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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 000-25621
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E-LOAN, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5875 Arnold Road, Suite 100, Dublin, California 94568
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Delaware 77-0460084
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(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 16, 2001 is approximately
$47,000,000. The total number of shares of common stock outstanding as of March
16, 2001 was 53,652,428.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 8, 2001 are incorporated by reference
into Part III of this report.
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 mortgage loans, home
equity lines of credit ("HELOCs"), 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 and interactive tools. 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 understand and 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. For consumers, E-LOAN provides a clear means to compare
and contrast the true cost of loan products via its no-hidden-lender-fee pricing
strategy. 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, when selling loans 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. E-LOAN intends to take advantage of both short and long term
cross-selling opportunities across its product line, thereby maximizing the
lifetime value of its customer base.
INDUSTRY BACKGROUND
Electronic Commerce and the Consumer Debt Market
The Internet has emerged as a global medium for communication,
information and commerce. As a result of the dramatic increase in the number of
Internet users, the dollar volume of commerce conducted over the Internet is
growing and is expected to continue growing.
Loan products: home mortgages, auto loans, home equity loans and lines
of credit, 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. More importantly, customers can determine just how much they can
save with their auto or home loan, compared to traditional channels in a private
setting. 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. Clearly, financing an auto
transaction for the vast majority of consumers is an unpleasant experience. The
last several years have seen a tremendous change in consumer ability and
willingness to educate themselves about their auto purchase. Using the Internet
to help save as much money as possible, within the financing component of the
auto transaction, is a natural result of that trend. Also, as consumers gain
experience in obtaining different mortgages, whether purchase or refinance, they
are more likely to become self-reliant and prefer a faceless transaction.
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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 not
as complex or difficult, obtaining an auto loan is an especially painful and
potentially costly 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:
o uncertain that their single source lenders and brokers are
providing unbiased advice and are recommending the most
suitable loan products;
o skeptical that rates initially quoted will ultimately be
available;
o intimidated by the number and variety of loan products
available;
o pressured to commit to a particular product before they have
researched and compared products to their satisfaction;
o frustrated with the amount and types of fees they are required
to pay; and
o 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 (prior to the rise of the
Internet) have relied largely upon local auto dealerships to provide financing.
This is due in part to the difficulty in obtaining loan information from a
variety of national lenders for comparison. Because direct lenders only offer
their own products, it may be time-consuming and frustrating for a borrower to
search for the lowest rate by comparing loans among several local lenders in the
consumer's area. In the past, dealers have bundled financing 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, in
the past may not be easily understood and transparent to the buyer, because the
dealer has no incentive to make it so. The Internet with its ability to educate
consumers about auto pricing and auto financing most importantly allows
consumers to separate the purchase price and the financing cost of a vehicle
into two different transactions. Therefore, buyers can now leave the dealership
with the ability to more fully control both negotiations, the price of the car
and the cost of financing, and save themselves time, money and aggravation.
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
convenient, cost-effective way, thereby building a leading national brand name
in consumer lending.
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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 and other financing sources. 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 mortgage loans, HELOCs, 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 2000, E-LOAN was
a leader in the online mortgage market with approximately $1.2 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 $860 million in
closed loans in 2000.
The E-LOAN solution provides the following key advantages to its customers
Large Selection of Mortgage Products. Each customer inquiry triggers a
proprietary rate search algorithm that sorts through thousands of 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 can provide next-day documentary drafts, allowing
the customer to eliminate the need to negotiate auto financing at the
dealership, which has tended to be a large source of profitability at a
dealership. By separating the financing and purchasing transactions, E-LOAN
effectively removes dealer control over financing terms and permits consumers to
receive the rates they deserve based upon their credit background and not their
negotiating skills.
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Customer Savings. By eliminating unnecessary, commissioned financing
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:
For mortgage loans and HELOCs:
quickly search a database of thousands of loan products from nationally
recognized 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; and 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; and receive
overnight documentary drafts to take to dealers.
For credit cards:
obtain instant online approval; transfer existing balances to a new
card online; and obtain 0% introductory APR for certain borrowers.
