United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 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 August 7, 2000
----- -----------------
Common Stock, $ .01 par value 44,325,772
<PAGE>
MORTGAGE.COM, INC.
INDEX TO FORM 10-Q
------------------
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 (Unaudited)...................................3
Consolidated Statements of Operations for the three month and
six month periods ended June 30, 2000 and 1999 (Unaudited)......4
Consolidated Statements of Cash Flows for the six month
period ended June 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......................................12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................23
ITEM 2. Changes in Securities and Use of Proceeds......................23
ITEM 3. Defaults Upon Senior Securities................................24
ITEM 4. Submission of Matters to a Vote of Securities Holders..........24
ITEM 5. Other Information..............................................25
ITEM 6. Exhibits and Reports on Form 8-K...............................25
Signature ...........................................................26
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>
June 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................... $ 14,720 $ 7,537
Mortgage loans available for sale, net .................................. 84,553 93,120
Receivable from sale of mortgage loans................................... 6,514 748
Property and equipment, net ............................................. 14,490 16,408
Capitalized software development costs, net ............................. 3,552 2,817
Goodwill and other intangible assets, net ............................... 8,969 9,780
Other assets ............................................................ 4,728 7,665
---------------- ----------------
Total assets ....................................................... $ 137,526 $ 138,075
================ ================
a. LIABILITIES AND SHAREHOLDERS' EQUITY:
Warehouse and other notes payable ....................................... $ 87,547 $ 88,399
Accounts payable, accrued expenses and other liabilities ................ 7,043 13,691
Capital lease obligations................................................ 2,916 2,409
---------------- ----------------
Total liabilities .................................................. 97,506 104,499
---------------- ----------------
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 44,321,812 and 43,221,964 shares, respectively ..... 443 432
Additional paid-in capital ........................................... 135,200 107,011
Unearned compensation ................................................ (6,468) (8,860)
Accumulated deficit .................................................. (89,185) (65,256)
---------------- ----------------
Total shareholders' equity ......................................... 40,020 33,327
---------------- ----------------
Total liabilities and shareholders' equity ......................... $ 137,526 $ 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 Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. $ 6,162 $ 9,946 $ 11,649 $ 18,546
Loan production and processing fees, net .......... 1,857 3,103 4,149 5,701
Management, technology and other fees ............. 480 967 1,195 2,958
Interest income ................................... 2,536 2,882 4,209 5,559
-------------- ------------- -------------- --------------
Total revenue ........................................ 11,035 16,898 21,202 32,764
-------------- ------------- -------------- --------------
Expenses:
Compensation and employee benefits ................ 11,034 12,713 23,023 22,358
Marketing and advertising.......................... 666 3,043 1,789 4,580
Research and development .......................... 788 593 1,206 1,370
Depreciation and amortization ..................... 2,181 1,154 4,210 1,852
General and administrative ........................ 5,184 4,416 10,957 8,174
Interest expense .................................. 2,239 3,536 3,945 6,186
-------------- ------------- -------------- --------------
Total expenses ....................................... 22,092 25,455 45,130 44,520
-------------- ------------- -------------- --------------
Loss before minority interest......................... (11,057) (8,557) (23,928) (11,756)
Minority interest..................................... (79) -- -- --
-------------- ------------- -------------- --------------
Net loss ............................................. $ (11,136) $ (8,557) $ (23,928) $ (11,756)
============== ============= ============== ==============
Net loss ............................................. $ (11,136) $ (8,557) $ (23,928) $ (11,756)
Preferred stock dividends
Paid .............................................. -- (73) -- (253)
Cumulative unpaid.................................. -- (918) -- (1,667)
-------------- ------------- -------------- --------------
Net loss available to common shareholders............. $ (11,136) $ (9,548) $ (23,928) $ (13,676)
============== ============= ============== ==============
Net loss per share - basic and diluted................ $ (0.25) $ (1.00) $ (0.55) $ (1.44)
============== ============= ============== ==============
Weighted average number of shares..................... 44,206 9,573 43,796 9,533
============== ============= ============== ==============
</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>
Six Months Ended
June 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Net cash flows from operating activities:
Net loss ............................................................. $ (23,928) $ (11,756)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Amortization and depreciation ...................................... 4,210 1,852
Amortization of unearned compensation .............................. 1,068 1,029
Cancellation of stock options ...................................... (529) --
Provision for losses ............................................... 372 500
