United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
Commission File Number 000-26787
Mortgage.com, Inc.
------------------
Exact name of registrant as specified in its charter
Florida 65-0435281
--------- -------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1643 North Harrison Parkway, Sunrise, FL 33323
----------------------------------------------
(Address of principal executive offices)
(954) 838-5000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class On November 1, 2000
----- -------------------
Common Stock, $ .01 par value 44,378,272
<PAGE>
MORTGAGE.COM, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (Unaudited).....................................3
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 2000 and 1999 (Unaudited)..4
Consolidated Statements of Cash Flows for the nine month
period ended September 30, 2000 and 1999 (Unaudited)..............5
Notes to Unaudited Consolidated Financial Statements..............6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......23
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................25
ITEM 6. Exhibits and Reports on Form 8-K.................................26
Signature ...................................................................27
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
<CAPTION>
September 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................... $ 4,303 $ 7,537
Mortgage loans available for sale, net .................................. 86,537 93,120
Receivable from sale of mortgage loans................................... 9,197 748
Property and equipment, net ............................................. 12,997 16,408
Capitalized software development costs, net ............................. 1,396 2,817
Goodwill and other intangible assets, net ............................... 2,044 9,780
Other assets ............................................................ 4,359 7,665
---------------- ----------------
Total assets ....................................................... $ 120,833 $ 138,075
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Warehouse and other notes payable ....................................... $ 92,464 $ 88,399
Accounts payable, accrued expenses and other liabilities ................ 9,293 13,691
Capital lease obligations................................................ 2,501 2,409
---------------- ----------------
Total liabilities .................................................. 104,258 104,499
---------------- ----------------
Minority interest ....................................................... -- 249
Shareholders' equity:
Preferred stock of Openclose.com, Inc. subsidiary, $.01 par value.
Authorized 10,000,000 shares; issued and outstanding 3,000,000 and
no shares, respectively............................................. 30 --
Preferred stock, $.01 par value. Authorized 15,000,000 shares; no
shares issued and outstanding....................................... -- --
Common stock, $.01 par value. Authorized 210,000,000 shares; issued
and outstanding 44,378,272 and 43,221,964 shares, respectively ..... 444 432
Additional paid-in capital ........................................... 134,981 107,011
Unearned compensation ................................................ (5,867) (8,860)
Accumulated deficit .................................................. (113,013) (65,256)
---------------- ----------------
Total shareholders' equity ......................................... 16,575 33,327
---------------- ----------------
Total liabilities and shareholders' equity ......................... $ 120,833 $ 138,075
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. $ 5,756 $ 8,622 $ 17,406 $ 27,168
Loan production and processing fees, net .......... 1,510 2,442 5,659 8,143
Management, technology and other fees ............. 730 663 1,924 3,621
Interest income ................................... 2,432 2,847 6,641 8,406
-------------- ------------- -------------- --------------
Total revenue ........................................ 10,428 14,574 31,630 47,338
-------------- ------------- -------------- --------------
Expenses:
Compensation and employee benefits ................ 11,325 18,385 34,348 40,744
Marketing and advertising.......................... 755 8,623 2,544 13,203
Research and development .......................... 1,086 390 2,291 1,759
Depreciation and amortization ..................... 2,301 1,667 6,511 3,519
General and administrative ........................ 6,231 5,145 17,188 13,320
Interest expense .................................. 2,535 2,935 6,481 9,120
Impairment of assets .............................. 10,023 -- 10,023 --
-------------- ------------- -------------- --------------
Total expenses ....................................... 34,256 37,145 79,386 81,665
-------------- ------------- -------------- --------------
Loss before minority interest......................... (23,828) (22,571) (47,756) (34,327)
Minority interest..................................... -- -- -- --
Extraordinary item - loss on early extinguishment of
debt............................................... -- (436) -- (436)
-------------- ------------- -------------- --------------
Net loss ............................................. $ (23,828) $ (23,007) $ (47,756) $ (34,763)
============== ============= ============== ==============
Net loss ............................................. $ (23,828) $ (23,007) $ (47,756) $ (34,763)
Preferred stock dividends:
Paid .............................................. -- (178) -- (431)
Cumulative unpaid.................................. -- (549) -- (2,217)
-------------- ------------- -------------- --------------
Net loss available to common shareholders............. $ (23,828) $ (23,734) $ (47,756) $ (37,411)
============== ============= ============== ==============
Net loss per share - basic and diluted................
Loss before extraordinary item $ (0.54) $ (0.83) $ (1.09) $ (2.35)
Extraordinary item -- (0.02) -- (0.03)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
$ (0.54) $ (0.85) $ (1.09) $ (2.38)
============== ============= ============== ==============
Weighted average number of shares..................... 44,326 27,919 43,972 15,729
============== ============= ============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Net cash flows from operating activities:
Net loss ............................................................. $ (47,756) $ (34,763)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Extraordinary item ................................................. -- 436
Amortization and depreciation ...................................... 6,529 3,517
Amortization of unearned compensation .............................. 1,509 7,165
Cancellation of stock options ...................................... (615) --
Provision for losses ............................................... 446 1,195
Loss on disposal of property and equipment ......................... 121 --
Impairment of assets ............................................... 10,023 --
Decrease in mortgage loans available for sale, net ................... 6,580 66,604
Increase in receivable from sale of mortgage loans ................... (8,449) --
Changes in other assets and liabilities:
Decrease (increase) in other assets................................. 3,002 (7,395)
(Decrease) increase in accounts payable, accrued expenses and other
liabilities ...................................................... (4,119) 3,983
Decrease in deferred revenue ....................................... -- (1,012)
---------------- ----------------
Net cash (used in) provided by operating activities ..................... (32,728) 39,728
---------------- ----------------
Cash flows from investing activities:
Additions to capitalized software development costs .................. (2,781) (1,847)
Additions to property and equipment................................... (1,955) (5,619)
Proceeds from sale and leaseback of property and equipment ........... 1,311 --
Purchase of companies, net of cash acquired .......................... -- (617)
Additions to intangible assets ....................................... -- (3,564)
---------------- ----------------
---------------- ----------------
Net cash used in investing activities ................................... (3,425) (11,647)
---------------- ----------------
Cash flows from financing activities:
Net repayments from warehouse notes payable........................... 4,071 (85,309)
Proceeds from issuance of subordinated debentures .................... -- 40,500
Repayment of subordinated debentures ................................. -- (40,500)
Proceeds from other notes payable .................................... -- 100
Payment of other notes payable........................................ (5) (5)
Payments of capital lease obligations ................................ (1,257) (1,115)
Proceeds from exercise of stock options............................... 579 1,097
Cost of issuing common stock ........................................ (191) (5,744)
Proceeds from issuance of common stock ............................... -- 59,535
Proceeds from issuance of preferred stock ............................ -- 15,000
Cost of issuance of preferred stock .................................. -- (495)
Proceeds from exercise of warrants ................................... 427 126
Redemption of warrants ............................................... -- (12,433)
Proceeds from sale of interest in subsidiary ......................... 30,000 --
Costs of sale of interest in subsidiary .............................. (705) --
Dividends paid ....................................................... -- (431)
---------------- ----------------
Net cash provided by (used in) financing activities ..................... 32,919 (29,674)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents .................... (3,234) (1,593)
Cash and cash equivalents at beginning of period......................... 7,537 3,412
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period............................... $ 4,303 $ 1,819
================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................... $ 6,176 $ 9,071
---------------- ----------------
Cash paid for income taxes ........................................... $ 7 $ 5
---------------- ----------------
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
MORTGAGE.COM, INC.