For small business loans:
o apply online;
o obtain approvals in five minutes for loans up to $50,000; and
o 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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o providing consumer resources through its information-rich
website, which includes a comprehensive guide to various loan
products;
o working with mortgage loan, HELOC, and auto loan customers
throughout the entire transaction process;
o assigning a personal customer service representative to each
borrower to serve as a single point of contact and support
throughout the entire mortgage loan and HELOC process; and
o 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. Key elements of the
E-LOAN strategy include:
Expanding and Developing 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 and HELOCS from nationally recognized lenders. 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
partners with LiveCapital to offer small business loans from multiple lenders
through the E-LOAN website. 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.
Expanding 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
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.
Using 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.
Enhancing 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 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!, Kelley Blue Book, Carpoint, Charles Schwab & Co., Inc., United Mileage
Plus(R), bankrate.com, CapitalOne to promote its mortgage loans, HELOCs, and
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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, loyalty programs, and the
continuous enhancement of its customer service offerings.
Helping 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 our 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. E-LOAN intends to further develop tools that help its
customers identify optimal financing opportunities available through E-LOAN for
all of their debt types in order to lower their overall cost of capital.
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 loans,
HELOCs, and auto loans from the point of online rate searching and application
through the close of the loan and its sale in 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 wide and diverse 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 vehicles, access to 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 thousands of mortgage
loan and HELOC 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 loan customer at the time an 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.
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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 thousands of 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.
Pre-Qualification/Pre-Approval Services. Through its online
pre-qualification and 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.
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 and broker. 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
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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.
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, E-LOAN immediately mails each
customer a welcome package designed to further brand the E-LOAN experience that
contains the necessary disclosure documents mandated by governmental
authorities. Customers may also opt to have their required disclosures delivered
electronically.
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,
loan disclosures, 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.
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.
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. If a product cannot be secured for the
customer, the customer will receive a letter stating the reasons that a loan
could not be obtained.
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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 also solicits customer feedback regarding the loan process to
measure overall E-LOAN customer loyalty and to 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 HELOCs. Approximately 80% of the conventional
loans originated are conforming loans, which are eligible for sale in programs
sponsored by Fannie Mae or Freddie Mac.
The remainder of the conventional loans are non-conforming loans. These
include loans with an original balance in excess of $275,000 that otherwise meet
all other Fannie Mae or Freddie Mac guidelines (jumbo loans), and other loans
that do not meet those guidelines.
The following table illustrates the percentages of E-LOAN's business
from purchase and refinance loans through 2000:
PURCHASE VS. REFINANCE CLOSED LOANS
1998 1999 Q1 00 Q2 00 Q3 00 Q4 00
---- ---- ----- ----- ----- -----
Purchase 5% 63% 54% 66% 67% 49%
Refinance 95% 37% 46% 34% 33% 51%
E-LOAN offers the following categories of loan products:
o long term adjustable rate mortgages;
o intermediate term adjustable rate mortgages;
o fixed rate mortgages;
o home equity lines of credit; and
o no closing cost 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 as an originator under Fannie Mae's Desktop
Originator and Desktop Underwriter system (DU), and Freddie Mac's Loan
Prospector (LP). These systems help automate the lending process for all
conforming loans and loans aimed at low-and moderate-income borrowers. The goal
of DU and LP is to reduce the time and expense of property appraisals.
10
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:
o employment and income;
o credit history;
o property value and characteristics;
o borrower characteristics; and
o available assets.
E-LOAN's Express Loan product allows borrowers with excellent credit to obtain a
loan without the typical level of documentation required.
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 attempts to minimize the interest rate
risk associated with the time lag between when loans are rate-locked and when
they are committed for sale or exchanged in the secondary market, through its
hedging activities. Individual mortgage loan risks are aggregated by note rate,
mortgage loan type a stage in the pipeline, and are then matched, based on
duration, with the appropriate hedging instrument, thus mitigating basis risk
until closing and delivery. E-LOAN currently hedges its mortgage pipeline
through mandatory forward sale of Fannie Mae mortgage-backed securities and
non-mandatory forward sales agreements with the ultimate investor. E-LOAN
determines which alternative provides the best execution in the secondary
market.
E-LOAN believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in the market value of
its fixed-rate mortgage loans held for sale. However, an effective strategy is
complex and no hedging strategy can completely insulate the Company against such
changes.
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, and GE Capital. E-LOAN had
committed and uncommitted funds available through its warehouse credit
facilities and its agreement with Greenwich Capital aggregating approximately
$250 million as of March 31, 2001.
If E-LOAN continues to sell a majority of its internally funded
mortgage loans within approximately one month, its existing warehouse credit
facilities would enable E-LOAN to internally fund approximately $250 million in
mortgage loans during each 30-day period.
