As filed with the Securities and Exchange Commission on April 10, 2000
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
Mortgage.com, Inc.
(Exact name of registrant as specified in its charter)
Florida 6162 65-0435281
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
----------------------------------
Mortgage.com, Inc.
1643 North Harrison Parkway
Sunrise, Florida 33323
(954) 838-5000
(Address, including zip code, and
telephone number,
including area code, of
registrant's principal
executive offices)
----------------------------------
Seth S. Werner
Chief Executive Officer
Mortgage.com, Inc.
1643 North Harrison Parkway
Sunrise, Florida 33323
(954) 838-5000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------------
Copies to:
Luther F. Sadler, Jr., Esq. Michael Brenner, Esq. Joseph Smith, Esq.
Jeffrey M. McFarland, Esq. Mortgage.com, Inc. Epstein, Becker
Foley & Lardner 1643 North Harrison Parkway & Green
200 Laura Street Sunrise, Florida 33323 250 Park Avenue
Jacksonville, Florida 32202 (954) 838-5000 New York, NY 10177
(904) 359-2000 (212) 351-4500
-------------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| :
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.|_| .
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.|_| .
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed
Proposed maximum maximum Amount of
Title of each class of securities Amount to offering price aggregate offering registration
to be registered be registered per share price fee
--------------------------------- ------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Up to
Common Stock, $.01 par value 8,750,000 (1) (2) $40,000,000.00(3) $10,560.00
Common Stock, $.01 par value(4) 5,505,085 (4) $13,418,644.69(1) $ 3,542.52
Up to
Total 14,255,085(1) $53,418,644.69(1) $14,102.52
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The price per common share will vary based on the volume-weighted
average daily price of Mortgage.com's common stock during the drawdown
periods provided for in the common stock purchase agreement described
in this registration statement. The purchase price will be equal to 93%
of the volume-weighted average daily price for each trading day within
such drawdown pricing periods. The agreement allows for up to 12 draws
over a period of 24 months for amounts up to $4,000,000 per draw.
(3) This represents the maximum purchase price that Sugarplum Investments
Limited is obliged to pay Mortgage.com under the common stock purchase
agreement. The maximum net proceeds Mortgage.com can receive is
$40,000,000 less a 5% cash placement fee payable to its placement
agent, Ladenburg Thalmann & Co. Inc. and $1,500 in escrow fees and
expenses per drawdown.
(4) The remainder of the shares to be registered may be offered for sale
and sold from time to time during the period the registration statement
remains effective, by or for the accounts of the selling stockholders.
These shares include 332,060 shares issuable upon the exercise of a
warrant issued to Sugarplum under the common stock purchase agreement,
and 332,060 shares issuable upon the exercise of a warrant issued to
Ladenburg Thalmann as a placement fee. The exercise price of these
warrants is $2.4092. These warrants may be exercised until March 28,
2002. The proposed maximum offering price per share has been estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) of the Securities Act of 1933, based upon the average of
the high and low reported prices of the registrant's common stock on
April 5, 2000.
----------------------
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Subject to Completion, Dated April 10, 2000
Shares
mortgage.com logo
Common Stock
The information in this prospectus is not complete and may be changed. The
selling stock holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
All of the shares of common stock being sold are offered by selling
stockholders. We will not receive any proceeds from the sale of the shares by
the selling stockholders. However, we will receive the sale price of any common
stock that we sell to Sugarplum Investments Limited under the common stock
purchase agreement described in this prospectus or upon the exercise for cash of
the stock purchase warrants held by other selling stockholders, including
warrants we issued to Sugarplum. We will pay the costs of registering the shares
under this prospectus, including legal fees.
Our common stock is listed on The Nasdaq National Market under the
symbol "MDCM." The last reported sales price for our common stock on The Nasdaq
National Market on March 28, 2000 was $2.75 per share.
The selling stockholders may offer shares of our common stock on The
Nasdaq National Market, in negotiated transactions or otherwise, or by a
combination of these methods. The selling stockholders may sell the shares
through broker-dealers who may receive compensation from the selling
shareholders in the form of discounts or commissions. Sugarplum Investments
Limited is an "underwriter" within the meaning of the Securities Act of 1933 in
connection with its sales.
Investing in the common stock involves certain risks.
See "Risk Factors" on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the common stock or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Prospectus dated , 2000
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 5
Use of Proceeds ......................................................... 20
Dividend Policy ......................................................... 20
Price Range of Common Stock ............................................. 20
Selected Consolidated Financial Data .................................... 21
Management's Discussion and Analysis of Financial Condition
and results of Operations ............................................. 23
Business ................................................................ 39
Management .............................................................. 65
Certain Transactions .................................................... 75
Principal Stockholders .................................................. 79
Description of Capital Stock ............................................ 82
Common Stock Purchase Agreement ......................................... 88
Selling Stockholders .................................................... 94
Plan of Distribution .................................................... 97
Legal Matters ........................................................... 101
Experts ................................................................. 101
Additional Information .................................................. 101
Until , 2000 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the
rest of this prospectus. You should read the entire prospectus carefully.
Mortgage.com
Mortgage.com is a leading provider of online mortgage services and
technology to businesses and consumers. Our vision is to create the definitive
Internet-based technology platform for originating, underwriting, processing,
closing and selling mortgage loans. We enable other businesses to use this
technology platform when they market to customers who choose to obtain mortgage
services through the Internet. This platform will enable new businesses to
participate in the mortgage origination arena, by offering mortgage services to
their customers through the Internet while letting us do the technology and back
office work. We have designed this platform to decrease the cost of originating,
closing and selling loans, so consumers who obtain a loan via our technology
platform will save money when compared to obtaining a loan using a traditional
lender.
We have developed, and will continue to develop, state-of-the-art
technology to support the origination, processing, underwriting, closing and
secondary marketing of mortgage loans. Our clients include real estate
companies, homebuilders, trusted financial advisors, Internet-based companies
who market their services over the Internet, known in the industry as "affinity
customers", mortgage web sites that generate leads, and other non-traditional
mortgage originators. In addition, our clients include mortgage companies and
banks that wish to offer Internet mortgage services without developing a full
in-house Internet solution for themselves.
We believe that borrowers are generally dissatisfied with the
traditional mortgage lending process. This dissatisfaction stems from the
complexity of the process, inefficiencies and delays related to the manual
collection and transfer of information and the borrower's inability to monitor
the status of his loan. In addition, our internal research indicates that
borrowers feel the fees involved in obtaining a mortgage loan are too high.
Mortgage lending on the Internet can offer borrowers an easier, faster and less
expensive way to obtain mortgage loans and has the potential to eliminate many
of the borrower's frustrations found in traditional mortgage lending. We believe
companies that provide these benefits to borrowers will gain a competitive
advantage. We seek to take advantage of the existing relationships that our
clients have with prospective borrowers, and offer our services through our
clients marketing efforts.
We offer borrowers a more satisfying, less frustrating mortgage
experience. We use our Internet platform and other proprietary technologies to
make the mortgage lending process more efficient, whether the borrower comes
from one of the 89 private label web sites we have developed for our business to
business clients or is referred directly to our mortgage.com Web site.
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For the year ended December 31, 1999, we originated and closed $3.0
billion of mortgage loans, of which approximately 36.2% were originated online.
We are located on the Internet at www.mortgage.com, our address is 1643
North Harrison Parkway, Sunrise, Florida 33323 and our telephone number is (954)
838-5000. We began operations in April 1994 and changed our name to
Mortgage.com, Inc. in January 1999.
The Offering
Sugarplum Investments Limited and we signed a common stock purchase
agreement dated March 27, 2000, for the future issuance and purchase of shares
of our common stock. The transaction closed on March 28, 2000. The stock
purchase agreement establishes what is sometimes termed an equity line of credit
or an equity drawdown facility. In general, the drawdown facility operates like
this: the investor, Sugarplum, has committed up to $40 million to purchase
shares of our common stock over a 24 month period. Once every 22 trading days,
we may request a draw of up to $4,000,000 of that money, subject to a formula
based on the volume-weighted average common stock price and average trading
volume. At the end of a 22 day trading period following the draw down request,
we and Sugarplum will calculate the amount of money that Sugarplum will provide
to us and the number of shares we will issue to Sugarplum in return for that
money, based on the formula in the stock purchase agreement.
Sugarplum will receive a seven percent (7%) discount to the
volume-weighted average market price for the 22 day period and we will receive
the amount of the draw down less an escrow agent fee of $1,500 and a five
percent (5%) cash placement fee payable to the placement agent, Ladenburg
Thalmann & Co. Inc., which introduced Sugarplum to us. Ladenburg Thalmann is not
obligated to purchase any of our shares, but as an additional placement fee, we
have issued to Ladenburg Thalmann warrants to purchase 332,060 shares of our
common stock at an exercise price of $2.4092. We also have issued to Sugarplum
warrants to purchase 332,060 shares of our common stock at an exercise price of
$2.4092, in lieu of a minimum drawdown commitment. The common stock issuable
upon exercise of those warrants is included in the registration statement of
which this prospectus is a part. In addition, the remainder of the shares being
registered may be offered for sale from time to time during the period the
registration statement remains effective, by or for the accounts of the selling
stockholders identified in this prospectus.
The facility is based on a "use-it-or-lose-it" principle. We are under
no obligation to request a draw for any period. However, if we do not request a
draw for a given period, we may never to be able to draw those funds again. We
may make up to a maximum of twelve (12) draws; however, the aggregate total of
all draws cannot exceed $40 million and no single draw can exceed $4 million.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the following risks relating to our business and our common stock,
together with the other information described elsewhere in this prospectus. If
any of the following risks actually occur, our business, results of operations
and financial condition could be materially affected, the trading price of our
common stock could decline, and you might lose all or part of your investment.
We have experienced losses since inception, we expect future losses and we
may not become profitable.
We have incurred substantial net losses in every fiscal period since we
began operations. Although we have experienced strong revenue growth in the last
several quarters, we anticipate further quarterly and annual losses until at
least the latter half of 2002.
As of December 31, 1999, we had an accumulated deficit of approximately
$65.3 million. We incurred net losses of $46.9 million for the year ended
December 31, 1999. Net losses have increased for each fiscal year since 1996 and
this trend may continue. We may not become profitable. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. We expect to increase our research and development
and general and administrative expenses. As a result, we will need to generate
significant additional revenues to achieve and maintain profitability.
We have only operated online since 1997, so you may experience difficulty in
evaluating our prospects.
We began operations in April 1994 and did not begin our
Internet-related business until the summer of 1997. Our Web site was not
identified as "www.mortgage.com" until January 1999. Accordingly, we have a
limited operating history on which you can base your evaluation of our business
and prospects. In addition, we have recently changed our business model to focus
primarily on the business-to-business portion of the Internet mortgage market.
Our prospects are subject to the risks, expenses and uncertainties
frequently encountered by companies in the early stages of development in new
and evolving markets for online financial services. These risks include the
following:
o our ability to develop further our unproven online business model,
including our new business-to-business model;
o our ability to develop further awareness and loyalty for our
Internet platforms;
o our ability to maintain funding sources for mortgage loans;
o our ability to attract and retain qualified personnel; and
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o our ability to anticipate and adapt to the changes in the evolving
electronic commerce market.
We may need additional capital in the future and additional financing may not
be available.
We currently anticipate that our available cash resources combined with
the maximum drawdown under the stock purchase agreement with Sugarplum
Investments Limited will be sufficient to meet our anticipated working capital
and capital expenditure requirements for at least the next 12 months. However, a
decline in the trading volume or price of our common stock may reduce the amount
we can draw down under the common stock purchase agreement. In addition,
business and economic conditions may not make it feasible to draw down under the
common stock purchase agreement at every opportunity, and drawdowns are
available only every 22 trading days. We may need to raise additional capital to
fund more rapid expansion, to develop new and to enhance existing services to
respond to competitive pressures, and to acquire complementary businesses or
technologies.
Our placement agreement with Ladenburg Thalmann Co. Inc. restricts us
from raising investment capital during the term of the common stock purchase
agreement except through the common stock purchase agreement. If we need capital
but are unable to drawdown under the common stock purchase agreement for any
reason, we will need to separately negotiate with Ladenburg Thalmann and
Sugarplum to lift those restrictions so we can obtain the capital from other
sources. Our common stock purchase agreement with Sugarplum also limits our
ability to sell our securities for cash at a discount to the market price for 24
months from the effective date of the registration statement of which this
prospectus is a part.
We may not be able to obtain additional financing on terms favorable to
us, if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
We will originate and fund fewer mortgage loans if interest rates continue to
rise.
Interest rates continued to rise in 1999 and are expected to rise
further in 2000. In periods of rising interest rates, demand for mortgage loans
typically declines. During those periods, our clients and we will likely
originate and fund fewer mortgage loans and our revenues will decline.
Demand for refinancing mortgages declines more significantly than for
new home purchase mortgages during periods of rising interest rates. During
1999, approximately 33% of the mortgage loans we funded was refinancing
mortgages.
Our gains and losses on sales of mortgage loans in the secondary market are
affected by rising interest rates and any hedging strategy we implement may not
offset the risk.
Our ability to generate net gains on the sale of loans in the secondary
market may be adversely affected by increases in interest rates. We typically
establish interest rates on
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mortgage loans we originate at the same time we obtain commitments from the
anticipated purchasers of the loans. The mortgage loan purchase commitments we
obtain are contingent upon delivery of the loans to the purchasers within
specified periods. If we are unable to deliver closed loans on time and interest
rates increase, we may experience no gain, or even a loss, on the sale of these
loans. We currently do not use derivative financial instruments to hedge these
risks and are therefore exposed to losses caused by rising interest rates.
Management continues to evaluate hedging strategies to protect us
against this risk. Hedging strategies involve buying and selling mortgage-backed
securities so that if interest rates increase and we expect to suffer a loss on
the sale of those loans, our buying and selling of mortgage-backed securities
will offset the loss. An effective hedging strategy is complex and no hedging
strategy can completely eliminate our risk. To the extent that we implement a
hedging strategy but are unable to match effectively our purchases and sales of
mortgage-backed securities with the sale of the loans we originate, our gains on
sales of mortgage loans may be reduced. See "Disclosures About Market Risk" in
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
If we adopt a hedging strategy, we may also change the way we sell loans in
the secondary market, which would expose us to losses if interest rates decline
sharply.
If we adopt a hedging strategy to manage our risks, we may also begin
selling more loans on a mandatory delivery basis. Selling on a mandatory
delivery basis means we are required to sell the loans to a secondary market
investor at a price we agree upon, regardless of whether the loans close. This
strategy potentially generates greater revenue for us because secondary market
investors are willing to pay more for this type of commitment. However, it also
exposes us to greater losses if interest rates decline sharply and borrowers
choose not to close on the higher interest rate loans that we promised investors
before the decline in interest rates.
Any hedging strategy we adopt would help us manage the risk of selling
loans on a mandatory delivery basis. However, as with hedging strategies to
protect us against rising interest rates, no hedging strategy is perfect. To the
extent that we are unable to effectively match our purchases and sales of
mortgage-backed securities with the sale of the loans we originate, the greater
risks associated with loans sold on a mandatory delivery basis may cause us to
lose money on the sale of those loans. See "Disclosures About Market Risk" in
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our net interest income may be reduced by fluctuations in intermediate-term
and short-term interest rates.
When intermediate-term interest rates approach or sink below short-term
interest rates, our net interest income is reduced or we suffer net interest
losses. We earn net interest income or suffer net interest losses from the time
we fund a mortgage loan until it is delivered to an investor in the secondary
market. That time period generally consists of 18-40 days. Whether
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we earn net interest income or suffer net interest losses depends on the
difference between the interest rates on mortgage loans we fund and the interest
rates on the money we borrow to fund those mortgage loans.
The interest rates on mortgage loans we fund are affected by
intermediate-term rates in the United States. The interest rates on the money we
borrow to fund mortgage loans are affected by short-term rates based on the
London Interbank Offered Rate (LIBOR). If the intermediate-term rates in the
United States approach the LIBOR rate, our net interest income is reduced or we
suffer net interest losses.
Fluctuations may occur in our operating results due to seasonality and other
factors, any of which may reduce the price of our common stock.
Our revenue is subject to seasonal and other fluctuations. Due to these
factors, our operating results during any given period may suffer, which could
result in a reduction in the trading price of our common stock.
Home sales typically peak during the spring and fall seasons and
decline in the summer and winter. Our operating results may fluctuate
significantly as a result of a variety of other factors, many of which are
outside our control. These factors include the following:
o a decline in residential home buying that decreases the demand for
purchase mortgage loans;
o an increase in interest rates that decreases the demand for
refinancing existing mortgage loans; and
o the number of applications generated through our Web site and
those sites we create and maintain for clients.
Our business has grown significantly in the past three years and we may have
difficulty managing the growth.
We have been experiencing a period of rapid growth that has been
placing a significant strain on our resources. If we fail to manage our growth
effectively, the quality of our services will be impaired and our financial
performance will suffer.
We have maintained a significant online presence only since April 1998.
The number of our employees increased from 255 on December 31, 1997, to 776 on
December 31, 1999. In addition, we recently relocated to a larger facility. To
manage future growth effectively, we must manage our expanded operations and
continue to invest in our technology infrastructure.
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If we are unable to maintain adequate financing sources, our ability to
originate and fund mortgage loans will be impaired and our revenues will suffer.
Our ability to fund mortgage loans depends to a large extent upon our
ability to secure financing on acceptable terms. We currently fund most of the
loans we originate through large lines of credit known as warehouse lines of
credit, or under collateralized loan repurchase agreements. Several commercial
banks and institutional investors provide these funding sources. Most of these
financing arrangements have one-year terms and some are cancellable by the
lenders at any time.
If we are not successful in renewing our borrowings or in arranging new
financing with terms as favorable as the terms of our current financing
arrangements, we may have to curtail our origination and funding activities,
which would reduce our revenue.
All of the financing arrangements we use to fund mortgage loans are
subject to financial covenants and other restrictions. Because we are an early
stage company that is actively investing in growth, we are at times not in
compliance with those covenants and restrictions and rely on waivers from the
various lenders. If we are unable to operate within the covenants or obtain
waivers, all amounts that we owe under the financing arrangements could become
immediately payable. The termination of a financing arrangement by a lender, or
the acceleration of our debt, would have a significant negative effect on our
business.
The Internet market is highly competitive and we may not be able to compete
successfully against increased competition in this market.
The market for Internet products and services is highly competitive and
there are no substantial barriers to entry. We expect that competition will
continue to intensify. Many of our Internet competitors have more experience
online and have greater brand recognition. We may not be able to compete
successfully in the Internet services market, which would prevent us from
effectively executing our business strategy.
Recent significant entrants into the online mortgage market include
E-Loan, Countrywide, iOwn and LendingTree.com. In addition, some of our
competitors are collaborating with Internet portals such as Yahoo!, America
Online, Go.com and Excite.
The termination of our relationship with Intuit Lender Services may
negatively affect our loan production and processing fees.
On October 7, 1999, we terminated our agreement with Intuit Lender
Services, Inc. for the provision of prime loan mortgage services to the
QuickenMortgage.com Web site. Approximately 19.6% of the loans we processed in
1999 were generated from this agreement. Terminating the agreement lifted
certain exclusivity restrictions and will allow us to develop new and existing
relationships that we anticipate will replace and exceed the Intuit Lender
Services loan volume. However, if we are not successful in developing those
relationships, our loan production and processing fees will be reduced.
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Additional pricing pressures resulting from increased online competition
could reduce our revenues.
Pricing of mortgage loans on the Internet is also highly competitive.
Pricing to borrowers involves a number of factors, including the interest rate
on the loan, up-front origination fees and processing, underwriting and document
preparation fees. Increased competition in the online arena has forced online
mortgage lenders, including us, to reduce our prices to borrowers, thus reducing
revenue.
Our competitors in the mortgage banking market are often larger, more
experienced and have greater financial resources than we do, which will make it
difficult for us to successfully compete.
We compete with other mortgage banking companies, commercial banks,
savings associations, credit unions, insurance companies and other financial
institutions in every aspect of our business. Many of these companies and
financial institutions are larger, more experienced and have greater financial
resources than we do. Accordingly, we may not be able to compete successfully in
the mortgage banking market. Our competitors may be able to respond more quickly
to take advantage of new or changing opportunities, technologies and customer
requirements. They also may be able to undertake more extensive promotional
activities, offer more attractive terms to borrowers and adopt more aggressive
pricing policies.
A discontinuation or reduction in secondary market programs would hurt our
financial performance.
Our ability to sell mortgage loans to institutional investors in the
secondary market is largely dependent upon the continuation of programs
administered by Fannie Mae, Freddie Mac, Ginnie Mae and private mortgage
investors. These entities facilitate the sale of mortgage loans and
mortgage-backed securities through the secondary market. Any discontinuation of
or reduction in the operation of those programs or any significant impairment of
our eligibility to participate in those programs would hurt our financial
performance. In addition, any significant adverse change in the secondary market
level of activity or the underwriting criteria of Fannie Mae, Freddie Mac,
Ginnie Mae or other private mortgage investors would reduce our revenues.
The loss of our relationship with Fannie Mae would interrupt our plans for
our Openclose.com subsidiary.
We have an agreement with Fannie Mae that allows us to provide
customers of our Openclose.com, Inc. subsidiary with information generated by
Fannie Mae's Desktop Underwriter software. Openclose.com operates a Web site,
www.openclose.com, where mortgage brokers, mortgage bankers and other mortgage
industry participants can exchange product and pricing data and borrower
information. If Fannie Mae terminates the agreement with us, Openclose.com could
not obtain the right to use the Desktop Underwriter software
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unless it became an approved Fannie Mae seller/servicer, which it currently is
not qualified to do. As a result, our plans for Openclose.com would be
interrupted, and possibly discontinued, which would reduce Openclose.com's
revenue and therefore our revenue.
Our agreement with Fannie Mae expires October 14, 2003 and is
automatically renewed for one year terms unless:
o we or Fannie Mae give notice of intention to terminate before the
renewal date;
o we or Fannie Mae terminate the agreement because of a breach by
the other party which remains uncured; or
o Fannie Mae terminates the agreement upon significant changes
in our management, our board of directors or the ownership of
our company.
If Internet growth slows or borrowers are reluctant to conduct financial
business through the Web, we will generate fewer loans online.
Our ability to originate mortgage loans on the Internet and provide
clients with Internet-based mortgage services is dependent upon continued growth
in Internet usage. Web-based mortgage lending is relatively new, and we cannot
predict whether there will be growth in mortgage loans generated on the
Internet.
The Internet may not prove to be a viable commercial marketplace for a
number of reasons, including lack of acceptable security technologies,
inadequate development of the Internet infrastructure or slow or inadequate
development of performance improvements.
Mortgage borrowers are accustomed to traditional means of obtaining
mortgage financing. For us to be successful, these borrowers must accept the use
of the Internet to conduct financial transactions and exchange information
online.
If the economies of Florida and California experience a downturn, our
business may be significantly affected.
Although we expect our mortgage loan business to have a greater
national scope in the future, our short-term results of operations and financial
condition will be negatively affected by poor economic conditions in Florida and
California, particularly in their residential real estate markets. Approximately
14% of our funded loan volume for the year ended December 31, 1999 was derived
from borrowers or properties in Florida and approximately 47% was derived from
borrowers or properties in California.
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Internet system failures and security concerns could make borrowers
reluctant to use our online services.
The performance of our Web site and the Web sites we maintain for our
clients is important to our reputation, our ability to attract customers and our
ability to achieve market acceptance of our services. Any system failure that
causes an interruption or an increase in response time of our services could
result in fewer loan applications through our Web sites and those we maintain
for clients. System failures, if prolonged, could reduce the attractiveness of
our services to borrowers and clients.
Our primary Internet-related computer and communications hardware is
currently located in New Jersey. We are planning to move this hardware to
Florida later this year. Although we plan to fully duplicate our hardware in a
California facility, we currently do not have backup facilities to prevent
interruption of business in the event of any widespread power or
telecommunications outages in New Jersey, or after the hardware move, in
Florida. In addition, local power or telecommunications outages at our primary
processing centers and Teleweb centers in Florida and California may interrupt
our business operations.
In addition, despite our implementation of network security measures,
our servers are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with our computer systems.
We do not carry sufficient insurance to compensate for losses that may
occur as a result of any of these events.
If we are unable to comply with mortgage banking rules and regulations, our
ability to originate and fund mortgage loans may be restricted.
Our mortgage banking business is subject to the rules and regulations
of various federal, state and local regulatory agencies in connection with
originating, processing, underwriting and selling mortgage loans. These rules
and regulations, among other things, impose licensing obligations on us,
prohibit discrimination, establish underwriting guidelines and mandate
disclosures and notices to borrowers. We also are required to comply with each
regulatory entity's financial requirements. If we do not comply with these
rules, regulations and requirements, the regulatory agencies may restrict our
ability to originate and fund mortgage loans.
We also must comply with state usury laws. If we fail to comply with
these laws, the states can impose civil and criminal liability and restrict our
ability to operate in those states. In addition, secondary market investors may
demand indemnification or require us to repurchase loans sold in the secondary
market. We also may be subject to class action lawsuits. Any of these events
could impair our ability to originate and fund loans, which would reduce our
revenue.
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Changes in regulatory requirements or the interpretations of those requirements
could increase our costs of doing business or otherwise hurt our financial
performance.
Regulatory and legal requirements are subject to change and may become
more restrictive, making our compliance more difficult or expensive or otherwise
restricting our ability to conduct our business as it is now conducted. Changes
in these regulatory and legal requirements could increase our costs of doing
business.
Many states prohibit non-employees of a licensed mortgage company from
conducting business under that licensed mortgage company's name. Our clients
often hire us to provide back office functions, such as processing and
underwriting. Because providing these back office services is a relatively new
concept in the industry, most state regulations do not specifically address the
provision of back office services. As state regulators become more familiar with
these practices, it is possible that they may interpret current regulations or
enact new regulations to restrict our ability to perform these back office
services for our clients, either of which would adversely affect our financial
performance.
If we fail to maintain mortgage banking authority in the states where we do
business, we may incur liability.
We are authorized to originate loans for first mortgages on homes in
all 50 states and the District of Columbia. If we fail to maintain our licensing
approvals and exemptions in those jurisdictions, we may incur liability and may
be unable to transact business in those jurisdictions.
We have authority in 45 states to originate loans for mortgages that
would be subordinate to first mortgages in a foreclosure proceeding. In those
states in which we do not have authority to originate subordinate lien
mortgages, or in which our authority to do so is limited, we do not originate
subordinate lien mortgage loans. If we were to originate a subordinate lien
mortgage loan in a state without authority to do so, we might incur liability.
Some states require us to obtain prior approval before a change of
control of our company occurs. As a public company, we may not have advance
notice of a change of control occasioned by a stockholder's purchase of our
stock in the open market. We also are not able to control who purchases our
voting stock in the open market. If any person holding 10% or more of our stock
fails to meet a state's criteria, or refuses to comply with state regulatory
requirements, we could lose our authority to originate mortgage loans in that
state, which could hurt our business, results of operations and financial
condition.
We face legal uncertainties associated with the Internet and electronic
commerce that could increase our costs or reduce demands for our services.
Our operations on the Internet are not currently subject to direct
regulation by any government agency in the United States beyond mortgage-related
regulations and regulations applicable to businesses generally. However, the
adoption of new laws or the application of
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existing laws may decrease the use of the Internet, which would decrease the
demand for our services and might increase our cost of doing business.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including the following:
o taxation;
o access charges;
o online content;
o user privacy;
o liability for third-party activities; and
o jurisdiction.
The tax treatment of the Internet and electronic commerce is currently
unsettled and has been a subject of debate in Congress, which is awaiting the
recommendation of The Advisory Commission on Electronic Commerce. A number of
proposals have been made that could impose taxes on the sale of goods and
services and other Internet activities. In October 1998, the Internet Tax
Freedom Act was signed into law placing a three-year moratorium on new state and
local taxes on Internet commerce. The moratorium ends October 21, 2001. However,
we cannot assure you that future laws imposing taxes or other regulations would
not substantially impair the growth of our business and our financial condition.
Some local telephone carriers claim that the increasing popularity of
the Internet has burdened the existing telecommunications infrastructure and
that many areas with high Internet use are experiencing interruptions in
telephone service. These carriers have petitioned the Federal Communications
Commission to impose access fees on Internet service providers. If these access
fees are imposed, the costs of communicating on the Internet could increase,
which could decrease demand for our services and increase our cost of doing
business.
If we are unable to adapt to technological changes, our ability to compete
on the Internet will be impaired.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards, and frequent new
products and enhancements. As faster Internet access becomes more widely
available through cable modems or other technologies, we may be required to make
significant changes to the design and content of our Web site and the Web sites
we maintain for clients to compete effectively.
As the number of Web pages and users increase, we will need to modify
our Internet infrastructure, our Web site and the Web sites we maintain for our
clients to accommodate
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increased traffic. If we cannot modify our computer systems, we may experience
the following:
o system disruptions;
o slower response times;
o impaired quality and speed of application processing; and
o delays in reporting accurate interest rate information.
If we fail to adapt effectively to increased usage of the Internet or
new technological developments, we will be unable to compete successfully
online.
Our efforts to maintain our reputation may be unsuccessful, which would
affect our financial performance.
Over the past year, we have funded extensive brand advertising
campaigns to establish our name in the industry. Going forward, we expect to
enhance our reputation through partnerships and business alliances. To maintain
and enhance the Mortgage.com brand, we must provide high-quality products and
services, particularly on the Internet. If any breach or alleged breach of
security or privacy involving our online services occurs, or if we are unable to
otherwise successfully promote and maintain our brand, our business will suffer.
There are thousands of Internet Web site addresses, or "domain names,"
containing the word "mortgage," such as "mortgages.com" "1mortgage.com" and
"mortgage.cc," that have been registered to other users. To the extent consumers
confuse other Web sites with ours, our reputation could be harmed and our
business could suffer.
Online security risks may harm our business operations.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. If any compromise of our security
occurs, it would injure our reputation, and could influence the success of our
business.
We rely on encryption and authentication technology licensed from third
parties to effect secure transmission of confidential information, such as that
required on a mortgage loan application. Advances in computer capabilities, new
discoveries in cryptography, or other developments may result in a breach of the
techniques we use to protect customer data.
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Our reliance on third parties for development and maintenance of industry
standard software may put us at risk for interruptions or slow downs in our
business.
Our products and services rely on software licensed to us by third
parties. If we have to replace third-party software, our business could suffer
during the replacement period.
We believe there are other sources for most of the specialized software
we use through these licenses and that we could replicate the functionality of
this software. However, because our products incorporate software developed and
maintained by third parties, and because we license from third parties industry
standard software products that cannot be replicated, we depend on those third
parties to do the following:
o deliver and support reliable products;
o enhance their current products;
o develop new products on a timely and cost-effective basis; and
o respond to emerging industry standards and other technological
changes.
In addition, the third party software currently used in our products
and the delivery of our services may become obsolete or incompatible with the
products and services we offer in the future.
We face risks that our intellectual property is not adequately protected and
we may be subject to claims from third parties for infringement.
Our copyrights, trademarks, trade dress, trade secrets, and similar
intellectual property are critical to our success. We have obtained federal
trademark registration for CLOser, and have registered the Web site domain names
we use, which prevents any other person from using those names for their Web
sites in the United States. However, we may not be able to protect adequately
our intellectual property against infringement, which could damage our
reputation or create brand confusion in the market. Either of those events could
injure our financial performance if it took place on a large enough scale.
We protect our internally-developed technology through a combination of
copyright, trade secret and trademark law. However, we have no patents issued or
applied for on our technology. Unauthorized parties may attempt to copy or to
otherwise obtain and use our services or technology and we cannot be certain
that the steps we have taken and will take in the future will prevent them from
misappropriating or infringing upon our technology. The costs associated with
enforcing our rights to technology could increase our losses and depress our
stock price.
Mortgage-related Internet technologies are rapidly being developed. As
a result, we believe that disputes regarding the ownership of these technologies
are likely to arise in the future. Third parties have and in the future may
assert infringement claims against us. We may
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incur substantial costs in defending against third-party infringement claims
regardless of the merit of those claims. We also cannot guarantee that we would
be able to license comparable technology if our use was found to infringe on
someone else's rights. If we were unable to license comparable technology, our
business could suffer.
We may not be able to hire and retain sufficient technical and support
personnel that we need to succeed.
Competition for qualified technical and support personnel is intense,
and we may not be able to hire and retain sufficient numbers of qualified
technical and support personnel. If we fail to hire and retain sufficient
numbers of technical and support personnel, our business and results of
operations would be adversely affected.
Early mortgage loan payment defaults may cause losses.
If borrowers default in the first few months after the loan is
originated, we may be required to repurchase those loans from the secondary
market investors to whom we sold those loans. We may not be able to resell those
loans in the secondary market. Our financial performance may be adversely
affected during economic downturns when the frequency of loan defaults tends to
increase.
We may be required to repurchase loans or indemnify investors if we breach
representations and warranties.
When we sell a mortgage loan to a secondary market investor, we make
representations and warranties about characteristics of the mortgage loan, the
borrower and the underlying property. If we breach any of these representations
and warranties, we may be required to repurchase the loan from the investor or
indemnify the investor for any damages caused by the breach.
With some loan sales, we may be required to return a portion of the
premium paid by the investor for the loan if the loan is prepaid within the
first year after its sale. If we are regularly required to repurchase loans,
indemnify investors or return loan premiums, it would have an adverse effect on
our financial performance.
A delay in the receipt of services from third parties may reduce our
revenues.
We rely on third party sources for some of the information used in the
mortgage loan underwriting process, including credit reports, appraisals and
title searches. Any interruptions or delays in obtaining these services may
cause delays in our processing and closing of mortgage loans, which could create
customer dissatisfaction and injure our market position.
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Internet companies have been particularly susceptible to fluctuations in
stock market prices.
The stock market in general has recently experienced extreme price and
volume fluctuations. The market prices of technology companies, particularly
Internet-related companies, have experienced fluctuations unrelated or
disproportionate to the operating performance of those companies. These broad
market fluctuations could depress the market price of our common stock.
Recently, when the market price of a stock has been volatile, holders
of that stock have often instituted securities class action litigation against
the company that issued the stock. If that were to happen to us, we could incur
substantial costs defending the lawsuit. The lawsuit also could divert the time
and attention of our management team. Both could have a negative impact on our
financial performance.
We will have broad discretion in the use of the proceeds from the sale of
common stock under the common stock purchase agreement with Sugarplum, and any
failure to apply them effectively could negatively affect our business
prospects.
We expect to use the net proceeds from the draw downs under the common
stock purchase agreement with Sugarplum Investments Limited for general
corporate purposes. We will have significant flexibility in applying the net
proceeds. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the net
proceeds. If we fail to apply the net proceeds effectively, our business could
be negatively affected.
Because our executive officers and directors beneficially own a majority of
the voting stock, they have the ability to control all matters submitted to
stockholders for approval, which will limit your ability to control the company.
Our officers and directors beneficially own or control 27,223,745
shares of common stock, which represents approximately 58.4% of the outstanding
shares of common stock outstanding as of March 15, 2000 and prior to any
drawdowns under the common stock purchase agreement with Sugarplum Investments
Limited The percentage controlled by officers and directors will change as
drawdowns under the common stock purchase agreement occur. However, as of the
date of this prospectus, if executive officers and directors act together, they
will have the ability to control all matters submitted to our stockholders for
approval, including (1) the election and removal of directors and (2) any
merger, consolidation or sale of all or substantially all of our assets.
The future sale of eligible shares of our common stock may dilute our common
stock price.
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
There were 43,353,692 common shares issued and outstanding as of March 15, 2000,
which does not include the shares covered by this prospectus. All but 2,318,676
of these shares are eligible for sale under
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Rule 144 or are otherwise freely tradeable. In addition, 19,794,658 stock
options and warrants are outstanding. Including the warrants issued to Ladenburg
Thalmann and Sugarplum, 13,237,388 of these stock options and warrants are
vested as of March 15, 2000, and the remainder will vest within the next five
years. Moreover, we may issue additional shares in acquisitions and may grant
additional stock options to our employees, officers, directors and consultants
under our stock option plan.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Sugarplum Investments Limited that it has obtained under the common stock
purchase agreement. We also will not receive any of the proceeds from the sale
of shares by any other selling stockholder. However, we will receive the sale
price of any common stock we sell to Sugarplum Investments Limited under the
common stock purchase agreement described in this prospectus and upon the
exercise of warrants held by selling stockholders that pay the exercise price in
cash. We expect to use the proceeds of any such sales for general working
capital purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We anticipate that any earnings will be retained for development and expansion
of our business and we do not anticipate paying any cash dividends in the near
future. Our board of directors has sole discretion to pay cash dividends based
on our financial condition, results of operation, capital requirements,
contractual obligations and other relevant factors.
Our warehouse lines of credit restrict our ability to pay dividends.
Under our financing arrangement with Bank United and Residential Funding
Corporation, we are prohibited from declaring and paying dividends in excess of
our net after-tax income earned in any fiscal year, as determined on a fiscal
year-to-date basis.
PRICE RANGE OF COMMON STOCK
Since our initial public offering on August 11, 1999, our common stock
has traded on The Nasdaq National Market under the symbol "MDCM." The following
table provides the range of high and low sales prices of our common stock for
the periods indicated:
Fiscal Quarter High Low
-------------- ---- ---
3rd - 1999 $22.75 $7.00
4th - 1999 13.31 5.50
1st - 2000(1) 7.66 3.50
-----------------
(1) Through March 15, 2000.
Based on information supplied by the transfer agent, as of March 15,
2000, there were approximately 124 record holders of our common stock (not
including individual participants in security position listings). As of that
date, the closing sale price of our common stock as quoted on The Nasdaq
National Market was $4.06.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our
consolidated financial statements which have been audited by KPMG LLP,
independent certified public accountants. Our financial statements as of
December 31, 1999 and 1998, and for each of the years in the three year period
ended December 31, 1999, and the report on those financial statements are
included in this prospectus, and the information below for those periods is
qualified by reference to their report. The financial statements for the
periods ended March 31, 1995 and December 31, 1995 are unaudited. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements. All numbers are in thousands, except per share data.
[The Remainder of This Page Is Intentionally Left Blank]
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<TABLE>
Selected Consolidated Financial Data
<CAPTION>
Nine Months Apr. 15, 1994
Ended (inception)
Year Ended December 31, Dec. 31, through
1999 1998 1997 1996 1995 Mar. 31, 1995
---- ---- ---- ---- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Secondary marketing revenue, net........... $ 35,616 $ 28,598 $11,595 $ 4,101 $ 942 $ 77
Loan production and processing fees, net... 10,629 5,338 2,347 821 778 384
Management, technical and other fees....... 4,331 1,868 2,032 2,577 1,422 40
Interest income............................ 10,682 6,998 3,550 922 289 77
-------- -------- ------- ------- ------- --------
Total revenue............................ 61,258 42,802 19,524 8,421 3,431 578
-------- -------- ------- ------- ------- --------
Expenses:
Compensation and employee benefits......... 53,575 26,075 13,083 6,527 2,542 1,515
Marketing and advertising.................. 16,524 1,335 238 94 36 33
Research and development................... 2,110 2,888 1,079 497 -- --
Depreciation and amortization.............. 5,316 1,873 480 652 296 235
General and administrative................. 18,919 9,598 5,126 3,764 1,470 919
Interest expense........................... 11,310 7,111 3,050 905 381 94
-------- -------- ------- ------- ------- --------
Total expenses........................... 107,754 48,880 23,056 12,439 4,725 2,796
-------- -------- ------- ------- ------- --------
Loss before minority interest and
extraordinary item........................ (46,496) (6,078) (3,532) (4,018) (1,294) (2,218)
Minority interest............................. (4) -- -- -- -- --
-------- -------- ------- ------- ------- --------
Loss before extraordinary item................ (46,500) (6,078) (3,532) (4,018) (1,294) (2,218)
Extraordinary item - loss on extinguishment of
debt...................................... (436) -- -- -- -- --
-------- -------- ------- ------- ------- --------
Net loss...................................... $(46,936) $ (6,078) $(3,532) $(4,018) $(1,294) $ (2,218)
======== ======== ======= ======= ======= ========
Net loss per share - basic and diluted:
Loss before extraordinary item............ $ (2.17) $ (1.02) $ (0.55) $ (0.56) $ (0.16) $ (0.39)
Extraordinary item........................ (0.02) -- -- -- -- --
-------- -------- ------- ------- ------- --------
Net loss.................................. $ (2.19) $ (1.02) $ (0.55) $ (0.56) $ (0.16) $ (0.39)
======== ======== ======= ======= ======= ========
December 31,
March 31,
1999 1998 1997 1996 1995 1995
---- ---- ---- ---- ---- ----------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents.................... $ 7,537 $ 3,412 $ 1,680 $ 2,008 $ 222 $ 541
Working capital.............................. 6,980 2,240 1,353 2,283 (850) 213
Total assets................................. 138,075 193,438 81,927 30,711 11,684 3,253
Convertible preferred stock.................. -- 32 19 15 2 2
Stockholders' equity......................... 33,327 13,136 3,797 3,283 347 912
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion includes "forward-looking" statements that reflect our
current views with respect to future events and financial performance. We use
words such as we "expect", "anticipate", "believe" and "intend" and similar
expressions to identify forward-looking statements. Investors should be aware
that actual results may differ materially from our expressed expectations
because of risks and uncertainties inherent in future events, particularly those
risks identified in the "Risk Factors" section of this prospectus, and should
not unduly rely on these forward looking statements. We will not necessarily
update the information in this discussion if any forward-looking statement later
turns out to be inaccurate.
Overview
We are a leading provider of online mortgage services and technology to
businesses and consumers. Our vision is to create the definitive Internet
platform for originating, underwriting, processing, closing and selling mortgage
loans. We enable other businesses to use this technology platform when they
market to customers who choose to obtain mortgage services through the Internet.
We began operations in April 1994 in Florida as First Mortgage Network,
a wholesale mortgage lender providing independent mortgage brokers with various
support services, including processing, closing and funding services for their
loans. In April 1995, we acquired a software system from Morbank Financial
Systems that was designed to automate mortgage origination, processing,
underwriting and closing functions in traditional mortgage lending operations.
We enhanced this software and named it CLOser, our proprietary technology
platform that supports all of the services we provide. By the end of 1995, we
were using the CLOser software system to enable financial institutions and
non-traditional mortgage originators, such as Realtors(R) and homebuilders, to
originate mortgages as an ancillary service. These "network members" pay monthly
membership fees for the use of the CLOser software system and transaction fees
for our other services.
In the summer of 1996, we expanded our membership network by acquiring
Western America Mortgage, the mortgage affiliate of Mason-McDuffie Real Estate,
a major real estate company in northern California. In June 1997, we acquired
Online Capital, a mortgage lender also located in northern California, with more
than 25 loan counselors at the point-of-sale of homes, three Realtor(R)
business-to-business relationships and requisite back office personnel. We
deployed these acquired resources to support and expand our member business in
California.
In the spring of 1998, we acquired RM Holdings, Inc. and its American
Finance and Investment (AFI) operations, and moved the operations to Florida.
AFI was one of the first companies to originate mortgages through the Internet.
We integrated this acquired Internet technology with our CLOser system, enabling
us to establish various relationships with other
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Internet-based businesses and to originate mortgage applications online on a
national basis. In January 1999, we acquired the Internet Web address
www.mortgage.com and changed our corporate name to Mortgage.com, Inc. We believe
this name change more accurately reflects our business of re-engineering the
mortgage process through technology such as the Internet.
In October 1999, we acquired Capital Savings Co., Inc. and the assets
of PlanMax, Inc., ACM/USA, Inc. and CSC Marketing Services, LLC from CSC
Holdings, LLC for 162,500 shares of our common stock and $250,000 in cash.
Capital Savings Co., Inc. and CSC Marketing Services, LLC operated a traditional
mortgage brokerage company in North Carolina. We have substantially eliminated
this operation as of March 2000. PlanMax has the relationships that have formed
the foundation of our Trusted Financial Advisor vertical marketing strategy.
ACM/USA brought us three marketing relationships that focus on marketing our
services to real estate and other companies in Ohio, Illinois, Indiana,
Tennessee, Georgia and North Carolina. CSC Holdings brought us a relationship
with BuildNet Financial, with whom we have signed a marketing agreement pursuant
to which BuildNet will market our services to homebuilders nationwide.
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:
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 announced plans to convert our loan officer point-of-sale originations
to the installation of various Web-based solutions in the offices of our
Realtor(R) and homebuilder clients. We are also redesignating our loan officers
as account executives who will be responsible for marketing 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
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became available for commercial use in August 1999 and over 900 brokers and 38
lenders had agreed to participate in the program as of March 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 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.
Loans that we originate directly from borrowers or through one of our
business clients generate loan origination fees. Loans that we fund, including
loans originated by our business partners and clients, generate gains or losses
when we sell the loans to independent mortgage investors in the secondary
market. When we sell a loan in the secondary market, we achieve a net gain, or
suffer a net loss, equal to the difference between the amount we funded or paid
for the loan and the price at which the loan is sold to the secondary market
investor. Typically, we obtain commitments from investors to buy loans on a
loan-by-loan basis at the same time we lock an interest rate for the borrower.
We have sold and intend to continue to sell all loans, together with the
associated servicing rights, in the secondary market. Origination fees, or
"points," and secondary marketing gains or losses are recorded as "Secondary
marketing revenue, net" in our financial statements.
Other services, including 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
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,
technology 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
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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 our inception and, as of
December 31, 1999, have an accumulated deficit of $65.3 million. These net
losses and the accumulated deficit resulted from investments in our technology
infrastructure and personnel in anticipation of growth in loan volumes from both
our direct-to-consumer and business to business channels 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:
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; and
o improved terms of sale on loans we sell in the secondary market.
We will be able to realize improved terms on sales in the secondary
market because our negotiating leverage increases as our loan volumes increase.
We also are working to improve our risk management and are considering hedging
strategies to help manage the risk.
We have completed our brand advertising campaign and plan to use our
marketing and technology infrastructure to enhance loan production volumes
through partnerships and business alliances with business partners. We expect to
raise additional funds in the private and public capital markets and intend to
invest available funds heavily in developing these new partnerships and
strategic alliances, our operating infrastructure and supporting
www.openclose.com. Our operations have historically been centered in Florida and
California. This is partially due to the state of our incorporation and the
states where we have acquired businesses, and partially because Florida and
California represent two of the largest real estate markets in the United
States. We intend to use the Internet to expand our geographic scope to every
potential mortgage borrower in the United States.
Our limited operating history makes it difficult to forecast future
operating results. Although our revenue has grown significantly in recent years,
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:
26
<PAGE>
o changes in interest rates;
o loss of strategic relationships;
o changes in competitive pressures on pricing or quality of service;
o seasonal variations in demand for mortgages;
o general economic conditions;
o system failures or Internet down time;
o changes in state or federal government regulations and their
interpretations, especially with respect to the mortgage and
Internet industries;
o our ability to enhance our information technology to keep pace
with changes in the industry; and
o changes in attitudes of consumers doing business over the
Internet.
As a result, we do not believe that our historical results are
necessarily indicative of results to be expected in any future period.
