UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 001-15279
APPONLINE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2558192
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 Broadhollow Road
Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
(631) 844-9805 (Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None.
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(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if there is disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates
of the issuer as of March 31, 2000 was $61,827,986.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock,
$.001 Par Value, on March 31, 2000 was 44,823,107 shares.
Documents incorporated by reference: None
<PAGE>
APPONLINE.COM, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
Item 2. Properties..........................................................7
Item 3. Legal Proceedings...................................................7
Item 4. Submission of Matters to Vote of Security Holders...................7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matter ......................................................8
Item 6. Selected Financial Data............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........15
Item 8. Financial Statements and Supplementary Data........................15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.........................................15
PART III
Item 10. Directors and Executive Officers of the Registrant..................16
Item 11. Executive Compensation..............................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management......24
Item 13. Certain Relationships and Related Transactions......................25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....26
Signatures....................................................................27
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation, those
concerning (i) the Company's strategy, (ii) the Company's expansion plans and
(iii) the Company's capital expenditures, contained forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Business."
The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
We are a nationwide provider of mortgage banking and brokerage services
through our website at www.AppOnline.com. We also offer our services through our
57 branch offices located in 20 states. Our business operations consist of the
generation of mortgage loan applications, underwriting, closing and secondary
marketing of mortgage loans. Our products and services include consumer loans,
secondary loan sales, private labeling and co-branding of our products and
technologies to other financial institutions.
Private labeling involves offering both our online and offline technology
and services to other mortgage originators for them to use under their name.
Co-branding generally involves placing our name on a marketing partner's website
to provide our mortgage services in addition to our marketing partner's
services.
We have developed customized technology to enable us to quickly and
efficiently process each of our loans, regardless of whether the application
originates over the Internet or from a traditional in-person visit to one of our
branch offices. When customers access our website they may search and select
from a wide variety of mortgage products, apply for a mortgage, and track the
status of their application.
Our financial institution clients can improve the effectiveness of their
current services, and offer new services, through private label and co-branded
websites that offer access to our underlying mortgage processing technology. In
both our direct-to-consumer mortgage banking business or in support of our
business clients, we use our state-of-the-art technology to make the mortgage
lending process more efficient.
We believe that many consumers are dissatisfied with the traditional
mortgage lending process. They find it slow and have difficulty obtaining
information and monitoring the status of loan applications. Our Internet
technology significantly reduces these problems by offering a simpler, faster
and less expensive way to obtain a mortgage loan. We provide online applicants a
preliminary decision on their application within one hour and respond to
traditional applicants within one day. Our customers are able to monitor the
status of their loan via our website where they can also find information
intended to make the process more understandable. We believe that this
Internet-based process gives us an advantage over traditional mortgage lenders,
because we can offer borrowers a more satisfying and less frustrating mortgage
experience.
For the year ended December 31, 1999, we funded and closed mortgage loans
with a total principal amount of approximately $769,400,000. We have been
offering loans on our website since January 1999.
Since 1997, we have expanded our business primarily by acquiring small
independent mortgage banking and brokerage firms. To date we have acquired 26
companies. We intend to continue to acquire businesses that complement our
traditional and online mortgage business.
We continually evaluate potential acquisitions, although we are not
currently obligated to purchase any companies.
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MORTGAGE INDUSTRY OVERVIEW
The U.S. residential mortgage market is a substantial and growing part of
the U.S. economy. According to the Mortgage Bankers Association, in 1998 U.S.
consumer mortgage debt exceeded $4.3 trillion and loan origination volume
reached a record high of $1.5 trillion, compared to $834 billion of mortgage
origination in 1997. The residential mortgage market is fragmented, with the
largest mortgage lender, Norwest Mortgage, accounting for only 7.7% of funded
loans in 1998.
In 1998, mortgage brokers arranged approximately 70% of all mortgages.
These small, local businesses typically act as middlemen, do not approve or fund
loans, have inefficient processing systems and generally lack the technology
required to quickly determine borrower eligibility or to search and analyze
available mortgage products to select the best match for a customer.
The traditional mortgage process is paper intensive, generally requires
at least three weeks to complete, and involves the following steps:
-- Meeting with lender or broker to complete the lengthy paper application;
-- Gathering extensive supporting documentation for the application;
-- Entering the application information/data into the broker's or lender's
processing system;
-- Ordering appraisals, title and credit reports and verifying deposit and
other facts;
-- Submitting the paper loan file to an underwriter to determine loan
eligibility;
-- Receiving conditions to approval of loan by the underwriter;
-- Collecting additional information and complying with the conditions;
-- Resubmitting the revised paper file for approval;
-- Preparing loan documents and closing instructions;
-- Reviewing and approving the loan for funding; and
-- Closing the transaction.
This process tends to be costly, time-consuming, complex and
intimidating to many borrowers. We believe it leaves borrowers:
-- Uncertain that they are receiving complete and unbiased advice;
-- Skeptical about the availability of quoted rates;
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-- Intimidated by the number, complexity and variety of mortgage products;
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-- Pressured to commit to a mortgage before that have fully learned about
the process and their
options;
-- Aggravated by the overall cost and the multiple fees they must pay; and
-- Frustrated by the substantial time and energy required by the process.
INTERNET INDUSTRY OVERVIEW
The Internet provides companies additional channels to reach customers
along with the means to transact business with them more efficiently and
cost-effectively than through the traditional business channels. In addition,
the Internet gives companies the flexibility to adjust product features,
presentations and prices in response to competition. Consumers benefit from
greater convenience, wider access to information about available products and
services, ease of use, more choices and often lower prices.
According to Forrester Research, the market for online mortgages is
expected to grow from an estimated $18.7 billion in 1999 to over $91.2 billion
in 2003. This represents an increase in online usage of the existing market from
1.5% in 1999 to 9.6% in 2003. Mortgage origination is a business well suited to
an Internet-based distribution model for a number of reasons, including:
-- Mortgages need no physical delivery or warehousing;
-- Complex mortgage products can be presented in a simplified format using
graphic and dynamic, real- time presentations, explaining terminology and
providing access to detailed supporting information;
-- Borrowers can send data through a website, allowing quick and automated
underwriting and streamlined overall processing; and
-- There is no need for costly local offices, brokers or the expensive fee
structure associated with the traditional distribution model.
Given the inefficiency and consumer frustration present in the traditional
mortgage origination process, we believe there exists a significant market
opportunity for a centralized, globally accessible and easy-to-use online
mortgage banking service with:
-- A broad selection of loan products and features;
-- Compelling value based upon saving borrowers' money, time and effort;
and
-- An easy-to-use, complete service.
OUR STRATEGY
Our objective is to become the preferred mortgage banker for consumers and
industry partners both on the Internet and through our traditional business. We
intend to do this by efficiently using our technology
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and the Internet to originate mortgage loans and to enable our private label and
co-branding partners to do the same. Our technology provides more efficient
processing of loans and better access to data, resulting in a simpler and less
costly overall borrowing experience. We use this technology to process all of
our loans whether paper-based, Internet-based or with our business clients.
Because personalized questions and concerns characterize many mortgage
applications, we emphasize user friendliness in our website and customer service
with our in-person loan consultants. Key elements of our strategy include:
-- Establishing and enhancing consumer awareness of our brand;
-- Expanding our ability to serve borrowers and business partners;
-- Increasing our core consumer mortgage business;
-- Addressing underserved markets;
-- Pursuing additional channels of distribution and sources of revenue; and
-- Expanding the geographic reach of our business.
We intend to use the Internet to specifically address the aspects of
the traditional mortgage process most frequently cited as frustrating and
inconvenient. To date, few mortgage loan originators have capitalized on the
opportunities offered by the Internet. We believe that the majority of mortgage
originators use the Internet as an advertising medium (or "online brochure")
merely to provide product and contact information. Those mortgage lenders that
do offer online applications often encounter difficulty integrating their
Internet applications with the underlying systems used to process, underwrite,
track and close the mortgage loans.
Our strategy is to maximize the potential of Internet-based mortgage
origination by providing borrowers with:
-- Numerous ways to learn about and apply for mortgage loans;
-- Rapid loan application and pre-qualification processes;
-- Wide choice of loan products and rates;
-- Variety of loan evaluation tools and resources;
-- Reduced transaction costs; and
-- Continuous monitoring capability from application through closing.
We believe that the ability to deliver these advantages to consumers
will provide us with a significant competitive advantage.
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OUR SOLUTION
Internet Technology. Our Internet technology is a customized blend of
leading industry software and supporting technology. We use it to maximize
efficiency in the mortgage lending process, whether serving consumers directly,
or supporting the mortgage operations of our business clients, such as mortgage
bankers, brokers, financial institutions, realtors and homebuilders. These
efficiencies lead to a more satisfying and less frustrating mortgage experience
for borrowers due to benefits from:
-- Convenient access to the mortgage lending process through the Internet,
telephone or in person at a nearby location;
-- Comprehensive selection from an interactive suite of mortgage products
and services;
-- Easy-to-use service with value-added features;
-- Significant customer savings;
-- Personalized products and services tailored to individual needs;
-- Faster applications and pre-qualifications;
-- Interest rate locks; and
-- Ongoing monitoring of loan status.
Our loan processing software and Internet solution provide a tight and
seamless integration with the backend processing of the mortgage application
from "click to close." We use our website to educate, communicate and motivate
potential borrowers to complete a mortgage application for our services. We
believe we have built a website which is user-friendly, easy-to-navigate and
educational. Throughout the mortgage process, borrowers are supported by expert
customer service representatives either online or in person at our branch
offices. When we process, underwrite and fund mortgage loans for our mortgage
banking operations, borrowers have continual and convenient access through the
Internet and can monitor the status of their applications throughout the
process.
Marketing and Advertising. Our core marketing strategy objectives are to
establish AppOnline as a dominant Internet mortgage lender and to drive business
to our websites. We selected Benenson Janson, a nationally recognized
advertising agency, to develop our advertising campaign. We have launched an
advertising campaign that focuses on radio, print and broadcast advertising as
well as online advertising. Our campaign targets:
Distribution Channels. We use multiple channels of distribution to
strengthen and expand our competitive position in both Internet and traditional
mortgage banking. Our distribution strategy includes direct-to-consumer channels
and business-to-business partnerships. Our business partnerships, both co-
branded and private label, make the AppOnline residential mortgage loan solution
available to financial institutions with a desire to offer their clients a more
complete financial services package by introducing
<PAGE>
mortgages via the Internet. We currently market the AppOnline.com solution
through the following distribution channels:
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<TABLE>
<CAPTION>
Brand Names Co-branded Websites Private Label Website
<S> <C> <C>
- - AppOnline.com - DigitalCity.com - E-Profile.com
- - Island Mortgage Network - Moving.com
- - First Equities Commercial Corp. - NewHomesDirect.com
- - Reliance Mortgage Network - BuyOwner.com
- House-Hunting.com
- CyberBills.com
- WealthHound.com
- IndiaServer.com
- sbn.com
</TABLE>
We will continue to seek agreements to enhance our visibility and increase
the scope and volume of our Internet operations. We desire both portals (such as
Yahoo, AOL, Lycos, AltaVista, HotBot, Go, excite, etc.) and content providers
(such as CNN or Bloomberg) as strategic partners among high-traffic general
websites.
Brandnames. Our direct-to-consumer distribution channels include our
website at www.AppOnline.com and our loan consultants using our customized
software in our branch offices, under the AppOnline.com, Island Mortgage
Network, First Equities Commercial Corp. and Reliance Mortgage Network names.
Co-Branded Websites. We currently originate loans through the following
co-branding arrangements. Co-branding involves placing the AppOnline name on our
marketing partner's brand name on a website, where we provide mortgage services
in addition with our marketing partner's offered services. We currently appear
on the following websites:
- - DigitalCity.com--In October 1999, we entered into a marketing agreement
with America Online's "Digital City" feature. This is a regionalized
consumer information site which reaches an estimated 4.5 million
consumers per month spread across 60 metropolitan markets nationwide.
We provide users with mortgage evaluation tools and buying tips, and
receive featured placement of our services on the site.
- - Moving.com--This is a website designed to assist the 41 million
Americans moving their homes each year. The site specializes in
providing information about every stage of the moving process.
- - NewHomesDirect.com--This website provides listings of new homes across
the U.S. Users can search qualified lists submitted by realtors,
developers, brokers or publishers by state or metropolitan area. We are
the exclusive mortgage provider.
- - BuyOwner.com--This website lists homes for sale directly by the seller,
and includes a system matching prospective buyers and sellers. We
currently offer mortgages in southern Florida and Georgia for the
service.
- - House-Hunting.com--A real estate website where agents and brokers
across the United States manage properties online. Participants have
the ability to update their personal and property
<PAGE>
information themselves. We are the exclusive mortgage provider for the
website.
- - CyberBills.com--This is a consumer bill consolidation and payment
service, with all aspects of the process conducted online. In addition
to providing mortgage services to cyberbills' users, we offer the
website's automatic bill payment services to our mortgage customers.
- - WealthHound.com--Web portal focusing on personal finance. The website
provides in-depth information and analysis of financial and company
information, financial products and market data. We are the exclusive
mortgage provider for this website.
- - IndiaServer.com--This is the leading South Asian community website, and
we are its exclusive mortgage provider, delivering information on all
aspects of the home buying process.
- - sbn.com--The Superior Business Network offers online yellow pages on a
localized basis for U.S. cities. It provides faster and easier
searching capabilities for local services. We are the premier mortgage
provider for all U.S. area codes for the SBN yellow pages.
Private Label. We have initiated, and will continue to expand, our
private label channel of distribution by offering both the online and offline
components of our technology platform to other mortgage originators for use
under their own name. We have signed a letter of intent with E-Profile.com, a
subsidiary of Sanchez Computer Associates that provides proprietary e-banking
solutions, to enable a comprehensive mortgage solution for integration with
their Internet banking package.
OUR PRODUCTS AND SERVICES
We offer consumers a wide array of first mortgage products, as well as
second mortgages and home equity lines of credit. Our proprietary software
offers consumers mortgage analysis tools, either on our website or on our
partner's branded website. The following is a description of the types of
mortgage products and services we currently offer.
<TABLE>
<CAPTION>
Consumer Loan Products: Secondary Loan Sales: Online Mortgage Tools:
<S> <C> <C>
- - Conforming mortgage loans - Sales of servicing rights - Secure Universal Residential
- - Jumbo mortgage loans - Loan sales: - Loan Application
- - Alternative mortgage loans - Concurrent transactions - Secure Short Loan Application
- - Home equity and second - Assignment of trade sales - The Rate Reporter loans
mortgage loans - Whole-loan sales - The Market Observer
- - Sub-prime mortgage loans - Warehouse financing - The Loan Qualifier
</TABLE>
CONSUMER LOAN PRODUCTS
Conforming mortgage loans. Conforming mortgage loans are mortgage loans
that conform to the underwriting standards established by one of the
government-sponsored mortgage entities, Fannie Mae or Freddie Mac, and are
originated and generally sold by us directly to Fannie Mae or Freddie Mac.
