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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-25621
E-LOAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5875 ARNOLD ROAD, SUITE 100, DUBLIN CALIFORNIA 94568
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
DELAWARE 77-0460084
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 241-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT: COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of March 15, 2000 is approximately
$128,511,794. The total number of shares of common stock outstanding as of March
15, 2000 was 42,016,878.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 31, 2000 are incorporated by
reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
E-LOAN is a leading online provider of consumer loans, offering borrowers the
ability to obtain a suitable loan for their personal financial needs. E-LOAN is
a diversified consumer lender offering mortgages, auto loans, credit cards and
small business loans. E-LOAN originates loans through its website, providing its
borrowers with a combination of streamlined technology, personal customer
service and cost savings. E-LOAN's website provides borrowers access to a wide
range of consumer debt information. Borrowers can determine which loans best
suit their particular situation, easily compare loan products, apply online and
track their applications from origination to close. E-LOAN intends to become the
leading destination for consumer debt and the first national multi-lender
consumer brand by offering a broad selection of loan products from leading
lenders, along with tools and services to help consumers manage their debt to
reduce their overall cost of capital.
E-LOAN's model transforms the traditional loan process by focusing on all three
parts of the loan transaction: point of sale, transaction fulfillment, and sale
of the loan to the capital markets. At the point of sale, E-LOAN lowers the cost
to consumers and expands the number of lenders consumers typically find in the
offline world. E-LOAN also underwrites and funds large percentages of its loans,
which allows E-LOAN the ability to control loan fulfillment to streamline
processes and help eliminate inefficiencies, saving borrowers time and money.
Finally, E-LOAN sells the servicing value of closed loans to the highest bidder
in the capital markets. This allows E-LOAN to offer borrowers the lowest rates
available from a broad range of lenders. E-LOAN believes that its business
model, which encompasses sales, fulfillment and capital access, allows it to
take full advantage of the enormous opportunities in online consumer lending.
INDUSTRY BACKGROUND
Electronic Commerce
The Internet has emerged as a global medium for communication, information and
commerce. International Data Corporation estimates that the number of Internet
users will grow from approximately 142 million worldwide at the end of 1998 to
more than 500 million by the end of 2003. As a result of this dramatic increase
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in the number of Internet users, the dollar volume of commerce conducted over
the Internet is expected to continue growing. International Data Corporation
estimates that the total value of goods and services purchased on the Internet
by businesses and consumers will increase from approximately $51.1 billion in
1998 to approximately $1.4 trillion in 2003.
The Consumer Debt Market
Loan products are ideally suited to fulfillment over the Internet because they
are often complex, requiring extensive consumer research to find the right
product and provider, and do not require the consumer, provider and product to
be in physical proximity. The Internet gives consumers informational links and
graphical interfaces for comparing competing products as well as transaction
capabilities. In fact, because many consumers perceive obtaining a loan to be
inefficient and hard to understand because of the jargon, complex fees and
difficulty in easily accessing a wide range of choices, the Internet may be a
preferable source of loans for many borrowers who have had unpleasant
experiences obtaining loans in the traditional way. Forrester Research estimates
the overall United States consumer lending industry at $1.9 trillion in 1999.
Forrester Research projects that total United States online consumer lending
will grow substantially from $26 billion in 1999 to a total of $167 billion in
2003.
The largest elements of the United States consumer debt market in 1999 were
mortgages at $1,200 billion, home equity loans at $200 billion, auto loans at
$400 billion and credit cards at $120 billion.
Shortcomings of the Traditional Consumer Debt Market
Consumers seeking financing for homes, cars or other purchases often encounter
obstacles in obtaining multiple rate quotes, unbiased advice, thorough
comparisons of loan products and timely credit decisions. For consumers,
obtaining a home loan represents an especially difficult transaction. While
increased competition in the mortgage industry over the past decade has resulted
in tremendous innovation in the mortgage choices available to consumers, the
level of complexity associated with these loans has also increased. In addition,
the underwriting and lending processes remain paper and time-intensive, with
little visibility into the process for consumers. As a result, we believe that
the traditional mortgage lending process causes many consumers to feel:
- uncertain that their single source lenders and brokers are providing
unbiased advice and are recommending the most suitable mortgage products;
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- skeptical that rates initially quoted will ultimately be available;
- intimidated by the number and variety of mortgage products available;
- pressured to commit to a particular product before they have researched
and compared products to their satisfaction;
- frustrated with the amount and types of fees they are required to pay;
and
- overwhelmed by the substantial time and effort that it takes to get a
mortgage loan.
Many borrowers receive little ongoing assistance in managing their debt
after the loan is closed. Many direct lenders who also engage in mortgage
servicing are not committed to proactive monitoring of their customers' loans
because they risk losing servicing fees if customers refinance with other
lenders. Multi-lender brokers have an incentive to pursue refinancing
opportunities, but typically lack the technological capability to proactively
monitor the market changes of thousands of loan products in real time.
In the auto-lending arena, consumers often rely upon auto dealerships to provide
financing. This is due in part to the difficulty in obtaining loan information
from a variety of lenders for comparison. Because direct lenders only offer
their own products, it may be time-consuming for a borrower to search for the
lowest rate by comparing loans among several lenders. At auto dealerships,
financing is bundled with the sale of the car, and as a result, dealers can
manipulate the terms of the financing package to compensate for any price
concessions the buyer may negotiate for the vehicle. The elements of the loan,
such as payment, term, and interest rate, may not be easily understood and
transparent to the buyer, because the dealer has no incentive to make it so.
Therefore, buyers may leave a dealership feeling as if they have not received
the best deal.
Market Opportunity
Given the range of consumer debt products and the difficulties consumers face in
accessing and evaluating a variety of loan options, E-LOAN believes there is a
substantial opportunity to market debt products online in a
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convenient, cost-effective way, thereby building a leading national brand name
in consumer lending.
Many companies have addressed consumers' needs for capital by providing Internet
access to information about loans and loan applications. For example, existing
banks have created websites, which sell loans directly online as an alternative
to the traditional process. These sources, however, do not offer the consumer a
multi-lender selection or comparisons of products, and they may be reluctant to
reduce fees due to the risk of cannibalizing their existing offline distribution
channels.
A number of consumer loan websites act as multi-lender distribution channels for
banks. While many of these referral sites offer a selection of lenders, they do
not offer complete transaction fulfillment for customers, and therefore, add
additional steps and fees to the lending process. Therefore, these sites are
substantially unable to reduce costs and eliminate inefficiencies.
As a result of the shortcomings inherent in these and other online approaches to
loan origination, E-LOAN believes a significant market opportunity exists for a
centralized, globally accessible and easy to use online service with a broad
selection of lenders, a compelling value proposition based on saving borrowers
money, time and effort, and an open, integrated service that provides complete
transaction fulfillment.
The E-LOAN Solution
E-LOAN is a leading online provider of consumer debt, including mortgages, auto
loans, credit cards and small business loans. E-LOAN offers consumers the
ability to obtain a suitable loan product from a wide array of lenders at a
reduced cost to the consumer. Utilizing E-LOAN's website, borrowers can
efficiently search, analyze and compare loan products offered by multiple
lenders and apply for, qualify for and obtain the loan product that is
compatible with their individual financial characteristics and borrowing
requirements. E-LOAN provides credit approvals for mortgages, auto loans, credit
cards and small business loans. E-LOAN also enables borrowers to track online
the status of their mortgage applications, from submissions to closings, and to
monitor their loans on an ongoing basis. E-LOAN recognizes the importance to
borrowers of selecting the right loan product and performing ongoing debt
management given that these products typically represent the largest debt
components of an individual's financial portfolio. To assist borrowers in this
regard, E-LOAN provides unbiased recommendations, as well as online analytical
and product comparison tools. E-LOAN also provides a high level of customer
service, designed to make the lending process significantly more streamlined,
transparent to the borrower and efficient. In 1999, E-LOAN was the leader in the
online mortgage market with
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approximately $1.5 billion in closed loans, including E-LOAN's estimate of
closed loan volume from referrals. In addition, E-LOAN was a leader in online
auto financing with over $130 million in closed loans since the acquisition of
CarFinance.com from Bank of America in September 1999.
The E-LOAN solution provides the following key advantages to its customers:
Large selection of mortgage products. E-LOAN offers mortgages from over 70
lending sources, including nationally recognized institutions. Each customer
inquiry triggers a proprietary rate search algorithm that sorts through over
50,000 products that are updated in real time. The result, delivered in seconds,
is a set of the most competitively priced loans available through E-LOAN that
best match the customer's criteria. E-LOAN believes that this large selection of
lenders and loans available in a single destination saves borrowers time and
effort in searching for and obtaining the most suitable mortgage.
Convenient auto lending source. The E-LOAN website allows consumers to apply for
and obtain an auto loan. Customers receive immediate credit decisions online.
Once approved, E-LOAN provides next-day check drafts, allowing the customer to
eliminate the need to negotiate auto financing at the dealership. By separating
the financing and purchasing transactions, E-LOAN effectively removes dealer
control over financing terms.
Customer Savings. By eliminating unnecessary, commissioned intermediaries such
as loan agents and auto dealers, E-LOAN offers significant savings to its
customers. These savings can amount to over 50% in origination costs of
obtaining mortgages from traditional mortgage brokers or single source lenders.
Similarly, by separating the auto loan transaction from the auto purchase,
E-LOAN can typically offer its customers a lower loan rate than auto dealerships
can offer.
Loan Recommendations. E-LOAN provides borrowers with recommendations regarding
available loan products. E-LOAN formulates its recommendations by using powerful
comparative and analytical tools designed to assist the borrower in determining
the most suitable product available through E-LOAN. These recommendations are
based solely on borrower-provided information and criteria. This approach
differs substantially from traditional mortgage brokers and auto dealers, who
often recommend and promote products based on associated commissions, which can
vary by lender.
Easy to Use Service with Value-Added Features. E-LOAN's website is designed to
offer prospective borrowers easy access to rate quotes, information about loan
fulfillment and a variety of tools and services to help them understand their
options and make the best choices for their personal situations. At the E-LOAN
website, borrowers can:
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For mortgages:
quickly search a database of over 50,000 loan products from 70 lenders; compare
two or more loans along many characteristics; use a calculator to determine the
size of the loan for which they will qualify; obtain a pre-approval letter; set
up rate watch and monitoring accounts so that they can receive automatic
notification when their desired rates become available; apply for loans online;
track their loan applications through E-LOAN's unique E-Track service that
monitors every stage of their loan application in real time.
For auto loans:
quickly obtain a rate quote;
apply for a loan online;
receive a credit decision in minutes;
track loan applications online;
receive overnight check drafts to take to dealers
For credit cards:
obtain instant online approval;
transfer existing balances to a new card online;
obtain 0% introductory APR for certain borrowers
For small business loans:
- - - Apply online;
- - - Obtain approvals in five minutes for loans up to $50,000;
- - - Receive loan offers from multiple lending sources
High Level of Customer Service. E-LOAN is committed to providing a high level of
customer service, as evidenced by referrals received from satisfied customers.
Because customer service is a strategic priority, customers are surveyed on a
regular basis and an award is presented to customer care specialists achieving
the highest customer satisfaction standards. E-LOAN implements its customer
service objectives by:
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- - - Providing consumer resources through its information-rich website, which
includes a comprehensive guide to various loan products;
- - - Working with mortgage and auto loan customers throughout the entire
transaction process;
- - - Assigning a personal customer service representative to each borrower to
serve as a single point of contact and support throughout the entire
mortgage and auto loan process;
- - - Providing borrowers with a real time window into every stage of the lending
process for mortgage and auto loans with secure online status accounts for
customers.
Ongoing Mortgage Monitoring. E-LOAN enables customers to obtain information in
order to make refinance decisions by continuously comparing their existing loan
to new products available through E-LOAN and alerting them to opportunities to
save money over the life of their loan. E-LOAN's monitoring algorithm takes into
account the borrower's investment objectives, prospective hold period, risk
profile and marginal tax rates. E-LOAN's capability promotes long-term
relationships with its customers.
E-LOAN Strategy
E-LOAN's strategy is to be the leading internet-based provider of consumer loans
and debt management services for consumers worldwide. Key elements of the E-LOAN
strategy include:
Expand and Develop Consumer Debt Offerings. E-LOAN intends to offer a
multi-lender selection of loan products in every major category of consumer
debt. Currently, E-LOAN offers a wide range of fixed and adjustable mortgage
loans from over 70 lenders. E-LOAN offers auto loans from Bank of America at
competitive rates and plans to add other lenders' auto loan products. E-LOAN
partners with Providian, a large national credit-card issuer, to offer the Aria
brand credit card through the E-LOAN website. The Aria card offers a range of
interest rate and payment options tailored to a borrower's financial profile.
E-LOAN plans to seek out other competitive credit card providers to enhance
consumer choice. E-LOAN partners with LiveCapital to offer small business loans
from 25 lenders through the E-LOAN website. LiveCapital is the only company
offering access to multiple small business lenders online. E-LOAN intends to
continue to seek ways to enhance the number of lenders and product choices
available for consumers seeking a broad selection, savings and customer service.
Expand Multi-Source Lending Capabilities. E-LOAN believes that its ability to
satisfy customers' specific borrowing requirements by offering the most
comprehensive selection of consumer debt products available online
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nationwide is one of its greatest competitive advantages. Accordingly, E-LOAN
plans to continue to grow the number and variety of its products and intends to
offer multi-lender sources across all product groups.
Use Technology to Bring Borrowers and Capital Markets Closer Together. E-LOAN
intends to further streamline and automate consumer debt origination and
underwriting processes in order to substantially eliminate the inefficiencies
and unnecessary steps that separate the origination and underwriting processes
from the capital markets. By continually incorporating and upgrading automated
underwriting techniques and technologies, E-LOAN believes it will efficiently
match borrowers with lenders, resulting in faster approval, lower pricing and
reduced documentation.
Enhance Brand Awareness and Customer Loyalty. E-LOAN intends to become the first
national multi-source lender with a widely recognized consumer brand name.
E-LOAN uses both traditional and online marketing strategies to maximize
customer awareness and enhance brand recognition. Traditional advertising
efforts include a mix of radio, television and print campaigns aimed at building
brand awareness nationwide for E-LOAN's combination of savings, selection and
service. E-LOAN also partners with many leading online companies, including
Yahoo!, E*Trade, CBSMarketwatch, AutoTrader.com, Kelley Blue Book, and Microsoft
Carpoint to promote its mortgage and auto loan offerings. In addition, E-LOAN
has a strategic partnership as the exclusive provider of online mortgage
services to RE/MAX realty, a national real estate company, as part of its effort
to increase its brand awareness among Realtors.
E-LOAN plans to continue to focus on promoting customer loyalty and maximizing
the lifetime value of its customer relationships through the implementation of
superior personalization features and the continuous enhancement of its customer
service offerings.
Help Consumers Monitor and Manage Their Debt. E-LOAN recognizes that consumers
can lower their overall cost of capital by managing their loans as a portfolio,
much as they do their assets. E-LOAN intends to provide tools and services to
help consumers create and manage these debt portfolios through personalized
accounts within the E-LOAN online environment. E-LOAN believes that its role in
providing these tools and services will help it form and maintain strong,
ongoing relationships with borrowers that will prompt them to use E-LOAN to
fulfill their future capital needs.
E-LOAN's debt management services currently include loan monitoring and rate
alerts that provide customers with assistance in mortgage loan origination and
refinancing decisions. We intend to further develop
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tools that help our customers identify optimal financing opportunities available
through E-LOAN for all of their debt types in order to lower their overall cost
of capital.
Expand Internationally. E-LOAN recognizes that consumers outside the United
States can also benefit from the ability to access and compare a broad array of
loan products as well as enjoy significant savings and high levels of customer
service, E-LOAN has exported its solution for obtaining a loan to prospective
borrowers in other countries by exchanging its technology and expertise for
equity stakes in joint venture entities with strong local partners. These joint
ventures have launched online operations for various types of consumer loans in
the United Kingdom, Australia, Japan, France and Germany to take advantage of
sizable consumer debt markets in these markets.
PRODUCTS AND SERVICES
E-LOAN is an online service that offers an array of consumer debt products.
E-LOAN offers the consumer complete fulfillment of mortgage and auto loans from
the point of online rate searching and application through the close of the loan
and its sale on the secondary markets. E-LOAN also offers credit cards and small
business loans in partnership with leading online providers of these products.
LOAN PRODUCTS. E-LOAN has relationships with over 70 lending sources eligible to
quote product rates on the website. E-LOAN's website currently offers a complete
range of first and second mortgage products and home equity lines of credit,
auto loans for new and used cars, and partnerships with a leading provider of
credit cards and a provider of small business loans from a variety of lenders.
RATE SEARCH. E-LOAN's database contains rates for over 50,000 mortgage products
as well as rates for a variety of auto loans and is continuously updated.
Prospective borrowers can quickly obtain customized rate quotes for a range of
loan products. E-LOAN's search function features algorithms that identify the
most competitive products available through E-LOAN based on individual borrower
information.
E-TRACK. E-LOAN has developed a proprietary online tracking system, E-Track, in
order to make the loan application process more open and convenient for
consumers. E-Track allows borrowers to track the progress of their loan
application as well as the amount of anticipated closing costs from preliminary
estimates to final settlement. E-LOAN establishes an E-Track account for each
mortgage and auto loan customer at the time an
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application is completed online. Each E-Track account is personalized and
password-protected and contains important information, such as documentation
requirements and deadlines, that pertain to the loan. All of this information is
updated in real time as the loan application is processed.
INFORMATION FOR BORROWERS. E-LOAN's website hosts a rich array of information on
the consumer lending process, including a description of the various loan types,
articles about how to evaluate different loan products, a glossary of mortgage
terms, information about the loan transaction process, and answers to frequently
asked questions. Borrowers visiting the website can also click on a chat icon to
immediately connect with a customer service representative through a dedicated
browser window and receive answers instantly.
E-LOAN also provides additional products and services specific to the mortgage
transaction, including:
LOAN COMPARISON: Borrowers can compare loans available through E-LOAN for
differences in rates, points, prepayment penalties, interest rate costs over
time, and for ARMS, life cap, index type, margin and periodic adjustments.
Advanced comparison allows borrowers to take into account debt objectives, hold
periods, return on other investments, and marginal tax rates.
LOAN RECOMMENDATIONS: To help borrowers find the most suitable loan among the
broad array of available products, E-LOAN provides a recommendation feature.
This feature consists of a brief questionnaire that enables borrowers to
describe their investment objectives and prospective hold period, select an
interest rate scenario and indicate the loan amount sought. E-LOAN's proprietary
algorithm uses this information to deliver a set of suitable loan products
available through E-LOAN. Borrowers can then adjust various parameters, such as
the hold period or interest-rate scenario, to see how that recommendation might
change.