[The Remainder of This Page Is Intentionally Left Blank]
27
<PAGE>
Results of Operation
The following table provides the percentage of total revenue of certain
line items included in our statement of operations for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Secondary marketing revenue, net................................ 58.1% 66.8% 59.4%
Loan production and processing fees, net........................ 17.4 12.5 12.0
Management, technology and other fees........................... 7.1 4.4 10.4
Interest income................................................. 17.4 16.3 18.2
------ ------ ------
Total revenue...................................................... 100.0 100.0 100.0
------ ------ ------
Expense:
Compensation and employee benefits.............................. 87.5 60.9 67.0
Marketing and advertising....................................... 26.9 3.1 1.2
Research and development........................................ 3.4 6.7 5.5
Depreciation and amortization................................... 8.7 4.4 2.5
General and administrative...................................... 30.9 22.5 26.3
Interest expense................................................ 18.5 16.6 15.6
------ ------ ------
Total expenses..................................................... 175.9 114.2 118.1
------ ------ ------
Loss before extraordinary item..................................... (75.9) (14.2) (18.1)
------ ------ ------
Extraordinary item................................................. (0.7) - -
------ ------ ------
Net loss........................................................... (76.6)% (14.2)% (18.1)%
====== ====== ======
</TABLE>
Years Ended December 31, 1999 and 1998
Revenue
Total revenue increased 43% to $61.3 million in 1999 from $42.8 million
in 1998. This growth resulted primarily from loan volume generated by our Web
sites, from strategic alliances with online partners and Realtors(R) and a
full year's operational effect of our acquisition of AFI in April 1998.
Interest rates were generally low in 1998, but Federal Reserve policies
increased interest rates in the second half of 1999, weakening the volume of
originations of refinanced loans during that period.
28
<PAGE>
Secondary marketing revenue, net. Gains and other revenue from the
origination and secondary marketing of mortgage loans increased 24% to $35.6
million in 1999 from $28.6 million in 1998. This increase resulted primarily
from the increase in the total dollar amount of loans we originated, funded
and sold. The total dollar amount of closed loans that we originated
increased to $3.0 billion in 1999 as compared to $2.0 billion in 1998. From
these originations, we funded and sold in the secondary market $2.3 billion
in loans in 1999 and $1.5 billion in 1998. Other mortgage lenders funded
loans that we originated but did not fund. The increase in loan volumes and
related revenue resulted primarily from our introduction of additional
Internet origination channels and an increase in Realtor(R) affiliations.
Loan production and processing fees, net. Total loan production and
processing fees, less amounts paid to third parties for processing services,
increased 100% to $10.6 million in 1999 from $5.3 million in 1998. This
increase in production and processing fees resulted from an overall increase
in loan volume and from new strategic alliances that produced fees from
processing loans for third parties and other mortgage lenders. Approximately
20% of these fees came from Intuit Lender Services during 1999. Fees from
this source will decline with the termination of the Intuit Lender Services
contracts.
On October 7, 1999, we terminated our agreement with Intuit Lender
Services, Inc. for the provision of prime loan mortgage services to the
QuickenMortgage.com web site. Terminating this agreement relieved us of
exclusivity restrictions. Approximately 19.6% of the loans we processed in
1999 were under this agreement, and we anticipate that the reduced loan
volume from this termination will be replaced by new co-branded Internet
relationships entered into with economic terms more favorable to us.
In addition, on November 9, 1999, Intuit Lender Services terminated a
second agreement relating to sub-prime mortgage services. This termination
also relieved us of exclusivity restrictions. We processed few loans from
this agreement in 1999, 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.
Management, technology and other fees. Total revenue from management,
technology and other fees increased 126% to $4.3 million in 1999 from $1.9
million in 1998. The 1999 amount includes recognition of $1.0 million in
previously deferred revenue from the sale of software that we no longer use
in our business. The remaining increase was primarily attributable to fees
earned from business affiliations for management services and technology.
Interest income. Interest income increased 53% to $10.7 million in
1999 from $7.0 million in 1998 and was earned from the volume of loans
originated during the period between their funding and sale. In addition,
interest rates were higher in 1999 than in 1998.
29
<PAGE>
Expenses
Compensation and employee benefits. Compensation and employee benefits
consist primarily of management and employee salaries, bonuses, commissions
and related costs as well as the cost of personnel from temporary agencies.
Total compensation and benefit costs increased 105% to $53.6 million in 1999,
or 87.5% of revenue, from $26.1 million in 1998, or 60.9% of revenue. The
increase in total compensation and benefit costs resulted primarily from an
increase in the number of employees from 486 to 776 at December 31, 1998 and
1999, respectively, to support our new Internet origination volumes and
related technical support services. The increase was also a result of
increased commissions paid to loan originators commensurate with increased
loan volumes. Total compensation and benefit costs increased as a percentage
of revenue due to training periods involved in expanding our call center
capacity to meet Internet loan demand. We expect that compensation and
employee benefits will not increase significantly in the near future as we
have reorganized our operations to combine staff handling our separate
business channels into one function. We expect to obtain cost efficiencies
from directing our operations more toward full utilization of Internet
strengths.
Included in "Compensation and employee benefits" is the amortization of
unearned compensation, which resulted when stock options we granted during
1998 and the first and second quarters of 1999 were subsequently deemed to
have exercise prices less than the estimated fair market value of our common
stock at the time of grant. As of December 31, 1999, we have recorded
approximately $16.6 million in deferred compensation, and we amortized
approximately $7.7 million and $29,000 of that amount to expense in 1999 and
1998, respectively. During the third quarter of 1999, the vesting of certain
options was accelerated and approximately $5.4 million of deferred
compensation relating to these options was recognized in expense. The
remaining balance will be amortized on a straight-line basis over the
remaining vesting periods of the underlying options. Stock-based compensation
is a non-cash expense.
Marketing and advertising. Marketing and advertising expenses consist
primarily of the cost of a national advertising campaign to brand the
Mortgage.com name with the public and payments for leads generated through
internet marketing and distribution agreements or co-branding arrangements,
as well as the cost of direct advertising and trade-show participation.
Marketing and advertising expenses also include fees paid to other web sites
and business partners for lead generation. Marketing expenses increased
1.169% to $16.5 million in 1999, or 26.9% of revenue, from $1.3 million in
1998, or 3.1% of revenue. These increases were directly related to the
branding campaign, new online distribution agreements and online advertising
designed to increase the exposure of our Web site. Since the branding
campaign is complete, we believe that marketing expenses will decrease, both
in absolute dollars and as a percentage of revenue. We expect that the costs
of expanding strategic partnerships with other Web sites to drive more
traffic to our Web site will be less than the media costs of brand
advertising.
30
<PAGE>
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 decreased 28%
to $2.1 million in 1999, or 3.4% of revenue, from $2.9 million in 1998, or
6.7% of revenue. The decrease was primarily due to the redeployment of
product development personnel to the capitalized development of the
integration of CLOser with newly acquired Internet technology and third-party
software. 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 intangible assets and amortization of
capitalized software development costs. Depreciation and amortization
expenses increased 179% to $5.3 million in 1999, or 8.7% of revenue, from
$1.9 million in 1998, or 4.4% of revenue. These increases were a result of
increased expenditures for an expansion of our Internet infrastructure and
acquisition of capital equipment to support call center operations, additions
to goodwill from the AFI acquisition and payments relating to the Online
Capital and Mortgage.com name acquisitions. During 1999, $613,000 was
amortized on intangible assets. These expenses have increased in absolute
dollars as a result of our exercise of an option to repurchase our CLOser
software system from a third party in May 1999 for $3.5 million, an
additional $1.5 million in the cost of the domain name and planned
expenditures to maintain state-of-the-art technology in support of our
Internet operations.
General and administrative. General and administrative costs
include telephone and communication costs, rent and other occupancy costs,
equipment leases, certain loan transfer fees and consulting and professional
expenses. General and administrative expenses increased 97% to $18.9 million
in 1999, or 30.9% of revenue, from $9.6 million in 1998, or 22.5% of revenue.
The increase in general and administrative expenses resulted from additional
rent, communication costs and other expenses related to call center
operations and the addition of administrative personnel in anticipation of
becoming a public company. We expect general and administrative expenses to
increase at a slower rate as we continue to grow. We expect to benefit from
efficiencies in our plans to streamline processing operations to make better
use of the Internet.
Interest expense. Interest expense, which includes interest on
subordinated debt and on capital lease obligations, increased 59% to $11.3
million 1999, compared to $7.1 million 1998. These increases were a result of
the $40.5 million in subordinated debt issued in the first half of 1999,
which was paid off from public offering proceeds in August 1999, and of
higher interest rates incurred on warehouse loans in the second half of 1999.
31
<PAGE>
Years Ended December 31, 1998 and 1997
Revenue
Total revenue increased 119% to $42.8 million in 1998 from $19.5
million in 1997. This growth resulted primarily from our acquisition of
AFI in April 1998 and the loan volume generated by our Web sites, a full year
of operations of OnLine Capital acquired in the summer of 1997, strategic
alliances with online partners that generated loan volume for us and an
increase in refinancing activities resulting from relatively low interest
rates.
Secondary marketing revenue, net. Gains and other revenue from the
origination and secondary marketing of mortgage loans increased 147% to
$28.6 million in 1998 from $11.6 million in 1997. This increase resulted
primarily from the increase in the total dollar amount of loans we
originated, funded and sold. The total dollar amount of closed loans that we
originated increased from $2.0 billion in 1998 from $808.7 million in 1997.
We funded and sold in the secondary market $1.5 billion in loans in 1998 and
$562.0 million in 1997. The increase in loan volumes and related revenue
resulted primarily from the introduction of additional Internet origination
channels in April 1998 and a full year of operations of OnLine Capital. The
increase was also attributable to increased refinancing activity resulting
from relatively low interest rates.
Loan production and processing fees, net. Loan production and
processing fees, less amounts paid to third parties for certain processing
services, increased 130% to $5.3 million in 1998 from $2.3 million in 1997.
This increase in production and processing fees resulted from an overall
increase in loan volume.
Management, technology and other fees. Revenue from management,
technology and other fees decreased 5% to $1.9 million in 1998 from $2.0
million in 1997. This decrease was primarily attributable to the refocusing
of our resources in 1998 on internal development of expanded Internet
capabilities.
Interest income. Interest income increased 94% to $7.0 million in 1998
from $3.6 million in 1997. An overall increase in loan volume increased the
interest earned during 1998.
Expenses
Compensation and employee benefits. Compensation and benefit costs
increased 99% to $26.1 million in 1998, or 60.9% of revenue, from $13.1
million in 1997, or 67.0% of revenue. The dollar increase in total
compensation and benefit costs resulted primarily from an increase in number
of employees from 148 at December 31, 1997 to 486 at December 31, 1998 to
support our new Internet origination volumes and related technical support
services. The increase was also a result of increased commissions paid to
loan originators commensurate with increased loan volumes. Total compensation
and benefit costs decreased as a percentage of revenue.
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<PAGE>
Marketing and advertising. Marketing expenses increased 446% to $1.3
million in 1998, or 3.1% of revenue, from $238,000 in 1997, or 1.2% of
revenue. These increases were directly related to new online distribution
agreements and online advertising designed to increase the exposure of our
Web site.
Research and development. Research and development expenses increased
164% to $2.9 million in 1998, or 6.7% of revenue, from $1.1 million in 1997,
or 5.5% of revenue. These increases were primarily due to the addition of
product development personnel to integrate CLOser with newly-acquired
Internet technology and third-party software and Internet platforms.
Depreciation and amortization. Depreciation and amortization expenses
increased 296% to $1.9 million in 1998, or 4.4% of revenue, from $480,000 in
1997, or 2.5% of revenue. These increases were a result of increased
expenditures for an expansion of our Internet infrastructure and acquisition
of capital equipment to support call center operations, and a shortening of
the period that we amortize capitalized software development costs from five
years to three years. We capitalized an additional $832,000 in software
development costs in 1998 and $518,000 in 1997.
General and administrative. General and administrative expenses
increased 88% to $9.6 million in 1998, or 22.5% of revenue, from $5.1
million in 1997, or 26.3% of revenue. The increase in general and
administrative expenses resulted from additional rent, communication costs
and other expenses related to call center operations and the addition of
administrative support personnel. These expenses declined as a percentage of
revenue due to increased mortgage loan originations.
Interest expense. Interest expense increased 129% to $7.1 million in
1998 from $3.1 million in 1997. An overall increase in loan volume increased
the interest charge by our warehouse lenders during 1998.
Quarterly Results of Operations
The following table provides certain unaudited quarterly consolidated
statement of operations data for each of the eight quarters during the years
ended December 31, 1999 and 1998. This information has been prepared
substantially on the same basis as the audited consolidated financial statements
and all necessary adjustments consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the quarterly
results. The quarterly data should be read in conjunction with our audited
consolidated financial statements and the notes to those statements. As a result
of our limited operating history and numerous factors outside management's
control, some of which are listed above, we may experience material fluctuations
in revenue and earnings in future quarters. Accordingly, the operating results
of any quarter may not be indicative of the results that may be expected for any
future period.
33
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data: (In thousands)
Revenue:
Secondary marketing revenue, net............ $ 8,448 $ 8,622 $ 9,946 $ 8,600 $ 8,938 $ 7,632 $ 6,621 $5,407
Loan production and processing fees, net... 2,486 2,442 3,103 2,598 1,809 1,329 1,278 922
Management, technology and other fees....... 710 663 967 1,991 134 539 649 546
Interest income............................. 2,276 2,847 2,882 2,677 2,210 2,258 1,461 1,069
------- ------- ------ ------ ------ ------- ------ -----
Total revenue............................. 13,920 14,574 16,898 15,866 13,091 11,758 10,009 7,944
------- ------- ------ ------ ------ ------- ------ -----
Expenses:
Compensation and employee benefits.......... 12,832 18,385 12,713 9,645 8,602 6,653 5,892 4,928
Marketing and advertising................... 3,322 8,623 3,043 1,536 539 454 257 85
Research and development.................... 351 389 593 777 1,155 722 578 433
Depreciation and amortization............... 1,797 1,667 1,154 698 1,114 338 268 153
General and administrative.................. 5,599 5,146 4,415 3,759 2,994 2,721 2,293 1,590
Interest expense............................ 2,188 2,935 3,537 2,650 2,353 2,149 1,484 1,125
------- ------- ------ ------ ------ ------- ------ -----
Total expenses............................ 26,089 37,145 25,455 19,065 16,757 13,037 10,772 8,314
------- ------- ------ ------ ------ ------- ------ -----
Loss before minority interest and extraordinary (12,169) (22,571) (8,557) (3,199) (3,666) (1,279) (763) (370)
item
Minority interest.......................... (4) - - - - - - -
------- ------- ------ ------ ------ ------- ------ -----
Loss before extraordinary item................ (12,173) (22,571) (8,557) (3,199) (3,666) (1,279) (763) (370)
Extraordinary item......................... - (436) - - - - - -
------- ------- ------ ------ ------ ------- ------ -----
Net loss...................................... $(12,173) $(23,007) $(8,557) $(3,199) $(3,666) $ (1,279) $ (763) $ (370)
======= ======= ====== ====== ====== ======= ====== =====
As a percentage of total revenue:
Revenue:
Secondary marketing revenue, net.............. 60.7% 59.2% 58.9% 54.2% 68.3% 64.9% 66.2% 68.1%
Loan production and processing fees, net..... 17.9 16.8 18.4 16.4 13.8 11.3 12.8 11.6
Management, technology fees and other......... 5.1 4.5 5.7 12.5 1.0 4.6 6.4 6.9
Interest income............................. 16.3 19.5 17.0 16.9 16.9 19.2 14.6 13.4
------- ------- ------ ------ ------ ------- ------ -----
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------ ------ ------ ------- ------ -----
Expenses:
Compensation and employee benefits............ 92.2 126.1 75.2 60.8 65.7 56.6 58.9 62.0
Marketing and advertising................... 23.9 59.2 18.0 9.7 4.1 3.9 2.6 1.1
Research and development...................... 2.5 2.7 3.5 4.9 8.8 6.1 5.8 5.5
Depreciation and amortization................. 12.9 11.4 6.8 4.4 8.5 2.9 2.7 1.9
General and administrative.................... 40.2 35.4 26.2 23.7 22.9 23.1 22.8 20.0
Interest expense............................ 15.7 20.1 20.9 16.7 18.0 18.3 14.8 14.2
------- ------- ------ ------ ------ ------- ------ -----
Total expenses............................ 187.4 254.9 150.6 120.2 128.0 110.9 107.6 04.7
------- ------- ------ ------ ------ ------- ------ -----
Loss before minority interest and extraordinary (87.4) (154.9) (50.6) (20.2) (28.0) (10.9) (7.6) (4.7)
item
------- ------- ------ ------ ------ ------- ------ -----
Minority interest.......................... 0.0 - - - - - - -
Loss before extraordinary item................ (87.4) (154.9) (50.6) (20.2) (28.0) (10.9) (7.6) (4.7)
Extraordinary item......................... - (3.0) - - - - - -
------- ------- ------ ------ ------ ------- ------ -----
Net loss...................................... (87.4)% (157.9)% (50.6)% (20.2)% (28.0)% (10.9)% (7.6)% (4.7)%
======= ======= ====== ====== ====== ======= ====== =====
</TABLE>
Our quarterly growth in revenue resulted from a growth in loan volumes
until the third quarter of 1999, when increasing interest rates resulted in
slower growth. We also have experienced normal seasonality in the mortgage
industry by having stronger demand in the summer than in the winter.
34
<PAGE>
Our compensation costs reflect a general upward trend as a percentage
of revenue due to the increase in personnel to support our new Internet
origination volumes and related technical and administrative support services as
well as increased commissions paid to loan originators commensurate with
increased loan volumes. The $5.4 million of vested unearned compensation expense
caused an unusual increase in compensation during the third quarter of 1999. The
marketing and advertising branding expense affected the 1999 periods and is not
expected to continue in 2000. Our general and administrative expenses have
increased as a percentage of revenue due to our expansion to provide for
operational growth. The expansion required additions to leased space and
equipment and communication costs to handle support services from our call
center. We also used consultants to assist in the technology expansion and in
evaluation to determine that we had no exposure to potential Year 2000
technology problems.
Liquidity and Capital Resources
On August 11, 1999, we completed an initial public offering in which we
sold 7,062,500 shares of common stock. Subsequently, the underwriters of the
public offering exercised an option to purchase an additional 379,375 shares of
common stock to cover over-allotments of shares. The gross proceeds from these
transactions were $59.5 million, or $55.4 million net of underwriter discounts.
A portion of the proceeds was used to repay $40.5 million of subordinated debt
and $433,000 was used to redeem certain warrants.
Since inception and prior to the public offering, we have funded
operations primarily through net cash proceeds from private placements of
preferred stock totaling $26.5 million through December 31, 1998. In February
and April 1999, we received gross proceeds from the issuance of subordinated
notes totaling $13.0 million. In May 1999, we received an additional $27.5
million from the issuance of a convertible subordinated note. The subordinated
notes and the convertible subordinated notes were repaid upon completion of the
initial public offering. We also received $15.0 million from the sale of shares
of preferred stock in May. All preferred stock converted into common stock at
the date of the public offering in August.
As of December 31, 1999, we had cash and cash equivalents of $7.5
million and an additional $2.5 million in cash available through our warehouse
lines of credit which may be used for general corporate purposes. Excess cash
has been temporarily deposited against the warehouse balances to enhance our
return on cash. In January 2000, we raised an additional $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, $24.0 million of which was paid to us in connection with our
contribution of the Openclose.com assets. Subject to market conditions, we
intend to raise additional cash to fund our continuing expansion either through
a private placement of stock or through a secondary public offering.
One of our most significant needs for operating capital is to fund
mortgage loans between closing and eventual delivery to secondary market
investors. We have funded these loans through loan purchase agreements,
warehouse lines of credit and collateralized loan
35
<PAGE>
purchase agreements with banks and other financial institutions. We currently
have a single syndicated line of credit 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 the receipt of loan sale proceeds from investors was
approximately 22 days during 1999.
Net cash provided by operating activities for the year ended December
31, 1999 totaled $48.6 million. This cash was generated primarily from a
reduction in mortgage loans available for sale, offset by operating losses.
Net cash used in investing activities for the year ended December 31,
1999 totaled $16.6 million, $9.6 million of which was used for the purchase of
computers, workstations, servers and other equipment to support our growth in
technology support services and call center operations and costs related to
software development. Included in these purchases was the $3.5 million
repurchase of our CLOser software system from an unrelated party. The purchase
of the mortgage.com domain name cost us $2.4 million.
Net cash used in financing activities for the year ended December 31,
1999 totaled $28.0 million, as $69.0 million in proceeds from the issuance of
common and preferred stock was used to reduce warehouse and other notes payable,
to redeem warrants and for general corporate purposes.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $57.7 million available to reduce future taxable income expiring
on various dates from 2008 to 2019.
Since inception, we have significantly increased our operating costs
and we anticipate that we will continue to experience significant increases in
our operating costs for the foreseeable future. In addition, we may use cash
resources, including cash generated by the sale of www.openclose.com, to fund
acquisitions or investments in joint ventures, businesses, technologies and
products or services complementary to our business. Increased loan volume also
requires additional cash to fund the loans. We intend to raise capital to fund
these requirements either through a private placement of stock or through a
secondary public offering. However, we cannot be sure that we will be able to
raise sufficient funds in the capital markets to adequately support our
strategic plans. Moreover, the issuance of additional equity or convertible debt
securities could result in dilution to our existing stockholders.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to
36
<PAGE>
as derivatives) and for hedging activities. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB SFAS No. 133. SFAS 133, as amended, is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The impact of this Statement is not anticipated to have a material impact
on the Company's consolidated statements of operations, balance sheets or cash
flows upon the adoption of this standard.
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.
We originate mortgage loans and manage the market risk related to these
loans by pre-selling them on a best efforts basis to the anticipated secondary
market investors at the same time that we establish the borrowers' interest
rates. If we can deliver mortgage loans within the time frames established by
the secondary market investors, we have no interest rate risk exposure on those
loans. However, if the loan closes but we cannot deliver the loan within those
time frames, and if interest rates increase, we may experience a reduced gain or
may even incur a loss on the sale of the loan.
Management is currently evaluating hedging strategies to protect us
against the risk we incur with sales of mortgage loans in the secondary market
when interest rates rise and fall. We have retained Tuttle & Co., an
unaffiliated advisory firm, to help us manage our interest rate risks. We are
considering engaging Tuttle to also assist us with a hedging strategy. Hedging
strategies involve buying and selling mortgage-backed securities so that if
interest rates increase or decrease sharply and we expect to suffer a loss on
the sale of those loans, our buying and selling of mortgage-backed securities
will offset the loss. We would analyze the probability that a group of loans we
have originated will not close, and try to match our purchases and sales of
mortgage-backed securities to the amount we expect will close.
An effective hedging strategy is complex and no hedging strategy can
completely eliminate our risk. Part of this is because the prices of
mortgage-backed securities do not necessarily move in tandem with the prices of
loans we originate and close. To the extent the two prices do not move in
tandem, our hedging strategy may not work, and we may experience losses on our
sales of mortgage loans in the secondary market. The other key factor is whether
our probability analysis properly estimates the number of loans that will
actually close. To the extent that we implement a hedging strategy but are
unable to effectively match our purchases and sales of mortgage-backed
securities with the sale of the closed loans we have originated,
37
<PAGE>
our gains on sales of mortgage loans will be reduced, or we will experience a
net loss on those sales.
We currently sell more than 90% of the loans we sell through best
efforts commitments, which means we do not suffer a penalty if the loans do not
close. We sell some loans, including sub-prime loans, on a mandatory delivery
basis. Selling on a mandatory delivery basis means we are required to sell the
loans to a secondary market investor at a price we agree upon, regardless of
whether the loans close. This potentially generates greater revenue for us
because secondary market investors are willing to pay more for a mandatory
delivery commitment from us. However, it also exposes us to greater losses if
the loans do not close.
Management is considering selling a greater number of loans on a
mandatory delivery basis so that we can generate greater gains on the sales of
loans. Our hedging strategy of buying and selling mortgage-backed securities
would help us manage the additional risk we would incur when more loans are sold
on a mandatory delivery basis. However, because hedging strategies are not
perfect, our hedging strategy may not completely offset the additional risk, and
we may suffer losses on loans sold on a mandatory delivery basis.
We also do not currently maintain a trading portfolio. As a result, we
are not exposed to market risk as it relates to trading activities. Our entire
loan portfolio is held for sale. Accordingly, we must perform market valuations
of our pipeline, our mortgage portfolio held for sale and the related sale
commitments in order to properly record the portfolio and the pipeline at the
lower of cost or market. Therefore, we measure the interest rates of our loan
portfolio against prevailing interest rates in the market.
Because we pre-sell our mortgage loan commitments, we believe that a 1%
increase or decrease in long-term interest rates would not have a significant
adverse effect on our earnings from interest rate sensitive assets. We pay off
warehouse lines when the loans are sold in the secondary market. Because the
loans are held in the warehouse lines for a short period of time, we do not
expect to incur significant losses from an increase in interest rates on the
warehouse lines. However, since a significant percentage of our closed loan
volume is from refinancing mortgage loans, our future operating results may be
more sensitive to interest rate movements.
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BUSINESS
General
Mortgage.com, Inc. is a leading provider of online mortgage services
and technology to businesses and consumers. Our vision is to create the
definitive Internet-based technology platform for originating, underwriting,
processing, closing and selling mortgage loans. We enable other businesses to
use this technology platform when they market to customers who choose to obtain
mortgage services through the Internet. This platform will enable new businesses
to participate in the mortgage origination arena, by offering mortgage services
to their customers through the Internet while letting us do the technology and
back office work. We have designed this platform to decrease the cost of
originating, closing and selling loans, so consumers who obtain a loan via our
technology platform will save money when compared to obtaining a loan using a
traditional lender.
We have developed, and will continue to develop, state-of-the-art
technology to support the origination, processing, underwriting, closing and
secondary marketing of mortgage loans. Our clients include real estate
companies, homebuilders, trusted financial advisors, Internet-based companies
who market their services over the Internet, known in the industry as "affinity
customers", mortgage web sites that generate leads, and other non-traditional
mortgage originators. In addition, our clients include mortgage companies and
banks that wish to offer Internet mortgage services without developing a full
in-house Internet solution for themselves.
We believe that borrowers are generally dissatisfied with the
traditional mortgage lending process. This dissatisfaction stems from the
complexity of the process, inefficiencies and delays related to the manual
collection and transfer of information and the borrower's inability to monitor
the status of his loan. In addition, our internal research indicates that
borrowers feel the fees involved in obtaining a mortgage loan are too high.
Mortgage lending on the Internet can offer borrowers an easier, faster and less
expensive way to obtain mortgage loans and has the potential to eliminate many
of the borrower's frustrations found in traditional mortgage lending. We believe
companies that provide these benefits to borrowers will gain a competitive
advantage. We seek to take advantage of the existing relationships that our
clients have with prospective borrowers, and offer our services through our
clients marketing efforts. In some cases, we offer our services directly to
borrowers, although we are increasingly moving away from this strategy as we
realize the benefits of leveraging our client's marketing efforts.
We offer borrowers a more satisfying, less frustrating mortgage
experience. We use our Internet platform and other proprietary technologies to
make the mortgage lending process more efficient, whether the borrower comes
from one of the 89 private label web sites we have developed for our business to
business clients or is referred directly to our mortgage.com Web site.
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In 1999, we originated and closed mortgage loans with a total principal
amount of $3.0 billion, of which approximately 36.2% were originated through our
Internet platform. We funded and sold $2.3 billion of those loans. Wholesale
lenders provided the funding for the balance of the loans at our request.
Industry Background
Overview
The Mortgage Bankers Association of America, or MBA, estimates that the
mortgage industry originated approximately $1.29 trillion in mortgages in
1999 compared to $1.51 trillion in 1998. The MBA estimates that another $.97
trillion in mortgages will be originated in 2000.
In traditional mortgage lending, a borrower obtains a mortgage loan by
contacting a mortgage originator, such as a mortgage banker, mortgage broker
or a financial institution. After a borrower has selected a mortgage
originator, an employee or commissioned loan officer of the mortgage
originator collects information about the borrower and completes a loan
application by hand, while the borrower waits. These mortgage originators
often have business hours that are not convenient for a borrower who works
during the day, and a borrower may have to make several trips to provide all
of the information for the application. In addition, these mortgage
originators' offices may be located far from the borrower's home. The
borrower may have to wait weeks while credit reports, appraisals and other
third party verifications are ordered. In many cases, the mortgage originator
is a commissioned salesperson, and earns greater income when he or she can
convince a borrower to accept a higher rate. It is common for a mortgage
salesperson to earn 1% or more of the loan amount for originating a loan. For
these reasons, we believe that borrowers are generally dissatisfied with this
process.
We also believe that borrowers lack knowledge about the mortgage
process, including the costs associated with obtaining a mortgage loan.
Consequently, it is difficult for a borrower to determine whether he is
getting the right mortgage loan, at the right cost, in a timely fashion. In
addition, a borrower must depend upon the mortgage loan originator to keep
him informed about the status of the loan application and the available
products and pricing options.
Some of a borrower's frustration and dissatisfaction stems from
inefficiencies and delays in the application, processing and underwriting
phases of the mortgage lending process. Manual collection and transfer of
information from the application process through the processing and under-
writing phases increases loan approval time and results in a greater number
of human errors. Many mortgage originators and mortgage lenders do not have
the technical expertise or financial resources to automate the origination,
processing and underwriting of mortgage loans to achieve greater efficiency.
Continuing inefficiencies make it difficult for mortgage originators and
mortgage lenders to keep borrowers adequately informed and satisfied.
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We believe the mortgage origination market is highly fragmented with
many small originators. This leads to a lack of consistency in the pricing
and processing of mortgage loans and contributes to borrower dissatisfaction
with the entire process.
Growth of the Internet and Online Financial Services
The Internet has emerged as a global medium for communication, content
delivery and electronic commerce, and Internet use continues to increase
rapidly. International Data Corporation, or IDC, estimates that the number of
users worldwide will increase from 142 million in 1998 to over 500 million in
2002. As consumers have become increasingly adept at using the Internet for
evaluating and purchasing a variety of goods, the dollar volume of online
commerce transactions has risen dramatically. IDC estimates that the volume
of goods and services purchased through the Web will increase from $50
billion in 1998 to more than $2.8 trillion in 2002.
The Internet provides companies with additional ways to reach
potential customers along with the opportunity to transact business with them
in a more efficient, centralized and low-cost manner than business transacted
through traditional channels. In addition, the Internet offers companies
flexibility, permitting them to adjust features, presentations and prices in
response to competition. Consumers benefit from improved overall convenience,
low-cost access to information regarding available products and services,
ease of use, numerous choices and often more competitive pricing.
Financial services is one of the more prominent industries that has
taken advantage of the Internet. The information potential of the Internet
and the potential lower costs associated with conducting business
electronically underlie the success of financial services Web sites. Many of
these financial services companies have undertaken aggressive marketing
campaigns to establish their online brands. We believe that consumers will
become more willing to conduct financial transactions online, including
mortgage transactions, as Internet use increases, Internet brands are
established and concerns about security and privacy are alleviated. We also
believe that pending federal and state legislation authorizing the use of
electronic signatures will expedite the use of online mortgage transactions,
if such legislation is adopted.
Online Mortgage Services
The mortgage industry is well suited for transformation to an
Internet platform. Mortgage origination on the Internet can offer borrowers
an easier, faster, less expensive way to obtain mortgage loans and has the
potential to eliminate many of borrowers' frustrations found in traditional
mortgage lending. The legal and technology framework that will allow mortgage
underwriting, processing, closing and sales to take full advantage of the
power of the Internet is still developing. We are at the forefront of
developing the technology framework for these "back-office" services to
supplement the origination platform we have already developed. The same
principles that make online mortgage lending an easier, faster and less
expensive process for the borrower can also benefit
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mortgage providers. Mortgage providers will be under increasing pressure to
offer their borrowers an Internet origination and closing process. We believe
many of them will choose to use our platform instead of creating it
themselves.
Based on a recent report from Forrester Research, electronic
commerce on the Internet through direct-to-consumer channels is expected to
grow from $33 billion in 2000 to $108 billion in 2003, a 227% increase, while
electronic commerce on the Internet through business-to-business channels is
expected to grow from $251 billion in 2000 to $1.34 trillion in 2003, a 444%
increase.
We believe that very few of the largest mortgage loan originators have
capitalized on the mortgage lending opportunities on the Internet. Most
mortgage originators lack the expertise to develop their own Internet
technologies and have been slow to address the online market. We believe the
majority of the prominent mortgage originators use the Internet primarily to
advertise and provide contact information. Even among originators that offer
online applications, we believe that many still have problems seamlessly
integrating their Internet applications with the systems that assist in
processing, underwriting and closing the mortgage loans. As a result,
mortgage originators have not been leveraging the Internet as a means to
increase borrowers' satisfaction and reduce overall costs.
We believe that to maximize the potential of computer-related
technology in the mortgage industry, a company must be able to provide
borrowers:
o low cost loan choices when compared to obtaining a loan through
a traditional lender;
o multiple loan product and loan servicer choices, with an easy way to
compare the options;
o online loan applications and loan pre-qualifications;
o seven day a week convenience, with the option to speak with a person
for extended hours every day;
o service guarantees that are backed up by management commitment and
cash refunds when appropriate; and
o the ability to monitor the status of their loans from origination
through closing.
We believe companies that are able to provide these benefits to
borrowers will gain a competitive advantage.
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The Mortgage.com Solution
We use our Internet platform and other internally-developed,
proprietary technologies to maximize efficiency in the mortgage lending process
in support of the mortgage operations of our clients, such as mortgage bankers,
mortgage brokers, financial institutions, Realtors and homebuilders, and in our
current direct-to-consumer Internet mortgage banking operation. Because of these
efficiencies, borrowers find the experience of obtaining a mortgage more
satisfying and less frustrating because they benefit from:
o convenient access to the mortgage lending process through the
Internet, by e-mail, by telephone or in person at locations
where homes are sold;
o interactive selection from a comprehensive suite of mortgage
products and services;
o personalized services and products tailored to individual needs;
o service guarantees;
o faster applications and pre-qualifications;
o interest rate locks; and
o constant monitoring of loan status.
Through our business-to-business channels, we use our technology to
enable our clients to better satisfy their borrowers. Borrowers can access our
clients through customized "private label" mortgage lending Web sites we create
and maintain for clients who need technical expertise and other resources to
establish and maintain a comprehensive online presence. Borrowers also can get
efficient mortgage services at the point-of-sale of homes, where we enable
Realtors and homebuilders to enter the mortgage lending business with a minimum
initial investment and with low overhead. We also offer dedicated Internet-based
Teleweb center services to our clients so they can provide a high-level of
customer service for their borrowers.
When we process, underwrite and fund mortgage loans for our clients or
our own mortgage banking operations, borrowers have constant and convenient
access through the Internet to monitor the status of their loan applications.
After the mortgage loans close, we sell those mortgage loans in the secondary
market to investors who will be responsible for servicing the mortgage loans.
Servicing consists of collecting from the borrower debt service and escrow funds
for property taxes and insurance, paying debt service to loan investors, paying
property taxes and insurance premiums and supervising foreclosures for defaulted
loans.
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The Mortgage.com Strategy
Our objective is to touch every mortgage, either as a lender or via
implementing our technology for use by other mortgage lenders. Key elements of
our strategy are:
Establishing and Enhancing Brand Awareness Within the Mortgage,
Financial Services and Real Estate Industries. We seek to make the Mortgage.com
name synonymous with the delivery of mortgage services via the Internet
throughout these industries. We want consumers to recognize the "mortgage.com"
logo as being representative of a new and better loan process, combined with
greater speed and significant cost savings. We spent approximately $10 million
for advertising and promotion of the Mortgage.com brand name during 1999, and
because of the success of our promotional efforts, we believe our name is
generally well known throughout the industry. We therefore do not intend to
spend a material amount of money on advertising and promotion in the current
fiscal year, with a focus instead on co-branding with leading financial
information sites and developing additional business alliances.
Developing a New and Better Loan Process that Utilizes Technology and
the Internet to Reduce Costs. We intend to continue to devote substantial
resources to the development and acquisition of innovative Internet and software
solutions so that we can better serve our clients and mortgage borrowers. We are
currently developing and testing improvements to our CLOser software system and
its Internet interface that will increase its versatility and automate
additional portions of the mortgage process. For example, we intend to implement
additional automated underwriting systems, automated closing services and
automated links for third party services such as title insurance, hazard
insurance, and appraisals. We intend to continually modify and upgrade our
software, Internet servers and high-speed transmission lines to increase
bandwidth, expand services and reduce costs. We are also continually evaluating
strategic acquisitions of technology leaders in ancillary service areas, such as
appraisal and credit report services. In this way, our clients and we will be
able to provide borrowers with convenient, high-value and low-cost services. As
we are able to reduce our cost of loan origination and increase the areas in
which we generate revenues, we can offer our platform to other lenders at a cost
below that which they can perform the services themselves. This, in turn, allows
them to drive down costs to their consumers, creating a win-win cycle.
Addressing Under Served Markets. Because online commerce is still in
its infancy, there are a number of online markets for mortgage lending that are
currently under served. We have developed a new segment of our www.mortgage.com
Web site specifically tailored to borrowers of sub-prime loans. We have also
developed our Web interfaces, documentation and fulfillment services completely
in Spanish to serve this growing population in the language of their choice.
These services are found at www.hipoteca.com and at other private label versions
of this site. We also intend to continue to provide solutions to Realtors and
homebuilders, so that borrowers at the point-of-sale of homes have convenient
access to efficient, cost-effective mortgage financing. We believe that
enhancing our presence at the point-of-sale will strengthen our position in the
purchase mortgage market, which is less sensitive to changes in interest rates
than the refinancing mortgage market.
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Promoting and Enhancing our Private Label Capabilities. Substantially
every technology and service that we offer can be offered on a private label
basis. This is key to our strategy. We believe the mortgage origination market
is highly fragmented, with many small originators. As a result, we believe
marketing our private label services is a more effective marketing strategy than
marketing our own brand. In order to reach our goal of touching every mortgage,
we need to offer our services and technologies to all types of traditional and
non-traditional lenders. By doing this on a private label, variable cost basis,
we can allow these clients to take advantage of the Internet lending revolution
without developing all of the expertise in-house. The market is so vast, we feel
this strategy is superior to merely developing our brand directly with
consumers. In addition, we have substantial expertise in creating Affiliated
Business Arrangements and other marketing structures that allow non-traditional
companies to participate in the mortgage origination industry, while still
offering the services to borrowers at a substantial cost reduction over
traditional lenders.
Products and Services for our Business to Business Relationships
Our primary business-to-business products and services are:
o Co-branded web sites where our clients market our products to
their customers over the Internet;
o Private label loan origination, processing and closing services;
o Turnkey, point of sale mortgage origination solutions for
non-traditional mortgage industry participants; and
o Web site development and hosting.
Each of these services, except Web hosting services, takes advantage of
our platform for originating, underwriting, processing, and selling mortgages.
In addition, our clients benefit from our demonstrated ability to convert
Internet inquiries into closed loans.
"Co-Branded" Web Sites
We have entered into Internet marketing agreements that provide for
advertising and promotion of our online mortgage solutions and also provide
for Internet links to co-branded versions of www.mortgage.com through
established home and financial information Web sites such as
www.tdwaterhouse.com. In addition, certain special interest web sites, such
as www.thewhiz.com and www.gosmallbiz.com, desire to offer their clients
access to mortgage services, and we offer the co-branding solution to them as
well. Potential borrowers browsing one of these sites for home buying or
financial information are presented with an opportunity to apply for a
mortgage online, without having to search for a separate Web site. Borrowers
can click on a link that takes them to a version of our
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Web site that displays both our mortgage.com brand and the brand of the
information site that provided the link. We refer to these Web sites as
"co-branded."
Through these relationships, our co-branding partners can provide their
customers with more than home buying and financial information. Those
customers will gain access to convenient online mortgage financing through
www.mortgage.com, including our Teleweb center support and the ability to
monitor the status of their loans through closing. We process, underwrite and
fund the mortgage loans and then sell them in the secondary market.
In total, we have 41 co-branding relationships, and these accounted for
8.7% of our revenue in 1999. We are able to bring most co-branded Web sites
on line within two weeks of signing final agreements with our clients.
"Private Label" Loan Origination, Processing and Closing Services
We create and maintain private label Web sites for mortgage lenders,
including banks, thrifts and credit unions of any size or sophistication.
These private label Web sites are typically operated in the name of the
client, while we provide the technology and management support in the
background through our proprietary CLOser software system and a private label
Internet site. We create and maintain prime and sub-prime private label Web
sites for such clients as Chase Manhattan Mortgage Corporation as part of our
Prudential Real Estate Affiliates relationship, BuildNet Financial and
NetB@nk.
The Web sites we create are custom-tailored to our clients and offer
online applications, full integration with processing and underwriting
systems and Teleweb center support. Just as with our own www.mortgage.com Web
site, the private label Web sites we create for clients allow borrowers the
opportunity to shop and apply for mortgage loans at their convenience. They
also allow borrowers constant access to the status of their loans.
We have six private label relationships and they accounted for
6.6% of our revenue in 1999. Private labeling primarily is focused on working
with lenders who wish to maintain their brand identity throughout the
mortgage process. In some cases, these lenders wish to offer only loan
products that they will buy in the secondary market. We expect our financial
institutions marketing strategy to provide the bulk of our private label
relationships, as this solution is ideal for banks and mortgage banks looking
to add an Internet channel on a turnkey basis.
Turnkey, Point of Sale Mortgage Origination Solutions for Non-Traditional
Mortgage Industry Participants
Our turnkey point of sale mortgage solutions are typically offered to
new participants in the mortgage lending arena that operate at the point of
home sales. The primary clients using these services are Realtors,
homebuilders and "Trusted Financial Advisors," such as financial planners and
accounting firms. We offer specialized marketing
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agreements and membership programs, and can establish independent branch
offices for our clients, that allow them to participate in the loan
origination process using our Internet and CLOser technology platforms. The
client is able to offer its customers "one-stop shopping" for both the
client's primary product, such as a home or financial investment, and a
secondary product that facilitates the sale of the primary product, which in
this case is a mortgage.
A significant portion of our turnkey point-of-sale mortgage solutions
is offered under the trade names Princeton Capital, Advantage Financial and
Western America Mortgage. In each case, we place personnel and/or online
mortgage kiosks in the office of a client to implement the turnkey solutions.
Our Western America Mortgage operations are contained in Western America
Mortgage, Ltd., a partnership of which we own 51%. Our partner in that
operation is a wholly owned subsidiary of Mason-McDuffie Real Estate, Inc.,
which does business in Northern California as Prudential California Realty.
Our primary clients in this area are Prudential California Realty,
Arvida Homes, Keyes Realty and Cendant Mortgage. All told, we have over 40
point-of-sale relationships, which contributed 48.3% of our revenue in 1999.
We expect that this category will continue to be our largest revenue channel
in 2000.
Web Site Development and Hosting
We develop Web sites and software systems for lenders who use our
technology in their back office mortgage operations. With these services, we
do not act as a lender. We are typically paid up-front development fees and
ongoing hosting and use fees that are sometimes based on loan volume
generated by the use of our software.
As part of these services, we continue to develop and update our
proprietary CLOser software system, which automates virtually every stage of
the back office mortgage process. Among numerous other features, CLOser
automatically downloads credit reports and obtains other third party
verifications electronically. It also links to the Web sites we create, third
party automated underwriting systems and our processing and underwriting
systems. CLOser also contains an extensive loan product and pricing database
and sophisticated loan tracking features.
Our clients for these services are Superior Bank, Valley National Bank,
General Electric Mortgage Corporation, GMAC Mortgage Corporation and GHR
Systems, Inc. GHR acts as a reseller of our technology and services and
has brought us joint clients such as PNC Bank and Charter One Mortgage. Our
subsidiary, Openclose.com, also provides similar services for Countrywide
Home Loans, Inc.
This category of services contributed 13.8% of our revenue in 1999 and
we expect this percentage to remain stable in 2000. This strategy fits well
with our plan to "touch every mortgage" and allows us to increase revenues
without a significant increase in personnel required to fulfill mortgage
processing and closing services.
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World-Class Internet Lead Conversion Services
The companies which own lead aggregator mortgage Web sites market
heavily to entice potential borrowers to their Web sites, where the potential
borrowers are given the opportunity to select from an array of loan products
from several mortgage lenders. The Web site owners are typically paid based
on the number of mortgage inquiries, or "leads", that are converted into
closed loans or applications. Our unique focus on Internet lending strategies
has resulted in our ability to convert a higher than typical percentage of
Internet leads to closed loans. Therefore, operators of lead aggregator
mortgage Web sites seek our participation on their sites. Our lead conversion
capability also makes our co-branding and private label services more
desirable.
We have considerable experience with lead aggregator sites such as
QuickenMortgage, Lending Tree.com, Priceline.com, Microsoft Homeadvisor and
CFN. We enable the lead aggregators to offer high quality mortgage services
to consumers using their Web site and provide a cost effective means for
financial institutions to participate on these sites without the considerable
investment required to develop their own electronic mortgage infrastructure.
Our clients have informed us that over the past year, we consistently
outperformed most other participants on their Web sites by converting more
consumer inquiries into funded loans.
We include our revenue from participation on lead aggregator sites as
either private label or co-branding revenue, depending on the structure of
the relationship. We expect this revenue to decrease somewhat in 2000, as we
will no longer participate on the Web site owned by Intuit Lender Services.
On October 7, 1999, we terminated our agreement with Intuit Lender Services
for the provision of prime mortgage loan services to the
www.quickenmortgage.com web site. Terminating this agreement relieved us of a
prohibition from participating on multi-lender sites other than
www.quickenmortgage.com. Approximately 19.6% of the loans we processed in
1999 was derived from this agreement, and we anticipate the reduced loan
volume from this termination will be replaced by new and existing co-branded
Internet relationships entered into with economic terms more favorable to us.
On November 9, 1999, Intuit Lender Services terminated an agreement
relating to sub-prime mortgage services. This termination also relieved us of
certain exclusivity restrictions. We processed few loans under this agreement
in 1999, 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.
Products and Services for our Direct-to-Consumer Channels
Our direct-to-consumer channels include our www.mortgage.com Web site,
which is linked to our Teleweb centers, and our OnLine Capital operations.
During 1999, our direct-to-consumer channels originated and closed $678.6
million of mortgage loans, 33.2% of which were originated through the Internet.
We funded $462.7 million of those loans. These
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channels generally rely on our Internet Web sites, CLOser software system,
direct marketing efforts and loan officer sales force to generate consumer
interest in our loan products.
Online Mortgage Origination Through www.mortgage.com
We operate the www.mortgage.com Web site that serves as our primary
online origination source for mortgage loans. Through www.mortgage.com,
borrowers can research and evaluate mortgage products and services, select
the most suitable mortgage loan with interactive assistance, apply for a
mortgage loan, lock in an interest rate and monitor the status of their
loans. The www.mortgage.com platform also serves as the backbone of our
private label and co-branded Web sites that we provide in our business-to-
business relationships.
In 1999, we spent $10 million on targeted advertising to consumers
designed to drive them to www.mortgage.com. After reviewing the results of
this advertising and our company objectives, we determined that this was not
the most cost-effective way of growing our business and reaching our goal of
touching every mortgage. We discontinued this branding campaign and no
longer intend to spend significant advertising resources to drive consumers
to www.mortgage.com. Instead, we intend to concentrate on establishing
relationships with other businesses that already have consumer traffic
meeting our demographics and establish links from their Web sites to ours.