Jumbo mortgage loans. Jumbo mortgage loans are those that exceed the
maximum loan size for conforming loans, currently $240,000 for single-family
homes. We sell all jumbo mortgage loans to
<PAGE>
institutional investors such as GE Capital Mortgage and GMAC/RFC, among others.
Alternative mortgage loans. Alternative mortgage loans fail to satisfy one
or more elements of the jumbo or conforming loan underwriting criteria, such as
those relating to documentation, employment history, income verification,
loan-to-value ratios, credit history, qualifying ratios or borrower net worth.
We originate mortgage loans that do not satisfy one or more of the underwriting
criteria but which, in our estimation, based primarily on the borrower's credit
score and loan-to-value ratios for the property, present a risk profile
comparable to conforming loans. We generally sell these loans to GMAC/RFC and
IndyMac.
Home equity and second mortgage loans. Home equity and second mortgage
loans are typically secured by second liens on the home. Both types of loans are
designed primarily for high credit quality borrowers and are underwritten
according to the standards of their potential buyer. Home equity lines generally
provide for either a 5-year or 15-year draw period, during which the borrower
may make cash withdrawals, and a 10-year repayment period during which the
amount outstanding at the end of the draw period is amortized. Only interest
payments are made during the draw period. Second mortgage loans are
"closed-end," that is they are fixed in amount at the time of origination and
typically amortize over the term of the loan or have a balloon payment feature
which is a lump-sum payment made at the end of the term. Home equity lines
generally bear adjustable interest rates while second mortgage loans typically
bear fixed interest rates. Both types of loans are frequently originated in
conjunction with our origination of a first-lien mortgage loan on the related
property. We generally sell these loans to institutional investors such as Chase
Manhattan Bank or Homecomings, a GMAC/RFC subsidiary.
Sub-prime mortgage loans. This category consists of mortgage loans for
borrowers who have impaired or limited credit profiles or higher debt-to-income
ratios than would be acceptable for sale of such loans to one of the agencies or
private-sponsored mortgage conduits. Such mortgage loans may also fail to
satisfy the underwriting criteria of the government-sponsored entities in other
ways. We categorize these mortgage loans based on the borrower's credit profile
as "B" or "C" or loans which are generally considered "non-prime" mortgage loans
in the secondary mortgage market. We do not originate mortgage loans that our
automated underwriting system would categorize as "D" loans. We currently sell
the "B" or "C" loans we originate to investors such as GMAC/RFC.
SECONDARY LOAN SALES
Sales of servicing rights. With each loan we originate, a corresponding
right to service the loan is created. We sell the right to service the loan
either separately or combined with the loan sale. As a result, we minimize
default and prepayment risk. We do not currently plan to retain servicing rights
on loans we underwrite, fund and close.
Loan sales. A primary component of our business strategy is to seek the
most efficient method of selling our mortgage loans. This involves evaluating
and comparing available prices for each alternative method, given current market
conditions and the risks associated with the type of mortgage loan. We currently
sell our conforming loans through:
- - Concurrent transactions, which involves a sale of the underlying
mortgage loan directly to Fannie Mae or Freddie Mac with a concurrent
sale of the servicing rights to an independent servicer.
- - Assignment of trade sales, which are sales of conforming loans to a third
party along with an
<PAGE>
assignment of the associated mortgage-backed security commitment/trade. The
buyer then exchanges the loans with Fannie Mae or Freddie Mac for mortgage
backed securities to be delivered against the assigned trade.
- - Whole-loan sales involve loans that we underwrite and sell to a specific
buyer on a loan-by-loan basis. We currently sell Jumbo and Alternative
mortgage loans, as well as non-prime loans and home equity lines, on the same
basis.
The sale of mortgage loans may generate either a gain or loss, which may
result from changes in interest rates that affect the market value of the loans
between the time we commit to a price and the time that the loan is sold.
Warehouse financing. We customarily sell all of the loans we fund. We use
our secured revolving credit facilities to fund loan originations and
finance-originated loans until they are sold. We have available $125 million in
revolving lines of credit secured by the mortgage loans we close. We are
required to comply with various operating and financial covenants including
those relating to:
- - net worth;
- - maximum debt limits;
- - debt to equity ratio; and
- - restrictions on changes in our executive management.
In accordance with industry practice, these facilities will be renewable by
the lenders annually. As of December 31, 1999, the outstanding balance under our
revolving credit facility was $95 million.
ONLINE MORTGAGE TOOLS
Secure Universal Residential Loan Application. Consumers enter data into
the application which is directly entered into The Loan Handler. The borrower's
file is then sent electronically to one or more e-mail accounts within seconds.
Secure Short Loan Application. This is a secure application where consumers
enter data into the application which can be imported directly into The Loan
Handler. This form requires less information to be entered by the borrower, and
provides enough data to go directly to Desktop Underwriter or Loan Prospector.
The Rate Reporter. This allows visitors to locate loan programs instantly
and gives them a way to perform side-by-side loan program comparisons, cost
forecasts, closing costs and view estimates.
The Market Observer. This allows potential borrowers to monitor market
trends and set desired interest rates. An email notification is sent when the
desired interest rate becomes available.
The Loan Qualifier. This allows visitors to scan our database of loan
products and will present those for which they qualify.
<PAGE>
The Loan Monitor. Clients can enter information about a current mortgage
and search our database for products with better terms. If none are currently
available, an email notice will be sent when a program that is better than their
current mortgage becomes available.
Mortgage Calculators. These online calculators can be used to determine
monthly payments, balloon payments, rent-vs.-buy comparisons, amortization
schedules, loan lengths, prepayment effects, income requirements, payment tables
and debt consolidation tables.
OPERATIONS
Compliance. Our compliance department is responsible for compliance and
licensing. Our centralized compliance function allows us to ensure compliance
with applicable regulations and provide consistency to our customers.
Additionally, the compliance group develops loan documents for new products and
maintains lending and broker licenses.
Quality assurance. Prior to funding a loan, we perform a pre-closing audit
to ensure the loan meets investor requirements. The pre-closing audit includes
the following items:
- - Review of a new credit report;
- - Performance of a cross reference check to determine if the borrower or
property has been previously submitted for a loan;
- - Completion of a verbal verification of current employment; and
- - IRS confirmation of annual income (for most self-employed borrowers).
Quality control. Our quality control provider samples closed loans to
verify compliance with legal requirements and to see if the sampled loans are
accurate and show no evidence of fraud. These quality control reviews enable us
to monitor, evaluate and improve the overall quality of loan production and to
identify and communicate to the legal/compliance team and management existing
and potential underwriting problems.
We currently use an independent quality control provider to provide these
services. Each month our quality control provider selects at random and reviews
a 10% sample of our loans. This review includes:
- - a review of credit underwriting;
- - a complete loan package re-verification of employment, deposit, mortgage and
rental history;
- - a loan program compliance review; and
- - a federal regulatory compliance review.
A new residential mortgage credit report is ordered on 10% of the selected
loans, while a new review appraisal is ordered on an additional 10% of the
selected loans, the aim being to detect any fraud or imprudent activity during
the processing, funding, servicing or selling of the mortgage loan.
<PAGE>
We verify occupancy and applicable information by regular mail. Over each
12-month period, our quality control provider is required to include in its
review loans of all product types, all states of operation and all loans with
high-risk characteristics. Its quality control reports include individual loan
overviews, loan group overviews and key trends or patterns summarized on a
monthly and year-to-date basis. We evaluate our provider's quality control
reports on a regular basis and address any deficiencies in our loan procedures
specified in the reports. To date, these quality control reviews have not
uncovered any material deficiencies in our loan procedures.
TECHNOLOGY
We use loan processing software designed by Contour Software, a leading
software provider for the mortgage banking industry. Contour Software maintains
our website. Contour's loan processing and Internet software solutions allow us
to seamlessly integrate each phase of the loan process.
We intend to continue to take advantage of the latest developments in state
of the art technology. These features include state-of-the-art backbone data
communications capabilities. These technologies allow us to attain instant
online credit approval for our customers and efficient internal communications
between our branch offices and our main office.
Our website runs on a secure server which is backed up nightly. NetMagic
provides hosting services, with T-1 lines managing traffic to the servers.
Of our 756 total employees, 144 are currently engaged in our Internet
operations.
COMPETITION
The e-commerce market is new, rapidly evolving and intensely competitive,
and we expect competition to intensify in the future. Barriers to entry are
minimal, and current and new competitors can launch new websites on the Internet
at relatively low cost. In addition, the traditional residential mortgage loan
business is intensely competitive. We currently compete with a variety of other
companies offering mortgage services including:
- - online competitors, including E-LOAN, Inc., iOwn.com, Mortgage.com,
QuickenMortgage.com, Lendingtree and Keystroke Financial;
- - indirect competitors who offer various services online, including Yahoo
and Microsoft Corporation, through which other on-line mortgage
companies may offer products;
- - mortgage banking companies, commercial banks, savings associations,
credit unions and other financial institutions which originate mortgage
loans; and
- - mortgage brokers.
Many of our mortgage banking and mortgage brokerage competitors have
significant competitive advantages including the following:
- - longer operating histories;
<PAGE>
- - greater name recognition and more extensive customer bases; and
- - greater financial, marketing, technical and other resources.
INTELLECTUAL PROPERTY
Trademarks and other proprietary rights are important to our success and
our competitive position. We currently hold a number of trademarks, service
marks 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 will continue to 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.
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 proved valid, through
litigation or otherwise, we may be required to change our trademarks or other
proprietary marks and pay financial damages.
We currently enter into confidentiality or license agreements with our new
employees, consultants and corporate partners to 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 proprietary rights. The steps we have taken may not prevent misappropriation
of our proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
EMPLOYEES
As of December 31, 1999, we employed 756 persons, including 15 in
management, 657 in sales, marketing and customer support, and 43 in accounting,
human resources and administration and 41 clerical staff. We believe we have a
good relationship with our employees.
OUR HISTORY AND STRUCTURE
We were incorporated under the laws of the state of Delaware on November
12, 1980 as Nuclear and Genetics Technology, Inc. We were a development stage
company with no real operations until May 5, 1997, when as IMN Financial Corp.
we acquired all the assets of Island Mortgage Network, Inc. ("Island"), formerly
known as Donald Henig, Inc., First Equities Commercial Corp. and First Equities
Service Corp. On May 11, 1999 we changed our name to AppOnline.com, Inc.
We have a number of subsidiaries, all of them wholly-owned. Island, our
principal subsidiary, is a New York corporation formed on December 2, 1992.
Island operates under the names "Island Mortgage Network" "Reliance Mortgage
Network" and "AppOnline.com." Island received its New York State mortgage
banking license on May 12, 1994, is currently licensed to originate loans in all
50 states and is approved to participate in FHA and FMAC loan programs. Our new
Internet subsidiary, ApplyOnline, Inc., is a Delaware corporation which was
formed in February 2000.
Regarding our other subsidiaries, First Equities Commercial Corp., a New
York corporation, is a
<PAGE>
commercial loan brokerage company operating principally in New York City; First
Equities Service Corp., a New York corporation, is a land development company
currently engaged in a single development project in New Mexico; and Citizens
Mortgage Service Company, a Pennsylvania corporation, is a sub-prime mortgage
banking lender which operates in New York and Pennsylvania. Western National
Funding, Inc. a California corporation which we acquired on March 7, 2000, is
engaged in originating wholesale mortgages for single family residences of one
to four units. Cyber Media Group, Inc., a Delaware corporation which we acquired
on March 7, 2000, is a leading developer of e-finance solutions and has
developed premier websites that provide consumers with financial services.
AppOnline Internet R&D Inc., a Delaware corporation, is engaged in the
development of internet strategies and software.
The following is a list of our inactive subsidiaries:
- Queen City Mortgage Co.
- Alliance Mortgage Corp.
- Pioneer Financial Group, Inc.
- Arrowhead Mortgage Company, Inc.
<PAGE>
ITEM 2. PROPERTIES
Our principal executive offices are located at 520 Broadhollow Road,
Melville, NY 11747 where we lease 15,754 square feet of office space. We are
party to leases covering such facility that provides for an aggregate monthly
rental payment of $24,079, a portion of which expires on December 31, 1999. We
have the right to remain at this site on a month-to-month basis after the
expiration of our lease at a rate of approximately $30,605 for each of the first
two months after expiration and $32,527 per month thereafter. We believe that
our facilities are suitable and adequate for our current operations, although we
are currently searching for alternative facilities.
We also lease office space for our branch offices, which as of December 31,
1999 aggregated approximately 90,000 square feet with monthly aggregate base
rent of approximately $244,974. The terms of the leases vary as to duration and
to price escalation provisions. In general, the leases expire between January
2000 and October 2004 and provide for rent escalations tied to either increases
in the lessor's operating expenses or fluctuations in the Consumer Price Index
in the relevant geographical area.
ITEM 3. LEGAL PROCEEDINGS
Paul Brumaire and Poupette Brumaire v. Isaac Teitelbaum, Green Point Savings
Bank, Richard Kaplan, Diconza, LaRocca & DiCunto L.L.P., Gem Funding Limited,
Alliance Capital, Network Title, Morici & Morici, Island Mortgage Network and
Brucha Funding, is a second action brought in federal court for the Eastern
District of New York in July 1998, despite the containing pendency of the
lawsuit referenced above. Plaintiff and his daughter claim $5,000,000 in actual
and $2,000,000 in punitive damages against a group of ten defendants, consisting
of every entity which was involved in an abortive plan to refinance two
commercial properties plaintiffs owned in Brooklyn, New York. Two motions to
dismiss the complaint were granted, and plaintiff has re-pleaded one final time.
The federal judge hearing the case recused himself, and the motions to dismiss
have been refiled with the new judge, and are awaiting a hearing date.
Vincam Human Resources v. BDMC and Island Mortgage Network is a breach of
contract action pending in Dade County Florida, begun in January 1999, in which
plaintiff is seeking $708,000 from Island Mortgage Network as a successor in
interest to BDMC and its former parent CFI. Island Mortgage Network has moved to
dismiss on the basis of improper service of the complaint, and that motion is
pending.
Norwest v. Bankers Direct Mortgage Corp. and IMN Financial Corp. is an action
filed in May 1999 in Florida state court by a warehouse lender seeking to force
BDMC and us as its alleged successor, to repurchase certain problem loans in an
undisclosed amount.
Horvitz, et al. v. AppOnline.Com, Inc., Dawcin International Corp., et al.;
United States District Court, Eastern District: Plaintiffs commenced this action
in March 2000 seeking damages in an amount to be determined at trial, but in no
event less than $800,000. Plaintiffs allege violations of the Securities
Exchange Act and seek a declaratory judgment against all defendants.
AppOnline.Com, Inc.'s answer is due mid-April. AppOnline.Com, Inc. will proceed
with discovery and vigorously defend the claims asserted against it.