RATE WATCH: The Rate Watch service allows prospective borrowers to input a
target interest rate for the desired loan type. E-LOAN searches its database of
over 50,000 mortgage loan products on a daily basis to determine if a product
has become available that meets the borrower's criteria. If a suitable product
is found, the borrower receives an email alert inviting him or her to visit
E-LOAN's website and apply for the loan.
MORTGAGE MONITOR: The Mortgage Monitor service allows the prospective borrower
to input the terms for an existing mortgage and immediately compare that loan to
all other suitable products available through E-LOAN. In addition, the
prospective borrower can choose to receive an email alert whenever a product
becomes available that can beat the rate of his or her existing mortgage. All
E-LOAN customers are automatically enrolled in the Mortgage Monitor
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service once their loan closes.
PRE-QUALIFICATION/PRE-APPROVAL SERVICES: E-LOAN assists prospective mortgage
loan customers in making their home buying decisions by enabling them to
determine the exact amount of the loan they are qualified to obtain through its
online pre-qualification and pre-approval services.
REALTOR INFORMATION AND SERVICES: Realtors can use the E-LOAN website to help
their clients calculate the loan amount they can afford, generate a
pre-qualification letter or obtain a pre-approval before selecting a property,
search for rates, and educate them on the mortgage process and terms. In
addition, E-LOAN's website offers Realtors a free service allowing them to
generate custom flyers to advertise their listings. Realtors can also help
individual clients with loans in process by using E-Track Pro, a service that
allows Realtors to track the progress of their clients' loan applications
online, anytime, with their clients' permission.
RELOCATION INFORMATION AND SERVICES: E-LOAN offers a full array of specially
discounted relocation products for qualifying relocation customers. These rates
can be obtained through a search of a special relocation database accessible
through E-LOAN's Relocation Center. E-LOAN has a dedicated team of customer
service representatives specially trained in assisting relocating customers and
their agents. E-Track Pro is also available to relocation consultants who wish
to track their clients' loan in process in order to help them through the
process.
MORTGAGE OPERATIONS
E-LOAN is engaged in the mortgage loan origination business as a
multi-source lender. E-LOAN originates, underwrites, funds and sells mortgage
loans. Originations are funded either through lending partners or through
E-LOAN's own warehouse lines of credit. E-LOAN's loan originations are
principally prime credit quality first-lien mortgage loans secured by single
family residences. E-LOAN also offers second mortgages and home equity lines of
credit in many states. All loans are underwritten pursuant to standards
established by E-LOAN and conform to the underwriting standards of the ultimate
purchasers of the loans.
E-LOAN's principal sources of income are loan origination fees, gains from
the sale of loans, if any, and interest earned on mortgage loans during the
period that they are held pending sale. Because E-LOAN's policy is to sell all
loans that it originates, E-LOAN does not perform loan-servicing functions, and
therefore, does not generate ongoing servicing revenues that are customarily
earned by traditional mortgage lenders.
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In 46 states and the District of Columbia, E-LOAN is licensed as a mortgage
bank and/or mortgage broker or is exempt from mortgage licensing requirements,
and can fund all of the mortgage loans that it originates. E-LOAN licenses its
mortgage loan origination systems and proprietary marks to NetB@nk to enable
NetB@nk to fund mortgage loans under the E-LOAN brand in the remaining four
states, Arizona, Delaware, New Jersey and New York.
OBTAINING AN E-LOAN MORTGAGE LOAN. The loan origination process begins when
the customer completes a loan application online through the E-LOAN website.
Once the application is submitted, E-LOAN initiates a series of steps to
efficiently underwrite and process the loan while providing a consistent level
of customer service. Generally, within minutes of submitting an application (or
hours for weekend applications), customers receive a phone call from an E-LOAN
customer service representative welcoming them to E-LOAN, answering questions,
verifying information in the application and telling them what to expect from
the process. At the same time, a welcome package from E-LOAN is immediately sent
in the mail, which is designed to further brand the E-LOAN experience, and that
contains the necessary disclosure documents mandated by governmental
authorities.
An E-Track account is created at the time a loan application is received and
serves as the customer's primary communication system with E-LOAN throughout the
loan process. Customers are invited to visit their E-Track account frequently to
review key steps in the loan process, receive updated information regarding
their loan product, closing costs, an interest rate lock, and view the progress
of their loan approval.
Although the E-Track account is available 24 hours a day, seven days a week,
E-LOAN believes that a more personalized touch from a customer service
perspective is necessary to truly brand the E-LOAN experience and build customer
loyalty. Therefore, assigned customer service representatives maintain telephone
contact with borrowers throughout the loan process to communicate major events
and answer questions. Customer service contact begins once the online
application has been received, continues through approval and funding, and is
available until loan monitoring account preferences have been established.
Loan packages are pre-underwritten as soon as the information received in
the online application has been verified through a telephone conversation with
the borrower. All conforming loans are underwritten utilizing an automated
system. Loans that do not immediately qualify for automated underwriting are
underwritten using standard manual processes.
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As additional loan documentation is received, data provided by the customer
at the time of initial origination is validated. Appraisals, credit reports, and
title and survey documents are ordered and reviewed by the customer service
representative, who is supported by a loan processor.
Once the underwriting process is completed, customers are invited to request
interest rate commitments for their selected loan through their E-Track
accounts. E-LOAN then confirms that this request can be obtained from mortgage
loan purchasers or lending sources. Once the requested rate has been confirmed,
customers are notified and provided with all relevant product and execution
conditions. E-LOAN offers customers the ability to request rate locks up to
11:30 PM on weekdays and generally confirms rate lock requests within minutes.
Final loan approval is secured once all critical data elements have been
validated and have been confirmed to satisfy the guidelines of the lending
program sought by the borrower. If a borrower's loan does not satisfy lender
guidelines, the designated customer service representative will research
additional lenders for the customer. For more complex situations, customers will
be referred to an E-LOAN loan specialist. If a product cannot be secured for the
customer, the customer will receive a denial letter stating the reasons that a
loan could not be obtained.
After loans have been approved and all relevant conditions have been met,
E-LOAN will either prepare or request preparation of loan documents to be signed
by the borrower. The assigned customer service representative will work with the
borrower to obtain the necessary signatures for funding and schedule the closing
of the loan. Once the borrower has signed all documentation, the loan file is
reviewed to identify any missing requirements. If complete, the loan is then
funded and recorded as closed.
A quality control review of E-LOAN sourced and funded loans is performed
prior to forwarding the loan documentation to the final mortgage loan purchaser
or its designated custodian. An accounting audit is also performed to reconcile
settlement information provided by escrow/attorney settlement agents with
E-LOAN's internal information. Loan documentation relating to closed loans is
then shipped to the mortgage loan purchaser or its designated custodian, and
documentation is maintained to satisfy regulatory and company record retention
requirements.
E-LOAN then establishes ongoing loan monitoring accounts for all closed
loans to ensure that its customers remain in the most suitable loan products
available through E-LOAN based on their specified personal financial
requirements. E-LOAN also solicits customer feedback regarding the loan process
to measure overall E-LOAN customer loyalty and to
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utilize in developing future product and service enhancements that are
responsive to customer concerns.
LOAN PRODUCTION. E-LOAN originates conventional mortgage loans (conforming
and jumbo loans) and home equity lines of credit. Approximately 80% of the
conventional loans originated are conforming loans, which are eligible for sale
in programs sponsored by Fannie Mae or Freddie Mac. While E-LOAN does not
currently sell directly to Fannie Mae or Freddie Mac, the conforming loans
E-LOAN originates are ultimately eligible for sale in the secondary markets
supported by these organizations.
The remainder of the conventional loans are non-conforming loans. These
include loans with an original balance in excess of $252,700 that otherwise meet
all other Fannie Mae or Freddie Mac guidelines (jumbo loans), and other loans
that do not meet those guidelines. As part of E-LOAN's multi-source lending
activities, E-LOAN originates loans with balances of up to $2 million.
In 1999, a growing percentage of E-LOAN's loans were purchase loans, as shown in
the table below:
Purchase vs. Refinance Closed Loans
1998 Q1 99 Q2 99 Q3 99 Q4 99
Purchase 5% 4% 18% 53% 63%
Refinance 95% 96% 82% 47% 37%
E-LOAN offers the following categories of loan products:
- long term adjustable rate mortgages;
- intermediate term adjustable rate mortgages;
- fixed rate mortgages;
- balloons;
- home equity lines of credit; and
- no cost loans;
16
- asset backed loans; and
- interest-only loans.
AUTOMATED UNDERWRITING. Automated underwriting (AU) contributes
significantly to E-LOAN's goal of increasing the efficiency of multi-source
lending by providing customers faster, more cost-efficient credit reviews and
decisions. AU may further offer efficiency enhancements through reduced costs in
property appraisals. In addition, E-LOAN believes customers also value the less
onerous and time-consuming nature of AU relative to more traditional
underwriting processes.
E-LOAN is approved by Fannie Mae as an originator under Fannie Mae's Desktop
Originator and Desktop Underwriter system (DU). DU helps automate the lending
process for all conforming loans and loans aimed at low-and moderate-income
borrowers. The goal of DU is to reduce the time and expense of property
appraisals. The DU system is expected to enable E-LOAN to implement a
comprehensive, integrated point-of-sale solution providing expedited loan
decisions. E-LOAN is the largest exclusive online originator approved to use the
DU system. E-LOAN also expects to implement additional AU systems, including
Freddie Mac's Loan Prospector and GECMC's Good Decisions.
E-LOAN will continue to seek to enhance its AU capabilities and incorporate as
many techniques and technologies as are warranted by its business needs and the
needs of its major business partners.
LOAN UNDERWRITING. E-LOAN's guidelines for underwriting conventional
conforming loans comply with the underwriting criteria employed by Fannie Mae
and/or Freddie Mac. E-LOAN's underwriting guidelines and property standards for
all other conventional non-conforming loans are based on the underwriting
standards employed by the secondary mortgage loan purchasers.
E-LOAN considers the following general underwriting criteria in determining
whether to approve a loan application:
- employment and income;
- credit history;
- property value and characteristics;
17
- borrower characteristics; and
- available assets.
SALE OF LOANS. E-LOAN sells all loans that it originates, on a loan by loan
basis, along with the loan servicing rights. Substantially all prime credit
quality first mortgage loans sold by E-LOAN are sold without recourse.
Generally, E-LOAN sells its non-conforming conventional loan production to large
buyers in the secondary market.
E-LOAN minimizes its credit exposure on loans funded through its warehouse
credit facilities by currently selling a majority of these loans within 20 days
of funding. To facilitate the rapid sale of each loan, E-LOAN enters into a
best-efforts commitment with the mortgage loan purchaser at the same time the
customer's interest rate commitment is obtained. E-LOAN sells its loans on a
best efforts basis, as opposed to a mandatory basis, in order to avoid the
potential financial penalties associated with failing to deliver a loan to the
mortgage loan purchaser under a mandatory commitment. With the interest rate
risk limited by the commitments to sell originated loans, E-LOAN does not enter
into any hedging transactions in order to offset the risk that a change in
interest rates will result in a decrease in the value of E-LOAN's current
mortgage loan inventory or its commitments to purchase or originate mortgage
loans.
FINANCING OF INTERNAL MORTGAGE FUNDING OPERATIONS. E-LOAN's principal
financing requirements are associated with its internal loan funding activities.
To satisfy these requirements, E-LOAN currently draws on warehouse credit
facilities it has established with Greenwich Capital, Bank United and GE
Capital. E-LOAN had committed and uncommitted funds available through its
warehouse credit facilities and its agreement with Greenwich Capital aggregating
approximately $290 million as of March 24, 2000.
If E-LOAN continues to sell a majority of its internally funded mortgage
loans within 20 days, the existing warehouse credit facilities, would enable
E-LOAN to internally fund approximately $435 million in mortgage loans during
each 30-day period.
Our agreements with our warehouse lenders require us to comply with various
operating and financial covenants. These covenants restrict our ability to:
18
- sell any of our material assets or merge or consolidate with another
company;
- issue additional shares of common stock without their consent;
- pay dividends on our outstanding shares of common stock; and
- amend our Certificate of Incorporation or Bylaws.
These covenants also require us to:
- maintain a minimum tangible net worth;
- limit the amount of debt we incur relative to our net worth; and
- ensure that our current assets are equal to or greater than our current
liabilities.
E-LOAN intends to increase and diversify further its short-term funding
capabilities and continue to identify and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets.
AUTO LOAN OPERATIONS
On September 17, 1999, E-LOAN acquired from Bank of America a subsidiary called
Electronic Vehicle Remarketing, Inc., (EVRI), which operated the leading auto
loan origination website, CarFinance.com. In September 1999, E-LOAN relaunched
its website, having integrated the CarFinance.com product offerings so consumers
could easily research home mortgages and auto loans by simply moving to
different tabbed sections of the website. As a result of the acquisition, E-LOAN
became the leading online provider of auto loans. Currently, E-LOAN acts
primarily as a broker of auto loans, referring all approved loans to Bank of
America for funding. In the first half of the year 2000, E-LOAN expects to fund
auto loans using a warehouse line of credit and then sell them to auto loan
purchasers in a manner similar to that which it employs for mortgage loan sales.
OBTAINING AN AUTO LOAN
The process of obtaining a car loan involves fewer steps than a mortgage and
occurs at a much faster pace. The process begins when a customer searches for a
rate, then completes a short, online application at the E-LOAN website. The
application goes through an automated underwriting process that takes only
minutes to complete.
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If approved, a customer receives an email notification within two hours after
submitting the application. At the time of approval, a check draft and two sets
of sample loan documents are created (one for a used car and one for a new car),
and delivered overnight to the customer. The customer then takes the check draft
and documents to any franchised auto dealership and negotiates for a car of
their choice, with the same leverage in the transaction as a cash purchaser
brings to a dealer.
When the customer selects a vehicle, and the purchase price is finalized, the
customer signs the draft and presents it to the dealer as payment, just like a
check. The dealer is required to obtain a copy of the customer's driver's
license as proof of identity and to forward this to E-LOAN. In addition, the
dealer ensures that the title is filed properly with E-LOAN as the lien-holder
and that the purchase agreement is faxed to E-LOAN. The dealer deposits the
draft as a regular bank deposit. Upon notification that the draft has been
presented for payment, E-LOAN has 72 hours to verify that all of the
documentation has been received and is in order before honoring the draft. When
the documents have been verified, the bank is notified to honor the draft and a
copy of the final loan contract is delivered to the customer.
CUSTOMER SERVICE
E-LOAN devotes significant resources to providing personalized, timely customer
service and support to minimize the potential uncertainty, anxiety and
inconvenience of the loan process. By combining high-tech communications with
highly personalized attention, E-LOAN believes it provides a level of customer
service superior to that experienced in the traditional loan application
process.
To help prospective customers understand the lending process, E-LOAN's website
provides a rich assortment of information on how to choose the most suitable
loan, descriptions of the various types of loan products, articles about buying
and refinancing a home, tips on buying cars, a glossary of mortgage terms,
information about the loan transaction process, and answers to frequently asked
questions. Borrowers visiting the website can also click on a chat icon to
immediately connect with a customer service representative through a dedicated
browser window and receive answers instantly. Prospective customers may call
E-LOAN's call center staff toll-free with questions seven days a week or email
E-LOAN and receive prompt replies. To respond promptly to questions from
Realtors, E-LOAN also maintains a toll-free Realtor hotline, also staffed seven
days a week.
Once a mortgage application is submitted online, E-LOAN assigns the customer a
customer service representative (CSR). The CSR becomes the customer's primary
point of contact with E-LOAN, ensuring prompt and personalized attention. The
CSR maintains regular email and phone communication with the
20
borrower to answer questions, address any problems and generally facilitate
closing the loan by coordinating with E-LOAN's underwriting and processing
staff. After closing, E-LOAN surveys all borrowers to assess the quality of
their experience both on the website and in terms of customer service.
Every online mortgage application also triggers the opening of a
password-protected E-Track account. Using E-Track, customers can track the
process of their loan applications online, at any time. Each event that occurs
throughout the various stages of the loan process generates an automated email
alert to the borrower. The information is also logged in E-Track so the borrower
has a continuously updated record of all loan application developments.
TECHNOLOGY
E-LOAN's technology systems use a combination of its own proprietary
technologies and commercially available, licensed technologies from industry
leading providers, including Sun Microsystems, Cisco Systems and Oracle.
E-LOAN's systems were designed around industry standard architecture to reduce
downtime in the event of outages or catastrophic occurrences. Our systems
provide availability 24 hours a day, seven days a week, and have capacity for a
tenfold increase in activity before requiring additional hardware or support.
USER INTERFACE. The E-LOAN website is designed for fast downloads and
compatibility with the most basic browsers. Pages are built with minimal
graphics and do not require client-side plug-ins or Java to view.
LOAN APPLICATION AND TRACKING. When a customer applies for a loan online, the
application data is stored in a file server. As additional information,
including credit reports, appraisal details and financial documentation, is
obtained throughout the loan process and added to the borrower's file, e-mails
are automatically sent to the borrower and Realtor to inform them of the current
status of the loan application. At the same time, the borrower's E-Track account
is updated. Each day, E-LOAN sends thousands of automated e-mails and updates
hundreds of E-Track accounts.
SECURITY. In order to safeguard borrowers' sensitive financial data, E-LOAN's
systems provide the most secure online transaction capability available.
Customer information sent via the website is encrypted using a Secure Socket
Layer. The server is protected with industry leading firewall software. The
website itself is locked down, with only two people authorized to change the
content on the production server. E-Track is password-protected so that only the
borrower may access the account. For an extra measure of protection, none of the
borrower's credit or financial information is contained in the E-Track account.
The file server containing borrower data is
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accessible only to authorized users within E-LOAN. There is no external access
to this internal server via modem, even by E-LOAN employees.
SERVER HOSTING AND BACK-UP. E-LOAN's website system hardware is hosted at the
Exodus facilities in Santa Clara, California and Jersey City, New Jersey,
providing redundant communication lines and emergency power back-up. We have
implemented load balancing systems and our own redundant servers to provide for
fault tolerance. Scheduled maintenance takes place without taking the website
offline.
MARKETING
E-LOAN's marketing strategy is to attract loan applicants to its website by
promoting the E-LOAN brand as a byword for choice, selection, competitive
pricing and service for consumer loans. E-LOAN relies on a variety of methods to
promote its brand. By providing superior customer service, E-LOAN promotes
online referrals from satisfied borrowers. Offline marketing campaigns featuring
radio and TV advertising nationwide target the demographic segments with the
highest propensity to utilize an online loan provider.
MORTGAGE MARKETING. Strategic partnerships with online financial websites,
including Yahoo!, E*Trade and Wingspanbank.com drive applications through
mortgage loan centers on those websites. E-LOAN's strategic partnership with
LiveCapital, the provider of small business loans through the E-LOAN site, also
includes a reciprocal set of links on the LiveCapital site to drive mortgage
loan customers back to E-LOAN.
