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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________ .
Commission File Number 000-29215
LENDINGTREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1795344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11115 Rushmore Drive
Charlotte, North Carolina 28277
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(Address of principal executive offices) (Zip Code)
(704) 541-5351
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(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the act: None
Securities registered pursuant to section 12(g) of the act:
Common Stock, $.01 par value
(Title of class)
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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
herein, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting common equity held by
non-affiliates of the Registrant, based upon the closing sale price of common
stock on January 31, 2002 as reported on the NASDAQ National Market, was
approximately $88 million.
As of January 31, 2002 there were 19,296,939 shares of Common Stock,
$.01 par value, outstanding, excluding 661,996 shares of treasury stock.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be delivered to security
holders for the 2002 Annual Meeting of Stockholders to be held on April 24, 2002
are incorporated by reference into Part III of this Form 10-K.
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Forward-Looking Statements
This Annual Report on Form 10-K may contain certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended,
that represent our expectations or beliefs concerning future events or projected
financial results. Words such as "expect," "anticipate," "estimate," "intend,"
"believe," "plan" and similar expressions are used to identify these
forward-looking statements. Such forward-looking statements are about matters
that are inherently subject to risks and uncertainties. Factors that could
influence the matters discussed in certain forward-looking statements include
the timing and amount of revenue that may be recognized by us, continuation of
current expense trends, absence of unforeseen changes in our markets, continued
acceptance of our services and products and general changes in the economy. The
cautionary statements made in this Form 10-K should be read as being applicable
to all related forward-looking statements whenever they appear in this Form
10-K. Our actual results could differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the section
captioned "Factors That May Affect Future Results of Operations or Reported
Results" in Item 7 of this Form 10-K as well as those cautionary statements and
other factors set forth elsewhere herein.
Part I
Item 1. Description of Business
General Development of the Business and 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; instead we attract consumers to our
Website through various forms of advertising and send their loan requests to the
network of banks, lenders and loan brokers ("Lenders") participating on our
exchange.
Our technology platform, Lend-X(SM), 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 automatically compared to the underwriting criteria of the more
than 140 Lenders participating on our lending exchange. Qualified consumers can
receive multiple loan offers on-line 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, home
equity loans, automobile loans, credit cards, and personal loans. Additionally,
through our Website we also provide access to other Realty Services related to
owning, maintaining and buying and selling a home, including a network of real
estate brokers.
We earn revenue from the Lenders on our exchange which pay us fees for
qualification forms that meet their underwriting criteria and are transmitted to
them ("transmission fees"). Since a qualification form can be transmitted to
more than one lender, we may generate multiple transmission fees for the same
form. We also earn revenue for loans that the Lenders on our exchange close
with consumers that we referred to them ("closed-loan fees"). Additionally, in
most states, real estate brokers participating in our exchange pay us a fee when
consumers' requests that we transmit to them result in a purchase or sale of a
home ("realty services fees"). We refer to the aggregate of these fees as our
Exchange revenue.
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 lender marketplaces or may provide access to the LendingTree
exchange with more
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than 140 participating Lenders. Through these Lend-X relationships, 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 such exchanges.
Industry Background
For Lenders, the traditional loan origination process is
paper-intensive, time-consuming, and usually accompanied by high fixed costs and
labor expense. This inefficient process often involves significant marketing and
origination costs.
For consumers, the traditional loan process is time-consuming, requires
completion of multiple forms, and can often be frustrating and confusing.
Consumers typically search through a variety of loan products from many
different lenders, apply to one lender at a time for that lender's offered
price, and then wait for that lender to approve or reject the application.
Competing online lending sites generally mirror the traditional loan origination
process. Consumers visit the Website, view a list of loan products, apply for
one product from one lender, and are either given an offer or rate quote or are
rejected by the lender. While the consumer proposition presented by online
lending Websites is the same as the traditional offline process, the business
models for online lending Websites generally fall into the following two
categories:
-- Lender/Broker Model. The operators of Websites such as
Mortgagebot.com and QuickenLoans and Ditech generate a large
portion of revenue in the same way as traditional lenders, from a
mark-up over their cost of capital, whether the source of capital
is a lender, secondary market purchaser, or warehouse line of
credit. In exchange for these mark-ups, the lender/broker
undertakes all of the document processing, verification, and
customer interaction. In addition, to the extent the
lenders/brokers fund originated loans with their own capital, they
are often directly exposed to interest rate risk, credit risk,
liquidity risk and must also effectively manage their loan
pipeline.
-- Referral Agent Model. The operators of Websites such as
Providian's GetSmart typically generate revenue by providing
referrals to lenders. Because referral agents typically do not
generate any revenue upon loan closings, there is little incentive
for these companies to ensure that lenders and consumers
consummate the loan transaction. Additionally, because referral
Websites do not offer the consumers multiple offers on their
sites, they are not able to continually give best practices and
pricing data to lender participants.
LendingTree believes that the inefficiencies of the traditional lending
process and the shortcomings of other online business models, combined with the
large and recurring nature of consumer loan demand, offer a substantial
opportunity for the exchange business model.
The LendingTree Process
The LendingTree process consists of the following steps:
-- Credit Request. Consumers access our exchange at www.lendingtree.com or
sites enabled by Lend-X and select a loan product from our multiple loan
categories. Consumers complete a single qualification form for the selected
loan product with information such as income, assets and liabilities, loan
preferences and other data. Consumers also consent to our retrieval of
their credit report.
-- Qualification Form Filtering and Transmission. Our filtering process
matches the consumer's qualification form data, credit profile, and
geographic location to the preset underwriting criteria provided by
participating Lenders. Lenders are able to modify their underwriting
criteria in real-time directly through a password-protected Website known
as our LenderWeb. Once qualification forms pass the filters, they are
transmitted to up to four Lenders whose lending criteria match that of the
consumers' profile.
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-- Lender Evaluation and Response. Lenders evaluate and respond to the
qualification forms that pass their filters. This response takes place on
the LenderWeb or via automated interface technology that we have developed.
-- Communication of Offer. Once a lender evaluates a qualification form,
renders a decision, and responds with an offer, our system automatically
notifies the consumer via e-mail and displays the offers on the Website
where the request originated. The e-mail contains instructions to return to
the Website and provides instructions directing the consumer to the Check
Status page where consumers can view and compare the terms of each offer
including: interest rate, closing costs, monthly payment amount, lender
fees and other information.
-- Offer Acceptance. The consumer has the ability to accept, reject or request
more information about any particular loan offer. When the consumer selects
one of these options, our system automatically notifies the chosen lender
and the remainder of the process is conducted offline.
-- Ongoing Consumer and Lender Support. We provide active email and telephone
follow-up and support to both Lenders and consumers during the loan
transaction process. This follow-up and support is designed to provide
technical support and increase overall satisfaction of the participants in
our exchange, as well as increase the percentage of consumers who accept
and close a loan from our lending exchange.
Lend-X
Lend-X is our online lending exchange technology that offers a fast,
adaptable and reliable online lending solution for lenders and non-lenders
alike, providing valuable access to our online lending exchange of more than 140
Lenders. We license our Lend-X technology to over 30 companies who create
lending exchanges using Lend-X on a private-label or co-branded basis to
leverage their own lender relationships or those that we have established.
The Lend-X technology platform is made up of the following integrated
components:
ConsumerWeb - Consumer interactions
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-- Consumer-tested online form with help tips
-- Resource center with more than 100 pages dedicated to
consumer education
-- Cross-sell opportunities
-- Online communication of offers
-- Customer care / call center support
-- Automated email tools and customer surveys
Automated Decision Engine - Product and pricing
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-- Product and pricing configuration for automated offers
-- Offer conditions and rules-based closing costs
-- Credit-pull capability
Exchange Platform - System integration
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-- Interfacing to connect front-end sources and back-end
systems
-- Routing capability based on loan request and business
model
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LenderWeb - Lender interactions
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-- Lead management tools
-- Point of sale tools
-- Configuration of workflow, product and pricing, and
administrative functions
-- Reporting capability
The benefits to our Lend-X clients include:
-- Incremental Revenue. Lend-X offers lenders the ability to cross-sell
lending products to a wider consumer base and non-lenders to utilize Lend-X
and LendingTree's services to access a new market place.
-- Lower Upfront Cost. Using our Lend-X proprietary technology can result in
lower upfront cost for our clients than if they developed a web-based
lending exchange themselves. As companies seek to develop proprietary
Internet capabilities, Lend-X can meet their needs in a more cost-effective
and scalable manner.
-- Reduced Technology Obsolescence. Lend-X is continually updated as new
technologies develop. Companies that use Lend-X can take advantage of these
improvements and maintain the latest technology.
-- Multi-lender Capability. We believe that financial institutions will adopt
a multi-lender approach over time. Lend-X facilitates transactions between
financial institutions. A multi-lender approach not only increases consumer
choice, but also provides additional transaction revenue to the Lend-X
customer.
-- Time to Market Advantage. Because our Lend-X product typically runs in an
application service provider environment, a company can have a Website up
and running in as little as two weeks. This gives a valuable time-to-market
advantage compared to other solutions.
-- Robust, Scalable Technology. Lend-X clients need to process significant
transaction volume. Lend-X was designed, and has proven its ability to
handle significant volume and a wide range of products.
-- Access to Market Information. We provide Lend-X clients with access to a
comprehensive data warehouse and real-time reporting capabilities.
Additionally, we provide Lend-X clients with the benefits of our experience
and knowledge of the Internet lending arena.
Customers
LendingTree Exchange Customers
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Our on-line exchange offers consumers the opportunity to obtain the
loan products and other services listed below. We do not charge consumers a fee
to use our services and our network of Lenders and real estate brokers ("our
customers") pay us fees for the transmitted qualification forms, closed loans or
closed real estate transactions.
As of December 31, 2001:
-- Home Mortgage. LendingTree had 95 Lenders providing home mortgage
loans.
-- Home Equity. LendingTree had 54 Lenders providing home equity
loans.
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-- Automobile Loans. LendingTree had 12 Lenders providing automobile
loans.
-- Credit Cards. LendingTree had 9 credit card issuers.
-- Personal Loans. LendingTree had 5 Lenders providing personal
loans.
Some Lenders provide more than one type of loan product through our
exchange. Accordingly, the sum of the Lenders by product category above exceeds
the total number of Lenders on our exchange.
In addition to these loan products, LendingTree offers other services
to our consumers:
-- Real Estate Services. We refer consumers from our exchange or
various third party sites to participants in our network of real
estate agents located in most states. As of December 31, 2001, we
had relationships with approximately 650 real estate brokerages
representing over 2,600 real estate offices to support referrals
supplied by LendingTree.
-- Other Products and Services. LendingTree also has other marketing
arrangements with a variety of providers that offer home ownership
and maintenance related products and services.
For the years ended December 31, 2001, 2000 and 1999, Exchange revenue
was 90%, 89% and 88% of our total revenue, respectively.
Lend-X Technology Customers
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We have over 30 Lend-X technology customers, that are lenders or other
businesses that have created a loan marketplace using Lend-X on a private-label
or co-branded basis. These businesses leverage their own lender relationships or
those that LendingTree has established. We also perform certain other services
for some of our Lend-X technology customers. In these transactions, we typically
receive a basis point fee from the lender.
Revenue from sales of Lend-X technology represented $6.5 million (or
10% of total revenue) in 2001, $3.3 million (or 11% of total revenue) in 2000
and $0.9 million (or 12% of total revenue) in 1999.
Reference is made to our consolidated financial statements, included in
Item 14 herein, for further disclosures about our business segments.
Geographic Information
All of our revenue is generated from transactions originating in the
United States. All of our fixed assets are located in the United States,
principally in Charlotte, North Carolina at our headquarters.
Competition
Online Lending Exchange:
As previously stated, LendingTree operates a unique lending exchange,
matching the on-line requests of borrowers with up to four Lenders on
our network. The primary competitive factors for the exchange model are
as follows:
-- Brand awareness: To be competitive as an exchange, competitors
must have the ability to attract consumer demand in high volumes.
Competitors will need to make significant investments to build and
maintain a compelling brand that will compete against
LendingTree's established brand.
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-- Lender network: In order to provide value to prospective
borrowers, a competitor must create strategic alignment with a
critical mass of lenders to fulfill consumer demand. This takes
significant investments in time and resources and will require
learning about lending practices both on-line and through off-line
channels.
-- Online relationships: - access to consumers from other major
portals or Internet sites is essential for developing market
share;
-- Scalable technology: - infrastructure that integrates easily with
lenders and can adapt to support extended product offerings; and
-- Ease of use and convenience for consumers and lenders.
Our success depends upon capturing and maintaining a significant share
of consumers who obtain loans through the Internet. In order to do this, we must
continue to build on our first mover advantage, maintain brand awareness among
consumers and lenders, expand our network of Lenders, establish additional
Lend-X relationships, and continually upgrade our technology. Many of our
current competitors, however, have longer operating histories, larger customer
bases, and significantly greater financial, technical, and marketing resources
than we do. In addition, participants in other areas of the financial services
industry may enter the consumer loan marketplace.
We believe that our primary competition in online lending are
traditional lending institutions developing their own on-line lending channels
(a "Click and Mortar" approach). Established entities such as JPMorgan Chase,
GMAC and CountryWide have entered the online lending business as a way to
diversify their revenue streams, maintain growth and broaden their appeal to a
wider base of consumers. These companies do not operate a true exchange, rather
they are set up to process, close, and fund the loan as a stand-alone lender.
The single-lender model enables lenders with large brand names and established
customer bases to attract consumers to their own web site, creating potential
for efficient loan acquisition and processing. However, because the channel is
usually small as compared to the lender's traditional channels, service
standards may lag, and consumers may not receive a differentiated experience.
Because the Internet consumer is expecting a faster, more convenient experience,
and because other lending institutions are easily accessible via the Internet,
click and mortar competitors must refine their sales and fulfillment processes
to be effective. Also, they must resolve substantial channel conflict issues to
price the channel attractively, and large lenders in particular must resolve
internal barriers in order to distribute consumer leads to the right internal
departments and ensure appropriate follow-up. Like traditional channels, the
model exposes the lenders to interest rate risk, credit risk and liquidity risk.
Certain products such as personal loans and credit cards are particularly prone
to adverse selection, requiring stringent underwriting to manage risk.
Additional competition comes from lending Websites, including
Mortgagebot.com, Quicken Loans, and Ditech. These lenders originate the bulk of
their loans via their Websites, and are considered "e-lenders" and can also be
lenders on our exchange. In addition, some online financial services companies,
including the online brokerages and Internet banks, have extended consumer
products to include online lending. These companies typically operate a
consumer-branded website and attract consumers via online banner ads, key word
placement on search engines, partnering with affiliates and business development
deals with other Internet properties, including major portals. They may also
attract consumers via off-line advertising. The e-lenders process, close, and
fund loans and thus are subject to credit risk. As compared to click and mortar
competitors, the on-line lenders do not need to invest heavily in branch-offices
and infrastructure and given sufficient scale, may provide a cost-effective and
convenient way for consumers to obtain a loan. To be successful, the on-line
lenders must build and maintain a brand, develop relationships with on-line
portals and other sources of potential consumers and build out loan product
offerings to appeal to a mass audience.
LendingTree's chief competitor in the Exchange space is GetSmart.
Similar to LendingTree, GetSmart refers consumers to up to three lenders. The
consumer gets the name, email address and phone number of the lender, plus a
link to their web site. At that point GetSmart exits the process. By contrast
the LendingTree consumer gets up to four real loan offers upon which to make a
decision. LendingTree works with both the borrower and lender to move the loan
to closure. The key consumer benefit provided by LendingTree's lending exchange
is choice,
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combined with empowerment, speed and convenience. Additionally, LendingTree can
match consumers across the credit spectrum with a wide array of loan products.
Lenders gain access to consumers usually at a lower cost of acquisition. As an
exchange, LendingTree is not exposed to interest rate risk or credit risk. The
fees a lender charges are also typically greater than the fees paid by
LendingTree's network of Lenders. The challenges for on-line lending exchanges
are that they must build and maintain a brand as well as a lender network. The
exchange providers must also build and maintain their own technology.
Online Realty Services Exchange:
Our primary competitors in the area of offering online real estate
referral services are Homestore.com, Realtor.com and Homegain.com. In each of
these exchanges, including our own, the consumer completes an on-line form and
is referred to a realtor that is participating in the network of realtors. These
Websites offer a variety of real estate related tools and helpful hints for the
consumer.
Lend-X technology:
We believe that our primary competitors in this area are:
-- Traditional software companies and custom website development
companies (e.g. American Management Systems, Alltel, Cybertek,
CMSI, etc.). Traditional software companies and custom website
development companies generally develop large-scale custom
websites for financial institutions. These companies are
competitive to LendingTree because of the in-depth relationships
that these companies have in place. The benefit of these
companies' offerings is that they are customized and developed
specifically for a single institution. The challenges for these
offerings compared to Lend-X is that they typically require
substantially longer lead times, cost significantly more, do not
have multi-lender linkage capability, and must be updated and
changed as technologies advance.
-- Emerging Internet Software Development Companies (e.g. Expede,
Framework, S-1, Digital Insight, Corrillion). Other companies are
currently developing and marketing software to the financial
services industry. These companies generally are focused at the
front-end as Customer Relationship Management (CRM) software
providers or at the back-end as loan processing systems. Other
companies are focused on other banking-related applications like
bill payment and online banking. As these companies develop their
existing products and as functionality is added to Lend-X,
competition from these companies could emerge.
Business Development
Our business development teams target and establish relationships with
lenders to achieve an adequate array of credit products to meet consumer demand.
Additionally, Lend-X sales people cross-sell into the lender network and also
target non-lender clients that could utilize the Lend-X platform to establish a
single lender or co-branded Website to offer loan products. Our marketing
objective is to increase awareness of our lending exchange through trade
advertising, public relations, and attendance at trade shows and industry
conferences.
Customer Service
We employ a staff of customer service and technical support personnel
who provide support to all users of our services. They provide support via email
and telephone. The responsibilities of the customer service and technical
support personnel include:
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-- Responding to consumers' questions about the status of their
credit request, how to use our Website, and other frequently asked
questions.
-- Acting as a liaison between consumers and Lenders, to ensure
consumers receive prompt service from Lenders.
-- Acting as a facilitator for the consumer and real estate agent.
-- Providing technical support to lender technical and systems
questions 24 hours a day, seven days per week.
-- Providing technical support to Lend-X clients.
Marketing
Our principal marketing objectives are to maintain our leading brand
awareness position and to increase volume on our exchange. These efforts include
offline advertising, online advertising and direct marketing. We also collect
and analyze consumer data to enhance our consumer marketing programs, subject to
compliance with our privacy policy.
Offline Advertising
-- Television Advertising. Our television advertising has proven to
be an effective medium to drive both brand awareness and
transaction volume. Utilizing television we have created
significant brand awareness of our brand promise of "When Banks
Compete, You Win."
-- Radio Advertising. Our radio advertising directly increases
transaction volume on our Website as well as consumer awareness of
the LendingTree brand. Radio advertising, through a combination of
network and spot buying, enables us to reach our target audience
in a cost-effective manner both nationally and locally. We select
our spot radio markets based on a variety of factors including
population density, housing starts, Internet-enabled households,
and overall home buying activity.
Online Advertising
-- Online Advertising and Sponsorships. Online advertising and
sponsorships play an important role in our overall effort to reach
potential consumers. We focus on those portals and Websites having
a high affinity to consumer lending, such as real estate, personal
finance and automobile-related Websites. We have also partnered
with major search engine companies such as Yahoo! Finance and
incorporated banner advertising into our online strategy to
maximize consumer reach at relatively low cost.
The LendingTree Affiliate Network
-- We have agreements with other Websites that route consumers to
www.lendingtree.com. We pay advertising fees to our affiliates in
exchange for the placement of banner ads and links from their site
to ours. Our affiliate program has been a cost-effective source of
loan request volume. These affiliates are independent third
parties and LendingTree does not have any ownership interest in
any such affiliate.
Direct Marketing
We believe that direct marketing is an effective means of increasing
loan requests and closure rates, and a way to develop more sustainable
relations with consumers. Our direct marketing initiatives have been
executed through both offline and online channels, within the
guidelines of our privacy policy. Our direct marketing initiatives
include:
-- Direct Email. We use email to encourage customers to visit our
Website, complete the loan request process, communicate with
consumers throughout the lending process, offer additional product
and service value and facilitate consumers' ability to obtain
loans.
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-- Direct Mail. We use direct mail to compliment our online email
efforts to build brand equity and increase overall transaction
volume.
-- Cross-Selling. We use cross-selling and other adaptive marketing
activities to provide consumers the opportunity to purchase
related products and services from selected third parties at
various points in the LendingTree loan process. We previously
added the cross-sell of real estate services to consumers in
addition to existing cross-sell programs such as home, auto and
credit card products.
Employees and Recruitment
As of December 31, 2001, we had 234 full-time employees. Of these, 92
were in technology and project management, 20 were in lender relations and 40
customer care, 51 were in sales, marketing, and business development, 23 were in
financial and legal, and the remaining 8 were in human resources and
administrative positions. None of our employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
Privacy Policy
We believe that issues relating to privacy and use of personal
information of Internet users are becoming increasingly important as the
Internet and its commercial use grow. As a result, we have adopted a detailed
privacy policy that outlines how we use consumer information and the extent to
which Lenders and other third parties may have access to this information. This
policy is prominently noted on our Website. We do not sell, license or rent any
personally identifiable information about our consumers to any third party, and
will use the information about its customers for internal purposes only.
Generally, the privacy provisions of the recently enacted
Gramm-Leach-Bliley Act:
-- Prohibit financial institutions from disclosing to unaffiliated
third parties nonpublic personal information collected from
consumers, subject to several exceptions;
-- Require financial institutions to develop and disclose consumer
privacy policies;
-- Empower federal regulators with the authority to regulate
information sharing and enforce the provisions of the law; and
-- Allow states to pass stricter financial privacy laws.
Compliance with the Gramm-Leach-Bliley Act became mandatory on
July 1, 2001. As a result, we amended our privacy policy and
implemented new procedures to make privacy disclosures to consumers. In
addition, we have worked with our Lenders to assist them in complying
with their obligations, to the extent possible, through our Website.