Notes To Unaudited Consolidated Financial Statements
1. Subsequent event
----------------
On October 31, 2000, Mortgage.com, Inc. (the "Company") announced that
it had been unable to obtain sufficient capital needed to execute fully its
business plan and that it was commencing the orderly wind down of its lending
operations and was laying off the majority of its employees. On November 6,
2000, the Board of Directors, after exploring the Company's available options
for maximizing the value of its remaining assets for the benefit of creditors
and shareholders, approved the sale to Mortgage Systems International LLC
("MSI"), a subsidiary of Banco Hipotecario SA ("BH"), of the Company's rights to
its technology, proprietary software and certain related assets, including
intellectual property rights, technology contracts, third party technology
licenses and certain furniture, fixtures and equipment related to the
development of the technology. On November 13, 2000, the Company received
written consent approving the sale from holders of a majority of the Company's
outstanding stock, and on November 16, the sale was consummated. The Company
also sold to MSI the Company's trademark "Rapid Response Center" and the related
domain name and the trademark "CLOser". MSI also hired 45 technology related
staff members from the Company. In consideration for all of the foregoing
transfers, the Company received $1.5 million in cash, 25% of the equity
interests of MSI and a two-year option to acquire an additional 5% of the equity
of MSI for an exercise price of $1.5 million. BH, an Argentinian financial
institution, funded MSI with $10 million in capital.
Following the transfer of assets to MSI, the Company's remaining assets
consisted primarily of the domain name "www.mortgage.com", a loan officer-based
mortgage brokerage operation in California, and a 51% interest in its
subsidiary, Openclose.com, Inc. (which interest is pledged to secure a $2
million loan from Openclose.com, Inc. to the Company), and the Company's 25%
equity interest in MSI. The board of directors of Openclose.com, Inc., has
authorized the sale of a new issue of its Series B Preferred Stock to venture
capital investors to raise additional capital. The effect of this transaction
will be to dilute the Company's interest in Openclose.com, Inc. The Company
continues to explore ways to maximize the value of its remaining assets for the
benefit of the Company's creditors and shareholders, but the Company may be
unsuccessful in generating funds sufficient to pay creditors in full or in
generating a return to shareholders.
As a result of the decision to wind down its lending operations, the
Company has recorded a write down of goodwill and other intangible assets,
capitalized software development costs and property and equipment and recorded
an impairment of assets expense in an amount of $10,023,000 on September 30,
2000, as follows:
Goodwill $ 5,836,000
Covenant not to compete 684,000
-----------
Goodwill and other intangible assets $ 6,520,000
Capitalized software development costs 2,835,000
Property and equipment 668,000
-----------
$10,023,000
The Company is reviewing alternatives for disposal of other assets, and
such disposals might result in additional write offs in the fourth quarter of
2000.
6
<PAGE>
2. Description of Business
-----------------------
The Company is incorporated in Florida, and prior to the events
described above, provided 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 used 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 was
enhanced and became known as CLOser, a proprietary platform that supports all of
the services that the Company offers. The Company used 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. The Company also used the CLOser platform to provide management
processing and back-office services to those customers on an outsourced basis
and also provided funding for the mortgages originated by them.
In January 1999, the Company changed its name from First Mortgage
Network, Inc. to Mortgage.com, Inc.
3. Unaudited Interim Consolidated Financial Statements
---------------------------------------------------
The consolidated financial statements as of September 30, 2000 and for
the three and nine-month periods ended September 30, 2000 and 1999 are
unaudited. The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and should be
read in conjunction with the Company's audited consolidated financial statements
as of and for the year ended December 31, 1999 as set forth in the Company's
Annual Report on Form 10-K. 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.
All share and per share amounts, and additional paid-in capital, have
been restated to reflect a seven-for-one common stock split effective August 11,
1999.
4. Use of Estimates
----------------
In preparation of the consolidated 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.
7
<PAGE>
5. Other Assets
------------
The Company entered into an agreement in 1996 to sell internally
developed software to an investment firm. As a condition to the agreement, the
Company entered into a ten-year distribution and profit sharing agreement for
the software with the same investment firm. The purchase price of the software
was $10,800,000 of which $1.61 million was received in cash. Due to certain
contract contingencies, the proceeds from the transaction, net of related costs,
were recorded as deferred revenue to be recognized when the contingencies were
satisfied. The related note was included in accounts and notes receivable on the
balance sheet at December 31, 1998 at its discounted net present value and, due
to the contingencies affecting collectibility, was fully reserved for at
December 31, 1998. On March 31, 1999, this software profit sharing agreement was
sold to an unrelated company as part of a sale of a subsidiary of the Company.
The Company was relieved of any further obligations. As a result, the $1.01
million in deferred revenue was recorded as management, technology and other
fees income in the nine-month period ended September 30, 1999.
6. 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.
(b) Stock Option and Warrant Transactions
Options to purchase 561,308 shares of common stock under the Company's
Stock Option Plan were exercised during the nine-month period ending September
30, 2000. During the nine-month period ending September 30, 2000, 595,000 common
stock warrants were exercised.
On January 1, 2000, the Company issued warrants to purchase 233,331
shares of common stock to John Rodgers, Andrew Heller and Kyle Meyer as earn-out
consideration in connection with our merger with American Finance & Investment
in 1998. The exercise price of the warrants is $1.071.
On March 27, 2000, the Company issued warrants to purchase 332,060
shares of common stock to Ladenburg Thalmann & Co., Inc. in consideration of
certain investment banking services performed in connection with an equity line
of credit we entered into with Sugarplum Investments Limited. The exercise price
of the warrants is $2.4092.