E-LOAN also has an exclusive partnership to provide mortgage loans through
hrblock.com, the website of industry leading tax preparer H&R Block. E-LOAN has
also partnered with RE/MAX Realty, the nation's second-largest real estate
agency, to be its exclusive provider of mortgage solutions to its realtors
nationwide. E-LOAN also engages in marketing activities at realtor and
relocation trade shows and other events in the real estate industry in order to
encourage Realtors and relocation consultants to refer homebuyers directly to
our website.
AUTO MARKETING: Strategic partnerships with leading automotive sites, including
Microsoft's CarPoint, Kelley Blue Book, AutoByTel, AutoTrader.com, and
Bankrate.com, drive applications through auto loan centers on those websites. In
addition. E-LOAN maintains an auto affiliate program with over 300 websites that
provide access to E-LOAN's auto loans in exchange for a small fee per
application.
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LICENSING AND REGULATION OF MORTGAGE AND AUTO LOAN BUSINESS
In 46 states and the District of Columbia, E-LOAN is licensed as a mortgage
lender and/or mortgage broker, or is exempt from mortgage licensing
requirements, and can fund all of the mortgage loans that it originates. E-LOAN
licenses its mortgage loan origination systems and proprietary marks to NetB@nk
to enable NetB@nk to fund mortgage loans under the E-LOAN brand in the remaining
four states, Arizona, Delaware, New Jersey and New York.
E-LOAN is filing applications for licenses to make and broker auto loans in
states that require such licensing. E-LOAN is currently licensed to make and
broker auto loans, or is exempt from auto loan licensing requirements, in 23
states.
The mortgage and auto loan businesses are highly regulated. In order to offer
its mortgage and auto loan services, E-LOAN must comply with federal and state
laws and regulations relating to licensing, advertising, loan disclosures and
servicing, rate and fee limits, use of credit reports, notification of action
taken on loan applications, discrimination, unfair and deceptive business
practices, payment or receipt of kickbacks, referral fees or unearned fees in
connection with the provision of real estate settlement services, and other
requirements.
Current laws, and those enacted or interpreted to deal with Internet
transactions and other aspects of E-LOAN's business, may be revised or
interpreted in ways that adversely affect E-LOAN's business. Failure to comply
with laws and regulations governing E-LOAN's business may result in revocation
of lending or brokering authority, voiding of loans or security interests,
rescission of loans, indemnity or loan repurchase obligations, class action
lawsuits, administrative enforcement actions and civil and criminal liability.
E-LOAN believes it is in substantial compliance with the laws applicable to
E-LOAN's business, and has taken prudent steps to mitigate risks associated with
offering loan services through the Internet.
COMPETITION
The market for the origination of consumer loans is rapidly evolving, both
online and through traditional channels, and competition for borrowers is
intense and is expected to increase significantly in the future. E-LOAN faces
competition from offline mortgage brokers and auto dealers, who as a group
provide the majority of mortgage and auto loans, respectively. In addition,
E-LOAN competes directly with companies offering mortgage and auto loans over
the Internet. Principal among these competitors are Intuit QuickenLoans,
23
iOwn.com, LendingTree, Mortgage.com, PeopleFirst and Giggo.com. Traditional
lenders, including Countrywide, Norwest, Wells Fargo and Bank of America, also
provide access to their loan offerings over the Internet. Increased competition,
particularly online competition, could result in price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business. Further, we cannot assure you that E-LOAN's competitors and potential
competitors will not develop services and products that are equal or superior to
those of E-LOAN or that achieve greater market acceptance than its products and
services.
E-LOAN believes that the primary competitive factors in creating a financial
services resource on the Internet are functionality, brand recognition, customer
loyalty, ease-of-use, quality of service, reliability and critical mass.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- larger, established customer bases; and
- substantially greater financial, marketing, technical and other
resources.
INTELLECTUAL PROPERTY
Trademarks and other proprietary rights are important to our success and our
competitive position. Although we seek to protect our trademarks and other
proprietary rights through a variety of means, we cannot assure you that the
actions we have taken are adequate to protect these rights. We may also license
content from third parties in the future and it is possible that we could face
infringement actions based upon the content licensed from these third parties.
Claims brought against us, regardless of their merit, could result in costly
litigation and the diversion of our financial resources and technical and
management personnel. Further, if any of these claims are proved valid, through
litigation or otherwise, we may be required to change our trademarks and pay
financial damages, which could adversely affect our business.
24
EMPLOYEES
As of December 31, 1999, E-LOAN employed 319 full-time employees, of whom 184
were in mortgage operations, 45 were in auto loan operations, 40 were in
administration, 19 were in marketing and business development, and 31 were in
engineering. As E-LOAN continues to grow and introduce more products, it expects
to hire more personnel, particularly in the areas of mortgage and auto
operations. None of E-LOAN's employees is represented by a labor union or is the
subject of a collective bargaining agreement. E-LOAN believes that relations
with its employees are good.
ITEM 2. PROPERTIES
E-LOAN is headquartered in Dublin, California, where it leases approximately
68,000 square feet of space primarily in a single building where its mortgage
operations and a portion of its auto loan operations take place. E-LOAN also
holds a lease on approximately 24,000 square feet of office space in
Jacksonville, Florida where most of the auto loan fulfillment activity takes
place. The lease for E-LOAN's office space in Dublin expires in October 2003.
The lease for E-LOAN's office space in Jacksonville expires in May 2005. E-LOAN
currently anticipates that it will require additional space as more personnel
are hired.
25
ITEM 3. LEGAL PROCEEDINGS
On March 7, 2000, we reached a settlement with EduCap, Inc., a provider of
educational loan services and financing for computer equipment for use in
education, on a dispute concerning the use of the name "E-LOAN". All disputes
between the companies have been resolved and all claims dismissed. The
settlement resulted in a non-recurring charge of $400,000 for the fourth quarter
of 1999.
On August 2, 1999, E-LOAN initiated a declaratory judgment action against
EduCap, Inc., in the United States District Court for the Northern District of
California. EduCap, a provider of educational loan services and financing for
computer equipment for use in education, is the alleged owner of the trademark
that is the subject of U.S. registration no. 2,166,332 for the mark THE E-LOAN.
By its action, E-LOAN sought a declaratory judgment from the Court that E-LOAN
has not engaged in unfair competition or infringed upon any trademark or other
rights of EduCap in its use of the name or mark E-LOAN.
On October 1, 1999, EduCap initiated an action against E-LOAN in the United
States District Court for the Eastern District of Virginia. In this action,
EduCap alleged that E-LOAN's use of the name E-LOAN was wrongful, likely to
cause consumer confusion, and infringed EduCap's alleged trademark THE E-LOAN.
EduCap sought to recover damages and to enjoin E-LOAN from using the name and
mark E-LOAN, or any other colorable imitation of the mark, in any way, including
in E-LOAN's corporate name, in the address of its website, and in its
advertising materials.
On October 5, 1999, EduCap filed a motion in the California action seeking to
dismiss E-LOAN's action, or in the alternative, to have the case transferred to
the United States District Court for the Eastern District of Virginia. E-LOAN
successfully opposed the motion, and a trial date of April 12, 2000 was set in
the California action. On December 16, 1999, E-LOAN amended its complaint to
seek cancellation of EduCap's alleged mark THE E-LOAN. EduCap filed an answer
and counterclaims in the California action (seeking essentially the same relief
as it had sought in the Virginia proceeding). E-LOAN filed its reply to these
counterclaims on January 18, 2000. After exchanging discovery, the parties
settled the case on March 10, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Our common stock has been quoted on the Nasdaq National Market under the
symbol "EELN" since our initial public offering on June 28, 1999. Prior to this
time, there was no public market for our common stock. The following table shows
the high and low sale prices per share of our common stock as reported on the
Nasdaq National Market for the periods indicated:
High Low
---- ---
Fiscal 1999:
Second Quarter.................................. $51 $20
Third Quarter................................... $74 $18
Fourth Quarter.................................. $30 $16
On March 15, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $10.25 per share. We had approximately 170
holders of record of our common stock on that date.
We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. The covenants under our Loan and Security Agreement with
Silicon Valley Bank prohibit us from paying cash dividends.
(b) On July 2, 1999, E-LOAN completed an initial public offering in which it
sold 4,020,000 shares of its common stock and 5,000 shares were sold by a
selling stockholder. The managing underwriters in the offering were Goldman,
Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht &
Quist LLC, DLJdirect Inc. and E*TRADE Securities, Inc. The shares of common
stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-74945) that was declared effective by the Securities and Exchange
Commission on June 28, 1999. All 4,025,000 shares of common stock registered
under the Registration Statement were sold at a price of $14.00 per share for
gross proceeds to E-LOAN of $56.2 million and gross proceeds to the selling
stockholder of $70,000. Offering proceeds to E-LOAN, net of underwriter
discounts, were approximately $52.3 million. Concurrent with the company's
initial public offering, the company sold 960,061 shares of its common stock for
$12.5 million in net proceeds in a private placement. The private placement was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") as a transaction not involving any public offerings.
As of June 30, 1999, E-LOAN's balance sheet reflected a receivable of
$64.8 million in respect of the offering proceeds it received on July 2, 1999.
The net proceeds from the initial public offering will be used for general
corporate purposes, including working capital to fund anticipated operating
losses, expenses associated with its advertising campaigns, brand-name
promotions and other marketing efforts and capital expenditures. E-LOAN also
may use a portion of the net proceeds, currently intended for general corporate
purposes, to acquire or invest in businesses, technologies, products or
services, although no specific acquisitions are planned and no portion of the
net proceeds has been allocated for any acquisition. None of the net offering
proceeds of E-LOAN have been or will be paid directly or indirectly to any
director, officer, general partner of E-LOAN or their associates, persons
owning 10% or more of any class of E-LOAN's equity securities, or an affiliate
of E-LOAN.
Simultaneous with the effectiveness of the registration statement
relating to the initial public offering, each outstanding share of E-LOAN's
Series A and Series B convertible preferred stock and Series C and Series D
mandatorily redeemable convertible preferred stock was automatically converted
into three shares of E-LOAN's common stock without payment of additional
consideration. The common stock issued upon conversion of the preferred stock
was exempt from registration under Section 3(a)(9) of the Act, as Securities
exchanged by an issuer with existing security holders.
On September 17, 1999, E-LOAN acquired Electronic Vehicle Remarketing,
Inc., a Delaware corporation ("EVRI") through a stock exchange effected
pursuant to an Agreement and Plan of Reorganization dated August 23, 1999 (the
"Reorganization Agreement"). Pursuant to the Reorganization Agreement, the five
stockholders of EVRI transferred to E-LOAN all of the issued and outstanding
shares of capital stock of EVRI and E-LOAN issued to the five stockholders of
EVRI an aggregate of 2,879,997 shares of the common stock, par value $0.001,
per share, of E-LOAN. The shares issued in this transaction were exempt from
the registration requirements pursuant to the exemption from registration
contained in Regulation D, Rule 506 of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is qualified by reference to the Financial Statements and Notes
thereto appearing elsewhere in this document. The balance sheet data as of
December 31, 1998 and 1999 and the income statement data for each of the three
years in the period ended December 31, 1999 are derived from, and are qualified
by reference to, the audited financial statements of E-LOAN included elsewhere
in this document. The balance sheet data as of December 31, 1995 and 1996 and
the income statement data for the year ended December 31, 1995 are derived from
the unaudited financial statements of E-LOAN not included herein. The historical
results are not necessarily indicative of results to be expected for any future
period.
27
YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- -------- ---------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues ........................ $1,603 $ 893 $ 1,043 $ 6,832 $ 22,097
Operating expenses:
Operations ................... 1,368 903 1,319 8,257 22,779
Sales and marketing .......... -- -- 470 5,704 30,286
Technology ................... -- -- 102 1,346 3,595
General and administrative ... 152 97 524 1,619 6,859
Amortization of unearned
compensation ................. -- -- -- 1,251 23,116
Amortization of goodwill ..... -- -- -- -- 11,589
------ ------- ------- -------- ---------
Total operating expenses .... 1,520 1,000 2,415 18,177 98,224
------ ------- ------- -------- ---------
Loss from operations ...... 83 (107) (1,372) (11,345) (76,127)
Other income, net ............... -- (3) (2) 173 3,152
------ ------- ------- -------- ---------
Net income (loss) ............... $ 83 $ (110) $(1,374) $(11,172) $ (72,975)
====== ======= ======= ======== =========
Net loss per share:
Basic and diluted ......... $ .01 $ (0.01) $ (0.12) $ (0.98) $ (2.75)
====== ======= ======= ======== =========
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents ....... $ 47 $ 2 $ 4,218 $ 9,141 $ 37,748
Mortgage loans held-for-sale
(pledged) .................... -- -- -- 42,154 35,140
Goodwill and intangible assets .. -- -- -- -- 67,878
Total assets .................... 81 40 4,680 55,523 152,967
Warehouse lines payable ......... -- -- -- 41,046 33,115
Long term obligations ........... -- -- -- 1,290 2,525
Mandatorily redeemable
convertible preferred stock .. -- -- 5,049 21,393 --
Total stockholders' equity
(deficit) .................... 58 (52) (966) (11,184) 103,007
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.
THIS DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S 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 BELOW, AS WELL AS THOSE DISCUSSED BELOW
UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS." THE COMPANY DISCLAIMS ANY
OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY FORWARD-LOOKING STATEMENT.
OVERVIEW
E-LOAN is a leading online lender whose revenues are derived primarily from the
commissions and fees earned from both brokered mortgage and auto loans and
mortgage loans that it underwrites, funds on its warehouse lines and sells on
the secondary market.
MORTGAGE REVENUES
E-LOAN's mortgage revenues are derived from the brokering of loans and the
origination and sale of loans. Brokered loans are funded through lending
partners and E-LOAN never takes title to the mortgage. Brokerage revenues are
comprised of the mark-up to the lending partner's loan price, and processing and
credit reporting fees. These revenues are recognized at the time a loan is
closed. Originated and sold loans are loans that are funded through E-LOAN's own
warehouse lines of credit and sold to mortgage loan purchasers. Loan origination
and sale revenues consist of proceeds in excess of the carrying value of the
loan, origination fees less certain direct origination costs, other processing
fees and interest paid by borrowers on loans that E-LOAN holds for sale. These
revenues are recognized at the time the loan is sold or, for interest income, as
earned
28
during the period from funding to sale. E-LOAN earns additional revenue from its
loan origination and sale operations as compared to brokered loan operations
because the sale of loans includes a service release premium.
AUTO REVENUES
E-LOAN's auto revenues are derived from the brokering of auto loans. Auto
brokerage revenues are primarily comprised of the mark-up to the lending
partner's loan price. These revenues are recognized at the time a loan is
closed. All loans were brokered to Bank of America in the quarter ended December
31, 1999. In the first half of the year 2000, E-LOAN expects to begin funding
auto loans using a warehouse line of credit and then sell them to auto loan
purchasers in a manner similar to its approach with mortgage loans.
GENERAL
In generating revenues, E-LOAN relies on a number of strategic Internet
distribution partners to direct a significant number of prospective customers to
its website. E-LOAN considers its distribution partnerships with Yahoo!,
E*Trade, Wingspanbank.com, CBS MarketWatch, Kelley Blue Book, AutoTrader.com and
bankrate.com to be the most critical to its ability to generate revenues. Both
Yahoo! and E*Trade have made equity investments in E-LOAN.
29
QUARTERLY RESULTS
The following table sets forth the results of operations for E-LOAN on a
quarterly basis and expressed as a percentage of total revenues:
Three Months Ended
-----------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- --------- -------- --------- --------
(Unaudited)
Revenues $ 527 $ 1,233 $ 2,051 $ 3,021 $ 4,802 $ 4,562 $ 5,026 $ 7,707
Operating expenses:
Operations 865 1,156 2,293 3,943 4,442 4,835 6,470 7,032
Sales and marketing 524 890 2,191 2,099 3,698 7,574 9,362 9,652
Technology 174 393 304 475 529 749 972 1,345
General and administrative 271 319 508 521 996 2,473 1,598 1,792
Amortization of unearned
compensation 44 211 296 700 6,554 5,785 5,599 5,178
Amortization of Goodwill -- -- -- -- -- -- 1,656 9,933
------- ------- ------- ------- -------- -------- -------- --------
Total operating expenses 1,878 2,969 5,592 7,738 16,219 21,416 25,657 34,932
------- ------- ------- ------- -------- -------- -------- --------
Loss from operations (1,351) (1,736) (3,541) (4,717) (11,417) (16,854) (20,631) (27,225)
Other income (loss), net 20 29 26 98 36 (66) 387 2,795
------- ------- ------- ------- -------- -------- -------- --------
Net loss $(1,331) $(1,707) $(3,515) $(4,619) $(11,381) $(16,920) $(20,244) $(24,430)
======= ======= ======= ======= ======== ======== ======== ========
As a percentage of revenues:
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Operations 164% 94% 112% 131% 93% 106% 129% 91%
Sales and marketing 99% 72% 107% 69% 77% 166% 186% 125%
Technology 33% 32% 15% 16% 11% 16% 19% 17%
General and administrative 51% 26% 25% 17% 21% 54% 32% 23%
Amortization of unearned
compensation 8% 17% 14% 23% 136% 127% 111% 67%
Amortization of Goodwill 0% 0% 0% 0% 0% 0% 33% 129%
Total operating expenses 356% 241% 273% 256% 338% 469% 510% 453%
Loss from operations -256% -141% -173% -156% -238% -369% -410% -353%
Other income (loss), net 4% 2% 1% 3% 1% -1% 8% 36%
Net loss -253% -138% -171% -153% -237% -371% -403% -317%
------ ------ ------ ------ ------- -------- -------- --------
REVENUES
Revenues increased sequentially each quarter throughout 1998 from $0.5 million
to $3.0 million and increased throughout 1999 from $4.8 million to $7.7 million.
A significant portion of these increases resulted from growth in the number of
loans closed and the initiation of E-LOAN's mortgage loan origination and sale
operations in June 1998. In addition, included in total revenue for the quarter
ended December 31, 1999 is $2.4 million from closed auto loans, as a result of
E-LOAN's acquisition of CarFinance.com on September 17, 1999. E-LOAN received
approximately 3% of total revenues in the quarter ended December 31, 1999 from
the establishment of an alliance with a leading credit card provider. E-LOAN has
also formed alliances to offer home equity lines of credit, small business loans
and to process subprime mortgage loans. E-LOAN's purchase mortgage loan business
continues to increase as a percentage of its total loan business. Part of
E-LOAN's strategy is to become less reliant on refinance loans, which are more
sensitive to changes in interest rates. Historically, purchase mortgage loans
industrywide have demonstrated growth through a number of economic cycles.
30
OPERATING EXPENSES
TOTAL OPERATING EXPENSES. Total operating expenses increased sequentially from
the first quarter to the fourth quarter of 1998 from $1.9 million to $7.7
million and from the first quarter to the fourth quarter of 1999 from $16.2
million to $34.9 million. The quarterly increases in 1999 are primarily due to
significant increases in compensation and benefits as a result of increased
headcount, expanded advertising and promotional activities, amortization of
unearned compensation related to stock options granted and the amortization of
goodwill related to the acquisition of Carfinance.com in September 1999.
