<PAGE>
As filed with the Securities and Exchange Commission on May 5, 2000.
Registration No. 333-93587
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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iOwn Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 6162 94-3333914
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
333 Bryant Street, Lower Level
San Francisco, California 94107
(415) 618-3600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Edward P. Hoyt
Chief Executive Officer
and Chairman of the Board
iOwn Holdings, Inc.
333 Bryant Street, Lower Level
San Francisco, California 94107
(415) 618-3600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Ralph L. Arnheim III, Esq. Laird H. Simons III, Esq.
Edward J. Wes, Esq. Horace L. Nash, Esq.
David M. Hornik, Esq.
Darren L. Nunn, Esq.
David B. Tom, Esq. Kimberly A. Chance, Esq.
Perkins Coie LLP Fenwick & West LLP
135 Commonwealth Drive, Suite 250 Two Palo Alto Square
Menlo Park, California 94025 Palo Alto, California 94306
(650) 752-6000 (650) 494-0600
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
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, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Amount to be Price to Aggregate Amount of
Securities to be Registered Registered Public Offering Amount(1) Registration Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 6,900,000 $11.00 $75,900,000 $20,037.60
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</TABLE>
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(1) Includes 900,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of
1933. ($16,698.00 previously paid)
------------------
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 that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities in any state where the offer for sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
[IOWN LOGO]
6,000,000 Shares
Common Stock
iOwn Holdings, Inc. is offering 6,000,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We have requested that the underwriters reserve up to 690,000 shares to
be offered to our directors, officers, employees and business associates,
including real estate agents, home builders, mortgage brokers and our
registered users. We have applied for approval for quotation of our common
stock on the Nasdaq National Market under the symbol "IOWN." We anticipate that
the initial public offering price will be between $9.00 and $11.00 per share.
---------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to iOwn Holdings, Inc.................................. $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
iOwn Holdings, Inc. has granted the underwriters a 30-day option to
purchase up to an additional 900,000 shares of common stock to cover any over-
allotments.
---------------
Robertson Stephens Lehman Brothers
U.S. Bancorp Piper Jaffray Friedman Billings Ramsey
The date of this prospectus is , 2000
<PAGE>
[ARTWORK TO BE PROVIDED IN SUBSEQUENT AMENDMENT]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with information different from that contained in this prospectus. We are
not, and the underwriters are not, making an offer to sell these shares of
common stock in any jurisdiction in which the offer or sale is not permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock. In this prospectus, references to "iOwn," "we,"
"us" and "our" refer to iOwn Holdings, Inc. and its wholly owned subsidiaries,
and references to "iOwn.com" refer to our website.
Until , 2000, which is the 25th day after the commencement of this
offering, all dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 28
Business................................................................. 37
Management............................................................... 57
Related Party Transactions............................................... 67
Principal Stockholders................................................... 69
Description of Capital Stock............................................. 71
Shares Eligible for Future Sale.......................................... 75
Underwriting............................................................. 77
Legal Matters............................................................ 79
Experts.................................................................. 79
Where You Can Find Additional Information................................ 79
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
HomeScout(R) and HomeShark(R) are registered service marks, of iOwn.
iOwn.com and the iOwn logo are service marks of iOwn. Genesis 2000(R), ePass
and WebBuilder are trademarks of Genesis 2000. Preferred Correspondent Lender
Program is a service mark of HomeBuilders Financial Network. Realtor(R) is a
registered service mark of the National Association of Realtors. Other service
marks, trademarks and trade names referred to in this prospectus are the
property of their respective owners.
3
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this prospectus.
Our Business
We are an Internet enabler of the home mortgage industry. Our technology
tools enable a streamlined mortgage origination process for businesses and
consumers. Our proprietary Internet technology applications enable retail
mortgage originators to access a broad range of wholesale and correspondent
lenders. We are creating a business-to-business mortgage industry hub that we
believe will allow retail mortgage originators to access a wide range of
capital sources effectively and to deliver a high-quality tailored customer
service to their end consumers. We believe that our solution allows wholesale
lenders to fund or purchase loans more efficiently, which can improve both
their profitability and service delivery, and empowers homeowners with better
ways to identify, purchase, finance and manage their most significant asset,
their home.
We deliver our products and services through multiple channels, including
our website, www.iown.com, and our relationships with mortgage brokers, real
estate agents, home builders and relocation companies. Our multi-channel
distribution approach allows us to:
. Internet-enable a broad cross-section of mortgage brokers and other
real estate professionals; and
. reach a broad group of homeowners and prospective homeowners.
We believe that we are the first business-to-business enabler of the
mortgage industry, and the only company with an integrated set of business-to-
business-to-consumer channels for distribution of home mortgages and related
homeownership services. As of March 31, 2000, we accessed the computer desktops
of over 12,000 mortgage brokers through our Genesis 2000 software and
distribution partners, and we provided mortgage services for 15 national
homebuilders with over $2.0 billion in annual new home sales. In addition, we
have established consumer-direct distribution arrangements with online leaders
such as AOL's Netscape/Netcenter and Digital City, AT&T and NBCi/Snap!. In
1999, we originated approximately $1.5 billion in mortgages.
Our Market Opportunity
Mortgage originations in the United States averaged more than $1.0
trillion annually from 1995 to 1999, and are expected to total $1.1 trillion in
2000. The total dollar amount of mortgages used to purchase homes grew at an
average annual rate of 19% from 1995 to 1998, according to the Mortgage Bankers
Association of America. Forrester Research estimates that the online purchase
mortgage market will grow to over $91.2 billion in 2003, representing
approximately 10% of total U.S. originations, from approximately $18.7 billion
in 1999, or 1.5% of total U.S. mortgage originations. In addition, since
approximately 67% of households in the United States own homes, there is a
substantial market for ancillary services, such as title insurance, appraisals,
insurance and home improvement.
The home buying process is complex and difficult; it often results in a
confusing and frustrating home buying experience for consumers and it is
cumbersome and inefficient for mortgage brokers, Realtors and other real estate
professionals. Through our Internet-enabled services, we believe we offer
businesses and consumers a more satisfying and cost-efficient process than is
currently available. Through our Genesis 2000 ePASS service, mortgage brokers
are able to submit loans for automated underwriting, order title and other
settlement services and interact with lenders to obtain electronic pricing,
rate locks and document delivery. Through our eWholesale service, mortgage
brokers can access iOwn lender partners for electronic pricing and loan
fulfillment. We simplify shopping for a mortgage by making it easier to compare
loans from multiple lenders. We provide businesses and consumers with rich
content and easy-to-use tools at each step in the home buying process. We
simplify mortgage applications by providing both mortgage brokers and consumers
with online application and tracking tools.
4
<PAGE>
Our Strategy
Our objective is to Internet-enable the mortgage industry. We are
building a business-to-business mortgage industry hub to allow retail mortgage
originators to access a broader range of capital sources, at lower cost, more
efficiently, and to deliver higher quality services tailored to their
customers' needs. Key elements of our strategy include:
. Expanding participation in our business-to-business mortgage hub for
wholesale and correspondent lending;
. Expanding into new business-to-business-to-consumer channels;
. Developing iOwn as a leading brand associated with the complete
homeownership experience through advertising, co-branded partnerships
and business-to-business distribution relationships;
. Capturing synergies between our channels, such as referring customers
to mortgage brokers and Realtors who may originate loans through our
eWholesale business;
. Expanding revenues and profitability on each transaction by serving as
a mortgage bank and by offering a wide range of loan products, such as
sub-prime loans and home equity credit lines, and ancillary services,
such as appraisal, title, escrow, insurance, home warranties and home
improvement services; and
. Maintaining and leveraging our technology leadership by continuing to
invest in our proprietary systems and processes to Internet-enable the
mortgage industry.
Our Corporate Information
We were incorporated in California in July 1996, and reincorporated in
Delaware in September 1999. Our executive office is located at 333 Bryant
Street, Lower Level, San Francisco, California 94107. Our telephone number at
that location is (415) 618-3600 and our Internet address is www.iown.com.
Information contained on our website does not constitute part of this
prospectus.
This Offering
<TABLE>
<S> <C>
Common stock offered by iOwn Holdings,
Inc. ..................................... 6,000,000 shares
Common stock to be outstanding after this
offering.................................. 29,552,475 shares
Use of proceeds............................. We intend to use the net proceeds for
investment in marketing and promotion,
strategic acquisitions, debt repayment up to
$15.0 million, technology development, and
general corporate purposes.
Proposed Nasdaq National Market symbol...... IOWN
</TABLE>
Shares of common stock to be outstanding after this offering is based on
shares outstanding as of April 30, 2000. It does not include:
. 3,913,094 shares issuable upon exercise of outstanding options;
. 200,392 shares available for grant under our 1997 Stock Option Plan;
. 1,533,333 shares available for grant or issuance under our 2000 Stock
Option Plan and 500,000 shares available for purchase under our 2000
Employee Stock Purchase Plan; and
. 909,715 shares issuable upon exercise of outstanding warrants.
5
<PAGE>
Summary Consolidated Financial and Other Data
The following table presents our consolidated statement of operations
data. The table also presents unaudited pro forma statement of operations data
for the years ended December 31, 1998 and 1999 as if the acquisitions of
Genesis 2000, Inc. and HomeBuilders Financial Network, Inc. had occurred on
January 1, 1998, after giving effect to purchase accounting adjustments. You
should refer to our unaudited pro forma combined financial information
contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
(unaudited)
Inception --------------------
(July 11, 1996) Years Ended
through Years Ended December 31, December 31,
December 31, --------------------------- --------------------
1996 1997 1998 1999 1998 1999
--------------- ------- -------- -------- -------- ----------
(in thousands, except per share data and number of loans)
<S> <C> <C> <C> <C> <C> <C>
Consolidated
Statement of Operations
Data:
Revenues:
Transactions............ $ -- $ 51 $ 1,224 $ 4,065 $ 5,505 $ 9,017
Other Internet and
e-commerce............ 25 18 89 469 89 469
Software licenses and
maintenance........... -- -- -- 33 6,167 5,286
------ ------- -------- -------- -------- ----------
Total revenues......... $ 25 $ 69 $ 1,313 $ 4,567 $ 11,761 $ 14,772
Operating expenses....... (74) (2,414) (17,417) (49,216) (47,836) (78,047)
Loss from operations..... (49) (2,345) (16,104) (44,649) (36,075) (63,275)
Net loss................. (48) (2,363) (16,015) (45,031) (37,100) (63,812)
Net loss attributable to
common stockholders.... (48) (2,433) (17,341) (49,834) (37,100) (63,812)
Net loss per share
attributable to common
stockholders, basic and
diluted................ $(0.09) $ (1.74) $ (11.66) $ (27.08) $ (3.15) $ (3.33)
Shares used in computing
net loss attributable
to common stockholders,
basic and diluted...... 547 1,402 1,487 1,840 11,791 19,135
Other Data (unaudited):
Loans closed (dollar
volume)................ $ -- $ 8,606 $192,389 $511,450 $955,063 $1,489,891
Loans closed (loan
volume)................ -- 38 1,028 3,200 6,415 9,635
</TABLE>
6
<PAGE>
The following table presents our consolidated balance sheet data as of
December 31, 1999. The pro forma information gives effect to the conversion of
all outstanding shares of preferred stock into common stock and the acquisition
of HomeBuilders Financial Network, including the issuance of 2,666,666 shares
of common stock. The pro forma as adjusted data gives effect to the sale of
6,000,000 shares of common stock that we are offering under this prospectus at
an assumed initial offering price of $10.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses, and
application of the net proceeds. The December 31, 1999 pro forma and pro forma
as adjusted balance sheets are unaudited. You should refer to our unaudited pro
forma combined financial information contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------
Pro Pro Forma
Actual Forma as Adjusted
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 27,329 $ 24,629 $ 70,679
Other current assets............................ 4,484 4,925 4,925
Property and equipment, net..................... 6,080 6,125 6,125
Total assets.................................... 63,245 104,439 149,622
Current liabilities............................. 19,234 28,296 20,546
Long-term obligations, less current portion..... 8,183 13,183 13,183
Redeemable convertible preferred stock ......... 94,123 -- --
Total stockholders' equity (deficit)............ (58,295) 62,960 115,893
</TABLE>
Except as otherwise noted, all information in this prospectus:
. reflects a 1-for-3 reverse stock split effective January 11, 2000;
. assumes that the holders of the convertible debt issued in connection
with the Genesis 2000 acquisition is repaid solely in cash;
. assumes the closing of the acquisition of HomeBuilders Financial
Network;
. reflects the conversion of all outstanding shares of preferred stock
into shares of common stock and conversion of warrants to purchase
preferred stock into warrants to purchase common stock upon completion
of this offering;
. assumes no exercise of outstanding warrants; and
. assumes no exercise of the underwriters' over-allotment option.
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be harmed, the
value of our stock could decline and you may lose part or all of your
investment. The risks described below are not the only risks we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also harm our business.
Risks Related To Our Business
Our limited operating history makes it difficult to evaluate our future
prospects.
We have a limited history of recognizing and addressing risks in our
business. We incorporated in July 1996 and initiated our online mortgage
brokerage operations in June 1997 and only began operating as a mortgage banker
in October 1999. In addition, we recently acquired Genesis 2000 and
HomeBuilders Financial Network. Given our limited history of integrated
operations, we currently cannot identify and analyze all the risks inherent in
these businesses.
All of our operations have occurred during a period in which the overall
home mortgage market has grown and the online mortgage market has emerged. We
depend upon the continued growth of the overall home mortgage market and,
particularly, on the continued growth of the online mortgage market. The online
mortgage market is still in an emerging stage and competition is accelerating.
We have a history of losses and expect losses for the foreseeable future.
We have never operated at a profit and, given the level of planned
operating and capital expenditures, we expect to continue to incur operating
losses for the foreseeable future. We also expect to incur net losses for the
foreseeable future. We incurred net losses of $16.0 million and $45.0 million
in 1998 and 1999, respectively. As of December 31, 1999, we had an accumulated
deficit of $69.7 million. It is critical to our success that we continue to
devote financial resources, including some of the proceeds of this offering, to
developing brand awareness for our website and expanding our relationships with
third-party partners, including real estate agents and brokers, who help to
drive traffic to our website. As a result, we expect that our operating
expenses will increase significantly during the next several years, especially
in sales and marketing. As we increase spending, our losses may continue to
increase for the foreseeable future. As a result, we may never achieve or
sustain profitability, and if we do achieve profitability in any period, we may
not be able to sustain or increase profitability on a quarterly or annual
basis.
Adjustments to the business models of Genesis 2000 and HomeBuilders Financial
Network may result in those businesses operating at a loss for the foreseeable
future.
While our Genesis 2000 and HomeBuilders Financial Network subsidiaries
have traditionally operated at a profit, we expect to adjust their business
models as part of their integration, which will likely involve significant
additional expenditures and investments. Accordingly, it is possible that both
of these businesses will also operate at a loss for the foreseeable future.
Further, the investments and business model changes that we make to these
subsidiaries may be unsuccessful, and neither of these subsidiaries may ever
return to profitability.
We will need to increase the volume of our business and control costs if we are
to achieve and sustain profitability.
We are currently not profitable. To achieve profitability, we believe
that we need to address at least three areas. First, we will need to increase
the volume of our business substantially to allow us to amortize our
8
<PAGE>
fixed costs and technology investments over a significantly higher volume of
business. We currently price our loan products substantially below the prices
charged by many traditional mortgage lenders, but we will be unable to maintain
this pricing level unless the volume of our business increases to cover our
fixed costs and technology investments. Second, we will need to reduce the
costs of acquiring and servicing new customers. We currently spend a
significant amount of money per loan on marketing and distribution and our
existing customer service operations have been structured to support a volume
of loans greater than we currently service. Third, we will need to control the
capital expenditures and other fixed costs of our business while scaling to a
level of transactions at which we are profitable. There is no assurance that we
will be successful in achieving any of these goals or that there are not other
factors that may also affect our ability to achieve profitability.
Our stock price may be adversely affected by significant fluctuations in
quarterly financial operating results.
Our results of operations have varied significantly from quarter to
quarter and we anticipate that they will continue to fluctuate. Our quarterly
revenues and operating results are likely to be particularly affected by the
number of purchase and refinancing loans that we close, as well as our sales
and marketing expenses. Our revenues primarily consist of fees relating to
purchase and refinancing mortgages. We also expect to incur significant sales
and marketing expenses to promote our brand, products and services. If revenues
fall below our expectations, we generally will not be able to reduce our fixed
or other expenses in sufficient time to respond to the shortfall. Additionally,
we may choose to keep our marketing expenditures at a consistently high level
to build our brand name. Our quarterly results vary according to seasonal
patterns in home buying. We believe home sales typically decline in the winter.
We have experienced significant growth in recent periods, and if we are unable
to manage our growth effectively our business may suffer.
We recently expanded our operations and expect to continue to expand our
operations for the foreseeable future, which will place a significant strain on
our managerial, operational, financial and other resources. We have recently
hired a number of executive officers and other key employees. We have grown to
264 full time employees as of April 30, 2000 from 40 employees on December 31,
1997. We expect to hire additional employees to support technology, marketing,
finance and administration, and loan processing. We have limited experience
training large numbers of new staff members, and we could experience a
significant amount of employee turnover. If we fail to manage the growth of our
operations and staff effectively, the quality of our services will be impaired
and our financial performance will suffer.
We may experience difficulty identifying, acquiring and integrating
acquisitions.
We may be unable to identify and acquire suitable acquisition candidates
on reasonable terms, if at all, despite the potential need to supplement our
internal growth by acquiring complementary businesses, technologies, product
lines or service offerings. We compete for acquisition candidates with
companies that have substantially greater financial and management resources
than us. If we do complete an acquisition, integrating newly acquired
organizations and products and services is likely to be expensive, time
consuming and a strain on our managerial resources. Acquisitions, particularly
multiple acquisitions over a short period of time as is the case with our
acquisitions of Genesis 2000 and HomeBuilders Financial Network, involve a
number of risks that may result in our failure to achieve the desired benefits
of the transactions. These risks include, among others:
. difficulties in assimilating the operations of the acquired
businesses;
. potential disruption of our existing businesses;
. inability to integrate, train, retain and motivate key personnel of
the acquired businesses;
. diversion of our management and employees from our day-to-day
operations;
. inability to achieve market acceptance or enhance brand loyalty;
9
<PAGE>
. inability to incorporate acquired technologies, products or services
successfully;
. operating companies in different geographical locations; and
. potential impairment of relationships with our employees, customers
and strategic partners.
We may finance potential acquisitions by issuing shares of our common
stock which could dilute our existing stockholders. We may also use cash or
incur additional debt to pay for these acquisitions. In addition, we may be
required to expend substantial funds and to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which could materially affect our operating results.
Our business strategy depends on promoting our brand and upon achieving brand
recognition.
We cannot assure you that our brand will be viewed positively and be
accepted by the market, and our investment in brand awareness spending may not
be successful. There are a growing number of websites that offer services that
are similar to and competitive with our services. Therefore, we believe that
brand recognition will become an increasingly important competitive advantage
in our industry. Establishing and maintaining our brand is critical to
expanding our customer base, solidifying our business relationships and
successfully implementing our business strategy. We intend to increase our
spending to create brand awareness, but if we fail to promote our brand
successfully, or if these efforts are excessively expensive, our business may
be harmed. The value of our brand could be diluted if visitors to our website
do not perceive our existing services to be of high quality or if we alter or
modify our brand image, introduce new services or enter into new business
ventures that are not favorably received. Moreover, promoting and enhancing our
brand will also depend, in part, on our ability to provide a high-quality
customer experience. We cannot assure you that we will be successful in
achieving this goal.
If online mortgages or our service offerings do not achieve widespread consumer
acceptance, our business will be adversely affected.
There is a significant uncertainty with respect to the viability and
growth potential of the online market for mortgage loans as the online market
is embryonic, evolving rapidly and characterized by an increasing number of
market entrants. Our success will depend in large part on widespread use of the
Internet as a commerce medium and as a marketplace for financial transactions.
Our success will also depend on a number of other factors, including our
ability to market our services to a sufficiently large number of customers
cost-effectively and our ability to overcome the perception among many real
estate market participants that obtaining mortgages online is risky for
consumers. Further, Internet usage by consumers may be inhibited by inadequate
network infrastructure, security concerns, inconsistent quality of service and
the unavailability of cost-effective, high-speed service.
Our market is intensely competitive and we expect competition will increase.
Many of our competitors have greater financial, technical, marketing and
other resources than we have and are able to respond more quickly to take
advantage of new or changing opportunities, technologies and customer
requirements. They may undertake more extensive marketing campaigns for their
products and services, adopt more aggressive pricing policies or make more
attractive offers to potential employees, distribution partners, commerce
companies and third-party service providers. Accordingly, our competitors may
experience greater growth than we do and our strategic partners may terminate
their agreements with us to enter into arrangements with these competitors. We
may not be able to compete successfully against our current or future
competitors. Increased competition, particularly online competition, could
result in price reductions, reduced margins and loss of market share, any or
all of which could harm our business. In light of our competitive market
position and other general market conditions, we may explore a variety of
strategic alternatives including consolidations and other business combinations
in the home mortgage and related industries. See "Business--Competition."
10
<PAGE>
We depend on partnership arrangements with web portal companies and online real
estate websites to generate traffic to our website, and the loss of one or more
of these relationships could harm our business.
A significant portion of our consumer traffic comes from web portals as
well as real estate-related and financial services websites with whom we have
distribution agreements. Many of these agreements require payment of
significant fees, but we cannot assure you that we will experience an increase
in user traffic as a result of new affiliations or that we will maintain or
increase our current levels with existing partners.
Our distribution agreements have terms of up to three years, with the
majority of them lasting one to two years with automatic one-year renewals. Due
to intense competition for placement on portals and other websites, as well as
increasing competition for placement on real estate-related websites when these
agreements expire, we may be unable to renew them or enter into replacement
agreements. If we fail to renew any of these agreements or enter into
substantially similar agreements with other partners, we could experience a
decline in the number of loan originations and our competitive position would
be significantly weakened. In addition, our operating results would likely be
adversely affected. Even if we renew our existing agreements or enter into
substantially similar agreements with other partners, we may be required to pay
significantly higher fees to do so and may be unable to retain the benefit of
any exclusivity privilege we currently enjoy.
We depend on a range of traditional third-party referral sources for lead
generation and the loss of one or more of these relationships could adversely
affect our business.
The loss of one or more of our third-party lead generation sources on
whom we depend could adversely affect our business for referrals. For example,
we serve as the mortgage service provider to MarketPlace Bank, the United
States banking initiative for Canadian Imperial Bank of Commerce, or CIBC. We
also serve as the online mortgage partner for Pinnacle Relocation. In our home
builder channel, we serve as the mortgage partner for Beazer Homes. In addition
to each of these situations, all of our non-consumer direct channels depend
significantly on a range of partners who promote our services to their
customers. Although we intend to continue to serve these partners in a manner
that encourages them to remain in partnership with us, we cannot predict
whether and to what extent the needs of these partners may change over time.
Further, we cannot be assured that the terms of these partnerships will
continue to be acceptable to us.
It is important for us to have a critical mass of real estate listings
available on our website in order to reach home buying customers early in the
home buying process, and the loss of one or more of our listing partners could
harm our business.
If we are unable efficiently and cost effectively to aggregate real
estate listings information from several hundred partners such as real estate
agents, real estate brokers, real estate print publication aggregators, online
third-party property listing aggregators and multiple listing services, we may
incur substantial additional operating expenses and may not be able to provide
a superior service offering. We have agreements with these third parties that
are not exclusive and are generally terminable at will. These third parties may
choose not to provide listing information to us on an on-going basis.
Currently, we do not pay for property listings and in the future it is possible
that we may be required to make such payments, which could significantly
increase our expenses. We believe that our future success will depend in part
on our ability to demonstrate value to these third parties.
We need to continue to develop our content, products and service offerings to
remain competitive and increase our brand awareness.
If we fail to add additional content or to develop and introduce or
acquire new functions or services effectively and on a timely basis, we may not
be able to attract new users or retain our existing users and our business will
suffer. Our business strategy requires us to enhance and improve the ease of
use, responsiveness, functionality and content of our website, and to develop
new product and service offerings. These efforts may
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require us to develop or to license increasingly complex technologies. We may
expand our product offerings to include sub-prime mortgages, home equity credit
lines and construction loans. Additionally, our website development plans and
software enhancement plans could be expensive and time consuming. We can make
no assurances that any new features, functions or services will achieve market
acceptance or enhance our brand loyalty.
Volatility in interest rates could adversely impact our operational
performance.
Our ability to profitably resell loans that we fund may be impaired by
volatility in interest rates. We typically establish the interest rates on the
mortgage loans that we originate at the same time we obtain best-efforts
commitments from the anticipated purchasers of the loans. The mortgage loan
purchase commitments we obtain are contingent upon our delivery of the closed
loans to the purchasers within specified periods.
If interest rates rise and we are unable to close loans within specified
periods, we may suffer a loss on the sale of these loans. In addition, interest
rate increases will increase the cost of our warehouse line of credit, upon
which we depend to fund a preponderance of the loans we originate.
In addition, a sharp decrease in interest rates over a short period may
cause customers who have interest rates on mortgages committed through iOwn
either to delay closing their loans or to refinance with another lender. If
this occurs in significant numbers, it may have an adverse effect on our
business or quarterly results of operations. In addition, if the percentage of
committed loans that convert into closed loans declines substantially, banks
that purchase these loans from us may raise the rates they charge us or decide
not to buy loans from us.
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.
The lenders to whom we deliver loans, either as a mortgage broker or as a
mortgage banker, are under no obligation to continue their relationships with
us. Although we maintain relationships with 30 lenders, most of the loans we
originate are funded by a much smaller subset of these lenders. This small
group of lenders tends to provide more favorable rates and terms to our
customers. We believe that if and when other lenders offer comparable terms,
the sources of loans will shift accordingly. If lenders with the most
competitive terms do not continue to accept the loans we originate, our
business could suffer.
We are generally required to repurchase mortgage loans funded by lenders
in the event of fraud or the discovery of misrepresentations or inaccuracies in
the borrowers' loan applications. Although we have errors and omissions
liability insurance to protect ourselves from this risk, there can be no
assurance that we will not be compelled to repurchase loans in the future, or
that our future repurchase of loans will not harm our business.
Our ability to fund mortgage loans internally depends to a large extent
upon our ability to secure financing on acceptable terms. We currently fund a
portion of the loans we originate through a line of credit known as a warehouse
line of credit. We have only one source of warehouse funding with Bank United
of Texas. This $50 million warehouse line of credit expires on May 8, 2000. We
are currently in discussions with Bank United for an extension of the term of
our warehouse line of credit. We also are in discussions with a number of other
potential providers for additional warehouse facilities. If we are unable to
negotiate such extensions or new facilities, we may have to curtail the growth
of our origination and funding activities.
Our warehouse line of credit subjects us, and future financing
arrangements will likely subject us, to financial covenants and other
restrictions. In the future we may be in default under those covenants and
restrictions. In those cases, we must rely on waivers from the lender. If we
are unable to operate within the covenants or obtain waivers, all amounts that
we owe under our 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.
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If we enter the sub-prime mortgage business in the future, our business would
be subject to significantly greater risks.
Although we do not currently originate sub-prime loans, we intend to
enter the sub-prime market and fund loans to borrowers who have impaired or
limited credit histories or higher debt-to-income ratios than prime mortgage
lenders typically would allow. There is a greater risk of default and product
offerings for sub-prime mortgages frequently change, which may make selling a
sub-prime loan to our institutional investors more difficult. In addition,
since this would be a new line of business for us, we may encounter unexpected
difficulties that would harm our financial results.
We may incur significant losses as a result of loan defaults that occur prior
to the sale of the loan to investors or as a result of repurchases required if
we breach certain representations and warranties.
As a mortgage banker, we face risks associated with loan defaults, which
typically increase during economic downturns. From the time that we fund a loan
to the time we sell the loans we will be generally at risk for any loan
defaults. Once we sell the loans we originate, the risk of loss from loan
defaults and foreclosure generally passes to the purchaser of the loans. During
the loan sale process, however, we would typically be required to make certain
representations and warranties to the purchasers of loans relating to the
conformance of those loans with state and federal laws and applicable investor
guidelines. If a loan defaults and there has been a breach of these
representations and warranties, we may be required to repurchase the loan and
bear any subsequent loss or indemnify the purchaser for any damages caused by
the breach. If we must repurchase a loan, we would have to hold it until it is
paid off or foreclosed or we may have to sell the loan at less than the
outstanding principal balance. Any of the above events would seriously harm our
business and operating results.
Our ability to operate our mortgage banking operations depends on the continued
existence of federal programs, mortgage-related programs and our continued
qualification for those programs.
Any discontinuation of or reduction in the operation of programs
administered by federally-sponsored mortgage loan program providers such as
Fannie Mae, Freddie Mac, Ginnie Mae and by private mortgage investors, or any
significant impairment of our eligibility to participate in those programs,
would hurt our financial performance. Any decline in the secondary market level
of activity, or increase in the underwriting criteria of, Fannie Mae, Freddie
Mac, Ginnie Mae or other private mortgage investors, would reduce our revenues.
Our failure to manage the delivery of services provided by third parties in the
loan process could harm our business.
If we are unsuccessful in managing the delivery of ancillary services
provided by third parties, including property appraisals, credit reports, flood
certifications and title searches, we will likely experience decreased customer
satisfaction and our business will likely suffer. Any interruptions, delays or
mistakes in providing these ancillary services may cause delays in our
processing and closing of loans for our customers. The value of the service we
offer and the ultimate success of our business depends on our ability to manage
the timely delivery of these ancillary services by the third parties with whom
we have business relationships.
We depend on automated underwriting, and the loss of our relationship with
significant providers of automated underwriting would harm our business.
We depend on automated underwriting and other services offered by
government sponsored enterprises to help reduce loan repurchase risk and to
ensure that our mortgage services can be offered on a timely and efficient
basis and the termination of our agreements with any of our lenders could harm
our business by reducing our ability to streamline the mortgage origination
process. Furthermore, we may not be able to implement automated underwriting
services in a manner that will lead to substantial processing efficiencies. The
use of automated underwriting permits which we are currently authorized to use
by a number of our
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lenders allows us to streamline mortgage originations by moving conditional
underwriting to the initial stages of the loan process. We cannot assure that
we will remain in good standing with Freddie Mac or Fannie Mae or those lenders
currently sponsoring our use of these systems, or that these entities will not
prohibit our use of their automated underwriting systems for other reasons. We
expect to process a significant portion of our conforming loans using the
automated underwriting services of Freddie Mac and Fannie Mae, or other
providers of automated underwriting services.
Loans closings may be delayed, which can lead to unpredictable quarterly
fluctuations in revenues and profitability.
The time between the date when an application is received from a customer
and the date on which the loan closes has typically been lengthy and
unpredictable and there is a risk that we expend substantial funds and
management resources supporting the loan completion process without ever
generating revenue from closed loans. The loan application and approval process
is often subject to delays over which we have little or no control, including
the timing of the customer's decision to commit to an available interest rate,
the timeliness of completed appraisals and the adequacy of the customer's own
disclosure documentation. Furthermore, in situations where we have committed to
extend the closing of loans beyond the associated interest rate commitment
periods, we may incur additional costs.
Our success depends on retaining our key senior management team and attracting
and retaining qualified individuals in the online real estate, mortgage and
related industries.
Our future success depends to a significant extent on the continued
services of our senior management, particularly Edward P. Hoyt, our Chief
Executive Officer and Chairman of the Board. The loss of the services of any
person on our senior management team would likely have a significantly
detrimental effect on our business. Although we have obtained key person life
insurance for Mr. Hoyt, we believe this coverage would not be sufficient to
compensate us for the loss of his services.
We may also be unable to retain our key employees or to attract,
assimilate or retain other highly qualified employees in the future. We have
from time to time experienced, and we expect in the future to continue to
experience, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. Attracting and retaining qualified personnel with
experience in the real estate industry, a complex industry that requires a
unique knowledge base, is an additional challenge for us. In addition, there is
significant competition for qualified employees in the Internet industry and,
in particular, in northern California where we are located. We are considering
implementing a program to retain employees in connection with any potential
business combinations involving the Company. However, we cannot assure that all
key employees will remain with the Company in such circumstances. If we do not
succeed in attracting new personnel or retaining and motivating our current
personnel, our business will suffer.
We depend on continued improvements in our systems and the Internet
infrastructure to provide our services as the volume of traffic to our website
and on the Internet increases.
If our website response time slows down, our website may become less
attractive to consumers, real estate professionals, providers of real estate-
related products and services and advertisers. Our revenues depend in part on
the number of consumers who visit our website and the volume of transactions
processed through the website. Accordingly, the satisfactory performance,
reliability and availability of our website, transaction-processing systems and
network infrastructure are critical to our ability to attract and retain
customers and maintain adequate customer service levels. In addition, any
significant increase in the volume of our website traffic could strain the
capacity of our existing technical infrastructure, which could lead to slower
response times or system failures. This would cause the number of real property
search inquiries, loan applications, advertising impressions and other
revenue-producing inquiries to decline, any of which could hurt our revenue
growth, reputation and our brand equity. We will need to incur additional costs
to upgrade our infrastructure if our server and networking systems cannot
adequately service increased volumes of traffic. There can be no
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assurance that we will be able to accurately expand and upgrade our systems to
accommodate these increases in a timely manner. Our ability to increase the
speed with which we provide services to consumers and to increase the scope of
these services is dependent upon the speed and reliability of the Internet.
Consequently, the emergence and growth of the market for our services is
dependent on the performance of and future improvements to the Internet.
We may be unable to protect our intellectual property and proprietary rights
adequately and we may be subject to claims by third parties for infringement.
Despite our precautionary measures, third parties may copy or otherwise
obtain and use our proprietary information without authorization, particularly
in foreign countries where laws or law enforcement practices may not protect
our proprietary rights as fully as in the United States, or develop similar
technology independently. Any legal action that we may bring to protect our
proprietary information could be expensive and distract management from day-to-
day operations. We regard substantial elements of our website and underlying
technology as proprietary. We seek to protect our proprietary rights through a
combination of trademarks, copyrights and confidentiality agreements. In the
future, we may also seek to protect our proprietary technology through the use
of patents. No assurance can be made that these future patents will not be
invalidated or that any claims allowed from those patents will have sufficient
scope or strength.
We also hold domain names that are important to our business. The
regulation of domain names is subject to change. Some proposed changes include
the creation of additional top-level domains in addition to the current top-
level domains, such as ".com," ".net" and ".org." It is also possible that the
requirements for obtaining and holding a domain name could change. Therefore,
we may not be able to obtain or maintain relevant domain names for all areas of
our business. It may also be difficult for us to prevent third parties from
acquiring domain names that are similar to ours, that infringe our trademarks
or that otherwise decrease the value of our intellectual property.
We also receive or license content for our website from third parties and
it is possible that we could become subject to infringement actions based upon
the content received or licensed from these third parties. Any claims brought
against us, regardless of their merit, could result in costly litigation and
the diversion of our financial resources and technical and management
personnel. Further, if such claims are successful, through litigation or
otherwise, we may be required to change our trademarks, alter our content and
pay financial damages, which could adversely affect our business. We also
expect that we may be subject to legal proceedings and claims from time to time
in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by us and our licensees.
Mortgage-related Internet technologies are being developed rapidly. As a
result, we believe that disputes regarding the ownership of these technologies
are likely to arise in the future. Third parties may assert infringement claims
against us in the future and we may incur substantial costs in defending
against these third-party infringement claims, regardless of the merit of those
claims. We cannot guarantee that we would be able to license comparable
technology on reasonable terms, or at all, if our use was found to infringe on
someone else's rights. If we were unable to license comparable technology on
reasonable terms, our business could suffer.
In November 1999, CheckFree Corporation introduced a financial software
product under the brand name "Genesis 2000," which we consider an unauthorized
usage of the Genesis 2000, Inc. registered trademark of "Genesis 2000" under
U.S. Registration No. 1,794,755. Our legal counsel has notified CheckFree
Corporation regarding their unauthorized usage of the "Genesis 2000" mark.
CheckFree has refused to withdraw their use of the mark. We may take legal
action to enforce the registered trademark of Genesis 2000. Any legal action we
may take would require the attention of certain key employees and cause us to
incur legal and related costs and expenses. The significant expenditure of time
by any of our key employees could detract from our other initiatives and could
harm our business.
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Our business and reputation may suffer if we are unable to process our
customers' loan applications in a timely and efficient manner.
We have occasionally received complaints from customers stating that they
have suffered adverse financial effects from our products and services. This is
a common problem in our industry, and typically arises when a borrower fails to
lock in an interest rate and, at the time of the closing of the transaction,
the available rate has increased from the rate available at the time of initial
application. Although assessment of these claims is highly subjective, it is
possible that the borrower could argue that he or she had not been made
sufficiently aware of the possibility of rate increases and the protection
afforded by a rate lock. In these instances it may be necessary to make certain
concessions to satisfy such disgruntled customers. If, despite our efforts,
these complaints continue, our business may suffer.
Our business will be adversely affected if we are unable to safeguard the
security and privacy of our customers' financial data.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms we use to protect
customer transaction data. A party who is able to circumvent our security
measures could misappropriate proprietary information or cause disruptions in
our operations. We may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. The concerns over the security of transactions
conducted on the Internet and the privacy of users may also inhibit the growth
of the Internet generally, and electronic commerce in particular.
We also retain on our premises personal financial documents that we
receive from prospective borrowers in connection with their loan applications.
These documents are highly sensitive and if a third party were to
misappropriate our prospective borrowers' personal information, prospective
borrowers could possibly bring legal claims against us.
We cannot assure that our privacy policies will be deemed sufficient by
our prospective customers or any federal or state laws governing privacy which
may be adopted in the future. In addition, repeated security breaches could
damage our reputation and expose us to a risk of loss or litigation and
possible liability.
We expect to derive revenues from selling advertisements on our website and
sponsorship activities, and if there is no market demand for these
advertisements and sponsor activities, these revenue opportunities would be
limited.
Our business will be adversely affected if the market for web advertising
fails to develop or develops more slowly than expected. Our ability to generate
advertising revenues will depend on, among other factors, the development of
demand for the Internet as an advertising medium, the amount of traffic on our
website and our ability to achieve and demonstrate user and member demographic
characteristics that are attractive to advertisers. Most potential advertisers
and their advertising agencies have only limited experience with the Internet
as an advertising medium and have not devoted a significant portion of their
advertising expenditures to Internet-based advertising. The widespread adoption
of technologies that permit Internet users selectively to block out unwanted
graphics, including advertisements, attached to web pages could also harm the
growth of the Internet as an advertising medium and therefore our revenue.
If we securitize our loans in the future, we will be subject to additional
risks.