In 1999, 13.1% of our revenue was generated by consumers coming
directly to www.mortgage.com. Because of the shift in our business strategy,
we anticipate that this percentage will decrease in 2000.
OnLine Capital Operations
Our OnLine Capital operations consist of commissioned loan officers who
conduct their own marketing to consumers, individual real estate agents and
other sources of mortgage loans. These loan officers originate the loans
using our CLOser software system and personalized Web sites that we have
developed for each loan officer. In late 1999, we decided to redesignate
these loan officers as account executives to reflect a new focus on selling
our business-to-business products and services to real estate companies,
homebuilders and other industry participants, rather than marketing loan
products to individual consumers.
In 1999, 9.5% of our revenue was generated by OnLine Capital personnel.
We expect this figure to increase in 2000, although we expect the revenues to
be generated through business-to-business relationships developed by account
executives, rather than through direct-to-consumer channels. We will phase
out our use of the OnLine Capital trade name in 2000.
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Our Service Delivery Platform
Teleweb Center Support
For both our business-to-business and direct to consumer operations, we
receive our Internet loan applications and customer inquiries through our
Teleweb centers. Our Teleweb center operations are integrated with our Web
sites to provide customer service to visitors to www.mortgage.com and all of
the other Web sites we operate for various business-to-business clients.
For those borrowers who have submitted a complete online application, our
automatic call distribution software, CLOserLink, electronically imports all
of the borrower's data into our CLOser software system. In addition,
artificial intelligence software that we license from a third party provides
an automated, customized e-mail response to confirm the application and make
immediate contact with the potential borrower. We then follow up with
frequent telephone calls and e-mails to keep the borrower informed of the
mortgage loan's approval status.
When a partial online application is submitted, or when a borrower
calls or e-mails us based on contact information on our Web site, a customer
service representative in our Teleweb center is assigned to that potential
borrower for the duration of the origination process. The customer service
representative works with the potential borrower to explain portions of the
mortgage lending process, provide rate and product information and assist the
borrower with obtaining a mortgage loan. The customer service representative
can enter data into an electronic loan application through CLOser, which
efficiently manages the remainder of the mortgage transaction.
Loan Products
We offer a complete menu of mortgage loan products to serve the portion
of the residential real estate market consisting of one to four-unit housing.
Generally, the industry breaks down the description of these products into
two categories: prime mortgage loans and sub-prime mortgage loans. These
categories are described below.
Prime Mortgage Loans. Prime mortgage loans include residential
mortgage loans that meet Fannie Mae's or Freddie Mac's secondary
marketing guidelines. These loans generally meet the agencies'
guidelines because the borrowers are credit-worthy and the loans have
appropriate loan-to-value ratios and principal amounts. Prime mortgage
loans also include loans made to credit-worthy borrowers that would
otherwise meet Fannie Mae's or Freddie Mac's underwriting guidelines,
but have a principal amount that exceeds the amounts permitted by
Fannie Mae or Freddie Mac.
The prime mortgage loan portion of our Web site and the Web sites
we create for clients first provides a borrower with knowledge about
the mortgage lending process. It then provides the borrower with the
opportunity to use "SmartQuote," a loan program search system we
developed to make choosing a mortgage simple. SmartQuote prompts the
user for information and then searches the database for all of the loan
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programs meeting the borrower's criteria. After obtaining information
on pricing and the right type of loan for the borrower's situation,
the borrower has an opportunity to submit a secure online application
for a mortgage loan in about 20 minutes. The borrower then can monitor
the progress of the loan through closing.
This portion of our Web site and the Web sites we create for
clients also includes a feature that allows a user to specify the
conditions under which he would be interested in refinancing his
mortgage loan. CLOser then stores this information and provides the
user with an automatic e-mail notification when a suitable loan program
becomes available.
In 1999, 95.5% of the dollar amount of loans we funded was
attributable to the funding of prime mortgage loans. The funding of
prime mortgage loans generated approximately 94.3% of our revenue from
lending activities.
Sub-prime Mortgage Loans. Sub-prime mortgage loans have
characteristics that make them generally ineligible for sale to Fannie
Mae or Freddie Mac in the secondary market for reasons other than an
excessive principal amount. Those characteristics might include the
credit history of the borrower, the debt-to-income ratio, the loan-to-
value ratio, the property type, the lien position or other factors.
Because borrowers of sub-prime loans have often been denied financing,
they are more likely to be dissatisfied with the traditional sub-prime
lending process. Our goal is to provide these borrowers with an
unintimidating, informative and confidential way to obtain a mortgage.
Our Web site and the Web sites we create for clients, and the
associated customer service representatives, try to simplify the
borrowing process and give borrowers answers within a short period of
time. In most cases, a borrower knows within 3 hours whether he is
approved for a mortgage loan.
Commensurate with the higher credit risk, we charge borrowers
higher interest rates on sub-prime mortgages, which allows us to
generate higher origination fees and higher gains on sale in the
secondary market than prime mortgage loans. The higher interest rate
also allows us to generate a greater spread between the interest rate
we charge the borrower and the interest rate we pay to lenders for the
financing arrangements we use to fund the mortgage loans.
In 1999, 4.5% of the dollar amount of loans we funded was
attributable to the funding of sub-prime mortgage loans. The funding of
sub-prime mortgage loans generated approximately 5.7% of our revenue
from lending activities.
Paperless Mortgage Services and Technology
We recently entered into strategic alliance and licensing agreements
with eOriginal, Inc., a prominent technology company that has patented a
process to enable the electronic creation of negotiable instruments and other
documents and the ability to transmit, store and retrieve these instruments
and documents. The eOriginal technology helps assure that
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electronic documents are unique, authentic and secure. Our agreements with
eOriginal allow us to embed the eOriginal technology into the products and
services we provide to our business-to-business clients.
The agreement also provides for development phases to promote the
ability to do business electronically. For example, the initial development
phase involves the cooperation of us, eOriginal, e-close as settlement agent,
GMAC Mortgage Corporation, Residential Funding Corporation and Fannie Mae as
secondary market investors, and the Florida counties of Broward, Duval and
Hillsborough, to develop an electronic mortgage process. We believe the
eOriginal technology has the potential to get us one step closer to our
future goal of electronic, paperless mortgages.
Openclose.com
To address the changing technology needs of the wholesale mortgage
industry, we developed a Web site to promote the migration to Internet lending.
That Web site, www.openclose.com, caters exclusively to the business-to-business
market segment. At www.openclose.com, participating mortgage lenders, brokers
and loan correspondents can exchange lender product and pricing information,
automated underwriting data, mortgage insurance certificates and borrower
application information in a neutral environment. We do not act as a lender on
the openclose site. The Web site is designed to give mortgage brokers access to
automated underwriting information earlier in the cycle of the origination
process, which results in faster transactions, cost savings for borrowers,
brokers and lenders and a reduction in paperwork. The Web site also offers
improved communications between lenders and their broker customers. Membership
in www.openclose.com also creates opportunities to develop business from new
relationships.
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 are held by accredited investors who are also significant
investors in Mortgage.com and who have representatives on the board of directors
of both Mortgage.com and Openclose.com. Openclose.com received $30 million in
cash from the sale of 49% of its outstanding securities to these accredited
investors, $24 million of which was paid to us in connection with our
contribution of the openclose assets.
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. In addition, we entered into an Administrative Services and
Technology Sharing Agreement with Openclose.com under which we will continue to
provide certain management, accounting and technical services to Openclose.com.
We also have granted Openclose.com a non-exclusive, perpetual license to certain
computer code owned by us that is necessary to the operation of the
www.openclose.com Web site.
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As of March 1, 2000, 38 mortgage lenders and approximately 900 mortgage
brokers were participating subscribers to www.openclose.com. Participating
mortgage bankers pay Openclose.com a fee for each mortgage loan sent to them
through www.openclose.com for their review, a loan transfer fee and an access
fee for each of the mortgage brokerage offices that access participating
mortgage banker sections of the Web site. In addition, participating mortgage
bankers pay Openclose.com a fee for each sub-prime mortgage loan transmitted
through www.openclose.com for review. The fees charged by Openclose.com to
participating mortgage bankers for each viewing of the mortgage banker's page on
the Web site by brokers are split equally between Openclose.com and an
unaffiliated third party, from whom Openclose.com licenses some of the tools
available on www.openclose.com.
Mortgage brokers pay Openclose.com a fee for each loan submitted to
www.openclose.com for review by lenders. There are no monthly participation fees
charged to mortgage brokers.
In December 1999, we signed a Master Web Services Agreement with
Countrywide Home Loans pursuant to which we obtained the exclusive right for a
four-year term to develop Web sites to be marketed and sold by Countrywide to
its network of mortgage brokers nationwide. The agreement combines our Web
development capabilities with Countrywide's technical and sales expertise. Each
participating broker for whom we develop a Web site will pay us a setup fee and
a monthly fee from which we will pay Countrywide a commission. We have assigned
the agreement to Openclose.com but will continue to provide the necessary Web
development services under the Administrative Services and Technology Sharing
Agreement. Openclose.com will use the www.openclose.com platform to provide
Countrywide mortgage brokers with same-day ability to order Web sites online and
begin online mortgage originations. Openclose receives fees for each Web site
created and also generates ongoing Web hosting revenue.
The www.openclose.com Web site incorporates the functionality of Fannie
Mae's Desktop Underwriter software that is used in connection with automated
underwriting decisions. We hold a license to use Desktop Underwriter and pay
Fannie Mae a licensing fee based on the volume of mortgage loans submitted for
automated underwriting. Through the Administrative Services Agreement, we use
Desktop Underwriter to provide Openclose.com with automated underwriting
decisions. A portion of the fee we pay to Fannie Mae for Desktop Underwriter is
reimbursed by Openclose.com.
Customers
Our business-to-business clients include real estate companies,
homebuilders, trusted financial advisors, Internet-based affinity customers,
lead aggregation mortgage web sites, and other non-traditional mortgage
originators. In addition, our clients include financial institutions, primarily
mortgage companies and banks, which wish to offer Internet mortgage services
without developing a full in-house solution for themselves.
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Our relationship with Mason-McDuffie Real Estate accounted for 8.4% or
more of our loans originated in 1999. Our relationship with Intuit Lender
Services accounted for approximately 19.6% of the mortgage loans we originated
in 1999, but our relationship with Intuit Lender Services has terminated.
Through Cendant Mortgage, we have developed relationships with CENTURY 21(R) and
Coldwell Banker(R) offices that taken together accounted for approximately 17.9%
of the mortgage loans we originated in 1999. Superior Bank contributed $2.0
million in management, technology and other fees in 1999.
Our direct-to-consumer customers consist of borrowers who contact us
through www.mortgage.com and our OnLine Capital loan officers. We provided 3,875
homebuyers and homeowners with mortgage financing totaling more than $678
million in 1999 through direct-to-consumer channels.
Sales and Marketing
Business-to-Business Sales and Marketing.
We market our business-to-business services through an internal sales
force that is divided into the five markets that we serve: real estate
companies, homebuilders, trusted financial advisors, financial institutions
and consumer Web sites. We advertise in trade journals, attend trade shows
and make individual sales calls on known leaders in the various vertical
markets. As of February 2000, we have 9 people in our business development
area. In addition, many of the former loan officers in our direct-to-consumer
business who are now working as account executives will transition to
business development in the year 2000.
We have several marketing relationships with other businesses that
market our products. These businesses include BuildNet Financial, Prudential
Real Estate Affiliates, Chase Manhattan Mortgage Corporation, McPherson TMR,
ACM Carolinas and Strategic Networks.
Relationship with BuildNet Financial. We have entered into
agreements with BuildNet Financial Services Inc. which provides
BuildNet with exclusive marketing rights to our suite of Internet
mortgage solutions for the residential home building industry in the
United States. BuildNet, whose homebuilder user base manages the
construction of over 350,000 residential homes in the United States
each year, has agreed to offer our products to its clients. These
products include:
o net branch agreements, which enable builders to participate
directly in the mortgage origination process;
o marketing agreements, through which BuildNet Financial helps
create and maintain Web sites for individual builders; and
o co-branded Web-sites, which link builders' Web sites to the
BuildNet Financial Web site.
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BuildNet Financial, through its relationship with us, plans to
offer participating homebuilders back-office support that should
include technology, processing, underwriting, and loan funding. Our
marketing agreement with BuildNet Financial expires March 2002, with
automatic 12 month renewals unless we or BuildNet Financial give notice
of an intent not to renew. BuildNet Financial can terminate the
marketing agreement early only if BuildNet sells all or substantially
all of its assets or merges with another company and does not survive
the merger.
Relationship with Chase and the Prudential Real Estate Network.
We have a joint marketing agreement with The Prudential Real Estate
Affiliates, Inc. and Chase Manhattan Mortgage Company that designates
us as the exclusive recommended provider of Internet lending technology
to real estate brokers and sales associates in the Prudential Real
Estate Network. Chase will market its traditional mortgage services and
our technology-based services to the more than 600 member companies of
the Prudential Real Estate Network, which have more than 1,500 offices
throughout the country.
Members that select our services can use a centralized private-
label Web site that we have designed and maintain for the Prudential
relationship. They also will have the benefit of our Teleweb centers
and our processing, underwriting and closing services. Chase will be
the servicer for many of the loans originated using our services. Under
a separate services agreement, we will receive a flat fee from Chase
for each loan closed through the Web site or the Teleweb centers.
Relationships with McPherson TMR, Strategic Networks and ACM
Carolinas. We have entered into Master Marketing and Management
Agreements with McPherson TMR, Strategic Networks and ACM Carolinas.
Under the terms of the agreements, these entities have agreed to offer
our products and services, including marketing agreements, net branch
programs and memberships to designated clients. Net branch programs
refer to contracts between us and clients to manage the day-to-day
operations of a separate mortgage business established by us for a
client. All of the mortgage loans originated by a net branch are
transmitted to us for processing, closing and funding. Membership
programs refer to contracts between us and a mortgage broker or
homebuilder that licenses our technology for a fee. The mortgage loans
originated through our technology members are transmitted to us for
processing, closing and funding.
They earn a fee for successful marketing of the programs and
ongoing support of the clients they bring to us. McPherson primarily
markets the programs to Remax real estate franchisees in Ohio,
Tennessee and Georgia. Strategic Networks markets the programs to a
variety of real estate companies in Illinois and Missouri. ACM
Carolinas markets the programs in North Carolina. In combination,
these companies brought us 12 new relationships with real estate
companies in the fourth quarter of 1999.
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Direct-to-Consumer Sales and Marketing
We market our products and services directly to consumers on the
Internet via banner advertisements. This program is limited and not likely
to be expanded. In addition, our general business activities, past branding
advertising and easy to remember Web site name continue to generate consumer
traffic directly to www.mortgage.com. Lastly, our OnLine Capital loan
officers will continue to generate some direct to consumer loans as they
transition to their new roles as account executives marketing our business to
business solutions. We do not intend to hire additional consumer direct loan
officers.
Openclose.com Marketing
Openclose.com has its own sales team dedicated to www.openclose.com.
Openclose.com is developing a national marketing plan to build awareness
among mortgage brokers, mortgage lenders and mortgage insurance companies.
The plan includes direct mail advertising with promotional CD-Roms included,
direct sales, lender sponsorships, online advertising and free trial offers.
Openclose.com also intends to continue to participate in numerous industry
trade shows, including regional trade shows in Florida and California,
and the trade shows held for the National Association of Mortgage Brokers and
the Mortgage Bankers Association.
Marketing Services provided by Quintel Communications
We recently entered into an exclusive strategic marketing agreement
with Quintel Communications. This marketing agreement provides for joint
development of new marketing programs for products and services of both
companies to be offered to visitors and customers of the Mortgage.com Web
site and our related business-to-business Web sites.
The new marketing programs will market both mortgage and non-mortgage
products and services. The programs will be directed to our growing database
of more than 800,000 consumers and to Quintel's network and databases, which
currently include more than 5 million profiled consumers, both on- and off-
line.
Quintel is a direct marketing company with the ability to market
thousands of products and services to a detailed database of profiled
consumers via direct, permission-based e-mail marketing, on-line promotions,
loyalty and incentive programs, and group buying events. Currently, Quintel's
network of strategic investments and marketing partnerships includes
MultiBuyer.com, GroupLotto.com, itarget.com, skymall.com, the Innovation
Factory, Inc., GenerationA.com and CyberGold.
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Operations
Production of Mortgage Loans
At the initiation of the mortgage banking process is the generation of
leads and the completion of loan applications. We perform this function (1)
online, (2) through loan counselors that we employ, and (3) through network
members. We evaluate the loan applications and fund those loans that meet our
underwriting criteria. We then sell the mortgage loans in the secondary
market. In some cases, we will present the loans to wholesale lenders who
make the underwriting decisions and fund the loans, paying us a loan
origination fee.
As a step to evaluating mortgage loan applications, our processing
department evaluates credit reports and property appraisals when required,
verifies borrowers' income and assets and obtains any additional third
party verifications relating to the borrowers and the mortgaged properties.
We maintain processing centers in Walnut Creek, California, Los Gatos,
California and Plantation, Florida, where as of December 31, 1999, 111
employees execute the processing functions. Our operations managers approve
and monitor third party sources that have originated the loans, and third
parties from which we receive credit reports, appraisals and similar
verifications, based on criteria established by our chief underwriter.
We underwrite mortgage loans based on criteria established by secondary
market investors. Underwriting criteria may include the borrower's credit
standing and repayment ability and the value and adequacy of the mortgaged
property as collateral. Our underwriting department consists of a team of 35
underwriters in Plantation, Florida, Walnut Creek, California and Los Gatos,
California. The underwriting evaluation is done primarily through our CLOser
software system and through links to the automated underwriting systems
of Fannie Mae and Freddie Mac.
CLOser acts as a pre-funding quality control department because it will
not generate closing documents for a mortgage loan that does not meet the
underwriting criteria. If a mortgage loan meets the underwriting criteria,
CLOser automatically generates closing documents tailored to the loan
product, the borrower, secondary marketing requirements and state laws and
regulations.
Secondary Marketing of Mortgage Loans
We originate all of our mortgage loans with the intent of selling those
loans in the secondary market. Our secondary marketing department monitors
the prices secondary market investors are willing to pay for various loan
products. We then add an appropriate profit margin to the interest rate for
the loan and publish our price for that loan on our Web site, in CLOser and
on various industry databases and price sheets. Our price includes a premium
that we charge investors for the value of the servicing rights associated
with the mortgage loans we sell in the secondary market. When we sell a loan
in the secondary
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market, we achieve a net gain, or suffer a net loss, equal to the difference
between the amount we paid for the loans and the price at which the loans are
sold to secondary market investors.
We obtain commitments from secondary market investors for the purchase
of substantially all the prime mortgage loans we fund on the same day that we
lock in a rate for a borrower. This protects us against changes in interest
rates between the date we issue a loan commitment at a locked-in interest
rate to the borrower and the date we sell the loan in the secondary market.
Our obligations to sell to secondary market investors are generally on a
"best efforts" basis, which means we are required to sell the loan to a
committed secondary market investor only if the loan closes within an agreed
upon time period. However, occasionally a borrower will elect not to lock an
interest rate until the closing. In those cases, we may choose to sell the
loan on a short-term "mandatory" basis, which means we are required to sell
the loan to a secondary market investor within a specified number of days
after the closing.
We also accumulate sub-prime mortgage loans for sale in pools of
between $1 million and $3 million. While this entails additional credit risk
because we hold the mortgage loan for a longer period of time, sales of these
pooled sub-prime loans typically bring higher net gains than the net gains
earned on the sale of prime loans. If we are particularly concerned about the
credit risk on a sub-prime mortgage loan, we will obtain an investor
commitment in advance, which reduces our credit risk but decreases the amount
we receive on the sale of the mortgage loan to secondary market investors.
We are considering selling a greater number of loans in pools on a
mandatory delivery basis. If we do so, we will employ a hedging strategy to
help manage the additional risks associated with pooling loans and selling
them on a mandatory delivery basis.
The following list shows some of the secondary market investors who
commonly purchase mortgage loans from us:
Norwest Funding Fleet Mortgage
Cendant Mortgage GE Capital Mortgage Services
Residential Funding Corporation Interfirst Mortgage
Citicorp Mortgage
In most cases when we sell a mortgage loan in the secondary market,
there is no recourse to us. However, inaccuracies in loan documents,
information about the borrower or information about the mortgaged property
may require us to repurchase the mortgage loans from the investors and
indemnify them for any damages caused by the inaccuracies. Since our
inception, mortgage loans that we have repurchased from investors have
represented an insignificant percentage of our total mortgage loan
originations.
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Funding Mortgage Loans
After a mortgage loan has been approved for funding, we generally
borrow from one of our warehouse lines of credit or other financing vehicles
to fund and close the mortgage loan. We currently have aggregate borrowing
limits of $190 million, consisting of a single syndicated line of credit for
$90 million and a loan purchase agreement for $100 million.
After we borrow funds to fund a mortgage loan, we must pledge the
mortgage loan to the lender as security for our repayment of the borrowed
money. During the time a mortgage loan is pledged to the lender, it is
considered "warehoused." A mortgage loan is warehoused until we sell it in
the secondary market, at which time we repay the lender and the pledge is
released. Prime mortgage loans are warehoused for an average of approximately
18 days. Sub-prime mortgage loans are warehoused for an average of
approximately 40 days. In cases where we hold loans for more than 30 days, we
perform some interim servicing on those loans using computer software
licensed from a third party.
Post-Closing Quality Control
After we have funded and closed a mortgage loan, we submit 10% of
funded loans for a post-funding review. A post-funding review includes a
re-verification of credit, employment income and source of funds, as well as
a review of closing documentation. These reviews also include procedures
designed to detect evidence of fraudulent documentation or unacceptable
activities during the processing, funding or selling of the mortgage loan.
Technology
The CLOser software system encompasses an Internet platform, local and
wide area networks, back office modules for processing, underwriting, closing
and secondary marketing, automated call and e-mail distribution links and
computer-based training. As of December 31, 1999, we employed 59 software
developers who are continually working to develop new technological solutions
for the mortgage industry. As of that date, we employed 43 systems support and
operations personnel who provide communications and infrastructure support for
our direct-to-consumer and business-to-business channels and training services
for clients who use our technology. We also employed 13 customer service
employees who provide technical help desk services. Last year we spent
approximately $2.1 million on research and development and we intend to continue
devoting substantial resources toward that end.
Technology Infrastructure and Security
We have 100 computer servers that house all of our computer-based
technology, from our Internet Web sites to our e-mail capabilities. All of
our server hardware is provided by Dell Computer Corp. and our routers and
switches are provided by Cisco Systems. Our servers run on the Microsoft
Windows NT operating system software. We have redundant high-speed data lines
from multiple vendors for Internet access. We stock
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additional hardware parts and have designed system and power supply
redundancies to ensure that there are no interruptions in service based on
hardware failures. In addition, we monitor our servers to ensure that we have
sufficient space to handle software upgrades and that at least 35% of our
disk drive space is free for performance considerations. All software and
data in the system is backed up to magnetic tape each night, which is stored
off-site.
Our technology security systems are designed to prevent unauthorized
access to internal systems and illegal third-party access to our data.
Internally, log in identifications and passwords are maintained for all
systems, and personnel have access only to those areas for which they are
responsible. We rely on encryption and authentication technology licensed
from third parties to provide secure transmission of confidential
information, such as employment and income items submitted with online
applications. Our servers are protected by firewalls and no outside access is
permitted.
Our technology must accommodate a large number of users and must
deliver frequently updated information. Some components of our technology
have experienced outages or slower response times in the past, but none have
had a material effect on our business.
Other Licensed Technology
The www.openclose.com Web site owned by Openclose.com uses a wide range
of internally developed software, as well as the Desktop Underwriter
software, which we license from Fannie Mae. Our Desktop Underwriter license
expires October 15, 2003, with provision for automatic year to year renewals.
Fannie Mae can amend our license by issuing a bulletin. If we object to the
amendment, Fannie Mae can terminate our license.
Competition
Many of our business-to-business clients also compete with us for
mortgage loan originations. We compete with other mortgage bankers, mortgage
brokers and financial institutions such as Norwest Bank, Countrywide Mortgage,
Chase Mortgage, Headlands Mortgage, Cendant Mortgage, Citibank and Fleet
Mortgage for the origination and funding of mortgage loans directly with
borrowers. Many of our competitors have branch offices in the same areas where
our loan counselors and network members operate. We also compete with mortgage
companies whose focus is on telemarketing, such as The Money Store.
Our online competition also is substantial. In addition to the
traditional mortgage companies and financial institutions who have or are
developing an online presence, we compete with other online financial service
providers, such as Intuit's QuickenMortgage, iOwn, E-LOAN and Finet. Our primary
competitors for business-to-business mortgage banking technology solutions are
FiServ, Inc. and Alltel Corporation. In addition, many large and local lenders
market mortgage solutions to real estate companies, homebuilders, trusted
financial advisors, Web site operators and financial institutions.
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We believe that the principal competitive factors for our business to
business solutions are:
o ability to offer our clients' customers a web origination and
service experience that is efficient and effective;
o ability to quickly and effectively develop co-branding and private
label web sites;
o a broad selection of mortgage loan products;
o ability to offer our clients' consumers attractive interest rates
and fees;
o comprehensiveness of information services;
o quality and responsiveness of customer service; and
o ease of use of computer technology.
We must continue to enhance our technology to compete effectively. Many
of our current and potential competitors are profitable, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial resources than we do. In addition, other financial-related
businesses with these characteristics are likely to enter into the online
mortgage origination business. We cannot be sure that we will be able to compete
successfully against current and future competitors.
Intellectual Property
We regard substantial elements of our Web sites and underlying
technology as proprietary and attempt to protect them by relying on
trademark, service mark, copyright and trade secret laws and restrictions on
disclosure. We also generally enter into confidentiality agreements with all
technical employees and consultants, and with third parties in connection
with our license agreements. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our proprietary
information without our authorization. Third parties may also develop similar
technology independently from us.
We have registered CLOser as a federal trademark. The mortgage.com logo
and "SmartQuote" are also our trademarks and service marks. Openclose.com
owns the trademark for "Openclose." Other trademarks and service marks in
this prospectus are the property of their holders. We also have registered
the Internet domain names "mortgage.com," "realoans.com," "hipoteca.com" and
other domain names we use. Openclose.com has registered the Internet domain
name "openclose.com." A registered domain name gives the owner the exclusive
rights to use these names as the addresses for Web sites in the United
States.
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We may not be able to register "mortgage.com" and certain other of our
trade names as federal trademarks because those names may be too generic to
qualify for federal trademark protection. Accordingly, we may not be able to
prevent other people from using those names in their businesses. It is
possible that others could use "mortgage.com" and our other trade names in
such a way as to damage our reputation, which could ultimately affect our
revenues.
Legal standards relating to the validity, enforceability and scope of
protection of our proprietary rights are uncertain and are still evolving,
especially as they relate to Internet-related rights. In addition, the laws
of some foreign countries may not protect our rights to the same degree as
the United States. For these reasons, we cannot be sure that the steps we
take will adequately protect our proprietary rights. We also may be required
to litigate to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. This could create
substantial costs and a diversion of management's attention.
Regulation
Our mortgage banking business is subject to the rules and regulations
of each state's regulatory authority, the Department of Housing and Urban
Development, Federal Housing Administration, Veteran's Administration, Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation,
Government National Mortgage Association and other regulatory agencies in
connection with originating, processing, underwriting and selling mortgage
loans. Rules and regulations issued by these entities impose licensing and work
flow obligations on us, prohibit discrimination and establish underwriting
guidelines. We also are required to comply with each regulatory entity's
financial requirements.
Mortgage origination activities are further subject to the provisions
of various federal and state statutes including the Equal Credit Opportunity
Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Federal
Truth-in-Lending Act, the Fair Credit Reporting Act and the Real Estate
Settlement Procedures Act. The Equal Credit Opportunity Act and the Fair Housing
Act prohibit us from discriminating against applicants on the basis of race,
color, religion, national origin, familial status, sex, age, marital status or
other prohibited characteristics. It also requires us to disclose specific
information to applicants, such as the reason for any credit denial. The
Truth-in-Lending Act requires us to provide borrowers with uniform,
understandable information about the terms and conditions of mortgage loans so
that they can compare credit terms. It also guarantees borrowers a three-day
right to cancel specified credit transactions. If we fail to comply with
Truth-in-Lending, aggrieved customers could have the right to rescind their loan
transaction with us and to demand the return of finance charges paid to us. The
Fair Credit Reporting Act requires us to supply loan applicants with a name and
address of the credit reporting agency we use when the applicant is denied
credit or when the rate or charge for a loan increases as a result of
information we obtained from a credit reporting agency.
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Some of our client relationships are "affiliated business arrangements"
that must comply with complex limitations under the Real Estate Settlement
Procedures Act and to regulation by the Department of Housing and Urban
Development. Affiliated business arrangements permit companies to refer real
estate settlement business to us without violating the Real Estate Settlement
Procedures Act's prohibition on "kickbacks" to the referring company. There are
limitations on the types of payments that can be made to the referring company
and disclosures that are required to be made to borrowers. Home Mortgage
Disclosure Act also requires us to collect applicant information and file an
annual report with the Department of Housing and Urban Development. Failure to
comply with the Home Mortgage Disclosure Act could result in administrative
enforcement actions that could eliminate important revenue sources for us and
could lead to demands for indemnification or loan repurchases.
Industry participants are frequently named as defendants in class
action and other litigation involving alleged violations of federal and state
consumer lending laws and regulations. Some of the practices that have been the
subject of lawsuits against other companies include:
o "add on" fees;
o truth in lending calculations and disclosures;
o escrow and adjustable rate mortgage calculations;
o private mortgage insurance calculations and disclosures;
o forced-placed hazard, flood and optional insurance; and
o unfair lending practices.
If a significant judgment were rendered against us in connection with
any litigation, it could have a material adverse effect on our business and
results of operations.
Although our operations on the Internet are not currently regulated by
any government agency in the United States beyond the mortgage-related
regulations described above and regulations applicable to businesses generally,
it is likely that a number of laws and regulations may be adopted governing the
Internet. In addition, existing laws may be interpreted to apply to the
Internet. There may be claims that our services violate those laws.
Regulatory and legal requirements are subject to change and may become
more restrictive, making our compliance more difficult or expensive or otherwise
restricting our ability to conduct our business as it is now conducted. Such
changes could hurt our business.
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Employees
At December 31, 1999, we had 776 full-time employees. Our success
depends upon our ability to attract, train and retain qualified personnel. We
have a comprehensive training program that explains our customer service
philosophies and techniques, and we have developed a sophisticated
computer-based training program for CLOser and its Internet component.
Approximately one-half of the people who enter the training program become
permanent hires. To date, our attrition rate has been low for personnel who
emerge from the training program. However, as we develop new business alliances
that increase the mortgage loan volumes we handle through our Teleweb centers
and processing centers, finding personnel to participate in and graduate from
these training programs may become more difficult. Although our training program
is designed to allow us to implement qualified personnel quickly, we cannot be
sure that we will be able to find qualified personnel who can be trained in
sufficient time to handle increased mortgage loan volumes.
None of our employees is represented by a union. We believe we have a
good relationship with our employees.
Facilities
We are headquartered in Sunrise, Florida, where we currently lease
approximately 111,814 square feet of office space. Our lease for this building,
which houses our executive offices and our Teleweb centers, expires in 2009 with
a provision for extension. Our California operations are contained in several
locations in the San Jose/San Francisco metropolitan area, totaling
approximately 29,200 square feet. A majority of our technology personnel reside
primarily in approximately 15,000 square feet of space in Montvale, New Jersey.
Our Montvale office sub-lease expires in 2002 and we do not have the ability to
extend or renew the sub-lease. We also have a 2,500 square foot office in Santa
Rosa, California and a 1,000 square foot office in Reno, Nevada.
Legal Proceedings
We are not a party to any material litigation.
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MANAGEMENT
Executive Officers And Directors
Each member of our board of directors serves for a one-year term and
until their successors are elected and qualified. Our executive officers and
directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Seth S. Werner(1).................................. 54 Chairman of the Board, President and
Chief Executive Officer
John J. Hogan(1)................................... 38 Senior Executive Vice President and Director
Edwin D. Johnson................................... 43 Executive Vice President and Chief Financial Officer
John T. Rodgers.................................... 37 Executive Vice President, Sales and Marketing
Don M. Lashbrook................................... 47 Executive Vice President, Operations
B. Anderson Young.................................. 49 Executive Vice President and Chief
Information Officer
Barbara Rambo...................................... 47 President, Openclose.com, Inc.
George A. Naddaff(2)............................... 70 Vice Chairman of the Board
Stephen L. Green(2)................................ 49 Director
Michael K. Lee..................................... 43 Director
C. Toms Newby, III................................. 33 Proposed Director
</TABLE>
____________________
(1) The employment agreement for this officer requires us to nominate him for
election to the board of directors at each annual shareholders meeting.
(2) Member of the Compensation Committee.
Seth S. Werner founded our company in September 1993, has served as
Chairman of the Board and Chief Executive Officer since the company's inception,
and as President from 1993 to 1997 and again from 1999 to present. From 1973 to
1995, Mr. Werner was the President and Chief Executive Officer of Werner Capital
Corporation, a Miami-based real estate investment banking firm which served as a
consultant to some of the largest financial institutions in the United States
and to the United States government on matters concerning its real estate
portfolios. He also was founder, Chairman and Chief Executive Officer of First
Capital Financial Corporation, a national real estate investment banking firm,
from 1974 through 1984. He is a director and President of SSW, Inc. and a
director, President, Secretary and Treasurer of Harbour Real Estate Corporation.
Mr. Werner is also Chairman of the board of directors of our Openclose.com, Inc.
subsidiary.
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John J. Hogan has served as an Executive Vice President from July 1997
through January 2000, as Senior Executive Vice President from January 2000 to
the present and as a member of our board of directors since July 1997. From
February 1995 to June 1997, he served as the President of OnLine Capital, which
merged into our company in June 1997. From March 1986 to February 1995, Mr.
Hogan served as Vice President of Loan Administration, Senior Vice President of
Mortgage Operations and Senior Vice President and Chief Financial Officer of
First Franklin Financial Corporation in San Jose, California.
Edwin D. Johnson was a Senior Vice President from November 1998 through
January 2000, an Executive Vice President from January 2000 to present and our
Chief Financial Officer since November 1998. From June 1998 through October
1998, Mr. Johnson was a principal in JR Capital, Inc., an acquisition firm. From
March 1996 to June 1998, Mr. Johnson was Chief Financial Officer of MasTec,
Inc., a telecommunications infrastructure company. From January 1995 to March
1996, he was a private real estate consultant and from October 1984 to January
1995, Mr. Johnson was worldwide Chief Financial Officer for Attwoods, plc, an
international services company.
John T. Rodgers has been an Executive Vice President since April 1998
and heads our sales and marketing group. In 1993, Mr. Rodgers co-founded
American Finance and Investment and served as its President until April 1998
when it was merged into our company. He also serves as a member of Microsoft's
Real Estate Advisory Board.
Don M. Lashbrook joined us in November 1998 as Executive Vice President
and Chief Operating Officer of our Consumer Direct Division. In January 2000,
his title was changed to Executive Vice President, Operations. From April 1997
to October 1998, he served as the Chief Operating Officer for CFI Mortgage,
Inc., in West Palm Beach, Florida, which specialized in the retail production of
prime and sub-prime mortgage loans and the wholesale production of sub-prime and
alternative mortgage loans. From March 1996 to April 1997, he was Senior Vice
President, Risk Management, with Citizens Mortgage, and from December 1994 to
February 1996, was Executive Vice President, Operations with Barnett Mortgage
Company.
B. Anderson Young joined us in July 1999 as a Senior Vice President and
Chief Information Officer. In January 2000, his title was changed to Executive
Vice President and Chief Information Officer. From September 1998 through July
1999, Mr. Young was the New Product Manager at London Bridge Group, Ltd., a firm
that provides mortgage software systems. From May 1997 to September 1998, he was
a Vice President, Mortgage Servicing Systems, and a Vice President, Development,
at Checkfree Software Systems, before its mortgage unit was sold to London
Bridge. From March 1994 to May 1997, Mr. Young was Senior Vice President of
Front End Systems and InterChange Architecture at Alltel Information Systems
(formerly Computer Power, Inc.).
Barbara Rambo has been president of our Openclose.com subsidiary since
January 2000. From October 1993 to December 1998 Ms. Rambo was a Group Executive
Vice President at Bank of America, and from April 1990 to September 1993, was an
Executive Vice
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President at Bank of America. She also serves on the boards of directors of
several private and non-profit organizations.
George A. Naddaff is Vice Chairman of our board of directors and has
been a director since September 1995. Mr. Naddaff is the controlling shareholder
and a director of Business Expansion Capital Corporation, a venture capital firm
he founded in 1987. From 1994 to 1996, he served as a director and Chairman of
Food Trends Acquisition Corporation, a publicly traded corporation. Mr. Naddaff
also is the Chairman and Chief Executive Officer of Ranch 1, Inc. which has
operated a chain of sandwich shops since November 1997, and since June 1997, Mr.
Naddaff has been Chairman of Frame King Express, Inc., which sells framed art.
He currently is a consultant to Jreck Subs Group, Inc. Mr. Naddaff also is a
consultant to, and a director of, numerous private companies.
Stephen L. Green has been a director since March 1996. Since 1991, Mr.
Green has served as a general partner of Canaan Partners, a principal
shareholder in our company. He serves on the boards of directors of Advance
Paradigm, Inc., a provider of pharmacy benefit management services, and Suiza
Foods Corporation, a manufacturer and distributor of dairy products and plastic
packaging, as well as a number of private companies. Mr. Green is also a member
of the board of directors of our Openclose.com, Inc. subsidiary.
Michael K. Lee has been a director since March 1996. In 1985 Mr. Lee
founded Dominion Ventures, Inc., a venture capital firm specializing in emerging
growth companies, and has served as its President and Chief Executive Officer
since its founding. Affiliates of Dominion Ventures, Inc. are principal
stockholders in our company, and Mr. Lee is the managing general partner of
those affiliates. He serves on the boards of directors of Online Resources &
Communications Corp., a provider of financial e-commerce hubs, and a number of
private companies. Mr. Lee is also a member of the board of directors of our
Openclose.com, Inc. subsidiary.
C. Toms Newby, III has been nominated to stand for election as a
director at our annual meeting of shareholders to be held in May 2000. Mr. Newby
has been a general partner in Technology Crossover Ventures, one of our
principal stockholders, since July 1998. From April 1996 to June 1998, Mr. Newby
was an associate at Technology Crossover Ventures. From July 1994 through April
1996, he was an investment banker at Montgomery Securities. Mr. Newby currently
serves on the boards of directors of several private companies, including our
Openclose.com, Inc. subsidiary.
Committees of the Board of Directors
The audit committee of the board of directors consists of three
non-employee directors, Michael Lee, Stephen Green and George Naddaff, two of
whom are independent directors. The audit committee reviews and recommends
outside auditors and compensation paid to outside auditors, reviews results and
recommendations in each external audit, assists external auditors in connection
with the preparation of financial statements, review the procedures we use to
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prepare financial statements and related management commentary and meets
periodically with management to review our major financial risk exposures.
The compensation committee of the board of directors consists of two
independent non-employee directors, Stephen Green and George Naddaff. The
compensation committee oversees and reviews all decisions regarding the
compensation of executive officers and directors and the granting of stock
options under our stock option plan.
Directors' Compensation
Non-employee directors are reimbursed for out of pocket expenses
incurred in attending the meetings. No director who is an employee receives
separate compensation for services rendered as a director. Non-employee
directors are eligible to participate in our stock option plan.
Executive Compensation
The following table summarizes the compensation we paid or accrued for
services rendered for the years ended December 31, 1997, 1998 and 1999, to our
Chief Executive Officer and each of the four other most highly compensated
executive officers who earned more than $100,000 in salary and bonus for the
year ended December 31, 1999:
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation Compensation Awards
Number of Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
- --------------------------- ---- ------ ----- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Seth S. Werner 1999 $350,000 -- 400,000 $26,165(1)
Chairman, President and 1998 190,000 $100,000 350,000 26,165(1)
Chief Executive Officer 1997 165,000 -- -- 21,253(1)
John J. Hogan 1999 250,000 -- 350,000 23,000(2)
Senior Executive Vice 1998 161,347 100,000 140,000 22,248(2)
President 1997 240,652 223,897 175,000 8,869(2)
David Larson 1999 195,417 50,000 -- 24,808(3)
Executive Vice President 1998 190,000 100,000 350,000 53,841(3)
1997 92,813 -- 1,050,000 10,500(3)
Don M. Lashbrook 1999 150,616 87,500 119,000 21,555(4)
Executive Vice President, 1998 23,333 -- -- 900(4)
Operations 1997 -- -- -- --
John T. Rodgers 1999 187,500 139,014 105,000 11,000(5)
Executive Vice President, 1998 142,536 -- -- 6,576(5)
Sales and Marketing 1997 -- -- -- --
</TABLE>
______________________
(1) The 1999 and 1998 figures each consist of an $18,000 car allowance, $5,000
in matching company contributions to the 401(k) plan and $3,165 in life
insurance premiums. The 1997 figure consists of an
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$18,000 car allowance, $88 in matching company contributions to the 401(k)
plan and $3,165 in life insurance premiums.
(2) The 1999 figure consists of an $18,000 car allowance and $5,000 in matching
company contributions to the 401(k) plan. The 1998 figure consists of an
$18,000 car allowance and $4,248 in matching company contributions to the
401(k) plan. The 1997 figure consists of a $7,500 car allowance and $1,369
in matching company contributions to the 401(k) plan.
(3) Mr. Larson's employment was terminated in February 2000. The 1999 figure
consists of an $18,000 car allowance, $5,000 in matching company
contributions to the 401(k) plan and $1,808 in life insurance premiums. The
1998 figure consists of an $18,000 car allowance, $3,633 in matching
company contributions to the 401(k) plan, $1,808 in life insurance premiums
and a $30,400 relocation allowance. The 1997 figure consists of a $10,500
car allowance.
(4) The 1999 figure consists of a $5,400 car allowance, $2,772 in matching
company contributions to the 401(k) plan and a $13,382 relocation
allowance. The 1998 figure consists of a $900 car allowance.
(5) The 1999 figure consists of a $6,000 car allowance and $5,000 in matching
company contributions to the 401(k) plan. The 1998 figure consists of an
$4,500 car allowance and $2,076 in matching company contributions to the
401(k) plan.
Employment Agreements
We have entered into employment agreements with most of our executive
officers. Each employment agreement entitles the executive officer to
participate in our company's benefits plans, including health insurance plans,
401(k) plan and stock option plan. Each also prohibits the executive officer
from making any unauthorized disclosures of our confidential information.
Mr. Werner's employment agreement requires him to be our President and
Chief Executive Officer and also requires us to nominate him for the board of
directors at each annual meeting. His employment agreement expires December 31,
2003, with provision for annual one year renewals. Effective January 1, 2000,
his base salary is $350,000 per year, subject to annual increases. Mr. Werner
has agreed to a 30% holdback of his salary until such time as we are using cash
at a rate of less than $1 million per month for two consecutive months. When
this financial milestone is achieved, Mr. Werner will be entitled to the amount
held back, plus an additional bonus equal to the amount held back. He also is
entitled to bonuses based on merit and on the financial performance of our
company. We also pay premiums on a life insurance policy of which Mr. Werner is
the beneficiary. If Mr. Werner is terminated without cause or if he quits for
good reason, we must pay him a lump sum cash severance amount.
Mr. Werner's employment agreement contains provisions to provide him
economic security after a change of control. Mr. Werner may terminate his
employment for good reason any time within two years after a change of control.
If that happens, or if we terminate him without cause within two years after a
change of control, or in some circumstances, prior to a change of control, Mr.
Werner is entitled to a lump sum cash payment equal to three times his base
salary and three times his bonuses. Mr. Werner also may terminate his employment
for any reason after 120 days have passed since the change of control. If that
happens, Mr. Werner is entitled to a lump sum cash payment equal to his base
salary and his average bonus over the
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three prior years or his bonus for the current year. In either case, he is
entitled to immediate vesting of all of his stock options and the deadline for
exercise of those options may be extended. To the extent Mr. Werner incurs any
federal excise taxes on the severance amount or the value of the accelerated
stock options, Mr. Werner is entitled to be reimbursed by us for those tax
consequences.
If we terminate Mr. Werner for cause or if he terminates his employment
without good reason, he is prohibited from competing with the company for three
years following the date of his termination. If we terminate Mr. Werner without
cause, or if he terminates his employment for good reason he is prohibited from
competing with the company for one year following the date of his termination.
In addition, if we terminate Mr. Werner for cause or if he leaves voluntarily,
he is prohibited from soliciting our employees or any of the businesses with
whom we have business relationships for a period of two years after the date of
termination.
Mr. Hogan's employment agreement requires him to be an executive vice
president. The agreement also requires us to nominate him for the board of
directors at each annual meeting during the term of his employment agreement.
His employment agreement expires by its terms on December 31, 2001, with
provision for annual one year renewals. Effective January 1, 2000, Mr. Hogan's
base salary is $250,000 per year, subject to annual increases. Mr. Hogan has
agreed to a 30% holdback of his salary until such time as we are using cash at a
rate of less than $1 million per month for two consecutive months. When this
financial milestone is achieved, Mr. Hogan will be entitled to the amount held
back, plus an additional bonus equal to the amount held back. Mr. Hogan is also
entitled to merit bonuses at the discretion of the board of directors. We also
pay premiums on a life insurance policy of which he is the beneficiary. If Mr.
Hogan is terminated without cause or if he quits for good reason, we must pay
him a lump sum cash severance amount.
Mr. Hogan's employment agreement contains change of control provisions
substantially similar to the change of control provisions in Mr. Werner's
employment agreement. In addition, the non-competition and non-solicitation
provisions in Mr. Hogan's agreement are substantially similar to Mr. Werner's
agreement.
Our employment agreement with Mr. Larson was terminated in February
2000. Mr. Larson's employment agreement required him to head our broker
services group, which administered openclose.com before we contributed the
assets of openclose.com to our subsidiary. Mr. Larson was entitled to merit
bonuses based on the number of lenders and brokers who committed to
openclose.com. We also paid premiums on a life insurance policy of which he
is the beneficiary.
We believe Mr. Larson resigned from his employment with us. Mr. Larson
has taken the position that he was terminated without cause. His employment
agreement provided that if Mr. Larson is terminated without cause, we must pay
him certain severance benefits which have a value of approximately $575,000 over
a 21 month period and his stock options become fully vested.
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His employment agreement also provided for the opportunity to earn
additional incentive compensation. Under the employment agreement, Mr. Larson
was entitled to receive, beginning on January 1, 2001, a portion of the pre-tax
net profits earned by Openclose.com. His percentage interest was to peak at 10%
on January 1, 2004. We believe that Mr. Larson resigned his employment and
therefore is not entitled to this additional incentive compensation. If it is
determined that Mr. Larson was terminated without cause, Mr. Larson may have a
right to this incentive compensation in perpetuity or the right to elect to
trade his profit interest in Openclose.com for the right to exercise options to
purchase 350,000 shares of our common stock which exercise rights Mr. Larson has
foregone in consideration of the opportunity to receive a portion of the pre-tax
net profits of Openclose.com. We also would have the right to redeem his profit
interest in Openclose.com for cash equal to the appraised value of his profit
interest in Openclose.com.
