series C
Preferred.
(ii) As to the holders of Series D Series E
Preferred and Series F Preferred. As to the holders
of Series D Preferred, Series E Preferred, and Series
F Preferred in the event the Corporation shall make
or issue or shall fix a record date for the
determination of holders of Common Stock entitled to
receive a dividend or other distribution (other than
a distribution in liquidation or other distribution
otherwise provided for herein) with respect to the
Common Stock payable in (i) securities of the
Corporation other than shares of Common Stock, or
(ii) other assets (excluding cash dividends or
distributions), then and in each such event provision
shall be made so that the holders of the Series D
Preferred, Series E Preferred and Series F Preferred
shall receive at the time of such distribution the
number of securities or such other assets of the
Corporation which they would have received had their
Series D Preferred, Series E Preferred and Series F
Preferred been converted into Common Stock on the
date of such event and had they thereafter, during
the period from the date of such event to and
including the Conversion Date (as that term is
hereafter defined in Section 4.2.4(i) below),
retained such securities or such other assets
receivable by them during such period, giving
application to all other adjustments called for
during such period under this Section 4.2.4 with
respect to the rights of the holders of the Series D
Preferred, Series E Preferred and Series F Preferred.
(g) Capital Reorganization or Reclassification. If
the Common Stock issuable upon the conversion of the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
or Series F Preferred shall be changed into the same or different
number of shares of any class or classes of capital stock, whether by
capital reorganization, recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend
provided for elsewhere in this Section 4.2.4, or the sale of all or
substantially all of the Corporation's capital stock or assets to any
other person), then and in each such event the holders of the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
and Series F Preferred shall have the right thereafter to convert such
shares into the kind and amount of shares of capital stock and other
securities and property receivable upon such reorganization,
recapitalization, reclassification or other change by the holders of
the number of shares of Common Stock into which such shares of Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
or Series F Preferred might have been converted immediately prior to
such reorganization, recapitalization, reclassification or change, all
subject to further adjustment as provided herein.
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<PAGE>
(h) Certificate as to Adjustments: Notice by
Corporation. In each case of an adjustment or readjustment of the
respective Applicable Conversion Rates, the Corporation at its expense
will furnish each holder of Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F Preferred so
affected with a certificate prepared by the Treasurer or Chief
Financial Officer of the Corporation, showing such adjustment or
readjustment, and stating in detail the facts upon which such
adjustment or readjustment is based. Within 90 days of the end of each
fiscal year of the Corporation, the Corporation at its expense will
furnish each holder of Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, or Series F Preferred so affected with a
certificate prepared by the independent public accountants to the
Corporation, showing such adjustment or readjustment, and stating in
detail the facts upon which such adjustment or readjustment is based.
(i) Exercise of Conversion Privilege. To exercise its
conversion privilege, a holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred shall surrender the certificate or certificates
representing the shares being converted to the Corporation at its
principal office, and shall give written notice to the Corporation at
that office that such holder elects to convert such shares, including,
in the case of the Series F Preferred, an indication of whether the
Series F Preferred is to be converted into Series E Preferred or Common
Stock. Such notice shall also state the name or names (with address or
addresses) in which the certificate or certificates for shares of
Common Stock issuable upon such conversion shall be issued. The
certificate or certificates for shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred surrendered for conversion shall be accompanied
by proper assignment thereof to the Corporation or in blank. The date
when such written notice is received by the Corporation, together with
the certificate or certificates representing the shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, or Series F Preferred being converted, shall be the
"Conversion Date." As promptly as practicable after the Conversion
Date, the Corporation shall issue and shall deliver to the holder of
the shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or Series F
Preferred being converted, or on its written order, such certificate or
certificates as it may request for the number of whole shares of Stock
issuable upon the conversion of such shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred in accordance with the provisions of
this Section 4.2.4, and cash, as provided in Section 4.2.4(j), in
respect of any fraction of a share of Stock issuable upon such
conversion. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the Conversion Date, and
at such time the rights of the holder as holder of the converted shares
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, or Series F Preferred shall cease and
the person(s) in whose name(s) any certificate(s) for shares of Stock
shall be issuable upon
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such conversion shall be deemed to have become the holder or holders of
record of the shares of Stock represented thereby.
(j) Cash in Lieu of Fractional Shares. No fractional
shares of Common Stock or scrip representing fractional shares shall be
issued upon the conversion of shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
or Series F Preferred. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, or Series F Preferred, the Corporation shall pay to
the holder of the shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, or Series F
Preferred, which were converted a cash adjustment in respect of such
fractional shares in an amount equal to the same fraction of the fair
market value per share of the Common Stock (as determined in a
reasonable manner prescribed by the Board of Directors) at the close of
business on the Conversion Date or the date of the closing of the
Qualified Public Offering, as applicable. The determination as to
whether or not any fractional shares are issuable shall be based upon
the aggregate number of shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred being converted at any one time by any holder
thereof, not upon each share of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred or Series F
Preferred being converted.
(k) Reservation of Stock. The Corporation shall at
all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred or Series F
Preferred, such number of its shares of Common Stock (and, in the case
of Series F Preferred, such number of its shares of Series E Preferred)
as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, and Series
F Preferred (including any shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
and Series F Preferred represented by any warrants, options,
subscription or purchase rights for Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred), and if at any time the number of authorized
but unissued shares of Common Stock (or Series E Preferred, as the case
may be) shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, and Series
F Preferred (including any shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
and Series F Preferred represented by any warrants, options,
subscriptions or purchase rights for such Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred), the
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Corporation shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Series E Preferred,
as the case may be) to such number of shares as shall be sufficient for
such purpose.
(l) No Reissuance of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred
or Series F Preferred. No share or shares of Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred acquired by the Corporation by reason
of redemption, purchase, conversion or otherwise shall be reissued, and
all such shares shall be canceled, retired and eliminated from the
shares which the Corporation shall be authorized to issue. Upon any of
the foregoing events, the Corporation shall from time to time take such
appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred,
or Series F Preferred.
Section 4.2.5 Redemption.
-------------------------
(a) Redemption Dates. At the prior written request of
the holders of at least a majority of the then outstanding shares of
Series B Preferred (voting separately as a class), given no later than
90 days prior to a Redemption Date (as defined below), the Corporation
may redeem on the Redemption Date specified in such written request, at
any time on or after June 30, 2001, June 30, 2002 and June 30, 2003
(each a "Redemption Date") the percentage of shares of Series B
Preferred specified in such written request; provided that the
aggregate percentage of shares of Series B Preferred to be redeemed by
the Corporation, including all shares of Series B Preferred redeemed
prior thereto pursuant to this Section 4.2.5 shall not exceed the
following percentages:
Percentage of Series B Preferred
Earliest (on a cumulative basis within the series)
Redemption Date Which May Be Redeemed
--------------- ---------------------
June 30, 2001 33%
June 30, 2002 67%
June 30, 2003 100%
At the prior written request of at least a majority
of the then outstanding shares of Series C Preferred (voting separately
as a class) given no later than 90 days prior to a Redemption Date, the
Corporation may redeem on the Redemption Date specified in such written
request, at any time on or after any Redemption Date the percentage of
shares of Series C Preferred specified in such written request;
provided that the aggregate percentage of shares of Series C Preferred
to be redeemed by the Corporation, including
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<PAGE>
all shares of Series C Preferred redeemed prior thereto pursuant to
this Section 4.2.5 shall not exceed the following percentages:
Percentage of Series C Preferred
Earliest (on a cumulative basis within the series)
Redemption Date Which May Be Redeemed
--------------- ---------------------
June 30, 2001 33%
June 30, 2002 67%
June 30, 2003 100%
At the prior written request of at least two-thirds
(2/3) of the then outstanding shares of Series D Preferred (voting
separately as a class) given no later than 90 days prior to a
Redemption Date, the Corporation may redeem on the Redemption Date
specified in such written request, at any time on or after any
Redemption Date the percentage of shares of Series D Preferred
specified in such written request; provided that the aggregate
percentage of shares of Series D Preferred to be redeemed by the
Corporation, including all shares of Series D Preferred redeemed prior
thereto pursuant to this Section 4.2.5 shall not exceed the following
percentages:
Percentage of Series D Preferred
Earliest (on a cumulative basis within the series)
Redemption Date Which May Be Redeemed
--------------- ---------------------
June 30, 2001 33%
June 30, 2002 67%
June 30, 2003 100%
At the prior written request of at least a majority
of the then outstanding shares of Series E Preferred (voting separately
as a class) given no later than 90 days prior to a Redemption Date, the
Corporation may redeem on the Redemption Date specified in such written
request, at any time on or after any Redemption Date the percentage of
shares of Series E Preferred specified in such written request;
provided that the aggregate percentage of shares of Series E Preferred
to be redeemed by the Corporation, including all shares of Series E
Preferred redeemed prior thereto pursuant to this Section 4.2.5 shall
not exceed the following percentages:
Percentage of Series E Preferred
Earliest (on a cumulative basis within the series)
Redemption Date Which May Be Redeemed
--------------- ---------------------
June 30, 2001 33%
June 30, 2002 67%
June 30, 2003 100%
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<PAGE>
At the prior written request of at least a majority
of the then outstanding shares of Series F Preferred (voting separately
as a class) given no later than 90 days prior to a Redemption Date, the
Corporation may redeem on the Redemption Date specified in such written
request, at any time on or after any Redemption Date the percentage of
shares of Series F Preferred specified in such written request;
provided that the aggregate percentage of shares of Series F Preferred
to be redeemed by the Corporation, including all shares of Series F
Preferred redeemed prior thereto pursuant to this Section 4.2.5 shall
not exceed the following percentages:
Percentage of Series F Preferred
Earliest (on a cumulative basis within the series)
Redemption Date Which May Be Redeemed
--------------- ---------------------
June 30, 2001 33%
June 30, 2002 67%
June 30, 2003 100%
(b) Redemption Price: Payment. The redemption price
for each share of Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, or Series F Preferred, redeemed pursuant
to this Section 4.2.5 shall be $5.50, $7.50, $11.50, $60.00 or $60.00,
per share respectively, plus all accrued but unpaid dividends thereon,
whether or not earned or declared up to and including the applicable
Redemption Date (respectively, the "Series B Redemption Price", "Series
C Redemption Price", "Series D Redemption Price", "Series E Redemption
Price" and "Series F Redemption Price"). The Corporation shall pay the
respective Redemption Prices on the Redemption Dates in cash.
(c) Equitable Adjustment. The respective Redemption
Prices set forth in this Section 4.2.5 shall be subject to equitable
adjustment whenever there shall occur a stock split, stock dividend,
combination, recapitalization, reclassification or other similar event
involving a change in the Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, or Series F Preferred.
(d) Redemption Notice. If the Corporation has
received from the holders of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, or Series F
Preferred, the written notice set forth in Section 4.2.5(a) above, at
least 45 days prior to the Redemption Date to which such written notice
relates, written
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<PAGE>
notice (hereinafter referred to as the "Redemption Notice") may be
mailed, certified mail, return receipt requested, by the Corporation to
each holder of record of such series which is to be redeemed, at its
address shown on the records of the Corporation: provided, however,
that the Corporation's failure to give such Redemption Notice shall in
no way affect the remedies of the holders of Series B Preferred, Series
C Preferred, Series D Preferred, Series E Preferred or Series F
Preferred set forth in Section 4.2.5(h). The Redemption Notice shall
contain the following information:
(i) the number of shares of Series B
Preferred, Series C Preferred, Series D Preferred,
Series E Preferred or Series F Preferred held by such
holder which such holder may elect to have redeemed
pursuant to its option under this Section 4.2.5;
(ii) the Redemption Date and the respective
Redemption Price; and
(iii) that the holder is to surrender to the
Corporation, at the places and times designated
therein, its certificate or certificates representing
the shares of the series to be redeemed.
(e) Surrender of Certificates. Each holder of shares
of Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, or Series F Preferred to be redeemed shall surrender the
certificate(s) representing such shares to the Corporation at the
places and times designated in the Redemption Notice, and thereupon the
respective Redemption Price shall be paid to the order of the person
whose name appears on such certificate(s) and each surrendered
certificate shall be canceled and retired.
(f) Dividends and Conversion after Redemption. Each
share to be redeemed shall retain all of its respective rights and
privileges until such share is actually redeemed in cash, including,
without limitation, the dividend rights of Section 4.2.1 herein, the
liquidation preferences of Section 4.2.2(b) herein, the conversion
rights of Section 4.2.4 herein and the voting rights of Section
4.2.3(b) and Section 4.2.6 herein.
(g) Insufficient Funds. If the funds of the
Corporation legally available for redemption on any Redemption Date are
insufficient to redeem the number of shares of Series B Preferred,
Series C Preferred, Series D Preferred, and Series E Preferred to be so
redeemed on such date, the holders of shares of Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which
would be payable with respect to the number of shares owned by them if
the shares to be so redeemed on such date were redeemed in full. The
shares of Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred and Series F
27
<PAGE>
Preferred not redeemed shall remain outstanding and entitled to all
rights and preferences provided herein.
(h) Failure to Redeem. In the event the Corporation
has chosen to not redeem any shares of Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F
Preferred in accordance with this Section 4.2.5 on any Redemption Date
(each a "Redemption Failure"), the holders of at least a majority of
the then outstanding shares of Series B Preferred (voting as a separate
class), the holders of at least a majority of the then outstanding
shares of Series C Preferred (voting as a separate class), the holders
of at least a majority of the then outstanding shares of Series D
Preferred (voting as a separate class), the holders of at least a
majority of the then outstanding shares of Series E Preferred (voting
as a separate class), or the holders of at least a majority of the then
outstanding shares of Series F Preferred (voting as a separate class),
may elect in writing to have the respective Applicable Conversion
Values of the unredeemed shares of such series requested to be redeemed
on such Redemption Date lowered as of the Determination Date (as
hereinafter defined) and on each anniversary thereof by an amount equal
to the product of the respective Applicable Conversion Value in effect
at such time multiplied by .20. Within 30 days of such election (a
"Determination Date"), the Corporation shall either (a) pay the
appropriate Redemption Price in cash on such Determination Date, (b)
consent in writing to the lowering of the respective Applicable
Conversion Value effective on such Determination Date or (c) agree to
use its best efforts to solicit proposals for a sale of the business of
the Corporation at a price acceptable to the holders of such electing
series. If the Corporation elects option (c) above, then the
Corporation shall solicit proposals for the sale of the business of the
Corporation, and shall within 30 days of the Determination Date, at its
expense, retain an investment banking firm of national reputation,
approved in writing by the holders of at least a majority of the then
outstanding shares of each such electing series (each voting as a
separate class) to assist it in such efforts. The Corporation shall
provide prompt written notice to the holders of each such electing
series of each proposal received by it specifying the terms of such
proposal in reasonable detail subject to receipt of their written
agreement to maintain such proposal as confidential and not to disclose
the same without the written consent of the Corporation. If the
Corporation receives written notice from the holders of at least a
majority of the then outstanding shares of each such electing series
(each voting as a separate class) directing the Corporation to
consummate the sale of the business of the Corporation pursuant to a
specific proposal or if the Corporation shall have received an offer to
sell the business of the Corporation for a price per share of Common
Stock (assuming conversion of all Common Stock Equivalents), equal to
120% of the Series E Applicable Conversion Value (prior to the
adjustments provided in Section 4.2.5 hereof), the Corporation shall
take all appropriate action and use its best efforts to consummate the
sale of the business of the Corporation in accordance with such
proposal. Notwithstanding the Corporation's efforts to sell, if the
sale of the business of the Corporation does not occur within 6 months
of such Determination Date, then the respective Applicable
28
<PAGE>
Conversion Values of each series shall be lowered in accordance with
this subsection effective on such Determination Date. It is understood,
however, that the Corporation's obligations pursuant to this subsection
shall cease and terminate if the Corporation shall have made all
requested payments in full and otherwise redeemed all shares of such
series requested to be redeemed. This Section 4.2.5 shall constitute
the exclusive remedy of the holders of the Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F
Preferred in connection with a Redemption Failure.
(i) Duration. The rights of the holders of the Series
B Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred under this Section 4.2.5 shall expire upon a
Qualified Public Offering.
Section 4.2.6 Restrictions and Limitations. The Corporation shall not
take any corporate action or otherwise amend its Articles of
Incorporation or Bylaws without the approval by vote or written consent
of the holders of at least a majority of the then outstanding Series B
Preferred, Series C Preferred, Series E Preferred and Series F
Preferred (each voting as a separate class) and at least two-thirds
(2/3) of the then outstanding shares of Series D Preferred, each share
of Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred Stock, or Series F Preferred to be entitled to one vote in
each instance, if such corporate action or amendment would change any
of the rights, preferences, privileges of or limitations provided for
herein for the benefit of any shares of the respective series or
materially adversely affect the rights of the holders of the respective
series.
(a) Series B Preferred. Without limiting the
generality of the preceding sentence, the Corporation will not amend
its Articles of Incorporation or take any other corporate action
without the approval of the holders of at least a majority of the then
outstanding Series B Preferred, voting separately as a single class, if
such amendment or corporate action would:
(i) cause or authorize the Corporation to
redeem, purchase or otherwise acquire for value (or
pay into or set aside for a sinking fund for such
purpose), any share or shares of equity securities of
the Corporation other than as provided for in Section
4.2.1 or Section 4.2.5 hereof; or
(ii) authorize, create or issue, or obligate
the Corporation to authorize, create or issue,
additional shares of any security senior to or on a
parity with the Series B Preferred; or
(iii) reduce the amount payable to the
holders of Series B Preferred upon the voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
29
<PAGE>
(iv) adversely affect the liquidation
preferences, dividend rights, voting rights or
redemption rights of the holders of Series B
Preferred; or
(v) cancel or modify the conversion rights
of the holders of Series B Preferred provided for in
Section 4.2.4 herein; or
(vi) provide for the voluntary liquidation,
dissolution, recapitalization or winding up of the
Corporation; or
(vii) cause or authorize the Corporation to
pay any dividend with respect to any class of stock
ranking junior to or on a parity with the Series B
Preferred other than any dividend consisting solely
of shares of any class of capital stock paid to the
holders of shares of such class of capital stock,
dividends payable with respect to the Series C
Preferred, Series D Preferred, Series E Preferred and
Series F Preferred (provided that the Series B
Preferred participates on a pro rata basis in such
dividend) and dividends on the Special Preferred
payable solely out of Net Profits (as defined in the
designation of the Special Preferred attached as
Addendum 1); or
(viii) sell, transfer or encumber any assets
(including mortgage loans) other than in the ordinary
course of business, or as security for bank debt, or
remarketing and sales of used equipment in excess of
$50,000; or
(ix) cause or authorize, or obligate itself
to cause to authorize any Reorganization.
(b) Series C Preferred. Without limiting the
generality of the first sentence of this Section, the Corporation will
not amend its Articles of Incorporation or take any other corporate
action without the approval of the holders of at least a majority of
the then outstanding shares of Series C Preferred, voting separately as
a single class, if such amendment of corporate action would:
(i) cause or authorize the Corporation to
redeem, purchase or otherwise acquire for value (or
pay into or set aside for a sinking fund for such
purpose), any share of shares of equity securities of
the Corporation other than as provided for in Section
4.2.1 or Section 4.2.5 hereof; or
(ii) authorize, create or issue, or obligate
the Corporation to authorize, create or issue,
additional shares of any security senior to or on a
parity with the Series C Preferred; or
30
<PAGE>
(iii) reduce the amount payable to the
holders of Series C Preferred upon the voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
(iv) adversely affect the liquidation
preferences, dividend rights, voting rights or
redemption rights of the holders of Series C
Preferred; or
(v) cancel or modify the conversion rights
of the holders of Series C Preferred provided for in
Section 4.2.4 herein; or
(vi) provide for the voluntary liquidation,
dissolution, recapitalization or winding up of the
Corporation; or
(vii) cause or authorize the Corporation to
pay any dividend with respect to any class of stock
ranking junior to or on a parity with the Series C
Preferred, other than any dividend consisting solely
of shares of any class of capital stock paid to the
holders of shares of such class of capital stock, the
dividend payable with respect to the Series B
Preferred, Series D Preferred, Series E Preferred and
Series F Preferred (provided that Series C Preferred
participates on a pro rata basis in such dividend),
and dividends on the Special Preferred payable solely
out of Net Profits (as defined in the designation of
the Special Preferred attached as Addendum 1); or
(viii) sell, transfer or encumber any assets
(including mortgage loans) other than in the ordinary
course of business, or as security for bank debt, or
remarketing and sales of used equipment in excess of
$50,000; or
(ix) cause or authorize, or obligate itself
to cause to authorize, any Reorganization.