We currently do not securitize the loans we originate, if we decide to do
so in the future we would be subject to numerous risks, including delayed
operating cash flow, economic conditions in the general securities and
securitization markets, the need to obtain satisfactory credit enhancements,
retention of credit enhancing residual interests and increased potential for
earnings fluctuations. Our failure to address these risks could have a material
adverse effect on our business.
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If we retain the servicing rights to our loans in the future, we would be
subject to additional risks.
We do not retain the servicing rights to our loans, and if we decide to
do so in the future we would be subject to additional risks, including
decreased operating cash flow and the potential of having to write down the
value of the servicing rights through a charge to earnings, particularly as a
result of changing interest rates and the use of alternative financing options
that lead to increased prepayments. Our failure to address these and other
related risks adequately could harm our operating results.
Risks Related To Our Industry
The real estate industry is both seasonal and cyclical, which could affect our
quarterly results.
Our business is seasonal. We anticipate that as the online mortgage
origination industry matures, our business will be increasingly susceptible to
the same seasonal factors that affect the mortgage industry as a whole. The
real estate industry experiences a decrease in activity during the winter.
However, because of our limited operating history, we do not know if or when
any seasonal pattern will develop or the size or nature of any seasonal pattern
in our business.
In addition, the residential real estate and mortgage business in which
we operate is cyclical. Shifts in the economy and interest rates, as well as in
residential real estate values, generally affect the number of home sales and
refinancing activities. Since our incorporation, sales of residential homes in
the United States have been at historically high levels. The economic swings in
the real estate industry may be caused by various factors. When interest rates
are high or national and global economic conditions are perceived to be or are
weak, there is typically less sales activity in real estate. A decrease in the
current level of sales of real estate and those products and services related
to the real estate industry could adversely affect demand for our mortgage
products and services.
We may be particularly affected by general economic conditions.
Our success depends to a significant extent upon a number of factors
relating to discretionary consumer and business spending, and the overall
economy, as well as regional and local economic conditions in markets in which
we operate, including:
. interest rates;
. employment levels;
. wage and salary levels;
. availability of credit; and
. taxation policies.
An increase in interest rates may reduce mortgage transactions.
A high percentage of mortgage loan transactions involve the refinancing
of existing mortgages. Homeowners are motivated to refinance primarily when
interest rates fall below the rates of their existing mortgages. In the event
interest rates increase significantly, homeowners' incentive to refinance will
be greatly reduced and the number of loans that the industry originates could
decline significantly. Similarly, if there were a sustained increase in
interest rates, there would eventually be some impact on the market for
purchase mortgages as higher monthly payments would make housing less
affordable.
If we are unable to comply with mortgage banking and mortgage brokerage rules
and regulations, our ability to originate or fund loans may be restricted.
From time to time we may not be in compliance with federal and state
regulations imposed on the mortgage banking and lending businesses. In
particular, these rules limit the broker fees, interest rates, finance
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charges and other fees we may assess, require extensive disclosure to our
customers, regulate advertising practices, prohibit discrimination and impose
on us multiple qualification and licensing obligations.
Our failure to comply with these standards could lead to revocation of
required licenses or registrations, loss of approved status, voiding of loan
contracts, demands for loan repurchases from mortgage loan purchasers, class
action lawsuits and administrative enforcement actions. These regulatory
requirements are subject to change and may in the future become more
restrictive, making compliance more difficult or expensive or otherwise
restricting our ability to conduct our business.
At the state level, we are subject to licensing and regulation in most of
the states where we act as a mortgage broker or lender. Some states also
require prior approval before a change of control occurs. In addition, any
person who acquires control of 10% or more of our voting stock may be subject
to certain state licensing regulations, which require the periodic filing of
certain financial information and other personal and business information. If
any person controlling 10% or more of stock refuses or fails to comply with
such filing requirements, our existing licensing arrangements could be
jeopardized. 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.
At the federal level, our mortgage brokering and funding activities are
regulated under a variety of laws, including the Truth in Lending Act and
Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair
Housing Act, the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act and Regulation X, and the Home Mortgage Disclosure Act of 1975
and Regulation C. As the mortgage lending and brokerage businesses evolve in
the online environment, legislators, regulators and industry participants may
advocate additional legislative or regulatory initiatives. Should existing laws
or regulations be amended or new laws or regulations be adopted, we may need to
comply with additional legal requirements and incur additional expenses, be
subject to regulation of the listings we provide and be precluded from certain
activities.
The Real Estate Settlement Procedures Act (RESPA) was designed to prevent
abuses in the referral of business among vendors in the real estate industry.
It prevents certain types of payments between and by certain providers of
services deemed to be "settlement services" and it requires a range of
disclosures when certain types of referrals are made. We believe the online
promotion and advertising and integrated or co-branded online service offerings
were never envisioned by RESPA, nor were the types of services that we provide
through Genesis 2000 or HomeBuilders Financial Network. As a result, it is
difficult for us to be sure that we are, and will continue to be, in compliance
with RESPA.
Further, given our goals of creating a more integrated consumer
experience around the home buying process, we will increasingly find ourselves
in a position where we market settlement services provided by vendors with whom
we have business relationships or provide additional services ourselves in a
way that may cause us to unintentionally be in violation of this act.
Many federal laws and regulations that limit brokers' fees are unclear.
In the last three years there has been significant litigation concerning limits
on mortgage broker fees. The lack of clarity in this area of law is compounded
when applied to mortgage brokers and lenders operating in an Internet
environment and it is possible that plaintiffs' attorneys may attempt to assert
similar allegations against Internet lenders.
Changes in the law governing tax treatment of home mortgage interest may harm
our business.
The reduction or elimination of tax benefits associated with the
deductibility of mortgage interest from federal and state income tax could have
a material adverse effect on the demand for the kind of mortgage loans we
offer. Members of Congress, government officials and political candidates have
from time to time suggested the elimination of mortgage interest deductions
based on borrower income, type of loan or principal amount. Because many of our
loans are made to borrowers for the purpose of purchasing a home, the
competitive advantage of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
this type of governmental action.
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Risks Related To The Internet
The regulation of the Internet is unsettled and future regulations could harm
our business.
Laws and regulations directly applicable to electronic commerce or
relating to online content, user privacy, access charges, liability for third-
party activities, jurisdiction and taxation may become more prevalent in the
future. It is uncertain as to how existing laws will be applied toward the
Internet. Such legislation could dampen the growth in Internet usage generally
and decrease the acceptance of the Internet as a commercial medium. Although
our business is based in California, the governments of other states or foreign
countries might attempt to regulate our activities or levy sales or other taxes
on us.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by various foreign governments to impose taxes on the sale of goods
and services and other Internet activities. In the future, laws may impose
taxes or other regulations on Internet commerce, which could substantially
impair the growth of electronic commerce.
Some local telephone carriers have asserted that the increasing
popularity and use of the Internet have burdened the existing
telecommunications infrastructure, and that many areas with high Internet use
have begun to experience interruptions in telephone service. These carriers
have petitioned the Federal Communications Commission to impose access fees on
Internet service providers and online service providers. If access fees are
imposed, the costs of communicating on the Internet could increase
substantially, potentially slowing the increasing use of the Internet. This
slowing could in turn decrease demand for our services or increase our cost of
doing business.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws such as those governing intellectual property,
telecommunications, privacy and taxation apply to the Internet. In addition,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting business
over the Internet. In the event the Federal Trade Commission, Federal
Communications Commission, local authorities or other governmental authorities
adopt or modify laws or regulations relating to the Internet, our business
could suffer.
Our internal network infrastructure could be disrupted by a number of different
occurrences.
Our operations depend upon our ability to maintain and protect our
computer systems, which are located at our corporate headquarters in San
Francisco, California, and our ability to maintain and protect our contact
management center in Martinez, California. In addition we have contracted with
third parties to host back-up websites in California and Virginia.
Nevertheless, our systems are vulnerable to damage from break-ins, unauthorized
access, vandalism, fire, floods, earthquakes, power loss, telecommunications
failures and similar events. Although we maintain insurance against these
occurrences and general business interruptions, the amount of coverage may not
be adequate in any particular case.
We expect that hackers may attempt to penetrate our network security from
time to time. Because a hacker who penetrates our network security could
misappropriate proprietary or private consumer information or cause
interruptions in our services, we might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
these security breaches.
The Internet industry is characterized by rapid technological change, and if we
fail to effectively adapt to these changing technological developments we will
be unable to successfully compete.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and consumer demands,
and frequent new product and service introductions and
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enhancements. Our future success will depend significantly on our ability to
adapt to increasing usage of the Internet and to rapidly changing technology,
which may involve:
. increasing the performance and reliability of our website;
. integrating third-party software into our website in a fully
functional manner; and
. adding new and useful services and content to our website.
Furthermore, the widespread adoption of developing multimedia-enabling
technologies could require fundamental and costly changes in our technology. If
we fail to effectively adapt to increased usage of the Internet or new
technological developments, we will be unable to successfully compete online.
We could face liability for information retrieved from or transmitted over the
Internet and liability for products and services sold over the Internet.
We provide third-party content on our website, particularly real estate
listings. We could be exposed to liability with respect to this third-party
information. Our customers might assert, among other things, that, by directly
or indirectly providing links to websites operated by third parties, we should
be liable for copyright or trademark infringement or other wrongful actions by
third parties on these websites. Our customers could also assert that our
third-party information contains errors or omissions, and they could seek
damages for losses incurred if they rely upon that information. Even if these
claims do not result in liability to us, we could incur significant costs in
investigating and defending against these claims. Our general liability
insurance may not cover all potential claims to which we are exposed and may
not be adequate to indemnify us for all liability that may be imposed.
Risks Related To This Offering
There has been no prior market for our common stock and an active trading
market may not develop following this offering.
Before this offering, there has been no public market for our common
stock and the trading market price for our common stock may decline below the
initial public offering price. We cannot predict the extent to which a market
will develop or how liquid that market might become. The initial public
offering price for the shares of our common stock will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market.
Our stock price could be volatile and could decline following this offering.
The stock markets, particularly the Nasdaq National Market on which we
have applied to have our common stock listed, have experienced significant
price and volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been highly volatile over the
past few months. Investors in this offering may not be able to resell their
shares at or above the initial public offering price. In the past, securities
class action litigation has often been instituted against companies following
periods of volatility in the market price of their securities. Such litigation
could result in substantial costs and a diversion of management's attention and
resources.
Certain existing stockholders own a large percentage of our voting stock, and
thus individual investors will have minimal influence on stockholder decisions.
Upon completion of this offering, we anticipate that our executive
officers, directors and greater than five percent stockholders, along with
their affiliates, will, in the aggregate, own approximately 54% of our
outstanding common stock. This concentration of ownership may have the effect
of delaying, deferring or
20
<PAGE>
preventing a change in control, impeding a merger, consolidation, takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if such a transaction would be beneficial to other stockholders.
As a result, such persons, acting together, will have the ability to
substantially influence all matters submitted to the stockholders for approval,
including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of our assets. These persons will also have
the ability to control our management and affairs. See "Principal
Stockholders."
Future sales of our common stock may cause our stock price to decline.
The sale of a large number of shares held by affiliates could have an
adverse effect on the market price for our common stock or our future ability
to raise capital through an offering of our equity securities. After the
closing of this offering, we will have 29,552,475 shares of common stock
outstanding. Of the outstanding shares, the shares sold in this offering will
be freely tradeable, except for any shares purchased by our "affiliates" as
defined in Rule 144 of the Securities Act of 1933. These shares will be
restricted securities and will become eligible for sale subject to the
limitations of Rule 144. Those shares of common stock that constitute
restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Securities Act of 1933. All of the holders of these restricted
securities, including our officers and directors, have entered into lock-up
agreements providing that, subject to certain limited exceptions, they will not
sell, directly or indirectly, any shares of our common stock without the prior
consent of FleetBoston Roberston Stephens Inc. for a period of 180 days from
the date of this prospectus. Upon expiration of this 180-day period and subject
to the provisions of Rules 144, 144(k) and 701, 20,382,887 shares of common
stock will be available for sale in the public market, subject to compliance
with certain volume restrictions in the case of shares held by affiliates.
In addition, as of April 30, 2000, there were outstanding options to
purchase 3,913,094 shares of common stock that will be eligible for sale in the
public market from time to time, subject to vesting and the expiration of lock-
up agreements. After the completion of this offering, certain stockholders
representing approximately 17,724,590 shares of common stock, including shares
issuable upon the exercise of certain warrants to purchase capital stock, are
entitled to certain demand and piggy-back registration rights. See
"Management--Stock Plans," "Description of Capital Stock--Registration Rights"
and "Shares Available for Future Sale."
We are uncertain of our ability to obtain additional financing for our future
capital needs.
Additional financing may not be available on terms favorable to us,
although we may need to raise additional funds in order to fund more rapid
expansion, to expand marketing activities, to develop new or enhance existing
services or products, to respond to competitive pressures or to acquire
complementary services, businesses or technologies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
New investors will experience immediate substantial dilution from this
offering.
Because our common stock has been sold previously at prices substantially
below the initial public offering price that you will pay, investors in this
offering will experience an immediate dilution of $8.42 per share, based on the
number of outstanding shares as of December 31, 1999. The exercise of
outstanding options and warrants may result in further dilution. See "Dilution"
and "Principal Stockholders."
21
<PAGE>
Forward-Looking Statements
This prospectus contains forward-looking statements.
We have made statements under the captions "Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and in other sections of this prospectus
that are forward-looking statements. You can identify these statements by the
use of the future tense forward-looking words such as "may," "will," "expect,"
"intend," "anticipate," "believe," "estimate" and "continue" or similar words.
These forward-looking statements may also use different phrases. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements, which are subject to
risks, uncertainties, and assumptions about us, may include, among other
things, projections of our future results of operations or of our financial
condition, our anticipated growth strategies, and anticipated trends in our
business.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or which we do not fully control that could cause actual
results to differ materially from those expressed or implied in our forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including those factors discussed above.
22
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 6,000,000 shares of
common stock offered by us at an assumed initial public offering price of
$10.00 per share will be approximately $53.8 million, after deducting the
underwriting discounts and estimated offering expenses. If the underwriters
exercise in full their option to purchase an additional 900,000 shares of
common stock, we estimate that such aggregate net proceeds will be
approximately $62.2 million.
We intend to use $7.8 million of the net proceeds of this offering to
repay promissory notes payable to the prior shareholders of Genesis 2000. These
promissory notes bear interest at the rate of 6% per annum and are payable
immediately upon the closing of this offering. In addition, we intend to use
$2.7 million of the net proceeds to pay the cash portion of the purchase price
for HomeBuilders Financial Network, and $4.5 million to pay the prior
stockholder of HomeBuilders Financial Network at the end of the first calendar
quarter following the closing of this offering as partial payment of a $13.3
million promissory note. This promissory note bears interest at prime plus one
percent and the remaining portion is payable in seven equal quarterly
installments.
We expect to use the remainder of the net proceeds for general corporate
purposes, including marketing and promotional expenditures, technology,
research and development and other working capital, as well as possible
acquisitions of businesses. We have no current plans, agreements or commitments
with respect to any such acquisition. The amounts actually expended for working
capital purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenues and the other factors described
under "Risk Factors." Accordingly, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending such uses, we will
invest the net proceeds of this offering in short-term, interest-bearing,
investment grade securities.
<TABLE>
<CAPTION>
Use of Proceeds (in thousands)
------------------------------
<S> <C>
Genesis 2000 promissory notes payable............................. $ 7,800
HomeBuilders Financial Network--cash portion of purchase price.... 2,700
HomeBuilders Financial Network--promissory notes payable.......... 4,500
General corporate purposes........................................ 38,800
-------
Total........................................................... $53,800
=======
</TABLE>
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently intend to retain all of our earnings to finance our operations and do
not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We have incurred debt that prohibits or effectively
restricts the payment of dividends. Our ability to pay dividends in the future
will depend on our ability to repay or refinance this debt or to renegotiate
the loan agreement with the lender to permit the payment of dividends.
23
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. our actual capitalization as of December 31, 1999;
. our pro forma capitalization after giving effect to the impact of the
acquisition of HomeBuilders Financial Network including the issuance
of 1,333,333 shares of Series EEEE preferred stock and 1,333,333
shares of common stock; and
. our pro forma as adjusted capitalization after giving effect to the
sale of 6,000,000 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, less
underwriting discounts and commissions and estimated offering
expenses payable by us and the application of the net proceeds.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -------------
(in thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 27,329 $ 24,629 $ 70,679
=========== =========== ===========
Long-term obligations, less current
portion.............................. $ 8,183 $ 13,183 $ 13,183
----------- ----------- -----------
Redeemable convertible preferred
stock(1):
Series A, B, C, D, E, EEE, $0.001
par value, 46,829,700 shares
authorized; 17,558,760 shares
issued and outstanding actual
(aggregate liquidation preference
of $87,887); no shares issued and
outstanding pro forma and pro
forma as adjusted.................. 94,123 -- --
----------- ----------- -----------
Shareholders' equity (deficit):
Common stock, $0.001 par value,
56,666,666 shares authorized;
3,320,820 shares issued and
outstanding actual; 23,546,246
shares issued and outstanding pro
forma; 29,546,246 shares issued
and outstanding pro forma as
adjusted........................... 3 24 30
Additional paid-in capital........... 12,062 132,831 185,758
Common stock warrants................ 1,540 2,005 2,005
Unearned stock-based compensation.... (2,244) (2,244) (2,244)
Accumulated deficit.................. (69,656) (69,656) (69,656)
----------- ----------- -----------
Total stockholders' equity
(deficit)....................... (58,295) 62,960 115,893
Total redeemable convertible
preferred stock and
stockholders' equity (deficit).. 35,828 62,960 115,893
----------- ----------- -----------
Total capitalization............ $ 44,011 $ 76,143 $129,076
=========== =========== ===========
</TABLE>
- --------
(1) Includes 26,972,873 authorized but unissued shares of Series A-1, Series B-
1, Series C-1, Series D-1, Series DD, Series DD-1, Series E-1, Series EE,
Series EE-1, Series EEE-1, Series EEEE and Series EEEE-1.
24
<PAGE>
DILUTION
Our unaudited pro forma net tangible book value as of December 31, 1999
was approximately $10.2 million, or $0.49 per share of common stock. Our pro
forma net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the shares of common stock
outstanding after giving effect to the conversion of outstanding shares of
preferred stock as of December 31, 1999. Our pro forma as adjusted net tangible
book value as of December 31, 1999, after giving effect to the issuance and
sale of 6,000,000 shares of common stock offered hereby after deducting
underwriting discounts and commissions and estimated offering expenses and
assuming the issuance of 1,333,333 shares of Series EEEE preferred stock and
1,333,333 shares of common stock in connection with the acquisition of
HomeBuilders Financial Network would have been $46.7 million, or $1.58 per
share.
This represents an immediate increase in pro forma net tangible book
value per share of $1.09 to existing stockholders and an immediate dilution per
share of $8.42 to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $10.00
Unaudited pro forma net tangible book value per share at December
31, 1999........................................................ $0.49
Increase in unaudited pro forma net tangible book value per share
attributable to new investors and acquisition of HomeBuilders
Financial Network............................................... 1.09
-----
Unaudited pro forma as adjusted net tangible book value per share
after the offering and acquisition of HomeBuilders Financial
Network......................................................... 1.58
------
Dilution per share to new investors............................... $ 8.42
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis, as of
December 31, 1999, the number of shares of common stock purchased in this
offering, the aggregate cash consideration paid and the average price per share
paid by existing stockholders for common stock and by new investors purchasing
shares of common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 20,879,580 71% $ 79,790,000 48% $ 3.82
HFN stockholders......... 2,666,666 9 26,667,000 16 $10.00
New investors............ 6,000,000 20 60,000,000 36 $10.00
---------- --- ------------ ---
Total.................. 29,546,246 100% $166,457,000 100%
========== === ============ ===
</TABLE>
The foregoing discussion and tables assume no exercise of any stock
options. As of December 31, 1999, there were outstanding options to purchase a
total of 2,842,312 shares of common stock with a weighted average exercise
price of $5.35 per share. To the extent that any of these options are
exercised, there may be further dilution to new investors. The foregoing
discussion and tables also assume no exercise of any warrants. As of December
31, 1999, there were outstanding warrants to purchase a total of 648,885 shares
of common stock with a weighted average exercise price of $9.80 per share,
outstanding warrants to purchase a total of 68,053 Series B Preferred Stock
convertible into 68,053 shares of common stock with a weighted average exercise
price per share of $1.95 per share, outstanding warrants to purchase a total of
53,333 Series D Preferred Stock convertible into 53,333 shares of common stock
with an exercise price of $7.50 per share and outstanding warrants to purchase
a total of 44,444 Series E preferred stock convertible into 44,444 shares of
common stock with an exercise price of $9.00 per share. To the extent that any
of these warrants are exercised, there may be further dilution to new
investors.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, our financial statements,
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated balance sheet data set
forth below as of December 31, 1998 and 1999 and the consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999 are
derived from, and are qualified by reference to our audited financial
statements included elsewhere in this prospectus. The consolidated balance
sheet data set forth below as of December 31, 1996 and 1997 and the
consolidated statement of operations data for the period from July 11, 1996
(inception) to December 31, 1996 are derived from and are qualified by
reference to our audited financial statements not included in this prospectus.
The historical results are not necessarily indicative of results to be expected
for any future period.
The following unaudited pro forma consolidated information reflects
statement of operations data for the years ended December 31, 1998 and 1999 as
if the acquisitions of Genesis 2000 and HomeBuilders Financial Network had
occurred on January 1, 1998 after giving effect to purchase accounting
adjustments. In addition, the December 31, 1999 pro forma as adjusted balance
sheet is unaudited. The pro forma as adjusted balance sheet reflects the impact
of the acquisition of HomeBuilders Financial Network including the issuance of
1,333,333 shares of Series EEEE preferred stock and 1,333,333 shares of common
stock and the sale of 6,000,000 shares of common stock that we are offering
under this prospectus at an assumed per share offering price of $10.00, after
deducting the underwriting discounts and commissions and estimated offering
expenses, and application of the net proceeds.
<TABLE>
<CAPTION>
Actual Pro Forma
------------------------------------------- ------------------
Inception
(July 11, 1996) Years Ended
Through Years Ended December 31, December 31,
December 31, --------------------------- ------------------
1996 1997 1998 1999 1998 1999
--------------- ------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transactions.......... $ -- $ 51 $ 1,224 $ 4,065 $ 5,505 $ 9,017
Other Internet and
e-commerce.......... 25 18 89 469 89 469
Software licenses and
maintenance......... -- -- -- 33 6,167 5,286
------ ------- -------- -------- -------- --------
Total revenues....... 25 69 1,313 4,567 11,761 14,772
Operating expenses:
Operations and cost of
revenues............ (35) (310) (4,367) (12,404) (6,674) (15,639)
Sales and marketing... (1) (571) (6,112) (17,926) (7,236) (19,132)
Technology, research
and development..... -- (970) (4,793) (9,674) (5,490) (10,391)
General and
administrative...... (38) (563) (1,172) (4,337) (3,615) (7,196)
Write-off of in-
process research and
development......... -- -- -- (1,900) -- --
Amortization of
goodwill and
intangible assets... -- -- (673) (1,032) (24,521) (23,746)
Amortization of stock-
based compensation.. -- -- (300) (1,943) (300) (1,943)
------ ------- -------- -------- -------- --------
Total operating
expenses........... (74) (2,414) (17,417) (49,216) (47,836) (78,047)
------ ------- -------- -------- -------- --------
Loss from operations.. (49) (2,345) (16,104) (44,649) (36,075) (63,275)
Other income
(expense), net...... 1 (18) 89 (382) (894) (413)
------ ------- -------- -------- -------- --------
Net loss before
provision for
income taxes....... (48) (2,363) (16,015) (45,031) (36,969) (63,688)
Pro forma provision for
income taxes......... -- -- -- -- (131) (124)
------ ------- -------- -------- -------- --------
Net loss............. (48) (2,363) (16,015) (45,031) (37,100) (63,812)
Accretion on preferred
stock................ -- (70) (1,326) (4,803) -- --
------ ------- -------- -------- -------- --------
Net loss attributable
to common
stockholders......... $ (48) $(2,433) $(17,341) $(49,834) $(37,100) $(63,812)
====== ======= ======== ======== ======== ========
Net loss per share
attributable to
common stockholders,
basic and diluted.... $(0.09) $ (1.74) $ (11.66) $ (27.08) $ (3.15) $ (3.33)
====== ======= ======== ======== ======== ========
Shares used in
computing net loss
attributable to
common stockholders,
basic and diluted.... 547 1,402 1,487 1,840 11,791 19,135
====== ======= ======== ======== ======== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
December 31, as Adjusted
-------------------------------- ------------
December 31,
1996 1997 1998 1999 1999
---- ------- -------- -------- ------------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ -- $ 713 $ 10,157 $ 27,329 $ 70,679
Other current assets........... 30 970 813 4,484 4,925
Property and equipment, net.... 5 193 1,864 6,080 6,125
Total assets................... 38 1,906 14,275 63,245 149,622
Current liabilities............ 32 382 2,679 19,234 20,546
Long-term obligations, less
current portion.............. -- 70 334 8,183 13,183
Redeemable convertible
preferred stock.............. -- 3,878 31,665 94,123 --
Total stockholders' equity
(deficit).................... 6 (2,424) (20,403) (58,295) 115,893
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains certain forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated by these forward-looking statements due to
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview
iOwn is a leading Internet enabler of the home mortgage industry. Our
technology and content tools enable both businesses and consumers to streamline
the mortgage origination process and empower homeowners by providing them with
a better way to identify, purchase, finance and manage their most significant
asset, their home.
We were incorporated in California in July 1996 and reincorporated in
Delaware in September 1999. We began offering online services in July 1997 and
first derived revenues as an online mortgage broker in August 1997. In March
1998, we acquired HomeScout, a leading provider of home listings, and
subsequently incorporated it into our website as an additional free service to
consumers. In April 1999, we changed our name from HomeShark to iOwn,
reflecting our broadened strategy to incorporate products and services to cover
all aspects of the home buying process. On December 22, 1999, we acquired
Genesis 2000, Inc., a provider of loan origination software to mortgage
brokers. In addition, in December 1999, we entered into an agreement to acquire
HomeBuilders Financial Network, which provides loan services to home builders.
We derive our transactions revenues primarily from the brokering of home
loans. We charge a fixed processing fee, a credit report fee and a markup on
the lender's loan price. We recognize revenues when the loan is closed, at
which time we are paid by the lender. We derive additional transaction revenues
by directing customers to third parties and from transaction fees generated by
our ePASS, electronic pricing and submission system, through our Genesis 2000
software.
To date, we have generated transactions revenues primarily through our
consumer-direct channel. We reach customers online through our other market
channels, including Realtors, home builders, financial institutions, mortgage
brokers and relocation specialists. We expect to derive mortgage fees and other
revenues from these channels in the future.
We recently commenced mortgage banking operations. Our revenues from
these operations consist of proceeds in excess of the carrying value of the
loan, origination fees less certain direct origination costs, other processing
fees and interest paid by borrowers on loans that we hold for sale. These
revenues are recognized at the time the loan is sold. We expect to earn higher
revenues per loan from our mortgage banking operations as compared to our
existing brokerage loan operations.
We derive other Internet and e-commerce revenues from the sale of
advertising and sponsorship space on our website and fees from WebBuilder, our
website building service for mortgage brokers.
We derive software licensing and maintenance revenues from the sale of
Genesis 2000 loan origination software and annual maintenance contracts in
support of this software. We recognize revenue from the sale of loan
origination software at the time of shipment and amortize revenue from annual
maintenance contracts monthly on a straight-line basis over the 12-month terms
of the agreements. In July 1999, we reduced our license fees for Genesis 2000
software from an average of $2,500 to a fixed price of $895 as a strategy to
maintain or increase our market share. This price reduction resulted in an
immediate decrease in software licensing revenues.
Since inception, we have invested in attracting senior management,
developing products and product enhancements and expanding our sales and
marketing efforts. We have a limited operating history upon which
28
<PAGE>
investors may evaluate our business and prospects. We have incurred significant
losses to date, and as of December 31, 1999, we had an accumulated deficit of
$69.7 million. We intend to expend significant financial and management
resources on developing additional products and services, increasing sales and
marketing activities, improving our technologies and expanding our operations.
As a result, we expect to incur additional losses and negative cash flow for
the foreseeable future. Our revenues may not increase or even continue at their
current levels, and we may not achieve or maintain profitability or generate
cash from operations in future periods. Our prospects should be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stages of development.
Due to our limited operating history and our recent growth, it will be
necessary for us to implement new operational, financial and administrative
systems and control procedures to enable us to expand, train and manage our
employees and coordinate the efforts of our underwriting, accounting, finance,
marketing and operations departments. For example, we will need to implement
both a new financial reporting system and a loan origination system within the
next 12 months.
Acquisitions. In December 1999, we acquired Genesis 2000, Inc., a
provider of point-of-sale software for loan prequalification, origination,
processing and tracking for mortgage brokers. The software uses web
connectivity to access pricing, application documents and loan status for loan
approvals. Genesis 2000 was established in 1990 and is headquartered in
Calabasas, California.
The total purchase price was $26.2 million, which included (1) 833,331
shares of common stock with an estimated fair value of approximately
$6.8 million, (2) 833,331 shares of Series EEE preferred stock with an
estimated fair value of approximately $7.5 million, (3) $1.0 million in
collateralized promissory notes, (4) $8.8 million in promissory notes
convertible at the election of the holder into shares of common stock to be
issued at the close of the next equity financing at the then established price
per share and (5) acquired liabilities and closing costs aggregating $2.1
million. We have set aside 550,000 shares of common stock in an escrow account
to cover contingent indemnification obligations, if any. The acquisition
agreement provides for payments up to $6.0 million over the next two fiscal
years upon achievement of Genesis 2000 performance targets. We will treat these
earn-out payments, if any, as additional purchase consideration, which will
increase our goodwill charges in the future. The total purchase price includes
$791,000 in tangible assets, $12.5 million in intangible assets and $12.9
million in goodwill. We will amortize intangible assets using a straight-line
method over periods ranging from 18 to 48 months and goodwill using a straight-
line method over 36 months. An independent, third-party valuation was performed
and used to determine the above allocations.
In December 1999, we entered into an agreement to acquire HomeBuilders
Financial Network, which assists home builders in establishing captive mortgage
operations. HomeBuilders Financial Network establishes and manages these
operations on behalf of home builders, and in return, receives either a fee for
services or a distribution based on a joint venture interest. Additionally,
HomeBuilders Financial Network provides a range of centralized services to
these captive operations, including loan underwriting, closing and secondary
market functions, for which it receives fee income directly from the captive
operations. HomeBuilders Financial Network was established in 1995 and is
headquartered in Miami Lakes, Florida. The closing of HomeBuilders Financial
Network acquisition is contingent upon the completion of this offering.
The total purchase price of approximately $44.2 million includes (1)
1,333,333 shares of common stock with an estimated fair value of approximately
$13.3 million, (2) 1,333,333 shares of Series EEEE preferred stock with an
estimated fair value of approximately $13.3 million, (3) $2.7 million of cash,
(4) a $13.3 million promissory note, and (5) acquired liabilities and closing
costs aggregating $1.6 million. The acquisition agreement provides for an earn-
out of up to $17.0 million over the next two years based on the growth of
HomeBuilders Financial Network's revenues and pre-tax earnings. We will treat
these earn-out payments, if any, as additional purchase consideration, which
will increase our goodwill charges in the future. The total purchase price
includes $697,000 in tangible assets, $12.8 million in intangible assets and
$30.7 million in goodwill. We will amortize intangible assets using a straight
line method over periods ranging from 24 to 60 months and goodwill using a
straight-line method over 36 months. An independent, third-party valuation was
performed and used to determine the above purchase price allocations.
29
<PAGE>
Amortization of Stock-Based Compensation. Under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock-Based Compensation," we
recognize compensation expense based on the difference, if any, between the
fair value of our stock on the date of each option grant and the exercise price
of the option. We granted stock options during the years ended December 31,
1998 and 1999 which are considered to be compensatory for financial accounting
purposes. We amortized and expensed compensation associated with these stock
options on an accelerated basis over the applicable vesting period of the stock
options. We expect to record amortization of stock-based compensation of
approximately $2.4 million and $1.2 million for 2000 and 2001, respectively.
The actual amount will depend on the number of options granted and their
exercise price.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues increased by $3.3 million to $4.6 million in
1999 from $1.3 million in 1998. The increase was primarily due to higher
numbers of loan closures, which increased to 3,200 in 1999 from 1,028 in 1998,
and greater transaction revenue, which increased by $2.8 million, and to
increased revenues from the sale of advertising and sponsorship which rose to
$294,000.
Pro forma total revenues increased by $3.0 million to $14.8 million in
1999 from $11.8 million in 1998. Of the total increase, iOwn accounted for $3.3
million and HomeBuilders Financial Network accounted for $670,000. These
increases were partially offset by a decrease in Genesis 2000 revenues of
$900,000 resulting from the decision to reduce software licensing fees in an
attempt to expand market share. One major client of HomeBuilders Financial
Network accounted for 34% of its revenues. The loss of this client would likely
have an adverse impact on our business.
Operations. Operating expenses primarily consist of compensation and
benefits for loan processing personnel, credit report expenses, document
shipping and handling, rent and other overhead expenses related to our contact
management center. Operating expenses increased $8.0 million to $12.4 million
in 1999 from $4.4 million in 1998. The increase was primarily due to growth in
loan processing personnel and related expenses in line with increases in loan
volume. During 1999, we also added key management personnel and established a
new contact management center in Martinez, California.
Pro forma operating expenses increased by $8.7 million to $14.5 million
in 1999, from $5.8 million in 1998. In addition to an $8.0 million increase for
iOwn, HomeBuilders Financial Network operating expenses increased by $664,000
in 1999. HomeBuilders Financial Network's business growth resulted in
corresponding increases in operations, personnel and related expenses. We
expect that operating expenses will increase in the future as we hire
additional personnel, expand our facilities and incur associated expenses to
support our anticipated growth.
Pro Forma Cost of Revenues. Pro forma cost of revenues increased by
$264,000 to $1.1 million in 1999 from $828,000 in 1998. The increase was
primarily due to the higher revenue volume of Genesis 2000.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and benefits, advertising, trade shows and promotional activities,
as well as allocated rent and overhead expenses. Sales and marketing expenses
increased $11.8 million in 1999 to $17.9 million in 1999 from $6.1 million in
1998. The increase was primarily due to: an increase in advertising and
distribution costs of approximately $9.2 million; an increase in personnel
costs of $1.0 million; allocated rent and overhead expenses of $900,000; and
higher expenditures for trade shows and other marketing and promotional
activities, including public relations aggregating to $654,000.
Pro forma sales and marketing expense increased by $11.9 million to $19.1
million in 1999 from $7.2 million in 1998. The increase was primarily due to
iOwn sales and marketing activities.
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Technology, Research and Development. Technology, research and
development expenses primarily consist of: compensation and benefits for
engineering, product development and information services personnel; data
telecommunications; outside professional advisors; and allocated rent and other
overhead expenses. Technology, research and development expenses increased $4.9
million to $9.7 million in 1999 from $4.8 million in 1998. The increase was
primarily due to: hiring additional personnel, resulting in increased
compensation costs of $2.9 million; and expansion of our website
infrastructure, resulting in an increase of $1.4 million. We expect to make
significant investments in technology for the foreseeable future.
Pro forma technology, research and development expenses increased $4.9
million to $10.4 million in 1999 from $5.5 million in 1998. The increase was
primarily due to our research and development activities, the costs of which
were expensed as incurred.
General and Administrative. General and administrative expenses primarily
consist of compensation and benefits for finance, administrative and human
resources personnel, fees for professional advisors and allocations for
overhead. General and administrative expenses increased $3.1 million to
$4.3 million in 1999 from $1.2 million in 1998. The increase was primarily due
to: hiring additional administrative personnel resulting in increased
compensation costs totaling $1.1 million; costs relating to our engagement of
professional advisory services of $1.6 million; and allocated rent and overhead
expenses of approximately $400,000.
Pro forma general and administrative expense increased $3.6 million to
$7.2 million in 1999 from $3.6 million in 1998. In addition to our $3.1 million
increase in general and administrative expense, HomeBuilders Financial
Network's growth resulted in an increase of $303,000 during 1999. We expect
that general and administrative expenses will increase in the future as we hire
additional personnel, expand our facilities and incur associated expenses to
support our anticipated growth.
Write-off of In-Process Research and Development. In connection with the
acquisition of Genesis 2000, we incurred a one-time, nonrecurring charge for
writing off in-process research and development totaling $1.9 million.
Amortization of Goodwill and Intangible Assets. In March 1998, we
acquired assets, including intellectual property, relating to the HomeScout
service. These assets are being amortized over a 30-month period. Amortization
expenses increased $359,000 to $1.0 million in 1999 from $673,000 in 1998. The
increase was primarily due to: recording a full year of amortization relating
to the acquisition of HomeScout; and recording $224,000 in amortization expense
in 1999 resulting from the acquisition of Genesis 2000 in December 1999.
Pro forma amortization of goodwill and intangible assets decreased
$775,000 to $23.7 million in 1999 from $24.5 million in 1998. Intangible assets
acquired in connection with the Genesis 2000 acquisition are being amortized
over periods ranging from 18 to 40 months, resulting in some assets being
amortized for a full year in 1998 compared to only a partial year in 1999.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation expense increased by $1.6 million to $1.9 million in 1999 from
$300,000 in 1998. This increase was due to the increase in the number of stock
option grants and the deemed fair value of our common stock.
Other Income (Expense), Net. Our other income (expense), net decreased by
$471,000 to ($382,000) in 1999 from an income of $89,000 in 1998. The decrease
was primarily due to additional interest expense of $479,000 resulting from
borrowings made under an equipment lease line and line of credit with a
financial institution.
Pro forma other income (expense), net increased by $481,000 to ($413,000)
in 1999 from ($894,000) in 1998. The increase was primarily due to a decrease
of $513,000 in pro forma interest expense on notes payable to the prior owners
of Genesis 2000 and HomeBuilders Financial Network following principal paydowns
made on the notes in 1998 and 1999.
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Provision for Income Taxes. As of December 31, 1999, we had net operating
loss carryforwards of approximately $57.0 million for federal and $37.0 million
for state income tax purposes. Provisions for income tax, if any, would
represent the minimum state franchise tax.
The pro forma provision for income taxes totaled $131,000 and $124,000
for the year ended December 31, 1999 and 1998, respectively, representing the
state franchise taxes applicable to Genesis 2000 and HomeBuilders Financial
Network.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased $1.2 million to $1.3 million in 1998
from $69,000 in 1997 due to a $1.2 million increase in transactions revenues as
the number of closed loans increased from 38 to 1,028.