Government Regulation
The loan products and real estate agent referral services available
through our Website are subject to extensive regulation by various federal and
state governmental authorities. Because of uncertainties as to the applicability
of some of these laws and regulations to the Internet and, more specifically, to
our business, and considering our business has evolved and expanded in a
relatively short period of time, we may not always have been, and may not always
be, in compliance with applicable federal and state laws and regulations.
Failure to comply with the laws and regulatory requirements of federal and state
regulatory authorities may result in, among other things, revocation of required
licenses or registrations, loss of approved status, termination of contracts
without compensation, loss of exempt status, indemnification liability to
Lenders and others doing business with us, administrative enforcement actions
and fines, class action lawsuits, cease and desist orders, and civil and
criminal liability.
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Many, but not all, states require licenses to solicit or broker to
residents of those states, loans secured by residential mortgages, and other
consumer loans, including credit card, automobile and personal loans. We are not
currently licensed and able to accept credit requests for all loan products in
every state. We are not currently accepting credit requests for loan products
from residents of states in which we are not licensed to provide those products.
In many of the states in which we are licensed, we are subject to examination by
regulators. In addition, as a result of our Realty Services offerings, we are
required to obtain real estate broker licenses, additional mortgage broker
licenses and individual call center personnel licenses in numerous states.
Failure to obtain these licenses and approvals could prevent us from receiving
fees from the real estate agent referral and mortgage services programs we offer
and may subject us to the types of fines, forfeitures and litigation discussed
above.
As a computer loan origination system or mortgage broker conducting
business through the Internet, we face an additional level of regulatory risk
given that most of the laws governing lending transactions have not been
substantially revised or updated to fully accommodate electronic commerce. Until
these laws, rules and regulations are revised to clarify their applicability to
transactions conducted through electronic commerce, any company providing
loan-related services through the Internet or other means of electronic commerce
will face compliance uncertainty. Federal law, for example, generally prohibits
the payment or receipt of referral fees in connection with residential mortgage
loan transactions. The applicability of referral fee prohibitions to the
advertising, marketing, distribution and cyberspace rental arrangements used by
online companies like ours may have the effect of reducing the types and amounts
of fees that we may charge or pay in connection with real estate-secured
products.
Regulations promulgated by some states may impose compliance
obligations on any person who acquires 10% or more of our common stock,
including requiring that person to periodically file financial and other
personal and business information. If any person acquires 10% or more of our
common stock and refuses or fails to comply with these requirements, we may not
be able to obtain a license and existing licensing arrangements in particular
states may be jeopardized.
The parties conducting business with us, such as Lenders and other
Website operators, may similarly be subject to federal and state regulation.
These parties act as independent contractors and not as our agents in their
solicitations and transactions with consumers. Consequently, we cannot ensure
that these entities will comply with applicable laws and regulations at all
times. Failure on the part of a lender or other Website operator to comply with
these laws or regulations could result in, among other things, claims of
vicarious liability or have a negative impact on the our reputation.
In addition to licensing requirements, federal and state laws regulate
residential lending activities and record keeping requirements of brokers and
lenders. At the federal level, our services are regulated by, among other laws,
the Truth in Lending Act and Regulation Z, the Equal Credit Opportunity Act and
Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, federal
privacy laws, and the Real Estate Settlement Procedures Act and Regulation X.
These laws generally regulate the manner in which loan services are made
available, including advertising and other consumer disclosures, payments for
services, record keeping requirements, and the privacy and reporting of consumer
data. State and federal laws also prohibit unfair and deceptive trade practices
and require companies to adopt appropriate policies and practices to protect
consumer privacy.
Under the Truth in Lending Act, creditors are required to provide
consumers with uniform, understandable information concerning some of the terms
and conditions of loan and credit transactions being offered, which may include
disclosures in advertising. This particular federal law is generally applicable
to lenders and applies to us primarily in the context of advertising.
The Equal Credit Opportunity Act prohibits discrimination against
applicants on the basis of race, color, sex, age, religion, national origin, or
marital status, and the Fair Housing Act similarly prohibits discrimination in
residential mortgage lending. The regulations under the Equal Credit Opportunity
Act also restrict creditors from requesting various types of information from
loan applicants and require lenders to supply applicants with a notice, referred
to as an adverse action notice, when the lender denies its applicants credit.
Our Lenders are generally obligated to provide the required disclosures. While
the applicability of these disclosure requirements to us is unclear, we
nevertheless provide such disclosures to consumers in the event that a
qualification form cannot be transmitted to any lender.
11
The Fair Credit Reporting Act is a consumer privacy statute that
generally governs the assemblage, evaluation, maintenance, and dissemination of
information on consumers that has been collected for the purpose of evaluating
their qualifications for credit. The Fair Credit Reporting Act also requires
that users of consumer credit reports notify consumers when their loan
applications are denied on the basis of those consumer credit reports. In
addition, recent consumer privacy legislation enacted as part of the
Gramm-Leach-Bliley Act restricts the dissemination of nonpublic consumer
information to non-affiliated third parties and will require institutions to
maintain privacy policies, and give notice of such policies. We have made
numerous changes to our Website and procedures to address the consumer privacy
provisions of the Gramm-Leach-Bliley Act.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or any other item
of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or
unearned fees in connection with the provision of residential real estate
settlement services, including mortgage brokerage and lending services.
Notwithstanding these prohibitions, RESPA permits payments for goods or
facilities furnished or for services actually performed, so long as those
payments bear a reasonable relationship to the market value of the goods,
facilities or services provided. Failure to comply with RESPA may result in,
among other things, administrative enforcement actions, class action lawsuits,
cease and desist orders and civil and criminal liability.
The mortgage and home equity products offered through our exchange are
residential real estate secured loans subject to these provisions of RESPA.
Consequently, our online relationships with Lenders, other companies and
Websites on which we offer services are subject to RESPA's prohibitions on
payment or receipt of referral fees for referrals and for unearned fees or fee
splits. We believe that we have structured these relationships to comply with
RESPA. The applicability of RESPA's referral fee and fee splitting prohibitions
to these types of Internet-based relationships, however, is unclear and the
appropriate regulatory agency has provided limited guidance to date on the
subject. See the section of this Form 10-K entitled "Risk Factors" for more
information.
Copyrights, Trademarks, Patents and Licenses
We regard our intellectual property as important to our success. We
rely on a combination of patent, trademark, copyright law, and trade secret
protection to protect our proprietary rights. We have applied for a U.S. patent
and filed a Patent Cooperation Treaty international patent application on our
Lend-X technology and our online loan market process. We also pursue the
protection of our intellectual property through trademark and copyright
registrations. We have registered "LendingTree" and the phrase "When Banks
Compete You Win!" as trademarks in the United States. We have also applied for
trademark registration in the United States for "Lend-X". We consider the
protection of our trademarks to be important for maintenance of our brand
identity and reputation. We cannot assure you that any of these registrations or
applications will not be successfully challenged by others or invalidated
through administrative process or litigation. In fact, a company called Lendx,
Inc. has filed a formal opposition to the registration of our mark for "Lend-X",
alleging that its first use of the mark "Lendx" in the field of commercial
lending superceded our first use of the "Lend-X" mark. We dispute the
allegations and are vigorously litigating the matter before the Federal
Trademark Trail and Appeals Board. Further, if our trademark applications are
not approved or granted due to the prior issuance of trademarks to third parties
or for other reasons, there can be no assurance that we would be able to enter
into arrangements with such third parties on commercially reasonable terms
allowing us to continue to use such trademarks. It is possible that our patent
applications will be denied or granted in a very limited manner such that they
offer little or no basis for us to deter competitors from employing similar
technology or processes or allow us to defend ourselves against third-party
claims of patent infringement.
In addition, we seek to protect our proprietary rights through the use
of confidentiality agreements and other contractual arrangements with our
employees, affiliates, clients, Lend-X licensees, and others. We cannot assure
you that these agreements will provide adequate protection for our proprietary
rights in the event of any unauthorized use or disclosure, that employees, our
affiliates, clients, Lend-X licensees, or others will maintain the
confidentiality of such proprietary information, or that such proprietary
information will not otherwise become known, or be independently developed, by
competitors. Occasionally, we have been, and expect to continue to be, subject
to
12
claims in the ordinary course of our business, including claims alleging that we
have violated a patent or infringed a copyright, trademark or other proprietary
right belonging to a third party. We cannot assure you that the steps we have
taken to protect our proprietary rights will be adequate or that third parties
will not infringe or misappropriate our proprietary rights. Any infringement
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources on our part, which could materially adversely
affect our business, results of operations, and financial condition.
A substantial portion of our intellectual property is licensed to third
parties. We license the right to use Lend-X technology to well-known regional
and national Lenders, other online companies that create single and multi-lender
online marketplaces, and other websites providing lending services.
Item 2. Properties
Our principal executive offices are currently located in approximately
38,000 square feet of office space in Charlotte, North Carolina under a lease
that expires in 2010.
Item 3. Legal Proceedings
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 the Company, alleging that the Company's financial card
(credit card) qualification form processing system infringes its U.S. Patent No.
6,014,645 entitled, "Real-Time Financial Card Application System." The complaint
seeks both monetary damages in the form of a reasonable royalty and injunctive
relief. On November 19, 2001, the Company filed an answer to the complaint
denying infringement of the Block patent. The Company also filed a counterclaim
against Block seeking a declaratory judgment of non-infringement and invalidity
of the Block patent. The lawsuit is in an early stage, and discovery is just
beginning to get underway.
In October 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, the NYSBD examiners raised an issue as
to whether the Company was obligated to make certain mortgage broker disclosures
to consumers under New York state law. Following correspondence with the NYSBD
and discussions with local counsel and NYSBD officials, the Company agreed to
provide certain disclosures requested by the NYSBD. Moreover, based upon the
guidance of local counsel following discussions with NYSBD officials, the
Company believes that this matter has been resolved without a finding of a
violation and without imposition of fines or forfeitures against it.
A third party has opposed the federal registration of LendingTree's
Lend-X mark. The case is currently in the discovery phase. The matter is pending
before the Trademark Trial and Appeal Board of the U.S. Patent and Trademark
Office. Management intends to contest the case vigorously and is aggressively
pursuing the matter.
We are involved in other litigation from time to time that is routine
in nature and incidental to the conduct of its business. We believe that the
outcome of any such litigation would not have a material adverse effect on our
financial condition, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the
fourth quarter of the fiscal year ended December 31, 2001.
13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholders' Matters
Market for Common Stock
Our common stock is traded on the NASDAQ National Market System under
the symbol "TREE". The following table sets forth the high and low sale prices
for the common stock for the periods indicated as reported by NASDAQ. Such
prices represent prices between dealers without adjustment for retail mark-ups,
markdowns, or commissions and may not necessarily represent actual transactions.
Price Ranges
------------
High Low
---- ---
Year Ended
December 31, 2001
-----------------
Fourth Quarter $ 6.10 $ 3.00
Third Quarter $ 6.74 $ 3.35
Second Quarter $ 7.39 $ 2.81
First Quarter $ 4.41 $ 1.88
Year Ended
December 31, 2000
-----------------
Fourth Quarter $ 5.25 $ 1.78
Third Quarter $ 9.56 $ 4.22
Second Quarter $14.88 $ 4.75
First Quarter (beginning
February 15, 2000) $21.00 $10.75
Holders of Record
As of January 31, 2002, there were approximately 120 holders of record
of our common stock. This number does not include stockholders whose shares are
held by brokers and other institutions.
Dividends
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The holders of our Series A Preferred Stock are entitled to
receive dividends on their shares equal to eight percent (8%) per annum 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. We intend to evaluate the alternative dividend
payment options on the Series A Preferred Stock prior to each quarterly dividend
payment date. The Series A Preferred Stock ranks senior to any class of our
common stock with respect to dividend rights. Our revolving credit agreement
with GE Capital Commercial Services prohibits us from paying cash dividends on
common stock or Series A Preferred Stock without the prior written consent of
GE.
14
Item 6. Selected Financial Data
The following table sets forth selected financial and operating data
for our business. You should read the information together with our consolidated
financial statements and the accompanying notes included in this Form 10-K and
the information under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The statement of operations data for the
years ended December 31, 2001, 2000 and 1999, and the balance sheet data as of
December 31, 2001 and 2000, are derived from, and are qualified by reference to,
our consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP and are included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 1998 and 1997 and
the balance sheet data as of December 31, 1999, 1998 and 1997 are derived from
our consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP and are not included in this Form 10-K. Historical
results are not necessarily indicative of the results to be expected in the
future.
2001 2000 1999 1998 1997
------------- ------------ ------------ ----------- --------
Statement of Operations Data: (Amounts in thousands, except per share and per transmit data)
Revenue
Exchange $ 57,478 $ 27,465 $ 6,112 $ 273 $ 2
Lend-X technology 6,541 3,348 852 136 --
------------- ------------ ------------ ----------- --------
Total revenue 64,019 30,813 6,964 409 2
------------- ------------ ------------ ----------- --------
Net loss attributable to common shareholders $ (31,827) $ (68,464) $ (27,561) $ (6,458) $ (963)
============= ============ ============ =========== ========
Net loss per common share - basic and diluted $ (1.66) $ (4.15) $ (7.74) $ (1.88) $ (1.20)
============= ============ ============ =========== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 19,160 16,512 3,560 3,435 803
============= ============ ============ =========== ========
Operating Data:
Qualification Forms transmitted:
Number (in thousands) 1,416 716 186 18 --
Dollar volume (in thousands) $ 115,557,000 $ 54,997,000 $ 16,210,000 $ 1,597,000 $ --
Lending exchange revenue (1) per transmitted
Qualification Form $ 37.21 $ 37.31 $ 32.90 $ 14.96 $ --
Variable cost (2) per transmitted Qualification Form $ (21.70) $ (64.20) $ (95.12) $ (99.30) $ --
------------- ------------ ------------ ----------- --------
Contribution margin (3) per transmitted
Qualification Form $ 15.51 $ (26.89) $ (62.22) $ (84.34) $ --
------------- ------------ ------------ ----------- --------
Loans closed:
Number (in thousands) 290 145 27 1 --
Dollar volume (in thousands) $ 12,148,000 $ 4,641,000 $ 941,000 $ 26,000 $ --
Balance Sheet Data:
Cash, cash equivalents, short term investments $ 6,164 $ 12,716 $ 29,472 $ 3,085 $ 402
Working capital $ 1,958 $ 7,937 $ 26,474 $ 2,666 $ 333
Total assets $ 27,931 $ 37,957 $ 33,767 $ 3,687 $ 424
Capital lease obligations $ 1,034 $ 1,580 $ -- $ -- $ --
Total liabilities $ 17,254 $ 14,261 $ 6,030 $ 751 $ 71
Preferred stock $ 23,878 $ -- $ 59,118 $ -- $ --
Total shareholders' equity (deficit) $ (13,201) $ 23,696 $ 27,737 $ (1,695) $ 353
(1) Computed by dividing exchange revenue derived from our Lenders by the
number of qualification forms transmitted in the period.
(2) Computed by dividing variable marketing and advertising costs (including
media advertising and affiliate network costs) by the number of
qualification forms transmitted in the period.
(3) Computed by subtracting the variable cost per transmit from the lending
exchange revenue per transmit.
15
Item 7. 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; instead we attract consumers to our
Website through various forms of advertising and send their loan requests to the
network of banks, lenders and loan brokers ("Lenders") participating on our
exchange.
Our technology platform, Lend-X(SM), 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 automatically compared to the underwriting criteria of the more
than 140 Lenders participating on our lending exchange. Qualified consumers can
receive multiple loan offers on-line 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, home
equity loans, automobile loans, credit cards, and personal loans. Additionally,
through our Website we also provide access to other realty services related to
owning, maintaining and buying and selling a home, including a network of real
estate brokers.
We earn revenue from the Lenders on our exchange which pay us fees for
qualification forms that meet their underwriting criteria and are transmitted to
them ("transmission fees"). Since a qualification form can be transmitted to
more than one lender, we may generate multiple transmission fees for the same
form. We also earn revenue for loans that the Lenders on our exchange close
with consumers that we referred to them ("closed-loan fees"). Additionally, in
most states, real estate brokers participating in our exchange pay us a fee when
consumers' requests that we transmit to them result in a purchase or sale of a
home ("realty services fees"). We refer to the aggregate of these fees as our
Exchange revenue.
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 lender marketplaces or may provide access to the LendingTree
exchange with more than 140 participating Lenders. Through these Lend-X
relationships, 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 such exchanges.
16
2001 Compared to 2000
As described above, our business is focused on two primary activities,
operating our Exchange and licensing and hosting our Lend-X technology. Our
Exchange business includes revenue and costs from two operating segments, our
lending exchange and our Realty Services operations. Our Lend-X technology
business is a third operating segment. Management regularly reviews the revenue,
cost of revenue and gross margins for these segments. No other operating
expenses, measure of profitability or assets or liabilities are consistently
segregated or allocated into these segments for regular review by management or
in determining allocations of resources. There are no inter-segment revenues.
Revenue
Total revenue was approximately $64.0 million in the year ended
December 31, 2001, an increase of $33.2 million, or 108%, from $30.8 million for
the year ended December 31, 2000.
Exchange Revenue
For 2001, our Exchange revenue was approximately $57.5 million, or 90%
of our total revenue, compared with approximately $27.5 million, or 89% of total
revenue, for 2000. This is an increase of 109% from year to year. 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 (a
discrete qualification form can be transmitted to more than one lender
generating multiple transmission fees for the same form) and in the number of
closed loans. Realty Services also contributed $3.9 million to the increase in
total Exchange revenue.
Year Ending December 31, 2001 Year Ending December 31, 2000
(in thousands)
Discrete Number Discrete Number
Transmission of Closed Transmission of Closed
Exchange Transactions - Revenue Volume Loans Revenue Volume Loans
Mortgage $25,764 577 38 $11,133 277 15
Home Equity 17,660 216 51 10,308 141 32
Auto, Personal, Credit Card 7,331 623 201 4,453 298 98
All Other Exchange Fees 2,170 879
------- ------------ --------- ------- ------------ ---------
Subtotal Lending Exchange $52,925 1,416 290 $26,773 716 145
======= ============ ========= ======= ============ =========
Realty Services 4,553 692
------- -------
Total Exchange $57,478 $27,465
======= =======
Discrete transmission volume increased 98% to approximately 1,416,000
qualification forms in 2001 from approximately 716,000 in 2000. We attribute
this increase to several factors:
First, we believe the effectiveness of our advertising has
elevated and maintained consumer awareness of the LendingTree brand.
Throughout 2001, we have continued to sharpen the focus of our media
expenditures, particularly cable television and on-line advertising,
targeting key audiences to keep the LendingTree brand name recognition
high. A recent study performed by a third party for us showed that we
enjoy an overall brand awareness of 59% nationally among our key target
audience, adults 18-54, improving from overall brand awareness of 41%
in the prior year.
17
Second, there continues to be an expanding acceptance of the
use of the Internet to find a loan. According to various industry
publications, in 2001 the volume of mortgage loans applied for through
the Internet is estimated to have more than doubled when compared to
2000.
Third, although our revenue and exchange volume have shown
growth both in periods of rising and falling interest rates, we also
believe that the lower interest rate environment over the past year has
contributed to the increase in the number of consumers applying for
loans and refinancing existing debt through our exchange. For example,
in 2001, when interest rates were generally declining, 76% of our
mortgage revenue was derived from mortgage refinancings; approximately
double our rate in 2000. Mortgage revenue was approximately 40% of our
total revenue, accordingly the higher mix of refinancings contributed
to 17% of our total revenue growth in 2001 over 2000. Conversely, in
periods of rising interest rates, we have seen Lenders on our network
focus more aggressively on the qualification forms we send them as
volume from their traditional channels slows down. This also increases
our average number of transmits per qualification form and our closing
rates. Additionally, as interest rates increase, consumers have a
greater incentive to receive multiple, competitive loan offers to
ensure they are finding the loan best suited for them. Looking forward,
management believes improvements in these key operating metrics and the
rate of growth in online lending will more than offset decreases caused
by lower levels of consumer refinancing activity.
Closed loan volume increased 100% to 290,000 in 2001 from 145,000 in
2000. This increase is substantially all due to the increase in transmission
volume as discussed above.
In order to continue to capitalize on the substantial increases in
transmission volume we have implemented several significant initiatives aimed at
improving the rate at which loans close through our exchange. An ongoing
initiative has been to add to the number and variety of Lenders on our exchange,
thus increasing capacity and our ability to handle different types of loan
requests. At December 31, 2001 we had 145 active participating Lenders on our
exchange compared to 114 active participants at December 31, 2000. Additionally,
we have begun offering several new tools to enable our Lenders to process and
close loans more efficiently; including automation tools and benchmark studies.
We have also implemented several closed-loan incentives, including gift
certificates and other payments to reward borrowers for closing loans through
our network of Lenders.
In addition to the volume increases, our revenue is also impacted by
our pricing structure. Through October 2001 we generally charged a set fee to
all Lenders for mortgage and home equity transmissions and closed loans.
However, beginning in November of 2001 our revenue was impacted by a pricing
change. The standard fee for a transmitted loan request increased from $8.00 to
$9.00 for both our mortgage and home equity services. The standard fee for
closed-loans also changed, beginning with loans that originated from
qualification forms completed on and after November 5, 2001. For a closed home
equity loan the fee increased from $250 to $275. The standard fee for a closed
mortgage loan changed from a flat $400 to a tiered structure with fees ranging
from $300 to $750 depending on the amount of the loan. We do not currently have
plans to significantly change pricing arrangements for our auto, personal and
credit card products.
All other lending exchange revenue, as shown in the table above,
increased 147% to $2.2 million in 2001 compared to $0.9 million in 2000. The
$1.3 million increase is primarily attributed to fees that we earned from
transactions involving arrangements with third party membership programs, such
as Delta's Skymiles and Costco Wholesale, which allow us to provide mortgage
brokerage services to their members. We provide the loan referral to selected
Lenders and earn a fee from the lender for each loan that closes.