(c) Series D Preferred. Without limiting the
generality of the first sentence of this Section, the Corporation will
not amend its Articles of Incorporation or take any other corporate
action without the approval of the holders of at least two-thirds (2/3)
of the then outstanding shares of Series D Preferred, voting separately
as a single class, if such amendment or corporate action would:
(i) cause or authorize the Corporation to
redeem, purchase or otherwise acquire for value (or
pay into or set aside for a sinking fund for such
purpose), any share of shares of equity securities of
the Corporation other than as provided for in Section
4.2.1 or Section 4.2.5 hereof; or
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<PAGE>
(ii) authorize, create or issue, or obligate
the Corporation to authorize, create or issue,
additional shares of Series D Preferred or additional
shares of any security senior to or on a parity with
the Series D Preferred; or
(iii) reduce the amount payable to the
holders of Series D Preferred upon the voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
(iv) adversely affect the liquidation
preferences, dividend rights, voting rights or
redemption rights of the holders of Series D
Preferred; or
(v) cancel or modify the conversion rights
of the holders of Series D Preferred provided for in
Section 4.2.4 herein; or
(vi) provide for the voluntary liquidation,
dissolution, recapitalization or winding up of the
Corporation; or
(vii) cause or authorize the Corporation to
pay any dividend with respect to any class of stock
ranking junior to or on a parity with the Series D
Preferred, other than any dividend consisting solely
of shares of any class of capital stock paid to the
holders of shares of such class of capital stock, the
dividend payable with respect to the Series B
Preferred, Series C Preferred, Series E Preferred and
Series F Preferred (provided that Series D Preferred
participates on a pro rata basis in such dividend),
and dividends on the Special Preferred payable solely
out of Net Profits (as defined in the designation of
the Special Preferred attached as Addendum 1); or
(viii) sell, transfer or encumber any assets
(including mortgage loans) other than in the ordinary
course of business, or as security for bank debt, or
remarketing and sales of used equipment in excess of
$50,000; or
(ix) result in a merger or consolidation of
the Corporation with or into another corporation,
unless the Corporation shall be the surviving
corporation, or would result in the sale of all or
substantially all of the Corporation's capital stock
or assets to any other person or entity; or
(x) cause or allow any direct or indirect
subsidiary of the Corporation to issue any security
to any person or entity other than the Corporation or
an entity wholly-owned by the Corporation.
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<PAGE>
(d) Series E Preferred. Without limiting the
generality of the first sentence of this Section, the Corporation will
not amend its Articles of Incorporation or take any other corporate
action without the approval of the holders of at least a majority of
the then outstanding shares of Series E Preferred, voting separately as
a single class, if such amendment or corporate action would:
(i) cause or authorize the Corporation to
redeem, purchase or otherwise acquire for value (or
pay into or set aside for a sinking fund for such
purpose), any share of shares of equity securities of
the Corporation other than as provided for in Section
4.2.1 or Section 4.2.5 hereof; or
(ii) authorize, create or issue, or obligate
the Corporation to authorize, create or issue,
additional shares of Series E Preferred or additional
shares of any security senior to or on a parity with
the Series E Preferred; or
(iii) reduce the amount payable to the
holders of Series E Preferred upon the voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
(iv) adversely affect the liquidation
preferences, dividend rights, voting rights or
redemption rights of the holders of Series E
Preferred; or
(v) cancel or modify the conversion rights
of the holders of Series E Preferred provided for in
Section 4.2.4 herein; or
(vi) provide for the voluntary liquidation,
dissolution, recapitalization or winding up of the
Corporation; or
(vii) cause or authorize the Corporation to
pay any dividend with respect to any class of stock
ranking junior to or on a parity with the Series E
Preferred, other than any dividend consisting solely
of shares of any class of capital stock paid to the
holders of shares of such class of capital stock, the
dividend payable with respect to the Series B
Preferred, Series C Preferred, Series D Preferred and
Series F Preferred (provided that Series E Preferred
participates on a pro rata basis in such dividend),
and dividends on the Special Preferred payable solely
out of Net Profits (as defined in the designation of
the Special Preferred attached as Addendum 1); or
33
<PAGE>
(viii) sell, transfer or encumber any assets
(including mortgage loans) other than in the ordinary
course of business, or as security for bank debt, or
remarketing and sales of used equipment in excess of
$50,000; or
(ix) result in a merger or consolidation of
the Corporation with or into another corporation,
unless the Corporation shall be the surviving
corporation, or would result in the sale of all or
substantially all of the Corporation's capital stock
or assets to any other person or entity; or
(x) cause or allow any direct or indirect
subsidiary of the Corporation to issue any security
to any person or entity other than the Corporation or
an entity wholly-owned by the Corporation.
(e) Series F Preferred. Without limiting the generality of the
first sentence of this Section, the Corporation will not amend its Articles of
Incorporation or take any other corporate action without the approval of the
holders of at least a majority of the then outstanding shares of Series F
Preferred, voting separately as a single class, if such amendment or corporate
action would:
(i) cause or authorize the Corporation to
redeem, purchase or otherwise acquire for value (or
pay into or set aside for a sinking fund for such
purpose), any share of shares of equity securities of
the Corporation other than as provided for in Section
4.2.1 or Section 4.2.5 hereof; or
(ii) authorize, create or issue, or obligate
the Corporation to authorize, create or issue,
additional shares of Series F Preferred or additional
shares of any security senior to or on a parity with
the Series F Preferred; or
(iii) reduce the amount payable to the
holders of Series F Preferred upon the voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
(iv) adversely affect the liquidation
preferences, dividend rights, voting rights or
redemption rights of the holders of Series F
Preferred; or
(v) cancel or modify the conversion rights
of the holders of Series F Preferred provided for in
Section 4.2.4 herein; or
(vi) provide for the voluntary liquidation,
dissolution, recapitalization or winding up of the
Corporation; or
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<PAGE>
(vii) cause or authorize the Corporation to
pay any dividend with respect to any class of stock
ranking junior to or on a parity with the Series F
Preferred, other than any dividend consisting solely
of shares of any class of capital stock paid to the
holders of shares of such class of capital stock, the
dividend payable with respect to the Series B
Preferred, Series C Preferred, Series D Preferred and
Series E Preferred (provided that Series F Preferred
participates on a pro rata basis in such dividend),
and dividends on the Special Preferred payable solely
out of Net Profits (as defined in the designation of
the Special Preferred attached as Addendum 1); or
(viii) sell, transfer or encumber any assets
(including mortgage loans) other than in the ordinary
course of business, or as security for bank debt, or
remarketing and sales of used equipment in excess of
$50,000; or
(ix) result in a merger or consolidation of
the Corporation with or into another corporation,
unless the Corporation shall be the surviving
corporation, or would result in the sale of all or
substantially all of the Corporation's capital stock
or assets to any other person or entity; or
(x) cause or allow any direct or indirect
subsidiary of the Corporation to issue any security
to any person or entity other than the Corporation or
an entity wholly-owned by the Corporation.
(f) Additional Provision for Series D Preferred. As
to the Series D Preferred, the Corporation shall not take any corporate
action without the approval by vote or written consent of Intuit Inc.
if such corporate action would cause or authorize, or obligate itself
to cause or authorize, any Reorganization with any entity identified in
Appendix C of that certain Distribution, Marketing, Facilities and
Services Agreement dated as of May 29, 1998, between the Corporation
and Intuit Lender Services Inc. ("Services Agreement"); provided,
however, that this paragraph shall not apply to any such transactions
to be effected at a time when Intuit Inc. holds less than 50,000 shares
of the outstanding shares of Series D Preferred, as adjusted for stock
dividends, subdivisions or combinations, or at any time following
termination of the Services Agreement.
Section 4.2.7 No Dilution or Impairment. The Corporation will not, by
amendment of its Articles of Incorporation or through any
reorganization, transfer of capital stock or assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms of the Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred or Series F Preferred set forth herein,
but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in
35
<PAGE>
order to protect the rights of the holders of the Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred against dilution or other impairment. Without limiting the
generality of the foregoing, the Corporation (a) will not increase the
par value of any shares of stock receivable on the conversion of the
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred above the amount payable therefor on
such conversion, and (b) will take all such action as may be necessary
or appropriate in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of stock on the conversion of
all Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred and Series F Preferred from time to time outstanding.
Section 4.2.8 Notices of Record Date. In the event of:
-------------------------------------
(a) any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of capital stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Corporation,
any reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, or any
transfer of all or substantially all of the assets of the Corporation
to any other Corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation,
then and in each such event the Corporation shall
mail or cause to be mailed to each holder of Series B Preferred, Series
C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred a notice specifying (i) the date on which any such record is
to be taken for the purpose of such dividend, distribution or right and
a description of such dividend, distribution or right, (ii) the date on
which any such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding up
is expected to become effective, and (iii) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock
(or other securities) for securities or other property deliverable upon
such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up. Such
notice shall be mailed by first class mail, postage prepaid, at least
20 days prior to the date specified in such notice on which such action
is to be taken.
36
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Section 4.2.9 Hart-Scott-Rodino. To the extent that any conversion of
the Series F Preferred would be required at a time when a holder thereof would
be required to first comply with the Premerger Notification requirements of the
Hart-Scott-Rodino Antitrust Improvement Act, as amended, the effective date for
such conversion shall be deferred until such compliance can be accomplished.
Section 4.3 Common Stock. Subject to the rights of any outstanding
classes or series of Preferred Stock having preferential dividend rights,
holders of Common Stock are entitled to such dividends as may be declared by the
Board of Directors out of funds lawfully available therefor. Upon the
dissolution of the Corporation, holders of Common Stock are entitled to receive,
pro rata in accordance with the number of shares owned by each, the net assets
of the Corporation remaining after the holders of any outstanding classes or
series of Preferred Stock having preferential rights to such assets have
received the distributions to which they are entitled.
Section 4.3.1 Voting Rights. Except as otherwise required by law,
holders of Common Stock and holders of Series A Preferred shall vote
together as a single voting group and not separately by class on all
matters required by Florida law to be approved by the stockholders,
with the holders of Common Stock having one vote for each share of such
class held by them and the holder of the Series A Preferred having one
vote for each share of such series held by them.
ARTICLE 5
REGISTERED OFFICE AND AGENT
Section 5.1 Registered Office and Agent. The street address of the
registered office of the Corporation is 8751 Broward Boulevard, Fifth Floor,
Plantation, Florida 33324, and the name of the registered agent of the
Corporation at that address is Seth S. Werner.
37
<PAGE>
IN WITNESS WHEREOF, the undersigned Senior Vice President has executed
these Amended and Restated Articles of Incorporation as of this 27th day of May,
1999.
By: /s/ Edwin Johnson
---------------------------
Edwin Johnson
Senior Vice President
Mortgage.com, Inc.
38
<PAGE>
ACCEPTANCE BY REGISTERED AGENT
OF MORTGAGE.COM, INC.
Having been named to accept service of process for the above-stated
corporation, at the place designated in the above Restated Articles of
Incorporation, I hereby agree to act in this capacity, and I further agree to
comply with the provisions of all statutes relative to the proper and complete
performance of my duties. I am familiar with and I accept the obligations of a
registered agent.
By: /s/ Seth S. Werner
---------------------
Seth S. Werner
Registered Agent
Date: May 3, 1999
-------------------
39
<PAGE>
ADDENDUM 1 TO FOURTH AMENDED AND RESTATED
ARTICLES OF INCORPORATION
of
FIRST MORTGAGE NETWORK, INC.
DESIGNATION OF THE PREFERENCES, RIGHTS AND LIMITATIONS OF
SPECIAL PREFERRED STOCK
(NORTHERN CALIFORNIA DIVISION), $.01 PAR VALUE
The Board of Directors, by authority expressly conferred upon it by
Section 4.2 of the Articles of Incorporation, as amended ("Articles of
Incorporation"), adopted as of February 29, 1996 a resolution providing for an
issue of a series of the Company's preferred stock to be designated Special
Preferred Stock (Northern California Division), $.01 par value ("Special
Preferred Stock"). The designation of the Special Preferred Stock was originally
filed on April 9, 1996. Holders of the Series A Preferred Stock ratified and
consented to such issuance as of December 31, 1996. No other shareholder consent
was required.
As of June 2, 1997, the Board of Directors adopted an amendment to the
designation of the Special Preferred Stock which was approved by the holders of
the Special Preferred Stock as of June 2, 1997 and was filed on July 3, 1997. No
other shareholder consent was required with respect to the amendment.
On October 18, 1998 and as of December 1, 1998, the Board of Directors
adopted an amendment to the designation of the Special Preferred Stock which was
approved by the holders of the Special Preferred Stock as of July 1, 1998, and
by the holders of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock as of December 2, 1998. The
amendment was filed December 18, 1998. No other shareholder consent was required
with respect to the amendment.
RESOLVED, that pursuant to the authority expressly granted to the
Company's Board of Directors by Section 4.2 of the Articles of Incorporation,
the Board of Directors establishes a series of the Company's preferred stock,
$.01 par value per share, and hereby fixes the designation, the number of shares
and relative rights, preferences and limitations thereof, as follows:
1. Number of Shares; Designation of Series; Definitions.
a. There shall be a series of the class of preferred stock, par value $0.01
per share (the "Preferred Stock"), of the Company, consisting of 1,000 shares
designated "Special Preferred Stock (Northern California Division)" (hereinafter
called this "Series") which has been issued pursuant to an agreement (the
"Merger Agreement") with Western America
Page 1 to Addendum 1
Mortgage ("WAM") and Mason-McDuffie Real Estate, Inc. ("Mason-McDuffie") in
which WAM was merged with and into the Company pursuant to the Florida Business
Corporation Act, with the Company surviving. This Series shall rank senior to
the Company's Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock as to dividends (but only
as to dividends from Net Profits) and senior to the Company's Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock as to liquidation rights (but only as to liquidation of
assets of the Division).
b. For the purposes of this Designation, the following terms shall have the
following meanings:
"Affinity Business" means the origination, processing and funding of
mortgage loans, the source of which are members of an organization that has
contracted with FMN to provide FMN products to such organization's members.
"Board" means the Board of Directors of the Company, as it may be
constituted from time to time.
"Business Day" means a day on which the New York Stock Exchange is open
for trading.
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Common Value" means (i) before the closing date of the Initial Public
Offering, the per share value of the Company's Common Stock as determined by an
Independent Appraiser and (ii) after the closing date of the Initial Public
Offering, the average closing price of the Company's Common Stock for the ten
(10) trading days immediately preceding the Post-IPO Conversion Date or Merger
Conversion Date, as applicable.
"Division" means the Company's Northern California Division.
"Division Business" means all revenues and expenses (including without
limitation, servicing revenues and expenses and revenues and expenses resulting
from the sale of servicing rights) derived from (a) Retail Business where the
majority of the underlying mortgaged real estate is situated in the Territory,
(b) Member Business where the majority of the underlying mortgaged real estate
is situated in the Territory, (c) Affinity Business where the majority of the
underlying mortgaged real estate is situated in the Territory and (d) all other
business of any kind generated or referred by FMN or Mason-McDuffie, so long as
approved by the Board and so long as handled by Division Employees, even if such
business would be deemed to be outside of the Territory. Notwithstanding the
foregoing, the operations of FMN or its Affiliates with respect to Intuit, Inc.,
Anytime Access, Openclose.com, SMART, Realeads U.S.A., Inc., RESULTS, Superior
Bank, F.S.B., or First Realty Network, or any of their Affiliates, shall not be
included as "Division Business."
Page 2 to Addendum 1
<PAGE>
"Division Employees" means FMN employees or individual independent
contractors whose salaries and commissions are paid by the Division.
"Expenses" means the expenses of the Division, determined in accordance
with generally accepted accounting principles consistently applied.
"Holder" or "Holders" means the holder or holders of record of shares
of this Series.
"Independent Appraiser" means an independent appraiser selected by the
Holder and the Company to assess the value of the Division or the Common Stock,
or any of them, as if the Division were being sold in its entirety, taking into
consideration, among other things, the current financial performance of the
Division, the circumstances triggering the need for such valuation, including
the methods of valuation used in the transaction triggering such valuation, but
without applying any discount for lack of control or lack of marketability.
"Initial Public Offering" means the first fully underwritten, firm
commitment public offering pursuant to an effective registration statement
(other than any registration statement on Form S-4, Form S-8, or any successor
form or other form not permitting registration of securities offered by selling
security holders) under the Securities Act of 1933, as amended, covering the
offer and sale by the Company of Common Stock which results in the Common Stock
being traded on a national securities exchange, on NASDAQ or on a comparable
system.
"Liquidation Price" means 20% of the fair market value of the Division,
at the enterprise level of value (as if the Division is not (and has never been)
charged the "technology fee" identified as "Interco Technology Charge" on
Appendix A to the Operating Agreement), as determined by an Independent
Appraiser, multiplied by the percentage of the Series which remains outstanding.
"Member Business" means the origination, processing and funding of
mortgage loans referred to FMN by companies (typically mortgage brokers, home
builders, realtors, banks and credit unions) that have executed a membership
agreement or net branch agreement with FMN.
"Net Profits" means the excess of Revenues over Expenses, determined in
accordance with generally accepted accounting principles consistently applied,
with adjustments to Revenues as described in Appendix A to the Operating
Agreement. Net Profits shall be determined on a cumulative basis for all fiscal
quarters (including portions thereof).
"Offering Price" means that price per share at which a Initial Public
Offering is made to the public.
"Operating Agreement" means that certain Amended and Restated Operating
Agreement for the Northern California Division dated as of July 1, 1998, between
the Company and Mason-McDuffie Real Estate, Inc., and approved by John Hogan, as
amended.
Page 3 to Addendum 1
<PAGE>
"Pipeline" means, as of any date, mortgage loans that have been
originated and processed, but not closed, and which, if closed, would have
appeared in the column designated "Center 51 - WAM" on the monthly statements of
Net Profits required to be delivered by FMN to the Holder pursuant to Section
4.1(a)(2) of the Operating Agreement.
"Preferred Value" means 20% of the fair market value of the Division,
at the enterprise level of value (as if the Division is not (and has never been)
charged the "technology fee" identified as "Interco Technology Charge" on
Appendix A to the Operating Agreement), as determined by an Independent
Appraiser, multiplied by the percentage of the Series which remains outstanding,
then divided by the number of outstanding shares of this Series.
"Redemption Price" means 20% of the fair market value of the Division,
at the enterprise level of value (as if the Division is not (and has never been)
charged the "technology fee" identified as "Interco Technology Charge" on
Appendix A to the Operating Agreement), as determined by an Independent
Appraiser, multiplied by the percentage of the Series which remains outstanding.
"Registration Statement" shall have the meaning set forth in Section
3.a.
"Retail Business" means the origination, processing and funding of
mortgage loans originated by a Division Employee or by non-Division Employees.