Because we believe Mr. Larson has resigned, his employment agreement
prohibits him from competing with us for one year following the date of his
termination. He also is prohibited from soliciting our employees or any of the
businesses with which we have business relationships for a period of one year
after the date of termination. If Mr. Larson is determined to have been
terminated without cause, he will not be bound by these non-competition and
non-solicitation provisions.
Our employment arrangement with John T. Rodgers makes him an executive
vice president and the head of our sales and marketing group. Effective January
1, 2000, his base salary is $187,500. Mr. Rodgers has agreed to a 15% holdback
of his salary until such time as we are using cash at a rate of less than $1
million per month for two consecutive months. When this financial milestone is
achieved, Mr. Rodgers will be entitled to the amount held back, plus an
additional bonus equal to the amount held back. Mr. Rodgers is entitled to
bonuses based on merit and on the financial performance of our company. In March
2000, we paid Mr. Rodgers a bonus of $42,500, which he has agreed to repay if he
resigns before March 1, 2001. If Mr. Rodgers is terminated for any reason, he is
prohibited from competing with the company for one year following the date of
his termination. In addition, if Mr. Rodgers is terminated for any reason, he is
prohibited from soliciting our employees or any of the businesses with which we
have business relationships for a period of one year after the date of
termination.
Mr. Lashbrook's employment arrangement provides for his employment as
an executive vice president for an indefinite term at an annual base salary of
$150,000, subject to annual increases. Mr. Lashbrook is entitled to merit
bonuses at the discretion of the chief executive officer. However, his total
compensation for each year may not exceed $250,000. If Mr. Lashbrook is
terminated without cause, we must continue to pay him his base salary as
severance pay for six months or until he finds new employment, whichever occurs
first.
Stock Option Plan
We have adopted a stock option plan as of April 24, 1996 to assist us
in attracting and retaining highly competent people to serve as employees,
directors and advisors who will
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contribute to our success and the success of the members of our network. We also
seek to motivate those people to achieve long-term objectives that will benefit
our stockholders. The following groups of people are eligible to receive options
under the stock option plan:
o employees
o directors
o advisors and consultants, including former employees who have
become members of our network or have become employees of
members of our network, at our request
The compensation committee administers the stock option plan and has
wide discretion to award options. Subject to the provisions of the stock option
plan, the compensation committee determines who will be granted options, the
type and timing of options to be granted, vesting schedules and other terms and
conditions of options, including the exercise price. All of our employees are
granted options. The number of options awarded to a person is based on the
person's potential ability to contribute to our company's success, the person's
position with our company and sometimes length of service. The compensation
committee makes its granting decisions monthly.
The compensation committee may award "incentive" options or
"non-qualified" options. We have granted both incentive and non-qualified
options under the stock option plan. If the holder of an incentive option
exercises the option and holds the shares of common stock he receives for the
holding periods required by the Internal Revenue Code, the exercise of the
option does not result in taxable income to the holder. We are therefore not
entitled to a corresponding tax deduction. The incentive options we grant under
the stock option plan are designed to meet the requirements of the Internal
Revenue Code, including a requirement that the exercise price is at least 100%
of the fair market value of our common stock on the date we grant the option and
that the option has a term no longer than ten years.
By contrast, if the holder of a non-qualified option exercises the
option, the holder will be required to recognize taxable income on the date of
exercise. The taxable income is equal to the difference between the fair market
value of the shares acquired by exercising the option and the exercise price of
the option. We are then entitled to a corresponding tax deduction.
During the period from October 1998 to May 1999, the compensation
committee granted options with exercise prices subsequently determined to be
below fair market value at the date of grant. To determine the fair market value
of the stock, Mortgage.com's management analyzed equity financing transactions,
recent value-creating events and activities, and relevant market and industry
developments. Management assigned weighting factors to each event on a scale of
1 through 10 to create a distribution of value-creating events over the period
from October 1998 through May 1999. It combined these events with its growth in
Internet loan originations to determine the fair market value of the common
stock for each of the months analyzed. The difference between the estimated fair
market value and the exercise
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price of these options has been classified as unearned compensation in the
stockholders equity section of our balance sheet and is amortized as
compensation expense over the vesting period.
We have reserved 21,000,000 shares of common stock for issuance through
our stock option plan, 7,606,602 of which are available for issuance. Only
options that are vested may be exercised. The options terminate after a period
of time following the termination of employment. Options that expire unexercised
or that are forfeited become available again for issuance under the stock option
plan. All of the option agreements contain customary anti-dilution adjustments
that provide for adjustments to the exercise price and number of shares subject
to the warrants upon events such as stock splits, stock dividends and
consolidations. The vesting of many of the options accelerates upon a change of
control of the company.
The compensation committee may not grant options if the granting of the
options would make the total number of shares issuable upon exercise of all
outstanding options exceed 30% of the then outstanding shares of common stock,
including any convertible preferred on an "as if converted" basis. However, a
higher percentage may be approved by at least two-thirds of the outstanding
shares entitled to vote.
We have awarded the following options under the stock option plan
during the last fiscal year to the executive officers named in the summary
compensation table:
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<PAGE>
<TABLE>
Option Grants in 1999
<CAPTION>
Potential Realizable Value at Assumed
Rates of Stock Price Appreciation for
Individual Grants Option Term(4)
% of Total Assumed
Options Market
Shares Granted to Value
Covered by Employees in Exercise on Grant Expiration
Name Options(1) Fiscal Year(2) Price Date Date 0% ($) 5% ($) 10% ($)
- -------------------- ---------- ----------------- -------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Seth S. Werner 400,000 5.6% $2.14 $5.36 2/28/09 $1,288,000 $2,636,350 $4,704,984
John J. Hogan 350,000 4.9 2.14 5.36 2/28/09 1,127,000 2,306,806 4,116,861
David W. Larson -- -- -- -- -- -- --
Don M. Lashbrook 105,000 1.5 2.14 5.36 2/28/09 338,100 692,042 1,235,058
Don M. Lashbrook 14,000 0.2 8.00 8.00 8/11/09 -- 70,436 178,499
John T. Rodgers 105,000 1.5 4.29 6.44 4/30/09 225,750 651,009 1,303,439
</TABLE>
________________________
(1) All options are either incentive stock options or nonqualified stock options
and generally vest over five years at the rate of 20% of the shares on each
anniversary of the date of grant. Options expire ten years from the date of
grant.
(2) Based on options to purchase a total of 7,083,630 shares of common stock
granted under the stock option plan in 1999.
(3) Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by the assumed market value
on the date of grant, (2) assuming that the aggregate stock value derived
from that calculation compounds at the annual 0%, 5% or 10% rates shown in
the table for the entire ten-year term of the option and (3) subtracting
from that result the aggregate option exercise price. The 0%, 5% and 10%
assumed annual rates of stock price appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent our estimate
or projection of future common stock prices.
None of the named executive officers or directors who have been granted
options under the stock option plan exercised any of the options in fiscal year
1999. The following table provides information about exercisable and
unexercisable stock options held as of December 31, 1999 by the named executive
officers.
<TABLE>
Aggregated Fiscal Year End Option Values
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Seth S. Werner 420,000 980,000 $2,051,350 $3,736,600
John J. Hogan 203,000 462,000 946,610 1,751,540
David W. Larson 490,000 910,000 2,283,540 4,155,060
Don M. Lashbrook 21,000 98,000 77,070 308,280
John T. Rodgers -- 105,000 -- 160,335
</TABLE>
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401(k) Savings Plan
We maintain a 401(k) savings plan that is intended to satisfy the tax
qualification requirements of the Internal Revenue Code of 1986, as amended. All
of our employees aged 18 or older are eligible to participate in the 401(k) plan
after two months of service with us. The 401(k) plan permits participants to
contribute up to 15% of their annual compensation. We match up to 50% of an
employee's contributions to the 401(k) plan, not to exceed 2.5% of their annual
compensation. We contributed $562,163 to the 401(k) plan in 1999.
Compensation Committee Interlocks and Insider Participation
The compensation committee is presently comprised of Stephen Green and
George Naddaff. Prior to our initial public offering, the compensation
committee of the board of directors consisted of Seth S. Werner, Stephen Green
and Michael Lee. Seth Werner is our President and Chief Executive Officer. Mr.
Green and Mr. Lee are each partners in one or more of our principal
stockholders. For more information on our transactions with members of the
compensation committee, please see "Certain Transactions."
Prior to our initial public offering, the compensation committee
recommended to the board of directors appropriate executive officer compensation
and the granting of stock options under the stock option plan. The board of
directors historically made all final decisions regarding executive officer
compensation and the granting of stock options under the stock option plan. Mr.
Werner did not participate in making recommendations to the board of directors
when his compensation was being reviewed and approved.
CERTAIN TRANSACTIONS
Venture Capital Financings
Upon completion of our initial public offering in August 1999, each
share of preferred stock described in this section was converted to common
stock. The information in this section has been adjusted for a 7-for-1 stock
split which was effective in August 1999 and states preferred shares as the
number of common shares into which they were converted.
Between December 1996 and June 1997, we sold 3,733,352 shares of Series
C Preferred Stock to Canaan Equity, L.P., Canaan Ventures II Limited
Partnership, Canaan Ventures II Offshore CV, Canaan Capital Limited Partnership,
Canaan Capital Offshore Limited Partnership, CV, and Dominion Fund III. The
aggregate consideration was approximately $4,000,000. Each of these entities is
a principal shareholder. Director Stephen Green is a principal in Canaan and
director Michael K. Lee is a principal in Dominion.
In August 1997, we sold $1,500,000 of Senior Subordinated Convertible
Notes due September 30, 2002, and warrants to purchase 350,000 shares of common
stock at approximately $1.07 per share to Canaan Equity, L.P. and Dominion Fund
III. In December
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1997, the principal of these Notes was converted into an aggregate of 1,442,000
shares of Series C Preferred Stock based on a conversion value of approximately
$1.07 per share.
In January 1998, we sold $2,000,000 of Senior Subordinated Convertible
Notes due January 31, 2003, to Canaan Equity, L.P. and Dominion Fund III. In
connection with this sale, we issued warrants to purchase an aggregate of
466,669 shares of our common stock at an exercise price of approximately $1.07
per share. In May 1998, the principal of the Senior Subordinated Convertible
Notes was converted into an aggregate of 1,218,384 shares of Series D Preferred
Stock based on a conversion value of approximately $1.64 per share.
In addition, in May 1998, we sold an aggregate of 45,640 shares of
Series D Preferred Stock to directors Stephen Green and Michael K. Lee
individually for approximately $1.64 per share. The aggregate consideration was
$74,980. In August 1998, Stephen Green purchased an additional 60,865 shares of
Series D Preferred Stock for approximately $1.64 per share, for aggregate
consideration of $99,992.50.
In April 1998, we entered into a settlement agreement with FMN
Associates Limited Partnership. FMN Associates was the sole holder of the Series
A Preferred Stock, which converted into common stock upon the closing of our
initial public offering. Under an earlier agreement with FMN Associates, we
agreed to become a licensed insurance agent and pay FMN Associates a portion of
the profits we generated from that business. In consideration of foregoing this
right, FMN Associates received in the settlement agreement warrants to purchase
252,000 shares of our common stock at an exercise price of approximately $1.64
per share. FMN Associates has since distributed those warrants to its partners.
In February 1999, we sold $2,000,000 of Senior Subordinated Notes due
February 9, 2000, to Canaan Equity, L.P., Intuit, Inc., Dominion Fund IV, which
is an affiliate of Dominion Fund III, and Technology Crossover Ventures, each of
whom are principal shareholders or affiliates of principal shareholders. C. Toms
Newby, III, a nominee for election as a director, is a principal in Technology
Crossover Ventures. In connection with that sale, we issued warrants to purchase
an aggregate of 46,676 shares of common stock at an exercise price of $8.00.
Later the same month, we sold $8,000,000 of Senior Subordinated Notes due
February 26, 2001, to Intuit, Dominion Fund IV and Technology Crossover
Ventures. In connection with that sale, we issued warrants to purchase an
aggregate of 373,408 shares of common stock at an exercise price of $8.00. In
August 1999, upon closing of our initial public offering, the number of shares
subject to the warrants described in this paragraph was reduced to an aggregate
of 125,027 shares in accordance with formulas contained in the warrants.
In May 1999, we sold $27.5 million of Senior Subordinated Convertible
Notes due May 5, 2001 to Intuit Inc. The Notes were retired with a portion of
the proceeds from our initial public offering in August 1999.
In May 1999, we sold 1,750,007 shares of Series F Preferred Stock to
Dominion Fund IV, L.P., Canaan Equity, L.P., and Technology Crossover Ventures.
The Series F Preferred
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Stock was sold for approximately $8.57 per share, for aggregate consideration of
$15.0 million. Each of the purchasers is a principal stockholder of our company.
We believe that each of these transactions was completed on terms no
less favorable to us than we would have obtained from unrelated third parties.
Openclose.com, Inc. Transaction
On January 27, 2000, we contributed certain assets constituting our
"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% of its outstanding securities. Simultaneously with this contribution,
Technology Crossover Ventures, Canaan Equity II, L.P., Canaan Equity II, L.P.
(Q), Canaan Equity II Entrepreneurs LLC, each an affiliate of other Canaan
entities which are principal shareholders, and Dominion Fund V, an affiliate of
Dominion Fund III and Dominion Fund IV, contributed $30 million in cash to
Openclose.com in exchange for convertible preferred stock representing the
remaining 49% of its outstanding securities.
The amount of consideration paid was based on the estimated fair value
of the assets contributed as determined in negotiations between our management
and the investors. Our board of directors obtained a fairness opinion from an
investment banking firm and believes the transaction was completed on terms no
less favorable to us than we would have obtained from unrelated third parties.
We also have entered into an Administrative Services Agreement with
Openclose.com under which we will provide certain management, accounting and
technical services. We believe this agreement has terms that are fair to both us
and Openclose.com.
Transactions with Dominion Ventures, Inc.
We have obtained a lease line of credit from Dominion Ventures, Inc.,
an affiliate of two of our principal stockholders: Dominion Fund III and
Dominion Fund IV, L.P. Dominion Ventures has agreed to acquire computer and
office equipment when we request it, and to lease the equipment to us. Upon
signing the agreement, we were required to pay Dominion Ventures advance rent of
approximately $140,247. In addition, each time Dominion Ventures leases us
equipment, we are required to make monthly rental payments equal to the cost of
the equipment multiplied by the "rental factor", initially 2.81%. The rental
factor is subject to upward and downward adjustment based on the change in the
yield, if any, for U.S. Treasury Notes of comparable maturity. Prior to the end
of the lease term on each piece of equipment, we have an option to purchase the
equipment for its fair market value. The total value of the equipment leased
under the lease line of credit cannot exceed $3,394,637.48.
In consideration of Dominion Ventures providing us with the lease line
of credit, we issued to Dominion Fund III a warrant to purchase 68,600 shares of
our common stock at an exercise price of $1.64 per share and issued to Dominion
Capital Management LLC two
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warrants, the first to purchase 61,950 shares of our common stock at an exercise
price of $1.64 per share, and the second to purchase 38,150 shares of our common
stock at $5.19 per share. We believe that the lease line of credit we obtained
from Dominion Ventures contains rental rates and terms no less favorable to us
than we would have obtained in an arm's length transaction with another lease
line of credit provider.
Transactions with Intuit Lender Services
On May 26, 1999, we entered into a distribution, marketing, facilities
and services agreement with Intuit Lender Services, a wholly owned subsidiary of
Intuit Inc., which through an affiliate is a principal stockholder in our
company. On November 9, 1999, Intuit Lender Services terminated this agreement,
although the agreement contained a nine-month phase down period that required us
to continue to process a minimum number loans in return for payment by Intuit
Lender Services. On February 29, 2000, we signed a Termination Agreement with
Intuit Lender Services that terminated the phase down periods from the sub-prime
agreement and an earlier terminated prime loan processing agreement we had with
Intuit Lender Services. Under the Termination Agreement, we paid Intuit Lender
Services $25,276 in consideration of the release from these minimum processing
requirements. We believe that the Termination Agreement was entered into with
terms no less favorable to us than we would have obtained in an arm's length
transaction.
Transactions with Executive Officers
In 1997, we merged OnLine Capital into our company and paid for the
merger with a combination of cash and common stock for an approximate aggregate
purchase price of $793,000. We accounted for this acquisition under the purchase
method of accounting. In addition, we entered into an employment agreement with
John Hogan, who was the sole shareholder of OnLine Capital and who is now senior
executive vice president and a member of our board of directors. In 1998, we
revised Mr. Hogan's compensation. In consideration of the revisions, Mr. Hogan,
or any entity designated by Mr. Hogan, is entitled to receive cash in an amount
equal to a percentage of the quarterly pre-tax profits of our mortgage services
group and Mr. Hogan received 700,000 shares of common stock. The amount of cash
that can be earned is capped at $3,400,000 and Mr. Hogan's right to earn the
cash consideration ends on June 30, 2001. Mr. Hogan has designated J.J.H.
Financial, LLC, a company principally owned by him, as the recipient of the cash
consideration. Through March 15, 2000, we have paid J.J.H. Financial $2,228,694.
We believe that the revised terms are no less favorable to us than we would have
obtained in an arm's length transaction.
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PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership
of our common stock as of March 15, 2000. Based on information supplied by the
transfer agent, as of that date, there were 124 holders of record of our common
stock. We have listed each person that beneficially owns more than 5% of the
outstanding common stock, each of our directors and executive officers
identified in the summary compensation table and all directors and executive
officers as a group. Unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially owned.
Unless otherwise noted in the footnotes, the address for each principal
stockholder is 1643 North Harrison Parkway, Sunrise, Florida 33323
For purposes of calculating the number of shares of common stock
beneficially owned after the offering, we have assumed the sale of all shares
covered by the registration statement of which this prospectus is a part. For
purposes of calculating the percentage beneficially owned after the offering,
the total number of shares of common stock deemed outstanding includes (1) the
shares of common stock covered by the registration statement of which this
prospectus is a part that are registered on behalf of Sugarplum Investments
Limited and (2) shares of common stock covered by the registration statement of
which this prospectus is a part that are issuable upon the exercise of warrants.
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------------------- --------------------------------
Number of Shares Percent of Number of Shares Percent of
Name and Address of Common Stock Class of Common Stock Class
- ---------------- ---------------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Stephen Green(1), (2) 8,680,187 19.8% 8,680,187 15.9%
Canaan Partners(2) 8,604,111 19.6 8,604,111 15.8
C. Toms Newby, III(3), (4) 6,655,934 15.4 6,655,934 12.3
Technology Crossover Ventures(4) 6,655,934 15.4 6,655,934 12.3
Michael K. Lee(5), (6) 6,580,579 15.0 6,580,579 12.1
Dominion Ventures(6) 6,550,150 15.0 6,550,150 12.1
Intuit Ventures Inc. (7) 3,720,937 8.6 0 *
Seth S. Werner(8) 2,012,500 4.6 2,012,500 3.7
George A. Naddaff(9) 1,627,185 3.7 1,627,185 3.0
John J. Hogan(10) 1,261,176 2.9 1,261,176 2.3
David W. Larson(11) 700,000 1.6 700,000 1.3
John T. Rodgers(12) 334,184 * 334,184 *
Don M. Lashbrook(13) 21,000 * 21,000 *
All directors and executive officers as a group 27,223,745 58.4 27,223,745 47.6
(12 persons)**
</TABLE>
- ----------------------------------------
* Represents less than 1%.
** As of the first quarter 2000, David W. Larson is neither an executive
officer nor a director. Accordingly, he has not been included in the figures
for directors and executive officers as a group.
[Footnotes are continued on the following pages.]
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(1) Mr. Green is a member of our board of directors and is a partner in Canaan
Partners. Mr. Green has shared voting power with respect to the shares owned
by Canaan Partners and shared investment power with respect to the shares
and warrants owned by Canaan Partners. See footnote (2).
(2) Includes shares and presently exercisable warrants beneficially owned as
follows:
<TABLE>
<CAPTION>
Shares Owned Presently Exercisable
Beneficially Warrants (Exercise Price)
------------ -------------------------
<S> <C> <C>
Canaan Capital Limited Partnership 390,383
Canaan Capital Offshore Limited Partnership, C.V. 3,258,108
Canaan Ventures II Limited Partnership 362,131
Canaan Ventures II Offshore, C.V. 571,200
Canaan Equity, L.P. 3,432,707 6,251 ($8.00)
583,331 ($1.07)
</TABLE>
The address for each of these Canaan entities is 105 Rowayton Avenue,
Rowayton, Connecticut 06853.
(3) Mr. Newby has been nominated for election as a director. He is a member of
Technology Crossover Management II, L.L.C. ("TCM II"), which is the general
partner of the TCV II Funds listed below in footnote (4), and a member of
Technology Crossover Management III, L.L.C. ("TCM III"), which is the
general partner of the TCV III Funds listed below in footnote (4). Mr.
Newby has neither voting power nor investment power over shares held by the
TCV Funds. Mr. Newby disclaims beneficial ownership of those shares.
Nevertheless, through his respective interests in TCM II and TCM III, Mr.
Newby has a pecuniary interest in the shares held by the TCV Funds. See
footnote (4).
(4) Includes shares and presently exercisable warrants beneficially owned as
follows:
<TABLE>
<CAPTION>
Shares Owned Presently Exercisable
Beneficially Warrants (Exercise Price)
------------ -------------------------
<S> <C> <C>
Technology Crossover Ventures II, L.P. 2,075,985 8,970 ($8.00)
TCV II, V.O.F. 67,440 293 ($8.00)
TCV II (Q), L.P. 1,596,046 6,897 ($8.00)
TCV II Strategic Partners, L.P. 283,244 1,227 ($8.00)
Technology Crossover Ventures II, C.V. 316,962 1,369 ($8.00)
TCV III (GP) 16,680
TCV III, L.P. 79,241
TCV III (Q), L.P. 2,106,201
TCV III Strategic Partners, L.P. 95,379
</TABLE>
Jay C. Hoag and Richard H. Kimball are the sole managing members of TCM II,
the general partner of each of the TCV II Funds, and TCM III, the general
partner of each of the TCV III Funds. Consequently, TCM II and Messrs. Hoag
and Kimball may each be deemed to beneficially own all of the shares held by
the TCV II Funds, and TCM III and Messrs. Hoag and Kimball may each be
deemed to beneficially own all of the shares held by the TCV III Funds. TCM
II, TCM III and Messrs. Hoag and Kimball each disclaim beneficial ownership
of such shares, except to the extent of their pecuniary interests in those
shares. The address for each of these TCV entities is 575 High Street, Suite
400, Palo Alto, California 94301.
(5) Mr. Lee is a member of our board of directors and is a principal in the
general partner of the Dominion Ventures entities. Mr. Lee has sole voting
power with respect to the shares owned by Dominion Ventures and has shared
investment power with respect to the shares and warrants owned by Dominion
Ventures. See footnote (6).
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(6) Includes shares and presently exercisable warrants beneficially owned as
follows:
<TABLE>
<CAPTION>
Shares Owned Presently Exercisable
Beneficially Warrants (Exercise Price)
------------ -------------------------
<S> <C> <C>
Dominion Fund III 5,366,851 68,600 ($1.64)
233,338 ($1.07)
Dominion Fund IV, L.P. 750,005 31,256 ($8.00)
Dominion Capital Management LLC 61,950 ($1.64)
38,150 ($5.19)
</TABLE>
The address for Dominion Fund III, Dominion Capital Management LLC and
Dominion Fund IV, L.P. is 1656 N. California Blvd, Suite 300, Walnut Creek,
CA 94596.
(7) Includes 3,653,173 shares of common stock beneficially owned by Intuit
Ventures Inc. and warrants to purchase 68,764 shares of common stock at
$8.00 per share. The address for Intuit Ventures, Inc. is 2535 Garcia
Avenue, Mountain View, California 94043.
(8) Consists of 1,382,500 shares of common stock beneficially owned by the Seth
Werner Revocable Trust dated October 1, 1996 and the following presently
exercisable options for the purchase of common stock: 350,000 shares at
approximately $0.79 per share; 140,000 shares at approximately $1.64 per
share; and 140,000 shares at $2.14 per share.
(9) Consists of 509,089 shares of common stock and the following presently
exercisable warrants to purchase common stock which are held by FirstMN,
LLC, of which Mr. Naddaff, a member of our board of directors, is 50% owner:
350,000 shares at approximately $0.71 per share; 256,032 shares at
approximately $1.14 per share; 256,032 shares at approximately $1.50 per
share; and 256,032 shares at approximately $1.86 per share. The address for
Mr. Naddaff and FirstMN, LLC is 305 Walnut Street, Newton, MA 02160.
(10)Consists of 988,176 shares of common stock and the following presently
exercisable options for the purchase of common stock: 175,000 shares at
approximately $1.07 per share; and 28,000 shares at approximately $1.64 per
share; and 70,000 shares at $2.14 per share.
(11)Consists of the following presently exercisable options for the purchase of
common stock: 630,000 shares at approximately $1.07 per share; and 70,000
shares at approximately $1.64 per share. Mr. Larson's address is 21562 St.
Andrews Grand Circle, Boca Raton, FL 33486.
(12)Consists of 192,780 shares of common stock, warrants to purchase 120,404
shares of common stock at approximately $1.07 per share and presently
exercisable options for the purchase of 21,000 shares of common stock at
$4.29 per share.
(13)Consists of presently exercisable options for the purchase of 21,000
shares of common stock at approximately $2.14 per share.
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DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 210,000,000 shares of common stock,
$.01 par value per share, and 15,000,000 shares of preferred stock, $.01 par
value per share. As of March 15, 2000, 43,353,692 shares of common stock and
were issued and outstanding. We have no preferred stock outstanding. All of the
outstanding capital stock is and will be, fully paid and non-assessable.
Common Stock
Holders of common stock are entitled to one vote per share. All actions
submitted to a vote of stockholders are voted on by holders of common stock
voting together as a single class. Holders of common stock are not entitled to
cumulative voting in the election of directors.
Holders of common stock are entitled to receive dividends in cash or in
property on an equal basis, if and when dividends are declared on the common
stock by our board of directors, subject to any preference in favor of
outstanding shares of preferred stock, if there are any.
In the event of liquidation of our company, all holders of common stock
will participate on an equal basis with each other in our net assets available
for distribution after payment of our liabilities and payment of any liquidation
preferences in favor of outstanding shares of preferred stock, if there are any.
Holders of common stock are not entitled to preemptive rights and the
common stock is not subject to redemption.
The rights of holders of common stock are subject to the rights of
holders of any preferred stock that we designate or have designated. The rights
of preferred stockholders may adversely affect the rights of the common
stockholders.
Preferred Stock
Our board of directors has the ability to issue up to 15,000,000 shares
of preferred stock in one or more series, without stockholder approval. The
board of directors may designate for the series -
o the number of shares and name of the series,
o the voting powers of the series, including the right to elect
directors, if any,
o the dividend rights and preferences, if any,
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o redemption terms, if any, liquidation preferences and the amounts
payable on liquidation or dissolution,
o the terms upon which such series may be converted into any other
series or class of our stock, including the common stock and
o any other terms that are not prohibited by law.
It is impossible for us to state the actual effect it will have on
common stock holders if the board of directors designates a new series of
preferred stock. The effects of such a designation will not be determinable
until the rights accompanying the series have been designated. The issuance of
preferred stock could adversely affect the voting power, liquidation rights or
other rights held by owners of common stock or other series of preferred stock.
The board of directors' authority to issue preferred stock without shareholder
approval could make it more difficult for a third party to acquire control of
our company, and could discourage any such attempt. We have no present plans to
issue any additional shares of preferred stock.
Options and Warrants
As of March 15, 2000, 12,162,498 options for shares were outstanding
under our stock option plan and 7,606,602 shares were available for future
grants under our stock option plan. The Board has authorized an additional
2,000,000 of the available options for issuance to account executives to provide
incentive for their business-to-business marketing efforts. Terms of these
account executive options will be determined at the discretion of management,
but we anticipate that vesting will be tied to performance targets.
In addition to options granted through the stock option plan, the
following options and warrants were outstanding as of March 15, 2000 and are
presently exercisable for shares of common stock, except that the warrants
issued to Ladenburg Thalmann and Sugarplum were issued March 28, 2000:
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Warrants and Options Outside of Stock Option Plan
Number of Shares
Purchasable Exercise Price(1)
---------------- -----------------
3,010,000 $0.71
395,388 0.79
2,205,546 1.07
256,032 1.14
256,032 1.50
382,550 1.64
256,032 1.86
664,120(2) 2.41
38,150 5.19
168,310 8.00
___________________
(1) Exercise prices are rounded to the nearest cent.
(2) Consists of the warrants issued to Ladenburg Thalmann Co. Inc. as a
placement fee, and the warrants issued to Sugarplum Investments Limited in
connection with closing the common stock purchase agreement.
Holders of options and warrants do not have any of the rights or
privileges of our stockholders, including voting rights, prior to exercise of
the options and warrants. We have reserved sufficient shares of authorized
common stock to cover the issuance of common stock subject to the options and
warrants.
Statutory Provisions And Provisions Of Our Articles Of Incorporation And Bylaws
The following provisions of the Florida Business Corporation Act and
our articles of incorporation and bylaws could have the effect of preventing or
delaying a person from acquiring or seeking to acquire a substantial equity
interest in, or control of, our company.
Statutory Provisions
We are subject to several anti-takeover provisions under Florida law
that apply to public corporations organized under Florida law unless the
corporation has elected to opt out of those provisions in its articles of
incorporation or its bylaws. We have not elected to opt out of these
provisions.
The Florida Business Corporation Act prohibits the voting of shares in
a publicly held Florida corporation that are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
approve the granting of voting rights to the acquiring party. A "control
share acquisition" is defined as an acquisition that immediately thereafter
entitles the acquiring party, directly or indirectly, to vote in the election
of directors within any of the following ranges of voting power:
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o 1/5 or more but less than 1/3
o 1/3 or more but less than a majority
o a majority or more
There are some exceptions to the "control share acquisition" rules.
The Florida Business Corporation Act also contains an "affiliated
transaction" provision that prohibits a publicly held Florida corporation
from engaging in a broad range of business combinations or other
extraordinary corporate transactions with an "interested shareholder" unless
o the transaction is approved by a majority of disinterested
directors before the person becomes an interested shareholder
o the corporation has not had more than 300 stockholders of record
during the past three years
o the interested shareholder has owned at least 80% of the
corporation's outstanding voting shares for at least five years
o the interested shareholder is the beneficial owner of at least
90% of the voting shares (excluding shares acquired directly
from the corporation in a transaction not approved by a
majority of the disinterested directors)
o consideration is paid to the holders of the corporation's
shares equal to the highest amount per share paid by the
interested shareholder for the acquisition of the
corporation's shares in the last two years or fair market
value, and other specified conditions are met or
o the transaction is approved by the holders of two-thirds of the
Company's voting shares other than those owned by the interested
shareholder.
An "interested shareholder" is defined as a person who, together with
affiliates and associates, beneficially owns more than 10% of a company's
outstanding voting shares. The Florida Business Corporation Act defines
"beneficial ownership" in more detail.
Indemnification and Limitation of Liability
The Florida Business Corporation Act authorizes Florida corporations to
indemnify any person who was or is a party to any proceeding other than an
action by, or in the right of, the corporation, by reason of the fact that he
is or was a director, officer, employee, or agent of the corporation. The
indemnity also applies to any person who is or was serving at the request of
the corporation as a director, officer, employee, or agent of another
corporation or other entity. The indemnification applies against liability
incurred in
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connection with such a proceeding, including any appeal thereof, if the
person acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the corporation. To be eligible for
indemnity with respect to any criminal action or proceeding, the person must
have had no reasonable cause to believe his conduct was unlawful.
In the case of an action by or on behalf of a corporation,
indemnification may not be made if the person seeking indemnification is
found liable, unless the court in which the action was brought determines
such person is fairly and reasonably entitled to indemnification.
The indemnification provisions of the Florida Business Corporation Act
require indemnification if a director, officer, employee or agent has been
successful in defending any action, suit or proceeding to which he was a
party by reason of the fact that he is or was a director, officer, employee
or agent of the corporation. The indemnity covers expenses actually and
reasonably incurred in defending the action.
The indemnification authorized under Florida law is not exclusive and
is in addition to any other rights granted to officers and directors under
the articles of incorporation or bylaws of the corporation or any agreement
between officers and directors and the corporation. Each of our directors and
executive officers has signed an indemnification agreement. The
indemnification agreements provide for full indemnification under Florida
law. The indemnification agreements also provide that we will indemnify the
officer or director against liabilities and expenses incurred in a proceeding
to which the officer or director is a party or is threatened to be made a
party, or in which the officer or director is called upon to testify as a
witness or deponent, in each case arising out of actions of the officer or
director in his official capacity. The officer or director must repay such
expenses if it is subsequently found the officer or director is not entitled
to indemnification. Exceptions to this additional indemnification include
criminal violations by the officer or director, transactions involving an
improper personal benefit to the officer or director, unlawful distributions
of our assets under Florida law and willful misconduct or conscious disregard
for our best interests.
Our bylaws provide for the indemnification of directors, former
directors and officers to the maximum extent permitted by Florida law and
for the advancement of expenses incurred in connection with the defense of
any action, suit or proceeding that the director or officer was a party to by
reason of the fact that he is or was a director or officer of our
corporation, or at our request, a director, officer, employee or agent of
another corporation. Our bylaws also provide that we may purchase and
maintain insurance on behalf of any director against liability asserted
against the director in such capacity.
Under the Florida Business Corporation Act, a director is not
personally liable for monetary damages to us or to any other person for acts
or omissions in his capacity as a director except in certain limited
circumstances. Those circumstances include violations of criminal law and
transactions in which the director derived an improper personal benefit. As
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a result, stockholders may be unable to recover monetary damages against
directors for actions taken by them which constitute negligence or gross
negligence or which are in violation of their fiduciary duties, although
injunctive or other equitable relief may be available.
Transfer Agent and Registrar
The transfer agent for our common stock is Continental Stock Transfer &
Trust Company, New York, New York.
[The Remainder of This Page Is Intentionally Left Blank]
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COMMON STOCK PURCHASE AGREEMENT
Overview
Sugarplum Investments Limited, a British Virgin Islands corporation,
and we signed a common stock purchase agreement dated March 27, 2000, for the
future issuance and purchase of shares of our common stock. The transaction
closed on March 28, 2000. The stock purchase agreement establishes what is
sometimes termed an equity line of credit or an equity drawdown facility. In
general, the drawdown facility operates like this: the investor, Sugarplum, has
committed up to $40 million to purchase shares of our common stock over a 24
month period. Once every 22 trading days, we may request a draw of up to
$4,000,000 of that money, subject to a formula based on the average common stock
price and average trading volume. Each draw down must be for at least $250,000.
At the end of a 22 day trading period following the draw down request, we and
Sugarplum will calculate the amount of money that Sugarplum will provide to us
and the number of shares we will issue to Sugarplum in return for that money,
based on the formula in the stock purchase agreement.
Sugarplum will receive a seven percent (7%) discount to the average
daily market price of our common stock for the 22-day period, weighted by
trading volume. We will receive the amount of the draw down less an escrow agent
fee of $1,500 and a 5% placement fee payable to the placement agent, Ladenburg
Thalmann & Co. Inc., which introduced Sugarplum to us. Ladenburg Thalmann is not
obligated to purchase any of our shares, but as an additional placement fee, we
have issued to Ladenburg Thalmann warrants to purchase 332,060 shares of our
common stock at an exercise price of $2.4092. The common stock issuable upon
exercise of those warrants is included in the registration statement of which
this prospectus is a part.
The facility is based on a "use-it-or-lose-it" principle. We are under
no obligation to request a draw for any period. However, if we do not request a
draw for a given period, we may never to be able to draw those funds again. We
may make up to a maximum of twelve (12) draws; however, the aggregate total of
all draws cannot exceed $40 million and no single draw can exceed $4 million.
In lieu of providing Sugarplum with a minimum aggregate drawdown
commitment, we have issued to Sugarplum a stock purchase warrant to purchase
332,060 shares of our common stock with an exercise price of $2.4092, which was
the volume-weighted average share price on March 27, 2000, the day prior to the
closing date. The warrant expires March 28, 2002.
Based on a review of our trading volume and stock price history and the
number of drawdowns we estimate making, we are registering 8,750,000 shares of
common stock for possible issuance under the stock purchase agreement and
664,120 shares underlying the warrants for common shares delivered to Sugarplum
and Ladenburg Thalmann & Co. Inc. The listing requirements of The Nasdaq
National Market prohibit us from issuing 20% or more of our issued and
outstanding common shares in a single transaction if the shares may be issued
for less than the greater of market value or book value. Based on shares of
common stock issued and outstanding on March 28, 2000, the date of closing of
the common stock purchase
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agreement, we may not issue more than 8,754,157 shares under the common stock
purchase agreement, the Sugarplum warrant and the Ladenburg warrant, without the
approval of our shareholders. Because 664,120 of these shares are committed to
the Sugarplum warrant and the Ladenburg warrant, if we wish to draw amounts
under the common stock purchase agreement which would cause an issuance of more
8,090,037 shares under the common stock purchase agreement, we must receive
shareholder approval prior to any such drawdown. At such time, our officers and
directors as a group may own sufficient shares of our common stock to approve
such a drawdown.
The Drawdown Procedure and the Stock Purchases
We may request a drawdown by faxing a drawdown notice to Sugarplum,
stating the amount of the drawdown we wish to exercise and the minimum threshold
price, if any, at which we are willing to sell the shares. The next 22 trading
days immediately following the drawdown notice are used to determine the actual
amount of money Sugarplum will provide and the number of shares we will issue in
return. The 23rd trading day is the drawdown exercise date when the amount of
the draw and the number of shares to be issued are calculated and delivered
based on the formulas below.
Amount of the Draw
The amount of the draw down is the amount we have requested, except
that the amount is capped based on the following formula:
o Average daily trading volume for the 45 trading days immediately
prior to the date we give notice of the drawdown, multiplied by
22;
multiplied by
o The average of the volume-weighted average daily prices for the 22
trading days immediately prior to the date we give notice of the
drawdown;
multiplied by
o 20%.
If the volume-weighted average daily price for any given trading day is
below the threshold price set by us in the drawdown notice during the 22
trading days immediately following the date we give notice, then the drawdown
amount that Sugarplum is obligated to pay us is correspondingly reduced by
1/22 for each day that is below the threshold price. Thus, if the daily price
for a day is below the threshold price we will not issue any shares and
Sugarplum will not purchase any shares for that day.
Number of Shares
To determine the number of shares of common stock we must issue in
connection with a drawdown, take 1/22 of the draw down amount and for each of
the 22 trading days immediately following the date we give notice of the
drawdown, divide it by 93% of the
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volume-weighted average daily trading price of our common stock on such date.
The 93% accounts for Sugarplum's 7% discount. The sum of these 22 daily
calculations produces the number of common shares we will issue, unless the
volume-weighted average daily price for any given trading day is below the
threshold amount, in which case that day is not part of the sum.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount
and the number of shares we would issue to Sugarplum in connection with that
drawdown based on hypothetical assumptions.
Sample draw down amount calculation.
We provide a draw down notice to Sugarplum that we wish to draw down
$4,000,000, which is the maximum amount for any draw. The average daily
trading volume for the 45 trading days prior to the notice is 300,000. The
average of the volume-weighted average daily prices of our common stock for
the 22 trading days prior to the notice is $3.00. The maximum amount we can
draw down under the formula is capped at $3,960,000, so we can draw down
$3,960,000 of the $4,000,000 requested.
Suppose that our notice specifies a threshold amount of $3.50, below
which we will not sell any shares to Sugarplum during this draw down period.
If the volume-weighted average daily price of our common shares for each
of the next 22 trading days following the draw down notice is at least $3.50,
we will be able to draw the maximum $3,960,000 amount. If on the other hand
the volume-weighted average daily price of our common shares is below $3.50
on two of those 22 days, for example, the $3,960,000 would be reduced by 1/22
for each of those days and our draw down amount would be 20/22 of $3,960,000,
or $3,600,000.
Sample Calculation of Number of Shares
Assume that the drawdown amount for the drawdown period is $3,960,000
and assume that the volume-weighted average daily price for our common shares
is as set forth in the table below. Suppose that our notice specifies a
threshold amount of $3.50. The number of shares to be issued based on any
trading day during the drawdown period is calculated from the formula:
(1/22 of the drawdown amount) divided by (93% of the volume weighted average
daily price).
For example, for the first trading day in the example in the table
below, the calculation is as follows: (1/22 of $3,960,000) divided by (93%
of $4.00 per share) or 48,387 shares. Perform this calculation for each of
the 22 measuring days, excluding any days on which the volume-weighted
average daily price is below the $3.50 threshold amount, and add the results
to determine the number of shares to be issued, which in this example is
978,845.
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<TABLE>
<CAPTION>
Number of Shares of Common
Volume-Weighted Average Daily 1/22 of Requested Draw Stock to be Issued for the
Trading Day Stock Price* Down Amount Trading Day
---------- ----------------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
1 $4.00 $ 180,000.00 48,387
2 4.25 180,000.00 45,541
3 4.00 180,000.00 48,387
4 3.75 180,000.00 51,613
5 3.50 180,000.00 55,300
6 3.75 180,000.00 51,613
7 3.50 180,000.00 55,300
8 3.25 ** **
9 3.375 ** **
10 3.50 180,000.00 55,300
11 3.75 180,000.00 51,613
12 4.00 180,000.00 48,387
13 3.75 180,000.00 51,613
14 4.00 180,000.00 48,387
15 4.25 180,000.00 45,541
16 4.125 180,000.00 46,921
17 4.25 180,000.00 45,541
18 4.50 180,000.00 43,011
19 4.25 180,000.00 45,541
20 4.125 180,000.00 46,921
21 4.25 180,000.00 45,541
22 4.00 180,000.00 48,387
---------------------- ---------------------------
Total $3,600,000.00 978,845
====================== ===========================
</TABLE>
- --------------------
* The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the
share prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical draw down notice.
We would receive $3,600,000.00 less the 5% fee to the placement agent,
less a $1,500 escrow fee or $3,418,500.00. The delivery of the requisite
number of shares and payment of the draw will take place through an escrow
agent, Epstein, Becker & Green, P.C. of New York. The escrow agent pays 95%
of the draw to us -- after subtracting its escrow fee -- and 5% to Ladenburg
Thalmann & Co. Inc., our placement agent, in satisfaction of placement agent
fees. Only one drawdown can occur during this 22-day draw down period.
Necessary Conditions Before Sugarplum is Obliged to Purchase our Shares
The following conditions must be satisfied before Sugarplum is
obligated to purchase the common shares that we wish to sell from time to time:
o A registration statement for the shares we will be issuing
must be declared effective by the Securities and Exchange
Commission and must remain effective and available as of the
draw down settlement date for making resales of the common
shares purchased by Sugarplum;
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o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets
to another company, unless the acquiring company has agreed to
honor the common stock purchase agreement;
o No statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of
the transactions contemplated by the stock purchase agreement;
o No litigation or proceeding adverse to us, Sugarplum or their
affiliates, can be pending, nor any investigation by any
governmental authority threatened against us or them seeking
to restrain, prevent or change the transactions contemplated
by the stock purchase agreement or seeking damages in
connection with such transactions; and
o Trading in our common shares must not have been suspended by
the Securities and Exchange Commission or The Nasdaq National
Market, nor shall minimum prices have been established on
securities whose trades are reported by The Nasdaq National
Market.
On each drawdown settlement date for the sale of common shares, we must
deliver an opinion from our counsel about these matters.
A further condition is that Sugarplum may not purchase more than 19.9%
of our common shares issued and outstanding on March 28, 2000, the closing date
under the stock purchase agreement, without obtaining approval from our
shareholders for such excess issuance. In addition, the common stock purchase
agreement does not permit us to draw down funds if the issuance of shares of
common stock to Sugarplum pursuant to the drawdown would result in Sugarplum
owning more than 9.9% of our outstanding common stock on the drawdown exercise
date.
Restrictions on Future Financings
The common stock purchase agreement limits our ability to raise money
by selling our securities for cash at a discount to the market price until the
earlier of March 28, 2001 or the date which is 60 days after Sugarplum has
purchased the maximum of $40,000,000 worth of common stock from us under the
common stock purchase agreement.
There are exceptions to this limitation for securities sold in the
following situations:
o in a registered public offering which is underwritten by one or
more established investment banks;
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o in one or more private placements where the purchasers do not have
registration rights;
o pursuant to any presently existing or future employee benefit plan
which plan has been or is approved by our stockholders;
o pursuant to any compensatory plan for a full-time employee or key
consultant;
o in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to
raise money; and
o a transaction to which Sugarplum gives its written approval.
Costs of Closing the Transaction
At the closing of the transaction on March 28, 2000, we delivered the
requisite opinion of counsel to Sugarplum and paid the escrow agent, Epstein
Becker & Green P.C., $20,000 for Sugarplum's legal, administrative and escrow
costs and for the ordinary services of the escrow agent for the closing of the
draw downs. We also paid Ladenburg Thalmann & Co. Inc. an additional $35,000 for
its expenses. Ladenburg Thalmann also received warrants for a total of 332,060
shares of our common stock with an exercise price equal to the volume-weighted
average price of our common stock as reported on The Nasdaq National Market on
March 27, 2000 or $2.4092. Ladenburg Thalmann is not obligated to purchase any
of our shares pursuant to the warrant.
Termination of the Stock Purchase Agreement
Sugarplum may terminate the equity draw down facility under the stock
purchase agreement if any of the following events occur:
o We suffer a material adverse change in our business, operations,
properties, or financial condition;
o Our common shares are delisted from The Nasdaq National Market
unless such delisting is in connection with the listing of such
shares on a comparable stock exchange in the United States;
o We file for protection from creditors;
o We complete a financing that violates the limitations on
financings contained in the common stock purchase agreement; or
o Our officers and directors existing on March 28, 2000 cease to
own or control at least 25% of our outstanding common stock on
a fully diluted basis.
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Indemnification of Sugarplum
Sugarplum is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Sugarplum to us for inclusion in the
registration statement and prospectus.
SELLING STOCKHOLDERS
Overview
Common shares registered for resale under this prospectus constitute
32.9% of our issued and outstanding common shares as of March 15, 2000.
Sugarplum Investments Limited
Sugarplum Investments Limited is engaged in the business of investing
in publicly traded equity securities for its own account. Sugarplum's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein. Investment
decisions for Sugarplum are made by its board of directors. Other than the
warrants we issued to Sugarplum in connection with closing the common stock
purchase agreement, Sugarplum does not currently own any of our securities as of
the date of this prospectus. Other than its obligation to purchase common shares
under the common stock purchase agreement, it has no other commitments or
arrangements to purchase or sell any of our securities. There are no business
relationships between Sugarplum and us other than the common stock purchase
agreement.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc. is acting as placement agent in
connection with the common stock purchase agreement. This prospectus covers
332,060 shares of common stock issuable upon exercise of warrants we have issued
to Ladenburg Thalmann as a placement fee for introducing us to Sugarplum. Those
warrants are exercisable at $2.4092 per share and expire March 28, 2002. The
decision to exercise any warrants issued, and the decision to sell the common
stock issued pursuant to the warrants, will be made by Ladenburg Thalmann's
officers and board of directors. Other than the warrants, Ladenburg Thalmann
does not currently own any of our securities as of the date of this prospectus.