Realty Services revenue increased to $4.6 million in 2001 from $0.7
million in 2000. Because we first added Realty Services in August 2000, the
first full year of realty revenue on our exchange was 2001. Although the growth
in Realty Services revenue in 2001 is substantially due to 2000 being a partial
year, we have also grown this business by increasing our marketing efforts and
adding to the number of real estate professionals participating in our exchange.
18
Lend-X Technology Revenue
Lend-X technology revenue totaled $6.5 million, or 10% of our revenue,
for 2001 compared to $3.3 million, or 11% of revenue for 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 2000. These
new arrangements typically contain certain up-front fees that are being
recognized as revenue over the expected term of the arrangement. For 2001, two
customers accounted for 35% and 32%, respectively, of our total Lend-X
technology revenue. For 2000 one of these customers accounted for 71% of our
total Lend-X technology revenue. Additionally, some of our Lend-X arrangements
provide for transactional exchange revenue derived from volume from these third
party sites that have been enabled by our technology. The total of Lend-X
technology and transactional exchange revenue derived from Lend-X customer
sources was approximately $9.6 million and $5.6 million for 2001 and 2000,
respectively, which represents 15% of 2001 and 18% of 2000 total revenue.
Gross Profit and Cost of Revenue
Our 2001 gross profit of $50.3 million, or (79% of total revenue
improved by $28.9 million over the 2000 gross profit of $21.4 million, or 70% of
total revenue. The improvement in gross profit and gross profit percentage is
primarily due to the substantial increase in closed-loans as noted above.
Because closed-loans generate a higher fee for us and because a significant
portion of our costs of revenue are incurred up-front related to the
transmission of a loan request, when more loans close our gross profit tends to
increase. Additionally, some of our costs of revenue did not increase in direct
proportion to the increase in volume. As an example, our volume based
credit-scoring fees increased only 58% and network- hosting fees decreased 42%
as a result of negotiated vendor price reductions that were successful in
lowering our monthly costs.
Overall, our revenue increased over 100% while our total cost of
revenue increased only 46% to $13.7 million in 2001 from $9.4 million in 2000.
As further discussed below, this increase is principally due to costs related to
an increase in the number of closed-loan transactions such as consumer
incentives and other promotional costs.
Exchange Gross Profit and Cost of Revenue
For 2001, our exchange gross profit was $45.0 million, or 78% of
exchange revenue, compared to $20.0 million or 73% of exchange revenue for 2000,
an increase of 125%. Our lending exchange segment contributed $24.7 million of
the $25 million increase in gross profit over 2000 while our Realty Services
segment added $0.3 million of the increase.
We attribute this increase to the scalability of our exchange business
model. Although our volume has increased approximately 100% in 2001 compared to
2000, a proportional increase in costs was not necessary.
Overall, exchange related cost of revenue expenses increased only $4.9
million, or 66%, to $12.4 million in 2001 from $7.5 million in 2000.
The addition of Realty Services in August 2000 contributed to $3.5
million of this increase in 2001 and reflects the full year impact of increased
staffing and incentives and promotional payments made directly to consumers that
closed a realty transaction with a Real Estate professional on our exchange.
Management believes its current staffing levels are sufficient to handle the
planned growth in realty services and we have recently decreased the incentive
amounts offered to consumers. As such, costs will decrease as a percentage of
Realty Services revenue.
The lending exchange accounted for the other $1.4 million of the
increase in exchange cost of revenue in 2001, reflecting the growth in the
number of closed loans in 2001 over 2000, which resulted in an increase in the
promotional payments and gift certificates to consumers who closed a loan
through our exchange.
19
Lend-X technology Gross Profit and Cost of Revenue
For 2001, Lend-X technology gross profit was $5.3 million, or (81% of
Lend-X technology revenue, compared to $1.5 million, or 44% of Lend-X technology
revenue, for 2000. The lower gross profit percentage in 2000 reflects the impact
of expending significant hours on a large fixed-price customization contract.
Comparatively, in 2001, substantially all of our technology revenue was earned
from the revenue recognition of certain fees that are being recognized over the
expected term of each arrangement and from less labor intensive consulting and
implementation projects, resulting in a 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 third
parties, as well as ongoing server costs related to hosting Lend-X for these
companies. These costs decreased approximately $0.6 million from 2000 compared
to the same period in 2001.
Operating Expenses
Product development expense was approximately $4.6 million for 2001
compared to $2.7 million for 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. Compensation costs accounted for
93% of product development expense in 2001 compared to 74% in 2000. The overall
increase from 2000 to 2001 is principally related to higher staff levels in the
technology department. Additionally, in 2000 there were approximately $0.9
million more compensation costs classified in cost of revenue primarily related
to a significant labor-intensive, fixed fee contract.
Marketing and advertising expenses decreased $16.7 million to
approximately $39.9 million for 2001 compared to $56.6 million for 2000.
Marketing and advertising expenses were approximately 62% of our total revenue
in 2001 compared to 184% of our total revenue in 2000. Management uses variable
marketing cost and contribution margin per transmitted qualification form as key
measures of our advertising efficiency. In 2001 our exchange revenue per
transmission was $37.21 while our variable marketing cost per transmission was
$21.70, resulting in a contribution margin of $15.50 per transmission.
Comparatively, in 2000 our exchange revenue per transmission was $37.31 and
advertising cost per transmission was $64.20 for a negative contribution of
$26.89 per transmission. The substantial improvement in contribution margin per
transmission, as well as the decrease in advertising costs in 2001 reflect the
following:
-- In 2000, following the launch of our national advertising
campaign, we spent significantly on combinations of
television, radio and other forms of advertising in order to
establish and grow awareness of the LendingTree brand.
Comparatively, during 2001, our focus shifted more to
maintaining and building on the high-level of awareness for
our brand. By improving the targeting of our advertisements,
such as selecting cable television as a primary medium and
expanding our advertisements to include home equity and
auto-specific messages, we were able to improve the cost
effectiveness of our ads.
-- In 2001, as a result of the continued adoption of on-line
lending, a declining interest rate environment and decreasing
prices in the advertising market we were able to decrease
advertising spending by 30% over the prior year and still
achieve 108% growth in revenue.
Sales, general and administrative expenses in 2001 decreased to 53% of
total revenue, or $33.6 million, from 92% of total revenue, or $28.3 million in
2000. While our revenue increased $33.2 million in 2001, our sales, general and
administrative costs increased only $5.4 million. We had hired approximately 130
people throughout 2000; accordingly, the increase in expense in 2001 is
primarily the result of the full year impact, or $3.4 million, of higher
employee compensation and other related costs. Currently management does not
anticipate the need for any significant staffing increases to facilitate our
planned growth. Accordingly, we believe that sales, general and administrative
expenses will continue to decline as a percentage of total revenue.
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Another $1.4 million of the 2001 increase in sales, general and
administrative expenses is due to non-cash charges incurred as a result of
variable accounting charges related to a loan to our Chief Executive Officer
that was secured by shares of our common stock and Series A Preferred Stock.
This loan was modified in August 2001 resulting in fixed accounting treatment
for this arrangement going forward.
Additionally, the amortization of the intangible assets and software
related to an acquisition made in August 2000 contributed to $2.8 million of the
increase in sales, general and administrative expenses. Depreciation expense
also increased $1.6 million from 2000 to 2001, reflecting new equipment and
software purchases.
Through improved cost management, we were able to reduce our spending
on consulting and travel by approximately $1.9 million in 2001 compared to 2000.
Our recruiting and relocation expenses were approximately $1.0 million lower due
to decreased hiring efforts in 2001. We have the approximately the same number
of people at December 31, 2001 (234) that we had at the end of 2000 (230). Bad
debt expenses were approximately $1.0 million lower in 2001 compared to 2000 due
to improved collection efforts.
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 company merged 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 terms of the preferred securities issued to the new
investors, and the historical losses from operations of both companies before
the merger. Accordingly in June 2001, 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. In December 2001, this company began
evaluating strategic alternatives in light of its deteriorating financial
condition. The company announced its plans to sell its assets to third party in
a transaction in which we received no proceeds. Accordingly, we wrote off the
remaining $0.25 million investment as a non-operating loss on impaired
investment for the period ending December 31, 2001.
Interest Income
Interest income consists of interest earned on cash and cash
equivalents and restricted and short-term investments. Interest income decreased
to $0.6 million in 2001 from $2.2 million 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 $0.9 million increase in interest and financing
charges in 2001 from 2000 is primarily due to $0.6 million of charges related to
the termination of a credit facility and the issuance of a warrant to purchase
shares of our common stock and a $0.3 million charge related to the write off of
deferred costs associated with an equity line. The equity line had not yet been
used and in the fourth quarter of 2001 management determined any possible use
would be remote. Footnote 7 to our consolidated financial statements, contained
herein, provides further details of the terminated credit facility and the
equity line.
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Dividends and Accretion of Series A Convertible Preferred Stock
Each share of our Series A Preferred Stock is convertible, at the
option of the holder, into the number of shares of common stock determined by
dividing (a) the current value per share by (b) the conversion price.
The current value per share is the sum of the stated value per share
plus any accrued but unpaid dividends. The conversion price is the initial
purchase price of $3.50, subject to certain revisions from time to time for
stock splits and similar adjustments.
The holders of our Series A Preferred Stock are entitled to receive
quarterly dividends on the Series A Preferred Stock equal to eight percent (8%)
per annum of the stated value per share payable at our option (i) in cash or
(ii) by increasing the stated value per share on the dividend payment date.
The stated value per share is the sum of the initial purchase price of
$3.50 per share as cumulatively adjusted from time to time by accumulated
dividends.
Through December 31, 2001 we had elected to pay the quarterly dividends
by increasing the stated value per share of the Series A Preferred Stock. As a
result of these dividends, through December 31, 2001, we have increased the
carrying value of the Series A Preferred Stock on our balance sheet by
approximately $1.5 million. We have also recognized, as an increase to our net
loss attributable to common shareholders, an additional $0.9 million of dividend
charges resulting from the excess of the fair value of the common stock that the
8% dividends on the Series A Preferred Stock will convert into over the $3.50
conversion price that will be paid upon such conversion. In total we recorded
$2.4 million of dividend charges for the year ending December 31, 2001. If we
continue to settle the dividend obligations by increasing the stated value of
the preferred stock and if the market price 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 $4.5 million during that
twelve-month period. Conversely, if the market price of our common stock were to
decrease $1.00 per quarter over the next twelve months, we would incur
additional fair-value dividend charges of approximately $0.3 million during that
twelve-month period.
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. Accordingly, we are accreting the
value of the Series A Preferred Stock up to the redemption value of the shares
using the effective interest method. This is increasing the carrying value of
the Series A Preferred Stock and the charge is included in the computation of
net loss attributable to common shareholders. As of December 31, 2001, we have
recorded approximately $0.5 million of accretion charges.
For the year ended December 31, 2000 we recorded dividend charges of
$2.5 million on our Series D Preferred Stock, including additional dividend
charges related to the increasing value of the common stock underlying the
dividends on the preferred stock. Effective upon the closing of our initial
public offering of common stock on February 22, 2000, all outstanding shares of
Series D Preferred Stock and accumulated undeclared dividends were converted
into shares of common stock.
Other Information
For the years ended December 31, 2001 and December 31, 2000, net losses
included non-cash compensation charges of $2.5 million and $2.3 million,
depreciation and amortization of $7.9 million and $3.2 million, and
non-operating income (expense) of $(0.8) million and $0.1 million, respectively.
Net losses excluding such items, which management refers to as EBITDA, were
$17.4 million and $60.6 million for the years ended December 31, 2001 and 2000,
respectively, a 71% decrease. Because of the significance of non-cash and
one-time charges included in net losses, management regularly reviews EBITDA as
one measure or our operating performance. EBITDA as determined by LendingTree is
not a substitute for operating performance measures under generally accepted
accounting principles (GAAP) and may be different from the presentation of
financial information by other companies. GAAP measures of operating performance
are included in the accompanying consolidated financial statements and are
discussed elsewhere in this management discussion and analysis section.
22
2000 Compared to 1999
Revenue
Total revenue was approximately $30.8 million in 2000, an increase of
$23.8 million, or 340%, from $7.0 million in 1999.
Exchange
Our exchange revenue was approximately $27.5 million, or 89% of total
revenue for 2000, compared with $6.1 million, or 88% of total revenue for 1999,
an increase of 349%. The August 2000 addition of Realty Services to our product
offerings resulted in two operating segments within our exchange. The lending
exchange accounts for $26.8 million, or 97% of the exchange revenue, while
Realty Services contributed $0.7 million.
Other than the added $0.7 million of Realty Services revenue in 2000,
the overall exchange revenue growth reflects a substantial increase in volume of
qualification forms we transmitted to our Lenders and a significant increase in
the amount of revenue earned from closed-loan fees.
We attribute the increase in transmission volume (from approximately
186,000 discrete transmitted qualification forms in 1999 to approximately
716,000 in 2000) primarily to our extensive advertising campaign in 2000.
Although advertising expense was reduced in the second half of 2000 (compared to
the first half of 2000), we attribute increased brand awareness and a
significant increase in Website traffic year-over-year to the effectiveness of
the increased advertising spending. The increase in closed-loan fees reflects
not only the increased transmission volume, but also to an increase in the
number and variety of Lenders on our exchange. Added Lenders create additional
opportunities for consumer's credit requests to be transmitted for evaluation
and/or closure by a lender, thereby creating revenue for us. Closed loans
increased to approximately 145,000 in 2000 from approximately 27,000 in 1999.
Lend-X technology
Lend-X technology revenue totaled $3.3 million, or approximately 11% of
total revenue for 2000, compared with $0.9 million, or approximately 12% of
total revenue for 1999. The increase in Lend-X technology revenue is principally
the result of a significant new customization, implementation and licensing
contract that was entered into in the second quarter of 2000. Lend-X technology
revenue recognized during the 2000 under this contract reflects our progress
towards completion. For 2000, this single customer accounted for $2.4 million,
or 71% of the total Lend-X technology revenue.
Additionally, some of our Lend-X arrangements provide for transactional
exchange revenue derived from volume from the sites that have been enabled by
our technology. The total of Lend-X technology and transactional exchange
revenue derived from Lend-X customer sources was approximately $5.6 million for
the year ending December 31, 2000, compared to none in 1999.
Gross Profit and Cost of Revenue
Gross profit of $21.4 million, or 70% of total revenue, for 2000 was
$17.0 million higher than 1999 that had gross profit of $4.4 million, or (64% of
total revenue. These improvements in gross profit and gross profit percentage
are due to the substantial increase in exchange revenue, as noted above, without
similar, proportionate increases in exchange costs of revenue.
Total cost of revenue increased $6.9 million to $9.4 million in 2000
from $2.5 million in 1999, principally due to increases in variable exchange
costs of revenue. The most significant portions of our costs of revenue are
volume-based. Costs such as credit scoring fees, consumer rebates, network
hosting expenses and other direct costs tend to increase as volume and revenue
increase.
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Exchange
Gross profit from our exchange in 2000 was $20.0 million, or 73% of
exchange revenue. In 1999 our exchange gross profit was $3.9 million, or 64% of
exchange revenue. For both years, all of the exchange gross profit was
contributed by the lending exchange segment. Realty Services, added in August of
2000, did not generate any gross profit in 2000.
The $16.1 million increase in exchange gross profit is due to the
substantial increases in exchange revenue noted above. Exchange costs, on the
other hand, increased only $5.3 million in 2000 over 1999.
In 2000, our lending exchange segment had $6.8 million in costs of
revenue, an increase of $4.5 million over 1999. In 2000, variable cost of
revenue for the lending exchange included $1.4 million for direct consumer
promotion costs associated with consumers that requested and qualified for
rebates. These promotional costs were $0.2 million in the same period of 1999. .
Other variable exchange costs related to credit scoring, network hosting and
other direct costs increased $1.0 million, $1.1 million and $0.5 million,
respectively, due to increases in customer volume on the lending exchange.
Costs of revenue that are not directly volume based, principally
personnel costs, increased approximately $0.7 million to $1.2 million in 2000
reflecting increased staffing in our customer care department.
The addition of our Realty Services segment in August of 2000
contributed $0.7 million of costs of revenue to the exchange, principally
consumer promotional costs and additional staffing in our customer care center.
Lend-X technology
Costs of revenue associated with Lend-X technology are principally
employment and consultant costs related to projects to customize and/or
implement Lend-X for third parties as well as ongoing server costs related to
hosting Lend-X for these companies. Due to the fact that we entered into several
more Lend-X technology arrangements in 2000, these types of costs were $1.5
million higher in 2000 (at $1.8 million) compared to 1999 ($0.3 million).
Operating Expenses
Product development expense was approximately $2.7 million for 2000 and
$1.1 million for the same period of 1999. The increase over the prior year is
principally related to increased personnel costs. Product development costs
represent costs incurred related to the ongoing efforts to enhance and maintain
the functionality of our Lend-X technology and our Website.
Marketing and advertising expenses increased $38.1 million to
approximately $56.6 million for 2000 compared to $18.5 million for 1999. This
increase is primarily due to substantially higher advertising expenses in 2000
incurred in an effort to build and maintain our brand awareness and attract
users to our Website. During 2000, we ran a national network and cable
television advertising campaign and expanded our radio and outdoor advertising
campaigns to significantly more markets than we did during 1999.
Sales, general and administrative expenses increased to $28.3 million
for 2000 from $10.1 million in 1999, an increase of $18.2 million. Approximately
$9.1 million of this increase is due to higher employee-compensation related
costs due to significant growth in the business. Another $1.6 million of the
increase relates to employee related costs such as travel, relocation and
recruiting fees. Professional and consulting fees increased $1.6 million from
1999 to 2000 reflecting increased professional development; technology
consulting costs; public relations and increased professional fees related to
regulatory and intellectual property matters. We also incurred $1.2 million in
higher facilities, telephone and utilities related expenses due primarily to a
larger facility and employee growth in
24
2000. The amortization of the excess purchase price related to an acquisition
contributed $2.1 million of the increase. Bad debt expense increased $0.8
million from 1999. Depreciation expenses increased $0.8 million from 1999 to
2000 reflecting new equipment and software purchased in 2000.
Included in our operating expenses for 2000 is amortization of deferred
non-cash compensation charges of $2.3 million. As of December 31, 2000, our
consolidated balance sheet reflected deferred non-cash compensation charges of
$3.1 million related to certain stock option and warrant grants that were
considered compensatory. The deferred charge related to stock options ($3.0
million) is being amortized over the four-year vesting period associated with
the related options, ending principally in the third quarter of 2003 and the
first quarter of 2004. The deferred charge related to warrants ($0.1 million) is
being amortized through January 2001, corresponding to the initial term of the
underlying service agreement.
Loss on Impaired Investment
In February 2000, we made a $2.5 million equity investment in a company
providing mortgage marketplace services over the Internet. Our minority
investment represented approximately 8.3% of the outstanding equity of that
business and accordingly, it is accounted for using the cost method of
accounting. In December 2000, we determined that the carrying value of this
investment was impaired as a result of a series of historical and forecasted
operating losses and the prospect that the investment might be unable to fund
its operations in the future. As a result of this impairment, 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.
Interest Income
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased to $2.2
million in 2000 from $0.5 million in 1999. This increase was primarily due to
higher average interest earning account balances in 2000 as a result of the net
proceeds from our initial public offering in February 2000 and the net proceeds
from a private offering of preferred stock in September 1999.
Interest Expense, Financing and Other Charges
Interest expense, financing and other charges consists of bank service
charges and interest expense on capital leases. The increase from 1999 to 2000
is due primarily to new capital leases entered into in 2000.
Dividends and Accretion of Series A Convertible Preferred Stock
For the years ended December 31, 2000 and December 31, 1999, dividends
on preferred stock, including additional dividend charges related to the
increasing value of the common stock underlying the dividends on the preferred
stock, were $2.5 million and $1.7 million, respectively. For the year ended
December 31, 1999, we incurred approximately $0.1 million of accretion charges
related to our preferred stock. We were accreting the value of the mandatorily
redeemable preferred stock up to the redemption value of the shares.
Additionally, for the year ended December 31, 1999, we also incurred $0.5
million of charges related to the conversion of preferred stock warrants to
common stock warrants and $0.5 million of accumulated, undeclared dividends on
preferred stock. See Item 8. Consolidated financial statements, Note 8, for more
details.
Other Information
For the years ended December 31, 2000 and December 31, 1999, net losses
included non-cash compensation charges of $2.3 million and $0.6 million,
depreciation and amortization of $3.2 million and $0.2 million, and
non-operating income (expense), net of $0.1 million and $0.5 million,
respectively. Net losses excluding such items were $60.6 million and $24.4
million, respectively. Because of the significance of non-cash and one-time
charges included in net losses, management regularly reviews EBITDA as one
measure or our operating performance. EBITDA as determined by LendingTree is not
a substitute for operating performance measures under generally accepted
accounting principles (GAAP) and may be different from the presentation of
25
financial information by other companies. GAAP measures of operating performance
are included in the accompanying consolidated financial statements and are
discussed elsewhere in this management discussion and analysis section.
Liquidity and Capital Resources
During 2001, 2000 and 1999 we required $17.2 million, $59.2 million and
$21.2 million of cash to fund operations; such amounts were expended primarily
for advertising, expansion of the infrastructure and support personnel, and
working capital needs. Since inception, we have incurred significant losses and
had an accumulated deficit of $127.1 million as of December 31, 2001. These uses
of cash, losses and accumulated deficit have resulted from the significant costs
incurred for growing our overall business and building our LendingTree brand. As
of December 31, 2001, we had approximately $6.2 million in cash, cash
equivalents and restricted short-term investments.
Restricted cash at December 31, 2001 ($2.8 million) and 2000 ($5.1
million) primarily includes funds that are maintained in an escrow account. This
escrow account was established by us and our advertising agency to maintain
funds set aside by us for future expenditures and services of the advertising
agency. Disbursements from the escrow account can only be made for advertising
expenditures we have approved in advance. We anticipate that advertising costs
will continue to represent a significant portion of operating expenses and that
we will continue to be required to set aside funds in order to secure favorable
advertising spots at reasonable costs.