Operations. Operating expenses increased $4.1 million to $4.4 million in
1998 from $310,000 in 1997. This increase was primarily due to a $3.1 million
increase in operations payroll and related expenses and a $1.0 million increase
in non-payroll related loan processing costs. Both increases were attributable
to processing a higher number of closed loans.
Sales and Marketing. Sales and marketing expenses increased $5.5 million
to $6.1 million in 1998 from $571,000 in 1997. This increase was primarily due
to an increase of: $3.3 million from the initiation of new strategic
relationships with a number of our online distribution partners; $1.2 million
in expenditures for trade shows and other marketing activities, including
public relations, offline advertising and customer research; and $750,000 in
payroll and related expenses, including the addition of several management
level positions, and associated recruiting costs.
Technology, Research and Development. Technology, research and
development expenses increased $3.8 million to $4.8 million in 1998 from $1.0
million in 1997. This increase was primarily due to: a $3.0 million increase in
payroll and related expenses; and an $800,000 increase in consulting and other
expenses to support the expansion of our website infrastructure.
General and Administrative. General and administrative expenses increased
$600,000 to $1.2 million in 1998 from $563,000 in 1997. This increase was
primarily due to: a $380,000 increase in payroll and related expenses for
finance, administrative and human resources personnel; a $180,000 increase in
consulting and professional services; and a $40,000 increase in occupancy and
other costs related to an increase in the square footage leased at our
corporate headquarters in San Francisco, California over the same period.
Amortization of Goodwill and Intangible Assets. We amortized $673,000 in
connection with the March 1998 acquisition of assets, including intellectual
property assets, relating to the HomeScout service. We had no amortization
expense in 1997.
Amortization of Stock-Based Compensation. We amortized $300,000 of stock-
based compensation in 1998. We had no amortization expense in 1997.
Other Income (Expense), Net. Other income (expense), net increased by
$107,000 to $89,000 of income in 1998 from an expense of ($18,000) in 1997.
This increase is primarily due to an increase of $167,000 in interest income
earned on our cash and cash equivalent balances, offset by an increase of
$60,000 in interest expense due to increased borrowings under capital leases.
Provision for Income Taxes. The provision for income taxes in 1998 and
1997 represents minimum state income and franchise taxes. At December 31, 1998,
we had $15.4 million of net operating loss carryforwards for federal and state
income tax purposes, which begin to expire in 2018 and 2005, respectively.
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Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
private placement of our preferred stock and, to a lesser extent, through
equipment financing. Through December 31, 1999, we have raised approximately
$80.4 million through equity financings. As of December 31, 1999, we had $27.3
million in cash and cash equivalents.
We have had negative cash flows from operating activities since
inception. Net cash used in operating activities was $2.1 million, $13.4
million and $36.9 million in 1997, 1998 and 1999, respectively. Cash used in
operating activities in each of these periods primarily resulted from net
operating losses and increases in prepaid expenses, partially offset by
increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $59,000, $3.3 million and $2.5
million in 1997, 1998 and 1999, respectively. Net cash used in investing
activities in each of these periods primarily related to purchases of property
and equipment. In addition, we purchased HomeScout in 1998 for $2.0 million.
Net cash provided by financing activities was $2.9 million, $26.2 million
and $56.5 million in 1997, 1998 and 1999, respectively. Net cash provided by
financing activities in each of these periods primarily related to the sale of
preferred stock and, to a lesser extent, equipment financing, partially offset
by repayments of capital lease obligations on the financed equipment. We also
borrowed on our line of credit and made advances on our warehouse line of
credit during 1999.
As of December 31, 1999, our principal commitments consisted of
obligations outstanding under operating leases and marketing service agreements
with our strategic online distribution partners. Under these marketing
agreements, our partners display the iOwn logo and certain of our products and
services on their websites with direct links to our website. We pay for these
services in minimum required monthly and quarterly installments in addition to,
in some cases, a per-click charge for each time a customer clicks on one of the
iOwn links and/or a per gross lead charge for each loan application that is
submitted by a customer using the co-branded website. As of December 31, 1999,
future minimum payments under these obligations were approximately $13.1
million in 2000, $6.8 million in 2001, $2.2 million in 2002 and $2.1 million in
the aggregate thereafter.
During 1997, 1998 and 1999, we obtained equipment lines of credit with
various financial institutions totaling, in aggregate, approximately $4.8
million. These lines of credit are secured by our fixed assets and generally
have three-year terms that expire at various times between February 2000 and
October 2002. As of December 31, 1999, the aggregate amount outstanding under
these lines of credit was $3.6 million. These borrowings are due in monthly
installments through October 2002. As of December 31, 1999 future minimum
principal and interest payments under capital lease agreements are
approximately $1.8 million in 2000, $1.6 million in 2001 and $1.0 million in
2002. Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures and lease
commitments consistent with our anticipated growth in operations,
infrastructure and personnel.
In 1999, we entered into a line of credit agreement with Comdisco Inc. to
draw up to $5.0 million in operating loans. We borrowed $2.5 million in
September 1999 and the remaining $2.5 million in November 1999. These
borrowings are paid down in equal monthly installments through September 2002
and December 2002, respectively. As of December 31, 1999, future minimum
principal payments under this line of credit are approximately $1.5 million in
2000, $1.7 million in 2001 and $1.7 million in 2002.
During 1999, we entered into an agreement with Bank United of Texas for a
$10.0 million warehouse line. We currently use the warehouse line to fund
mortgage loans and to capture potential incremental revenues by acting as a
mortgage banker for such loans. The funds borrowed under this commitment are
secured by the related mortgage loans. This agreement includes various
financial and non-financial covenants. As of
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December 31, 1999 we had $1.9 million outstanding under the warehouse line of
credit, and subsequently the Company increased the warehouse line of credit to
$50.0 million. The term of the warehouse line of credit was extended to May 8,
2000. We are in discussions with several other lenders to obtain additional
warehouse lines of credit.
On December 22, 1999, we acquired Genesis 2000, a provider of loan
origination software to mortgage brokers, and entered into a definitive
agreement to acquire HomeBuilders Financial Network, a provider of loan
services to home builders. These acquisitions involve principal commitments as
follows:
. $8.8 million in convertible promissory notes, of which $1.0 million
was paid in January 2000, the remainder of which will become due upon
the completion of this offering, and all of which bear interest at
6.0% per annum;
. a $13.3 million promissory note, which bears interest at the prime
rate plus 1% per annum, with $4.6 million of principal and related
interest due at the end of the quarter in which this offering is
completed, and $1.3 million of principal and related interest due at
the end of each of the following seven quarters;
. $2.7 million of cash payable at the closing of this offering;
. $1.0 million in promissory notes payable monthly over 24 months
beginning December 1999, bearing interest at 6.0% per annum; and
. approximately $3.7 million in acquired liabilities and closing costs.
In addition to the above promissory notes, the acquisition agreements
provide for earn-outs. Our earn-out arrangements for the Genesis 2000
acquisition provide for a maximum of $5.0 million at the end of 2000 and $1.0
million at the end of 2001. The year 2000 earn-out is payable in cash after the
release of year 2000 results. The year 2001 earn-out is payable $625,000 in
cash and $375,000 in common stock, based on the fair value of the common stock
during specified periods prior to payment, after the release of year 2001
results. These earn-outs are contingent upon the achievement of Genesis 2000
financial targets.
Our earn-out arrangements with HomeBuilders Financial Network provide for
a maximum of $17.0 million in payments based upon achievement of revenue and
earnings growth over eight quarters commencing upon completion of the
acquisition. This earn-out is payable 50% in cash and 50% in common stock,
based on the fair value of the common stock during specified periods prior to
payment. Payments, if any, will be made at the end of each quarter upon the
achievement of predetermined targets.
We believe that our available cash and cash equivalents combined with the
net proceeds from this offering will be sufficient to meet our anticipated
needs for working capital and capital expenditures for at least the next 12
months. In the event that this offering is not completed, we will need to
obtain additional sources of capital to fund our operations, and we may be
required to reduce operating expenses. In the event that we elect to develop
additional new services or products or acquire or invest in complementary
businesses, we may need to raise additional funds. If we require additional
capital resources, we may seek to sell additional equity or debt securities or
obtain a bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders.
Furthermore, there can be no assurance that any financing arrangements will be
available in necessary amounts or on acceptable terms, if at all.
Disclosures About Market Risk
The residential real estate and mortgage industry is sensitive to swings
in the national economy in general and interest rate movements in particular.
In a high interest rate environment, consumer demand for mortgage loans
declines, particularly with respect to refinancing of existing mortgages. A
significant rise in interest rates could therefore have a negative impact on
our volume of closed loans. As such, interest rate movements represent the
primary component of our market risk.
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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 we cannot process the loan within this timeframe and
interest rates increase, we may honor our original rate commitment in order to
maintain customer satisfaction, which may result in a loss on the sale of the
loan. With the exception of pre-selling loans through best-efforts commitments,
we currently do not engage in any hedging activities. All loans that we fund
are held for sale. Draw-downs on our warehouse lines are repaid 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.
Recent Accounting Pronouncements
In December 1986, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting
for Non-Refundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases." SFAS No. 91 establishes the
accounting for nonrefundable fees and costs associated with lending, committing
to lend, or purchasing a loan or a group of loans. Under SFAS No. 91, direct
loan origination costs, net of loan origination fees, are recognized as a
reduction of the loan's yield over the earlier of the life of the related loan
or the sale of the loan. In effect, SFAS No. 91 requires that origination fees
be offset by their related direct loan costs and that net deferred fees be
recognized over the earlier of the life of the loan or the sale of the loan,
whether the loan is sold through securitization or on a whole basis. As we
initiate mortgage banking activities this statement will begin to affect us.
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP No. 98-1 did not have a material impact on our financial statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
SFAS No. 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interest in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer. SFAS No. 125 provides implementation guidance for assessing isolation
of transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishment of
liabilities. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 and
is to be applied prospectively.
We do not anticipate this statement having any material effect on
financial statements until the business decision to retain servicing and or
aggregate loans for securitization purposes has been made. Neither of these
activities have been contemplated at this time.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. To date, we have not
engaged in derivative and hedging activities. We will adopt SFAS No. 133 as
required on January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition". This SAB summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The Company is
evaluating the future impact of the SAB on its consolidated financial position
and results of operations.
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BUSINESS
Overview
iOwn is a leading provider of Internet technology and content tools to
streamline the mortgage origination process for businesses and consumers. Our
strategy is to create a business-to-business mortgage industry hub that will
allow retail mortgage originators to access a broader range of capital sources
efficiently, and deliver a higher quality of tailored customer service to their
end consumers. We believe that our solution also allows wholesale lenders to
fund or purchase loans more efficiently, which can improve both their
profitability and service delivery and empowers homeowners by providing them
with a better way to identify, purchase, finance and manage their most
significant asset, their home.
We deliver our services through a range of distribution channels to many
of the traditional participants in the real estate transaction, including
Realtors, home builders, relocation services, financial institutions and
traditional mortgage brokers, as well as directly to the consumer through our
iOwn.com website. We believe that our multi-channel distribution approach
allows us to reach the broadest possible group of homeowners and prospective
homeowners and provides us with a strategy to Internet-enable a diverse cross-
section of mortgage industry participants. We have established consumer-direct
distribution arrangements with online leaders such as AOL's Netscape/Netcenter
and Digital City, Inc., AT&T and NBCi/Snap!. In addition, as of March 31, 2000,
we accessed the computer desktops of over 12,000 mortgage brokers through our
Genesis software and distribution partners and we provided mortgage services
for 15 national home builders with over $2.0 billion in new home sales. In
1999, we originated approximately $1.5 billion in mortgages.
Industry Background
The Internet. The Internet has emerged as a significant global medium for
communications and commerce. According to International Data Corporation, or
IDC, the number of home Internet users in the United States will increase to
101.2 million in 2002 from 30.5 million in 1997. The Gartner Group estimates
that all business-to-business electronic commerce will grow to $7.3 trillion
worldwide in 2004.
The online mortgage market is expected to benefit from the growth in
Internet users and commerce. Forrester Research estimates the online mortgage
market in the United States will grow to over $91.2 billion in 2003,
representing approximately 10% of total U.S. mortgage originations, from $18.7
billion in 1999, or approximately 1.5% of total U.S. mortgage originations.
The Real Estate Industry. The real estate industry accounts for
approximately 15% of the gross domestic product of the United States. Home
ownership in the United States is at record levels, with approximately 67% of
households owning homes in 1999, according to Fannie Mae. Fannie Mae also
forecasts that the combined sales of new and existing homes will reach 5.7
million in 2000. Home sales consist of two major types of transactions: the
construction and sale of new homes by home builders, and the resale of existing
residential properties by their owners.
Sales of new homes reached a record high in 1999 of 904,000 homes,
according to Fannie Mae. The home building industry is highly fragmented, and
while the market share of the nation's largest builders has been increasing,
the majority of homes are built by smaller regional builders. Many of the
largest builders provide a range of ancillary services, such as mortgage, title
insurance and escrow services to their home buyers.
Sales of existing homes have averaged 4.5 million homes per year over the
last 3 years. Most buyers and sellers of existing homes use the services of a
licensed real estate professional, or Realtor while approximately 20% of homes
are sold by the owner without the services of real estate professionals. There
are over 700,000 active Realtors in the United States, most of whom work as
independent contractors for real estate brokerage firms. Many of these firms
are independent firms and brands, but there has been a growing trend towards
franchising, including national brands such as RE/MAX and Century21. Many
brokers have responded
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to increased competitive pressures by providing ancillary services, such as
mortgage, title insurance and escrow services to improve their margins.
Realtors also share home listing information through approximately 800 regional
multiple listing services, which are increasingly available through the web. In
addition, many households relocate with the assistance of a corporate
relocation program. These programs are either managed in-house by the
corporation or by an outside specialist. Often these specialists select and
manage the real estate professionals and other service providers involved in
the relocation.
Homeowners typically need many after-market and ancillary services,
including products such as title insurance and appraisal services, additional
related services such as home warranty products and fire insurance, and other
products including home improvement and home equity loans. There is a
significant number of ancillary service providers in this highly-fragmented
market.
The Mortgage Industry. Approximately $4.4 trillion in residential
mortgage debt was outstanding in 1999. The overall market for new mortgage
originations in the United States averaged more than $1.0 trillion annually
from 1995 to 1999. This market has two distinct segments that can be broadly
categorized into a market for purchase originations that has grown at an
average annual rate of 19% from 1995 to 1999, according to the Mortgage Bankers
Association, and a more cyclical and interest-rate sensitive market for
refinancings. Favorable interest rates increased the demand for refinances in
1998. As a result of increasing interest rates and fewer refinances, the
overall mortgage market declined to approximately $1.3 trillion in 1999.
Historically, local banks originated most mortgages. Over time, the
traditional mortgage origination market split into two types of originators:
large, national mortgage banks and smaller, local mortgage originators. While
many large mortgage banks have continued to grow their direct origination
capabilities, none had a retail market share greater than 8% of total U.S.
retail mortgage originations in 1999 and most of their growth has come from the
development of wholesale channels to aggregate loans originated by local
mortgage originators. In contrast, mortgage brokers originated approximately
70% of the market of mortgage originations in 1998 according to the Wholesale
Access Report.
Some traditional mortgage originators have created Internet offerings to
promote and sell their loans directly to consumers online as an alternative to
the traditional process. These offerings tend to be limited in that they
generally do not provide a choice of lenders or comparison of products to the
consumer. Further, such offerings often fail to provide to consumers a range of
self-service tools that allow them to shop for and conveniently apply for a
mortgage online but tend simply to provide contact and other information about
the traditional mortgage originator. In addition, launching an Internet
offering may involve significant channel conflict issues for traditional
mortgage industry participants, as they may be unable or unwilling to compete
with prices available online or to promote online loan processing services that
might undermine their existing business. Further, they may be unable or
unwilling to make the significant investments required to build an online
offering successfully.
A number of companies have created websites that offer a selection of
multiple lenders. However, many of these websites simply refer customers to
their chosen lender for processing. Accordingly, these companies have
difficulty ensuring consistent and superior service delivery. Since
commissioned loan agents are typically involved in these transactions, these
companies are often unable to reduce significantly the costs to the consumer of
securing a mortgage. In addition, few traditional banks have made significant
progress in streamlining their relationships with retail mortgage originators
through the use of technology, particularly the Internet. Many mortgage
originators use a desktop software solution to enable their loan originations.
Most providers of loan origination software have been slow to adapt to or
incorporate the Internet into their offerings to streamline the origination
process for their customers.
Limitations of the Conventional Home Buying Process
The information flow in the traditional home buying process is
decentralized, causing each buyer to make decisions and monitor the status of
the process by personally consolidating information from other sources. This
presents significant challenges for consumers and the industry as a whole.
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Issues for Consumers. Buying a home has traditionally been a confusing
and time-intensive process, characterized by high transaction costs. Home
buyers often find it difficult to identify a home that meets their needs. Once
a home buyer finds a suitable home, he or she is faced with the complex process
of obtaining a mortgage and satisfying closing conditions. This process is
paper-intensive and frustrating, particularly for first-time home buyers. The
complexity of this process often compels prospective home buyers to seek
assistance from real estate agents and mortgage brokers, who may have
inconsistent levels of expertise. We believe this process leaves many consumers
feeling:
. uncertain that they are receiving unbiased advice;
. skeptical that rates initially quoted will ultimately be available;
. intimidated by the number and variety of mortgage products available;
. frustrated with the amount and types of fees they are required to pay;
and
. overwhelmed by the substantial time and effort and the vast amount of
information that must be processed in order to get a mortgage loan.
Issues for Realtors. Many Realtors focus on creating a personal brand to
generate referrals within their local market. They do this by acquiring new
customers, providing them with superior service and maintaining that
relationship to generate follow-on business. Because they depend on a variety
of service providers, many Realtors have difficulty ensuring the quality of
their customers' experience with these service providers. Further, because
homeowners buy or sell infrequently, most Realtors spend heavily to generate
new customer leads. Many Realtors do not have access to technologies that can
make their customer interaction more efficient, such as Internet-based loan
status applications.
Issues for Home Builders. We believe that one of the most difficult
challenges facing home builders in selling new homes is assisting home buyers
in financing the prospective home, as well as overcoming inefficiencies in the
mortgage financing process which result in costly delays and lost sales. Many
builders require access to financing outlets with multiple loan products in
order to meet the financing needs of disparate new home buyers. As a result,
builders seek third-party mortgage solutions that will provide them with more
operational control, better customer service and new profit opportunities.
Issues for Relocation Companies. Relocation companies look to third
parties to supply an array of real estate-related products and services.
Traditionally, such third-party service providers have operated principally on
a local or regional level. Accordingly, relocation companies have faced
variability in the scope, reliability and stability of these outsourced
services and have not been able to achieve the scale and efficiencies of
national service providers.
Issues for Mortgage Brokers. A typical mortgage broker has relationships
with a limited number of lenders and transacts a substantial portion of his or
her business by phone and facsimile. The mortgage broker must compare rates
from multiple sources, collate the data, differentiate the various offerings
and then provide that information to consumers. However, the broker often lacks
software productivity tools that would enable them to do this more efficiently.
Not surprisingly, most mortgage brokers do not maintain a website that
aggregates information and makes that information available in a convenient and
efficient manner to the consumer.
Issues for the Mortgage Industry. Traditional mortgage companies
generally rely on branch offices and legacy systems. Therefore, we believe they
have not experienced cost reductions to the same extent as companies in the
banking and stock brokerage industries. Prior to the introduction of Internet
mortgage offerings featuring reduced brokerage fees, there had been less
pressure on the industry to cut costs and operate more efficiently. Some
industry participants may not have the financial or other resources necessary
to respond to these challenges.
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The iOwn Solution
We are an Internet enabler of the home mortgage industry. Our technology
tools enable a streamlined mortgage origination process for businesses and
consumers, and empower homeowners with better ways to identify, purchase,
finance and manage their most significant asset, their home. Our proprietary
Internet technology applications enable retail mortgage originators to access a
broad range of wholesale and correspondent lenders. We are creating a business-
to-business mortgage industry hub that we believe will allow retail originators
to access a wide range of capital sources effectively and to deliver a high
quality of tailored customer service to their end consumers. We believe that
our solution allows wholesale lenders to fund or purchase loans more
efficiently, which can improve both their profitability and service delivery.
We deliver our products and services through multiple channels, including
our website, www.iown.com, and our relationships with mortgage brokers, real
estate agents, home builders and relocation companies. Our multi-channel
distribution approach allows us to:
. Internet enable a broad cross-section of mortgage brokers and other
real estate professionals; and
. reach a broad group of homeowners and prospective homeowners.
We believe that we are the first business-to-business enabler of the
mortgage industry, and the only company with an integrated set of business-to-
business-to-consumer channels for distribution of home mortgages and related
home ownership services.
Benefits to Mortgage Brokers. We offer mortgage brokers a range of
services designed to help them be more productive and profitable. By providing
mortgage brokers with online tools, we allow them to provide a compelling
customer service experience more efficiently. For example, through our Genesis
2000 software, a leading desktop suite of point-of-sale loan origination
software tools, we allow mortgage brokers to originate and track mortgages.
Through our ePASS service, we provide mortgage brokers with easy online access
to a wide range of wholesale mortgage offerings and settlement services. This
service helps reduce their costs, while improving the level of service that
they can deliver to their customers.
In addition, we provide mortgage brokers with a range of marketing tools
to help them grow their customer base by leveraging the capabilities of the
Internet. For example, our WebBuilder service enables mortgage brokers to
maintain a high-quality Internet presence to market themselves to consumers,
providing both online content and mortgage tools. Through our Mortgage411.com
service and through the iOwn.com website, we provide a range of tools for
mortgage brokers to capture additional leads, including helping consumers who
want to shop online but receive local service to reach a qualified mortgage
professional.
Benefits to Financial Institutions. Most financial institutions need an
efficient vehicle for acquiring loan assets. We offer a range of new, low-cost
distribution channels that make it easier for lenders to broaden their
geographic reach, spread their risk and reduce transaction costs by
streamlining the loan closing process. Additionally, we provide lenders with
dynamic pricing flexibility and online brand exposure. Through our ePASS online
wholesale lending service we can also help lenders deliver their services to
their existing mortgage brokerage customers more efficiently.
In addition, for those financial institutions that wish to provide their
customers with a full suite of consumer financial services, but who do not
have, or do not wish to invest in, the development of mortgage capabilities, we
provide an efficient way to provide a high-quality Internet-based service to
their customers. We partner with financial institutions to provide both online
mortgage processing capabilities and co-branded or private label websites for
those institutions seeking to develop online offerings. For example, we are
currently the exclusive online mortgage provider for the Canadian Imperial Bank
of Commerce's MarketPlace Bank subsidiary in the United States.
Benefits to Real Estate Professionals. We provide real estate
professionals with an additional channel to acquire customers cost effectively
and enable them to provide those customers with a higher level of service.
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Our home listing service, HomeScout, acts as a search engine that refers users
directly to a real estate agent's or broker's website, allowing the agent or
broker to maintain and build his or her own online brand identity. Our free
online agent directory, AgentFinder, enables real estate professionals to
market themselves to online home seekers. Our prequalified and preapproved
customers also represent thousands of prospective home buyers that we direct to
our real estate agent partners.
We also enable real estate professionals to enhance the quality of
service they offer their customers. For example, HomeScout helps agents to sell
homes faster by making their listings available to a greater number of
qualified home buyers. By referring clients to us, agents can provide a loan
service with greater choice, more informative online tools and customer service
that is superior to traditional mortgage originators. We plan to develop other
compelling tools and services for real estate agents, such as online tracking
of the status of any particular loan.
Benefits to Home Builders. We offer home builders a range of services
designed to help them be more productive and profitable. Through our
HomeBuilders Financial Network subsidiary, we are able to offer builders a
complete solution, called the Preferred Correspondent Lender Program, through
which they may establish a captive in-house mortgage financing capability. This
facility enables home builders to provide dedicated services to home buyers,
while sharing in any profits generated by these mortgage origination services.
By providing more mortgage finance options we increase the pool of qualified
buyers and therefore enable builders to sell most homes. We also enhance their
operational control through dedicated service teams, which integrate the
mortgage origination process with the sale of the home. This integration
enables the home builder to sell larger homes with more profitable features by
better understanding the maximum mortgage loan for which the customer can
qualify.
By supporting captive, in-house mortgage operations with our consumer web
offerings and our online loan processing capabilities, we intend to enable the
home builder to deliver a superior experience to the home buyer. We can readily
qualify and approve a prospective new home buyer through a website which we
provide for the home builder. In addition, through HomeScout, we intend to
offer our builder partners a more robust opportunity to showcase their new
homes online.
Benefits to Consumers. We have created a service which we believe enables
the consumer to have a cheaper, faster and easier transaction experience,
regardless of the channel they use to receive our service. Relative to
traditional service offerings, the combination of our online transaction
capabilities and our content, tools and personalization features creates a
comprehensive and compelling approach to homeownership.
Product Selection and Cost Savings. We provide access to mortgages from a
selection of competitively-priced national and regional lenders, 24 hours per
day, seven days a week, based on individualized search criteria. We streamline
the mortgage process by leveraging the electronic communication capabilities of
the Internet and by automating our back-end mortgage processing and access to
the capital markets. We believe this will allow us to deliver mortgages at a
significantly lower cost to the customer than traditional services and, as a
result, to maintain and potentially increase the consumer's cost savings.
Compelling Content and Guidance. We empower the consumer with a range of
informative and compelling content that enables them to make informed decisions
regarding their home purchase and mortgage financing. For example, our
HomeScout service aggregates one of the largest selections of real estate
property listings on the Internet. Our relationships with real estate
professionals and aggregators of real estate listings have resulted in
approximately 700,000 properties being listed for sale on our website. We also
provide home buyers with access to important neighborhood information, such as
neighborhood and school district comparisons and detailed demographic data for
over 1,000 counties covering over 90% of the U.S. population.
Value-Added Self-Service Tools. Using our online tools, consumers are
able to access guidance on many of the decisions they encounter in the home
buying process. Consumers can determine whether to rent or buy, the price of a
home they can afford, and the optimal mortgage for their needs. Each of these
analytical
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tools provides recommendations based on buyer-provided information, without the
potential bias of commissioned sales agents. Our self-service tools enable home
buyers to efficiently identify, purchase and finance a home in complete
privacy, on their own time and without the pressures of the traditional home
and mortgage sales process. Our proprietary tools, including AgentFinder,
RateShopper and LoanStatus, provide our customers with powerful solutions that
distinguish us from both content-only websites and mortgage transaction-only
focused websites.
Superior Customer Service. Our goal throughout the mortgage experience is
to combine exceptional customer service with leading edge technology to provide
a superior customer experience. In contrast to many websites that refer
customers to third-party lenders, we believe that processing the complete
mortgage transaction and controlling the entire customer service experience is
the best way to provide a consistently high level of service quality.
Strategy
Our objective is to Internet-enable the mortgage industry. We are
building a business-to-business mortgage industry hub to allow retail mortgage
orginators to access a broader range of capital sources, at lower cost, more
efficiently, and to deliver higher quality services tailored to their
customer's needs. Key elements of our strategy include:
Create the Business-to-Business Mortgage Industry Hub for Wholesale
Lending. We intend to expand the participants in and services offered by our
business-to-business wholesale lending hub. We are working with a wide variety
of lenders across our multiple service offerings. We also are working to
transition our existing lenders to this hub, while seeking new lender
participants. We intend to add new features to the service that further enhance
lenders' ability to communicate with local originators regarding products,
pricing and underwriting, while enabling them to provide enhanced service
levels at lower costs. We expect to work with other industry organizations to
support and encourage the growth of this hub.
Expand and Grow Our Business-to-Business-to-Consumer Channels. We plan to
continue to grow our customer base and mortgage originations by extending our
technology infrastructure to all parties who traditionally participate in the
home buying process. This will include extending our existing channels which
serve traditional mortgage brokers, real estate agents, home builders, and
relocation companies, as well as adding new channels. We believe that operating
multiple integrated channels allows us to reach, and ultimately Internet
enable, a larger portion of the mortgage market than we would be able to reach
were we to operate in a single channel. For example, we intend to enhance the
tools and services we provide to local mortgage brokers through our Genesis
2000 software to increase the number of brokers using our business-to-business
hub as well as the number of transactions enabled by that hub. Through
HomeBuilders Financial Network, we intend to add solutions targeted to small
and mid-size home builders which we currently do not serve.
Develop iOwn as a Leading Brand. We intend to build the iOwn brand around
the complete homeownership experience, in order to reach the broadest range of
consumers with an extensive set of products and services. This branding
strategy positions us as the objective provider of useful tools and content for
both businesses and consumers throughout the homeownership lifecycle. We use a
mix of online and off-line media, including print media and radio spots, as
well as aggressive public relations efforts. We also have distribution
relationships with more than 20 online media partners and a network of
affiliate websites. We plan to expand our distribution partnerships, to include
new relationships with real estate professionals and with websites targeting
homeowners.
Capture Cross-Channel Synergies. We intend to create synergies among our
channels. For example, we refer customers who come to our iOwn.com website, and
who may need face-to-face assistance, to local mortgage brokers and real estate
agents, and we encourage these brokers and agents to become users of our online
tools and content. Further, because we provide content and tools on the web
sites of our real estate and mortgage industry partners, these partners often
direct customers to our consumer website. We expect to create and capture such
channel-related synergies for each of our channels over time.
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Expand Revenues and Profitability on Each Transaction. We intend to
increase our per-transaction revenues and profitability over time. For example,
we recently began underwriting, funding and selling our own mortgage loans,
which we believe will enable us to increase revenue per transaction and
operating margins while improving customer service. In addition, we are
pursuing opportunities to increase the range of customers with whom we do
business by expanding or adding product lines such as sub-prime mortgages, home
equity credit lines and construction loans. We also intend to improve our
effectiveness in cross-selling for each transaction and to provide a greater
range of ancillary services. These services may include appraisal, title and
escrow services, as well as home equity loans, home warranties and home
improvement services. By providing a greater range of services, we provide
benefits to both homeowners and to mortgage brokers who utilize our business-
to-business hub to aid them in serving their end customers.
Leverage Our Technology Leadership to Further Streamline the Real Estate
Transaction. We intend to extend out technology leadership by continuing to
invest in research and development to ensure that our systems are scalable to
meet the current and future needs of both real estate professionals and online
customers. Our proprietary software is based on state-of-the-art web-enabled,
scalable systems. By incorporating automated underwriting with our proprietary
software and linking directly with many settlement services providers, we
increase our ability to expedite the loan approval process and reduce borrower
documentation requirements. As we continue to integrate the Genesis 2000 loan
origination system with our web-based loan application systems, we expect to
strengthen our technology leadership position on the mortgage broker's desktop.
The iOwn Service
The iOwn service consists of a business-to-business hub for wholesale and
correspondent lending, integrated with an online service for homeowners and
homeownership-related services. Both business-to-business and business-to-
business-to-consumer offerings are delivered through a range of tailored
channels to reach a broad range of home buyers and homeowners.
We are involved in mortgage transactions in any of three ways:
. as a pure business-to-business technology enabler between local
mortgage originators and wholesale mortgage lenders;
. as a wholesale provider of mortgages to local originators on behalf of
correspondent lenders or capital markets sources; and
. as a retail originator of mortgages directly to a consumer on behalf
of both wholesale and correspondent lenders and capital markets
sources.
Our business-to-business hub provides us opportunities to cross-sell
ancillary services such as appraisals, title insurance and home warranties on
each of these transactions increasing service quality, revenues and margins.
Our consumer-direct online services empower homeowners by providing them
with a better way to identify, purchase, finance, manage and sell their home,
including:
. a wide selection of mortgages from leading lenders;
. online home listings and neighborhood information;
. informative tools and content; and
. referrals to a range of highly-qualified real estate professionals.
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Marketing and Distribution
We intend to increase our customer base and mortgage originations by
extending our technology infrastructure to the parties who traditionally
participate in the home buying process, including real estate agents, home
builders, relocation companies and mortgage brokers. We plan, through third-
party channels, to reach and ultimately to Internet-enable, all significant
processes in the real estate market. Our mortgage broker, home builder and
consumer channels operate under a unified marketing strategy, with channel-
specific implementation. Each channel has a targeted independent sales force
offering tailored products to their specific markets.
We intend to leverage each transaction to establish a broader
relationship with each homeowner, attempting to create a customer for life, by
delivering to them a range of tailored content and services which help them to
maximize their homeownership experience, and which builds in their mind iOwn as
a branded provider of all of their homeownership-related needs. We are building
the iOwn brand around the complete homeownership experience, rather than around
the specific mortgage financing event. Over time, we believe this branding
strategy will enable us to reach the broadest range of consumers with the
broadest set of products and services.
Third-Party Channels
In addition to our iOwn.com website, we reach customers through a range
of third-party channels, including real estate agents, home builders,
relocation companies, financial institutions and mortgage brokers. We typically
deliver these services in any of three ways:
. by providing a range of Internet-enabling technologies and capital
markets solutions to a partner with an existing mortgage operation,
such as we provide to mortgage brokers through our Genesis 2000
subsidiary;
. by providing a complete Internet-based outsourcing solution as our
partner's primary mortgage partner, such as we provide for CIBC's
MarketPlace Bank; or
. by setting up and managing a captive mortgage operation for a partner
that leverages our Internet technologies and capital markets access,
such as we provide for leading home builders like Beazer Homes through
HomeBuilders Financial Network.
For each of these models we have the ability to offer a range of
customized service offerings, including some or all of the following:
Co-Branded Websites. We have created over 50 co-branded websites for
various partners, each designed to create an integrated online home buying
experience. We also assign dedicated customer service teams to our partners to
extend the tailored experience from the initial online point of contact through
to loan closure.
Partner Promotion. We promote our partners' services and help them to
succeed by integrating their services into our consumer offerings. For example,
our HomeScout and AgentFinder services promote our Realtor partners and their
home listings, helping them to market themselves cost-effectively and sell
homes more quickly. Our Mortgage411.com service helps mortgage brokers capture
those consumers who prefer to shop online, but wish to work with a local
provider for loan fulfillment. We believe that these types of programs enable
us to establish effective long-term relationships with real estate
professionals.
Specialized Service Capabilities. We can tailor our service delivery to
meet the specific customer service needs of individual partners or specific
channels. For example, in serving some relocation companies, we bill the
sponsoring corporation directly, rather than charging the relocating employee
upon the closing of their loan transaction.
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Capital Markets Access. We can offer some of our partners, and their
customers, access to superior loan pricing and delivery mechanisms. By
aggregating the volume of our smaller financial institution, mortgage broker
and home builder partners, we can access the capital markets with greater scale
and with greater technical integration than any of them would otherwise be able
to achieve on their own.
Loan Origination Technologies. We provide our partners with a range of
leading technologies for loan origination through a combination of centralized
online loan-processing capabilities and a suite of loan origination tools such
as our Genesis 2000 LOS.
Our Mortgage Broker Channel--Genesis 2000 and iOwn Broker Connect
Through our Genesis 2000 subsidiary, we are an industry pioneer in
providing mortgage brokers with point-of-sale loan origination and tracking
software and Internet-based mortgage services. Over 7,000 mortgage brokers
across America currently use Genesis 2000 software to help them sell, process,
track and close mortgages. Our Genesis 2000 software automates key steps in the
mortgage process, from loan prequalification to printing documents and
delivering files to lenders. Brokers can also create customized forms and
templates and calculate fees.
The latest version of our Genesis 2000 software increases mortgage broker
efficiency by connecting to a range of mortgage services through the Internet.
Using our ePASS service, mortgage brokers can submit loans to Freddie Mac for
instant automated underwriting, order title and other settlement services and
interact with lenders for electronic pricing, rate locks and document delivery.
Furthermore, Genesis 2000 facilitates communication between mortgage brokers
and their customers through an embedded email system called MortgageMail.
Finally, Genesis 2000 helps mortgage brokers generate leads and service
customers through the Internet via a website development and hosting service
called WebBuilder, which integrates with the Genesis 2000 desktop system.
In the future we expect to offer mortgage brokers the following
additional benefits: (1) expanded electronic lender pricing and loan
fulfillment through our iOwn Broker Connect offering; (2) a wide range of
mortgage and home buying content for the websites built through WebBuilder; and
(3) access to iOwn customers who may prefer to shop online for mortgage rates,
but have their mortgage through an offline mortgage broker. This latter service
is known as Mortgage411.com.
Further we are expanding our distribution of both the iOwn Broker Connect
and ePASS services by partnering with other loan originating software
companies. For example, through our partnership with NetUpdate we provide
portions of our business-to-business wholesale lending hub to mortgage brokers
that use the LoanUpdate and ByteOnline solutions. Byte currently has over 5,000
active users.
With our business-to-business-to-consumer strategy, we believe we have an
advantage over competitors whose success depends entirely upon the growth of
the consumer-direct online mortgage business. We expect to leverage our online
assets to serve both the consumer-direct and business-to-business segments of
the mortgage industry and expand our revenue and mortgage volume more rapidly
than if we had only one distribution channel.
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The following chart describes certain key features and benefits of our Genesis
2000 services:
<TABLE>
<CAPTION>
Feature Description Benefit
- --------------------------------------------------------------------------------
<S> <C> <C>
Genesis LOS . Provides point-of-sale loan . Eases mortgage process for
Software origination services, including mortgage brokers by automating
prequalification, form key steps in origination and
preparation and generation, fee processing, increasing
calculators and loan tracking efficiency and service quality
and helping manage customers
and loans more effectively
- --------------------------------------------------------------------------------
ePASS . Provides Internet-based . Speeds delivery of information
connectivity to a wide-range of and loan decisions to the
mortgage providers, settlement mortgage broker and increases
service providers and Freddie efficiency and convenience over
Mac traditional processes
. Allows mortgage brokers to . Improves service response time
transfer loan files while lowering cost to serve
electronically to facilitate customers
detailed loan pricing and rate
locks, automated underwriting
and ordering
- --------------------------------------------------------------------------------
WebBuilder . Provides customized websites . Assists mortgage brokers in
for mortgage brokers, including lead generation by providing a
loan calculators, mortgage rate high-quality, credible Internet
information and loan presence
application
. Allows customer leads to be . Simplifies and facilitates
imported directly into Genesis conversion of customer from
2000 software lead to applicant
- --------------------------------------------------------------------------------
Mortgage411.com . Aggregates online directory of . Provides lead generation to
local mortgage brokers with mortgage brokers and access to
WebBuilder sites otherwise unavailable marketing
leverage
. Provides Genesis 2000 users . Provides the convenience of
with access to a "supermarket" accessing multiple lenders
of lenders with wholesale through one provider
pricing and electronic delivery
for mortgage brokers
- --------------------------------------------------------------------------------
iOwn Broker Connect . Provides electronic rate . Provides better wholesale
quotes, loan locks, loan pricing through our aggregation
delivery and loan status of volume
. Increases efficiency and
service levels through
electronic interaction
</TABLE>
Our Home Builder Channel--HomeBuilders Financial Network
We work with home builders across the country to establish and manage
captive mortgage loan origination operations. The management team of
HomeBuilders Financial Network pioneered the concept of setting up and managing
mortgage operations for local and regional home builders. These operations are
typically owned or affiliated with the home builders and are referred to as
captive loan origination businesses. These operations are designed to enable
home builders to realize the potential benefits of an in-house mortgage
operation, such as
. increased sales by giving home buyers access to competitive pricing
through a broad range of lenders and products, thereby increasing the
pool of qualified buyers;
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. increased operational control during the sales process, enabling the
home builder to sell larger homes with more profitable features by
better understanding the maximum mortgage loan for which the customer
can qualify;
. increased profits as a result of the home builders' share of potential
mortgage origination profits; and
. increased customer satisfaction by providing customers of the home
builder with a one-stop shopping environment for both purchasing a
home and obtaining a loan.