"Revenues" means the revenues of the Division (excluding the
"technology fee" identified as "Interco Technology Charge" on Appendix A to the
Operating Agreement), determined in accordance with generally accepted
accounting principles consistently applied.
"Territory" means that area of California lying north of Bakersfield as
set forth in the map attached to the Operating Agreement, and such other places
as the Board may designate from time to time with the consent of Mason-McDuffie
Real Estate, Inc. FMN may not reduce the Territory without the consent of
Mason-McDuffie Real Estate, Inc.
2. Dividends.
----------
The Holder will be entitled to receive, pro rata, when and as declared
by the Board, out of funds legally available therefor, a dividend or
distribution payable in cash no less frequently than on a quarterly basis, but
such dividend shall not exceed 20% of the Net Profits attributable to the
Division multiplied by the percentage of the Series which remains outstanding.
The Holder will not be entitled to dividends or distributions from any sources
other than those portions of Net Profits described herein.
3. Conversion Rights.
------------------
a. Upon Initial Public Offering. Upon the Initial Public Offering while
any of the shares of this Series are outstanding, notice shall be given by
registered mail, mailed not less than 60 days prior to the date the registration
statement is expected to be filed with the Securities and Exchange Commission
("SEC"), to each Holder at such Holder's address as the
Page 4 to Addendum 1
<PAGE>
same appears on the stock register of the Company. Each such notice will state:
1) the approximate date upon which the Company expects the registration
statement will be filed with the SEC; and 2) that the Holder may, on the IPO
Conversion Date (as defined herein), convert not more than 66% of its shares of
this Series into shares of Common Stock of the Company in accordance with the
following paragraph. Upon conversion, such converted shares of this Series will
no longer be deemed to be outstanding and no longer have any voting or other
rights (except only the right of the Holder to receive shares of Common Stock
upon conversion).
In order to convert shares of this Series into Common Stock pursuant to
this Section 3(a), the Holder shall provide to the Company written notice that
such Holder elects to convert that number of shares of this Series as is
identified in such notice (not to exceed 66% of the shares of this Series owned
by such Holder), and such notice shall be given by registered mail, mailed
within 10 days after receipt of the notice required by the immediately preceding
paragraph. Such notice will also state the name(s) and address(es) in which the
Holder wishes the certificate(s) of Common Stock issuable upon conversion and
will designate an Independent Appraiser. Upon receipt of such notice FMN shall
also select an Independent Appraiser. Each of the Independent Appraisers
selected by the Holder and FMN shall be instructed to complete the required
appraisal of the Division within fifteen (15) days of his appointment. The
Company and the Holder shall supply all information necessary to allow the
appraisers to perform the appraisals. Following submission of the Independent
Appraisers' reports to the Company and the Holder, the Company and the Holder
shall have five (5) business days (an "Agreement Period") to agree on a
valuation. If the Company and the Holder agree on a valuation, then the fair
market value of the Division shall be set at such agreed upon figure, and the
Holder's election to convert shall become irrevocable. If the Company and the
Holder cannot so agree, the Holder shall have the option to rescind its election
to convert the shares specified in its conversion notice, by delivering to the
Company written notice of such rescission (by facsimile to the Chief Executive
Officer of the Company, with receipt confirmed by telephone), no later than the
first business day following the end of the Agreement Period. No partial
rescission shall be permitted. If no rescission notice is timely delivered, the
Holder's election to convert shall become irrevocable. The two Independent
Appraisers submitting reports shall be instructed by the Holder and the Company,
respectively, to immediately appoint a third Independent Appraiser to perform
the valuation. The third Independent Appraiser shall be instructed to complete
the required appraisal within fifteen (15) days of his appointment. The value of
the Division or the Common Stock, as determined by the third appraiser, shall be
final and binding upon the Company and the Holder, free of challenge or review
in any court.
Conversion will be deemed to have been effected as of the opening of
business on the day on which the closing with respect to such Initial Public
Offering is held, and such date is referred to herein as the "IPO Conversion
Date." On the IPO Conversion Date, the Holder shall surrender the certificate(s)
for the Preferred Stock being converted, endorsed if the Company so requires, or
accompanied by appropriate instruments of transfer satisfactory to the Company,
at the office of any transfer agent, at the principal offices of the Company, or
at such other office designated by the Company. Each Holder will be entitled to
receive for each share of this Series being converted that number of shares of
Common Stock as is equal
Page 5 to Addendum 1
<PAGE>
to the Preferred Value divided by the Offering Price. The Company shall issue
and deliver to such Holder a certificate or certificates for the number of full
shares of Common Stock to which any such Holder is entitled. The person in whose
name the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a holder of record of the Common Stock on the IPO
Conversion Date.
b. After Initial Public Offering. The Holder shall have the option to
provide written notice that the Holder elects to convert that number of shares
of this Series as is identified in the notice (not to exceed 66% of the shares
of this Series owned by such Holder), and such notice shall be given by
registered mail, mailed no less than thirty days prior to the Post-IPO
Conversion Date (defined below). Such notice will also state the name(s) and
address(es) in which the Holder wishes the certificate(s) of Common Stock
issuable upon conversion and will designate an Independent Appraiser. Upon
receipt of such notice FMN shall also select an Independent Appraiser. Each of
the Independent Appraisers selected by the Holder and FMN shall be instructed to
complete the required appraisal of the Division within fifteen (15) days of his
appointment. The Company and the Holder shall supply all information necessary
to allow the appraisers to perform the appraisals. Following submission of the
Independent Appraisers' reports to the Company and the Holder, the Company and
the Holder shall have five (5) business days (an "Agreement Period") to agree on
a valuation. If the Company and the Holder agree on a valuation, then the fair
market value of the Division shall be set at such agreed upon figure, and the
Holder's election to convert shall become irrevocable. If the Company and the
Holder cannot so agree, the Holder shall have the option to rescind its election
to convert the shares specified in its conversion notice, by delivering to the
Company written notice of such rescission (by facsimile to the Chief Executive
Officer of the Company, with receipt confirmed by telephone), no later than the
first business day following the end of the Agreement Period. No partial
rescission shall be permitted and no rescission shall extend the Post-IPO
Conversion Date. If no rescission notice is timely delivered, the Holder's
election to convert shall become irrevocable. The two Independent Appraisers
submitting reports shall be instructed by the Holder and the Company,
respectively, to immediately appoint a third Independent Appraiser to perform
the valuation. The third Independent Appraiser shall be instructed to complete
the required appraisal within fifteen (15) days of his appointment. The value of
the Division or the Common Stock, as determined by the third appraiser, shall be
final and binding upon the Company and the Holder, free of challenge or review
in any court.
Conversion pursuant to this Section 3b. will be deemed to have been
effected as of the date set forth in the notice, which date shall be not later
than 6 months after the day on which the closing with respect to the Initial
Public Offering was held, and such date is referred to herein as the "Post-IPO
Conversion Date." On the Post-IPO Conversion Date, the Holder shall surrender
the certificate(s) for the Preferred Stock being converted, endorsed if the
Company so requires, or accompanied by appropriate instruments of transfer
satisfactory to the Company, at the office of any transfer agent, at the
principal offices of the Company, or at such other office designated by the
Company. Each Holder will be entitled to receive for each share of this Series
being converted that number of shares of Common Stock as is equal to the
Preferred Value divided by the Common Value. The Company shall issue and deliver
to such Holder a certificate or certificates for the number of full shares of
Common Stock to which
Page 6 to Addendum 1
<PAGE>
any such Holder is entitled. The person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
holder of record of the Common Stock on the Post-IPO Conversion Date.
c. Upon Merger, Consolidation or Share Exchange. In the event the board
of directors of the Company shall approve and recommend to its shareholders a
transaction, such as a merger, consolidation, or share exchange, which upon
approval of shareholders as required by law would result in a change of control
of the Company, the Company shall provide notice of such transaction to the
Holder (at such address as appears on the stock register of the Company) by
registered mail, mailed not less than 60 days prior to the expected date of the
closing of such transaction. Each notice shall state that the Holder may, on the
Merger Conversion Date (as herein defined), convert not more than 66% of its
shares of this Series into shares of Common Stock of the Company in accordance
with the following paragraph. Upon conversion, such converted shares of this
Series will no longer be deemed to be outstanding and no longer have any voting
or other rights (except only the right of the Holder to receive shares of Common
Stock upon conversion).
In order to convert shares of this Series into Common Stock pursuant
to this Section 3(c), the Holder shall provide to the Company written notice
that such Holder elects to convert that number of shares of this Series as is
identified in such notice (not to exceed 66% of the shares of this Series owned
by such Holder), and such notice shall be given by registered mail, mailed
within 10 days after receipt of the notice required by the immediately preceding
paragraph. Such notice will also state the name(s) and address(es) in which the
Holder wishes the certificate(s) of Common Stock issuable upon conversion and
will designate an Independent Appraiser. Upon receipt of such notice FMN shall
also select an Independent Appraiser. Each of the Independent Appraisers
selected by the Holder and FMN shall be instructed to complete the required
appraisals of the Division and the Common Stock (if necessary) within fifteen
(15) days of his appointment. The Company and the Holder shall supply all
information necessary to allow the appraisers to perform the appraisals.
Following submission of the Independent Appraisers' reports to the Company and
the Holder, the Company and the Holder shall have five (5) business days (an
"Agreement Period") to agree on a valuation. If the Company and the Holder agree
on a valuation, then the fair market value of the Division shall be set at such
agreed upon figure, and the Holder's election to convert shall become
irrevocable. If the Company and the Holder cannot so agree, the Holder shall
have the option to rescind its election to convert the shares specified in its
conversion notice, by delivering to the Company written notice of such
rescission (by facsimile to the Chief Executive Officer of the Company, with
receipt confirmed by telephone), no later than the first business day following
the end of the Agreement Period. No partial rescission shall be permitted. If no
rescission notice is timely delivered, the Holder's election to convert shall
become irrevocable. The two independent Appraisers submitting reports shall be
instructed by the Holder and the Company, respectively, to immediately appoint a
third Independent Appraiser to perform the valuation. The third Independent
Appraiser shall be instructed to complete the required appraisal within fifteen
(15) days of his appointment. The value of the Division or the Common Stock, as
determined by the third appraiser, shall be final and binding upon the Company
and the Holder, free of challenge or review in any court.
Page 7 to Addendum 1
<PAGE>
Conversion will be deemed to have been effected on the
effective date of the merger, consolidation or share exchange, and such date is
referred to herein as the "Merger Conversion Date." On the Merger Conversion
Date, the Holder shall surrender the certificate(s) for the Preferred Stock
being converted, endorsed if the Company so requires, or accompanied by
appropriate instruments of transfer satisfactory to the Company, at the office
of any transfer agent, at the principal offices of the Company, or at such other
office designated by the Company. Each Holder will be entitled to receive for
each share of this Series being converted that number of shares of Common Stock
as is equal to the Preferred Value divided by the Common Value. The Company
shall issue and deliver to such Holder a certificate or certificates for the
number of full shares of Common Stock to which any such Holder is entitled. The
person in whose name the certificate or certificates for Common Stock are to be
issued shall be deemed to have become a holder of record of the Common Stock on
the Merger Conversion Date.
d. One-Time Conversion. Notwithstanding anything in this Section 3 to
the contrary, if the Holder elects to convert any shares of this Series on any
of the IPO Conversion Date, the Post-IPO Conversion Date or the Merger
Conversion Date, it shall not have the right to convert any shares of this
Series at any time after such applicable conversion date.
e. No Fractional Shares. No fractional shares shall be issued upon
conversion of shares of this Series into Common Stock and the number of shares
of Common Stock shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon conversion of shares of this Series will be
determined on the basis of the total number of shares of this Series that the
Holder is at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
f. Reservation of Common Stock. The Company will reserve, free from
preemptive rights, out of its authorized but unissued Common Stock, solely for
the purpose of effecting the conversion of shares of this Series, sufficient
shares of Common Stock to provide for the conversion of all such shares
outstanding from time to time. All shares of Common Stock issued upon conversion
of shares of this Series will be fully paid and nonassessable. The Company will
pay any documentary, stamp or similar issue or transfer tax due on the issue of
shares of Common Stock upon the conversion, except that the holder of the
converted shares will pay any such tax which is due because the shares of Common
Stock are issued in a name other than such holder's name.
4. Voting.
-------
So long as any shares of this Series remain outstanding, consent of the
Holders of at least a majority of the outstanding shares of this Series will be
required for any action that would 1) amend or repeal any provision of the
Company's Articles of Incorporation to change the rights of the shares of this
Series, or increase or decrease the number of authorized shares of this Series;
2) create any new series or class of shares senior to or on a parity with this
Series; 3) create any notes or other obligations convertible into, exchangeable
for, or having the option rights to purchase shares of stock that are senior to
or on a parity with the shares of
Page 8 to Addendum 1
<PAGE>
this Series; or 4) reclassify any class or series of Common Stock into shares
that are senior to or on a parity with the shares of this Series. The shares of
this Series will have no other voting rights except to the extent required by
law.
5. Liquidation Rights.
-------------------
a. Upon the dissolution, liquidation or winding up of the Company or
the Division, the Holder will be entitled to receive out of the assets of the
Division available for distribution to shareholders, before any payment or
distribution shall be made on the Common Stock or on any other class or series
of stock of the Company ranking junior to this Series upon liquidation, (i) an
amount equal to the Liquidation Price, (ii) an assignment of all of the
Company's right, title and interest in and to, and the obligations relating to,
the Pipeline and (iii) return of any unreturned capital contributions paid by
the Holder under the Operating Agreement. The Holder will have no claim to any
assets of the Company other than the assets of the Division as described herein.
Written notice of such dissolution, liquidation or winding up, stating a payment
date, the amount of such payment and the place where payment will be made shall
be given by certified mail, postage prepaid, not less than 30 nor more than 60
days prior to the payment date stated therein to the Holder, such notice to be
addressed to the Holder at its address as the same appears on the stock register
of the Company. The Company will cooperate with the Holder in transferring the
rights and obligations associated with the Pipeline to any entity designated by
the Holder.
b. Neither (i) the sale, lease or other transfer of all or
substantially all the property or business of the Company, nor (ii) the merger,
share exchange or consolidation of the Company into or with any other
corporation or other business entity, nor (iii) the merger or consolidation of
any other corporation or other business entity into or with the Company, nor
(iv) any winding up of the Division pursuant to Section 8.2 of the Operating
Agreement, shall be deemed to be a dissolution, liquidation or winding up,
voluntary or involuntary, for the purposes of this Section.
c. After providing the Holder with the liquidation rights described in
this Section 5, the Holder, as such holder, shall have no right or claim to any
of the remaining assets of the Division.
6. Redemption.
-----------
Upon an Event of Termination under subsections (a)(1), (a)(3) or (a)(5)
of Section 8.2 of the Operating Agreement, the Company will redeem all
outstanding shares of this Series by distributing to the Holder cash (or cash
equivalents) or assets in kind in an aggregate amount equal to the Redemption
Price. Written notice of the redemption will be given by first class mail,
postage prepaid, to the address of the Holder as reflected on the stock register
of the Company, mailed not less than ten, nor more than 30 days prior to the
date fixed for redemption. Notice so mailed will be conclusively presumed to
have been given, whether or not actually received. Such notice will state the
redemption date, the redemption price and the place or places where certificates
for shares of this Series will be surrendered for payment of the redemption
price. If such notice is sent as provided above, and if the Company has set
Page 9 to Addendum 1
<PAGE>
aside sufficient funds or assets (in a liquidation trust or otherwise) to redeem
all outstanding shares of this Series, then on and after the redemption date,
the shares of this Series will be deemed to be no longer outstanding and all
rights thereunder will cease, except the right to receive the Redemption Price
without interest upon surrender of the certificates representing such shares. In
the event that no assets of the Division or FMN remain after all obligations
thereof have been paid or provided for, the shares of this Series will
nevertheless be redeemed in accordance with the procedures set forth in this
Section, with the redemption price being zero.
Upon an Event of Termination under any other subsection of Section 8.2
of the Operating Agreement, the shares of this Series will be redeemed in
accordance with the procedures set forth in this Section, except that the
Redemption Price shall be zero.
7. Ranking.
--------
For purposes of this resolution, any stock of any class or classes or
of any series of the Company shall be deemed to rank:
a. senior to the shares of this Series, either as to dividends or
liquidation preference, if the holders of such stock shall be entitled to the
receipt of dividends or amounts distributable from the Division's assets, in
preference or priority to the holders of shares of this Series;
b. on a parity with shares of this Series, either as to dividends or
liquidation preference, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share or sinking fund provisions,
if any, be different from those of this Series, if the holders of such stock
shall be entitled to the receipt of dividends or amounts distributable from the
Division's assets, in proportion to their respective dividend rates or
liquidation preferences, without preference or priority between the holders of
such stock and the holders of shares of this Series;
c. junior to shares of this Series, either as to dividends or
liquidation preference with respect to the Division, if such class shall be
Common Stock of the Company, Series A Preferred Stock of the Company, Series B
Preferred Stock of the Company, Series C Preferred Stock of the Company, Series
D Preferred Stock of the Company or if the holders of shares of this Series
shall be entitled to the receipt of dividends or of amounts distributable from
the Division's assets in preference or priority to the holders of such stock.
8. Transfer and Reissuance.
------------------------
a. All or any shares of this Series acquired by the Company, whether by
conversion, redemption or otherwise, will be restored to the status of
authorized but unissued shares of Preferred Stock without designation as to
series and may be transferred by the Company to any other person(s). However,
for so long as such shares are held by the Company, and until such shares are
transferred to another person, no dividends shall accrue with respect to such
shares.
Page 10 to Addendum 1
<PAGE>
b. The number of shares of this Series available for issuance under
this Designation at any time shall be the difference between the authorized
number of shares designated in Section 1 and the number issued at such time, and
no reduction shall be made for any shares of this Series acquired by the Company
or converted into Common Stock under Section 3.
9. Notices to Company. All notices required to be given by the Holder to
the Company hereunder shall, unless specified otherwise herein, be delivered to
the Company's principal office at 8751 Broward Blvd., Fifth Floor, Plantation,
FL 33324, Attention: Chief Executive Officer; provided, that the Company may
provide the Holder with an alternative address for use hereunder, by delivering
such address to the Holder in writing.
Page 11 to Addendum 1
DISTRIBUTION, MARKETING, FACILITIES, and SERVICES AGREEMENT
-----------------------------------------------------------
This DISTRIBUTION, MARKETING, FACILITIES, SERVICES AGREEMENT (the
"Agreement") is entered into as of May 31, 1998, between INTUIT LENDER SERVICES,
INC., a Delaware corporation with its principal place of business at 2535 Garcia
Avenue, Mountain View, CA 94043 ("ILSI"), and FIRST MORTGAGE NETWORK, INC., a
Florida corporation with its principal place of business at 8751 Broward Blvd,
Plantation, FL, 33324 ("FMN").
WITNESSETH:
-----------
WHEREAS, ILSI owns and operates the QuickenMortgage(R) website located
at (the "Website"), through which consumers can shop for loans, prequalify and
apply for mortgage loans with various lenders online;
WHEREAS, ILSI has agreements with various lenders obligating ILSI to:
display and advertise the loan products of such lenders through the Website;
counsel and prequalify applicants; receive and transmit mortgage loan
applications electronically; and provide other goods and facilities and perform
various other services for lenders;
WHEREAS, FMN is in the business of providing mortgage loan underwriting
and origination support services to mortgage loan brokers and lenders;
WHEREAS, FMN is or will become, prior to performing its duties under
this Agreement, an approved loan correspondent for various mortgage lenders,
with an adequate facility enabling it to fund and close mortgage loans in its
name as creditor;
WHEREAS, ILSI has entered into technology and distribution agreements
with various companies to draw consumer traffic to the Website and facilitate
consumer navigation through mortgage loan financing and related sites;
WHEREAS, ILSI wishes to improve the speed, process, and customer
satisfaction associated with consumers' use of its proprietary mortgage
marketspace, known as QuickenMortgage, by engaging FMN to perform loan
origination and related tasks for some or all of the lenders participating in
QuickenMortgage;
WHEREAS, ILSI and FMN desire to work together to originate, underwrite
and close mortgage loans that have been initiated through Inquiries,
Prequalifications, Short Applications and Enhanced Applications, as defined
herein ("ILSI Loans"), for sale by them, individually or together, in secondary
market transactions to participating lenders (the "Participating Lenders").