As more fully described in our notes to our consolidated financial
statements included herein, we have the following sources of financing in place:
-- A revolving credit facility with GE Capital Commercial
Services, Inc. ("GE") that provides for borrowings of up to
$15.0 million. Borrowings are limited to 85% of our eligible
accounts receivable and bear interest at the prime rate. As of
December 31, 2001 we had eligible receivables of $9.0 million
and we had no balance outstanding under this facility.
Eligible receivables fluctuate frequently as a result of
ongoing invoicing and collecting of balances from customers.
We also pay GE a fee of 0.115% of the eligible accounts
receivable arising during the term of the facility.
-- A $2.5 million revolving loan with the Federal Home Loan
Mortgage Corporation ("Freddie Mac") that expires in March
2003. Any amounts outstanding under the Freddie Mac facility
would bear interest at a rate of 10% payable in cash and an
additional amount payable in warrants as more fully described
in the notes to our consolidated financial statements. As of
December 31, 2001, we have not borrowed under this credit
facility and accordingly, have not paid any interest or issued
any warrants.
-- An equity line whereby we may, at our discretion sell shares
of our common stock to an investor from time-to-time subject
to maximum sale limitations in any one monthly period, for up
to a total of $24 million during the term beginning March 6,
2001 and ending March 6, 2003. 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. As of December 31, 2001 we
have not used this equity line.
We believe that the existing cash and cash equivalents, restricted
short-term investments and the availability of the two revolving credit
facilities noted above as well as cash generated from operations will be
sufficient to fund
26
our operating and capital needs through 2002. We believe cash from operations
will be generated from revenue growth resulting from the continued growth in
online-lending, expansion of our network of lenders and by more consumers
utilizing our exchange. We expect to be able to drive more consumers to our
exchange by leveraging our existing high brand awareness and utilizing our new,
product focused advertisements and by developing business relationships with
significant web-portals and financially oriented on-line businesses.
Although we have historically experienced significant revenue growth
and have plans to generate positive cash flows from operations in 2002, 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. Our liquidity could be significantly
affected if this does not happen. However, if revenue does not grow as
anticipated or if we are unable to successfully raise sufficient additional
funds, 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
achieve our business objectives.
If needed, additional financing may not be available 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.
Factors That May Affect Results of Our Operations or Reported Results
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating LendingTree. If any of the events or
circumstances described in the following risk factors actually occur, our
business, financial condition or results of operations may suffer.
Use of Estimates and Judgments
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments 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. We base our estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. On an ongoing basis we evaluate our estimates and refine our
judgments as actual results and experiences develop.
The significant accounting policies listed in Note 3 to the
consolidated financial statements, included herein beginning on page F-1, affect
our estimates and judgments in preparing the consolidated financial statements.
Specifically, our most significant accounting policies affect our
results of operations and financial condition in the following ways:
-- For most of our Lend-X technology arrangements we host our
Lend-X technology for use by third parties that pay us various
fees for the right to access and use our software. For each
arrangement we estimate the term that the customer will use
our services and recognize the applicable revenue over that
period if it is longer than the stated term of the related
contract.
-- At December 31, 2001 we have $3.7 million of intangible
assets, net of accumulated amortization on our balance sheet.
We are amortizing these assets over their estimated useful
lives ranging from 2 to 3.75 years. We estimate the useful
lives of these assets considering our expected use of the
assets, technological advances and the competitive
environment.
-- We estimate liabilities for payouts under various consumer
promotional programs. In order to estimate the expected payout
for any period we consider historical payout levels, the
number of consumers the
27
promotions are being offered to and the rate at which
consumers have historically responded to the promotions.
Actual results could differ from our estimates.
Risks Related to our Financial Condition
Our Limited Operating History Makes our Business and Prospects
Difficult to Evaluate.
We have a limited operating history. We were formed in 1996 and began
serving consumers across the United States in July 1998. There is no significant
historical basis to assess how we will respond to competitive, economic or
technological challenges. Our business and prospects must be considered in light
of the risks and uncertainties frequently encountered by companies in the early
stages of development, particularly companies like LendingTree, Inc., which
operate in new and rapidly developing online marketplaces. Our failure to
address these risks and uncertainties could materially impact our results of
operations and financial condition.
We Have A History of Losses.
We have never been profitable. We incurred losses from operations of
approximately $27.8 million in 2001. As of December 31, 2001, we had an
accumulated net deficit of approximately $127.1 million.
Based on our operating plans and primarily as a result of revenue
growth, management anticipates revenue will exceed operating expenses excluding
depreciation, amortization, non-cash compensation and dividend charges for 2002.
If our revenue grows at a slower rate than we anticipate, or if our spending
levels exceed our expectations or cannot be adjusted to reflect slower revenue
growth, we may not achieve or sustain profitability.
The Long-Term Viability of Our Business Model is Unproven and Could
Fail.
The long-term viability of our business model and profit potential are
unproven and no assurances can be made that we will be able to sustain
profitability. Our revenue model depends heavily on revenue generated from
Lenders participating in our network who pay us fees based upon their receipt of
credit requests (referred to as transmission fees) and fees based upon loan
closings (referred to as closed-loan fees). We also license our Lend-X
technology to other companies who can create single and multi-lender online
marketplaces. We have rapidly achieved broad market acceptance of our service by
both Lenders and consumers who have traditionally used other means to lend and
borrow money. However, to achieve and maintain profitability, we must maintain
such broad market acceptance. In addition, although we have attracted a
sufficient number of consumers with credit profiles targeted by our Lenders and
the revenue per consumer has exceeded the cost of attracting such consumer there
is no guarantee that we will continue to be able to attract sufficient customers
or that the revenue per customer will exceed the costs of attracting the
customer. We cannot accurately predict what, if any, changes we would make to
our business model in response to any uncertainties in the online lending
market.
Our Operating Results May Be Negatively Impacted By Fluctuations in
Interest Rates.
Although we have historically demonstrated growth during periods of
either rising or falling interest rates, future operating results may be
negatively impacted by fluctuations in key interest rates.
During 2001, revenue earned from mortgages, traditionally a market
segment that is greatly impacted by changes in interest rates represented
approximately 40% of our total revenue. While interest rates during this period
were generally falling, our business continued to show increases in Website
traffic, transmitted qualification forms for mortgages and revenue from
closed-loan fees from mortgages.
28
Conversely, during 1999 and through the middle of 2000, interest rates
were generally increasing and our business continued to show increases in
Website traffic, transmitted qualification forms and revenue from closed-loan
fees.
However, there can be no assurances that during future periods of
rising interest rates that we will not experience a decline in consumer traffic
to our Website due to shrinking credit demand. Conversely, during periods of
robust credit demand, typically associated with falling interest rates, Lenders
may have less incentive to use our marketplace. Either of these events could
reduce our revenue and we cannot assess the effects of interest rates on our
business over a broad range of interest rate environments.
Our Quarterly Operating Results Are Not an Indication of Our Future
Results.
Our quarterly operating results may fluctuate significantly in the
future due to a variety of factors that affect our revenue or expenses in any
particular quarter. Our quarterly results will fluctuate in part based on the
demand for and supply of consumer loans, which are a function of seasonal and
other fluctuations in interest rates and related economic factors, all of which
are outside of our control. These temporary fluctuations could adversely affect
our business. If revenue falls below our expectations in any quarter and we are
unable to quickly reduce our spending in response, our operating results would
be lower than expected.
In addition, we expect that as our business matures we will experience
seasonal fluctuations in our operating results due to fluctuations in consumer
credit markets during the year. For example, home buying behavior is seasonal.
Typically there are a greater number of mortgage closings in the second and
third quarters of a year as compared to the first and fourth quarters. Because
of our limited operating history, it has not been possible for us to assess the
impact of seasonal effects on its business.
Pledged Assets
Important components of our intellectual property are subject to an
amended software customization, license and services agreement by and between
LendingTree and the Federal Home Loan Mortgage Corporation, or Freddie Mac.
Pursuant to this agreement a version of our core software, that was customized
to operate according to certain standards established by Freddie Mac, will be
released to Freddie Mac from escrow if we fail to meet specified repayment
obligations, financial covenants or reporting requirements.
A covenant in one of our capital lease agreements requires that we
maintain a cash and cash equivalents 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 December 31, 2001, the balance of this lease was
approximately $0.5 million
Under our revolving credit facility with GE we have pledged our
accounts receivable as collateral security.
Risks Related To Our Markets And Strategy
Our Future Success Is Dependent Upon Increased Acceptance Of The
Internet By Consumers And Lenders As A Medium For Lending.
Increased consumer use of the Internet is subject to uncertainty. If
consumer and lender acceptance of our online exchange does not increase, our
business will not succeed. The online lending market is new and rapidly
developing. The adoption of online lending in general, and our exchange in
particular, requires the acceptance of a new way of conducting business,
exchanging information and applying for credit by consumers, as well as
acceptance by Lenders that have historically relied upon traditional lending
methods. As a result, we cannot be sure that we will be able to compete
effectively with traditional borrowing and lending methods.
Lenders In Our Network Are Not Precluded From Offering Consumer Credit
Products Outside Our Exchange.
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If a significant number of our potential consumers are able to obtain
loans from our participating Lenders without utilizing our service, our ability
to generate revenue may be limited. Because we do not have exclusive
relationships with the Lenders whose loan products are offered on our online
exchange, consumers may obtain offers and loans from these Lenders without using
our service. Our Lenders can offer their products directly to consumers through
brokers, mass marketing campaigns, or through other traditional methods of
credit distribution. These Lenders can also offer their products over the
Internet without using our Lend-X technology, either directly to prospective
borrowers, through one or more of our online competitors, or both.
If Our Participating Lenders Do Not Provide Competitive Levels Of
Service To Consumers, Our Brand Will Be Harmed And Our Ability To Attract
Consumers To Our Website Will Be Limited.
Our ability to provide a high-quality borrowing experience depends in
part on consumers receiving competitive levels of convenience, customer service,
pricing terms and responsiveness from our participating Lenders. If our
participating Lenders do not provide consumers with competitive levels of
convenience, customer service, price and responsiveness, the value of our brand
may be harmed, our ability to attract consumers to our Website may be limited
and the number of consumers using our service may decline.
We May Not Be Able To Manage Our Expanding Operations Effectively.
We have recently experienced a period of rapid expansion. In order to
execute our business plan, we must continue to expand significantly. Our
inability to expand our operations in an efficient manner could cause our
expenses to grow disproportionately to our revenue, or revenue to decline or
grow more slowly than expected, or could otherwise have a material adverse
effect on our business and the value of your investment. Our anticipated future
growth, combined with the requirements we now face as a public company, will
continue to place a significant strain on our management, systems and resources.
We will need to continue to expand and maintain close coordination among our
technical, accounting, finance and sales and marketing departments. We may not
succeed in these efforts.
If We Are Unable To Maintain Our Brand Recognition, Consumer And Lender
Demand For Our Services May Decrease
If we fail to promote and maintain our brand successfully, or incur
significant expenses in promoting our brand and fail to generate a corresponding
increase in revenue as a result of its branding efforts, our business could be
materially adversely affected. We believe we have successfully built a
recognizable brand. We believe that continuing to build and maintain brand
awareness of the LendingTree exchange and Lend-X is critical to achieving
increased demand for our service. Brand recognition is a key differentiating
factor among providers of online lending services, and we believe it will be
increasingly important as competition intensifies. In order to increase our
brand awareness, we must succeed in our marketing efforts, provide high-quality
services and increase the number of consumers using our exchange. If visitors to
our Website do not perceive our existing service to be of high quality or if we
alter or modify our existing service, introduce new services or enter into new
business ventures that are not favorably received, the value of our brand could
be diluted, which could decrease the attractiveness of our service to consumers
and Lenders.
Our Business Could Suffer If We Lose The Services Of Mr. Lebda.
If we lose the services of Douglas Lebda, our founder, Chief Executive
Officer, and a director, our ability to expand our business may be compromised.
Mr. Lebda has been instrumental in determining our strategic direction and focus
and in promoting the concept of an Internet-based lending exchange for consumers
and Lenders. We do not maintain key person insurance on Mr. Lebda.
Risks Related To The Internet And Our Technology Infrastructure
We May Experience Reduced Visitor Traffic, Reduced Revenue And Harm To
Our Reputation In The Event Of Unexpected Network Interruptions Caused By System
Failures.
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Any significant failure to maintain the satisfactory performance,
reliability, security and availability of our Website, filtering systems or
network infrastructure may cause significant harm to our reputation, our ability
to attract and maintain a high volume of visitors to our Website, and to attract
and retain participating consumers and Lenders. Our revenue depends in large
part on the number of credit requests submitted by consumers. Any system
interruptions that result in the inability of consumers to submit these credit
requests, or more generally the unavailability of our service offerings, could
have an adverse impact on our revenue. In addition, we believe that consumers
who have a negative experience with our Website may be reluctant to return to
our Website or recommend LendingTree to other potential consumers. If an outage
occurs, it may severely harm our reputation and our ability to offer our
service. Our computer hardware is located in leased facilities in Beltsville,
Maryland. If this location experienced a system failure, the performance of our
Website would be harmed. These systems are also vulnerable to damage from fire,
floods, power loss, telecommunications failures, break-ins and similar events.
Our insurance policies may not compensate us for any losses that may occur as a
result of any failures or interruptions in our systems. Any extended period of
disruptions could materially adversely affect our business, results of
operations and financial condition.
Breaches Of Our Network Security Could Subject Us To Increased
Operating Costs As Well As Litigation And Other Liabilities.
Any penetration of our network security or other misappropriation of
our users' personal information could cause interruptions in our operations and
subject us to liability. Claims against us could also be based on other misuses
of personal information, such as for unauthorized marketing purposes. These
claims could result in litigation and financial liability. Security breaches
could also damage our reputation with our consumers, Lenders, brokers and
service providers. We rely on licensed encryption and authentication technology
to effect secure transmission of confidential information. It is possible that
advances in computer capabilities; new discoveries or other developments could
result in a compromise or breach of the technology that we use to protect
consumer transaction data. We cannot guarantee that our security measures will
prevent security breaches. We may be required to expend significant capital and
other resources to protect against and remedy any potential or existing security
breaches and their consequences.
Failure To Protect Our Intellectual Property Rights Could Impair Our
Ability To Compete Effectively.
Failure to protect our intellectual property could harm our brand and
our reputation, devalue our content in the eyes of our customers and adversely
affect our ability to compete effectively. Further, enforcing or defending
LendingTree's intellectual property rights, including our service marks, patent
applications, copyrights and trade secrets, could result in the expenditure of
significant financial and managerial resources. We regard our intellectual
property as important to LendingTree's success. To protect the rights to
LendingTree's intellectual property, we rely on a combination of patent,
trademark and copyright law, trade secret protection, confidentiality
agreements, and other contractual arrangements with our employees, affiliates,
clients and others. The protective steps we have taken may be inadequate to
deter misappropriation of our proprietary information. We may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. We may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or diminish the value
of our trademarks and other proprietary rights. We have applied for a U.S.
patent and filed a Patent Cooperation Treaty international patent application on
our Lend-X technology and our online loan market process. While the number of
software and business method patents issued by the U.S. Patent and Trademark
Office has been growing substantially in recent years, there is still a
significant degree of uncertainty associated with these patents. It is possible
that our patent applications will be denied or granted in a very limited manner
such that they offer little or no basis for us to deter competitors from
employing similar technology or processes or allows us to defend against third
party claims of patent infringement.
Risks Related To Legal And Regulatory Uncertainty
As an online lending exchange we may be liable as a result of
information retrieved from our Website or the Websites of businesses with which
we maintain relationships.
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We may be subject to legal claims relating to information that is
published or made available on our Website and the other Websites linked to it.
Our service may subject us to potential liabilities or claims resulting from:
-- Lost or misdirected messages from our network Lenders,
consumers or vendors;
-- Illegal or fraudulent use of e-mail; or
-- Interruptions or delays in transmission of qualification forms
or Lenders' offers.
In addition, we could incur significant costs in investigating and
defending such claims, even if LendingTree ultimately is not found liable. If
any of these events occur, our business could be materially adversely affected.
Failure To Comply With Laws Governing LendingTree's Service Or Material
Changes In The Regulatory Environment Relating To The Internet Could Have A
Material Adverse Effect On Our Business.
The loan products and services available through our Website and the
real estate agent referral and other business relationships in which we operate
essentially as a non-processing mortgage broker, are subject to extensive
regulation by various federal and state governmental authorities. Because of
uncertainties as to the applicability of some of these laws and regulations to
the Internet and, more specifically, to our business, and considering our
business has evolved and expanded in a relatively short period of time, we may
not always have been, and may not always be, in compliance with applicable
federal and state laws and regulations. Failure to comply with the laws and
regulatory requirements of federal and state regulatory authorities may result
in, among other things, revocation of required licenses or registrations, loss
of approved status, termination of contracts without compensation, loss of
exempt status, indemnification liability to Lenders and others doing business
with us, administrative enforcement actions and fines, class action lawsuits,
cease and desist orders, and civil and criminal liability. The occurrence of one
or more of these events could materially affect our business and results of
operations.
Many States Require Us To Obtain Licenses To Offer Many Of Our Products
And We Have Not Obtained Those Licenses In Every State.
Many, but not all, states require licenses to solicit or broker to
residents of those states, loans secured by residential mortgages and other
consumer loans, including credit card, automobile and personal loans. We are
currently neither licensed nor able to accept credit requests for all loan
products in every state. We are not currently accepting credit requests for loan
products from residents of states in which we are not licensed to provide those
products. In many of the states in which we are licensed, we are subject to
examination by regulators. In addition, we are required to obtain real estate
broker licenses, additional mortgage broker licenses and individual call center
personnel licenses in numerous states. Failure to obtain these licenses and
approvals could prevent us from receiving fees from the real estate agent
referral and mortgage services programs we offer and may subject us to the types
of fines, forfeitures and litigation discussed above. As a computer loan
origination system or mortgage broker conducting business through the Internet,
we face an additional level of regulatory risk given that most of the laws
governing lending transactions have not been substantially revised or updated to
fully accommodate electronic commerce. Until these laws, rules and regulations
are revised to clarify their applicability to transactions conducted through
electronic commerce, any company providing loan-related services through the
Internet or other means of electronic commerce will face compliance uncertainty.
Federal law, for example, generally prohibits the payment or receipt of referral
fees in connection with residential mortgage loan transactions. The
applicability of existing or future referral fee prohibitions to the
compensation provisions of fee advertising, marketing, distribution and
cyberspace rental arrangements used by online companies like us may have the
effect of reducing the types and amounts of fees that we may charge or pay in
connection with real estate-secured products.
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.
Regulations promulgated by some states may impose compliance
obligations on any person who acquires 10% or more of our common stock,
including requiring that person to periodically file financial and other
personal and business information. If any person acquires 10% or more of
LendingTree's common stock and refuses or fails to comply with these
requirements, we may not be able to obtain a license and existing licensing
arrangements in
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particular states may be jeopardized. The inability to obtain, or the loss of,
required licenses could have a material adverse effect on our operations or
financial condition. The parties conducting business with us, such as Lenders
and other Website operators, similarly may be subject to federal and state
regulation. These parties act as independent contractors and not as our agents
in their solicitations and transactions with consumers. Consequently, we cannot
ensure that these entities will comply with applicable laws and regulations at
all times. Failure on the part of a lender or other Website operator to comply
with these laws or regulations could result in, among other things, claims of
vicarious liability or a negative impact on our reputation. The occurrence of
one or more of these events could materially adversely affect our business,
results of operation and financial condition.
Regulation Of The Internet Is Unsettled, And Future Regulations Could
Inhibit The Growth Of The Internet, Decrease The Number Of Visitors To
LendingTree's Website Or Otherwise Materially Adversely Affect Our Business.
Existing laws and regulations specifically regulate communications and
commerce on the Internet. Additional laws and regulations that address issues
such as user privacy, pricing, online content regulation, online real estate
referral services, taxation, and the characteristics and quality of online
products and services are under consideration by federal, state and local
governments and agencies. Several telecommunications companies have petitioned
the Federal Communications Commission to regulate Internet service providers and
online service providers in a manner similar to the regulation of long distance
telephone carriers and to impose access fees on such companies. This regulation,
if imposed, could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as intellectual property ownership and infringement and
personal privacy are applicable to the Internet. Many of these laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. The Federal Trade Commission and government agencies in certain
states have been investigating Internet companies regarding their use of
personal information. We could incur additional expenses if any new regulations
regarding the use of personal information are introduced or if these agencies
choose to investigate our privacy practices. Any new laws or regulations
relating to the Internet, or new application or interpretation of existing laws,
could inhibit the growth of the Internet as a medium for commerce or credit
procurement which could, in turn, decrease the demand for our service or
otherwise materially adversely affect our business, results of operation and
financial condition.
We May Be Limited Or Restricted In The Way We Establish And Maintain
Our Online Relationships By Laws Generally Applicable To Our Business.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or any other item
of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or
unearned fees in connection with the provision of residential real estate
settlement services, including mortgage brokerage and lending services.
Notwithstanding these prohibitions, RESPA permits payments for goods or
facilities furnished or for services actually performed, so long as those
payments bear a reasonable relationship to the market value of the goods,
facilities or services provided. Failure to comply with RESPA may result in,
among other things, administrative enforcement actions, class action lawsuits,
cease and desist orders and civil and criminal liability. The mortgage and home
equity products offered through LendingTree's exchange are residential real
estate secured loans subject to these provisions of RESPA. Consequently, our
online relationships with Lenders, other companies and Websites on which we
offer services are subject to RESPA's prohibitions on payment or receipt of
referral fees for referrals and for unearned fees or fee splits. We believe that
we have structured these relationships to comply with RESPA. The applicability
of RESPA's referral fee and fee splitting prohibitions to these types of
Internet-based relationships, however, is unclear and the appropriate regulatory
agency has provided limited guidance to date on the subject.
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Risks Related To Our Stock Price And Corporate Control
Our Common Stock Purchase Agreement With Paul Revere And The Issuance
Of Shares To Paul Revere Thereunder May Cause Significant Dilution To Our
Stockholders And May Have An Adverse Impact On The Market Price Of Our Common
Stock.