Our current client base, which includes several of the top 100 builders
in the country, sold approximately $2.0 billion of new homes in 1999, and we
originated approximately $1.0 billion in mortgage loans.
We believe that our operations improve on traditional mortgage operations
in several respects. First, we provide the captive operation with a mechanism
for integrating the mortgage origination process into the home sales effort.
This frequently results in a capture rate (the percentage of home sales for
which the mortgage is also sold) approaching 75-80%, which significantly
increases volume and reduces sales costs. Second, we have replaced the role of
the traditional loan originator, who was typically paid a large commission on
each loan, with a lower cost customer service environment. Finally, we deliver
a range of centralized services, including access to the capital markets, that
provides these operations with the benefits of scale that most traditional
mortgage operations are unable to match. Accordingly, we believe our captive
mortgage operations are more profitable than traditional mortgage operations,
even after accounting for HomeBuilders Financial Network's management fees
and/or share of profits.
We believe that the combination of our leading Internet-based services
with HomeBuilders Financial Network's tested model for captive mortgage
operations further differentiates us as an alternative to traditional mortgage
originators for most home builders. This will also enable us to expand our
offerings to currently underserved segments of the home building industry,
particularly the smaller, local builders.
Our Preferred Correspondent Lender Program provides an extensive menu of
services to support home builders:
<TABLE>
<CAPTION>
Feature Description Benefit
- --------------------------------------------------------------------------------
<S> <C> <C>
Set-Up Services . Establishes a new captive . Speeds implementation through
mortgage operation for the replication of a standard model
builder
. Coordinates legal and
regulatory requirements
. Hires and trains all staff
- --------------------------------------------------------------------------------
Management . Manages all aspects of the . Permits home builders to track
Services captive mortgage operation and measure efficiency,
customer satisfaction and
profitability from financing
activities
. Provides timely and meaningful . Permits home builders to focus
management reports on their core business of
building and selling homes
while participating in mortgage
origination profits
</TABLE>
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<TABLE>
<CAPTION>
Feature Description Benefit
- --------------------------------------------------------------------------------
<S> <C> <C>
Multi-Lender . Enables home builder to access . Facilitates greater home sales
Solution a wide range of loan programs by having a full menu of loan
programs to meet varied buyer
needs
. Secures attractive loan terms . Improves home builder's
from competing wholesale operational
investors results, e.g. faster starts,
lower
fall-out
. Provides easy prequalification
and preapproval to potential
home buyers
- --------------------------------------------------------------------------------
Centralized Support . Provides underwriting, closing . Provides a dedicated account
Services and post-closing functions on a resource team for support
centralized basis
. Manages lender relations, . Permits access to economies of
capital markets access and risk scale that might not otherwise
management functions be available
</TABLE>
Our Consumer-Direct Channel: iOwn.com
Customers enter the www.iown.com website and have two primary ways of
accessing our services. First, we provide tailored site paths for customers
that are purchasing or refinancing their home. Each of these paths contains
customized content, tools and transaction capabilities applicable to each
specific situation. The customer's experience is simplified by the use of a
path checklist which guides the customer through the various requirements of
buying or refinancing a home. The second major way to navigate our website is
to use our various self-serve tools directly. These key tools and features are
directly available from our home page and are prominently featured through a
range of quick links throughout the rest of our website.
Our consumer website provides a range of personalization and subscription
features that tailor our customer's experience, both initially and over time.
These features include dynamic page serving that adjusts the website to the
customer's prior actions, saved settings, password-protected data access, the
ability to reuse loan application data for new loans, and the delivery of
customized content through a range of opt-in and outbound email messaging
capabilities.
Buying a Home. We provide customers with a one-stop shopping destination
where they can access information and tools to assist them in deciding to buy,
shopping for or financing a home. Consumers can begin by using the Buying
Checklist, which breaks down the complicated home buying process into discrete
stages and allows consumers to directly access the tools of their choice. They
can then shop using our HomeScout service searching approximately 700,000 home
listings. Next they can compare mortgates from several lenders using our
RateShopper feature and apply online.
We also offer an easy-to-use online home loan application, which is
routed through our proprietary workflow automation system. Once a consumer
submits a loan application, he or she is contacted within 24 hours by a loan
specialist, who will be their primary point of contact for the remainder of the
home buying process. Also within 24 hours, this specialist will send the
consumer all necessary forms and guide them through the remaining stages of the
closing process, such as obtaining appraisals and title insurance and
completing the escrow period. After submitting their application, customers can
track their loan status online at anytime. Borrowers can also interact with our
customer service representatives either by email or telephone to check the
status of their loans or lock in interest rates.
Refinancing a Home. Consumers who already own a home can use our services
to refinance their existing mortgage. While the refinance loan application is
very similar to the purchase loan application, we also
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offer the homeowner specific tools designed to guide them through the
refinancing process. Our Refinance Check service will also compare a customer's
current loan with the loans available through us. Consumers can also sign up
for our RateWatch service, which sends automatic email updates of loan rates,
allowing them to conveniently monitor movements in interest rates to decide
whether or not it makes sense to consider beginning the refinancing process.
Consumer Products and Services. We provide current and prospective
homeowners with a broad selection of content and features to facilitate the
home buying process and to enrich homeownership:
<TABLE>
<CAPTION>
Feature Description Benefit
- --------------------------------------------------------------------------------
<S> <C> <C>
HomeScout . Enables search of approximately . Leverages investments others
700,000 up-to-date, national have made in hosting home
home listings listings
. Offers weekly email updates on . Encourages significant repeat
new listings for homes matching usage and provides an
customized search criteria opportunity to cross-sell early
in the buying process
- --------------------------------------------------------------------------------
Neighborhood . Facilitates school district . Provides valuable information
Information comparisons and provides and builds relationships with
detailed demographic profiles potential customers
for cities and towns
- --------------------------------------------------------------------------------
HomeSales . Provides searchable content on . Enables consumers to track
recent home sales recent home sales easily
. Sends automatic email updates . Provides continuous customer
information and interaction
- --------------------------------------------------------------------------------
Analytical Tools . Provides interactive tools, . Encourages repeat use of our
and Advice such as calculators covering website and empowers the
topics ranging from home consumer with information
affordability to selecting the
appropriate mortgage
- --------------------------------------------------------------------------------
Agent Center . Enables real estate agents to . Helps consumers find and
prequalify clients, add new evaluate real estate
home listings, include professionals
themselves in the agent
directory and read agent- . Creates free marketing
targeted news opportunities for agents
- --------------------------------------------------------------------------------
Resource Center . Provides co-branded information . Helps meet broader home-related
from leading service partners information needs of home buyer
such as insurance companies and or homeowner
home improvement centers
. Provides a single source for
ancillary services needed by
the home buyer or refinancing
customer
- --------------------------------------------------------------------------------
RateShopper . Provides customized rate quotes . Allows for clear comparisons of
and estimated closing costs for mortgage quotes between several
specific loans lenders
. Provides customized email . Provides full up-front
updates and alerts on loan disclosure of closing costs
rates
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Feature Description Benefit
- --------------------------------------------------------------------------------
<S> <C> <C>
Prequalification . Helps customers determine how . Explains in detail how the
expensive a home they can customer may improve the
afford likelihood of getting a loan
. Automatically carries over data
from RateShopper to the
prequalification database
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Preapproval . Enables consumers to receive a . Gives the consumer confidence
loan commitment without and a competitive edge when
limitation to a specific shopping for a home
property
- --------------------------------------------------------------------------------
Online Loan . Enables the consumer to provide . Allows consumers to apply for
Application virtually all the information mortgages 24 hours a day
required for a federally-
compliant loan application
. Enables consumers to save their . Enables consumers to submit
password-protected data within applications quickly and
a loan application efficiently
. Allows for copying or deleting . Allows consumer maximum
of loan applications convenience and control of
their application
- --------------------------------------------------------------------------------
LoanStatus . Permits 24 hour access to loan . Offers reassurance and reduces
status customer service inquiries
</TABLE>
iOwn.com's Customer Service
Our goal throughout the mortgage process is to effectively combine
exceptional customer service with leading-edge technology to provide a superior
customer experience. Each customer is assigned to dedicated iOwn personnel,
with specific regional expertise, to support his or her transaction and ensure
a positive home buying experience. Our customers have access to their
representatives through the phone, email, fax or mail. Through our LoanStatus
service, which is a password-protected feature, customers can monitor the
status of their loan online.
We are committed to continuous improvement through customer feedback.
Every customer receives a survey asking for feedback, including a rating of his
or her customer service experience. We continually use our customers'
evaluations in order to improve our processes and provide an exceptional
service experience.
We operate a contact management center in Martinez, California. We have
staff available on extended hours, 6 days per week, and we intend to increase
our coverage until we have staff available 24 hours a day, 7 days a week, in
response to increasing customer demand. We monitor and analyze our call
performance. This allows our managers to provide coaching and instruction to
our contact center employees, and to adjust and modify our ongoing training
programs. This monitoring, in conjunction with our customer satisfaction
research, allows us to identify areas for improvement and automation.
As a result of our continued investment in our proprietary technology
platform and workflow planning, we believe that we will be able to deliver a
superior customer service experience. We maintain an efficient and scalable
customer service environment relative to both traditional mortgage originators
and other online mortgage companies.
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<PAGE>
Mortgage Banking and Capital Markets
We intend to enhance our access to the capital markets to further improve
our competitive advantage on price, selection and service. For example, we
recently began underwriting, funding and selling our own mortgage loans, which
we believe will enable us to offer better customer service and increase our
operating margins. We currently offer mortgage products from 40 lenders
nationwide, and we intend to selectively extend the geographic reach and the
number of lenders we offer as part of our service offering. We believe that
offering a greater quantity of lenders does not necessarily lead to greater
quality for our customers. By proactively managing our lender relationships we
believe that we will be able to offer our customers not only high levels of
service, but also better pricing through volume discounts, internal scale
economies and tighter technical integration. In addition, we are pursuing
opportunities to increase the range of customers with whom we do business by
expanding or adding product lines such as sub-prime mortgages, home equity
credit lines and construction loans.
Mortgage Banking. The mortgage banking industry involves primarily two
businesses: origination and servicing. The origination business involves taking
a loan application, gathering and evaluating the relevant credit, down payment
and property information to make a loan decision, then providing funds to
close, and delivering the loan to the end investor in the secondary market.
Servicing a loan occurs after the loan has been made and involves collecting
principal and interest payments, assuring that adequate insurance is maintained
on the property, handling prepayment collections and handling foreclosures.
We are currently licensed or otherwise eligible to engage in mortgage
finance activities as a mortgage broker in 49 states and the District of
Columbia. We are licensed as a mortgage banker in 49 states and the District of
Columbia and have an application pending in the state of New York. When we act
as a mortgage broker, we originate and process our customers' loan
applications. When we act as a mortgage banker we also underwrite, fund and
sell mortgages to our customers' chosen lenders. Whether acting as a mortgage
banker or broker, we offer the customer a choice of lender, product, and terms.
We initiated mortgage banking operations in October 1999, and now operate as a
mortgage banker in 49 states and the District of Columbia. We expect to act as
a mortgage banker for a majority of the loans we originate. We believe that as
a mortgage banker we will eventually have the ability to offer more timely
customer service and increase our operating margins.
We fund loans from our warehouse credit line provided by Bank United of
Texas. This line may be used to fund loans for a short period of time while we
package the loans for sale to our customers' chosen lenders. We are in
negotiation with Bank United of Texas, and several additional providers of
warehouse lines, to increase both the number and size of our warehouse line
facilities. In March 2000, Bank United of Texas increased our line of credit to
$50 million. We are currently in discussions with a number of other potential
providers for additional warehouse facilities.
Sale of Loans and Servicing Rights. We intend to sell the loans we fund,
typically within 30 days of origination, rather than hold them for investment.
We currently sell our loans to our customers' chosen lenders. From time to
time, we may elect to work with one or more of our correspondent lenders, where
volume permits, to co-issue mortgage-backed securities or assignment of trades
with Freddie Mac and Fannie Mae. We do not currently securitize our loans,
although we may decide to do so in the future if market conditions or other
considerations justify doing so.
We do not currently retain the rights to service the mortgages we
originate and sell. We transfer the servicing to the customer's chosen lender
when we sell the loan. In the future, we may elect to sell a loan directly to
an end investor, usually Freddie Mac or Fannie Mae, and concurrently transfer
the servicing to the lender chosen by the customer. In the future, we may
choose to retain the servicing on some loans, or to sub-service the loan on
behalf of the chosen lender or investor. Such a strategy would provide us with
new opportunities for additional, stable revenue streams, but would also
subject us to additional risks.
We attempt to limit our exposure to certain risks related to lending by
delivering, selling or swapping loans to others. The lenders to whom we sell
our customers' mortgages subject us to general representations
51
<PAGE>
and warranties contained in our selling agreements with these lenders. These
representations and warranties may require us to repurchase loans if an early
payment default occurs, an underwriting defect exists or other material defects
exist. We reduce our repurchase risk through our extensive use of automated
underwriting systems available through Fannie Mae and Freddie Mac and our loan
quality control process. To reduce the risks related to loans to customers with
less-than-perfect credit, we fund these loans only with a firm approval from
the end lender or investor.
Approach to Risk Management. Our current approach to risk management is
to limit the level of risk to which we are exposed as a mortgage broker or
banker. When we fund loans, we potentially subject ourselves to interest rate
risk on mortgages that we originate and close prior to delivery of these loans
to the customers' chosen lenders. Interest rate risk results from price changes
in market interest rates which impact the value of loans that we are obligated
to fund. If interest rates rise, the value of loans we are obligated to fund
declines. If interest rates decline, the borrower may decide not to accept our
commitment to fund their loan. We currently reduce our interest rate exposure
by selling loans to the customers' chosen lenders in a "best efforts" delivery.
In a "best efforts" delivery, a customer's rate on a mortgage is locked with
their chosen lender at the same time the borrower requests a rate lock. We are
committed to the lender to deliver that loan for purchase if we actually fund
the loan. If we do not fund the loan, we have no obligation to deliver a loan
to the lender and have no exposure to interest rate risk.
In the future, we may elect to increase our revenue opportunities, and
correspondingly increase our risk, by switching to an approach of mandatory
delivery of loans to investors. Under mandatory delivery, we can elect to lock
the interest rate on a customer's mortgage with an investor of our choice and
pay a penalty fee if we fail to deliver the loan by the commitment expiration
date.
Quality Control. We have developed loan quality control policies and
procedures to monitor and report on the quality and accuracy of our loan
origination efforts. While this policy has not been tested thoroughly with
closed loan results, it has been reviewed by Fannie Mae and Freddie Mac as part
of their lender approval process. We employ experienced staff to monitor loan
quality and have developed a sampling process that we believe meets Fannie
Mae's and Freddie Mac's requirements for quality control plans. Our senior
management reviews quality control reports monthly to identify areas that need
corrective action or otherwise need improvement.
Government Regulation. The residential mortgage financing business is
highly regulated. Our business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities and government sponsored enterprises, including the
Department of Housing and Urban Development (HUD), the Federal Housing
Administration, the Veteran's Administration, Fannie Mae, Freddie Mac, Ginnie
Mae and various state regulatory authorities. These rules and regulations
impose obligations and restrictions on our loan origination and credit
activities, including the processing, underwriting, making, selling,
securitizing and servicing of mortgage loans.
Our lending activities also are subject to various federal laws,
including the Federal Truth-in-Lending Act and Regulation Z thereunder (TILA),
the Homeownership and Equity Protection Act of 1994, the Federal Equal Credit
Opportunity Act and Regulation B thereunder (ECOA), the Fair Credit Reporting
Act of 1970 (FCRA), the Real Estate Settlement Procedures Act of 1974 and
Regulation X thereunder (RESPA), the Fair Housing Act, the Home Mortgage
Disclosure Act and Regulation C thereunder (HMDA) and the Federal Debt
Collection Practices Act, as well as other federal statutes and regulations
affecting our activities. Our loan origination activities also are subject to
the laws and regulations of each of the states in which we conduct our
activities.
Under TILA, lenders are required to provide consumers with uniform,
understandable information concerning certain terms and conditions of their
loan and credit transactions. These disclosures include providing the annual
percentage rate, monthly payment amount and total amount financed, plus certain
disclosures concerning alternative mortgage transactions. In addition, TILA
gives borrowers, among other things, the right to rescind loan transactions in
certain circumstances if the lender fails to provide the requisite disclosure.
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<PAGE>
Under the Fair Housing Act and ECOA, creditors are prohibited from
discriminating against applicants on the basis of race, color, sex, age,
religion, national origin or marital status. The regulations under ECOA also
restrict creditors from requesting certain types of information from loan
applicants. FCRA requires lenders to supply applicants with certain
information, often referred to as an "adverse action notice," when the lender
denies the applicants' request for credit.
RESPA requires certain disclosures, including a good faith estimate of
closing costs and fees, as well as mortgage servicing transfer practices. RESPA
also prohibits the payment or receipt of kickbacks or referral fees, fee shares
or splits, or unearned fees in connection with the provision of real estate
settlement services. It is a common practice for online mortgage companies to
enter into advertising, marketing and distribution arrangements with other
Internet companies and websites whereby the mortgage companies pay the Internet
companies fees for such advertising, marketing and distribution services and
other goods and facilities based on the number of click-throughs, completed
loan applications or closed loans derived from such arrangements. The
applicability of RESPA's referral fee prohibitions to the compensation
provisions of these arrangements is unclear and the Department of Housing and
Urban Development has provided no guidance to date on the subject. Although we
believe that we have structured our relationships with Internet advertisers to
ensure compliance with RESPA, some level of risk is inherent absent amendments
to the law or regulations, or clarification from regulators.
Technology
We have built a technology infrastructure that uses the capabilities of
the Internet to streamline the shopping, application-taking, processing and
tracking of home finance-related transactions, while providing a platform for
extended online customer relationships. We have invested heavily in our
technology platform to ensure that our systems are scalable to meet the current
and future needs of both online customers and real estate professionals.
Website. Our website is constructed to maximize performance and maintain
service 24 hours per day, seven days per week through network optimization,
load balancing and website monitoring tools. We have two mirrored websites. One
is at AboveNet in Vienna, Virginia and one is at Frontier Global Center in
Sunnyvale, California. The Frontier Global Center location provides a state-of-
the-art secure building with redundant power, air conditioning and high
bandwidth telecommunications capacity. Our engineering group has developed a
data replication system that allows us to take traffic at both locations. We
have utilized the data replication capabilities of Microsoft SQL 7.0 and the
networking redundant traffic and switching functionality of F5 Networks 3DNS
geographic load balancer to enable mirroring. The existence of two mirrored
sites simultaneously taking traffic significantly improves our download time
and system uptime. The engineering staff monitors both sites with a combination
of external third-party and internally-developed tools. We use Keynote and Red
Alert on a continuous basis to assess the consumer experience and to compare
our performance with other websites. We also use a number of internally-
developed tools that are customized for our site and our applications. Our
mirrored website in Vienna, Virginia also provides us with disaster recovery in
the event the San Francisco, California area experiences a catastrophic event
that disables local telecommunication infrastructure.
Customer Management Intranet Solution. We have invested resources to
create a customer management intranet. This system is a combination of
application software, systems software and hardware designed to support our
customers after they have submitted a loan application. Our system consolidates
loan applications from a variety of sources, including our website, third-party
sources and applications through our toll-free number. It provides status on
loans for both internal loan processing personnel and consumers through our
website. The system can be accessed by our partners through the Internet and
acts as a central depository that allows us to produce reports tracking the
progress of all loans in our pipeline, regardless of application origin.
53
<PAGE>
Back Office Loan Processing Systems. We have made a significant
investment in integrating our website's front-end commerce engine with our
back-end loan processing systems. After a loan application has been submitted
on our website, it is automatically categorized and electronically sent to our
loan processing system and database. Details about the loan are also sent to a
proprietary reporting system to ensure that the loan is tracked properly from
inception to completion. We combine data from both the back-end loan processing
tracking mechanisms and our website activity tracking tools to internally
report on a variety of statistics, including new users, unique users, repeat
users, loan status and other loan-closing metrics. We are in the process of
integrating the Genesis 2000 LOS with our proprietary back office loan
processing systems.
Back Office Real Estate Systems. We partner with over 300 real estate
listing providers. To support these providers, we have created a system that
captures and updates real estate listings. These listings are filtered and then
posted on a daily basis to our main real estate database. We run reports
regularly from this database to determine listing count, origin breakdown,
click through to Realtors and application utilization.
Applications. We host a wide variety of home-related applications,
including advice about the home buying process, the ability to search for home
listings, home loan rate searches and the ability to submit an online loan
application. Several of these applications support a subscription customer base
that includes daily interest rate alerts, alerts for new home listings and
refinance recommendation alerts. Our web applications are all server-side
applications requiring little or no special consumer hardware or software.
Security. We use internally-developed systems for transaction processing
to maximize security. We believe that we provide a secure solution and intend
to continue to lead the industry in the safekeeping of customer data. All
financial transactions are secured though the use of Verisign server website
certificates and Secured Socket Layering 128-bit encryption. We provide
additional security through a proprietary password mechanism, as well as
through firewalls to ensure that our website serves only legitimate requests.
We follow a daily routine of tape backup. Our tape backups are stored off-site.
Competition
The market for web-based services is highly competitive and there are no
substantial barriers to entry, making it possible for new competitors to
proliferate rapidly. In addition, many of our existing and potential
competitors have longer operating histories in the traditional mortgage and
Internet markets, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Our business model focuses on improving efficiency and quality of service
delivery in both the retail and wholesale loan origination channels through
Internet-enabling the mortgage process. We believe competition takes place on
many levels, including pricing, convenience in obtaining mortgage loans,
breadth of product offerings and lending sources, customer service, marketing
and brand awareness. Our principal competitors include:
. traditional lenders and mortgage brokers with no online presence;
. traditional lenders and brokers that offer access to their mortgage
products over the Internet, such as BankAmerica, Countrywide and
General Motors Acceptance Corporation; and
. competitors in the online financial services sector including E-Loan,
mortgage.com and Intuit's QuickenMortgage.
Further, in establishing relationships with third-party partners, we
compete with several companies that specialize in providing services to
companies in each channel, including, for example:
. companies that generate leads from mortgage providers, including
LendingTree and Microsoft's HomeAdvisor;
. companies that are attempting to create wholesale lending
marketplaces, such as IMX Exchange, LoanTrader.com and openclose.com;
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<PAGE>
. companies providing loan origination software for mortgage brokers,
including Calyx, Contour and Byte; and
. companies specializing in captive mortgage operations for home
builders, including CTX and Norwest.
In addition, we compete with a variety of websites for customer awareness
and Internet traffic, some of which are also our partners and all of which
compete with us for awareness, including:
. websites that offer real estate listings and related services, such as
CyberHomes, HomeSeekers, Homes.com, Homestore.com and Microsoft's
HomeAdvisor;
. general purpose consumer websites such as Alta Vista, Excite, Lycos,
Infoseek and Yahoo! that offer real estate-related content;
. newspapers and magazines that advertise real estate listings; and
. other financial institutions that are partnering with mortgage brokers
to offer related services, such as DLJ Direct and Fidelity.
Intellectual Property
Trademarks and other proprietary rights are important to our success and
our competitive position. We currently have a number of trademarks and
copyrights. Although we seek to protect our trademarks and other proprietary
rights through a variety of means, we may not have taken adequate steps to
protect these rights. We may also license content from third parties in the
future, and it is possible that we could be subjected to infringement actions
based upon the content licensed from these third parties.
We typically enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our rights.
In November 1999, CheckFree Corporation introduced a financial software
product under the brand name "Genesis 2000," which we consider an unauthorized
usage of the Genesis 2000, Inc. registered trademark of "Genesis 2000" under
U.S. Registration No. 1,794,755. Our legal counsel has notified CheckFree
Corporation regarding their unauthorized usage of the "Genesis 2000" mark.
CheckFree has refused to withdraw their use of the mark. We may take legal
action to enforce the registered trademark of Genesis 2000.
Litigation
We are not party to any material litigation proceedings.
Employees
Combined with our subsidiaries, we employ 264 employees. As of April 30,
2000, iOwn, Inc. employed 215 full-time employees, of whom 116 were in
operations, 44 were in technology, 33 were in sales, marketing and business
development, and 22 were in finance and administration. As we continue to grow
our loan volumes and product offerings, we expect to hire a significantly
larger number of personnel, particularly in the areas of operations and
engineering. None of our employees are covered by collective bargaining
agreements. We believe that we maintain good relations with our employees.
As of April 30, 2000, Genesis 2000 employed 45 full time employees, of
whom 12 were in operations, 11 in technology, 14 in sales and 8 in general
administration. As of April 30, 2000, HomeBuilders Financial Network employed
45 full time employees, of whom 28 were in operations, 10 were in finance and
administration, 3 were in technology, and 4 were in marketing.
55
<PAGE>
Facilities
Our headquarters are currently located in a leased facility in San
Francisco, California consisting of approximately 25,000 square feet of office
space in a single building. In addition, we lease approximately 40,000 square
feet of office space in Martinez, California for our loan processing operations
and 3,000 square feet of office space in Santa Clara, California for
engineering functions.
Genesis 2000 has headquarters in Calabasas, California. HomeBuilders
Financial Network has headquarters in Miami Lakes, Florida.
The annual lease payments and lease expirations of our facilities
including our subsidiaries are presented in the table below:
<TABLE>
<CAPTION>
Year
---------------------------------------
2000 2001 2002 2003 2004 TOTAL
------ ------ ------ ------ ---- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Facilities:
San Francisco, CA....................... $ 865 $1,483 $1,385 $ 746 $630 $5,109
Martinez, CA............................ 620 642 654 667 111 2,694
Santa Clara, CA......................... 86 88 30 -- -- 204
Calabasas, CA........................... 106 -- -- -- -- 106
Miami Lakes, FL......................... 168 25 7 -- -- 200
------ ------ ------ ------ ---- ------
$1,845 $2,238 $2,076 $1,413 $741 $8,313
====== ====== ====== ====== ==== ======
</TABLE>
56
<PAGE>
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as
of April 30, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Edward P. Hoyt.............. 32 Chief Executive Officer and Chairman of the
Board
Paul Holmes................. 50 President, Chief Operating Officer and
Director
Harvey J. Auger............. 52 Vice President, Real Estate and Relocation
Marcia J. Donner............ 51 Vice President, Customer Service and
Operations
Kevin E. Flood.............. 48 Vice President, Engineering
Jennifer A. M. Marshall..... 33 Vice President, Product Development
Laura J. Pilz............... 48 Vice President, Marketing
Charles E. Reed............. 55 Vice President, Capital Markets
Ian Rose.................... 43 Vice President, General Counsel, Secretary
William M. Terry............ 56 Chief Financial Officer
Baron J. Wilhelm............ 46 Vice President, Affinity and Wholesale
Lending
Michael L. Zimmerman........ 33 Vice President, Consumer Channel
Thomas H. Meyer............. 49 Chief Executive Officer and President,
HomeBuilders Financial Network; Director
Kamyar Tafreshi............. 43 Chief Executive Officer and President,
Genesis 2000
K. David Chao(1)(2)......... 33 Director
Han J. Kim(1)(2)............ 34 Director
Stanley H. Rhodes(1)........ 51 Director
Scott A. Shay(1)............ 42 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Edward P. Hoyt was a co-founder of iOwn, and has served as our Chief
Executive Officer and as a member of our Board of Directors since our
inception. Mr. Hoyt currently serves as Chairman of our Board. From 1994 to
July 1996, Mr. Hoyt served as an Engagement Manager at McKinsey & Company, a
global business consulting firm. From 1990 to 1994, Mr. Hoyt served as a First
Lieutenant in the U. S. Army as an Infantry Platoon Leader and was trained as
an Airborne Ranger. Mr. Hoyt holds a B.A. in Politics and Economics from
Queen's College, Oxford University, where he was a Marshall Scholar, and a B.S.
in Economics from the U. S. Military Academy at West Point, where he graduated
first in his class.
Paul Holmes has served as our President, Chief Operating Officer and as a
member of our Board of Directors since October 1999. From March 1997 through
September 1999 he was President and Chief Executive Officer of Mellon Mortgage
Company, a mortgage lending company. From 1991 to March 1997, Mr. Holmes was
the Executive Vice President and Chief Operating Officer for EurekaBank, a
consumer banking and mortgage lending company. Mr. Holmes has also held senior
management positions at BancBoston Mortgage Corp., KPMG Peat Marwick and Bank
of America. Mr. Holmes has a B.A. in Mathematics and Computer Science from the
University of California at Berkeley and an M.B.A. from San Jose State
University.
Harvey J. Auger has served as our Vice President, Real Estate and
Relocation since April 1999. From January 1998 to April 1999, he served as
President and Chief Executive Officer of Nexx Financial Services, Inc., a
financial services relocation company. From August 1997 to December 1997, Mr.
Auger served as President and Chief Executive Officer of Amerus Home Services,
a real estate holding company. From February 1995 to August 1997, Mr. Auger
served as a real estate relocation consultant. From 1989 to January 1995,
Mr. Auger served as President of PHH Homequity, a relocation management
Company. Mr. Auger holds a B.A. in Sociology from Sacred Heart University.
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<PAGE>
Marcia J. Donner has served as our Vice President, Customer Service and
Operations since April 1999. Prior to joining us, Ms. Donner served over 25
years with Wells Fargo Bank, most recently as Senior Vice President and
Division Manager of the Technology Services Group from September 1998 to April
1999, and as Senior Vice President and Division Manager of Express Electronic
Banking from 1994 to September 1998. Ms. Donner holds a B.A. in Sociology from
California State University, Fullerton.
Kevin E. Flood has served as our Vice President, Engineering since
September 1997. From March 1995 to July 1997, he served as Vice President,
Engineering at Puma Technology, a software company. From 1987 to February 1995,
Mr. Flood served as the President of AI Squared, Inc., a software company. From
1980 to 1987, Mr. Flood served as Engineering Manager at Wang Laboratories, a
computer company. Mr. Flood holds a B.A. in History from the University of
Colorado.
Jennifer A. M. Marshall was a co-founder of iOwn, and has served us in
various executive capacities since our inception, including as our Vice
President, Marketing and Vice President, Product Development. From 1994 to
September 1996, Ms. Marshall was the Producer at Elliott Portwood Productions,
an educational software startup. From 1989 to 1993, Ms. Marshall worked in
marketing and communications at Microsoft Corporation. She holds an M.B.A. from
the University of California at Berkeley and a B.A. in English from the
University of Maryland.
Laura J. Pilz has served as our Vice President, Marketing since April
2000. From 1978 until April 2000, Ms. Pilz served in various marketing and
executive capacities with Bank of America, most recently as Vice President,
Brand and Communications for Small Business. From 1975 to 1978, Ms. Pilz was
employed by Mellon Bank. Ms. Pilz holds an M.B.A. in Finance and Accounting
from the University of North Carolina, Chapel Hill and a B.A. in Economics and
Political Science from Chatham College.
Charles E. Reed has served as our Vice President, Capital Markets since
January 1998. From January 1995 to January 1998, Mr. Reed served as Chief
Operating Officer and Partner at Tuttle & Co., a risk management and technology
company. From 1992 to January 1995, Mr. Reed served as Senior Vice President,
Director of Mortgage Banking at Bay View Federal Bank. From 1987 to 1992, Mr.
Reed served in various capacities, including, most recently as Executive Vice
President of Residential Loan Division at First Nationwide Bank. Mr. Reed holds
a B.S. in Business Administration from the University of Colorado.
Ian Rose has served as our Vice President, General Counsel since February
2000 and Corporate Secretary since March 2000. From July, 1999 to January, 2000
Mr. Rose served as General Manager of ZPass, Inc., a financial services start-
up. From September 1998 to June 1999, Mr. Rose maintained a private law
practice counseling clients in the software and internet services areas. Mr.
Rose was the Senior Vice President, General Counsel and Secretary of Mindscape,
Inc., a consumer software company, from June 1995 to September 1998. From March
1992 to May 1995, Mr. Rose served as General Counsel and Secretary of Capcom
USA, Inc., the North American arm of a major Japanese video game publisher. Mr.
Rose was an associate in the corporate, business and international practice
groups at the law firms of Baker & McKenzie from 1987 to 1989 and McCutchen,
Doyle, Brown & Enersen from 1989 to 1992. Mr. Rose holds a J.D. degree from
Columbia University School of Law and a B.A. in Asian Studies from Brigham
Young University.
WIlliam M. Terry was appointed our Chief Financial Officer in March 2000.
From February 1998 to February 2000, Mr. Terry was a finance and strategy
consultant to financial institutions. From December 1992 to January 1998, he
served at EurekaBank, a San Francisco area thrift--from February 1996 to
January 1998 as its EVP and Chief Financial Officer, and from December 1992 to
January 1996 as a board member, Finance Committee Chair and Audit Committee
member. From July 1991 to January 1996, Mr. Terry managed a consulting practice
providing finance and strategy guidance to banks, thrifts and securities firms.
From July 1990 to July 1991, he was a Senior Manager in Deloitte & Touche's
consulting practice in San Francisco. Mr. Terry was President of Diversified
Corporate Loans from July 1986 to July 1990. From February 1968 to July 1986,
he served in various capacities at Bank of America, most recently as a Senior
Vice President. Mr. Terry holds Masters and Bachelors degrees in Management
from MIT.
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Baron J. Wilhelm has served as Vice President, Affinity and Wholesale
Lending since October 1999. From November 1996 to October 1999, Mr. Wilhelm
served as Director of Residential Production for Mellon Mortgage, a national
mortgage company. From 1989 to November 1996, Mr. Wilhelm served with PNC
Mortgage Company, formerly known as Sears Mortgage, most recently as Vice
President, Wholesale and Correspondent Lending. Prior to his service at PNC
Mortgage Company, Mr. Wilhelm served as the Senior Vice President of Allied
Bancshares Mortgage, a mortgage banking company. Mr. Wilhelm holds a B.S. in
Business Administration from Roosevelt University.
Michael L. Zimmerman has served as our Vice President, Consumer Channel
since March 1997. From 1994 to February 1997, Mr. Zimmerman served as a
consultant at Bain & Company, an international strategy consulting firm. From
1992 to present, Mr. Zimmerman has been a director of Start-Up, Inc., a non-
profit organization that trains and funds low-income entrepreneurs. From 1991
to 1992, Mr. Zimmerman was the Regional Director for The One to One
Partnership, a national mentoring and youth entrepreneurship foundation. From
1989 to 1991, Mr. Zimmerman was a Financial Analyst, Investment Banking
Division at Goldman, Sachs & Co. Mr. Zimmerman holds an M.B.A. from the
Stanford University Graduate School of Business and a B.A. in American Studies
from Amherst College.
Thomas H. Meyer founded HomeBuilders Financial Network in January 1995
and has served as its President and Chief Executive Officer since that time.
Upon the closing of this offering, HomeBuilders Financial Network will become a
wholly-owned subsidiary of iOwn, and Mr. Meyer will remain the President and
Chief Executive Officer of that subsidiary. Additionally, Mr. Meyer will become
a member of our Board of Directors upon the effectiveness of this offering.
From 1992 to 1994, Mr. Meyer was Chief Executive Officer of Builders Funding
Corporation, a mortgage finance company. Prior to 1992, Mr. Meyer served as
Senior Vice President at J.I. Kislak Mortgage Corporation, a national wholesale
mortgage banking firm. Mr. Meyer has also held senior management positions at
DNA Plant Technology, an agricultural biotechnology firm, and at Sears World
Trade, the global trading subsidiary of the Sears Roebuck organization. Mr.
Meyer holds an M.B.A. in Marketing from the Wharton School of Business of the
University of Pennsylvania, an M.A. in International Management from the
University of Pennsylvania, and a B.A. in Philosophy from Syracuse University.
Kamyar Tafreshi was a co-founder of Genesis 2000, Inc., a mortgage
software company and a wholly-owned subsidiary of iOwn, and has served as its
Chief Executive Officer, President and Director of Software Development since
1990. Prior to 1990, Mr. Tafreshi worked as a software engineer for Cadam a
subsidiary of Lockheed Corporation, an aeronautics company. Mr. Tafreshi has
also served as an engineer for several large engineering firms in California,
including Bechtel International. Mr. Tafreshi is a registered professional
Engineer in the State of California and holds a B.S. and two M.S. degrees in
Engineering from the University of California, Los Angeles.
K. David Chao has served as a member of our Board of Directors since
November 1997. Since July 1997, Mr. Chao has served as General Partner of Doll
Capital Management, Inc., a venture capital investment firm. From January 1997
to July 1997, Mr. Chao served as a founding executive team member of Japan
Communication Inc., an advertising company. From 1993 to January 1997, Mr. Chao
served as an Associate and Engagement Manager for McKinsey & Company, a
management consulting firm. From 1988 to 1991, Mr. Chao held a variety of
marketing and product development positions with Apple Computer, Inc. Mr. Chao
holds a B.A. in Economics and East Asian Studies from Brown University and an
M.B.A. from the Stanford University Graduate School of Business.
Han J. Kim has served as a member of our Board of Directors since April
1999. Since January 1996, Mr. Kim has been a general partner of Altos Ventures
I, L.P., a venture capital investment company. From June 1994 to January 1996,
Mr. Kim was an associate at Booz Allen & Hamilton, a management and technology
consulting firm. In 1993, Mr. Kim was a planning analyst at Proctor & Gamble, a
manufacturer of household products. From 1987 to 1992, Mr. Kim served in the
U.S. Army, retiring as a captain. Mr. Kim holds an M.B.A. from the Stanford
University Graduate School of Business and a B.S. in Political Science from the
U.S. Military Academy at West Point.