Pacific International Securities Inc. v. AppOnline.Com, Inc., et al.; United
States District Court, Eastern District: This action was commenced in December
1999. Plaintiffs seek damages in an amount to be determined at trial, but in no
event less than $450,000. AppOnline.Com,Inc. has answered the complaint and the
parties are proceeding with discovery.
<PAGE>
In addition to the above, we are subject to various other legal
proceedings which arise in the ordinary course of our business or relate to
claims brought against companies we have acquired. Other than the above, we do
not believe that any of our current legal proceedings, individually or in the
aggregate, could have a material adverse effect on our operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is listed under the symbol "AOP" on the American Stock
Exchange. The following table shows, for the quarters indicated, the reported
high and low bid prices of our common stock while traded on the OTC Bulletin
Board through September 3, 1999 and the high and low sale prices of our common
stock since it began trading on the American Stock Exchange on September 7,
1999:
Common Stock
Fiscal 1998 High Low
----------- ---- ---
First Quarter $4.50 $3.00
Second Quarter 4.06 1.06
Third Quarter 1.50 0.63
Fourth Quarter 3.06 0.60
Fiscal 1999 High Low
----------- ---- ---
First Quarter $2.00 $0.81
Second Quarter 5.50 0.84
Third Quarter
From July 1 to September 3.44 1.81
From September 7 to September 30 4.50 2.50
Fourth Quarter 3.25 1.25
Fiscal 2000 High Low
----------- ---- ---
First Quarter $5.78 $1.56
From May 5, 1997 to September 3, 1999, our common stock was listed on the
OTC Bulletin Board under the symbol "IMNF." On September 7, 1999, our common
stock began trading on the American Stock Exchange and we changed our symbol to
"AOP."
On March 31, 2000, the last reported sale price of our common stock on the
American Stock Exchange was $3.75. On March 31, 2000, there were approximately
4,200 holders of record of our common stock.
DIVIDEND POLICY
We have never paid or declared dividends on our common stock. The payment
of cash dividends, if any, in the future is within the discretion of our Board
of Directors and will depend upon our earnings, its capital requirements,
financial condition and other relevant factors. We intend for the foreseeable
future, to retain future earnings for use in our business.
<PAGE>
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 45,000,000 shares of common stock, par
value $0.001 per share, and up to 5,000,000 shares of preferred stock, par value
$0.001 per share. As of March 31, 2000, there were 44,823,107 shares of common
stock issued and outstanding and 5,000 shares of preferred stock issued and
outstanding. All outstanding shares of common stock are of the same class, and
have equal rights and attributes.
Common Stock
Each share of common stock entitles its holder to one vote on all matters
submitted to a vote of the stockholders. Since the common stockholders do not
have cumulative voting rights, holders of more than 50% of the outstanding
shares can elect all of our directors, and the remaining stockholders cannot by
themselves elect any directors. The common stockholders do not have preemptive
rights and cannot convert their shares of common stock into other securities.
Common stockholders are entitled to receive ratably any dividends as may be
declared by the board of directors, subject to any preference in favor of
outstanding shares of preferred stock. In the event we liquidate, dissolve or
wind up, common stockholders will participate ratably in our net assets
available for distribution after payment of our liabilities and payment of any
liquidation preference in favor of outstanding shares of preferred stock.
Preferred Stock
Our board of directors is authorized to issue, without further action by
our stockholders, up to a further 4,988,750 shares of preferred stock. We may
issue preferred stock in the future in connection with, for example,
acquisitions or financings; we currently have no plans to issue any additional
shares of preferred stock. Issuance of any additional shares of preferred stock
could have the effect of making it more difficult for a third party to acquire
us by means of a merger, tender offer, proxy contest or other method.
Series C Convertible Preferred Stock
There are 5,000 shares of Series C convertible preferred stock outstanding.
Each share of Series C preferred stock is convertible into 200 shares of common
stock, does not pay a dividend and has no voting rights.
Warrants
We have 388,000 warrants outstanding; 88,000 are exercisable at $3.60 per
share, 150,000 are exercisable at $4.80 per share, and 150,000 are exercisable
at $4.92 per share. All of the warrants are exercisable for a period of three
years commencing between Dec. 31, 1997 to June 14, 1998. In addition, we have
1,200,000 warrants outstanding, each exercisable at $0.58 per share, all of
which are exercisable from April 18, 1999 through October 1, 2004, as well as
500,000 warrants exercisable at $2.709 per share from October 14, 1999 through
October 31, 2004.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 1999, 1998
and 1997 have been derived from the audited financial statements of the Company
percent are percent of Net Sales:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
(in thousands, except per share data)
Income Statement Data: 1999 % 1998 % 1997 %
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $32,207 100% $36,400 100% $12,788 100%
Expenses........................ 55,022 161 35,613 98 13,758 108
Income (loss) from
operations...................... (19,586) n/a 787 2 (970) n/a
Net (loss) income............... (22,815) n/a 337 1 (998) n/a
Basic and diluted net income
(loss) per share................ (0.75) 0.01 (0.10)
December 31,
(In thousands)
Balance Sheet Data: 1999 1998
---- ----
Total assets................................................ $127,193 $108,145
Total liabilities........................................... 103,622 94,175
Stockholders' equity........................................ 23,570 13,970
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and related notes included elsewhere in this
Form 10-K. See "Special Note Regarding Forward-Looking Statements."
General
We are a nationwide provider of mortgage banking and brokerage services
both online through our website and through our 57 branch offices located in 20
states. We offer our services directly to borrowers, as well as to other
businesses. We utilize our technology to support the origination, processing,
underwriting, closing and secondary marketing of mortgage loans.
We intend to continue to expand our traditional mortgage business through
internal growth and the acquisition of complementary businesses. In January
1999, we expanded our operations into the Internet market and created the
Internet web address www.AppOnline.com. We intend to use the Internet to expand
our geographic reach to the entire United States. Since then we have invested
significant resources in developing, marketing and expanding our Internet
operation. For the year ended December 31, 1999, we originated approximately
$769,400,000 in mortgage. To better reflect the shift towards expanding and
marketing our Internet business, we changed our corporate name to AppOnline.com,
Inc. in May 1999. We believe this name more accurately reflects the focus of our
business.
We earn fees, or "points" on loans that we originate directly from
borrowers or through one of our business clients. We sell all loans that we fund
and the associated servicing rights to institutional investors in the secondary
market. In doing so we realize gains or losses equal to the difference between
the amount we funded and the price at which we sold the loan. Typically, for any
given loan, at the time we lock in the interest rate that the borrower will pay
we obtain a commitment from institutional investors to buy that loan.
We provide other services, including loan underwriting and processing and
obtaining appraisals and credit reports, for which borrowers pay at closing.
These fees are offset against amounts we pay vendors for some of these services.
We pay interest at short-term interest rates on money we borrow to fund the
loans we make to our customers, whereas we generally charge the borrower on that
loan interest at intermediate-term interest rates. We generate net interest
income on any given mortgage loan if the intermediate-term interest rate charged
the borrower is higher than the short-term interest rate we are charged under
our financing arrangements. Conversely, we experience a net interest loss if the
short-term interest rate under our financing arrangements is higher than the
intermediate-term interest rate charged the borrower. We try to sell loans in
the secondary market as soon as possible after closing, particularly during
periods when intermediate-term rates are equal to, or only slightly higher than,
short-term interest rates. The interest we earn on the loans we fund is recorded
in our financial statements under "Interest income," and the interest we pay
under our warehouse lines of credit is recorded in our financial statements
under
<PAGE>
"Interest expense."
For the year ended December 31, 1999, we experienced a loss of $22,644,312
and have an accumulated deficit of $23,432,154. These net losses and accumulated
deficit resulted from our investment in technology infrastructure and personnel
in anticipation of an increase in loan volumes processed through our website. We
do not expect to return to profitability for at least fifteen months. To return
to profitability we plan, among other things, to do the following:
- -- reduce our costs per loan by achieving economies of scale through higher
volume;
- -- increase the automation of the loan process; and
- -- improve the terms under which we sell loans in the secondary market.
We plan to strengthen our brand position and utilize our technology
infrastructure to increase our loan production volume. Accordingly, we intend to
invest heavily in marketing and advertising, new partnerships and strategic
alliances and our technology infrastructure.
We anticipate that we will continue to experience losses similar to or
greater than those described above during the next fifteen months. Significant
increases in our advertising and marketing campaign will contribute to such
loss. We believe that this program is necessary to build brand recognition. We
anticipate that when we have completed the development of our Internet
operations, we will incur lower costs originating mortgages through our website
than through traditional means. We expect the combination of increased volume
and lower costs to lead to profitability. We believe that our Internet
operations represent a key element of our future and that we can become a
leading online mortgage banker.
Although our revenue has grown significantly in recent quarters, we cannot
assure you that we will be able to sustain revenue growth or return to and
maintain profitability. Even if we were to return to profitability, we expect
material fluctuations in quarterly revenue and earnings to result from a number
of factors. As a result, we do not believe that our historical results are
necessarily indicative of results to be expected in any future period.
Results of Operations
Year ended December 31, 1999 vs. Year ended December 31, 1998
Total revenues for the year ended December 31, 1999 decreased to
$32,206,592 from $36,400,605 for the same period in 1998, a decrease of 11.5%.
This decrease is primarily attributable to a 70% industry-wide decrease in the
refinancing sector of the loan market, a decrease which we also experienced.
This decrease was caused by an increase in interest rates of approximately 1 3/4
percentage points during 1999. In addition, our average company-wide percentage
of closed loans versus originations was approximately 45% in 1999 down from
approximately 85% in 1998. The decrease is due primarily to our initial entry
into the internet market, which created a 10% closed loans versus originations
through internet leads and which also resulted in increased personnel costs. Our
goal for 2000 is to increase our average company-wide closed loan percentage to
approximately 70-75%.
Total general and administrative expenses for the year ended December 31,
1999, increased to $18,300,040 as compared to $11,019,820 for the same period in
1998, an increase of 66.1%. We
<PAGE>
attribute this significant increase primarily to additional costs associated
with entry into the Internet market, including the hiring of additional
personnel as noted above.
Total field and direct expenses for the year ended December 31, 1999,
increased to $21,250,461 as compared to $18,175,416 for the same period in 1998,
an increase of 16.9%. This increase is attributable to additional costs related
to acquisitions completed during 1999, as well as costs associated with entry
into the Internet market, including an advertising and marketing campaign.
Total interest expense for the year ended December 31, 1999 increased to
$6,644,215 as compared to $5,434,808 for the same period in 1998, an increase of
22.3%. This increase is due to an increase in interest rates as well as to the
fluctuation in the average balance of the warehouse lines of credit.
Total non-recurring expenses for the year ended December 31, 1999 totaled
$7,431,058. These expenses were incurred in connection with the development of
our Internet operation. These expenses are not expected to be recurring
expenditures of the Company and do not include normal operating costs in
conjunction with our Internet operations.
We incurred a net loss for the year ended December 31, 1999 of $22,644,312
as compared to a net income of $337,461 for the same period in 1998. We
attribute the significant decrease primarily to costs associated with our entry
into the Internet market as well as a significant decrease in the refinancing
sector of the market.
Year ended December 31, 1998 vs. Year ended December 31, 1997
Total operating income increased to $36,400,605 from $12,787,797 in the
previous year. The increase of 185% was a result of increased market penetration
through both internal growth and acquisitions.
Total operating expenses increased to $35,613,308 from $13,757,793 in the
previous year. This increase of 159% was a direct result of our expanded
operation and corresponding increase in revenues. Total operating expenses as a
percentage of total operating income decreased to 98% from 108% in the previous
year. This reflects management's efforts to control costs and the successful
integration of our recent acquisitions.
We had income from operations of $787,297 versus a loss from operations of
$969,996 in the previous year. Our income taxes increased from $27,999 to
$449,836 as a result of the increase in income from operations. As a result of
the above factors, we had a net income of $337,461 in the year ended December
31, 1998 versus a loss of $997,995 in the previous year.
Liquidity and Capital Resources
We believe that current operations will provide adequate cash flow to meet
current obligations. As of December 31, 1999, our capital resources consisted of
$3,548,137 in cash, $1,975,354 in points and fees receivable and investments of
$6,188,083 and revolving lines of credit of $125 million, $95 million of which
was outstanding. We believe that these resources give us adequate working
capital for the next twelve months.
<PAGE>
Year 2000 Preparation
Many computer systems and software products worldwide and throughout all
industries were not expected to function properly as the year 2000 approached
unless changed, due to a once-common programming standard that represents years
using two-digits. This is the "Year 2000 problem" that has received considerable
media coverage.
Management has not experienced any significant failure of the company's
systems or any problems associated with any of its vendors or other third-party
providers' systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
The financial statements are included at the end of this Annual Report on
Form 10-K at the pages included below.
Page
Financial Statements: Number
------
Report of Independent Accountants.........................................F - 1
Balance Sheets as at December 31, 1999 and 1998 ..........................F - 2
Statements of Operations and Comprehensive Income (loss) for the
years ended December 31, 1999, 1998 and 1997.....................F - 4
Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997.................F - 6
Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997.................F - 9
Notes to Financial Statements.............................................F - 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 27, 2000, AppOnline.com, Inc. dismissed Werblin, Cassucio &
Moses ("Werblin"), AppOnline's former independent certified public accountants.
During neither of the past two years ended December 31, 1998 and 1997 did the
reports by Werblin on the financial statements of AppOnline contain an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles. The decision to dismiss
Werblin as AppOnline's independent certified public accountants was approved by
the Audit Committee of the Board of Directors of AppOnline. During AppOnline's
two most recent fiscal years and subsequent period up to January 27, 2000, there
were no disagreements with the former accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
On January 27, 2000, AppOnline engaged Citrin, Cooperman & Company, LLP to
serve as the AppOnline's independent certified public accountants. During
AppOnline's two most recent fiscal years, and during any subsequent period
through January 27, 2000, AppOnline did not consult with Citrin, Cooperman &
Company, LLP on any accounting or auditing issues.
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table shows information regarding our executive officers and
directors.
Name Age Position
- ---- --- --------
Edward R. Capuano 53 Chairman of the Board and Chief
Executive Officer
Jeffrey Skulsky 50 President and Director
Cindy L. Eisele 34 Chief Financial Officer and Treasurer
James Richmond 53 Executive Vice President
Pargie Raiola 57 Senior Vice President
Eric Fishman 46 Senior Vice President
James Britton 52 Senior Vice President
Patrick A. Reilly 42 General Counsel and Secretary
Jerry Dugan 62 Director
Robert Knickman 50 Director
Stanley Hagendorf 69 Director
Edward R. Capuano. Mr. Capuano has served as our Chief Executive Officer and
Chairman of the Board since May 1997. From 1995 to present Mr. Capuano has
served as the President of Island Mortgage Network. From 1993 to 1995, Mr.
Capuano served as the Northeastern Regional Director of United Capital Mortgage
Corp. Mr. Capuano earned a B.A. in Business Administration from Manhattan
College in 1967.