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
ILSI SERVICES AND FACILITIES
1
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
ILSI shall perform the following services and provide the following
facilities in connection with ILSI Loans:
1.1 Marketing. ILSI shall use commercially reasonable efforts, using
such methods and distribution channels as it deems advisable, to advertise and
market the Website to increase the number of Participating Lenders served by the
Website, the number of borrowers using the Website, and the number and variety
of loan products available on the Website.
1.2 Inquiry. Through a simple question-and-answer format, ILSI shall
collect information consisting of the name, address, income, assets and
liabilities of potential borrowers. Alternatively, potential borrowers may
supply a subset of the above information to ILSI by telephone or through e-mail.
(The information obtained at this stage is called an "Inquiry" or, if more than
one, "Inquiries").
1.3 Prequalifications. Using the information gathered during the
Inquiry stage, as well as additional information that may be gathered on the
Website, and using its proprietary or licensed software, ILSI shall (i) analyze
the prospective borrower's income and debt, (ii) educate the prospective
borrower about the homebuying and financing process, (iii) advise the
prospective borrower about different types of loans available through the
Website, and (iv) prequalify the prospective borrower for the loan or loans
chosen by him or her ("Prequalification" or, if more than one,
"Prequalifications"). Other services shall be provided as part of
Prequalification; these services may be accessed by the prospective borrower at
his or her option, and include linkages to the Participating Lenders' home pages
and websites and linkages to other websites related to mortgage financing.
1.4 Short Application. Following Inquiry and/or Prequalification, ILSI
shall (i) assist the prospective borrower in understanding and clearing any
credit problems; (ii) assist the prospective borrower in completing an
abbreviated loan application form; (iii) provide the initial good faith estimate
of closing costs ("GFE") and other required federal and state disclosures; (iv)
provide a contact point during the loan application process for the prospective
borrower to check the progress of the loan application; (v) identify for
prospective borrowers the necessary financial documentation to be assembled in
support of the application; and (vi) collect credit card information to
facilitate the ordering of property appraisals and consumer credit reports (if
deemed appropriate) (collectively "Short Application"). ILSI shall transmit the
loan application information gathered during the Inquiry through Short
Application stages to FMN for further processing as described in Article II
below.
1.5 Enhanced Application. ILSI shall assist in collecting information
from the borrower to complete the FNMA/FHLMC Form 1003 loan application form
("Form 1003"), provide facilities and software to enable ILSI and FMN to obtain
credit reports online, perform automated underwriting, order appraisal reports
online, conduct home valuation using automated tools, create and send required
verification letters, and perform other ancillary services and provide
additional items as deemed appropriate by the parties ("Enhanced Application").
2
<PAGE>
1.6 Software Support. ILSI shall provide various facilities including
software engineering and operations resources to assist the parties in
performing the services described in this Agreement, including, without
limitation, (i) building a temporary interface between FMN and the Website by
July 15, 1998, or as soon thereafter as practicable; (ii) building an interface
between the FMN CLOser(R) system, which is described in Section 2.5(a) (the "FMN
CLOser(R)"), and the Website database by October 15, 1998; (iii) providing a
means for FMN to access loan products and pricing on the Website or through a
similar web-based application created by ILSI; (iv) building and maintaining
communication tools to enable loan processors to communicate efficiently with
loan applicants; and (v) developing, maintaining and continuing to enhance other
software productivity tools as needed for the optimal operation of the loan
origination, borrower counseling, loan processing and loan underwriting efforts
of ILSI and FMN.
1.7 Customer Support. ILSI shall provide customer support through the
Website and call centers for prospective borrowers who have questions about the
site and other general questions that are not specific to any loan. ILSI will
provide, through the Website and/or other means, in its discretion, customer
disclosures concerning the participation of FMN in ILSI Loan transactions as it
deems necessary and desirable to fully comply with all legal obligations
applicable to the Website and the parties, including affiliated business
arrangement disclosures under RESPA, and disclosures concerning the source of
funding of ILSI Loans.
1.8 Employee and Software Sharing. ILSI and FMN shall share employees
and software tools as appropriate for processing loan applications, including,
without limitation, employees and tools to order and analyze flood
certifications, inspections, engineering reports, property appraisals and credit
reports.
ARTICLE II
FMN'S SERVICES AND FACILITIES
This Agreement contemplates that FMN will initially act as loan
correspondent for Participating Lenders who offer mortgage loans on the Website.
This Agreement does not, however, preclude ILSI or FMN from establishing
wholesale relationships in the future, with either the Participating Lenders or
other lenders. In connection with ILSI Loans that are transmitted to FMN for
processing initially, FMN shall perform the following services and provide the
following facilities:
2.1 Status Updates. ILSI Loans may be transmitted to FMN for further
processing at any stage of the application process. Thus, either or both FMN and
ILSI may conduct specific processing tasks for ILSI Loans prior to closing and
funding; however, the parties agree to work together to ensure that the services
provided are not duplicative. Once an ILSI Loan has been transmitted to FMN, FMN
shall update the processing system and/or the Website database with the status
of the loan processing as agreed between ILSI and FMN but at a minimum wherever
indicated below. Furthermore, as soon as possible, FMN will begin to notify the
borrower of all status changes as they occur and will work with ILSI to create
an automated system that will update the Website with such status changes and
transmit electronic messages to borrowers by October 15, 1998.
3
<PAGE>
2.2 Origination. The parties acknowledge and agree that an essential
element of successful loan origination, particularly online loan origination via
the Website, involves making timely contact with prospective borrowers. To that
end, earlier and faster initial and subsequent communications between the loan
originator and the prospective borrower are more likely to result in completed
applications and eventual closed loans. The parties therefore agree that time is
of the essence in all processing tasks involving communications with prospective
borrowers, and that prompt communications are an essential element of the
origination task for which FMN is engaged. FMN shall maintain its status as an
approved loan correspondent of the Participating Lenders, and shall demonstrate
and confirm that status to ILSI upon request.
FMN shall perform the following origination services with respect to
ILSI Loan applications or Inquiries that are transmitted to FMN by ILSI:
(a) Response to Prospective Borrowers. Respond to submissions by
prospective borrowers and finalize loan applications as appropriate for each
Stage described in (i) to (iv) below:
(i) Inquiry Stage. Respond to Inquiries submitted through the
Website or ILSI call centers. If prequalification was not requested through the
Website, analyze Inquiry data, send out prequalification notices and encourage
borrower to submit an application;
(ii) Prequalification Stage. Send out prequalification notices
to prospective borrowers; provide those prospective borrowers who prequalified
for a particular loan or loans through the Website with personalized on-line
prequalification letters; follow up with prospective borrowers; and encourage
them to submit an application for the selected ILSI Loan. Where the borrower has
selected an ILSI Loan that is not appropriate for the borrower, assist the
borrower in choosing a different ILSI Loan;
(iii) Short Application Stage. Confirm to the prospective
borrowers the receipt of the Short Application and assist him or her in
finalizing the application as needed;
(iv) Enhanced Application Stage. Confirm receipt of the
Enhanced Application and assist the prospective borrower in finalizing the
application as needed;
(b) Re-Qualify, Verify, Amend or Modify Information. At the request of
a prospective borrower, re-qualify the prospective borrower for the same or
another loan, based on change of circumstances, change of preferences, or for
other reasons, and answer questions concerning information submitted on
Prequalification, Short Application or Enhanced Application screens.
(c) Credit Report Ordering/Review. Check credit history of borrower as
appropriate, including review of any credit scoring data.
4
<PAGE>
(d) Commitments. Prepare and send out commitment letters in the name of
the creditor, and/or collect commitment fees, application fees or deposits
toward closing costs, as appropriate.
(e) Loan Application Package Preparation. Prepare completed loan
application packages and send them to borrowers via overnight courier,
electronically, or other means. The loan application package shall include all
data provided by borrowers, itemization of information outstanding, including,
without limitation, Form 1003, GFE, disclosures, Truth-in-Lending statements and
other disclosures required by law to be furnished by creditors, and
instructions.
(f) Borrower Support. Answer any borrower questions concerning the loan
application package and the ILSI Loan.
(g) Transfer to Processing. Ensure that transmission of ILSI Loans from
ILSI to FMN (and within teams at FMN) is a smooth process from the perspective
of the prospective borrower, with the required degree of communication between
all parties.
2.3 Processing and Underwriting. FMN shall process and arrange for
underwriting for all ILSI Loan applications.
(a) Processing. In connection with processing, FMN shall provide the
following services:
(i) Appraisal. FMN shall engage an appraisal firm and ensure
that the property appraisal is performed in a timely manner. FMN's call center
representative shall update the processing system and the Website database with
the status of the appraisal;
(ii) Verifications. FMN shall maintain frequent contact with
the loan applicant to collect verifications of employment (VOE), income (VOI),
assets, and debt, including mortgage debt (VOM). FMN shall update the processing
system, the Website database and the loan application data with the status of
all verifications;
(iii) Underwriting. FMN or its designee shall underwrite the
completed loan package and update the processing system and the Website database
with the underwriting decision. FMN shall call the applicant to inform him/her
of the underwriting decision. FMN shall send the loan applicant an adverse
action letter under the Equal Credit Opportunity Act ("ECOA") if appropriate;
(iv) Flood, Tax, Ancillary Services. FMN shall order flood
certifications, tax service and other ancillary services as needed. FMN shall
update the processing system and the Website database with the status of such
services;
(v) Title. FMN shall assist borrowers to engage a reputable
title firm and follow through to ensure that the title search is completed and
insurance is issued. FMN shall update the processing system and Website database
with the status of title and insurance;
5
<PAGE>
(vi) Escrow. FMN shall engage a reputable escrow firm and
arrange for escrow services pending closing and sale of ILSI Loans as described
below. FMN shall update the processing system and Website database with the
status of the escrow.
(b) Pricing of Ancillary Services. FMN shall obtain pricing for the
ancillary services listed in Section 2.3(a) and any other third party services
required, which pricing is at least as competitive, for a comparably priced
loan, as the aggregate fees charged by the Index Group of lenders as defined in
Appendix A to this Agreement, for similar services. FMN further agrees that it
will pass through to the borrowers third party fees that are customarily
reimbursed by borrowers with no mark-up of any kind, nor will FMN receive
directly or indirectly any monetary or in-kind benefit from the providers of
such ancillary services, except as described in Section 2.3(c) below. ILSI and
FMN will cooperate with each other to negotiate the lowest pricing for such
ancillary services without jeopardizing the quality of service to the borrower
or to the lenders who require such services.
(c) Third Party Servicer Provider Entity. ILSI and FMN may, in the
future and pursuant to a separate agreement, form a separate entity (a limited
liability company, joint venture or other entity), either by themselves or with
one or more service providers, to provide, in connection with ILSI Loans, some
or all of the ancillary services described in Section 2.3(a). If ILSI and FMN
form such an entity, they shall share any resulting profits and expenses in
accordance to their respective ownership interests in the new entity. Each party
will offer the other the right to participate in up to 50% of the ownership of
such new entity. In the event a party offered participation declines to
participate, the other party may proceed with the formation of such an entity
and the provision of ancillary services, so long as the services are priced
competitively with those charged by the Index Group, as described in 2.3(b)
above. A party that declines to participate in the new entity at its formation
may participate thereafter, provided it purchases ownership interests in the
entity at its then-current fair market value, as determined by an independent
public accountant chosen by the parties.
If applicable, any entity formed by the parties pursuant to this
Section 2.3(c) shall comply with the rules governing affiliated business
arrangements, as defined in the Real Estate Settlement Procedures Act (RESPA)
and the regulations adopted thereunder.
(d) Negotiating Loan Pricing. FMN shall use its best efforts to
negotiate the lowest correspondent pricing available from Participating Lenders.
ILSI shall cooperate with FMN in this effort.
2.4 Packaging, Funding and Closing. FMN shall operate initially under
this Agreement as a loan correspondent with warehouse lines of credit available
for loan funding. In that capacity, FMN shall provide the following services
with respect to ILSI Loans:
(a) Packaging. FMN shall package, process, and underwrite ILSI Loans.
6
<PAGE>
(b) Funding. FMN shall use its own funding sources to close and fund
ILSI Loans in FMN's name as original payee/mortgagee. FMN shall immediately sell
closed loans to the Participating Lender for whom it has acted as correspondent
in the transaction, and which has committed to purchase such loan. For all ILSI
Loans which will be funded and closed by FMN, FMN shall disclose to the borrower
prior to the borrower's binding commitment for the loan (or at an earlier time,
as required by law and in the mutual judgment of ILSI and FMN) the name of the
Participating Lender to whom the loan is being sold.
(c) Closing. FMN shall coordinate and perform or arrange for the
closing of ILSI Loans, and where appropriate, the placement of loan funds in
escrow pending closing and/or sale.
(d) Selling. ILSI Loans closed and funded in FMN's name shall be sold
by FMN to the appropriate Participating Lender. FMN will be responsible for
coordinating the sale, collecting the proceeds, and other tasks involved in the
sale. Nothing in this Agreement may be construed to preclude ILSI from
processing, closing and funding mortgage loans in its own name in the future, as
a correspondent lender or as an originator or broker of loans for wholesale
lenders, but such activities will not relieve ILSI of its obligations under this
Agreement. ILSI agrees not to engage in processing, closing and funding mortgage
loans in its own name to the extent that its doing so shall have the effect of
decreasing the number of ILSI Loans then being transmitted to FMN for processing
under this Agreement, in accordance with FMN's then-current capacity for
processing. Furthermore, ILSI agrees to provide to FMN six (6) months' written
notice of its intention to act as a lender, originator or processor of loans for
other lenders, including wholesale lenders. Following its receipt of such
notice, FMN shall be relieved of the restrictions applicable to it in Section
5.1.
2.5 Facilities. FMN shall provide the following facilities to ILSI in
connection with ILSI Loans:
(a) FMN CLOser(R) System. FMN shall install the FMN CLOser(R) in ILSI
offices and on its computer networks and shall train ILSI personnel in ILSI
offices in its use. FMN CLOser(R) is FMN's proprietary loan origination,
pricing, locking, pipeline management and status reporting system. As used in
this Agreement, FMN CLOser(R) includes interfaces with automated underwriting
and credit evaluation functions and integration with FMN's Internet site. During
the term of this Agreement, ILSI will have a royalty-free worldwide license to
use FMN CLOser(R) in connection with the origination and processing of ILSI
Loans under the terms of this Agreement and in connection with any other loans
for which FMN receives compensation as described in Article IV. This licensed
use of FMN CLOser(R) by ILSI shall not apply to any loans processed, closed and
funded by ILSI without the participation and compensation of FMN as described in
Section 2.4(d), or other compensation arrangement agreed upon by the parties.
(b) Engineering and Other Resources. FMN shall coordinate all tasks
related to the integration of the FMN systems, including CLOser(R), with the
Website. FMN will dedicate a minimum of one full-time person to this effort. FMN
shall further provide such additional staff as are needed from time to time to
work with ILSI as quickly and efficiently as reasonably possible to achieve the
development and operational objectives agreed to by the parties. The parties
shall work together to determine the tasks to be performed, the staffing needed
and the timing of completion of the tasks.
7
<PAGE>
(c) Security. FMN shall achieve ICSA E-Commerce security standards on
all data transmissions involving ILSI Loans by July 1, 1998 and shall maintain
such standards on such transmissions at all times.
(d) Commitment to OFX. FMN shall work with ILSI to build its services
within OFX guidelines.
ARTICLE III
OPERATIONS AND STANDARDS
3.1 Timing. The parties shall work together to begin offering ILSI
Loans under the terms of this Agreement by July 15, 1998 or as soon thereafter
as practicable, at which point the technical integration of the parties'
electronic and automated systems shall be partially integrated, and a minimum of
three (3) Participating Lenders shall have agreed to offer ILSI loans on the
Website (the "Preliminary Launch"). By October 15, 1998, the parties shall have
completed, or nearly completed, the technical integration of the electronic and
automated systems, and a minimum of four (4) Participating Lenders shall have
agreed to offer loans on the Website (the "Launch").
3.2 Volume Planning. The following are the capacity plans for the first
four (4) months of funding ILSI Loans after the Preliminary Launch:
(a) By the end of **
(b) By the end of **
(c) By the end of **
(d) By the end of **
For each calendar month after the month in which the Preliminary Launch
occurs, the parties shall establish a monthly funding capacity. If the parties
cannot reasonably agree on the funding capacity, FMN shall establish the funding
capacity, which shall be stated in terms of loans to be funded per month. If the
capacity level is inadequate to meet customer demand for mortgage loan services
and ILSI gives FMN fifteen (15) days' written notice of a request for increased
capacity, FMN shall have thirty (30) days to agree to create the additional
capacity, and a reasonable period of time thereafter to put the additional
capacity in place.
If FMN declines to increase capacity following ILSI's written request,
ILSI reserves the right to obtain loan processing services from other sources
without loss of the benefits to ILSI of the exclusivity provisions in Section
5.1.
While the benefits to ILSI of the exclusivity provisions of Section 5.1
remain in place, FMN shall have the exclusive right to provide processing and
related services and facilities as described in this Agreement, for all ILSI
Loans, until such time as FMN is operating at 100% of its production capacity.
** indicates information which has been omitted pursuant to a
confidential treatment request filed separately with the
commission.
8
<PAGE>
FMN's production capacity shall not be deemed to have reached 100% at any time
that FMN is achieving the conversion ratios described in Section 3.4 and the
closed loan schedules as described in Section 3.5(c).
In the event that FMN declines to increase production capacity
following ILSI's written request within the time periods specified above, FMN
may thereafter increase capacity in response to the ILSI request, and shall give
ILSI six (6) months' notice of its intention to do so.
3.3 Initial Participating Lenders. As stated above, ILSI shall enter
into agreements with a minimum of three (3) lenders to become Participating
Lenders by the time of the Preliminary Launch and four (4) Participating Lenders
by the time of the Launch. ILSI shall select such Participating Lenders in
consultation with FMN based upon competitive pricing and attractive
correspondent programs offered by such lenders. The Participating Lenders will
provide correspondent and/or wholesale pricing to ILSI and FMN. In cases where
correspondent relationships are established, FMN agrees to maintain
correspondent approval from all Participating Lenders. ILSI agrees to make all
necessary agreements with the Participating Lenders to effectuate the purposes
of this Agreement.
3.4 Conversion Ratios. The parties agree to the following minimum
performance standards for FMN.
(a) FMN shall meet the following conversion ratios for ILSI Loans from
the indicated stage or category, to a closed and funded loan:
(i) ** Stage **
(ii) ** Stage **
(iii) ** Stage (assuming prospective borrower submits
a fee or credit card deposit with the application. )**
(iv) ** Stage (assuming prospective borrower does not
submits a fee or credit card deposit with the application).**
(b) The above ratios will be reviewed by the parties after six (6)
months following the Launch (or such other time periods determined by the
parties). The parties may adjust such ratios, but the blended average of the
ratios as adjusted shall provide a combined conversion ratio that is
substantially equivalent to the above ratios. In no event shall the conversion
ratios achieved by FMN fall below the highest conversion rate on a blended
average basis, offered by the top two lenders participating on the Website,
including the QuickenMortgage charter lenders as well as Participating Lenders
as defined in this Agreement.