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Stanley H. Rhodes has served as a member of our Board of Directors since
March, 2000. Mr. Rhodes has been the President of ABN AMRO Mortgage Group, Inc.
Mr. Rhodes also was a Branch Manager at First Savings of Ypsilanti, which
became InterFirst in 1983. He was promoted to Chief Executive Officer of
InterFirst in 1987, and InterFirst merged with ABN AMRO in May 1997. Mr. Rhodes
holds a B.S from West Virginia University.
Scott A. Shay has served as a member of our Board of Directors since
September 1998. Mr. Shay has been a Managing Director of Ranieri & Co., Inc., a
registered broker-dealer, since its formation in March 1998. Since January
1996, Mr. Shay has been a Director of a general partner of Cardworks, L.P., a
credit card issuer and servicer, and a Director of a general partner of Capital
Lease Funding, L.P., a specialized commercial mortgage bank since September
1995. Additionally, he has been a Director of Bank Hapoalim B.M. in Tel Aviv,
Israel since November 1997, Bank United Corp since December 1998 and Transworld
Healthcare, Inc. since January 1996. Mr. Shay was an Associate from August 1980
to December 1983, Vice President from January 1984 to December 1987 and a
Director from January to February 1988 at Salomon Brothers, Inc. Mr. Shay holds
a Master of Management Degree from the J.L. Kellogg Graduate School of
Management and a B.A. in Economics from Northwestern University.
Board Composition
Our certificate of incorporation and by-laws fix the number of members of
the Board of Directors at seven. Mr. Meyer has agreed to serve as a member of
our Board of Directors upon the effectiveness of this offering. There are no
family relationships among any of our directors and executive officers.
Board Committees
The Audit Committee of the Board of Directors reviews our internal
accounting procedures and consults with and reviews the services provided by
our independent accountants. The Audit Committee currently consists of Stanley
H. Rhodes, Scott A. Shay, Han J. Kim and K. David Chao.
The Compensation Committee of the Board of Directors reviews and
recommends to the Board of Directors the compensation and benefits of all of
our executive officers, administers our stock option plans and establishes and
reviews general policies relating to compensation and benefits of our
employees. The Compensation Committee currently consists of K. David Chao and
Han J. Kim, neither of whom are employees of the Company. We intend to add a
third member to the Compensation Committee within 90 days after the completion
of this offering.
Director Compensation
Our directors receive no cash compensation for their service as members
of the Board of Directors but are reimbursed for expenses in connection with
attending meetings of the Board of Directors or any committee thereof. We
provide no additional compensation for committee participation or special
assignments. Beginning with our annual meeting of stockholders in 2000, our
non-employee directors will receive options to purchase 2,222 shares of our
common stock pursuant to our 2000 Stock Incentive Compensation Plan for each
year of service as a director. Such options will be exercisable at a price
equal to the fair market value of our common stock as of the date of grant
which shall be our annual meeting and shall vest in full on the subsequent
annual meeting if such director is still serving in such capacity at that time.
See "--Stock Plans" and "--Certain Transactions."
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Executive Compensation
The following table sets forth the total compensation received for
services rendered to us during the fiscal year ended December 31, 1999 by our
Chief Executive Officer and four executive officers who received salary and
bonus in 1999 of more than $100,000. The executive officers listed in the table
below are referred to as the Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
------------------ -------------------
Securities
Underlying
Name and Principal Position Salary($) Bonus($) Options(#)
- --------------------------- --------- -------- -------------------
<S> <C> <C> <C>
Edward P. Hoyt..................................... $140,000 $ -- 120,833
Chief Executive Officer and Chairman of the Board
Lee T. Kirkpatrick(1).............................. 142,708 -- 73,332
Vice President, Finance and Administration;
Chief Financial Officer
Kevin E. Flood..................................... 135,625 -- 46,666
Vice President, Engineering
Charles E. Reed.................................... 142,708 -- 56,596
Vice President, Lending Services
Marcia J. Donner................................... 112,019 78,750 116,666
Vice President, Customer Service and Operations
</TABLE>
- --------
(1) As of April 2000, Mr. Kirkpatrick is no longer at the Company.
In April 1999, Mr. Auger joined us as our Vice President, Real Estate and
relocation, and was compensated at an annual base salary of $150,000 during the
fiscal year ended December 31, 1999. Mr. Auger has been awarded options to
purchase 83,332 shares of our common stock.
In October 1999, Mr. Holmes joined us as our President and Chief
Operating Officer and was compensated at an annual base salary of $240,000
during the fiscal year ended December 31, 1999 plus an annual performance bonus
to be determined by us. Mr. Holmes has been awarded options to purchase 400,000
shares of our common stock.
During 1999, Mr. Tafreshi's salary totaled $134,615. In addition, during
1999 Mr. Tafreshi received $500,000 in profits distribution and $27,000 in the
form of a car allowance from Genesis 2000, Inc. In January 2000, Mr. Tafreshi
was awarded options to purchase 83,333 shares of our common stock.
During 1999, Mr. Meyer's compensation totaled $37,839. In addition,
during 1999 Mr. Meyer received $1,941,000 in profits distribution from
HomeBuilders Financial Network.
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Option Grants in Last Fiscal Year
The following table sets forth certain summary information concerning
grants of stock options to each of the Named Executive Officers for the year
ended December 31, 1999. We have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grant
------------------------------------------------
Potential Realizable Value
Number of at Assumed Annual Rates
Securities % of Total of Stock Price Appreciation
Underlying Options Exercise for Option Term
Options Granted to Price Expiration ---------------------------
Name Granted (#) Employees ($/Sh) Date 0%($) 5%($) 10%($)
- ---- ----------- ---------- -------- ---------------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward P. Hoyt.......... 37,500 1% $2.08 April 5, 2009 304,125 537,537 1,530,657
83,333 3% $0.83 January 13, 2009 770,830 1,289,520 3,496,445
Lee T. Kirkpatrick(1)... 33,333 1% $7.50 April 28, 2009 83,333 290,807 1,173,572
6,666 * $1.89 April 5, 2009 54,061 95,552 272,090
33,333 1% $0.75 January 13, 2009 308,330 515,805 1,398,570
Kevin E. Flood.......... 8,333 * $7.50 April 28, 2009 20,833 72,700 293,384
5,000 * $1.89 April 5, 2009 40,550 71,762 204,088
33,333 1% $0.75 January 13, 2009 308,330 515,805 1,398,570
Charles E. Reed......... 16,666 * $7.50 April 28, 2009 41,665 145,399 586,768
6,597 * $1.89 April 5, 2009 53,502 94,563 269,273
33,333 1% $0.75 January 13, 2009 308,330 515,805 1,398,570
Marcia J. Donner........ 33,333 1% $1.89 April 5, 2009 270,331 477,805 1,360,570
83,333 3% $1.89 April 5, 2009 675,831 1,194,521 3,401,446
</TABLE>
- --------
* Less than 1% of the total options granted to employees.
(1) As of April 2000, Mr. Kirkpatrick is no longer with the Company.
In 1999, we granted options to purchase an aggregate of 3,101,391 shares
of common stock, of which 2,777,232 were granted to employees and 275,000 were
granted to members of the Board of Directors. The 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. The potential realizable value is calculated by
assuming that the assumed initial public offering price of $10.00 per share
appreciates at the indicated rate for the entire term of the options and that
the option is exercised at the exercise price and sold on the last day at the
appreciated price. The potential realizable value is net of the applicable
exercise price, but does not take into account applicable federal or state
income tax consequences and other expenses of option exercises or sales of
appreciated stock.
Fiscal Year-End Option Values
The following table provides certain summary information concerning stock
options held as of December 31, 1999 by each of the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at FY-End At FY-End
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward P. Hoyt.......... 83,333 $47,500 120,833 -- $1,061,164 --
Lee T. Kirkpatrick(1)... 24,999 $15,749 73,332 -- $ 445,724 --
Kevin E. Flood.......... 29,999 $21,199 58,332 -- $ 477,623 --
Charles E. Reed......... -- -- 66,596 -- $ 495,997 --
Marcia J. Donner........ -- -- 116,666 -- $ 946,161 --
</TABLE>
- --------
(1) As of April 2000, Mr. Kirkpatrick is no longer with the Company.
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There was no public trading market for our common stock as of December
31, 1999. Accordingly, the value realized of unexercised in-the-money options
as of that date was calculated on the basis of an assumed initial public
offering price of $10.00 per share.
Stock Plans
2000 Stock Incentive Compensation Plan. Our 2000 Stock Incentive
Compensation plan was approved by our Board in December 1999 and is subject to
our shareholders' approval. The purpose of our 2000 incentive plan is to
enhance long-term shareholder value by offering to our and our subsidiaries'
officers, directors, employees, consultants, agents and independent contractors
the opportunity to participate in our growth and success, and to encourage them
to remain in our service and to own our stock. Our 2000 incentive plan provides
for awards of stock options and stock. Our Board has reserved a total of
1,533,333 shares of common stock, plus an annual increase to be added on the
first day of our fiscal year beginning in 2001, equal to the lesser of 5% of
the adjusted average common shares outstanding used to calculate fully diluted
earnings per share as reported in our financial statements for the preceding
year, or a lesser amount determined by the Board. Any shares from increases in
previous years that are not actually issued shall be added to the aggregate
number of shares available for issuance under the plan. There are no options or
restricted stock outstanding under our 2000 incentive plan.
Our 2000 incentive plan provides for the granting to employees, including
officers and directors, of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and for the granting to employees and
consultants, agents and independent contractors, including nonemployee
directors, of nonqualified stock options. To the extent an optionee would have
the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value
(determined for each share as of the date the option to purchase the shares was
granted) in excess of $100,000, any such excess options shall be treated as
nonqualified stock options. Unless terminated earlier by the Board, our 2000
incentive plan will terminate ten years after the earlier of the plan's
adoption by the Board and its approval by the stockholders.
Our 2000 incentive plan shall be administered by the Board or a committee
or committees of the Board. Currently, our 2000 incentive plan is administered
by the compensation committee of our Board. The plan administrator has
exclusive authority to determine the terms of options granted under the 2000
option plan, including the number of shares subject to an option, as well as
the term, exercisability, vesting, and exercise price of the option. For
incentive stock options the exercise price must be at least equal to the fair
market value of the common stock on the date of grant and for an individual
owing more than 10% of the total voting power of all classes of our stock the
exercise price must be 110% of fair market value on the date of grant.
The plan administrator determines the term of options, which may not
exceed ten years, or five years in the case of an incentive stock option
granted to a 10% shareholder. Optionees may not transfer options other than by
will or the laws of descent or distribution, with the provision that the plan
administrator may grant limited transferability rights in certain circumstances
to the extent permitted by Section 422 of the Internal Revenue Code. We expect
that options granted under the 2000 incentive plan generally will vest at the
rate of 1/4th of the total number of shares subject to the options twelve
months after the date of grant, and 1/48th of the total number of shares
subject to the options each month thereafter.
The plan administrator is authorized under our 2000 incentive plan to
issue shares of common stock to eligible participants with terms, conditions
and restrictions established by the plan administrator in its sole discretion.
Restrictions may be based on continuous service with us or our subsidiaries or
the achievement of performance goals. Holders of restricted stock have, subject
to certain restrictions, all the rights of stockholders with respect to such
shares.
The plan administrator will make proportional adjustments to the
aggregate number of shares subject to and issuable under our 2000 incentive
plan and to outstanding awards in the event of stock splits or other capital
adjustments.
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In the event of the sale of all or substantially all of our outstanding
securities or assets, or a merger or consolidation of iOwn with or into another
corporation, all options outstanding under the 2000 incentive plan will be
assumed, continued or equivalent options substituted by the successor
corporation, unless such successor corporation does not agree to such
assumption or substitution, in which case each outstanding option and
restricted stock award will automatically accelerate and become 100% vested and
exercisable for a specified time period, in each case conditioned upon
consummation of the transaction.
1997 Stock Option Plan. Our 1997 option plan was adopted by our Board and
approved by our shareholders in February 1997. A total of 5,188,870 shares of
common stock have been reserved for issuance under the 1997 option plan. As of
December 31, 1999 options to purchase 2,842,312 shares of common stock at a
weighted average exercise price of $5.35 per share were outstanding and
1,277,402 shares remained available for future option grants. Upon the
effectiveness of this offering, no further grants will be made pursuant to our
1997 option plan. As of the effectiveness of this offering, shares remaining
for future option grants and any future cancellations of options from our 1997
option plan will become available for future grant under our 2000 incentive
plan.
The purpose of the 1997 option plan is to attract and retain the best
available personnel, to provide additional incentives to our officers,
employees, directors and persons rendering consulting or advisory services to
us, and to promote the success of our business. The 1997 option plan provides
for the granting of incentive and nonqualified options and stock purchase
rights.
The terms and conditions for options granted under the 1997 option plan
are substantially similar to those for options granted under the 2000 incentive
plan, except as follows: Generally options may not be exercised until the
purchaser's options are vested. In certain instances, the plan administrator
may accelerate vesting or waive forfeiture or other restrictions regarding any
option or stock purchase right. We also retain the right to repurchase shares
at the time of the optionee's termination of employment by paying an amount
equal to the original price paid by the purchaser. No option may be transferred
by the optionee other than by will or the laws of descent or distribution.
Nonstatutory stock options granted under the 1997 option plan must be granted
with an exercise price equal to at least 85% of the fair market value of the
common stock on the date of grant, unless granted to a 10% shareholder, in
which case the exercise price must be at least 110% of the fair market value on
the date of grant.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
was approved by our Board in December 1999 and is subject to our stockholders'
approval. We will implement the purchase plan upon the effectiveness of this
offering. A total of 500,000 shares of common stock have been reserved for
issuance under the purchase plan. The number of shares reserved will be
increased automatically each year on the first day of our fiscal year beginning
in 2001 by an amount equal to the lesser of 500,000 shares, 2% of the average
common shares outstanding as used to calculate fully diluted earnings per share
as reported in our annual financial statements for the preceding year, or a
lesser amount determined by our Board. Any shares from increases in previous
years that are not actually issued shall be added to the aggregate number of
shares available for issuance under the purchase plan.
We intend the purchase plan to qualify under Section 423 of the Internal
Revenue Code. We will implement the purchase plan by a series of offerings of
24 months duration, the first of which shall commence upon the effectiveness of
this offering and end on January 31, 2000. Each subsequent offering period will
have a duration of twenty-four months. Each offering period after the first
offering period will commence on February 1st and August 1st of each year. Each
offering period will consist of four consecutive purchase periods of six months
duration, with the last day of each period being designated a purchase date. A
purchase period shall commence February 1 and August 1 of each year and end on
the next July 31 and January 31 respectively. The purchase plan will be
administered by the compensation committee of our Board. iOwn employees
(including officers and employee directors), or of any of our majority-owned
subsidiaries, are eligible to participate in the purchase plan if they are
employed by iOwn or any such subsidiary for at least 20 hours per week and more
than five months per year.
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<PAGE>
The purchase plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation. Under the purchase plan, no employee may purchase common stock
worth more than $25,000 in any calendar year, valued as of the first day of
each offering period. In addition, owners of 5% or more of iOwn's or a
subsidiary's common stock may not participate in the purchase plan. The price
of the common stock purchased under the purchase plan will be the lesser of 85%
of the fair market value of iOwn's common stock at the beginning of the
offering period or the last day of each purchase period, except that the
purchase price for the first offering period will be equal to the lesser of
100% of the initial public offering price of the common stock and 85% of the
fair market value on the last day of such purchase period. Employees may end
their participation in an offering at any time prior to the end of the purchase
period for which such withdrawal is to be effective. The participants may
resume participation in subsequent offerings. Participation ends automatically
on termination of employment with iOwn or a participating subsidiary. If not
terminated earlier, the purchase plan will have a term of ten years from the
date of its adoption by the Board.
The purchase plan provides that in the event of a merger of iOwn with or
into another corporation or a sale of all or substantially all of iOwn's
assets, each right to purchase stock under the purchase plan will be assumed or
an equivalent right substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for the purchase right, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed merger or sale. Our Board has the power
to amend or terminate the purchase plan as long as such action does not
adversely affect any outstanding rights to purchase stock under the plan.
401(k) Plan
We maintain the iOwn Holdings, Inc. 401(k) Plan (the "401(k) Plan"), a
defined contribution 401(k) salary reduction plan intended to qualify under
Section 401 of the Code. Our employees are eligible to participate in the
401(k) Plan on the first day of each month coinciding with or immediately
following the date of their employment. A participating employee, by electing
to defer a portion of his or her compensation, may make pre-tax contributions
to the 401(k) Plan, subject to limitations under the Code, of a percentage (not
to exceed 20%) of his or her total compensation. Employee contributions and the
investment earnings thereon will be fully vested at all times. We are not
required to contribute to the 401(k) Plan and have made no contributions since
the inception of the 401(k) Plan. Upon the effectiveness of this offering, we
will amend the 401(k) Plan to include a 50% employer match of the employee's
401(k) elective deferral which does not exceed 3% of the participant's
compensation.
Genesis 2000 maintains a 401(k) Plan under which Genesis 2000 matches up
to 25% of employees contributions not to exceed 6% of the employee's pre-tax
salary. Effective February 1, 2000, the employees of Genesis 2000 began
participating in the iOwn Holdings, Inc. 401(k) Plan, and the Genesis 2000
401(k) Plan was terminated. HomeBuilders Financial Network has no 401(k) plan
for its employees.
Employment Contracts and Change of Control Arrangements
Under the terms of our offer of employment to Edward P. Hoyt, dated
October 25, 1999 we agreed to pay Mr. Hoyt an annual salary of $140,000 plus an
annual performance bonus to be determined by the Compensation Committee of our
Board of Directors. Upon termination in connection with a change of control we
will pay Mr. Hoyt an amount equal to two months of salary and have agreed to
the acceleration of vesting equal to 50% of the then-unvested shares of any
options granted after October 25, 1999.
Under the terms of our offer of employment to Paul Holmes, dated October
11, 1999, we agreed to pay Mr. Holmes an annual salary of $240,000, plus an
annual performance bonus to be determined by us. For 1999, Mr. Holmes'
aggregate bonus is targeted at $50,000 prorated to the end of the year.
Mr. Holmes was also granted options to purchase up to 400,000 shares of our
common stock, subject to vesting requirements. Upon termination in connection
with a change of control the Company will pay Mr. Holmes an amount equal to two
months of salary and has agreed to the acceleration of vesting equal to 50% of
the then-unvested shares granted pursuant to his agreement.
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<PAGE>
Under the terms of our employment agreement with Marcia J. Donner dated
April 1, 1999, we agreed to pay Ms. Donner an annual salary of $150,000, plus
an annual cash bonus of up to $40,000 in 1999 and up to $50,000 in each
subsequent year of employment with us. Additionally, we agreed to pay Ms.
Donner a cash bonus of $42,500 ninety days after the first date of her
employment and a cash bonus of $42,500 one hundred eighty days after the first
date of her employment. We also granted Ms. Donner options to purchase
83,333 shares of common stock and a bonus option of 33,333 shares of common
stock, with each purchase price subject to adjustment. Upon a sale of all or
substantially all of our assets or any merger, consolidation or stock sale that
results in the holders of our capital stock owning less than 50% of the voting
power of our capital stock after the transaction, the stock options shall be
deemed vested an additional six months as of the date of such change of
control.
Under the terms of our employment agreement with Thomas H. Meyer that
will take effect upon the close of this offering, we are agreeing to pay Mr.
Meyer an annual salary of $150,000 plus an annual performance bonus to be
determined by our Board of Directors.
Under the terms of our employment agreement with Kamyar Tafreshi dated
December 23, 1999, we agreed to pay Mr. Tafreshi an annual salary of $166,667.
In January 2000, Mr. Tafreshi was awarded options to purchase 83,333 shares of
our common stock, subject to vesting requirements. Upon a sale of all or
substantially all of our assets or any merger, consolidation or stock sale that
results in the holders of our capital stock owning less than 50% of the voting
power of our capital stock after the transaction, the stock options shall be
deemed vested an additional six months as of the date of such change of
control.
Under the terms of our agreement with Mark Pepitone, who manages an
operating division we recently acquired from him, we would be required to pay
up to $925,000 if we terminate Mr. Pepitone's employment prior to February 1,
2001.
Limitation of Liability and Indemnification Matters
Our Amended and Restated Certificate of Incorporation, which will be
effective upon the closing of this offering, limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors except liability for breach
of their duty of loyalty to the corporation or its stockholders, acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, unlawful payments of dividends or unlawful stock
repurchases or redemptions, or any transaction from which the director derived
an improper personal benefit. Such limitation of liability does not apply to
liabilities arising under the federal or state securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Our Bylaws provide that we shall indemnify our directors to the fullest
extent permitted by law, and grant to the Board the power on our behalf to
indemnify any person other than a director. We believe that indemnification
under our Bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our obligation to provide indemnification shall be offset
to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by us or any other
person.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
services as a director, officer, employee, agent or fiduciary of iOwn, any
subsidiary of iOwn or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of iOwn in which indemnification is required or permitted,
and we are not aware of any threatened litigation or proceeding that may result
in a claim for such indemnification.
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RELATED PARTY TRANSACTIONS
There has not been, nor is there currently proposed, any transaction or
series of similar transactions to which we were or are to be a party in which
the amount involved exceeds $60,000 and in which any director, executive
officer or holder of more than 5% of any class of our voting securities or
members of such person's immediate family had or will have a direct or indirect
material interest other than the transactions described below.
Series A Preferred Stock
In February and April 1997, in private placement transactions, we issued
a total of 830,962 shares of Series A preferred stock to certain investors at a
purchase price of $0.72 per share, which will automatically convert into
830,962 shares of common stock upon the completion of this offering. The
holders of such Series A preferred stock are entitled to registration rights
regarding the shares of common stock issued or issuable upon conversion.
Series B Preferred Stock
In November 1997, December 1997, January 1998 and March 1998, in private
placement transactions, we issued a total of 3,983,907 shares of Series B
preferred stock to certain investors at a purchase price of $1.8948 per share,
which will automatically convert into 3,983,907 shares of common stock upon the
completion of this offering. The holders of such Series B preferred stock are
entitled to registration rights regarding the shares of common stock issued or
issuable upon conversion.
Series C Preferred Stock
In September and November 1998, in private placement transactions, we
issued a total of 5,913,325 shares of Series C preferred stock to certain
investors at a purchase price of $3.75 per share, which will automatically
convert into 5,913,325 shares of common stock upon the completion of this
offering. The holders of such Series C preferred stock are entitled to
registration rights regarding the shares of common stock issued or issuable
upon conversion.
Series D Preferred Stock
In April 1999, in a private placement transaction, we issued 2,606,870
shares of Series D preferred stock to certain investors at a purchase price of
$7.50 per share, which will automatically convert into 2,606,870 shares of
common stock upon the completion of this offering. The holders of such Series D
preferred stock are entitled to registration rights regarding the shares of
common stock issued or issuable upon conversion.
Series E Preferred Stock
In October and November 1999, in private placement transactions, we
issued a total of 3,390,365 shares of Series E preferred stock to certain
investors at a purchase price of $9.00 per share, which will automatically
convert into 3,390,365 shares of common stock upon the completion of this
offering. The holders of such Series E preferred stock are entitled to
registration rights regarding the shares of common stock issued or issuable
upon conversion. See "Description of Capital Stock."
Series EEE Preferred Stock
In December 1999, we issued 833,331 shares of common stock and 833,331
shares of Series EEE preferred stock, which Series EEE will automatically
convert into 833,331 shares of common stock upon the completion of this
offering. The holders of such Series EEE preferred stock are entitled to
registration rights regarding the shares of common stock issued or issuable
upon conversion. See "Description of Capital Stock."
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Series EEEE Preferred Stock
In December 1999, we agreed to issue 1,333,333 shares of common stock and
1,333,333 shares of Series EEEE preferred stock. These shares of Series EEEE
will automatically convert into 1,333,333 shares of common stock upon the
completion of this offering. The holders of such Series EEEE preferred stock
are entitled to registration rights regarding the shares of common stock issued
or issuable upon conversion. See "Description of Capital Stock."
The investors in the preferred stock include the following executive
officers, directors, director nominees, and security holders known to us to own
more than 5% of our preferred stock:
<TABLE>
<CAPTION>
Series E/
Series A Series B Series C Series D EEE/EEEE
Investor Preferred Preferred Preferred Preferred Preferred
- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ABN AMRO Capital Investments
(Belgie) NV............... 555,554
Altos Ventures I, L.P....... 555,555 798,394 325,978 149,926 250,388
CIBC WMV, Inc............... 1,733,333 237,181
Discovery Ventures.......... 266,666 23,798 22,222
Doll Technology Affiliates
Fund, L.P................. 40,816 14,966 4,978 8,314
Doll Technology Investment
Fund, L.P................. 693,745 254,399 84,615 141,317
Doll Technology Side Fund,
L.P....................... 26,573 9,744 3,241 5,413
Marcia Donner............... 8,000
Kevin E. Flood.............. 5,277
Edward P. Hoyt.............. 133,333 33,333
Hyperion Partners II L.P.... 1,333,333 66,666 111,111
Brendan S. Kim.............. 2,638
Han J. Kim.................. 5,277
Lee T. Kirkpatrick.......... 2,000
Lehman Brothers............. 800,000 71,395 119,237
Thomas H. Meyer............. 1,333,333
Hodong Nam.................. 5,277
Charles E. Reed............. 3,333 2,000
Charles E. Reed and Ruth S.
Reed, Trustees of the Reed
1991 Trust................ 8,000
Kamyar Tafreshi............. 263,450
TMCT Ventures, LLP.......... 1,066,666 95,193 158,983
Tribune Company............. 1,187,460 294,091 132,219 220,821
Weiss Peck & Greer Venture
Associates IV Cayman
L.P....................... 75,930 6,776 3,439
Weiss Peck & Greer Venture
Associates IV, L.P........ 601,434 53,674 27,238
WPG Enterprise Fund III,
L.P....................... 525,994 46,942 23,822
WPG Information Sciences
Entrepreneur Fund, L.P.... 23,306 2,080 1,055
Michael L. Zimmerman........ 7,333 7,375 3,466
</TABLE>
Other Transactions
We have issued to Altos Ventures I, L.P. three separate warrants to
purchase Series B preferred stock, exercisable for an aggregate of 39,582
shares at $1.8948 per share. These warrants were issued in connection with a
bridge financing prior to the closing of the Series B financing, and expire
through October 2004.
We have issued to ABN AMRO Capital Investments (Belgie) NV one warrant to
purchase common stock, exercisable for an aggregate of 555,555 shares at $9.00
per share, which expires in October 2006. If unexercised, this warrant will
expire upon the close of this offering.
We have entered into indemnification agreements with our officers and
directors containing provisions that require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors, other than
liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
We believe that the terms of the transactions described above were no
less favorable to us than would have been obtained from an unaffiliated third
party. Any future transactions between us and any of our officers, directors or
principal shareholders will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of April 30, 2000 by each person or entity known
by us to own beneficially more than 5% of our common stock, each of our
directors, each of our Named Executive Officers, and all of our executive
officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding (2)
Shares Beneficially -----------------
Owned Prior to Before After
Name of Beneficial Owner (1) the Offering (2) Offering Offering
- ---------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Altos Ventures I, L.P.
2882 Sand Hill Road, Suite 100
Menlo Park, CA 94025.................... 2,119,823 10.13% 7.16%
CIBC WMV, Inc.
425 Lexington Avenue, 9th Floor
New York, NY 10017...................... 1,970,514 9.43% 6.67%
Edward P. Hoyt (3)....................... 1,854,165 8.83% 6.25%
Tribune Company
435 N. Michigan Avenue
Chicago, IL 60611....................... 1,834,591 8.78% 6.21%
Hyperion Partners II L.P.
50 Charles Lindbergh Blvd., Suite 500
Uniondale, NY 11553..................... 1,511,110 7.24% 5.11%
Entities Affiliated with Weiss, Peck &
Greer Investments (4)
555 California Street, Suite 3130
San Francisco, CA 94104................. 1,391,690 6.66% 4.71%
TMCT Ventures
Los Angeles Times
13 South Broadway
Los Angeles, CA 90012................... 1,320,842 6.32% 4.47%
Entities Affiliated with Doll Capital
Management (5)
3000 Sand Hill Road
Building 3, Suite 225
Menlo Park, CA 94025.................... 1,288,121 6.17% 4.36%
ABN AMRO Capital Investments (Belgie) NV
International Venture Capital (AA3240)
Foppingadreef 22
P.O. Box 283, 1000 EA Amsterdam
The Netherlands........................ 1,111,109 5.18% 3.69%
K. David Chao (6)........................ 1,314,787 6.30% 4.45%
Han J. Kim (7)........................... 2,133,989 10.20% 7.21%
Scott Shay (8)........................... 1,511,110 7.24% 5.11%
Stanley H. Rhodes (9).................... 1,111,109 5.18% 3.69%
Paul Holmes (10)......................... 12,121 * *
Lee T. Kirkpatrick (11).................. 68,666 * *
Kevin E. Flood (12)...................... 161,942 * *
</TABLE>
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<TABLE>
<CAPTION>
Percentage of
Shares Outstanding (2)
Shares Beneficially --------------------------
Owned Prior to Before After
Name of Beneficial Owner (1) the Offering (2) Offering Offering
- ---------------------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Charles E. Reed (13)........... 136,595 * *
Marcia J. Donner (14).......... 144,666 * *
All directors and executive
officers as a group
(16 persons) (15)............. 9,264,707 43.78% 31.23%
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Unless otherwise indicated, the address for this person is c/o iOwn, Inc.
Holdings, 333 Bryant Street, Lower Level, San Francisco, California
94107.
(2) Applicable percentage ownership is based on 20,885,809 shares of common
stock outstanding as of April 30, 2000 and 29,552,475 shares outstanding
immediately following completion of this offering. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock underlying options or
warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. These shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, each
stockholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
(3) Includes options to purchase 120,833 shares of our common stock
exercisable within 60 days, and includes 93,750 shares of common stock
subject to our right of repurchase. Includes 1,000,000 shares of our
common stock held by the Edward Hoyt 1999 Irrevocable Trust, dated
January 13, 1999, Kathy Carrett Hoyt and R. Walter Hale III, co-trustees.
Mr. Hoyt disclaims beneficial ownership of all such shares, except to the
extent he has a pecuniary interest therein.
(4) Includes 682,346 shares held of record by Weiss, Peck & Greer Venture
Associates IV, L.P., 596,758 shares held of record by WPG Enterprise Fund
III, L.P., 86,145 shares held of record by Weiss, Peck & Greer Venture
Associates IV Cayman, L.P., and 26,441 shares held of record by WPG
Information Sciences Entrepreneur Fund, L.P.
(5) Includes 1,174,076 shares held of record by Doll Technology Investment
Fund, L.P., 69,074 shares held of record by Doll Technology Affiliates
Fund, L.P. and 44,971 shares held of record by Doll Technology Side Fund,
L.P.
(6) Includes 1,174,076 shares held of record by Doll Technology Investment
Fund, L.P., 69,074 shares held of record by Doll Technology Affiliates
Fund, L.P. and 44,971 shares held of record by Doll Technology Side Fund,
L.P. Mr. Chao is a Managing Partner of Doll Capital Management LLC which
is the general partner of Doll Technology Investment Fund, L.P. and Doll
Technology Side Fund, L.P. Mr. Chao disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein. Also
includes 26,666 shares of common stock, of which 10,556 shares are
subject to our right of repurchase.
(7) Includes 2,080,241 shares and warrants to purchase 39,582 shares of
Series B preferred stock held of record by Altos Ventures I, L.P., of
which Mr. Han Kim is a Managing Partner. Mr. Han Kim disclaims beneficial
ownership of all such shares except to the extent of his pecuniary
interest therein. Also includes 14,166 shares which Mr. Han Kim received
as a distribution from shares held by Altos Ventures I, L.P. pursuant to
the exercise of stock options by Altos Ventures I, L.P., of which 4,074
shares are subject to our right of repurchase.
(8) Represents shares held of record by Hyperion Partners II L.P., of which
Mr. Shay is an executive vice president of the general partners. Mr. Shay
disclaims beneficial ownership of all such shares except to the extent of
his pecuniary interest therein.
(9) Includes 555,554 shares and warrants to purchase 555,555 shares of our
common stock held of record by ABN AMRO Capital Investments (Belgie) NV.
Mr. Phillips disclaims beneficial ownership of all such shares except to
the extent of his pecuniary interest therein.
(10) Includes options to purchase 12,121 shares of our common stock
exercisable within 60 days.
(11) Includes 35,555 shares of common stock subject to our right of
repurchase. As of April 2000, Mr. Kirkpatrick is no longer with the
Company.
(12) Includes options to purchase 87,667 shares of our common stock
exercisable within 60 days, and includes 26,459 shares of common stock
subject to our right of repurchase.
(13) Includes options to purchase 66,596 shares of our common stock
exercisable within 60 days, and includes 25,625 shares of common stock
subject to our right of repurchase. Also includes 70,000 shares held by
the Reed 1991 Trust, dated March 1991, Charles E. and Ruth S. Reed, co-
trustees.
(14) Includes options to purchase 136,666 shares of our common stock
exercisable within 60 days.
(15) Includes options to purchase 1,071,184 shares of our common stock
exercisable within 60 days, warrants to purchase 595,137 shares of our
common stock issuable within 60 days, and includes 209,103 shares of
common stock subject to our right of repurchase.
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DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation authorizes the issuance of up to
100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share, the rights and
preferences of which may be established from time to time by our Board of
Directors. As of December 31, 1999, 3,320,820 shares of common stock were
issued and outstanding and 17,558,760 shares of preferred stock convertible
into 17,558,760 shares of common stock upon the completion of this offering
were issued and outstanding. As of December 31, 1999 we had 255 stockholders.
Common Stock
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock may be
entitled, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore. In the event of a
liquidation, dissolution or winding up of the Company, holders of common stock
would be entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking fund provisions applicable to the common stock.
All outstanding shares of common stock are, and the shares of common stock
offered by us in this offering, when issued and paid for, will be, fully paid
and nonassessable. The rights, preferences and privileges of the holders of
common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any Series of preferred stock, which we may designate
in the future.
Preferred Stock
Upon the closing of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 10,000,000 shares of
preferred stock, in one or more Series, each of such Series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences as shall be determined by the
Board of Directors. The rights of the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. We have no
present plans to issue any shares of preferred stock.
Warrants
In August 1997, we issued to Altos Ventures I, L.P. a warrant to purchase
19,791 shares of Series B preferred stock at an exercise price of $1.8948 per
share, which is exercisable at any time prior to August 25, 2004. In September
1997, we issued to Altos Ventures I, L.P. a warrant to purchase 13,194 shares
of Series B preferred stock at an exercise price of $1.8948 per share, which is
exercisable at any time prior to September 25, 2004. In October 1997, we issued
to Altos Ventures I, L.P. a warrant to purchase 6,597 shares of Series B
preferred stock at an exercise price of $1.8948 per share, which is exercisable
at any time prior to October 25, 2004. In November 1997, we issued to Joanna
Rees Gallanter a warrant to purchase 5,000 shares of common stock at an
exercise price of $0.135 per share, which is exercisable at any time prior to
February 28, 2004. In April 1998, we issued to Imperial Bank a warrant to
purchase 10,000 shares of Series B preferred stock at an exercise price of
$2.274 per share, which is exercisable at any time prior to April 2, 2005. In
July 1998, we issued to LINC Capital, Inc. a warrant to purchase 18,471 shares
of Series B preferred stock at an exercise price of $1.8948 per share, which is
exercisable at any time prior to July 20, 2008. In July 1999, we
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<PAGE>
issued to America Online, Inc. a warrant to purchase 8,333 shares of common
stock at an exercise price of $30.00 per share, which is exercisable at any
time prior to June 30, 2006. In August 1999, we issued to Comdisco, Inc. a
warrant to purchase 53,333 shares of Series D preferred stock at an exercise
price of $7.50 per share, which is exercisable at any time prior to August 12,
2009. In September 1999, we issued to American Mortgage Services a warrant to
purchase 6,666 shares of common stock at an exercise price of $8.25 per share
which is exercisable at any time prior to September 16, 2002. In September
1999, we issued to Cashin Realty Group, Inc. a warrant to purchase 3,333 shares
of common stock at an exercise price of $8.25 per share which is exercisable at
any time prior to September 16, 2002. In September 1999, we issued to Roger
Thrun a warrant to purchase 1,666 shares of common stock at an exercise price
of $8.25 per share which is exercisable at any time prior to September 16,
2002. In September 1999, we issued to Arthur Nadolske a warrant to purchase
1,666 shares of common stock at an exercise price of $8.25 per share which is
exercisable at any time prior to September 16, 2002. In October 1999, we issued
to ABN AMRO Capital Investments (Belgie) NV a warrant to purchase 555,555
shares of common stock at an exercise price of $9.00 per share which is
exercisable at any time prior to October 29, 2006. In November 1999, we issued
to Comdisco, Inc. a warrant to purchase 44,444 shares of Series E preferred
stock at an exercise price of $9.00 per share, which is exercisable at any time
prior to November 15, 2009. In December 1999, we issued to Ranieri & Co., Inc.
a warrant to purchase 66,666 shares of common stock at an exercise price of
$15.00 per share, which is exercisable at any time prior to December 8, 2004.
In March 2000, we issued to Bank United of Texas a warrant to purchase 95,000
shares of common stock at an exercise price of $15.00 per share, which is
exercisable at any time prior to March 16, 2005.
Registration Rights
Pursuant to the terms of an Investor Rights Agreement among us and
certain holders of our securities, after the closing of this offering, the
holders of a majority of the shares of our outstanding common stock issued upon
conversion of our currently outstanding shares of preferred stock, are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. The holders of at least a majority of the outstanding shares of
common stock issued upon conversion of our currently outstanding shares of
preferred stock are entitled to two demand registrations that require us to
file a registration statement covering their shares of common stock so long as
the aggregate proceeds to such stockholders exceed at least $30 million. We are
not required to effect: (1) a registration within 60 days prior to the
Company's estimated date of filing any registration statement; (2) a
registration during the period in which any other registration statement has
been filed or has been declared effective within the prior 180 days; or (3) a
registration for a period not to exceed 90 days, if our Board of Directors has
made a good faith determination that such registration would be seriously
detrimental to us or to its stockholders. Furthermore, pursuant to the terms of
the Investor Rights Agreement, the holders of the shares entitled to
registration rights are entitled to certain piggyback registration rights in
connection with any registration by us of our securities for our own account or
the account of other security holders. In the event that we propose to register
any shares of common stock under the Securities Act, the holders of such
piggyback registration rights are entitled to receive notice of such
registration and are entitled to include their shares therein, subject to
certain limitations.