In the event that management utilizes the Common Stock Purchase
Agreement, which we refer to as the Equity Line, the resale by Paul Revere of
the common stock that it purchases from us will increase the number of our
publicly traded shares, which could depress the market price of our common
stock. Moreover, as all the shares we sell to Paul Revere will be available for
immediate resale, the mere prospect of our sales to it could depress the market
price for our common stock. The shares of our common stock issuable to Paul
Revere under the equity line will be sold at a 5% discount to the
volume-weighted average daily price of our common stock during the applicable
drawdown period and the proceeds paid to us upon each drawdown will be net of a
4% placement fee to our placement agent, Ladenburg Thalmann, and an escrow agent
fee of $1,000. If we were to require Paul Revere to purchase our common stock at
a time when our stock price is low, our existing common stockholders will
experience substantial dilution. The issuance of shares to Paul Revere will
therefore dilute the equity interest of existing stockholders and could have an
adverse effect on the market price of our common stock.
The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of our
common stock. Moreover, the perceived risk of dilution and the resulting
downward pressure on our stock price could encourage investors to engage in
short sales of our common stock. By increasing the number of shares offered for
sale, material amounts of short selling could further contribute to progressive
price declines in our common stock. In addition, from time to time, we issue
guidance to analysts and the financial community regarding our projected results
for future periods and revisions to guidance previously issued. The
dissemination of guidance or revisions to guidance previously issued may
increase the volatility of our stock price.
Sales Of Substantial Amounts Of Our Common Stock In The Public Market,
Including Shares Issuable Upon The Conversion Of Shares Of 8% Convertible
Preferred Stock, Could Have an Adverse Impact On the Market Price of our Common
Stock.
Sales of a substantial number of shares of our common stock in the
public market could cause a reduction in the market price of our common stock. A
substantial number of our outstanding shares of common stock are eligible for
resale in the public market. As of January 31, 2002, we had 19,246,939 common
shares issued and outstanding. We also had shares of 8% convertible preferred
stock, convertible into 7,370,989 shares of common stock, outstanding at January
31, 2002. The holders of the 8% convertible preferred stock are entitled to
receive quarterly dividends equal to eight percent (8%) per annum 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 each
dividend payment date. If we continue to pay the dividends with adjustments to
the additional stated value per share, the accrued dividends will result in
additional shares of common stock being issued upon conversion of shares of 8%
convertible preferred stock. In addition, the price protection provisions of the
8% convertible preferred stock may result in an upward adjustment to the number
of shares of common stock issuable upon conversion of the 8% convertible
preferred stock, which would result in further dilution to our common
stockholders. At January 31, 2002, we also had outstanding 5,414,334 stock
options to purchase shares and 1,085,385 warrants to purchase shares. Moreover,
we may issue additional shares in acquisitions and may grant additional stock
options to our employees, officers, directors and consultants under our stock
option plan. Any substantial sales of such shares, including shares registered
for resale in connection with our March 2001 financing transactions or shares
held by our principal investors, officers, directors, or other affiliates, my
cause our stock price to decline.
Holders Of Our 8% Convertible Preferred Stock Have Greater Rights And
Preferences Than Our Common Stockholders.
The holders of our 8% convertible preferred stock have rights and
preferences that are senior to those of our common stockholders in many
significant respects. The existence of these rights and preferences may, in a
given
34
situation, result in a reduction in the value of our common stock. Among the
preferential rights afforded to the holders of our 8% convertible preferred
stock are the following:
-- Dividends and Distributions. Dividends must be paid to the
holders of the 8% convertible preferred stock prior to and in
preference to the common stock.
-- Redemption Premium. We are required to redeem all shares of 8%
convertible preferred stock that remain outstanding on March
20, 2006 at a 5% premium to the then current "stated value"
per share, which equals $3.50 per share, plus accrued
dividends. If a significant portion of the 8% convertible
preferred stock remains outstanding on March 20, 2006, all or
substantially all of our assets may be necessary to fund this
redemption.
-- Price Protection. In certain circumstances, the economic value
of the investment in our 8% convertible preferred stock is
protected against future sales of common stock by us at prices
below $3.50 per share. If we sell additional securities at a
price below $3.50 per share, the price at which the 8%
convertible preferred stock converts into common stock may be
adjusted downward, which would automatically entitle these
holders to receive additional shares of common stock upon
conversion. No such protection exists with respect to our
common stock.
-- Protective Provisions. So long as more than 1,377,143 shares
of our 8% convertible preferred stock are outstanding, we are
restricted from engaging in a variety of corporate actions
without the consent of 68.5% of the shares of 8% convertible
preferred stock then outstanding. These provisions may impede
management's ability to conclude transactions that it believes
to be in the best interests of all stockholders.
-- Liquidation Preference. In the event LendingTree is liquidated
or dissolves, the holders of our 8% convertible preferred
stock will be entitled to receive a liquidation preference
equal to 105% of the then current stated value per share,
before any distributions may be made to holders of our common
stock.
-- Change in Control. Upon a merger or change in control, holders
of our 8% convertible preferred stock may have the right to
receive the greater of the liquidation preference described
above or the consideration that they would have received if
they had converted their shares of 8% convertible preferred
stock into common stock immediately prior to the consummation
of the merger or change in control event. In a non-cash
transaction, the holders of 8% convertible preferred stock may
effectively require that the counterparty to such transaction
redeem the convertible preferred stock for a cash amount equal
to the liquidation preference. These provisions may inhibit
our ability to consummate a merger or change in control
transaction and will likely reduce the proceeds of any such
transaction to our common stockholders.
Any of the foregoing rights and preferences may, in a given
situation, disadvantage the holders of our common stock and may reduce
the market price of our common stock.
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.
Our common stock is quoted on the NASDAQ National Market. In order to
continue to be included in the NASDAQ National Market, a company must meet
certain maintenance criteria. Among other things, the maintenance criteria most
applicable to us requires a market capitalization of $50 million and revenue of
$50 million, public float of 1.1 million shares with a value of $15 million, and
a minimum bid price of $3.00. The public float excludes shares held directly or
indirectly by any officer or director of LendingTree. As of December 31, 2001,
we had approximately $113.5 million of market capitalization and for the year
then ended we had revenue of $64 million. Our public float was over 11 million
shares with a market value of approximately $65 million on December 31, 2001.
However, we cannot assure you that we will continue to meet these listing
criteria. If our common stock were to be delisted and in order to have our
common stock relisted on the NASDAQ National Market, we would be
35
required to meet the criteria for initial listing, which are more stringent than
the maintenance criteria. Accordingly, we cannot provide assurances that if we
were delisted we would be able to have our common stock relisted on the NASDAQ
National Market. Further, if our common stock were to be delisted, it may become
more difficult for us to raise funds through the sale of our common stock or
securities convertible into our common stock.
We May Be Unable To Access All Or Part Of Our Equity Line.
If our stock price and trading volume fall below established levels,
then we will not be able to drawdown on the equity line with Paul Revere. In
addition, business and economic conditions may not make it feasible to drawdown
pursuant to this facility. Furthermore, if we are unable to keep a registration
statement effective for those shares of common stock subject to the equity line,
or if our common stock is delisted from The NASDAQ National Market, or if we
experience a material adverse change to our business that is not cured within 45
days, the common stock purchase agreement may terminate, or we may not be able
to drawdown any funds.
It May Be Difficult For A Third Party To Acquire LendingTree, Which
Could Depress Our Stock Price.
Delaware corporate law and our amended and restated certificate or
incorporation and by-laws contain provisions that could have the effect of
delaying, deferring, or preventing a change in control of LendingTree that our
management and stockholders may consider favorable or beneficial. These
provisions could discourage proxy contests and make it more difficult for
stockholders to elect directors and take other corporate actions. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock. These provisions include:
-- Authorization to issue blank check preferred stock, which is
preferred stock that can be created and issued by the board of
directors without prior stockholder approval, with rights
senior to our common stockholders;
-- A staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
-- A requirement that business combinations either be approved by
80% of our stockholders or a majority of our continuing
directors, or provide consideration to our stockholders in
excess of established amounts;
-- Prohibition of stockholder action by written consent; and
-- Advance notice requirements for the submission by stockholders
of nominations for election to the board of directors and for
proposing matters that can be acted upon by stockholders at a
meeting. In addition, we have entered into a stockholder
rights agreement that makes it more difficult for a third
party to acquire us without the support of our board of
directors and principal stockholders.
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.
Our executive officers, directors and entities affiliated with them, as
a group, beneficially own approximately 43% of our voting common stock. These
stockholders are able to exercise significant influence over all matters
requiring approval by our stockholders, including the election of directors and
the approval of significant corporate transactions, including a change of
control of LendingTree. The interests of these stockholders may differ from the
interests of our other stockholders.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141, Business
Combinations, ("SFAS No. 141") which requires that the purchase method
36
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. The implementation of SFAS No. 141 did not have a material impact on
our results of operations, financial condition or cash flows.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This new standard changes the accounting for goodwill and
indefinite-lived 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, effective January 1, 2002. We have evaluated this new standard and
determined that, upon adoption on January 1, 2002 we will continue to amortize
our intangibles over their remaining useful life. We have no goodwill or
indefinite lived intangible assets.
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. We adopted this
standard on January 1, 2002 with no impact on our results of operations,
financial condition or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Related Risks
On July 13, 2001, LendingTree and GE Capital Commercial Services, Inc.
entered into a loan and security agreement and revolving credit note. Under
these arrangements, borrowings will bear interest at the prime rate determined
on the last business day of the preceding calendar month. As of December 31,
2001 the interest rate in effect for us was 5.0% and we had no borrowings
outstanding under this facility. However, with assumed average borrowings
outstanding of $2.0 million over a 12-month period, a 1.0% increase in the prime
rate would result in additional interest expense of approximately $20,000 during
that period.
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 due to the terms of our Series A
Preferred Stock. 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 year ended December 31, 2001, we have
recorded $0.9 million, of dividend charges related to the changes in the fair
value of our common stock underlying the Series A Preferred Stock. As an
example, if we continue to settle the dividend obligations by increasing the
stated value of the preferred stock and if the market price 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 $4.5 million during that
twelve-month period. Conversely, if the market price of our common stock were to
decrease $1.00 per
37
quarter over the next twelve months, we would incur additional fair-value
dividend charges of approximately $0.3 million during that twelve-month period.
Additionally, our credit facility agreement with Freddie Mac requires
that a portion of the quarterly interest payments be in the form of warrants to
purchase our common stock at an exercise price of $.01 per share. The amount of
warrants to be issued will be calculated by dividing the amount of interest to
be paid in the form of warrants by $3.99. 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 December 31, 2001, no amounts had been borrowed
under this facility and no warrant-based interest charges had been incurred.
Item 8. Financial Statements and Supplementary Data
Financial Statements:
The Financial Statements required to be presented under Item 8 are
hereby incorporated by reference to the Financial Statements beginning at page
F-1 of this Form 10-K.
Supplementary Data:
Quarterly Results of Operations
The following table (presented in thousands, except per share amounts)
sets forth a summary of our unaudited quarterly results of operations for each
of the eight quarters in the two-year period ended December 31, 2001. This
information has been derived from unaudited interim financial statements.
Management believes that this unaudited information has been prepared on a basis
consistent with financial statements contained elsewhere in this Form 10-K and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the quarters presented.
This information should be read in conjunction with our consolidated financial
statements and the accompanying notes included elsewhere in this Form 10-K.
Historical results for any quarter are not necessarily indicative of the results
to be expected for any future period.
Quarter Ended
------------------------------------------------------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31
2001 2001 2001 2001 2000 2000 2000 2000
-------- -------- --------- --------- --------- --------- --------- ---------
Revenue $18,751 $17,203 $ 15,809 $ 12,256 $ 9,601 $ 9,030 $ 7,699 $ 4,483
Gross profit 15,451 13,893 12,216 8,770 6,556 6,433 5,632 2,820
Net loss attributable to common shareholders (5,501) (3,725) (12,361) (10,240) (14,946) (15,031) (18,796) (19,691)
Net loss per share (basic and diluted) $ (0.27) $ (0.20) $ (0.66) $ (0.52) $ (0.75) $ (0.81) $ (1.04) $ (2.07)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
PART III
Certain information required by Part III is omitted from this report because we
will file with the Commission a definitive proxy statement relating to our
Annual Meeting of Shareholders scheduled to be held April 24, 2002, no later
than 120 days after the year end of the fiscal year covered by this report, and
certain information to be included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information under the captions "Election of Directors" and "Stock
Ownership of Directors and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 11. Executive Compensation
The information under the captions "Executive Officers, Compensation
and Other Information," "Employment Agreements" and "Compensation Committee
Report on Executive Compensation" in the Proxy Statement is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the captions "Principal Stockholders" "Election
of Directors" and "Stock Ownership of Directors and Executive Officers" in the
Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Relationships and Related
Party Transactions" in the Proxy Statement is incorporated herein by reference.
39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report
The following consolidated financial statements are included as part of Item 8.
1. Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Statements of Changes in Shareholders' Equity (Deficit) for the years
ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules for which provision is made in the applicable regulation of
the Securities and Exchange Commission are not required under the related
instructions, are inapplicable, or the required information is included
elsewhere in the consolidated financial statements.
3. Exhibits
Index to Exhibits
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Amended and Restated Bylaws.
4.1(1) Specimen Common Stock certificate
4.2(1) Specimen Preferred Stock certificate
4.3(2) Certificate of Designation, Preferences and Rights of Series A 8%
Convertible Preferred Stock of LendingTree, Inc.
4.4(2) Registration Rights dated March 7, 2001 by and among LendingTree, Inc
and the signing stockholders listed therein.
10.1(2) Series A 8% Convertible Preferred Stock Purchase Agreement among
LendingTree, Inc. and various investors dated March 7, 2001.
10.2(2) Promissory Note dated March 7, 2001 between Douglas R. Lebda and
LendingTree, Inc.*
10.3(2) Amended and Restated Pledge Agreement dated March 7, 2001 among
LendingTree, Inc., Douglas R. Lebda and Tara Lebda*
10.4(2) Credit Agreement between LendingTree, Inc. and the Union Labor Life
Insurance Company, on Behalf of its Separate Account P dated March 7
2001
10.5(2) Revolving Credit Facility dated March 7, 2001, between LendingTree,
Inc. and the Federal Home Loan Mortgage Corporation.
10.6(2) Warrant to acquire 12,500 shares of LendingTree, Inc. common stock
issued to the Federal Home Loan Mortgage Corporation
10.7(2) Common Stock Purchase Agreement dated March 6, 2001, by and between
LendingTree, Inc. and Paul Revere Capital Partners, Ltd.
40
10.8(2) Separation Agreement and Full and Final Release between Virginia P.
Rebata, Senior Vice President - Human Resources and LendingTree, Inc.,
effective February 1, 2001
10.9(1) 1999 Stock Option Plan of LendingTree, Inc. dated November 20, 1999*
10.10(1) Amended and Restated 1999 Stock Option Plan of LendingTree, Inc.*
10.11(1) 1998 Stock Option Plan of LendingTree, Inc. dated February 3, 1998*
10.12(1) 1997 Stock Option Plan of CreditSource USA, Inc. (formerly known as
Lewisburg Ventures, Inc. and a predecessor to LendingTree, Inc.) dated
January 15, 1997.*
10.13(1) Management Incentive Plan*
10.14(1) LendingTree, Inc. Deferred Compensation Plan for Employees*
10.15(1) LendingTree, Inc. Non-Employee Director Deferred Compensation Plan*
10.16(1) Registration Rights Agreement, dated September 20, 1999
10.17(1) LoanTrader.com, Inc. Series A. Preferred Stock Purchase Agreement,
dated February 1, 2000.
10.18(2) Warrant to purchase 40,000 shares of common stock of LendingTree, Inc.
issued to the Union Labor Life Insurance Company, on behalf of its
Separate Account P.
10.19(2) The Voting Agreement between LendingTree, Inc. and the investors that
are party to the Series A 8% Convertible Preferred Stock Purchase
Agreement each dated March 7, 2001.
10.21(2) Amended and Restated Promissory Note for $1,200,00 dated March 7, 2001
between Douglas R. Lebda and LendingTree, Inc.*
10.22(2) Amended and Restated Promissory Note for $500,000 dated March 7, 2001
between Douglas R. Lebda and LendingTree, Inc.*
10.23(3) Warrant to purchase 40,000 shares of common stock of LendingTree, Inc.
issued to the Union Labor Life Insurance Company, on behalf of its
Separate Account P, dated July 31, 2001.
10.24(3) LendingTree, Inc. Amended and Restated Stock Purchase Plan dated
July 1, 2001.
10.25(3) Promissory Note Between LendingTree, Inc. and Douglas R. Lebda dated
August 14, 2001*
10.26(3) Amended and Restated Pledge Agreement Among LendingTree, Inc. and
Douglas R. Lebda dated August 14, 2001.*
10.27(4) LendingTree, Inc. 2001 Stock Incentive Plan dated August 23, 2001*
10.28(4) Letter of Understanding Between LendingTree, Inc. and Douglas R. Lebda
dated September 24, 2001*
10.29(4) Officer Grant Letter Between LendingTree, Inc. and Douglas R. Lebda
dated September 28, 2001*
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney, pursuant to which amendments to this Form 10-K may
be filed, is included on this signature page contained in Part IV of
this Form 10-K.
99.1 Press release dated February 5, 2002 to announce fourth quarter 2001
results
1 - Incorporated by reference to the exhibit previously filed with our
Registration Statement on Form S-1, declared effective on February 15, 2000.
2 - Incorporated by reference to the exhibit of such information previously
filed with our Form 10-K for the year ending December 31, 2000.
3 - Incorporated by reference to the exhibit of such information previously
filed with our Form 10-Q for the quarter ending June 30, 2001.
4 - Incorporated by reference to the exhibit of such information previously
filed with our Form 10-Q for the quarter ending September 30, 2001.
* - Denotes a management contract or a compensatory plan or arrangement.
41
(b) Reports on Form 8-K
On November 29, 2001, we filed a Current Report on Form 8-K to report, pursuant
to Item 5 thereof (Other Events), matters discussed at the LendingTree open
house for investors and analysts. No financial statements were filed as part of
this Current Report on Form 8-K.
(c) Exhibits
See Item 14(a)(3)
(d) Financial Statement Schedules
See Item 14 (a)(2)
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ Douglas R. Lebda
-------------------------------
Name: Douglas R. Lebda
Title: Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Douglas R. Lebda and Keith B.
Hall, and each or any of them, his true and lawful attorneys-in-fact and agents,
each with the power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934 this report has been signed by the following persons in
the capacities indicated and on the date below:
DATE SIGNATURE TITLE(S)
---- --------- --------
February 25, 2002 /s/ Douglas R. Lebda Chief Executive Officer and
Director (principal executive officer)
--------------------------------------------------------------------------------
Douglas R. Lebda
February 25, 2002 /s/ Keith B. Hall Senior Vice President, Chief Financial
Officer and Treasurer (principal
financial and accounting officer)
--------------------------------------------------------------------------------
Keith B. Hall
February 25, 2002 /s/ Michael DeVico Director
--------------------------------------------------------------------------------
Michael DeVico
43
February 25, 2002 /s/ Richard Field Director
--------------------------------------------------------------------------------
Richard Field
February 25, 2002 /s/ Robert Kennedy Director
--------------------------------------------------------------------------------
Robert Kennedy
February 25, 2002 /s/ Daniel Charles Lieber Director
--------------------------------------------------------------------------------
Daniel Charles Lieber
February 25, 2002 /s/ W. James Tozer, Jr. Director
--------------------------------------------------------------------------------
W. James Tozer, Jr.
February 25, 2002 /s/ Robert A. Spass Director
--------------------------------------------------------------------------------
Robert A. Spass
44
CONSOLIDATED FINANCIAL STATEMENTS
As required under Item 8. Financial Statements and Supplementary Data,
our consolidated financial statements are provided in this separate section. The
consolidated financial statements included in this section are as follows:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of LendingTree, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of LendingTree, Inc. and its subsidiary at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Charlotte, North Carolina
February 4, 2002
F-2
LendingTree, Inc.
Consolidated Balance Sheets
December 31,
2001 2000
--------- ---------
Assets ($ in thousands)
Current assets:
Cash and cash equivalents $ 3,400 $ 2,666
Short-term investments -- 4,991
Restricted short-term investments 2,764 5,059
--------- ---------
Total cash and cash equivalents, short-term investments
and restricted short-term investments 6,164 12,716
Accounts receivable, net of allowance for doubtful accounts 11,438 7,510
Prepaid expenses and other current assets 1,174 1,010
--------- ---------
Total current assets 18,776 21,236
Equipment, furniture and leasehold improvements, net 2,016 2,866
Software, net 2,854 6,475
Intangible assets, net 3,667 6,204
Other assets 618 576
Investment in other business -- 600
--------- ---------
Total assets $ 27,931 $ 37,957
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 4,508 $ 4,778
Deferred revenue 2,013 1,601
Accrued expenses 9,554 6,189
Current portion capital lease obligations 743 732
--------- ---------
Total current liabilities 16,818 13,300
Deposits by subtenants 145 113
Capital lease obligations 291 848
Commitments and contingencies (Note 10)
Mandatorily redeemable securities (Note 8):
Series A convertible preferred stock, $.01 par value,
8% cumulative, 6,885,715 shares authorized, 6,885,715
and 0 shares issued and outstanding at December 31, 2001
and December 31, 2000, respectively 23,878 --
Shareholders' equity (deficit):
Common stock, $.01 par value, 100,000,000 shares authorized,
19,907,034 and 19,653,956 shares issued at December 31, 2001
and 2000, respectively 199 197
Treasury stock (661,996 shares at December 31, 2001 and
916,515 shares at December 31, 2000, at cost) (4,170) (5,774)
Additional paid-in-capital 121,675 132,080
Accumulated deficit (127,064) (98,149)
Deferred compensation (1,477) (3,056)
Notes receivable from officers for equity transactions (2,364) (1,603)
Unrealized gain on available-for-sale securities -- 1
--------- ---------
Total shareholders' equity (deficit) (13,201) 23,696
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 27,931 $ 37,957
========= =========
The accompanying notes are an integral part of
these consolidated financial statements
F-3
LendingTree, Inc.
