Filed Pursuant to Rule 424(b)(3)
Registration Number 333-60686
Prospectus Supplement dated November 15, 2001
To Prospectus dated July 6, 2001 of LendingTree, Inc.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
-----
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-----
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 000-29215
LENDINGTREE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1795344
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11115 RUSHMORE DRIVE
CHARLOTTE, NORTH CAROLINA 28277
------------------------- -----
(Address of principal executive offices (Zip code)
(704) 541-5351
(Registrant's telephone number, including area code)
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 [ ].
As of October 31, 2001 there were 19,067,281 shares of Common Stock,
$0.01 par value, outstanding, excluding 811,682 shares of treasury stock.
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LENDINGTREE, INC.
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Statements of Operations -
Three months and nine months ended September 30, 2000
and September 30, 2001 (unaudited) 3
Balance Sheets -
December 31, 2000 and September 30, 2001 (unaudited) 4
Statements of Cash Flows -
Nine months ended September 30, 2000 and September 30,
2001 (unaudited) 5
Statement of Changes in Shareholders' Equity (Deficit)-
September 30, 2001 (unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
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PRODUCTS MENTIONED IN THIS REPORT ARE USED FOR IDENTIFICATION PURPOSES ONLY AND
MAY BE TRADE NAMES OR TRADEMARKS OF LENDINGTREE, INC. OR THIRD PARTIES.
----------------------------
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LENDINGTREE, INC.
Statements of Operations
(unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 2001 2000 2001
-------- -------- -------- --------
(in thousands, except (in thousands, except
per share data) per share data)
Revenue:
Network $ 7,831 $ 15,243 $ 19,506 $ 40,397
Lend-X technology 1,199 1,960 1,706 4,871
-------- -------- -------- --------
Total revenue 9,030 17,203 21,212 45,268
-------- -------- -------- --------
Cost of revenue:
Network 1,866 3,033 5,321 9,314
Lend-X technology 731 277 1,006 1,075
-------- -------- -------- --------
Total cost of revenue 2,597 3,310 6,327 10,389
Gross profit:
Network 5,965 12,210 14,185 31,083
Lend-X technology 468 1,683 700 3,796
-------- -------- -------- --------
Total gross profit 6,433 13,893 14,885 34,879
Operating expenses:
Product development 532 1,137 2,096 3,386
Marketing and advertising 12,493 9,973 46,113 29,447
Sales, general and administrative 8,762 5,362 19,461 25,927
-------- -------- -------- --------
Total operating expenses 21,787 16,472 67,670 58,760
-------- -------- -------- --------
Loss from operations (15,354) (2,579) (52,785) (23,881)
Loss on impaired investments -- -- -- (350)
Interest income 458 176 1,879 522
Interest expense, financing and other charges (135) (590) (151) (718)
-------- -------- -------- --------
Net loss (15,031) (2,993) (51,057) (24,427)
-------- -------- -------- --------
Accretion of mandatorily redeemable convertible preferred stock -- (155) -- (361)
Dividends on mandatorily redeemable convertible preferred stock -- (577) (2,461) (1,538)
-------- -------- -------- --------
Net loss attributable to common shareholders $(15,031) $ (3,725) $(53,518) $(26,326)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.81) $ (0.20) $ (3.49) $ (1.37)
======== ======== ======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 18,479 18,976 15,354 19,190
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
3
LENDINGTREE, INC.
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,666 $ 2,089
Short-term investments 4,991 313
Restricted short-term investments 5,059 8,925
--------- ---------
Total cash and cash equivalents, short-term investments and
restricted short-term investments 12,716 11,327
Accounts receivable, net of allowance for doubtful accounts
($649 at December 31, 2000 and $289 at September 30, 2001) 7,510 9,731
Prepaid expenses and other current assets 1,010 1,033
--------- ---------
Total current assets 21,236 22,091
Equipment, furniture and leasehold improvements, net 2,866 2,213
Software, net 6,475 3,490
Intangible assets, net 6,204 4,249
Other assets 1,176 1,197
--------- ---------
Total assets $ 37,957 $ 33,240
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,778 $ 5,192
Accrued expenses 6,189 8,249
Deferred revenue 1,601 1,946
Short term borrowings (Note 4) -- 1,998
Current portion capital lease obligations 732 755
--------- ---------
Total current liabilities 13,300 18,140
Deposits by subtenants 113 132
Capital lease obligations 848 378
Commitments and contingencies (Note 5)
Mandatorily redeemable securities (Note 4):
Series A convertible preferred stock, $.01 par value, 8% cumulative,
6,885,715 shares authorized, 0 and 6,885,715 shares issued and
outstanding at December 31, 2000 and September 30, 2001,
respectively -- 23,193
Shareholders' equity (deficit):
Common stock, $.01 par value, 100,000,000 shares authorized,
19,653,956 and 19,878,963 shares issued at December 31,
2000 and September 30, 2001, respectively 197 199
Treasury stock (948,971 shares at December 31, 2000 and
811,682 shares at September 30, 2001, at cost) (5,774) (5,113)
Additional paid-in-capital 132,080 122,937
Accumulated deficit (98,149) (122,576)
Deferred compensation (3,056) (1,686)
Notes receivable from officers (1,603) (2,364)
Unrealized gain on available-for-sale securities 1 --
--------- ---------
Total shareholders' equity (deficit) 23,696 (8,603)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 37,957 $ 33,240
========= =========
The accompanying notes are an integral part of these financial statements
4
LENDINGTREE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 2001
-------- --------
(in thousands)
Cash flows used in operating activities:
Net loss $(51,057) $(24,427)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets 104 3
Depreciation and amortization 1,486 5,851
Loss on impairment of investment -- 350
Provision for doubtful accounts 720 (98)
Amortization of deferred compensation 1,629 728
Compensation charge related to officer note -- 1,365
Issuance of warrants and other costs in conjunction with
revolving credit facilities -- 481
Non-cash equity based compensation charges -- 444
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (5,295) (2,123)
Prepaid expenses and other current assets (170) (12)
Other assets (373) (52)
Accounts payable 2,939 469
Accrued expenses 884 2,321
Deferred revenue 266 345
Deposits 92 19
-------- --------
Net cash used in operating activities (48,775) (14,336)
-------- --------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments (58,401) (16,964)
Sales of short-term investments 71,878 21,641
Purchases of restricted investments (43,657) (27,084)
Sales of restricted investments 35,138 23,218
Investment in another business (2,500) --
Acquisition of certain assets of another business (6,200)
Investments in software (2,065) (339)
Purchases of equipment, furniture,
and leasehold improvements (444) (98)
-------- --------
Net cash (used in) provided by investing activities (6,251) 374
-------- --------
Cash flows provided by financing activities:
Proceeds from sales of common stock and warrants
and exercise of stock options 249 206
Payment of capital lease obligations -- (532)
Net short-term borrowings -- 1,998
Fees paid related to debt and equity financing -- (645)
Proceeds from issuance of preferred stock -- 12,290
Proceeds from sale of equity rights certificate 10,000 --
Proceeds from initial public offering of common stock, net of
offering costs 44,811 --
Proceeds from repayment of officer note -- 68
-------- --------
Net cash provided by financing activities 55,060 13,385
-------- --------
Net increase (decrease) in cash and cash equivalents 34 (577)
Cash and cash equivalents, beginning of period 2,419 2,666
-------- --------
Cash and cash equivalents, end of period $ 2,453 $ 2,089
======== ========
The accompanying notes are an integral part of these financial statements
5
LENDINGTREE, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, 2001
($ IN THOUSANDS)
(UNAUDITED)
NOTES TOTAL
COMMON STOCK RECEIV- SHARE-
------------------ ADDITIONAL UNREAL- DEFERRED ABLE HOLDERS'
NUMBER OF TREASURY PAID-IN ACCUMULATED IZED COMPEN- FROM EQUITY
SHARES AMOUNT STOCK CAPITAL DEFICIT GAINS SATION OFFICERS (DEFICIT)
---------- ------- -------- ---------- --------- ------- -------- -------- ---------
Balance at December 31, 2000 19,653,956 $ 197 $ (5,774) $ 132,080 $ (98,149) $ 1 $(3,056) $ (1,603) $ 23,696
Amortization of deferred compensation 728 728
Accrued dividends on Series A convertible
preferred stock (Note 4) (1,003) (1,003)
Accretion of Series A convertible
preferred stock (Note 4) (329) (329)
Note receivable from officer in exchange
for Series A convertible preferred
stock (Note 4) (829) (829)
Compensation charge related to officer
note (Note 4) 1,365 1,365
Repayment of an officer note received for
option exercise 68 68
Issuance of warrants in conjunction with
revolving credit facilities (Note 4) 381 381
Issuance of warrants to financial advisor
for services provided (Note 5) 431 431
Cashless exercise of common stock warrants 84,219 1 (1) --
Conversion of equity share rights to
Series A preferred stock (Note 4) (9,367) (9,367)
Deferred compensation adjustment for
forfeited and amended options (Note 4) (596) 642 46
Reissuance of treasury shares for employee
stock purchase plan participants 661 (484) 177
Stock compensation 35,405 137 137
Exercise of common stock options 105,383 1 323 324
Other comprehensive loss:
Unrealized gain, available-for-sale
securities (1)
Net loss (24,427)
Total other comprehensive loss -- -- -- -- -- -- -- -- (24,428)
---------- ------- -------- ---------- --------- ------- ------- -------- --------
Balance at September 30, 2001 19,878,963 $ 199 $ (5,113) $ 122,937 $(122,576) $ -- $(1,686) $ (2,364) $ (8,603)
========== ======= ======== ========== ========= ======= ======= ========= ========
The accompanying notes are an integral part of these financial statements
6
LENDINGTREE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY
LendingTree, Inc. was incorporated in the state of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998.
We are a lending exchange empowering consumers, lenders, and related service
providers. We are not a lender, rather, as a lending exchange we attract
consumers to our Website through various forms of advertising and send their
loan requests to the network of lenders participating on our exchange.
Our technology platform, Lend-XSM, is the technology that powers our Internet
based lending exchange at www.lendingtree.com. Additionally, we have also
licensed the use of our Lend-X technology to other businesses and have enabled
them to create either private-labeled or co-branded exchanges on their Websites.
Consumers begin the LendingTree process by completing a simple on-line credit
request (which we refer to as a "qualification form"). After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
scores are then compared to the underwriting criteria of the more than 100
lenders participating on our lending exchange. Consumers can receive multiple
loan offers in response to a single credit request and then compare, review, and
accept the offer that best suits their needs. Lenders can generate new business
that meets their specific underwriting criteria at a lower cost of acquisition
than traditional marketing channels. Our lending exchange encompasses most
consumer credit categories, including mortgages and home equity loans, as well
as automobile loans, credit cards, and personal loans. Additionally, through our
Website we also provide access to other services related to owning, maintaining
and buying and selling a home, including a network of real estate brokers.
We earn revenue from lenders that pay fees for qualification forms that meet
their underwriting criteria and are transmitted to them ("transmission fees")
and for loans that they close ("closed-loan fees"). Additionally, in most
states, real estate brokers participating in our network pay us a fee when
consumers' requests that we transmit to them result in a purchase or sale of a
home.
We also license and host our Lend- X technology platform for use by other
businesses. This enables these businesses to create their own customized
co-branded or private-labeled lending exchanges. These exchanges, powered by
Lend-X, may be single lender or multi-lender marketplaces or may provide access
to the LendingTree exchange with more than 100 participating lenders. Through
these Lend-X partnerships, we can earn revenue both from technology fees related
to customizing, licensing and hosting the third party exchange, as well as from
transactional fees resulting from the volume processed through partners'
exchanges.
NOTE 2 - BASIS OF PRESENTATION:
Interim Financial Information
Our financial statements include all adjustments of a normal recurring nature
which, in the opinion of management, are necessary for a fair presentation of
our financial position as of September 30, 2001 and results of operations and
cash flows for the interim periods presented. The results of operations for the
three months and nine months ended September 30, 2001 are not necessarily
indicative of the results to be expected for the entire year.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnotes that are required by generally
accepted accounting principles are not included herein. These interim financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 2000 as reported by us in our Annual
Report on Form 10-K, which is filed with the Securities and Exchange Commission.
7
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include percentage complete calculations under long-term
contracts, useful lives of long-term assets, and the valuation of our common
stock, options, and warrants. Actual results could differ from those estimates.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is prohibited. SFAS No. 141 also establishes the criteria for recognition
of intangible assets separately from goodwill. We have not yet determined the
impact of this new standard.
SFAS No. 142 changes the accounting for goodwill and certain intangible assets
from an amortization method to an impairment-only approach. Thus, amortization
of goodwill and indefinite lived intangible assets, including goodwill and
indefinite lived intangible assets recorded in past business transactions, will
cease upon adoption of SFAS No. 142, which for companies like us with calendar
year-ends, will be January 1, 2002. We have not yet determined the impact of
this new standard.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Accordingly, we will adopt SFAS No. 143 on
January 1, 2003. Because we do not presently have any asset retirement
obligations, we do not expect the impact of adopting this statement on our
results of operations, financial condition, or cash flows to be significant.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. Accordingly, we will adopt this standard on January
1, 2002. Because it is not clear what, if any, impairment or disposal issues
related to long-lived assets we will have at the time we adopt this standard, we
cannot determine the impact of adopting this standard on our results of
operations, financial condition or cash flows.
Reclassifications
Certain comparative period amounts have been reclassified to conform to current
period presentation.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Capital Resources
As of September 30, 2001, we had approximately $11.3 million in cash, cash
equivalents, restricted short-term investments and short-term investments. We
believe that these existing sources, the availability of existing revolving
credit facilities as well as cash generated from operations will be sufficient
to fund our operating and capital needs through 2002.
Although we have historically experienced significant revenue growth and we plan
to eliminate negative cash flows from future operations, the operating results
for future periods are subject to numerous uncertainties. There can be no
assurance
8
that revenue growth will continue or that we will be able to achieve or sustain
profitability. Hence, our liquidity could be significantly affected. However, if
revenue does not grow as anticipated and if we are unable to successfully raise
sufficient additional funds through the equity line referred to in Note 4, or in
another manner, management would reduce discretionary operating expenditures,
including advertising and marketing and certain administrative and overhead
costs. Failure to generate sufficient revenue or to reduce costs as necessary
could have a material adverse effect on our ability to continue as a going
concern and to achieve our business objectives.
Restricted Investments
As of September 30, 2001, we had $8.9 million of restricted short-term
investments of which $8.6 million was held in an escrow account that has been
established by us and our advertising agency to maintain funds set aside for
approved future expenditures and services of the advertising agency.
Disbursements from the escrow account can only be made with signatures from both
parties. The fund is used only for future advertising costs we have previously
approved. Disbursements from the escrow account are made no sooner than one
month following the invoice date for the expenditures. We receive all income
earned on funds held in this investment account.
Advertising Expenses
Advertising expenses consist of certain direct expenses, including television,
radio, outdoor advertising campaign costs and affiliate and partner marketing
fees as well as certain indirect expenses, such as agency fees and production.
We expense advertising costs as incurred. For the three months ending September
30, 2000 and 2001, advertising expenses were $10.6 million and $9.4 million,
respectively. For the nine months ending September 30, 2000 and 2001 advertising
expenses were $42.5 million and $27.8 million, respectively.
Supplemental Cash Flow Information
For the quarters and the nine months ended September 30, 2000 and 2001, we paid
interest of approximately $0.1 million and paid no income taxes during those
periods.
A supplemental schedule of non-cash financing and investing activities follows
(in thousands):
Nine Months Ended
September 30,
2000 2001
---------------------
Notes receivable issued to officers $ 1,603 $ 829
Acquisition of assets through a capital lease 1,682 85
Issuance of common stock in connection with the
acquisition of key assets from another business 4,739 --
Accretion of Series A Preferred Stock - 361
Dividends on Series A Preferred Stock 2,461 1,538
Issuance of warrants and other costs in conjunction
with revolving credit facilities -- 481
Issuance of warrants to financial advisor in
connection with Series A Preferred Stock financing -- 431
Accrued liabilities established in connection with a
business acquisition 1,384 --
NOTE 4 - SIGNIFICANT TRANSACTIONS
Mandatorily Redeemable Series A 8% Convertible Preferred Stock
In March 2001, we issued 3,700,001 shares of mandatorily redeemable Series A 8%
Convertible Preferred Stock ("Series A Preferred Stock") to a group of investors
for $12.95 million or $3.50 per share. We issued an additional 128,571 shares of
9
Series A Preferred Stock on April 30, 2001 at $3.50 per share plus accumulated
dividends. After deducting fees related to both transactions, this resulted in
net proceeds to us totaling approximately $12.3 million. In addition, we issued
and sold 200,000 shares of Series A Preferred Stock to our Chief Executive
Officer, funded by a promissory note to us, for $0.7 million.