At any time after we become eligible to file a registration statement on
Form S-3, any holders of the registrable securities, as defined in the Investor
Rights Agreement, under our Investor Rights Agreement may require us to file up
to three registration statements on Form S-3 under the Securities Act for a
public offering of shares of the registrable securities the reasonably
anticipated aggregate price to the public of which would exceed $750,000, with
respect to their shares of common stock.
Each of the foregoing registration rights is subject to the right of the
underwriters in any underwritten offering to limit the number of shares to be
included in that registration statement by the holders. The registration
rights, with respect to any holder thereof, terminate upon the later of (1)
five years from the effective date of this offering or (2) such date when the
shares held by that holder may be sold under Rule 144 during any three-month
period. We are generally required to bear all of the expenses of all such
registrations,
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<PAGE>
except underwriting discounts and commissions applicable to the securities
registered by the holder. The registration of any of the shares entitled to
registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act immediately upon effectiveness of
such registration. The Investor Rights Agreement also contains a commitment by
us to indemnify the holders of registration rights, subject to certain
limitations.
Effect of Certain Provisions of Our Certificate of Incorporation and Bylaws,
and the Delaware Anti-Takeover Law
Our certificate of incorporation and bylaws contain provisions that could
have the effect of discouraging potential acquisition proposals and tender
offers or could delay or prevent a change in control of iOwn. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock. In particular, our certificate of
incorporation and bylaws, as applicable, among other things:
. provide that special meetings of the stockholders may be called by the
Chairman of the Board, Chief Executive Officer or at the direction of
the majority of the authorized directors. If a special meeting is
called by anyone other than the Board of Directors, advance written
notice is required, which must be received by the Secretary not less
than 35 days nor more than 120 days prior to the meeting. Any
amendment of our bylaws requires a vote of at least 66.66% of our
capital stock;
. do not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority stockholder holding a
sufficient number of shares may be able to ensure the election of one
or more directors. The absence of cumulative voting may have the
effect of limiting the ability of minority stockholders to effect
changes in our board and, as a result, may have the effect of
deterring a hostile takeover or delaying or preventing changes in
control or management of iOwn;
. provide that vacancies on our board may be filled by a majority of
directors in office, although less than a quorum, and not by the
stockholders; and
. allow us to issue up to 10,000,000 shares of undesignated preferred
stock with rights senior to those of the common stock and that
otherwise could adversely affect the rights and powers, including
voting rights, of the holders of common stock. In certain
circumstances, this issuance could have the effect of decreasing the
market price of the common stock, as well as having the anti-takeover
effect discussed above.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board and in the policies formulated by
them, and to discourage certain types of transactions that may involve an
actual or threatened change in our control. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our management.
In addition, we are subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless:
. prior to such date, the Board of Directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the
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number of shares outstanding (a) shares owned by persons who are
directors and also officers, and (b) shares owned by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
. on or subsequent to such date, the business combination is approved by
the Board of Directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least 66.66% of the outstanding voting stock which is not owned by
the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's common stock is
ChaseMellon Investor Services.
Listing
The common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "IOWN."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock,
and we cannot assure you that a significant public market for the common stock
will develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market following this offering could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through the sale of our equity securities. As
described below, substantially all of our outstanding shares of capital stock
will be unavailable for sale immediately after this offering because of certain
contractual restrictions on resale.
Upon completion of this offering and including the shares to be issued in
connection with the acquisition of HomeBuilders Financial Network, we will have
outstanding 29,552,475 shares of common stock, based upon shares outstanding as
of April 30, 2000, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants that do not expire
prior to completion of this offering. Of these shares, the shares sold in this
offering will be freely tradable without restriction under the Securities Act,
except for any shares purchased by our "affiliates" as defined in Rule 144
under the Securities Act. The remaining 23,552,475 shares of common stock held
by existing stockholders are "restricted shares" as defined in Rule 144.
Substantially all of these restricted shares are subject to lock-up agreements
providing that the stockholder will not offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock owned as of the date of this prospectus or acquired
directly from us by the stockholder or with respect to which they have or may
acquire the power of disposition for a period of 180 days after the date of
this prospectus without the prior written consent of FleetBoston Roberston
Stephens Inc. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
almost all of these shares will be resellable until 181 days after the date of
this prospectus. FleetBoston Robertson Stephens Inc. may, in its sole
discretion, and at any time without notice, release all or any portion of the
restricted shares subject to lock-up agreements.
Beginning 181 days after the date of this prospectus, approximately
20,382,887 restricted shares will be eligible for sale in the public market.
All of these shares are subject to volume limitations under Rule 144, except
2,120,255 shares eligible for sale under Rule 144(k) and 1,329,812 shares
eligible for sale under Rule 701, subject in some cases to repurchase rights of
iOwn.
In addition, as of December 31, 1999, there were outstanding warrants to
purchase 165,830 shares of preferred stock convertible into a like number of
shares of common stock, some of which may be exercised prior to this offering.
Substantially all of the shares issuable pursuant to these warrants are subject
to lock-up agreements.
Rule 144
In general, under Rule 144, as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner except an affiliate, would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1.0% of the number of shares of common stock then outstanding, which
will equal approximately 295,525 shares immediately after this
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned
75
<PAGE>
the shares proposed to be sold for at least two years, including the holding
period of any prior owner except an affiliate, is entitled to sell those shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to iOwn who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell their Rule 701 shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling their Rule 701 shares. However, certain Rule 701
shares are subject to lock-up agreements and will only become eligible for sale
at the earlier of the expiration of the 180-day lock-up agreements or the
receipt of the written consent of FleetBostonRobertson Stephens more than 90
days after the date of this prospectus.
After this offering, we intend to file a registration statement on Form
S-8 registering shares of common stock subject to outstanding options or
reserved for future issuance under our stock plans. As of December 31, 1999,
options to purchase a total of 2,842,312 shares were outstanding and 1,277,402
shares were reserved for future issuance under our stock plans. any shares of
common stock issued upon exercise of outstanding vested options or issued
pursuant to our employee stock purchase plan, other than common stock issued to
our affiliates or subject to lock-up agreements, will be available for
immediate resale in the open market following the effectiveness of such
registration statement.
76
<PAGE>
UNDERWRITING
The underwriters named below, acting through their Representatives,
FleetBoston Roberston Stephens Inc., Lehman Brothers Inc., U.S. Bancorp Piper
Jaffray Inc. and Friedman, Billings, Ramsey & Co., Inc. (the
"Representatives"), have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
FleetBoston Roberston Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc....................................
Lehman Brothers Inc...................................................
U.S. Bancorp Piper Jaffray Inc........................................
Friedman, Billings, Ramsey & Co., Inc.................................
---------
Total............................................................ 6,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the initial public offering price located on the
cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be reallocated
to other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
reduction in this price will change the amount of proceeds to be received by us
as indicated on the cover page of this prospectus.
The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
Internet Distribution. The underwriters, at the request of iOwn, have
reserved for sale at the initial public offering price up to 3% of the shares
of common stock to members of and visitors to fbr.com, an affiliate of
Friedman, Billings, Ramsey & Co., Inc. who express an interest in purchasing
these shares. Of these shares, we anticipate that up to half of these shares
will be reserved for sale to iOwn registered users who express an interest in
purchasing shares in this offering. The sale of these shares will be made by
fbr.com. Purchases of the reserved shares will be made through an account at
fbr.com in accordance with fbr.com's procedures for opening an account and
transacting in securities. Any of these reserved shares not purchased by
visitors to and users of fbr.com services or website or iOwn registered users
will be offered by the underwriters to the public on the same terms as the
other shares. A prospectus in electronic format is being made available on a
website maintained by fbr.com.
Directed Shares. In addition to those shares being offered to iOwn
registered users through fbr.com, we have requested that the underwriters
reserve up to 10% of the shares of common stock for sale, at the initial public
offering price, to directors, officers, employees and other individuals
designated by iOwn, including real estate agents, home builders, mortgage
brokers, consultants and business associates. As a result, the number of shares
of common stock available for sale to the general public in the offering will
be reduced to the extent these individuals and entities purchase the directed
shares. Any directed shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
Over-Allotment Option. We have granted the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 900,000 additional shares of common stock at the same price per
share as we will receive for the shares offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will have a firm commitment to purchase approximately the same percentage of
these additional shares that the number of shares of common stock to be
purchased by it shown in the above table represents as a percentage of the
shares offered by this prospectus. If purchased, the additional shares will be
sold by the underwriters on the same terms as those on which the
77
<PAGE>
shares offered by this prospectus are being sold. We will be obligated, under
this option, to sell shares to the extent the option is exercised. The
underwriters may exercise the option only to cover over-allotments made in
connection with the sale of the shares offered by this prospectus. If the
option is exercised in full, the total public offering price will be $69.0
million, the total underwriting discounts and commission will be $4.8 million
and the total proceeds to us will be $64.2 million.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-Up Agreements. All of our executive officers and directors, and
stockholders holding, in the aggregate, in excess of 98% of the outstanding
shares of common stock have agreed with the Representatives, for a period of
180 days after the date of this prospectus, not to offer to sell, contract to
sell or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of common stock, any options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
FleetBoston Roberston Stephens Inc. However, FleetBoston Roberston Stephens
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements. There are no
agreements between the Representatives and any of our stockholders of record
providing consent by the Representatives to the sale of shares prior to the
expiration of the 180-day lock-up period.
Future Sales By Us. In addition, we have generally agreed that, during
the 180-day lock-up period, we will not, without the prior written consent of
FleetBoston Roberston Stephens Inc.: (a) consent to the disposition of any
shares held by stockholders prior to the expiration of the 180-day lock-up
period or (b) issue, sell, contract to sell or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or exchangeable for
shares of common stock, other than our sale of shares in the offering, our
issuance of common stock upon the exercise of currently outstanding options and
warrants, and our issuance of incentive awards under our stock incentive plans.
See "Shares Eligible for Future Sale."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for our common stock offered by this prospectus has been determined through
negotiations between us and the Representatives. Among the factors considered
in these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
Representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The Representatives have advised us that, under Regulation
M under the Securities Exchange Act, some participants in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the common stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The Representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
78
<PAGE>
NASD Compliance. FleetBoston Robertson Stephens Inc. acted as the
placement agent for the second close of the private placement of our Series E
preferred stock in December 1999. In connection with its services as placement
agent, FleetBoston Robertson Stephens Inc. received 4,555 shares of our Series
E preferred stock at a price of $9.00 per share. Pursuant to requirements of
the National Association of Securities, Inc., FleetBoston Robertson Stephens
Inc. has agreed not to sell, transfer or assign these securities for one year
after the effective date of this offering.
Expenses of the Offering. The expenses of the offering are estimated at
$1.8 million and are payable entirely by us.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Perkins Coie LLP. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Fenwick & West LLP. As of
the completion of this offering, an investment partnership affiliated with
Perkins Coie LLP will own an aggregate of 13,333 shares of our common stock.
EXPERTS
The consolidated financial statements of iOwn Holdings, Inc. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The financial statements of Genesis 2000, Inc. as of December 31, 1998
and September 30, 1999 and for the year ended December 31, 1998 and the nine-
month period ended September 30, 1999, included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of HomeBuilders Financial Network,
Inc. and subsidiaries as of December 31, 1998 and 1999 and for each of the
years in the two-year period ended December 31, 1999, have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
For more information with respect to iOwn and the common stock offered by
this prospectus, see the registration statement and the exhibits and schedule
filed by us with the Securities and Exchange Commission on Form S-1 under the
Securities Act. This prospectus does not contain all of the information set
forth in the registration statement and the related exhibits and schedules.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and its exhibits and schedule may be inspected without
charge at the public facilities maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Securities and Exchange Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of all or any part of the registration statement may be obtained
from these offices upon the payment of the fees prescribed by the Securities
and Exchange Commission. The Securities and Exchange Commission maintains a
website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the website is http://www.sec.gov.
79
<PAGE>
iOwn Holdings, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
iOwn Holdings, Inc.
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit).............. F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Pro Forma Combined Financial Information
Unaudited Pro Forma Combined Financial Information..................... F-23
Unaudited Pro Forma Combined Balance Sheets............................ F-25
Unaudited Pro Forma Combined Statements of Operations.................. F-26
Notes to Unaudited Pro Forma Combined Balance Sheets and Statements of
Operations........................................................... F-28
Genesis 2000, Inc.
Report of Independent Accountants...................................... F-30
Balance Sheets......................................................... F-31
Statements of Operations............................................... F-32
Statements of Shareholders' Equity..................................... F-33
Statements of Cash Flows............................................... F-34
Notes to Financial Statements.......................................... F-35
HomeBuilders Financial Network, Inc. and Subsidiaries
Independent Auditors' Report........................................... F-38
Consolidated Statements of Financial Condition......................... F-39
Consolidated Statements of Operations.................................. F-40
Consolidated Statements of Stockholder's Equity........................ F-41
Consolidated Statements of Cash Flows.................................. F-42
Notes to Consolidated Financial Statements............................. F-43
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
iOwn Holdings, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
iOwn Holdings, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards in the United
States which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2, the Company
has incurred losses and generated negative cash flows from operations since
inception and will require additional financing. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 8, 2000
F-2
<PAGE>
iOwn Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity as of
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 10,157 $ 27,329
Restricted cash.......................... -- 521
Trade receivables, less allowance of $9
in 1998, and $271 in 1999.............. 142 912
Mortgage loans held-for-sale............. -- 1,950
Prepaids and other current assets........ 671 1,101
-------- --------
Total current assets.................. 10,970 31,813
Property and equipment, net................ 1,864 6,080
Goodwill and intangible assets, net........ 1,346 24,012
Other assets............................... 95 1,340
-------- --------
Total assets.......................... $ 14,275 $ 63,245
======== ========
Liabilities, Redeemable Convertible
Preferred Stock, and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable................... $ 973 $ 1,438
Accrued liabilities...................... 1,403 5,090
Deferred revenue......................... -- 1,309
Warehouse line of credit, net............ -- 1,948
Notes payable to stockholders, current
portion................................ -- 6,667
Line of credit, current portion.......... -- 1,479
Capital lease obligations, current
portion................................ 303 1,303
-------- --------
Total current liabilities............. 2,679 19,234
Notes payable to stockholders, non-current
portion.................................. -- 3,083
Line of credit, non-current portion........ -- 2,807
Capital lease obligations, non-current
portion.................................. 334 2,293
-------- --------
Total liabilities..................... 3,013 27,417
Redeemable convertible preferred stock
$0.001 par value, 46,829,700 shares
authorized; 10,728,194, and 17,558,760,
shares issued and outstanding in 1998 and
1999, respectively (aggregate liquidation
preference of $87,887) and no shares
issued and outstanding in pro forma
(unaudited).............................. 31,665 94,123 $ --
-------- -------- --------
Commitments (Notes 4, 8, 9 and 10)
Stockholders' equity (deficit):
Common stock $0.001 par value,
56,666,666 shares authorized;
1,955,458 and 3,320,820 shares issued
and outstanding in 1998 and 1999,
respectively; 20,879,580 shares issued
and outstanding pro forma
(unaudited)............................ 2 3 21
Additional paid-in capital............... 1,393 12,062 106,167
Common stock warrants.................... 1 1,540 1,540
Notes receivable from stockholders....... (1,024) -- --
Unearned stock-based compensation........ (953) (2,244) (2,244)
Accumulated deficit...................... (19,822) (69,656) (69,656)
-------- -------- --------
Total stockholders' equity (deficit).. (20,403) (58,295) $ 35,828
-------- -------- ========
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit).... $ 14,275 $ 63,245
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
iOwn Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
Transaction revenue............................ $ 51 $ 1,224 $ 4,065
Other Internet and e-commerce revenue.......... 18 89 469
Software licenses and maintenance.............. -- -- 33
------- -------- --------
Total revenues.............................. 69 1,313 4,567
------- -------- --------
Operating expenses:
Operations..................................... (310) (4,367) (12,404)
Sales and marketing............................ (571) (6,112) (17,926)
Technology, research and development........... (970) (4,793) (9,674)
General and administrative..................... (563) (1,172) (4,337)
Write-off of in-process research and
development.................................. -- -- (1,900)
Amortization of goodwill and intangible
assets....................................... -- (673) (1,032)
Amortization of stock-based compensation....... -- (300) (1,943)
------- -------- --------
Total operating expenses.................... (2,414) (17,417) (49,216)
------- -------- --------
Loss from operations........................ (2,345) (16,104) (44,649)
Interest income.................................. 7 201 509
Interest expense................................. (22) (112) (591)
Other expense.................................... (3) -- (300)
------- -------- --------
Net loss......................................... (2,363) (16,015) (45,031)
Accretion on preferred stock..................... (70) (1,326) (4,803)
------- -------- --------
Net loss attributable to common stockholders..... $(2,433) $(17,341) $(49,834)
======= ======== ========
Net loss per share attributable to common
stockholders, basic and diluted................ $ (1.74) $ (11.66) $ (27.08)
======= ======== ========
Shares used in computing net loss attributable to
common stockholders, basic and diluted......... 1,402 1,487 1,840
======= ======== ========
Pro forma net loss per share, basic and diluted
(unaudited).................................... $ (3.03)
========
Shares used in computing pro forma net loss,
basic and diluted (unaudited).................. 14,842
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
iOwn Holdings, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
For the years ended December 31, 1997, 1998 and 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Common Receivable
----------------- Paid-In Stock from Unearned Accumulated
Shares Amount Capital Warrants Stockholders Compensation Deficit Total
--------- ------ ---------- -------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,400,000 $ 1 $ 53 $ -- $ -- $ -- $ (48) $ 6
Common stock issued in
connection with
purchased technology at
$0.15 per share........ 13,333 -- 2 -- -- -- -- 2
Accretion to redemption
value relating to
mandatorily redeemable
preferred stock........ -- -- -- -- -- -- (70) (70)
Warrants to purchase
10,000 shares of common
stock issued for
services rendered...... -- -- -- 1 -- -- -- 1
Net loss................. -- -- -- -- -- -- (2,363) (2,363)
--------- ---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1997................... 1,413,333 1 55 1 -- -- (2,481) (2,424)
Common stock issued in
connection with
exercise of stock
options................ 542,125 1 85 -- -- -- -- 86
Notes receivable from
stockholders........... -- -- -- -- (1,024) -- -- (1,024)
Accretion to redemption
value relating to
mandatorily redeemable
preferred stock........ -- -- -- -- -- -- (1,326) (1,326)
Unearned compensation
related to stock
options................ -- -- 1,253 -- -- (953) -- 300
Net loss................. -- -- -- -- -- -- (16,015) (16,015)
--------- ---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1998................... 1,955,458 2 1,393 1 (1,024) (953) (19,822) (20,403)
Common stock issued in
connection with
exercise of stock
options................ 586,231 -- 181 -- -- -- -- 181
Stock issued in
connection with the
acquisition of Genesis
2000, Inc. ............ 833,331 1 6,873 -- -- -- -- 6,874
Repayment of notes
receivable from
stockholders........... -- -- -- -- 1,024 -- -- 1,024
Accretion to redemption
value relating to
mandatorily redeemable
preferred stock........ -- -- -- -- -- (4,803) (4,803)
Unearned compensation
related to stock
options................ -- -- 3,644 -- -- (1,291) -- 2,353
Exercise of common stock
warrants............... 5,000 -- 1 (1) -- -- -- --
Warrants to purchase
643,885 shares of
common stock issued for
services rendered...... -- -- -- 1,540 -- -- -- 1,540
Repurchase of common
stock (59,200) (30) -- -- -- -- (30)
Net loss................. -- -- -- -- -- -- (45,031) (45,031)
--------- ---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1999................... 3,320,820 $ 3 $12,062 $ 1,540 $ -- $(2,244) $(69,656) $(58,295)
========= ==== ======= ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
iOwn Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(2,363) $(16,015) $(45,031)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 25 352 1,914
Write-off of in-process research and
development.................................... -- -- 1,900
Amortization of goodwill and intangible assets... -- 673 1,032
Amortization of stock-based compensation......... -- 300 1,943
Equity issued for services rendered.............. 3 51 1,589
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables........ 13 (138) (314)
Increase in mortgage loans held-for-sale........ -- -- (1,950)
Increase in prepaids and other.................. (63) (676) (1,456)
Increase in trade accounts payable.............. 129 836 465
Increase in accrued liabilities................. 161 1,216 3,037
------- -------- --------
Net cash used in operating activities.......... (2,095) (13,401) (36,871)
------- -------- --------
Cash flows from investing activities:
Acquisition of HomeScout......................... -- (2,000) --
Purchase of property and equipment............... (59) (1,331) (1,970)
Increase in restricted cash...................... -- -- (521)
------- -------- --------
Net cash used in investing activities.......... (59) (3,331) (2,491)
------- -------- --------
Cash flows from financing activities:
Common stock issued for cash..................... -- 86 181
Repurchase of common stock....................... -- -- (30)
Proceeds from warehouse line of credit........... -- -- 5,215
Repayment of warehouse line of credit............ -- -- (3,267)
Proceeds from line of credit..................... -- -- 5,000
Repayment of line of credit...................... (5) -- (176)
Repayment of capital lease obligations........... (24) (182) (1,011)
Proceeds from stock subscription receivable...... -- 913 --
Proceeds from issuance of preferred stock, net... 2,896 25,359 49,598
Proceeds from notes receivable from
stockholders................................... -- -- 1,024
------- -------- --------
Net cash provided by financing activities...... 2,867 26,176 56,534
------- -------- --------
Increase in cash and cash equivalents............ 713 9,444 17,172
Cash and cash equivalents at beginning of year... -- 713 10,157
------- -------- --------
Cash and cash equivalents at end of year......... $ 713 $ 10,157 $ 27,329
======= ======== ========
Supplemental cash flow information:
Interest paid.................................... $ 9 $ 27 $ 503
======= ======== ========
Income taxes paid................................ $ 1 $ 1 $ 10
======= ======== ========
Noncash investing and financing activities:
Issuance of stock and notes in connection with
acquisition of Genesis 2000, Inc............... $ -- $ -- $ 26,211
======= ======== ========
Purchase of equipment under capital leases....... $ 152 $ 691 $ 3,969
======= ======== ========
Preferred stock purchased with notes............. $ -- $ 1,024 $ --
======= ======== ========
Accretion to preferred stock redemption value.... $ 70 $ 1,326 $ 4,803
======= ======== ========
Preferred and common stock warrants.............. $ 1 $ 55 $ 2,118
======= ======== ========
Preferred stock issued for services.............. $ -- $ 24 $ 41
======= ======== ========
Stock subscription receivable.................... $ 913 $ -- $ --
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements
1. Organization
iOwn Holdings, Inc. (the "Company") is the parent company of iOwn, Inc.
("iOwn") and Genesis 2000 Holdings, Inc. ("Genesis"). The Company was
established through a corporate reorganization as the parent of iOwn. This
reorganization has been accounted for as a transaction between entities under
common control. Accordingly, the Company's financial statements include the
historical financial position, results of operations, and cash flows of iOwn,
and its predecessor companies at historical basis.
The Company operates an Internet destination site for homeowners and home
buyers providing customers with the means to identify, purchase, finance, and
sell residential real estate. The Company provides customers with Internet
access to a wide selection of mortgages from leading lenders, home listings and
neighborhood information, informative tools and content, and referrals to a
range of real estate professionals. In addition, through Genesis, the Company
offers mortgage professionals a variety of desktop and Internet-based loan
processing and tracking products to enhance workflow performance and automate
the mortgage origination process. Genesis' products are being used by mortgage
brokers, mortgage bankers, banks, credit unions, and savings institutions.
2. Basis of Presentation
The Company's financial statements have been prepared assuming the
Company will continue as a going concern. The Company has sustained net losses
and negative cash flows from operations since its inception. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to meet its obligations in the ordinary course
of business is dependent upon its ability to establish profitable operations or
raise additional financing through public or private equity financings,
collaborative or other arrangements with corporate sources, or other sources of
financing to fund operations. However, there can be no assurance that the
Company will be able to achieve profitable operations or raise additional
capital. These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. Summary of Significant Accounting Policies
Principles of consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries, iOwn and Genesis. All significant intercompany
balances and transactions have been eliminated in the consolidation.
Risks and uncertainties
The Company offers its services over the Internet, and competes in the
market for Internet services and products, which is characterized by intense
competition and rapid technological changes. The Company has a limited
operating history, has never generated profits, and its prospects are subject
to the risks, expenses, and uncertainties frequently encountered by
organizations in new and rapidly evolving markets for Internet products and
services. These risks include the failure to generate brand awareness, the
rejection of the services by customers, vendors or advertisers, or the
inability of the Company to maintain and increase the level of demand for its
online products and services.
The Company's mortgage loan brokerage business may be adversely affected
by several risks, including an increase in market interest rates which
generally result in reduced refinancing activity, and therefore lower
transaction revenues.
The Company's operations include mortgage banking activities. Its ability
to engage in profitable secondary sales of loans may be adversely affected by
increases in interest rates. To the extent that the
F-7
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
Company is unable to deliver closed loans to financial investors within
contractually specified periods and interest rates increase, the Company may
experience no gain or even a loss on the sale of these loans. In addition, any
increase in interest rates will increase the cost of maintaining the Company's
warehouse line of credit, on which it depends to fund the loans it originates.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include valuation allowances for doubtful
accounts and deferred taxes, and the value of the Company's common stock.
Actual results could differ from those estimates.
Revenue recognition
The Company's revenues through December 31, 1999 were primarily derived
from mortgage brokerage fees. In connection with these mortgage transactions,
the Company recognizes revenues as loans are closed. Such loans are provided by
third-party lenders. The Company also derives revenues from its mortgage
banking activities. In connection with these transactions, the Company funds
mortgage loans through its warehouse line of credit and simultaneously enters
into sale contracts with mortgage loan purchasers. Revenues, which are
recognized at the time of sale, are derived from: (i) origination and
processing fees paid by the borrower net of origination costs and (ii) proceeds
in excess of the carrying value of the loan.
Other Internet and e-commerce revenues are primarily derived from the
sale of advertising space on the Company's website and the subscription fees
relating to the use of the HomeScout database.
Finally, through Genesis, the Company derives revenues from the sale of
software products and the delivery of maintenance services. In accordance with
the provisions of Statement of Position 97-2, Software Revenue Recognition, the
Company recognizes software licensing revenue upon shipment of the software
product to the customer if collectibility is probable and no significant vendor
obligations exist. Maintenance revenues are deferred and recognized ratably
over the term of the service period which is typically one year.
Advertising costs
The Company incurs advertising costs related to various media content
advertising such as television, radio, and print. These costs include the cost
of production as well as the cost of any airtime. Production costs are charged
to operations upon commencement of the related advertising campaign, while
airtime costs are charged as incurred.
Software costs
Effective January 1, 1999, the Company adopted the provisions of
Statement of Position No. 98-1, Software for Internal Use, which provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. The adoption of this standard did not have a material effect
on the financial position or results of operations of the Company as of
December 31, 1999 and for the year then ended.
Income taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. Under this method, deferred
F-8
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income tax
expense represents taxes payable for the current period, plus the net change in
deferred tax amounts.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Under APB No. 25, compensation expense is calculated as the excess of the
estimated fair value of the Company's stock over the exercise price, if any, on
the date of the grant.
Cash and cash equivalents
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less to be cash equivalents. All cash
deposits are held by two financial institutions and exceed federal deposit
insurance coverage limits.
Mortgage loans held-for-sale
The Company reports mortgage loans held-for-sale in accordance with the
provisions of SFAS No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. Under SFAS No. 91, the unamortized balance of loan origination,
commitment, and other fees and costs and purchase premiums and discounts that
is being recognized as an adjustment to the loan yield shall be presented as
part of the loan balance to which it relates. Loan origination fees and direct
loan origination costs are deferred until the related loan is sold.
Property and equipment
Property and equipment, including furniture and equipment under capital
leases and software, are recorded at cost and depreciated using the straight-
line method over their estimated useful lives, which is generally three years.
Maintenance and repairs are charged to expense as incurred, and improvements
are capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in operations in the period realized.
Fair value of financial instruments
The carrying amount of cash, accounts receivable and payable and accrued
liabilities approximate their fair values based on the short-term nature of
these instruments. The carrying amount of borrowings under lines of credit and
capital lease arrangements approximate fair value due to the market interest
rates which these borrowings bear.
Stock splits
On August 20, 1997 the Company's stockholders approved a two-for-one
stock split, and on December 16, 1999 the stockholders approved a one-for-three
reverse stock split. All preferred and common share amounts for all periods
presented have been restated to reflect these changes.
F-9
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
Historical and pro forma net loss per share
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Stock options, warrants
and preferred stock were not included in the computation of diluted net loss
per share because their effects would be antidilutive.
Unaudited pro forma net loss per share has been computed assuming the
conversion of all outstanding shares of convertible preferred stock into shares
of common stock which will occur upon closing of the offering discussed in Note
16. The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma consolidated balance sheet at December
31, 1999.
The following table sets forth the computation of historical and
unaudited pro forma basic and diluted net loss per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Historical:
Numerator:
Net loss......................................... $(2,363) $(16,015) $(45,031)
Accretion of convertible preferred stock to
redemption value............................... (70) (1,326) (4,803)
------- -------- --------
Net loss attributable to common stockholders..... $(2,433) $(17,341) $(49,834)
======= ======== ========
Denominator:
Weighted average common shares, basic and
diluted........................................ 1,402 1,616 2,420
Common stock subject to repurchase............... -- (129) (580)
------- -------- --------
Total weighted average shares outstanding....... 1,402 1,487 1,840
======= ======== ========
Historical net loss per share attributable to
common stockholders,
basic and diluted............................... $ (1.74) $ (11.66) $ (27.08)
======= ======== ========
Anti-dilutive securities excluded from
computation..................................... 887 6,533 14,905
======= ======== ========
Pro forma:
Denominator:
Weighted average common shares, basic and
diluted........................................ 1,840
Conversion of convertible preferred stock........ 13,002
--------
Total weighted average shares (unaudited)....... 14,842
========
Pro forma net loss per share, basic and diluted
(unaudited)..................................... $ (3.03)
========
</TABLE>
Comprehensive income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, during
1998. The Company classifies items of "other comprehensive income" by their
nature in a financial statement and displays the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. To date the Company has not
had any transactions that are required to be reported in comprehensive income.
Segment reporting
The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, which
establishes standards for the way public business
F-10
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports. The
operations of Genesis represented an insignificant component of consolidated
operations through 1999 due to its acquisition in December 1999; it may be
presented as a separate segment in future periods.
Pro forma stockholders' equity (unaudited)
Effective upon the closing of the Company's initial public offering, the
outstanding shares of preferred stock will automatically convert into shares of
common stock on a one-for-one basis. The pro forma effects of this conversion
are unaudited and have been reflected in the accompanying pro forma
consolidated balance sheet as of December 31, 1999.
Recently issued accounting standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. To date, the Company
has not engaged in derivative and hedging activities. In July 1999, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. The Company is evaluating the impact that
SFAS No. 133 may have on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition". This SAB summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The Company is
evaluating the future impact of the SAB on its consolidated financial position
and results of operations.
4. Acquisitions
In March 1998, the Company acquired certain assets and intellectual
property relating to the HomeScout services in exchange for $2,000,000. The
full purchase price, including transaction costs, of $2,020,000 was allocated
to intangible assets such as traffic on the HomeScout website, business
partnerships and the HomeScout trademark. These assets are being amortized over
a 30 month period. The amortization for the years ended December 31, 1998 and
1999 was $673,000 and $808,000, respectively.
In December 1999, the Company, through its wholly owned subsidiary,
acquired all of the outstanding shares of Genesis 2000, Inc. The purchase price
aggregated to $26,211,000 consisting of 833,331 shares of the Company's common
stock, 833,331 shares of the Company's Series EEE preferred stock,
collateralized promissory notes aggregating to $1,000,000, promissory notes
aggregating to $8,750,000 convertible at the election of the holder into shares
of stock to be issued at the close of the next equity financing at the then
established price per share, assumed liabilities totaling $1,511,000 and
$575,000 in incurred transaction costs. The acquisition was accounted for as a
purchase transaction.
In conjunction with the acquisition of Genesis 2000, Inc., the Company
recorded $12,920,000 of goodwill, $12,500,000 of acquired intangible assets and
wrote-off $1,900,000 relating to in-process research and development. The
goodwill and intangible assets are primarily amortized on a straight-line basis
over a three-year period. The amortization for the year ended December 31, 1999
was $224,000.
The following unaudited pro forma financial information reflects the
results of operations for the years ended December 31, 1998 and 1999, as if the
acquisitions of HomeScout and Genesis 2000, Inc. had occurred
F- 11
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
on January 1, 1998 including the effects of purchase accounting adjustments
arising from the acquisitions. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisitions actually taken place on January 1,
1998 and may not be indicative of future operating results (in thousands,
except per share data).
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues............................................. $ 7,480 $ 9,820
Net loss............................................. $(24,901) $(49,147)
Net loss attributable to common stockholders......... $(26,227) $(53,950)
Net loss per share attributable to common
stockholders, (basic and diluted).................. $ (11.30) $ (20.34)
Weighted average shares (basic and diluted).......... 2,320 2,652
</TABLE>
On December 22, 1999, the Company agreed to acquire all the outstanding
shares of HomeBuilders Financial Network, Inc. for a purchase price of $44.2
million consisting of 1,333,333 shares of common stock, 1,333,333 shares of
Series EEEE preferred stock, $2,700,000 in cash and a promissory note in the
amount of $13,300,000 and acquired liabilities and closing costs aggregating
approximately $1,550,000. The closing of this transaction is contingent upon
the consummation of the Company's initial public offering.
In connection with the agreement to acquire HomeBuilders Financial
Network, Inc., the Company issued a warrant to purchase 66,666 shares of common
stock to a financial advisor at an exercise price of $15 per share. This
warrant expires on December 8, 2009. The fair value of this warrant was
estimated at $466,000 using the following Black-Scholes assumptions: volatility
of 75%, fair value of common stock of $9, expected life of five years, and
risk-free interest rate of 6.2%. The fair market value of this warrant was
capitalized as deferred acquisition costs.
On February 1, 2000, the Company acquired substantially all the assets of
Real Estate By-Owners Network, Inc. for approximately $350,000 in cash,
including $25,000 in transaction costs. The Company also assumed liabilities
which approximated $100,000.
5. Property and Equipment
Property and equipment at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Leasehold improvements.................................... $ 94 $ 982
Computer equipment and software........................... 986 2,084
Office equipment.......................................... 317 465
Equipment under capital leases............................ 844 4,840
------ -------
2,241 8,371
Less: accumulated depreciation and amortization........... (377) (2,291)
------ -------
$1,864 $ 6,080
====== =======
</TABLE>
Accumulated amortization for assets under capital leases amounts to
$243,000 and $1,712,000 for the years ended December 31, 1998 and 1999,
respectively. All equipment under capital leases serves as collateral for the
related lease obligations.
F-12
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
6. Income Taxes
The provision for income taxes for the years ended December 31, 1997,
1998, and 1999 represents minimum state franchise taxes. The effective income
tax rate differs from the statutory federal income tax rate due to management's
determination that it is more likely that the Company will be unable to utilize
the benefit of net operating losses and the resulting recognition of a
valuation allowance. The increase in the valuation allowance was $940,000,
$6,290,000 and $10,770,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
The primary components of temporary differences which give rise to
deferred taxes at December 31, 1997, 1998 and 1999 consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998 1999
----- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 900 $ 6,850 $ 21,500
Other deferred tax assets...................... 40 380 1,500
Deferred tax liabilities....................... -- -- (5,000)
----- ------- --------
Total deferred tax assets................... 940 7,230 18,000
Valuation allowance.............................. (940) (7,230) (18,000)
----- ------- --------
$ -- $ -- $ --
===== ======= ========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $57.0 million for federal and $37.0 million for state income tax
purposes. The federal and state carryforwards expire through 2019 and 2006,
respectively.
Pursuant to the provisions of the Tax Reform Act of 1986, utilization of
the net operating loss carryforwards may be subject to an annual limitation in
the event of a greater than 50% change in the ownership of the Company.
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Advertising production...................................... $ 208 $ 446
Customer acquisition........................................ 790 1,596
Compensation................................................ 200 804
Professional services....................................... 116 869
Payable to stockholders..................................... -- 633
Other....................................................... 89 742
------ ------
$1,403 $5,090
====== ======
</TABLE>
F-13
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
8. Lines of Credit
On August 12, 1999, the Company entered into a $5.0 million line of
credit with a financial institution. Borrowings against this line bear interest
of 12.5% per annum, payable in 36 equal monthly installments and are
collateralized by all of the Company's assets. As of December 31, 1999, the
Company had $5.0 million outstanding under this line of credit. In connection
with this line of credit agreement, the Company issued warrants to purchase
53,333 and 44,444 shares of the Company's Series D and Series E preferred
stocks, respectively. The Series D preferred stock warrant was issued in August
1999 and has an exercise price of $7.50 per share. This warrant expires in
August 2009. The Series D warrant's fair value was estimated to be
approximately $344,000 using the following Black-Scholes assumptions:
volatility of 65%, risk-free interest of 5.2% and expected life of ten years.
The proceeds have been allocated to the line of credit and the warrant based
upon the relative fair values at the date of issuance. This resulted in
additional debt discount totaling $320,000.
The Series E preferred stock warrant was issued in November 1999 and has
an exercise price of $9.00. This warrant expires in November 2009. The
warrant's value was estimated to be approximately $312,000 using the Black-
Scholes assumptions: volatility of 65%, risk-free interest of 6.0% and expected
life of ten years. Application of the proceeds to the line of credit and
warrant based on relative fair values at the date of issuance resulted in
additional debt discount totaling $259,000. Interest expense relating to the
amortization of the debt discounts amounted to $41,000 during the year ended
December 31, 1999.
On October 8, 1999, the Company entered into a $10.0 million warehouse
line of credit with a financial institution to be used to fund mortgage loans
under its mortgage banking activities. Interest charged on borrowings against
the line of credit is variable based on the LIBOR rate plus a spread of 2.50%
per annum. Additionally, this line is collateralized by mortgage loans made by
the Company. To the extent 50% of the total available line of credit is unused,
the Company will pay a fee equal to 0.25% per annum on the total amount of the
unused portion of the commitment, as defined in the loan agreement. The loan
agreement also requires the Company to maintain several financial and non-
financial covenants and restricts the declaration and payment of dividends. As
of December 31, 1999, the Company was in compliance with the financial
covenants contained in the agreement.
The proceeds received by the Company in conjunction with the sale of its
mortgage loans to financial investors are applied as principal paydowns on the
draws made on the warehouse line of credit. The line of credit expires on April
8, 2000 with all outstanding principal due and payable (see Note 15). As of
December 31, 1999, the Company has $1,948,000 outstanding under the warehouse
line of credit.