Our agreement with Ladenburg Thalmann provides Ladenburg Thalmann with a right
of first refusal for one year after completion of the offering under the common
stock purchase agreement, as underwriter or placement agent, all of our
financing arrangements at terms no less favorable than we could obtain in the
market.
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Other Selling Stockholders
Of the 14,255,085 shares we are registering, 4,840,965 shares are being
registered and may be offered for sale from time to time during the period the
registration statement remains effective, by or for the accounts of the selling
stockholders described in the table below. The selling stockholders currently
hold unregistered shares of our common stock and/or warrants for the purchase of
common stock. The shares of common stock being offered by the selling
stockholders were acquired from us in private placement transactions or pursuant
to warrants issued in private placement transactions. Certain of the shares of
common stock being registered for resale will be issued upon exercise of
warrants issued in connection with private placement transactions.
Based on information provided to us by each selling stockholder, the
following table shows, as of March 15, 2000:
o The name of the selling stockholder;
o The number of shares and the percentage the selling stockholder
beneficially owns before this offering;
o How many shares of common stock the selling stockholder may resell
under this prospectus; and
o Assuming the selling stockholder sells all the shares it is
entitled to sell under this prospectus, how many shares of common
stock and the percentage the selling stockholder will beneficially
own after completion of the offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of
common stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
[The Remainder of This Page Is Intentionally Left Blank]
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<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock to
Beneficially Owned be Beneficially Owned
Before Offering After Offering
Under this Prospectus Under this Prospectus(1)
----------------------- -------------------------
Shares to be
Name Number Percentage Offered Number(2) Percentage
- --------------------------------------- ---------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Telebanc Capital Markets, Inc.(3) 140,028 0.3% 140,028 -- %
Intuit Ventures Inc.(4) 3,720,937 8.6 3,720,937 --
A.J. Miller(5) 175,000 0.4 175,000 --
AMC Financial, Inc.(6) 140,000 0.3 70,000 70,000
Frederic C. Hamilton(7) 910,000 2.1 455,000 455,000
Robert Grosser and Robin F. Grosser(8) 175,000 0.4 175,000 --
Elisabeth W. Ireland(9) 140,000 0.3 70,000 70,000
Segal Family Partners(10) 142,550 0.3 35,000 107,550
Total 5,543,515 12.5% 4,840,965 702,550
</TABLE>
- ----------------------
1 Assumes the sale of all shares selling stockholders may sell under this
prospectus.
2 The shares listed in this column are available for sale without limitation
under Rule 144(k) of the Securities Act of 1933.
3 Consists of 140,028 shares of common stock issuable upon exercise of
immediately exercisable warrants.
4 Consists of 3,652,173 shares of common stock and 68,764 shares of common
stock issuable upon exercise of immediately exercisable warrants.
5 Consists of 175,000 shares of common stock issuable upon exercise of
immediately exercisable warrants.
6 Consists of 70,000 shares of common stock and 70,000 shares of common stock
issuable upon exercise of immediately exercisable warrants.
7 Consists of 455,000 shares of common stock and 455,000 shares of common stock
issuable upon exercise of immediately exercisable warrants.
8 Consists of 175,000 shares of common stock issuable upon exercise of
immediately exercisable warrants.
9 Consists of 70,000 shares of common stock and 70,000 shares of common stock
issuable upon exercise of immediately exercisable warrants.
10 Consists of 142,550 shares of common stock.
The selling stockholders have not held any positions or offices or had
material relationships with us or any of our affiliates within the past three
years other than as a result of the ownership of our common stock except (1)
Robert Grosser is a consultant to us and is a client through an independent
mortgage company we helped establish and (2) Intuit Ventures Inc. is an
affiliate of Intuit Lender Services, with which we had material agreements
disclosed in this prospectus. We may amend or supplement this prospectus from
time to time to update the disclosure.
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PLAN OF DISTRIBUTION
General
Sugarplum is offering the common shares for its account as statutory
underwriter, and not for our account. We will not receive any proceeds from the
sale of common shares by Sugarplum. Sugarplum may be offering for sale up to
9,082,060 common shares acquired by it pursuant to the terms of the stock
purchase agreement more fully described under the section above entitled "The
Common Stock Purchase Agreement" and the warrants we issued to it in connection
with the transaction. Sugarplum has agreed to be named as a statutory
underwriter within the meaning of the Securities Act of 1933 in connection with
such sales of common shares and will be acting as an underwriter in its resales
of the common shares under this prospectus. Sugarplum has, prior to any sales,
agreed not to effect any offers or sales of the common shares in any manner
other than as specified in the prospectus and not to purchase or induce others
to purchase common shares in violation of any applicable state and federal
securities laws, rules and regulations and the rules and regulations of The
Nasdaq National Market.
To permit Sugarplum to resell the common shares issued to it under the
stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Sugarplum that we will
prepare and file such amendments and supplements to the registration statement
and the prospectus as may be necessary in accordance with the Securities Act and
the rules and regulations promulgated thereunder, in order to keep it effective
until the earliest of any of the following dates:
o the date after which all of the common shares held by Sugarplum or
its transferees that are covered by the registration statement of
which this prospectus is a part have been sold under the
provisions of Rule 144 under the Securities Act of 1933;
o the date after which all of the common shares held by Sugarplum or
its transferees that are covered by the registration statement
have been transferred to persons who may trade such shares without
restriction under the Securities Act of 1933 and we have delivered
new certificates or other evidences of ownership of such common
shares without any restrictive legend;
o the date after which all of the common shares held by Sugarplum or
its transferees that are covered by the registration statement
have been sold by Sugarplum or its transferees pursuant to such
registration statement;
o the date after which all of the common shares held by Sugarplum or
its transferees that are covered by the registration statement may
be sold, in the opinion of our counsel, under Rule 144 under the
Securities Act of 1933 irrespective of any applicable volume
limitations;
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o the date after which all of the common shares held by Sugarplum
or its transferees that are covered by the registration statement
may be sold, in the opinion of our counsel, without any time,
volume or manner limitations under Rule 144(k) or similar
provision then in effect under the Securities Act of 1933; or
o the date after which none of the common shares held by Sugarplum
that are covered by the registration statement are or may become
issued and outstanding.
Shares of common stock offered through this prospectus may be sold from
time to time by Sugarplum, the other selling stockholders or by pledgees,
donees, transferees or other successors in interest. Such sales may be made on
The Nasdaq National Market, on the over-the-counter market or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price, or in negotiated private transactions, or in a combination of
these methods. The selling stockholders will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. We are
not aware of any existing arrangement between any selling stockholder, any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of shares of common stock which may be sold by selling stockholders
through this prospectus.
The common shares may be sold in one or more of the following manners:
o a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker or dealer for its account under this
prospectus; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the common
shares by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating in
such transactions as agent may receive commissions from the selling stockholders
(and, if they act as agent for the purchaser of such common shares, from such
purchaser).
Broker-dealers may agree with the selling stockholders to sell a
specified number of common shares at a stipulated price per share, and, to the
extent such a broker dealer is unable
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to do so acting as agent for the selling stockholders, to purchase as principal
any unsold common shares at price required to fulfill the broker-dealer
commitment to the selling stockholders. Broker-dealers who acquire common shares
as principal may thereafter resell such common shares from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such common shares commissions computed as described
above. Such brokers or dealers and any other participating brokers or dealers
may be deemed to be underwriters in connection with such sales.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part, and have
reimbursed Sugarplum $20,000 for its legal, administrative and escrow costs.
Sugarplum is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 thereunder. Under applicable rules and
regulations under the Exchange Act, any person engaged in a distribution of the
common shares may not simultaneously engage in market making activities with
respect to such securities for a period beginning when such person becomes a
distribution participant and ending upon such person's completion of
participation in a distribution, including stabilization activities in the
common shares to effect covering transactions, to impose penalty bids or to
effect passive market making bids. In addition, in connection with the
transactions in the common shares, Sugarplum and we will be subject to
applicable provisions of the Exchange Act and the rules and regulations under
that Act, including, without limitation, the rules set forth above. These
restrictions may affect the marketability of the common shares.
The selling stockholders will pay all commissions and certain other
expenses associated with the sale of the common shares.
The price at which we will issue the common shares to Sugarplum under
the stock purchase agreement will be 93% of the volume-weighted average daily
price traded on The Nasdaq National Market, for each day in the pricing period
with respect to each drawdown request. Assuming we use the entire $40 million of
financing available under the stock purchase agreement and we do not issue any
more than the shares registered under the registration statement of which this
prospectus is a part, underwriting compensation for Sugarplum based on the
discounted purchase price will be $3,010,752.69, or approximately $0.32 per
share, plus 332,060 warrants to purchase common stock at $2.4092 per share
issued March 28, 2000.
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Limited Grant of Registration Rights
We granted registration rights to Sugarplum to enable it to sell the
common stock it purchases under the common stock purchase agreement. In
connection with any such registration, we will have no obligation -
o to assist or cooperate with Sugarplum in the offering or
disposition of such shares;
o to indemnify or hold harmless the holders of any such shares
(other than Sugarplum) or any underwriter designated by such
holders;
o to obtain a commitment from an underwriter relative to the sale of
any such shares; or
o to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine
a method of disposition for such shares or to otherwise include such shares
within the confines of any registered offering other than the registration
statement of which this prospectus is a part.
We will use our best efforts to file, during any period during which we
are required to do so under our registration rights agreement with Sugarplum,
one or more post-effective amendments to the registration statement of which
this prospectus is a part to describe any material information with respect to
the plan of distribution not previously disclosed in this prospectus or any
material change to such information in this prospectus. This obligation may
include, to the extent required under the Securities Act of 1933, that a
supplemental prospectus be filed, disclosing
o the name of any broker-dealers;
o the number of common shares involved;
o the price at which the common shares are to be sold;
o the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
o that broker-dealers did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus, as supplemented; and
o any other facts material to the transaction.
Our registration rights agreement with Sugarplum permits us to restrict
the resale of the shares Sugarplum has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Sugarplum for more than 30 consecutive days and our
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stock price declines during the restriction period, we are required to pay to
Sugarplum cash to compensate Sugarplum for its inability to sell shares during
the restriction period. The amount we would be required to pay would be the
difference between our stock price on the first day of the restriction period
and the last day of the restriction period, for each share held by Sugarplum
during the restriction period that has been purchased under the common stock
purchase agreement.
LEGAL MATTERS
The validity of the shares of common stock issued in this offering will
be passed upon for us by the law firm of Foley & Lardner, Jacksonville, Florida.
An individual attorney at Foley & Lardner beneficially owns 30,429 shares of our
common stock. That attorney has not participated in the preparation of this
prospectus.
EXPERTS
Our financial statements as of December 31, 1998 and 1999, and for each
of the three years in the period ended December 31, 1999, have been included in
this prospectus and in the Registration Statement filed with the Securities and
Exchange Commission in reliance upon the report of KPMG LLP, independent
certified public accountants, upon its authority as experts in accounting and
auditing. KPMG LLP's report on the financial statements can be found at the end
of this prospectus and in the Registration Statement.
[The Remainder of This Page Is Intentionally Left Blank]
101
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement (of which this prospectus is a part) under the Securities
Act of 1933, as amended, relating to the common stock we are offering. This
prospectus does not contain all the information that is in the Registration
Statement. Portions of the Registration Statement have been omitted as allowed
by the rules and regulations of the Securities and Exchange Commission.
Statements in this prospectus that summarize documents are not necessarily
complete, and in each case you should refer to the copy of the document filed as
an exhibit to the Registration Statement.
For further information regarding our company and our common stock,
please see the Registration Statement and its exhibits and schedules. You may
examine the Registration Statement free of charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of the
Registration Statement may also be obtained from the public reference facilities
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or by
calling the Commission at 1-800-SEC-0330, at prescribed rates.
In addition, the Registration Statement and other public filings can be
obtained from the Commission's Web site at http://www.sec.gov. We intend to
furnish our stockholders written annual reports containing audited financial
statements certified by an independent public accounting firm.
102
<PAGE>
MORTGAGE.COM, INC.
Consolidated Financial Statements
As of December 31, 1999 and 1998 and for each of the years
in the three-year period ended December 31, 1999
(With Independent Auditors' Report Thereon)
<PAGE>
MORTGAGE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998, and 1997............................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998, and 1997............... F-6
Consolidated Statements of Cash Flow for the years
ended December 31, 1999, 1998, and 1997............................. F-7
Notes to Consolidated Financial Statements............................... F-9
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Mortgage.com, Inc.:
We have audited the accompanying consolidated balance sheets of Mortgage.com,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mortgage.com, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Fort Lauderdale, Florida
February 11, 2000, except for note 17,
which is as of March 27, 2000
F-2
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
<CAPTION>
Assets 1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 7,537 $ 3,412
Mortgage loans available for sale, net 93,120 176,373
Property and equipment, net 16,408 5,266
Capitalized software development costs, net 2,817 978
Goodwill and other intangible assets, net 9,780 4,688
Other assets 8,413 2,721
--------- ---------
Total assets $ 138,075 $ 193,438
========= =========
Liabilities and Shareholders' Equity
Warehouse and other notes payable $ 88,399 $ 172,166
Accounts payable, accrued expenses and other liabilities 13,691 5,558
Capital lease obligations 2,409 1,566
Deferred revenue -- 1,012
--------- ---------
Total liabilities 104,499 180,302
--------- ---------
Minority interest 249 --
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 15,000,000
shares, issued and outstanding 3,199,073 shares
at December 31, 1998 -- 32
Common stock, $.01 par value. Authorized 210,000,000
shares, issued and outstanding 43,221,964 and 9,398,270
shares at December 31, 1999 and 1998, respectively 432 94
Additional paid-in capital 107,011 31,531
Unearned compensation (8,860) (631)
Accumulated deficit (65,256) (17,890)
--------- ---------
Total shareholders' equity 33,327 13,136
--------- ---------
Total liabilities and shareholders' equity $ 138,075 $ 193,438
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(In thousands, except per share data)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Secondary marketing revenue, net $ 35,616 $ 28,598 $ 11,595
Loan production and processing fees, net 10,629 5,338 2,347
Management, technology and other fees 4,331 1,868 2,032
Interest income 10,682 6,998 3,550
----------- ----------- -----------
Total revenues 61,258 42,802 19,524
----------- ----------- -----------
Expenses:
Compensation and employee benefits 53,575 26,075 13,083
Marketing and advertising 16,524 1,335 238
Research and development 2,110 2,888 1,079
Depreciation and amortization 5,316 1,873 480
General and administrative 18,919 9,598 5,126
Interest expense 11,310 7,111 3,050
----------- ----------- -----------
Total expenses 107,754 48,880 23,056
----------- ----------- -----------
Loss before minority interest and extraordinary item (46,496) (6,078) (3,532)
Minority interest (4) -- --
----------- ----------- -----------
Loss before extraordinary item (46,500) (6,078) (3,532)
Extraordinary item - loss on extinguishment of debt (436) -- --
----------- ----------- -----------
Net loss $ (46,936) $ (6,078) $ (3,532)
Net loss per share - basic and diluted:
Loss before extraordinary item $ (2.17) $ (1.02) $ (0.55)
Extraordinary item (0.02) -- --
----------- ----------- -----------
Net loss $ (2.19) $ (1.02) (0.55)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 1,452,507 $ 14 7,923,594 $ 79
Issuance of preferred stock 266,668 3 -- --
Issuance of common stock warrants -- -- -- --
Issuance of common stock in acquisitions -- -- 501,676 5
Conversion of subordinated debentures 206,000 2 -- --
Retirement of treasury stock -- -- (735,000) (7)
Net loss -- -- -- --
---------- -------- ----------- ------
Balance at December 31, 1997 1,925,175 19 7,690,270 77
Issuance of preferred stock,
net of expenses of $343,000 1,080,427 11 -- --
Issuance of common stock warrants -- -- -- --
Issuance of common stock in acquisitions -- -- 1,400,000 14
Issuance of common stock for services -- -- 308,000 3
Conversion of subordinated debentures 193,471 2 -- --
Stock option plan compensation -- -- -- --
Amortization of unearned compensation -- -- -- --
Dividends paid -- -- -- --
Net loss -- -- -- --
---------- -------- ----------- ------
Balance at December 31, 1998 3,199,073 32 9,398,270 94
Issuance of preferred stock,
net of expenses of $495,050 250,001 2 -- --
Issuance of common stock in an initial
public offering, net of expenses
of $5,743,649 -- -- 7,441,875 74
Issuance of common stock for acquisition
of mortgage.com Internet domain name -- -- 140,000 1
Issuance of common stock in acquisition -- -- 162,500 2
Issuance of common stock warrants -- -- -- --
Conversion subordinated debentures -- -- 46,669 1
Conversion of preferred stock (3,449,074) (34) 24,515,961 245
Exercise of stock options -- -- 1,306,689 13
Repurchase of common stock warrants -- -- -- --
Exercise of common stock warrants -- -- 210,000 2
Stock option plan compensation -- -- -- --
Amortization of unearned compensation -- -- -- --
Dividends paid -- -- -- --
Net loss -- -- -- --
---------- -------- ----------- ------
Balance at December 31, 1999 -- $ -- 43,221,964 $ 432
========== ======== =========== ======
F-5
<PAGE>
Balance at December 31, 1996 $ 11,270 $ -- $ (7,530) $ (550) $ 3,283
Issuance of preferred stock 1,997 -- -- -- 2,000
Issuance of common stock warrants 8 -- -- -- 8
Issuance of common stock in acquisitions 533 -- -- -- 538
Conversion of subordinated debentures 1,498 -- -- -- 1,500
Retirement of treasury stock (543) -- -- 550 --
Net loss -- -- (3,532) -- (3,532)
---------- -------- ----------- ------ --------
Balance at December 31, 1997 14,763 -- (11,062) -- 3,797
Issuance of preferred stock,
net of expenses of $343,000 12,011 -- -- -- 12,022
Issuance of common stock warrants 86 -- -- -- 86
Issuance of common stock in acquisitions 1,486 -- -- -- 1,500
Issuance of common stock for services 327 -- -- -- 330
Conversion of subordinated debentures 2,198 -- -- -- 2,200
Stock option plan compensation 660 (660) -- -- --
Amortization of unearned compensation -- 29 -- -- 29
Dividends paid -- -- (750) -- (750)
Net loss -- -- (6,078) -- (6,078)
---------- -------- ----------- ------ --------
Balance at December 31, 1998 31,531 (631) (17,890) -- 13,136
Issuance of preferred stock,
net of expenses of $495,050 14,503 -- -- -- 14,505
Issuance of common stock in an initial
public offering, net of expenses
of $5,743,649 53,717 -- -- -- 53,791
Issuance of common stock for acquisition
of mortgage.com Internet domain name 645 -- -- -- 646
Issuance of common stock in acquisition 1,339 -- -- -- 1,341
Issuance of common stock warrants 529 -- -- -- 529
Conversion subordinated debentures 99 -- -- -- 100
Conversion of preferred stock (211) -- -- -- --
Exercise of stock options 1,216 -- -- -- 1,229
Repurchase of common stock warrants (12,433) -- -- -- (12,433)
Exercise of common stock warrants 148 -- -- -- 150
Stock option plan compensation 15,928 (15,928) -- -- --
Amortization of unearned compensation -- 7,699 -- -- 7,699
Dividends paid -- -- (430) -- (430)
Net loss -- -- (46,936) -- (46,936)
---------- -------- ----------- ------ --------
Balance at December 31, 1999 $ 107,011 $ (8,860) $ (65,256) $ -- $ 33,327
========== ======== =========== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net loss $ (46,936) $ (6,078) $ (3,532)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization and depreciation 5,316 1,873 480
Amortization of unearned compensation 7,699 29 --
Provision for losses 1,269 899 133
Extraordinary item 436 -- --
Minority interest 4 -- --
Decrease (increase) in mortgage loans available for sale, net 82,949 (102,703) (36,490)
Changes in other operating assets and liablities:
(Increase) decrease in other assets (6,564) (1,639) 846
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 5,530 2,912 (4,432)
Decrease in deferred revenue (1,012) -- (20)
-------- --------- --------
Net cash provided by (used in) operating activities 48,691 (104,707) (43,015)
-------- --------- --------
Cash flows from investing activities:
Additions to capitalized software development costs (2,765) (832) (518)
Additions to property and equipment (9,619) (2,580) (1,065)
Purchase of companies, net cash acquired (621) (2,650) 366
Additions to intangible assets (3,564) -- --
-------- --------- --------
Net cash used in investing activities (16,569) (6,062) (1,217)
-------- --------- --------
Cash flows from financing activities:
Net (repayments) proceeds from warehouse notes payable (83,760) 99,554 39,031
Proceeds from issuance of subordinated debentures 40,500 2,000 1,500
Repayment of subordinated debentures (40,500) (200) --
Proceeds from other notes payable 100 -- 396
Payment of other notes payable (7) (468) (31)
Payment of capital lease obligations (1,387) -- --
Proceeds from issuance of common stock 59,535 -- --
Costs of issuing common stock (5,744) -- --
Proceeds from exercise of stock options 1,229 -- --
Proceeds from issuance of preferred stock 15,000 12,365 3,000
Costs of issuing preferred stock (495) -- --
Proceeds from exercise of warrants 150 -- 8
Redemption of warrants (12,433) -- --
Dividends paid (430) (750) --
Contributions from minority interests 245 -- --
-------- --------- --------
Net cash provided by (used in) financing activities (27,997) 112,501 43,904
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 4,125 1,732 (328)
Cash and cash equivalents at beginning of year 3,412 1,680 2,008
-------- --------- --------
Cash and cash equivalents at end of year $ 7,537 $ 3,412 $ 1,680
======== ========= ========
(Continued)
</TABLE>
F-7
<PAGE>
<TABLE>
MORTGAGE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 10,107 $ 6,731 $ 2,749
======== ========= ========
Cash paid during the period for income taxes $ 2 $ 26 $ --
======== ========= ========
Non-cash investing and financing activities:
Common stock issued in connection with purchase of
Internet domain name 646 -- --
Common stock issued to facilitate capital investments -- 330 --
Conversion of preferred stock for common stock 34 -- --
Conversion of subordinated debentures for common stock 100 -- --
Conversion of subordinated debentures for preferred stock -- 2,200 1,500
Unearned compensation on stock options 15,928 660 --
Capital lease obligations incurred for equipment 2,230 -- --
Receivable for subordinated debentures -- 2,000 --
Receivable for preferred stock -- -- 1,000
Property received in exchanged for note receivable -- 131 --
Retirement of treasury stock -- -- 550
Construction in progress accrued but unpaid 2,681 -- --
Acquisition of businesses:
Fair value of assets acquired -- 2,540 14,276
Liabilities assumed 2 319 13,482
Common stock issued at acquisition 1,341 750 538
Common stock issued under earnout agreement -- 750 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MORTGAGE.COM, INC.
Notes to Consolidated Financial Statements
(1) Description of Business
(a) Organization
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.
Effective January 7, 1999, the Company changed its name from First
Mortgage Network, Inc. to Mortgage.com.
(b) Risks and Uncertainties
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets
for Internet products and services. These risks include the
failure to develop and extend the Company's online service brands,
the rejection of the Company's services by consumers, vendors
and/or advertisers, the inability of the Company to maintain and
increase the levels of traffic on its online services, as well as
other risks and uncertainties.
Additionally, in the normal course of business, companies in the
mortgage banking industry encounter certain economic and
regulatory risks. Economic risks include interest rate risk,
credit risk and market risk. The Company is subject to interest
rate risk to the extent that in a rising interest rate
environment, the Company will generally experience a decrease in
loan production, which may negatively impact the Company's
operations. Credit risk is the risk of default, primarily in the
Company's mortgage loans that result from the mortgagors'
inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of mortgage
loans available for sale and in commitments to originate loans.
F-9
<PAGE>
As a non-depository mortgage banker, the Company is dependent on
specialized mortgage credit facilities to finance its mortgage
lending activities. Several commercial banks and institutional
investors provide these funding sources. Most of these financing
arrangements have one-year terms and some are cancelable by the
lenders at any time. Management expects the lenders will continue
to finance its mortgage banking activities; however, there can be
no assurance that they will continue to do so. The termination of
one or more of these relationships would adversely affect the
Company's business.
The Company sells loans to mortgage loan purchasers on a servicing
released basis without recourse. As such, the purchasers have
assumed the risk of loss or default by the borrower. However, the
Company is usually required by these purchasers to make certain
representations relating to credit information, loan documentation
and collateral. To the extent that the Company does not comply
with such representations, or there are early payment defaults,
the Company may be required to repurchase the loans and indemnify
these purchasers for any losses from borrower defaults. To date,
repurchase of loans has not been significant.
(c) Liquidity and Capital Resources
The Company has experience a period of rapid growth that has
placed a significant strain on its resources. Net losses for the
years ended December 31, 1999, 1998 and 1997 amounted to $46.9
million, $6.1 million and $3.5 million, respectively. Since
inception, the Company has funded its operations primarily through
cash raised from the issuance of subordinated debt and from
private placements of preferred and common stock. On August 11,
1999, the Company completed an initial public offering in which
7,062,500 shares of common stock were sold. Subsequently, the
underwriters of the public offering exercised an option to
purchase 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
the $40.5 million of subordinated debt, and $433,000 was used to
redeem certain warrants. Expenses in addition to underwriter
discounts incurred in the offering were approximately $1.6
million.
The Company's near and long-term strategies focus on exploiting
existing and potential competitive advantages while eliminating or
mitigating competitive disadvantages. In response to current
market conditions and as a part of its ongoing corporate strategy,
the Company is pursuing several initiatives intended to increase
liquidity and better position the Company to compete under current
market conditions.
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 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
F-10
<PAGE>
assets were carried on the Company's balance sheet at a nominal
amount. The Company will account for the transaction as a capital
contribution in its 2000 consolidated financial statements.
The Company has and is pursuing aggressive cost cutting programs
by reducing employee levels across the Company, streamlining
overhead and administrative expenses and reorganizing back office
operations around one platform. The Company has also entered into
a strategic alliance and licensing agreement in February 2000 with
eOriginal, Inc., a technology company that has a patented process
to enable the electronic creation of negotiable instruments and
other critical source documents in the Internet and the ability to
transmit, store and retrieve these protected electronic original
documents. This strategic alliance and licensing agreement will
allow the Company to embed this technology into the products and
services the Company provides to its business customers.
(2) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the
Company and of all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Basis of Presentation
The consolidated financial statements of the Company have been
prepared on the accrual basis of accounting. Certain prior year
balances have been reclassified to conform to current year
presentation. In particular, the presentation of interest expense,
which in prior years was presented as an offset of revenue, in
1999 is being included within expenses. The effect of this
reclassification has been to increase total revenue and total
expenses by $7,111,344 and $3,049,591 for the year ended December
31, 1998 and 1997, respectively, as compared to previously
reported amounts.
(c) Use of Estimates
In preparation of the financial statements, management has
considered all events and/or transactions that are subject to
reasonable and normal methods of estimation, and the financial
statements reflect that consideration. Management of the Company
has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(d) Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
F-11
<PAGE>
(e) Mortgage Loans Available for Sale, Net
Mortgage loans available for sale, net of discounts and deferred
fees, are carried at the lower of cost or aggregate market value.
Market value is determined by outstanding commitments from
investors or current investor yield requirements. The net deferred
fees and costs are credited to income when the related loans are
sold. The loans are secured by one to four family residential real
estate located throughout the United States.
(f) Property and Equipment, Net
Property and equipment is carried at cost less accumulated
depreciation. Depreciation is recorded on the straight-line method
over the estimated useful lives of the assets. Useful lives for
property and equipment are as follows:
Building 30 years
Computer hardware and software 3 years
Furniture and fixtures, telephone
equipment and vehicle 5 years
Leased property and equipment meeting certain criteria is
capitalized and the present value of lease payments is recorded as
a capital lease obligation. Amortization of capitalized leased
assets is provided on the straight-line basis over the shorter of
the useful lives or the term of the lease.
(g) Capitalized Software Development Costs
Costs incurred in developing computer software for internal use
are charged to expense when incurred as research and development
costs, until the project has reached the application development
stage. Software development costs incurred thereafter are
capitalized . Capitalized costs include (i) external direct costs
of material and services consumed in developing internal-use
software, and (ii) payroll and payroll-related costs for employees
who are directly associated with and who devote time to the
internal-use software project. Capitalization of such costs ceases
no later than the point at which the project is substantially
complete and ready for its intended use. Capitalized software
development costs are amortized on a straight-line basis over a
three years period.
The Company periodically evaluates impairment of capitalized
software costs by considering, among other factors, whether the
software is not expected to provide substantive service potential,
and a significant change is made or will be made to the software
program. A loss measured by the lower of carrying value or fair
value, if any, less cost to sell, is recognized when the value of
the undiscounted cash flow benefit related to the asset falls
below the unamortized cost.
F-12
<PAGE>
(h) Goodwill and Other Intangible Assets, Net
Goodwill is recognized in business combinations where the purchase
price exceeds the fair value of the identifiable assets acquired
less liabilities assumed. Other intangible assets are recorded at
cost, represented by the cash paid and/or the fair value of the
shares of common stock exchanged. Goodwill and other intangible
assets are amortized on a straight-line basis over the following
estimated useful lives:
Goodwill 15 years
Internet domain name 10 years
Covenant not to compete 2 years
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance reduces deferred tax assets when it is "more likely than
not" that some portion or all of the deferred tax assets will not
be realized.
(j) Allowance for Losses
The Company provides for losses relating to the origination and
sale of mortgage loans and receivables. The allowance for losses
is based on management's evaluation of various factors, including
potential for repurchase-related expenses and contractual recourse
obligations relating to loans sold in the secondary market. While
management uses the information available to make evaluations,
future adjustments to the allowance may be necessary if future
economic conditions differ substantially from the assumptions used
in making the evaluations. Management has considered all events
and/or transactions that are subject to reasonable and normal
methods of estimations, and the financial statements reflect that
consideration.
Management, considering current information and events regarding
the borrowers' ability to repay their obligations, considers a
loan to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual
terms of the loan. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for
losses through a charge to the provision.
F-13
<PAGE>
The Company has agreements with several unaffiliated investors,
whereby all loans that are originated and funded are sold on an
individual loan basis. The agreements include clauses whereby
loans that fail to meet specific criteria require repurchase by
the Company. Loans that are repurchased are usually resold to
other investors once the specific deficiencies are resolved. The
impact of such repurchases has not been significant to date.
(k) Secondary Marketing Revenue, Net
Gains or losses on sales of mortgage loans are recognized based
upon the difference between the selling price and the carrying
value of the related mortgage loans. Loan origination fees and
direct loan origination costs on one to four family residential
mortgage loans are deferred until the loans are sold to permanent
investors and are considered part of the carrying value of a loan.
Deferred origination fees and expenses, net of commitment fees
paid in connection with the sale of the loans, are recognized when
the related loans are sold.
(l) Loan Production and Processing Fees, Net
Loan production and processing fees, which are received for
underwriting, processing and preparing documents for loans
originated, are recorded when the loans are closed. Any
disbursements incurred in originating the loans, such as for
credit reports, appraisals and flood certifications, are charged
as an offset against this revenue.
(m) Interest Income and Expense
Interest income is accrued as earned. Loans are placed on
non-accrual status when any portion of principal or interest is
ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. Loans return to
accrual status when principal and interest become current and are
anticipated to be fully collectible. Interest expense is recorded
when incurred.
(n) Management, Technology and Other Fees
Revenue from software sales to unaffiliated third parties is
recorded as revenue in the period during which the sale occurs,
when there are no further obligations on behalf of the Company and
no right of return exists. Maintenance fees are recorded as
revenue in the period when services are rendered.
Software sales, development, maintenance and user fees of
approximately $1.9 million, $1.6 million and $1.9 million were
earned from one customer for the years ended December 31, 1999,
1998 and 1997, respectively.
F-14
<PAGE>
(o) Research and Development Expenses
Research and development expenses are charged to operations in the
year incurred and are comprised of the compensation and general
and administrative expenses directly related to such activities.
(p) Marketing and advertising costs
Marketing and advertising costs are expensed as incurred.
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of
The Company reviews long-lived assets, goodwill and certain
identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell.
(r) Stock Compensation
The Company accounts for its stock-based employee compensation
arrangements in conformity with the Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company recognizes unearned compensation as a direct charge to
shareholders' equity the excess of the estimated market price of
the Company's common stock at the date of grant over the amount,
if any, an employee must pay to acquire the stock. Unearned
compensation is amortized to the statement of operations on a
straight-line basis over the related vesting period.
(s) Net Loss Per Share
Basic net loss per share is computed by dividing the net loss
available to common shareholders for the year by the
weighted-average number of shares of common stock outstanding
during the year. Diluted net loss per share is computed by
dividing the net loss available to common shareholders for the
year by the weighted-average number of common stock and potential
common stock outstanding during the year, to the extent that such
potential common stock is dilutive. Potential common stock
includes the shares issuable pursuant to the exercise of stock
options, convertible debentures and convertible preferred stock.
Since the potential common stock for all years were antidilutive
(i.e. reduce net loss per share), basic and dilutive net loss per
share are the same.
F-15
<PAGE>
The following table presents the computation of basic and diluted
net loss per share:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In thousands, except per share data)
<S> <C> <C> <C>
Loss before extraordinary item $ (46,500) $ (6,078) $ (3,532)
Preferred stock dividends:
Paid (430) (750) --
Cumulative unpaid (2,217) (2,115) (953)
----------------- ----------------- -----------------
Loss available to common shareholders (49,147) (8,943) (4,485)
Extraordinary item (436) -- --
----------------- ----------------- -----------------
Net loss available to common
shareholders $ (49,583) $ (8,943) $ (4,485)
================= ================= =================
Weighted-average number of shares 22,646 8,729 8,162
================= ================= =================
Basic and diluted net loss per share:
Loss before extraordinary item $ (2.17) $ (1.02) $ (0.55)
Extraordinary item (.02) -- --
----------------- ----------------- -----------------
Net loss $ (2.19) $ (1.02) $ (0.55)
================= ================= =================
</TABLE>
(t) New Accounting Pronouncements
Derivatives. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB SFAS
No. 133. SFAS 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The
impact of this Statement is not anticipated to have a material
impact on the Company's consolidated statements of operations,
balance sheets or cash flows upon the adoption of this standard.
(3) Acquisitions
On October 7, 1999, the Company acquired all the outstanding common stock
of Capital Savings Co., a wholly-owned subsidiary of CSC Holdings, LLC
engaged as retail mortgage broker, and certain other assets and contracts
for $1,590,625 consisting of $250,000 in cash and 162,500 shares of
common stock (valued at $1,340,625). The acquisition has been accounted
under the purchase method of accounting, and the results of operations of
the acquired business have been included in the consolidated statements
of operations since the date of acquisition. The purchase price has been
allocated to the respective assets acquired and liabilities assumed based
on their estimated fair values. Goodwill recorded in conjunction with
this purchase was $1,338,141 and is being amortized on a straight-line
basis over 15 years. The term of the purchase agreement provides for the
sellers to receive additional payments in shares of the Company based on
the revenues of certain of the operations acquired.
F-16
<PAGE>
During 1998, the Company acquired all the outstanding common stock of RM
Holdings, Inc., an internet-based mortgage lender and call center for
$2,221,000 consisting of $1,471,000 in cash and 700,000 shares of common
stock (valued at $750,000). The acquisition has been accounted under the
purchase method of accounting, and the results of operations of the
acquired business have been included in the consolidated statements of
operations since the date of acquisition. The purchase price has been
allocated to the respective assets acquired and liabilities assumed based
on their estimated fair values. Goodwill recorded in conjunction with
this purchase was $2,112,629 and is being amortized on a straight-line
basis over 15 years.
During 1997, the Company acquired all the outstanding common stock of
OnLine Capital, a mortgage lender for $793,186 consisting of $255,672 in
cash and 501,676 shares of common stock (valued at $537,510). The
acquisition has been accounted under the purchase method of accounting,
and the results of operations of the acquired business have been included
in the consolidated statements of operations since the date of
acquisition. The purchase price has been allocated to the respective
assets acquired and liabilities assumed based on their estimated fair
values. Goodwill recorded in conjunction with this purchase was $476,475
and is being amortized on a straight-line basis over 15 years. The terms
of the purchase agreement provided for the sole shareholder of OnLine
Capital to receive an additional 700,000 shares of common stock and a
contingent considerations of up to $3,400,000 in cash, calculated based
upon a percentage of the profits of the business, payable quarterly until
the limit is reached or until June 30, 2001, whichever comes first.
During 1998, 700,000 shares (valued at $750,000) were issued together
with cash consideration amounting to $1,652,694. During 1999, $548,048
has been paid under this contingent payment provision of the purchase
agreement. Additional goodwill of $548,048 and $2,402,694 has been
recognized at December 31, 1999 and 1998, respectively.
Pro forma financial information assuming that the acquisitions occurred
as of January 1, 1998 is not significantly different than the actual
amounts recognized in the consolidated financial statements.
(4) Mortgage Loans Available for Sale, Net
Mortgage loans available for sale, net consist of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Mortgage loans available for sale $ 92,677 $ 175,683
Loan broker premiums, origination points and
discounts, net 31 186
Deferred loan origination costs 412 504
------------------- -------------------
Mortgage loans available for sale, net $ 93,120 $ 176,373
=================== ===================
</TABLE>
All mortgage loans held for sale are pledged as collateral for the
warehouse notes at December 31, 1999 and 1998 (see note 9).
F-17
<PAGE>
(5) Property and Equipment, Net
Property and equipment, net consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Land $ 132 $ 132
Building 288 288
Computer hardware and software 11,685 4,617
Furniture and fixtures 1,901 1,052
Leasehold improvements 652 453
Telephone equipment 1,281 743
Construction in progress 6,053 --
Vehicle -- 12
------------------- -------------------
21,992 7,297
Less accumulated depreciation and amortization (5,584) (2,031)
------------------- -------------------
Property and equipment, net $ 16,408 $ 5,266
=================== ===================
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $3,386,878, $1,091,941 and $330,869, respectively.
(6) Capitalized Software Development Costs, Net
Capitalized software development costs at December 31, 1999 and 1998,
were net of accumulated amortization of $1,594,675 and $666,253,
respectively.
Information related to net capitalized software costs is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 978 $ 639 $ 250
Capitalized costs 2,765 827 518
Amortization (926) (488) (129)
------------------ ------------------ ------------------
Balance at end of year $ 2,817 $ 978 $ 639
================== ================== ==================
</TABLE>
F-18
<PAGE>
(7) Goodwill and Other Intangible Assets, Net
Goodwill and other intangible assets, net consists of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Goodwill $ 6,877 $ 4,992
Internet domain name 2,387 --
Covenant not to compete 1,823 --
------------------- -------------------
11,087 4,992
Less accumulated amortization (1,307) (304)
------------------- -------------------
Goodwill and other intangible assets, net $ 9,780 $ 4,688
=================== ===================
</TABLE>
The amortization of goodwill and other intangible assets during the years
ended December 31, 1999, 1998 and 1997 was $1,003,238, $292,632 and
$20,637, respectively.
On January 31, 1999, the Company acquired the internet domain names of
www.mortgage.com and www.hipoteca.com for $241,180 in cash, including
legal costs, and 140,000 shares of common stock valued at $646,000. The
agreement provides that the Company pay certain amounts based on the
level of loan volume generated by such web sites. On July 1,1999, the
Company settled this contingency with a cash payment of $1.5 million.
On July 1, 1999, the Company entered into three covenants not to compete
with certain former employees of the Company. The agreements provide for
a total cash payment of $1,822,958 based on an initial cash payment of
$1,203,958 and additional cash payments of $77,375 over the subsequent
eight-month period.
(8) Other Assets
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Accounts receivable $ 333 $ 571
Note receivable 300 --
Due from sale of mortgage loans 748 --
Broker fee receivables 1,133 672
Interest receivable 366 197
Prepaid expenses 1,906 457
Deposits 3,593 821
Other 34 3
------------------- -------------------
$ 8,413 $ 2,721
=================== ===================
</TABLE>
F-19
<PAGE>
The Company entered into an agreement on December 5, 1996, to sell
internally developed software to an investment firm. As a condition to
the agreement, the Company entered into a ten-year distribution and
profit sharing agreement for the software with the same investment firm.
The purchase price of the software was $10,800,000 of which $1,080,000
was received as of December 31, 1996, and $533,222 was received as of
March 31, 1997. The proceeds from the transaction, net of related costs,
were recorded as deferred revenue. Due to contract contingencies, whereby
the deferred revenue could be refundable, the Company elected to
recognize the revenue when the contingencies where satisfied. These
contract contingencies also affected the ultimate collectibility of the
note. The note was due on or before November 30, 2006, and bore interest
at 5 percent. The note was discounted to its net present value and, due
to the contingencies affecting collectibility, was fully reserved 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.
(9) Warehouse and Other Notes Payable
Warehouse and other notes payable at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
(In thousands)
<S> <C> <C>
Warehouse lines of credit totaling $90 and $205 million at December 31, 1999
and 1998, respectively, with unaffiliated lenders to support the funding of
mortgage loans. The term of the lines of credit call for monthly interest
rate ranging from 1.75% to 3% over the applicable lending rate, primarily
prime rate, LIBOR or commercial paper rate. The weighted-average interest
rate at December 31, 1999 and 1998 was 8.17% and 7.41, respectively. The
warehouse lines of credit are collateralized by mortgage loans available
for sale amounting to $91,981,126 and $174,838,356 at
December 31, 1999 and 1998, respectively. $ 88,017 $ 171,777
Subordinated convertible debenture bearing an interest rate of
12% and maturing on May 1, 1999. Interest is due and
payable monthly through maturity. The debt was converted
to 46,669 shares of common stock during 1999. -- 100
Unsecured promissory note bearing an interest rate of 6.00% maturing on
December 31, 2003 payable to a mortgage broker
100 --
Mortgage note payable bearing an interest rate of 9.25% maturing
though April 10, 2002. Note payable is collateralized by
certain Company property. 282 289
------------------- ------------------
$ 88,399 $ 172,166
=================== ==================
</TABLE>
F-20
<PAGE>
The warehouse lines of credit contain customary conditions and events of
default, the failure to comply with, or occurrence of, would prevent any
further borrowings and would generally require the prepayment of any
outstanding borrowings under the lines of credit. These conditions
include financial covenants requiring the Company to maintain a minimum
tangible net worth, adjusted tangible net worth, current ratio and
leverage ratio, as defined in the agreements.
In addition to the warehouse lines of credit, the Company maintains
repurchase facilities amounting to $100 million and $25 million at
December 31, 1999 and 1998, respectively, with other lenders for the sale
of mortgage loans.
During 1999, the Company issued $40,500,000 of subordinated debentures to
shareholders of the Company. The debentures consisted of (i) $27,500,000
of debt convertible to 3,208,331 shares of common stock and, (ii)
$13,000,000 of debt with detachable warrants to purchase 563,415 shares
at $4.29 per share. The debentures bore interest at 12% and were due at
various dates through May 5, 2001. The proceeds of the issuance of the
debentures with detachable warrants have been allocated between the
warrants and the debt based on the relative fair values at the time of
issuance. The portion allocable to the warrants amounting to $529,440 has
been accounted for as additional paid-in capital with an offsetting
discount on the debentures. The subordinated debentures were extinguished
with the proceeds of the initial public offering. The Company recognized
an extraordinary loss of $435,601 on the extinguishment of debt.
The following table provides detail of common warrants outstanding at
December 31, 1999. All warrants are currently exercisable.
Number of
Exercise price shares
--------------------------- ----------------
$0.71 3,010,000
0.79 395,388
1.07 2,205,546
1.14 256,032
1.50 256,032
1.64 382,550
1.86 256,032
5.19 38,150
8.00 168,310
----------------
6,968,040
================
F-21
<PAGE>
(10) Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable and accrued expenses consist of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
(In thousands)
<S> <C> <C>
Accounts payable $ 8,184 $ 3,226
Accrued expenses 2,584 1,489
Construction in progress payable 2,681 --
Warehouse line interest payable 195 512
Profit distribution payable 28 312
Deferred rent 19 19
------------------- ------------------
Total accounts payable, accrued expenses and
other liabilities $ 13,691 $ 5,558
=================== ==================
</TABLE>
(11) Stock Option Plans
The Company has two stock option plans that provide for the granting of
incentive stock options and nonqualified stock options to directors,
officers, key employees and consultants. The objectives of these plans
include attracting and retaining the best personnel, providing for
additional performance incentives, and promoting the success of the
Company by providing the opportunity to acquire common stock.
The 1996 Employee Stock Option Plan (the "Plan") provides for the
granting of incentive and nonqualified options for up to 21,000,000
shares to officers, key employees and consultants of the Company.
Incentive stock options granted under the Plan vest 40 percent on the
second anniversary from the date of grant and 20 percent in each of three
years thereafter, except that California residents vest 20 percent on the
first anniversary. The options are exercisable for a period of up to ten
years from the date of grant at an exercise price, which is not less than
the fair market value of the Company's common stock on the date of the
grant. For any stockholder owning more than 10 percent of the outstanding
common stock, incentive stock options are exercisable for a period of up
to ten years from the date of grant at an exercise price which is not
less than 110 percent of the fair market value of the Company's common
stock on the date of the grant. Nonqualified options vest at 40 percent
after the second anniversary of the date of first service as an employee
or consultant to the Company and then equally over three years on the
anniversary date of service, and are granted on terms determined by the
Company's board of directors.
F-22
<PAGE>
Options totaling 376,089 shares were also issued to certain directors,
employees and consultants prior to 1997 outside the stock option plan.
During 1999, 201,089 of these shares were exercised.
The Directors' 1996 Stock Option Plan (the "Directors' Plan") provides
for the granting of nonqualified stock options for up to 420,000 shares
to the Company's nonexecutive directors. Stock options granted under the
Directors' Plan vest 66.67 percent on the second anniversary of the date
of first service as a director of the Company and entirely on the third
anniversary and are exercisable for a period of up to 3-1/2 years from
the date of grant at an exercise price which is not less than the fair
market value of the Company's common stock on the date of grant. The
Directors' Plan is administered by the board of directors or a committee
appointed by the board of directors consisting of at least three of its
members.
In addition, options for 375,555 shares have been issued outside the plan
to employees, and 200,555 of these shares were exercised in 1999.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-average
Shares Exercise price
-------------- ------------------
<S> <C> <C>
Outstanding at December 31, 1996 2,621,500 $ 0.79
Granted 1,631,000 1.07
Forfeited (343,700) 0.91
-------------- ------------------
Outstanding at December 31, 1997 (1,631,000 shares 3,908,800 0.90
exercisable)
Granted 4,400,739 1.47
Forfeited (462,875) 1.16
-------------- ------------------
Outstanding at December 31, 1998 (2,793,819 shares 7,846,664 1.21
exercisable)
Granted 7,284,185 3.91
Exercised (1,306,689) 1.23
Forfeited (1,521,924) 3.66
-------------- ------------------
Outstanding at December 31, 1999 (5,280,039 shares 12,302,236 $ 2.46
exercisable)
============== ==================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted average
Number remaining contractual Number
Exercise price Outstanding life (years) exercisable
-------------------------- ------------------ --------------------------- ------------------
<S> <C> <C> <C>
$0.79 - 1.07 4,213,472 6.9 2,966,478
1.64 - 2.14 6,311,064 7.9 2,311,041
4.29 262,220 9.3 2,520
8.00 - 11.53 1,515,480 9.6 -
------------------ ------------------
12,302,236 5,280,039
================== ==================
</TABLE>
F-23
<PAGE>
The Company recognized unearned compensation for $15,928,000 and $660,000
during the years ended December 31, 1999 and 1998, respectively, for
certain incentive stock options granted from October 1998 through April
1999 where the estimated fair value of the options exceeded their
exercise price at the date of grant. For the years ended December 31,
1999 and 1998, the amortization of unearned compensation was $7,699,100
and $29,000, respectively.