OPERATIONS. Operations expense is comprised of both fixed and variable expenses,
including salaries, benefits and expenses associated with the brokering,
origination and sale of mortgage and auto loans and interest expense paid by
E-LOAN under the warehouse facilities it uses to fund mortgage loans held for
sale. Operations expense increased sequentially from the first quarter to the
fourth quarter of 1998 from $0.9 million to $3.9 million and increased from the
first quarter to the fourth quarter of 1999 from $4.4 million to $7.0 million.
E-LOAN has expanded its mortgage loan origination and sale business since
inception in June 1998, which has resulted in a significant increase in interest
expense due to an increase in the number of mortgage loans held for sale.
Operations expense decreased as a percentage of revenues from 164% for the first
quarter of 1998 to 91% for the fourth quarter of 1999. E-LOAN expects operations
expenses to continue to be lower than revenue going forward as it further
streamlines and automates the loan process and leverages its fixed costs over a
growing loan volume.
SALES AND MARKETING. Sales and marketing expense is primarily comprised of
expenses related to advertising, promotion and distribution partnerships and
salaries, benefits and other expenses related to personnel. Sales and marketing
expense increased from the first quarter to the fourth quarter of 1998 from $0.5
million to $2.1 million and increased sequentially from the first quarter to the
fourth quarter of 1999 from $3.7 million to $9.7 million. Sales and marketing
expense increased as a percentage of revenues from 99% for the first quarter of
1998 to 125% for the fourth quarter of 1999. Sales and marketing expense
increased primarily due to a substantial increase in expenses for advertising,
promotion and distribution partnerships beginning in the third quarter of 1998
and continuing through the twelve months ended December 31, 1999, and increases
in compensation associated with additional headcount. E-LOAN intends to increase
absolute dollar spending in sales and marketing activities in an effort to
increase origination volume and increase overall brand awareness, however, the
spending as a percentage of revenues is expected to decline.
TECHNOLOGY. Technology expense includes salary, benefits and consulting fees
related to website development, the introduction of new technologies and the
support of E-LOAN's existing technological infrastructure. Technology expense
increased from the first quarter to the fourth quarter of 1998, from $0.2
million to $0.5 million and increased sequentially from the first quarter to the
fourth quarter of 1999, from $0.5 million to $1.3 million. Technology expense
decreased as a percentage of revenues from 33% for the first quarter of 1998 to
17% for the fourth quarter of 1999. The absolute dollar increases were primarily
the result of the growth in engineering and management information systems
personnel to support the expansion of online operations. E-LOAN intends to
moderately increase absolute dollar spending on technology in an effort to
further improve the online loan origination process and implement new features
and services to its website.
GENERAL AND ADMINISTRATIVE. General and administrative expense is primarily
comprised of salary, benefits and professional services. General and
administrative expense increased sequentially from the first quarter to the
fourth quarter of 1998 from $0.3 million to $0.5 million and from the first
quarter to the fourth quarter of 1999 from $1.0 million to $1.8 million. General
and administrative expense decreased as a percentage of revenues from 51% for
the first quarter of 1998 to 23% for the fourth quarter of 1999. General and
administrative expense increased primarily due to the addition of general and
administrative headcount and increased professional services fees. In addition,
during the second quarter of 1999, E-LOAN recorded a $0.9 million non-cash
charge in connection with its donation of 75,000 shares of common stock to a
charitable foundation. General and administrative expenses are expected to stay
relatively constant in the upcoming quarters.
31
AMORTIZATION OF UNEARNED COMPENSATION. Certain stock options granted in the
years ended December 31, 1998 and 1999 have been considered to be compensatory.
Additionally, an issuance of Series D preferred stock to an officer in 1999 has
been considered to be compensatory. Unearned compensation associated with stock
options for the years ended December 31, 1998 and 1999 amounted to $5.7 million
and $44.3 million, respectively. Of these amounts $1.25 million and $23.1
million have been amortized for the years ended December 31, 1998 and 1999,
respectively. The remainder will be amortized over the respective stock option
vesting periods.
AMORTIZATION OF GOODWILL. Amortization of goodwill, which resulted from the
acquisition of CarFinance.com in September of 1999, increased from $1.7 million
to $9.9 million from the third quarter to the fourth quarter of 1999,
respectively. E-Loan is amortizing the goodwill and acquired intangible assets
on a straight-line basis over two years.
OTHER INCOME, NET. Other income, net, increased sequentially from the first
quarter to the fourth quarter of 1998 from $20,000 to $98,000 and from the first
quarter to the fourth quarter of 1999 from $36,000 to $3.2 million. In the
fourth quarter of 1999, E-LOAN negotiated a settlement regarding one of its
strategic alliance agreements and received a warrant to purchase 53,996 shares
of the Company's Series D convertible preferred stock. E-LOAN recorded the
warrant at fair value on the date the settlement was reached, and accordingly,
E-LOAN recognized a one-time, non-cash gain of $2.9 million. In addition,
E-Loan accrued for a one-time expense of $400,000 at December 31, 1999 related
to an existing trademark dispute.
32
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
The following table sets forth the results of operations for E-LOAN and
these results expressed as a percentage of total revenues:
Years Ended
December 31,
----------------------
1998 1999
-------- --------
Revenues $ 6,832 $ 22,097
Operating expenses:
Operations 8,257 22,779
Sales and marketing 5,704 30,286
Technology 1,346 3,595
General and administrative 1,619 6,859
Amortization of unearned
stock-based compensation 1,251 23,116
Amortization of goodwill -- 11,589
-------- --------
Total operating expenses 18,177 98,224
Loss from operations (11,345) (76,127)
Other income, net 173 3,152
-------- --------
Net loss $(11,172) $(72,975)
======== ========
As a percentage of revenues:
Revenues 100% 100%
Operating expenses:
Operations 121% 103%
Sales and marketing 83% 137%
Technology 20% 16%
General and administrative 24% 31%
Amortization of unearned
stock-based compensation 18% 105%
Amortization of goodwill 0% 52%
Total operating expenses 266% 445%
Loss from operations -166% -345%
Other income, net 3% 14%
Net loss -164% -330%
======== ========
REVENUES
Revenues for the year ended December 31, 1999 increased $15.3 million from $6.8
million for the twelve months ended December 31, 1998 to $22.1 million for the
twelve months ended December 31, 1999. This increase resulted primarily from the
growth in the number of loans closed and the initiation of E-LOAN's mortgage
loan origination and sale operations in June 1998. Included in the total revenue
for the year ended December 31, 1999 is $2.9 million from closed auto loans, as
a result of E-LOAN's acquisition of CarFinance.com on September 17, 1999. In
addition, E-LOAN received approximately 3% of total revenues in the year ended
December 31, 1999 from the establishment of an alliance with a leading credit
card provider. E-LOAN has also formed alliances to offer home equity lines of
credit and small business loans, and to process subprime mortgage loans.
33
OPERATING EXPENSES
TOTAL OPERATING EXPENSES. Total operating expenses increased $80.0 million from
$18.2 million for the twelve months ended December 31, 1998 to $98.2 million for
the twelve months ended December 31, 1999. The increase is primarily due to an
overall increase in compensation and benefits as a result of increased
headcount, an increase of $24.6 million in sales and marketing expenses, a $21.9
million increase in amortization of unearned compensation and an increase of
$11.6 million in goodwill amortization related to the acquisition of
Carfinance.com on September 17, 1999.
OPERATIONS. Operations expense increased $14.5 million from $8.3 million for the
twelve months ended December 31, 1998 to $22.8 million for the twelve months
ended December 31, 1999. Operations expense as a percentage of revenues
decreased from 121% in 1998 to 103% in 1999. E-LOAN has expanded its mortgage
loan origination and sale business since inception in June 1998, which has
resulted in a significant increase in interest expense due to an increase in the
number of mortgage loans held for sale. Operations headcount increased by 46 to
233 as of December 31, 1999 from 187 as of December 31, 1998. This increase was
primarily due to the establishment of the Company's auto operations resulting
from the acquisition of CarFinance.com on September 17, 1999. E-LOAN expects
operations expense to increase in absolute dollars and intends to increase
operations capacity in anticipation of an increase in the number of loans
funded.
SALES AND MARKETING. Sales and marketing expense increased $24.6 million from
$5.7 million for the twelve months ended December 31, 1998 to $30.3 million for
the twelve months ended December 31, 1999. Sales and marketing as a percentage
of revenues increased from 83% in 1998 to 137% in 1999. These increases were
primarily attributable to a substantial increase in expenses for advertising,
promotion and distribution partnerships beginning in the third quarter of 1998
and continuing through the twelve months ended December 31, 1999, and increases
in compensation associated with additional headcount. Sales and marketing
headcount increased by 11 to 17 as of December 31, 1999 from 6 as of December
31, 1998.
TECHNOLOGY. Technology expense increased $2.3 million from $1.3 million for the
twelve months ended December 31, 1998 to $3.6 million for the twelve months
ended December 31, 1999. Technology expense decreased as a percentage of
revenues from 20% in 1998 to 16% in 1999. These absolute dollar increases were
primarily the result of growth in engineering and management information systems
personnel to support the expansion of online loan operations. Technology
headcount increased by 15 to 31 as of December 31, 1999 from 16 as of December
31, 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $5.3
million from $1.6 million for the twelve months ended December 31, 1998 to $6.9
million for the twelve months ended December 31, 1999. General and
administrative expense increased as a percentage of revenues from 24% in 1998 to
31% in 1999. The increase is primarily attributable to the addition of general
and administrative headcount and increased professional services fees. General
and administrative headcount increased by 24 to 41 as of December 31, 1999 from
17 as of December 31, 1998.
AMORTIZATION OF UNEARNED COMPENSATION. Amortization of unearned compensation
increased from $1.3 million for the twelve months ended December 31, 1998 to
$23.1 million for the twelve months ended December 31, 1999.
AMORTIZATION OF GOODWILL. The Company recorded $78.0 million in goodwill and
$1.4 million of acquired intangible assets resulting from the acquisition of
Carfinance.com on September 17, 1999, which will be amortized on a straight-line
basis over a two-year period. As of December 31, 1999, the Company incurred an
$11.6 million charge related to the amortization of goodwill and acquired
intangible assets.
34
OTHER INCOME, NET. Other income, net, increased from $173,000 to $3.2 million
from December 31, 1998 to 1999. The increase is primarily attributable to the
one-time, non-cash gain in the amount of $2.9 million from the settlement of a
strategic alliance agreement during the fourth quarter of 1999. In addition,
E-Loan accrued for a one-time expense of $400,000 at December 31, 1999 related
to an existing trademark dispute.
35
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
The following table sets forth the results of operations for E-LOAN and
these results expressed as a percentage of total revenues:
Years Ended
December 31,
----------------------
1997 1998
-------- --------
Revenues $ 1,043 $ 6,832
Operating expenses:
Operations 1,319 8,257
Sales and marketing 470 5,704
Technology 102 1,346
General and administrative 524 1,619
Amortization of unearned
compensation -- 1,251
-------- --------
Total operating expenses 2,415 18,177
Loss from operations (1,372) (11,345)
Other income (loss), net (2) 173
-------- --------
Net loss $ (1,374) $(11,172)
======== ========
As a percentage of revenues:
Revenues 100% 100%
Operating expenses:
Operations 126% 121%
Sales and marketing 45% 83%
Technology 10% 20%
General and administrative 50% 24%
Amortization of unearned
compensation 0% 18%
Total operating expenses 231% 266%
Loss from operations -132% -166%
Other income (loss), net 0% 3%
Net loss -132% -164%
======== ========
REVENUES
Revenues for the year ended December 31, 1998 increased $5.8 million to $6.8
million as compared to $1.0 million for the same period in 1997. This increase
resulted primarily from growth in the number of mortgage loans closed and the
initiation of E-LOAN's mortgage loan origination and sale operations in June
1998.
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased $15.8 million to
$18.2 million for the year ended December 31, 1998 as compared to $2.4 million
in 1997. The increase is primarily due to a $6.5 million increase in
compensation and benefits and a $4.8 million increase in sales and marketing
expenses. Total headcount increased from 40 at December 31, 1997 to 224 at
December 31, 1998. The sales and marketing increase is primarily related to the
initiation of a major advertising campaign and increased costs related to third
party distribution agreements.
36
OPERATIONS. Operations expense increased $7.0 million to $8.3 million for the
year ended December 31, 1998 as compared to $1.3 million in 1997 and decreased
as a percentage of revenues from 126% to 121% for the same period. The absolute
dollar increase was attributable to an operations headcount increase to 187 as
of December 31, 1998 from 27 as of December 31, 1997. This increase was
primarily necessary to support the growth in E-LOAN's mortgage origination
volume and to establish its mortgage loan origination and sale operations. The
decrease as a percentage of revenues was primarily due to revenues growing much
faster than operations expense.
SALES AND MARKETING. Sales and marketing expense increased $5.2 million to $5.7
million for 1998, as compared to $0.5 million for 1997 and increased as a
percentage of revenues from 45% to 83% for the same period. These increases were
primarily attributable to:
- - - the initiation of a major advertising campaign in 1998;
- - - increased costs related to third party distribution partnership agreements;
and
- - - the addition of sales and marketing personnel.
Sales and marketing headcount increased to 6 as of December 31, 1998 from 3 as
of December 31, 1997.
TECHNOLOGY. Technology expense increased $1.2 million to $1.3 million for 1998,
as compared to $0.1 million for 1997 and increased as a percentage of revenues
from 10% to 20% for the same period. These increases were primarily the result
of the growth in engineering and management information systems personnel to 14
as of December 31, 1998 from 2 as of December 31, 1997 to support the initiation
of online loan operations in June 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.1
million to $1.6 million for 1998, as compared to $0.5 million for 1997 and
decreased as a percentage of revenues from 50% to 24% for the same period. The
absolute dollar increase is primarily attributable to:
- - - the addition of general and administrative headcount;
- - - increase in rent and building expense resulting from the move into a new
facility; and
- - - growth in depreciation and amortization expense on computer equipment and
leasehold improvements.
General and administrative headcount increased to 15 as of December 31, 1998
from 8 as of December 31, 1997. The decrease as a percentage of revenues was
primarily due to revenues growing much faster than general and administrative
expense.
AMORTIZATION OF UNEARNED COMPENSATION. Amortization of unearned compensation
increased from zero to $1.3 million for the year ended December 31, 1998.
OTHER INCOME, NET. Other income, net, increased from an expense of
$2,000 in 1997 to income of $173,000 for the year ended December 31, 1998. The
increase is attributable to interest income on cash proceeds from sale of equity
partially offset by interest expense on non-warehouse facility borrowings.
37
LIQUIDITY AND CAPITAL RESOURCES
E-LOAN's sources of cash flow include cash from the sale of mortgage loans,
borrowings under warehouse lines of credit and other credit facilities, mortgage
and auto loans, brokerage fees, interest income, credit card referrals and the
sale of equity securities in both private and public transactions. E-LOAN's uses
of cash include the funding of mortgage loans, repayment of amounts borrowed
under warehouse lines of credit, operating expenses, payment of interest, and
capital expenditures primarily comprised of furniture, fixtures, computer
equipment, software and leasehold improvements.
Net cash used in operating activities was ($50.4) million and ($27.8) million
for the twelve months ended December 31, 1998 and 1999, respectively. Net cash
used in operating activities was primarily due to an increase in net losses and
an increase in mortgage loans held for sale.
Net cash used in investing activities was ($1.6) million and ($2.1) million for
the twelve months ended December 31, 1998 and 1999, respectively. Net cash used
in investing activities during these periods was primarily for the purchase of
software, furniture and equipment and leasehold improvements.
Net cash provided by financing activities was $56.9 million and $58.5 million
for the twelve months ended December 31, 1998 and 1999, respectively. Net cash
provided in these periods was primarily from the net proceeds from the Company's
initial public offering on July 2, 1999, notes payable, borrowings under
E-LOAN's warehouse lines of credit and other credit facilities, partially offset
by repayments of warehouse lines of credit and issuance costs related to the
initial public offering.
As of December 31, 1999, the Company had cash and cash equivalents of $37.7
million and available operating credit lines of $1.5 million, which the Company
believes is sufficient to fund operations for the next twelve months. During the
next twelve months, it may be necessary to raise additional funds. However,
there can be no assurance that the Company will be able to raise the additional
funds on favorable terms. If additional funds are raised through the issuance of
equity securities, the percentage ownership of its then-current stockholders
would be reduced.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report or presented elsewhere by management from time to time.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE
OR MAINTAIN PROFITABILITY
We have not achieved profitability and expect to continue to incur operating
losses for the foreseeable future. We incurred net losses of $11.2 million and
$72.9 million for the years ended December 31, 1998 and December 31, 1999,
respectively. As of December 31, 1999, our accumulated deficit was $85.6
million. Because we expect to continue to incur significant sales and marketing
expenses and our operating costs will increase to accommodate expected growth in
loan applications, we will need to generate significant revenues to achieve and
maintain profitability. Even if we achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future. If revenues
grow slower than we anticipate, or if operating expenses exceed our expectations
or cannot be adjusted accordingly, our business, results of operations and
financial condition will be adversely affected. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
38
WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
CHALLENGES IN BUILDING OUR BUSINESS
We were incorporated in August 1996, initiated our online mortgage operations in
June 1997 and acquired our online auto operations in September 1999. Since we
began our online mortgage operations, we have operated during only one downturn
in the mortgage business, which occurred in 1999. We cannot assure you that we
will be able to operate successfully if a more extensive sustained downturn
occurs in the future. As a result of our limited operating history, our recent
growth and our reporting responsibilities as a public company, we will need to
expand operational, financial and administrative systems and control procedures
to enable us to further train and manage our employees and coordinate the
efforts of our underwriting, accounting, finance, marketing, and operations
departments.
OUR QUARTERLY FINANCIAL RESULTS ARE VULNERABLE TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
Due to rising interest rates and other factors, it is possible that in some
future periods our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
fall. Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. Certain months or quarters have historically
experienced a greater volume of purchase money loan applications and funded
loans. As a result, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our quarterly operating results.
INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL WAYS,
INCLUDING CUSTOMERS' INCENTIVE TO REFINANCE EXISTING MORTGAGE LOANS, OUR ABILITY
TO SELL MORTGAGE LOANS IN THE SECONDARY MARKET AND OUR COSTS OF INTERNALLY
FUNDED MORTGAGE LOANS
A significant percentage of our customers use our services to refinance existing
mortgages and they are motivated to do so primarily when interest rates fall
below the rates of their existing mortgages. In the event interest rates
significantly increase, consumers' incentive to refinance will be greatly
reduced and the number of loans that we originate could significantly decline.
OUR ABILITY TO ENGAGE IN PROFITABLE SECONDARY SALES OF LOANS MAY ALSO BE
ADVERSELY AFFECTED BY INCREASES IN INTEREST RATES.