In conjunction with the March 2001 closing of the Series A Preferred Stock, an
Equity Rights Certificate issued to an affiliate of Capital Z on September 29,
2000, for $10 million, was converted into 2,857,143 shares of Series A Preferred
Stock at an effective rate of $3.50 per share. As of September 30, 2001, there
were 6,885,715 shares of Series A Preferred Stock outstanding.
The holders of the Series A Preferred Stock are entitled to receive dividends on
the Series A Preferred Stock equal to eight percent (8%) of the stated value per
share payable at our option (i) in cash on each quarterly dividend date or (ii)
by an upward adjustment to the stated value per share on a quarterly dividend
payment date. As of September 30, 2001, we have recorded approximately $0.9
million of these dividends that have increased the carrying value of the
preferred stock. However, our net loss attributable to common shareholders
includes a total of $1.5 million of dividend charges, reflecting an additional
$0.6 million of dividend charges related to the increasing value of the common
stock underlying the 8% dividends on the preferred stock.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on the fifth anniversary of the issue date of such shares at a price
of 105% of the then current value per share (defined as the stated value per
share, plus cumulative adjustments for dividends). We are accreting the value of
the preferred stock up to the redemption value of the shares using the effective
interest method. This is increasing the value of the Series A Preferred Stock
and the charge is included in the computation of net loss attributable to common
shareholders. As of September 30, 2001, we have recorded approximately $0.4
million of accretion charges.
Revolving Lines of Credit
On July 13, 2001, LendingTree and GE Capital Commercial Services, Inc. ("GE")
entered into a loan and security agreement and revolving credit note. Under
these arrangements, GE will provide a two-year senior revolving credit facility
providing for borrowings of up to $15 million. The facility has a two-year term
under which we have pledged certain accounts receivable. As of September 30,
2001 we had pledged receivables of $4.3 million. Borrowings are limited to 85%
of the eligible accounts receivable and bear interest at the prime rate. For
purposes of computing interest, all payments against borrowings are deemed
received by GE three (3) business days following receipt of such payments. We
will also pay GE a fee equal to 0.115% of the eligible accounts receivable
arising during the term of the facility. Eligible accounts receivable are
subject to significant fluctuation period to period.
As of September 30, 2001, we have borrowings of approximately $2.0 million
outstanding under the GE credit facility. Our borrowings have primarily been to
fund advance purchases of measured media advertising (cable television, network
television and spot radio). The funds for the advance purchases were put into
the escrow account we set up with our advertising agency and are included on our
balance sheet as restricted short-term investments.
In March 2001, we had entered into a two-year, $5 million revolving line of
credit agreement with the Union Labor Life Insurance Company, on behalf of its
separate account P, ("ULLICO"). Concurrent with the closing of the credit
facility with GE, LendingTree and ULLICO terminated our agreement and we issued
ULLICO a termination warrant to purchase 40,000 shares of common stock at an
exercise price of $.01 per share. We recorded an expense of approximately $0.4
million for the estimated fair value of these warrants and remaining deferred
offering costs related to this transaction.
Revolving Loan
In March 2001, LendingTree and the Federal Home Loan Mortgage Corporation
("Freddie Mac") (a current customer) entered into a two-year revolving loan
agreement whereby Freddie Mac provided us a two-year credit agreement under
which we may borrow up to $2.5 million on a revolving basis, subject to certain
covenants and restrictions.
As a commitment fee, Freddie Mac received warrants to purchase 12,500 shares of
our common stock with an exercise price of $.01 per share. The $35,000 estimated
fair value of these warrants, calculated using a valuation model, was recorded
as a long-term asset and is being amortized to interest expense over the life of
the revolving loan. Additionally, approximately
10
$0.1 million of other related offering costs have been recorded as a long-term
asset and are also being amortized to interest expense over the life of the
revolving loan.
As of September 30, 2001 we had not borrowed and there was no balance
outstanding under this revolving loan.
Equity Line
In March 2001, we entered into a common stock purchase agreement with Paul
Revere Capital Partners, Ltd. ("Paul Revere") for the potential future issuance
and sale of up to $24 million of our common stock. Under this arrangement, we,
at our sole discretion and during the term ending March 2003, may exercise up to
twenty-four monthly drawdowns under which Paul Revere is obligated to purchase a
certain number of shares of our common stock.
If we choose to drawdown the equity line, the minimum amount of any drawdown is
$0.1 million and the maximum amount is the greater of (i) $1.0 million or (ii)
20% of the average of the daily volume weighted average price of our common
stock for the twenty-two (22) day trading period immediately prior to the date
we request a drawdown multiplied by the total trading volume of the common stock
for such period. Only one drawdown is allowed in each period of 22 trading days
beginning on the date of the drawdown notice. Subject to certain adjustments,
the number of shares to be issued on each settlement date will be a number of
shares equal to the sum of the quotients (for each trading day within the
settlement period) of (x) 1/22nd of the investment amount and (y) the purchase
price on each trading day within the settlement period.
Under this arrangement, the price at which we can sell shares of our common
stock to Paul Revere is equal to 95% of the daily volume weighted average price
of our common stock. We may set a threshold (lowest) price during any drawdown
period at which we will sell our common stock in accordance with this agreement.
As of September 30, 2001 there have been no drawdowns under this equity line.
Other Arrangements
In March 2001, in connection with the sale of the Series A Preferred Stock, we
entered into a promissory note and pledge agreement with our Chief Executive
Officer to provide him with a $0.7 million loan to acquire 200,000 shares of the
Series A Preferred Stock. This note and pledge agreement also amended and
restated existing notes and pledge agreements with respect to $1.7 million in
loans for option exercises. In August 2001, we entered into an amended and
restated note and pledge agreement (Pledge Agreement) with our Chief Executive
Officer relating to all the outstanding loans and interest accrued thereon
totaling approximately $2.5 million. This amended and restated note bears
interest at a fixed rate of 8% per annum on the unpaid balance of the loan.
Interest is payable along with the principal payments annually except that
payment of $55,000 of interest accruing through June 30, 2002 will be deferred
until June 30, 2003. The amended and restated note is not prepayable.
Under the Pledge Agreement, the Chief Executive Officer has granted us a
security interest in 1.1 million shares of his LendingTree common and preferred
stock. The Pledge Agreement contains a provision which states that if the value
of the collateral divided by the outstanding principal and interest on the note
falls below a ratio of 2.8 to 1, the Chief Executive Officer is precluded from
selling or transferring these securities without our prior written consent. The
Pledge Agreement also specifies that so long as the Chief Executive Officer is
employed by us, our sole recourse for satisfaction of the principal obligations
under this note will be our rights to the collateral. However, interest
obligations accruing under the note are full recourse. From March 2001 through
August 14, 2001, the effective date of this amendment to the note, we had
applied variable accounting treatment to the underlying pledged securities for
this note and recorded periodic changes in the fair value of such securities as
non-cash compensation charges or credits. Due to a decline in the fair market
value of our common stock during the third quarter of 2001, up to and including
August 14, 2001, we recorded a net $2.7 million credit to non-cash compensation.
Due to an overall increase in the fair value of our common stock from March
2001, up to and including August 14, 2001, we recorded a net $1.3 million of
expense to non-cash compensation. The amendment on August 14, 2001 resulted in
fixed accounting treatment for the underlying securities and as such the company
will no longer incur these variable accounting charges and credits going
forward.
11
Option Grants
As of September 30, 2001, we have approximately $1.7 million of deferred
compensation recorded on our balance sheet related to options granted below fair
market value in late 1999 and early 2000. In the nine months ending September
30, 2001, we have adjusted the balance of deferred compensation to reflect
forfeited options. We are amortizing the deferred compensation to expense over
the options' four-year vesting periods. For the three-month and nine-month
periods ended September 30, 2001, we recorded compensation expenses of $0.2
million and $0.7 million, respectively, related to these option grants.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
As compensation for services provided related to our Series A Preferred Stock
financing, we agreed to pay our financial advisor approximately $0.5 million in
cash and issue warrants to purchase 112,500 shares of our common stock with an
exercise price of $0.01 per share. As of September 30, 2001, we had a commitment
to pay the final installment of $0.1 million and warrants to purchase 28,125
shares our common stock with an exercise price of $0.01 per share. This final
installment will be paid in December 2001.
NOTE 6 - NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing net loss
attributable to common shareholders by the weighted average number of common
shares outstanding. Common stock equivalents, including stock options and
warrants, are excluded from the calculation, as their effect would be
anti-dilutive to the net loss per common share. The calculation of diluted loss
per share for the three months and nine months ended September 30, 2000 excludes
weighted average options and warrants to purchase approximately 1.0 million and
1.7 million shares, respectively, of common stock as their impact would be
anti-dilutive. The calculation of diluted loss per share for the three months
and nine months ended September 30, 2001 excludes weighted average options and
warrants to purchase approximately 1.4 million and 1.2 million shares,
respectively, of common stock as their impact would be anti-dilutive.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
LendingTree, Inc. was incorporated in the state of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998.
We are a lending exchange empowering consumers, lenders, and related service
providers. We are not a lender, rather, as a lending exchange we attract
consumers to our Website through various forms of advertising and send their
loan requests to the network of lenders participating on our exchange.
Our technology platform, Lend-XSM, is the technology that powers our Internet
based lending exchange at www.lendingtree.com. Additionally, we have also
licensed the use of our Lend-X technology to other businesses and have enabled
them to create either private-labeled or co-branded exchanges on their Websites.
Consumers begin the LendingTree process by completing a simple on-line credit
request (which we refer to as a "qualification form"). After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
scores are then compared to the underwriting criteria of more than 100 lenders
participating on our exchange. Consumers can receive multiple loan offers in
response to a single credit request and then compare, review, and accept the
offer that best suits their needs. Lenders can generate new business that meets
their specific underwriting criteria at a lower cost of acquisition than
traditional marketing channels. Our lending exchange encompasses most consumer
credit categories, including mortgages and home equity loans, as well as
automobile loans, credit cards, and personal loans. Additionally, through our
Website we also provide access to other services related to owning, maintaining
and buying and selling a home, including a network of real estate brokers.
We earn revenue from lenders that pay fees for qualification forms that meet
their underwriting criteria and are transmitted to them ("transmission fees")
and for loans that they close ("closed-loan fees"). Additionally, in most
states, real estate brokers participating in our network pay us a fee when
consumer's requests that we transmit to them result in a purchase or sale of a
home.
We also license and host our Lend- X technology for use by other businesses.
This enables these businesses to create their own customized co-branded or
private-label lending exchanges. These exchanges powered by Lend-X may be single
lender or multi-lender marketplaces or may provide access to the LendingTree
exchange with more than 100 participating lenders. Through these Lend-X
partnerships, we can earn revenue both from technology fees related to
customizing, licensing and hosting the third party exchange, as well as from
transactional fees resulting from the volume processed through partners'
exchanges.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2000
REVENUE
Total revenue was approximately $17.2 million in the three months ended
September 30, 2001, an increase of $8.2 million from $9.0 million reported in
the same period in 2000.
Network Revenue
For the three months ended September 30, 2001, our LendingTree network revenue
was approximately $15.2 million, or 89% of our total revenue, compared with
approximately $7.8 million, or 87% of total revenue, for the same period in
2000. As shown in the following table, this revenue growth reflects a
substantial increase across all products in the volume of discrete transmissions
of qualification forms to our lenders (a discrete qualification form can be
transmitted to more than one lender, generating multiple transmission fees for
the same form) and in the amount of closed-loan volume.
Three Months Ending September 30, 2000 Three Months Ending September 30, 2001
(in thousands)
Discrete Closed Loan Discrete Closed Loan
Transmission Transaction Transmission Transaction
Network Transactions - Revenue Volume Volume Revenue Volume Volume
Mortgage $ 2,891 76 4 $ 7,178 136 11
Home Equity 3,212 43 10 4,540 53 14
Auto, Personal, Credit Card 1,393 93 33 1,446 161 44
-------------- -------------- -------------- ------------- -------------- --------------
Subtotal Loan Transactions $ 7,496 212 47 $ 13,164 350 69
-------------- ============== ============== ------------- ============== ==============
All Other Network Fees,
and Realty Services 335 2,079
-------------- -------------
Total Network $ 7,831 $ 15,243
============== =============
We attribute the 65% increase in discrete transmission volume (from
approximately 212,000 discrete qualification forms in the three months ended
September 30, 2000 to approximately 350,000 in the same period of 2001)
primarily to growing adoption of on-line lending and the effectiveness of our
advertising which has increased and maintained consumer awareness of our brand.
Although we have demonstrated volume growth both during periods of rising and
falling interest rates, we believe that the lower interest rate environment over
the past year has also contributed to the increase in the number of consumers
applying for loans and refinancing existing debt.
The 47% increase in our closed-loan volume (from 47,000 in the three months
ended September 30, 2000 to 69,000 in the same period of 2001) is due not only
to the increased transmission volume, but also to an increase in average closed
loan rates across all product lines (from 10.1% in third quarter of 2000 to
11.9% for the same period in 2001). Our closed loan rates have increased
primarily due to certain closed-loan initiatives. A significant initiative is
adding to the number and variety of lenders on our network. This allows us to
add capacity to handle more, as well as more types of, loan requests through our
network. At September 30, 2001 we had 128 participating lenders on our network
compared to 112 lenders at September 30, 2000. Additionally, there has been an
increase in the number of lenders utilizing our automation tools.
All other network revenue increased more than 100% to $2.1 million or 14% of
network revenue in the three months ended September 30, 2001 compared to 2000.
This increase primarily reflects the addition of realty services to our product
offerings, generating approximately $1.3 million of revenue in the third quarter
2001. Another $.5 million of the increase relates to an increase in revenue
generated through affinity partner transactions. These transactions result from
arrangements with third party membership programs or clubs, which allow us to
offer members our services through a limited network or single lender program.
14
During the periods presented we generally charged a standard fee to all lenders
for mortgage and home equity transmissions and closed loans. Accordingly, the
volume increase noted above for these products contributed directly to the
increases in revenue. However, beginning in November of 2001 our revenue will be
impacted by a pricing change for our mortgage and home equity offerings. The
standard fee for a transmitted loan request on and after November 5, 2001 will
increase from $8.00 to $9.00 for both our mortgage and home equity products. The
standard fee for closed-loans will change beginning with those that originate
from qualification forms completed on and after November 5, 2001. For a closed
home equity loan the fee will increase from $250 to $275. The standard fee for a
closed mortgage loan will change from a flat $400 to a tiered structure with
fees ranging from $300 to $750.
The revenue for the auto, personal and credit card products is also driven by
increases in volume; however, the pricing for these products is not standard for
all lenders and therefore the revenue does not increase proportionately with the
volume increases from quarter to quarter. We do not currently have plans to
significantly change pricing arrangements for these products.
Lend-X Technology Revenue
Lend-X technology revenue totaled $2.0 million, or 11% of our revenue, for the
three months ended September 30, 2001. This is an increase of $0.8 million over
the same period in 2000. The growth in Lend-X technology revenue is the result
of several significant new customizing, licensing and hosting contracts that
have been entered into since the third quarter of 2000. These new arrangements
contain certain upfront fees that are being recognized as revenue over their
expected service periods. For the quarter ended September 30, 2001, two
customers accounted for 43% and 28%, respectively, of our total Lend-X
technology revenue. For the quarter ended September 30, 2000 one customer
accounted for 82% of our total Lend-X technology revenue. Additionally, some of
the Lend-X arrangements provide for transactional revenue derived from volume
from customers' sites that have been enabled by our technology. The total of
Lend-X technology and transactional network revenue derived from Lend-X partner
sources was approximately $1.5 million and $2.5 million, respectively, for the
three months ended September 30, 2000 and 2001.