On March 27, 2000, the Company issued warrants to purchase 332,060
shares of common stock to Sugarplum Investments Limited in consideration of
Sugarplum providing us with an equity line of credit. The exercise price of the
warrants is $2.4092.
During the three months ended June 30, 2000, the Company entered into
marketing agreements with Independent Brokers Network and Mid-American Realty
Concepts, Inc. in which non-qualified options were issued to purchase 15,000 and
25,000 shares, respectively. Vesting under these options are contingent on the
optionees successfully re-marketing our services.
8
<PAGE>
The 664,120 warrants issued and the 35,000 non-qualified options issued
in 2000 triggered certain antidilution adjustments to certain warrants issued in
1999 increasing total warrant shares by 2,068.
The issuances of the warrants described above in 2000 are exempt
pursuant to Section 4(2) as transactions by an issuer not involving a public
offering.
(c) Openclose.com, Inc. Subsidiary
On January 27, 2000, the Company contributed certain assets
constituting the Company's "Openclose" division to a newly formed corporation,
Openclose.com, Inc., in exchange for $24 million in cash and common stock of
Openclose.com representing 51 percent of its outstanding securities.
Simultaneously with this contribution, certain accredited investors contributed
$30 million in cash to Openclose.com in exchange for 3,000,000 shares of
convertible preferred stock representing the remaining 49 percent of its
outstanding securities. The assets contributed by the Company consisted
primarily of the www.openclose.com Internet web site, the programming and
computer code, and certain customer contracts pertaining to the web site. These
contributed assets were carried on the Company's balance sheet at a nominal
amount. The Company has accounted for the transaction as a capital contribution.
(d) Additional Financing
On March 27, 2000, the Company entered into a common stock purchase
agreement with Sugarplum granting the Company an option to sell stock to that
investor over the next 24 months, commencing on June 30, 2000. Under this
commitment, the Company may be able to sell, subject to certain conditions, up
to a total of $40 million of its unissued common stock. As of September 30,
2000, no stock has been sold under this agreement.
(e) Unearned Compensation
Unearned compensation resulted when stock options were granted in 1998
and 1999 at prices that were subsequently determined to be less than their
estimated fair value. The Company recorded an estimate of the excess of fair
value over the exercise price of approximately $16.6 million as a separate
component of shareholders' equity. During the nine-month periods ended September
30, 2000 and 1999, the Company amortized approximately $1.5 million and $7.2
million to compensation and employee benefits expense, respectively. As the
Company's stock option plan has a five-year vesting requirement, the remaining
deferred compensation cost is being amortized on a straight line basis over the
vesting period. Stock-based compensation is a non-cash expense. During the three
and nine month periods ended September 30, 2000, 111,832 and 858,431 shares,
respectively, of option grants included in the recording of unearned
compensation were cancelled. In the three and nine month periods ended September
30, 2000, the Company reversed $86,000 and $615,000, respectively, of previously
expensed compensation expense and $160,000 and $1,484,000, respectively, of the
remaining balance of unearned compensation against additional paid-in capital.
(f) Preferred Stock Transaction
During the three months ended June 30, 1999, the Company issued 250,000
shares of preferred stock for $14,505,000 net of expenses. These shares were
converted into common shares at the time of the Company's Initial Public
Offering of common stock on August 11, 1999.
9
<PAGE>
7. Risk Management Activities
--------------------------
In order to mitigate the risk that a change in interest rates will
result in a decline in the value of the Company's committed pipeline or
inventory, the Company enters into derivative financial instruments. Due to the
variability of closings in the Company's committed pipeline, which is driven
primarily by interest rates, the Company's hedging policies require that a
substantial percentage of the committed fixed-rate conforming pipeline be hedged
with forward contracts for the sale of mortgage-backed-securities. As of
September 30, 2000, the forward contracts to sell mortgage-backed securities
amounted to $121.0 million in maturities of up to three months. These forward
contracts had an unrealized loss of $575,000 at September 30, 2000 ($172,000 has
been recognized as a liability). The mortgage-backed securities that are to be
delivered under these contracts are fixed-rate, and generally correspond with
the composition of the Company's inventory and committed pipeline.
As of September 30, 2000, the Company had $29.0 million of fixed-rate
closed mortgage loans in inventory. In addition, as of September 30, 2000, the
Company had short-term rate and point commitments amounting to approximately
$67.5 million to fund fixed-rate mortgage loan applications in process.
Substantially all of these commitments are for periods of 60 days or less.
(After funding and sale of the mortgage loans, the Company's exposure to credit
loss in the event of nonperformance by the mortgagor is limited).
The Company has potential exposure to credit loss in the event of
nonperformance by the counterparties to the various forward sales. The Company
manages this credit risk by selecting only well established, financially strong
counterparties, spreading the credit risk among many such counterparties, and by
placing contractual limits on the amount of unsecured credit risk from any one
counterparty. The Company's exposure to credit risk in the event of default by a
counterparty is the current cost of replacing the contracts net of any available
margins retained by the Company, a custodian or the Mortgage-Backed Securities
Clearing Corporation (the"MBSCC"), which is an independent clearing agent.
8. Income Taxes
------------
No current or deferred provision for income taxes was recorded for the
three or nine-month periods ended September 30, 2000 and 1999 due to the
Company's operating losses in the respective periods.
9. Segment Information
-------------------
The Company operates in two reportable business segments: the Direct to
Consumer reportable Segment, which includes the Mortgage.com Internet web site
which originates mortgage loans that are subsequently sold in the secondary
market; and the Business to Business reportable Segment, which includes
back-office mortgage services for lenders, realtors, homebuilders and software
and Internet conduits, technology platform licenses to mortgage industry
participants and the Openclose.com web site that enables brokers, lenders 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 or by
funding and selling loans originated through a business customer in the
secondary market. These segments
10
<PAGE>
are characterized by the nature of their customers and represent components of
the Company about which separate financial information is available that is
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Summarized financial information
concerning the business segments is shown in the following table: (Certain
expenses that are not directly attributable to the business channels have not
been allocated to segments in these tables.)