Jeffrey Skulsky. Mr. Skulsky has served as our President and a member of our
board of directors since November 1998. From 1995 to 1998, Mr. Skulsky was the
Director of Operations of Island Mortgage Network. From 1993 to 1995, Mr.
Skulsky served as a Branch Manager of United Capital Corp.
Cindy L. Eisele. Ms. Eisele has been our Chief Financial Officer and Treasurer
since November 1998. From 1996 to May 1997, Ms. Eisele served as the Chief
Financial Officer of Island Mortgage Network. From 1993 to 1996, Ms. Eisele
served as the assistant controller of Midcoast Mortgage Corporation. Ms. Eisele
earned a B.S. in Accounting in 1986 from the State University of New York at
Binghamton and an M.B.A. in 1992 from Dowling College.
James Richmond. Mr. Richmond has served as our Executive Vice President since
March 1996. From 1996 to May 1997, Mr. Richmond served as an Executive Vice
President of Island Mortgage Network. From 1995 to 1996, Mr. Richmond served as
an Executive Vice President of New Jersey Lenders Corp. From 1993 to 1995, Mr.
Richmond served as an Executive Vice President of Globe Mortgage Co. Mr.
Richmond has more than 27 years experience in the mortgage banking industry. Mr.
Richmond served as the President of the New Jersey Mortgage Bankers Association
from 1994 to 1995. Mr. Richmond earned a B.A. in History from the State
University of New York at Stony Brook in 1969.
<PAGE>
Pargie Raiola. Mr. Raiola has served as one of our Senior Vice Presidents since
May 1997. From 1993 to May 1997, Mr. Raiola served as a Senior Vice President of
Island Mortgage Network. Mr. Raiola has over 30 years experience in the mortgage
banking and financial services industry. Mr. Raiola earned a B.A. in Economics
from New York University in 1984.
Eric Fishman. Mr. Fishman has served as one of our Senior Vice Presidents since
September 1997. From May 1996 to September 1997 Mr. Fishman served as President
and CEO of Citizens Mortgage Service Corp. Mr. Fishman served as Vice President
of Chase Manhattan Mortgage Corp. from April 1990 to May 1996.
James Britton. Mr. Britton has served as one of our Senior Vice Presidents since
May 1997. From 1996 to May 1997 Mr. Britton served as a Senior Vice President of
Island Mortgage Network. From 1994 to 1996, Mr. Britton served as Regional
Manager of Patriot Mortgage Co. From 1993 to 1994, Mr. Britton served as
Regional Manager of Affinity National Mortgage.
Patrick A. Reilly. Mr. Reilly has served as our Secretary and General Counsel
since 1997. From 1993 to 1996 Mr. Reilly worked as an attorney for Avis, Inc.,
specializing in environmental, employment and discrimination litigation,
divestitures and mergers and acquisitions. Mr. Reilly received his Juris
Doctorate from Hofstra University School of Law in 1982.
Jerry Dugan. Mr. Dugan has served as a member of our board of directors since
July 1998. From 1986 to 1998, Mr. Dugan has served as President and Chief
Executive Officer of Advance Lamp Technologies Inc. Mr. Dugan received a B.B.A.
from the University of Houston in 1963.
Robert Knickman. Mr. Knickman has served as a director of the Company since May
1998. From 1980 to the present, Mr. Knickman has served as the President of
Knickman Associates, Inc., a company that owns, develops and manages commercial
real estate. From 1994 to the present, he has been a partner of Lark Property
Management, Inc., a company that manages bank owned properties and real estate
in foreclosure and receivership. From 1996 to the present. Mr. Knickman has
served as the President of Know Lead, Inc. a lead and asbestos inspection and
consulting firm. From 1997 to the present, he has served as the Chief Operating
Officer of Network Title Agency Corp., a full-service title agency. Mr. Knickman
is a New York State licensed real estate broker and a registered mortgage broker
licensed by the New York State Banking Department.
Stanley Hagendorf. Mr. Hagendorf has served as a member of our board of
Directors since November 1998. Mr. Hagendorf is a practicing attorney with over
twenty-five years of experience and has been engaged in private practice for the
past twenty years. Mr. Hagendorf received his Juris Doctorate from Harvard Law
School in 1956.
Our directors are elected for one year terms or until their successors are
elected, and officers are appointed by the Board of Directors.
Director Compensation
We pay each of our directors a nominal amount for attending meetings of our
board of directors, and reimburse any reasonable expenses they incur in
attending those meetings. Otherwise, we do not compensate our directors for
acting as such. We have no plans to change this arrangement. On December 29,
1999, we issued a total of 400,000 options to the directors of the company at an
exercise price of $1.375. The options
<PAGE>
were granted to the following directors:
Stanley Hangendorf 50,000 options
Robert Knickman 300,000 options
Jerry Dugan 50,000 options
The options granted to the above-named directors vest as follows: (i) one-third
after six months, (ii) one-third after fifteen months, and (iii) one-third after
twenty-nine months, from December 29, 1999. The options expire on December 29,
2004.
Compensation Committee Interlocks And Insider Participation
The compensation committee of the board of directors is responsible for
making all compensation decisions with respect to our executive officers,
including salary, bonus and granting of stock options under our stock option
plan. The compensation committee consists of Edward Capuano, our Chief Executive
Officer, and Jerry Dugan and Stanley Hagendorf, each of whom are independent
outside directors.
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial owner
of more than ten percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended December 31, 1999.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last three fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000 for the year ended December 31, 1999.
Summary Compensation Table
Annual Compensation
Name and Principal Position Year Salary
- --------------------------- ---- ------
Edward Capuano 1999 $173,310
CEO and Director 1998 170,170
1997 170,170
Jeffrey Skulsky 1999 $126,762
President and Director 1998 -0-
1997 -0-
James Richmond, Executive Vice 1999 $132,500
President 1998 123,410
1997 93,836
Option Grants in Last Fiscal Year
There were no options granted during 1999 to any of the executive
officers named in the Summary Compensation Table.
Fiscal Year-end Option Values
The executive officers named in the Summary Compensation Table do not
own any options to purchase our common stock.
Stock Option Plan
In 1997, we established a non-statutory stock option plan providing for the
issuance of up to 4,000,000 shares of our common stock. To date, we have granted
directors, officers and key employees an aggregate of 2,200,000 options,
2,200,000 of which have been exercised to date. No other options have been
issued under the plan and the plan has expired.
Employee Pension Plan
We do not currently have an employee pension plan, although we do have a
401(k) plan, to which employees may contribute.
<PAGE>
Directors Compensation and Committees
The Company has three formal committees; the Audit Committee, which
consists of Stanley Hagendorf, Jerry Dugan and Robert Knickman, the Compensation
Committee, which consists of Edward Capuano, Stanley Hagendorf and Robert
Knickman the Stock Option Committee, which consists of Edward Capuano, Jeffrey
Skulsky and Stanley Hagendorf. The Company does not currently have a Nominating
Committee.
The functions of the Audit Committee include: (i) recommending for approval
by the Board of Directors a firm of certified public accountants whose duty it
will be to audit the financial statements of the Company for the fiscal year in
which they are appointed, and (ii) to monitor the effectiveness of the audit
effort, the Company's internal financial and accounting organization and
controls and financial reporting. The Audit Committee will also consider various
capital and investment matters.
The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors of the Company, reviewing benefit plans
and administering each of the Company's stock option plans.
Executive Compensation Policy
The Company's executive compensation policy is designed to attract,
motivate, reward and retain the key executive talent necessary to achieve the
Company's business objectives and contribute to the long-term success of the
Company. In order to meet these goals, the Company's compensation policy for its
executive officers focuses primarily on determining appropriate salary levels
and providing long-term stock-based incentives. To a lesser extent, the
Company's compensation policy also contemplates performance-based cash bonuses.
Cash Compensation. In determining its recommendations for adjustments to
officers' base salaries the Company focuses primarily on the scope of each
officer's responsibilities, each officer's contributions to the Company's
success in moving toward its long-term goals during the fiscal year, the
accomplishment of goals set by the officer and approved by the Board for that
year, the Company's assessment of the quality of services rendered by the
officer, comparison with compensation for officers of comparable companies and
an appraisal of the Company's financial position. In certain situations,
relating primarily to the completion of important transactions or developments,
the Company may also pay cash bonuses, the amount of which will be determined
based on the contribution of the officer and the benefit to the Company of the
transaction or development.
Equity Compensation. The grant of stock options to executive officers
constitutes an important element of long-term compensation for the executive
officers. The grant of stock options increases management's equity ownership in
the Company with the goal of ensuring that the interests of management remain
closely aligned with those of the Company's stockholders. The Board believes
that stock options in the Company provide a direct link between executive
compensation and stockholder value. By attaching vesting requirements, stock
options also create an incentive for executive officers to remain with the
Company for the long term. See "Stock Option Plan."
<PAGE>
CORPORATE PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total stockholder
return from May 5, 1997 through December 31, 1999 for AppOnline, the Amex Market
Value Index and the S&P Consumer Finance Index.
Graphic Omitted
Amex Market S&P Consumer
AppOnline Value Index Finance Index
--------- ----------- -------------
May 5, 1997 100.00 100.00 100.00
December 31, 1997 68.00 130.03 134.21
December 31, 1998 47.33 139.57 181.44
December 31, 1999 32.00 178.30 189.62
The graph assumes that the value of the investment in AppOnline's
Common Stock, the Amex Market Value Index and the S&P Consumer Finance Index was
$100 on May 5, 1997 and that all dividends were reinvested. No dividends have
been declared or paid on the Company's Common Stock.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, as of the date hereof
with respect to the beneficial ownership of the Common Stock by (i) each person
known to the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each executive officer and director of the Company and
(iii) all executive officers and directors of the Company as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned.
Name and Address of
Beneficial Owner(1) Number(2) Percentage
- ------------------- --------- ----------
Edward R. Capuano 9,063,057 20.2%
Jeffrey Skulsky(3) 19,253,386 43.0
The Skulsky Trust 19,251,233 42.9
Cindy L. Eisle 2,164 *
James Richmond 1,163 *
Pargie Raiola 0 0
James Britton 1,163 *
Patrick Reilly 0 0
Jerry Dugan 2,871 *
Robert Knickman 0 0
Stanley Hagendorf(4) 11,840 *
All Executive Officers and Directors as a 28,335,644 63.2%
Group (10 persons)(3)(4)
- ---------
*less than one percent
(1) Unless otherwise indicated, the address of each person listed below is c/o
AppOnline.com, Inc., 520 Broadhollow Road, Melville, New York 11747.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities and includes Shares of Common Stock issuable
upon conversion of outstanding preferred stock, or subject to options, or
warrants exercisable or convertible within 60 days.
(3) 19,251,233 of which are owned by the Skulsky Trust, of which Jeffrey Skulsky
is the Trustee.
(4) All of which are owned by Mr. Hagendorf's wife.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to December 31, 1999, we owed $31,410,221 to the Skulsky Trust.
Jeffrey Skulsky, our President, is the trustee of the Skulsky Trust. This
indebtedness represents advances from the Skulsky Trust to us since 1997. The
debt owed to the Skulsky Trust is interest-free with no set repayment terms.
On December 31, 1999, in satisfaction of the debt owed to the Skulsky
Trust, we transferred ownership of the following assets:
Transferred Value
Mortgage receivable $ 2,216,087
Stock subscription receivable 5,916,100
Accrued interest and financing fee on
stock subscription 1,073,715
Investment in Wireless Mexicano, Inc. 500,000
----------------
Total assets tranferred $ 9,705,902
===============
After the transfer of the aforementioned assets, the outstanding debt
remaining to the Skulsky Trust was $21,704,319. This debt was completely
satisfied through the issuance of 18,191,534 shares of our common stock on
December 31, 1999.
On December 31, 1999, Edward Capuano, our CEO, donated 8,500,000 shares of
common stock back to the company for cancellation.
All current transactions between us and our officers, directors and
principal stockholders or any affiliates thereof are, and in the future such
transactions will be, on terms no less favorable to us than could be obtained
from unaffiliated third parties.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements.
Report of Independent Accountants..................................F-1
Consolidated Statements of Financial Position as at
December 31, 1999 and 1998.....................................F-2
Consolidated Statements of Operations and
Comprehensive Income (loss) for the years ended
December 31, 1999, 1998 and 1997...............................F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997...........F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997...........F-9
Notes to Financial Statements......................................F-12
(b)Reports on Form 8-K.
None.
(c) Exhibits.
21 List of subsidiaries
23.1 Financial Data Schedule
- --------------------------------------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPONLINE.COM, INC.
By: /s/ Edward Capuano
------------------
Edward Capuano
Chief Executive Officer
Dated: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Edward Capuano CEO and Chairman of the Board April 14, 2000
- ------------------------
Edward Capuano
/S/ JEFFREY SKULSKY President and Director April 14, 2000
- ------------------------
Jeffrey Skulsky
/S/ CINDY EISELE
- ------------------------
Cindy Eisele Chief Financial Officer, Treasurer April 14, 2000
and Principal Accounting Officer
/s/ PATRICK A. REILLY
- ------------------------
Patrick A. Reilly Secretary and General Counsel April 14, 2000
- ------------------------
Jerry Dugan Director April 14, 2000
/S/ ROBERT L. KNICKMAN
- ------------------------
Robert L. Knickman Director April 14, 2000
- ------------------------
Stanley Hagendorf Director April 14, 2000
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
DECEMBER 31, 1999, 1998 AND 1997
Independent Auditors' Report - 1999 F-1
Independent Auditors' Report - 1998 and 1997 F-1A
FINANCIAL STATEMENTS:
Consolidated Statements of Financial Position F-2-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) F-4-5
Consolidated Statements of Stockholders' Equity F-6-8
Consolidated Statements of Cash Flows F-9-11
Notes to Consolidated Financial Statements F-12-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AppOnline.com, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial position of
AppOnline.com, Inc. (Formerly IMN Financial Corp.) and Subsidiaries as of
December 31, 1999 and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for the year
then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AppOnline.com, Inc.
and Subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/S/ CITRIN COOPERMAN & COMPANY, LLP
-----------------------------------
CITRIN COOPERMAN & COMPANY, LLP
New York, New York
March 28, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
IMN Financial Corp. and Subsidiaries
We have audited the accompanying consolidated statement of financial position of
IMN Financial Corp. and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IMN Financial Corp.
and Subsidiaries as of December 31, 1998, and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997, in conformity
with generally accepted accounting principles.
/S/ WERBLIN, CASUCCIO & MOSES, P.C.
-----------------------------------
WERBLIN, CASUCCIO & MOSES, P.C.