GROSS PROFIT AND COST OF REVENUE
Gross profit of $13.9 million (81% of total revenue) for the three months ended
September 30, 2001 was approximately $7.5 million higher than the same period of
2000, which had gross profit of $6.4 million (71% of total revenue). The
improvement in gross profit and gross profit percentage is primarily due to the
substantial increase in closed-loan volume (as noted above). A significant
portion of our costs of revenue are fixed or volume-based related to the
transmission of the loan request and as such are incurred whether or not a loan
closes. Accordingly, our gross profits tend to increase when closed-loans
increase in a period. Additionally, for 2001, volume based credit-scoring fees
and network hosting fees did not increase in proportion to volume increases as a
result of negotiated vendor price reductions that lowered our monthly costs.
Total cost of revenue increased 27% from $2.6 million in the three months ended
September 30, 2000 to $3.3 million in the same period of 2001. This increase is
principally due to costs related to an increase in the volume of closed-loan
transactions such as consumer incentives and other promotional costs.
Network Gross Profit and Cost of Revenue
For the quarter ending September 30, 2001, network gross profit was $12.2
million (80%) compared to $6.0 million (76 %) for the same period in 2000.
Network costs of revenue increased $1.2 million from $1.8 million in 2000 to
$3.0 million in 2001. This increase is a result of the addition of realty
services to our product offerings in August 2000. Substantially all of this
increase relates to incentives and promotional payments made directly to
consumers that closed a realty transaction with a broker on our network.
Other costs of revenue principally personnel costs, increased approximately $0.2
million reflecting increased staffing in our implementation and customer care
departments as a result of overall business growth, including the addition of
realty services to our product offerings. Although our volume has increased
substantially in third quarter 2001 compared to third quarter 2000, a
proportional increase in staffing was not necessary, as we have improved
efficiencies in our customer care processes.
15
Lend-X technology Gross Profit and Cost of Revenue
For the quarter ending September 30, 2001, Lend-X technology gross profit was
$1.7 million (86%) compared to $0.5 million (39%) for the same period in 2000.
Costs of revenue associated with Lend-X technology are principally employment
costs related to customizing and/or implementing Lend-X for partners, as well as
ongoing server costs related to hosting Lend-X for these partners. Lend-X
technology cost of revenue decreased from third quarter 2000 to third quarter
2001 by approximately $0.5 million. This decrease is due to the fact that in the
prior year we were expending significant hours on a large fixed-price
customization contract, resulting in a low gross profit for the period.
Comparatively, in third quarter 2001, substantially all of our technology
revenue was earned from the recurring revenue recognition of certain upfront
fees that are being recognized over each of our contracts' expected service
periods and from less significant customization projects. This has resulted in a
significantly improved gross profit for 2001.
OPERATING EXPENSES
Product development expense was approximately $1.1 million for the three months
ended September 30, 2001 compared to $0.5 million for the same period in 2000.
Product development costs consist of expenses incurred related to the ongoing
efforts to enhance and maintain the functionality of our Lend-X technology and
our Website and include compensation costs, purchased software and consulting
costs. During the third quarter of 2000, more of our technology department
employees were working on revenue generating projects as opposed to internal
efforts. As such, more of their employment costs were captured in cost of
revenue and not in product development.
Marketing and advertising expenses decreased $2.5 million to approximately $10.0
million for the three months ended September 30, 2001 compared to $12.5 million
for the same period in 2000. Following the launch of our February 2000 national
advertising campaign, we continued our brand-building efforts, spending
significantly on advertising throughout the remainder of 2000 with combinations
of radio and television advertising. Comparatively, during the third quarter of
2001, we were able to decrease advertising spending because we were already
experiencing high consumer volume on our Website as a result of wider adoption
of on-line lending and higher consumer awareness of our brand. These factors,
along with lower interest rates, allowed us to reduce our overall advertising
spending by 20% while still growing our network revenue 95% in the third quarter
of 2001 compared to 2000.
Sales, general and administrative expenses decreased $3.4 million to $5.4
million for the three months ended September 30, 2001 from $8.8 million for the
same period in 2000. This decrease is primarily due to a $2.7 million non-cash
credit to compensation expense related to variable accounting treatment on the
underlying securities of the Chief Executive Officer`s promissory note. This
promissory note was amended in August of 2001 resulting in fixed accounting
treatment for the underlying securities going forward.
Additionally, through improved cost management, we have been able to reduce our
spending in certain areas, such as consulting fees and travel. These expenses
were lower in third quarter 2001 versus third quarter 2000 by approximately $0.7
million. Bad debt expenses were approximately $0.5 million lower. We have also
reduced our hiring efforts in 2001 and as a result, recruiting and relocation
expenses were approximately $0.4 million lower.
Partially offsetting these decreases were increases in amortization and
depreciation expenses. The amortization of intangible assets from an acquisition
made in August 2000 contributed to a $0.4 million increase. Depreciation
expenses increased $0.3 million from third quarter 2000 to third quarter 2001,
reflecting new equipment and software purchases.
INTEREST INCOME
Interest income consists of interest earned on cash and cash equivalents and
restricted and short-term investments. Interest income decreased to $0.2 million
in the three months ended September 30, 2001 from $0.5 million in the same
period in 2000. This decrease was primarily due to lower average interest
earning account balances in 2001 than in 2000.
16
INTEREST EXPENSE, FINANCING AND OTHER CHARGES
Interest expense, financing and other charges consists of bank service charges,
interest on capital leases and borrowings and other expenses related to our
credit facilities. The $0.5 million increase from third quarter 2000 to third
quarter 2001 is primarily due to $0.4 million of warrant and other charges
related to the termination of our ULLICO credit facility.
OTHER INFORMATION
For the three-month periods ended September 30, 2000 and September 30, 2001, net
losses included non-cash compensation charges (credits) of $0.6 million and
$(2.3) million, depreciation and amortization of $1.2 million and $2.0 million,
and miscellaneous and interest income (expense), net of $0.3 million and $(0.4)
million, respectively. Net losses excluding such items were $13.6 million and
$3.0 million for the three months ended September 30, 2000 and 2001,
respectively, a 78% decrease from quarter to quarter.
17
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2000
REVENUE
Total revenue was approximately $45.3 million in the nine months ended September
30, 2001, an increase of $24.1 million from $21.2 million reported in the same
period in 2000.
Network Revenue
For the nine months ended September 30, 2001 our total network revenue was
approximately $40.4 million, or 89% of total revenue, compared with
approximately $19.5 million, or 92% of total revenue, for the same period in
2000. As shown in the table below, this revenue growth reflects a substantial
increase across all products in the volume of discrete transmissions of
qualification forms to our lenders (a discrete qualification form can be
transmitted to more than one lender generating multiple transmission fees for
the same form) and in the amount of closed-loan revenue.
Nine Months Ending September 30, 2000 Nine Months Ending September 30, 2001
(in thousands)
Discrete Closed Loan Discrete Closed Loan
Transmission Transaction Transmission Transaction
Network Transactions - Revenue Volume Volume Revenue Volume Volume
Mortgage $ 8,037 217 10 $ 17,686 411 26
Home Equity 7,592 112 23 12,282 150 37
Auto, Personal, Credit Card 3,297 197 72 5,657 447 147
-------------- ------------ ------------- --------------- ------------- ------------
Subtotal Loan Transactions 18,926 526 105 35,625 1,008 210
-------------- ============ ============= --------------- ============= ============
All Other Network Fees
and Realty Services 580 4,772
-------------- ---------------
Total Network $ 19,506 $ 40,397
============== ===============
We primarily attribute the 92% increase in discrete transmission volume (from
approximately 526,000 discrete qualification forms in the nine months ended
September 30, 2000 to approximately 1,008,000 in the nine months ended September
30, 2001) to the growing adoption of on-line lending and the effectiveness of
our advertising which has increased and maintained consumer awareness of our
brand. Although we have demonstrated volume growth during both periods of rising
and falling interest rates, we believe that the lower interest rate environment
over the past year has also contributed to the increase in the number of
consumers applying for loans and refinancing existing debt.
The increase in closed-loan volume from 105,000 in the nine months ended
September 30, 2000 to 210,000 in the nine months ended September 30, 2001, a
100% increase, is due not only to the increased transmission volume, but also to
certain closed-loan initiatives which have allowed us to maintain a consistent
average closed loan rate across all products lines of approximately 11.4%. These
initiatives have enabled us to leverage on the greater volume of transmitted
qualification forms. Adding to the number and variety of lenders on our network
has allowed us to add capacity to handle more, as well as more types of, loan
requests through our network. At September 30, 2001 we had 128 participating
lenders on our network compared to 112 lenders at September 30, 2000.
Furthermore, there has been an increase in the number of lenders utilizing our
automation tools.
All other network revenue increased $4.2 million to $4.8 million for the nine
months ended September 30, 2001 compared to $0.6 million for the same period in
2000. This increase primarily reflects the addition of realty services to our
product offerings, generating approximately $3.4 million of revenue in 2001.
$0.8 million of the increase relates to an increase in revenue generated through
affinity partner transactions.
18
During the periods presented we generally charged a standard fee to all lenders
for mortgage and home equity transmissions and closed loans. Accordingly, the
volume increases noted above for these products contributed directly to the
increases in revenue. However, beginning in November of 2001 our revenue will be
impacted by a pricing change for our mortgage and home equity offerings. The
standard fee for a transmitted loan request on and after November 5, 2001 will
increase from $8.00 to $9.00 for both our mortgage and home equity products. The
standard fee for closed-loans will change beginning with those that originate
from qualification forms completed on and after November 5, 2001. For a closed
home equity loan the fee will increase from $250 to $275. The standard fee for a
closed mortgage loan will change from a flat $400 to a tiered structure with
fees ranging from $300 to $750.
The revenue for the auto, personal and credit card products is also driven by
increases in volume; however, the pricing for these products is not standard for
all lenders and therefore the revenue does not increase proportionately with the
volume increases from quarter to quarter. We do not currently have plans to
significantly change pricing arrangements for these products.
Lend-X Technology Revenue
Lend-X technology revenue totaled $4.9 million, or 11% of our revenue, for the
nine months ended September 30, 2001. This is an increase of $3.2 million over
the same period in 2000. The growth in Lend-X technology revenue in the nine
months ended September 30, 2001 is the result of several significant new
customizing, licensing and hosting contracts that have been entered into since
the third quarter of 2000. The new licensing and hosting contracts contain
certain upfront fees that are being recognized as revenue over their expected
service periods. For the nine months ended September 30, 2001, two customers
accounted for 42% and 29%, respectively, of our Lend-X technology revenue. For
the nine months ended September 30, 2000 one customer accounted for 70% of our
Lend-X technology revenue. Additionally, some of the Lend-X arrangements provide
for transactional revenue derived from volume from customers' sites that have
been enabled by our technology. The total of Lend-X technology and network
revenue derived from Lend-X partner sources was approximately $3.5 million and
$6.5 million, respectively, for the nine months ended September 30, 2000 and
2001.
GROSS PROFIT AND COST OF REVENUE
Gross profit of $34.9 million (77% of total revenue) for the nine months ended
September 30, 2001 was approximately $20.0 million higher than the same period
of 2000, which had gross profit of $14.9 million (70% of total revenue). The
improvement in gross profit and gross profit percentage is primarily due to the
substantial increase in closed-loan volume (as noted above). A significant
portion of our costs of revenue are fixed or volume-based related to the
transmission of the loan request and as such are incurred whether or not a loan
closes. Accordingly, our gross profits tend to increase when closed-loans
increase in a period. Additionally, for 2001, volume based credit-scoring fees
and network hosting fees did not increase in proportion to volume increases as a
result of negotiated vendor price reductions that lowered our monthly costs.
Total cost of revenue increased $4.1 million from $6.3 million in the first nine
months of 2000 to $10.4 million in the first nine months of 2001. This increase
is principally due to costs related to an increase in the volume of closed-loan
transactions such as consumer incentive and promotional costs.
Network Gross Profit and Cost of Revenue
For the nine months ending September 30, 2001, network gross profit was $31.1
million (77%) compared to $14.2 million (73%) for the same period in 2000.
Network cost of revenue increased $4.0 million from $5.3 million in 2000 to $9.3
million in 2001. $2.4 million of this increase is a result of the addition of
realty services to our product offerings in August 2000 and reflects incentives
and promotional payments made directly to consumers that closed a realty
transaction with a broker on our network. $0.9 million of this increase is
related to payments to consumers that requested and qualified for a credit card
and also closed a loan through our network of lenders and gift certificates
provided for closing a loan.
Other costs of revenue, principally personnel costs increased approximately $1.1
million reflecting increased staffing in our implementation and customer care
departments as a result of overall business growth, including the increase
resulting from the addition of realty services to our product offerings.
Although our volume has increased substantially in 2001 compared to
19
2000, a proportional increase in staffing was not necessary, as we have improved
efficiencies in our customer care processes.
Lend-X technology Gross Profit and Cost of Revenue
For the nine months ending September 30, 2001, Lend-X technology gross profit
was $3.8 million (78%) compared to $0.7 million (41%) for the same period in
2000. The increase in gross profit percentage is due to the fact that in the
prior year we were expending significant hours on a large fixed-price
customization contract, resulting in a low gross profit for the period.
Comparatively, in 2001, substantially all of our technology revenue was earned
from the recurring revenue recognition of certain upfront fees that are being
recognized over each of our contracts' expected service periods and from less
labor intensive customization projects, resulting in an significantly improved
gross profit for 2001.
Costs of revenue associated with Lend-X technology are principally employment
costs related to customizing and/or implementing Lend-X for partners, as well as
ongoing server costs related to hosting Lend-X for these partners. These costs
increased approximately $0.1 million from the nine months ended September 30,
2000 compared to the same period in 2001.
OPERATING EXPENSES
Product development expense was approximately $3.4 million for the nine months
ended September 30, 2001 and $2.1 million for the same period in 2000. Product
development costs consist of expenses incurred related to the ongoing efforts to
enhance and maintain the functionality of our Lend-X technology and our Website
and include compensation costs, purchased software and consulting costs. The
increase from 2000 to 2001 is principally related to higher staff levels in the
technology department resulting from the substantial recruiting efforts in
second and third quarter of 2000. Additionally in 2000, there were more
technology department employee costs captured in cost of revenue primarily
related to a significant fixed fee contract.
Marketing and advertising expenses decreased $16.6 million to approximately
$29.5 million for the nine months ended September 30, 2001 compared to $46.1
million for the same period in 2000. Following the launch of our February 2000
national advertising campaign, we continued our brand-building efforts, spending
significantly on advertising throughout the remainder of 2000 with combinations
of radio and television advertising. Comparatively, during 2001, we were able to
decrease advertising spending because we were already experiencing high consumer
volume on our Website as a result of a wider adoption of on-line lending and
higher consumer awareness of our brand. These factors, along with lower interest
rates allowed us to reduce our overall advertising spending by approximately 36%
from the nine months ending September 30, 2000 to the nine months ending
September 30, 2001, while revenue increased approximately 107% during the same
period.
Sales, general and administrative expenses increased to $25.9 million for the
nine months ended September 30, 2001 from $19.5 million for the same period in
2000. This increase is primarily a result of $3.8 million of higher employee
compensation and other related costs due to 2001 reflecting the full impact of
the people hired during 2000 (from 125 employees to 230 employees), reflecting
the overall growth in our business. $1.3 million of the increase is due to
non-cash compensation expenses related to net charges taken as a result of
variable accounting treatment on the underlying securities of our Chief
Executive Officer's promissory note. This promissory note was amended late in
August 2001 resulting in fixed accounting treatment for the underlying
securities going forward.
Additionally, the amortization of the intangible assets related to an
acquisition made in August 2000 contributed to $2.8 million of the increase.
Depreciation expenses increased $1.3 million from the nine months ended
September 30, 2000 compared to the nine months ending September 30, 2001,
reflecting new equipment and software purchases.
We have been able to reduce our spending in certain areas, such as consulting
and travel in the nine months ending September 2001 versus September 2000, by
approximately $1.5 million through improved cost management. Recruiting expenses
were approximately $0.4 million lower due to decreased hiring efforts in 2001
(we have the same number of people at September 30, 2001 that we had at December
31, 2000). Bad debt expenses were approximately $0.8 million lower due, in part,
to improved collection efforts and customer screening.