<TABLE>
<CAPTION>
(In Thousands) Business to Direct to
Total Business Consumer
--------------- -------------- --------------
<S> <C> <C> <C>
Three months ended September 30, 2000
Revenue:
Secondary marketing revenue, net .................... $ 5,756 $ 4,816 $ 940
Loan production and processing fees, net ............ 1,510 1,297 213
Management, technology and other fees ............... 730 730 --
Interest income ..................................... 2,432 2,064 368
--------------- -------------- --------------
Total revenue ......................................... 10,428 8,907 1,521
Expenses:
Compensation and employee benefits .................. 9,985 8,438 1,547
Marketing and advertising........................... 686 580 106
Depreciation and amortization ....................... 1,764 1,491 273
General and administrative .......................... 4,308 3,640 668
Interest expense .................................... 30 25 5
--------------- -------------- --------------
Total segment expenses ................................ 16,773 14,174 2,599
-------------- --------------
Segment loss .......................................... $ (5,267) $ (1,078)
-------------- --------------
Research and development not allocated to segments .... 1,086
Expenses not allocated to segments .................... 6,374
Impairment of Assets .................................. 10,023
---------------
Total expenses ........................................ 34,256
---------------
Net loss .............................................. $ (23,828)
===============
Three Months ended September 30, 1999
Revenue:
Secondary marketing revenue, net .................... $ 8,622 $ 6,083 $ 2,539
Loan production and processing fees, net ............ 2,442 1,983 459
Management, technology and other fees ............... 663 663 --
Interest income ..................................... 2,847 2,217 630
--------------- -------------- --------------
Total revenue ......................................... 14,574 10,946 3,628
Expenses:
Compensation and employee benefits .................. 11,306 8,632 2,674
Marketing and advertising........................... 8,622 6,363 2,259
Depreciation and amortization ....................... 1,233 1,094 139
11
<PAGE>
(In Thousands) Business to Direct to
Total Business Consumer
--------------- -------------- --------------
General and administrative .......................... 3,713 2,959 754
Interest expense .................................... 2,277 1,791 486
--------------- -------------- --------------
Total segment expenses ................................ 27,151 20,839 6,312
-------------- --------------
Segment loss .......................................... $ (9,893) $ (2,684)
-------------- --------------
Research and development not allocated to segments .... 389
Expenses not allocated to segments .................... 9,605
---------------
Total expenses ........................................ 37,145
---------------
Loss before extraordinary item ....................... $ (22,571)
===============
Nine months ended September 30, 2000
Revenue:
Secondary marketing revenue, net .................... $ 17,406 $ 15,221 $ 2,185
Loan production and processing fees, net ............ 5,659 4,939 720
Management, technology and other fees ............... 1,924 1,924 --
Interest income ..................................... 6,641 5,778 863
--------------- -------------- --------------
Total revenue ......................................... 31,630 27,862 3,768
--------------- -------------- --------------
Expenses:
Compensation and employee benefits .................. 30,437 26,985 3,452
Marketing and advertising........................... 2,468 2,269 199
Depreciation and amortization ....................... 4,951 4,403 548
General and administrative .......................... 11,634 10,268 1,366
Interest expense .................................... 755 674 81
--------------- -------------- --------------
Total segment expenses ................................ 50,245 44,599 5,646
-------------- --------------
Segment loss .......................................... $ (16,737) $ (1,878)
-------------- --------------
Research and development not allocated to segments .... 2,291
Expenses not allocated to segments .................... 16,827
Impairment of Assets .................................. 10,023
---------------
Total expenses ........................................ 79,386
---------------
Net loss .............................................. $ (47,756)
===============
Nine Months ended September 30, 1999
Revenue:
Secondary marketing revenue, net .................... $ 27,168 $ 19,361 $ 7,807
Loan production and processing fees, net ............ 8,143 6,688 1,455
Management, technology and other fees ............... 3,621 3,621 --
Interest income ..................................... 8,406 6,856 1,550
Total revenue ......................................... 47,338 36,526 10,812
Expenses:
Compensation and employee benefits .................. 31,224 23,278 7,946
Marketing and advertising........................... 12,991 9,725 3,266
12
<PAGE>
(In Thousands) Business to Direct to
Total Business Consumer
--------------- -------------- --------------
Depreciation and amortization ....................... 2,617 2,271 346
General and administrative .......................... 10,101 8,212 1,889
Interest expense .................................... 7,336 5,880 1,456
--------------- -------------- --------------
Total segment expenses ................................ 64,269 49,366 14,903
-------------- --------------
Segment loss .......................................... $ (12,840) $ (4,091)
-------------- --------------
Research and development not allocated to segments .... 1,759
Expenses not allocated to segments .................... 15,637
---------------
Total expenses ........................................ 81,665
---------------
Loss before extraordinary item......................... $ (34,327)
===============
Segment assets at September 30, 2000 ..................... $ 95,734 $ 80,282 $ 15,452
-------------- --------------
Other assets not allocated to segments ................... 25,099
---------------
Total assets ............................................. $ 120,833
===============
Segment assets at September 30, 1999 ..................... $ 109,487 $ 65,509 $ 43,978
-------------- --------------
Other assets not allocated to segments ................... 32,864
---------------
Total assets ............................................. $ 142,351
===============
</TABLE>
10. New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board ("FASB") has issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. As amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133-an Amendment of FASB Statement No. 133," the standard is
effective for fiscal years beginning after June 15, 2000, and will be adopted
by the Company for the year ending December 31, 2001. The Company anticipates
that the adoption of the standard will not have a material impact on the
consolidated financial statements.
The FASB has additionally issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities - a
Replacement of FASB Statement No. 125," effective for transfers and extinguish-
ments after March 31, 2001. The impact and adoption of these standards is not
expected to materially affect the Company's financial condition or results of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of Mortgage.com, Inc. should be read in conjunction with the
Financial Statements and the related
13
<PAGE>
Notes included in this Form 10-Q. This discussion contains, in addition to
historical information, "forward-looking" statements that reflect our current
views with respect to future events and financial performance. We use words such
as "anticipate," "believe," "expect," "future," "plan" and "intend," and similar
expressions, to identify forward-looking statements. You should be aware that
actual results may differ materially from our expressed expectations because of
risks and uncertainties inherent in future events, such as the results of
negotiations with the Company's warehouse lenders and other creditors and the
adequacy of cash to cover expenses while the Company seeks to maximize the value
of its assets, and you should not unduly rely on these forward looking
statements.
Subsequent event
----------------
On October 31, 2000, Mortgage.com, Inc. (the "Company") announced that
it had been unable to obtain sufficient capital needed to execute fully its
business plan and that it was commencing the orderly wind down of its lending
operations and was laying off the majority of its employees. On November 6,
2000, the Board of Directors, after exploring the Company's available options
for maximizing the value of its remaining assets for the benefit of creditors
and shareholders, approved the sale to Mortgage Systems International LLC
("MSI"), a subsidiary of Banco Hipotecario SA ("BH"), of the Company's rights to
its technology, proprietary software and certain related assets, including
intellectual property rights, technology contracts, third party technology
licenses and certain furniture, fixtures and equipment related to the
development of the technology. On November 13, 2000, the Company received
written consent approving the sale from holders of a majority of the Company's
outstanding stock, and on November 16, the sale was consummated. The Company
also sold to MSI the Company's trademark "Rapid Response Center" and the related
domain name and the trademark "CLOser". MSI also hired 45 technology related
staff members from the Company. In consideration for all of the foregoing
transfers, the Company received $1.5 million in cash, 25% of the equity
interests of MSI and a two-year option to acquire an additional 5% of the equity
of MSI for an exercise price of $1.5 million. BH, an Argentinian financial
institution, funded MSI with $10 million in capital.