Consolidated Statements of Operations
For the Years Ended December 31,
2001 2000 1999
-------- -------- --------
(in thousands, except per share data)
Revenue:
Exchange $ 57,478 $ 27,465 $ 6,112
Lend-X technology 6,541 3,348 852
-------- -------- --------
Total revenue 64,019 30,813 6,964
-------- -------- --------
Cost of revenue:
Exchange 12,427 7,498 2,209
Lend-X technology 1,262 1,874 312
-------- -------- --------
Total cost of revenue 13,689 9,372 2,521
Gross profit:
Exchange 45,051 19,967 3,903
Lend-X technology 5,279 1,474 540
-------- -------- --------
Total gross profit 50,330 21,441 4,443
Operating expenses:
Product development 4,580 2,677 1,109
Marketing and advertising 39,903 56,599 18,528
Sales, general and administrative 33,637 28,268 10,056
-------- -------- --------
Total operating expenses 78,120 87,544 29,693
-------- -------- --------
Loss from operations (27,790) (66,103) (25,250)
Loss on impaired investment (600) (1,900)
Interest income 594 2,212 545
Interest expense, financing and other charges (1,119) (212) (40)
-------- -------- --------
Net loss (28,915) (66,003) (24,745)
-------- -------- --------
Accretion of mandatorily redeemable preferred stock (527) -- (131)
Conversion of preferred stock warrants to common stock warrants -- -- (525)
Accumulated, undeclared dividends on convertible preferred stock -- -- (506)
Dividends on preferred stock (2,385) (2,461) (1,654)
-------- -------- --------
Net loss attributable to common shareholders $(31,827) $(68,464) $(27,561)
======== ======== ========
Net loss per common share - basic and diluted $ (1.66) $ (4.15) $ (7.74)
======== ======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 19,160 16,512 3,560
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements
F-4
LendingTree, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
(in thousands, except share data)
Convertible
Preferred Unreal- Note Total
Stock Common Stock Addi- ized Receiv- Share-
------------------ ----------------- tional Accum- Gains Deferred able to holders'
Number of Number of Treasury Paid-In ulated (loss- Compen- Acquire Equity
Shares Amount Shares Amount Stock Capital Deficit es) sation Stock (Deficit)
--------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 1998 -- -- 3,750,172 $ 38 $ -- $ 5,668 $ (7,401) $ -- $ -- $ (1,695)
Exercise of common stock
options 274,419 3 494 497
Issuance of common stock in
lieu of compensation 46,064 310 310
Sale of Series D Convertible
Preferred stock, net 6,024,096 47,457 47,457
Issuance of warrants in
conjunction with sale of
Series A Convertible
Preferred stock 25 25
Conversion of preferred stock
from mandatorily redeemable 1,666,667 9,378 9,378
Conversion of preferred stock
warrants to common stock
warrants 303 303
Conversion of convertible
notes into Series D
Convertible Preferred stock 214,076 1,777 1,777
Repurchase of common stock (5,978) (5,978)
Issuance of stock options in
conjunction with consulting
and severance agreements 684 (335) 349
Issuance of stock options to
employees at below fair
market value 2,576 (2,576) --
Amortization of deferred
compensation 144 144
Accretion of mandatorily
redeemable preferred stock (131) (131)
In-kind dividends on Series A
convertible preferred stock 87,817 506 (506) --
Other comprehensive income:
Unrealized gain,
available-for-sale
securities 46
Net loss (24,745)
Total comprehensive loss (24,699)
--------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 1999 7,992,656 59,118 4,070,655 $ 41 $ (5,978) $ 9,423 $(32,146) $ 46 $(2,767) $ -- $ 27,737
The accompanying notes are an integral part of
these consolidated financial statements
F-5
LendingTree, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) - continued
(in thousands, except share data)
Convertible
Preferred Unreal- Note Total
Stock Common Stock Addi- ized Receiv- Share-
------------------- ----------------- tional Accum- Gains Deferred able to holders'
Number of Number of Treasury Paid-In ulated (loss- Compen- Acquire Equity
Shares Amount Shares Amount Stock Capital Deficit es) sation Stock (Deficit)
---------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 1999 7,992,656 59,118 4,070,655 $ 41 $ (5,978) $ 9,423 $(32,146) $ 46 $(2,767) $ -- $ 27,737
Issuance of stock options to
employees below fair
market value 1,320 (1,320) --
Issuance of warrants to
business partner for
services provided 1,279 (1,279) --
Amortization of deferred
compensation 2,310 2,310
Initial public offering of
common stock 4,197,500 42 44,770 44,812
In-kind dividends on
Series A and D
preferred stock 269,996 4,115 (4,115) --
Conversion of Series A
and D preferred stock to
common stock (8,262,652) (63,233) 10,493,530 105 63,128 --
Exercise of common stock
options 253,221 3 1,846 1,849
Notes receivable from
officers to acquire stock (1,603) (1,603)
Issuance of common stock in
connection with
business acquisition 639,077 6 4,733 4,739
Issuance of equity rights
certificate 9,844 9,844
Reissuance of treasury
shares for employee stock
purchase plan participants 204 (148) 56
Other comprehensive income:
Unrealized gain,
available-for-sale
securities (45)
Net loss (66,003)
Total comprehensive loss (66,048)
---------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 2000 -- -- 19,653,983 $ 197 $ (5,774) $132,080 $(98,149) $ 1 $(3,056) $(1,603) $ 23,696
The accompanying notes are an integral part of
these consolidated financial statements
F-6
LendingTree, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) - continued
(in thousands, except share data)
Convertible
Preferred Unreal- Note Total
Stock Common Stock Addi- ized Receiv- Share-
------------------ ----------------- tional Accum- Gains Deferred able to holders'
Number of Number of Treasury Paid-In ulated (loss- Compen- Acquire Equity
Shares Amount Shares Amount Stock Capital Deficit es) sation Stock (Deficit)
--------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 2000 -- -- 19,653,983 $ 197 $ (5,774) $132,080 $(98,149) $ 1 $(3,056) $(1,603) $ 23,696
Amortization of deferred
compensation 937 937
Accrued dividends on Series A
convertible preferred stock
(Note 8) (1,522) (1,522)
Accretion of Series A
convertible preferred
stock (Note 8) (495) (495)
Note receivable from officer
in exchange for Series A
convertible preferred stock
(Note 11) (829) (829)
Compensation charge related
to officer note receivable 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 7) 381 381
Issuance of warrants to
financial advisor for
services provided 431 431
Cashless exercise of common
stock warrants 112,290 1 (1) --
Conversion of equity share
rights to Series A
convertible preferred stock
(Note 8) (9,367) (9,367)
Deferred compensation
adjustment for forfeited and
amended options (591) 642 51
Reissuance of treasury shares
for employee stock purchase
plan participants 1,604 (1,066) 538
Stock based compensation 35,405 137 137
Exercise of common stock options 105,356 1 323 324
Other comprehensive loss:
Unrealized gain,
available-for-sale securities (1)
Net loss (28,915)
Total comprehensive loss (28,916)
--------- -------- ---------- ------ --------- -------- --------- ------ -------- -------- ---------
Balance at December 31, 2001 -- -- 19,907,034 $ 199 $ (4,170) $121,675 $(127,064)$ -- $(1,477) $(2,364) $(13,201)
========= ======== ========== ====== ========= ======== ========= ====== ======== ======== =========
The accompanying notes are an integral part of
these consolidated financial statements
F-7
LendingTree, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
-----------------------------------
2001 2000 1999
-------- --------- --------
($ in thousands)
Cash flows used in operating activities:
Net loss $(28,915) $ (66,003) $(24,745)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,857 3,232 249
Loss on the impairment of investment and other assets 944 1,900 --
(Gain) loss on the disposal of fixed assets (18) 148 --
Provision for doubtful accounts (13) 945 129
Compensation charge related to officer note 1,365 -- --
Non-cash equity based compensation charges 475 -- 672
Issuance of warrants in conjunction with credit facilities 481 -- --
Amortization of deferred compensation 937 2,310 144
Issuance of Series D Convertible Preferred
stock in lieu of interest -- -- 27
Changes in assets and liabilities:
Accounts receivable (3,915) (6,402) (1,911)
Prepaid expenses and other current assets (162) (15) (918)
Other assets (84) (398) (117)
Accounts payable (169) 1,126 2,843
Deferred revenue 412 1,392 209
Accrued expenses and other liabilities 3,592 2,571 2,227
-------- --------- --------
Net cash used in operating activities (17,213) (59,194) (21,191)
-------- --------- --------
Cash flows from (used in) investing activities:
Purchase of short-term investments (16,964) (134,207) (27,007)
Sales of short-term investments 21,954 156,221 --
Purchase of restricted investments (28,728) (62,415) --
Sales of restricted investments 31,561 57,358 --
Acquisition of certain assets of another business 61 (6,200) --
Investment in another business -- (2,500) --
Investments in software (781) (2,326) (415)
Purchases of equipment, furniture, leasehold improvements (206) (1,105) (710)
-------- --------- --------
Net cash from (used in) investing activities 6,897 4,826 (28,132)
-------- --------- --------
Cash flows from financing activities:
Proceeds from sales of common stock and
warrants and exercise of stock options 206 246 497
Payment of capital lease obligations (757) (287) --
Repurchase of common stock -- -- (5,978)
Proceeds from issuance of convertible notes -- -- 1,750
Proceeds from sale of mandatorily redeemable
Series A Convertible Preferred stock and warrants,
net of offering costs 12,178 -- 4,931
Fees paid related to debt and equity financing (645) -- --
Proceeds from initial public offering, net of offering costs -- 44,812 --
Proceeds from the sale of an equity rights certificate,
net of offering costs -- 9,844 --
Proceeds from repayment of officer note 68 -- --
Proceeds from sale of Series D Convertible
Preferred stock, net of offering costs -- -- 47,457
-------- --------- --------
Net cash provided by financing activities 11,050 54,615 48,657
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 734 247 (666)
Cash and cash equivalents, beginning of period 2,666 2,419 3,085
-------- --------- --------
Cash and cash equivalents, end of period $ 3,400 $ 2,666 $ 2,419
======== ========= ========
The accompanying notes are an integral part of
these consolidated financial statements
F-8
LENDINGTREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ presented in tables herein are in thousands;
all other amounts are as shown)
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; instead we attract consumers to our
Website through various forms of advertising and send their loan requests to the
network of banks, lenders and loan brokers ("Lenders") participating on our
exchange.
Our technology platform, Lend-X(SM), 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 automatically compared to the underwriting criteria of the more
than 140 Lenders participating on our lending exchange. Qualified consumers can
receive multiple loan offers on-line 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, home
equity loans, 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 the Lenders on our network that pay us fees for
qualification forms that meet their underwriting criteria and are transmitted to
them ("transmission fees"). Since a qualification form can be transmitted to
more than one lender, we may generate multiple transmission fees for the same
form. We also earn revenue for loans that the Lenders on our network close
with consumers that we referred to them ("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 refer to the aggregate of these fees as our Exchange revenue.
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 140 participating Lenders. Through
these Lend-X relationships, 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 such
exchanges.
2. Business Conditions and Liquidity Considerations
During 2001, we required $17.2 million of cash to fund operations; such
amounts were expended primarily for advertising, expansion of the infrastructure
and support personnel, and working capital needs. During 2000, we required $59.2
million of cash to fund operations. Since inception, we have incurred
significant losses and had an accumulated deficit of $127.1 million as of
December 31, 2001. These uses of cash, losses and accumulated deficit have
resulted from the significant costs incurred for growing our overall business
and building our LendingTree brand. As of December 31, 2001, we had
approximately $6.2 million in cash, cash equivalents and restricted short-term
investments.
F-9
As more fully described in Note 7, herein, we have the following
sources of financing in place:
-- A revolving credit facility with GE Capital Commercial
Services, Inc. ("GE") that provides for borrowings of up to
$15.0 million. Borrowings are limited to 85% of our eligible
accounts receivable and bear interest at the prime rate. As of
December 31, 2001 we had eligible receivables of $9.0 million
and we had no balance outstanding under this facility.
Eligible receivables fluctuate frequently as a result of
ongoing invoicing and collecting of balances from customers.
We also pay GE a fee of 0.115% of the eligible accounts
receivable arising during the term of the facility.
-- A $2.5 million revolving loan with the Federal Home Loan
Mortgage Corporation ("Freddie Mac") that expires in March
2003. Any amounts outstanding under the Freddie Mac facility
would bear interest at a rate of 10% payable in cash and an
additional amount payable in warrants as more fully described
in the notes to our consolidated financial statements. As of
December 31, 2001, we have not borrowed under this credit
facility and accordingly, have not paid any interest or issued
any warrants.
-- An equity line whereby we may, at our discretion sell shares
of our common stock to an investor from time-to-time subject
to maximum sale limitations in any one monthly period, for up
to a total of $24 million during the term beginning March 6,
2001 and ending March 6, 2003. 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. As of December 31, 2001 we
have not used this equity line.
We believe that the existing cash and cash equivalents, restricted
short-term investments and the availability of the revolving credit facilities
noted above 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 have plans to generate positive cash flows from operations in 2002, 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 positive cash flows from operations. Our liquidity
could be significantly affected if this does not happen. However, if revenue
does not grow as anticipated or if we are unable to successfully raise
sufficient additional funds, 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 achieve our business objectives.
If needed, additional financing may not be available 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.
3. Summary Of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
LendingTree, Inc. and our wholly owned subsidiary (Homespace Acquisition
Company). All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates and Judgments
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments 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. We base our estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. On an ongoing basis we evaluate our estimates and refine our
judgments as actual results and experiences develop. Significant estimates and
judgments are involved in the process of determining our Lend-X technology
revenue recognition, percentage complete under long-term contracts, the value
and lives of acquired intangible assets, liabilities for consumer promotional
costs and the valuation of our common stock options and warrants. Actual results
could differ from those estimates. The following significant accounting policies
affect our estimates and judgments in preparing the consolidated financial
statements.
F-10
Cash and Cash Equivalents
For purposes of the statement of cash flows, we consider all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Short-Term and Restricted Short-Term Investments
The aggregate fair values of our short-term and restricted short-term
investments (all available-for-sale investments in short-term corporate
commercial paper) as of December 31, 2000 were as follows:
Unrealized Amortized
Holding Cost
Fair Value Gains Basis Maturities
---------- ---------- --------- ------------------
12/31/2000 $ 10,050 $ 1 $ 10,049 Less than 6 months
---------- ---------- ---------
The specific identification cost basis is used to determine realized
gains on our available-for-sale securities. The unrealized holding gain of
$1,000 is included as a separate component of shareholders' equity for the year
ended December 31, 2000. Investments in available-for-sale securities are
carried at fair value. There were no available-for-sale investments at December
31, 2001.
As of December 31, 2001 and 2000, we had $2.8 million and $5.1 million,
respectively, of cash classified as restricted investments. Of these balances at
December 31, 2001 and 2000, $2.3 million and $4.9 million, respectively, relate
to funds deposited into an escrow account that was established by us and our
advertising agency to maintain funds set aside by us 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 advertising costs we have approved in advance. 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 escrow
account.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 2001 and 2000 approximated their fair value
due to the short-term nature of these items. The carrying value of our
short-term investments at December 31, 2001 and 2000 approximated their fair
values.
Accounts Receivable
Our accounts receivable are presented net of an allowance for doubtful
accounts. Management estimates the amount of the necessary allowance using its
judgment about current factors, such as customers' financial condition, and
based on historical trends of receivable write-offs. Receivables are written-off
against this allowance when management determines the amount is uncollectible.
Equipment, Furniture, Leasehold Improvements and Intangible Assets
Our equipment and furniture are stated at cost less accumulated
depreciation and are being depreciated using the straight-line method over their
estimated useful lives, which range from one to five years. Leasehold
improvements are stated at cost and are depreciated over the shorter of the
lease period or the estimated useful life of the improvement. Ordinary
maintenance and repair costs are expensed as incurred.
Intangible assets consist of purchased intangible assets and are
amortized on a straight-line basis over their estimated useful lives ranging
from 2 years to 3.75 years. See Note 5.
F-11
Impairment of Long-Lived Assets
We evaluate the recoverability of our property and equipment and
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," ("SFAS No. 121"). SFAS No. 121 requires recognition
of impairment of long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets or
the business to which such assets relate. No impairments of long-lived assets
were required to be recognized during the years ended December 31, 2001, 2000
and 1999.
Incentive Compensation
Under our incentive compensation plan, employees can earn awards based
on achievement of various financial and operational performance factors or other
specific goals. The actual award formula may vary by individual and the goals
are not the same from year to year. During the year, management makes monthly
estimates of the amount of an award each employee has earned based on levels of
achievement relative to the goals and performance factors. These monthly
estimates are accrued with a charge to operating income for that period. The
awards are typically paid to the employee following the completion of a year.
Consumer Promotional Costs
At our discretion, we may offer consumers that utilize our exchange
services certain promotional incentives to complete a transaction. We may offer
these consumers the opportunity to receive cash payments, gift certificates,
airline miles or other discounts or coupons in the event they complete a
transaction utilizing our services. We estimate the liability for these consumer
promotional costs each month based on the number of consumers that are presented
such offers, the cost of the item being offered and the historical trends of
consumers qualifying for the offer and our payout rates. The estimated costs of
the consumer promotional incentives are charged to operating income each period.
Income Taxes
We account for income taxes using the liability method whereby deferred
tax assets or liabilities are recognized for the temporary differences between
financial reporting and tax bases of our assets and liabilities and for tax
carryforwards. In estimating future tax consequences, we generally consider all
expected future events other than enactment of changes in tax law or rates. If
it is "more likely than not" that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is recorded.
Revenue Recognition
Exchange:
Our exchange revenue principally represents transmission fees and
closed-loan fees paid by Lenders that received a transmitted loan request or
closed a loan for a consumer that originated through our Website,
www.lendingtree.com. Transmission fees are recognized at the time qualification
forms are transmitted, while closed-loan fees are recognized at the time the
lender reports the closed loan to us, which may be several months after the
qualification form is transmitted. Additionally, we earn revenue through a
network of real estate brokers who compensate us for real estate transactions
that generally originate from a consumer on our or a client's Website. Revenue
earned through our network of real estate brokers is recognized upon
notification by the broker that a real estate transaction has closed.
Additional exchange revenue is derived from loan requests that are
received through private-label or co-branded Websites of other businesses that
are enabled by our Lend-X technology. If these qualification forms are
successfully transmitted to or closed by one of the Lenders on our exchange, we
earn transmission fees and/or closed-loan fees, if applicable, from that lender,
which are recognized as described above.
F-12
Technology:
Lend-X technology revenue is related primarily to hosting, licensing
access to and modifying our proprietary software for use by Lenders and other
third parties.
Our typical Lend-X technology arrangement involves licensing access to
and hosting our software for use by third parties. These arrangements typically
include implementation, consulting and/or other services bundled together with
the access and hosting fees. In accordance with SAB No. 101, the revenue for the
entire arrangement is deferred and recognized over the longer of the term of the
related contract or the expected service period. Our hosting arrangements do not
permit customers to take possession of our software.
Revenue from arrangements involving only consulting or other services
(that is not bundled with access or hosting services) is recognized as the
services are performed. Maintenance is recognized ratably over the longer of the
term of the underlying agreement or the expected service period. Maintenance
includes technical support and updates and upgrades to our software.
When a contractual arrangement requires us to provide services for
significant implementation, customization or modification of the software or
when the customer considers these services essential to the functionality of the
software product, both the software fees and consulting services revenue are
recognized in accordance with the provisions of Statement of Position ("SOP")
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." We recognize revenue from these arrangements using
the percentage-of-completion method primarily based on labor hour inputs.
Therefore, during the implementation period, both the software fee and the
consulting services revenue are recognized as work progresses.
Losses, if any, are recognized when identified.
Cost of Revenue
Exchange:
Our exchange cost of revenue includes salary and benefit costs of the
customer care and implementation groups, credit scoring fees, consumer
promotional costs, and the website network hosting fees.
Technology:
Cost of revenue related to Lend-X technology includes direct costs of
modifying our proprietary software for licensing to lenders and the cost of
servers related to hosting the systems for these licensees. When revenue has
been deferred for hosting contracts, we defer the related direct costs incurred
and recognize these costs pro rata with the related revenue.
Marketing and Advertising Expenses
Marketing and advertising expenses consist primarily of costs of
advertising, trade shows, fees paid to affiliates, and certain indirect costs.
All costs of advertising our services and products are expensed as incurred.
Advertising expense totaled approximately $35.1 million, $50.7 million and $17.1
million in the years ended December 31, 2001, 2000 and 1999, respectively.
Software Development Costs
Software development costs primarily include expenses incurred by us to
develop our proprietary software, which powers our Website. Statement of
Position No. 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1") provides guidance regarding when
software developed or obtained for internal use should be capitalized. SOP 98-1
requires that certain costs incurred during the application development stage be
capitalized, while costs incurred during the preliminary project stage and post-
F-13
implementation/operation stage should be expensed as incurred. We account
for our website development costs and other internal use software in accordance
with SOP 98-1.
During 2001 and 2000, we capitalized internal use software development
costs of approximately $0.8 million and $2.2 million, respectively, (including
compensation costs, purchased software and consulting costs related to internal
use software projects). Additionally, we have recorded capitalized software
costs related to the purchase of technology through an acquisition.
Capitalized software development costs are amortized over the estimated
life of the related application, which range from 1 to 3 years.
Stock-Based Compensation
We account for the effect of our stock-based compensation plans for
employees under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") using the optional intrinsic
value method. The intrinsic value method results in compensation cost equal to
the excess of the fair value of the stock over the exercise or purchase price at
the date of award. Such compensation costs are recorded over the vesting period
of the respective option and presented in the consolidated statement of
operations as a cost of revenue or operating expense, consistent with where the
optionees' compensation is recorded. We also disclose the pro forma income
statement effect of its stock-based compensation plans as if we had adopted the
fair value approach. The fair value approach results in compensation cost using
an option-pricing model that takes into account the fair value at the grant
date, the exercise price, the expected life of the award, the expected
dividends, and the risk-free interest rate expected over the life of the award.