(c) If FMN does not achieve the agreed-upon conversion ratios for three
(3) consecutive months (based upon a blended average of the categories), then,
upon written notice from ILSI, FMN shall have ninety (90) days to cure the
shortfall. Cure shall be effected by FMN's achieving the blended average
conversion ratios during the ninety (90) day cure period. If the shortfall
continues after the end of the cure period, ILSI shall have the right to
terminate this Agreement in accordance with Article VIII below.
** indicates information which has been omitted pursuant to a
confidential treatment request filed separately with the
commission.
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<PAGE>
Notwithstanding the foregoing, if FMN does not achieve at least 50% of
the agreed-upon conversion ratios for two (2) consecutive months, ILSI will
provide written notice of this fact to FMN, and FMN shall have only sixty (60)
days to cure the shortfall. The cure shall be effected in the manner described
immediately above, except that the cure period shall be reduced to 60 days. If
the shortfall continues after the end of the sixty (60) day cure period, ILSI
shall have the right to terminate this Agreement as provided herein.
3.5 Service Levels. The parties shall cooperate with each other to
perform the following customer services:
(a) Customer Survey. The parties shall design a mutually
acceptable customer survey and establish minimum goals for customer
satisfaction. FMN shall transmit the survey to all borrowers at the time of
closing of ILSI Loans. The parties will develop and implement process
improvements to address instances of failure to meet customer satisfaction
goals.
(b) Quality Control Standards. The parties shall cooperate
with each other to develop mutually acceptable quality control standards for
ILSI Loans, which the parties shall work together to maintain. The parties will
develop and implement process improvements to address instances of failure to
meet minimum quality control standards.
(c) Amount of Time to Close Loans. FMN shall monitor the
processing of ILSI Loans to achieve and maintain an average amount of time
between application (Short Application or Enhanced Application) and loan
closing, not to exceed the average time to closing for loans funded by the three
fastest-closing lenders on the Website which information shall be provided to
FMN by ILSI.
(d) Customer Service Commitment. ILSI and FMN agree that
excellent customer service represents one of the foundations for building a
successful business and is a consideration for this Agreement.
To that end, the parties agree to the following customer service standards:
FMN shall deliver customer service performance at least equal to the
service level standards delivered by the average of the two lenders on the
Website determined to have the highest customer service levels (defined as
lowest ratio of complaints to applications) ("High Service Standard"). The two
lenders whose customer service levels are averaged to determine the High Service
Standard shall be selected from among the four lenders on the Website with the
highest application volume. The High Service Standard will be measured monthly,
and will be determined by the ratio of customer complaints received (and found
in ILSI's reasonable judgement to result from lender actions) regarding a
specific lender to the total applications taken by that lender during the month.
If FMN's customer service fails to meet the High Service Standard for
two (2) consecutive months, then upon written notice from ILSI, FMN shall take
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<PAGE>
reasonable measures to improve service levels within 15 days and shall cure the
cause(s) of its failure to meet the High Service Standard within an additional
45 days; provided however, that if ILSI identifies a pattern of material
problems resulting from FMN conduct, which problems have resulted in specific
instances of customer complaints, then upon written notice from ILSI, FMN shall
take reasonable measures to improve service levels within 15 days and shall cure
the underlying problems within 45 days.
If the service shortfall is not cured during the cure period, then,
notwithstanding any other term of this Agreement to the contrary, ILSI shall
have the right to terminate this Agreement in accordance with Article VIII of
this agreement.
For purposes of this section a problem shall not be deemed to be
material if the specific events complained of occur in fewer than 2% of loan
applications taken by FMN. The provisions of this Section 3.5(d) shall not apply
during any period where actual loan volume exceeds the capacity levels
established and agreed to by the parties, as described in Section 3.2.
3.6 Management Commitment. Prior to the Preliminary Launch, ILSI and
FMN shall each employ or identify one managerial employee or officer to act as a
liaison between FMN and ILSI to assist with effectuating the goals of this
Agreement.
ARTICLE IV
COMPENSATION
4.1 Federal and State Law. The compensation structure set forth below
reflects the intent of the parties but is subject to change, by mutual agreement
of the parties, to comply with applicable federal and state laws and
regulations.
4.2 Fees for FMN Services and Facilities. ILSI shall compensate FMN for
loan origination, loan, processing services, and related services and facilities
comtemplated by this Agreement based on the following schedule and formulae for
each closed ILSI Loan. The fee structure described in this section is
illustrative on only and is based on a loan in the principal amount of **. It is
acknowledged by the parties that the compensation to be earned by ILSI with
respect to any particular loan(s) approximates by does not exceed net orgination
revenue to ILSI for loans originated via the Website and processed to closing
without the participation of FMN.
FMN's compensation shall consist of a combination of cash paid for loan
orgination services by either ILSI or the Participating Lender purchasing the
loan, and the secondary market profit or margin received by FMN upon sale of the
loan to the Participating Lender.
<TABLE>
<CAPTION>
For example: Inquiry Prequalification Short Application
------- ---------------- -----------------
<S> <C> <C> <C>
Total Fees to FMN/ILSI
Standard Correspondent
Fee to Lender ** ** **
Total Loan Origination
Fees ** ** **
Rebate to Borrower ** ** **
Net Orgination Fees
Payable by Borrower ** ** **
Breakdown of Origination Fee
Portion to ILSI ** ** **
Portion to Lender via FMN ** ** **
Portion to FMN ** ** **
</TABLE>
** indicates information which has been omitted pursuant to a
confidential treatment request filed separately with the
commission.
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<PAGE>
4.3 Competitive Pricing Index. On a monthly basis the parties shall
generate a pricing index ("Index") for the following three (3) base loan
products: (i) thirty (30)-year conforming fixed rate loans, (ii) fifteen
(15)-year conforming fixed rate loans, and (iii) one (1)-year ARM loans. The
initial Index will consist of either the rates of lenders from competitive
websites, as set forth on Appendix A to this Agreement, or will be based on
other mutually agreed-upon standards.
4.4 Retail Pricing. FMN shall recommend retail pricing on a daily basis
by loan product that at least matches or improves upon the Index, and the
parties shall review the pricing on a monthly basis. Final retail pricing posted
on the Website shall be subject to ILSI's approval. For loan products other than
the three (3) base loan products described in Section 4.3, the same spread
between correspondent pricing based on the Index and retail pricing will be
maintained.
4.5 Fee Reduction. If it is determined that total loan origination fees
based on the illustrative example in Section 4.2 do not allow ILSI and FMN to
compete effectively in the market (i.e., to match or improve upon the Index
pricing level), ILSI and FMN will reduce their fees in amounts corresponding to
the proportional share of each in the total fees described in the example in
Section 4.2, to remain competitive.
4.6 Margin Improvement From Increased Loan Orgination Revenue. If FMN
negotiates correspondent pricing from Participating Lenders such that the
difference between that figure and the Index is greater than **, FMN will be
entitled to keep the first ** of incremental revenue in each loan type category
derived from such improved pricing. Incremental additional revenue increases
over ** will be shared, such that the next ** in incremental revenue shall be
split equally between FMN and ILSI. If incremental revenue of more than ** is
achieved on any loan type, such revenue shall be allocate ** to borrowers (to be
used for price reductions or special promotion, offers, which may be offered to
individual borrowers as a group) ** to FMN, and ** to ILSI. Until such time as
ILSI no longer wishes to obtain such reports, FMN will provide weekly price
summaries to ILSI containing details of the correspondent pricing available and
the retail pricing to borrowers, indicating the spreads, by loan product.
** indicates information which has been omitted pursuant to a
confidential treatment request filed separately with the Commission.
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4.7 Margin Improvement From Reduced Costs. FMN and ILSI will use their
best efforts, individually and jointly, to achieve cost reductions related to
the processing of ILSI Loans; the parties will share any expenses incurred by
either of them in achieving these reductions, provided that such expenses have
been agreed upon in advance. Examples of projects resulting in cost reductions
include: adding additional functionality in Website point-of-sale; making
ongoing investments in technology and productivity tools; adding additional
interfaces to third party service providers; and general and administrative cost
reduction projects. The parties will plan, project, and monitor cost savings
anticipated from cost reduction projects. Cost savings achieved as a result of
these efforts will be quantified and allocated as follows ** to the borrower (to
be used for price reductions or special promotional offers to borrowers
individually or consummers as a group) ** to ILSI by reducing the fee paid to
FMN ** of the specified saving, and ** to FMN in the form of annual reduced
costs.
The initial cost-per-loan levels are the targets below, and set forth
in detail on Appendix D hereto, which savings will be shared according to the
formula described above.
Inquiry **
Prequalification **
Short Application **
4.8 Cost Review. On April 15, 1999, the parties shall review the actual
costs incurred by them individually and jointly for operation during the
previous six (6) months, with a view to adjusting the above the formulas to
reflect the actual costs incurred while maintaining the margin objectives of the
parties. ILSI and FMN each commit to working to reduce costs throughout the loan
process and sharing cost-saving data with each other. ILSI shall have access to
FMN's books and records to determine what cost savings, if any, have been
achieved; ILSI may appoint, at its expense, an auditor to review the books and
records of FMN to the extent they relate to ILSI. Initial cost-reduction
projects are set forth on Appendix B attached hereto.
ARTICLE V
EXCLUSIVITY
5.1 Multi-Lender Mortgage Sites. For so long as subsections (a) and (b)
of this Section 5.1 are in effect, neither FMN nor any affiliate of FMN shall
offer a consumer direct multi-lender mortgage website, nor provide services
similiar to the services described in this Agreement to the top eight (8)
consumer direct multi-lender mortgage websites or to the companies which own or
control such sites, as identified on Attachment C of this Agreement and as
thereafter identified by ILSI to FMN at six-month intervals. The top eight (8)
websites shall not include the mortgage sites associated with real estate
franchisees, franchisors, owners, and homebuilders. Notwithstanding the
foregoing, this Section 5.1 shall not restrict FMN from providing services to
companies and Internet sites that use the technology platforms that have been
licensed from those identified on Attachment C (as that Attachment may be
amended), if FMN's services consist of standard linkages and are limited to
transmissions of loan dat from such companies and Internet sites to FMN and/or
the transmission of pricing information, and do not include customized services
(apart from those requested by the licensee) or customized integration of FMN
systems with the technology platforms provided by those companies identified on
Attachment C.
** indicates information which has been omitted pursuant to a
confidential treatment request filed separately with the
commission.
<PAGE>
(a) Processing Services. Provided that FMN is not in breach of
any of its material obligations under this Agreement, ILSI shall use FMN as the
sole outsource provider of loan processing services for ILSI Loans.
(b) Minimum Loan Business. Provided that FMN is not in breach
of any of its material obligations under this Agreement, during the first six
(6) months of 1999 ILSI shall transmit to FMN for processing and funding at
least 2,400 ILSI Loans. Thereafter, the number of ILSI Loans transmitted to FMN
will increase in each subsequent six (6) month period by at least 600 until an
aggregate to of 6,000 ILSI Loans are processed and funded by FMN for the six (6)
month period from July 1, 2001 to December 31, 2001. After the year 2001,
provided FMN is not in breach of its material obligations under this Agreement,
ILSI must transmit to FMN for processing and funding at least 6,000 ILSI Loans
during each six (6) month period in order for the exclusivity provision of this
Section 5.1 to remain in effect. The foregoing minimum requirements for
transmission of ILSI Loans to FMN will not be in effect for any six (6) month
period during which FMN does not meet the conversion ratios specified in Section
4.9, but the exclusivity provision in Section 5.1 will continue to apply
regardless of FMN's failure to achieve the conversion ratios.
5.2 Subprime Services. Subprime services are not subject to the
exclusivity provisions of this Agreement. Nothing in this Agreement shall be
construed as preventing FMN from providing services of any kind in support of
the origination of subprime loans on the Internet, provided, however, that FMN
will give ILSI 10 days notice of its intention to offer such services, followed
by a reasonable period, not to exceed 10 days, in which ILSI may notify FMN of
its desire to participate with FMN in the offering of such services on a joint
basis to be determined by the parties. If ILSI notifies FMN of its desire to
jointly offer subprime activities or services, the parties agree to negotiate
with each other in good faith to implement such activities or services within a
period not longer than 30 days, unless extended by mutual consent.
5.3 FMN Lending Services. FMN may offer single lender-branded mortgage
banking services directly to consumers over the Internet, in the name of its AFI
division or in the name of any other lender wholly owned by FMN ("Single Lender
Private Label").
5.4 Single Lender Outsource Services. The parties acknowledge that they
are both presently offering private label solutions for single lenders and that
this Agreement does not prohibit either of them from continuing to do so.
5.5 Joint Multi-Lender Services. FMN and ILSI shall cooperate with each
other to jointly offer multi-lender mortgage banking services to third parties
("Multi-Lender Private Label"), provided that:
(a) ILSI continues to use FMN to provide loan processing
services and related facilities for processing ILSI Loans;
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<PAGE>
(b) The third party has not explicitly requested to work with
only FMN or ILSI and there is no pre-existing relationship between the third
party and either FMN or ILSI; and
(c) ILSI's relationship with GHR Systems, the lenders on the
Website, or any other person with whom ILSI has a contractual relationship does
not prevent such an arrangement.
The parties shall share any profits of such joint offering of
Multi-Lender Private Label operations in accordance with their interests in the
venture. Costs of the joint venture shall be allocated in accordance with the
parties interests.
5.6 Fannie Mae and Freddie Mac LP Transferable AU Decisions for
Brokers. If, on or before December 31, 1998, FMN offers to brokers in a
commercial setting a service that would allow brokers to electronically obain an
automated underwriting ("AU") score for a particular borrower, using FMN's
seller-servicer status with Fannie Mae and/or Freddie Mac, and such service
provides a technical and organizational mechanism for the broker to transfer and
transmit such score electronically to different lenders **.
5.7 Right to Fund Non-Exclusive. The processing and funding of ILSI
Loans by FMN does not limit ILSI's present or future ability to act as a
mortgage banker, loan correspondent, loan broker to wholesale lenders, or in any
other similar capacity during the term of this Agreement, with respect to loans
in which FMN has no involvement, provided that ILSI meets its obligations under
this Agreement, and provided further that ILSI shall give FMN six (6) months'
advance written notice of its intentions to carry out any of these functions.
FMN shall be relieved of any exclusivity restrictions imposed upon it by Section
5.1 upon receipt of notice from ILSI of its intention to perform the activities
described in this section.
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Representations and Warranties of FMN. FMN represents and warrants
that the following is true and correct and shall remain true and correct during
the Term:
(a) Authority. FMN is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida with full
corporate power and authority to transact any and all business contemplated by
this Agreement and it possesses all requisite authority, power, licenses,
permits and franchises to conduct its business as presently conducted. Its
execution, delivery and compliance with its obligations under the terms of this
Agreement are not prohibited or restricted by any government agency. FMN has
taken all necessary action to authorize its execution, delivery and performance
of this Agreement.
15
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
(b) Conflict with Existing Laws or Contracts. The execution
and delivery of this Agreement and the performance of its obligations hereunder
by FMN will not (i) conflict with or violate (A) FMN's Certificate of
Incorporation or By-laws, or (B) any provision of any law or regulation or any
decree, demand or order to which FMN is subject, or (ii) conflict with or result
in a breach of or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under any of the terms, conditions
or provisions of any agreement or instrument to which FMN is a party or by which
it is bound or any order or decree applicable to FMN or result in the creation
or imposition of any lien on any of its assets or property.
(c) Licenses and Consents. FMN has obtained all necessary or
required governmental licenses, permits, approvals, and consents for the
transactions contemplated by this Agreement. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by FMN of or compliance by FMN with this
Agreement, or if required, such approval has been obtained or will be obtained
prior to the date of this Agreement.
(d) Legal Action Against FMN. There is no claim, action, suit,
proceeding or investigation pending or, to the best of FMN's knowledge,
threatened against FMN or against any of its principal officers, directors or
key employees, which, either in any one instance or in the aggregate, may result
in any adverse change in the business, operations, financial condition,
properties or assets of FMN, or in any impairment of the right or ability of FMN
to carry on its business substantially as now conducted through its existing
management group, or in any material liability on the part of FMN, or which
would draw into question the validity of this Agreement or any of the other
instruments, documents or agreements entered into by FMN in connection with this
Agreement, or of any action taken or to be taken in connection with the
obligations of FMN contemplated therein, or which would be likely to impair the
ability of FMN to perform the terms of this Agreement.
(e) Binding on FMN; Enforceability. This Agreement, assuming
due authorization, execution and delivery hereof, and all the obligations of FMN
hereunder, constitute the valid and binding obligations of FMN, enforceable
against FMN in accordance with the terms hereof, except as such enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting the enforcement of creditors' rights in general and by
general equity principles (regardless of whether such enforcement is considered
in a proceeding in equity or at law).
(f) Compliance With Laws. FMN has complied and will continue
to comply with all applicable federal and state laws and regulations in its
business operations, in the loan origination activities proposed to be
conducted, and in the performance of this Agreement. In particular, FMN
represents and warrants that its loan origination, processing and underwriting
systems, including, without limitation, the FMN CLOser(R), comply with
applicable state and federal laws and regulations, including, without
limitation, the Fair Housing Act, Truth-in-Lending Act, and ECOA. FMN will not
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<PAGE>
seek to hold ILSI liable in any action prosecuted against FMN by a borrower,
government agency, or other party which alleges non-compliance with the laws
applicable to originators of mortgage loans, provided that neither the bad faith
or wilful misconduct of ILSI materially contributed to the circumstances giving
rise to the claim against FMN. FMN will maintain errors and omissions insurance,
fidelity bonds and similar financial instruments designed to protect those with
whom it deals in the origination of mortgage loans, in commercially reasonable
amounts, and to provide evidence of such instruments to ILSI upon request. ILSI
will be a named or additional insured in such policies and instruments. The
types and amounts of insurance, bonds and other financial instruments maintained
by FMN will be subject to approval and upward revision by ILSI in its reasonable
discretion, as the volume of FMN activity subject to this Agreement increases.
FMN represents on behalf of its officers, directors, and key employees
that none of these individuals are currently in violation of any federal, state
or other law or regulation applicable to them in their professional capacities
as mortgage bankers, mortgage brokers, or any other regulated field or
occupation, except as disclosed to ILSI in writing in connection with this
Agreement, and that there is no pending legal, administrative or similar action
pending against any of them that would affect their ability to perform their
obligations to FMN or to the Participating Lenders, or to ILSI hereunder.
6.2 Representations and Warranties of ILSI. ILSI represents and
warrants that the following is true and correct and shall remain true and
correct during the Term:
(a) Authority. ILSI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware with full
corporate power and authority to transact any and all business contemplated by
this Agreement and it possesses all requisite authority, power, and material
licenses, permits and franchises to conduct its business, and to execute,
deliver and comply with its obligations under this Agreement. The execution of
this Agreement and its delivery and the performance by ILSI of its obligations
under this Agreement are not prohibited or restricted by any government agency.
ILSI has taken all necessary action to authorize the execution, delivery and
performance of this Agreement.
(b) Conflict with Existing Laws or Contracts. The execution
and delivery of this Agreement and the performance of its obligations hereunder
by ILSI will not (i) conflict with or violate (A) ILSI's Certificate of
Incorporation or By-laws, or (B) any provision of any law or regulation or any
decree, demand or order to which ILSI is subject, or (ii) conflict with or
result in a breach of or constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under any of the terms,
conditions or provisions of any agreement or instrument to which ILSI is a party
or by which it is bound or any order or decree applicable to ILSI or result in
the creation or imposition of any lien on any of its assets or property.