Following the transfer of assets to MSI, the Company's remaining assets
consisted primarily of the domain name "www.mortgage.com", a loan officer-based
mortgage brokerage operation in California, and a 51% interest in its
subsidiary, Openclose.com, Inc. (which interest is pledged to secure a $2
million loan from Openclose.com, Inc. to the Company), and the Company's 25%
equity interest in MSI. The board of directors of Openclose.com, Inc., has
authorized the sale of a new issue of its Series B Preferred Stock to venture
capital investors to raise additional capital. The effect of this transaction
will be to dilute the Company's interest in Openclose.com, Inc. The Company
continues to explore ways to maximize the value of its remaining assets for the
benefit of the Company's creditors and shareholders, but the Company may be
unsuccessful in generating funds sufficient to pay creditors in full or in
generating a return to shareholders.
14
<PAGE>
As a result of the decision to wind down its lending operations, the
Company has recorded a write down of goodwill and other intangible assets,
capitalized software development costs and property and equipment and recorded
an impairment of assets expense in an amount of $10,023,000 on September 30,
2000, as follows:
Goodwill $ 5,836,000
Covenant not to compete 684,000
-----------
Goodwill and other intangible assets $ 6,520,000
Capitalized software development costs 2,835,000
Property and equipment 668,000
-----------
$10,023,000
The Company is reviewing alternatives for disposal of other assets, and
such disposals might result in additional write offs in the fourth quarter of
2000.
The Company has received a delisting notice from the Nasdaq Stock
Market due to its low trading price per share. The delisting is scheduled to
become effective on February 7, 2001. The Company does not expect to be able to
satisfy the requirements for continued listing. Moreover, the rules of the
Nasdaq Stock Market require that companies listed on the Nasdaq National Market
continue to have an operating business. If the Company completes its plans to
wind down its operations, it will no longer have an operating business. If the
Nasdaq Stock Market delists the Company's common stock, the ability of
shareholders to buy and sell shares may be materially impaired.
The Company may not be able to find qualified buyers for its remaining
assets at prices necessary to generate cash to satisfy its current and future
obligations. The Company may not be able to negotiate the orderly wind down of
its obligations to creditors. As a result, the Company may not be able to
generate meaningful cash, or any cash, which could be returned to shareholders,
and the timing of any distribution is uncertain.
Overview
--------
Until the events described in the subsequent event above, we have been
a provider of mortgage services to businesses and to consumers and a leading
provider of such services on the Internet. We developed state-of-the-art
technology to support the origination, processing, underwriting, closing and
secondary marketing of mortgage loans. We used 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 provided origination, processing, underwriting, closing, funding and
post-closing mortgage services, and the technology to support these services, to
other mortgage industry participants through our business-to-business channels.
We enabled these business clients to efficiently conduct the mortgage process by
providing them with:
o private label mortgage services, where we provided mortgage
services that our clients can market under their own brand names;
o co-branded mortgage services, where we provided mortgage services
that we and our clients jointly market under both of our brand
names;
o back office services, where we provided the behind-the-scenes
administrative and operational portions of the mortgage process
for our clients and licenses of our proprietary technology,
including CLOser and its Internet interface.
15
<PAGE>
We provided similar services for mortgages originated directly with
borrowers through our direct-to-consumer channels. We originated mortgages
directly with borrowers through www.mortgage.com and several other web sites and
through our loan counselors stationed at the point-of-sale of homes. In February
2000, we initiated the conversion of our loan officer point of sale originations
to the installation of various web-based solutions in the offices of our Realtor
and homebuilder clients. We have also enabled our loan officers to offer our
point of sale Internet solutions to real estate and other companies.
We also developed www.openclose.com, a web site where participating
mortgage lenders, brokers and loan correspondents pay for the opportunity to
exchange lender product and pricing information, automated underwriting data,
mortgage insurance certificates and borrower application information in an
online environment. The www.openclose.com web site became available for
commercial use in 1999 and 1,449 brokers and 20 lenders have agreed to
participate in the program as of September 30, 2000.
On January 27, 2000, we contributed assets associated with the
www.openclose.com business to a newly formed subsidiary, Openclose.com, Inc., in
exchange for $24 million in cash and common stock representing 51% of the
subsidiary's outstanding securities. The remainder of the outstanding securities
of Openclose.com were purchased by accredited investors that contributed $30
million in cash to Openclose.com in exchange for 3,000,000 shares of convertible
preferred stock. Among the assets contributed were co-ownership of the
www.openclose.com Internet web site, the programming and computer code used
exclusively in connection with the site, trade rights associated with this
programming and code and ownership of certain customer contracts pertaining to
www.openclose.com. The assets contributed had been carried on our balance sheet
at a nominal amount. The Company has accounted for the transaction as a capital
contribution.
Loans that we originate directly from borrowers or through 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.
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 recorded as "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.
16
<PAGE>
The cost of funds under our financing arrangements is based on
short-term interest rates, while the 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
interest we earn on the loans we fund is recorded as "Interest income", and the
interest we pay under our financing arrangements, along with other interest
incurred on debt obligations, is recorded as "Interest expense" in our financial
statements.
We have experienced substantial losses since inception and, as of
September 30, 2000, have an accumulated deficit of $113.0 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 business-to-business and direct-to-consumer channels and from a $10 million
advertising campaign in 1999 to increase the awareness of the Mortgage.com brand
name. We have discontinued all lending operations effective on October 31, 2000
and are in the process of selling all remaining assets, or seeking other methods
for maximizing the value of our remaining assets for the benefit of our
creditors and shareholders, as described in Note 1 to the financial statements.