20
LOSS ON IMPAIRED INVESTMENT
In February 2000, we made a $2.5 million equity investment in a company
providing wholesale mortgage marketplace services for brokers and lenders over
the Internet. In December 2000, we determined that the carrying value of this
investment was impaired and we wrote the investment down to its estimated fair
value of $0.6 million, recording $1.9 million as a non-operating loss on
impaired investment. In June 2001, this company and another entered into a
merger agreement and received an additional investment of $9.5 million. We
determined that the value of our investment in this combined company was further
impaired based on our reduced ownership percentage of the combined company, the
financial condition of the combined company, the new investors having a
liquidation preference of two-times other investors, and the historical losses
from operations of both companies before the merger. Accordingly, we wrote down
the investment to its estimated fair value of $0.25 million, recording $0.35
million as a non-operating loss on impaired investment.
INTEREST INCOME
Interest income consists of interest earned on cash and cash equivalents and
restricted and short-term investments. Interest income decreased to $.5 million
in the nine months ended September 30, 2001 from $1.9 million in the same period
in 2000. This decrease was primarily due to lower average interest earning
account balances in 2001 than in 2000.
INTEREST EXPENSE, FINANCING AND OTHER CHARGES
Interest expense, financing and other charges consists of bank service charges,
interest on capital leases and borrowings and other expenses related to our
credit facilities. The increase from the nine months ended September 30, 2000 to
the nine months ended September 30, 2001 is primarily due to $0.4 million of
warrant and other charges related to the termination of our ULLICO credit
facility.
OTHER INFORMATION
For the nine months ended September 30, 2000 and September 30, 2001, net losses
included non-cash compensation charges of $1.6 million and $2.3 million,
depreciation and amortization of $1.5 million and $5.9 million, and
miscellaneous and interest income (expense), net of $1.7 million and $(0.5)
million, respectively. Net losses excluding such items were $49.7 million and
$15.7 million for the nine months ending September 30, 2000 and 2001,
respectively, a 68% decrease.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, LendingTree had approximately $11.3 million in cash,
cash equivalents, restricted short-term investments and short-term investments.
Management believes that these existing sources, the availability of existing
revolving credit facilities as well as cash generated from operations will be
sufficient to fund our operating and capital needs through 2002.
Although we have historically experienced significant revenue growth and we plan
to eliminate negative cash flows from future operations, the operating results
for future periods are subject to numerous uncertainties. There can be no
assurance that revenue growth will continue or that we will be able to achieve
or sustain profitability. Hence, our liquidity could be significantly affected.
However, if revenue does not grow as anticipated and if we are unable to
successfully raise sufficient additional funds through the equity line referred
to in footnote 4 to the Financial Statements above, or in another manner,
management would reduce discretionary operating expenditures, including
advertising and marketing and certain administrative and overhead costs. Failure
to generate sufficient revenue or to reduce costs as necessary could have a
material adverse effect on our ability to continue as a going concern and to
achieve our business objectives.
Additional financing may not be available when needed or, if available, such
financing may not be on terms favorable to us. If additional funds are raised
through the issuance of equity securities, our shareholders may experience
significant dilution.
On July 13, 2001, LendingTree and GE Capital Commercial Services, Inc. ("GE")
entered into a loan and security agreement and revolving credit note. Under
these arrangements, GE will provide a two-year senior revolving credit facility
of up to $15 million. The facility has a two-year term under which we have
pledged our accounts receivable. As of September 30, 2001, we had pledged
receivables of $4.3 million. Borrowings will be limited to 85% of the eligible
accounts receivable and will
21
bear interest at the prime rate. For purposes of computing interest, all
payments against borrowings are deemed received by GE three (3) business days
following receipt of such payments. We will also pay GE a fee equal to .115% of
the eligible accounts receivable arising during the term of the facility.
Eligible accounts receivable are subject to significant fluctuation period to
period. As of October 31, 2001, we had no borrowings outstanding under the GE
Credit facility. Our borrowings have principally been to fund advance purchases
of measured media advertising (cable television, network television and spot
radio) and also to fund our working capital needs. We were able to purchase
premium advertising programming and lock-in significant cost savings with this
advance purchase.
A covenant in one of our capital lease agreements requires that we maintain a
cash balance of not less than $3.0 million throughout the term of the lease. If
our cash balance falls below $3.0 million at the end of a period, we will be
required to collateralize the balance of the lease with cash. As of September
30, 2001, the balance of this lease was approximately $0.6 million.
On April 30, 2001, we received approximately $0.4 million, net of approximately
$52,000 of offering costs, from the issuance of 128,571 shares of Series A
Convertible Preferred Stock.
On March 20, 2001, we received approximately $11.9 million, net of approximately
$1.1 million of offering costs, from the issuance of 3,700,001 shares of Series
A Convertible Preferred Stock.
In March 2001, we entered into a common stock purchase agreement with Paul
Revere Capital Partners, Ltd. ("Paul Revere") for the potential future issuance
and sale of up to $24 million of our common stock. Under this arrangement, we,
at our sole discretion and during the term ending March 2003, may exercise up to
twenty-four monthly drawdowns under which Paul Revere is obligated to purchase a
certain number of shares of our common stock.
On September 29, 2000, we received $10 million from an affiliate of Capital Z,
our largest investor, in exchange for an Equity Rights Certificate. In
conjunction with the March 20, 2001, Series A Convertible Preferred Stock sale,
the Equity Rights Certificate was converted into 2,857,143 million shares of the
Series A Convertible Preferred Stock.
On August 2, 2000, we acquired certain assets and assumed certain liabilities
from another business. The consideration paid for the acquired assets consisted
of $6.2 million in cash and 639,077 shares of our common stock.
On February 15, 2000, we completed the sale of 4,197,500 shares of our common
stock at an initial public offering price of $12.00 per share, raising
approximately $44.9 million net of offering costs, underwriting discounts and
commissions.
Excluding our initial public offering, we have financed our operations primarily
through private placements of securities, raising over $85 million, net of
offering costs, since inception.
Restricted cash at September 30, 2001 of $8.9 million includes $8.6 million of
investments that are maintained in an escrow account that was established by us
and our advertising agency to maintain funds for non-cancelable and approved
expenditures and services of the advertising agency. Disbursements from the
escrow account can only be made for advertising expenditures we have approved in
advance.
INCOME TAXES
LendingTree has not generated taxable income for federal or state purposes to
date and therefore has not paid any federal or state income taxes since
inception. Utilization of our net operating loss carryforwards, which begin to
expire in 2011, may be subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended. We have provided a full valuation
allowance on the deferred tax asset, consisting primarily of net operating loss
carryforwards, due to the uncertainty regarding its realization.
FORWARD-LOOKING STATEMENTS AND CERTAIN RISKS
This quarterly report on Form 10-Q contains certain forward-looking statements
and information based on our beliefs as well as assumptions made by, and
information currently available to us. Many statements made in the 10-Q are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not
based on historical facts but are based on beliefs as well as assumptions made
by us and information
22
currently available to us. The words "expects", "anticipates", "estimates",
"intends", "believes", "plans" and similar expressions are intended to identify
forward-looking statements. These statements include, among others, those
relating to the growth of our sales, general and administrative spending in the
future; our ability to fund our operating and capital needs through 2002 with
our existing cash and cash equivalents, restricted short-term investments and
short-term investments, together with availability under our revolving credit
facilities; the impact of pricing changes on our revenue; the effect of interest
rates on our business; our continued revenue growth and its impact on our
liquidity; our plans to reduce negative cash flows in the future and our ability
to become cash flow positive after 2001. Our actual results could differ
materially from the results discussed in any of our forward-looking statements.
We are not undertaking to publicly update or revise any forward-looking
statement if we obtain new information or upon the occurrence of future events
or otherwise.
The forward-looking statements reflect our current views with respect to future
events and are subject to a number of risks, including, among others, the
following: risks related to our financial condition; risks related to our
markets and strategy; risks related to the Internet and our technology
infrastructure; risks related to legal and regulatory uncertainty and risks
related to our stock price and corporate control.
Risks related to our financial condition include the following: if we are unable
to obtain additional funds from other financings we may have to significantly
curtail the scope of our operations and alter our business model; our business
model is unproven and could fail; we have a history of losses and expect losses
for 2001; our limited operating history makes our business and prospects
difficult to evaluate; our operating results may be negatively impacted by
fluctuations in interest rates and substantially all of our assets are pledged
under existing revolving credit arrangements and capital lease obligations, and
we may be required to collateralize the balance of one of our capital leases
with cash.
Risks related to our markets and strategy include the following: our future
success is dependent upon increased acceptance of the Internet by consumers and
lenders as a medium for lending; lenders in our network are not precluded from
offering consumer credit products outside of our exchange; if our participating
lenders do not provide competitive levels of service to our consumers, our brand
will be harmed and our ability to attract consumers to our Website will be
limited; we may not be able to manage our expanding operations effectively; our
quarterly operating results are not an indication of our future results and the
guidance we provide to analysts may prove to be incorrect; if we are unable to
maintain our brand recognition, consumer and lender demand for our service may
dwindle; we cannot assure you that any acquisition we elect to make will be
successful; and our business could suffer if we lose the services of our Chief
Executive Officer.
Risks related to the Internet and our technology infrastructure include the
following: we may experience reduced visitor traffic, reduced revenue and harm
to our reputation in the event of unexpected network interruptions caused by
system failures; breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities; and failure to
protect our intellectual property rights could impair our ability to compete
effectively.
Risk related to legal and regulatory uncertainty include the following: failure
to comply with laws governing our service or material changes in the regulatory
environment relating to the Internet could have a material adverse effect on our
business; many states require us to obtain licenses to offer our products and we
have not obtained those licenses in every state; because some state regulations
impose filing obligations on some of our largest stockholders and customers, if
any of these parties fail to comply with these filing obligations, we may be
unable to obtain or maintain necessary licenses in these states for reasons
beyond our control; regulation of the Internet is unsettled, and future
regulations could inhibit the growth of the Internet, decrease the number of
visitors to our Website or otherwise materially adversely affect our business;
and we may be limited or restricted in the way we establish and maintain our
online relationships by laws generally applicable to our business.
Risks related to our stock price and corporate control include the following:
sales of substantial amounts of our common stock in the public market, including
shares issuable upon the conversion of shares of our Series A 8% convertible
preferred stock, could reduce the value of our current stockholders'
investments; the issuance of shares under our equity line of credit may cause
significant dilution to our shareholders and may have an adverse impact on the
market price of our common stock; holders of our recently issued our Series A 8%
convertible preferred stock have significantly greater rights and preferences
than our common stockholders; if our common stock price drops significantly, we
may be delisted from the Nasdaq National Market, which could eliminate the
trading market for our common stock; we may be unable to access all or part of
our equity line facility; it may be difficult for a third party to acquire us,
which could depress our stock price; and our executive officers and directors
and entities affiliated with them, whose interests may differ from other
stockholders, have the ability to exercise significant control over us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On July 13, 2001, LendingTree and GE entered into a loan and security agreement
and revolving credit note. Under these arrangements, borrowings will bear
interest at the prime rate. For purposes of computing interest, all payments
against borrowings are deemed received by GE three (3) business days following
receipt of such payments. As of November 13, 2001 the prime rate was 5.0% and we
had no borrowings outstanding under this facility. We currently believe that the
possibility of significant fluctuations in the prime rate is low and accordingly
the risk to us of material increases in interest expense on this facility is
also low. However, a 1.0% increase in the prime rate on average borrowings under
this facility of $2.0 million over the next twelve months would result in
additional interest expense of approximately $20,000 during that twelve months.
We currently hold no derivative instruments and do not earn foreign-sourced
income. All of our transactions occur in U.S. dollars and we do not have any
investments in foreign countries. Accordingly, changes in currency exchange
rates related to these types of transactions do not have a direct effect on our
financial position or results of operations.
We are subject to market risk under our preferred stock and officer pledge
agreements related to our recent financing transaction. These agreements expose
us to market risk, as dividends on our Series A Preferred Stock that are paid by
increasing the stated value will be recorded based on the fair value of the
underlying common stock into which the additional value is convertible. For the
three months and nine months ended September 30, 2001, we have recorded $0.1
million and $0.6 million, respectively of dividend charges related to the
changes in the fair value of our common stock underlying the Series A Preferred
Stock. If we continue to settle the dividend obligations by increasing the
stated value of the preferred stock and if the fair value of our common stock
were to increase $2.00 per quarter over the next twelve months, we would incur
additional fair-value dividend charges of approximately $3.4 million during that
twelve-month period.
Additionally, one of our credit facility agreements requires that a portion of
the quarterly interest payments be in the form of warrants. The amount of
interest expense that we will record will be based upon the estimated fair value
of the warrants on the date that they are issued. As of September 30, 2001, no
amounts had been borrowed under this facility and no warrant-based interest
charges had been incurred.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were previously named as one of a number of defendants in a putative class
action lawsuit originally filed on September 7, 2000 in California Superior
Court in Contra Costa, California. This action for injunctive relief and class
action restitution was filed under Cal. Bus. Prof. Code sections 17200 and
17500. The other defendants named in the action are Ohio Savings Bank, Costco
Wholesale Corp., Costco Financial Services Inc., First American Title Insurance
Company and First American Lenders Advantage. Given the costs and uncertainties
of protracted litigation and without admitting any wrong-doing or liability of
any kind, we recently settled this case for a nominal amount of money which did
not have a material effect on our financial condition, cash flows or results of
operations. The court recently approved the settlement.
In October of 2000, we were the subject of a routine examination conducted by
the New York State Banking Department ("NYSBD"). At the close of the
examination, during the exit interview and again by letter dated August 20,
2001, NYSBD examiners raised an issue as to whether we are obligated to make
certain mortgage broker disclosures to consumers under New York state law. We
believe that the NYSBD regulation which triggers the disclosures in question is
inapplicable to us and we worked with the NYSBD to resolve the issue. We have
subsequently agreed to provide certain disclosures requested by the NYSBD and,
based upon conversations with the NYSBD, to the best of our knowledge this
matter has now been resolved without a finding of a violation and without
imposition of fines or forfeitures against us.
On September 10, 2001, Block Financial Corporation ("Block") filed a complaint
in the United States District Court for the Western District of Missouri [Block
Financial Corporation v. LendingTree, Inc., Case Number 01-1007-CV-W-3], against
us, alleging that our financial card (credit card) qualification form processing
system infringes its U.S. Patent No. 6,014,645 entitled, "Real-Time Financial
Card Application System." Although we have not yet filed an answer to the
complaint, we believe that we have meritorious defenses to Block's claims and we
intend to vigorously defend ourselves in connection with this action. . The
complaint seeks both monetary and injunctive relief. As the lawsuit is in an
early stage, we cannot determine the effect, if any, on our results of
operations, financial position or cash flows.
We are involved in litigation from time to time that is routine in nature and
incidental to the conduct of our business. We believe that the outcome of any
such litigation would not have a material adverse effect on our financial
condition or the results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
NUMBER DESCRIPTION
------ -----------
10.1 LendingTree, Inc. 2001 Stock Incentive Plan dated August 23, 2001
10.2 Letter of Understanding between LendingTree, Inc. and Douglas R. Lebda
Dated September 24, 2001
10.3 Officer Grant Letter Between LendingTree, Inc. and Douglas R. Lebda
Dated September 28, 2001
10.4 LendingTree, Inc. Employee Stock Purchase Plan dated July 1, 2001
(b) REPORTS ON FORM 8-K:
On July 26, 2001, we filed a report on Form 8-K to report that LendingTree, Inc.
and GE Capital and Commercial Services, Inc. entered into a loan and security
agreement and revolving credit note, report on our second quarter 2001 financial
results and announce that we had accepted the resignation of a board member and
appointed a new director.
On September 13, 2001, we filed a report on Form 8-K to report that we had
announced results of a third-party brand tracking study. The study measured
Total Brand Awareness both nationally and within major metropolitan areas among
adults 19-54 for brands competing within the online lending market. The results
show the LendingTree brand enjoys 59% Total Brand Awareness among adults
nationwide, and that Total Brand Awareness among frequent Internet users in
major metropolitan markets is 70%.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LENDINGTREE, INC.
Date: November 14, 2001 By: /s/ Keith B. Hall
----------------- -------------------------------------
Keith B. Hall, Senior Vice President,
Chief Financial Officer and Treasurer
26
2001 STOCK INCENTIVE PLAN
OF LENDINGTREE, INC.
(REVISED AUGUST 23, 2001)
1. PURPOSE AND TYPES OF AWARDS
The purpose of the 2001 Stock Incentive Plan of LendingTree, Inc. (the
"Plan") is to promote the long-term growth and profitability of LendingTree,
Inc. (the "Company") by (i) providing key people with incentives to improve
stockholder value and to contribute to the growth and financial success of the
Company, and (ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility.