(c) Licenses and Consents. ILSI, in connection with
performance of its duties under this agreement, has obtained or will obtain all
necessary or required governmental licenses and consents requisite for the
transactions contemplated by this Agreement. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by ILSI of or compliance by ILSI with this
Agreement, or if required, such approval has been obtained prior to the date of
this Agreement.
17
<PAGE>
(d) Legal Action Against ILSI. There is no claim, action,
suit, proceeding or investigation pending or, to the best of ILSI's knowledge,
threatened against ILSI, which, either in any one instance or in the aggregate,
may result in any material adverse change in the business, operations, financial
condition, properties or assets of ILSI, or in any material impairment of the
right or ability of ILSI to carry on its business substantially as now
conducted, or in any material liability on the part of ILSI, or which would draw
into question the validity of this Agreement, or any of the other instruments,
documents or agreements entered into by ILSI in connection with this Agreement,
or of any action taken or to be taken in connection with the obligations of ILSI
contemplated therein, or which would be likely to impair materially the ability
of ILSI to perform under the terms of this Agreement.
(e) Binding on ILSI; Enforceability. This Agreement, assuming
due authorization, execution and delivery hereof, and all the obligations of
ILSI hereunder, constitute the valid and binding obligations of ILSI,
enforceable against ILSI in accordance with the terms hereof, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting the enforcement of creditors' rights in general
and by general equity principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law).
(f) Compliance With Laws. ILSI has complied and will continue
to comply with all applicable federal and state laws and regulations in its
business operations, in the operation of the Website, and in the performance of
this Agreement.
6.3 Covenants.
(a) Compliance with Laws. FMN and ILSI covenant to each other
that they will comply with all applicable federal and state laws and regulations
in performing their respective obligations under this Agreement. Any successful
challenge of any particular provision of this Agreement, including the
compensation provisions, by any governmental authority, will, at the option of
either party hereto, constitute sufficient cause for termination of this
Agreement if the Agreement and its purposes cannot be reasonably effectuated
without the challenged provision or term.
(b) Continuing Obligations of the Parties. The parties shall
cooperate with each other in the performance of this Agreement until the
termination hereof. Neither party shall take any action or refrain from taking
any action which would jeopardize or compromise the performance of the Website
or FMN's systems or which would hinder the performance by the parties of their
respective services to the Participating Lenders and to their customers. Each
party shall promptly forward to the other all notices, claims, letters,
documents and other information received by such party which are relevant to the
performance of this Agreement. The parties shall provide to each other all
information and documentation regarding their respective products and services
which are necessary or relevant to the performance of the transactions
contemplated by this Agreement.
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<PAGE>
(c) FMN's Books and Records. FMN shall make all material books
and records pertaining to the services and facilities provided under this
Agreement, including without limitation, records and reports on Inquiries,
Prequalifications, Short Applications and Enhanced Applications that are
initiated through the Website and any other services and facilities provided to
ILSI, available for inspection at FMN's offices or any other mutually convenient
location upon five (5) days prior notice by ILSI.
(d) Further Assurances. At any time, and from time to time
after the execution of this Agreement, upon the reasonable request of a party
hereto, and at the expense of such party, the other party shall do, execute,
acknowledge and deliver, and shall cause to be done, executed, acknowledged and
delivered, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may be reasonably required in order to
enable the parties to perform their respective obligations hereunder and carry
out the terms of this Agreement.
ARTICLE VII
INDEMNIFICATION
7.1. General Indemnification by ILSI. ILSI shall indemnify FMN and any
directors, officers, employees or agents of FMN (collectively, "FMN Indemnified
Parties") and hold each of them harmless from and against any and all claims,
losses, damage, penalties, fines, forfeitures, reasonable legal fees and
expenses (including attorneys' fees) and related costs, expenses of litigation,
judgments, and any other costs, fees and expenses (each, a "Liability" and
collectively "Liabilities") that were caused by or resulted from a breach of any
of ILSI's representations, warranties, covenants and agreements contained in
this Agreement or by ILSI's willful misfeasance, bad faith or gross negligence
in the performance of or failure to perform as provided in this Agreement.
7.2. General Indemnification by FMN. FMN shall indemnify ILSI and any
directors, officers, employees or agents of ILSI (collectively, "ILSI
Indemnified Parties") and hold each of them harmless from and against any and
all Liabilities that were caused by or resulted from a breach of any of FMN's
representations, warranties, covenants and agreements contained in this
Agreement or by FMN's willful misfeasance, bad faith or gross negligence in the
performance of or failure to perform as provided in this Agreement. Further, FMN
shall indemnify the ILSI Indemnified Parties for losses, damages or Liabilities
resulting from FMN's failure to adhere to commercially reasonable standards and
any applicable canons of ethics in the origination, processing or funding of
mortgage loans. The indemnification based on the professional conduct of FMN
shall not be limited to willful acts, bad faith or gross negligence.
7.3 Survival of Indemnifications. FMN's and ILSI's respective
obligations to indemnify any ILSI Indemnified Party or any FMN Indemnified Party
will survive the expiration or termination of this Agreement by either party for
any reason.
7.4 Notice of Claims. Each party shall promptly notify the other in
writing of any and all litigation and claims known to such party made against it
or the other party in connection with this Agreement.
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<PAGE>
ARTICLE VIII
TERM AND TERMINATION
8.1 Term. This Agreement shall remain in effect through June 25, 2004
(the date of termination of a certain agreement between Intuit Inc. and Excite
(the "Intuit/Excite Agreement"). Thereafter, if the Intuit/Excite Agreement is
extended, this Agreement shall be automatically extended for an additional three
(3) years after the end of the initial term. The initial term and any renewal
term of this Agreement shall be collectively referred to as the "Term."
8.2 Termination. This Agreement may be terminated by written notice of
either party prior to the end of the Term due to one of the following Events of
Default, after giving the defaulting party the applicable notice and opportunity
to cure set forth below:
(a) Breach of the Agreement. If a party breaches a material term or
condition of this Agreement, the non-defaulting party must give the defaulting
party written notice of the breach. If the breach is of a monetary nature, the
defaulting party will have five (5) business days to cure the default.
Otherwise, the defaulting party will have thirty (30) days to cure the default.
The non-defaulting party may terminate this Agreement at the expiration of the
applicable cure period if the breach is not cured within the given cure period.
(b) Change in Control. If FMN merges with, or is acquired by, a third
party, and, in the reasonable opinion of ILSI, such change in control materially
adversely affects FMN's ability to perform under this Agreement, then ILSI may
terminate this Agreement after giving three (3), months' prior written notice.
This provision shall specifically exclude mergers in which FMN is the surviving
entity.
(c) Change in Financial Condition. If FMN undergoes a material change
in financial condition such that it is unable to meet its obligations under this
Agreement, ILSI may terminate this Agreement if, after giving FMN written notice
and a 15-day opportunity to cure, FMN's financial condition has not been
restored to the extent that it can perform its obligations hereunder; provided,
however, that if the adverse change in FMN's financial condition results in
FMN's failure to fund loans as and when scheduled for three (3) consecutive
days, ILSI may thereafter immediately terminate this Agreement and at its
option, seek alternative funding for the affected loans.
(d) Performance. If FMN does not meet its minimum requirements for
closing ILSI Loans as set forth in Section 3.4 of this Agreement, ILSI shall
notify FMN in writing of the shortfall. FMN shall have ninety (90) days after
notice to cure the shortfall. If FMN has failed to cure the shortfall during
that period, then ILSI may terminate this Agreement after six (6) months' prior
written notice.
(e) Insufficient Volume. If ILSI does not achieve eighty percent (80%)
of capacity levels set forth in Section 3.2 for three (3) consecutive months,
FMN shall notify ILSI in writing of the shortfall. ILSI shall have ninety (90)
days after notice to cure the shortfall. If ILSI has failed to cure the
shortfall during that period, and for six (6) consecutive months thereafter,
then FMN may terminate this Agreement after giving six (6) months' prior written
notice.
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<PAGE>
(f) Bankruptcy. In the event of the occurrence of any of the following
events, the non-defaulting party may terminate this Agreement immediately upon
giving prior written notice to the defaulting party:
(i) the commencement of any bankruptcy, insolvency,
reorganization, dissolution, liquidation of debt, receivership or
conservatorship proceeding or other similar proceeding under federal or state
bankruptcy, debtors relief, bank regulatory or other law by or against either
party; or
(ii) the appointment of a receiver, conservator, trustee or
similar officer to take charge of, a substantial part of the property of either
party.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. Any written notice required or permitted to be given to
the parties hereunder shall be addressed as follows:
If to ILSI: Intuit Lender Services, Inc.
2535 Garcia Avenue
Mountain View, CA 94043
Tel: (619) 784-1214
Fax: (619) 784-1244
Attention: Carl Reese, President
[email protected]
with a copy to:
Andrea Lee Negroni, Esq.
Negroni & Winston PLLC
1156 Fifteenth Street, N.W.
Suite 1105
Washington, D.C. 20005
Tel: 202-887-1610
Fax: 202-887-1902
[email protected]
If to FMN: Seth Werner, Chairman
First Mortgage Network, Inc.
8751 Broward Blvd
Plantation, FL 33324
Tel: (954) 452-0000
Fax: (954) 472-0800
E-mail address _________
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with a copy to:
Luke Sadler, Esq.
Foley & Lardner
200 Laura St.
Jacksonville, FL 32202
Tel: (904) 359-2000
Fax: (904) 359-8700
[email protected]
All notices shall be in writing and delivered in person or shall be
sent by registered or certified mail, return receipt requested, and shall be
deemed effective, three days after the same is mailed as provided above with
postage prepaid. Notice sent by any other method shall be effective only upon
actual receipt.
9.2 Assignment; Contracting. This Agreement shall not be assignable in
whole or in part by ILSI or FMN without the other party's prior written consent,
and any attempted assignment without such consent shall be void. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
9.3 Change of Control or Ownership. FMN will not, during the term of
this Agreement as it may extended, cause or authorized, or obligate itself to
cause or authorize, any Reorganization (defined below) with any entity **. A
Reorganization shall mean any capital reorganization of the Common Stock, or a
merger or consolidation of the Company with or into another corporation, unless
FMN shall be the surviving corporation, or the sale of all or substantially all
of FMN's capital stock or assets to any other person or entity, or any other
form of business combination or reorganization in which control of FMN is
transferred. "Control" shall be deemed to have been transferred in a transaction
or series of transactions in which any person, or group of related persons,
shall have acquired beneficial ownership of more than 25% of the capital stock
of FMN (assuming all rights, options, warrants or convertible or exchangeable
securities entitling the holders thereof to subscribe for or purchase or
otherwise acquire shares of capital stock have been fully exercised or
converted)or of substantially all of the assets of FMN.
9.4 Waiver. No term or provision hereof will be deemed waived, and no
variation of terms or provisions hereof shall be deemed consented to, unless
such waiver or consent shall be in writing and signed by the party against whom
such waiver or consent is sought to be enforced. Any delay, waiver or omission
by ILSI or FMN to exercise any right or power arising from any breach or default
of the other party in any of the terms, provisions or covenants of this
Agreement shall not be construed to be a waiver by ILSI or FMN of any subsequent
breach or default of the same or other terms, provisions or covenants on the
part of either party.
9.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of California, without respect to its conflicts of law
principles.
22
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
9.6 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof, except where
expressly noted herein, and all prior negotiations, agreements and
understandings, whether oral or written, are superseded or canceled hereby.
9.7 Modification. This Agreement may not be amended or modified except
in a written document signed by both parties.
9.8 Severability. If any provision of this Agreement is declared or
found to be illegal, unenforceable or void, this Agreement shall be construed as
if not containing that provision, and the rest of the Agreement shall remain in
full force and effect, and the rights and obligations of the parties hereto
shall be construed and enforced accordingly.
9.9 Independent Contractor. FMN, in performance of this Agreement, is
acting as an independent contractor, is not the partner, joint venturer or agent
of ILSI and has no authority to act on behalf of ILSI except as necessary or
desirable to carry out FMN's obligations under this Agreement. The parties shall
each be responsible for payment of their respective taxes and assessments
incurred in connection with performance of this Agreement. Neither party's
employees are eligible for employee benefits of the other party.
9.10 Confidentiality. Each party agrees to keep all information related
to the other party confidential, as provided in the Non-Disclosure Agreement
dated April 29, 1998. The parties further agree that the business strategy,
marketing plans and product specifications of either party disclosed in
connection with this transaction, as well as the terms of this Agreement, are
confidential and shall not be used by the other party or disclosed by such other
party to third parties unless such information is (i) required to effect the
transactions contemplated herein, (ii) in the public domain or already in the
possession of a party prior to the disclosure to it by the other party
(including information received lawfully from third parties without an
obligation of confidentiality); or (iii) required by law or regulation to be
disclosed.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
signed and delivered by its duly authorized officer as of the date first written
above.
INTUIT LENDER SERVICES, INC.
By /s/ Mark Gains
---------------------------------
Name Mark Gains
---------------------------------
Title Sr Vice President
---------------------------------
FIRST MORTGAGE NETWORK, INC.
By /s/ Seth Werner
---------------------------------
Name Seth Werner
---------------------------------
Title Chairman & CEO
---------------------------------
24
<PAGE>
APPENDIX A
- ----------
Index of Rates of Lenders
25
The initial Index shall consist of the following: **
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
APPENDIX B
- ----------
INITIAL COST-REDUCTION PROJECTS
1. Automated underwriting/automated document transmission systems.
2. Pulling single in-file credit reports.
3. Automated provision of documents/information from consumer.
4. Automated transfer of data from Quicken(R), TurboTax(R) and other sources.
5. Using Brightware for automated e-mail responses.
26
<PAGE>
APPENDIX C
----------
TOP EIGHT WEBSITES
Date of this Appendix : May 30, 1998
Site Company
1. Home Advisor Microsoft
2. E-Loan E-Loan
3. HomeShark HomeShark
4. CFN CFN
5. GetSmart GetSmart
6. iQualify Monument
7. Realtor.com RealSelect
8. Lending Tree Lending Tree
27
<PAGE>
APPENDIX D
----------
Roll-Up Inquiry Prequalification Short Application
- ------- ------- ---------------- -----------------
Total Origination Expense ** ** **
Total Processing Expense ** ** **
Total Underwriting Expense ** ** **
Total Closing Expense ** ** **
General & Administrative ** ** **
Total Secondary Expense ** ** **
Total Expense Per Loan ** ** **
28
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
INTUIT LENDER SERVICES, INC.
SUBPRIME AGREEMENT FOR DISTRIBUTION, MARKETING, FACILITIES,
AND SERVICES
This SUBPRIME AGREEMENT FOR DISTRIBUTION, MARKETING, FACILITIES, AND
SERVICES (the "Agreement") is entered into as of May 26, 1999, between INTUIT
LENDER SERVICES, INC., a Delaware corporation with its principal place of
business at 2535 Garcia Avenue, Mountain View, CA 94043 ("ILSI"), and
MORTGAGE.COM, INC. (FORMERLY FIRST MORTGAGE NETWORK, INC.), a Florida
corporation with its principal place of business at 8751 Broward Blvd,
Plantation, FL, 33324 ("MC").
WITNESSETH:
-----------
WHEREAS, ILSI owns and operates the QuickenMortgage(R) website located
at (the "Website"), through which consumers can shop for mortgage loans,
prequalify and apply for such mortgage loans with various lenders online (the
"Participating Lenders");
WHEREAS, ILSI would like to begin offering subprime mortgage loans to
its customers through the Website, and MC has agreed to provide loan
underwriting, origination support and funding services for the Subprime Loans
originated by ILSI (as defined in Section 9.11 hereof) for sale in the secondary
market to Participating Lenders and other lenders;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
ARTICLE I
ILSI SERVICES AND FACILITIES
ILSI shall perform the following services and provide the following
facilities in connection with Subprime Loans:
1.1 Inquiry. Through a simple question-and-answer format, ILSI shall
collect information consisting of the name, address, income, assets and
liabilities of potential borrowers. Alternatively, potential borrowers may
supply a subset of the above information to ILSI by telephone or through e-mail.
(The information obtained at this stage is called an "Inquiry" or, if more than
one, "Inquiries").
1.2 Prequalifications. Using the information gathered during the
Inquiry stage, as well as additional information that may be gathered on the
Website, and using its proprietary or licensed software, ILSI shall (i) analyze
the prospective borrower's income and debt, (ii) educate the prospective
borrower about the homebuying and financing process, (iii) advise the
prospective borrower about different types of loans available through the
Website, and (iv) prequalify or preapprove the prospective borrower for the loan
or loans chosen by him or her ("Prequalification" or, if more than one,
"Prequalifications"). Other services shall be provided as part of
Prequalification; these services may be accessed by the prospective borrower at
his or her option, and include linkages to the Participating Lenders' home pages
and websites and linkages to other websites related to mortgage financing.
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1.3 Application. Following Inquiry and/or Prequalification, ILSI shall
(i) assist the prospective borrower in understanding and clearing any credit
problems; (ii) assist the prospective borrower in completing an abbreviated loan
application form; (iii) provide the initial good faith estimate of closing costs
("GFE") and other required federal and state disclosures; (iv) provide a contact
point during the loan application process for the prospective borrower to check
the progress of the loan application; (v) identify for prospective borrowers the
necessary financial documentation to be assembled in support of the application;
(vi) collect credit card information to facilitate the ordering of property
appraisals and consumer credit reports (if deemed appropriate); (vii) provide
facilities and software to enable ILSI and MC to obtain credit reports online
(collectively "Application"). ILSI shall transmit the loan application
information gathered during the Inquiry through Application stages to MC for
further processing as described in Article II below.
1.4 Software Support. ILSI shall provide various facilities including
software engineering and operations resources to assist the parties in
performing the services described in this Agreement, including, without
limitation, (i) building an interface between MC and the Website; (ii) building
an interface between the MC CLOser(R) system, which is described in Section
2.5(a) (the "MC CLOser(R)"), and the Website database; (iii) providing a means
for MC to access loan products and pricing on the Website or through a similar
web-based application created by ILSI; (iv) building and maintaining
communication tools to enable loan processors to communicate efficiently with
loan applicants; and (v) developing, maintaining and continuing to enhance other
software productivity tools as needed for the optimal operation of the loan
origination, borrower counseling, loan processing and loan underwriting efforts
of ILSI and MC.
1.5 Customer Support. ILSI shall provide customer support through the
Website and call centers for prospective borrowers who have questions about the
site and other general questions that are not specific to any loan. ILSI will
provide, through the Website and/or other means, in its discretion, customer
disclosures concerning the participation of MC in Subprime Loan transactions as
it deems necessary and desirable to fully comply with all legal obligations
applicable to the Website and the parties, including affiliated business
arrangement disclosures under RESPA, and disclosures concerning the source of
funding of Subprime Loans.
1.6 Employee and Software Sharing. ILSI and MC shall share employees
and software tools as appropriate for processing loan applications, including,
without limitation, employees and tools to order and analyze flood
certifications, inspections, engineering reports, property appraisals and credit
reports.
1.7 Subprime Marketing. ILSI shall use commercially reasonable efforts
to specifically advertise and market the Subprime Loans, using such methods and
distribution channels as it deems advisable, to increase the number of customers
using the
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<PAGE>
Website to find Subprime Loans. To the extent feasible, as provided in Section
5.2 of this Agreement, no other Subprime services shall be advertised on the
Website or on Quicken.com or other "Quicken" websites that are owned and
operated by Intuit, Inc. without the consent of MC. Such consent shall not be
unreasonably withheld. ILSI shall not offer first lien Subprime Loans in
principal amounts less than $40,000.
1.8 Customer Information. ILSI shall develop and market articles and
calculators specifically designed for Subprime Loan customers. ILSI shall
regularly update and refine the information it provides to customers of Subprime
Loans.