On October 7, 1999, we terminated our agreement with Intuit Lender
Services, Inc. ("ILSI") for the provision of conforming loan mortgage services
to the Quicken mortgage.com web site. Upon notice of termination, we were
immediately relieved of certain exclusivity restrictions, and minimum loan
obligations specified in the agreement will be reduced by 1/12 per month over a
12-month period. In addition, on November 9, 1999, ILSI terminated a second
agreement concerning the provision for sub-prime mortgage services. Upon notice
of termination, we were immediately relieved of certain exclusivity restrictions
and minimum loan obligations specified in the agreement will be reduced by 1/9
each month over a period of nine months. We processed 15 loans from this
agreement in the nine months ended September 30, 2000, and accordingly, do not
anticipate that the termination of this agreement will have a material adverse
effect on the Company's sub-prime loan business.
17
<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 Ended Nine Months Ended
(Unaudited) September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. 55.2 % 59.2 % 55.0% 57.4 %
Loan production and processing fees, net .......... 14.5 16.8 17.9 17.2
Management, technology and other fees ............. 7.0 4.5 6.1 7.6
Interest income .................................. 23.3 19.5 21.0 17.8
-------------- ------------- ------------- --------------
Total revenue ........................................ 100.0 100.0 100.0 100.0
-------------- ------------- ------------- --------------
Expenses:
Compensation and employee benefits ................ 108.6 126.2 108.6 86.1
Marketing ......................................... 7.2 59.2 8.0 27.9
Research and development .......................... 10.4 2.7 7.2 3.7
Depreciation and amortization ..................... 22.1 11.4 20.6 7.4
General and administrative ........................ 59.8 35.3 54.3 28.1
Other Interest expense ............................ 24.3 20.1 20.5 19.3
Impairment of Assets .............................. 96.1 -- 31.7 --
-------------- ------------- ------------- --------------
Total expenses ....................................... 328.5 254.9 250.9 172.5
-------------- ------------- ------------- --------------
Loss before minority interest ..................... (228.5) (154.9) (150.9) (72.5)
Loss on early extinguishment of debt .............. -- (3.0) -- (0.9)
-------------- ------------- ------------- --------------
Net loss ............................................. (228.5)% (157.9)% (150.9)% (73.4)%
============== ============= ============= ==============
</TABLE>
Comparison of Three and Nine-month periods Ended September 30, 2000 and 1999
----------------------------------------------------------------------------
Revenue
-------
Total revenue decreased 28% to $10.4 million for the three-month period
ended September 30, 2000 from $14.6 million in the three-month period ended
September 30, 1999 and decreased 33% to $31.6 million for the nine-month period
ended September 30, 2000 from $47.3 million in the comparable period in 1999.
The total dollar amounts of loans that we closed were $517.0 million and $1.7
billion for the three and nine-month periods ended September 30, 2000,
respectively. Of these loans, $451.9 million and $1.4 billion were from
purchase-money mortgages and $65.0 million and $216.0 million were from
refinances in the respective periods. In the comparable periods in 1999, we
closed $687.3 million and $2.3 billion in loans, respectively. Of these loans,
$544.4 million and $1.4 billion were from purchase-money mortgages and $142.9
million and $831.0 million from refinances in the respective periods. From these
closed loans, we funded and sold in the secondary market $416.9 million and $1.3
billion for the three and nine-month periods ended September 30, 2000,
respectively, as compared to $544.0 million and $1.8 billion in the comparable
periods last year. Other mortgage lenders funded the loans that we originated
but chose not to fund. The decrease in revenue resulted primarily from lower
volumes of loans originated due to the effect of higher interest rates on
mortgage demand in 2000 and the cancellation of the affiliation with ILSI.
18
<PAGE>
Secondary marketing revenue, net. Gains on sale and other revenue from
the closing and selling of mortgage loans decreased 33% to $5.8 million for the
three-month period ended September 30, 2000 from $8.6 million in the three-month
period ended September 30, 1999 and decreased 36% to $17.4 million for the
nine-month period ended September 30, 2000 from $27.2 million in the comparable
period in 1999. The decreases resulted primarily from the decreases in the total
dollar amount of loans we closed, funded and sold due to the effect of higher
interest rates on loan demand in 2000, especially on refinanced loans.
Loan production and processing fees, net. Loan production and
processing fees, less amounts paid to third parties for processing services,
decreased 38% to $1.5 million for the three-month period ended September 30,
2000 from $2.4 million in the comparable period in 1999 and decreased 31% to
$5.7 million for the nine-month period ended September 30, 2000 from $8.1
million in the comparable period in 1999. The decrease in production and
processing fees resulted from an overall decrease in loan volume. During the
three-month periods ended September 30, 2000 and 1999, approximately 0% and 18%
of these fees came from ILSI, respectively. During the nine- month periods ended
September 30, 2000 and 1999, approximately 13% and 20% of these fees came from
ILSI, respectively. Fees from ILSI in the nine-month period ended September 30,
2000 included $420,000 from the settlement of outstanding fees in the
termination of the contracts. Fees from this source have ceased.
Management, technology and other fees. Revenue from management,
technology and other fees increased 10% to $730,000 for the three-month period
ended September 30, 2000 from $663,000 in the comparable period in 1999 and
decreased 47% to $1.9 million for the nine-month period ended September 30, 2000
from $3.6 million in the comparable period in 1999. Fees for technology services
and software development resulted in the increase between the three-month
periods. The nine month period in 1999 includes recognition of $1.0 million in
previously deferred revenue from the sale of software that we no longer use in
our business.
Interest income. Interest income decreased 15% to $2.4 million for the
three-month period ended September 30, 2000 from $2.8 million in the comparable
period in 1999 and decreased 21% to $6.6 million for the nine-month period ended
September 30, 2000 from $8.4 million in the comparable period in 1999. The
decrease was primarily related to lower volume of closed loans and of loans
earning interest prior to sale.
19
<PAGE>
Expenses
--------
Total expenses decreased 8% to $34.3 million in the three-month period
ended September 30, 2000 from $37.1 million in the comparable period in 1999.
This decrease reflects a $7.9 million decrease in marketing expenses from a
branding advertising campaign in 1999 to introduce the Mortgage.com brand name
to the public, a reduction of personnel required to handle lower volumes of
loans closed and sold and related overhead expenses. This advertising campaign
ended by December 31, 1999 and no comparable expenses were incurred in 2000.
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 personnel from temporary agencies.
Total compensation and benefit costs decreased 39% to $11.3 million for the
three-month period ended September 30, 2000 from $18.4 million in the comparable
period in 1999 and decreased 16% to $34.3 million for the nine-month period
ended September 30, 2000 from $40.7 million in the comparable period in 1999.