Loss on disposal of property and equipment ......................... 128 --
Decrease in mortgage loans available for sale, net ................... 8,608 27,810
Increase in receivable from sale of mortgage loans ................... (5,766) --
Changes in other assets and liabilities:
Decrease (increase) in other assets................................. 2,618 (6,273)
(Decrease) increase in accounts payable, accrued expenses and other
liabilities ...................................................... (6,324) 3,616
Decrease in deferred revenue ....................................... -- (1,012)
---------------- ----------------
Net cash (used in) provided by operating activities ..................... (19,543) 15,766
---------------- ----------------
Cash flows from investing activities:
Additions to capitalized software development costs .................. (1,557) (1,207)
Additions to property and equipment................................... (1,416) (4,858)
Proceeds from sale and leaseback of property and equipment ........... 1,303 --
Purchase of companies, net of cash acquired .......................... -- (519)
Additions to intangible assets ....................................... -- (1,445)
---------------- ----------------
Net cash used in investing activities ................................... (1,670) (8,029)
---------------- ----------------
Cash flows from financing activities:
Net repayments from warehouse notes payable........................... (847) (46,855)
Proceeds from issuance of subordinated debentures .................... -- 40,500
Proceeds from other notes payable .................................... -- 100
Payment of other notes payable........................................ (4) (3)
Payments of capital lease obligations ................................ (835) (614)
Proceeds from exercise of stock options............................... 535 5
Cost of issuing common stock sale agreement .......................... (175) --
Proceeds from issuance of preferred stock ............................ -- 15,000
Cost of issuance of preferred stock .................................. -- (467)
Proceeds from exercise of warrants ................................... 427 --
Redemption of warrants ............................................... -- (12,000)
Proceeds from sale of interest in subsidiary ......................... 30,000 --
Costs of sale of interest in subsidiary .............................. (705) --
Dividends paid ....................................................... -- (253)
---------------- ----------------
Net cash provided by (used in) financing activities ..................... 28,396 (4,587)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents .................... 7,183 3,150
Cash and cash equivalents at beginning of period......................... 7,537 3,412
---------------- ----------------
Cash and cash equivalents at end of period............................... $ 14,720 $ 6,562
================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................... $ 3,849 $ 5,273
================ ================
================ ================
Cash paid for income taxes ........................................... $ 5 $ 3
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
MORTGAGE.COM, INC.
Notes To Unaudited Consolidated Financial Statements
1. Description of Business
-----------------------
Mortgage.com, 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 was
enhanced and became known as CLOser, a proprietary platform that supports all of
the services that the Company offers. The Company uses 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 uses the CLOser platform to provide management
processing and back-office services to those customers on an outsourced basis
and also provides funding for the mortgages originated by them.
In January 1999, the Company changed its name from First Mortgage
Network, Inc. to Mortgage.com, Inc.
2. Unaudited Interim Consolidated Financial Statements
---------------------------------------------------
The consolidated financial statements as of June 30, 2000 and for the
three and six-month periods ended June 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.
3. 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
6
<PAGE>
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
4. 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 six-month period ended June 30, 1999.
5. 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 504,848 shares of common stock under the Company's
Stock Option Plan were exercised during the six- month period ending June 30,
2000. During the six month period ending June 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.
7
<PAGE>
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.
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 will be able to sell, subject to certain conditions, up
to a total of $40 million of its unissued common stock.
(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 six month periods ended June 30,
2000 and 1999, the Company amortized approximately $1,068,000 and $1,029,000 to
compensation and employee benefits expense, respectively. As
8
<PAGE>
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 six months ended June 30, 2000, 746,599 shares of option grants included
in the recording of unearned compensation were cancelled. The Company reversed
$529,000 of previously expensed compensation expense and $1,324,000 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.
6. 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 June
30, 2000, the forward contracts to sell mortgage-backed securities amounted to
$85.8 million in maturities of up to three months. These forward contracts had
an unrealized loss of $947,000 at June 30, 2000 ($244,000 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 June 30, 2000, the Company had $31.7 million of fixed-rate closed
mortgage loans in inventory. In addition, as of June 30, 2000, the Company had
short-term rate and point commitments amounting to approximately $74.1 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.