The mortgage loan purchase commitments we obtain are contingent upon our
delivery of the relevant loans to the purchasers within specified periods. To
the extent that we are unable to deliver the loans within the specified periods
and interest rates increase during those periods, we may experience no gain or
even a loss on the sale of these loans. In addition, any increase in interest
rates will increase the cost of maintaining our warehouse and repurchase lines
of credit on which we depend to fund the loans we originate. We currently do not
use derivative financial instruments to hedge these risks and are therefore
exposed to losses caused by fluctuations in interest rates. A sharp decrease in
interest rates over a short period may cause customers who have interest rates
on mortgages committed through E-LOAN to either delay closing their loans or
refinance with another lender. If this occurs in significant numbers, it may
have an adverse effect on our business or quarterly results of operations.
UNCERTAINTY WITH RESPECT TO THE TIME IT TAKES TO CLOSE MORTGAGE LOANS CAN LEAD
TO UNPREDICTABLE REVENUE AND PROFITABILITY
The time between the date an application for a mortgage loan is received from a
customer on our website and the date the loan closes can be lengthy and
unpredictable. The loan application and approval process is often delayed due to
factors over which we have little or no control, including the timing of the
customer's decision to commit to an available interest rate, the close of escrow
date for purchase loans, the timeliness of
39
appraisals and the adequacy of the customer's own disclosure documentation.
Purchase mortgage loans generally take longer to close than refinance loans as
they are tied to the close of the property sale escrow date. This uncertain
timetable can have a direct impact on our revenue and profitability for any
given period. We may expend substantial funds and management resources
supporting the loan completion process and never generate revenue from closed
loans. Therefore, our results of operations for a particular period may be
adversely affected if the mortgage loans applied for during that period do not
close in a timely manner or at all.
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS, AND IF WE ARE
UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Over the past two years we have experienced significant growth, which has placed
a strain on our resources and will continue to do so in the future. Our failure
to manage this growth effectively could adversely affect our business. We may
not be successful in managing or expanding our operations or maintaining
adequate management, financial and operating systems and controls. Our headcount
has grown substantially. At December 31, 1997, we had 40 full-time employees, at
December 31, 1998, we had 226 full-time employees and at December 31, 1999, we
had 275 full-time employees.
IF ONLINE LENDING AND OUR SERVICE OFFERINGS DO NOT ACHIEVE WIDESPREAD CONSUMER
ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our success will depend in large part on widespread consumer acceptance of
obtaining mortgages and auto loans online. The development of an online market
for mortgage and auto loans has only recently begun, is rapidly evolving and
likely will be characterized by an increasing number of market entrants. Our
future growth, if any, will depend on the following critical factors:
- the growth of the Internet as a commerce medium generally, and as a
market for consumer financial products and services specifically;
- our ability to successfully and cost-effectively market our services to a
sufficiently large number of customers; and
- our ability to overcome a perception among many real estate market
participants that obtaining mortgages online is risky for consumers.
We cannot assure you that the market for our services will develop, that our
services will be adopted or that consumers will significantly increase their use
of the Internet for obtaining mortgage or auto loans. If the online market for
mortgage and auto loans fails to develop, or develops more slowly than expected,
or if our services do not achieve widespread market acceptance, our business,
results of operations and financial condition would be adversely affected.
THE LOSS OF ONE OR MORE OF OUR SIGNIFICANT DISTRIBUTION PARTNERS WOULD ADVERSELY
AFFECT OUR BUSINESS
We rely on Internet distribution partners to direct a significant number of
prospective customers to our website. If we lose any of our significant
distribution partners, we will likely fail to meet our growth objectives, both
in terms of additional borrowers and increased brand awareness. In the
aggregate, approximately 22% of our closed mortgage loans were derived from the
websites of our distribution partners during the year ended December 31, 1999
and the majority of auto loan applications have also been derived from the
websites of distribution partners. Our agreements with our distribution partners
are typically short-term, from one to three years in length, and can be
terminated for any reason upon 30 to 60 days prior written notice. We cannot
assure you that any or all of these agreements will not be terminated or will be
renewed or extended past their current expiration dates. If any of these
agreements were to be terminated or were to lapse without extension, we could
lose a considerable number of loan applications and our business would be
adversely affected.
40
THE TERMINATION OF ONE OR MORE OF OUR MORTGAGE FUNDING SOURCES WOULD ADVERSELY
AFFECT OUR BUSINESS
We depend on GE Capital Mortgage Services, Inc. and Bank United to finance our
internal mortgage loan funding activities through the warehouse credit
facilities provided by each of these lenders. We also depend on Greenwich
Capital Financial Products, Inc. to finance portions of our mortgage loan
inventory pending ultimate sale to mortgage loan purchasers. If either of our
warehouse credit facilities becomes unavailable or our relationship with
Greenwich Capital is terminated, our business would be adversely affected. Under
our agreements with each of these lenders, we make extensive representations,
warranties and various operating and financial covenants. A material breach of
these representations, warranties or covenants could result in the termination
of our agreements and an obligation to repay all amounts outstanding at the time
of termination. In the past, we have had to obtain waivers from Greenwich
Capital and GE Capital as a result of our failure to comply with covenants
regarding the issuance of capital stock, excess asset purchases and the breach
of financial ratios.
Our agreement with Greenwich Capital expires in May 2000, our agreement with GE
Capital expires in September 2000 and our agreement with Bank United expires in
April 2000. We are continually seeking to obtain additional warehouse lending
resources, but we may not be successful in this regard.
WE ARE DEPENDENT ON ONE LENDING SOURCE FOR ALL OF OUR AUTO LOAN BUSINESS
Currently, all of our auto loans are funded through Bank of America pursuant to
a Transition Services Agreement entered into in connection with our acquisition
of Electronic Vehicle Remarketing, Inc. If Bank of America is unable to fund our
auto loans, we may experience delays in processing loans or an inability to
accept or process auto loan applications until we are able to secure a new
source of funding. Additional sources of funding for our auto loans may not be
available on favorable terms or at all.
IF WE DO NOT INCREASE THE NUMBER OF AUTO LOAN LENDERS WHO FUND THROUGH OUR SITE
OUR AUTO LOAN BUSINESS WILL NOT GROW
To grow our auto loan business, we must broaden our offering of auto loans to a
wide range of credit profiles. Currently, the underwriting criteria that Bank of
America requires allows us to fund auto loans only for those applicants with
high credit profiles. In order to fund auto loans for more of the applicants, we
must increase the number of lenders who make their loan products available
through our site. We cannot assure you that we will be able to enter into
arrangements with other auto loan lenders on favorable terms or at all.
WE DEPEND ON THE TIMELY AND COMPETENT SERVICES OF VARIOUS COMPANIES INVOLVED IN
THE MORTGAGE PROCESS; IF THESE COMPANIES FAIL TO TIMELY AND COMPETENTLY DELIVER
THESE SERVICES, OUR BUSINESS AND REPUTATION WILL BE DIRECTLY AND ADVERSELY
AFFECTED
We rely on other companies to perform services related to the loan underwriting
process, including appraisals, credit reporting and title searches. Any
interruptions or delays in the provision of these services may cause delays in
the processing and closing of loans for our customers. If we are unsuccessful in
managing the timely delivery of these services we will likely experience
increased customer dissatisfaction and our business and reputation could be
adversely affected.
WE DEPEND ON OUR AGREEMENTS WITH THIRD PARTIES TO FUND MORTGAGE LOANS OR FULFILL
LOAN TRANSACTION PROCESSING IN 5 STATES; IF THESE AGREEMENTS ARE TERMINATED, OUR
BUSINESS COULD BE ADVERSELY AFFECTED
E-LOAN licenses its mortgage loan origination systems and proprietary marks to
NetB@nk to enable NetB@nk to fund mortgage loans under the E-LOAN brand in four
states, and has agreements with PHH Mortgage Services Corporation and Prism
Mortgage Company relating to the fulfillment of all aspects of mortgage loan
transaction processing following origination in one state. Each of these
agreements may be terminated by either party upon 30 days prior written notice.
The termination of any or all of these agreements could have a material adverse
effect on our business.
41
THE LOSS OF OUR RELATIONSHIP WITH FANNIE MAE OR ANY OTHER SIGNIFICANT PROVIDER
OF AUTOMATED UNDERWRITING WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
We depend on automated underwriting and other services offered by government
sponsored and other mortgage investors, including Fannie Mae and Freddie Mac, to
help ensure that our mortgage services can be offered efficiently and on a
timely basis. We currently have an agreement with Fannie Mae that authorizes our
use of their automated underwriting services and enables us to sell qualified
first mortgages to Fannie Mae. We cannot assure you that we will remain in good
standing with Fannie Mae or that Fannie Mae will not terminate our relationship.
We expect to continue to process a significant portion of our conforming
mortgage loans using the Fannie Mae system until we are able to obtain automated
underwriting services from other providers. Our agreement with Fannie Mae can be
terminated by either party. The termination of our agreement with Fannie Mae
would adversely affect our business by reducing our ability to streamline the
mortgage origination process. Additionally, we may not be able to successfully
implement the automated underwriting services of Fannie Mae or other automated
underwriting providers in a manner that will lead to substantial processing
efficiencies.
WE WILL CONTINUE TO EXPAND INTO INTERNATIONAL MARKETS IN WHICH WE HAVE LIMITED
EXPERIENCE
A key part of our strategy is to develop E-LOAN-branded online properties in
international markets and we have, through joint ventures and subsidiaries,
developed E-LOAN properties localized for over 4 other countries. To date, we
have only limited experience in developing localized versions of our products
and marketing and operating our products and services internationally and we
rely on the efforts and abilities of our foreign business partners in such
activities.
We believe that in light of substantial anticipated competition, we need to move
quickly into international markets in order to effectively obtain market share.
However, in a number of international markets, we face substantial competition
from other online lenders that offer or may offer similar services. Many of
these other online lenders have a dominant market share in their territories.
Further, foreign providers of competing online services may have a substantial
advantage over us in attracting users in their country due to more established
branding in that country, greater knowledge with respect to the tastes and
preferences of users residing in that country and/or their focus on a single
market. We expect to continue to experience higher costs as a percentage of
revenues in connection with the development and maintenance of international
online properties. International markets we have selected may not develop at a
rate that supports our level of investment. In particular, international markets
typically have been slower in adoption of the Internet generally and as an
advertising and commerce medium in particular.
In addition to uncertainty about our ability to continue to generate revenues
from our foreign operations and expand our international presence, there are
certain risks inherent in doing business on an international level, including:
trade barriers and unexpected changes in regulatory requirements;
difficulties in staffing and managing foreign operations including, as a
result of distance, language and cultural differences;
longer payment cycles and currency exchange rate fluctuations;
political instability and export restrictions;
seasonal reductions in business activity;
risks related to government regulation; and
potentially adverse tax consequences.
42
We have operations in Japan, Europe, the United Kingdom, and Australia. One or
more of the factors listed above could have a material adverse effect on our
present or future international operations and, consequently, on our business.
WE MAY INCUR LOSSES ON LOANS IF WE BREACH REPRESENTATIONS OR WARRANTIES TO
MORTGAGE LOAN PURCHASERS
In connection with the sale of mortgage loans, we make customary representations
and warranties to mortgage loan purchasers relating to, among other things,
compliance with laws and origination practices. In the event we breach any of
these representations and warranties, we may be required to repurchase or
substitute these mortgage loans and bear any subsequent losses on the
repurchased loans. We may also be required to indemnify mortgage loan purchasers
for these losses and claims with respect to mortgage loans for which there was a
breach of representations and warranties. In addition, many of our agreements
with mortgage loan purchasers prohibit our solicitation of borrowers with
respect to the refinancing of loans we originate and sell. The mortgage loan
purchasers under these agreements may construe our continuing mortgage
monitoring service as violating these non-solicitation provisions, in which case
they may elect to terminate their agreements with us or may seek recovery from
us for damages sustained by them. Many of our agreements with mortgage loan
purchasers prohibit us from refinancing mortgage loans for specified time
periods, unless we pay penalties to the mortgage loan purchasers or obtain their
consent. These agreements also require us to return any premiums paid by a
mortgage loan purchaser if the mortgage loans purchased are prepaid in full
during periods of up to 12 months following the date the mortgage loan is
purchased.
THE CONSUMER LENDING INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE FAIL TO
SUCCESSFULLY COMPETE IN THIS INDUSTRY, OUR MARKET SHARE AND BUSINESS WILL BE
ADVERSELY AFFECTED
To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance and expand our services, as well as our
sales and marketing channels. Increased competition, particularly online
competition, could result in price reductions, reduced margins or loss of market
share, any of which could adversely affect our business. We may not be able to
compete successfully in our market environment and our failure to do so could
have an adverse effect on our business, results of operations and financial
condition. See "Business--Competition".
IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN OUR
INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED
Our business must comply with extensive and complex rules and regulations of,
and licensing and examination by, various federal, state and local government
authorities. These rules impose obligations and restrictions on our auto
business and our residential loan brokering and lending activities. In
particular, these rules limit the mortgage broker fees, interest rates, finance
charges and other fees we may assess, require extensive disclosure to our
customers, prohibit discrimination and impose on us multiple qualification and
licensing obligations. We may not always have been and may not always be in
compliance with these requirements. Failure to comply with these requirements
may result in, among other things, revocation of required licenses or
registrations, loss of approved status, voiding of loan contracts or security
interests, indemnification liability or the obligation to repurchase mortgage
loans sold to mortgage loan purchasers, rescission of mortgage loans, class
action lawsuits, administrative enforcement actions and civil and criminal
liability. See "Business--Licensing and Regulation of Mortgage and Auto Loan
Business".
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, AND COULD
DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS
In September, 1999, we acquired Electronic Vehicle Remarketing, Inc., and we may
acquire or make investments in other complementary businesses, technologies,
services or products in the future. These acquisitions and investments could
disrupt our ongoing business, distract our management and employees and increase
our expenses. In the past, we have had discussions with companies regarding our
acquiring, or
43
investing in, their businesses, products, services, or technologies and we
expect to have additional discussions in the future. If we acquire a company, we
could have difficulty in assimilating that company's personnel, operations,
technology, and software. In addition, the key personnel of the acquired company
may decide not to work for us. We could also have difficulty in integrating the
acquired products, services or technologies into our operations and we may incur
indebtedness or issue equity securities to pay for any future acquisitions. The
issuance of equity securities could be dilutive to our existing stockholders.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE AN
ADVERSE EFFECT ON OUR BUSINESS
Our future success depends to a significant extent on the continued services of
our senior management and other key personnel, particularly co-founders Chris
Larsen, Chief Executive Officer, and Janina Pawlowski, Chairman of the Board of
Directors as well as Joseph Kennedy, President and Chief Operating Officer, and
Robert Ferber, Senior Vice President of Auto Operations. Ms. Pawlowski, a
licensed real estate broker, is responsible for all of our mortgage activities
in California and two other states. If Ms. Pawlowski were to terminate her
relationship with us for any reason, we would not be able to conduct mortgage
business in these states until a replacement is found. The loss of the services
of Mr. Larsen, Ms. Pawlowski, Mr. Kennedy, Mr. Ferber or other key employees,
would also likely have an adverse effect on our business, results of operations
and financial condition. We have not entered into employment agreements with any
of our executives, except Mr. Kennedy and Mr. Ferber, and we do not maintain
"key person" life insurance for any of our personnel.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
Competition for personnel throughout our industry is intense. We may be unable
to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. Our future success depends on our continuing
to attract, retain and motivate highly skilled employees, particularly with
respect to our loan processing functions. We have in the past experienced, and
we expect to continue to experience in the future, difficulty in hiring and
retaining employees with appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected.
OUR BUSINESS WILL BE IMPAIRED IF CONSUMERS DO NOT CONTINUE TO USE THE INTERNET
Our business will be adversely affected if Internet usage does not continue to
grow, particularly by home and auto buyers. A number of factors may inhibit
Internet usage by consumers, including inadequate network infrastructure,
security concerns, inconsistent quality of service, and lack of availability of
cost-effective, high-speed service. If Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. In addition, many
websites have experienced service interruptions as a result of outages and other
delays occurring throughout the Internet infrastructure. If these outages or
delays frequently occur in the future, Internet usage, as well as the usage of
our website, could grow more slowly or decline.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO EXPAND AND PROMOTE OUR BRAND
RECOGNITION
Establishing and maintaining our brand is critical to attracting and expanding
our customer base, solidifying our business relationships and successfully
implementing our business strategy. We cannot assure you that our brand will be
positively accepted by the market or that our reputation will be strong.
Promotion and enhancement of our brand will also depend, in part, on our success
in providing a high-quality customer experience. We cannot assure you that we
will be successful in achieving this goal. To date, we are aware of numerous
customer complaints regarding the quality of our service. If these complaints
persist, they may significantly damage our reputation and offset the efforts we
make in promoting and enhancing our brand and could have an adverse effect on
our business, results of operations and financial condition. If visitors to our
website do not perceive our existing services to be of high quality or if we
alter or modify our brand image, introduce new services or enter into new
business ventures that are not favorably received, the value of our
44
brand could be diluted, thereby decreasing the attractiveness of our service to
potential customers.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL
CHANGE THAT CHARACTERIZES OUR INDUSTRY
Our future success will depend on our ability to adapt to rapidly changing
technologies by continually improving the performance features and reliability
of our services. We rely on third party software products and services,
including software related to automated underwriting functions, which will
enable us to realize processing efficiencies that are central to our operations.
If we are unable to integrate this software in a fully functional manner, we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition,
enhancements of our products and services must meet the requirements of our
current and prospective customers and must achieve significant market
acceptance. We could also incur substantial costs if we need to modify our
services or infrastructure to adapt to these changes.
ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE SYSTEMS OF THIRD
PARTIES ON WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS
Our communications hardware and certain of our other computer hardware
operations are located at the facilities of Exodus Communications, Inc. in Santa
Clara, California and Jersey City, New Jersey. Our auto financing hardware and
certain other computer hardware operations are located at the facilities of Bank
of America in Charlotte, North Carolina. The hardware for our internal loan and
product database, as well as our loan processing operations is maintained in our
Dublin, California facility. Fires, floods, earthquakes, power losses,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our website. Our business could be
adversely affected if our systems were affected by any of these occurrences. Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems.