Compensation and benefits represents 108.6% and 108.6% of revenue in the three
and nine-month periods ended September 30, 2000, respectively, and 126.2% and
86.1% of revenues in the comparable periods in 1999. The three and nine month
periods in 1999 included $6.1 million of amortization of unearned compensation,
as described below. The decrease in total compensation and benefit costs in the
third quarter primarily resulted from the continuation of a planned decrease in
personnel from 776 at December 31, 1999 to 589 at September 30, 2000 in reaction
to lower volumes of loans closed and the efficiencies of a more experienced
staff in 2000. The first nine months of 1999 reflected a 290 person increase in
employees as we were staffing and training new employees to handle the then
newly-created Internet call center.
Included in "Compensation and employee benefits" is the amortization of
unearned compensation which resulted when stock options we granted during 1998
and 1999 were subsequently deemed to have exercise prices less than the
estimated fair market value of our common stock at the time of grant. Prior to
2000, we recorded approximately $16.6 million in unearned compensation, and we
amortized approximately $441,000 and $6.1 million of that amount to expense in
the three-month periods ended September 30, 2000 and 1999, respectively. We
amortized approximately $1.5 million and $7.2 million of that amount to expense
in the nine-month periods ended September 30, 2000 and 1999, respectively.
During the three and nine month periods ended September 30, 2000, 111,832 and
858,431 shares, respectively, of option grants included in the recording of
unearned compensation were cancelled. In the three and nine month periods ended
September 30, 2000, the Company reversed $86,000 and $615,000, respectively, of
previously expensed compensation expense and $160,000 and $1,484,000,
respectively, of the remaining balance of unearned compensation against
additional paid-in capital. The remaining unearned compensation balance will be
amortized on a straight line basis over the remaining vesting periods of the
underlying options. The reduction in employees in conjunction with the
operational wind down in the fourth quarter of 2000, discussed in Note 1, to the
financial statements, will result in cancelled options and a reversal of most of
the remaining balance of Unearned Compensation and a reversal of expense
previously recorded. Stock-based compensation is a non-cash expense.
20
<PAGE>
Marketing and advertising. In 2000, marketing and advertising expenses
consist primarily of leads generated through Internet marketing and distribution
agreements or co-branding arrangements, as well as the cost of trade-show
participation. Marketing and advertising expenses also include fees paid to
other web sites and business partners for lead generation. In 1999, the cost of
the Company's national advertising campaign to introduce the Mortgage.com brand
name to the public was included in marketing and advertising. This campaign
ended by December 31, 1999 and no comparable expenses were incurred in 2000.
Marketing and advertising expenses decreased 91% to $755,000 for the
three-month period ended September 30, 2000, or 7.2% of revenue, from $8.6
million in the comparable period in 1999, or 59.2% of revenue. These expenses
decreased 81% to $2.5 million for the nine-month period ended September 30,
2000, or 8.0% of revenue, from $13.2 million in the comparable period in 1999,
or 27.9% of revenue. The decrease was directly related to the cost of $6.8
million for brand advertising incurred in the second quarter of 1999, and the
reduced levels of co-branding costs with the termination of the ILSI contracts.
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 182% to $1.1 million
for the three-month period ended September 30, 2000, or 10.4% of revenue, from
$390,000 in the comparable period in 1999, or 2.7% of revenue. Research and
development expenses increased 28% to $2.3 million for the nine-month period
ended September 30, 2000, or 7.2% of revenue, from $1.8 million in the
comparable period in 1999, or 3.7% of revenue. These expenses primarily include
the initial phases of product development to integrate CLOser with
newly-acquired Internet technology and to develop third-party software and web
platforms.
Depreciation and amortization. Depreciation and amortization consists
of depreciation of capital equipment, amortization of goodwill related to
acquisitions, amortization of the Mortgage.com domain name intangible asset and
amortization of capitalized software development costs. Depreciation and
amortization expenses increased 35% to $2.3 million for the three-month period
ended September 30, 2000, or 22.1% of revenue, from $1.7 million in the
comparable period in 1999, or 11.4% of revenue. Depreciation and amortization
expenses increased 86% to $6.5 million for the nine-month period ended September
30, 2000, or 20.6% of revenue, from $3.5 million in the comparable period in
1999, or 7.4% of revenue. The increases related to expenditures to expand our
Internet infrastructure, to consolidate our Florida facilities into our new home
office in January 2000, to acquire capital equipment in support of call center
operations and for additions to goodwill for acquisitions in 1999. During the
nine-month period ended September 30, 2000, $869,000 was amortized on the
intangible asset compared to $323,000 in the comparable period in 1999.
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 22% to $6.2 million for the three-month period
ended September 30, 2000, or 59.8% of revenue, from $5.1 million in the
comparable period in 1999, or 35.3% of revenue. General and administrative
expenses increased 29% to $17.2 million for the nine-month period ended
September 30, 2000, or 54.3% of revenue, from $13.3 million in the comparable
period in 1999, or 28.1% of revenue. The increases in general and administrative
expenses resulted from additional rent, communication costs and other expenses
related to call center operations, the new home office and the operating leases
of equipment acquired in 1999.
21
<PAGE>
Impairment of Assets. The actions described under the caption
"Subsequent Event", resulted in a $10.0 million expense for impairment of assets
in the three-month and nine-month periods ended September 30, 2000, as follows:
Goodwill $ 5,836,000
Covenant not to compete 684,000
-----------
Goodwill and other intangible assets $ 6,520,000
Capitalized software development costs 2,835,000
Property and equipment 668,000
-----------
$10,023,000
The Company is reviewing alternatives for disposal of other assets, and
such disposals might result in additional write-offs in the fourth quarter of
2000.
Interest expense. Interest expense, which includes interest on
subordinated debt and on capital lease obligations, decreased 14% to $2.5
million, or 24.3% of revenue, in the three-month period ended September 30,
2000, compared to $2.9 million, or 20.1% of revenue, in the comparable period in
1999. Interest expense decreased 29% to $6.5 million, or 20.5% of revenue, in
the three-month period ended September 30, 2000, compared to $9.1 million, or
19.3% of revenue, in the comparable period in 1999. The decrease was a result of
the interest on the $40.5 million in subordinated debt issued in February 1999
and repaid in August 1999 with proceeds of our initial public offering of common
stock, the effect of reduced loan originations on warehouse lines in 2000 and
use of cash to reduce the warehouse borrowing.
Liquidity And Capital Resources
-------------------------------
As of September 30, 2000, we had cash and cash equivalents of $4.3 million.
In the third quarter, we used approximately $10.4 million in cash in operating
our business. We actively pursued various alternatives to improve our liquidity
position over the past several months. These efforts were not successful in
raising additional cash or capital, forcing us to take measures described in
Note 1 to the financial statements.