We account for the effect of its stock-based compensation for
non-employees under SFAS No. 123, using the fair value approach.
Significant Customers and Concentrations
Financial instruments that potentially subject us to a concentration of
credit risk consist of cash and cash equivalents and accounts receivable. Cash
equivalents are invested in repurchase agreements on an overnight basis with
high credit quality financial institutions. Short-term investments are comprised
of commercial paper from a diverse group of high credit quality issuers.
For the years ended December 31, 2001, 2000 and 1999, no lender
exceeded 10% of our revenue. All of our revenues are from transactions
originating in the United States.
For 2001, two customers accounted for 35% and 32%, respectively, of our
total Lend-X technology revenue. For 2000 one customer accounted for 71% of our
total Lend-X technology revenue. For 1999, one customer accounted for 49% and
another customer accounted for 45% of our Lend-X technology revenue.
As of December 31, 2001, no customer exceeded 10% of our accounts
receivable balance. As of December 31, 2000 one customer accounted for
approximately 22% of the accounts receivable balance. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
Lenders comprising our customer base.
If a significant number of potential consumers are able to obtain loans
from our participating Lenders without utilizing our service, our ability to
generate revenue may be limited. Because we do not have exclusive relationships
with the Lenders whose loan products are offered on our online marketplace,
consumers may obtain offers and loans from these Lenders without using our
service. Our Lenders can offer their products directly to consumers through
brokers, mass marketing campaigns, or through other traditional methods of
credit distribution.
F-14
These Lenders can also offer their products over the Internet, either directly
to prospective borrowers, through one or more of our online competitors, or
both.
Net Loss Per Common Share
We compute net loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128").
Under the provisions of SFAS No. 128 basic net loss per common share is computed
by dividing net loss available to common shareholders by the weighted average
number of common shares outstanding. Diluted net loss available to common
shareholders is computed by dividing net loss by the weighted average number of
common shares and dilutive potential common shares then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants and shares issuable upon conversion of convertible preferred stock.
The calculation of net loss per common share for years ended December
31, 2001, 2000 and 1999 does not include 1.4 million, 1.7 million and 5.2
million, respectively, of weighted average potential common shares, as their
impact would be antidilutive.
F-15
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This statement
establishes standards for the way companies report information about business
segments in annual and interim financial statements.
Based on the nature of our products and services, the types of
customers and the regulatory environment, management has organized our business
into three operating segments: our lending exchange (lendingtree.com), real
estate services and Lend-X Technology.
The lending exchange is primarily focused on enabling consumers to
receive multiple loan offers in response to a single, on-line, credit request
and then compare, review and accept the offer that best suits their needs. The
exchange is also focused on providing Lenders the ability to generate new
business that meets their specific underwriting criteria. Consumer's can reach
the exchange through our website, www.lendingtree.com or through a variety of
private-label or co-branded websites enabled by Lend-X. Once on the exchange,
consumers can apply for a variety of loan products.
Through our real estate services we provide access to a network of real
estate professionals that can assist a consumer in buying or selling a home. 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.
The Lend-X Technology segment is focused licensing and hosting our
Lend- X technology platform for use by other businesses enabling them 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. Through these Lend-X
relationships, 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 such exchanges.
Management regularly reviews the revenue, cost of revenue and gross
margins for these segments. No other operating expenses, measure of profitablity
or assets or liabilities are consistently segregated or allocated into these
segments for regular review by management or in determining allocations of
resources. There are no inter-segment revenues.
F-16
The following tables present the revenue and gross profits for each of
our three segments for 2001, 2000 and 1999 as well as a reconciliation to
consolidated net loss.
-----------------------------------------------------
For the Year Ended December 31, 2001
-----------------------------------------------------
------------------
Exchange
------------------
Lending Realty Total Lend-X Consolidated
Exchange Services Exchange Technology
------------------ ------- ---------- ------------
Revenue $ 52,925 $ 4,553 $57,478 $ 6,541 $ 64,019
Cost of revenue 8,223 4,204 12,427 1,262 13,689
------------------ ------- ------------------------
Gross profit $ 44,702 $ 349 $45,051 $ 5,279 50,330
------------------ ------- ------------------------
Reconciling items:
Operating expenses 78,120
------------
Loss from operations (27,790)
------------
Loss on impaired
investment (600)
Interest income 594
Interest expense (1,119)
------------
Consolidated net loss $ (28,915)
============
-----------------------------------------------------
For the Year Ended December 31, 2000
-----------------------------------------------------
------------------
Exchange
------------------
Lending Realty Total Lend-X Consolidated
Exchange Services Exchange Technology
------------------ ------- ---------- ------------
Revenue $ 26,773 $ 692 $27,465 $ 3,348 $ 30,813
Cost of Revenue 6,750 748 7,498 1,874 9,372
------------------ ------- ------------------------
Gross Profit 20,023 (56) 19,967 1,474 21,441
------------------ ------- ------------------------
Reconciling items:
Operating expenses 87,544
------------
Loss from operations (66,103)
------------
Loss on impaired
investment (1,900)
Interest income 2,212
Interest expense (212)
------------
Consolidated net loss $ (66,003)
============
-----------------------------------------------------
For the Year Ended December 31, 1999
-----------------------------------------------------
------------------
Exchange
------------------
Lending Realty Total Lend-X Consolidated
Exchange Services Exchange Technology
------------------ ------- ---------- ------------
Revenue $ 6,112 $ -- $ 6,112 $ 852 $ 6,964
Cost of Revenue 2,209 -- 2,209 312 2,521
------------------ ------- ------------------------
Gross Profit 3,903 -- 3,903 540 4,443
------------------ ------- ------------------------
Reconciling items:
Operating expenses 29,693
------------
Loss from operations (25,250)
------------
Interest income 545
Interest expense (40)
------------
Consolidated net loss $ (24,745)
============
F-17
Cash Flow Information
For the years ended December 31, 2001, 2000 and 1999 we paid interest
of approximately $0.2 million, less than $0.1 million and less than $0.1
million, respectively. We paid no income taxes during such periods.
A supplemental schedule of non-cash investing and financing activities follows:
Year Ended
December 31,
------------
2001 2000 1999
---------------------------
Conversion of preferred stock and
accumulated dividends into common stock $ -- $63,233 $ --
Notes receivable issued to officers to
acquire stock in the company $ 829 $ 1,603 $ --
Acquisition of assets through capital leases $ 211 $ 1,867 $ --
Accretion of mandatorily
redeemable preferred stock $ 527 $ -- $ 131
Dividends issued to preferred
shareholders on conversion of
preferred stock warrants to
common stock warrants $ -- $ -- $ 525
Accumulated, undeclared dividends
on convertible preferred stock $ -- $ -- $ 506
Dividends on convertible preferred
stock $ 2,385 $ 2,461 $1,654
Conversion of convertible notes and
accrued interest into Series D
Convertible Preferred stock $ -- $ -- $1,777
Issuance of warrants and other costs in
conjunction with revolving credit facilities $ 481 $ -- $ --
Issuance of warrants in conjunction
with preferred stock financing and
convertible promissory notes $ 431 $ -- $ 63
Issuance of common stock in connection with
acquisition of key assets for another business $ -- $ 4,739 $ --
Accrued liabilities established in connection
with a business acquisition $ -- $ 1,496 $ --
Reclassifications
Certain reclassifications were made to the prior year consolidated
financial statements to conform them to the current presentation.
F-18
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141, Business
Combinations, ("SFAS No. 141") which 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. The implementation of SFAS No. 141 did not have a material impact on
our results of operations, financial condition or cash flows.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This new standard changes the accounting for goodwill and
indefinite-lived 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, effective January 1, 2002. We have evaluated this new standard and
determined that, upon adoption on January 1, 2002 we will continue to amortize
our intangibles over their remaining useful life. We have no goodwill or
indefinite lived intangible assets.
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. We adopted this
standard on January 1, 2002 with no impact on our results of operations,
financial condition or cash flows.
4. Accounts Receivable
Trade accounts receivable consists of the following at December 31:
December 31,
------------
2001 2000
-------- --------
Accounts receivable $ 11,750 $ 8,159
Less: allowance for doubtful accounts (312) (649)
-------- --------
$ 11,438 $ 7,510
======== ========
The provision for doubtful accounts, in dollars and as a percentage of
sales, was nil, $0.9 million (2.1%) and $0.1 million (1.7%) for the years ended
December 31, 2001, 2000 and 1999, respectively. Write-offs of accounts
receivable, in dollars and as a percentage of sales, were $0.3 million (0.5%),
$0.4 million (1.3%) and $0.02 million (0.3%) for the years ended December 31,
2001, 2000 and 1999, respectively.
F-19
5. Non-current Assets
Our non-current assets consist principally of the following:
December 31,
Expected Life ------------
(Years) 2001 2000
------------- ------- -------
Equipment, furniture and
leasehold improvements
Computer hardware 2 to 3 $ 2,020 $ 1,834
Office furniture and equipment 3 to 5 1,888 1,801
Leasehold improvements Life of lease 78 37
------- -------
3,986 3,672
Accumulated depreciation (1,970) (806)
------- -------
Net $ 2,016 $ 2,866
======= =======
Software
Computer systems software 1 to 3 $ 8,374 $ 7,168
Work in progress 282 794
------- -------
8,656 7,962
Accumulated amortization (5,802) (1,487)
------- -------
Net $ 2,854 $ 6,475
======= =======
Intangible Assets
Realtor network 3 $ 6,472 $ 6,644
Affinity program partner contracts 2 to 3.75 544 559
------- -------
7,016 7,203
Accumulated amortization (3,349) (999)
------- -------
Net $ 3,667 $ 6,204
======= =======
Depreciation expense for equipment, furniture and leasehold
improvements for the years ended December 31, 2001, 2000 and 1999 was
approximately $1.2 million, $0.7 million and $0.2 million, respectively.
Amortization expense for software for the years ended December 31,
2001, 2000 and 1999 was $4.3 million, $1.5 million and $0.1 million,
respectively.
Amortization expense for intangible assets for the years ended
December 31, 2001, 2000 and 1999 was $2.4 million, $1.0 million and none,
respectively.
We lease certain equipment and furniture under capital lease
arrangements. The cost of the equipment and furniture under capital leases at
December 31, 2001 and 2000 was $ 2.1 million and $1.9 million, respectively. The
accumulated amortization for equipment and furniture under capital lease
arrangements was $1.0 million and $0.3 million, respectively.
F-20
6. Accrued Expenses
Accrued expenses are comprised of the following:
December 31,
------------
2001 2000
------------ ------------
Professional services and other fees $ 444 $ 516
Advertising 1,080 744
Incentive and other compensation 5,627 3,638
Consumer promotional costs 1,619 769
Other 784 522
------------ ------------
Total Accrued Expenses $ 9,554 $ 6,189
============ ============
7. Financing Sources
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 our accounts receivable and is subject
to certain covenants and restrictions. Borrowings are limited to 85% of the
eligible accounts receivable and bear interest at the prime rate. As of December
31, 2001 we had eligible receivables of $9.0 million. Eligible accounts
receivable are subject to significant fluctuation period to period. 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.
As of December 31, 2001, we had no borrowings outstanding under the GE
credit facility and we were in compliance with the covenants of the facility.
Also as of December 31, 2001 we had a approximately $.5 million receivable due
from GE representing funds collected on our accounts receivable through a
lockbox service managed by GE.
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") and issued ULLICO a commitment fee warrant
to purchase 40,000 shares of common stock at an exercise price of $.01 per
share. 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. Both warrants expire in March 2006. In connection with the termination of
the ULLICO credit facility, 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 agreed to provide us a two-year
credit facility under which we may borrow up to $2.5 million on a revolving
basis through February 2003, subject to certain covenants and restrictions.
Under the terms of this agreement, we are required to pay interest
quarterly on the average daily outstanding balance at a rate of 10% per annum
interest in cash and additional interest in the form of warrants to purchase our
common stock at a price of $.01 per share. The number of warrants Freddie Mac is
entitled to receive is based on
F-21
the average amount outstanding on the revolving line of credit during the
quarter multiplied by an annual interest rate of 10% divided by $3.99 (subject
to certain adjustments as defined in the agreement). We anticipate that the
actual amount of interest expense recorded will be based on the estimated fair
value of the warrants on the date that they are issued.
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 $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 December 31, 2001, we had not borrowed and there was no balance
outstanding under this revolving loan and we were in compliance with the
covenants of this facility.
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.
In connection with establishing this facility, we had incurred
approximately $0.3 million of costs that were initially deferred and were to be
recognized as a charge against the proceeds of the first sale of stock under
this facility. As of December 31, 2001 there have been no drawdowns under this
equity line. Further, based on our current cash position and projected financial
results, the likelihood of any future use of this equity line, in management's
judgment, is remote. Accordingly, in the period ending December 31, 2001 we
wrote-off the $0.3 million of deferred financing costs with a charge to interest
and other financing costs.
8. Convertible Preferred Stock and Shareholders' Equity
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 (including Capital Z, our largest shareholder and certain officers
and directors) for $12.95 million or $3.50 per share. We issued an additional
128,571 shares of Series A Preferred Stock to our Chief Financial Officer and a
director 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 $12.2 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.
F-22
Also, as further discussed below (see Equity Rights Certificate), in
conjunction with the March 2001 closing of the Series A Preferred Stock
financing transaction, an Equity Rights Certificate was converted into 2,857,143
shares of Series A Preferred Stock at an effective rate of $3.50 per share.
As of December 31, 2001, there were a total of 6,885,715 shares of
Series A Preferred Stock outstanding.
Each share of our Series A Preferred Stock is convertible, at the
option of the holder, into the number of shares of common stock determined by
dividing (a) the current value per share by (b) the conversion price.
The current value per share is the sum of the stated value per share
plus any accrued but unpaid dividends. The conversion price is the initial
purchase price of $3.50, subject to certain revisions from time to time for
stock splits and similar adjustments.
The holders of our Series A Preferred Stock are entitled to receive
quarterly dividends on the Series A Preferred Stock equal to eight percent (8%)
per annum of the stated value per share payable at our option (i) in cash or
(ii) by increasing the stated value per share on the dividend payment date.
The stated value per share is the sum of the initial purchase price of
$3.50 per share as cumulative adjusted from time to time by accumulated
dividends.
Through December 31, 2001 we had elected to pay the quarterly dividends
by increasing the stated value per share of the Series A Preferred Stock. As a
result of these dividends, through December 31, 2001, we have increased the
carrying value of the Series A Preferred Stock on our balance sheet by
approximately $1.5 million. We have also recognized, as an increase to our net
loss attributable to common shareholders, an additional $0.9 million of dividend
charges resulting from the excess of the fair value of the common stock that the
8% dividends on the Series A Preferred Stock will convert into over the $3.50
conversion price that will be paid upon such conversion. In total we recorded
$2.4 million of dividend charges for the year ending December 31, 2001. If we
continue to settle the dividend obligations by increasing the stated value of
the preferred stock and if the market price of our common stock remains above
$3.50 per share, we will continue to incur these fair value dividend charges
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. Accordingly, we are accreting the
value of the Series A 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 December 31, 2001, we have recorded
approximately $0.5 million of accretion charges.
In certain circumstances, the economic value of the investment in our
8% convertible preferred stock is protected against future sales of stock by us
at prices below $3.50 per share. If we sell additional common or preferred stock
at a price below $3.50 per share, the price at which the 8% convertible
preferred stock converts into common stock may be adjusted downward, which would
automatically entitle these holders to receive additional shares of common stock
upon conversion
In connection with the Series A Preferred Stock financing transaction,
we agreed to grant warrants to acquire a total of 112,500 shares of common stock
at a price of $.01 per share to our financial advisor in this transaction. The
warrants were granted in four equal installments on April 30, 2001, June 20,
2001, September 20, 2001 and December 20, 2001 and immediately exercised, using
the cashless exercise method, resulting in the issuance of a total of 112,290
shares of common stock.
F-23
Equity Rights Certificate
On September 29, 2000, Capital Z Partners ("Capital Z"), our largest
shareholder, purchased an Equity Rights Certificate from us for $10 million. The
Equity Rights Certificate was initially exercisable for 1,253,918 shares of our
common stock and warrants to purchase 225,000 shares of our common stock with an
exercise price of $7.975. The Equity Rights Certificate contained anti-dilution
provisions that allowed Capital Z to receive additional shares of our common
stock if a financing transaction occurred prior to the expiration of the Equity
Rights Certificate. As a part of the transaction, Capital Z also received a
commitment fee warrant to purchase 135,000 shares of our common stock.
In conjunction with the March 2001 Series A Preferred Stock financing
transaction, the Equity Rights Certificate was converted into 2,857,143 shares
of Series A Preferred Stock at an effective rate of $3.50 per share. We recorded
the conversion of the Equity Rights Certificate through a credit to mandatorily
redeemable preferred stock of approximately $9.4 million (net of offering and
related costs) with a corresponding charge to additional paid in capital. This
amount was determined as the gross proceeds received net of offering costs (of
approximately $0.2 million) and the estimated fair value of the warrants
(approximately $0.5 million determined using a valuation model). Additionally,
concurrent with the sale of the Series A Preferred Stock, the exercise price of
the commitment fee warrant was calculated and set at $3.762 per share. The
warrant is exercisable at any time until September 29, 2005.
Common Stock
On February 15, 2000, we completed the sale of 4,197,500 shares of its
common stock at an initial public offering ("IPO") price of $12.00 per share,
raising approximately $44.8 million, net of offering expenses, underwriting
discounts and commissions. Simultaneous with the closing of the initial public
offering, all previously outstanding shares of Series D convertible preferred
stock including accumulated, unpaid in-kind dividends through that date were
automatically converted into an aggregate of 10.5 million shares of common
stock.
Stock Split
In January 2000, the Board of Directors approved a 1.27-for-1 common
stock split that was effective February 22, 2000 upon the closing of our initial
public offering. The consolidated financial statements for all periods presented
have been restated to reflect the effect of this stock split. In addition, the
Board approved an amendment to our certificate of incorporation, effective in
conjunction with our Form S-1 Registration Statement, increasing the authorized
capital stock to 100,000,000 shares of common stock and 10,000,000 shares of
preferred stock, each with a par value of $0.01 per share.
1999 Convertible Preferred Stock Sale
On September 20, 1999, we entered into a Series D Convertible Preferred
Stock Purchase Agreement (the "Series D Agreement") under which we sold
6,024,096 shares of Series D Convertible Preferred stock at $8.30 per share for
total gross proceeds of approximately $50 million. We also incurred
approximately $2.5 million in offering costs, which have been netted against the
proceeds. Preferred shareholders were entitled to cumulative dividends that
accrued on a daily basis at a rate of 8% per annum.
During May 1999, we sold 333,334 shares of Series A Convertible
Preferred stock at $6.00 per share for gross proceeds of $2.0 million. We also
granted a warrant to the investors in this round to purchase 33,020 shares of
common stock at approximately $7.87 per share. The fair value of these warrants
was approximately $12,000 and was calculated using an option valuation model.
F-24
During March 1999, we sold 500,000 shares of Series A Convertible
Preferred stock at a price of $6.00 per share and a warrant to purchase 40,000
shares of Preferred stock at $9.00 per share for gross proceeds of $3.0 million.
Effective upon the closing of our public offering of common stock on
February 22, 2000, all outstanding shares of Series A and Series D preferred
stock and accumulated undeclared dividends automatically converted into 10.5
million shares of common stock.
In conjunction with the sale of Series D Convertible Preferred stock,
warrants to acquire 381,000 shares of Preferred stock were exchanged for
warrants to purchase 381,000 shares of common stock at approximately $4.72 per
share. The warrants expire September 2005. The exchange has been reflected in
the consolidated financial statements as a $0.5 million distribution to the
preferred shareholders equivalent to the excess of the current fair value of the
new warrants over the carrying value of the existing warrants, and has been
included in the calculation of net loss attributable to common shareholders for
the year ended December 31, 1999. The new warrants issued were valued at
approximately $0.8 million utilizing an option valuation model.
In connection with the Series D Agreement we granted a warrant to
purchase 127,000 shares of common stock at approximately $7.52 per share to a
broker in the transaction, the fair value of which (approximately $0.5 million,
calculated using an option valuation model) was included in offering costs of
the Series D sale. In January 2000, this broker became an underwriter our
initial public offering and agreed to exchange its existing warrant for a new
warrant to purchase 127,000 shares of common stock at an exercise price equal to
the initial public offering price of common stock ($12.00). The new warrant is
exercisable for a five-year period from the date of the first warrant or through
September 21, 2004. Upon the exchange of these warrants, we recorded an offset
to the IPO proceeds of approximately $0.1 million based upon the fair value of
the new warrant issued in excess of the existing warrant based upon an option
valuation model.
Convertible Promissory Notes
During June and July 1999, we entered into Convertible Promissory Note
Agreements (the "Notes") with certain individuals from which we received a total
of $1.75 million. We also issued 53,340 warrants to purchase common stock at
approximately $7.87 per share to the purchasers of these Notes. These warrants
were valued at approximately $19,000 using an option valuation model. The value
of these warrants was recognized as interest expense during the year ended
December 31, 1999.
The Notes bore interest at 8% per annum, compounded quarterly. The
Notes plus accrued interest converted to 214,076 shares of Series D Convertible
Preferred stock in connection with the 1999 Convertible Preferred Stock sale
described above.
F-25
Common Stock Warrants
In addition to the warrants issued in connection with the credit
facilities (see Note 7) and the Preferred stock sales and issuance of
convertible notes (see Note 8) we have also issued the following warrants:
In February 2000, we issued two warrants to a Lend-X client in
connection with an agreement to co-brand a website. Each warrant is for the
purchase of 95,250 shares of our common stock at $7.87 per share. The first
warrant, granted February 2, 2000, with an underlying fair value of $11.00, was
immediately vested and exercisable at the date of grant. The second warrant was
granted February 15, 2000 with an underlying fair value of $12.00 and was also
immediately vested and exercisable. Both warrants expire in February 2002. An
expense of approximately $1.3 million, calculated using an option valuation
model, was recognized ratably for services provided over the initial one-year
period of the agreement. For the years ended December 31, 2001 and 2000, we
recognized charges for these warrants of approximately $0.1 million and $1.2
million, respectively.
