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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
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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
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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
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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
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