The future minimum principal payments under these lines of credit, as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000.............................................................. $3,427
2001.............................................................. 1,687
2002.............................................................. 1,658
------
Total.......................................................... $6,772
======
</TABLE>
The amounts payable under the lines of credit of $6,234,000 as of
December 31, 1999 are presented net of the remaining debt discount of $538,000.
F-14
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
9. Notes Payable to Stockholders
In connection with the acquisition of Genesis 2000, Inc., the Company
issued collateralized promissory notes and promissory notes aggregating to
$1,000,000 and $8,750,000, respectively. The collateralized promissory notes
are payable in twenty-four equal monthly principal payments with interest of
6.0% per annum based on the outstanding principal.
The promissory notes bear an interest rate of 6.0% per annum with
interest payable monthly and mature on March 1, 2001. Principal is payable as
follows: (i) a $1,000,000 lump sum payment due on January 7, 2000 and (ii)
three $2,583,000 lump sum payments due on September 1, 2000, December 1, 2000
and March 1, 2001, respectively. The promissory notes are convertible at the
election of the holder into shares of the Company's equity securities upon the
next equity offering of the Company.
10. Commitments
Leases
During 1997 and 1998, the Company entered into capital lease agreements
for equipment. In addition, the Company and Genesis lease office spaces under
four operating leases, one of which is noncancellable. Deposits relating to
such leases have been classified as restricted cash. Rent expense under
operating leases amounted to $48,000, $350,000 and $1,334,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
The Company's obligations under capital and operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, ------- ---------
<S> <C> <C>
2000................................................. $1,795 $1,729
2001................................................. 1,637 2,253
2002................................................. 999 2,092
2003................................................. -- 1,413
2004................................................. -- 741
Thereafter........................................... -- --
------ ------
Total minimum lease payments........................... 4,431 $8,228
======
Less: amount representing interest..................... 835
------
Present value of minimum lease payments................ 3,596
Less: current portion of capital lease obligations..... 1,303
------
Non-current portion of capital lease obligations....... $2,293
======
</TABLE>
Advertising and customer acquisition arrangements
During 1998 and 1999, the Company entered into online advertising and
customer acquisition arrangements with various Internet companies. Subject to
certain vendor performance requirements, the Company is committed to make
aggregate payments of up to $15,973,000 under such arrangements as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000............................................................ $11,385
2001............................................................ 4,510
2002............................................................ 78
-------
$15,973
=======
</TABLE>
F-15
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
Advertising expense amounted to $149,000, $4,879,000 and $14,759,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
Mortgage Banking Activities
At December 31, 1999, the Company had mortgage loans held-for-sale with
principal amounts aggregating to $1,968,000. The Company is obligated under
sales contracts it had entered into to sell these mortgage loans to financial
investors at locked interest rates. As specified in agreements with financial
investors, the Company would be liable and could be assessed penalties if it
fails to deliver the mortgage loans in the prescribed time and form.
Legal
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing pending
and threatened actions and proceedings with counsel, management believes that
the outcome of such actions or proceedings is not expected to have a material
adverse effect on the financial position or results of operation of the
Company.
11. Redeemable Securities
Convertible preferred stock
Redeemable convertible preferred stock consists of the following (in
thousands, except share data):
<TABLE>
<CAPTION>
Shares
Outstanding Amount
----------- -------
<S> <C> <C>
Issuance of Series A preferred stock.................. 830,962 $ 553
Issuance of Series B preferred stock.................. 1,722,995 3,255
Preferred stock accretion............................. -- 70
---------- -------
Balances at December 31, 1997......................... 2,553,957 3,878
Issuance of Series B preferred stock.................. 2,260,912 4,289
Issuance of Series C preferred stock.................. 5,913,325 22,118
Issuance of Series B preferred stock warrants......... -- 54
Preferred stock accretion............................. -- 1,326
---------- -------
Balances at December 31, 1998......................... 10,728,194 31,665
Issuance of Series D preferred stock.................. 2,606,870 19,475
Issuance of Series D preferred stock warrants......... -- 320
Issuance of Series E preferred stock ................. 3,390,365 30,101
Issuance of Series E preferred stock warrants......... -- 259
Issuance of Series EEE preferred stock................ 833,331 7,500
Preferred stock accretion............................. -- 4,803
---------- -------
Balances at December 31, 1999......................... 17,558,760 $94,123
========== =======
</TABLE>
F-16
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
Redemption
Series A and B preferred stock are redeemable at the option of two-thirds
of the preferred stockholders. Series C, D and E preferred stock are redeemable
at the option of the majority of the preferred stockholders. The redemption may
not occur earlier than February 28, 2003 for Series A preferred stock, November
30, 2003 or upon redemption of prior series for Series B preferred stock,
September 4, 2004 or upon redemption of prior series for Series C preferred
stock, April 28, 2004 or upon redemption of prior series for Series D preferred
stock, and October 29, 2005 or upon redemption of prior series for Series E
preferred stock.
The redemption price with respect to Series A preferred stock is an
amount equal to $0.72 per share plus $0.072 per share per annum along with any
dividends declared but unpaid. The redemption price with respect to Series B
preferred stock is an amount equal to $1.8948 per share plus $0.1895 per share
per annum along with any dividends declared but unpaid. The redemption price
with respect to Series C preferred stock is an amount equal to $3.75 per share
plus $0.375 per share per annum along with any dividends declared but unpaid.
The redemption price with respect to Series D preferred stock is an amount
equal to $7.50 per share plus $0.75 per share per annum along with any
dividends declared but unpaid. The redemption price with respect to Series E
preferred stock is an amount equal to $9.00 per share plus $0.90 per share per
annum along with any dividends declared but unpaid. For the years ended
December 31, 1997 and 1998, the Company recorded $50,000 and $60,000 in
accreted dividends relating to Series A preferred stock; $20,000 and $676,000
in accreted dividends relating to Series B preferred stock; $0 and $590,000 in
accreted dividends relating to Series C preferred stock. For the year ended
December 31, 1999, the Company recorded $60,000, $755,000, $2,217,000,
$1,316,000 and $437,000 in accreted dividends relating to Series A, B, C, D and
E preferred stock, respectively. In addition, the Company recorded accreted
dividends of $18,000 relating to Series EEE preferred stock for the year ended
December 31, 1999.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of Series A, B, C, D, E,
and EEE preferred stock shall retain liquidation preference over common
stockholders, in an amount equal to: (i) $0.72 per share for each share of
Series A preferred stock, (ii) $1.8948 per share for each share of Series B
preferred stock, (iii) $3.75 per share for each share of Series C preferred
stock (iv) $7.50 per share for each share of Series D preferred stock and (iv)
$9.00 per share for each share of Series E and Series EEE preferred stock
adjusted for any combinations, consolidations, subdivisions, or stock splits.
In addition to the liquidation preference, the preferred stockholders are
entitled to any declared but unpaid dividends on such shares.
The remaining assets and funds of the Company available for distribution
shall be distributed ratably among all holders of preferred stock and the
holders of common stock based on the number of shares of common stock held by
each holder (assuming conversion of all preferred stock).
Voting rights
Holders of Series A, B, C, D, E and EEE preferred stock are entitled to
vote together with holders of common stock. The number of votes granted to
preferred stockholders is equal the number of full shares of common stock into
which each share of preferred stock could be converted.
Conversion
At the option of the holder, preferred shares are convertible at any time
into shares of common stock at the initial conversion price of $0.72 per share
for Series A preferred stock, $1.8948 per share of Series B preferred stock,
$3.75 per share of Series C preferred stock, $7.50 per share of Series D
preferred stock and
F-17
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
$9.00 per share of Series E and Series EEE preferred stock. The conversion
price of each series of preferred stock is subject to adjustment as described
in the Company's articles of incorporation. All preferred shares will
automatically be converted into shares of common stock upon (i) the closing of
a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
any of the Company's common stock with aggregate gross proceeds to the Company
of at least $30,000,000 or (ii) upon the stockholder consent of the majority of
the then outstanding shares of preferred stock.
Dividends
Each fiscal year, holders of preferred stock are entitled to receive,
when and if declared by the Board of Directors, out of any funds legally
available, a preferential non-cumulative dividend of $0.057 per share for
Series A preferred stock, $0.1895 per share of Series B preferred stock, $0.375
per share for Series C preferred stock, $0.75 per share for Series D preferred
stock, and $0.90 per share of Series E and Series EEE preferred stocks as
adjusted for stock splits, recapitalizations, and combinations. In addition,
preferred stockholders are entitled to participate in cash dividends paid to
common stockholders in an amount per share as would be payable on the number of
shares of common stock into which each share of preferred stock could be
converted. No dividends have been declared to date.
Equity instruments issued
In November 1997, the Company issued warrants to purchase up to 10,000
shares of common stock at an exercise price of $0.135 per share to third
parties for consulting services performed. The warrants are exercisable through
February 2004. 5,000 of the 10,000 warrants issued in November 1997 were
exercised in April 1999. The fair value of such warrants under the Black-
Scholes model was immaterial.
In March 1998, the Company issued 12,666 shares of the Company's Series B
preferred stock at a price of $1.89 per share to a vendor for services
rendered. The fair value of such shares was recorded as expense during fiscal
1998.
In April 1998, the Company issued warrants to purchase 10,000 shares of
the Company's Series B preferred stock at an exercise price of $2.274 per share
to a financial institution in connection with the iOwn Holdings, Inc.
ratification of a line of credit agreement. These warrants are exercisable at
any time through April 2005. The fair value of such warrants under the Black-
Scholes model was immaterial.
In July 1998, the Company issued warrants to purchase 18,471 shares of
the Company's Series B preferred stock at an exercise price of $1.89 per share
to a financial institution in connection with the leasing of computer
equipment. These warrants are exercisable at any time through July 2008. The
fair value of such warrants under the Black-Scholes model was immaterial and
was recorded as an expense during fiscal 1998.
As part of a marketing services agreement with a third party, the Company
issued a warrant to purchase 8,333 shares of common stock at an exercise price
of $30 per share in July 1999. The fair value of such warrants was $29,000
using the following Black-Scholes assumptions: volatility of 65%, fair value of
common stock of $8.25, expected life of 7 years, and risk-free interest rate of
5.1%. An additional warrant to purchase 8,333 shares of common stock may be
issued in connection with the agreement, contingent upon the service provider
meeting certain specified performance criteria. These warrants are exercisable
at any time through July 2006. The value of these warrants is being recorded as
advertising expense over the two-year term of the agreement.
F-18
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
As described in Note 8, on August 12, 1999, the Company issued warrants
to purchase 53,333 shares of the Company's Series D preferred stock at a price
of $7.50 per share to a financial institution in connection with a line of
credit agreement. These warrants are exercisable at any time through August
2009 or five years from the effective date of the Company's initial public
offering, whichever is longer. An additional warrant to purchase 44,444 shares
of the Company's Series E preferred stock at a price of $9.00 per share was
issued in November 1999. The warrants are exercisable at any time through
November 2009 or five years from the effective date of the Company's initial
public offering, whichever is longer. The fair value and accounting of these
warrants are disclosed in Note 8.
In September 1999, the Company issued warrants to purchase 9,998 shares
of common stock at an exercise price of $8.25 per share to vendors for services
rendered. The fair value of such warrants was $56,000 using the following
Black-Scholes assumptions: volatility of 65%, fair value of common stock of
$8.25, expected life of 7 years, and risk-free interest rate of 5.2%. These
warrants are exercisable at any time through September 2006. The fair value of
such warrants was recorded as expense during fiscal 1999.
In October 1999, the Company issued warrants to purchase 555,555 shares
of common stock at a price of $9.00 per share to a financial institution. These
warrants are exercisable upon the occurrence of any one of certain
predetermined events but no later than October 2006. The fair value of such
warrants was $970,000 using the following: volatility of 65%, fair value of
common stock of $9.00, expected life of 0.5 years, and risk-free interest of
5.9%. The full fair value of the warrants was immediately expensed as no
tangible future benefit was expected to be received from the financial
institution. In addition, the Company also issued warrants to purchase 3,333
shares of common stock at a price of $8.25 per share to a real estate company
in conjunction with a one-year marketing agreement. These warrants are
exercisable at any time through September 2006. The value of these warrants is
immaterial and was recorded as an expense during fiscal 1999.
As described in Note 4, in December 1999, the Company issued 66,666
warrants to purchase common stock to a financial advisor in connection with the
agreement to purchase HomeBuilders Financial Network, Inc.
12. Common Stock
In December 1999, the Company amended its articles of incorporation to
increase the number of authorized shares of common stock to 56,666,666 shares
and preferred stock to 46,829,700 shares.
The stock subscription receivable balance of $913,000 as of December 31,
1997 was paid to the Company in early January 1998. The notes receivable from
stockholders balance of $1.0 million as of December 31, 1998 was paid to the
Company in late February 1999.
13. 1997 Stock Option Plan
The Company has reserved up to 5,188,870 shares of common stock issuable
upon exercise of options issued to certain employees, directors, and
consultants pursuant to the Company's 1997 Stock Option Plan ("The 1997 Plan"),
as amended. Substantially all options are exercisable at prices equal to the
estimated fair value of the Company's common stock at the date of grant, and
have a term of ten years. Substantially all optionees have a vested interest in
25% of the option shares upon the optionee's completion of one year of service
measured from the vesting commencement date. The balance then vests in equal
successive monthly installments of 1/48 upon the optionee's completion of each
of the next 36 months of service. If an option holder ceases to be employed by
the Company, vested options held at the date of termination may be exercised
within three months.
F-19
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
The 1997 Plan allows certain option holders to exercise their options
prior to vesting. However, such exercises are subject to repurchase by the
Company if not vested. The Company's repurchase right lapses over a four year
period. During 1999, the Company repurchased 59,200 unvested shares of common
stock due to separation from the related employees. As of December 31, 1999,
404,860 shares of common stock acquired by option holders are subject to
repurchase by the Company.
A summary of the status of the Company's 1997 Plan for the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------
Weighted
Number Exercise Average
of Price per Aggregate Exercise
Options Share Price Price
--------- ------------ -------------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1996... -- -- $ -- --
Granted...................... 632,309 $0.075-$0.18 68 $0.11
Exercised.................... -- -- -- --
Forfeited.................... (21,664) -- (2) $0.11
--------- ------------ ------- -----
Balance at December 31, 1997... 610,645 $0.075-$0.18 66 $0.11
Granted...................... 1,171,111 $ 0.18-$0.75 346 $0.30
Exercised.................... (542,125) $0.075-$0.75 (86) $0.16
Forfeited.................... (153,481) $0.075-$0.54 (25) $0.16
--------- ------------ ------- -----
Balance at December 31, 1998... 1,086,150 $0.075-$0.75 301 $0.28
Granted...................... 3,101,391 $ 0.75-$8.25 18,138 $5.85
Exercised.................... (586,231) $0.075-$8.25 (181) $0.32
Forfeited.................... (758,998) $0.105-$8.25 (3,043) $4.00
--------- ------------ ------- -----
Balance at December 31, 1999... 2,842,312 $0.075-$8.25 $15,215 $5.35
========= =======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life (in Exercise Number Exercise
Price Outstanding years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.075--$0.54 286,392 8.49 $0.35 133,860 $0.42
$0.75--$1.50 414,545 9.04 $0.84 365,883 $0.80
$1.89--$7.50 561,283 9.27 $3.08 308,479 $3.74
$8.25 1,580,092 9.75 $8.25 266,282 $8.25
--------- ---------
2,842,312 9.42 $5.35 1,074,504 $3.44
========= =========
</TABLE>
F-20
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company accounts for its plan
in accordance with APB No. 25 and related interpretations. The fair value of
each iOwn Holdings, Inc. stock option is estimated on the date of grant using
the minimum value option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (in years)................................. 5 4.5 4.5
Risk-free interest rate.................................. 5.21% 5.11% 5.60%
Expected dividend rate................................... -- -- --
</TABLE>
As a result of the above assumptions, the weighted average fair value of
options granted for the years ended December 31, 1997, 1998 and 1999 was
$0.039, $0.144, and $0.874, respectively.
Had compensation expense for the stock option plans been determined based
on the fair value at the grant date for options granted in 1997, 1998, and 1999
consistent with the provisions of SFAS No. 123, the pro forma net loss would
have been reported as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--as
reported....................................... $(2,433) $(17,341) $(49,834)
Net loss attributable to common stockholders--pro
forma.......................................... $(2,435) $(17,349) $(50,149)
Net loss per share attributable to common
stockholders--as reported...................... $ (1.74) $ (11.66) $ (27.08)
Net loss per share attributable to common
stockholders--pro forma........................ $ (1.74) $ (11.67) $ (27.25)
</TABLE>
Under APB No. 25, when the exercise price of the Company's employee stock
options equals or exceeds the fair value price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's financial
statements. The Company granted options at exercise prices based upon the fair
value of the underlying stock as determined by its Board of Directors.
Subsequently, it was determined that the Company had granted options in 1998
and 1999 at exercise prices that were below the fair value price of the
underlying stock. Accordingly, the Company has recorded deferred stock-based
compensation of $1,253,000 and $3,644,000 in the years ended December 31, 1998
and 1999, respectively, based upon the intrinsic value of the options at the
grant date. The deferred stock-based compensation is being amortized to expense
on an accelerated basis over the vesting periods of the underlying options
which is generally four years.
14. Employee benefit plans
In 1997, the Company adopted a 401(k) plan. Participation in the 401(k)
plan is available to all employees. Employees are eligible to participate in
the 401(k) plan at any time beginning with their first day of employment. Each
participant may elect to contribute an amount up to 20% of his or her annual
base salary plus commission and bonus, but not to exceed the statutory limit as
prescribed by the Internal Revenue Code. The Company may make discretionary
contributions to the 401(k) plan. To date, no contributions have been made by
the Company.
In December 1999, the Company adopted the 2000 Stock Incentive
Compensation Plan. The Company has reserved a total of 1,533,333 shares of
common stock plus (i) any shares reserved but not granted, or canceled and
returned, under the 1997 Plan, and (ii) an automatic annual increase equal to
the lesser of 5% of the average number of common stock outstanding during the
preceding year or a lesser amount determined by the Board of Directors.
F-21
<PAGE>
iOwn Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
15. Subsequent events (unaudited)
Subsequent to December 31, 1999, the Company granted to its employees
options to purchase 1,672,204 shares of the Company's common stock at an
exercise price of $8.25 per share. Such grants would result in an additional
deferred stock-based compensation of approximately $1,850,000.
The term of the warehouse line of credit was extended to May 8, 2000 and
the total available under the line was increased to $50 million.
16. Initial public offering (unaudited)
In December 1999, the Company's Board of Directors authorized the Company
to file a registration statement with the Securities and Exchange Commission
for the purpose of an initial public offering of the Company's common stock.
Upon completion of this offering, the Company's preferred stock will be
automatically converted into shares of common stock, and all outstanding shares
of preferred stock will be cancelled and retired. The pro forma effect of the
conversion has been presented as a separate column in the Company's balance
sheet, assuming the conversion had occurred as of December 31, 1999.
F-22
<PAGE>
iOwn Holdings, Inc.
Unaudited Pro Forma Combined Financial Information
As of December 31, 1999 and
For the Years Ended December 31, 1998 and 1999
Overview
On December 22, 1999, the Company (i) acquired all the outstanding shares
of Genesis 2000, Inc. ("Genesis") and (ii) agreed to acquire all the
outstanding shares of HomeBuilders Financial Network, Inc. ("HFN"). The Genesis
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The fair value of intangible
assets was determined using the income approach and the cost approach. The HFN
acquisition will be accounted for using the same method.
The total purchase price of Genesis was $26,211,000 and consisted of (i)
833,331 shares of the Company's common stock with an estimated fair value of
$6,875,000, (ii) 833,331 shares of the Company's Series EEE preferred stock
with an estimated fair value of $7,500,000, (iii) collateralized promissory
notes aggregating to $1,000,000, (iv) promissory notes aggregating to
$8,750,000 convertible into shares of the Company's common stock, (v) assumed
liabilities aggregating to $1,511,000 and (vi) $575,000 in incurred transaction
costs. Of the total purchase price, $791,000 was allocated to tangible assets
and $25,420,000 to intangible assets, including goodwill in the amount of
$12,920,000, non-compete agreements of $3,400,000, existing technology of
$2,500,000, assembled workforce of $2,500,000, in-process research and
development of $1,900,000, customer base of $1,600,000 and purchased trademark
and trade name of $600,000. The intangible assets will be amortized over their
estimated useful lives of 18 to 48 months. The in-process research and
development was immediately expensed.
The closing of the HFN acquisition is anticipated to be consummated with
the initial public offering. Upon closing, the total purchase price of
approximately $44,220,000 will consist of (i) 1,333,333 shares of the Company's
common stock with an estimated fair value of $13,333,000, (ii) 1,333,333 shares
of the Company's Series EEEE preferred stock with an estimated fair value of
$13,333,000, (iii) $2,700,000 in cash payments, (iv) a $13,300,000 promissory
note, (v) warrants to purchase 66,667 shares of the Company's common stock
valued at $466,000, (v) assumed liabilities aggregating to $762,000 and (vi)
approximately $326,000 in transaction fees. Of the total purchase price,
$698,000 will be allocated to tangible assets and $43,522,000 to intangible
assets, including goodwill in the amount of $30,722,000, non-compete agreements
of $5,400,000, assembled work force of $400,000, investments in joint ventures
of $2,100,000 and management contracts of $4,900,000. The intangible assets
will be amortized over their estimated useful lives ranging from 24 to
60 months.
The Genesis and HFN acquisition agreements provide for additional
contingent consideration payments up to a maximum of $23,000,000 through 2001.
The acquisitions of Genesis and HFN have been structured as tax-free
exchanges of stock; therefore, the differences between the recognized fair
values of the acquired assets, including tangible assets, and their historical
tax bases are not deductible for tax purposes.
The following unaudited pro forma and pro forma as adjusted Combined
Balance Sheet reflects the financial position of the Company as if the
following transactions occurred on December 31, 1999; (i) the acquisition of
HFN and (ii) the initial public offering of the Company per this registration
statement. The Company anticipates selling 6,000,000 shares of common stock at
an assumed initial public offering price of $10.00 per share. Net proceeds from
the offering is estimated to be $53,800,000 after deducting the underwriting
discounts and estimated offering expenses. The Company intends to use
$7,750,000 of the net proceeds from the offering to repay promissory notes
payable to prior shareholders of Genesis. In addition, the Company will use
$2,700,000 of the net proceeds to pay the cash portion of the purchase price
for HFN.
F-23
<PAGE>
The following unaudited pro forma and pro forma as adjusted Combined
Statements of Operations reflect the results of operations of the Company for
the years ended December 31, 1998 and 1999, as if the following transactions
occurred on January 1, 1998; (i) the acquisitions of Genesis and HFN, after
giving effect to purchase accounting adjustments; and (ii) the initial public
offering of the Company per this registration statement. The Company intends to
use $7,750,000 of the net proceeds from the offering to repay promissory notes
payable to prior shareholders of Genesis. These promissory notes bear interest
at the rate of 6% per annum and are payable immediately upon the closing of the
offering.
These pro forma and pro forma as adjusted results have been prepared for
comparative purposes only, do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1998, and may not be indicative of future operating results.
F-24
<PAGE>
iOwn Holdings, Inc.
Unaudited Pro Forma Combined Balance Sheets
As of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company HFN Adjustments Pro Forma Adjustments as Adjusted
-------- ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........ $ 27,329 $2,363 $ (5,063)(a) $ 24,629 $46,050 (g)(h) $ 70,679
Restricted cash.................. 521 -- -- 521 -- 521
Trade receivables, net........... 912 423 -- 1,335 -- 1,335
Prepaids and other current
assets......................... 3,051 18 -- 3,069 -- 3,069
-------- ------ --------- -------- ------- --------
Total current assets.......... 31,813 2,804 (5,063) 29,554 46,050 75,604
Property and equipment, net........ 6,080 45 -- 6,125 -- 6,125
Goodwill and intangible assets,
net.............................. 24,012 -- 43,522 (b) 67,534 -- 67,534
Other assets....................... 1,340 211 (325)(c) 1,226 (867)(g) 359
-------- ------ --------- -------- ------- --------
Total assets.................. $ 63,245 $3,060 $ 38,134 $104,439 $45,183 $149,622
======== ====== ========= ======== ======= ========
Liabilities, Redeemable Preferred
Stock and Warrants, and
Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable........... $ 1,438 $ 512 $ -- $ 1,950 $ -- $ 1,950
Accrued liabilities and deferred
revenue........................ 6,399 -- 250 (d) 6,649 -- 6,649
Lines of credit, current
portion........................ 3,427 -- -- 3,427 -- 3,427
Notes payable to stockholders,
current portion................ 6,667 -- 8,300 (e) 14,967 (7,750)(h) 7,217
Capital lease obigations,
current portion................ 1,303 -- -- 1,303 -- 1,303
-------- ------ --------- -------- ------- --------
Total current liabilities..... 19,234 512 8,550 28,296 (7,750) 20,546
Lines of credit, noncurrent
portion.......................... 2,807 -- -- 2,807 -- 2,807
Notes payable to stockholders,
noncurrent portion............... 3,083 -- 5,000 (e) 8,083 -- 8,083
Capital lease obligations,
noncurrent portion............... 2,293 -- -- 2,293 -- 2,293
-------- ------ --------- -------- ------- --------
Total liabilities............. 27,417 512 13,550 41,479 (7,750) 33,729
-------- ------ --------- -------- ------- --------
Redeemable convertible preferred
stock............................ 94,123 -- ( 94,123)(e)(f) -- -- --
Stockholders' equity (deficit)
Common stock and common stock
warrants....................... 13,605 556 120,699 (e)(f) 134,860 52,933 (g) 187,793
Unearned stock-based
compensation................... (2,244) -- -- (2,244) -- (2,244)
(Accumulated deficit) retained
earnings....................... (69,656) 1,992 (1,992) (69,656) -- (69,656)
-------- ------ --------- -------- ------- --------
Total stockholders' equity
(deficit)................... (58,295) 2,548 118,707 62,960 52,933 (g) 115,893
-------- ------ --------- -------- ------- --------
Total liabilities,
redeemable preferred
stock, warrants and
stockholders' equity
(deficit)................. $ 63,245 $3,060 $ 38,134 $104,439 $45,183 $149,622
======== ====== ========= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
iOwn Holdings, Inc
Unaudited Pro Forma Combined Statements of Operations
For the Year Ended December 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company Genesis HFN Adjustments Pro Forma Adjustments as Adjusted
-------- ------- ------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage transaction
revenue.............. $ 1,224 $ -- $ 4,281 $ -- $ 5,505 $ -- $ 5,505
Other Internet and e-
commerce............. 89 -- -- -- 89 -- 89
Software licenses and
maintenance.......... -- 6,167 -- -- 6,167 -- 6,167
-------- ------- ------- -------- -------- ---- --------
Total revenues....... 1,313 6,167 4,281 -- 11,761 -- 11,761
Operating expenses:
Operations............ (4,367) -- (1,479) -- (5,846) -- (5,846)
Cost of revenues...... -- (828) -- -- (828) -- (828)
Sales and marketing... (6,112) (1,124) -- -- (7,236) -- (7,236)
Technology and
research and
development.......... (4,793) (697) -- -- (5,490) -- (5,490)
General and
administrative....... (1,172) (1,739) (625) (79)(i) (3,615) -- (3,615)
Amortization of
intangible assets.... (673) -- -- (23,848)(k) (24,521) -- (24,521)
Amortization of stock-
based compensation... (300) -- -- -- (300) -- (300)
-------- ------- ------- -------- -------- ---- --------
Total operating
expenses............ (17,417) (4,388) (2,104) (23,927) (47,836) -- (47,836)
-------- ------- ------- -------- -------- ---- --------
Income (loss) from
operations............. (16,104) 1,779 2,177 (23,927) (36,075) -- (36,075)
Interest income......... 201 143 34 -- 378 -- 378
Interest expense........ (112) -- (8) (1,340)(l) (1,460) 435(o) (1,025)
Other income (expense).. -- 26 162 -- 188 -- 188
-------- ------- ------- -------- -------- ---- --------
Net income (loss)
before provision for
income taxes........ (16,015) 1,948 2,365 (25,267) (36,969) 435 (36,534)
Pro forma provision for
income taxes........... -- (779) (893) 1,541 (m) (131) -- (131)
-------- ------- ------- -------- -------- ---- --------
Net income (loss).... (16,015) 1,169 1,472 (23,726) (37,100) 435 (36,665)
Accretion on preferred
stock.................. (1,326) -- -- 1,326 (n) -- -- --
-------- ------- ------- -------- -------- ---- --------
Net income (loss)
attributable to common
shareholders........... $(17,341) $ 1,169 $ 1,472 $(22,400) $(37,100) $435 $(36,665)
======== ======= ======= ======== ======== ==== ========
Net income (loss) per
share attributable to
common shareholders,
basic and diluted...... $ (11.66) $ 11.69 $14,720
======== ======= =======
Shares used in computing
net income (loss)
attributable to common
shareholders, basic and
diluted................ 1,487 100 0.1
======== ======= =======
Pro forma net loss per
share ................. $ (3.15) $ (2.06)
======== ========
Shares used in computing
pro forma net loss per
share.................. 11,791 17,791
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
iOwn Holdings, Inc.
Unaudited Pro Forma Combined Statements of Operations
For the Year Ended December 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company Genesis HFN Adjustments Pro Forma Adjustments as Adjusted
-------- ------- ------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage transaction
revenue............... $ 4,065 $ -- $ 4,952 $ -- $ 9,017 $ -- $ 9,017
Other Internet and
e-commerce............ 469 -- -- -- 469 -- 469
Software licenses and
maintenance........... 33 5,253 -- -- 5,286 -- 5,286
-------- ------- ------- -------- -------- ---- --------
Total revenues........ 4,567 5,253 4,952 -- 14,772 -- 14,772
Operating expenses:
Operations............. (12,404) -- (2,143) -- (14,547) -- (14,547)
Cost of revenues....... -- (1,092) -- -- (1,092) -- (1,092)
Sales and marketing.... (17,926) (1,206) -- -- (19,132) -- (19,132)
Technology and research
and development....... (9,674) (717) -- -- (10,391) -- (10,391)
General and
administrative........ (4,337) (1,850) (930) (79)(i) (7,196) -- (7,196)
Write off of in process
research and
development........... (1,900) -- -- 1,900 (j) -- -- --
Amortization of
intangible assets..... (1,032) -- -- (22,714)(k) (23,746) -- (23,746)
Amortization of stock-
based compensation.... (1,943) -- -- -- (1,943) -- (1,943)
-------- ------- ------- -------- -------- ---- --------
Total operating
expenses............. (49,216) (4,865) (3,073) (20,893) (78,047) -- (78,047)
-------- ------- ------- -------- -------- ---- --------
Income (loss) from
operations........... (44,649) 388 1,879 (20,893) (63,275) -- (63,275)
Interest income......... 509 163 74 -- 746 -- 746
Interest expense........ (591) -- (1) (355)(l) (947) 39(o) (908)
Other income (expense).. (300) 7 81 -- (212) -- (212)
-------- ------- ------- -------- -------- ---- --------
Net income (loss)
before provision for
income taxes......... (45,031) 558 2,033 (21,248) (63,688) 39 (63,649)
Pro forma provision for
income taxes........... -- (9) (841) 726 (m) (124) -- (124)
-------- ------- ------- -------- -------- ---- --------
Net income (loss)..... (45,031) 549 1,192 (20,522) (63,812) 39 (63,773)
Accretion on preferred
stock.................. (4,803) -- -- 4,803 (n) -- -- --
-------- ------- ------- -------- -------- ---- --------
Net income (loss)
attributable to common
shareholders........... $(49,834) $ 549 $ 1,192 $(15,719) $(63,812) $ 39 $(63,773)
======== ======= ======= ======== ======== ==== ========
Net income (loss) per
share attributable to
common shareholders,
basic and diluted...... $ (27.08) $ 5.49 $11,920
======== ======= =======
Shares used in computing
net income (loss)
attributable to common
shareholders, basic and
diluted................ 1,840 100 0.1
======== ======= =======
Pro forma net loss per
share ................. $ (3.33) $ (2.54)
======== ========
Shares used in computing
pro forma net loss per
share.................. 19,135 25,135
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
iOwn Holdings, Inc.
Unaudited Pro Forma Combined Financial Information
Notes to Unaudited Pro Forma Combined Balance Sheets and Statements of
Operations
1. Basis of Presentation
The unaudited pro forma and pro forma as adjusted combined balance sheet
and statement of operations have been prepared to reflect (i) the acquisitions
of Genesis 2000, Inc. ("Genesis") and HomeBuilders Financial Network, Inc.
("HFN") by the Company; and (ii) the consummation of the initial public
offering per this registration statement.
2. Pro Forma Adjustments
The following adjustments were applied to the historical balance sheets
and statements of operations to arrive at the pro forma and pro forma as
adjusted combined balance sheet and statements of operations:
(a) Reflects (i) the exclusion of cash held by HFN at the time of
acquisition pursuant to the agreements aggregating to $2,363,000, and (ii)
the payment of the cash portion of the acquisition amounting to
$2,700,000.
(b) Reflects the fair value of the identifiable intangible assets
acquired and goodwill recorded in connection with the acquisition of HFN.
(c) Represents the transaction fees incurred in connection with the
acquisition of HFN which have been accounted for as deferred acquisition
costs and were capitalized to the assets acquired.
(d) Reflects the accrual of liabilities anticipated to be assumed in
connection with the acquisition of HFN.
(e) Reflects the issuance by the Company of the following equity and
debt instruments in connection with the acquisition of HFN: (i) a
$13,300,000 promissory note; (ii) 1,333,333 shares of the Company's Series
EEEE preferred stock with an estimated fair value of $13,333,000; (iii)
issuance of 1,333,333 shares of common stock with an estimated fair value
of $13,333,000; and (iv) warrants to purchase 66,667 shares of the
Company's common stock valued at $466,000. The preferred stock was
converted to an equivalent number of the Company's common stock.
(f) Reflects the conversion of the convertible preferred stock into
common stock. The increase in the Company's common stock and common stock
warrants was partially offset by the exclusion of HFN's common stock held
by the prior owner.
(g) Reflects the net cash proceeds received in connection with the
Company's initial public offering of its common stock per this
registration statement aggregating to $53,800,000. The Company anticipates
selling 6,000,000 shares of common stock at an assumed initial public
offering price of $10.00 per share. Underwriting discounts and offering
expenses are estimated to aggregate $6,200,000 of which $867,000 are
capitalized as deferred offering costs as of December 31, 1999.
(h) Reflects the repayment of promissory notes payable to the prior
shareholders of Genesis totaling $7,750,000.
(i) To record the additional twelve months of depreciation expense
relating to fixed assets acquired in connection with the acquisition of
Genesis and HFN. The annual depreciation expense associated with the fixed
assets acquired in connection with the Genesis acquisition totaled
$64,000. The annual depreciation expense associated with the fixed assets
acquired in connection with HFN acquisition totaled $15,000.
F-28
<PAGE>
iOwn Holdings, Inc.
Unaudited Pro Forma Combined Financial Information--(Continued)
Notes to Unaudited Pro Forma Combined Balance Sheets and Statements of
Operations
(j) In connection with its acquisition, Genesis wrote off acquired
in process research and development aggregating to $1,900,000. The expense
is deemed to be a non-recurring, one-time charge.
(k) Reflects the additional amortization expense related to
intangible assets resulting from the acquisition of Genesis and HFN over
their estimated useful lives. Amortization expense associated with the
intangible assets in connection with the Genesis acquisition totaled
$9,374,000 and $8,240,000 for the year ended December 31, 1998 and 1999,
respectively. Amortization expense associated with the intangible assets
in connection with the HFN acquisition totaled $14,474,000 for the years
ended December 31, 1998 and 1999.
(l) To record the interest expense incurred for the promissory notes
issued in connection with the acquisition of Genesis and HFN. Interest
expense incurred for the promissory notes issued in connection with the
Genesis acquisition totaled $483,000 and $56,000 for the years ended
December 31, 1998 and 1999, respectively. Interest expense incurred for
the HFN promissory notes totaled $857,000 and $299,000 for the years ended
December 31, 1998 and 1999, respectively.
(m) Represents the adjustment to the provision for income taxes
taking into consideration the consolidated federal and state taxable
income of the Company. In view of its projected losses, the Company does
not anticipate paying any federal income tax.
(n) Represents the reversal of the accretion on preferred stock as a
result of the conversion of the preferred stock to common stock.
(o) Represents the adjustment to interest expense resulting from the
repayment of promissory notes issued to the prior shareholders of Genesis
totaling $7,750,000.
3. Net Loss Per Share
Historical net loss per share for the pro forma years ended December 31,
1998 and 1999 is computed using the historical weighted average number of
shares of common stock outstanding during such periods.
Pro forma net loss per share reflects (i) the conversion of the preferred
stock into the Company's common stock, (ii) the number of shares of common
stock issued in conjunction with the acquisitions of Genesis and HFN as if such
shares were outstanding from January 1, 1998 and (iii) the number of shares of
preferred stock issued in conjunction with the acquisitions of Genesis and HFN
and conversion to an equal number of the Company's common stock as if such
shares were outstanding from January 1, 1998.
Pro forma as adjusted net loss per share, in addition to the conversion
of preferred stock, includes the anticipated number of shares to be issued in
conjunction with the Company's initial public offering.
F-29
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
Genesis 2000, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Genesis 2000, Inc. at December 31,
1998 and September 30, 1999, and the results of its operations and its cash
flows for the year ended December 31, 1998 and for the nine month period ended
September 30, 1999, in conformity with generally accepted accounting principles
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United States which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
November 29, 1999
F-30
<PAGE>
Genesis 2000, Inc.
Balance Sheets
as of December 31, 1998 and September 30, 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 709 $ 748
Accounts receivable, net of allowance for doubtful accounts of
$173 and $134 at December 31, 1998 and September 30, 1999,
respectively................................................. 1,038 684
Other assets................................................... 31 --
------ ------
Total current assets........................................ 1,778 1,432
Property and equipment, net.................................... 201 206
------ ------
Total assets.............................................. $1,979 $1,638
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................................... $ 27 $ 62
Accrued liabilities............................................ 220 254
Deferred revenue............................................... 852 990
------ ------
Total current liabilities................................... 1,099 1,306
------ ------
Commitments and Contingencies (Note 5)
Shareholders' equity:
Common stock, par value of $0.01; 100,000 shares authorized;
99,999 shares issued and outstanding at December 31, 1998
and September 30, 1999....................................... 1 1
Retained earnings.............................................. 879 331
------ ------
Total shareholders' equity.................................. 880 332
------ ------
Total liabilities and shareholders' equity................ $1,979 $1,638
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
Genesis 2000, Inc.