The Plan permits the granting of Options (including Incentive Stock
Options), Restricted Stock, Phantom Stock Units, Stock Bonuses and Other
Stock-Based Awards.
2. DEFINITIONS
Under the Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" shall mean any entity, whether now or hereafter
existing, that controls, is controlled by, or is under common
control with, the Company (including, but not limited to,
joint ventures, limited liability companies, and
partnerships). For this purpose, "control" shall mean
ownership of 50% or more of the voting power of the entity.
(b) "Award" shall mean any Option, Restricted Stock, Phantom Stock
Unit, Stock Bonus or Other Award granted under the Plan.
(c) "Award Agreement" shall mean a written agreement between the
Company and a Grantee memorializing the terms and conditions
of an Award granted pursuant to the Plan.
(d) "Board" shall mean the board of directors of the Company.
(e) "Cause" shall mean, unless the Grantee is a party to a written
employment agreement with the Company or an affiliate which
contains a definition of "cause," "termination for cause" or
any other similar term or phrase, in which case "Cause" shall
have the meaning set forth in such agreement: (i) any
substantiated act by the Grantee involving dishonesty or bad
faith against the Company or an affiliate, or any act or
omission that demonstrates a lack of integrity of Grantee with
respect to the Company or an affiliate; (ii) the Grantee
engaging in acts or omissions that demonstrably and materially
injure the business and affairs of the Company or an
affiliate, monetarily or otherwise; (iii) a breach or
threatened breach by the Grantee of any non-competition or
confidentiality agreement entered into between Grantee and the
Company or its affiliate; (iv) the chronic use of alcohol,
drugs or other similar substances affecting the Grantee's work
performance; or (v) the Grantee being convicted of, or
pleading guilty or no lo contendere to, or being indicted for
a felony or other crime involving theft, fraud or moral
turpitude. The good faith determination by the Committee of
whether a Grantee's employment or service relationship was
terminated by the Company for `Cause' shall be final and
binding for all purposes hereunder.
1
(f) "Change in Control" shall mean (i) the acquisition by any
Person of shares of the Company's stock representing more than
50.0% of the total voting power of the Company; (ii) the
following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for
election by the Company's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors on
the date hereof or whose appointment, election or nomination
for election was previously so approved or recommended; (iii)
any merger, share exchange, consolidation or other
reorganization or business combination in which the Company is
not the surviving or continuing corporation or in which the
Company's stockholders do not control greater than 50.0% of
the voting power of the surviving or continuing corporation,
or in which the Company's stockholders become entitled to
receive cash, securities of the Company other than voting
common stock, or securities of another issuer; or (v) the
stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 50.0% of the combined voting power of the voting
securities of which are owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.
(g) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder.
(h) "Committee" shall mean the Board or committee of Board members
appointed pursuant to Section 3 to administer the Plan.
(i) "Common Stock" shall mean shares of the Company's common
stock, par value one cent ($0.01) per share.
(j) "Disability" shall mean the inability to engage in any
substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than
twelve months. The Committee may require such proof of
Disability as the Committee in its sole discretion deems
appropriate and the Committee's determination as to whether
Grantee is Disabled shall be final and binding on all parties
concerned.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(l) "Fair Market Value" of a share of the Common Stock for any
purpose on a particular date shall be determined in a manner
such as the Committee shall in good faith determine to be
appropriate; provided, however, that in the case of Incentive
Stock Options, the determination of Fair Market Value shall be
made by the Committee in good faith in conformance with the
Treasury Regulations under Section 422 of the Code.
2
(m) "Grant Date" shall mean the date on which the Committee
formally acts to grant an Award to a Grantee or such other
date as the Committee shall so designate at the time of taking
such formal action.
(n) "Grantee" shall mean a person granted an Award pursuant to the
Plan.
(o) "Incentive Stock Option" shall mean an Option that is an
'Incentive Stock Option' within the meaning of Section 422 of
the Code, or any successor provision, and that is designated
by the Committee as an Incentive Stock Option.
(p) "Issue Date" shall mean the date established by the Committee
on which certificates representing Restricted Stock shall be
issued by the Company pursuant to the terms of Section 7(a).
(q) "Non-Qualified Option" shall mean an Option other than an
Incentive Stock Option.
(r) "Option" shall mean an option to purchase Common Stock granted
pursuant to Section 6.
(s) "Other Stock-Based Award" shall mean an award granted pursuant
to Section 10.
(t) "Outside Director" shall mean each Director who is not an
employee or executive officer of the Company.
(u) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of 'parent
corporation' provided in Section 424(e) of the Code, or any
successor thereto of similar import.
(v) "Performance Goals" shall mean performance goals determined by
the Committee in its sole discretion. Such goals may be based
on one or more or none of the following criteria: (i) pre-tax
income or after-tax income, (ii) operating profit, (iii)
return on equity, assets, capital or investment, (iv) earnings
or book value per share, (v) sales or revenues, (vi) operating
expenses, (vii) Common Stock price appreciation; (viii)
implementation or completion of critical projects or
processes; (ix) increase in the volume of qualification forms
completed or submitted, which goals may be expressed in terms
of absolute numbers and/or as a percentage increase; (x)
comparison of actual performance during a performance period
against budget for such period; (xi) increase in the number of
loans closed, which increase may be measured by type(s) of
loan or in the aggregate; (xii) growth of revenue, which
growth may be expressed in terms of absolute numbers and/or as
a percentage increase; or (xiii) reductions in expenses, which
reductions may be expressed in terms of absolute numbers
and/or as a percentage decrease; provided that with respect to
clauses (xi) through (xiii), such achievement may be measured
against budget for the same period. Where applicable, the
Performance Goals may be expressed in terms of attaining a
specified level of the particular criteria or the attainment
of a percentage increase or decrease in the particular
criteria, and may be applied to one or more of the Company, a
Subsidiary or Affiliate, or a division or strategic business
unit of the Company, or may be applied to the performance of
the Company relative to a market index, a group of other
companies or a combination thereof, all as determined by the
Committee. The Performance Goals may include a threshold level
of performance below which no vesting will occur, levels of
performance at which specified vesting will occur, and a
maximum level of performance at which full vesting will occur.
Each of the foregoing Performance Goals shall be determined in
accordance with generally accepted
3
accounting principles and shall be subject to certification by
the Committee; provided that the Committee shall have the
authority to make equitable adjustments to the Performance
Goals in recognition of unusual or non-recurring events
affecting the Company or any Subsidiary or Affiliate or the
financial statements of the Company or any Subsidiary or
Affiliate in response to changes in applicable laws or
regulations, or to account for items of gain, loss or expense
determined to be extraordinary or unusual in nature or
infrequent in occurrence or related to the disposal of a
segment of a business or related to a change in accounting
principles.
(w) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include: (i)
the Company or any of its subsidiaries; (ii) a trustee or
other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates; (iii) an
underwriter temporarily holding securities pursuant to an
offering of such securities; or (iv) a corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company.
(x) "Phantom Stock" shall mean the right, granted pursuant to
Section 8, to receive in cash or shares the Fair Market Value
of a share of Common Stock.
(y) "Restricted Stock" shall mean a share of Common Stock which is
granted pursuant to the terms of Section 7 and which is
subject to the restrictions set forth in Section 7(c).
(z) "Retirement" shall mean termination of a Grantee's employment
or service, other than for Cause, on or after attainment of
age 65.
(aa) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the
Exchange Act on the effective date of the Plan, or any
successor provision prescribing conditions necessary to exempt
the issuance of securities under the Plan (and further
transactions in such securities) from Section 16(b) of the
Exchange Act.
(bb) "Stock Bonus" shall mean a bonus payable in shares of Company
Stock granted pursuant to Section 9.
(cc) "Subsidiary" and "Subsidiaries" shall mean only a corporation
or corporations, whether now or hereafter existing, within the
meaning of the definition of `subsidiary corporation' provided
in Section 424(f) of the Code, or any successor thereto of
similar import.
(dd) "Ten Percent Stockholder" shall mean a Grantee who owns
(within the meaning of Section 422(b)(6) of the Code, after
the application of the attribution rules in Section 424(d) of
the Code) more than 10% of the total combined voting power of
all classes of shares of the Company, or its Parent or
Subsidiary corporations.
(ee) "Vesting Date" shall mean the date established by the
Committee on which Restricted Stock or Phantom Stock may vest.
3. ADMINISTRATION
(a) Procedure. The Plan shall be administered by the Board. In the
alternative, the Board may appoint a Committee consisting of not less than two
members of the Board to administer the Plan on
4
behalf of the Board, subject to such terms and conditions as the Board may
prescribe. The members of the Committee shall be both "non-employee directors"
within the meaning of Rule 16b-3 and, to the extent that the Board has resolved
to take actions necessary to enable compensation arising with respect to Awards
under the Plan to constitute performance-based compensation for purposes of
Section 162(m) of the Code, "outside directors" within the meaning of Section
162(m) of the Code. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. The Board or the Committee may delegate to
senior management of the Company authority to make grants of Awards to employees
of the Company who are not executive officers or directors of the Company. From
time to time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and, thereafter, directly administer the Plan. In
the event that the Board is the administrator of the Plan in lieu of a
Committee, the term "Committee" as used herein shall be deemed to mean the
Board.
The Committee shall meet at such times and places and upon such notice
as it may determine. A majority of the Committee shall constitute a quorum. Any
acts by the Committee may be taken at any meeting at which a quorum is present
and shall be by majority vote of those members entitled to vote. Additionally,
any acts reduced to writing or approved in writing by all of the members of the
Committee shall be valid acts of the Committee.
Members of the Board or the Committee who are either eligible for
Awards or have been granted Awards may vote on any matters affecting the
administration of the Plan or the grant of Awards pursuant to the Plan, except
that no such member shall act upon the granting of an Award to himself or
herself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board or the Committee during which action is taken
with respect to the granting of an Award to him or her.
(b) Powers of the Committee. The Committee shall have all the powers
vested in it by the terms of the Plan, such powers to include authority, in its
sole and absolute discretion, to grant Awards under the Plan, prescribe Award
Agreements evidencing such Awards and establish programs for granting Awards.
The Committee shall have full power and authority to take all other actions
necessary to carry out the purpose and intent of the Plan, including, but not
limited to, the authority to:
(i) determine the eligible persons to whom, and the time or times
at which, Awards shall be granted;
(ii) determine the types of Awards to be granted;
(iii) determine the number of shares to be covered by each Award;
(iv) impose such terms, limitations, restrictions and conditions
upon any such Award as the Committee shall deem appropriate;
(v) modify, extend or renew outstanding Awards, accept the
surrender of outstanding Awards and substitute new Awards;
(vi) accelerate or otherwise change the time in which an Award may
be exercised or become payable and to waive or accelerate the
lapse, in whole or in part, of any restriction or condition
with respect to such Award, including, but not limited to, any
restriction or condition with respect to the vesting or
exercisability of an Award following termination of any
Grantee's employment or service; and
5
(vii) to establish objectives and conditions, if any, for earning
the grant of an Award.
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and for the conduct of its
business as the Committee deems necessary or advisable and to interpret same,
all within the Committee's sole and absolute discretion.
(c) Limited Liability. To the maximum extent permitted by law, no
member of the Board or Committee shall be liable for any action taken or
decision made in good faith relating to the Plan or any Award thereunder.
(d) Indemnification. To the maximum extent permitted by law and the
Company's charter or by-laws, the members of the Board and Committee shall be
indemnified by the Company in respect of all their activities under the Plan.
(e) Effect of Committee's Decision. All actions taken and decisions and
determinations made by the Committee on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Committee's sole
and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Company, its stockholders, any participants in the Plan
and any other employee of the Company, and their respective successors in
interest.
4. SHARES AVAILABLE FOR THE PLAN
Subject to adjustments as provided in Section 13, the shares of stock
that may be delivered or purchased with respect to Awards granted under the
Plan, including with respect to Incentive Stock Options intended to qualify
under Section 422 of the Code, shall not exceed an aggregate of 4,000,000 shares
of Common Stock of the Company. The Company shall reserve such number of shares
for Awards under the Plan, subject to adjustments as provided below. No
executive officer of the Company shall receive Awards within any 12-month period
covering more than 4,000,000 shares of Common Stock If any Award, or portion of
an Award, under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or canceled
as to any shares without the delivery of shares of Common Stock or other
consideration, the shares subject to such Award shall thereafter be shares with
respect to which further Awards may be granted under the Plan.
In the event that the Committee shall determine that any
reclassification, recapitalization, stock split, dividend or other distribution
(whether in the form of cash, stock or other property), combination, merger,
consolidation, spin-off, share exchange, repurchase or other similar corporate
transaction or event affects the Common Stock such that an adjustment is
appropriate in order to prevent dilution or enlargement of the rights of
Grantees under the Plan, the maximum number and kind of shares reserved for
issuance or with respect to which Awards may be granted under the Plan shall be
adjusted to reflect such event, and the Committee shall make such adjustments as
it deems appropriate and equitable in the number, kind and price of shares
covered by outstanding Awards previously granted under the Plan, and in any
other matters which relate to Awards and which are affected by the changes in
the Common Stock referred to above; provided, however, that with respect to
Incentive Stock Options, such adjustment shall be made in accordance with
Section 424(h) of the Code.
The Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in the
preceding paragraph of this Section 4) affecting the Company, or the financial
statements of the Company or any Subsidiary, or of changes in applicable laws,
regulations, or accounting
6
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan.
5. PARTICIPATION
Participation in the Plan shall be open to all employees, directors,
officers and consultants of the Company, or of any Affiliate of the Company, as
may be selected by the Committee from time to time. Notwithstanding the
foregoing, participation in the Plan with respect to grants of Incentive Stock
Options shall be limited to employees of the Company or of any Parent or
Subsidiary of the Company.
Awards may be granted to such eligible persons and for such number of
shares of Common Stock as the Committee shall determine, subject to the
limitations in Section 4. A grant of any type of Award made in any one year to
an eligible person shall neither guarantee nor preclude a further grant of that
or any other type of Award to such person in that year or subsequent years.
6. STOCK OPTIONS
Subject to the other applicable provisions of the Plan, the Committee
may from time to time grant to eligible participants Awards of Incentive Stock
Options or Non-Qualified Stock Options. In addition to such terms and conditions
as may not inconsistent with the terms of the Plan and shall be set forth in the
applicable Award Agreement, Options shall be subject to the following terms and
conditions.
(a) Grant of Option. The grant of an Option shall be evidenced by a
Award Agreement, executed by the Company and the Grantee, stating the number of
shares of Common Stock subject to the Option evidenced thereby and the terms and
conditions of such Option, in such form as the Committee may from time to time
determine.
(b) Price. The price per share payable upon the exercise of each Option
("exercise price") shall be determined by the Committee in its discretion;
provided, however, that in the case of Incentive Stock Options, the exercise
price shall not be less than 100% of the Fair Market Value of a share of Common
Stock on the Grant Date.
(c) Term and Exercisability. Unless otherwise determined by the
Committee at the time of grant, the term of each Option shall be no longer than
10 years from the Grant Date; provided, however, that in the case of Incentive
Stock Options, the term of such option shall not exceed 10 years from the Grant
Date. Unless earlier terminated pursuant to the provisions of the Plan or the
Award Agreement, each Option shall become vested in accordance with the vesting
schedule specified in the Award Agreement, which vesting schedule shall be
determined by the Committee in its discretion.
(d) Payment. Options may be exercised in whole or in part by payment of
the exercise price of the shares to be acquired in accordance with the
provisions of the Award Agreement, or such rules and regulations as the
Committee may have prescribed, or such determinations, orders, or decisions as
the Committee may have made. Payment may be made by one or a combination of the
following methods: (i) in cash (or cash equivalents acceptable to the
Committee); (ii) the surrender of previously acquired shares of Common Stock
having a Fair Market Value less than or equal to the aggregate exercise price,
which shares shall have been held by the Grantee for at least six months prior
to the date of such surrender; (iii) if so determined by the Committee as of the
Grant Date and set forth in the applicable Award Agreement, authorization for
the Company to withhold a number of shares otherwise payable pursuant to the
exercise of an Option having a Fair market Value less than or equal to the
aggregate exercise price; or (iv) by delivery of a properly executed exercise
notice, together with irrevocable instructions: (1) to a brokerage firm
designated by the Grantee and approved by the Company to deliver
7
promptly to the Company the aggregate amount of sale or loan proceeds to pay the
exercise price and any withholding tax obligations that may arise in connection
with the exercise, and (2) to the Company to deliver the certificates for such
purchased shares directly to such brokerage firm. The Committee may, in its sole
discretion, authorize the Company to make or guarantee loans to Grantees to
assist Grantees in exercising Options.