In December 1998, we issued a warrant to purchase 63,500 shares of
common stock at $4.72 per share to a broker in connection with the closing of a
Preferred stock sale. The warrant is exercisable and expires in December 2004.
The value of the warrant (approximately $50,000 determined utilizing a option
valuation model) was recorded as an offset to the proceeds of the Preferred
stock sale.
In November 1998, we also issued a warrant to purchase 9,525 shares of
common stock at $4.72 per share in connection with a line of credit provided by
a shareholder. The fair value of this warrant (approximately $7,000) was
recognized in expense during the year ended December 31, 1998. This warrant was
valued using an option valuation model. The warrant expires in November 2003.
The line of credit is no longer available.
F-26
The following tables summarize the common stock warrants outstanding at
December 31, 2001 and the annual activity for common stock warrants:
Weighted
Average
Common Stock Warrants Number of Exercise
Warrants Price
--------- --------
Outstanding as of December 31, 1998 403,225 $ 4.72
Granted 645,160 6.76
Cancelled/Forfeited (381,000) 6.40
--------- --------
Outstanding as of December 31, 1999 667,385 6.52
Granted 342,010 6.25
Cancelled/Forfeited (16,510) 7.87
--------- --------
Outstanding as of December 31, 2000 992,885 6.40
Granted 205,000 0.01
Exercised (112,500) 0.01
Cancelled/Forfeited -- --
--------- --------
Outstanding as of
December 31, 2001 1,085,385 $ 5.86
========= ========
Exercisable as of
December 31, 2001 1,085,385 $ 5.86
========= ========
Common Stock Warrants
Outstanding at December 31, 2001
--------------------------------
Exercise Number Expiration
Price Outstanding Date
-------- ----------- --------------
$0.01 92,500 March 2006
3.76 135,000 September 2005
4.72 9,525 November 2003
4.72 63,500 December 2004
4.72 381,000 September 2005
7.87 190,500 February 2002
7.87 33,020 May 2004
7.87 22,860 June 2004
7.87 30,480 July 2004
12.00 127,000 September 2004
---------
1,085,385
=========
F-27
Treasury Stock
We utilized approximately $6.0 million of the proceeds from the 1999
sale of Convertible Preferred Stock to repurchase 948,971 shares of common stock
(of which 666,750 shares were purchased from Board members for approximately
$4.2 million in connection with their departure from the Board) which has been
reflected as treasury stock, at cost, in the accompanying consolidated financial
statements.
As of December 31, 2001 there are 661,996 shares of common stock issued
and classified as treasury stock.
Employee Stock Options and Other Benefit Plans
We have established and our shareholders have approved the 1997, 1998,
1999 and 2001 Stock Option Plans (the "Plans"). The Plans, as amended, provide
for the granting of both incentive stock options and non-qualified stock options
to our employees, officers, directors and consultants.
--------------------------------------------------------------------------------
Number of
Securities
Plan Category Number of Weighted Remaining
Securities Average Available for
to be Issued Exercise Future Issuance
Upon Exercise Price of Under Equity
of Outstanding Outstanding Compensation
Options Options Plans
--------------------------------------------------------------------------------
Equity Compensation Plans
Approved By Shareholders
- Stock Option Plans 5,455,985 $4.86 2,620,537
--------------------------------------------------------------------------------
Equity Compensation Plan Not
Approved By Shareholders
- Employee Stock None - See Not Applicable 263,025
Purchase Plan below,
securities have
been issued
--------------------------------------------------------------------------------
Under all of our stock option plans, the exercise price of any
incentive stock option shall not be less than the fair value of the stock on the
date of grant or less than 110% of the fair value in the case of optionees
holding more than 10% of the total combined voting power of all our classes of
stock. Options under our stock option plans are exercisable for ten years from
the date of grant, except for incentive stock options granted to optionees
holding more than 10% of the total combined voting power of all classes of
stock, which must be exercised within five years.
Our stock option plans generally provide for a four-year vesting
requirement with one-quarter of such shares vesting at the end of one full year
and on an annual basis thereafter. Upon a change of control, as defined, 50% of
all unvested stock options shall vest. If a change of control occurs, the
compensation committee to our Board of Directors has authority to vest the
remaining 50% of unvested options that are otherwise not automatically vested.
F-28
A summary of incentive stock options awarded to employees during the
years ended December 31, 2001, 2000 and 1999 follows (exercise prices are
expressed in actual dollars):
Weighted
Average Exercise
Number of Exercise Price
Options Price Range
--------- -------- ------------
Outstanding as of December 31, 1998 619,141 $ 4.15 $1.43-$5.20
Granted at fair value 521,660 5.09 4.72-6.06
Granted below fair value 530,466 5.68 5.51-6.53
Cancelled/Forfeited (218,377) 4.85 4.72-5.20
--------- -------- ------------
Outstanding as of December 31, 1999 1,452,890 4.93 1.43-6.53
Granted at fair value 1,632,743 5.32 2.38-16.31
Granted below fair value 537,924 9.30 9.25-10.43
Exercised (56,757) 4.22 3.54-5.51
Cancelled/Forfeited (465,352) 6.71 3.54-16.31
--------- -------- ------------
Outstanding as of December 31, 2000 3,101,448 5.65 1.43-16.13
Granted at fair value 302,119 3.91 3.06-6.76
Exercised (11,856) 4.00 3.54-4.72
Cancelled/Forfeited (372,560) 5.53 2.80-14.00
--------- -------- ------------
Outstanding as of December 31, 2001 3,019,151 5.49 $1.43-$16.13
========= ======== ============
Exercisable as of December 31, 2001 1,016,042 $ 5.19 $1.43-$16.13
========= ======== ============
A summary of non-qualified stock options awarded during the years ended
December 31, 2001, 2000 and 1999 follows (exercise prices are expressed in
actual dollars):
Weighted
Average Exercise
Number of Exercise Price
Options Price Range
--------- -------- ------------
Outstanding as of December 31, 1998 1,212,701 $ 2.19 $ 1.43-$5.20
Granted at fair value 287,752 5.81 4.72-6.06
Granted below fair value 403,682 5.23 4.72-5.51
Exercised (274,419) 1.80 1.43-4.72
Canceled/forfeited (111,610) 4.80 4.72-5.20
--------- -------- ------------
Outstanding as of December 31, 1999 1,518,106 3.56 1.43-4.72
Granted at fair value 584,970 4.92 2.80-12.00
Granted below fair value 229,844 9.43 9.25-12.00
Exercised (196,464) 8.19 1.43-12.00
Cancelled/Forfeited (42,186) 5.51 5.51-5.51
--------- -------- ------------
Outstanding as of December 31, 2000 2,094,270 4.11 1.43-12.00
Granted at fair value 462,316 3.72 3.44-7.15
Granted below fair value 25,000 0.01 .01-.01
Exercised (93,500) 1.70 .01-4.72
Cancelled/Forfeited (51,252) 4.90 2.80-9.25
--------- -------- ------------
Outstanding as of December 31, 2001 2,436,834 $ 4.07 $1.43-$12.00
========= ======== ============
Exercisable as of December 31, 2001 1,330,091 $ 3.61 $1.43-$12.00
========= ======== ============
F-29
The following table summarizes information about our stock options
(exercise prices are actual dollars):
Options Outstanding at
December 31, 2001
------------------------------
Exercise Number Remaining Options
Price Outstanding Contractual Life Exercisable
------------ ------------ ---------------- -----------
$0 -$1.63 728,094 5.8 years 728,094
1.63-3.26 1,076,750 8.9 years 268,557
3.26-4.89 1,240,847 8.1 years 406,683
4.89-6.53 1,224,868 7.8 years 599,843
6.53-8.16 398,525 8.5 years 115,814
8.16-9.79 639,063 8.0 years 177,058
9.79-11.42 65,338 8.1 years 16,334
11.42-13.05 48,500 7.8 years 25,250
13.05-14.68 18,000 8.3 years 4,500
14.68-16.31 16,000 8.2 years 4,000
------------ ------------- -----------
5,455,985 7.9 years 2,346,133
============ ============= ===========
The weighted average fair value at date of grant for options granted at
fair value during the years ended December 31, 2001, 2000 and 1999 was $3.68,
$3.74 and $1.10, respectively.
The weighted average fair value at the date of grant for options
granted below fair value during the years ended December 31, 2001, 2000 and 1999
was $0.01, $3.90 and $4.66, respectively.
In September 1999, a consulting agreement was entered into with a
former member of the Board of Directors and a severance agreement was entered
into with a former executive. Both individuals had their existing incentive
stock options cancelled, and new non-qualified stock options were issued at the
current fair value. They received 76,200 and 114,300 options, respectively, to
purchase common stock at $5.20 and $4.72 per share, respectively. The fair value
of these options, as determined using an option valuation model range from $2.39
to $4.40. Compensation expense related to the consulting agreement is being
recognized over the three-year term ending October 12, 2002. For the years ended
December 31, 2001, 2000 and 1999, we recorded expense of approximately $0.1
million, $0.1 million and less than $0.1 million, respectively. Compensation
expense of $0.3 million related to the severance agreement was recognized
immediately in September 1999.
During the third and fourth quarter of 1999, we granted stock options
to purchase approximately 740,000 shares of our common stock to employees at
exercise prices ranging from $5.51 to $6.54 per share. Based on the difference
between the strike price of these options and the fair market value at the date
of grant (ranging from $6.54 to $9.70 per share), we recorded a deferred
compensation charge of approximately $2.6 million and we are amortizing it to
expense over the options' four year vesting period.
In January 2000, we granted stock options to purchase approximately
770,000 shares of common stock to employees at an exercise price of $9.25 per
share. Based on the difference between the exercise price of these options and
the fair market value at the date of grant ($11.00), we recorded a deferred
compensation charge of approximately $1.3 million and we are amortizing it to
expense over the options' four-year vesting period.
At December 31, 2001 we have approximately $1.4 million of deferred
compensation remaining on our consolidated balance sheet related to the 1999 and
January 2000 stock options granted below fair market value. For the years ended
December 31, 2001, 2000 and 1999 the amortization of these deferred compensation
charges resulted in $0.8 million, $1.0 million and $0.1 million of non-cash
compensation expense, respectively.
F-30
In January 2000, we adopted the LendingTree, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP is intended to comply with the requirements of
Section 423 of the Internal Revenue Code and to assure the participants of the
tax advantages thereby. The ESPP is administered by a committee established by
the board of directors. The committee has authorized for issuance under the plan
a total of 550,000 shares of common stock. All full-time employees are eligible
to participate in the ESPP, except employees who own five percent or more of our
common stock.
For 2001 and 2000, the ESPP provides for a series of consecutive,
overlapping offering periods that generally will be 24 months long. Beginning on
January 1, 2002, the overlapping offering periods will be 18 months long.
Successive six-month purchase periods will run during each offering period.
During each offering period, participating employees will be able to purchase
shares, subject to limitations, of common stock at a purchase price equal to 85%
of the fair market value of the common stock at either the beginning of each
offering period or the end of each purchase period within the offering period,
whichever price is lower.
Since the beginning of the ESPP, there have been three purchase dates
under which we sold and participants in the ESPP acquired shares of our common
stock from treasury stock at the following prices:
Average
Purchase
Purchase Date Shares Sold Price
------------- ----------- --------
December 31, 2001 149,686 shares $2.41
June 30, 2001 104,833 shares $1.70
December 29, 2000 32,456 shares $1.75
We account for the effect of our stock-based compensation plans for
employees under SFAS No. 123 using the optional intrinsic value method. Had
compensation expense for all of our stock options been recorded based on the
fair value method, our net loss and net loss per common share basic and diluted
would have been as follows:
Year Ended
December 31,
------------
2001 2000 1999
-------- -------- --------
Net loss attributable to
common shareholders $(31,827) $(68,464) $(27,561)
Pro forma adjustment for stock
compensation expense (5,679) (4,182) (748)
--------- --------- --------
Pro forma net loss attributable
to common shareholders $ (37,506) $ (72,646) $(28,309)
========= ========= ========
Net loss per common share -
basic and diluted $ (1.66) $ (4.15) $ (7.74)
Pro forma adjustment for stock
compensation expense (0.30) (0.25) (0.21)
--------- --------- --------
Pro forma net loss per common
share - basic and diluted $ (1.96) $ (4.40) $ (7.95)
========= ========= ========
F-31
Because options vest over several years and additional options are
expected to be granted in subsequent years, the pro forma impact on periods
presented may not be representative of the pro forma effects on reported net
income or loss in future years.
The fair value of each option grant in 1998, 1999 and until our initial
public offering of common stock in February 2000 was estimated on the date of
grant using the minimum value method based upon the following assumptions:
dividend yield -- 0%; risk free interest rate -- 5.1% (1998); 4.75 -- 5.75%
(1999) and 5.3% (2000) and weighted average expected option term - 4 years
(1998); 5 years (1999) and 5 years (2000).
Following our initial public offering of common stock in February 2000
and for 2001, the fair value of each option grant was estimated on the date of
the grant using the Black-Scholes method based on the following assumptions: a
dividend yield - 0%; a risk-free interest rate of 4.36%, a weighted average
expected option term of 5 years and a volatility factor of 95%.
Beginning in 2000, we provided a 401(k) Retirement Savings Plan to our
employees. We may make a matching contribution equal to a uniform percentage of
participants salary deferrals. These contributions vest ratably over a two-year
period. Our matching contributions for the years ending December 31, 2001 and
2000 were approximately $0.1 million in each year.
9. Income Taxes
There is no current income tax provision or benefit for the years ended
December 31, 2001, 2000 or 1999 as we have generated net operating losses for
income tax purposes since inception. There is no deferred provision or benefit
for income taxes recorded as we are in a net deferred tax asset position for
which a full valuation allowance has been recorded because the realization of
these benefits could not be reasonably assured.
Significant components of our deferred tax assets and liabilities at
December 31, 2001 and 2000 consist of the following:
December 31,
------------
2001 2000
-------- --------
Deferred tax assets:
Current
Accounts receivable $ 121 $ 356
Compensation accruals 946 1,400
Noncurrent
Domestic net operating loss carryforwards 46,240 34,139
Unrealized investment loss -- 740
Stock compensation 580 1,159
Intangible amortization 1,651 677
Other 460 203
-------- --------
Gross deferred tax assets 49,998 38,674
Less: Valuation allowance (49,871) (38,637)
-------- --------
Net deferred tax assets $ 127 $ 37
-------- --------
Deferred tax liabilities:
Stock based compensation 127 --
Fixed assets -- 37
-------- --------
Total deferred tax liabilities 127 37
-------- --------
Net deferred tax asset (liability) $ -- $ --
======== ========
F-32
The increase in the valuation allowance resulted primarily from the
additional net operating loss carryforward generated.
We have net operating loss carryforwards for income tax purposes of
approximately $118 million available at December 31, 2001 to offset future
federal and state taxable income. These net operating loss carryforwards begin
to expire in 2011. Should we undergo an ownership change as defined in Section
382 of the Internal Revenue Code, our tax net operating loss carryforwards
generated prior to the ownership change may be subject to annual limitation
which could reduce or defer the utilization of these losses. As of December 31,
2001, we have research and development credit carryforwards of less than $0.1
million. The credits begin to expire in 2019.
Taxes computed at the statutory Federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
For the years ended December, 31
--------------------------------
% of % of % of
Pretax Pretax Pretax
2001 Loss 2000 Loss 1999 Loss
------- ------ -------- ------ ------- ------
U.S. Federal tax benefit at statutory rate $(9,831) -34.0% $(22,441) -34.0% $(8,413) -34.0%
State taxes (net of federal benefit) (1,431) - 5.0% (3,260) -5.0% (1,222) -5.0%
Change in valuation allowance 11,234 38.9% 25,653 38.9% 9,615 38.9%
Other nondeductible expenses 28 0.1% 48 0.1% 20 0.1%
------- ------ -------- ------ ------- ------
Provision for income taxes $ -- -- % $ -- -- % $ -- -- %
======= ====== ======== ====== ======= ======
F-33
10. Commitments and Contingencies
We lease certain office facilities and equipment under operating
leases. These leases are generally renewable. We also lease certain furniture
and computer equipment under capital leases with terms of approximately 2 to 3
years.
The following is a schedule of future minimum rental payments required
under the leases as of December 31, 2001:
Capital Operating
Leases Leases
------- ---------
2002 $ 799 $ 993
2003 292 695
2004 9 691
2005 -- 741
2006 -- 761
Thereafter -- 2,884
------- ---------
Total minimum lease payments 1,100 $ 6,765
=========
Less: amount representing interest (66)
-------
Present value of net minimum lease payments 1,034
Less: current portion (743)
-------
Long-term portion capital leases $ 291
=======
Rent expense totaled $1.3 million, $1.4 million and $0.5 million for
the years ended December 31, 2001, 2000 and 1999.
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
December 31, 2001, the balance of this lease was approximately $0.5 million. At
December 31, 2002 the balance of this lease will be $0.2 million.
Important components of our intellectual property are subject to an
amended software customization, license and services agreement by and between
LendingTree and the Federal Home Loan Mortgage Corporation, or Freddie Mac.
Pursuant to this agreement a version of our core software, that was customized
to operate according to certain standards established by Freddie Mac, will be
released to Freddie Mac from escrow if we fail to meet specified repayment
obligations, financial covenants or reporting requirements.
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 the Company, alleging that the Company's financial card
(credit card) qualification form processing system infringes its U.S. Patent No.
6,014,645 entitled, "Real-Time Financial Card Application System." The complaint
seeks both monetary damages in the form of a reasonable royalty and injunctive
relief. On November 19, 2001, the Company filed an answer to the complaint
denying infringement of the Block patent. The Company also filed a counterclaim
against Block seeking a declaratory judgment of non-infringement and invalidity
of the Block patent. The lawsuit is in an early stage, and discovery is just
beginning to get underway.
F-34
In October 2000, the Company was 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, the NYSBD examiners raised an issue
as to whether the Company was obligated to make certain mortgage broker
disclosures to consumers under New York state law. Following correspondence with
the NYSBD and discussions with local counsel and NYSBD officials, the Company
agreed to provide certain disclosures requested by the NYSBD. Moreover, based
upon the guidance of local counsel following discussions with NYSBD officials,
the Company believes that this matter has been resolved without a finding of a
violation and without imposition of fines or forfeitures against it.
A third party has opposed the federal registration of LendingTree's
LEND-X mark. The case is currently in the discovery phase. The matter is pending
before the Trademark Trial and Appeal Board of the U.S. Patent and Trademark
Office. Management intends to contest the case vigorously and is aggressively
pursuing the matter.
We are involved in other litigation from time to time that is routine
in nature and incidental to the conduct of its business. We believe that the
outcome of any such litigation would not have a material adverse effect on its
financial condition, cash flows or results of operations.
11. Officer Loans
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 from February 2000. 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.
In February 2000, we entered into full recourse promissory note and
pledge agreements with our Chief Financial Officer in the aggregate amount of
$0.1 million for the purpose of exercising non-qualified stock options and for
paying the related withholding taxes on such exercises. The loan is to be repaid
to us, plus interest at the federal rate (as defined) in equal annual
installments beginning on January 31, 2002, and through January 31, 2005. Our
Chief Financial Officer has pledged to us a security interest in the stock
issued as a result of these options being exercised. The pledged stock may not
be sold without prior written consent by us.
12. 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. Capital Z, our largest shareholder and represented on our Board of
Directors by two members also invested in this company. 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 company merged and received an additional investment of $9.5
million. We determined that the value of our
F-35
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 terms of the preferred securities issued to the new
investors, and the historical losses from operations of both companies before
the merger. Accordingly in June 2001, 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. In December 2001, this company began
evaluating strategic alternatives in light of its deteriorating financial
condition. In January 2002, we sold its assets to a third party in a transaction
in which we received no proceeds. Accordingly, in December 2001, we wrote off
the remaining $0.25 million investment as a non-operating loss on impaired
investment.
13. Acquisition
On August 2, 2000, we acquired certain assets and assumed certain
liabilities of HomeSpace Services, Inc. The consideration paid by us
(approximately $11.2 million) for the acquired assets consisted of $6.2 million
in cash, 639,077 shares of our restricted common stock, valued at $4.7 million
and $0.3 million of assumed liabilities. The total purchase price (including
$1.2 million of transaction related costs) resulted in a purchase price of $12.4
million, which was allocated primarily to certain intangible assets based on a
third party valuation study. The allocation of the purchase price is summarized
below:
Purchase Price:
Cash $ 6,200
Stock 4,739
Assumed Liabilities:
Note payable plus interest 232
Accrued other liabilities 72
--------
Total consideration 11,243
Estimated transaction costs 1,191
--------
Total purchase price $ 12,434
========
Allocation of Purchase Price:
Accounts receivable $ 16
Intangible Assets:
Realtor network 6,644
Software and technology 5,215
Affinity program partner contracts 559
--------
$ 12,434
========
At closing, 169,851 shares of the common stock were placed in escrow in
the event of any post-closing indemnification claims. On July 20, 2001
LendingTree and HomeSpace entered into a mutual release and settlement agreement
and as a result all claims were settled and all of the shares in escrow were
released. Final adjustments to the purchase price were not significant.
F-36
The following unaudited pro forma consolidated financial information
reflects our results of operations for the years ended December 31, 2000 and
1999 as if the acquisition of the HomeSpace assets had occurred on January 1,
2000 and 1999, respectively, and after giving effect to certain purchase
accounting adjustments. These pro forma results are not necessarily indicative
of what our operating results would have been had the acquisition actually taken
place on January 1, 2000 or 1999, and may not be indicative of future operating
results.
Pro forma (unaudited) 2000 1999
-------- --------
Revenue $ 33,087 $ 11,470
Net loss attributable to common shareholders $ 94,252 $ 65,340
Net loss per common share - basic and diluted $ (5.14) $ (11.99)
Weighted average shares outstanding -
basic and diluted (in thousands) 18,336 5,450
F-37