1.9 Debt Counseling. ILSI shall offer online debt counseling services
to assist all ILSI customers and particularly customers of Subprime Loans.
1.10 Debt Consolidation. ILSI shall upgrade its online and call center
customer support services to include providing advice to customers on debt
consolidation, calculators to compare payments and recommendations on Subprime
Loan programs.
ARTICLE II
MC'S SERVICES AND FACILITIES
In connection with Subprime Loans that are transmitted to MC, MC shall
perform the following services and provide the following facilities:
2.1 Status Updates. Subprime Loans may be transmitted to MC for further
processing at any stage of the application process. Thus, either or both MC and
ILSI may conduct specific processing tasks for Subprime Loans prior to closing
and funding; however, the parties agree to work together to ensure that the
services provided are not duplicative. Once a Subprime Loan has been transmitted
to MC, MC shall update the processing system and the Website database with the
status of the loan processing as agreed between ILSI and MC but at a minimum
wherever indicated below. Furthermore, MC shall notify the borrower of all
status changes as they occur and update the Website with such status changes and
transmit electronic messages to borrowers.
2.2 Origination. The parties acknowledge and agree that an essential
element of successful loan origination, particularly online loan origination via
the Website, involves making timely contact with prospective borrowers. To that
end, earlier and faster initial and subsequent communications between the loan
originator and the prospective borrower are more likely to result in completed
applications and eventual closed loans. The parties therefore agree that time is
of the essence in all processing tasks involving communications with prospective
borrowers, and that prompt communications are an essential element of the
origination task for which MC is engaged. MC shall maintain its status as an
approved loan correspondent of the Participating Lenders, and shall demonstrate
and confirm that status to ILSI upon request.
MC shall perform the following origination services with respect to
Subprime Loan applications or Inquiries that are transmitted to MC by ILSI:
3
<PAGE>
(a) Response to Prospective Borrowers. Respond to Submissions by
prospective borrowers and finalize loan applications as appropriate for each
Stage described in (i) to (iii) below:
(i) Inquiry Stage. Respond to Inquiries submitted through the
Website or ILSI call centers. If prequalification was not requested through the
Website, analyze Inquiry data, send out prequalification notices and encourage
borrower to submit an application;
(ii) Prequalification Stage. Send out prequalification notices
to prospective borrowers; provide those prospective borrowers who prequalified
for a particular loan or loans through the Website with personalized on-line
prequalification letters; follow up with prospective borrowers; and encourage
them to submit an application for the selected Subprime Loan. Where the borrower
has selected a Subprime Loan that is not appropriate for the borrower, assist
the borrower in choosing a different Subprime Loan;
(iii) Application Stage. Confirm to the prospective borrowers
the receipt of the Application and assist him or her in finalizing the
application as needed.
(b) Re-Qualify, Verify, Amend or Modify Information. At the request of
a prospective borrower, re-qualify the prospective borrower for the same or
another loan, based on change of circumstances, change of preferences, or for
other reasons, and answer questions concerning information submitted on
Prequalification or Application screens.
(c) Credit Report Ordering/Review. Check credit history of borrower as
appropriate, including review of any credit scoring data.
(d) Commitments. Prepare and send out commitment letters in the name of
the creditor, and/or collect commitment fees, application fees or deposits
toward closing costs, as appropriate.
(e) Loan Application Package Preparation. Prepare completed loan
application packages and send them to borrowers via overnight courier,
electronically, or other means. The loan application package shall include all
data provided by borrowers, itemization of information outstanding, including,
without limitation, Form 1003, GFE, disclosures, Truth-in-Lending statements and
other disclosures required by law to be furnished by creditors, and
instructions.
(f) Borrower Support. Answer any borrower questions concerning the loan
application package and the Subprime Loan.
(g) Transfer to Processing. Ensure that transmission of Subprime Loans
from ILSI to MC (and within teams at MC) is a smooth process from the
perspective of the prospective borrower, with the required degree of
communication between all parties.
4
<PAGE>
2.3 Processing and Underwriting. MC shall process and arrange for
underwriting for all Subprime Loan applications.
(a) Processing. In connection with processing, MC shall provide the
following services:
(i) Appraisal. MC shall engage an appraisal firm and ensure
that the property appraisal is performed in a timely manner. MC's call center
representative shall update the processing system and the Website database with
the status of the appraisal;
(ii) Verifications. MC shall maintain frequent contact with
the loan applicant to collect verifications of employment (VOE), income (VOI),
assets, and debt, including mortgage debt (VOM). MC shall update the processing
system, the Website database and the loan application data with the status of
all verifications;
(iii) Underwriting. MC or its designee shall underwrite the
completed loan package and update the processing system and the Website database
with the underwriting decision. MC shall call the applicant to inform him/her of
the underwriting decision. MC shall send the loan applicant an adverse action
letter under the Equal Credit Opportunity Act ("ECOA") if appropriate;
(iv) Flood, Tax, Ancillary Services. MC shall order flood
certifications, tax service and other ancillary services as needed. MC shall
update the processing system and the Website database with the status of such
services;
(v) Title. MC shall assist borrowers to engage a reputable
title firm and follow through to ensure that the title search is completed and
insurance is issued. MC shall update the processing system and Website database
with the status of title and insurance;
(vi) Escrow. MC shall engage a reputable escrow firm and
arrange for escrow services pending closing and sale of Subprime Loans as
described below. MC shall update the processing system and Website database with
the status of the escrow.
(b) Pricing of Ancillary Services. MC shall obtain pricing for the
ancillary services listed in Section 2.3(a) and any other third party services
required, which pricing is at least as competitive, for a comparably priced
loan, as the aggregate fees charged by the Index Group of lenders as defined in
Appendix A to this Agreement, for similar services. MC further agrees that it
will pass through to the borrowers third party fees that are customarily
reimbursed by borrowers with no mark-up of any kind, nor will MC receive
directly or indirectly any monetary or in-kind benefit from the providers of
such ancillary services, except as described in Section 2.3(c) below. ILSI and
MC will cooperate with each other to negotiate the lowest pricing for such
ancillary services without jeopardizing the quality of service to the borrower
or to the lenders who require such services.
(c) Negotiating Loan Pricing. MC shall use its best efforts to
negotiate the
5
<PAGE>
lowest correspondent pricing available from Participating Lenders. ILSI shall
cooperate with MC in this effort. In addition, in order to qualify for payments
for shortfalls in Submissions, as described in Section 3.2, MC shall maintain
pricing spreads and fees to borrowers that are typical within the Subprime
industry. If the parties cannot reach agreement on what is considered typical
pricing spreads or fees, they shall hire an independent third party to make the
determination. Both parties agree that such determination shall be binding upon
them.
2.4 Packaging, Funding and Closing. MC shall operate initially under
this Agreement as a loan correspondent with warehouse lines of credit available
for loan funding. In that capacity, MC shall provide the following services with
respect to Subprime Loans:
(a) Packaging. MC shall package, process, and underwrite Subprime
Loans.
(b) Funding. MC shall use its own funding sources to close and fund
Subprime Loans in MC's name as original payee/mortgagee. For all Subprime Loans
which will be funded and closed by MC, MC shall disclose to the borrower prior
to the borrower's binding commitment for the loan (or at an earlier time, as
required by law and in the mutual judgment of ILSI and MC) the name of the
servicer to whom the loan will be transferred.
(c) Closing. MC shall coordinate and perform or arrange for the closing
of Subprime Loans, and where appropriate, the placement of loan funds in escrow
pending closing and/or sale.
(d) Selling. Subprime Loans closed and funded in MC's name shall be
sold by MC to the appropriate Participating Lender or other lender. MC will be
responsible for coordinating the sale, collecting the proceeds, and other tasks
involved in the sale. Nothing in this Agreement may be construed to preclude
ILSI from processing, closing and funding mortgage loans in its own name in the
future, as a correspondent lender or as an originator or broker of loans for
wholesale lenders, but such activities will not relieve ILSI of its obligations
under this Agreement.
2.5 Facilities. MC shall provide the following facilities to ILSI in
connection with Subprime Loans:
(a) MC CLOser(R) System. MC shall install the MC CLOser(R) in ILSI
offices and on its computer networks and shall train ILSI personnel in ILSI
offices in its use. MC CLOser(R) is MC's proprietary loan origination, pricing,
locking, pipeline management and status reporting system. As used in this
Agreement, MC CLOser(R) includes interfaces with automated underwriting and
credit evaluation functions and integration with MC's Internet site. During the
term of this Agreement, ILSI will have a royalty-free worldwide license to use
MC CLOser(R) in connection with the origination and processing of Subprime Loans
under the terms of this Agreement and in connection with any other loans for
which MC receives compensation as described in Article IV. This licensed use of
MC CLOser(R) by ILSI shall not apply to any loans processed, closed and funded
by
6
<PAGE>
ILSI without the participation and compensation of MC as described in Section
2.4(d), or other compensation arrangement agreed upon by the parties.
(b) Engineering and Other Resources. MC shall coordinate all tasks
related to the integration of the MC systems, including CLOser(R), with the
Website. MC will dedicate a minimum of one full-time person to this effort. MC
shall further provide such additional staff as are needed from time to time to
work with ILSI as quickly and efficiently as reasonably possible to achieve the
development and operational objectives agreed to by the parties. The parties
shall work together to determine the tasks to be performed, the staffing needed
and the timing of completion of the tasks.
(c) Security. MC shall maintain ICSA E-Commerce security standards on
all data transmissions involving Subprime Loans at all times.
2.6 Agreement with Participating Lenders. MC shall use its best efforts
to enter into arrangements with Participating Lenders for the purchase of
Subprime Loans originated through the Website in accordance with this Agreement.
To the extent that MC charges participation fees to other lenders, ILSI and MC
shall share such fees on a 50/50 basis.
2.7 Use of Name "FMN" and "First Mortgage Network" on Website. MC shall
take all necessary action to file the trade names "FMN" and "First Mortgage
Network" in the appropriate jurisdictions, and otherwise maintain its ownership,
right and license to use such names in connection with MC products and services.
MC shall cooperate with ILSI in identifying MC products and services on the
Website, through "Quicken"-related portals, co-branded sites and in other media
and communications with consumers in connection with "Quicken" as "FMN" and/or
"First Mortgage Network" products and services.
ARTICLE III
OPERATIONS AND STANDARDS
3.1 Timing of Offering Subprime Loans. The parties shall work together
to begin offering Subprime Loans under the terms of this Agreement by May 31,
1999, or as soon thereafter as practicable (the "Commencement Date"). The first
contract year under this Agreement with respect to Subprime Loans shall begin on
the Commencement Date and end on the date 12 months following the Commencement
Date. The successive contract years under this Agreement shall begin and end on
such dates of the following years (each, a "Contract Year").
3.2 Guaranteed Submissions. ILSI guarantees that the following minimum
numbers of Submissions for Subprime Loans will be generated through the Website
or ILSI's call center and forwarded to MC for processing during the following
three Contract Years:
(a) First Contract Year: 17,000 Submissions
First quarter: 3,500
Second quarter: 4,000
Third quarter: 4,500
Fourth quarter: 5,000
(b) Second Contract Year: 24,000 Submissions
First quarter: 6,000
Second quarter: 6,000
Third quarter: 6,000
Fourth quarter: 6,000
(c) Third Contract Year: 28,800 Submissions
First quarter: 7,200
Second quarter: 7,200
Third quarter: 7,200
Fourth quarter: 7,200
ILSI shall attain the guaranteed minimum amounts of Submissions for each
quarter. For any quarter for which the minimum amount is not reached, ILSI shall
pay MC $25 for each Submission below the required level of submissions for that
quarter, provided, however, that if the shortfall for any one quarter does not
exceed 10% of the guaranteed minimum amount. MC shall monitor the number of
Submissions transmitted through ILSI each quarter and shall invoice ILSI for any
amount due at the end of such quarter. ILSI shall pay such invoices within 30
days of receipt.
The above guaranteed minimum amounts will be reviewed by the parties after
six (6) months following the Commencement Date (or such other time periods
determined by the parties). During the six (6) month review, the parties agree
to negotiate in good faith to agree on appropriate guaranteed minimum amounts of
Submissions. The parties may further adjust such minimum amounts from time to
time by agreement in writing.
3.3 Conversion Ratios for Subprime Loans. The parties agree to the
following minimum performance standards for MC.
(a) MC shall meet the following conversion ratios for Subprime Loans
from the indicated stage or category, to a closed and funded loan:
(i) Inquiry Stage **
(ii) Prequalification Stage: **
(iii) Application Stage: **
The parties agree that ILSI will not provide pricing for Subprime Loans
online for five (5) months from the Commencement Date (or such earlier or later
date as the parties subsequently agree in writing). Therefore, all loans closed
and funded during that period will be deemed to be Inquiry Stage loans.
7
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
(b) The above ratios will be reviewed by the parties after six (6)
months following the Commencement Date (or such other time periods determined by
the parties). During the six (6) month review, the parties agree to negotiate in
good faith to agree on appropriate ratios. The parties may further adjust such
ratios from time to time by agreement in writing.
(c) If MC does not achieve the agreed-upon conversion ratios for three
(3) consecutive months (based upon a blended average of the categories), then,
upon written notice from ILSI, MC shall have ninety (90) days to cure the
shortfall. Cure shall be effected by MC's achieving the blended average
conversion ratios during the ninety (90) day cure period. If the shortfall
continues after the end of the cure period, ILSI shall have the right to
terminate this Agreement in accordance with Article VIII below.
3.4 Service Levels for Subprime Loans. MC shall perform the following
customer services in connection with Subprime Loans:
(a) Customer Survey. The parties shall design a mutually
acceptable customer survey and establish minimum goals for customer
satisfaction. MC shall transmit the survey to all borrowers at the time of
closing of Subprime Loans. The parties will develop and implement process
improvements to address instances of failure to meet customer satisfaction
goals.
(b) Quality Control Standards. The parties shall cooperate
with each other to develop mutually acceptable quality control standards for
Subprime Loans, which the parties shall work together to maintain. The parties
will develop and implement process improvements to address instances of failure
to meet minimum quality control standards.
(c) Amount of Time to Close Loans. Amount of Time to Close
Loans. MC shall monitor the processing of Subprime Loans to achieve and maintain
an average amount of time between application and loan closing of ** days for
refinance loans. From and after 18 months after the Commencement Date, the
average amount of time between application and loan closing for refinance loans
will be ** days. For purchase loans, MC shall close the loans within the time
period selected by the consumer not less than **% of the time.
If MC fails to achieve the above service levels for two (2) consecutive
months, then upon written notice from ILSI, MC shall take reasonable measures to
improve service levels within 15 days and shall cure such failure within an
additional 45 days. Furthermore, if ILSI identifies a pattern of material
problems resulting from MC conduct, which problems have resulted in specific
instances of customer complaints, then upon written notice from ILSI, MC shall
take reasonable measures to improve service levels within 15 days and shall cure
the underlying problems within 45 days.
If the service shortfall is not cured to ILSI's satisfaction during the
cure period, then, notwithstanding any other term of this Agreement to the
contrary, ILSI shall have
8
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
the right to terminate this Agreement in accordance with Article VIII of this
agreement.
(d) Customer Service Commitment. ILSI and MC agree that
excellent customer service represents one of the foundations for building a
successful business and is a consideration for this Agreement. To that end, the
parties agree to the following customer service standards:
MC shall deliver customer service performance at least equal to the
service level standards delivered by the average of the two lenders on the
Website determined to have the highest customer service levels (defined as
lowest ratio of complaints to applications) ("High Service Standard"). The two
lenders whose customer service levels are averaged to determine the High Service
Standard shall be selected from among the four lenders on the Website with the
highest application volume. The High Service Standard will be measured monthly,
and will be determined by the ratio of customer complaints received (and found
in ILSI's reasonable judgement to result from lender actions) regarding a
specific lender to the total applications taken by that lender during the month.
If MC's customer service fails to meet the High Service Standard for
two (2) consecutive months, then upon written notice from ILSI, MC shall take
reasonable measures to improve service levels within 15 days and shall cure such
failure to meet the High Service Standard within an additional 45 days; provided
however, that if ILSI identifies a pattern of material problems resulting from
MC conduct, which problems have resulted in specific instances of customer
complaints, then upon written notice from ILSI, MC shall take reasonable
measures to improve service levels within 15 days and shall cure the underlying
problems within 45 days.
If the service shortfall is not cured during the cure period, then,
notwithstanding any other term of this Agreement to the contrary, ILSI shall
have the right to terminate this Agreement in accordance with Article VIII of
this agreement.
For purposes of this section a problem shall not be deemed to be
material if the specific events complained of occur in fewer than 2% of loan
applications taken by MC. The provisions of this Section 3.5(d) shall not apply
during any period where actual loan conversion ratios exceed the capacity levels
established and agreed to by the parties, as described in Section 3.3.
3.5 Improving Processing Time. ILSI and MC shall work together and with
GHR to integrate their respective technologies in order to improve processing,
underwriting and closing processes. The parties shall work with each other and
GHR to improve the quality and nature of the back office services so as to
reduce the time, cost and difficulty to the customer of obtaining a Subprime
Loan.
ARTICLE IV
COMPENSATION
4.1 Federal and State Law. The compensation structure set forth below
9
<PAGE>
reflects the intent of the parties but is subject to change, by mutual agreement
of the parties, to comply with applicable federal and state laws and
regulations.
4.2 Signing and Exclusivity Fee.
MC shall pay ILSI a nonrefundable fee of * on August 10, 1999, provided
that ILSI has begun offering Subprime Loans on the Website on or before that
date. Furthermore, MC shall pay ILSI a non-refundable exclusivity fee in the
aggregate amount of **, payable in three equal installments on the first day of
each Contract Year for the first three Contract Years. Thereafter, MC shall pay
ILSI a non-refundable exclusivity fee in the amount of ** for each successive
Contract Year on the first day of each such year.
4.3 Fees for ILSI's Services and Facilities.
MC shall compensate ILSI for ILSI's origination of Subprime Loans at
the rate of ** basis points for each Subprime Loan closed by MC. This fee is
broken down as follows: (a) ** basis points will be paid by the borrower at the
time of closing of the loan as compensation for ILSI's mortgage origination
services; and (b) ** basis points as ILSI's share in the profit on the sale of
the loan by MC on the secondary market (whether or not MC realizes a profit on
any particular loan sale).
ILSI's services and facilities, as described in the Agreement shall
include, without limitation, educating the customer on the home buying and
financing process through various articles and chat services on the Website,
providing calculators for the customer to determine appropriate loan products
available, taking customer information and compiling the information into an
application, analyzing the customer's income and debt and pre-qualifying the
customer for Subprime Loans, providing disclosures, and assisting the borrower
in understanding and clearing credit problems, including debt consolidation
advice, and related services and facilities contemplated by this Agreement.
ARTICLE V
EXCLUSIVITY
5.1 Multi-Lender Mortgage Sites.
For so long as Section 5.2 is in effect, ** Notwithstanding the
foregoing, this Section 5.1 shall not restrict MC from providing services to
companies and Internet sites that use the technology platforms that have been
licensed from those identified on Attachment B (as that Attachment may be
amended), if MC's services consist of standard linkages and are limited to
transmission of loan data from such companies and Internet sites to MC and/or
the transmission of pricing information, **.
5.2 Exclusivity with Respect to Subprime Loans. [Redacted]
MC shall be **. To the extent permitted by ILSI shall not permit **
without receiving the prior consent of MC. ILSI shall use its best efforts to **
as soon as practicably possible, but in any event not later than **. In
addition, ILSI shall pay MC a ** for each lender that **.