(e) Exercise of Options Following Termination of Employment or Service
Relationship. Subject to Section 6(f) (with respect to Incentive Stock Options)
and unless otherwise determined by the Committee in its discretion, Options
shall be subject to the following conditions with respect to their
post-termination exercisability.
(i) Following Termination of Employment or Service
Relationship for Reasons Other Than Death, Disability
or Retirement. Unless otherwise determined by the
Committee in its sole discretion, the vested portion
of any then outstanding Option held by such Grantee
shall remain exercisable for 90 days after the date
the Grantee is no longer employed by, nor in a
service relationship with, the Company and its
affiliates for any reason other than the Grantee's
death, Disability, or Retirement, following which
period the Option shall terminate. Notwithstanding
the foregoing, a Grantee's Options shall terminate in
their entirety, whether or not vested, upon
termination of the employment or service relationship
of the Grantee by the Company or an affiliate for
Cause.
(ii) Following Grantee's Death. Unless otherwise
determined by the Committee in its sole discretion,
following a Grantee's death such Grantee's executor,
personal representative, or the person to whom an
Option shall have been transferred by will or the
laws of descent and distribution, as the case may be,
may exercise the vested portion of any then
outstanding Option transferred to such individual for
one year; provided, that the Committee may, in its
sole discretion, provide that an Option granted to a
non-employee director may remain exercisable
following such director's death for up to three years
if so determined by the Committee as of the Grant
Date and set forth in the applicable Award Agreement.
(iii) Following Termination of Employment or Service
Relationship by Reason of Disability or Retirement.
Unless otherwise determined by the Committee in its
sole discretion, in the event that a Grantee ceases,
by reason of Disability or Retirement, to be an
employee of or in a service relationship with the
Company or an Affiliate, the vested portion of an
outstanding Option then held by such Grantee may be
exercised in whole or in part at any time within one
year after the date of Disability or Retirement, as
the case may be, following which period the Option
shall terminate.
(iv) Notwithstanding anything to the contrary in the Plan,
no Option shall remain exercisable beyond the
original term of such Option, as stated in the Award
Agreement evidencing such Option.
(f) Restrictions on Incentive Stock Options. Incentive Stock Options
granted under the Plan shall comply in all respects with Section 422 of the Code
and, as such, shall meet the following additional requirements:
(i) Designation. No Option shall be an Incentive Stock
Option unless so designated by the Committee at the
time of grant in the Award Agreement.
8
(ii) Exercise Price and Term. The exercise price per share
of an Incentive Stock Option shall be not less than
100% of the Fair Market Value of a share of Common
Stock on the Grant Date, and the term of such Option
shall not exceed ten years; provided, however, that
the exercise price of any Incentive Stock Option
granted to a Ten Percent Stockholder shall be not
less than 110% of the Fair Market Value of the Common
Stock on the Grant Date, and the term of such Option
shall not exceed five years.
(iii) Limitation on Shares. The aggregate Fair Market Value
(determined as of the Grant Date) of shares of Common
Stock with respect to which any Incentive Stock
Options first become exercisable by a Grantee in any
calendar year under this or any other plan of the
Company and its Parent and Subsidiary corporations
may not exceed $100,000 or such other amount as may
be permitted from time to time under Section 422 of
the Code. To the extent that such aggregate Fair
Market Value shall exceed $100,000, or other
applicable amount, such Options shall be treated as
Non-Qualified Stock Options. In such case, the
Company may designate the shares of Common Stock that
are to be treated as stock acquired pursuant to the
exercise of an Incentive Stock Option by issuing a
separate certificate for such shares and identifying
the certificate as Incentive Stock Option shares in
the stock transfer records of the Company.
(iv) Grantee. Incentive Stock Options shall only be issued
to employees of the Company, or of a Parent or
Subsidiary of the Company.
(v) Tandem Awards Prohibited. An Incentive Stock Option
may not be granted in tandem with any other Award in
such a manner that the exercise of one affects a
Grantee's right under the other.
(vi) Post-Termination Exercisability.
(1) In the event that the employment of a
Grantee with the Company and its Affiliates
is terminated for Cause, all outstanding
Incentive Stock Options held by such
Grantee, whether or not vested, shall be
immediately forfeited and cancelled as of
the effective date of such termination.
(2) In the event that the employment of a
Grantee with the Company and its Affiliates
is terminated due to such Grantee's
Disability, all outstanding Incentive Stock
Options held by such Grantee (or such
Grantee's beneficiary, if applicable) may be
exercised, to the extent exercisable at the
effective date of such termination, for a
period not to exceed one year following the
effective date of such termination.
(3) In the event that the employment of a
Grantee is terminated for any other reason,
all outstanding Incentive Stock Options held
by such Grantee may be exercised, to the
extent exercisable at the effective date of
such termination, for a period not to exceed
three months following the effective date of
such termination.
9
(g) Outside Director Program. Outside Directors shall be entitled to
grants of Options under the terms and conditions set forth in this Section 6(g)
and otherwise in accordance with the terms and conditions of the Plan.
(i) Identification of Options. Each Option granted under
this Section 6(g) shall be designated a Non-Qualified
Stock Option in the Award Agreement evidencing such
Option.
(ii) Grant Upon Election or Appointment. As of the date of
the initial election or appointment to the Board of
an Outside Director who is a beneficial owner or
represents an organization that is a beneficial owner
(as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) of less than five percent
(5%) of the combined voting power of the Company
(such date, the "Initial Grant Date"), such Director
shall be granted, without further action on the part
of the Board or the Committee, an Option to purchase
a number of whole shares of Common Stock calculated
by dividing $66,000 by one-third of the Grant Value
of the Common Stock, calculated as of the Initial
Grant Date and rounded to the nearest whole share.
(iii) Annual Grants. Immediately following each annual
meeting of the Company's stockholders (the "Annual
Grant Date"), each Outside Director then serving
shall be granted, without further action on the part
of the Board or the Committee, an Option to purchase
a number of whole shares of Common Stock, calculated
by dividing $22,000 by one-third of the Grant Value
of the Common Stock, calculated as of such date and
rounded to the nearest whole share; provided,
however, that each such Director shall, prior to the
Annual Grant Date, be given the opportunity to make
the election provided for in Section 6(g)(vi).
(iv) For purposes of Section 6, "Grant Value" means (a) if
the Common Stock is then traded on any national
securities exchange or any automated quotation
system, the average closing price rounded to three
(3) decimal places of the Common Stock for the five
(5) trading days immediately preceding the Initial
Grant Date and/or the Annual Grant Date, as
applicable, or (b) if the Common Stock is not then
traded on any national securities exchange or any
automated quotation system, the per share Fair Market
Value of the Common Stock.
(v) Term and Exercise of Options.
(1) Each Option granted under this Section 6(g)
shall have a term of ten years.
(2) Each Option granted under this Section 6(g)
shall become cumulatively exercisable with
respect to twenty-five percent (25%) of the
shares covered thereby on each of the
following dates: (1) the date which is three
months following the Initial Grant Date or
Annual Grant Date, as applicable; (2) the
date which is six months following the
Initial Grant Date or Annual Grant Date, as
applicable; (3) the date which is nine
months following the Initial Grant Date or
Annual Grant Date, as applicable; and (4)
the first anniversary of the Initial Grant
Date or Annual Grant Date, as applicable.
10
(3) Each Option granted under this Section 6(g)
may be exercised, in whole or in part, with
respect to whole shares of Common Stock, to
the extent then exercisable.
(4) Each Option granted under this Section 6(g)
shall be exercised by delivering notice to
the Company's principal office, to the
attention of its Secretary. Such notice
shall be accompanied by the applicable Award
Agreement, shall specify the number of whole
shares of Common Stock with respect to which
the Option is being exercised and the
effective date of the proposed exercise and
shall be signed by the Grantee or other
person then having the right to exercise the
Option. The methods of payment with respect
to the exercise price of Options granted
under this Section 6(g) shall be consistent
with Section 6(d).
(vi) Annual Grant Election. Prior to the Annual Grant
Date, each Outside Director may elect, subject to his
or her receiving the grant provided in Section
6(g)(iii), to receive as of the Annual Grant Date, in
lieu of the Option described in Section 6(g)(iii), a
grant of a number of shares of Restricted Stock
calculated by dividing $22,000 by the Grant Value of
the Common Stock as of the Annual Grant Date. The
Award Agreement evidencing such grant of Restricted
Stock shall provide that the restrictions (as
determined in accordance with Section 7) applicable
to such Award shall cumulatively lapse with respect
to twenty-five percent (25%) of the shares covered
thereby on each of the following dates: (1) the date
which is three months following the Annual Grant
Date; (2) the date which is six months following the
Annual Grant Date; (3) the date which is nine months
following the Annual Grant Date; and (4) the first
anniversary of the Annual Grant Date.
(h) Exercise Prior to Vesting. The Committee may in its sole discretion
provide at the time of grant of any Option that the Grantee may elect at any
time during both (1) the term of such Option and (2) the period during which
such Grantee is employed by or providing services to the Company or any of its
Affiliates, that the Grantee may exercise all or any portion of such Option,
including the unvested portion of such Option; provided, however, that
(i) a partial exercise of such Option shall be deemed to
cover first vested shares and then the earliest
vesting installment of unvested shares;
(ii) any shares so purchased from installments which have
not vested as of the date of exercise shall be
subject to a repurchase option in favor of the
Company, the terms of which shall be set forth in the
Award Agreement evidencing such Option;
(iii) the Grantee shall enter into a form of Early Exercise
Stock Purchase Agreement with a vesting schedule that
will result in the same vesting as if no early
exercise had occurred; and
(iv) if such Option is an Incentive Stock Option, then,
the maximum vesting provisions of Section 6(f)(iii)
shall continue to apply with respect to such shares.
11
(i) Restrictions on Transfer. The Committee may in its sole discretion
provide at the time of grant of any Option that, upon its exercise, the shares
of Common Stock to be issued to the Grantee shall be subject to such
restrictions on transfer as the Committee may determine are advisable.
7. RESTRICTED STOCK
(a) Issue Date and Vesting Date. At the time of the grant of an Award
of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates
and a Vesting Date or Vesting Dates with respect to such shares. The Committee
may divide such shares into classes and assign a different Issue Date and/or
Vesting Date for each class. If the Grantee is employed by or providing services
to the Company on an Issue Date (which may be the Grant Date), the specified
number of shares of Restricted Stock shall be issued in accordance with the
provisions of Section 7(e). Provided that all conditions to the vesting of a
share of Restricted Stock imposed pursuant to Section 7(b) are satisfied, and
except as provided in Section 7(g), upon the occurrence of the Vesting Date with
respect to a share of Restricted Stock, such share shall vest and the
restrictions of Section 7(c) shall lapse.
(b) Conditions to Vesting. At the time of the grant of shares of
Restricted Stock, the Committee may impose such restrictions or conditions to
the vesting of such shares as it, in its absolute discretion, deems appropriate.
(c) Restrictions on Transfer Prior to Vesting. Prior to the vesting of
a share of Restricted Stock, no transfer of a Grantee's rights with respect to
such share, whether voluntary or involuntary, by operation of law or otherwise,
shall be permitted. Immediately upon any attempt to transfer such rights, such
share, and all of the rights related thereto, shall be forfeited by the Grantee.
(d) Dividends on Restricted Stock. The Committee in its discretion may
require that any dividends paid on shares of Restricted Stock be held in escrow
until all restrictions on such shares have lapsed.
(e) Issuance of Certificates.
(i) Reasonably promptly after the Issue Date with respect
to shares of Restricted Stock, the Company shall
cause to be issued a stock certificate, registered in
the name of the Grantee to whom such shares were
granted, evidencing such shares; provided, that the
Company shall not cause such a stock certificate to
be issued unless it has received a stock power duly
endorsed in blank with respect to such shares. Each
such stock certificate shall bear the following
legend:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE
SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE
RESTRICTIONS, TERMS AND CONDITIONS (INCLUDING
FORFEITURE PROVISIONS AND RESTRICTIONS AGAINST
TRANSFER) CONTAINED IN THE 2001 STOCK INCENTIVE PLAN
OF LENDINGTREE, INC. AND AN AGREEMENT ENTERED INTO
BETWEEN THE REGISTERED OWNER OF SUCH SHARES AND THE
COMPANY. A COPY OF THE PLAN AND AGREEMENT IS ON FILE
IN THE OFFICE OF THE SECRETARY OF THE COMPANY, 11115
RUSHMORE DRIVE, CHARLOTTE, NC 28277.
Such legend shall not be removed until such shares
vest pursuant to the terms hereof.
12
(ii) Each certificate issued pursuant to this Section
7(e), together with the stock powers relating to the
shares of Restricted Stock evidenced by such
certificate, shall be held by the Company unless the
Committee determines otherwise.
(f) Consequences of Vesting. Upon the vesting of a share of Restricted
Stock pursuant to the terms hereof, the restrictions of Section 7(c) shall lapse
with respect to such share. Reasonably promptly after a share of Restricted
Stock vests, the Company shall cause to be delivered to the Grantee to whom such
shares were granted, a certificate evidencing such share, free of the legend set
forth in Section 7(e).
(g) Effect of Termination of Employment. Subject to such other
provision as the Committee may set forth in the applicable Agreement, and to the
Committee's amendment authority pursuant to Section 15, upon the termination of
a Grantee's employment for any reason, any and all shares to which restrictions
on transferability apply shall be immediately forfeited by the Grantee and
transferred to, and reacquired by, the Company. In the event of a forfeiture of
shares pursuant to this Section 7(g), the Company shall repay to the Grantee (or
the Grantee's estate) any amount paid by the Grantee for such shares. In the
event that the Company requires a return of shares, it shall also have the right
to require the return of all dividends paid on such shares, whether by
termination of any escrow arrangement under which such dividends are held or
otherwise.
(h) Special Provisions Regarding Restricted Stock. Notwithstanding
anything to the contrary contained herein, Restricted Stock granted pursuant to
this Section 7 may be based on the attainment of Performance Goals. Such shares
of Restricted Stock shall be released from restrictions only after the
attainment of such Performance Goals has been certified by the Committee.
8. PHANTOM STOCK
(a) Vesting Date. At the time of the grant of shares of Phantom Stock,
the Committee shall establish a Vesting Date or Vesting Dates with respect to
such shares. The Committee may divide such shares into classes and assign a
different Vesting Date for each class. Provided that all conditions to the
vesting of a share of Phantom Stock imposed pursuant to Section 8(c) are
satisfied, and except as provided in Section 8(d), upon the occurrence of the
Vesting Date with respect to a share of Phantom Stock, such share shall vest.
(b) Benefit Upon Vesting. Upon the vesting of a share of Phantom Stock,
the Grantee shall be entitled to receive, within 30 days of the date on which
such share vests, an amount, in cash and/or shares of Common Stock, as
determined by the Committee, equal to the sum of (i) the Fair Market Value of a
share of Common Stock on the date on which such share of Phantom Stock vests and
(ii) the aggregate amount of cash dividends paid with respect to a share of
Common Stock during the period commencing on the date on which the share of
Phantom Stock was granted and terminating on the date on which such share vests.
(c) Conditions to Vesting. At the time of the grant of shares of
Phantom Stock, the Committee may impose such restrictions or conditions to the
vesting of such shares as it, in its absolute discretion, deems appropriate.
(d) Effect of Termination of Employment. Subject to such other
provision as the Committee may set forth in the applicable Agreement, and to the
Committee's amendment authority pursuant to Section 15, shares of Phantom Stock
that have not vested, together with any dividends credited on such shares, shall
be forfeited upon the Grantee's termination of employment for any reason.
13
(e) Special Provisions Regarding Awards. Notwithstanding anything to
the contrary contained herein, the vesting of Phantom Stock granted pursuant to
this Section 8 may be based on the attainment by the Company of one or more
Performance Goals. No payment in respect of any such Phantom Stock award will be
paid until the attainment of the respective Performance Goals have been
certified by the Committee.
9. STOCK BONUSES
In the event that the Committee grants a Stock Bonus, a certificate for
the shares of Common Stock comprising such Stock Bonus shall be issued in the
name of the Grantee to whom such Award was granted and delivered to such Grantee
as soon as practicable after the date on which such Stock Bonus is payable.