7. Income Taxes
------------
No current or deferred provision for income taxes was recorded for the
three month periods ended June 30, 2000 and 1999 due to the Company's operating
losses in the respective periods.
9
<PAGE>
8. 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 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>
(In Thousands)
<CAPTION>
Business to Direct to
Total Business Consumer
--------------- ----------- ----------
<S> <C> <C> <C>
Three months ended June 30, 2000
Revenue:
Secondary marketing revenue, net .................... $ 6,162 $ 5,329 $ 833
Loan production and processing fees, net ............ 1,857 1,592 265
Management, technology and other fees ............... 480 480 --
Interest income ..................................... 2,536 2,228 308
--------------- -------------- --------------
Total revenues ........................................ 11,035 9,629 1,406
Expenses:
Compensation and employee benefits .................. 10,431 9,022 1,409
Marketing and advertising........................... 663 573 90
Depreciation and amortization ....................... 1,648 1,425 223
General and administrative .......................... 3,589 3,104 485
Interest expense .................................... 416 360 56
--------------- -------------- --------------
Total segment expenses ................................ 16,747 14,484 2,263
-------------- --------------
Segment loss .......................................... $ (4,856) $ (857)
-------------- --------------
Research and development not allocated to segments .... 787
Expenses not allocated to segments .................... 4,558
---------------
Total expenses ........................................ 22,092
---------------
Loss before minority interest ......................... (11,057)
Minority interest ..................................... (79)
Net loss .............................................. $ (11,136)
===============
10
<PAGE>
(In Thousands)
Business to Direct to
Total Business Consumer
--------------- ----------- ----------
Three Months ended June 30, 1999
Revenue:
Secondary marketing revenue, net .................... $ 9,946 $ 7,132 $ 2,814
Loan production and processing fees, net ............ 3,103 2,640 463
Management, technology and other fees ............... 967 967 --
Interest income ..................................... 2,882 2,485 397
--------------- -------------- --------------
Total revenues ........................................ 16,898 13,224 3,674
Expenses
Compensation and employee benefits .................. 11,164 8,401 2,763
Marketing and advertising........................... 3,018 2,362 656
Depreciation and amortization ....................... 1,000 883 117
General and administrative .......................... 3,402 2,772 630
Interest expense .................................... 2,552 2,084 468
----------- -------------- --------------
Total segment expenses ................................ 21,136 16,502 4,634
-------------- --------------
Segment loss .......................................... $ (3,278) $ (960)
-------------- --------------
Research and development not allocated to segments .... 593
Expenses not allocated to segments .................... 3,726
---------------
Total expenses ........................................ 25,455
---------------
Net loss ............................................. $ (8,557)
===============
Six months ended June 30, 2000
Revenue:
Secondary marketing revenue, net .................... $ 11,649 $ 10,404 $ 1,245
Loan production and processing fees, net ............ 4,149 3,642 507
Management, technology and other fees ............... 1,195 1,190 5
Interest income ..................................... 4,209 3,714 495
--------------- -------------- --------------
Total revenues ........................................ 21,202 18,950 2,252
--------------- -------------- --------------
Expenses:
Compensation and employee benefits .................. 20,453 18,548 1,905
Marketing and advertising........................... 1,780 1,688 92
Depreciation and amortization ....................... 3,187 2,912 275
General and administrative .......................... 7,325 6,627 698
Interest expense .................................... 726 649 77
--------------- -------------- --------------
Total segment expenses ................................ 33,471 30,424 3,047
-------------- --------------
Segment loss .......................................... $ (11,474) $ (795)
-------------- --------------
Research and development not allocated to segments .... 1,206
Expenses not allocated to segments .................... 10,453
---------------
Total expenses ........................................ 45,130
---------------
Loss before minority interest ......................... (23,928)
Minority interest ..................................... --
---------------
Net loss .............................................. $ (23,928)
===============
11
<PAGE>
(In Thousands)
Business to Direct to
Total Business Consumer
--------------- ----------- ----------
Six Months ended June 30, 1999
Revenue:
Secondary marketing revenue, net .................... $ 18,546 $ 13,279 $ 5,267
Loan production and processing fees, net ............ 5,701 4,704 997
Management, technology and other fees ............... 2,958 2,958 --
Interest income ..................................... 5,559 4,640 919
--------------- -------------- --------------
Total revenues ........................................ 32,764 25,581 7,183
Expenses
Compensation and employee benefits .................. 19,917 14,646 5,271
Marketing and advertising........................... 4,368 3,361 1,007
Depreciation and amortization ....................... 1,384 1,176 208
General and administrative .......................... 6,389 5,253 1,136
Interest expense .................................... 5,059 4,089 970
--------------- -------------- --------------
Total segment expenses ................................ 37,117 28,525 8,592
-------------- --------------
Segment loss .......................................... $ (2,944) $ (1,409)
-------------- --------------
Research and development not allocated to segments .... 1,370
Expenses not allocated to segments .................... 6,033
---------------
Total expenses ........................................ 44,520
Net loss ............................................. $ (11,756)
Segment assets at June 30, 2000 .......................... $ 91,066 $ 77,853 $ 13,213