Syosset, New York
March 24, 1999
F-1A
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Position
December 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Cash $ 3,548,137 $ 4,446,542
Mortgage Inventory 96,731,181 74,109,762
Points, Fees and Other Receivables 1,975,354 7,919,147
Investments 6,188,083 7,630,245
Prepaid Expenses 6,517,350 3,690,823
Mortgage Receivable 2,254,013
Property and Equipment (Net of
Accumulated Depreciation) 4,822,326 2,225,629
Intangible Assets (Net of Accumulated
Amortization) 6,573,400 4,679,988
Deferred Income Taxes 259,500
Other Assets 836,989 514,693
------------ ------------
TOTAL ASSETS $127,192,820 $107,730,342
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Position
December 31,
1999 1998
------------- -------------
LIABILITIES
<S> <C> <C>
Accounts Payable and Accrued Expenses $ 6,327,306 $ 6,332,544
Warehouse Lines of Credit 95,510,116 73,344,945
Borrowers Escrow Funds 704,706 1,354,661
Capital Lease Obligations 135,043 135,817
Corporate Taxes Payable 9,525 310,650
Notes Payable 750,180 712,374
Deferred Income 185,436 840,084
Due to Related Party 10,439,778
Deferred Income Taxes 289,345
------------- -------------
TOTAL LIABILITIES 103,622,312 93,760,198
------------- -------------
COMMITMENTS AND CONTINGENCIES
(NOTES14 AND 17)
STOCKHOLDERS' EQUITY
Preferred Stock - 5,000,000 shares, $.001 par value
authorized, 7,000 and 5,960 shares issued and
outstanding in 1999 and 1998, respectively 7 6
Common Stock - 45,000,000 shares, $.001 par
value authorized; 41,206,346 and 28,661,905
outstanding shares issued and outstanding
in 1999 and 1998, respectively 41,206 28,663
Paid-in Capital 46,331,932 20,203,554
Stock subscription receivable (5,916,100)
Unrealized Gain on Available-for-Sale
Securities 629,517 396,576
Accumulated Deficit (23,432,154) (742,555)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,570,508 13,970,144
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 127,192,820 $ 107,730,342
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
For The Years Ended December 31,
1999 1998 1997
------------ ------------- -------------
OPERATING INCOME
<S> <C> <C> <C>
Points, Fees and Premium Income -
Operating Branches $ 25,128,985 $ 29,849,430 $ 10,720,139
Points, Fees and Premium Income -
Closed Branches 3,175,935 1,486,000
Interest Income 3,671,291 4,322,788 1,367,996
Management Fee Income 230,381 742,387 699,662
------------ ------------ ------------
Total Operating Income 32,206,592 36,400,605 12,787,797
------------ ------------ ------------
OPERATING EXPENSES
General and Administrative Expenses -
Operating Branches 14,452,523 9,644,816 3,184,149
General and Administrative Expenses -
Closed Branches 3,847,517 1,375,004
Field and Direct Expenses -
Operating Branches 18,883,062 16,927,054 8,267,735
Field and Direct Expenses -
Closed Branches 2,367,399 1,248,362
Interest Expense 6,644,215 5,434,808 1,044,281
Depreciation and Amortization 1,396,401 983,264 289,027
Acquisition Expenses 972,601
Nonrecurring Expenses 7,431,058
------------ ------------ ------------
Total Operating Expenses 55,022,175 35,613,308 13,757,793
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (22,815,583) 787,297 (969,996)
BENEFIT (PROVISION) FOR INCOME TAXES 171,271 (449,836) (27,999)
------------ ------------ ------------
NET INCOME (LOSS) (22,644,312) 337,461 (997,995)
Preferred Dividends Paid or Accrued 45,287 63,231
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $(22,689,599) $ 274,230 $ (997,995)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
For The Years Ended December 31,
1999 1998 1997
------------ ------------ -------------
COMPREHENSIVE INCOME
<S> <C> <C> <C>
Net Income (Loss) $(22,644,312) $ 337,461 $ (997,995)
OTHER COMPREHENSIVE INCOME
Unrealized Gain on Available-for-Sale
Securities (Net of Income Tax) 232,941 41,282 355,294
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $(22,411,371) $ 378,743 $ (642,701)
============ ============ ============
EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) Per Share $ (0.75) $ 0.01 $ (0.10)
Diluted Earnings (Loss) Per Share $ (0.75) $ 0.01 $ (0.10)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For The Years Ended December 31, 1999, 1998 and 1997
UNREALIZED
GAIN ON
STOCK AVAILABLE
DATE COMMON COMMON PREFERRED PREFERRED ADDITIONAL SUBSCRIPTION FOR
STOCK STOCK STOCK STOCK PAID-IN N SALE
(SHARES) ($) (SHARES) ($) CAPITAL RECEIVABLES SECURITIES
- ----------------------------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance 1/1/97 4,257,199 $ 426 $ 16,867
Reverse Split (3,192,900) 638 (638)
Reverse Acquisition 20,421,700 20,422 6,727,382
Options Exercised 2,200,000 2,200 5,961,300
Issued for Acquisitions 1,078,108 1,078 3,844,492
Treasury Stock Issued 7,000,000 7,000 (7,000)
Preferred Stock Sold Series A 1,100 $ 1 1,099,999
Value of Options Issued 50,891
Unrealized Gain on Avail for Sale Securities $ 355,294
Reverse Stock Subscription Receivable $ (6,141,600)
Net Loss
-------------- -------- ------- ------- ------------ ------------ ----------
Balance 12/31/97 31,764,107 31,764 1,100 1 17,693,293 (6,141,600) 355,294
Preferred Stock Sold Series B 3,150 3 2,430,157
Preferred Stock Issued Series C 5,000 5 (5)
Pref. Stock Converted
</TABLE>
<TABLE>
<CAPTION>
DATE ACCUMULATED
DEFICIT TOTALS
- --------------------------------- ------------ --------------
<S> <C> <C>
Balance 1/1/97 $ (18,793) $ (1,500)
Reverse Split 0
Reverse Acquisition 6,747,804
Options Exercised 5,963,500
Issued for Acquisitions 3,845,570
Treasury Stock Issued 0
Preferred Stock Sold Series A 1,100,000
Value of Options Issued 50,891
Unrealized Gain on Avail for Sale Securities 355,294
Reverse Stock Subscription Receivable (6,141,600)
Net Loss (997,995) (997,995)
----------- --------------
Balance 12/31/97 (1,016,788) 10,921,964
Preferred Stock Sold Series B 2,430,160
Preferred Stock Issued Series C 0
Pref. Stock Converted
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For The Years Ended December 31, 1999, 1998 and 1997
UNREALIZED
GAIN ON
STOCK AVAILABLE
DATE COMMON COMMON PREFERRED PREFERRED ADDITIONAL SUBSCRIPTION FOR
STOCK STOCK STOCK STOCK PAID-IN N SALE
(SHARES) ($) (SHARES) ($) CAPITAL RECEIVABLES SECURITIES
- ----------------------------- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pref. Stock Converted
Series B 3,522,180 $3,522 (3,150) $(3) $(3,519)
Series A 254,562 $255 (140) $(1) $(254)
Rounding 1 1 (2)
Issued for Acquisition 94,131 94 299,906
Treasury Stock Retired (7,000,000) (7,000) 7,000
Stock Issued as Compensation 26,925 27 62,978
Net Income after Preferred Dividends
Imputed Interest - Current Amortization (60,500)
Imputed Interest (286,000) 286,000
Unrealized Gain on Available
for Sale Securities 41,282
------------ -------- -------- ------- --------- ------------ ----------
Balance 12/31/98 28,661,905 28,663 5,960 6 20,203,554 (5,916,100) 396,576
Preferred Stock Sold Series E 2,000 2 1,589,423
Pref. Stock Converted
Series A and Accrued
Dividends Dividends 928,174 928 (960) $(1) 13,294
Issued for Acquisitions 519,826 $519 $1,217,535
</TABLE>
<TABLE>
<CAPTION>
DATE
ACCUMULATED
DEFICIT TOTALS
- ----------------------------- -------------- --------------
<S> <C> <C>
Pref. Stock Converted
Series B $0
Series A $0
Rounding 3 3
Issued for Acquisition 300,000
Treasury Stock Retired 0
Stock Issued as Compensation 63,005
Net Income after Preferred Dividends 274,230 274,230
Imputed Interest - Current Amortization (60,500)
Imputed Interest 0
Unrealized Gain on Available for Sale Securities 41,282
----------- ----------
Balance 12/31/98 (742,555) 13,970,144
Preferred Stock Sold Series E 1,589,425
Pref. Stock Converted
Series A and Accrued
Dividends Dividends 14,221
Issued for Acquisitions $1,218,054
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For The Years Ended December 31, 1999, 1998 and 1997
DATE COMMON COMMON PREFERRED PREFERRED ADDITIONAL SUBSCRIPTION FOR
STOCK STOCK STOCK STOCK PAID-IN N SALE
(SHARES) ($) (SHARES) ($) CAPITAL RECEIVABLES SECURITIES
- ----------------------------- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Issued as 20,000 $ 20 $ 64,980
Compensation
Common Stock Sold 1,388,400 1,388 1,878,412
Acquisition Closing (197,538) (198) (606,712)
Adjustments
Stock Issued in 194,045 194 363,006
Payment of Expenses
Stock Donated and (8,500,000) (8,500) 8,500
Retired
Stock Issued in 18,191,534 18,192 21,686,127
Payment of Debt
Value of Compensatory 3,813
Options to Non-
employees
Transfer of Receivable 5,916,100
in Payment of Debt
Net Loss after
Preferred Dividends
Unrealized Gain on 232,941
Available for Sale
Securities
---------- ------- ----- -------- ----------- ---------- --------
Balance 12/31/99 41,206,346 $41,206 7,000 $ 7 $46,331,932 $ 0 $629,517
========== ======= ===== ======== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
DATE
ACCUMULATED
DEFICIT TOTALS
- ----------------------------- -------------- --------------
<S> <C> <C>
Stock Issued as 65,000
Compensation
Common Stock Sold 1,879,800
Acquisition Closing (696,910)
Adjustments
Stock Issued in 363,200
Payment of Expenses
Stock Donated and 0
Retired
Stock Issued in 21,704,319
Payment of Debt
Value of Compensatory 3,813
Options to Non-
employees
Transfer of Receivable 5,916,100
in Payment of Debt
Net Loss after (22,689,599) (22,689,599)
Preferred Dividends
Unrealized Gain on 232,941
Available for Sale
Securities
------------- -----------
Balance 12/31/99 $ (23,432,154) $23,570,508
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31,
1999 1998 1997
------------ -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
ACTIVITIES:
<S> <C> <C> <C>
Net Income (loss) $(22,644,312) $ 337,461 $ (997,995)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
Net cash provided(used) by operating activities:
Depreciation and amortization 1,396,401 983,264 439,909
Value of compensatory options granted
to non-employees 3,813 50,891
Market value adjustment on foreclosed
real estate 63,750
Income from investment in partnership /
unconsolidated subsidiary (80,682) (75,236)
Compensation paid through the issuance of
of common stock 65,000 63,005
Expenses paid through the issuance of
common stock 363,200
Deferred income taxes (29,845) 29,845
Change in assets and liabilities:
Mortgages originated (net of those sold) (22,621,419) (45,171,726) (2,508,157)
Net proceeds from warehouse lines of credit 22,165,171 44,794,950 9,142,087
Points, fees and other receivables 4,980,965 (5,432,488) (1,385,116)
Prepaid expenses (2,762,881) (1,584,667) (485,646)
Other assets (255,933) (858,817) (237,270)
Accounts payable and accrued expenses (379,387) 3,174,699 (1,308,427)
Borrowers escrow funds (649,955) 866,897 124,211
Deferred income (654,648) 250,003 66,978
Corp. income taxes payable (301,125) 310,650
------------ ------------ ------------
Total adjustments 1,238,675 (2,649,621) 3,963,210
------------ ------------ ------------
Net cash provided (used) by operating activities (21,405,637) (2,312,160) 2,965,215
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in (return of) real estate
development partnership 27,000 (32,000) (25,000)
Purchase of property and equipment (2,807,810) (958,086) (282,377)
Purchase of intangibles (824,883) (120,875) (1,516,672)
Receipt of cash through acquisitions 75,348 36,749 1,720,555
Collection of mortgage receivable 37,926 22,623 21,479
Notes receivable extended (3,617,408)
------------ ------------ ------------
Net cash used by investing activities (3,492,419) (4,668,997) (82,015)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31,
1999 1998 1997
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Acquisition costs (636,500)
Sale of preferred stock 1,589,425 2,430,160 1,100,000
Sale of common stock 1,879,800
Payment of notes payable and capital leases (440,017) (269,983) (42,989)
Collection of stock subscriptions 458,400
Advances (or allocations) from/to related
parties (net) 20,970,443 7,303,015 (1,734,373)
Dividends paid (63,231)
------------ ------------ ------------
Net cash provided (used) by financing activities 23,999,651 9,399,961 (855,462)
------------ ------------ ------------
Net increase (decrease) in cash (898,405) 2,418,804 2,027,738
CASH - JANUARY 1 4,446,542 2,027,738
------------ ------------ ------------
CASH - DECEMBER 31 $ 3,548,137 $ 4,446,542 $ 2,027,738
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Page 12
APPONLINE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31,
1999 1998 1997
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 6,576,299 $ 5,141,753 $ 1,417,930
=========== =========== ===========
Income Taxes Paid $ 188,299 $ 113,234 $ 6,306
=========== =========== ===========
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Equipment acquired through capital lease
obligations $ 150,736 $ 0 $ 100,246
=========== =========== ===========
Common stock issued in conjunction with
acquisitions $ 1,218,054 $ 300,000 $10,739,317
=========== =========== ===========
Increase in market value of available-for-sale
securities $ 232,941 $ 41,282 $ 355,294
=========== =========== ===========
Assets distributed to reduce debt $ 0 $ 4,744,745 $ 0
=========== =========== ===========
Notes issued to acquire assets $ 0 $ 554,710 $ 0
=========== =========== ===========
Assets transferred in satisfaction of debt $ 9,705,902 $ 0 $ 0
=========== =========== ===========
Increase in assets and liabilities as a result of
additional liabilities in conjunction with stock
acquisitions $ 134,852 $ 0 $ 0
=========== =========== ===========
Common stock acquisition closing adjustments $ 696,910 $ 0 $ 0
=========== =========== ===========
Common stock issued in repayment of debt $21,704,319 $ 0 $ 0
=========== ============ ===========
Stock issued for subscriptions $ 0 $ 0 $ 6,600,000
=========== =========== ===========
</TABLE>
F-11
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The financial statements presented herein are of AppOnline.com, Inc. and
Subsidiaries.
AppOnline.com, Inc. (the "Company") was incorporated under the laws of the State
of Delaware on November 12, 1980 as Nuclear & Genetic Technology, Inc. The
Company changed its name to NGT Enterprises Inc., then to IMN Financial Corp.
and then effective May 11, 1999, to AppOnline.com, Inc..