10. OTHER STOCK-BASED AWARDS
Other forms of Awards ("Other Stock-Based Awards") valued in whole or
in part by reference to, or otherwise based on, Common Stock may be granted
either alone or in addition to other Awards under the Plan. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to
determine the persons to whom and the time or times at which such Other
Stock-Based Awards shall be granted, the number of shares of Common Stock to be
granted pursuant to such Other Stock-Based Awards and all other conditions of
such Other Stock-Based Awards.
11. WITHHOLDING OF TAXES
The Company may require, as a condition to the exercise of any Option
under the Plan or the delivery of certificates for shares issued or payments of
cash to a Grantee pursuant to the Plan or an Award Agreement (hereinafter
collectively referred to as a "taxable event"), that the Grantee pay to the
Company in cash any federal, state or local taxes of any kind required by law to
be withheld with respect to any taxable event under the Plan. The Company, to
the extent permitted or required by law, shall have the right to deduct from any
payment of any kind (including salary or bonus) otherwise due to a Grantee any
federal, state or local taxes of any kind required by law to be withheld with
respect to any taxable event under the Plan, or to retain or sell without notice
a sufficient number of the shares to be issued to such Grantee to cover any such
taxes. If shares of Common Stock are to be withheld by the Company from shares
of Common Stock otherwise to be issued upon the exercise of an Option or in
satisfaction or settlement of any Award, for purposes of satisfying withholding
tax obligations, the number of shares to be so withheld shall be calculated
using the minimum statutory withholding rates for federal and state tax
purposes, including payroll taxes, that are applicable to the taxable event then
applicable to such Award. The Committee may, in its sole discretion, authorize
the Company to make or guarantee loans to Grantees to assist Grantees in
satisfying such withholding obligation.
12. TRANSFERABILITY
Except as otherwise determined by the Committee, and in any event in
the case of an Incentive Stock Option, no Award granted under the Plan shall be
transferable by a Grantee otherwise than by will or the laws of descent and
distribution. Unless otherwise determined by the Committee in accord with the
provisions of the immediately preceding sentence, an Option may be exercised
during the lifetime of the Grantee, only by the Grantee or, during the period
the Grantee is under a legal disability, by the Grantee's guardian or legal
representative.
14
13. CHANGE IN CONTROL
In the event of a Change in Control, 50% of the time-vesting portion of
any outstanding Award (i.e., that portion of an Award that vests or becomes
exercisable only through the passage of time and is not subject to any
Performance Goal) that is not then vested and/or exercisable shall become
immediately vested and/or exercisable. In addition to the acceleration provided
for in the immediately preceding sentence, the Committee may, in its sole
discretion, provide that all or any part of the remaining portion of an
outstanding Award that is not then vested and/or exercisable shall become
immediately vested and/or exercisable.
14. TERMINATION AND MODIFICATION OF THE PLAN
The Board, without further approval of the stockholders, may modify or
terminate the Plan or any portion thereof at any time, except that no
modification shall become effective without prior approval of the stockholders
of the Company if stockholder approval is necessary to comply with any tax or
regulatory requirement or rule of any exchange or listing or quotation system
established by the National Association of Securities Dealers, Inc. ("NASDAQ
System") upon which the Common Stock is listed or quoted; including for this
purpose stockholder approval that is required to enable the Committee to grant
Incentive Stock Options pursuant to the Plan or to qualify compensation paid
under the plan as "performance based compensation" within the meaning of Section
162(m) of the Code.
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Company or
that may be authorized or made desirable by such laws. The Committee may amend
or modify any outstanding Award in any manner to the extent that the Committee
would have had the authority to make such Award as so modified or amended.
15. NON-GUARANTEE OF EMPLOYMENT OR SERVICE
Nothing in the Plan or in any Award Agreement thereunder shall confer
any right on an employee, director, or consultant to continue in the employ or
service of the Company or shall interfere in any way with the right of the
Company to terminate an employee or sever any service relationship of an
individual at any time.
16. TERMINATION OF EMPLOYMENT
For purposes of maintaining a Grantee's continuous status as an
employee and accrual of rights under any Award granted pursuant to the Plan,
transfer of an employee among the Company and the Company's affiliates shall not
be considered a termination of employment with the employer.
17. WRITTEN AGREEMENT
Each Award Agreement entered into between the Company and a Grantee
with respect to an Award granted under the Plan shall incorporate the terms of
this Plan and shall contain such provisions, consistent with the provisions of
the Plan, as may be established by the Committee.
18. NON-UNIFORM DETERMINATIONS
The Committee's determinations under the Plan (including without
limitation determinations of the persons to receive Awards, the form, amount and
timing of such Awards, the terms and provisions of such Awards and the
agreements evidencing same) need not be uniform and may be made by it
15
selectively among persons who receive, or are eligible to receive, Awards under
the Plan, whether or not such persons are similarly situated.
19. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of Common Stock
pursuant to Awards granted under the Plan will be used for general corporate
purposes.
20. LISTING AND REGISTRATION
If the Company determines that the listing, registration or
qualification upon any securities exchange or upon any NASDAQ System or under
any law, of shares subject to any Award is necessary or desirable as a condition
of, or in connection with, the granting of same or the issue or purchase of
shares thereunder, no such Award may be exercised in whole or in part, unless
such listing, registration or qualification is effected free of any conditions
not acceptable to the Company.
21. COMPLIANCE WITH SECURITIES LAW
Common Stock shall not be issued with respect to an Award granted under
the Plan unless the issuance and delivery of share certificates for such Common
Stock pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any
national securities exchange or NASDAQ System upon which the Common Stock may
then be listed or quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance to the extent such
approval is sought by the Committee. All certificates for Common Stock delivered
under the Plan pursuant to any Award or the exercise thereof shall be subject to
such stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations, and other requirements of
the Securities and Exchange Commission, any stock exchange or NASDAQ System upon
which such securities are then listed or quoted, and any applicable Federal or
state laws, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
22. NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS
Nothing contained in the Plan shall prevent the Company or its Parent
or any of its Subsidiaries from adopting or continuing in effect other
compensation arrangements (whether such arrangements be generally applicable or
applicable only in specific cases) as the Committee in its discretion determines
desirable, including without limitation the granting of stock-based incentive
awards otherwise than under the Plan.
23. NO TRUST OR FUND CREATED
Neither the Plan nor any Award shall create or be construed to create a
trust or separate fund of any kind or a fiduciary relationship between the
Company and a Grantee or any other person. To the extent that any Grantee or
other person acquires a right to receive payments from the Company pursuant to
an Award, such right shall be no greater than the right of any unsecured general
creditor of the Company.
16
24. GOVERNING LAW
The validity, construction and effect of the Plan, of Award Agreements
entered into pursuant to the Plan, and of any rules, regulations, determinations
or decisions made by the Board or Committee relating to the Plan or such Award
Agreements, and the rights of any and all persons having or claiming to have any
interest therein or thereunder, shall be determined exclusively in accordance
with applicable federal laws and the laws of the State of North Carolina,
without regard to its conflict of laws rules and principles.
25. PLAN SUBJECT TO CHARTER AND BY-LAWS
This Plan is subject to the Charter and By-Laws of the Company, as they
may be amended from time to time.
26. EFFECTIVE DATE; TERMINATION DATE
The Plan, as amended and restated, is effective as of the date on which
the Plan is approved by the Board, or such other date as the Board may specify
as the effective date, subject to approval of the stockholders within twelve
months before or after such date. No Award shall be granted under the Plan after
the close of business on the day immediately preceding the tenth anniversary of
the effective date of the Plan. Subject to other applicable provisions of the
Plan, all Awards made under the Plan prior to such termination of the Plan shall
remain in effect until such Awards have been satisfied or terminated in
accordance with the Plan and the terms of such Awards.
17
[LendingTree Letterhead]
September 24, 2001
Douglas R. Lebda
11115 Rushmore Drive
Charlotte, NC 28277
Re: Company Loans
Dear Sir:
We refer to (i) the Amended and Restated Promissory Note,
dated as of August 14, 2001 (as amended, modified and supplemented from time to
time, the "Note") by Douglas R. Lebda in favor of LendingTree, Inc. (the
"Company"), and (ii) the Amended and Restated Pledge Agreement, dated as of
August 14, 2001 (as amended, modified and supplemented from time to time, the
"Pledge Agreement") among Mr. Lebda and the Company. Capitalized terms used
herein and not defined herein shall have the meanings given to such terms in the
Note and the Pledge Agreement, as applicable.
The Company and Mr. Lebda desire hereby to correct a
computational error in the stated principal amount of the Loan evidenced by the
Note and secured by the provisions of the Pledge Agreement. Notwithstanding any
provisions to the contrary in either the Note or the Pledge Agreement, the
undersigned hereby agree and acknowledge the principal amount of the Loan, as of
August 14, 2001, to be $2,528,219 (the "Corrected Principal Amount"). All
references to the principal amount of the Loan in Note and the Pledge Agreement
shall be deemed to refer to the Corrected Principal Amount. The undersigned
further agree that the principal payment due on the June 30, 2006 shall be in
the amount of $878,220 and that Schedule 1 to the Note is deemed to be so
modified.
This letter shall be governed by, and construed in accordance
with, the internal laws of the State of New York. This letter, together with the
Note and the Pledge Agreement, is intended by the parties as the final
expression of their agreement regarding the subject matter hereof and as a
complete and exclusive statement of the terms and conditions of such agreement.
This letter may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts together shall
constitute one and the same instrument. Delivery of an executed counterpart of a
signature page of this letter by facsimile transmission shall be as effective as
delivery of a manually signed counterpart hereof.
If the foregoing correctly sets forth our understanding,
please indicate your acceptance of the terms hereof by signing in the
appropriate spaces below and returning to us the enclosed duplicate originals
hereof, whereupon this letter agreement shall become a binding agreement among
us.
Very truly yours,
LENDINGTREE, INC.
By:____________________________
Name:
Title:
ACKNOWLEDGED, CONSENTED AND AGREED:
DOUGLAS R. LEBDA
___________________________________
2
September 28, 2001
Douglas R. Lebda
11115 Rushmore Drive
Charlotte, NC 28277
Re: Grant
Dear Douglas:
In consideration for your valuable service in the position of
chief executive officer, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agree to the following:
LendingTree, Inc. (the "Company") shall, on the date hereof,
grant to you an amount equal to $432,000. The grant shall consist of (a) an
immediate grant of shares of common stock of the Company in the amount of
$136,630 (35,405 shares at the current valuation of $3.859 per share, based on
the average market price of the stock for the 5 trading day period ending
September 28, 2001) plus $79,370 in cash; and (b) $216,000 in cash payable in
equal installments payable on April 15, 2002 and May 30, 2002. The Company shall
withhold the cash portion of the grant for payment of all federal, state, local
and foreign taxes assessed or to be assessed in connection with such grant.
Please indicate your acceptance of the terms hereof by signing
below and returning this letter to us.
Very truly yours,
LENDINGTREE, INC.
By:/s/ Keith B. Hall
----------------------------------
Name: Keith B. Hall
Title: Senior Vice President and CFO
By: /s/ Robert Spass
--------------------------------
Name: Robert Spass
Title: Director and Chairman of
Compensation Committee
ACKNOWLEDGED, CONSENTED AND AGREED:
DOUGLAS R. LEBDA
/s/ Douglas R. Lebda
---------------------------
2
LENDINGTREE, INC.
EMPLOYEE STOCK PURCHASE PLAN
Amended and Restated Effective as of July 1, 2001
1. Purpose. The LendingTree, Inc. Employee Stock Purchase Plan, as
amended and restated (the "Plan"), is established for the benefit of employees
of LendingTree, Inc., a Delaware corporation, and its Designated Subsidiaries.
The Plan is intended to provide the employees of the Employer with an
opportunity to purchase shares of common stock of the Company. It is the
intention of the Company that the Plan qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Internal Revenue Code, and the
provisions of the Plan shall be construed in a manner consistent with the
requirements of the Internal Revenue Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Capitalization" shall mean any increase, reduction, or
change or exchange of Shares for a different number or kind of shares or other
securities of the Company by reason of a reclassification, recapitalization,
merger, consolidation, reorganization, Share dividend, Share split or reverse
Share split, combination or exchange of Shares, repurchase of Shares, change in
corporate structure or otherwise.
(c) "Change in Control" of the Company shall be deemed to occur upon
the first to occur of the following: (i) the acquisition by any Person of shares
of the Company's stock representing more than fifty percent (50%) of the total
voting power of the Company; (ii) the following individuals cease for any reason
to constitute a majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was previously
so approved or recommended; (iii) any merger, share exchange, consolidation or
other reorganization or business combination in which the Company is not the
surviving or continuing corporation or in which the Company's stockholders do
not control greater than fifty percent (50%) of the voting power of the
surviving or continuing corporation, or in which the Company's stockholders
become entitled to receive cash, securities of the Company other than voting
common stock, or securities of another issuer; or (iv) the stockholders of the
Company approve a plan of complete liquidation or dissolution of the Company or
there is consummated an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the Company's assets
to an entity, at least fifty percent (50%) of the combined voting power of the
voting securities of which are
owned by stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. A reference to a particular section of the Code shall include
reference to any regulations issued under the section and to the corresponding
section of any subsequently enacted federal revenue law.
(e) "Committee" shall mean the Compensation Committee or any other
committee of members of the Board appointed by the Board to administer the Plan
and to perform the functions set forth herein.
(f) "Company" shall mean LendingTree, Inc., a corporation organized
under the laws of the State of Delaware, or any successor corporation.
(g) "Compensation" shall mean the fixed salary, wages, commissions,
overtime pay and bonuses paid by an Employer to an Employee as reported by the
Employer to the United States government for Federal income tax purposes,
including an Employee's portion of any compensation deferral contributed on the
Employee's behalf to a plan described in Section 401(k) of the Code, any amount
excludable pursuant to Section 125 of the Code and any compensation deferral
made under a non-qualified deferred compensation plan, but excluding any foreign
service allowance, severance pay, expense reimbursement or any credit or benefit
under any employee plan maintained by the Employer (other than those described
above).
(h) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Employee's Employer, if such leave is for a
continuous period of not more than ninety (90) days or, if longer, re-employment
upon the expiration of such leave is guaranteed by contract or statute.
(i) "Designated Subsidiary" shall mean (1) any wholly-owned Subsidiary
of the Company, or (2) any Subsidiary of the Company that the Board designates
from time to time in its sole discretion as eligible to participate in the Plan,
which may include any corporation that becomes a Subsidiary of the Company after
the adoption of the Plan.
(j) "Employee" shall mean any person, including an officer, who as of
an Offering Date has been regularly employed on a full-time basis by the Company
or a Designated Subsidiary of the Company for at least six (6) months; provided,
however, that any individual who is employed on a full-time basis as of the
first Offering Date under the Plan shall be entitled to participate in the first
Offering Period under the Plan.
(k) "Employer" shall mean, as to any particular Employee, the
corporation which employs such Employee, whether it is the Company or a
Designated Subsidiary of the Company.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2
(m) "Exercise Date" shall mean the last business day of each Purchase
Period, except as the Committee may otherwise provide.
(n) "Fair Market Value" per Share as of a particular date shall mean
(i) the closing sales price per Share on such date, as reported by the Composite
Transactions reporting system or if not so reported, as reported by the New York
Stock Exchange or (ii) in the event the Shares are not traded on such date, the
closing price per Share, as so reported in the immediately preceding date on
which trading occurred, or if not so reported, as reported by any national
securities exchange on which the Shares are listed.
(o) "Offering Date" shall mean the first Trading Day of each Offering
Period of the Plan. The Offering Date of an Offering Period is the grant date
for the options offered in such Offering Period.
(p) "Offering Period" shall mean a period as described in Section 4
hereof.
(q) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an option, each of the corporations other than the Company owns shares
possessing fifty percent (50%) or more of the total combined voting power of all
classes of shares in one of the other corporations in such chain.
(r) "Participant" shall mean an Employee who participates in the Plan.
(s) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
(t) "Plan" shall mean the LendingTree, Inc. Employee Stock Purchase
Plan, as amended and restated, and as may be further amended from time to time.
(u) "Plan Year" shall mean the calendar year, except that the first
Plan Year shall begin the date the Company's registration statement filed in
connection with the initial public offering is declared effective by the
Securities and Exchange Commission and shall end on the next December 31.