On August 11, 1999, we completed an initial public offering in which we
sold 7,062,500 shares of common stock. Subsequently, the underwriters of the
public offering exercised an option to purchase an additional 379,375 shares of
common stock to cover over-allotments of shares. The gross proceeds from these
transactions were $59.5 million, or $55.4 million net of underwriter discounts.
A portion of the proceeds was used to repay $40.5 million of subordinated debt
and $433,000 was used to redeem certain warrants that were issued in the
nine-month period ended September 30, 1999.
From the Company's inception until the initial public offering in
August 1999, operations were funded primarily through net cash proceeds from
private issuances of preferred stock, including $15.0 million in the second
quarter and $40.5 million in subordinated debt in the third quarter of 1999. All
preferred stock converted into common stock at the date of the public offering
in August, and the subordinated debt was repaid with the proceeds of the public
offering
Our primary need for operating capital has been 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
22
<PAGE>
institutions. At September 30, 2000, we had a single syndicated line of credit
with Residential Funding Corporation and Bank United for $110 million and loan
purchase agreements with Greenwich Capital and Superior Bank of $50 million and
$10 million, respectively. These financing arrangements generally provided
between 97% and 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 the three months ended September 30, 2000. On
September 30, 2000, the Company was in default with covenants related to the
amount of our tangible net assets and of net loss incurred in the third quarter
and on October 31, 2000 these financing arrangements were rescinded by the
lenders. These financing arrangements will be terminated by November 30, 2000
and all remaining loans sold to investors.
In January 2000, we raised $24.0 million in cash by contributing the
assets of www.openclose.com to a newly formed subsidiary, Openclose.com, Inc.
Openclose.com raised $30.0 million in cash from the sale of preferred stock
representing 49% of the outstanding voting stock of Openclose.com, of which
$24.0 million was paid to us in connection with our contribution of the
Openclose.com assets.
Net cash used in operating activities for the nine-month period ended
September 30, 2000 totaled $32.7 million. This cash was used primarily to fund
losses, increase the mortgage loans available for sale and reduce other
liabilities.
Net cash used in investing activities in the nine-month period ended
September 30, 2000 totaled $3.4 million primarily for costs related to software
development, offset by disposals of property and equipment in locations vacated
in the move to the new home office.
Net cash provided by financing activities for the nine-month period
ended September 30, 2000 totaled $32.9 million, as $30.0 million in proceeds
from sale of interest in the Openclose.com subsidiary was used partly to reduce
warehouse and other notes payable.
Currently, we have net operating loss carryforwards of approximately
$57.7 million available to reduce future taxable income, which carryforwards
expire on various dates from 2008 to 2019.
Item 3. Quantitative and Qualitative 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.
Prior to May 2000, we originated mortgage loans and managed the market
risk related to those loans by pre-selling them on a best efforts basis to the
anticipated secondary market investors at the same time that we established the
borrowers' interest rates. When selling loans on a best efforts basis, if we can
deliver the 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
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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. In the third quarter, we sold the majority of the loans through
best efforts commitments, which means we do not suffer a penalty if the loans do
not close.
The balance of the loans, including sub-prime loans, are sold 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 at the time of sale, regardless of whether the loans close and are
available for delivery. 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 penalties if the
loans do not close or are not available for delivery.
During 2000, we implemented a hedging strategy to help us manage the
additional risk we incur when loans are sold on a mandatory delivery basis. We
retained Tuttle & Co., an unaffiliated advisory firm, to help us manage our
interest rate risks through hedging strategies. 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.
After five months of testing methodologies, we developed a hedging
strategy for Fannie Mae, Freddie Mac, Veterans' Administration and Housing and
Urban Development mortgage loans. Every day, we submit information to Tuttle &
Co. about loan applications, closed loan inventories, existing unfilled
commitments for delivery to investors of these loan types and existing purchases
and sales of mortgage-backed securities. Tuttle & Co. analyzes this data and
provides a projection of how many of the loans are at risk not to close. It then
recommends the amount of purchases and sales of mortgage-backed securities that
are necessary to offset the interest rate risks associated with those loans. Our
risk management team then meets with Tuttle & Co. on a daily conference call to
review the recommendations and implement the purchases and sales of
mortgage-backed securities.
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 receive from investors when we sell them. 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 projections properly estimate the number of loans that
will actually close. To the extent that our projections prove inaccurate so that
we have not effectively matched 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 would be reduced, or we would experience a net loss on
those sales.
As of September 30, 2000, the Company had $121.0 million of
mortgage-backed security forward sales with maturities of up to three months.
The fair value of such mortgage-backed security forward sales amounted to $120.4
million at September 30, 2000 ($171,000 recognized as a liability).
We 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 value of our loan portfolio
based on the prices at which the loans would sell in the secondary market, using
prevailing interest rates in the market.
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Based on the hedging and loan sale strategies described, 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 and because overall loan volume is
somewhat dependent upon long-term interest rates, our future operating results
may be more sensitive to interest rate movements.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 1, 2000, we issued warrants to purchase 233,331 shares of
common stock to John Rodgers, Andrew Heller and Kyle Meyer as earn-out
consideration in connection with our merger with American Finance &
Investment in 1998. The exercise price of the warrants is $1.071.
On March 27, 2000, we issued warrants to purchase 332,060 shares of
common stock to Ladenburg Thalmann & Co., Inc. in consideration of
certain investment banking services performed in connection with an
equity line of credit we entered into with Sugarplum Investments
Limited. The exercise price of the warrants is $2.4092.
On March 27, 2000, we issued warrants to purchase 332,060 shares of
common stock to Sugarplum Investments Limited in consideration of
Sugarplum providing us with an equity line of credit. The exercise
price of the warrants is $2.4092.
On April 12, 2000, we issued non-qualified options to purchase 15,000
shares of common stock to Independent Brokers Network ("IBN") in
connection with a marketing agreement where IBN is to introduce our
programs to its members and realtors. The options will vest as certain
success is reached in our obtaining and funding loans from IBN sources.
On May 4, 2000, we issued non-qualified options to purchase 25,000
shares of common stock to Mid-America Realty Concepts, Inc. ("MARC") in
connection with a marketing agreement where MARC is to introduce our
programs to owners of real estate companies and their realtor agents.
The options will vest as certain success is reached in our obtaining
and funding loans from MARC sources.
The issuances of the warrants described above in 2000 are exempt
pursuant to Section 4(2) as transactions by an issuer not involving a
public offering.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORTGAGE.COM, INC.
Registrant
Dated: November 22, 2000
/s/ Stephen H. Foltz
-----------------------------------------
Stephen H. Foltz, its duly authorized
officer, Interim Chief Financial Officer
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