Island Mortgage Network, Inc. ("Island"), a wholly owned subsidiary acquired on
May 5, 1997, was incorporated under the laws of the State of New York on
December 2, 1992. It operates under the D/B/As "AppOnline", "Island Mortgage
Network" and "Reliance Mortgage Network". Its principal business activity is the
origination and sale of residential mortgage loans. Presently, all mortgages are
either table funded, funded through Company resources or funded through the
Company's warehouse lines of credit. Virtually all loans are closed subject to a
binding purchase agreement with an investor and sold shortly after closing. The
Company does not perform any loan servicing activities. As of the date of this
report, the Company is currently licensed to originate loans in 46 states and is
approved to participate in FHA and Freddie Mac loan programs.
Citizens Mortgage Service Company ("Citizens"), a wholly owned subsidiary
acquired on September 5, 1997, was incorporated under the laws of the State of
Pennsylvania on April 10, 1973. Its principal business activity is that of a
full service mortgage banker, consisting of the origination and sale of
residential mortgage loans secured by one to four family residences. Citizens is
approved to participate in FHA, Fannie Mae, GNMA and Freddie Mac programs, in
addition to licenses in various states.
First Equities Service Corp. ("Service") , a wholly owned subsidiary acquired on
May 5, 1997, was incorporated under the laws of the State of New York on January
24, 1997. Its principal business activity is participation in a single real
estate development project.
First Equities Commercial Corp. ("Commercial") , a wholly owned subsidiary
acquired on May 5, 1997, was incorporated under the laws of the State of New
York on January 23, 1997. Its principal business activity is that of a
commercial loan brokerage company. It is presently servicing the same states
serviced by Island.
AppOnline Internet Research and Development Corp. (Internet), a wholly owned
subsidiary, was incorporated under the laws of the State of Delaware on April 1,
1999. Its principal business activity is the expansion of mortgage banking
operations through entry into the internet market. It is presently servicing the
same states serviced by Island.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The 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. Investments in companies
less than 50% owned are accounted for under the equity method of accounting.
MORTGAGE INVENTORY
- ------------------
The Company presents its mortgage inventory at lower of cost or market. Mortgage
inventory secures the related warehouse lines of credit (Note 7). The mortgage
inventory balance represents amounts which have been funded by warehouse lines
of credit. The funds will either be disbursed at closing or returned to the
warehouse if closing does not take place, in which case the Company remains
liable to the warehouse until the funds are returned.
F-12
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INVESTMENT SECURITIES
- ---------------------
Management determines the appropriate classification of investment securities at
the time they are acquired, and evaluates the appropriateness of such
classification at each balance sheet date. For the year ended December 31, 1999
and 1998, marketable securities were classified as available-for-sale.
Available- for-sale securities are stated at fair value, and unrealized holding
gains and losses, net of the related deferred tax effect, are reported as a
separate component of comprehensive income.
Dividends on marketable equity securities are recognized in income when
declared. Realized gains and losses are included in income. Realized gains and
losses are determined on the basis of the actual cost of the securities sold.
DEFERRED COSTS
- --------------
Direct processing costs associated with mortgages in the Company's pipeline at
December 31, 1999 and 1998, have been deferred. These costs include commissions,
processing salaries and related expenses, appraisal fees, credit costs, and
other direct expenses. These costs are recognized when the related loans are
closed and presold to permanent investors. They are included in prepaid expenses
on the consolidated statements of financial position.
Commissions paid under a "draw against commission" arrangement have been
deferred when the draw exceeds the commission earned.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment contributed to the Company by a former shareholder are
stated at the appraised fair market values at the date of contribution. Property
and equipment purchased by the Company is stated at cost.
Depreciation is calculated using straight-line and accelerated methods over the
estimated useful lives of the assets.
ACQUISITION GOODWILL
- --------------------
Acquisition Goodwill represents the cost in excess of fair value of identifiable
assets of acquired businesses, and is being amortized on a straight line basis
over 10 years. The Company annually evaluates whether events and circumstances
have occurred subsequent to its acquisition, which may indicate that the
remaining useful life of goodwill warrants revision, or that the remaining
balance of goodwill may not be recoverable. To make a determination as to
whether goodwill has been impaired, the Company estimates the related business
segment's discounted future cash flows, and compares it to the remaining life of
the goodwill.
REVENUE RECOGNITION
- -------------------
Commitment fees, points and premium fees are earned and recognized as revenue
when the loans are closed and presold to permanent investors. Any fees collected
prior to closing are included in deferred income.
Application fees, partially representing reimbursement for the costs of specific
services performed by third parties with respect to loans originated, collected
during loan processing are recognized as revenue when the loans have been
originated and all related services have been performed.
F-13
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INCOME TAXES
- ------------
The Company files a consolidated income tax return with its subsidiaries. The
Company provides for deferred income taxes resulting from temporary differences
in reporting certain income and expense items (Note 19) for income tax and
financial reporting purposes. The change in deferred income taxes for the
current year is reflected in the provision for income taxes.
FAIR VALUES OF FINANCIAL INSTRUMENTS
- ------------------------------------
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments, whether or not
recognized in the statement of financial position, for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based upon estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions and
estimates used, including the discount rate and the estimated future cash flows.
In that regard, the resulting fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized by
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
fair value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:
MORTGAGE INVENTORY: The fair value of mortgage loans held for sale, presented at
lower of cost of market, is estimated at the actual cost of the loan (par value)
plus the premium to be paid by the investor. At December 31, 1999, the total
estimated fair value is mortgage inventory of $96,731,181 plus premiums of
$1,975,354, totaling $98,706,535. At December 31, 1998, the total estimated fair
value is mortgage inventory of $74,109,762 plus premiums of $2,019,808, totaling
$76,129,570.
WAREHOUSE LINES OF CREDIT: These facilities have original maturities of less
than 120 days and, therefore, the carrying values are reasonable estimates of
fair value.
ESTIMATES
- ---------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT PRONOUNCEMENTS
- ---------------------
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement establishes
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at fair
value. The statement requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000; however, it may be
adopted earlier. It cannot be applied retroactively to
F-14
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
RECENT PRONOUNCEMENTS (CONT'D)
- ------------------------------
financial statements of prior periods. Management believes that the adoption of
SFAS No. 133 will not impact the Company's consolidated financial statements.
In October, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134 amends SFAS No. 65,
Accounting for Certain Mortgage Banking Activities, to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability to sell or hold those investments. This
statement also conforms the subsequent accounting for securities retained after
the securitization of mortgage loans held by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a nonmortgage banking enterprise. SFAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998;
however, earlier application is encouraged and is permitted as of the issuance
of this statement. Management believes that the adoption of SFAS No. 134 will
not impact the Company's consolidated financial statements.
EARNING PER SHARE
- -----------------
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per common share also includes the dilutive effect of potential
common shares (dilutive stock options) outstanding during the period.
NOTE 2 - ACQUISITIONS
1998
- ----
Pursuant to an acquisition agreement dated April 4, 1998, the Company acquired
100% of the issued and outstanding capital stock of Gentry Capital Mortgage
Corporation. The consideration for this acquisition was 94,131 shares of the
Company's common stock worth $300,000 in addition to $60,000 in cash and notes
payable of $394,710.
Pursuant to an acquisition agreement dated September 4, 1998, the Company
acquired 100% of the issued and outstanding capital stock of Bankers Direct
Mortgage Company (Bankers). The consideration for this acquisition is contingent
on future earnings and certain covenants and is not expected to be material.
Pursuant to an acquisition agreement dated December 21, 1998, the Company
acquired 100% of the assets of Lenders Associates Corporation. The consideration
for this acquisition is a note contingent on future earnings and is estimated to
be approximately $160,000.
F-15
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - ACQUISITIONS (CONT'D)
1998 (CONT'D)
- -------------
The total purchase price of all the acquisitions is allocated as follows:
Cash $ 36,749
Mortgage inventory 5,357,495
Accounts receivable 520,215
Prepaid expenses 184,017
Property and equipment 1,090,112
Goodwill 1,006,986
Other assets 320,980
Accounts payable and accrued expenses (1,060,677)
Warehouse line of credit (5,754,392)
Notes payable (76,831)
Other liabilities (709,944)
----------
Total allocation of purchase price $ 914,710
==========
Certain of the foregoing acquisitions were sold during 1998 (Note12).
1999
- ----
Pursuant to an acquisition agreement dated April 1, 1999, the Company acquired
100% of the assets of By Owner Mortgage Company (By Owner). The consideration
for this acquisition was $78,287 in cash.
Pursuant to an acquisition agreement dated May 28, 1999, the Company acquired
100% of the issued and outstanding capital stock of Queen City Mortgage Co.
(Queen City) The consideration for this acquisition was 42,000 shares of the
Company's common stock valued at $147,000 and $75,000 in cash.
Pursuant to an acquisition agreement dated July 28, 1999, the Company acquired
100% of the assets of Biltmore Home Loans, Inc. (Biltmore). The consideration
for this acquisition was 7,320 shares of the Company's common stock valued at
$17,860 and $8,996 in cash .
Pursuant to an acquisition agreement dated August 17, 1999, the Company acquired
100% of the issued and outstanding capital stock of Pioneer Financial Group,
Inc. (Pioneer). The consideration for this acquisition was 150,000 shares of the
Company's common stock valued at $346,500.
Pursuant to an acquisition agreement dated September 7, 1999, the Company
acquired 100% of the issued and outstanding capital stock of Alliance Mortgage
Corp. (Alliance). The consideration for this acquisition was 65,306 shares of
the Company's common stock valued at $212,244.
Pursuant to an acquisition agreement dated December 9, 1999, the Company
acquired 100% of the issued and outstanding capital stock of Arrowhead Mortgage
Company, Inc. (Arrowhead). The consideration for this acquisition was 255,200
shares of the Company's common stock valued at $494,450 and $150,000 in cash.
F-16
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - ACQUISITIONS (CONT'D)
The total purchase price of all the acquisitions is allocated as follows:
Cash $ 75,348
Accounts receivable 110,887
Prepaid expenses 63,646
Property and equipment 269,856
Goodwill 1,503,780
Other assets 66,363
Accounts payable and accrued expenses (343,082)
Notes payable (216,461)
----------
Total allocation of purchase price $ 1,530,337
==========
The 1998 and 1999 acquisitions are not considered significant and therefore
proforma results of operations for 1998 and 1999 are not presented.
Common stock values were the quoted market values on the date of the transaction
The Company has not completed its valuation of these purchases (due to certain
contingencies), and the purchase price allocations are subject to change when
further information becomes available and the acquisition closing adjustments
are recorded at that time. All acquisitions were accounted for using the
"purchase " method of accounting.
NOTE 3 - INVESTMENTS
INVESTMENTS WITHOUT READILY DETERMINABLE FAIR VALUES
- ----------------------------------------------------
The Company owned 100,000 shares of Wireless Mexicano, Inc. ("Wireless"), a
related party (Note 13). The investment was acquired in a stock for stock
exchange on December 30, 1996, between the Company's former parent, First
Equities Corp. and Wireless Mexicano, Inc. The Company valued this exchange
utilizing sales of Wireless securities on or about December 30, 1996, to arrive
at a cost of $500,000. In 1999, ownership of this investment was transferred, in
partial satisfaction of outstanding debt, to a related party (Note 13).
The Company owns common and preferred stock of Seasons Mortgage Group, Inc.
("Seasons"). By agreement, this amounts to a 31.25% ownership interest. The
Company acquired this stock as part of its acquisition of Potomac. It is being
accounted for utilizing the equity method of accounting.
The Company owns 50% of Thunder Development Ltd Co ("Thunder"), a real estate
development partnership. The Company acquired its ownership percentage for cash
in 1997. This investment is being accounted for utilizing the equity method of
accounting.
F-17
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENTS (CONT'D)
INVESTMENTS WITHOUT READILY DETERMINABLE FAIR VALUES (CONT'D)
- -------------------------------------------------------------
Carrying value of investments without readily determinable fair values:
1999 1998
--------------------------
Wireless Mexicano, Inc. $ 0 $ 500,000
Seasons Mortgage Group, Inc. 395,282 1,631,825
Thunder Development Ltd Co 163,284 76,844
---------- ----------
Total $ 558,566 $2,208,669
========== ==========
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------
1999
- ----
<TABLE>
<CAPTION>
Unrealized Change in Unrealized Less: Aggregate Fair
Holding Gain Unrealized Holding Gain Securities Value at
at December Holding Gain at December Original Cost Transferred December 31,
31, 1998 for 1999 31, 1999 of Investment or Sold 1999
--------------- ---------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Aristocrat Endeavor $396,576 $ 232,941 $ 629,517 $ 5,000,000 $ 0 $ 5,629,517
Fund, Ltd.
Community Bank - 0 0 0 25,000 (25,000) 0
Market
--------------- ---------------- --------------- --------------- --------------- ----------------
Total $396,576 $ 232,941 $ 629,517 $ 5,025,000 $ (25,000)$ 5,629,517
=============== ================ =============== =============== =============== ================
</TABLE>
1998
- ----
<TABLE>
<CAPTION>
Unrealized Change in Unrealized Aggregate Fair
Holding Gain Unrealized Holding Gain Value at
at December Holding Gain at December Original Cost of December 31,
31, 1997 for 1998 31, 1998 Investment 1998
---------------- ---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Aristocrat Endeavor Fund, Ltd. $355,294 $ 41,282 $ 396,576 $ 5,000,000 $ 5,396,576
Community Bank - Market 0 0 0 25,000 25,000
---------------- ---------------- --------------- ------------------ -----------------
Total $ 355,294 $ 41,282 $ 396,576 $ 5,025,000 $ 5,421,576
================ ================ =============== ================== =================
</TABLE>
F-18
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 - MORTGAGE RECEIVABLE
In conjunction with the sale of The Best Mortgage Company of America, Inc., one
of Island's former subsidiaries, the Company held a mortgage of $2,300,000 on
the underlying vacant land.
The terms of the mortgage provided for equal monthly payments of $15,302, which
included interest thereon at a rate of 7% per annum, for a term of 5 years,
based on a 30 year amortization. The unpaid balance was due with the sixtieth
monthly payment.
In 1999, ownership and all future rights to this receivable were transferred, in
partial satisfaction of outstanding debt, to a related party (Note 13).
NOTE 5 - PROPERTY AND EQUIPMENT
The major categories of property and equipment are as follows at December 31,:
1999 1998
-------------------- ------------------
Furniture, Fixtures and Equipment $ 5,499,674 $ 2,463,301
Furniture, Fixtures and Equipment
under Capital Leases 326,926 318,845
Leasehold Improvements 590,670 407,414
Land 207,500 207,500
-------------------- ------------------
Total 6,624,770 3,397,060
Less: Accumulated Deprecation (1,802,444) (1,171,431)
-------------------- -----------------
Total Property and Equipment $ 4,822,326 $ 2,225,629
==================== =================
Depreciation charged to operations, which includes amortization of capital lease
obligations, during 1999 and 1998 was $631,705 and $350,072, respectively. The
depreciation applicable to the capital lease obligations, during 1999 and 1998,
was $54,297 and $55,316, respectively.
Equipment under Capital Leases of $326,926 and $318,845 secure the related
financing in 1999 and 1998, respectively (Note 16). The accumulated depreciation
on this equipment at December 31, 1999 and 1998, was $188,278 and $133,981,
respectively.