The following table provides the fair value of options granted during the
year ended December 31, 1999, 1998 and 1997 together with a description
of the assumptions to calculate the fair value. The Black-Scholes Model
was used in estimating the fair market value of options and a discount
for lack of marketability was used as the options granted prior to August
11, 1999 are not traded on a public market. Management has reviewed both
internal and external factors, which influence the value of the options.
Internal factors include, among other things, the Company's financial
position, results of its operations and the size and marketability of the
interest being valued. External factors include, among other things, the
status of the industry, the position of the Company relative to the
industry and the local, national and international economic environment.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 5.10-5.67% 4.42-5.74% 6.12-6.73%
Expected volatility 150% -- --
Dividend yield -- -- --
Weighted-average expected option life 5 years 6 years 5 years
Weighted-average fair value of options $ 3.79 $ 0.37 $ 0.03
</TABLE>
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the date of grant consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per share
(basic and diluted) for the years ended December 31, 1999, 1998 and 1997
would have increase to the pro forma amounts indicated below (amounts in
thousands except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss - as reported $ (46,936) $ (6,078) $ (3,532)
Net loss - pro forma (48,825) (6,212) (3,571)
Loss per share - as reported (2.19) (1.02) (0.55)
Loss per share - pro forma (2.27) (1.04) (0.55)
</TABLE>
The pro forma effects of applying SFAS No. 123 are not indicative of
future amounts because this statement does not apply to options granted
prior to 1996. Additional stock options are anticipated in future years.
F-24
<PAGE>
(12) Income Taxes
No current or deferred provision for income taxes was recorded for the
years ended December 31, 1999, 1998 and 1997, due to the Company's
operating losses in the respective years.
At December 31, 1999, the Company had approximately $57.7 million of tax
net operating loss carryforwards. If not used, the net operating loss
carryforwards will expire between 2008 and 2019.
Utilization of these carryforwards is dependent on the future
profitability of the Company and may be limited if certain changes in
ownership occur. If certain substantial changes in the Company's
ownership should occur, there would be an annual limitation in the amount
of tax net operating loss carryforwards, which could be utilized.
The composition of net deferred tax assets at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforward $ 21,713 $ 6,053
Deferred revenue -- 607
Stock compensation 2,908 --
Organization costs -- 30
Allowance for losses 599 182
Property and equipment principally due to
depreciation 255 38
Internet domain name 20 --
Other 9 11
------------------- -------------------
25,504 6,921
Valuation allowance (24,385) (6,480)
------------------- -------------------
Net deferred tax asset 1,119 441
------------------- -------------------
Deferred tax liabilities:
Covenant not to compete 427 --
Capitalized software development costs 692 441
------------------- -------------------
1,119 441
------------------- -------------------
Total $ -- $ --
=================== ===================
</TABLE>
F-25
<PAGE>
A 100 percent valuation allowance was established against the net
deferred tax asset at December 31, 1999 and 1998. Subsequently recognized
tax benefits relating to the valuation allowance for deferred tax assets
as of December 31, 1999 will be recognized as an income tax benefit in
the statement of operations, except for $62,671 relating to the tax
benefit from the exercise of stock options which will be recorded as
additional paid-in capital.
(13) Related Parties
The Company has a consulting agreement with two consulting firms of which
the principle owners are shareholders of the Company. Total consulting
fees expensed related to these consulting firms were $316,000 $604,600
and $300,100 during the years ended December 31, 1999, 1998 and 1997,
respectively. As of December 31, 1999, total unpaid fees for services
rendered during 1999 under such agreement totaled $15,000.
(14) Financial Instruments
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidations. Significant
differences can arise between the fair value and carrying amount of
financial instruments that are recognized at historical cost amounts.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. The fair value of amounts disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. Also, because of differences in methodologies
and assumption used to estimate fair value, the Company's fair values
should not be compared to those of other companies.
The methods and assumptions to estimate the fair value of each class of
financial instrument are as follows:
Mortgage loans held for sale - The fair value of mortgage loans held for
sale is based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing
rights released, as is the Company's normal business practice. The fair
value of mortgage loans held for sale at December 31, 1999 and 1998 was
$93,540,636 and $177,167,458 (carrying value of $93,119,907 and
$176,372,516), respectively.
F-26
<PAGE>
Warehouse and other notes payable - The fair value of warehouse notes
payable approximates its carrying value because of the short maturity of
the notes. The fair value of subordinated debentures is estimated using
the estimated fair value of the preferred stock into which the
subordinated debt can be converted. The fair value of other notes payable
is estimated by discounting estimated future cash flows using a rate
commensurate with the risks involved. The fair value of warehouse and
other notes payable at December 31, 1999 and 1998 was $88,398,872 and
$172,406,856 (carrying value of $88,398,872 and $172,166,273),
respectively.
Other financial instruments - The fair value of other financial
instruments (cash and cash equivalents, receivables, payables, accrued
expenses and letters of credit) approximate their carrying amount because
of the short maturity of those instruments.
Financial Instruments with Off-balance sheet Risk
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk, primarily commitments to
originate mortgage loans and forward commitments to sell mortgage loans.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount in excess of the amounts
recognized in the consolidated balance sheets. The contract amount of
those instruments reflects the extent of involvement the Company has in
these particular classes of financial instruments. The Company's exposure
to credit loss in the event of nonperformance by the other party with
respect to loan commitments is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For forward commitments, the contract or notional amounts
exceed the Company's exposure to credit loss.
Commitments to originate loans are agreements to lend to a customer,
provided the customer meets all conditions established in the contract.
Commitments have fixed expiration dates and may require payment of a fee.
Forward commitments to sell mortgage loans are contracts, which the
Company enters into for the purpose of reducing the market risk
associated with originating loans for sale. Risks may arise from the
possible inability of the Company to originate loans to fulfill the
contracts, in which case the Company may purchase securities in the open
market to deliver against the contracts.
The following table represents outstanding commitments at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Commitments to originate mortgage loans $ 87,096 $ 156,229
Commitments to sell mortgage loans 112,836 184,106
</TABLE>
F-27
<PAGE>
The Company is contingently liable for performance under letters of
credit totaling $3,122,971 at December 31, 1999. These letters of credit
secure certain lease agreements and commitments under a construction
contract and are collateralized by certificates of deposit (presented as
deposits in other assets) amounting to $3,123,013.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to credit risk
consist primarily of cash and cash equivalents, mortgage loans held for
sale and receivables. The Company maintains cash and cash equivalents
with various major financial institutions and at times such amounts
exceed federal deposit insurance coverage limits. Mortgage loans held for
sale are secured by mortgages on residential properties and arise from
customers throughout the United States. Other receivables arise from a
variety of customers where the Company continually evaluates the
creditworthiness but does not require collateral. Management believes
that no significant concentration of credit risk exist with respect to
the Company's financial instruments.
(15) Commitments and Contingencies
(a) Leases
The Company is obligated under various lease agreements relating
to property and equipment. Lease terms expire through 2009,
subject to renewal options. The following is a schedule of future
minimum lease payments as of December 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, Leases Leases
-------------------------------------------------- ------------------- -------------------
(In thousands)
<S> <C> <C>
2000 $ 1,373 $ 6,085
2001 1,173 5,476
2002 378 4,143
2003 -- 3,089
2004 -- 1,837
2005 and thereafter -- 7,553
------------------- -------------------
Total minimum lease payments 2,924 $ 28,183
===================
Less amount representing interest at 12% 515
-------------------
Capital lease obligations $ 2,409
===================
</TABLE>
F-28
<PAGE>
Cost of property and equipment under capital leases and related
accumulated amortization at December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In thousands)
<S> <C> <C>
Computer hardware and software $ 3,184 $ 1,102
Furniture and fixtures 323 322
Leasehold improvements 127 107
Telephone equipment 584 527
------------------- -------------------
4,218 2,058
Less: accumulated depreciation and
amortization (1,476) (397)
=================== ===================
$ 2,742 $ 1,661
=================== ===================
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997
was $4,699,814, $2,313,552 and $1,583,606 respectively.
The Company has entered into a 10-year lease for approximately
110,000 square feet in an existing facility in Sunrise, Florida
and expects to consolidate operations that are in three separate
facilities early in 2000. Rental payments will be approximately
$100,000 per month.
(b) Litigation
The Company is a defendant in various lawsuits arising during the
ordinary course of business. Management has consulted with legal
counsel and is of the opinion, based on legal counsel's advice,
that none of these matters will have a material adverse effect on
the financial position of the Company. Where appropriate, the
Company has adequately reserved for fees and costs.
(c) Other
The Company has entered into arrangements with certain employees
and third parties, which provide for profit sharing based on
results of operations of specified products or divisions of the
Company. In conjunction with these arrangements, the Company has
also entered into employment and noncompetitive agreements with
certain individuals.
(16) Segment Information
The Company operates in two reportable business segments: the "Direct to
Consumer" reportable segment, which includes the Mortgage.com internet
web site and retail mortgage brokerage operations, both of which
originate mortgage loans that are subsequently sold in the secondary
market; and the "Business to Business" reportable segment, which includes
back-office mortgage services for lenders, realtors, homebuilders and
software and internet conduits, technology platform licenses to mortgage
industry participants and the Openclose.com web site that enables
brokers, 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
F-29
<PAGE>
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 been
reclassified to overhead in these tables.
Assets not allocated to reportable segments include all assets other than
mortgage loans available for sale, net. All segment revenues are from
external customers. Expenses not allocated to reportable segments include
corporate overhead related to facilities, general and administrative
costs and executive salaries. Certain costs are allocated between
segments based on either the number of loans processed and/or originated.
Research and development costs are not allocated as the development
efforts are primarily related to the technology platform, which is used
to support the activities conducted by all segments.
<TABLE>
<CAPTION>
Direct to Business to
Year ended December 31, 1999 Total Consumer Business
-------------------------------------------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Secondary marketing revenue, net $ 35,616 $ 9,849 $ 25,767
Loan production and processing fees, net 10,629 1,932 8,697
Management, technology and other fees 4,331 -- 4,331
Interest income 10,682 2,036 8,646
---------------- ----------------- ----------------
Total revenue 61,258 13,817 47,441
---------------- ----------------- ----------------
Expenses:
Compensation and employee benefits 43,038 10,754 32,284
Marketing and advertising 16,331 4,031 12,300
Depreciation and amortization 3,972 511 3,461
General and administrative 14,913 2,942 11,971
Interest expense 9,516 1,968 7,548
---------------- ----------------- ----------------
Total segment expenses 87,770 20,206 67,564
----------------- ----------------
Segment loss $ 6,389 $ 20,123
================= ================
Research and development not allocated to
segments 2,110
Expenses not allocated to segments 17,874
----------------
Total expenses 107,754
Minority interest (4)
Extraordinary items (436)
----------------
Net loss $ 46,936
================
Segmental assets $ 93,868 $ 24,477 $ 69,391
Other assets not allocable to segments 44,207
----------------
Total assets $ 138,075
================
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Direct to Business to
Year ended December 31, 1998 Total Consumer Business
-------------------------------------------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Secondary marketing revenue, net $ 28,598 $ 12,571 $ 16,027
Loan production and processing fees, net 5,338 1,826 3,512
Management, technology and other fees 1,868 - 1,868
Interest income 6,998 2,056 4,942
---------------- ----------------- ----------------
Total revenue 42,802 16,453 26,349
---------------- ----------------- ----------------
Expenses:
Compensation and employee benefits 23,641 10,732 12,909
Marketing and advertising 1,325 613 712
Depreciation and amortization 743 240 503
General and administrative 7,997 3,008 4,989
Interest expense 7,111 2,274 4,837
---------------- ----------------- ----------------
Total segment expenses 40,817 16,867 23,950
----------------- ----------------
Segment (loss) income $ (414) $ 2,399
================= ================
Research and development not allocated to
segments 2,888
Expenses not allocated to segments 5,175
----------------
Total expenses 48,880
Net loss $ (6,078)
================
Segmental assets $ 176,373 $ 93,325 $ 83,048
Other assets not allocable to segments 17,065
----------------
Total assets $ 193,438
================
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
Direct to Business to
Year ended December 31, 1997 Total Consumer Business
-------------------------------------------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Secondary marketing revenue, net $ 11,595 $ 4,998 $ 6,597
Loan production and processing fees, net 2,347 788 1,559
Management, technology and other fees 2,032 -- 2,032
Interest income 3,550 412 3,138
---------------- ----------------- ----------------
Total revenue 19,524 6,198 13,326
---------------- ----------------- ----------------
Expenses:
Compensation and employee benefits 12,058 4,781 7,277
Marketing and advertising 58 51 7
Depreciation and amortization 318 91 227
General and administrative 3,258 714 2,544
Interest expense 3,050 354 2,696
---------------- ----------------- ----------------
Total segment expenses 18,742 5,991 12,751
----------------- ----------------
Segment income $ 207 $ 575
================= ================
Research and development not allocated to
segments 1,078
Expenses not allocated to segments 3,235
----------------
Total expenses 23,056
Net loss $ (3,532)
================
Segmental assets $ 73,738 $ 31,243 $ 42,494
Other assets not allocable to segments 8,189
----------------
Total assets $ 81,927
================
</TABLE>
(17) Subsequent Event
On March 27, 2000, the Company entered into a common stock purchase
agreement with an investor granting the Company an option to sell stock
to that investor over the next 24 months, commencing on the effective
date of a registration statement. 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.
F-32
<PAGE>
[BACK COVER PAGE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table provides the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the
securities being registered. All amounts are estimates, except the Securities
and Exchange Commission registration fee. All of these costs and expenses will
be borne by the registrant.
Securities and Exchange Commission filing fee.............. $ 14,102.52
Accountants' fees and expenses............................. 35,000.00
Legal fees and expenses.................................... 150,000.00
-----------
Total...................................................... $199,102.52
Item 14. Indemnification of Directors and Officers.
Section 607.0850 of the Florida Business Corporation Act authorizes a
court to award, or permits a Florida corporation to grant, indemnity to present
or former directors and officers, as well as certain other persons serving at
the request of the corporation in related capacities. This permitted indemnity
is sufficiently broad to permit indemnification for liabilities arising under
the Securities Act of 1933, including reimbursement for expenses incurred.
The indemnification authorized under Florida law is not exclusive and
is in addition to any other rights granted to officers and directors under the
Articles of Incorporation or Bylaws of the corporation or any agreement between
officers and directors and the corporation. The registrant's Bylaws provide for
the indemnification of directors, former directors and officers to the maximum
extent permitted by Florida law. The registrant's Bylaws also provide that it
may purchase and maintain insurance on behalf of a director or officer against
liability asserted against the director or officer in such capacity. In
addition, the registrant has entered into Indemnification Agreements (Exhibits
10.29, 10.30 and 10.31 hereto) with each officer and director.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, the registrant has sold the following
securities that were not registered under the Securities Act. The purchases and
sales were exempt pursuant to Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder) as transactions by an issuer not involving
a public offering, where the purchasers represented their intention to acquire
the securities for investment only, not with a view to distribution, and
received or had access to adequate information about the registrant. The
information in this item has been
II-1
<PAGE>
adjusted for a 7-for-1 stock split for the common stock effective August 11,
1999 and states preferred shares as the number of common shares into which they
were converted.
1. Between December 24, 1996 and June 30, 1997, the registrant issued
3,733,352 shares of Series C Preferred Stock to six accredited institutional
investors, Canaan Equity, L.P., Canaan Ventures II Limited Partnership, Canaan
Ventures II Offshore CV, Canaan Capital Limited Partnership, Canaan Capital
Offshore Limited Partnership, CV, and Dominion Fund III, for aggregate
consideration of approximately $4,000,000. We undertook this transaction to
raise funds for general working capital purposes. In connection with this
issuance and sale, between December 24, 1996 and March 10, 1997, the registrant
also issued warrants to purchase 104,664 shares of common stock at approximately
$1.07 per share to Raymond James and Associates, Inc. in consideration for its
services as placement agent in the sale of Series C Preferred Stock. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
were accredited investors, represented their intention to acquire the securities
for investment only, not with a view to distribution, and received or had access
to adequate information about the registrant.
2. As of June 30, 1997, the registrant issued 250,838 shares of
common stock to John Hogan in consideration for the merger of OnLine Capital
into the registrant. On January 1, 1998, the registrant issued an additional
250,838 shares of common stock to John Hogan pursuant to a clause in the OnLine
Capital merger agreement. As of January 1, 1998, the registrant issued 700,000
shares of common stock to John Hogan in consideration of changing John Hogan's
compensation plan.
3. As of August 31, 1997, the registrant issued $1,500,000 in face
amount of 12% Senior Subordinated Convertible Notes due September 30, 2002 and
warrants to purchase 350,000 shares of common stock at approximately $1.07 per
share to two accredited, institutional investors, Canaan Equity, L.P. and
Dominion Fund III. We undertook this transaction to raise funds for general
working capital purposes. The purchases and sales were exempt pursuant to Rule
506 and Regulation D as transactions by an issuer not involving a public
offering, where the purchasers were accredited investors, represented their
intention to acquire the securities for investment only, not with a view to
distribution, and received or had access to adequate information about the
registrant.
4. As of December 31, 1997, the registrant issued 1,442,000 shares of
Series C Preferred Stock to two accredited, institutional investors, Canaan
Equity, L.P. and Dominion Fund III, upon their conversion of $1,500,000 in face
amount of 12% Senior Subordinated Convertible Notes due September 30, 2002. We
undertook this transaction to raise funds for general working capital purposes
and to retire debt. The purchases and sales were exempt pursuant to Rule 506
and Regulation D as transactions by an issuer not involving a public offering,
where the purchasers were accredited investors, represented their intention to
acquire the securities for investment only, not with a view to distribution and
received or had access to adequate information about the registrant.
II-2
<PAGE>
5. As of January 30, 1998, the registrant issued $2,000,000 of 12%
Senior Subordinated Convertible Notes due January 31, 2003 and warrants to
purchase 466,669 shares of common stock at approximately $1.07 per share to two
accredited, institutional investors, Canaan Equity, L.P. and Dominion Fund III.
We undertook this transaction to raise funds for general working capital
purposes. The purchases and sales were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers were accredited investors, represented their intention to acquire
the securities for investment only, not with a view to distribution, and
received or had access to adequate information about the registrant.
6. As of March 31, 1998, the registrant issued 700,000 shares of
common stock to John Rodgers, Andrew Heller and Kyle Meyer as consideration for
the merger of RM Holdings, Inc. into the registrant. The merger agreement also
contained an earn-out provision that provided for the issuance of warrants to
purchase 700,000 shares of common stock at approximately $1.07 per share,
pursuant to a formula. On December 31, 1998, the registrant issued warrants to
purchase 203,882 shares of common stock, and on December 31, 1999, the
registrant issued warrants to purchase 233,331 shares of common stock, each at
approximately $1.07 per share to John Rodgers, Andrew Heller and Kyle Meyer
pursuant to the earn-out provision.
7. As of April 1, 1998 the registrant issued a warrant to purchase
2,100,000 shares of common stock at approximately $1.07 per share and a warrant
to purchase 700,000 shares of common stock at approximately $1.07 per share to
an accredited, institutional investor, Superior Bank, FSB, in consideration of
services under the Sale and Marketing Agreement between the registrant and
Superior Bank dated as of April 28, 1995, as amended.
8. As of April 15, 1998, the registrant issued a warrant to purchase
252,000 shares of common stock with an exercise price of approximately $1.64 per
share to FMN Associates Limited Partnership in consideration for the settlement
of a dispute.
9. As of April 15, 1998, the registrant issued warrants to purchase
147,000 shares of common stock with an exercise price of approximately $1.07 per
share and 308,000 shares of common stock to an accredited, institutional
investor, Raymond James & Associates, Inc., in settlement of a dispute regarding
services as a placement agent in connection with the sale of Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock.
10. As of April 1, 1998, the registrant issued a warrant to purchase
68,600 shares of Series D Preferred Stock with an exercise price of
approximately $1.64 per share to an accredited, institutional investor, Dominion
Fund III, as consideration for the establishment of an equipment lease line of
credit with an affiliate of Dominion Fund III. As of November 20, 1998, the
registrant issued a warrant to purchase 61,950 shares of Series D Preferred
Stock with an exercise price of approximately $1.64 per share to Dominion
Capital Management, LLC, an affiliate of the lessor, for an aggregate price of
$672.60 in connection with an increase of $925,000 in the equipment lease line
of credit. As of February 16, 2000, the registrant issued a warrant to
purchase 38,150 shares of common stock with an exercise price of $5.19 per share
to Dominion Capital Management, LLC in connection with a further increase of
$1,800,000 in the equipment lease line of credit.
II-3
<PAGE>
11. Between May 29, 1998 and August 31, 1998, the registrant issued
8,917,286 shares of Series D Preferred Stock to sixteen investors in exchange
for the retirement of $200,000 in face amount of 12% Senior Subordinated Notes
due January 31, 2003 and $14,900,000 in cash. We undertook this transaction to
raise funds for general working capital purposes and to retire debt. The
purchases and sales were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
represented their intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant.
12. As of January 1, 1999, the registrant issued 140,000 shares of
common stock to Credit.Com, LLC as partial consideration for the acquisition of
the domain name "www.mortgage.com".
13. As of February 9, 1999, the registrant issued an aggregate amount
of $2,000,000 of 12% Senior Subordinated Notes due February 9, 2000 and warrants
to purchase 46,678 shares common stock with an exercise price of $8.00 to eight
accredited, institutional investors. We undertook this transaction to raise
funds for general working capital purposes in the event funds were not available
in the public market. The purchases and sales were exempt pursuant to Rule 506
and Regulation D as transactions by an issuer not involving a public offering,
where the purchasers were accredited investors, represented their intention to
acquire the securities for investment only, not with a view to distribution, and
received or had access to adequate information about the registrant.
14. As of February 26, 1999, the registrant issued an aggregate amount
of $8,000,000 of 12% Senior Subordinated Notes due February 26, 2001 and
warrants to purchase 373,338 shares of common stock with an exercise price of
$8.00 to seven accredited, institutional investors. We undertook this
transaction to raise funds for general working capital purposes in the event
funds were not available in the public market. The purchases and sales were
exempt pursuant to Rule 506 and Regulation D as transactions by an issuer not
involving a public offering, where the purchasers were accredited investors,
represented their intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant.
15. As of April 5, 1999, the registrant issued an aggregate amount of
$3,000,000 of 12% Senior Subordinated Notes due April 5, 1999 and a warrant to
purchase 140,028 shares of common stock with an exercise price of $8.00 to an
accredited, institutional investor, TeleBanc Capital Markets, Inc. We undertook
this transaction to raise funds for general working capital purposes in the
event funds were not available in the public market. The purchase and sale was
exempt pursuant to Rule 506 and Regulation D as a transaction by an issuer not
involving a public offering, where the purchaser was an accredited investor,
represented its intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant.
II-4
<PAGE>
16. As of April 15, 1999, the registrant issued warrants to purchase
an aggregate of 28,000 shares of common stock with an exercise price of $8.00 in
consideration for the waiver by First Capital Corporation of Los Angeles and
Mortgage Loan Specialists, Inc. of their respective conversion rights pursuant
to Technology Member Correspondent Agreements dated as of November 1, 1998.
17. As of April 30, 1999, the registrant issued 46,669 shares of
common stock to Harris Friedman in conversion of a 12% Convertible Subordinated
Debenture with a principal amount of $100,000 due May 1, 1999. We undertook this
transaction to retire debt.
18. As of May 6, 1999, the registrant issued $27,500,000 in face
amount of 12% Senior Subordinated Convertible Debentures, due May 6, 2001,
convertible in certain circumstances to common stock or Series E Preferred
Stock, to an accredited, institutional investor, Intuit Inc. We undertook this
transaction to raise funds for general working capital purposes and to purchase
technology and redeem warrants. The purchase and sale was exempt pursuant to
Rule 506 and Regulation D as a transaction by an issuer not involving a public
offering, where the purchaser was an accredited investor, represented its
intention to acquire the securities for investment only, not with a view to
distribution, and received or had access to adequate information about the
registrant.
19. As of May 28, 1999, the registrant issued 1,875,007 shares of its
Series F Preferred Stock to three accredited institutional investors consisting
of affiliates of Dominion Fund III, Canaan Equity, L.P. and Technology Crossover
Ventures, for aggregate consideration of $15,000,000. We undertook this
transaction to raise funds for general working capital purposes in the event
funds were available in the public market. The purchases and sales were exempt
pursuant to Rule 506 and Regulation D as transactions by an issuer not involving
a public offering, where the purchasers were accredited investors, represented
their intention to acquire the securities for investment only, not with a view
to distribution, and received or had access to adequate information about the
registrant.
20. In October 1999 the registrant issued 162,500 shares of common
stock to CSC Holdings LLC as consideration for the acquisition by the registrant
of certain assets. The purchase and sale was exempt pursuant to Section 4(2) of
the Act as a transaction by the issuer not involving a public offering.
21. Since May 1996, the registrant has granted stock options to
purchase 15,912,869 shares of common stock with exercise prices ranging from
$0.79 to $11.53 per share, to employees, directors, and consultants pursuant to
the registrant's employee stock option plan. As of May 1, 1997, the Registrant
also granted an option outside of the plan to an employee for 42,000 shares of
common stock with an exercise price of approximately $0.79 per share as part of
a severance arrangement.
Of these options, 1,230,900 have been exercised for an aggregate
consideration of $1,360,496. The issuance of common stock upon exercise of the
options was exempt either pursuant to Rule 701, as a transaction pursuant to a
compensatory benefit plan, or pursuant to Section 4(2) as a transaction by an
issuer not involving a public offering.
II-5
<PAGE>
22. On November 10, 1999, we issued 35,000 shares of common stock
pursuant to an exercise of warrants originally issued in November 1995. The
exercise price for the warrants was approximately $0.71 per share.
No underwriters were employed in any of the above transactions.
Appropriate legends were affixed to the share certificates and warrants issued
in the transactions.
Item 16. Exhibits and Financial Statement Schedules.
2.1 Common Stock Purchase Agreement dated March 27, 2000,
between Registrant and Sugarplum Investments Limited
2.2 Registration Rights Agreement dated March 27, 2000, between
Registrant and Sugarplum Investments Limited
2.3 Escrow Agreement dated as of March 27, 2000, among
Registrant, Sugarplum Investments Limited and Epstein Becker
& Green, P.C.
2.4 Letter Agreement dated February 23, 2000, between the
Registrant 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** Agreement dated October 7, 1999, among MDCM Acquisition
Corp. (an affiliate of the registrant), CSC Holdings, LLC,
Capital Savings Co., Inc., PlanMax, Inc., ACM/USA, Inc., CSC
Marketing Services, LLC, Todd
Ballenger and Robert B. Ballenger
3.1* Fourth Amended and Restated Articles of Incorporation, as
amended
3.2* Amended and Restated Bylaws
4.1* $27,500,000 Note Purchase Agreement dated as of May 5, 1999
(schedules omitted)
4.2* $8,000,000 Note Purchase Agreement dated as of February 26,
1999 (schedules omitted)
4.3* $3,000,000 Note Purchase Agreement dated as of April 19,
1999 (schedules omitted)
4.4* Registration Rights Agreement dated March 15, 1996, between
the Registrant and Mason-McDuffie Real Estate, Inc.
4.5* Registration Rights Agreement dated May 1, 1996, between the
Registrant and Raymond James & Associates, Inc.
II-6
<PAGE>
4.6* Registration Rights Agreement dated as of January 1, 1998,
between the Registrant and Credit.com, LLC
4.7* Series B Preferred Stock Purchase Agreement dated as of
March 29, 1996 among the Registrant, purchasers of the
Series B Preferred Stock, Purchasers of the Series C
Preferred Stock, Purchasers of the Series D Preferred Stock,
Andrew Heller, Kyle Meyer, John T. Rodgers, TeleBanc Capital
Markets, Inc. and Dominion Fund IV, L.P., as amended
4.8* Specimen certificate for shares of Registrant's common stock
4.9* Recapitalization Agreement and Plan of Reorganization
between the registrant and Mason-McDuffie Real Estate, Inc.
4.10* Letter Agreement dated September 1, 1998 from the registrant
to Technology Crossover Ventures II, L.P.
5.1 Legal Opinion of Foley & Lardner as to legality of
securities
10.1* Employment Agreement between the Registrant and Seth S.
Werner dated January 1, 1999
10.2* Employment Agreement between the Registrant and John J.
Hogan dated May 28, 1999
10.3* Amended and Restated Employment Agreement between the
Registrant and David Larson dated May 28, 1999
10.4* Purchase and Sale Agreement dated April 7, 1995 among the
Registrant, Morbank Financial Systems, Inc., Globe Mortgage
Company, John Buscema, and Financial Resources Group
(a) Waiver of Rights to Software
10.5* Amended and Restated Stock Option Plan (as of March 24,
1999)
10.6* Form of Stock Option Agreements under Employee Stock Option
Plan
(a) Mortgage.com, Inc. (f/k/a First Mortgage Network,
Inc.) Non-Qualified Stock Option Agreement
(b) Mortgage.com, Inc. (f/k/a First Mortgage Network,
Inc.) Non-Qualified Stock Option Agreement (For
Employees of Network Members)
(c) Mortgage.com, Inc. (f/k/a First Mortgage Network,
Inc.) Incentive Stock Option Agreement
(d) Mortgage.com, Inc. Non-Qualified Stock Option
Agreement (Revised April 26, 1999)
(e) Mortgage.com, Inc. Non-Qualified Stock Option
Agreement (For Employees of Network Members
Revised April 26, 1999)
II-7
<PAGE>
(f) Mortgage.com, Inc. Incentive Stock Option
Agreement (Revised April 26, 1999)
10.7* Superior Bank Warrant Repurchase Agreement between
Registrant and Superior Bank, FSB dated May 4, 1999
(a) First Amendment to Superior Bank Warrant
Repurchase Agreement made as of August 11, 1999
10.8* Agreement between Registrant and Superior Bank, FSB dated as
of April 1, 1998
10.9* Common Stock Warrant dated April 1, 1998 to Superior Bank,
FSB to purchase 300,000 shares of Common Stock at $5.00 per
share
10.10* Common Stock Warrant dated April 1, 1998 to Superior Bank,
FSB to purchase 100,000 shares of Common Stock at $7.50 per
share
10.11* Amended and Restated Desktop Underwriter Seller/Servicer
Software License and Subscription Agreement between
Registrant and Fannie Mae executed October 15, 1998
10.12** Termination Agreement dated February 29, 2000, between
Registrant and Intuit Lender Services, Inc.
10.13* Mortgage Loan Processing Agreement between the Registrant
and Atlanta Internet Bank, FSB dated as of April 1, 1998
10.14* Atlanta Internet Bank Mortgage Center Mortgage Loan
Origination, Processing, Purchase and Sale Agreement between
Registrant and Atlanta Internet Bank, FSB dated as of
April 1, 1998
10.15* License, Staffing, Purchase and Sale Agreement between
Registrant and Atlanta Internet Bank, FSB dated as of
April 1, 1998
10.16* Letter Agreement dated May 20, 1999, between the Registrant
and NetBank 10.17* $2,000,000 Note Purchase Agreement dated
as of February 9, 1999 (schedules omitted)
10.18* Form of Common Stock Warrant dated August 31, 1997 with an
exercise price of $7.50 per share (50,000 shares)
10.19* Form of Common Stock Warrant dated January 30, 1998 with an
exercise price of $7.50 per share (66,667 shares)
10.20* Form of Warrant dated February 9, 1999 with an exercise
price of $30.00 per share (6,668 shares)
10.21* Form of Warrant dated February 26, 1999 with an exercise
price of $30.00 per share (53,334 shares)
10.22* Form of Warrant dated April 19, 1999 with an exercise price
of $30.00 per share (20,004 shares)
10.23** Second Amended and Restated Warehousing Credit and Security
Agreement (Syndicated Agreement) dated as of
II-8
<PAGE>
November 12, 1999, among the Registrant, Residential Funding
Corporation and certain other lenders
(a) First Amendment to Second Amended and Restated
Warehousing Credit and Security Agreement
(Syndicated Agreement) dated as of December 17,
1999
10.24* Master Lease Agreement between Dominion Ventures, Inc. and
Registrant dated as of April 1, 1998
10.25** First Amendment to Master Lease Agreement No. 10571 dated
November 5, 1998, between Dominion Ventures, Inc. and
Registrant
10.26 Second Amendment to Master Lease Agreement No. 10571 dated
February 16, 2000, between Dominion Ventures, Inc. and
Registrant
10.27* Agreement Regarding Creation of Western America Mortgage,
Ltd. dated as of July 8, 1999 among the Registrant, FMN
Management Company, Inc., Western America Mortgage, Ltd.,
Amcalfund, Inc. and Mason-McDuffie Real Estate, Inc.
(a) Western America Mortgage, Ltd. Limited Partnership
Agreement among FMN Management Company, Inc. and
Amcalfund, Inc.
(b) Office Use and Services Agreement between Mason-
McDuffie Real Estate, Inc. and Western America
Mortgage, Ltd.
(c) Noncompetition and Option Agreement between
Western America Mortgage, Ltd., Amcalfund, Inc.,
FMN Management Company, Inc. and Mason-McDuffie
Real Estate, Inc.
10.28* Domain Name Assignment Agreement dated as of January 1,
1999, between the Registrant and Credit.com, LLC
(a) Amendment No. 1 to Domain Name Assignment
Agreement dated as of June 30, 1999 between the
registrant and Credit.com, LLC
10.29* Form of Director Indemnification Agreement dated as of April
15, 1999 10.30* Form of Director/Officer Indemnification
Agreement dated as of April 15, 1999
10.31* Form of Officer Indemnification Agreement dated as of
April 15, 1999
10.32* Waiver Agreement dated December 28, 1998, between Cendant
Mortgage and Mortgage.com
10.33* B. Anderson Young - Terms of Offer of Employment
(a) Non-competition Agreement for B. Anderson Young
II-9
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10.34** Administrative Services and Technology Sharing Agreement
dated as of January 27, 2000, between the Registrant and
Openclose.com, Inc.
10.35** Contribution Agreement dated as of January 27, 2000, among
the Registrant, Openclose.com, Inc. and certain investors
listed therein
10.36** Lease Agreement dated June 23, 1999 between the Registrant
and ACP Office I, LLC.
21.1** List of Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Foley & Lardner (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page hereto)
-------------------
* Incorporated by reference from the registrant's Form S-1 (333-79757)
** Incorporated by reference from the registrant's Form 10-K for
December 31, 1999 (000-26787)
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to Sugarplum
Investments Limited, which is deemed an "underwriter" within the meaning of the
Securities Act of 1933 with respect to certain shares covered by this
registration statement, certificates in such denominations and registered in
such names as required by Sugarplum to permit prompt delivery to each subsequent
purchaser.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunrise,
State of Florida, on April 10, 2000.
MORTGAGE.COM, INC.
By: /s/ Seth S. Werner
--------------------------------------
Seth S. Werner, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Seth S. Werner, John Hogan and Edwin Johnson, and each
of them individually, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement and any Rule 462(b) registration statement and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
either or them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Seth S. Werner Chairman of the Board, President and April 10, 2000
- ------------------------- Chief Executive Officer
Seth S. Werner
/s/ John J. Hogan Senior Executive Vice President and April 10, 2000
- ------------------------- Director
John J. Hogan
/s/ George A. Naddaff Vice-Chairman of the Board April 10, 2000
- -------------------------
George A. Naddaff
/s/ Edwin D. Johnson Executive Vice President and Chief April 10, 2000
- ------------------------- Financial Officer
Edwin D. Johnson
/s/ Stephen Green Director April 10, 2000
- -------------------------
Stephen Green
/s/ Michael K. Lee Director April 10, 2000
- -------------------------
Michael K. Lee
</TABLE>
COMMON STOCK PURCHASE AGREEMENT
This COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of
March 27, 2000 by and between Mortgage.com, Inc., a Florida corporation (the
"Company"), and Sugarplum Investments Limited (the "Purchaser").
The parties hereto agree as follows:
ARATICLE I
Definitions
Section 1.1 Certain Definitions.
(a) "Average Daily Price" shall be the price based on the VWAP of the
Company on the Nasdaq National Market or, if the Nasdaq National Market is not
the Principal Market, on the Principal Market.
(b) "Draw Down" shall have the meaning assigned to such term in
Section 6.1(a) hereof.
(c) "Draw Down Exercise Date" shall have the meaning assigned to such
term in Section 6.1(b) hereof.
(d) "Draw Down Pricing Period" shall mean a period of twenty-two (22)
consecutive Trading Days preceding a Draw Down Exercise Date.
(e) "Effective Date" shall mean the date the Registration Statement
of the Company covering the Shares being subscribed for hereby is declared
effective.
(f) "Material Adverse Effect" shall mean any adverse effect on the
business, operations, properties or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole and/or any condition, circumstance, or situation that would prohibit
or otherwise materially interfere with the ability of the Company to perform any
of its material obligations under this Agreement or the Registration Rights
Agreement or to perform its obligations under any other material agreement.
(g) "Principal Market" shall mean initially the Nasdaq National
Market, and shall include the Nasdaq SmallCap Market, the American Stock
Exchange or the New York Stock Exchange if the Company is listed and trades on
such market or exchange, but shall not include the OTC Bulletin Board without
the express consent of the Purchaser.
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(h) "Registration Statement" shall mean the registration statement
under the Securities Act of 1933, as amended, to be filed with the Securities
and Exchange Commission for the registration of the Shares pursuant to the
Registration Rights Agreement attached hereto as Exhibit A.
(i) "SEC Documents" shall mean the Company's latest Form 10-K or
10-KSB as of the time in question (including the Form 10-K for the year ended
December 31, 1999 delivered to the Purchaser in final draft form), all Forms
10-Q or 10-QSB and 8-K filed thereafter, and the Proxy Statement for its latest
fiscal year as of the time in question until such time as the Company no longer
has an obligation to maintain the effectiveness of a Registration Statement as
set forth in the Registration Rights Agreement.
(j) "Shares" shall mean, collectively, the shares of Common Stock of
the Company being subscribed for hereunder.
(k) "Threshold Price" is the lowest Average Daily Price at which the
Company will sell its Common Stock with respect to this Agreement.
(l) "Trading Day" shall mean any day on which the Principal Market is
open for business.
(m) "VWAP" shall mean the daily volume weighted average price of the
Company's Common Stock on the Nasdaq National Market or on any Principal Market
as reported by Bloomberg Financial using the AQR function.
ARTICLE II
Purchase and Sale of Common Stock
Section 2.1 Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, the Company may issue and sell to the Purchaser
and the Purchaser shall purchase from the Company up to Forty Million Dollars
($40,000,000) of the Company's Common Stock, $0.01 par value per share (the
"Common Stock"), based on up to twelve (12) Draw Downs of up to Four Million
Dollars ($4,000,000) per Draw Down.
Section 2.2 The Shares. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a sufficient number of its
authorized but unissued shares of its Common Stock to cover the Shares to be
issued in connection with all Draw Downs requested under this Agreement.
Anything in this Agreement to the contrary notwithstanding, (i) at no time will
the Company request a Draw Down which would result in the issuance of a number
of shares of Common Stock pursuant to this Agreement which exceeds 19.9% of the
number of shares of Common Stock issued and outstanding on the Closing Date (as
defined in Section 2.3) without obtaining stockholder approval of such excess
issuance, and (ii) the Company may not make a Draw Down to the extent
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<PAGE>
that, after such purchase by the Purchaser, the sum of the number of shares of
Common Stock beneficially owned by the Purchaser and its affiliates would result
in beneficial ownership by the Purchaser and its affiliates of more than 9.9% of
the then outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities and Exchange Act of 1934, as amended.
Section 2.3 Purchase Price and Closing. The Company agrees to issue
and sell to the Purchaser and, in consideration of and in express reliance upon
the representation, warranties, covenants, terms and conditions of this
Agreement, the Purchaser agrees to purchase that number of the Shares to be
issued in connection with each Draw Down. The closing under this Agreement shall
take place at the offices of Epstein Becker & Green, P.C., 250 Park Avenue, New
York, New York 10177 (the "Closing") at 10:00 a.m. E.S.T. on (i) March 28, 2000,
or (ii) such other time and place or on such date as the Purchaser and the
Company may agree upon (the "Closing Date"). Each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing.
ARTICLE III
Representations and Warranties
Section 3.1 Representation and Warranties of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) Organization, Good Standing and Power. The Company is a
corporation duly incorporated validly existing and in good standing under the
laws of the State of Florida and has all requisite corporate authority to own,
lease and operate its properties and assets and to carry on its business as now
being conducted. The Company does not have any subsidiaries and does not own
more that fifty percent (50%) of or control any other business entity except as
set forth in the SEC Documents. The Company is duly qualified and is in good
standing as a foreign corporation to do business in every jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect on the Company's financial condition.
(b) Authorization, Enforcement.(i) The Company has the requisite
corporate power and corporate authority to enter into and perform its
obligations under this Agreement, the Registration Rights Agreement, the Escrow
Agreement and to issue the Draw Down Shares pursuant to their respective terms,
(ii) the execution, issuance and delivery of this Agreement, the Registration
Rights Agreement and the Escrow Agreement by the Company and the consummation
by it of the transactions contemplated hereby have been duly authorized by all
necessary
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<PAGE>
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required, and (iii) this Agreement, the
Registration Rights Agreement and the Escrow Agreement have been duly executed
and delivered by the Company and at the initial Closing shall constitute valid
and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for the issuance of the Draw Down Shares.
(c) Capitalization. The authorized capital stock of the company
consists of 210,000,000 shares of Common Stock, $0.01 par value per share, of
which 43,340,432 shares are issued and outstanding as of March 15, 2000 and
15,000,000 shares of preferred stock, $0.01 par value per share, of which no
shares are issued and outstanding as of March 15, 2000. All of the outstanding
shares of the Company's Common Stock have been duly and validly authorized and
are fully-paid and non-assessable. Except as set forth in this Agreement and
the Registration Rights Agreement and as set forth in the SEC Documents, or on
Schedule 3.1(c) hereto, no shares of Common Stock are entitled to preemptive
rights or registration rights and there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company. Furthermore, except as set forth in this Agreement and as
set forth in the SEC Documents or on Schedule 3.1(c), there are no contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of the capital stock of the Company or
options, securities or rights convertible into shares of capital stock of the
Company. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. Except as set forth in the SEC Documents or on Schedule 3.1(c)
hereto, the offer and sale of all capital stock, convertible securities, rights,
warrants, or options of the Company issued prior to the Closing complied with
all applicable federal and state securities laws, and no stockholder has a
right of rescission or damages with respect thereto which would have a Material
Adverse Effect on the Company's financial condition or operating results. The
Company has made available to the Purchaser true and correct copies of the
Company's Articles of Incorporation as in effect on the date hereof (the
"Articles"), and the Company's Bylaws as in effect on the date hereof (the
"Bylaws"). The Principal Market for the Common Stock in the United States is
the Nasdaq National Market, and the Company has not received any notice from
such market questioning or threatening the continued inclusion of the Common
Stock on such market.
(d) Issuance of Shares. The Shares to be issued under this Agreement
have been duly authorized by all necessary corporate action and, when paid for
or issued in accordance with the terms hereof, the Shares shall be validly
issued and
4
<PAGE>
outstanding, fully paid and non-assessable, and the Purchaser shall be entitled
to all rights accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated herein do not and will not (i) violate any provision of the
Company's Articles or Bylaws, (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party, (iii) create or impose a lien, charge or encumbrance on any property of
the Company under any agreement or any commitment to which the Company is a
party or by which the Company is bound or by which any of its respective
properties or assets are bound, or (iv) result in a violation of any federal,
state, local or other foreign statute, rule, regulation, order, judgment or
decree (including any federal and state or securities laws and regulations)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries are bound or affected, except,
in all cases, for such conflicts, defaults, termination, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect. The business of the Company and its
subsidiaries is not being conducted in violation of any laws, ordinances or
regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under any federal, state or local law, rule
or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement, or
issue and sell the Shares in accordance with the terms hereof (other than any
filings which may be required to be made by the Company with the Securities and
Exchange Commission (the "Commission") or state securities administrators
subsequent to the Closing and any registration statement which may be filed
pursuant hereto); provided that, for purpose of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein.
(f) Commission Documents, Financial Statements. The Common Stock of
the Company is registered pursuant to Section 12(g)of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, except as disclosed in the
SEC Documents or on Schedule 3.1(f) hereto, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing including filings incorporated by reference therein
being referred to herein as the "Commission Documents"). The Company has
delivered or made available to the Purchaser true and complete copies of the
Commission Documents filed with the Commission since December 31, 1998. The
Company has not provided to the
5
<PAGE>
Purchaser any information which, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company but which has
not been so disclosed, other than with respect to the transactions contemplated
by this Agreement. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission promulgated thereunder applicable to such
documents, and, as of their respective dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the Commission
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements), and
fairly present in all material respects the financial position of the Company
and its subsidiaries as of the dates thereof and the results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(g) Subsidiaries. The SEC Documents or Schedule 3.1(g) hereto sets
forth each subsidiary of the Company, showing the jurisdiction of its
incorporation or organization and showing the percentage of each person's
ownership of the outstanding stock or other interests of such subsidiary. For
the purposes of this Agreement, "subsidiary" shall mean any corporation or other
entity of which at least a majority of the securities or other ownership
interests having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by the Company and/or any of its other
subsidiaries. All of the outstanding shares of capital stock of each subsidiary
have been duly authorized and validly issued, and are fully paid and
non-assessable. Except as set forth on Schedule 3.1(g) hereto, there are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the purchase
or acquisition of any shares of capital stock of any subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Except as set forth on Schedule
3.1(g) hereto, neither the Company nor any subsidiary is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of the capital stock of any subsidiary or any convertible
securities, rights, warrants or options of the type described in the preceding
sentence. Neither the Company nor any subsidiary is a party to, nor has any
knowledge of, any agreement restricting the voting or transfer of any shares of
the capital stock of any subsidiary.
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(h) No Material Adverse Effect. Since December 31, 1999, no Material
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in the SEC Documents or on Schedule 3.1(h) hereof.
(i) No Undisclosed Liabilities. Except as disclosed in the SEC
Documents or on Schedule 3.1(i) hereto, neither the Company nor any of its
subsidiaries has any liabilities, obligations, claims or losses (whether
liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent
or otherwise) that would be required to be disclosed on a balance sheet of the
Company or any subsidiary (including the notes thereto) in conformity with GAAP
which are not disclosed in the Commission Documents, other than those incurred
in the ordinary course of the Company's or its subsidiaries respective
businesses since such date and which, individually or in the aggregate, do not
or would not have a Material Adverse Effect on the Company or its subsidiaries.