-------------- --------------
Other assets not allocated to segments ................... 46,460
---------------
Total assets ............................................. $ 137,526
===============
Segment assets at June 30, 1999 .......................... $ 148,432 $ 105,705 $ 42,727
-------------- --------------
Other assets not allocated to segments ................... 34,894
---------------
Total assets ............................................. $ 183,326
===============
</TABLE>
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 Notes included in this Form 10-Q. This
discussion contains, in addition to historical information, "forward-looking"
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipate," "believe," "expect,"
"future," "plan" and "intend," and similar expressions, to identify forward-
looking statements. You should be aware that actual results may differ
materially from our expressed expectations because of risks and uncertainties
inherent in future events, and you should not unduly rely on these forward
looking statements.
12
<PAGE>
Overview
--------
We are a provider of mortgage services to businesses and to consumers
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 provide 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 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 licenses of our proprietary technology,
including CLOser and its Internet interface.
We provide similar 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 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 over 1,350 brokers and 42 lenders have agreed to
participate in the program as of August 1, 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.
13
<PAGE>
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.
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
June 30, 2000, have an accumulated deficit of $89.2 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 do not expect to be profitable until at least the latter half of 2002.
Our plan to achieve profitability includes:
14
<PAGE>
o a reduction in our costs per loan through economies of scale we
achieve from higher loan volumes;
o developing the recognized standard technology platform for
originating, underwriting, processing, closing and selling
mortgages over the Internet;
o increased automation of the loan process, which will reduce our
cost to produce each loan;
o improved terms of sale on loans we sell in the secondary market;
and
o strategic alliances with financial institutions and others to
provide technology to support their internet lending services.
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 have initiated hedging
strategies in the second quarter of 2000 to help manage the risk.
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. We processed 364 loans from the agreement in the six months
ended June 30, 2000, and we anticipate the reduced loan volume from this
termination will be replaced by new co-branded Internet channels on better
economic terms for the Company. 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 six months ended June 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.
Our limited operating history makes it difficult to forecast future
operating results. Our revenues have fluctuated in the past and could continue
to fluctuate. 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;
15
<PAGE>
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.
Results of Operations
---------------------
The following table sets forth the percentage of total revenue of
selected line items included in our statement of operations for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Secondary marketing revenue, net .................. 55.8 % 58.8 % 54.9% 56.6 %
Loan production and processing fees, net .......... 16.8 18.4 19.6 17.4
Management, technology and other fees ............. 4.4 5.7 5.6 9.0
Interest, net, on lending operations .............. 23.0 17.1 19.9 17.0
-------------- ------------- ------------- --------------
Total revenue ........................................ 100.0 100.0 100.0 100.0
-------------- ------------- ------------- --------------
Expenses:
Compensation and employee benefits ................ 100.0 75.2 108.6 68.2
Marketing ......................................... 6.0 18.0 8.4 14.0
Research and development .......................... 7.1 3.5 5.7 4.2
Depreciation and amortization ..................... 19.8 6.8 19.9 5.7
General and administrative ........................ 47.0 26.2 51.7 24.9
Other interest expense ............................ 20.3 20.9 18.6 18.9
-------------- ------------- ------------- --------------
Total expenses ....................................... 200.2 150.6 212.0 135.9
-------------- ------------- ------------- --------------
Loss before minority interest ..................... (100.2) (50.6) (112.9) (35.9)
Minority interest ................................. (.7) -- -- --
-------------- ------------- ------------- --------------
Net loss ............................................. (100.9) % (50.6) % (112.9) % (35.9) %
============== ============= ============= ==============
</TABLE>
16
<PAGE>
Comparison of Three and Six Month Periods Ended June 30, 2000 and 1999
----------------------------------------------------------------------
Revenue
-------
Total revenue decreased 35% to $11.0 million for the three-month period
ended June 30, 2000 from $16.9 million in the three-month period ended June 30,
1999 and decreased 35% to $21.2 million for the six-month period ended June 30,
2000 from $32.8 million in the comparable period in 1999. The total dollar
amounts of loans that we closed were $603.9 million and $1.2 billion for the
three and six month periods ended June 30, 2000, respectively. Of these loans,
$528.3 million and $1.0 billion were from purchase-money mortgages and $76
million and $151 million were from refinances in the respective periods. In the
comparable periods in 1999, we closed $844.9 million and $1.6 billion in loans,
respectively. Of these loans, $555.9 million and $908.4 million were from
purchase-money mortgages and $288.9 million and $688.0 million from refinances
in the respective periods. From these closed loans, we funded and sold in the
secondary market $469.1 million and $852.1 million for the three and six-month
periods ended June 30, 2000, respectively, as compared to $683.9 million and
$1.3 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.