F-19
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6 - INTANGIBLE ASSETS
The major categories of intangible assets are as follows at December 31,:
1999 1998
-------------------- -------------------
Acquisition goodwill $ 7,777,139 $ 4,883,497
Other goodwill 150,000 150,000
Organization costs 0 699,345
-------------------- -------------------
Total 7,138,419 5,732,842
Less: Accumulated Amortization (1,353,739) (1,052,854)
-------------------- -------------------
Total Intangible Assets $ 6,573,400 $ 4,679,988
==================== ===================
Amortization expense charged to operations during 1999 and 1998 was $764,696 and
$633,192, respectively.
NOTE 7 - WAREHOUSE LINES OF CREDIT
The Company has seven warehouse and security agreements under which lines
of credit have been established for funding mortgage loans. As of December
31, 1999 and 1998, the Company had total credit lines of $125,000,000 and
$98,000,000, respectively, from the participating lenders. The agreements
call for interest to be calculated at rates based on prime or LIBOR ranging
from 8.75% to 9.75% and are anticipated to be renewed annually. The related
mortgages collateralize each advance. As of December 31, 1999 and 1998, the
Company owed $95,510,116 and $73,344,945 under these agreements.
Some of the agreements have financial covenants that we have either met or
obtained waivers for at December 31, 1999.
NOTE 8 - PROFIT SHARING PLAN
The Company adopted a 401(k) pension plan covering substantially all
employees. While the Company may elect to match employee contributions, it
did not do so in 1999 or 1998.
NOTE 9 - STOCK BASED COMPENSATION
Periodically, stock is issued to employees as compensation in lieu of cash.
The compensation is valued at the market value of the stock on the date of
issuance. The compensation amounted to $65,000 and $63,005 in 1999 and
1998, respectively.
F-20
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
- ---------------
SERIES A
- --------
On December 31, 1997, the Company entered into a subscription agreement under
which investors agreed to purchase 1,100 shares of Series A Convertible
Preferred Stock, $.001 par value, for $1,000 per share. The total consideration
paid was $1,100,000.
The preferred shares were convertible beginning 100 days from issuance, and
ending on the mandatory conversion date, two years from issuance. The number of
common shares to be exchanged upon conversion is based upon a formula utilizing
the market price of the common stock on or about the conversion date.
The preferred stock will rank senior to all common stock, now or hereafter
issued, and also to any additional preferred stock, now or hereafter issued, as
to payment of dividends, distribution of assets upon liquidation, dissolution,
or winding up of the corporation, voluntary or involuntary, unless approved by
the preferred shareholders, or for a transaction wherein the Company receives
proceeds of at least $3 million.
The preferred stock shall receive dividends of $60.00 per share, payable
quarterly, and no more, which shall be fully cumulative, shall accrue without
interest (except those in arrears) from the date of issuance, and shall be
payable quarterly in cash or Company stock.
There is no mandatory redemption required on the part of the investors or the
Company, and no sinking fund requirements.
During 1998 140 preferred shares were converted into 254,562 shares of common
stock. Dividends of $63,231 were paid to Series A convertible preferred
shareholders in 1998.
During 1999 the remaining 960 preferred shares and dividends payable of $14,221
were converted into 928,174 shares of common stock.
SERIES B
- --------
In the first quarter of 1998, the Company entered into a Securities Purchase
Agreement. Under the terms of the agreement, the buyers would receive 3,150
shares, 8% Convertible Preferred Stock and warrants to purchase additional
shares. The proceeds to the Company were $2,430,160, net of expenses. The
agreement provided for the issuance of preferred shares and warrants. The shares
are convertible at 75% of the average closing bid prices of the Company's common
stock as quoted by Bloomberg, LP for the five- day trading period (the "Average
Price") ending on the day prior to the date of the conversion (the "Conversion
Price"). The Conversion Price may not be greater than 120% of the Average Price
on the closing date (the "Maximum Price"). During 1998, all of the Series B
preferred shares were converted into 3,522,180 shares of common stock.
SERIES C
- --------
In October 1998, the Company issued 5,000 shares of Convertible Preferred Stock
to the Aristocrat Endeavor Fund, Ltd. (Aristocrat). The transaction reinstates
Aristocrat to its proper preferred stock holding position.
F-21
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY
PREFERRED STOCK (CONT'D)
- ------------------------
SERIES C (CONT'D)
- -----------------
The Series C shares are non voting and have no preference as to dividends. They
are convertible into 200 shares of common stock, per preferred share.
SERIES E
- --------
On October 11, 1999, the Company issued 2,000 shares of unregistered Series E
Convertible Preferred Stock together with 500,000 warrants (see "warrants") for
proceeds of $1,589,425, net of expenses.
The issuance of the Series E Convertible Preferred Stock was exempt from
registration under Section 4(2) of the Securities Act.
Each share of Series E Convertible Preferred Stock (based on a value of $1,000
per share plus accrued dividends and interest thereon) is convertible into
shares of Common Stock at the lowest of: (a) $2.26, (b) the average of the
closing bid prices on the American Stock Exchange during the period of five
consecutive trading days ending on the day prior to October 11, 1999, or (c) the
average of the three lowest closing bid prices on the American Stock Exchange
during the period of ten consecutive trading days ending with the last trading
day prior to the date of conversion. In no event shall the conversion price be
less that $1.26 during the 180 days following October 11, 1999, nor less than
$1.06 thereafter (except to give effect to subsequent stock splits, reverse
splits or dividends paid in shares of Common Stock).
The Series E Convertible Preferred Stock pays a 7% annual dividend, payable
quarterly in arrears, cash or freely tradeable Common Stock at the option of the
Company.
During 1999 none of the preferred shares were converted into shares of common
stock. As of December 31, 1999, dividends of $31,066 were accrued on the Series
E convertible preferred stock.
In 2000, all of the Series E shares were converted to 1,120,412 shares of common
stock along with the accrued dividends through the date of conversion of
approximately $55,000.
WARRANTS
- --------
In connection with the sales of securities the Company granted warrants which
are exercisable as follows:
388,000 warrants outstanding ; 88,000 are exercisable at $3.60 per share,
150,000 are exercisable at $4.80 per share, and 150,000 are exercisable at $4.92
per share. All of the warrants are exercisable for a period of three years
commencing between December 31, 1997 and June 14, 1998. In addition, 1,200,000
warrants outstanding, each exercisable at $.58 per share, all of which are
exercisable from April 18, 1999 through October 1 2004, as well as 500,000
warrants exercisable at $2.709 per share from October 14, 1999 through October
31, 2004.
F-22
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY (CONT'D)
COMMON STOCK
- ------------
At various times during 1998 the Company issued common stock to acquire other
companies (Note 2). The total stock issued for acquisitions in 1998 was 94,131
shares increasing the equity of the Company by $300,000.
During 1999, the Company issued 1,388,400 shares of common stock in two private
placements resulting in an increase to the equity of the Company of $1,879,800,
net of expenses.
On December 31, 1999, the CEO of the Company donated 8,500,000 shares of common
stock back to the Company, all of which was retired. The transaction was
recorded at the par value of the stock since it had no impact on the overall
equity of the Company.
On December 31, 1999, the Company issued 18,191,534 shares of common stock, in
satisfaction of outstanding debt, to a related party (Note 13). The stock was
valued at $21,704,319.
OPTIONS
- -------
On May 13, 1997, the Company implemented and registered in form S-8, a
nonstatutory stock option plan. Under the terms of the plan, the Company could
issue up to 4,000,000 stock options, which, upon exercise, are unrestricted
shares. The plan called for issuance of options until December 31, 1999. As
indicated above, the Company issued 2,200,000 of these options on May 13, 1997,
all of which were exercised immediately.
The 2,200,000 options issued and exercised in 1997 to consultants of the Company
produced a zero value using the Black-Scholes options-pricing model since the
exercise price and market price were equal and the options were exercised
simultaneously.
As of the date of these financial statements, there were no stock options
outstanding issued to employees of the Company under the Company's Employee
Stock Option Plan.
On August 1, 1997, the Company issued options to a consultant granting the right
to purchase 75,000 shares at $6.625 until August 1, 1999. The options were 100%
vested at the date of issuance. In accordance with SFAS No. 123, the options
were valued using the Black-Scholes options-pricing model resulting in a charge
to income of $50,891 in 1997.
There were no options issued for services in 1998.
On December 29, 1999, the Company issued a total of 400,000 options to three
directors of the Company with an exercise price of $1.375. The options are to
vest one third after six months, one third after fifteen months and one third
after twenty-nine months from December 29, 1999. The options are to expire on
December 29, 2004.
On December 31, 1999, the Company issued 5,000 options to a consultant with an
exercise price of $3.00. The options were 100% vested at the date of issuance
and are to expire on December 31, 2004.
F-23
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY (CONT'D)
OPTIONS
- -------
In accordance with SFAS No. 123, the aforementioned options were valued using
the Black-Scholes options-pricing model as noted below resulting in a charge to
income of $3,813 in 1999, with options values of $.61 and $.85.
On October 27, 1999, the Company issued 100,000 options to an employee with an
exercise price of $3.00. The options were 100% vested at the date of issuance
and are to expire on October 27, 2004.
The effect of applying SFAS No. 123 on the 1999 pro forma net loss as stated
below is not necessarily representative of the effects on reported net income
(loss) for futute years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options in future years.
Had compensation cost for the Company's stock options issued been determined
based upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss in 1999 would have been
$22,753,761 or $(.75) per share basic and $(.75) per share on a diluted basis.
The fair value of the options granted during 1999 to the employee are calculated
at $1.09 per share on the date of grant using the Black-Scholes options-pricing
model with the following assumptions: no dividend yield, volatility of 65%, a
risk free interest rate of 5.40% and an expected life of 5 years from date of
vesting.
A summary of stock option activity is as follows:
Weighted
Number Average
of Exercise
Shares Price
----------- ----------
Balance at December 31, 1996 0 $ 0.00
Granted 2,275,000 $ 3.12
Exercised (2,200,000) $ 3.00
Forfeited 0 $ 0.00
---------- --------
Balance at December 31, 1997 75,000 $ 6.63
Granted 0 $ 0.00
Exercised 0 $ 0.00
Forfeited 0 $ 0.00
---------- --------
Balance at December 31, 1998 75,000 $ 6.63
Granted 505,000 $ 1.71
Exercised 0 $ 0.00
Forfeited (75,000) $ 6.63
--------
Balance at December 31, 1999 505,000 $ 1.71
========== ========
F-24
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY (CONT'D)
OPTIONS
- -------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------- ----------------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise as of Remaining Exercise as of Exercise
Price 12/31/99 Life(in Price 12/31/99 Price
years)
- --------------------- ---------------------- ------------------- ----------------- --------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$1.38 400,000 5.0 $1.38 0 $0.00
$3.00 105,000 4.8 $3.00 105,000 $3.00
- --------------------- ---------------------- ------------------- ----------------- --------------------- ----------
$1.38 to $3.00 505,000 5.0 $1.71 105,000 $3.00
===================== ====================== =================== ================= ===================== ==========
</TABLE>
SUBSCRIPTIONS TO COMMON STOCK
On May 13, 1997, the Company issued 2,200,000 shares of common stock upon the
exercise of stock options described above. In consideration for the stock, the
shareholders executed promissory notes to the Company. The notes are due on or
before May 13, 2002. The notes bear interest at 5% per annum, and a financing
fee of $330,000 was charged upon the issuance. As of December 31, 1999, the
total interest accrued and unpaid amounted to $743,715. In 1999, ownership and
all future rights to this receivable and all accrued interest were transferred,
in partial satisfaction of outstanding debt, to a related party (Note 13 ).
NOTE 11 - EARNINGS PER SHARE
Earnings per share has been computed on the basis of the total weighted average
number of shares outstanding.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
--------------- --------------- ---------------
Weighted Average Number of Shares
<S> <C> <C> <C>
Outstanding - Basic 30,246,754 29,139,093 30,562,402
Outstanding Convertible Preferred Stock,
Options and Warrants 1,267,330
--------------- --------------- ---------------
Weighted Average Number of Shares
Outstanding - Diluted 30,246,754 30,406,423 30,562,402
=============== =============== ===============
</TABLE>
The weighted average number of shares diluted is the same as basic in 1999 and
1997 because, including the calculated number of additional shares through the
conversion of warrants, options and convertible preferred shares would be
antidilutive.
F-25
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12- SALE OF SUBSIDIARIES
On March 31, 1998 the Company entered into an agreement to sell Green Shield
Mortgage Corp., 1st Potomac Mortgage Corporation, and American National Mortgage
Corporation to Northport Industries, Inc.(Northport). The agreement was
effective January 1, 1998 and provided for $100 in consideration. In addition,
the Company agreed to continue to manage the sold companies for a period of one
year. Northport agreed to pay a $10,000 a month management fee, per company, and
to reimburse the Company for any monies expended on its behalf through the
issuance of a promissory note.
On October 16, 1998 the Company entered into a second agreement with Northport
to sell Bankers Direct Mortgage Company and Gentry Capital Financial Services,
Inc. The agreement was effective September 10, 1998. The balance of the terms of
the contract mirror the previous contract.
Under these agreed upon terms, Northport owed the Company $3,617,408 plus
interest of $217,044 as of December 31, 1998. This debt, evidenced by a
promissory note, was assigned to the Skulsky Trust, as repayment of debt at
December 31, 1998.
It should be noted that the Company removed certain intangible assets from these
subsidiaries before the sale. These assets continue to be carried on the
Company's books as Goodwill and consequently no gain or loss was recognized on
these sales.
NOTE 13- RELATED PARTY TRANSACTIONS
During 1999 and 1998, the Company was involved in advances to and from the
following related entities. In addition, many of these companies were charged
for their share of administrative costs and direct expenses (paid on their
behalf) and management fees. All management fee income shown in the Operating
Income section of the Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997, respectively, is from related parties.
(1) C.S. Amsterdam Realty, Inc. - Owned by a minority shareholder (less
than 5%) of the Company, under common administration.
(2) Wireless Mexicano, Inc. - Partially owned by a minority shareholder
(less than 5%) of the Company, under common administration.
(3) The Skulsky Trust - The trustee is an employee of the Company, and the
trust's beneficiary is a minority shareholder (less than 5%) of the
Company.
(4) Action Abstract, Inc. - Owned by a director of the Company.
The Skulsky Trust has an agreement with the Company whereby the Company has the
right to offset any intercompany balance against monies owed to the trust.
Accordingly, the Company had a net balance due to the Skulsky Trust of
$10,439,778 as of December 31, 1998. The debt was interest free with no set
repayment terms.
F-26
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13- RELATED PARTY TRANSACTIONS (CONT'D)
As of December 31, 1999, after the assignment of all intercompany balances, the
Company had a net balance due to the Skulsky Trust of $31,410,221.