10
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Representations and Warranties of MC. MC represents and warrants
that the following is true and correct and shall remain true and correct during
the Term:
(a) Authority. MC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida with full
corporate power and authority to transact any and all business contemplated by
this Agreement and it possesses all requisite authority, power, licenses,
permits and franchises to conduct its business as presently conducted. Its
execution, delivery and compliance with its obligations under the terms of this
Agreement are not prohibited or restricted by any government agency. MC has
taken all necessary action to authorize its execution, delivery and performance
of this Agreement.
(b) Conflict with Existing Laws or Contracts. The execution
and delivery of this Agreement and the performance of its obligations hereunder
by MC will not (i) conflict with or violate (A) MC's Certificate of
Incorporation or By-laws, or (B) any provision of any law or regulation or any
decree, demand or order to which MC is subject, or (ii) conflict with or result
in a breach of or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under any of the terms, conditions
or provisions of any agreement or instrument to which MC is a party or by which
it is bound or any order or decree applicable to MC or result in the creation or
imposition of any lien on any of its assets or property.
(c) Licenses and Consents. MC has obtained all necessary or
required governmental licenses, permits, approvals, and consents for the
transactions contemplated by this Agreement. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by MC of or compliance by MC with this
Agreement, or if required, such approval has been obtained or will be obtained
prior to the date of this Agreement.
(d) Legal Action Against MC. There is no claim, action, suit,
proceeding or investigation pending or, to the best of MC's knowledge,
threatened against MC or against any of its principal officers, directors or key
employees, which, either in any one instance or in the aggregate, may result in
any adverse change in the business, operations, financial condition, properties
or assets of MC, or in any impairment of the
11
<PAGE>
right or ability of MC to carry on its business substantially as now conducted
through its existing management group, or in any material liability on the part
of MC, or which would draw into question the validity of this Agreement or any
of the other instruments, documents or agreements entered into by MC in
connection with this Agreement, or of any action taken or to be taken in
connection with the obligations of MC contemplated therein, or which would be
likely to impair the ability of MC to perform the terms of this Agreement.
(e) Binding on MC; Enforceability. This Agreement, assuming
due authorization, execution and delivery hereof, and all the obligations of MC
hereunder, constitute the valid and binding obligations of MC, enforceable
against MC in accordance with the terms hereof, except as such enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting the enforcement of creditors' rights in general and by
general equity principles (regardless of whether such enforcement is considered
in a proceeding in equity or at law).
(f) Compliance With Laws. MC has complied and will continue to
comply with all applicable federal and state laws and regulations in its
business operations, in the loan origination activities proposed to be
conducted, and in the performance of this Agreement. In particular, MC
represents and warrants that its loan origination, processing and underwriting
systems, including, without limitation, the MC CLOser(R), comply with applicable
state and federal laws and regulations, including, without limitation, the Fair
Housing Act, Truth-in-Lending Act, and ECOA. MC will not seek to hold ILSI
liable in any action prosecuted against MC by a borrower, government agency, or
other party which alleges non-compliance with the laws applicable to originators
of mortgage loans, provided that neither the bad faith or wilful misconduct of
ILSI materially contributed to the circumstances giving rise to the claim
against MC. MC will maintain errors and omissions insurance, fidelity bonds and
similar financial instruments designed to protect those with whom it deals in
the origination of mortgage loans, in commercially reasonable amounts, and to
provide evidence of such instruments to ILSI upon request. ILSI will be a named
or additional insured in such policies and instruments. The types and amounts of
insurance, bonds and other financial instruments maintained by MC will be
subject to approval and upward revision by ILSI in its reasonable discretion, as
the volume of MC activity subject to this Agreement increases.
MC represents on behalf of its officers, directors, and key employees
that none of these individuals are currently in violation of any federal, state
or other law or regulation applicable to them in their professional capacities
as mortgage bankers, mortgage brokers, or any other regulated field or
occupation, except as disclosed to ILSI in writing in connection with this
Agreement, and that there is no pending legal, administrative or similar action
pending against any of them that would affect their ability to perform their
obligations to MC or to the Participating Lenders, or to ILSI hereunder.
6.2 Representations and Warranties of ILSI. ILSI represents and
warrants that the following is true and correct and shall remain true and
correct during the Term:
(a) Authority. ILSI is a corporation duly organized, validly
existing
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<PAGE>
and in good standing under the laws of the State of Delaware with full corporate
power and authority to transact any and all business contemplated by this
Agreement and it possesses all requisite authority, power, and material
licenses, permits and franchises to conduct its business, and to execute,
deliver and comply with its obligations under this Agreement. The execution of
this Agreement and its delivery and the performance by ILSI of its obligations
under this Agreement are not prohibited or restricted by any government agency.
ILSI has taken all necessary action to authorize the execution, delivery and
performance of this Agreement.
(b) Conflict with Existing Laws or Contracts. The execution
and delivery of this Agreement and the performance of its obligations hereunder
by ILSI will not (i) conflict with or violate (A) ILSI's Certificate of
Incorporation or By-laws, or (B) any provision of any law or regulation or any
decree, demand or order to which ILSI is subject, or (ii) conflict with or
result in a breach of or constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under any of the terms,
conditions or provisions of any agreement or instrument to which ILSI is a party
or by which it is bound or any order or decree applicable to ILSI or result in
the creation or imposition of any lien on any of its assets or property.
(c) Licenses and Consents. ILSI, in connection with
performance of its duties under this agreement, has obtained or will obtain all
necessary or required governmental licenses and consents requisite for the
transactions contemplated by this Agreement. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by ILSI of or compliance by ILSI with this
Agreement, or if required, such approval has been obtained prior to the date of
this Agreement.
(d) Legal Action Against ILSI. There is no claim, action,
suit, proceeding or investigation pending or, to the best of ILSI's knowledge,
threatened against ILSI, which, either in any one instance or in the aggregate,
may result in any material adverse change in the business, operations, financial
condition, properties or assets of ILSI, or in any material impairment of the
right or ability of ILSI to carry on its business substantially as now
conducted, or in any material liability on the part of ILSI, or which would draw
into question the validity of this Agreement, or any of the other instruments,
documents or agreements entered into by ILSI in connection with this Agreement,
or of any action taken or to be taken in connection with the obligations of ILSI
contemplated therein, or which would be likely to impair materially the ability
of ILSI to perform under the terms of this Agreement.
(e) Binding on ILSI; Enforceability. This Agreement, assuming
due authorization, execution and delivery hereof, and all the obligations of
ILSI hereunder, constitute the valid and binding obligations of ILSI,
enforceable against ILSI in accordance with the terms hereof, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting the enforcement of creditors' rights in general
and by general equity principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law).
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<PAGE>
(f) Compliance With Laws. ILSI has complied and will continue
to comply with all applicable federal and state laws and regulations in its
business operations, in the operation of the Website, and in the performance of
this Agreement.
6.3 Covenants.
----------
(a) Compliance with Laws. MC and ILSI covenant to each other
that they will comply with all applicable federal and state laws and regulations
in performing their respective obligations under this Agreement. Any successful
challenge of any particular provision of this Agreement, including the
compensation provisions, by any governmental authority, will, at the option of
either party hereto, constitute sufficient cause for termination of this
Agreement if the Agreement and its purposes cannot be reasonably effectuated
without the challenged provision or term.
(b) Continuing Obligations of the Parties. The parties shall
cooperate with each other in the performance of this Agreement until the
termination hereof. Neither party shall take any action or refrain from taking
any action which would jeopardize or compromise the performance of the Website
or MC's systems or which would hinder the performance by the parties of their
respective services to the Participating Lenders and to their customers. Each
party shall promptly forward to the other all notices, claims, letters,
documents and other information received by such party which are relevant to the
performance of this Agreement. The parties shall provide to each other all
information and documentation regarding their respective products and services
which are necessary or relevant to the performance of the transactions
contemplated by this Agreement.
(c) MC's Books and Records. MC shall make all material books
and records pertaining to the services and facilities provided under this
Agreement, including without limitation, records and reports on Inquiries,
Prequalifications and Applications that are initiated through the Website and
any other services and facilities provided to ILSI, available for inspection at
MC's offices or any other mutually convenient location upon five (5) days prior
notice by ILSI.
(d) Further Assurances. At any time, and from time to time
after the execution of this Agreement, upon the reasonable request of a party
hereto, and at the expense of such party, the other party shall do, execute,
acknowledge and deliver, and shall cause to be done, executed, acknowledged and
delivered, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may be reasonably required in order to
enable the parties to perform their respective obligations hereunder and carry
out the terms of this Agreement.
ARTICLE VII
INDEMNIFICATION
7.1. General Indemnification by ILSI. ILSI shall indemnify MC and any
directors, officers, employees or agents of MC (collectively, "MC Indemnified
Parties")
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<PAGE>
and hold each of them harmless from and against any and all claims, losses,
damage, penalties, fines, forfeitures, reasonable legal fees and expenses
(including attorneys' fees) and related costs, expenses of litigation,
judgments, and any other costs, fees and expenses (each, a "Liability" and
collectively "Liabilities") that were caused by or resulted from a breach of any
of ILSI's representations, warranties, covenants and agreements contained in
this Agreement or by ILSI's willful misfeasance, bad faith or gross negligence
in the performance of or failure to perform as provided in this Agreement.
7.2. General Indemnification by MC. MC shall indemnify ILSI and any
directors, officers, employees or agents of ILSI (collectively, "ILSI
Indemnified Parties") and hold each of them harmless from and against any and
all Liabilities that were caused by or resulted from a breach of any of MC's
representations, warranties, covenants and agreements contained in this
Agreement or by MC's willful misfeasance, bad faith or gross negligence in the
performance of or failure to perform as provided in this Agreement. Further, MC
shall indemnify the ILSI Indemnified Parties for losses, damages or Liabilities
resulting from MC's failure to adhere to commercially reasonable standards and
any applicable canons of ethics in the origination, processing or funding of
mortgage loans. The indemnification based on the professional conduct of MC
shall not be limited to willful acts, bad faith or gross negligence.
7.3 Survival of Indemnifications. MC's and ILSI's respective
obligations to indemnify any ILSI Indemnified Party or any MC Indemnified Party
will survive the expiration or termination of this Agreement by either party for
any reason.
7.4 Notice of Claims. Each party shall promptly notify the other in
writing of any and all litigation and claims known to such party made against it
or the other party in connection with this Agreement.
ARTICLE VIII
TERM AND TERMINATION
8.1 Term. This Agreement shall remain in effect for three Contract
Years following the Commencement Date (the "Initial Term"). Thereafter this
Agreement may be renewed for successive three Contract Year terms unless either
party notifies the other at least 30 days prior to the end of a term that it is
terminating the Agreement at the end of the current term. The Initial Term,
together with any successive terms shall be referred to herein as the "Term."
8.2 Termination. This Agreement may be terminated by written notice of
either party prior to the end of the Term due to one of the following Events of
Default, after giving the defaulting party the applicable notice and opportunity
to cure set forth below:
(a) Breach of the Agreement. If a party breaches a material term or
condition of this Agreement, the non-defaulting party must give the defaulting
party written notice of the breach. If the breach is of a monetary nature, the
defaulting party will have five (5)
15
<PAGE>
business days to cure the default. Otherwise, the defaulting party will have
thirty (30) days to cure the default. The non-defaulting party may terminate
this Agreement at the expiration of the applicable cure period if the breach is
not cured within the given cure period.
(b) Change in Control. If MC merges with, or is acquired by, a third
party, and, in the reasonable opinion of ILSI, such change in control materially
adversely affects MC's ability to perform under this Agreement, then ILSI may
terminate this Agreement after giving three (3), months' prior written notice.
This provision shall specifically exclude mergers in which MC is the surviving
entity.
(c) Change in Financial Condition. If MC undergoes a material change in
financial condition such that it is unable to meet its obligations under this
Agreement, ILSI may terminate this Agreement if, after giving MC written notice
and a 15-day opportunity to cure, MC's financial condition has not been restored
to the extent that it can perform its obligations hereunder; provided, however,
that if the adverse change in MC's financial condition results in MC's failure
to fund loans as and when scheduled for three (3) consecutive days, ILSI may
thereafter immediately terminate this Agreement and at its option, seek
alternative funding for the affected loans.
(d) Performance. If MC does not meet its minimum requirements for
closing Subprime Loans as set forth in Section 3.3 of this Agreement, ILSI shall
notify MC in writing of the shortfall. MC shall have ninety (90) days after
notice to cure the shortfall. If MC has failed to cure the shortfall during that
period, then ILSI may terminate this Agreement after six (6) months' prior
written notice.
(e) Insufficient Volume. If ILSI does not achieve ** of Submissions in
Section 3.2 for three (3) consecutive months, MC shall notify ILSI in writing of
the shortfall. ILSI shall have ** days after notice to cure the shortfall. If
ILSI has failed to cure the shortfall during that period, and for six (6)
consecutive months thereafter, then MC may terminate this Agreement after giving
six (6) months' prior written notice.
(f) Bankruptcy. In the event of the occurrence of any of the following
events, the non-defaulting party may terminate this Agreement immediately upon
giving prior written notice to the defaulting party:
(i) the commencement of any bankruptcy, insolvency,
reorganization, dissolution, liquidation of debt, receivership or
conservatorship proceeding or other similar proceeding under federal or state
bankruptcy, debtors relief, bank regulatory or other law by or against either
party; or
(ii) the appointment of a receiver, conservator, trustee or
similar officer to take charge of, a substantial part of the property of either
party.
ARTICLE IX
MISCELLANEOUS
16
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
9.1 Notices. Any written notice required or permitted to be given to the parties
hereunder shall be addressed as follows:
If to ILSI: Intuit Lender Services, Inc.
2535 Garcia Avenue
Mountain View, CA 94043
Tel: (619) 784-1214
Fax: (619) 784-1244
Attention: Carl Reese, President
[email protected]
with a copy to:
Andrea Lee Negroni, Esq.
Negroni & Winston PLLC
1156 Fifteenth Street, N.W.
Suite 1105
Washington, D.C. 20005
Tel: 202-887-1610
Fax: 202-887-1902
[email protected]
If to MC:
Seth Werner, Chairman
Mortgage.com, Inc.
8751 Broward Blvd
Plantation, FL 33324
Tel: (954) 452-0000
Fax: (954) 472-0800
E-mail address [email protected]
with a copy to:
Michael Brenner, General Counsel
Mortgage.com, Inc.
8751 Broward Blvd
Plantation, FL 33324
Tel: (954) 452-0000
Fax: (954) 472-0800
E-mail address: [email protected]
All notices shall be in writing and delivered in person or shall be
sent by registered or certified mail, return receipt requested, and shall be
deemed effective, three days after the same is mailed as provided above with
postage prepaid. Notice sent by any other method shall be effective only upon
actual receipt.
17
<PAGE>
9.2 Assignment; Contracting. Neither party may assign its rights or
obligations hereunder, by operation of law or otherwise, without the express
written consent of the other, except that (i) either party may assign any of its
obligations or rights, in whole or in part, to any parent, affiliate or
subsidiary of such party, and (ii) the acquisition of all or substantially all
of the voting securities of a party by merger or otherwise, shall not constitute
an assignment of its rights or obligations hereunder. Any attempted assignment
in violation of the foregoing will be null and void. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
9.3 Change of Control or Ownership. MC will not, during the term of
this Agreement as it may be extended, cause or authorize, or obligate itself to
cause or authorize, any Reorganization (defined below) with any entity ** . A
Reorganization shall mean any capital reorganization of the Common Stock, or a
merger or consolidation of the Company with or into another corporation, unless
MC shall be the surviving corporation, or the sale of all or substantially all
of MC's capital stock or assets to any other person or entity, or any other form
of business combination or reorganization in which control of MC is transferred.
"Control" shall be deemed to have been transfered in a transaction or series of
transactions in which any person, or group of related persons, shall have
acquired beneficial ownership of more than 25% of the capital stock of MC
(assuming all rights, options, warrants or convertible or exchangeable
securities entitling the holders thereof to subscribe for or purchase or
otherwise acquire shares of capital stock have been fully exercised or
converted) or of substantially all of the assets of MC.
9.4 Waiver. No term or provision hereof will be deemed waived, and no
variation of terms or provisions hereof shall be deemed consented to, unless
such waiver or consent shall be in writing and signed by the party against whom
such waiver or consent is sought to be enforced. Any delay, waiver or omission
by ILSI or MC to exercise any right or power arising from any breach or default
of the other party in any of the terms, provisions or covenants of this
Agreement shall not be construed to be a waiver by ILSI or MC of any subsequent
breach or default of the same or other terms, provisions or covenants on the
part of either party.
9.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of California, without respect to its conflicts of law
principles.
9.6 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof, except where
expressly noted herein, and all prior negotiations, agreements and
understandings, whether oral or written, are superseded or canceled hereby.
9.7 Modification. This Agreement may not be amended or modified except
in a written document signed by both parties.
9.8 Severability. If any provision of this Agreement is declared or
found to be illegal, unenforceable or void, this Agreement shall be construed as
if not containing that
18
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
provision, and the rest of the Agreement shall remain in full force and effect,
and the rights and obligations of the parties hereto shall be construed and
enforced accordingly.
9.9 Independent Contractor. MC, in performance of this Agreement, is
acting as an independent contractor, is not the partner, joint venturer or agent
of ILSI and has no authority to act on behalf of ILSI except as necessary or
desirable to carry out MC's obligations under this Agreement. The parties shall
each be responsible for payment of their respective taxes and assessments
incurred in connection with performance of this Agreement. Neither party's
employees are eligible for employee benefits of the other party.
9.10 Confidentiality. Each party agrees to keep all information related
to the other party confidential, as provided in the Non-Disclosure Agreement
dated April 29, 1998. The parties further agree that the business strategy,
marketing plans and product specifications of either party disclosed in
connection with this transaction, as well as the terms of this Agreement, are
confidential and shall not be used by the other party or disclosed by such other
party to third parties unless such information is (i) required to effect the
transactions contemplated herein, (ii) in the public domain or already in the
possession of a party prior to the disclosure to it by the other party
(including information received lawfully from third parties without an
obligation of confidentiality); or (iii) required by law or regulation to be
disclosed.
9.11 Definitions. Except where otherwise defined herein, capitalized
terms used in this Amendment shall have the meaning set forth below.
(a) The term "Submission" shall mean any Inquiry through the Website or
call centers, any Prequalification or Application.
(b) The term "Subprime" shall mean having an investment grade of "B" or
below.
(c) The term "Subprime Loans" shall mean residential mortgage
loans, which are Subprime and are offered by ILSI through the Website
or through portals, other co-branded sites or call centers.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
signed and delivered by its duly authorized officer as of the date first written
above.
INTUIT LENDER SERVICES, INC.
By: /s/ [illegible]
------------------------------------
Name: [illegible]
----------------------------------
Title: President & CEO
---------------------------------
MORTGAGE.COM, INC.
By: /s/
-----------------------------------
Name: John D. Rodgers
---------------------------------
Title: President, Consumer DirectGroup
--------------------------------
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<PAGE>
APPENDIX A
INDEX OF RATES OF LENDERS
The initial Index shall consist of the following:
**
**
**
**
**
Changes to this Index may be made by mutual consent, in order to maintain an
Index of at least five lenders from sites that may reasonably be deemed
competitive with QuickenMortgage.
21
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
<PAGE>
APPENDIX B
Site Company
1. ** **
2. ** **
3. ** **
4. ** **
5. ** **
6. ** **
7. ** **
8. ** **
** indicates information which has been omitted pursuant to a confidential
treatment request filed separately with the Commission.
Accountant's Consent
The Board of Directors
Mortgage.com., Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Fort Lauderdale, FLorida
July 21, 1999
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hearby consent to the reference to me as a prospective director of
Mortgage.com, Inc., where it appears in this Registration Statement, including
the Prospectus constituting a part thereof, and any amendments thereto.
/s/ C. Toms Newby, III
- ----------------------
C. Toms Newby, III