ANY OUTAGES, DELAYS OR OTHER DIFFICULTIES EXPERIENCED BY THE INTERNET SERVICE
PROVIDERS, ONLINE SERVICE PROVIDERS OR OTHER WEBSITE OPERATORS ON WHICH OUR
USERS DEPEND COULD ADVERSELY AFFECT OR BUSINESS
Our website has in the past and may in the future experience slower response
times or decreased traffic for a variety of reasons. In addition, our users
depend on Internet service providers, online service providers and other website
operators for access to our websites. Many of them have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. Additionally, the Internet
infrastructure may not be able to support continued growth in its use. Any of
these problems could adversely affect our business.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SAFEGUARD THE
SECURITY AND PRIVACY OF OUR CUSTOMERS' FINANCIAL DATA
Internet usage could decline if any well-publicized compromise of security
occurred. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by any breaches that occur. We
also retain on our premises personal financial documents that we receive from
prospective borrowers in connection with their loan applications. These
documents are highly sensitive and if a third party were to misappropriate our
customers' personal information, customers could possibly bring legal claims
against us. We cannot assure you that our privacy policy will be deemed
sufficient by our prospective customers or any federal or state laws governing
privacy which may be adopted in the future.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD PARTY CHALLENGES OR IF WE ARE INVOLVED
IN LITIGATION
Trademarks and other proprietary rights are important to our success and our
competitive position. Although we seek to protect our trademarks and other
proprietary rights through a variety of means, we cannot assure you
45
that the actions we have taken are adequate to protect these rights. We may also
license content from third parties in the future and it is possible that we
could face infringement actions based upon the content licensed from these third
parties. Trademark or propriety rights claims against us, regardless of their
merit, could result in costly litigation and the diversion of our financial
resources and technical and management personnel. Further, if any of these
claims are proved valid, through litigation or otherwise, we may be required to
change our trademarks and pay financial damages, which could adversely affect
our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate movements significantly impact E-LOAN'S volume of closed loans
and represent the primary component of market risk to E-LOAN. In a higher
interest rate environment, consumer demand for mortgage loans, particularly
refinancing of existing mortgages, declines. Interest rate movements affect the
interest income earned on loans held for sale, interest expense on the warehouse
lines payable, the value of mortgage loans held for sale and ultimately the gain
on sale of mortgage loans. In addition, in an increasing interest rate
environment, E-LOAN's mortgage loan brokerage volume is adversely affected.
E-LOAN originates mortgage loans and manages the market risk related to
these loans by pre-selling them on a best efforts basis to the anticipated
purchaser at the same time that E-LOAN establishes the borrowers' interest
rates. If E-LOAN can process loans within the applicable purchasers' commitment
timeframes E-LOAN had no interest rate risk exposure on the loans. However, if
E-LOAN cannot process the loan within this timeframe and interest rates
increase, E-LOAN may experience a reduced gain of may even incur a loss on the
sale of the loan.
With the exception of pre-selling loans through best-efforts commitments,
E-LOAN currently does not engage in any hedging activities.
E-LOAN currently does not maintain a trading portfolio. As a result, E-LOAN
is not exposed to market risk as it relates to trading activities. The majority
of E-LOAN'S portfolio is held for sale which requires E-LOAN to perform market
valuations of its pipeline, its mortgage portfolio held for sale and related
forward sale commitments in order to properly record the portfolio and the
pipeline at the lower of cost or market. Therefore, E-LOAN monitors the interest
rates of its loan portfolio as compared to prevailing interest rates in the
market.
Because E-LOAN pre-sells its mortgage loan commitments forward, E-LOAN
believes that a 100 basis point increase or decrease in long-term rates would
not have a significant adverse effect on E-LOAN'S earnings from its interest
rate sensitive assets. E-LOAN pays off the warehouse lines payable when the loan
is sold and consequently would not be expected to incur significant losses from
an increase in interest rates on the line due to the short timeframe that the
line is drawn down. However, since a high percentage of E-LOAN's closed loan
volume is from refinancings, E-LOAN's future operating results are more
sensitive to interest rate movements than a mortgage lender who has a lower
proportion of refinancings.
In the future, if E-LOAN does not pre-sell the mortgage commitments, its
market risk could change significantly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the independent public accountants on
accounting and financial disclosure.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF E-LOAN
The information required by this Item 10 regarding directors of E-Loan
is incorporated into this item by reference to the information set forth under
"Election of Directors" and "Further Information Concerning the Board of
Directors" in E-Loan's definitive Proxy Statement (the "2000 Proxy statement")
to be filed with the Securities and Exchange Commission and relating to its
Annual Meeting of Stockholders to be held on May 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 regarding compensation of
E-Loan's directors ad executive officers is incorporated into this item by
reference (except to the extent allowed by Item 402(a)(8) of Regulation S-K) to
the 2000 Proxy Statement sections "Further Information Concerning the Board of
Directors--Director Compensation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 regarding beneficial ownership
of our common stock by certain beneficial owners and by management of E-Loan is
incorporated into this Item by reference to the 2000 Proxy Statement section
"Principal Stockholders."
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 regarding certain relationships
and related transactions with management of E-Loan is incorporated into this
item by reference to the 2000 Proxy Statement sections "Further Information
Concerning the Board of Directors" and "Executive Compensation."
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. The following financial statements of E-Loan, Inc. and its
subsidiaries are found in this Annual Report on Form 10-K for the fiscal year
ended December 31, 1999:
Financial Statements Page
Report of Independent Accountants ................F-2
Balance Sheets ...................................F-3
Statements of Operations..........................F-4
Statement of Stockholders' Equity (Deficit) ......F-5
Statements of Cash Flows .........................F-6
Notes to Consolidated Financial Statements .......F-7
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. The Exhibits filed as part of this Report are listed in the Index
to Exhibits.
(b) Reports on Form 8-K. E-Loan filed one report on Form 8-K and one
report on form 8-K/A during the fourth quarter of 1999, as follows:
1. Current Report on Form 8-K filed October 1, 1999 for the purpose of
reporting under item 2 thereof the acquisition of Electronic
Vehicle Remarketing, Inc.
2. Current Report on Form 8-K/A filed November 30, 1999 for the
purpose of filing the financial statement related to the
acquisition of Electronic Vehicle Remarketing, Inc.
(c) Exhibits. See Index to Exhibits.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
E-LOAN, Inc.
a Delaware corporation
By:
-------------------------
Chris Larsen, CEO
Dated: March 30, 2000
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Chris Larsen and Frank Siskowski, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting to said attorneys-in-fact,
or his substitute or substitutes, the power and authority to perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer and Director March 30, 2000
- - ------------------------ (Principal Executive Officer)
Chris A. Larsen
President and Chief Operating Officer March 30, 2000
- - ------------------------
Joe Kennedy
Chairman of the Board March 30, 2000
- - ------------------------
Janina D. Pawlowski
Chief Financial Officer March 30, 2000
- - ------------------------ (Principal Financial and Accounting Officer)
Frank M. Siskowski
Director March 30, 2000
- - ------------------------
Ira M. Ehrenpreis
Director March 30, 2000
- - ------------------------
Robert C. Kagle
Director March 30, 2000
- - ------------------------
Tim Koogle
Director March 30, 2000
- - ------------------------
Wade Randlett
49
E-LOAN, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants ...................................... F-2
Balance Sheets ......................................................... F-3
Statements of Operations ............................................... F-4
Statements of Stockholders' Equity (Deficit) ........................... F-5
Statements of Cash Flows ............................................... F-6
Notes to Financial Statements .......................................... F-7
F-1
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of E-Loan, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of E-Loan, Inc. (the Company)
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating, the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- - -----------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
March 10, 2000
F-2
51
E-LOAN, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------------
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 9,141 $ 37,748
Mortgage loans held-for-sale 42,154 35,140
Accounts receivable, net 411 723
Prepaids and other current assets 720 5,739
--------- ---------
Total current assets 52,426 79,350
Furniture and equipment, net 2,366 4,053
Deposits and other assets 731 1,686
Goodwill and intangible assets -- 67,878
--------- ---------
Total assets $ 55,523 $ 152,967
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Warehouse lines payable $ 41,046 $ 33,115
Accounts payable, accrued expenses and other current liabilities 2,655 12,901
Capital lease obligation, current portion 253 252
Notes payable, current portion 71 1,167
--------- ---------
Total current liabilities 44,025 47,435
Capital lease obligations, long term 719 483
Notes payable, long term 570 2,042
--------- ---------
Total liabilities 45,314 49,960
--------- ---------
Mandatorily redeemable convertible preferred stock:
Series C, 4,467,912 and 0 shares authorized; 4,069,936 and 0 shares issued
and outstanding at December 31, 1998 and December 31, 1999 (aggregate
liquidation preference $5,245,702 and $0 at December 31, 1998
and December 31, 1999) 5,526 --
Series C-1, 4,467,912 and 0 shares authorized; 0 shares issued and oustanding
(liquidation preference $1.22852 per share) -- --
Series D, 1,950,000 and 0 shares authorized; 1,662,529 and 0 shares issued and
outstanding at December 31, 1998 and December 31, 1999 (aggregate liquidation
preference $15,400,006 and $0 at December 31, 1998 and December 31, 1999) 15,867 --
--------- ---------
Commitments and contingencies (Note 14):
Stockholders' equity (deficit):
Preferred Stock:
0 and 5,000,000 par value $0.001 shares authorized; 0 shares issued and outstanding at -- --
December 31, 1998 and December 31, 1999
Convertible preferred stock:
Series A, 428,635 and 0 shares authorized; 428,635 and 0 shares issued and
outstanding at December 31, 1998 and December 31, 1999 (aggregate
liquidation preference $94,300 and $0 at December 31, 1998
and December 31, 1999) 91 --
Series B, 450,708 and 0 shares authorized; 430,207 and 0 shares issued and
outstanding at December 31, 1998 and December 31, 1999 (aggregate liquidation
preference $412,999 and $0 at December 31, 1998 and December 31, 1999) 411 --
Common stock, 50,000,000 and 70,000,000 $0.001 par value shares authorized at
December 31, 1998 and December 31, 1999; 12,524,010 and 41,679,243 shares
issued and outstanding at December 31, 1998 and December 31, 1999 13 42
Less: subscription receivable (4) (4)
Unearned compensation (4,477) (21,195)
Additional paid-in capital 5,381 209,738
Accumulated deficit (12,599) (85,574)
--------- ---------
Total stockholders' equity (deficit) (11,184) 103,007
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders' equity (deficit) $ 55,523 $ 152,967
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
52
E-LOAN, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues (Note 11) $ 1,043 $ 6,832 $ 22,097
Operating expenses:
Operations 1,319 8,257 22,779
Sales and marketing 470 5,704 30,286
Technology 102 1,346 3,595
General and administrative 524 1,619 6,859
Amortization of unearned stock-based compensation -- 1,251 23,116
Amortization of goodwill -- -- 11,589
------------ ------------ ------------
Total operating expenses 2,415 18,177 98,224
------------ ------------ ------------
Loss from operations (1,372) (11,345) (76,127)
Other income, net (2) 173 3,152
------------ ------------ ------------
Net loss $ (1,374) $ (11,172) $ (72,975)
============ ============ ============
Net loss attributable to common stockholders $ (1,415) $ (12,185) $ (74,017)
============ ============ ============
Net loss per share: (Note 2)
Basic and diluted $ (0.12) $ (0.98) $ (2.75)
============ ============ ============
Weighted-average shares - basic and diluted 12,262,032 12,400,284 26,900,863
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
53
E-LOAN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------------
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 -- $ -- -- $ -- 12,255,000 $ 12
Series A preferred stock issued
for cash, net of issuance costs of
$3 @ $0.22 per share in June 1997 428,635 91
Series B preferred stock issued
for cash, net of issuance costs of
$2 @ $0.96 per share in
December 1997 430,207 411
Accretion for preferred stock Series C
Net loss
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 428,635 $ 91 430,207 $ 411 12,255,000 $ 12
Common Stock issued for cash 136,488 1
Common Stock issued for cash upon
exercise of stock options 132,522 --
Accretion for preferred stock Series C
Accretion for preferred stock Series D
Issuance of warrants for capital lease
Issuance of warrants in relation to
marketing agreements
Issuance of stock options for services
rendered
Unearned stock-based compensation
Net loss
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 428,635 $ 91 430,207 $ 411 12,524,010 $ 13
Common Stock issued for cash upon
exercise of stock options 687,763 1
Accretion for preferred stock Series C
Accretion for preferred stock Series D
Charitable Contribution 75,000
Issuance of warrant in relation to
warehouse line
Issuance of stock options for consulting
services rendered
Proceeds from Initial Public Offering
and private placement, net of
issuance costs of $2,281 4,980,061 5
Conversion of preferred stock (428,635) (91) (430,207) (411) 20,493,921 20
Issuance of common stock in
connection with acquisition 2,879,997 3
Obtained warrant and non-cash gain
from settlement of dispute
Issuance of common stock through ESPP 38,491 --
Unearned stock-based compensation
Net loss
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 -- $ -- -- $ -- 41,679,243 $ 42
========== ========== ========== ========== ========== ==========
UNEARNED
SUB- STOCK-BASED ADDITIONAL ACCUMU- TOTAL
SCRIPTION COMPEN- PAID-IN LATED STOCKHOLDERS'
RECEIVABLE SATION CAPITAL DEFICIT DEFICIT
---------- ----------- ---------- ---------- -------------
Balance at December 31, 1996 $ (4) $ -- $ (8) $ (53) $ (53)
Series A preferred stock issued
for cash, net of issuance costs of
$3 @ $0.22 per share in June 1997 91
Series B preferred stock issued
for cash, net of issuance costs of
$2 @ $0.96 per share in
December 1997 411
Accretion for preferred stock Series C (41) (41)
Net loss (1,374) (1,374)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 $ (4) $ -- $ (49) $ (1,427) $ (966)
Common Stock issued for cash 19 20
Common Stock issued for cash upon
exercise of stock options 3 3
Accretion for preferred stock Series C (500) (500)
Accretion for preferred stock Series D (513) (513)
Issuance of warrants for capital lease 29 29
Issuance of warrants in relation to
marketing agreements 640 640
Issuance of stock options for services
rendered 24 24
Unearned stock-based compensation (4,477) 5,728 1,251
Net loss (11,172) (11,172)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 $ (4) $ (4,477) $ 5,381 $ (12,599) $ (11,184)
Common Stock issued for cash upon
exercise of stock options 207 208
Accretion for preferred stock Series C (260) (260)
Accretion for preferred stock Series D (782) (782)
Charitable Contribution 900 900
Issuance of warrant in relation to
warehouse line 290 290
Issuance of stock options for consulting
services rendered 198 198
Proceeds from Initial Public Offering
and private placement, net of
issuance costs of $2,281 62,552 62,557
Conversion of preferred stock 23,767 23,285
Issuance of common stock in
connection with acquisition 80,274 80,277
Obtained warrant and non-cash gain
from settlement of dispute (3,081) (3,081)
Issuance of common stock through ESPP 458 458
Unearned stock-based compensation (16,718) 39,834 23,116
Net loss (72,975) (72,975)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 $ (4) $ (21,195) $ 209,738 $ (85,574) $ 103,007
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
54
E-LOAN, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
($ IN THOUSANDS)
- - --------------------------------------------------------------------------------
1997 1998 1999
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (1,374) $ (11,172) $ (72,975)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of unearned compensation -- 1,251 23,116
Charitable contribution of common stock -- -- 900
Non-cash gain on settlement of dispute -- -- (2,891)
Amortization of goodwill and intangible assets -- -- 11,589
Depreciation and amortization of fixed assets 7 513 1,188
Loss on disposal of furniture and equipment 37 41 --
Changes in operating assets and liabilities:
Accounts receivable (31) (377) (308)
Net change in mortgage loans held for sale -- (42,154) 7,014
Prepaids, deposits and other assets (277) (642) (5,665)
Accounts payable, accrued expenses and
other payables 475 2,136 10,227
----------- ----------- -----------
Net cash used in operating activities (1,163) (50,404) (27,805)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (161) (1,609) (2,874)
Net cash received in connection with acquisition
of CarFinance.com 813
----------- ----------- -----------
Cash used in investing activities (161) (1,609) (2,061)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 23 62,765
Payments on obligations under capital leases -- (27) (236)
Proceeds from notes payable 32 642 7,859
Payments on notes payable -- (79) (5,291)
Common stock issued in connection with the
Employee Stock Purchase Plan -- -- 458
Proceeds from warehouse lines payable -- 241,242 1,095,860
Repayments of warehouse lines payable -- (200,196) (1,103,791)
Proceeds from issuance of preferred stock, net 5,510 15,331 849
----------- ----------- -----------
Net cash provided by financing activities 5,542 56,936 58,473
----------- ----------- -----------
Net increase in cash 4,218 4,923 28,607
Cash and cash equivalents, beginning of period -- 4,218 9,141
----------- ----------- -----------
Cash and cash equivalents, end of period $ 4,218 $ 9,141 $ 37,748
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 7 $ 589 $ 5,335
=========== =========== ===========
Noncash investing and financing activities:
Furniture and equipment under capital leases $ -- $ 999 $ --
Acquisition of CarFinance.com for Common Stock -- -- 80,277
----------- ----------- -----------
$ -- $ 999 $ 80,277
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
55
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. THE COMPANY
E-LOAN, Inc. (the "Company") was incorporated on August 26, 1996 and began
marketing its services in June 1997. Prior to that date, the Company
conducted business through a predecessor company, Palo Alto Funding Group
("PAFG") which was established in 1992 as a mortgage broker. The
stockholders of PAFG and the Company were the same and on December 18, 1997,
PAFG merged with the Company. The transaction was accounted for in a manner
similar to a pooling of interests and, as a result, the accompanying
financial statements represent the combined balance sheets and results of
operations of the Company and PAFG.
The Company is a provider of first and second mortgage loans, home equity
loans, auto loans, small business loans and credit card referrals. The
Company operates as a single operating segment.
The Company completed its initial public offering of 4,020,000 shares of its
common stock on June 28, 1999, raising $52.3 million, net of underwriting
discount. Concurrently, the Company sold 960,061 shares of its common stock
for $12.5 million, net of underwriting discount, in a private placement to
Forum Holdings, Inc., an investment subsidiary of Group Arnault. The net
proceeds of $62.5 million were received on July 2, 1999. Simultaneous to the
closing of the initial public offering, all the convertible preferred stock
and mandatorily redeemable convertible preferred stock were automatically
converted into an aggregate of 20,493,921 shares of common stock.
On September 17, 1999, the Company acquired Electronic Vehicle Remarketing,
Inc. ("CarFinance.com"), a leading provider of online auto loans. Under the
terms of the agreement, the Company issued 2,879,997 shares of common stock
to five investors. As a result of the acquisition, the Company recorded
$78.0 million in goodwill and $1.4 million of acquired intangible assets,
which will be amortized on a straight-line basis over a two-year period.
This acquisition was accounted for as a purchase transaction.