(v) "Purchase Period" shall mean each approximately six-month period,
within an Offering Period, commencing on the Trading Day next following the last
previous Exercise Date in such Offering Period and ending with the next Exercise
Date in such Offering Period, except that the first Purchase Period of any
Offering Period shall commence on the first Trading Day of such Offering Period
and end with the next Exercise Date.
(w) "Share" shall mean a share of the common stock, par value $.01 per
share, of the Company.
3
(x) "Subsidiary" shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
granting an option, each of the corporations other than the last corporation in
the unbroken chain owns shares possessing fifty percent (50%) or more of the
total combined voting power of all classes of shares in one of the other
corporations in such chain.
(y) "Trading Day" shall mean a day on which national stock exchanges
and the NASDAQ system are open for trading.
3. Eligibility.
(a) Subject to the requirements of subsection (b) hereof, any person
who is an Employee as of an Offering Date shall be eligible to participate in
the Plan and be granted an option for the Offering Period commencing on such
Offering Date.
(b) Notwithstanding any provisions of the Plan to the contrary, no
Employee shall be granted an option under the Plan to the extent that:
(i) immediately after the grant, such Employee (or any other
person whose stock would be attributed to such Employee pursuant to
Section 424(d) of the Code) would own stock and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the
Company or of any Subsidiary or Parent of the Company, or
(ii) such Employee's right to purchase stock under all
employee stock purchase plans of the Company and any Subsidiary or
Parent of the Company, including this Plan, accrues at a rate which
exceeds twenty-five thousand dollars ($25,000) of the Fair Market Value
of such stock for any calendar year in which such option would be
outstanding at any time. For purposes of this limit, the Fair Market
Value of the stock shall be determined at the Offering Date on which
the option is granted.
Any amounts received from an Employee which cannot be used to purchase Shares
under this Plan as a result of these limitations will be returned as soon as
possible to the Employee without interest.
4. Offering Periods. The Plan shall be implemented by a series of
consecutive, overlapping Offering Periods. The first such Offering Period shall
commence on the first Trading Day on or following July 1, 2000 and shall end on
the last Trading Day on or before December 31, 2001. Unless otherwise determined
by the Committee, Offering Periods commencing on the first Trading Day on or
after January 1, 2001 and July 1, 2001 shall have a duration of two (2) years.
Thereafter, unless otherwise determined by the Committee, each subsequent
Offering Period shall have a duration of eighteen (18) months, commencing on the
first Trading Day on or after January 1 or July of each year. The Plan shall
continue until terminated in accordance with Section 19 hereof. Subject to
Section 19 hereof, the Committee shall have the power to change the duration
and/or the frequency of Offering Periods and/or Purchase Periods with respect to
future offerings and shall use its best efforts to notify Employees of any such
change at least fifteen (15) days prior to the scheduled beginning of the
4
first Offering Period to be affected. In no event shall any option granted
hereunder be exercisable more than twenty-seven (27) months from its date of
grant.
To the extent permitted by any applicable laws, regulations, or stock
exchange rules, if the Fair Market Value of the Shares on any Exercise Date in
an Offering Period is lower than the Fair Market Value of the Shares on the
Offering Date of such Offering Period, then all Participants in such Offering
Period shall be automatically withdrawn from such Offering Period immediately
after the exercise of their option on such Exercise Date and automatically
re-enrolled in the immediately following Offering Period as of the first day
thereof.
5. Participation; Grant of Option; Price.
(a) Each eligible Employee may elect to become a Participant in the
Plan with respect to an Offering Period, by filing a subscription agreement with
his or her Employer authorizing payroll deductions in accordance with Section 6
hereof and filing it with the Company or the Employer in accordance with the
form's instructions at least ten (10) business days prior to the applicable
Offering Date, unless a later time for filing the subscription agreement is set
by the Committee for all Employees with respect to a given offering. Such
authorization will remain in effect for subsequent Offering Periods, until
modified or terminated by the Participant by giving written notice to his or her
Employer prior to the next occurring Exercise Date. Additionally, a Participant
may participate to a greater extent by authorizing reinvestment of dividends on
the Shares held in his or her account (by giving written notice to the
Company).
(b) On each Offering Date, the Company shall commence an Offering
Period by granting to a Participant an option to purchase on each Exercise Date
during the Offering Period a number of Shares determined by dividing the amounts
credited to the Participant's account (as described in Sections 6 and 10) by the
applicable option exercise price (as described in Section 5(c)). However, in no
event may a Participant be permitted to purchase more than 25,000 Shares during
each Purchase Period or more than 25,000 Shares during any calendar year. Such
limits shall be subject to adjustment pursuant to Section 17. Options shall also
be subject to the limitations set forth in Sections 3(b)(ii) and 11(a). Each
option shall be exercisable only on the Exercise Date. The option shall expire
on the last day of the Offering Period.
(c) The option price per Share during an offering shall be eighty-five
percent (85%) of the Fair Market Value of a Share on (i) the Offering Date or
(ii) the Exercise Date, whichever is lower.
6. Payroll Deductions.
(a) Subject to Section 5(a) hereof, a Participant may, in accordance
with rules and procedures adopted by the Committee, authorize a payroll
deduction of any whole percentage from one percent (1%) to twenty percent (20%)
of such Participant's Compensation each pay period (the permissible range within
such percentages to be determined by the Committee from time to time). All
payroll deductions made by a Participant shall be credited to such Participant's
account under the Plan. Participants may not make contributions to their
accounts other than through payroll deduction.
5
(b) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a Participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such Participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the Participant as provided in Section 9 hereof.
(c) If a Participant withdraws from the Plan as provided in Section 9,
his or her payroll deductions will terminate for the Purchase Period in which
such withdrawal occurs. A Participant may increase or decrease the rate of his
or her payroll deductions not more than once each Purchase Period by completing
and filing with the Employer a new subscription agreement authorizing a change
in payroll deduction rate. The Committee may, in its discretion, limit the
number of rate changes by a Participant during an Offering Period. A change in
rate shall be effective as of the next payroll period following the date of
filing of the new subscription agreement.
7. Exercise of Option.
(a) Unless a Participant withdraws from the Plan as provided in Section
9 hereof, or unless the Committee otherwise provides, such Participant's
election to purchase Shares shall be exercised automatically on the Exercise
Date, and the maximum number of Shares (including any fractional Share) subject
to such option will be purchased for such Participant at the applicable option
price with (i) the accumulated payroll deductions and (ii) cash dividends paid
on Shares which have been credited to the Participant's account under the Plan
pursuant to Section 10 hereof.
(b) Any cash balance remaining in a Participant's account after the
termination of an Offering Period will be carried forward to purchase Shares
during the next Offering Period if the Participant has elected to continue to
participate in the Plan. If the Participant has not elected to continue to
participate in the Plan, the Participant will receive a cash payment equal to
the cash balance of his or her account.
(c) The Shares purchased upon exercise of an option hereunder shall be
credited to the Participant's account under the Plan as of the Exercise Date and
shall be deemed to be transferred to the Participant on such date (except that
no Shares purchased during the first Offering Period hereunder shall be credited
to the Participant's account until payment of the aggregate option price has
been completed within the Offering Period). Except as otherwise provided herein,
the Participant shall have all rights of a shareholder with respect to such
Shares upon their being credited to the Participant's account.
8. Delivery of Shares.
(a) As promptly as practicable after receipt by the Company of a
written request for withdrawal of Shares from any Participant, the Company shall
arrange the delivery to such Participant of a share certificate representing the
Shares in the Participant's account which the Participant requests to withdraw
(any fractional Share being paid in cash). Subject to Section 8(b) hereof,
withdrawals may be made no more frequently than once each Offering Period.
6
Shares received upon share dividends or share splits shall be treated as having
been purchased on the Exercise Date of the Shares to which they relate.
(b) Notwithstanding anything in Section 8(a) hereof to the contrary,
Shares may be withdrawn by a Participant more than once during an Offering
Period under the following circumstances: (i) within sixty (60) days following a
Change in Control of the Company or (ii) upon the approval of the Committee, in
its sole discretion.
9. Withdrawal; Termination of Employment.
(a) A Participant may withdraw at any time all, but not less than all,
cash amounts in his or her account under the Plan that have not been used to
purchase Shares (including, without limitation, the payroll deductions and cash
dividends credited to such Participant's account) by giving written notice to
the Company prior to the next occurring Exercise Date. All such payroll
deductions and cash dividends credited to such Participant's account shall be
paid to such Participant promptly after receipt of such Participant's notice of
withdrawal and such Participant's option for the Offering Period in which the
withdrawal occurs shall be automatically terminated. No further payroll
deductions for the purchase of Shares will be made for such Participant during
such Offering Period, and any additional cash dividends during the Offering
Period shall be distributed to the Participant.
(b) Upon termination of a Participant's Continuous Status as an
Employee during the Offering Period for any reason, including voluntary
termination, retirement or death, the payroll deductions and cash dividends
credited to such Participant's account that have not been used to purchase
Shares (and, as to the first Offering Period, any such amounts credited to the
account for partial payment for Shares as to which payment has not been
completed) shall be returned (and any future cash dividends shall be
distributed) to such Participant or, in the case of such Participant's death, to
the person or persons entitled thereto under Section 13 hereof, and such
Participant's option will be automatically terminated.
(c) A Participant's withdrawal from an offering will not have any
effect upon such Participant's eligibility to participate in a succeeding
Offering Period or in any similar plan which may hereafter be adopted by the
Company.
10. Dividends and Interest.
(a) Cash dividends paid on Shares held in a Participant's account shall
be credited to such Participant's account and used in addition to payroll
deductions to purchase Shares on the Exercise Date. Dividends paid in Shares or
share splits of the Shares shall be credited to the accounts of Participants.
Dividends paid in property other than cash or Shares shall be distributed to
Participants as soon as practicable.
(b) No interest shall accrue on or be payable with respect to the
payroll deductions or cash dividends credited to a Participant's account under
the Plan.
7
11. Shares.
(a) Subject to adjustment as provided in Section 17 hereof, the maximum
number of Shares which shall be reserved for sale under the Plan shall be
444,500 Shares, plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2001 equal to the lesser of (i) 400,000
Shares or (ii) a lesser amount determined by the Committee. Such Shares shall be
either authorized and unissued Shares or Shares which have been reacquired by
the Company. If the total number of Shares which would otherwise be subject to
options granted pursuant to Section 5(b) hereof on an Offering Date exceeds the
number of Shares then available under the Plan (after deduction of all Shares
for which options have been exercised or are then outstanding), the Committee
shall make a pro rata allocation of the Shares remaining available for option
grant in as uniform a manner as shall be practicable and as it shall determine
to be equitable. In such event, the Committee shall give written notice to each
Participant of such reduction of the number of option Shares affected thereby
and shall similarly reduce the rate of payroll deductions, if necessary.
(b) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or, at the election of the
Participant, in the name of the Participant and another person as joint tenants
with rights of survivorship.
(c) For shares acquired in Offering Periods commencing after January 1,
2002, a Participant may not sell or otherwise dispose of his or her interest in
shares acquired under the Plan for at least one (1) year from the Exercise Date
on which such shares were acquired.
12. Administration. The Plan shall be administered by the Committee,
and the Committee may select administrator(s) to whom its duties and
responsibilities hereunder may be delegated. The Committee shall have full power
and authority, subject to the provisions of the Plan, to promulgate such rules
and regulations as it deems necessary for the proper administration of the Plan,
to interpret the provisions and supervise the administration of the Plan, and to
take all action in connection therewith or in relation thereto as it deems
necessary or advisable. Any decision reduced to writing and signed by a majority
of the members of the Committee shall be fully effective as if it had been made
at a meeting duly held. Except as otherwise provided by the Committee, each
Employer shall be charged with all expenses incurred in the administration of
the Plan with respect to such Employer's Employees. No member of the Committee
shall be personally liable for any action, determination, or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully indemnified by the Company with respect to any such action,
determination or interpretation. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, the Participant (or any person claiming any rights under
the Plan from or through any Participant) and any shareholder.
13. Designation of Beneficiary.
(a) A Participant may file with the Company, on forms supplied by the
Company, a written designation of a beneficiary who is to receive any Shares and
cash remaining in such Participant's account under the Plan in the event of the
Participant's death.
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(b) Such designation of a beneficiary may be changed by the Participant
at any time by written notice to the Company, on forms supplied by the Company.
In the event of the death of a Participant and in the absence of a beneficiary
who has been validly designated under the Plan and who is living at the time of
such Participant's death, the Company shall deliver such Shares and/or cash to
the executor or administrator of the estate of the Participant or, if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant in
accordance with the applicable laws of descent and distribution, or if no
spouse, dependent or relative is known to the Company, then to such other person
as the Company may designate.
14. Transferability. Neither payroll deductions, dividends or dividend
reinvestments credited to a Participant's account nor any rights with regard to
the exercise of an option or to receive Shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way by the Participant
(other than by will, the laws of descent and distribution or as provided in
Section 13 hereof). Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may treat such act
as an election to withdraw funds in accordance with Section 9 hereof.
15. Use of Funds. All payroll deductions, dividends or dividend
reinvestments received or held by the Company under the Plan may be used by the
Company for any corporate purpose, and the Company shall not be obligated to
segregate such funds.
16. Reports. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to Participants as
soon as practicable following each Offering Period, which statements will set
forth the amounts of payroll deductions, dividends and dividend reinvestments,
the per Share purchase price, the number of Shares purchased, the aggregate
Shares in the Participant's account and the remaining cash balance, if any.
17. Effect of Certain Changes. In the event of a Change in
Capitalization or the distribution of an extraordinary dividend, the Committee
shall conclusively determine the appropriate equitable adjustments, if any, to
be made under the Plan, including without limitation adjustments to the number
of Shares which have been authorized for issuance under the Plan but have not
yet been placed under option, as well as the price per Share covered by each
option under the Plan which has not yet been exercised. In the event of a Change
in Control of the Company, the Offering Period shall terminate unless otherwise
provided by the Committee.
18. Term of Plan. Subject to the Board's right to discontinue the Plan
pursuant to Section 19 hereof, the Plan (and its last Offering Period) shall
terminate on the tenth anniversary of the commencement of the first Offering
Period. Upon any discontinuance of the Plan, unless the Committee shall
determine otherwise, any assets remaining in the Participants' accounts under
the Plan shall be delivered to the respective Participant (or the Participant's
legal representative) as soon as practicable.
19. Amendment to and Discontinuance of Plan. The Board may at any time
amend, suspend or discontinue the Plan. Except as provided in Section 17 hereof,
no such suspension or discontinuance may adversely affect options previously
granted and no amendment may make
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any change in any option theretofore granted which adversely affects the rights
of any Participant which accrued prior to the date of effectiveness of such
amendment without the consent of such Participant. No amendment shall be
effective unless it receives the requisite approval of the shareholders of the
Company if such shareholder approval of such amendment is required to comply
with Rule 16b-3 under the Exchange Act or Section 423 of the Code or to comply
with any other applicable law, regulation or stock exchange rule.
20. Notices. All notices or other communications by a Participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Regulations and Other Approvals; Governing Law.
(a) This Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of Delaware
without giving effect to the choice of law principles of any jurisdiction,
except to the extent that such law is preempted by federal law.
(b) The obligation of the Company to sell or deliver Shares with
respect to options granted under the Plan shall be subject to all applicable
laws, rules and regulations, including all applicable federal and state
securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(c) To the extent applicable hereto, the Plan is intended to comply
with Rule 16b-3 under the Exchange Act, and the Committee shall interpret and
administer the provisions of the Plan in a manner consistent therewith. Any
provisions inconsistent with Rule 16b-3 shall be inoperative and shall not
affect the validity of the Plan.
22. Withholding of Taxes. If the Participant makes a disposition,
within the meaning of Section 424(c) of the Code and regulations promulgated
thereunder, of any Share or Shares issued to such Participant pursuant to such
Participant's exercise of an option, and such disposition occurs within the
two-year period commencing on the day after the Offering Date or within the
one-year period commencing on the day after the Exercise Date, such Participant
shall, within ten (10) days of such disposition, notify the Company thereof and
thereafter immediately deliver to the Company any amount of Federal, state or
local income taxes and other amounts which the Company informs the Participant
the Company is required to withhold.
23. Effective Date. The Plan shall be effective as of the date of the
completion of the initial public offering of the Shares, subject to the approval
of the Plan by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted.
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