Secondary marketing revenue, net. Gains on sale and other revenue from
the closing and selling of mortgage loans decreased 37% to $6.2 million for the
three-month period ended June 30, 2000 from $9.9 million in the three-month
period ended June 30, 1999 and decreased 37% to $11.6 million for the six-month
period ended June 30, 2000 from $18.5 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 39% to $1.9 million for the three-month period ended June 30, 2000
from $3.1 million in the comparable period in 1999 and decreased 28% to $4.1
million for the six-month period ended June 30, 2000 from $5.7 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 June 30, 2000 and 1999, approximately 6.0% and 23.4% of these fees came
from ILSI, respectively. During the six- month periods ended June 30, 2000 and
1999, approximately 17.3% and 20.5% of these fees came from ILSI, respectively.
Fees from ILSI in the six-month period ended June 30, 2000 included $420,000
from the settlement of outstanding fees in the termination of the contracts.
Fees from this source will cease in future periods with the phase-out of the
ILSI contract.
Management, technology and other fees. Revenue from management,
technology and other fees decreased 50% to $480,000 for the three-month period
ended June 30, 2000 from $967,000 in the comparable period in 1999 and decreased
60% to $1.2 million for the six-month period ended June 30, 2000 from $3.0
million in the comparable period in 1999. 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. Also, specific software development and projects
for that generated income in 1999 were completed prior to 2000. Similar projects
for others in 2000 have not reached the stage to generate revenues through June
30, 2000.
Interest income. Interest income decreased 14% to $2.5 million for the
three-month period ended June 30, 2000 from $2.9 million in the comparable
period in 1999 and decreased 25% to $4.2 million for the six-month period ended
June 30, 2000 from $5.6 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.
17
<PAGE>
Expenses
--------
Total expenses decreased 13% to 22.1 million in the three-month period
ended June 30, 2000 from $25.5 million in the comparable period in 1999. This
decrease reflects a reduction of personnel required to handle lower volumes of
loans closed and sold and related overhead expenses. In the second quarter of
1999, the Company initiated a national advertising campaign to introduce the
Mortgage.com brand name to the public. This campaign ended by December 31, 1999
and no comparable expenses are impacting expenses 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 13% to $11.0 million for the
three-month period ended June 30, 2000 from $12.7 million in the comparable
period in 1999 and increased 3% to $23.0 million for the six-month period ended
June 30, 2000 from $22.4 million in the comparable period in 1999. Compensation
and benefits represents 100.0% and 108.6% of revenue in the three and six month
periods ended June 30, 2000, respectively, and 75.2% and 68.2% of revenues in
the comparable periods in 1999. The decrease in total compensation and benefit
costs in the second quarter primarily resulted from the continuation of a
planned decrease in personnel from 776 at December 31, 1999 to 608 at June 30,
2000 in reaction to lower volumes of loans closed and the efficiencies of a more
experienced staff in 2000. The first six months of 1999 reflected a 242 person
increase in employees as we were staffing and training new employees to handle
the then newly-created Internet call center. We expect total compensation and
employee benefits to remain stable through the remainder of 2000 as our
restructuring of operations to fully develop our business to business strategy
is nearing completion. This initiative combines operational responsibilities
into more effective units. We also expect efficiencies to result from our use of
technological advancements to reduce the time and paper trail used in
originating mortgages.