The following is a proforma summary of the unaudited consolidated statement
of operations of the Company for the years ended December 31, 1998 and 1999,
assuming the above acquisition had taken place as of January 1, 1998 and
1999:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(in thousands, except per
share amounts)
(Unaudited)
Revenues $ 8,648 $ 26,037
Net loss (52,292) (101,821)
Net loss per share:
Basic and diluted (1.74) (2.56)
=========== ===========
Weighted average number of shares 30,033,119 39,765,030
=========== ===========
RECLASSIFICATION
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the 1999 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
56
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less from the date of purchase to
be cash equivalents. Both cash equivalents and short term investments
are considered available-for-sale securities and are carried at
amortized cost, which approximates fair value. The following summarizes
cash and cash equivalents at December 31, 1998 and 1999:
DECEMBER 31,
------------------------
1998 1999
-------- --------
($ IN THOUSANDS)
Cash $ 9,141 $ 4,651
Commercial paper -- 33,097
-------- --------
$ 9,141 $ 37,748
======== ========
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale consists of residential property mortgages
having maturities up to 30 years. Pursuant to the mortgage terms, the
borrowers have pledged the underlying real estate as collateral for the
loans. It is the Company's practice to sell these loans to mortgage loan
purchasers shortly after they are funded. Mortgage loans held-for-sale
are recorded at the lower of cost or aggregate market value. Cost
generally consists of loan principal balance adjusted for net deferred
fees and costs. No valuation adjustment was required at December 31,
1998 or 1999.
FURNITURE AND EQUIPMENT
Furniture and equipment, including furniture and equipment under capital
leases, are recorded at cost and depreciated using the straight-line
method over their useful lives, which is generally three years for
computers and five years for furniture and fixtures. Assets under
capital leases are depreciated over the shorter of the useful life of
the asset or the term of the lease. Leasehold improvements are amortized
over the remaining life of the lease. Maintenance and repairs are
charged to expense as incurred, and improvements and betterments are
capitalized. When assets are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations in the period
realized.
In 1999, the Company adopted SOP 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which requires
that the Company expense computer software costs as they are incurred in
the preliminary project stage. Once the capitalization criteria of the
SOP have been met, external direct costs of materials and services
consumed in developing or obtaining internal-use computer software and
payroll and payroll related costs for employees who are directly
associated with and who devote time to the internal-use computer
software are capitalized. Capitalized costs are generally amortized over
three years on a straight-line basis. As of December 31, 1999, the
Company had capitalized approximately $1.1 million in software
development costs.
F-8
57
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
GOODWILL AND INTANGIBLE ASSETS
The Company recorded $78.0 million in goodwill and $1.4 million of
acquired intangible assets resulting from the acquisition of
Carfinance.com on September 17, 1999, which will be amortized on a
straight-line basis over a two-year period. As of December 31, 1999, the
Company incurred a $11.6 million charge related to the amortization of
goodwill and acquired intangible assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived 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"). 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. There was no impairment necessary in the Company's financial
statements for the years ended December 31, 1998 and 1999.
EQUITY INVESTMENTS
The Company accounts for investments in entities where its ownership
interest is between 20% and 50% under the equity method. These
investments are recorded in deposits and other assets and the Company's
proportionate share of income or loss is included in other income, net.
REVENUE
GAIN ON SALE OF LOANS AND BROKERAGE FEES
Gain on sale of loans includes gains or losses determined by loan
sales proceeds less the carrying value of the loans sold.
Origination fees, net of certain direct origination costs, are
deferred and recognized when the loan is sold. The carrying value of
the loan is adjusted for the deferred origination fees and costs.
Gain on sale of loans is recognized at the time of settlement with
the mortgage loan purchaser.
Brokerage fees represent compensation earned for the processing of
mortgage and auto loan applications for third party lenders. The
Company does not take title to the mortgages or autos and the
funding for these customers is provided by third party lenders. The
fees for providing these services are recognized at such time as the
loans are funded by the third party lender.
INTEREST INCOME ON LOANS
Interest income on loans is accrued as earned. Loans are placed on
non-accrual status when any portion of principal or interest is
ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. Loans return to
accrual status when principal and interest become current and are
anticipated to be fully collectible.
F-9
58
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
REVENUE RELATING TO MARKETING SERVICES CONTRACTS
The Company receives non-refundable up-front fees and on-going pay for
performance fees for providing marketing services to other financial
services companies. The up-front fees are deferred and recognized as
revenue on a straight-line basis over the expected term of the contract.
ADVERTISING EXPENSE
Advertising expense related to various media content advertising such as
television, radio and print are charged to operating expenses as
incurred. These costs include the cost of production as well as the cost
of any air time.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. Under this method, deferred tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
The provision for income tax expense represents taxes payable for the
current period, plus the net change in deferred tax assets and
liabilities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and complies
with the disclosure provision of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense is
based on the excess of the estimated fair value of the Company's stock
over the exercise price, if any, on the date of grant. The Company
accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus
in Issue No. 96-18.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128 basic net loss
per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is
computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common and common
equivalent shares outstanding during the period, to the extent such
common equivalent shares are dilutive. Common equivalent shares are
composed of incremental common shares issuable upon the exercise of
stock options and warrants and upon conversion of Series A, B, C and
Series D convertible preferred stock.
F-10
59
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
($ IN THOUSANDS)
Numerator:
Net loss $ (1,374) $ (11,172) $ (72,975)
Accretion of Series C and D mandatorily
redeemable convertible preferred
stock to redemption value (41) (1,013) (1,042)
------------ ------------ ------------
Net loss available to common
stockholders $ (1,415) $ (12,185) $ (74,017)
============ ============ ============
Denominator:
Weighted average common shares
basic and diluted 12,262,032 12,400,284 26,900,863
------------ ------------ ------------
Net loss per share:
Basic and diluted $ (0.12) $ (0.98) $ (2.75)
------------ ------------ ------------
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, during
1998. The Company classifies items of "other comprehensive income" by their
nature in the financial statements and displays the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. To date, the
Company has not had any transactions that are required to be reported in
comprehensive income.
3. MORTGAGE LOANS HELD-FOR-SALE
The inventory of mortgage loans consists primarily of first trust deed
mortgages on residential properties located throughout the United States. As
of December 31, 1998 and 1999, the Company had net mortgage loans
held-for-sale of $42,154,000 and $35,140,000, all of which are on accrual
basis. All mortgage loans held-for-sale are pledged as collateral for
borrowings at December 31, 1998 and 1999 (see Note 7).
4. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Cash totaling $9,141,000 and $4,651,000 at December 31, 1998 and 1999, is
held by two federally insured financial institutions and exceed existing
federal deposit insurance coverage limits at each institution. Commercial
paper totaling $33,097,000 at December 31, 1999 is deposited with two high
credit quality financial institutions and has original maturities of three
months or less. Additionally, approximately 67% and 39% of all mortgage
loans sold during the years ended December 31, 1998 and 1999 were sold to
one mortgage loan purchaser and all auto loans were brokered to one lender.
F-11
60
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
5. FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and consist of the following:
DECEMBER 31,
----------------------
1998 1999
-------- --------
($ IN THOUSANDS)
Computer equipment and software $ 930 $ 3,408
Furniture and fixtures 647 871
Equipment under capital leases 999 999
Leasehold improvements 145 317
-------- --------
2,721 5,595
Accumulated depreciation and amortization (355) (1,542)
-------- --------
$ 2,366 $ 4,053
======== ========
Depreciation and amortization expense for the years ended December 31, 1998
and 1999 was $347,000 and $1,188,000 respectively.
As of December 31, 1998 and 1999, respectively, the accumulated amortization
for equipment under capital leases was $203,000 and $518,000. All equipment
under capital lease serves as collateral for the related lease obligation
(see Note 14).
6. INCOME TAXES
There was no benefit for income taxes for the years ended December 31, 1997,
1998 and 1999 due to the Company's inability to recognize the benefit of net
operating losses. At December 31, 1999 the Company had net operating loss
carryforwards of approximately $45.7 million for federal purposes and $19.3
for state tax purposes. The federal carryforwards expire in the years 2011
through 2019. For federal and state tax purposes, a portion of the Company's
net operating loss may be subject to certain limitations on annual
utilization in case of changes in ownership, as defined by federal and state
tax laws.
F-12
61
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The primary components of temporary differences, which give rise to deferred
taxes are as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
($ IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards $ 442 $ 4,193 $ 16,660
Other 79 228 1,258
-------- -------- --------
Total deferred tax assets 521 4,421 17,918
Valuation allowance (521) (4,421) (17,918)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Management evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance. Due to the uncertainty surrounding the
realization of the favorable tax attributes in future tax returns, the
Company has recorded a valuation allowance against its net deferred tax
assets at December 31, 1997, 1998 and 1999. At such time as it is determined
that it is more likely than not that the deferred tax asset will be
realizable, the valuation allowance will be reduced.
7. WAREHOUSE LINES PAYABLE
As of December 31, 1999, the Company had a warehouse line of credit for
borrowings of up to $50 million for interim financing of mortgage loans. The
interest rate charged on borrowings against these funds is variable based on
the commercial paper rate of the lender plus various percentage rates.
Borrowings are collateralized by the mortgage loans held-for-sale. The
committed line of credit expires on September 30, 2000. Upon expiration,
management believes it will either renew its existing line or obtain
sufficient additional lines. At December 31, 1998 and 1999 approximately
$15.0 million and $31.7 million was outstanding under this line,
respectively. This line of credit agreement generally requires the Company
to comply with various financial and non-financial covenants. The Company
was in compliance with these covenants at December 31, 1999. Two of the
Company's founding stockholders have provided guarantees for the Company's
obligations under this line of credit.
The Company has an agreement to finance up to $200 million of mortgage loan
inventory pending sale of these loans to the ultimate mortgage loan
investors. Of this amount, $100 million is available in committed funds.
This loan inventory financing is secured by the related mortgage loans. The
interest rate charged on these funds is 95 basis points (.95%) over LIBOR.
The line expires May 20, 2000. Upon expiration, management believes it will
either renew its existing line or obtain sufficient additional lines. At
December 31, 1998 approximately $26.1 million was outstanding under this
financial commitment. At December 31, 1999 there were no outstanding
amounts. This agreement includes various non-financial negative and
affirmative covenants. The Company was in compliance with these convenants
at December 31, 1999.
F-13
62
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
On January 15, 1999, the Company entered into a warehouse line of credit
agreement for borrowings of up to $40 million for interim financing of
mortgage loans. The interest rate charged on these funds is 185 basis points
(1.85%) over the Monthly Average LIBOR. The line of credit expires on
April 2, 2000. Upon expiration, management believes it will either renew
its existing line or obtain sufficient additional lines. At December 31,
1999, there were no outstanding amounts on this line. This line of credit
agreement generally requires the Company to comply with various financial
and non-financial covenants. The Company was in compliance with these
covenants at December 31, 1999.
8. NOTES PAYABLE
In December 1998, the Company entered into two credit facilities in the
aggregate principal amount of $5 million for working capital and equipment
financing, both of which have an interest rate of prime plus 0.50%. At
December 31, 1999, $3.2 million was outstanding under these two credit
facilities. These credit facilities require the Company to meet various
financial covenants. The Company was in compliance with these covenants at
December 31, 1999.
9. STOCKHOLDERS' (DEFICIT) AND MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK
COMMON, CONVERTIBLE PREFERRED, AND PREFERRED STOCK
At December 31, 1998 and 1999, the Company was authorized to issue
50,000,000 shares and 70,000,000 shares of common stock and 11,765,167
and 5,000,000 shares of preferred stock, respectively. As of December
31, 1998, the Company designated 428,635 shares of the authorized
preferred stock as Series A convertible preferred stock, 450,708 shares
as Series B convertible preferred stock, 4,467,912 shares as Series C
convertible preferred stock, 4,467,912 shares as Series C-1 convertible
preferred stock and 1,950,000 shares as Series D convertible preferred
stock. As of December 31, 1999 the 5,000,000 shares of preferred stock
are undesignated. On June 28, 1999, the Company completed its initial
public offering, upon which all outstanding convertible preferred shares
automatically converted into 20,493,921 shares of common stock.
Terms relating to the convertible preferred stock were as follows:
REDEMPTION
Series A and B convertible preferred stock were not redeemable.
The Series C and C-1 convertible preferred stock were redeemable at any
time after December 17, 2001 at the request of no less than 66.67% of
the then outstanding Series C and C-1 stockholders. The redemption price
was equal to $1.22852 per share plus 10% per annum on the amount payable
plus all declared but unpaid dividends. The redemption amounts were
payable in three annual installments.
The Series D convertible preferred stock was redeemable at any time
after September 4, 2002 at the request of no less than 66.67% of the
then outstanding Series D stockholders and subject to the consent of a
majority of the Series C and C-1 convertible preferred stockholders. The
redemption price was equal to $9.263 per share plus 10% per annum on
F-14
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
the amount payable plus all declared unpaid dividends. The redemption
amounts were payable in three annual installments.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of convertible
preferred stock retained liquidation preference over common
stockholders. The liquidation amounts were $0.22 per share of Series A,
$0.96 per share of Series B, $1.22852 per share of Series C, $1.22852
per share of Series C-1, and $9.263 per share of Series D convertible
preferred stock.
The remaining assets and funds of the Company available for distribution
would have been distributed ratably among all holders of Series C,
Series C-1, and Series D convertible preferred stock and common stock
pro rata based on the number of shares of common stock held by each
holder (assuming conversion of all Series C, Series C-1, and Series D
convertible preferred stock) until, with respect to holders of Series C
and Series C-1, such holders would have received an aggregate of $3.6855
per shares and the holders of Series D convertible preferred stock have
received an aggregate of $13.89 per share. Any remaining assets would
have been distributed among the holders of common stock on a pro rata
basis.
VOTING RIGHTS
Holders of convertible preferred stock were entitled to vote together
with holders of common stock. The number of votes granted to convertible
preferred shareholders was to equal the number of full shares of common
stock into which each share of convertible preferred stock could be
converted as described in the Company's Articles of Incorporation.
Special voting rights were provided to Series C, C-1, and D convertible
preferred stockholders for the election of Board of Director members.
CONVERSION
At the option of the holder, each share of convertible preferred stock
was convertible at any time into shares of common stock as determined by
dividing the Issuance Price by the Conversion Price. The Issuance Price
and Conversion Price for the convertible preferred stock were as
follows: $0.22 per share and $0.07333 per share for Series A; $0.96 per
share and $0.32 per share for Series B; $1.22852 per share and $0.40951
per share for Series C; $1.22852 per share and $0.40951 per share for
Series C-1; and $9.26 per share and $3.0867 per share for Series D,
respectively. The Conversion Price for each series of convertible
preferred stock was subject to adjustment as described in the Company's
Articles of Incorporation. Additionally, Series C convertible preferred
stock would have been automatically converted to Series C-1 convertible
preferred stock in the event such holders of Series C convertible
preferred stock did not exercise their right of first refusal as was set
forth in the restated investors' rights agreement.
DIVIDENDS
Holders of convertible preferred stock were entitled to receive, when
and if declared by the Board of Directors, dividends at the rate of
$0.02 per share of Series A, $0.096 per share of Series B, $0.122852 per
share of Series C, $0.122852 per share of Series C-1 and $0.926 per
share of Series D, respectively, per year, payable in preference to any
payment of any dividend on common stock. After such dividend payment,
any additional dividends declared were to be payable entirely to the
holders of Series C and Series C-1 convertible preferred stock and
common stock on a pro rata basis. The dividends were non-cumulative.
F-15
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
As of December 31, 1998 and 1999 no dividends were declared on any
series of the Company's preferred stock.
WARRANTS
In March 1998, the Company issued warrants to purchase up to 15,000
shares of Series C convertible preferred stock at an exercise price of
$2.00 per share to a lender in connection with a capital lease. In
connection with two separate strategic alliance agreements, the Company
issued warrants to purchase 200,000 shares of Series C convertible
preferred stock at an exercise price of $2.40 per share in March 1998
and 53,996 shares of Series D convertible preferred stock at an exercise
price of $9.26 per share in September 1998. In May 1999, the Company
issued a warrant to purchase 75,000 shares of common stock at an
exercise price of $13.33 per share to a lender in connection with a
warehouse agreement.
As of December 31, 1998, no warrants had been exercised. In January
1999, the warrant for Series C convertible preferred stock was
exercised. These shares converted into 600,000 shares of common stock
upon the Company's initial public offering on June 28, 1999.
10. EMPLOYEE BENEFIT PLANS
401(k) SAVINGS PLAN
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). Under the 401(k) Plan, participating employees may defer
a percentage (not to exceed 20%) of their eligible pretax earnings up to
the Internal Revenue Service's annual contribution limit. All employees
on the United States payroll of the Company age 21 years or older are
eligible to participate in the 401(k) Plan.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
As of December 31, 1999, the Company had reserved up to 10,500,000
shares of common stock issuable upon exercise of options issued to
certain employees, directors, and consultants pursuant to the Company's
1997 Stock Option Plan. Such options were exercisable at prices
established at the date of grant, and have a term of ten years. Each
optionee had a vested interest in 25% of the option shares upon the
optionee's completion of one year of service measured from the grant
date. The balance will vest in equal successive monthly installments of
1/48 upon the optionee's completion of each of the next 36 months of
service. If an option holder ceases to be employed by the Company,
vested options held at the date of termination may be exercised within
three months. Options under the plan may be either Incentive Stock
Options, as defined under Section 422 of the Internal Revenue Code, or
Nonstatutory Options. During the years ended December 31, 1997, 1998 and
1999, 1,835,649, 3,084,627 and 4,961,910 options had been granted and
864,351, 621,630 and 2,304,101 options were still available for grant
under the Company's stock option plan. There were no options granted in
1996.
F-16
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Options granted during the years ended December 31, 1997, 1998 and 1999
resulted in unearned compensation of $0, $5.7 million and $38.2 million,
respectively. The amounts recorded represented the difference between
the exercise price and the deemed fair value of the Company's common
stock for shares subject to the options granted. The amortization of
deferred compensation is being charged to operations over the four-year
vesting period of the options. For the years ended December 31, 1997,
1998 and 1999, the amortization of unearned compensation related to
stock options was $0, $1,251,000 and $21,567,000.
In February 1999, the Company sold 40,000 shares of Series D convertible
and mandatorily redeemable convertible preferred stock at a price of
$9.26 per share for aggregate proceeds of $371,000 to an Officer of the
Company in connection with his employment by the Company. This price was
below the deemed fair market value of the common stock and resulted in a
compensation charge in the amount of $1,549,600 which was equal to the
difference between the deemed fair market value of the Series D
convertible preferred stock and the price paid for these shares.
In March 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") under which 1,500,000 shares of common stock were
reserved for issuance. Employees who participate in the Purchase Plan
may have up to 15% of their earnings withheld and used to purchase
shares of common stock on specified dates as determined by the Board.
The price of common stock purchased under the Purchase Plan is equal to
85% of the lower of the fair market value of the common stock, at the
commencement date or the ending date of each 24-month offering period.
Each offering period includes four six-month purchase periods. No
compensation expense is recorded in connection with this plan.
Sales under the Purchase Plan for the year ending December 31, 1999 were
38,491 shares of Common Stock at a price of $11.90 each. As of December
31, 1999, 1,461,509 shares of the Company's Common Stock are reserved
and available for issuance under this plan.