(j) No Undisclosed Events or Circumstances. Since December 31, 1999,
no event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
(k) Indebtedness. The SEC Documents or Schedule 3.1(k) hereto sets
forth as of the date hereof all outstanding secured and unsecured Indebtedness
of the Company or any subsidiary, or for which the Company or any subsidiary has
commitments. For the purposes of this Agreement, "Indebtedness" shall mean
(a) any liabilities for borrowed money or amounts owed in excess of $250,000
(other than trade accounts payable incurred in the ordinary course of business),
(b) all guaranties, endorsements and contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $250,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any subsidiary is
in default with respect to any Indebtedness.
(l) Title to Assets. Each of the Company and the subsidiaries has
good and marketable title to all of its real and personal property reflected in
the Commission Documents, free of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the SEC
Documents or on Schedule 3.1(1) hereto or such that do not cause a Material
Adverse Effect on the Company's financial condition or operating results. All
said leases of the Company and each of its subsidiaries are valid and subsisting
and in full force and effect.
(m) Actions Pending. There is no action, suit, claim, investigation
or proceeding pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary which questions the validity of this Agreement or
the
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transactions contemplated hereby or any action taken or to be taken pursuant
hereto or thereto. Except as set forth in the SEC Documents or on Schedule
3.1(m) hereto, there is no action, suit, claim, investigation or proceeding
pending or, to the knowledge of the Company, threatened, against or involving
the Company, any subsidiary or any of their respective properties or assets.
There are no outstanding orders, judgments, injunctions, awards or decrees of
any court, arbitrator or governmental or regulatory body against the Company or
any subsidiary.
(n) Compliance with Law. The business of the Company and the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the SEC Documents or on Schedule 3.1(n)
hereto or such that do not cause a Material Adverse Effect. The Company and each
of its subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of their respective businesses as now being conducted by them unless the
failure to possess such franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
(o) Taxes. The Company and each subsidiary has filed all Tax Returns
which it is required to file under applicable laws; all such Tax Returns are
true and accurate and have been prepared in compliance with all applicable laws;
the Company has paid all Taxes due and owing by it or any subsidiary (whether or
not such Taxes are required to be shown on a Tax Return) and have withheld and
paid over to the appropriate taxing authorities all Taxes which it is required
to withhold from amounts paid or owing to any employee, stockholder, creditor or
other third parties; and since December 31, 1998, the charges, accruals and
reserves for Taxes with respect to the Company (including any provisions for
deferred income taxes) reflected on the books of the Company are adequate to
cover any Tax liabilities of the Company if its current tax year were treated as
ending on the date hereof.
No claim has been made by a taxing authority in a
jurisdiction where the Company does not file tax returns that the Company or any
subsidiary is or may be subject to taxation by that jurisdiction. There are no
foreign, federal, state or local tax audits or administrative or judicial
proceedings pending or being conducted with respect to the Company or any
subsidiary; no information related to Tax matters has been requested by any
foreign, federal, state or local taxing authority; and, except as disclosed
above, no written notice indicating an intent to open an audit or other review
has been received by the Company or any subsidiary from any foreign, federal,
state or local taxing authority. There are no material unresolved questions or
claims concerning the Company's Tax liability. The Company (A) has not executed
or entered into a closing agreement pursuant to ss. 7121 of the Internal Revenue
Code or any predecessor provision thereof or any similar provision of state,
local or foreign law; and (B) has not agreed to or is required to make any
adjustments pursuant to ss. 481 (a) of the Internal Revenue Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or any of its subsidiaries or has any knowledge
that the
8
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IRS has proposed any such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting permission for any
changes in accounting methods that relate to the business or operations of
the Company. The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Internal Revenue Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Internal Revenue Code.
The Company has not made an election under Section 341(f)
of the Internal Revenue Code. The Company is not liable for the Taxes of
another person that is not a subsidiary of the Company under (A) Treas. Reg.
Section 1.1502-6 (or comparable provisions of state, local or foreign law),
(B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise.
The Company is not a party to any tax sharing agreement. The Company has not
made any payments, is obligated to make payments or is a party to an agreement
that could obligate it to make any payments that would not be deductible under
Section 280G of the Internal Revenue Code.
For purposes of this Section 3.1(o):
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
(p) Certain Fees. Except as set forth on Schedule 3.1(p) hereto, no
brokers, finders or financial advisory fees or commissions will be payable by
the Company or any subsidiary with respect to the transactions contemplated by
this Agreement.
(q) Disclosure. To the best of the Company's knowledge, neither this
Agreement or the Schedules hereto nor any other documents, Articles or
instruments furnished to the Purchaser by or on behalf of the Company or any
subsidiary in connection with the transactions contemplated by this Agreement
contain any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements made herein or therein, in the
light of the circumstances under which they were made herein or therein, not
misleading.
(r) Operation of Business. The Company and each of the subsidiaries
owns or possesses all patents, trademarks, service marks, trade names,
copyrights, licenses and authorizations as set forth in the SEC Documents and on
Schedule 3.1(r) hereto, and all rights with respect to the foregoing, which are
necessary for the conduct of its business as now conducted without any conflict
with the rights of others.
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(s) Regulatory Compliance. The Company has all necessary licenses,
registrations and permits to conduct its business as now being conducted in all
states where the Company conducts its business.
(u) Books and Records. The records and documents of the Company and
its subsidiaries accurately reflect in all material respects the information
relating to the business of the Company and the subsidiaries, the location and
collection of their assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of the Company or any subsidiary.
(v) Material Agreements. Except as set forth in the SEC Documents,
or on Schedule 3.1(t) hereto, neither the Company nor any subsidiary is a party
to any written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement, a copy of which would be required to be filed with the
Commission as an exhibit to a registration statement on Form S-1 or other
applicable form (collectively, "Material Agreements") if the Company or any
subsidiary were registering securities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company and each of its subsidiaries has in
all material respects performed all the obligations required to be performed by
them to date under the foregoing agreements, have received no notice of default
and, to the best of the Company's knowledge are not in default under any
Material Agreement now in effect, the result of which could cause a Material
Adverse Effect. No written or oral contract, instruments, agreement,
commitment, obligation, plan or arrangement of the Company or of any subsidiary
limits or shall limit the payment of dividends on the Company's Common Stock.
(w) Transactions with Affiliates. Except as set forth in the SEC
Documents or on Schedule 3.1(u) hereto, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions exceeding $100,000 between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediately family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.
(x) Securities Act of 1933. The Company has complied and will comply
with all applicable federal and state securities laws in connection with the
offer, issuance and sale of the Shares hereunder. Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or will sell or offer
to sell to, or solicit offers to buy the Shares or similar securities, or
solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person (other than the
Purchaser), so as to bring the issuance and sale of the Shares under the
registration provisions of the Securities Act and applicable state securities
laws. Neither the Company nor any of its affiliates, nor any person acting on
its or
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their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Shares.
(y) Governmental Approvals. Except as set forth in the SEC Documents
or on Schedule 3.1(w) hereto, and except for the filing of any notice prior or
subsequent to the Closing that may be required under applicable federal or state
securities laws (which if required, shall be filed on a timely basis), including
the filing of a registration statement or statements pursuant to this Agreement,
no authorization, consent, approval, license, exemption of, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution or delivery of the Shares, or for the
performance by the Company of its obligations under this Agreement.
(z) Employees. Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees,
except as set forth in the SEC Documents or on Schedule 3(x) hereto. Except as
set forth in the SEC Documents or on Schedule 3(x) hereto, neither the Company
nor any subsidiary is in breach of any employment contract, agreement regarding
proprietary information, noncompetition agreement, nonsolicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. Except for the
resignation of David W. Larson as an executive vice president and director,
since the date of the December 31, 1999, Form 10-K, no officer, consultant or
key employee of the Company or any subsidiary whose termination, either
individually or in the aggregate, could have a Material Adverse Effect, has
terminated or, to the knowledge of the Company, has any present intention of
terminating his or her employment or engagement with the Company or any
subsidiary.
(aa) Absence of Certain Developments. Except as provided in SEC
Documents or in Schedule 3.1(y) hereto, since December 31, 1999 neither the
Company nor any subsidiary has:
(i) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's or such subsidiary's business;
(iii) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current liabilities
paid in the ordinary course of business;
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(iv) declared or made any payment or distribution of cash or
other property to stockholders with respect to its stock, or purchased or
redeemed, or made any agreements so to purchase or redeem, any shares of its
capital stock;
(v) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;
(vi) sold, assigned or transferred any patent rights, trademarks,
trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of
business or to the Purchaser or its representatives;
(vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or suffered
the loss of any material amount of prospective business;
(viii) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that
aggregate in excess of $ 500,000;
(x) entered into any other material transaction, whether or not
in the ordinary course of business;
(xi) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(xii) experienced any material problems with labor or management
in connection with the terms and conditions of their employment; or
(xiii) effected any two or more events of the foregoing kind which
in the aggregate would be material to the Company or its subsidiaries.
(bb) Use of Proceeds. The proceeds from the sale of the Shares will be
used by the Company and its subsidiaries for general corporate purposes.
(cc) Acknowledgment Regarding Purchaser's Purchase of Shares. Company
acknowledges and agrees that Purchaser is acting solely in the capacity of arm's
length purchaser with respect to this Agreement and the transactions
contemplated hereunder. The Company further acknowledges that the Purchaser is
not acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereunder and any advice given by the Purchaser or any of its representatives or
agents in connection with this Agreement and the transactions contemplated here-
under is merely incidental to the Purchaser's purchase of the Shares. The
Company further represents to the Purchaser that the Company's decision to enter
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into this Agreement has been based solely on the independent evaluation by the
Company and its own representatives and counsel.
Section 3.2 Representations and Warranties of the Purchaser. The
Purchaser hereby makes the following representations and warranties to the
Company:
(a) Organization and Standing of the Purchaser. The Purchaser is a
corporation duly incorporated, validly existing and in good standing under the
laws of the British Virgin Islands.
(b) Authorization and Power. The Purchaser has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Shares being sold to it hereunder. The execution, delivery and performance of
this Agreement by Purchaser and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by the Purchaser of the transactions contemplated
hereby or relating hereto do not and will not (i) result in a violation of such
Purchaser's charter documents or bylaws or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement, indenture or instrument to which
the Purchaser is a party, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency
applicable to the Purchaser or its properties (except for such conflicts,
defaults and violations as would not, individually or in the aggregate, have a
Material Adverse Effect on Purchaser). The Purchaser is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or to purchase the Shares in
accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, the Purchaser is assuming and relying upon
the accuracy of the relevant representations and agreements of the Company
herein.
(d) Financial Risks. The Purchaser acknowledges that it is able to
bear the financial risks associated with an investment in the Shares and that it
has been given full access to such records of the Company and the subsidiaries
and to the officers of the Company and the subsidiaries as it has deemed
necessary or appropriate to conduct its due diligence investigation. The
Purchaser is capable of evaluating the risks and merits of an investment in the
Shares by virtue of its experience as an investor and its knowledge, experience,
and sophistication in financial and business matters and the Purchaser is
capable of bearing the entire loss of its investment in the Shares.
(e) Accredited Investor. The Purchaser is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act.
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(f) Compliance With Law. The Purchaser's trading and distribution
activities with respect to the Shares will be in compliance with all applicable
state and federal securities laws, rules and regulations and the rules and
regulations of the Principal Market.
(g) General. The Purchaser understands that the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Purchaser set forth herein in order to
determine the suitability of the Purchaser to acquire the Shares.
ARTICLE IV
Covenants
The Company covenants with the Purchaser as follows:
Section 4.1 Securities Compliance.
The Company shall notify The Nasdaq Stock Market, Inc., in accordance
with their rules and regulations, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Shares to the Purchaser or subsequent holders.
Section 4.2 Registration and Listing. The Company will cause its
Common Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under the Exchange Act, will comply with all requirements related to
any registration statement filed pursuant to this Agreement, and will not take
any action or file any document (whether or not permitted by the Securities Act
or the rules promulgated thereunder) to terminate or suspend such registration
or to terminate or suspend its reporting and filing obligations under the
Exchange Act or Securities Act, except as permitted herein. The Company will
take all action necessary to continue the listing or trading of its Common Stock
on the Nasdaq National Market or another Principal Market and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the NASD and The Nasdaq Stock Market.
Section 4.3 Registration Statement. The Company shall cause to be
filed the Registration Statement, which Registration Statement shall provide for
the resale by the Purchaser to the public in accordance with this Agreement. The
Company shall cause such Registration Statement to be declared effective by the
Commission as expeditiously as practicable. Before the Purchaser shall be
obligated to accept a Draw Down request from the Company, the Company shall have
caused a sufficient number of shares of Common Stock to be registered to cover
the resale of the Shares to be issued in connection with such Draw Down.
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Section 4.4 Escrow Arrangement. The Company and the Purchaser shall
enter into an escrow arrangement with Epstein Becker & Green, P.C. (the "Escrow
Agent") in the Form of Exhibit B hereto respecting payment against delivery of
the Shares.
Section 4.5 Compliance with Laws. The Company shall comply, and
cause each subsidiary to comply, with all applicable laws, rules, regulations
and orders, noncompliance with which could have a Material Adverse Effect.
Section 4.6 Keeping of Records and Books of Account. The Company
shall keep and cause each subsidiary to keep adequate records and books of
account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company and
its subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 4.7 Amendments. The Company shall not amend or waive any
provision of the Articles of Incorporation or Bylaws of the Company in any way
that would adversely affect the dividend rights or voting rights of the
holders of the Shares.
Section 4.8 Other Agreements. The Company shall not enter into any
agreement the terms of which such agreement would restrict or impair the right
to perform of the Company or any subsidiary under this Agreement or the Articles
of Incorporation of the Company.
Section 4.9 Notice of Certain Events Affecting Registration;
Suspension of Right to Request a Draw Down. The Company will immediately notify
the Purchaser upon the occurrence of any of the following events in respect of
the Registration Statement or related prospectus in respect of the Shares:
(i) receipt of any request for additional information from the Commission or any
other federal or state governmental authority during the period of effectiveness
of the Registration Statement the response to which would require any amendments
or supplements to the Registration Statement or related prospectus; (ii) the
issuance by the Commission or any other federal or state governmental authority
of any stop order suspending the effectiveness of the Registration Statement or
the initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; (iv) the happening
of any event that makes any statement made in the Registration Statement or
related prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or that requires the making
of any changes in the Registration Statement, related prospectus or documents so
that, in the case of the Registration Statement, it will not contain any untrue
statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the case
of the related prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (v) the Company's reasonable
determination that a post-effective amendment to the Registration Statement
would be appropriate; and the Company will promptly make available to the
Purchaser any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Purchaser any Draw Down Notice during the
continuation of any of the foregoing events.
Section 4.10 Consolidation; Merger. The Company shall not, at any
time after the date hereof, effect any merger or consolidation of the Company
with or into, or a transfer of all or substantially all of the assets of the
Company to, another entity (a "Consolidation Event") unless the resulting
successor or acquiring entity (if not the Company) assumes by written instrument
or by operation of law the obligation to deliver to the Purchaser such shares of
stock and/or securities as the Purchaser is entitled to receive pursuant to this
Agreement.
Section 4.11 Limitation on Future Financing. The Company agrees
that, except as set forth below, it will not enter into any sale of its
securities for cash at a discount to the current market price until the earlier
of (i) twelve (12) months from the effective date of the Registration Statement
or (ii) sixty (60) days after the entire $40,000,000 of Shares has been
purchased by Purchaser. The foregoing shall not prevent or limit the Company
from engaging in any sale of securities (i) in a registered public offering by
the Company which is underwritten by one or more established investment banks,
(ii) in one or more private placements where the purchasers do not have
registration rights, (iii) pursuant to any presently existing or future employee
benefit plan which plan has been or is approved by the Company's stockholders,
(iv) pursuant to any compensatory plan for a full-time employee or key
consultant, (v) in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to raise money, or
(vi) to which Purchaser gives its written approval.
ARTICLE V
Conditions to Closing and Draw Downs
Section 5.1 Conditions Precedent to the Obligation of the Company
to Sell the Shares. The obligation hereunder of the Company to issue and sell
the Shares to the Purchaser is subject to the satisfaction or waiver, at or
before the Closing, of each of the conditions set forth below. These conditions
are for the Company's sole benefit and may be waived by the Company at any time
in its sole discretion.
(a) Accuracy of the Purchaser's Representations and Warranties. The
representations and warranties of the Purchaser shall be true and correct in all
material respects as of the date when made and as of the Closing and as of each
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Draw Down Exercise Date as though made at that time, except for representations
and warranties that speak as of a particular date.
(b) Performance by the Purchaser. The Purchaser shall have performed,
satisfied and complied in all material respects with all material covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Purchaser at or prior to the Closing and as of each Draw
Down Exercise Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 5.2 Conditions Precedent to the Obligation of the Purchaser
to Close. The obligation hereunder of the Purchaser to enter this Agreement is
subject to the satisfaction or waiver, at or before the Closing, of each of the
conditions set forth below. These conditions are for the Purchaser's sole
benefit and may be waived by the Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. Each of
the representations and warranties of the Company shall be true and correct
in all material respects as of the date when made and as of the Closing as
though made at that time (except for representations and warranties that speak
as of a particular date).
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(d) No Proceedings or Litigation. No action, suit or proceeding
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Purchaser or the Company or any subsidiary, or any of the officers,
directors or affiliates of the Company or any subsidiary seeking to restrain,
prevent or change the transactions contemplated by this Agreement, or seeking
damages in connection with such transactions.
(e) Opinion of Counsel, Etc. At the Closing, the Purchaser shall have
received an opinion of counsel to the Company, dated the date of Closing, in the
form of Exhibit C hereto, and such other Articles and documents as the Purchaser
or its counsel shall reasonably require incident to the Closing.
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(f) Warrants In lieu of a minimum Draw Down commitment by the
Company, the Purchaser shall receive at the initial Closing warrants identical
in terms and number as those issued to the placement agent, Ladenburg Thalmann &
Co. Inc. The Common Stock underlying the Warrants shall be registered for resale
in the Registration Statement.
Section 5.3 Conditions Precedent to the Obligation of the Purchaser
to Accept a Draw Down and Purchase the Shares. The obligation hereunder of the
Purchaser to accept a Draw Down request and to acquire and pay for the Shares is
subject to the satisfaction or waiver, at or before each Draw Down Exercise
Date, of each of the conditions set forth below. The conditions are for the
Purchaser's sole benefit and may be waived by the Purchaser at any time in its
sole discretion.
(a) Satisfaction of Conditions to Closing. The Company shall have
satisfied, or the Purchaser shall have waived, the conditions set forth in
Section 5.2 hereof
(b) Effective Registration Statement. The Registration Statement
registering the Shares shall have been declared effective by the Commission and
shall remain effective on each Draw Down Exercise Date.
(c) No Suspension. Trading in the Company's Common Stock shall not
have been suspended by the Commission or The Nasdaq Stock Market, Inc. (except
for any suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to each Draw Down request), and, at
any time prior to such request, trading in securities generally as reported by
Nasdaq shall not have been suspended or limited, or minimum prices shall not
have been established on securities whose trades are reported by Nasdaq.
(d) Material Adverse Effect. No Material Adverse Effect and no
Consolidation Event shall have occurred.
(e) Opinion of Counsel The Purchaser shall have received a "down-to-
date" letter from the Company's counsel, confirming that there is no change from
the counsel's previously delivered opinion, or else specifying with
particularity the reason for any change.
ARTICLE VI
Draw Down Terms
Section 6.1 Draw Down Terms. Subject to the satisfaction of the
conditions set forth in this Agreement, the parties agree as follows:
(a) The Company, may, in its sole discretion, issue and exercise a
draw down (a "Draw Down") during each Draw Down Pricing Period, which Draw
Down the Purchaser will be obligated to accept.
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(b) Only one Draw Down shall be allowed in each Draw Down Pricing
Period. The price per share paid by the Purchaser shall be based on the Average
Daily Price on each separate Trading Day during the Draw Down Pricing Period.
The number of shares of Common Stock purchased by the Purchaser with respect to
each Draw Down shall be determined on a daily basis during each Draw Down
Pricing Period and settled at the election of the Purchaser on a weekly basis or
on the Draw Down Exercise Date, which shall be the first Trading Day following
the end of the Draw Down Pricing Period. In connection with each Draw Down
Pricing Period, the Company may set an Average Daily Price below which the
Company will not sell any Shares (the "Threshold Price"). If the Average Daily
Price on any day within the Draw Down Pricing Period is less than the Threshold
Price, the Company shall not sell and the Purchaser shall not be obligated to
purchase the Shares otherwise to be purchased for such day.
(c) There shall be a maximum of twelve (12) Draw Downs during the
term of this Agreement. The Company shall have the right to issue and exercise
a Draw Down of up to $4,000,000 of the Company's Common Stock per Draw Down,
subject to the limitations set forth immediately below. The minimum Draw Down
shall be $250,000, unless otherwise agreed by Purchaser.
(d) The maximum dollar amount of each Draw Down during any Draw Down
Pricing Period shall be limited pursuant to the following formula: Average
Stock Price: Average of the Average Daily Prices for the 22 Trading Days prior
to the Draw Down Notice date. Average Trading Volume: Average daily trading
volume for the 45 Trading Days prior to the Draw Down Notice date. Maximum
dollar amount of each Draw Down: 20% of (Average Stock Price x (Average Trading
Volume x 22)) the number of Shares of Common Stock to be issued in connection
with each Draw Down shall be equal to the sum of the quotients (for each
trading day within the Draw Down Pricing Period) of (x) 1/22nd of the Draw Down
amount and (y) 93% of the Average Daily Price of the Common Stock on each
Trading Day within the Draw Down Pricing Period. If the Average Daily Price on
a given Trading Day is less than the Threshhold Price, then the Purchaser's Draw
Down will be reduced by 1/22nd and that day shall be withdrawn from the Draw
Down Pricing Period.
(e) The Company must inform the Purchaser by delivering a Draw Down
Notice, in the form of Exhibit D hereto, via facsimile transmission as to the
amount of the Draw Down the Company wishes to exercise before the first day of
the Draw Down Pricing Period (the "Draw Down Notice"). The Company may set the
Threshold Price, if any, prior to each Draw Down request. At no time shall the
Purchaser be required to purchase more than the scheduled Draw Down amount for a
given Draw Down Pricing Period so that if the Company chooses not to exercise
the maximum permitted Draw Down in a given Draw Down Pricing Period the
Purchaser is not obligated to purchase more than the scheduled maximum amount in
a subsequent Draw Down Pricing Period.
(f) On or before three Trading Days after each Draw Down Exercise
Date, the Shares purchased by the Purchaser shall be delivered to The Depository
Trust Company ("DTC") on the Purchaser's behalf. The Shares shall be credited by
the Company to the DTC account designated by the Purchaser upon receipt by the
Escrow Agent of payment for the Draw Down into the Escrow Agent's trust account
as provided in the Escrow Agreement. The Escrow Agent shall be directed to pay
95% of the purchase price to the Company, net of One Thousand Five Hundred
Dollars ($1,500) as escrow expenses to the Escrow Agent, and 5% to the placement
agent. The delivery of the Shares into the Purchaser's DTC account in exchange
for payment therefor shall be referred to herein as "Settlement".
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ARTICLE VII
Termination
Section 7.1 Termination by Mutual Consent. The term of this
Agreement shall be twenty-four (24) months from the Effective Date. This
Agreement may be terminated at any time by mutual consent of the parties.
Section 7.2 Other Termination. (a) The Purchaser may terminate this
Agreement upon one (1) Trading Day's notice if (i) an event resulting in a
Material Adverse Effect has occurred, (ii) the Common Stock is de-listed from
the Nasdaq SmallCap Market unless such de-listing is in connection with the
listing of the Common Stock on the Nasdaq National Market, the New York or
American Stock Exchanges, (iii) the Company files for protection from creditors
under any applicable law, (iv) the Company completes any financing prohibited by
Section 4.11, (v) the Registration Statement is not effective by August 31, 2000
or (vi) in the event that the officers and directors of the Company shall
beneficially own less than 25% of the outstanding Common Stock of the Company.
(b) The Company may terminate this Agreement upon one (1) Trading
Day's notice if the Purchaser shall fail to fund any properly noticed Draw Down
within three (3) Trading Days of the date payment for such Draw Down is due.
Section 7.3 Effect of Termination. In the event of termination by
the company or the Purchaser, written notice thereof shall forthwith be given to
the other party and the transactions contemplated by this Agreement shall be
terminated without further action by either party. If this Agreement is
terminated as provided in Section 7.1 or 7.2 herein, this Agreement shall become
void and of no further force and effect, except for Sections 9.1 and 9.2, and
Article VIII herein. Notwithstanding the foregoing, nothing in this Section 7.3
shall be deemed to release the Company or the Purchaser from any liability for
any breach under this Agreement, or to impair the rights to the Company and the
Purchaser to compel specific performance by the other party of its obligations
under this Agreement.
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ARTICLE VIII
Indemnification
Section 8.1 General Indemnity. The Company agrees to indemnify and
hold harmless the Purchaser (and its directors, officers, affiliates, agents,
successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorney's fees, charges and disbursements) incurred by the Purchaser
as a result of any inaccuracy in or breach of the representations, warranties or
covenants made by the Company herein. The Purchaser agrees to indemnify and
hold harmless the Company and its directors, officers, affiliates, agents,
successors and assigns from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorneys fees, charges and disbursements) incurred by the Company as
result of any inaccuracy in or breach of the representations, warranties or
covenants made by the Purchaser herein.
Section 8.2 Indemnification Procedure. Any party entitled to
indemnification under this Article VIII (an "indemnified party") will give
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VIII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of counsel to the indemnified party a conflict of interest
between it and the indemnifying party may exist with respect of such action,
proceeding or claim, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. In the event that the indemnifying party
advises an indemnified party that it will contest such a claim for
indemnification hereunder, or fails, within thirty (30) days of receipt of any
indemnification notice to notify, in writing, such person of its election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it commences
such defense), then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the indemnifying party elects in writing to assume and does so assume the
defense of any such claim, proceeding or action, the indemnified party's costs
and expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any settlement negotiations or defense of any such
action or claim by the indemnifying party and shall furnish to the indemnifying
party all information reasonably available to the indemnified party which
relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or
any
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settlement negotiations with respect thereto. If the indemnifying party
elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense with counsel of its choice at its sole
cost and expense. The indemnifying party shall not be liable for any settlement
of any action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VIII to the contrary, the indemnifying
party shall not, without the indemnified party's prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VIII shall be made by
periodic payments of the amount thereof during the course of investigation or
defense, as and when bills are received or expense, loss, damage or liability is
incurred, within ten (10) Trading Days of written notice thereof to the
indemnifying party so long as the indemnified party irrevocably agrees to refund
such moneys if it is ultimately determined by a court of competent jurisdiction
that such party was not entitled to indemnification. The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to.
ARTICLE IX
Miscellaneous
Section 9.1 Fees and Expenses. The Company shall pay all fees and
expenses related to the transactions contemplated by this Agreement; including
all attorneys and escrow fees and expenses (exclusive of disbursements and out-
of-pocket expenses) incurred by the Purchaser of $20,000 in connection with the
preparation, negotiation, execution and delivery of this Agreement and the
transactions contemplated hereunder, which attorneys fees and expenses shall be
paid at Closing. In addition, the Company shall pay all reasonable fees and
expenses incurred by the Purchaser in connection with any amendments,
modifications or waivers of this Agreement or the Registration Rights Agreement
or incurred in connection with the enforcement of this Agreement and the
Registration Rights Agreement, including, without limitation, all reasonable
attorneys fees and expenses. The Company shall pay all stamp or other similar
taxes and duties levied in connection with issuance of the Shares pursuant
hereto.
Section 9.2 Specific Enforcement. The Company and the Purchaser
acknowledge and agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the
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provisions of this Agreement and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
Section 9.3 Entire Agreement; Amendment. This Agreement, together
with the Registration Rights Agreement and the Escrow Agreement contains the
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein, neither the Company nor the
Purchaser makes any representations, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 9.4 Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery or facsimile at the address
or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to the Company: Mortgage.com, Inc.
1643 N. Harrison Parkway
Sunrise, FL 33323
Telephone Number: (954) 838-5020
Fax: (954) 472-0800
Attention: Edwin Johnson
If to Purchaser: c/o Dr. Batliner & Partner
Aeulestrasse 74,
FL-9490 Vaduz, Liechtenstein
Telephone Number: 011-075-236-0404
Fax: 011-075-236-0405
Attention: Hans Gassner
with copies to: Foley & Lardner
200 Laura Street
Jacksonville, FL
Telephone Number: (904) 359-2000
Fax: (904) 359-8700
Attention: Luther F. Sadler, Jr.
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with copies to: Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Telephone Number: (212) 351-4924
Fax: (212) 661-0989
Attention: Joseph A. Smith
Any party hereto may from time to time change its address for notices
by giving written notice of such changed address to the other party hereto in
accordance herewith.
Section 9.5 Waivers. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provisions, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 9.6 Headings. The article, section and subsection headings
in this Agreement are for convenience only and shall not constitute a part of
this Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.
Section 9.7 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
The parties hereto may not amend this Agreement or any rights or obligations
hereunder without the prior written consent of the Company and each Purchaser to
be affected by the amendment. After Closing, the assignment by a party to this
Agreement of any rights hereunder shall not affect the obligations of such party
under this Agreement.
Section 9.8 No Third Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
Section 9.9 Governing Law/Arbitration. This Agreement shall be
governed by and construed in accordance with the internal laws of the State of
New York, without giving effect to the choice of law provisions. Any dispute
under this Agreement or any Exhibit attached hereto shall be submitted to
arbitration under the American Arbitration Association (the "AAA") in New York
City, New York, and shall be finally and conclusively determined by the decision
of a board of arbitration consisting of three (3) members (hereinafter referred
to as the "Board of Arbitration") selected as according to the rules governing
the AAA. The Board of Arbitration shall meet on consecutive business days in
New York City, New York, and shall reach and render a decision in writing
(concurred in by a majority of the members of the Board of Arbitration) with
respect to the amount, if any, which the losing party is required to pay to the
other party in respect of a claim filed. In connection with rendering its
decisions, the Board of
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Arbitration shall adopt and follow the laws of the State of New York. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to
be delivered to all parties involved in the dispute. The Board of Arbitration
shall be authorized and is directed to enter a default judgment against any
party refusing to participate in the arbitration proceeding within thirty days
of any deadline for such participation. Any decision made by the Board of
Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties
to the dispute, and entitled to be enforced to the fullest extent permitted by
law and entered in any court of competent jurisdiction. The prevailing party
shall be awarded its costs, including attorneys' fees, from the non-prevailing
party as part of the arbitration award. Any party shall have the right to seek
injunctive relief from any court of competent jurisdiction in any case where
such relief is available. The prevailing party in such injunctive action shall
be awarded its costs, including attorney's fees, from the non-prevailing party.
Section 9.10 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart. Execution may be made by
delivery by facsimile.
Section 9.11 Publicity. Prior to the Closing, neither the Company
nor the Purchaser shall issue any press release or otherwise make any public
statement or announcement with respect to this Agreement or the transactions
contemplated hereby or the existence of this Agreement. After the Closing, the
Company may issue a press release or otherwise make a public statement or
announcement with respect to this Agreement or the transactions contemplated
hereby or the existence of this Agreement; provided, that prior to issuing any
such press release, making any such public statement or announcement, the
Company obtains the prior consent of the Purchaser, which consent shall not be
unreasonably withheld or delayed.
Section 9.12 Severability. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement and this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of such provision, had
never been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent
possible.
Section 9.13 Further Assurances. From and after the date of this
Agreement, upon the request of the Purchaser or the Company, each of the Company
and the Purchaser shall execute and deliver such instruments, documents and
other
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writings as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be duly executed by their respective authorize officer
as of the date first above written.
MORTGAGE.COM, INC.
By: /s/ Seth Werner
--------------------------------------
Seth Werner, President and CEO
Sugarplum Investments Limited
By: /s/ Hans Gassner
--------------------------------------
Hans Gassner, Authorized Signatory
EXHIBIT 2.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 27, 2000, between
Sugarplum Investments Limited ("Purchaser"), and Mortgage.com, Inc. (the
"Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, pursuant to a Common Stock Purchase Agreement dated the date hereof
(the "Purchase Agreement") the Purchaser has committed to purchase up to
$40,000,000 worth of the Company's Common Stock (terms not defined herein shall
have the meanings ascribed to them in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Purchaser the registration
rights set forth herein with respect to the Shares and the shares of Common
Stock issuable upon exercise of the Warrants issued to Purchaser (hereinafter
referred to collectively as the "Stock" or "Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term "Registrable
Security" means the Securities until (i) all Securities have been disposed of
pursuant to the Registration Statement, (ii) all Securities have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Securities have been otherwise transferred to persons who may trade
such Securities without restriction under the Securities Act, and the Company
has delivered a new certificate or other evidence of ownership for such
Securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, which counsel shall be reasonably acceptable to the
Purchaser, all Securities may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be deemed to be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.
Section 2. Restrictions on Transfer. The Purchaser acknowledges and
understands that in the absence of an effective Registration Statement
authorizing the resale of the Securities as provided herein, the Securities are
"restricted securities" as defined in Rule 144 promulgated under the Act. The
Purchaser understands that no disposition or transfer of the Securities may be
made by Purchaser in the absence of (i) an opinion of counsel to the Purchaser,
in form and substance reasonably satisfactory to the
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Company, that such transfer may be made without registration under the
Securities Act or (ii) such registration.
With a view to making available to the Purchaser the benefits of Rule
144 under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Purchaser to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
(a) comply with the provisions of paragraph (c)(1) of Rule 144; and
(b) file with the Commission in a timely manner all reports and other
documents required to be filed by the Company pursuant to Section 13 or 15(d)
under the Exchange Act; and, if at any time it is not required to file such
reports but in the past had been required to or did file such reports, it will,
upon the request of any Purchaser, make available other information as required
by, and so long as necessary to permit sales of, its Registrable Securities
pursuant to Rule 144.
Section 3. Registration Rights With Respect to the Securities.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("Commission"), within forty-five (45) days
after the date hereof, a registration statement (on Form S-3 and/or S-1, or
other appropriate form of registration statement) under the Securities Act (the
"Registration Statement"), at the sole expense of the Company (except as
provided in Section 3(c) hereof), in respect of Purchaser, so as to permit a
public offering and resale of the Securities under the Act by Purchaser.
The Company shall use its best efforts to cause the Registration
Statement to become effective within five (5) days of SEC clearance to request
acceleration of effectiveness. If the Registration Statement is not declared
effective by August 31, 2000 this Agreement and the Purchase Agreement shall
terminate. The Company will notify Purchaser of the effectiveness of the
Registration Statement within one Trading Day of such event.
(b) The Company will maintain the Registration Statement or post-
effective amendment filed under this Section 3 hereof effective under the
Securities Act until the earlier of (i) the date the Securities are no longer
Registrable Securities; (ii) the date that none of the Securities are or may
become issued and outstanding, or (iii) the date the holders thereof receive an
opinion of counsel to the Company, which counsel shall be reasonably acceptable
to the Purchaser, that the Securities may be sold under the provisions of Rule
144 irrespective of any applicable volume limitation.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Purchaser shall bear the cost
of underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Securities being registered and the fees and expenses of its
counsel. The Purchaser and its counsel shall have a reasonable period,
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not to exceed ten (10) Trading Days, to review the proposed Registration
Statement or any amendment thereto, prior to filing with the Commission, and the
Company shall provide each Purchaser with copies of any comment letters received
from the Commission with respect thereto within two (2) Trading Days of receipt
thereof. The Company shall make reasonably available for inspection by
Purchaser, any underwriter participating in any disposition pursuant to the
Registration Statement, and any attorney, accountant or other agent retained by
such Purchaser or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and cause the Company's officers, directors and employees to
supply all information reasonably requested by such Purchaser or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Purchaser and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such Purchaser or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and provided further that, if the foregoing inspection and information gathering
would otherwise disrupt the Company's conduct of its business, such inspection
and information gathering shall, to the maximum extent possible, be coordinated
on behalf of the Purchaser and the other parties entitled thereto by one firm of
counsel designated by and on behalf of the majority in interest of Purchaser and
other parties. The Company shall qualify any of the securities for sale in such
states as such Purchaser reasonably designates and shall furnish indemnification
in the manner provided in Section 6 hereof. However, the Company shall not be
required to qualify in any state which will require an escrow or other
restriction relating to the Company and/or the sellers, or which will require
the Company to qualify to do business in such state or require the Company to
file therein any general consent to service of process. The Company at its
expense will supply the Purchaser with copies of the Registration Statement and
the prospectus included therein and other related documents in such quantities
as may be reasonably requested by the Purchaser.
(d) The Company shall not be required by this Section 3 to include a
Purchaser's Securities in any Registration Statement which is to be filed if, in
the opinion of counsel for both the Purchaser and the Company (or, should they
not agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for the Purchaser and the Company) the proposed
offering or other transfer as to which such registration is requested is exempt
from applicable federal and state securities laws and would result in all
purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) If at any time or from time to time after the effective date of
the Registration Statement, the Company notifies the Purchaser in writing of the
existence of
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a Potential Material Event (as defined in Section 3(f) below), the Purchaser
shall not offer or sell any Securities or engage in any other transaction
involving or relating to Securities, from the time of the giving of notice with
respect to a Potential Material Event until such Purchaser receives written
notice from the Company that such Potential Material Event either has been
disclosed to the public or no longer constitutes a Potential Material Event;
provided, however, that if the Company so suspends the right to such holders of
Securities for more than thirty (30) days in the aggregate during any twelve
month period, during the periods the Registration Statement is required to be in
effect then the Company must compensate the Purchaser for any decline in market
value of the Securities held by Purchaser at the beginning of such suspension
through the end of such suspension. If a Potential Material Event shall occur
prior to the date the Registration Statement is filed, then the Company's
obligation to file the Registration Statement shall be delayed without penalty
for not more than thirty (30) days. The Company must give Purchaser notice in
writing at least two (2) Trading Days prior to the first day of the blackout
period, if lawful and practicable to do so.
(f) "Potential Material Event" means any of the following: (a) the
possession by the Company of material information that is not ripe for
disclosure in a registration statement, as determined in good faith by the Chief
Executive Officer or the Board of Directors of the Company or that disclosure of
such information in the Registration Statement would be detrimental to the
business and affairs of the Company; or (b) any material engagement or activity
by the Company which would, in the good faith determination of the Chief
Executive Officer or the Board of Directors of the Company, be adversely
affected by disclosure in a registration statement at such time, which
determination shall be accompanied by a good faith determination by the Chief
Executive Officer or the Board of Directors of the Company that the Registration
Statement would be materially misleading absent the inclusion of such
information.
Section 4. Cooperation with Company. Purchaser will cooperate with the
Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company (which shall
include all information regarding the Purchaser and proposed manner of sale of
the Registrable Securities required to be disclosed in the Registration
Statement) and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities and
entering into and performing its obligations under any underwriting agreement,
if the offering is an underwritten offering, in usual and customary form, with
the managing underwriter or underwriters of such underwritten offering. The
Purchaser shall consent to be named as an underwriter in the Registration
Statement. Purchaser acknowledges that in accordance with current Commission
policy, the Purchaser will be named as the underwriter of the Securities in the
Registration Statement.
Section 5. Registration Procedures. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible, subject to
the Purchaser's assistance and cooperation as reasonably required:
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(a) (i) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Purchaser of such Registrable Securities shall desire to sell or otherwise
dispose of the same (including prospectus supplements with respect to the sales
of securities from time to time in connection with a registration statement
pursuant to Rule 415 promulgated under the Act) and (ii) take all lawful action
such that each of (A) the Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading and (B) the Prospectus forming part
of the Registration Statement, and any amendment or supplement thereto, does not
at any time during the Registration Period include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) (i) prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any prospectus (including any supplements thereto), provide draft copies thereof
to the Purchasers and reflect in such documents all such comments as the
Purchasers (and their counsel) reasonably may propose and (ii) furnish to each
Purchaser such numbers of copies of a prospectus including a preliminary
prospectus or any amendment or supplement to any prospectus, as applicable, in
conformity with the requirements of the Act, and such other documents, as such
Purchaser may reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such Purchaser;
(c) register and qualify the Registrable Securities covered by the
Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Purchaser shall reasonably request (subject to the
limitations set forth in Section 3(d) above), and do any and all other acts and
things which may be necessary or advisable to enable each Purchaser to
consummate the public sale or other disposition in such jurisdiction of the
securities owned by such Purchaser, except that the Company shall not for any
such purpose be required to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
(d) list such Registrable Securities on the Principal Market, and any
other exchange on which the Common Stock of the Company is then listed, if the
listing of such Registrable Securities is then permitted under the rules of such
exchange or the Nasdaq Stock Market;
(e) notify each Purchaser at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to
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make the statements therein not misleading in the light of the circumstances
then existing, and the Company shall prepare and file a curative amendment under
Section 5(a) as quickly as commercially possible;
(f) as promptly as practicable after becoming aware of such event,
notify each Purchaser who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the Commission or any state authority of any stop order or other suspension of
the effectiveness of the Registration Statement at the earliest possible time
and take all lawful action to effect the withdrawal, recession or removal of
such stop order or other suspension;
(g) cooperate with the Purchasers to facilitate the timely preparation
and delivery of certificates for the Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates for the
Registrable Securities to be in such denominations or amounts, as the case may
be, as the Purchasers reasonably may request and registered in such names as the
Purchaser may request; and, within three (3) Trading Days after a Registration
Statement which includes Registrable Securities is declared effective by the
Commission, deliver and cause legal counsel selected by the Company to deliver
to the transfer agent for the Registrable Securities (with copies to the
Purchasers whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and, to the extent necessary, an opinion
of such counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Purchasers of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
(i) in the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common Stock.
Section 6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Purchaser
and each person, if any, who controls the Purchaser within the meaning of the
Securities Act ("Distributing Purchaser") against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees), to which the Distributing
Purchaser may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material
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fact contained in the Registration Statement, or any related preliminary
prospectus, final prospectus or amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, preliminary
prospectus, final prospectus or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
the Distributing Purchaser, specifically for use in the preparation thereof.
This Section 6(a) shall not inure to the benefit of any Distributing Purchaser
with respect to any person asserting such loss, claim, damage or liability who
purchased the Registrable Securities which are the subject thereof if the
Distributing Purchaser failed to send or give (in violation of the Securities
Act or the rules and regulations promulgated thereunder) a copy of the
prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Distributing Purchaser was obligated to do so under the
Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Purchaser agrees that it will indemnify and hold
harmless the Company, and each officer, director of the Company or person, if
any, who controls the Company within the meaning of the Securities Act, against
any losses, claims, damages or liabilities (which shall, for all purposes of
this Agreement, include, but not be limited to, all reasonable costs of defense
and investigation and all reasonable attorneys' fees) to which the Company or
any such officer, director or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by such Distributing Purchaser, specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which the Distributing Purchaser may otherwise have. Notwithstanding
anything to the contrary herein, the Distributing Investor shall not be liable
under this Section 6(b) for any amount in excess of the net proceeds to such
Distributing Investor as a result of the sale of Registrable Securities pursuant
to the Registration Statement.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 6, notify
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the indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve the indemnifying party from any
liability which it may have to any indemnified party except to the extent of
actual prejudice demonstrated by the indemnifying party. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, assume the defense thereof, subject to
the provisions herein stated and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall not pursue the
action to its final conclusion. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of the indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified party;
provided that if the indemnified party is the Distributing Purchaser, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Purchaser and
the indemnifying party and the Distributing Purchaser shall have been advised by
such counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Purchaser (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Purchaser, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing
Purchaser, which firm shall be designated in writing by the Distributing
Purchaser). No settlement of any action against an indemnified party shall be
made without the prior written consent of the indemnified party, which consent
shall not be unreasonably withheld.
All fees and expenses of the indemnified party (including reasonable
costs of defense and investigation in a manner not inconsistent with this
Section and all reasonable attorneys' fees and expenses) shall be paid to the
indemnified party, as incurred, within ten (10) Trading Days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder; provided, that the indemnifying party may require such indemnified
party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such indemnified party is not entitled to
indemnification hereunder).
Section 7. Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for
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indemnification pursuant to Section 6 hereof but is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of Section 6 hereof provide for indemnification
in such case, or (ii) contribution under the Securities Act may be required on
the part of any indemnified party, then the Company and the applicable
Distributing Purchaser shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (which shall, for all purposes of
this Agreement, include, but not be limited to, all reasonable costs of defense
and investigation and all reasonable attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Purchaser on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Purchaser
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 7. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Notwithstanding any other provision of this Section 7, in no event
shall any (i) Purchaser be required to undertake liability to any person under
this Section 7 for any amounts in excess of the dollar amount of the net
proceeds to be received by such Purchaser from the sale of such Purchaser's
Registrable Securities (after deducting any fees, discounts and commissions
applicable thereto) pursuant to any Registration Statement under which such
Registrable Securities are to be registered under the Securities Act and (ii)
underwriter be required to undertake liability to any person hereunder for any
amounts in excess of the aggregate discount, commission or other compensation
payable to such underwriter with respect to the Registrable Securities
underwritten by it and distributed pursuant to the Registration Statement.
Section 8. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be delivered as set forth
in the Purchase Agreement.
Section 9. Assignment. Neither this Agreement nor any rights of the
Purchaser or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased
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<PAGE>
by the Purchaser pursuant to the Purchase Agreement other than through open-
market sales, and (b) upon the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed in the case of an
assignment to an affiliate of the Purchaser, the Purchaser's interest in this
Agreement may be assigned at any time, in whole or in part, to any other person
or entity (including any affiliate of the Purchaser) who agrees to be bound
hereby.
Section 10. Counterparts/Facsimile. This Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which, when together shall constitute but one and the same instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party. In lieu of the original, a facsimile
transmission or copy of the original shall be as effective and enforceable as
the original.
Section 11. Remedies. The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Section 12. Conflicting Agreements. The Company shall not enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.
Section 13. Headings. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any action may be brought as set
forth in the Purchase Agreement. Any party shall have the right to seek
injunctive relief from any court of competent jurisdiction in any case where
such relief is available. Any dispute under this Agreement shall be submitted to
arbitration under the American Arbitration Association (the "AAA") in New York
City, New York, and shall be finally and conclusively determined by the decision
of a board of arbitration consisting of three (3) members (hereinafter referred
to as the "Board of Arbitration") selected as according to the rules governing
the AAA. The Board of Arbitration shall meet on consecutive business days in New
York City, New York, and shall reach and render a decision in writing (concurred
in by a majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the losing party is
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required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. The Board of Arbitration shall be authorized and is
directed to enter a default judgment against any party refusing to participate
in the arbitration proceeding with thirty days of any deadline for such
participation. Any decision made by the Board of Arbitration (either prior to or
after the expiration of such thirty (30) calendar day period) shall be final,
binding and conclusive on the parties to the dispute, and entitled to be
enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The prevailing party shall be awarded its costs,
including attorneys' fees, from the non-prevailing party as part of the
arbitration award. Any party shall have the right to seek injunctive relief
from any court of competent jurisdiction in any case where such relief is
available. The prevailing party in such injunctive action shall be awarded its
costs, including attorney's fees, from the non-prevailing party.
Section 15. Severability. If any provision of this Agreement shall for
any reason be held invalid or unenforceable, such invalidity or unenforceablity
shall not affect any other provision hereof and this Agreement shall be
construed as if such invalid or unenforceable provision had never been contained
herein. Terms not otherwise defined herein shall be defined in accordance with
the Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed, on the day and year first above written.