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 $534,000 and $836,000 of that amount to expense in the
three-month periods ended June 30, 2000 and 1999, respectively. We amortized
approximately $1,068,000 and $1,029,000 of that amount to expense in the
six-month periods ended June 30, 2000 and 1999, respectively. In the second
quarter of 2000, 746,599 shares of option grants included in the recording of
unearned expense in 1998 and 1999 were cancelled. The Company reversed $529,000
of previously-expensed compensation and $1,324,000 of 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. Stock-based compensation is
a non-cash expense.
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 are impacting expenses in
2000.
18
<PAGE>
Marketing and advertising expenses decreased 78% to $666,000 for the
three-month period ended June 30, 2000, or 6.0% of revenue, from $3.0 million in
the comparable period in 1999, or 18.0% of revenue. These expenses decreased 61%
to $1.8 million for the six-month period ended June 30, 2000, or 8.4% of
revenue, from $4.6 million in the comparable period in 1999, or 14.0% of
revenue. The decrease was directly related to the reduced levels of co-branding
costs with the termination of the ILSI contracts and the initial cost of
$645,000 for brand advertising incurred in the second quarter of 1999. We
believe that marketing and advertising expenses will increase from the second
quarter of 2000 level as we expand our strategic partnerships with our business
partners.
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 33% to $788,000 for
the three-month period ended June 30, 2000, or 4.4% of revenue, from $593,000 in
the comparable period in 1999, or 2.8% of revenue. Research and development
expenses decreased 14% to $1.2 million for the six-month period ended June 30,
2000, or 5.7% of revenue, from $1.4 million in the comparable period in 1999, or
4.2% of revenue. These expenses primarily include product development to
integrate CLOser with newly-acquired Internet technology and third-party
software and web platforms. During the six-month period ended June 30, 2000,
development personnel directed their attention to projects that were
capitalizable, reducing the current research and development expense. 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, amortization of the Mortgage.com domain name intangible asset and
amortization of capitalized software development costs. Depreciation and
amortization expenses increased 83% to $2.2 million for the three-month period
ended June 30, 2000, or 19.8% of revenue, from $1.2 million in the comparable
period in 1999, or 6.8% of revenue. Depreciation and amortization expenses
increased 121% to $4.2 million for the six-month period ended June 30, 2000, or
19.9% of revenue, from $1.9 million in the comparable period in 1999, or 5.7% of
revenue. The increases were for 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
six-month period ended June 30, 2000, $580,000 was amortized on the intangible
asset compared to $34,000 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 18% to $5.2 million for the three-month period
ended June 30, 2000, or 47.0% of revenue, from $4.4 million in the comparable
period in 1999, or 26.2% of revenue. General and administrative expenses
increased 34% to $11.0 million for the six-month period ended June 30, 2000, or
51.7% of revenue, from $8.2 million in the comparable period in 1999, or 24.9%
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. We expect general and administrative expenses to increase in absolute
dollars at a slower rate as we continue to grow but decrease as a percentage of
revenue as mortgage loan volume increases.
19
<PAGE>
Interest expense. Interest expense, which includes interest on
subordinated debt and on capital lease obligations, decreased 37% to $2.2
million, or 20.3% of revenue, in the three-month period ended June 30, 2000,
compared to $3.5 million, or 20.9% of revenue, in the comparable period in 1999.
Interest expense decreased 37% to $3.9 million, or 18.6% of revenue, in the
three-month period ended June 30, 2000, compared to $6.2 million, or 18.9% 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, 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 June 30, 2000, we had cash and cash equivalents of $14.7 million.
In the second quarter, we used approximately $7.3 million in cash in operating
our business. It is likely that we will use a similar amount of cash in the 3rd
quarter. If this occurs, we may not be able to reduce expenses quickly enough,
or increase revenues quickly enough to generate sufficient cash flow to run our
operations through the end of the year. Our agreement with Sugarplum allows us
to sell up to $40 million in stock over the next 23 months. However, if our
stock price and trading volume remain at their current levels for the next 24
months, certain limitations in the Sugarplum agreement would limit us to selling
approximately $6 million in stock over 10 monthly periods. If our stock price
and trading volumes increase or decrease from their current levels, the amount
available via the Sugarplum agreement may be more or less than $6 million.