The following information concerning the Company's stock option plan and
employee stock purchase plan was provided in accordance with Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). As permitted by SFAS 123, the Company accounted
for such plans in accordance with APB No. 25 and related
interpretations. The fair value of each stock option was estimated on
the date of grant using the minimum value and fair value option-pricing
model with the following weighted average assumptions.
F-17
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Stock option plan:
Expected stock price volatility 0.00% 0.00% 80.00%(1)
Risk-free interest rate 5.00% 5.00% 6.54%
Expected life of options (years) 5 5 5
Stock purchase plan:
Expected stock price volatility 0.00% 0.00% 80.00%
Risk-free interest rate 0.00% 0.00% 6.54%
Expected life of options (years) -- -- 2
(1) Prior to the Company's initial public offering on June 28, 1999, the
fair value of each option grant was determined using the Minimum
Value Method using a zero volatility. Subsequent to the offering,
the fair value was determined using the Black-Scholes Model.
As a result of the above assumptions, the weighted average fair value of
options granted during the years ending December 31, 1997, 1998 and 1999
was $0.22, $2.02, and $5.20, respectively. The weighted average fair
value of stock purchased during the three years ending December 31,
1997, 1998 and 1999 was $0.00, $0.00, and $8.42, respectively.
The following pro forma net income (loss) information has been prepared
as if the Company had followed the provisions of SFAS No. 123:
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
($ IN THOUSANDS)
Net loss:
As reported $ (1,374) $ (11,172) $ (72,975)
Pro forma $ (1,402) $ (11,210) $ (75,483)
Net loss per share:
As reported $ (0.12) $ (0.98) $ (2.75)
Pro forma $ (0.12) $ (0.99) $ (2.80)
F-18
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan and changes
during those periods is presented below:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------- -------------------------------
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at
beginning of year -- -- 1,835,649 $0.05 - $0.32 3,746,118 $0.05 - $ 1.33
Granted 1,835,649 $0.05 - $0.32 3,084,627 $0.05 - $1.33 4,961,910 $2.00 - $46.00
Exercised -- -- (132,522) $0.05 - $0.22 (687,763) $0.05 - $ 2.00
Terminated/forfeited -- -- (1,041,636) $0.05 - $1.33 (644,651) $0.05 - $46.00
---------- -------------- ---------- -------------- ---------- --------------
Outstanding,
at end of year 1,835,649 $0.05 - $0.32 3,746,118 $0.05 - $1.33 7,375,614 $0.05 - $46.00
========== ============== ========== ============== ========== ==============
Options exercisable
at end of year 114,999 $0.05 496,437 $0.05 - $1.00 932,779 $0.05 - $23.38
========== ============== ========== ============== ========== ==============
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- - --------------------- ----------- -------------- ---------------- ----------- --------------
$0.05 786,996 $ 0.05 8.62 425,226 $ 0.05
$0.22 1,580,310 $ 0.22 9.23 30,525 $ 0.22
$0.32 10,935 $ 0.32 8.80 3,186 $ 0.32
$0.33 222,000 $ 0.33 9.52 -- --
$1.00 408,000 $ 1.00 9.64 37,500 $ 1.00
$1.33 737,877 $ 1.33 9.90 -- --
--------- ---------
3,746,118 496,437
========= =========
F-19
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- - --------------------- ----------- -------------- ---------------- ----------- --------------
$0.05 - $2.00 5,036,067 $ 1.22 8.75 852,650 $ 0.64
$10.00 - $19.31 1,805,122 $ 15.23 9.43 79,629 $ 11.49
$20.00 - $26.25 481,425 $ 22.55 9.82 500 $ 23.38
$31.06 - $46.00 53,000 $ 34.60 9.69 -- --
--------- ---------
7,375,614 932,779
========= =========
11. REVENUES AND OTHER INCOME, NET
The following table provides the components of revenues:
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------- ------- -------
($ IN THOUSANDS)
Mortgage revenues:
Gain on sale of loans and brokerage fee $ 1,043 $ 6,166 $13,569
Interest income on loans -- 666 5,049
Auto revenue - brokerage fees -- -- 2,887
Credit card and other -- -- 592
------- ------- -------
Total revenues $ 1,043 $ 6,832 $22,097
======= ======= =======
F-20
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The following table provides the components of other income, net:
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
-------- -------- --------
($ IN THOUSANDS)
Interest on short-term investments $ 5 $ 237 $ 1,104
Interest expense on non-warehouse
facility borrowings (7) (64) (311)
Equity investment loss -- -- (132)
Non-cash gain on settlement of dispute -- -- 2,891
Settlement of trademark dispute (400)
------------------------------------------
$ (2) $ 173 $ 3,152
======== ======== ========
In October 1999, the Company negotiated a settlement regarding one of
the Company's strategic alliance agreements. Pursuant to the agreement,
the Company obtained a warrant to purchase 53,996 shares of the
Company's Series D convertible preferred stock. The Company recorded the
warrant at fair value on the date the settlement was reached, and
accordingly, the Company recognized a one-time non-cash gain of $2.9
million.
In March 2000, the Company reached an agreement to settle a previously
existing trademark dispute regarding the use of the Company's name.
Accordingly, the Company accrued a one-time expense of $400,000 as at
December 31, 1999.
12. OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
($ IN THOUSANDS)
Compensation and benefits $ 924 $ 7,387 $ 17,423
Processing costs 624 1,220 2,495
Advertising and marketing 360 5,119 26,937
Professional services 125 308 4,356
Occupancy costs 108 375 2,715
Computer and Internet 43 249 704
General and administrative 231 1,510 3,470
Interest expense on warehouse -- 758 5,419
Amortization of unearned compensation -- 1,251 23,116
Amortization of goodwill -- -- 11,589
-------- -------- --------
Total operating expenses $ 2,415 $ 18,177 $ 98,224
======== ======== ========
F-21
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E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount for which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced liquidation sale. Fair value estimates are
subjective in nature and involve uncertainties and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
At December 31, 1998 and 1999, the fair value of mortgage loans
held-for-sale including the related commitments to sell those mortgage loans
exceeds the carrying value of the mortgage loans held-for-sale by
approximately $300,000 and $450,000, respectively. At December 31, 1998, and
1999, the fair value of commitments to originate mortgage loans and the
related commitments to sell those loans resulted in an unrecognized gain of
approximately $900,000 and $500,000, respectively. The fair value of
mortgage loans held-for-sale are estimated using quoted market prices for
similar loans or prices for mortgage backed securities backed by similar
loans and the fair value of the commitments to originate and commitments to
sell mortgage loans are estimated using quoted market prices.
The carrying value of the Company's other financial instruments, including
cash and cash equivalents, accounts receivable and all other financial
assets and liabilities approximate their fair value because of the
short-term maturity of those instruments or because they carry interest
rates which approximate market.
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under an operating lease, which provides
for renewal in November 2004. Rent expense under operating leases
amounted to $108,000, $375,000 and $1,120,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
During April 1998, the Company entered into a 48-month capital lease for
equipment (see Note 5). The Company's lease obligations under capital
and operating leases are as follows:
F-22
71
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
-------- ---------
($ IN THOUSANDS)
2000 $332 $ 1,194
2001 332 1,412
2002 162 1,362
2003 -- 1,401
2004 -- 1,474
-------- --------
Total minimum lease payments 826 $ 6,843
========
Less amount representing interest (91)
--------
Present value of minimum lease payments 735
Less current portion of capital lease obligations (252)
--------
Long-term portion $ 483
========
Under the terms of the office lease, the Company maintains a $1,250,000
stand-by letter of credit in favor of the lessor.
The Company entered into a 63 month lease agreement on February 4, 2000
for additional office space in Jacksonville, Florida. The base rent
installments due for the first three full calendar months of the initial
term have been abated in full. Contractual lease payments have been
reflected in above operating lease schedule. In addition, the Company
will be required to maintain a $500,000 stand-by letter of credit
secured by a certificate of deposit in favor of the lessor.
LEGAL
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing
pending and threatened actions and proceedings with counsel, management
believes that the outcome of such actions or proceedings is not expected
to have a material adverse effect on the financial position or results
of operation of the Company.
MORTGAGE BANKERS' BLANKET BOND
At December 31, 1998, the Company carried a mortgage bankers' blanket
bond for $300,000 and carried errors and omissions insurance coverage
for $2,000,000. At December 31, 1999, the Company carried a mortgage
bankers' blanket bond and errors and omissions insurance coverage for
$3,000,000. The premiums for the bond and insurance coverage are paid
through July 1, 2000.
MARKETING SERVICE AGREEMENTS
The Company has entered into several marketing service agreements with
third parties. Under these agreements the third parties will display the
Company's logo and loan information on their internet websites and
provide related marketing services. The Company pays for these services
in minimum monthly and quarterly installments plus, in some cases, a per
view charge for each time the information is displayed. Future minimum
payments under these agreements are as follows:
F-23
72
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, ($ IN THOUSANDS)
2000 $2,583
2001 1,255
2002 500
------
$4,338
======
Two of these marketing agreements are with stockholders of the Company.
The Company has incurred approximately $1.04 million and $4.44 million
in marketing service expenses under these agreements with these
stockholders during the years ended December 31, 1998 and December 31,
1999, respectively. There were no such agreements as of December 31,
1997.
FINANCIAL INSTRUMENT CONTINGENCIES
At December 31, 1999, the Company was committed to fund loans at
interest rates previously agreed (locked) by both the lender and the
borrower for specified periods of time. Prior to originating loans under
these commitments, the Company evaluates each customer's credit and
collateral worthiness. The Company uses its best efforts to fund these
locked loans within the agreed-upon locked period. If the loan cannot be
funded within this period, or if the Company is unable to secure a rate
lock from the lender equal to or less than the rate lock extended to the
borrower, the Company will earn less revenue than it anticipated at the
time it locked with the borrower. At December 31, 1999, the Company has
provided locks to originate loans amounting to approximately $43.7
million (the "locked pipeline"). In addition, the Company had
commitments at December 31, 1999, in its capacity as a broker, to
deliver locked rate mortgage loans to successful applicants amounting to
approximately $5.3 million.
At December 31, 1999, the Company has entered into non-mandatory forward
loan sale agreements, including commitments with lenders for brokered
loans, amounting to approximately $84.1 million (this includes the
mortgage loans held-for-sale at December 31, 1999, of approximately
$35.1 million). The forward loan sale agreements do not subject the
Company to mandatory delivery and there is no penalty if the Company
does not deliver into the commitment. The Company is exposed to the risk
that these counterparties may be unable to meet the terms of these sale
agreements. The investors are well-established U.S. financial
institutions; the Company does not require collateral to support these
commitments, and there has been no failure on the part of the
counterparties to these agreements to date.
RISKS AND UNCERTAINTIES
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently encountered
by companies in the new and rapidly evolving markets for internet
products and services. These risks include the failure to develop and
extend the Company's online service brands, the rejection of the
Company's services by consumers, vendors and/or advertisers, the
inability of the Company to maintain and increase the levels of traffic
on its online services, as well as other risks and uncertainties.
F-24
73
E-LOAN, INC.
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Additionally, in the normal course of business, companies in the
mortgage banking and auto finance industries encounter certain economic
and regulatory risks. Economic risks include interest rate risk, credit
risk and market risk. The Company is subject to interest rate risk to
the extent that in a rising interest rate environment, the Company will
generally experience a decrease in loan production, which may negatively
impact the Company's operations. Credit risk is the risk of default,
primarily in the Company's loan portfolio that result from borrowers'
inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of loans held-for-sale and in
commitments to originate loans. Regulatory risks include administrative
enforcement actions and/or civil or criminal liability resulting from
the Company's failure to comply with the laws and regulations applicable
to the Company's business.
The Company sells mortgage loans to loan purchasers on a servicing
released basis without recourse. As such, the risk of loss or default by
the borrower has been assumed by these purchasers. However, the Company
is usually required by these purchasers to make certain representations
relating to credit information, loan documentation and collateral. To
the extent that the Company does not comply with such representations,
or there are early payment defaults, the Company may be required to
repurchase the loans and indemnify these purchasers for any losses from
borrower defaults. For the years ended December 31, 1999 and 1998, the
Company had not repurchased any loans.
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its
ability to establish profitable operations or raise additional financing
through public or private equity financings, collaborative or other
arrangements with corporate sources, or other sources of financing to
fund operations. However, there can be no assurance that the Company
will be able to achieve profitable operations. Management believes that
its current funds, available lines of credit and proceeds from equity
financings will be sufficient to enable the Company to meet its planned
expenditures through until at least December 31, 2000.
F-25
74
E-LOAN, INC.
INDEX TO EXHIBITS
(Item 14(c))
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of E-LOAN as currently in effect.
3.2* Form of Restated Certificate of Incorporation of E-LOAN to be filed
immediately following the closing of the offering made under this
Registration Statement.
3.3* Bylaws of E-LOAN.
3.4* Form of Bylaws of E-LOAN to be adopted immediately following the
closing of the offering made under this Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
75
10.2* 1997 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* Restated Investor Rights Agreement dated September 4, 1998 among E-LOAN
and certain investors.
10.5* Warrant Agreement to Purchase Shares of the Series C Preferred Stock of
E-LOAN, Inc. dated March 4, 1998.
10.6* Employment Agreement with Joseph Kennedy dated March 26, 1999.
10.7*+ Marketing Agreement with DLJdirect, Inc. dated September 4, 1998.
10.8*+ Co-Marketing Agreement with E*Trade Group, Inc. dated March 26, 1998.
10.9*+ Marketing Agreement with MarketWatch.com dated February 8, 1999.
10.10* Marketing Agreement with Prism Mortgage Company dated July 6, 1998.
10.11*+ License Agreement with Yahoo!, Inc. dated September 1998 and amended in
March 1999.
10.12* Warehousing Credit and Security Agreement with Bank United, a federal
savings bank, dated February 3, 1999.
10.13* Broker Agreement with Citicorp Mortgage, Inc. dated September 23, 1997.
10.14*+ Underwriting Review Agreement with CMAC Service Company dated September
3, 1998.
10.15* Warehouse Credit Agreement with Cooper River Funding, Inc. and GE
Capital Mortgage Services, Inc. dated June 24, 1998 and Amended and
Restated Note.
10.16* Loan Purchase Agreement with Countrywide Home Loans, Inc. dated
September 25, 1998.
10.17* Conventional Loan Purchase Agreement with Crestar Mortgage Corporation
dated July 1, 1998.
10.18* GMAC Mortgage Corporation Seller's Agreement for Residential Mortgage
Loans with GMAC Mortgage Corporation dated July 1, 1998.
10.19* Mortgage Loan Purchase and Sale Agreement with Greenwich Capital
Financial Products, Inc. dated September 25, 1998.
10.19A* Master Loan and Security Agreement with Greenwich Capital Financial
Products, Inc. dated May 20, 1999.
10.19B* Stock Purchase Warrant issued to Greenwich Capital Financial Products,
Inc. dated May 20, 1999.
10.20* License, Staffing, Purchase and Sale Agreement with NetB@nk dated
October 1, 1998.
10.21* Mortgage Loan Processing Agreement with NetB@nk dated October 1, 1998.
10.22* Wholesale Mortgage Purchase Agreement with PHH Mortgage Services
Corporation dated June 1, 1998.
10.23* Underwriting Services Agreement with PMI Mortgage Services Co. Dated
June 12, 1998.
10.24* Mortgage Purchase Agreement with Resource Bancshares Mortgage Group,
Inc. dated May 1, 1998.
10.25* Mortgage Selling and Servicing Contract with Federal National Mortgage
Association dated February 12, 1999.
10.26* Multi-Tenant Office Triple Net Lease with Creekside South Trust dated
August 19, 1998.
II-3
76
10.26A* Second Amendment to Lease with Creekside South Trust dated March
25, 1999.
10.27* Alliance Agreement between E-LOAN, Inc., E-LOAN Europe BV and
Stater BV dated March 19, 1999.
10.28* Lease Agreement between JTC and Palo Alto Funding Group, Inc.
dated June 20, 1996.
10.29* Mortgage Loan Origination Agreement with Chase Home Mortgage
Corporation dated November 30, 1992.
10.30* Correspondent Agreement with Citicorp Mortgage, Inc. dated June
15, 1998.
10.31* Conventional Wholesale Mortgage Purchase Agreement with Colonial
Mortgage Company dated September 1, 1998.
10.32* Lender Associate Agreement with GreenPoint Mortgage dated
November 9, 1998.
10.33* Correspondent Broker Agreement with New America Financial, Inc.
10.34* Correspondent Mortgage Services Agreement with PHH Mortgage
Services Corporation dated May 20, 1998.
10.35* Correspondent Purchase Agreement with Prism Mortgage Company
dated March 22, 1998.
10.36* Wholesale Lending Agreement with Union Federal Savings Bank of
Indianapolis dated March 6, 1998.
10.37* Master Lease Agreement with Comdisco, Inc. dated March 4, 1998.
10.38* Loan and Security Agreement with Silicon Valley Bank dated
December 9, 1998.
10.39* Internet Data Center Services Agreement with Exodus
Communications, Inc. dated November 10, 1997.
10.40* Marketing Agreement with PHH Mortgage Services Corporation dated
January 19, 1998.
10.41*+ Joint Venture Agreement with Softbank Corp., dated March 31,
1999.
10.42* Stock Purchase Agreement with Forum Holdings, Inc. dated May 20,
1999.
11.1* Statement regarding computation of per share earnings.
11.2(1)+ Service agreement with FCC National Bank.
11.3(2) Agreement and Plan of Reorganization among the Registrant and the
former stockholders of Electronic Vehicle Remarketing, Inc.
11.4(2) Registration Rights Agreement among the Registrant and the former
stockholders of Electronic Vehicle Remarketing, Inc.
11.5(2) Press Release dated August 23, 1999.
11.6(3)+ Amended Investor Rights Agreement.
11.7(3) Robert Ferber Employment Agreement.
11.8(3) Amended Stock Option Plan.
11.9(3) Amended Employee Stock Purchase Plan.
11.10(3) GE Line of Credit Amendment.
11.11(3) Strategic Alliance Agreement with Greenpoint Mortgage Funding, Inc.
11.12(3) Systems & Marketing Agreement with Option One Mortgage.
11.13(3)+ Website Linking Agreement with Providian.
11.14(4)+ Bank of America Strategic Alliance Agreement.
11.15(4)+ AutoConnect Referral Agreement.
11.16(4)+ AutoConnect Addendum to Referral Agreement.
11.17(4)+ Intelligent Life Corporation Agreement.
11.18(4)+ Kelley Blue Book Agreement.
11.19(4)+ Kelley Blue Book Amendment to Referral Agreement.
11.20+ Content Partner/Distribution Agreement with Infoseek Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2* Consent of Counsel (Included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
- - -----------
(*) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-74945) filed on March 24, 1999
as amended, which Registration Statement became effective June 28, 1999.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1999 filed
September 30, 1999.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 8-K dated September 17, 1999 filed October 1,
1999.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
filed November 15, 1999.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1999
filed November 22, 1999.
+ Confidential treatment requested.