Statements of Operations
for the year ended December 31, 1998 and
the nine months ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Revenues:
Software licenses.............................................. $5,205 $3,161
Services and maintenance....................................... 962 1,261
------ ------
Total revenues.............................................. 6,167 4,422
------ ------
Costs and operating expenses:
Cost of revenues............................................... 828 850
Sales and marketing............................................ 1,124 909
Research and development....................................... 697 534
General and administrative..................................... 1,739 1,316
------ ------
Total costs and operating expenses.......................... 4,388 3,609
------ ------
Income from operations...................................... 1,779 813
Interest income.................................................. 143 138
Other income, net................................................ 26 4
------ ------
Income before provision for income taxes.................... 1,948 955
Provision for income taxes....................................... 20 18
------ ------
Net income.................................................. $1,928 $ 937
====== ======
Unaudited pro forma information (Note 2):
Income before provision for income taxes....................... $1,948 $ 955
Pro forma provision for income taxes........................... 779 382
------ ------
Pro forma net income............................................. $1,169 $ 573
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
Genesis 2000, Inc.
Statements of Shareholders' Equity
for the year ended December 31, 1998 and
the nine months ended September 30, 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------- Retained
Shares Amount Earnings Total
------ ------ -------- -------
<S> <C> <C> <C> <C>
Balances at January 1, 1998.................... 99,999 $ 1 $ 196 $ 197
Net income..................................... 1,928 1,928
Distributions to shareholders.................. (1,245) (1,245)
------ --- ------- -------
Balances at December 31, 1998.................. 99,999 1 879 880
Net income..................................... 937 937
Distributions to shareholders.................. (1,485) (1,485)
------ --- ------- -------
Balances at September 30, 1999................. 99,999 $ 1 $ 331 $ 332
====== === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
Genesis 2000, Inc.
Statements of Cash Flows
for the year ended December 31, 1998 and
the nine months ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 1,928 $ 937
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 84 56
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (370) 354
Other assets.............................................. 43 31
Accounts payable.......................................... (13) 35
Accrued liabilities....................................... 83 34
Deferred revenue.......................................... 253 138
------- -------
Net cash provided by operating activities............... 2,008 1,585
------- -------
Cash flows from investing activities:
Purchase of property and equipment......................... (169) (61)
------- -------
Net cash used in investing activities................... (169) (61)
------- -------
Cash flows from financing activities:
Distributions to shareholders............................... (1,245) (1,485)
------- -------
Net cash used in financing activities................... (1,245) (1,485)
------- -------
Increase in cash and cash equivalents.................. 594 39
Cash and cash equivalents at beginning of period............. 115 709
------- -------
Cash and cash equivalents at end of period................... $ 709 $ 748
======= =======
Supplemental cash flow information
Income taxes paid........................................... $ 1 $ 20
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
Genesis 2000, Inc.
Notes to Financial Statements
1. The Company
Genesis 2000, Inc. (the "Company"), was founded in 1986 and later
incorporated on March 16, 1992 as an S Corporation. The Company offers mortgage
professionals a variety of desktop and Internet-based loan processing and
tracking products to enhance workflow performance and automate the mortgage
origination process. The Company's products are being used by mortgage brokers,
mortgage bankers, banks, credit unions, and savings institutions throughout the
United States. The Company is organized into a single reporting segment which
is evaluated by management for making operating decisions and assessing
performance.
2. Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly-liquid monetary instruments with an
original maturity of three months or less to be cash equivalents. All cash
deposits are held by one financial institution and exceed federal deposit
insurance coverage limits.
Revenue recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, Software Revenue Recognition, as amended. The
Company recognizes software licensing revenue upon shipment of the software
product to the customer. Services revenues generally relate to postcontract
customer support (maintenance). Amounts billed for maintenance are deferred and
recognized ratably over the term of the service period which is typically one
year.
Cost of revenues
Cost of revenues includes the cost of the Company's software products,
packaging and personnel costs related to maintenance and services revenues.
Research and development costs
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, requires
that software development costs be capitalized once the technological
feasibility of the software product has been established. To date, such amounts
have been insignificant and have been charged to research and development
expense in the period incurred.
Property and equipment
Property and equipment is stated at cost. Depreciation is calculated
using the double-declining balance method over the estimated useful lives of
five years for computer hardware and purchased computer software and,
generally, seven years for furniture and fixtures.
When assets are sold or retired, the cost and related accumulated
depreciation is removed from the accounts and any resulting gain or loss is
included in operations. Maintenance and repairs are charged to operations as
incurred.
Advertising
The Company reports the costs of all advertising as expenses in the
periods in which those costs are incurred. Advertising expense, primarily
direct mailings and placements in business publications was $216,000 and
$201,000 for the year ended December 31, 1998 and the nine-month period ended
September 30, 1999, respectively.
F-35
<PAGE>
Genesis 2000, Inc.
Notes to Financial Statements--(Continued)
Income taxes
The Company has elected to be treated as an S Corporation for federal
and state income tax purposes, and, accordingly, any liabilities for federal
income taxes are the direct responsibility of the shareholders. The Company is
only subject to California state income taxes at a rate of 1.5 percent on
taxable income. Deferred tax assets and liabilities are immaterial since the
Company is subject only to minimal California income taxes.
The unaudited pro forma income tax information included in the
Statements of Operations is presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," as if
the Company had been subject to federal and state income taxes for all periods
presented.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amount of cash, accounts receivable and payable and accrued
liabilities approximate their fair values based on the short-term nature of
these instruments.
3. Concentrations of Business and Credit Risk
The Company's customers operate in the financial services industry.
Accordingly, the Company is subject to the effects of economic changes. Credit
is extended to customers based on an evaluation of their financial condition,
and collateral is generally not required. The Company performs ongoing credit
evaluations of its customers and provides an allowance for doubtful accounts
as appropriate. Additionally, the Company maintains its cash deposits with one
financial institution, which at times exceed federally insured limits.
4. Composition of Certain Balance Sheet Amounts
Balances at December 31, 1998 and September 30, 1999, consist of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Property and equipment:
Computer equipment and software............................ $ 248 $ 329
Furniture and fixtures..................................... 170 150
----- -----
418 479
Less: accumulated depreciation............................... (217) (273)
----- -----
Total property and equipment, net....................... $ 201 $ 206
===== =====
Accrued liabilities:
Wages and benefits......................................... $ 141 $ 171
Other...................................................... 79 83
----- -----
$ 220 $ 254
===== =====
</TABLE>
F-36
<PAGE>
Genesis 2000, Inc.
Notes to Financial Statements--(Continued)
5. Commitments and Contingencies
The Company maintains a 401(k) profit sharing plan covering substantially
all employees. Employees who work for the Company are eligible for
participation after six months of service. Company contributions to the plan
are made at the discretion of the Company's Board of Directors and aggregated
$106,000 and $0 for the year ended December 31, 1998 and the nine month period
ended September 30, 1999, respectively.
The Company leases its office space under a non-cancelable operating
lease expiring October 31, 2000, with an option to renew. Total remaining,
minimum rental commitments at September 30, 1999 aggregate $138,000. Rent
expense for the year ended December 31, 1998 and the nine month period ended
September 30, 1999 aggregated $111,000 and $93,000, respectively.
The Company is periodically subject to various claims arising in the
ordinary course of business. Company management believes that the ultimate
resolution of outstanding matters will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
6. Subsequent Event
On November 15, 1999, the stockholders of the Company reached an
agreement to sell the Company to iOwn Holdings, Inc.
F-37
<PAGE>
Independent Auditors' Report
To the Board of Directors
HomeBuilders Financial Network, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of HomeBuilders Financial Network, Inc. and subsidiaries (the
"Company") as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
years in the two 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as, evaluating the overall financial
statement presentation. We believe that our 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
HomeBuilders Financial Network, Inc. and subsidiaries as of December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the years in the two year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
January 21, 2000
Miami, Florida
F-38
<PAGE>
HomeBuilders Financial Network, Inc.
Consolidated Statements of Financial Condition
December 31, 1998 and 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $1,706 $2,363
Trading securities............................................. 329 --
Accounts receivable (net of allowance for doubtful accounts of
$0 and $5 as of December 31, 1998 and 1999, respectively).... 376 423
Other assets................................................... 19 18
------ ------
Total current assets........................................ 2,430 2,804
------ ------
Property and equipment, net...................................... 32 45
Investments in and advances to joint ventures.................... 227 211
------ ------
Total assets................................................ $2,689 $3,060
====== ======
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued expenses.......................... $ 203 $ 512
Borrowings under line of credit................................ 30 --
------ ------
Total current liabilities................................... 233 512
------ ------
Stockholder's equity:
Common stock, $.05 par value, 1,000 shares authorized, 100
shares issued and outstanding................................ -- --
Additional paid-in capital..................................... 556 556
Retained earnings.............................................. 1,900 1,992
------ ------
Total stockholder's equity.................................. 2,456 2,548
------ ------
Total liabilities and stockholder's equity.................. $2,689 $3,060
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
HomeBuilders Financial Network, Inc.
Consolidated Statements of Operations
For the years ended December 31, 1998 and 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Operating revenue:
Service revenue............................................ $ 3,753 $ 4,700
Equity in earnings of joint ventures....................... 528 252
Other income............................................... 100 52
------- -------
Total operating revenue................................. 4,381 5,004
------- -------
Operating expenses:
Employee compensation...................................... 1,479 2,143
General and administrative................................. 556 822
Rent....................................................... 54 90
------- -------
Total operating expenses................................ 2,089 3,055
------- -------
Net operating income.................................... 2,292 1,949
------- -------
Other:
Interest and dividend income............................... 34 74
Depreciation and amortization.............................. (15) (18)
Interest expense........................................... (8) (1)
------- -------
11 55
------- -------
Income from continuing operations.......................... 2,303 2,004
Discontinued operations:
Income from operations of discontinued segment............. 62 29
------- -------
Net income.............................................. $ 2,365 $ 2,033
======= =======
Pro-Forma data (unaudited):
Income from continuing operations before taxes............. $ 2,303 $ 2,004
Pro-Forma provision for income taxes....................... 870 830
------- -------
Income from continuing operations after taxes........... 1,433 1,174
Income from operations of discontinued segment (less
applicable taxes of $23 and $11 for the years ended
December 31, 1998 and 1999, respectively)................ 39 18
------- -------
Pro-Forma net income.................................... $ 1,472 $ 1,192
======= =======
Pro-Forma basic common per share amounts:
Income from continuing operations.......................... $14,330 $11,740
Income from operations of discontinued segment............. 390 180
------- -------
$14,720 $11,920
======= =======
Pro-Forma weighted average number of common shares
outstanding:
Basic...................................................... 100 100
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
HomeBuilders Financial Network, Inc.
Consolidated Statements of Stockholder's Equity
For the years ended December 31, 1998 and 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------- paid-in earnings
Shares Amount capital (deficit) Total
------ ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997........ 100 $-- $556 $ (330) $ 226
Dividends paid.................. -- -- -- (135) (135)
Net income...................... -- -- -- 2,365 2,365
--- --- ---- ------- -------
Balance, December 31, 1998........ 100 -- 556 1,900 2,456
Dividends paid.................. -- -- -- (1,941) (1,941)
Net income...................... -- -- -- 2,033 2,033
--- --- ---- ------- -------
Balance, December 31, 1999........ 100 $-- $556 $ 1,992 $ 2,548
=== === ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
HomeBuilders Financial Network, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations............................ $2,303 $ 2,004
Income from discontinued segment............................. 62 29
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 15 18
Provision for bad debt...................................... -- 5
Unrealized gain on trading securities, net.................. (62) --
Realized gain on sale of trading securities................. -- (29)
Equity in earnings of joint ventures........................ (528) (252)
Changes in operating assets:
Accounts receivable......................................... (212) (52)
Other assets................................................ 13 2
Changes in operating liabilities:
Accounts payable and accrued expenses....................... 103 309
------ -------
Net cash provided by operating activities................... 1,694 2,034
------ -------
Cash flows from investing activities:
Distributions from joint ventures............................ 465 344
Purchases of trading securities.............................. (267) (94)
Investments in and advances to joint ventures................ (5) (76)
Proceeds from sales of trading securities.................... -- 452
Purchases of property and equipment.......................... (21) (32)
------ -------
Net cash provided by investing activities................... 172 594
------ -------
Cash flows from financing activities:
Dividends paid............................................... (135) (1,941)
Repayment of line of credit.................................. -- (30)
Borrowing under line of credit............................... 30 --
Repayment of notes payable................................... (100) --
------ -------
Net cash used in financing activities....................... (205) (1,971)
------ -------
Net increase in cash and cash equivalents.................... 1,661 657
Cash and cash equivalents at beginning of year................ 45 1,706
------ -------
Cash and cash equivalents at end of year...................... $1,706 $ 2,363
====== =======
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 8 $ 1
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(in thousands)
1. Organization and Summary of Significant Accounting Policies
HomeBuilders Financial Network, Inc. and subsidiaries (the "Company")
assists new home builders in establishing a captive mortgage origination
business, in order to capitalize on the flow of mortgage business which is a
by-product of their core business. The Company either establishes a joint
venture with each builder or enters into a service fee agreement with the
builder or an entity wholly owned by the builder. For joint ventures, the
Company acts as a managing/general partner, and provides management services
for builder owned entities. Management services may consist of loan pricing,
loan underwriting, loan closing and post closing services, and management
support and bookkeeping/accounting services.
The Company is not a lender, but rather offers builders a complete
turnkey program. It obtains the necessary licenses, locates office space,
recruits staff, provides on-site training and installs the hardware and
software. And, after the operation is up and running, the Company provides
daily loan support services, including loan processing support, loan rate lock
support, loan underwriting services, regulatory compliance and ongoing quality
control.
The consolidated financial statements of the Company include the accounts
of HomeBuilders Financial Network, Inc. and its wholly owned subsidiaries,
HomeBuilders Financial Management Co., HomeBuilders Investment Inc., and
National Underwriting Services, Inc.
Balances, except per share amounts, are shown in thousands on the
financial statements and in the accompanying notes. The following is a summary
of the significant accounting and reporting policies followed by the Company:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
Service fees are recognized using the accrual basis. Service fees
primarily consist of management fees and fees for processing of loans (loan
fees). Based on its service fee agreement with each builder the Company's
revenue is derived from one, or a combination of; a management fee, which is
based on either specific charges for the various services offered and/or a
share of profits, and/or loan fees charged to borrowers.
Investments in Joint Ventures
The Company has investments in the following joint ventures: South
Florida Residential Lending Corporation; RHMC, LP; HFS Mortgage, LLC; Builders
Affiliated Mortgage Services (formerly known as IHG Mortgage Services); M. H.
Mortgage Company, LLC; and Builder's Choice Mortgage, LLC. The Company has non-
controlling ownership interest (fifty percent) in the joint ventures.
Accordingly, the joint ventures are accounted for under the equity method.
Accounts Receivable, Net
Accounts receivable, net primarily consists of management and loan fees
to be collected. The Company provides an allowance for doubtful accounts which
is determined based on a number of factors, including the risk characteristics
of the accounts, historical charge-offs, delinquency patterns and management's
judgement.
F-43
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(in thousands)
Property and Equipment, Net
Property and equipment net are carried at cost, less accumulated
depreciation. Depreciation is computed over a useful life of three, five and
seven years for software, hardware, and other property and equipment,
respectively.
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed 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.
Income Taxes
The Company has elected to be a "small business corporation" pursuant to
Subchapter S of the Internal Revenue Code. Under Subchapter S, the Company does
not pay federal income tax. Instead, the Company's income and deductions are
passed through to its sole shareholder who must report the income and expense
on his own income tax return.
If the Company was subject to income tax, the Company would have recorded
approximately $870 and $830 of federal and state income tax expense related to
income from continuing operations for the years ended December 31, 1998 and
1999, respectively.
Trading Securities
Trading securities consist of equity securities. At December 31, 1999,
all securities had been sold. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Trading securities are recorded at fair value. Unrealized holding gains
and losses on trading securities are included in earnings. Realized gains and
losses are recorded using the specific identification method.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company has
defined cash equivalents as highly liquid investments with original maturities
of less than ninety days.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimated.
Income Per Common Share
Basic income per share is based on the weighted average number of common
shares outstanding during the period presented.
F-44
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(in thousands)
Reclassifications
Certain 1998 balances were reclassified to conform with the 1999
presentation.
2. Property and Equipment, Net
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Furniture, fixtures, and equipment.......................... $ 73 $ 99
Software.................................................... 2 7
----- ------
75 106
Less: Accumulated depreciation.............................. 43 61
----- ------
$ 32 $ 45
===== ======
</TABLE>
3. Borrowings Under Line of Credit
The Company had a $500 revolving line of credit with a floating interest
rate, secured by the Company's stock, which expired on December 31, 1999. The
average interest rate for the years ended December 31, 1998 and 1999 was 7.64%
and 6.50%, respectively.
4. Leases
Rental expense amounts to $96 and $158 for the years ended December 31,
1998 and 1999, respectively. The Company also has subleases with third parties
on a month-to-month basis. Rental income on the subleases amounts to $42 and
$68 for the years ended December 31, 1998 and 1999, respectively. These amounts
are netted against rental expense in the statements of operations.
As of December 31, 1999, future minimum annual lease payments under
operating lease agreements are as follows:
<TABLE>
<S> <C>
2000.................................................................. $168
2001.................................................................. 25
2002.................................................................. 7
----
$200
====
</TABLE>
F-45
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(in thousands)
5. Investments in and Advances to Joint Ventures
The Company has a note receivable from a joint venture amounting to $0
and $26, as of December 31, 1998 and 1999, respectively. The note is payable on
demand and bears interest at 10%.
Investments in and advances to joint ventures amounts to $227 and $185 as
of December 31, 1998 and 1999, respectively. Investments in joint ventures
consist of 50% ownership in mortgage origination companies at home builders
sites. The following summarizes the combined financial information of the joint
ventures accounted for on the equity method as of December 31, 1998 and
December 31, 1999.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Assets:
Current assets................................. $ 558 $ 500
Non current assets............................. 42 68
------ ------
Total assets.................................. $ 600 $ 568
====== ======
Liabilities and equity:
Current liabilities............................ $ 137 $ 198
Equity......................................... 463 370
------ ------
Total liabilities and equity.................. $ 600 $ 568
====== ======
<CAPTION>
For the year For the year
ended ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Gross revenue................................... $2,509 $1,513
Expenses........................................ 1,452 1,010
------ ------
Net income...................................... $1,057 $ 503
====== ======
</TABLE>
Included in expenses of the joint ventures are fees paid to the Company
of $49 and $35 for the years ended December 31, 1998 and 1999, respectively.
On December 11, 1999, the Company entered into an additional venture,
which has not commenced operations.
6. Commitments and Contingencies
Certain joint venture agreements require the Company, as general or
managing partner, to fund operating deficits up to $50.
7. Employment Agreements
The Company has employment agreements with officers and certain employees
which require the payment of bonuses based on different criteria of revenue
earned. Included in expenses are bonuses paid in connection with such
agreements of $285 and $238 for the years ended December 31, 1998 and 1999,
respectively.
F-46
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(in thousands)
8. Business Segments
The Company operates in two business segments: mortgage management
services and trading in equity securities. The following table represents
operating revenues and expenses for each business segment. Identifiable assets
are those assets used exclusively in the operations of each business segment or
which are allocated when used jointly.
<TABLE>
<CAPTION>
Operating Operating Identifiable
Business Segment Revenues Expenses Assets
---------------- --------- --------- ------------
<S> <C> <C> <C>
1998:
Mortgage management services............ $4,381 $2,089 $2,360
Trading securities...................... 62 0 329
------ ------ ------
Total.................................. $4,443 $2,089 $2,689
====== ====== ======
1999:
Mortgage management services............ $5,004 $3,055 $3,060
Trading securities...................... 0 0 0
------ ------ ------
Total.................................. $5,004 $3,055 $3,060
====== ====== ======
</TABLE>
All revenue from customers and equity in the earnings of joint ventures
are included in the operating revenue, operating expenses and identifiable
assets mentioned above.
On December 31, 1999, the Company decided to dispose of its trading in
equity securities segment. All of the identifiable assets were sold on such
date.
9. Concentration of Risk
For the years ended December 31, 1998 and 1999, revenue from Beazer
Mortgage Corporation represented 35% and 34%, respectively, of the Company's
total operating revenue.
F-47
<PAGE>
HomeBuilders Financial Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(in thousands)
10. Fair Value of Financial Instruments
The following table represents the carrying amounts and estimated fair
value of the Company's financial instruments at December 31, 1998 and 1999. The
fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
-------------------------- --------------------------
Financial Assets Carrying Amount Fair Value Carrying Amount Fair Value
---------------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash
equivalents........... $1,706 $1,706 $2,363 $2,363
Trading securities...... 329 329 0 0
Accounts receivable,
net................... 376 376 423 423
<CAPTION>
Financial Liabilities
---------------------
<S> <C> <C> <C> <C>
Accounts payable and
accrued expenses...... $ 203 $ 203 $ 512 $ 512
Borrowings under line of
credit................ 30 30 0 0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash, accounts receivable, net, accounts payable and accrued expenses and
borrowings under line of credit: The carrying amounts approximate fair value
because of the short-term maturity of these instruments.
Trading Securities: The fair value is based on quoted market prices at
the reporting dates.
11. Agreement and Plan of Merger
On December 31, 1999, the sole stockholder of the Company entered into an
Agreement and Plan of Merger with iOwn Holdings, Inc., to sell all the issued
and outstanding common stock of the Company. Consummation of the transaction is
dependent upon the completion of the initial public sale of shares of common
stock of iOwn Holdings, Inc., which is expected to be completed in early 2000.
The Company has incurred legal expenses in connection with the Agreement
and Plan of Merger which provides that iOwn Holdings, Inc., will pay up to
$75,000 of such costs. Therefore, the consolidated statement of financial
condition includes a receivable, for such amount, from iOwn Holdings, Inc.,
related to such expenses as of December 31, 1999.
F-48
<PAGE>
[ART WORK]
<PAGE>
[IOWN LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with this
offering areas follows. All amounts are estimates other than the SEC
registration fee and the NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $
National Association of Securities Dealers filing fee..........
Nasdaq National Market listing fee.............................
Printing fees..................................................
Legal fees and expenses........................................
Accounting fees and expenses...................................
Blue sky fees and expenses.....................................
Transfer agent and registrar fees..............................
Miscellaneous fees.............................................
----------
Total........................................................ $2,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities including reimbursement for expenses
incurred arising under the Securities Act of 1933. Article X of our Amended and
Restated Certificate of Incorporation, which will be effective upon the closing
of this offering, and Article VII of our Bylaws provide for indemnification of
our directors, officers, employees and other agents to the maximum extent
permitted by Delaware law. In addition, we have entered into Indemnification
Agreements with our officers and directors. The Underwriting Agreement (Exhibit
1.01) also provides for cross-indemnification among iOwn Holdings, Inc. and the
Underwriters with respect to certain matters, including matters arising under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement,
we have sold and issued the following securities:
1. On February 28, 1997 and April 29, 1997, we issued a total of
830,962 shares of Series A preferred stock to 13 investors for an
aggregate consideration of $598,296.
2. On November 28, 1997, December 31, 1997, January 12, 1998 and
March 19, 1998, we issued a total of 3,983,907 shares of Series B
preferred stock to 55 investors for an aggregate consideration of
$7,548,734.
3. On September 4, 1998 and November 4, 1998, we issued a total of
5,913,325 shares of Series C preferred stock to 26 investors for an
aggregate consideration of $22,175,000.
4. On April 28, 1999, we issued 2,606,870 shares of Series D
preferred stock to 41 investors for an aggregate consideration of
$19,551,608.
5. On October 29, 1999 and November 30, 1999, we issued a total of
3,390,365 shares of Series E preferred stock to 38 investors for an
aggregate consideration of $30,472,398.
6. On December 22, 1999, we issued 833,331 shares of Series EEE
preferred stock to six investors in conjunction with the acquisition of
Genesis 2000.
II-1
<PAGE>
7. On August 25, 1997, September 25, 1997 and October 25, 1997, we
issued three separate warrants to Altos Ventures I, L.P. for an
aggregate of 39,582 shares of Series B preferred stock. Such warrants
have an exercise price of $1.8948 per share.
8. On November 24, 1997, we issued a warrant to VS Holdings, Inc.
for 10,000 shares of common stock, 5,000 shares of which warrant were
subsequently transferred to Steven D. Abbott and 5,000 shares of which
warrant were subsequently transferred to Joanna Rees Gallanter. Such
warrants have an exercise price of $.135 per share.
9. On April 2, 1998, we issued a warrant to Imperial Bank for up
to 10,000 shares of Series B preferred stock. Such warrant has an
exercise price of $2.274 per share.
10. On July 20, 1998, we issued a warrant to LINC Capital for up
to 18,471 shares of Series B preferred stock. Such warrant has an
exercise price of $1.8948 per share.
11. On July 7, 1999, we issued a warrant to America Online, Inc.
for up to 8,333 shares of common stock. Such warrant has an exercise
price of $30.00 per share.
12. On August 12, 1999, we issued a warrant to Comdisco, Inc. for
53,333 shares of Series D preferred stock. Such warrant has an exercise
price of $7.50 per share.
13. On September 16, 1999, we issued a warrant to Roger Thurn for
up to 1,666 shares of common stock. Such warrant has an exercise price
of $8.25 per share.
14. On September 16, 1999, we issued a warrant to Arthur Nadolske
for up to 1,666 shares of common stock. Such warrant has an exercise
price of $8.25 per share.
15. On September 24, 1999, we issued a warrant to American
Mortgage Services for up to 6,666 shares of common stock. Such warrant
has an exercise price of $8.25 per share.
16. On September 24, 1999, we issued a warrant to Cashin Realty
Group for up to 3,333 shares of common stock. Such warrant has an
exercise price of $8.25 per share.
17. On October 29, 1999, we issued a warrant to ABN AMRO Capital
Investment (Belgie) NV for up to 555,555 shares of common stock. Such
warrant has an exercise price of $9.00 per share.
18. On November 15, 1999, we issued a warrant to Comdisco, Inc.
for up to 44,444 shares of Series E preferred stock. Such warrant has an
exercise price of $9.00 per share.
19. On December 8, 1999, we issued a warrant to Ranieri & Co.,
Inc. for up to 66,666 shares of common stock. Such warrant has an
exercise price of $15.00 per share.
20. On March 16, 2000, we issued a warrant to Bank United for up
to 95,000 shares of common stock. Such warrant has an exercise price of
$15.00 per share.
21. From our incorporation through February 29, 1999, we have
issued an aggregate of 5,396,561 options to purchase our common stock to
employees, directors and consultants with exercise prices ranging from
$0.075 to $8.25.
[No underwriters were involved in the foregoing sales of securities.] The
issuance of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of such Securities Act as
transactions by an issuer not involving any public offering, or, in the case of
options to purchase common stock, Rule 701 of the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
------- ----------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of iOwn as currently in effect.
3.2+ Form of Restated Certificate of Incorporation of iOwn to be filed
immediately following the closing of the offering made under this
Registration Statement.
3.3+ Bylaws of iOwn as currently in effect.
3.4+ Form of Bylaws of iOwn to be adopted immediately following the closing
of the offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
5.1** Opinion of Perkins Coie LLP.
10.1+ Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2** 2000 Stock Incentive Compensation Plan.
10.3** 2000 Employee Stock Purchase Plan.
10.4+ Fifth Amended and Restated Investor Rights Agreement dated November
30, 1999 among iOwn and certain investors.
10.5+ 1997 Stock Option Plan.
10.6+ Series D Preferred Stock Purchase Agreement with certain investors
dated April 28, 1999.
10.7+* Interactive Services Agreement with America Online, Inc. dated June
30, 1999.
10.8+* Promotion Agreement with NBC/Snap! LLC dated October 19, 1998.
10.9+* Agreements with Homes.com, LLC dated November 1, 1999:
(a)HomeScout Promotion Agreement
(b)Preferred Provider Agreement
(c)Co-Branding and Promotion Agreement
(d)Amendment to HomeScout Data Agreement
10.10+* Platinum Premier Partner Package Agreement with Earthlink Network,
Inc. dated October 1, 1999.
10.11+* Warehousing Credit and Security Agreement with Bank United of Texas, a
federal savings bank, dated October 8, 1999.
10.12** Agreement and Plan of Merger with HomeBuilders Financial Network, Inc.
dated December 22, 1999.
10.13+* Subordinated Loan and Security Agreement with Comdisco, Inc. dated
August 12, 1999.
10.14+ Standard Industrial/Commercial Multi-Tenant Lease-Gross with Rincon
Associates dated April 16, 1999 and agreements related thereto.
10.15+ Office Lease with Mt. Diablo Tech, LLC dated December 31, 1998.
10.16+* Master Lease Agreement with LINC Capital Inc. dated July 20, 1998.
10.17+* Senior Loan and Security Agreement with Phoenix Leasing Incorporated
dated November 20, 1998 and amendments thereto.
10.18** Agreement and Plan of Merger with Genesis 2000, Inc. dated November
15, 1999.
10.19+ Lease with Walcott Business Center dated June 17, 1999.
10.20+* Agreement with First Franklin Financial Corporation dated December 1,
1997.
10.21+ Agreement with Federal Home Loan Mortgage Corporation dated September
20, 1999.
10.22+* Master Agreement with Fannie Mae dated October 6, 1999.
10.23+ Employment Agreement with Edward P. Hoyt dated October 25, 1999.
10.24+ Series E Preferred Stock Purchase Agreement with certain investors
dated November 13, 1999.
10.25+ Form of warrant to purchase common stock of the company dated
September 16, 1999.
10.26+ Warrant to Purchase Common Stock dated October 29, 1999 issued to ABN
AMRO Capital Investments (Belgie) NV.
10.27** Employment Agreement with Paul Holmes dated October 11, 1999.
10.28** Employment Agreement with Marcia Donner dated April 1, 1999.
10.29** Form of Employment Agreement with Thomas Meyer.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
------- ----------------------------------------------------------------------
<C> <S>
10.30** Employment Agreement with Kamyar Tafreshi dated November 23, 1999.
10.31** First Amendment to Warehousing Credit and Security Agreement dated
March 25, 2000.
10.32** Amendment No. 1 to the Agreement and Plan of Merger with Genesis 2000,
Inc. dated December 15, 1999.
11.1 Statement regarding computation of per share earnings.
12.1 Statement regarding computation of ratios.
21.1 Subsidiaries of iOwn Holdings, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of KPMG LLP, Independent Certified Public Accountants.
23.4** Consent of Counsel (Included in Exhibit 5.1).
23.5 Consent of Thomas H. Meyer.
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment requested.
** To be filed by amendment.
+ Previously provided.
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Francisco, State of California, on this 5th day of May, 2000.
iOwn Holdings, Inc.
/s/ Edward P. Hoyt
By: _________________________________
Edward P. Hoyt
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward P. Hoyt Chief Executive Officer May 5, 2000
______________________________________ and Chairman of the Board
Edward P. Hoyt (Principal Executive
Officer)
Paul Holmes* President, Chief Operating May 5, 2000
______________________________________ Officer and Director
Paul Holmes
/s/ William M. Terry Chief Financial Officer May 5, 2000
______________________________________ (Principal Financial and
William M. Terry Accounting Officer)
K. David Chao* Director May 5, 2000
______________________________________
K. David Chao
Han J. Kim* Director May 5, 2000
______________________________________
Han J. Kim
Scott A. Shay* Director May 5, 2000
______________________________________
Scott A. Shay
Director May 5, 2000
______________________________________
Stanley H. Rhodes
</TABLE>
*By: /s/ Edward P. Hoyt
------------------------------
Edward P. Hoyt
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
------- ----------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of iOwn as currently in effect.
3.2+ Form of Restated Certificate of Incorporation of iOwn to be filed
immediately following the closing of the offering made under this
Registration Statement.
3.3+ Bylaws of iOwn as currently in effect.
3.4+ Form of Bylaws of iOwn to be adopted immediately following the closing
of the offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
5.1** Opinion of Perkins Coie LLP.
10.1+ Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2** 2000 Stock Incentive Compensation Plan.
10.3** 2000 Employee Stock Purchase Plan.
10.4+ Fifth Amended and Restated Investor Rights Agreement dated November
30, 1999 among iOwn and certain investors.
10.5+ 1997 Stock Option Plan.
10.6+ Series D Preferred Stock Purchase Agreement with certain investors
dated April 28, 1999.
10.7+* Interactive Services Agreement with America Online, Inc. dated June
30, 1999.
10.8+* Promotion Agreement with NBC/Snap! LLC dated October 19, 1998.
10.9+* Agreements with Homes.com, LLC dated November 1, 1999:
(a)HomeScout Promotion Agreement
(b)Preferred Provider Agreement
(c)Co-Branding and Promotion Agreement
(d)Amendment to HomeScout Data Agreement
10.10+* Platinum Premier Partner Package Agreement with Earthlink Network,
Inc. dated October 1, 1999.
10.11+* Warehousing Credit and Security Agreement with Bank United of Texas, a
federal savings bank, dated October 8, 1999.
10.12** Agreement and Plan of Merger with HomeBuilders Financial Network, Inc.
dated December 22, 1999.
10.13+* Subordinated Loan and Security Agreement with Comdisco, Inc. dated
August 12, 1999.
10.14+ Standard Industrial/Commercial Multi-Tenant Lease-Gross with Rincon
Associates dated April 16, 1999 and agreements related thereto.
10.15+ Office Lease with Mt. Diablo Tech, LLC dated December 31, 1998.
10.16+* Master Lease Agreement with LINC Capital Inc. dated July 20, 1998.
10.17+* Senior Loan and Security Agreement with Phoenix Leasing Incorporated
dated November 20, 1998 and amendments thereto.
10.18** Agreement and Plan of Merger with Genesis 2000, Inc. dated November
15, 1999.
10.19+ Lease with Walcott Business Center dated June 17, 1999.
10.20+* Agreement with First Franklin Financial Corporation dated December 1,
1997.
10.21+ Agreement with Federal Home Loan Mortgage Corporation dated September
20, 1999.
10.22+* Master Agreement with Fannie Mae dated October 6, 1999.
10.23+ Employment Agreement with Edward P. Hoyt dated October 25, 1999.
10.24+ Series E Preferred Stock Purchase Agreement with certain investors
dated November 13, 1999.
10.25+ Form of warrant to purchase common stock of the company dated
September 16, 1999.
10.26+ Warrant to Purchase Common Stock dated October 29, 1999 issued to ABN
AMRO Capital Investments (Belgie) NV.
10.27** Employment Agreement with Paul Holmes dated October 11, 1999.
10.28** Employment Agreement with Marcia Donner dated April 1, 1999.
10.29** Form of Employment Agreement with Thomas Meyer.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
------- ------------------------------------------------------------------
<C> <S>
10.30** Employment Agreement with Kamyar Tafreshi dated November 23, 1999.
10.31** First Amendment to Warehousing Credit and Security Agreement dated
March 25, 2000.
10.32** Amendment No. 1 to the Agreement and Plan of Merger with Genesis
2000, Inc. dated December 15, 1999.
11.1 Statement regarding computation of per share earnings.
12.1 Statement regarding computation of ratios.
21.1 Subsidiaries of iOwn Holdings, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of KPMG LLP, Independent Certified Public Accountants.
23.4** Consent of Counsel (Included in Exhibit 5.1).
23.5 Consent of Thomas H. Meyer.
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment requested.
** To be filed by amendment.
+ Previously provided.
<PAGE>
Exhibit 11.1
iOwn Holdings, Inc.
Computation of Per Share Earnings
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net Loss $(2,363) $(16,015) $(45,031)
Dividend accretion on preferred stock (70) (1,326) (4,803)
------- -------- --------
Net Loss attributable to common shareholders $(2,433) $(17,341) $(49,834)
------- -------- --------
Weighted average number of common shares
outstanding 1,402 1,487 1,840
------- -------- --------
Net loss per share attributable to common
shareholders - basic and diluted $ (1.74) $ (11.66) $ (27.08)
------- -------- --------
</TABLE>
<PAGE>
Exhibit 12.1
iOwn Holdings, Inc.
Computation of Ratio of Earnings to Fixed Charges
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Earnings:
Net Loss $(2,363) $(16,015) $(45,031)
Interest Expense 22 112 591
------- -------- --------
Total $(2,341) $(15,903) $(44,440)
------- -------- --------
Fixed Charges:
Interest Expense $ 22 $ 112 $ 591
Dividend accretion on preferred stock 70 1,326 4,803
------- -------- --------
Total $ 92 $ 1,438 $ 5,394
------- -------- --------
Ratio of Earnings to Fixed Charges
and Dividend accretion on preferred stock (25.45) (11.06) (8.24)
------- -------- --------
</TABLE>
<PAGE>
Exhibit 21.1
iOwn Holdings, Inc.
Subsidiaries of the Company
iOwn, Inc., a California corporation
Genesis 2000, Inc., a California corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
(File No. 333-93587) of our reports dated February 8, 2000, relating to the
consolidated financial statements of iOwn Holdings, Inc. which appear in such
Registration Statement. We also consent to the reference to us under the
caption "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 5, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
(File No. 333-93587) of our reports dated November 29, 1999 relating to the
financial statements of Genesis 2000, Inc. which appear in such Registration
Statement. We also consent to the reference to us under the caption "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
May 5, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
HomeBuilders Financial Network, Inc.:
We consent to the use of our reports included in the registration
statement of iOwn Holdings, Inc. and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ KPMG LLP
Miami, Florida
May 5, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF THOMAS H. MEYER
I am a nominee director of iOwn Holdings, Inc. and consent to being so
named in this Registration Statement on Form S-1 (File No. 333-93587).
/s/ Thomas H. Meyer
-------------------------------------
Thomas H. Meyer
Miami, Florida
May 5, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 27,850 10,157
<SECURITIES> 0 0
<RECEIVABLES> 1,183 151
<ALLOWANCES> (271) (9)
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,813 10,970
<PP&E> 8,371 2,241
<DEPRECIATION> (2,291) (377)
<TOTAL-ASSETS> 63,245 14,275
<CURRENT-LIABILITIES> 19,234 2,679
<BONDS> 8,183 334
94,123 31,665
0 0
<COMMON> 3 2
<OTHER-SE> (58,298) (20,405)
<TOTAL-LIABILITY-AND-EQUITY> 63,245 14,275
<SALES> 0 0
<TOTAL-REVENUES> 4,567 1,313
<CGS> 0 0
<TOTAL-COSTS> (49,216) (17,417)
<OTHER-EXPENSES> (300) 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (591) (112)
<INCOME-PRETAX> (45,031) (16,015)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (45,031) (16,015)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (45,031) (16,015)
<EPS-BASIC> (27.08) (11.66)
<EPS-DILUTED> (27.08) (11.66)
</TABLE>