We are actively pursuing other alternatives to improve our liquidity
position. These include the licensing of our name and mortgage platform for use
outside of the United States, and selling additional stock to current or
strategic investors. There can be no assurances that we will be successful in
raising additional cash or capital from these efforts.
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
six-month period ended June 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 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
20
<PAGE>
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 currently
have 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 provide 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 26 days during the three months
ended June 30, 2000. On June 30, 2000, the Company was not in compliance with a
covenant of the syndicated line of credit agreement related to the covenant of
net loss incurred in the second quarter. The net loss for the second quarter
exceeded the covenant by $1.0 million. The Company has obtained waivers for the
non-compliance from Residential Funding Corporation and Bank United.
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 six-month period ended
June 30, 2000 totaled $19.5 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 six-month period ended
June 30, 2000 totaled $1.7 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 six-month period
ended June 30, 2000 totaled $28.4 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.
21
<PAGE>
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 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. We currently sell approximately 55% of the loans
we sell 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.
We have 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 will be reduced, or we will experience a net loss on
those sales.
As of June 30, 2000, the Company had $8.5 million of mortgage-backed
security forward sales with maturities of up to three months. The fair market
value of such mortgage-backed security forward sales amounted to $84.9 million
at June 30, 2000 ($244,000 recognized as a liability).
22
<PAGE>
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.
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 1. Legal Proceedings
We are not a party to any material litigation.
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.
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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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
On May 5, 2000, the Company held its Annual Meeting of Shareholders.
Shareholders approved the following matters submitted to a vote:
1. Elected six directors to serve until the 2001 Annual Meeting of
Shareholders. Votes were:
For Withheld
--- --------
Stephen L. Green 31,391,959 52,917
Michael K. Lee 31,392,044 52,838
George A. Naddaff 31,391,419 53,457
C. Toms Newby 31,391,559 53,317
Seth Werner 31,060,159 384,717
John J. Hogan 31,391,559 53,317
2. Approved the Amended and Restated Mortgage.com Stock Option Plan.
Votes were:
For Against Withheld
--- ------- --------
30,861,330 451,621 131,925
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3. Ratified the selection of independent accountants for the current
fiscal year. Votes were:
For Against Withheld
--- ------- --------
31,303,519 18,648 122,709
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1* Common Stock Purchase Agreement dated March 27, 2000,
between the Company and Sugarplum Investments Limited
2.2* Registration Rights Agreement dated March 27, 2000, between
the Company and Sugarplum Investments Limited
2.3* Escrow Agreement dated as of March 27, 2000, among the
Company, Sugarplum Investments Limited and Epstein Becker &
Green, P.C.
2.4* Letter Agreement dated February 23, 2000, between the
Company and Ladenburg Thalmann & Co. Inc.
*(a) Amendment to Letter Agreement
2.5* Stock Purchase Warrant dated March 28, 2000, issued to
Ladenburg Thalmann & Co. Inc.
2.6* Stock Purchase Warrant dated March 28, 2000, issued to
Sugarplum Investments Limited
2.7 Common Stock Warrant with Independent Brokers Network dated
April 12, 2000.
2.8 Common Stock Warrant with Mid-America Realty Concepts, Inc.
dated May 4, 2000
10.1** Termination Agreement dated February 29, 2000, between the
Company and Intuit Lender Services, Inc.
10.2* Second Amendment to Master Lease Agreement No. 10571 dated
February 16, 2000, between Dominion Ventures, Inc. and the
Company
10.3** Administrative Services and Technology Sharing Agreement
dated as of January 27, 2000, between the Company and
Openclose.com, Inc.
10.4** Contribution Agreement dated as of January 27, 2000, among
the Company, Openclose.com, Inc. and certain investors
listed therein
10.5** Second Amendment to Second Amended and Restated Warehousing
Credit and Security Agreement among the Company, Residential
Funding Corporation and certain other Lenders dated March
17, 2000
27 Financial Data Schedule
_______________
* Incorporated by reference from the registrant's Form S-1
(333-34444)
** Incorporated by reference from the registrant's Form 10-K for
December 31, 1999 (000-26787)
(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: August 14, 2000
/s/ Stephen H. Foltz
-----------------------------------------
Stephen H. Foltz, its duly authorized
officer, Interim Chief Financial Officer
26