MORTGAGE.COM, INC.
By: /s/ Seth Werner
--------------------------------------
Seth Werner, President and CEO
Sugarplum Investments Limited
By: /s/ Hans Gassner
--------------------------------------
Hans Gassner, Authorized Signatory
EXHIBIT 2.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made as of March 27, 2000,
by and among Mortgage.com, Inc., a corporation incorporated under the laws of
Florida, (the "Company"), Sugarplum Investments Limited ("Purchaser"), and
Epstein Becker & Green, P.C., having an address at 250 Park Avenue, New York, NY
10177 (the "Escrow Agent"). Capitalized terms used but not defined herein shall
have the meanings set forth in the Common Stock Purchase Agreement referred to
in the first recital.
WHEREAS, the Purchaser will from time to time as requested by the
Company, purchase shares of the Company's Common Stock from the Company as set
forth in that certain Common Stock Purchase Agreement (the "Purchase Agreement")
dated the date hereof between the Purchaser and the Company, which will be
issued as per the terms and conditions contained herein and in the Purchase
Agreement; and
WHEREAS, the Company and the Purchaser have requested that the Escrow
Agent hold in escrow and then distribute the initial documents and certain funds
which are conditions precedent to the effectiveness of the Purchase Agreement,
and have further requested that upon each exercise of a Draw Down, the Escrow
Agent hold the relevant documents and the applicable purchase price pending
receipt by Purchaser of certificates representing the securities issuable upon
such Draw Down;
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged and intending to be legally
bound hereby, the parties agree as follows:
ARTICLE 1
TERMS OF THE ESCROW FOR THE INITIAL CLOSING
1.1. The parties hereby agree to establish an escrow account with the
Escrow Agent whereby the Escrow Agent shall hold the funds and documents which
are referenced in Section 5.2 of the Purchase Agreement.
1.2. At the Closing, the Company shall deliver to the Escrow Agent:
(i) the original executed Registration Rights Agreement in
the form of Exhibit A to the Purchase Agreement;
(ii) the original executed opinion of Foley & Lardner in the
form of Exhibit C to the Purchase Agreement;
(iii) the sum of $35,000;
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(iv) the sum of $20,000;
(v) the original executed Company counterpart of this
Escrow Agreement;
(vi) the original executed Company counterpart of the
Purchase Agreement; and
(vii) a warrant certificate to purchase a number of the
Company's Common Stock as shall equal Eight Hundred
Thousand Dollars ($800,000) divided by the VWAP on the
Trading Day prior to the Closing Date at an exercise
price equal to 100% of the VWAP on the Trading Day
prior to the Closing Date issued to Ladenburg Thalmann
& Co., Inc. (the "LT Warrant") and an identical warrant
to the Purchaser (the "Purchaser Warrant").
1.3. Upon receipt of the foregoing, and receipt of executed
counterparts from Purchaser of the Purchase Agreement, the Registration Rights
Agreement and this Escrow Agreement, the Escrow Agent shall immediately transfer
the sum of Twenty Thousand Dollars ($20,000) to Epstein Becker & Green, P.C.
("EB&G"), 250 Park Avenue, New York, New York 10177 for the Purchaser's legal,
administrative and escrow costs and the sum of Thirty-Five Thousand Dollars
($35,000), as a non-accountable expense allowance and the LT Warrant to
Ladenburg Thalmann & Co. Inc. and the Escrow Agent shall then arrange to have
the Purchase Agreement, this Escrow Agreement, the Registration Rights
Agreement, the Purchaser Warrant and the opinion of counsel delivered to the
appropriate parties.
ARTICLE 2
TERMS OF THE ESCROW FOR EACH DRAW DOWN
2.1. Each time the Company shall send a Draw Down Notice to the
Purchaser as provided in the Purchase Agreement, it shall send a copy, by
facsimile, to the Escrow Agent.
2.2. Each time the Purchaser shall purchase Shares pursuant to a Draw
Down, the Purchaser shall send the applicable purchase price of the Draw Down
Shares to the Escrow Agent, which shall advise the Company in writing that it
has received the purchase price for such Draw Down Shares. The Company shall
promptly, but no later than three (3) Trading Days after receipt of such funding
notice from the Escrow Agent, cause its transfer agent to issue the Draw Down
Shares to the Purchaser via DTC deposit to the account specified by the
Purchaser from time to time. Upon receipt of written confirmation from the
transfer agent or from the Purchaser that such Draw Down Shares have been so
deposited the Escrow Agent shall within one (1) Trading Day wire 95% of the
purchase price per the written instructions of the Company, net of One Thousand
Five Hundred Dollars ($1,500) as escrow expenses to the Escrow Agent, and the
remaining 5% of the purchase price as directed by Ladenburg Thalmann & Co. Inc.
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ARTICLE 3
MISCELLANEOUS
3.1. No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act.
3.2. All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by fax, overnight courier,
registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed received upon receipt thereof, as set forth in the Purchase
Agreement.
3.3. This Escrow Agreement shall be binding upon and shall inure to
the benefit of the permitted successors and permitted assigns of the parties
hereto.
3.4. This Escrow Agreement is the final expression of, and contains
the entire agreement between, the parties with respect to the subject matter
hereof and supersedes all prior understandings with respect thereto. This Escrow
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
parties to be charged or by their respective agents duly authorized in writing
or as otherwise expressly permitted herein.
3.5. Whenever required by the context of this Escrow Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Escrow Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Escrow Agreement.
3.6. The parties hereto expressly agree that this Escrow Agreement
shall be governed by, interpreted under and construed and enforced in accordance
with the laws of the State of New York. Except as expressly set forth herein,
any action to enforce, arising out of, or relating in any way to, any provisions
of this Escrow Agreement shall brought in the Federal or state courts of New
York, New York as is more fully set forth in the Purchase Agreement.
3.7. The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by the Company, Purchaser and the
Escrow Agent.
3.8. The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by the Escrow Agent to be genuine and to have been signed or presented
by the proper party or parties. The Escrow Agent shall not be personally liable
for any act the Escrow Agent may do or omit to do hereunder as the Escrow Agent
while acting in good faith, excepting only its own gross negligence or willful
misconduct, and any act done or omitted by the Escrow Agent pursuant to the
advice of the Escrow Agent's attorneys-at-law (other than Escrow Agent itself)
shall be conclusive evidence of such good faith.
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3.9. The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree, the Escrow Agent shall not be liable to any of the parties hereto or
to any other person, firm or corporation by reason of such decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.
3.10. The Escrow Agent shall not be liable in any respect on account
of the identity, authorization or rights of the parties executing or delivering
or purporting to execute or deliver the Purchase Agreement or any documents or
papers deposited or called for thereunder or hereunder.
3.11. The Escrow Agent shall be entitled to employ such legal counsel
and other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with the Escrow Agent's duties hereunder, may rely
upon the advice of such counsel, and may pay such counsel reasonable
compensation therefor. The Escrow Agent has acted as legal counsel for the
Purchaser, and may continue to act as legal counsel for the Purchaser, from time
to time, notwithstanding its duties as the Escrow Agent hereunder. The Company
consents to the Escrow Agent in such capacity as legal counsel for the Purchaser
and waives any claim that such representation represents a conflict of interest
on the part of the Escrow Agent. The Company understands that the Purchaser and
the Escrow Agent are relying explicitly on the foregoing provision in entering
into this Escrow Agreement.
3.12. The Escrow Agent's responsibilities as escrow agent hereunder
shall terminate if the Escrow Agent shall resign by written notice to the
Company and the Purchaser. In the event of any such resignation, the Purchaser
and the Company shall appoint a successor Escrow Agent.
3.13. If the Escrow Agent reasonably requires other or further
instruments in connection with this Escrow Agreement or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
3.14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the documents
or the escrow funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed in the Escrow Agent's sole discretion (1) to retain in
the Escrow Agent's possession without liability to anyone all or any part of
said documents or the escrow funds until such disputes shall have been settled
either by mutual written agreement of the parties concerned by a final order,
decree or judgment or a court of competent jurisdiction after the time for
appeal has expired and no appeal has been perfected, but the Escrow Agent shall
be under no duty whatsoever to institute or defend any such proceedings or
(2) to deliver the escrow funds and any other property and documents held by the
Escrow Agent hereunder to a state or Federal court having competent subject
matter jurisdiction and located in the State and City of New York in accordance
with the applicable procedure therefor.
3.15. The Company and the Purchaser agree jointly and severally to
indemnify
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<PAGE>
and hold harmless the Escrow Agent and its partners, employees, agents and
representatives from any and all claims, liabilities, costs or expenses in any
way arising from or relating to the duties or performance of the Escrow Agent
hereunder or the transactions contemplated hereby or by the Purchase Agreement
other than any such claim, liability, cost or expense to the extent the same
shall have been determined by final, unappealable judgment of a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of the Escrow Agent.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date set forth above.
MORTGAGE.COM, INC.
By: /s/ Seth Werner
--------------------------------------
Seth Werner, President and CEO
PURCHASER:
Sugarplum Investments Limited
By: /s/ Hans Gassner
--------------------------------------
Hans Gassner, Authorized Signatory
ESCROW AGENT:
Epstein Becker & Green, P.C.
By: /s/ Joseph A. Smith
--------------------------------------
Joseph A. Smith,
Authorized Signatory
EXHIBIT 2.4
Ladenburg Thalmann Logo
February 23, 2000
Edwin Johnson
Chief Financial Officer, Executive V-P
Mortgage.com, Inc.
1643 N. Harrison Parkway
Sunrise, FL 33323
Dear Mr. Johnson:
The purpose of this letter agreement (the "Agreement") is to set forth the terms
and conditions pursuant to which Ladenburg Thalmann & Co. Inc. ("LTCO") shall
serve as exclusive placement agent in connection with the proposed offering (the
"Offering") of equity securities (the "Securities') of Mortgage.com, Inc. (the
"Company") pursuant to a registration statement. The gross proceeds from the
Offering will be up to $40,000,000. All references to dollars shall be to U.S.
dollars. The terms of such Offering and the Securities shall be as agreed to
between the Company, LTCO and the purchasers thereof.
Upon the terms and subject to the conditions of this Agreement, the
parties hereto agree as follows:
1. Appointment. (a) Subject to the terms and conditions of this
Agreement hereinafter set forth, the Company hereby retains LTCO, and LTCO
hereby agrees to act as the Company's exclusive placement agent and financial
advisor in connection with the Offering, effective as of the date hereof. The
Company expressly acknowledges and agrees that LTCO's obligations hereunder are
on a reasonable best efforts basis only and that the execution of this Agreement
does not constitute a commitment by LTCO to purchase the Securities and does not
ensure the successful placement of the Securities or any portion thereof or the
success of LTCO with respect to securing any other financing on behalf of the
Company. LTCO shall not commence any selling efforts until the registration
statement has been declared effective by the SEC.
(b) Except as set forth below in this Section 1 and as outlined
in Appendix I hereto, during the effectiveness of this Agreement, neither the
Company nor any of its subsidiaries or affiliates shall, directly or indirectly,
through any officer, director, employee, agent or otherwise (including, without
limitation, through any placement agent, broker, investment banker, attorney or
accountant retained by the Company or any of its subsidiaries or affiliates),
solicit, initiate or encourage the submission of any proposal or offer (an
"Investment Proposal") from any person or entity (including any of such person's
or entity's officers, directors, employees, agents and other representatives)
relating to any issuance of the Company's or any of its subsidiaries' equity
securities (including debt securities with any equity feature) or relating to
any other transaction having a similar effect or result on the Company's or any
of its subsidiaries' capitalization, or participate in any discussions or
<PAGE>
negotiations regarding, or furnish to any other person or entity any information
with respect to, or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage any effort or attempt by any other
person or entity to do or seek to do any of the foregoing. The Company shall
immediately cease and cause to be terminated any and all contacts, discussions
and negotiations with third parties regarding any Investment Proposal. The
Company shall promptly notify LTCO if any such Investment Proposal, or any
inquiry or contact with any person or entity with respect thereto, is made. The
Company shall not provide or release any information with respect to this
Agreement or the Offering except as required by law.
2. Fees and Compensation. In consideration of the services rendered
by LTCO in connection with the Offering, the Company agrees to pay LTCO the
following fees and other compensation:
(a) 1) 2% warrant coverage as commitment fee payable
immediately upon the initial closing; and
2) a cash fee payable upon the initial and each subsequent
closing equal to 5% of the amount drawn down by the
Company at each such closing; and
(b) $35,000 non-accountable expense allowance.
(c) All amounts payable hereunder shall be paid to LTCO out of
an attorney escrow account at the closing or by such other
means acceptable to LTCO.
(d) Should LTCO provide a qualified institutional investor
acceptable to the Company and such investor is willing to
invest at substantially the same terms as agreed to between
the Company, LTCO and such investor, and the Company were
to terminate the Agreement after February 23, 2000 or prior
to March 31, 2001 (the "Termination Date"), for reasons
other than a breach of this Agreement by LTCO, the Company
will pay $200,000 to LTCO as a "breakup" fee.
3. Terms of Retention. (a) Unless extended or terminated in writing
by the parties hereto in accordance with the provisions hereof, this Agreement
shall remain in effect until the Termination Date of March 31, 2001.
(b) Notwithstanding anything herein to the contrary, the
obligation to pay the Fees and Compensation and Expenses described in Section 2,
if any, and paragraphs 2, 6, and 8 of Exhibit A and all of Exhibit B and Exhibit
C attached hereto, each of which exhibits is incorporated herein by reference,
shall survive any termination or expiration of the Agreement. It is expressly
understood and agreed by the parties hereto that any private financing of equity
or debt or other capital raising activity of the Company within 24 months of
2
<PAGE>
the termination or expiration of this Agreement, with any investors to whom the
Company was introduced by LTCO or who was contacted by LTCO while this Agreement
was in effect and disclosed to the Company in writing, shall result in such fees
and compensation being due and payable by the Company to LTCO under the same
terms of Section 2 above. Upon completion of the Offering, any future
renegotiation, restructuring, revision or other amendment of such Offering by
and between the Company and the investors in such Offering involving additional
capital shall be deemed to be a new financing and shall result in additional
fees and compensation due and payable by the Company to LTCO under the terms of
Section 2 above.
4. Right of First Refusal. Upon completion of the Offering, LTCO
shall have an irrevocable right of first refusal for a period of one year to
provide all financing arrangements for the Company (other than conventional
banking arrangements, borrowing and commercial debt or lease financing and
discrete unrelated transactions of not more than $250,000 where no investment
banking fee is being paid), upon terms no less favorable than that reasonably
available to the Company in the market place. LTCO shall exercise such right in
writing within five (5) business days of receipt of a written term sheet
describing such proposed transaction in reasonable detail.
5. Information. The Company recognizes and confirms that in
completing its engagement hereunder, LTCO will be using and relying on publicly
available information and on data, material and other information furnished to
LTCO by the Company or the Company's affiliates and agents. It is understood
and agreed that in performing under this engagement, LTCO will rely upon the
accuracy and completeness of, and is not assuming any responsibility for
independent verification of, such publicly available information and the other
information so furnished. Notwithstanding the foregoing, it is understood that
LTCO will conduct a due diligence investigation of the Company and the Company
will cooperate in all respects with such investigation as a condition of LTCO's
obligations hereunder.
6. Registration. Promptly following execution of this Agreement,
the Company shall prepare and file with the SEC a registration statement. From
time to time in connection with any particular sale of Securities, the Company
will, at its own expense, obtain any registration or qualification required to
sell any Securities under the Blue Sky laws of any applicable jurisdictions, as
reasonably requested by LTCO.
7. No General Solicitation. The Securities will be offered only
by approaching prospective purchasers on an individual basis. No general
solicitation or general advertising in any form will be used in connection with
the offering of the Securities. From and after the filing of the registration
statement, the Company shall pre-clear any proposed press release with LTCO.
8. Closing. The closing of the sale of the Securities shall be
subject to customary closing conditions, including the provision at closing by
the Company of officers' certificates, opinions of counsel and "cold comfort"
letters from the Company's auditors.
9. Miscellaneous. This Agreement together with the attached
Exhibits A through C constitutes the entire understanding and agreement between
the parties with respect
3
<PAGE>
to its subject matter and there are no agreements or understandings with respect
to the subject matter hereof which are not contained in this Agreement. This
Agreement may be modified only in writing signed by the party to be charged
hereunder.
If the foregoing correctly sets forth our agreement, please confirm
this by signing and returning to us the duplicate copy of this letter.
We appreciate this opportunity to be of service and are looking forward
to working with you on this matter.
Very truly yours,
LADENBURG THALMANN & CO. INC.
By: /s/ David Boris
--------------------------------------
Name: David Boris
Title: EVP
Agreed to and accepted
as of the date first written above:
MORTGAGE.COM, INC.
By: /s/ Edwin D. Johnson
---------------------------------
Name: Edwin D. Johnson
Title: Exec. VP and CFO
4
<PAGE>
EXHIBIT A
---------
STANDARD TERMS AND CONDITIONS
1. The Company shall promptly provide LTCO with all relevant
information about the Company (to the extent available to the
Company in the case of parties other than the Company) that
shall be reasonably requested or required by LTCO, which
information shall be accurate in all material respects at the
time furnished.
2. LTCO shall keep all information obtained from the Company strictly
confidential except: (a) information which is otherwise publicly
available, or previously known to, or obtained by LTCO independently
of the Company and without breach of LTCO's agreement with the
Company; (b) LTCO may disclose such information to its employees and
attorneys, and to its other advisors and financial sources on a need
to know basis only and shall ensure that all such employees,
attorneys, advisors and financial sources will keep such information
strictly confidential; and (c) pursuant to any order of a court of
competent jurisdiction or other governmental body or as may otherwise
be required by law.
3. The Company recognizes that in order for LTCO to perform properly its
obligations in a professional manner, it is necessary that LTCO be
informed of and, to the extent practicable, participate in meetings
and discussions between the Company and any third party relating to
the matters covered by the terms of LTCO's engagement.
4. The Company agrees that any report or opinion, oral or written,
delivered to it by LTCO is prepared solely for its confidential use
and shall not be reproduced, summarized, or referred to in any public
document or given or otherwise divulged to any other person without
LTCO's prior written consent, except as may be required by applicable
law or regulation.
5. No fee payable to LTCO pursuant to any other agreement with the
Company or payable by the Company to any agent, lender or investor
shall reduce or otherwise affect any fee payable by the Company to
LTCO hereunder.
6. The Company represents and warrants that: (a) it has full right, power
and authority to enter into this Agreement and to perform all of its
obligations hereunder; (b) this Agreement has been duly authorized and
executed and constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms; and (c) the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby does not conflict with or result in a breach of
(i) the Company's certificate of incorporation or by-laws or (ii) any
agreement to which the Company is a party or by which any of its
property or assets is bound.
5
<PAGE>
EXHIBIT A (CONTINUED)
---------------------
7. Nothing contained in this Agreement shall be construed to place LTCO
and the Company in the relationship of partners or joint venturers.
Neither LTCO nor the Company shall represent itself as the agent or
legal representative of the other for any purpose whatsoever nor shall
either have the power to obligate or bind the other in any manner
whatsoever. LTCO, in performing its services hereunder, shall at all
times be an independent contractor.
8. This Agreement has been and is made solely for the benefit of LTCO and
the Company and each of the persons, agents, employees, officers,
directors and controlling persons referred to in Exhibit B and their
respective heirs, executors, personal representatives, successors and
assigns, and nothing contained in this Agreement shall confer any
rights upon, nor shall this Agreement be construed to create any
rights in, any person who is not party to such Agreement other than as
set forth in this paragraph.
9. The rights and obligations of either party under this Agreement may
not be assigned without the prior written consent of the other party
hereto and any other purported assignment shall be null and void.
10. All communications hereunder, except as may be otherwise specifically
provided herein, shall be in writing and shall be mailed, hand
delivered, or sent via facsimile and confirmed by letter, to the party
to whom it is addressed at the following addresses or such other
address as such party may advise the other in writing:
To the Company:
Edwin Johnson
Mortgage.com, Inc.
1643 N. Harrison Parkway
Sunrise, FL 33323
Telephone: (954) 838-5020
Facsimile: (954) 472-0800
To LTCO:
Ladenburg Thalmann & Co. Inc.
590 Madison Avenue
New York, NY 10022
Attention: David B. Boris
Telephone: (212) 409-2000
Facsimile; (212) 409-2169
All notices hereunder shall be effective upon receipt by the party to which it
is addressed.
6
<PAGE>
EXHIBIT B
---------
INDEMNIFICATION
The Company agrees that it shall indemnify and hold harmless, LTCO, its
stockholders, directors, officers, employees, agents, affiliates and controlling
persons within the meaning of Section 20 of the Securities Exchange Act of 1934
and Section 15 of the Securities Act of 1933, each as amended (any and all of
whom are referred to as an "Indemnified Party"), from and against any and all
losses, claims damages, liabilities, or expenses, and all actions in respect
thereof (including, but not limited to, all legal or other expenses reasonably
incurred by an Indemnified Party in connection with the investigation,
preparation, defense or settlement of any claim, action or proceeding, whether
or not resulting in any liability), incurred by an Indemnified Party; (a)
arising out of, or in connection with, any actions taken or omitted to be taken
by the Company, its affiliates, employees or agents, or any untrue statement or
alleged untrue statement of a material fact contained in any of the financial or
other information contained in the registration statement and/or final
prospectus furnished to LTCO by or on behalf of the Company or the omission or
alleged omission of a materiel fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; or (b) with respect to, caused by, or otherwise
arising out of any transaction contemplated by the Agreement or LTCO's
performing the services contemplated hereunder; provided, however, the Company
will not be liable under clause (b) hereof to the extent, and only to the
extent, that any loss, claim, damage, liability or expense is finally judicially
determined to have resulted primarily from LTCO's gross negligence or bad faith
in performing such services.
If the indemnification provided for herein is conclusively determined
(by an entry of final judgment by a court of competent jurisdiction and the
expiration of the time or denial of the right to appeal) to be unavailable or
insufficient to hold any Indemnified Party harmless in respect to any losses,
claims, damages, liabilities or expenses referred to therein, then the Company
shall contribute to the amounts paid or payable by such Indemnified Party in
such proportion as is appropriate and equitable under all circumstances taking
into account the relative benefits received by the Company on the one hand and
LTCO on the other, from the transaction or proposed transaction under the
Agreement or, if allocation on that basis is not permitted under applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
received by the Company on the one hand and LTCO on the other, but also the
relative fault of the Company and LTCO; provided, however, in no event shall the
aggregate contribution of LTCO and/or any Indemnified Party be in excess of net
compensation actually received by LTCO and/or such Indemnified Party pursuant to
this Agreement.
The Company shall not settle or compromise or consent to the entry of
any judgment in or otherwise seek to terminate any pending or threatened action,
claim, suit or proceeding in which any Indemnified Party is or could be a party
and as to which indemnification or contribution could have been sought by such
Indemnified Party hereunder (whether or not such Indemnified Party is a party
thereto), unless such consent or termination includes an express
7
<PAGE>
unconditional release of such Indemnified Party, reasonably satisfactory in form
and substance to such Indemnified Party, from all losses, claims, damages,
liabilities or expenses arising out of such action, claim, suit or proceeding.
The foregoing indemnification and contribution provisions are not in
lieu of, but in addition to, any rights which any Indemnified Party may have at
common law hereunder or otherwise, and shall remain in full force and effect
following the expiration or termination of LTCO's engagement and shall be
binding on any successors or assigns of the Company and successors or assigns to
all or substantially all of the Company's business or assets.
8
<PAGE>
EXHIBIT C
---------
JURISDICTION
The Company hereby irrevocably: (a) submits to the jurisdiction of any
court of the State of New York or any federal court sitting in the State of New
York for the purposes of any suit, action or other proceeding arising out of the
Agreement between the Company and LTCO which is brought by or against the
Company or LTCO; (b) agrees that all claims in respect of any suit, action or
proceeding may be heard and determined in any such court; and (c) to the extent
that the Company has acquired, or hereafter may acquire, any immunity from
jurisdiction of any such court or from any legal process therein, the Company
hereby waives, to the fullest extent permitted by law, such immunity.
The Company waives, and the Company agrees not to assert in any such
suit, action or proceeding, in each case, to the fullest extent permitted by
applicable law, any claim that (a) the Company is not personally subject to the
jurisdiction of any such court; (b) the Company is immune from any legal process
(whether through service or notice, attachment prior to judgment, attachment in
the aid of execution, execution or otherwise) with respect to it or its
property; (c) any such suit, action or proceeding is brought in an inconvenient
forum: (d) the venue of any such suit, action or proceeding is improper, or (e)
this Agreement may not be enforced in or by any such court.
Any process against the Company in, or in connection with, any suit,
action or proceeding filed in the United States District Court for the Southern
District of New York or any other court of the State of New York, arising out of
or relating to its Agreement or any transaction or agreement contemplated
hereby, may be served on the Company personally, or by first class mail or
overnight courier (with the same effect as though served upon the Company
personally) addressed to the Company at the address set forth in the Agreement
between the Company and LTCO.
Nothing in these provisions shall affect any party's right to serve
process in any manner permitted by law or limit its rights to bring a proceeding
in the competent courts of any jurisdiction or jurisdictions or to enforce in
any lawful manner a judgment obtained in one jurisdiction in any other
jurisdiction.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to conflicts of law
principles.
9
<PAGE>
Appendix I
----------
The Company is currently represented by Jolson Securities in the pursuit of
"strategic alternatives and market opportunities", including merger with or
strategic investment from specifically identified companies. The anticipated
transaction from the engagement of Jolson Securities, which could include a
capital investment from one or more of the listed companies, is considered
strategic in nature and not considered to be of similar effect to the
transaction outlined herein as referenced in section 1 paragraph (b) herein.
10
<PAGE>
Ladenburg Thalmann Logo
February 23, 2000
- -----------------
Mortgage.com, Inc.
------------------
Ticker: MDCM
Exchange: NASDAQ
Up to $40,000,000 Underwritten Offering of Common Stock
-------------------------------------------------------
Securities: Common Stock
- ---------- ------------
Total Draw Down Commitment: up to $40,000,000
- -------------------------- -----------------
Draw Down Amount: up to $4,000,000
- ---------------- ----------------
Use of Proceeds: [_____________]
- ---------------
Draw Down Terms:
- ---------------
(a) The Company may, in its sole discretion, issue and
exercise a draw down (a "Draw Down") during a Draw
Down Pricing Period (which shall mean a period of
22 consecutive trading days preceding a Draw Down
Exercise Date, as defined below), which Draw Down
the Investor will be obligated to accept.
(b) Only one Draw Down shall be allowed in each Draw
Down Pricing Period. The Draw Down shall occur on
the first trading day following the end of the
Draw Down Pricing Period (the "Draw Down Exercise
Date"), based on the Average Daily Price during
the Draw Down Pricing Period.
(c) There shall be a maximum of 12 Draw Downs during
the term of this Equity Line of Credit.
(d) Each Draw Down will expire on the calendar day
after the Draw Down Exercise Date.
(e) The Company must inform the Investor via facsimile
transmission as to the amount of the Draw Down the
Company wishes to exercise before the first day of
the Draw Down Pricing Period (the "Draw Down
Notice"). The closing bid price of the Common
Stock on each Draw Down Exercise Date must be
greater than [$_________] per share. At no time
shall the Investor be required to purchase more
than the scheduled Draw Down amount for a given
Draw Down Pricing Period so that if the Company
chooses not to exercise the Draw Down in a given
Draw Down Pricing Period the Investor
<PAGE>
is not obligated to purchase more than the
scheduled amount in a subsequent Draw Down Pricing
Period.
Pricing:
- -------
(a) Commencing on the Effective Date of the
Registration Statement and continuing for a period
of 12 months thereafter, the Investor agrees to
honor Draw Down requests from the Company for a
total of up to $40,000,000 of the Company's Common
Stock based upon Draw Downs of $4,000,000 per Draw
Down and a per share purchase price equal to 93%
of the Average Daily Price for the Draw Down
Pricing Period.
(b) If the Average Daily Price on a given trading day
is less than the Threshold Price then the
Investor's payment obligation under the Draw Down
will be reduced by 1/22nd for such trading day and
the corresponding portion of the Draw Down amount
shall be withdrawn from the Draw Down Pricing
Period. At no time shall the Threshold Price be
set below [$_______] unless agreed upon by the
Company and the Investor.
Conditions:
- ----------
(a) The Company shall cause to be filed a Registration
Statement, which Registration Statement shall
provide for the sale of the Common Stock purchased
by and issued to the Investor hereunder. Before
the Investor shall be obligated to accept a Draw
Down request from the Company, the Company shall
have caused a sufficient number of shares of
Common Stock to be registered to cover the shares
of Common Stock to be issued in connection with
the Draw Down.
(b) Such Common Stock shall be placed in a mutually
agreed upon escrow account before the issuance of
a Draw Down request. The shares of Common Stock
shall be settled on a weekly basis through the DTC
system.
(c) The Investor may terminate this Draw Down facility
if a Material Adverse Effect or a Material Change
of Ownership has occurred.
(d) The Company shall pay all fees and expenses
related to the transactions contemplated by this
Agreement. The Company shall pay at the Closing
all attorneys fees and expenses incurred by the
Investor of up to $35,000.
Limitation on Issuance: The Company shall not issue more than 20% of
- ---------------------- common shares outstanding without shareholder
approval.
2
<PAGE>
Confidentiality: The Company agrees that it will not disclose,
- --------------- and will not include in any public announcement,
the name or names of the Investor, unless
expressly agreed to by the Investor or unless and
until such disclosure is required by law or
regulation, and then only to the extent of such
requirement.
Documentation: The definitive documentation shall contain
- ------------- such additional and supplementary provisions,
including without limitation, representations,
warranties, covenants, agreements and remedies, as
are appropriate to preserve and protect the
economic benefits intended to be conveyed to the
Investor pursuant hereto.
Certain Definitions:
- -------------------
(a) "Average Daily Price" shall be the price based on
the VWAP of the Company's Common Stock.
(b) "Average Price" shall be the average of the
Average Daily Price for the applicable Draw
Down Pricing Period.
(c) "Draw Down Pricing Period" shall meet, a period of
22 consecutive trading days preceding a Draw Down
Exercise Date.
(d) "Material Adverse Effect" shall mean any effect on
the business, operations, properties or financial
condition of the Company that is material and
adverse to the Company and its subsidiaries and
affiliates, taken as a whole and/or any condition,
circumstance or situation that would prohibit or
otherwise interfere with the ability of the
Company to enter into and perform any of its
obligations under the Purchase Agreement or the
Registration Rights Agreement in any material
respect.
(e) "Material Change in Ownership" shall mean that
the officers and directors of the Company
shall own less than ___% of outstanding Common
Stock of the Company.
(f) "Threshold Price" is the lowest price at which the
Company will issue new shares of Common Stock.
(g) "VWAP" shall mean the daily volume weighted
average price of the Company's Common Stock as
reported by Bloomberg Financial using the AQR
function.
3
<PAGE>
AMENDMENT TO APPENDIX 1 OF ENGAGEMENT LETTER DATED
FEBRUARY 23, 2000 FROM LADENBURG THALMANN TO
MORTGAGE.COM, INC. ("ENGAGEMENT LETTER")
Appendix 1 of the Engagement Letter is hereby amended to read in its
entirety as follows:
The Company is currently represented by Jolson Securities in
the pursuit of "strategic alternatives and market
opportunities", including merger with or strategic investment
from specifically identified companies. The anticipated
transaction from the engagement of Jolson Securities, which
could include a capital investment from one or more of the
listed companies, is considered strategic in nature and not
considered to be an Investment Proposal referenced in section
1 paragraph (b) herein or subject to the right of first
refusal referenced in section 4 herein.
The Company has on March ___, 2000, entered into an engagement
letter with Lehman Brothers pursuant to which Lehman Brothers
has been engaged to act as the Company's placement agent and
financial advisor in connection with strategic alternatives
and market opportunities. Any transaction entered into or any
equity or equity-linked securities of the Company sold
pursuant to such engagement letter with or to a party
introduced to the Company by Lehman Brothers is considered
strategic in nature and not considered to be an Investment
Proposal referenced in section 1 paragraph (b) herein or
subject to the right of first refusal referenced in section 4
herein.
LADENBURG THALMANN CO., INC.
By /s/ David Boris
---------------------------------------
Dated: March 27, 2000
MORTGAGE.Com, INC.
By /s/ Edwin D. Johnson
---------------------------------------
Dated: March 27, 2000
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS.
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD,
PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION
WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT.
STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
MORTGAGE.COM, INC.
THIS CERTIFIES that, for value received, Ladenburg Thalmann & Co., Inc.
(the "Holder"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after _________ __, 2000 (the
"Issuance Date") and on or prior to the close of business on __________ __, 2002
(the "Termination Date") but not thereafter, to subscribe for and purchase from
Mortgage.com, Inc., a Florida corporation (the "Company"), up to _______________
(_______) shares (the "Warrant Shares") of Common Stock, $0.01 par value, of
the Company (the "Common Stock"). The purchase price of one share of Common
Stock (the "Exercise Price") under this Warrant shall be $______. The Exercise
Price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein.
1
<PAGE>
1. Title to Warrant. Prior to the Termination Date hereof and subject
to compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein,
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Issuance Date hereof, and before the close of
business on the Termination Date hereof. Exercise of this Warrant or any part
hereof shall be effected by the surrender of this Warrant and the Notice of
Exercise Form annexed hereto duly executed, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company) and upon payment of the Exercise Price of the
shares thereby purchased by wire transfer or cashier's check drawn on a United
States bank, the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
three (3) Trading Days after the date on which this Warrant shall have been
exercised as aforesaid. This Warrant shall be deemed to have been exercised and
such certificate or certificates shall be deemed to have been issued, and Holder
or any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price and
all taxes required to be paid by Holder, if any, pursuant to Section 5 prior to
the issuance of such shares, have been paid. If this Warrant shall have been
exercised in part, the Company shall, at the time of delivery of the certificate
or certificates representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant. This Warrant may also be exercised by means of a
"cashless exercise" in which the holder shall be entitled to receive a
certificate for the number of shares equal to the quotient obtained by dividing
[(A-B) (X)] by (A), where:
(A) = the average of the high and low trading prices per share of Common Stock
on the Trading Day preceding the date of such election;
(B) = the Exercise Price of the Warrants; and
(X) = the number of shares issuable upon exercise of the Warrants in accordance
with the terms of this Warrant.
2
<PAGE>
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder books
or records in any manner which prevents the timely exercise of this Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance with
any applicable securities laws, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of the Company
to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or denominations specified in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
3
<PAGE>
8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a)
Stock Splits, etc. The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the
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Company), or sell, transfer or otherwise dispose of all or substantially all its
property, assets or business to another corporation and, pursuant to the terms
of such reorganization, reclassification, merger, consolidation or disposition
of assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring corporation
("Other Property"), are to be received by or distributed to the holders of
Common Stock of the Company, then Holder shall have the right thereafter to
receive, upon exercise of this Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares of
Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 11.
For purposes of this Section 11, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 11 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
12. Voluntary Adjustment by the Company. The Company may at any time
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such notice, in the absence
of manifest error, shall be conclusive evidence of the correctness of such
adjustment.
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14. Notice of Corporate Action. If at any time:
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(d).
15. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the principal market
upon which the Common Stock may be listed.
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid
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or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder against impairment. Without
limiting the generality of the foregoing, the Company will (a) not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the amount payable therefor upon such exercise immediately prior
to such increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, and
(c) use all commercially reasonable efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Warrant and
the obligations of the Company hereunder.
Before taking any action which would cause an adjustment
reducing the current Exercise Price below the then par value, if any, of the
shares of Common Stock issuable upon exercise of the Warrants, the Company shall
take any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and non-assessable shares of such Common
Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Exercise Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
16. Miscellaneous.
(a) Jurisdiction. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of New York without regard to its conflict of law principles or
rules, and be subject to arbitration pursuant to the terms set forth in the
Purchase Agreement.
(b) Restrictions. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
(c) Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date hereof.
If the Company willfully fails to comply with any material provision of this
Warrant, the Company shall pay to Holder such amounts as shall be sufficient to
cover any costs and expenses including, but not limited to, reasonable
attorneys' fees, including those of appellate proceedings, incurred by Holder in
collecting any
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amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(e) Limitation of Liability. No provision hereof, in the absence
of affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(f) Remedies. Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(g) Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant Shares.
(h) Indemnification. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
however, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(i) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.
(j) Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(k) Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: March 28, 2000
MORTGAGE.COM, INC.
By: /s/ Seth Werner
--------------------------------------
Seth Werner, President & CEO
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NOTICE OF EXERCISE
To: Mortgage.com, Inc.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock (the "Common Stock"), of Mortgage.com, Inc. pursuant to the terms
of the attached Warrant, and tenders herewith payment of the exercise price in
full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
______________________________________
(Name)
______________________________________
(Address)
Dated:
_________________________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS.
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD,
PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION
WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT.
STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
MORTGAGE.COM, INC.
THIS CERTIFIES that, for value received, Sugarplum Investments Limited
(the "Holder"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after _________ __, 2000 (the
"Issuance Date") and on or prior to the close of business on __________ __, 2002
(the "Termination Date") but not thereafter, to subscribe for and purchase from
Mortgage.com, Inc., a Florida corporation (the "Company"), up to _______________
(_______) shares (the "Warrant Shares") of Common Stock, $0.01 par value, of
the Company (the "Common Stock"). The purchase price of one share of Common
Stock (the "Exercise Price") under this Warrant shall be $______. The Exercise
Price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein.
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<PAGE>
1. Title to Warrant. Prior to the Termination Date hereof and subject
to compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein,
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Issuance Date hereof, and before the close of
business on the Termination Date hereof. Exercise of this Warrant or any part
hereof shall be effected by the surrender of this Warrant and the Notice of
Exercise Form annexed hereto duly executed, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company) and upon payment of the Exercise Price of the
shares thereby purchased by wire transfer or cashier's check drawn on a United
States bank, the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
three (3) Trading Days after the date on which this Warrant shall have been
exercised as aforesaid. This Warrant shall be deemed to have been exercised and
such certificate or certificates shall be deemed to have been issued, and Holder
or any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price and
all taxes required to be paid by Holder, if any, pursuant to Section 5 prior to
the issuance of such shares, have been paid. If this Warrant shall have been
exercised in part, the Company shall, at the time of delivery of the certificate
or certificates representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant. This Warrant may also be exercised by means of a
"cashless exercise" in which the holder shall be entitled to receive a
certificate for the number of shares equal to the quotient obtained by dividing
[(A-B) (X)] by (A), where:
(A) = the average of the high and low trading prices per share of Common Stock
on the Trading Day preceding the date of such election;
(B) = the Exercise Price of the Warrants; and
(X) = the number of shares issuable upon exercise of the Warrants in accordance
with the terms of this Warrant.
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4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder books
or records in any manner which prevents the timely exercise of this Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance with
any applicable securities laws, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of the Company
to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or denominations specified in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
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8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a)
Stock Splits, etc. The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the
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<PAGE>
Company), or sell, transfer or otherwise dispose of all or substantially all its
property, assets or business to another corporation and, pursuant to the terms
of such reorganization, reclassification, merger, consolidation or disposition
of assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring corporation
("Other Property"), are to be received by or distributed to the holders of
Common Stock of the Company, then Holder shall have the right thereafter to
receive, upon exercise of this Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares of
Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 11.
For purposes of this Section 11, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 11 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
12. Voluntary Adjustment by the Company. The Company may at any time
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such notice, in the absence
of manifest error, shall be conclusive evidence of the correctness of such
adjustment.
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14. Notice of Corporate Action. If at any time:
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(d).
15. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the principal market
upon which the Common Stock may be listed.
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid
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or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder against impairment. Without
limiting the generality of the foregoing, the Company will (a) not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the amount payable therefor upon such exercise immediately prior
to such increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, and
(c) use all commercially reasonable efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Warrant and
the obligations of the Company hereunder.
Before taking any action which would cause an adjustment
reducing the current Exercise Price below the then par value, if any, of the
shares of Common Stock issuable upon exercise of the Warrants, the Company shall
take any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and non-assessable shares of such Common
Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Exercise Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
16. Miscellaneous.
(a) Jurisdiction. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of New York without regard to its conflict of law principles or
rules, and be subject to arbitration pursuant to the terms set forth in the
Purchase Agreement.
(b) Restrictions. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
(c) Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date hereof.
If the Company willfully fails to comply with any material provision of this
Warrant, the Company shall pay to Holder such amounts as shall be sufficient to
cover any costs and expenses including, but not limited to, reasonable
attorneys' fees, including those of appellate proceedings, incurred by Holder in
collecting any
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amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(e) Limitation of Liability. No provision hereof, in the absence
of affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(f) Remedies. Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(g) Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant Shares.
(h) Indemnification. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
however, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(i) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.
(j) Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(k) Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: March 28, 2000
MORTGAGE.COM, INC.
By: /s/ Seth Werner
--------------------------------------
Seth Werner, President & CEO
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NOTICE OF EXERCISE
To: Mortgage.com, Inc.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock (the "Common Stock"), of Mortgage.com, Inc. pursuant to the terms
of the attached Warrant, and tenders herewith payment of the exercise price in
full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
______________________________________
(Name)
______________________________________
(Address)
Dated:
_________________________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
EXHIBITS 5.1 and 23.2
FOLEY & LARDNER
ATTORNEYS AT LAW
CHICAGO POST OFFICE BOX 240 SACRAMENTO
DENVER JACKSONVILLE, FLORIDA 32201-0240 SAN DIEGO
JACKSONVILLE THE GREENLEAF BUILDING SAN FRANCISCO
LOS ANGELES 200 LAURA STREET TALLAHASSEE
MADISON JACKSONVILLE, FLORIDA 32202-3510 TAMPA
MILWAUKEE TELEPHONE (904) 359-2000 WASHINGTON, D.C.
ORLANDO FACSIMILE (904) 359-8700 WEST PALM BEACH
CLIENT/MATTER NUMBER
021837/0215
April 10, 2000
Mortgage.com, Inc.
1643 North Harrison Parkway
Sunrise, Florida 33323
Re: Registration Statement on Form S-1 filed April 10, 2000
Ladies and Gentlemen:
This opinion is being furnished in connection with the Registration
Statement on Form S-1 of Mortgage.com, Inc. (the "Company"), under the
Securities Act of 1933, as amended, for the registration of the resale of
14,255,085 shares of common stock, par value $0.01, comprised of the following
(the "Shares"):
a. up to 8,750,000 shares of common stock that may be sold by the
Company to Sugarplum Investments Limited pursuant to a Common Stock Purchase
Agreement dated March 27, 2000 (the "Agreement") and 332,060 shares of common
stock issuable pursuant to a warrant held by Sugarplum (the "Sugarplum
Warrant");
b. 332,060 shares of common stock issuable pursuant to a warrant held
by Ladenburg Thalmann & Co., Inc. (the "Ladenburg Warrant"); and
c. 4,840,965 shares of common stock held by, or issuable pursuant to
warrants held by, the other selling stockholders named in the Registration
Statement.
As counsel for the Company, we have examined and are familiar with the
Articles of Incorporation and Bylaws of the Company, the proceedings of the
board of directors of the Company in connection with the Agreement (and the
exhibits and schedules thereto, including the Sugarplum Warrant and the
Ladenburg Warrant), and such other documents, certificates, Company records, and
matters of law as we deemed to be pertinent. We have assumed the accuracy,
validity and completeness of all corporate records and information made
available to us by the Company and upon which we have relied.
<PAGE>
FOLEY & LARDNER
April 10, 2000
Page 2
Based upon our examination of such documents and our familiarity with
such proceedings, it is our opinion that:
1. The Company has been duly incorporated and is validly existing and
in good standing under the laws of the State of Florida.
2. The Shares covered by the Registration Statement to be sold by the
Company will be, upon their issuance, legally issued, fully paid and
non-assessable, and the Shares covered by the Registration Statement which have
been previously issued have been legally issued and are fully paid and
non-assessable.
We hereby consent to the inclusion of this opinion as Exhibit 5.1 in
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus. In giving this consent we do not admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules or regulations of the
Securities Exchange Commission promulgated thereunder.
FOLEY & LARDNER
/s/ Foley & Lardner
EXHIBIT 10.26
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 10571
This Second Amendment dated February 16, 2000 to Master Lease Agreement No.
10571 dated April 1, 1998 (the "Lease"), is entered into by and between
Mortgage.com, Inc. a Florida corporation, (formerly known as First Mortgage
Network, Inc.) (the "Lessee") and Dominion Ventures Inc. (the "Lessor").
WHEREAS, Lessee has requested an increase in Master Lease Line to allow
additional Equipment to be purchased pursuant to the terms of the Lease; and
WHEREAS, Lessor has agreed to extend the Master Lease Line to allow for
the purchase of additional Equipment, subject to the approval of Lessor and
pursuant to the terms of the Lease. All capitalized terms used and not otherwise
defined herein shall have the meanings given in the Lease.
NOW THEREFORE, the parties hereto agree to amend the Lease as follows:
1. The Master Lease Line shall be increased by $1,800,000.00 for a
total of $3,394,637.48.
2. The address of the Lessee is 1643 North Harrison Parkway,
Sunrise, Florida 33323.
3. The Funding Expiration Date of February 26, 1999, as set forth in
the First Amendment to the Master Lease, shall be extended to
May 30, 2000.
4. The initial Rent Factor for additional Equipment shall remain two
and 81/100 percent (2.81%) for a forty-two (42) month Lease. A
Rent Factor adjustment will apply at each funding under the
Lease. The Rental Factor will be adjusted based on the change in
yield, if any, for U.S. Treasury Notes of comparable maturity as
quoted in the Wall Street Journal three days before the date of
funding. The initial Treasury Rate assumed for this Amendment is
6.66%. For each basis point change from this Treasury Rate, the
rate of the Rental Factor will be adjusted by one basis point and
a new Rental Factor calculated. The Rental Factor for each
funding shall be fixed for the Lease Term.
5. The Advance Rental Amount of $89,667.00 as specified in the First
Amendment to the Master Lease, shall be increased by $50,580.00
(plus applicable taxes) for a total of $140,247.00 (plus
applicable taxes). The increase shall be paid to Lessor upon
execution of this Second Amendment and shall be credited to the
first and last complete calendar month's rent for each item of
Equipment, subject to the conditions set forth in the first
Amendment, and in Section 5 of the Master Lease.
<PAGE>
6. By this Amendment, Section 17 of the Master Lease is modified to
provide that Lessee will, at the end of the Lease term, purchase
leasehold improvements, and telephone systems at fifteen percent
(15%) of their original cost to Lessor.
7. Lessor hereby consents to, acknowledges, and agrees that the
transactions contemplated by the Contribution Agreement dated
January 27, 2000, among Lessee, Openclose.com, Inc., and other
Investors named therein, shall not be deemed to constitute an
Event of Default under the Lease.
Except as specifically provided herein, all terms and conditions of the
Lease shall remain in full force and effect, without waiver or modification.
IN WITNESS WHEREOF, the parties hereto have caused this amendment to be executed
as of the date first written above.
LESSEE: MORTGAGE.COM, INC LESSOR: DOMINION VENTURES INC.
By:_________________________________ By:_________________________________
Its:________________________________ Its:________________________________
Consent of Independent Auditors
The Board of Directors and Shareholders
Mortgage.com, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
Ft. Lauderdale, FL
April 10, 2000