On December 31, 1999, In satisfaction of this debt, the Skulsky Trust accepted
transfer of ownership of the following assets of the Company:
Transferred
Value
----------------
Mortgage receivable (Note 4) $ 2,216,087
Stock subscription receivable (Note 10) 5,916,100
Accrued interest and financing fee on
stock subscription (Note 10) 1,073,715
Investment in Wireless Mexicano, Inc. (Note 3) 500,000
---------------
Total assets transferred $ 9,705,902
===============
After the transfer of the aforementioned assets, the outstanding debt remaining
to the Skulsky Trust was $21,704,319. This debt was completely satisfied through
the issuance of 18,191,534 shares of common stock by the Company on December 31,
1999. The shares were issued at the approximate market value on the day of the
transaction.
NOTE 14 - OPERATING LEASES
The Company is obligated under a number of operating leases for its main and
branch office facilities, and equipment leases. The leases expire on various
dates through October 2004. Total rent expense
aggregated $2,045,399 and $1,213,327, for the years ended December 31, 1999 and
1998, respectively.
The lease obligations are as follows, for the years ending December 31,:
2000 $ 1,433,261
2001 1,237,505
2002 862,408
2003 435,292
2004 140,600
-----------------
Total $ 4,109,066
=================
F-27
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15 - NOTES PAYABLE
APPONLINE.COM, INC. AND ISLAND MORTGAGE NETWORK, INC.
In conjunction with the acquisition of Gentry, the Company owed $23,140 and
$434,327, at December 31, 1999 and 1998, respectively.
It consisted partly of two notes with identical terms, to the former owners of
Gentry, totaling $384,356 at December 31, 1998. Each note was due May 2008, and
was payable in monthly installments of $2,500, which included interest at 9%. In
1999, these notes were determined to be no longer payable, as the holders of
these notes were in violation of certain terms of the agreement. As a result,
the outstanding balance of the notes were offset against the Gentry purchase
price and accordingly, the original purchase price was reduced.
The remaining balance consist of an installment note, with a due date of October
2000. It is payable in monthly installments of $2,409, which includes interest
at 10.5%. As of December 31, 1999 and 1998, the outstanding balance was $23,140
and $49,971, respectively.
In connection with an acquisition of assets made during 1998, the Company owed
$180,772 at December 31, 1998. This debt was paid in full during 1999.
In conjunction with the acquisition of 1st Potomac, the Company is indebted to a
bank in the amount of $488,397, at December 31, 1999, under a line of credit
arrangement. The line renews March 31 annually, and calls for minimum monthly
installments, which includes interest at 6.5%. The line has no fixed repayment
term. It is secured by a certificate of deposit in the amount of $530,927 that
the Company holds with the bank.
In conjunction with the acquisition of Queen City, the Company is indebted to a
bank in the amount of $114,966, at December 31, 1999. The obligation is an
installment note, with a due date of June 2001. It is payable in monthly
installments of $6,850, which includes interest at 9.50%. It is also secured by
substantially all of the assets of the Company.
In conjunction with the acquisition of Alliance, the Company owed $30,000 at
December 31, 1999. It consisted of two notes with identical terms, to the former
owners of Alliance. Each note is payable in monthly installments of $1,667,
without interest, through September 2000.
FIRST EQUITIES SERVICE CORP.
Service is indebted to a bank in the form of an installment note, with a due
date of January 2003. It is payable in monthly installments of $1,014, which
includes interest at 9%, with a balloon payment due at maturity. It is secured
by the related real estate. As of December 31, 1999 and 1998, the outstanding
balance was $93,677 and $97,275, respectively.
Principal payments are due in accordance with the following schedule, for the
years ending December 31:
2000 $ 620,727
2001 44,278
2002 4,696
2003 80,479
---------------
Total $ 750,180
===============
F-28
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16- CAPITAL LEASE OBLIGATIONS
The Company leases equipment with lease terms expiring through July 2004.
Obligations under capital leases are reflected in the accompanying financial
statements at the present value of future minimum lease payments, discounted at
interest rates ranging from 9.77% to 15.77%.
The future minimum lease obligations under capital leases, and the net present
value of the future minimum lease payments, are due as follows, for the years
ending December 31,
2000 $ 48,105
2001 50,303
2002 38,127
2003 23,922
2004 13,954
--------------------------
Total minimum lease payments 174,411
Less: Amounts representing interest 39,368
--------------------------
Present value of net minimum
lease payments $ 135,043
==========================
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior members of
management. Some agreements renew automatically on an annual basis, and others
continue until September 2004. Some include provisions for bonuses based on
volume at particular locations.
The following schedule presents the minimum amounts due for the next five years
under these contracts, assuming the contracts continue to renew:
Years ending December 31,
2000 $820,502
2001 $828,200
2002 $828,200
2003 $672,100
2004 $190,988
MORTGAGES
In the normal course of business, the Company enters into commitments to extend
mortgages to borrowers whose loans have not closed at year end. At December 31,
1999 and 1998, those commitments totaled $77,175,474 and $97,703,391,
respectively.
F-29
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17- COMMITMENTS AND CONTINGENCIES (CONT'D)
MORTGAGES (CONT'D)
Also in the normal course of business, the Company enters into commitments to
sell mortgages to investors. These commitments include loans closed before year
end which are currently in inventory, as well as loans closed after year end. At
December 31, 1999 and 1998, those commitments amounted to $131,647,586 and
$171,813,153, respectively.
LITIGATION
The Company is party to a number of lawsuits and claims (a few of which are
substantial in amount ) arising in the ordinary course of business. The amount
of liability, if any, from these proceedings cannot be estimated, but management
is of the opinion that the outcome will not have a material impact on the
Company's financial position.
CONTINGENCIES - OFF BALANCE SHEET RISK
During the normal course of operations, warehouse lenders provide funding on
behalf of the Company to third party escrow accounts for mortgages prior to
closing. The escrow balances vary depending on the Company's volume of business.
OTHER COMMITMENTS
In connection with the acquisitions described above, and the related employment
agreements, the Company has agreed to issue additional shares of stock, should
certain revenue levels be achieved. The agreements state specific numbers of
shares or in some instances, dollar amounts to be divided by market share.
NOTE 18 - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at several financial institutions. The
Federal Deposit Insurance Corporation insures balances at each institution up to
$100,000. Uninsured balances aggregated $4,076,145 and $4,468,469, at December
31, 1999 and 1998, respectively.
F-30
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19 - INCOME TAXES
Temporary differences which give rise to deferred tax assets and liabilities as
of December 31, 1999 and 1998 are as follows:
1999 1998
--------------- ---------------
Net operating loss carryforward $ 8,451,838
Provision for doubtful accounts 546,864 $ 259,500
Deferred profit on installment sale (289,345)
--------------- ---------------
8,998,702 (29,845)
Less: valuation allowance (8,998,702) 0
--------------- ---------------
Net deferred tax asset (liability) $ 0 $ (29,845)
=============== ===============
NOTE 19 - INCOME TAXES
The provision for income taxes is as follows:
December 31, December 31, December 31,
1999 1998 1997
------------- -------------- -------------
Current:
Federal $ (111,556) $ 124,045 $ 0
State (29,870) 295,946 27,999
Deferred:
Federal (25,368) 68,770 0
State (4,477) (38,925) 0
------------- -------------- -------------
Total $ (171,271) $ 449,836 $ 27,999
============= ============== =============
The Provision for Income Taxes is different than the amount computed using the
United States Federal Statutory Income Tax Rate for the reasons set forth below:
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Expected tax at US statutory rate (34.0)% 34.0% (34.0)%
State and local income taxes * 32.6% 2.9%
(5.7)%
Prior year over-accrual (.9)%
Valuation allowance for operating loss
carryforwards not expected to be used
(released) 39.7% (9.5)% 34.0%
------------ --------- ----------
(.9)% 57.1% 2.9%
============ ========= ==========
* Effective rate at December 31, 1998 is high due to the fact that subsidiaries
do not file state tax returns on a consolidated basis. As a result, no net
operating loss carryforward is available to one of the subsidiaries with a very
large taxable income. In addition, other subsidiaries with taxable losses
currently have state taxes due based on capital.
As of December 31,1999, the Company has net operating loss carryforwards (NOL's)
of $21,129,596 for tax purposes which will be available to offset future taxable
income. Any unused NOL's will expire in 2019.
F-31
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - PRIMARY FINANCIAL STATEMENT COMPONENTS
PRIMARY COMPONENTS OF PREPAID EXPENSES
December 31, December 31,
1999 1998
----------------- ----------------
Prepaid processing costs $ 4,169,069 $ 1,897,326
Advance draws against commissions 2,031,413 1,387,354
Prepaid insurance 81,013 79,083
Other prepaid expenses 235,855 327,060
----------------- ----------------
Total prepaid expenses $ 6,517,350 $ 3,690,823
================= ================
PRIMARY COMPONENTS OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31, December 31,
1999 1998
---------------- ---------------
Trade accounts payable $ 4,236,995 $ 4,591,103
Accrued payroll and payroll taxes 1,594,809 1,333,906
Accrued interest 464,436 393,174
Dividends payable 31,066 14,361
---------------- ---------------
Total accounts payable and accrued $ 6,327,306 $ 6,332,544
expenses ================= ===============
PRIMARY COMPONENTS OF GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1999 1998 1997
-------------- ------------ -------------
<S> <C> <C> <C>
Salaries $ 6,090,184 $ 3,858,710 $ 1,112,025
Payroll taxes and benefits 1,578,820 858,537 342,061
Rent and occupancy 1,625,399 1,206,010 710,341
Other expenses 9,005,637 5,096,563 1,019,722
----------- ----------- -----------
Total general and administrative expenses
- operating and closed branches $18,300,040 $11,019,820 $ 3,184,149
=========== =========== ===========
</TABLE>
F-32
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - PRIMARY FINANCIAL STATEMENT COMPONENTS
PRIMARY COMPONENTS OF FIELD AND DIRECT EXPENSES
December 31, December 31 December 31,
1999 1998 1997
----------- ------------ -----------
Salaries $ 5,248,856 $ 6,174,654 $ 1,286,416
Commissions 10,032,242 7,948,276 4,505,625
Payroll Taxes and Benefits 1,329,263 1,185,637 513,091
Appraisal Fees and Credit Reports 3,239,608 2,297,195 1,127,592
Other expenses 1,400,492 569,654 835,011
----------- ----------- -----------
Total field and direct expenses
- operating and closed branches $21,250,461 $18,175,416 $ 8,267,735
=========== =========== ===========
NOTE 21- NONRECURRING EXPENSES
During the year ended December 31, 1999, the Company incurred certain expenses
for the development and start up of the Internet operation. Such expenses are
not expected to be recurring expenditures of the Company, and have been
reflected as nonrecurring in the accompanying statement of operations.
As required by Statement of Position 98-5, effective for fiscal years beginning
after December 15, 1998, all organization costs incurred currently are to be
written off and the unamortized balance of amounts capitalized at the end of the
previous fiscal year were written off during the year ended December 31, 1999.
The write off of approximately $278,000 has been included in nonrecurring
expenses since it was not material.
NOTE 22- SUBSEQUENT EVENTS
SPIN-OFF
On March 16, 2000, the Company announced plans to spin-off its Internet mortgage
operations through an initial public offering of a newly formed Internet
subsidiary, ApplyOnline, Inc. (ApplyOnline). ApplyOnline essentially represents
all of the Company's online operations, which commenced in 1999 and have grown
significantly to date.
Management believes that the new structure will enable both the Company and
ApplyOnline to build market leadership positions by allowing each company to
independently focus on growth opportunities in both the Internet and traditional
mortgage market.
The Company anticipates the initial public offering for its Internet mortgage
banking and brokerage subsidiary to be completed by early this summer, and
intends to subsequently spin-off the balance of the shares of the newly publicly
traded company to the Company's shareholders. Under this plan, the Company's
shareholders will ultimately own shares in both companies.
F-33
<PAGE>
APPONLINE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 22- SUBSEQUENT EVENTS (CONT'D)
SPIN-OFF (CONT'D)
Amounts and operations of the Internet operation included in the 1999
consolidated financial statements were as follows:
Total assets $ 2,600,000
Stockholders deficit $ 10,900,000
Revenues $ 3,100,000
Net loss $ 10,900,000
ACQUISITIONS
Pursuant to an acquisition agreement dated March 7, 2000, the Company acquired
100% of the issued and outstanding capital stock of Western National Funding,
Inc. (Western). The consideration for this acquisition was 750,000 shares of the
Company's common stock valued at $2,390,625 and $297,000 in cash. In addition,
Western received one irrevocable five year option to purchase 100,000 shares of
the Company's common stock at $1.60 per share.
Western is principally engaged in originating wholesale mortgages for single
family residences of one to four units. Their primary focus is FHA, VA, freddie
Mac and Fannie Mae loans. Western closed approximately $250 million in wholesale
loans in 1999.
Pursuant to an acquisition agreement dated March 7, 2000, the Company acquired
100% of the issued and outstanding capital stock of Cyber Media Group, Inc.
(Cyber). The consideration for this acquisition was 1,750,000 shares of the
Company's common stock valued at $5,578,125 and one five year option to purchase
1,250,000 shares of the Company's common stock at $1.75 per share.
Cyber is a leading developer of e-finance solutions and has developed premier
web sites that provide consumers with financial services including residential
mortgages, commercial loans and credit reports. Management believes that Cyber
will present new opportunities to expand the Company's business beyond mortgage
lending into the broader financial services arena and Cyber's expertise in
online advertising will complement the Company's print and broadcast campaign.
In addition, Cyber will play an integral role in the Company's plan to spin-off
its Internet mortgage operations.
The acquisitions will be accounted for using the "purchase" method of
accounting.
NOTE 23- RECLASSIFICATION
Certain amounts in the 1998 financial statements have been reclassified to
conform with the current period's financial statement presentation.
Exhibit 21
List of Subsidiaries
- - Island Mortgage Network, Inc.
- - First Equities Service Corp.
- - Citizens Mortgage Service Company
- - First Equities Commercial Corp
- - Queen City Mortgage Co.
- - Alliance Mortgage Corp
- - Pioneer Financial Group, Inc.
- - Arrowhead Mortgage Company, Inc.
- - AppOnline Internet R&D Corp.
- - Western National Funding, Inc.
- - Cyber Media Group, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,548,137
<SECURITIES> 0
<RECEIVABLES> 1,975,354
<ALLOWANCES> 0
<INVENTORY> 96,731,181
<CURRENT-ASSETS> 114,985,852
<PP&E> 4,822,326
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,192,820
<CURRENT-LIABILITIES> 103,622,312
<BONDS> 0
0
7
<COMMON> 41,206
<OTHER-SE> 23,529,295
<TOTAL-LIABILITY-AND-EQUITY> 127,192,820
<SALES> 28,304,920
<TOTAL-REVENUES> 32,206,592
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 48,377,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,644,215
<INCOME-PRETAX> (22,815,583)
<INCOME-TAX> 171,271
<INCOME-CONTINUING> (22,644,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,644,312)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