11
Our agreements with our warehouse lenders require us to comply with
various operating and financial covenants. These covenants restrict our ability
to:
o sell any of our material assets or merge or consolidate with
another company;
o issue additional shares of common stock without their consent;
o pay dividends on our outstanding shares of common stock; and
o amend our Certificate of Incorporation or Bylaws.
These covenants also require us to:
o maintain a minimum cash and cash equivalents, and tangible net
worth;
o limit the amount of debt we incur relative to our net worth;
o ensure that our current assets are equal to or greater than
our current liabilities; and
o maintain two warehouse facilities at all times with minimum
credit limits.
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 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. As a result of the
acquisition, E-LOAN became a leading online provider of auto loans. Currently,
E-LOAN acts both as a direct lender and as a broker of auto loans. In the first
half of the year 2001, 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.
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.
If approved, a customer receives an email notification within two hours
after submitting the application. At the time of approval, a documentary draft
and two sets of sample loan documents are created (one for a used car and one
for a new car), and are mailed or delivered overnight to the customer. The
customer then takes the documentary draft and documents to any franchised auto
dealership and negotiates for a vehicle 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. 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 or the loan
purchaser as the lien-holder and that the purchase agreement is faxed to E-LOAN.
The dealer deposits the draft with its bank. 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.
12
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 mortgage and auto 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.
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
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 loan 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. E-LOAN
is also configuring E-Track to enable customers to view required disclosures
electronically.
A CSR is available to every auto loan application, to ensure prompt
attention at all stages of the auto loan process. E-LOAN maintains regular
e-mail communication with all auto loan applicants throughout the loan process.
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
peak activity levels 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, if
applicable) 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.
13
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 servers. 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 accessible only to
authorized users within E-LOAN.
Server Hosting and Back-Up. E-LOAN's website system hardware is hosted
at the Exodus facilities in Santa Clara, California and 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 brand and direct response marketing strategy is to attract
home and auto loan applicants to its website by promoting the E-LOAN brand as a
byword for trust, choice, open and honest 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 advertising
nationwide target the demographic and geographic segments with the highest
propensity to utilize an online loan provider.
Mortgage Marketing. Strategic partnerships with online financial
websites, Charles Schwab & Co., Inc., Yahoo!, 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 with
Charles Schwab & Co., Inc. and 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. 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, and Bankrate.com, drive
applications from ready and sophisticated auto buyers through auto loan centers
on those websites. In addition. E-LOAN maintains an auto affiliate program with
over 3000 websites that provide access to E-LOAN's auto loans in exchange for a
small fee per application.
LICENSING AND REGULATION OF MORTGAGE AND AUTO LOAN BUSINESS
E-LOAN is licensed as a mortgage banker and/or mortgage broker, or is
otherwise authorized to originate mortgage loans in all states and the District
of Columbia. E-LOAN has obtained available licenses in every state that requires
such licensing for E-LOAN's online operations and originates auto loans in most,
but not all, states. In a few states where licensing would provide rate relief
for certain loans, but is not available for E-LOAN's particular online lending
operations, E-LOAN limits its product offerings to comply with state law.
14
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, privacy, 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. 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.
EMPLOYEES
As of December 31, 2000, E-LOAN employed 355 full-time employees, of
whom 155 were in mortgage operations, 12 were in home equity operations, 101
were in auto loan operations, 40 were in administration, 19 were in marketing
and business development, and 30 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 are represented by a labor union or are 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 November 2004.
The lease for E-LOAN's office space in Jacksonville expires in August 2005.
ITEM 3. LEGAL PROCEEDINGS
On May 23, 2000, Mobile Internet Technologies, LLC, d/b/a Auto2Auto
("Auto2Auto") initiated an action in the United States District Court for the
Middle District of Florida against E-LOAN, Inc., Jeff Danford, E-LOAN's former
Vice President of Auto Lending Operations, and Curtis Kuboyama, its former
Manager of Auto Product Development. The complaint alleged causes of action
against all defendants for violation of Florida's Uniform Trade Secrets Act and
Deceptive and Unfair Trade Practices Act, misappropriation of Auto2Auto's idea,
and unjust enrichment, and alleged causes of action against Danford and Kuboyama
for breach of contract and breach of an implied-in-fact contract. After the
parties exchanged motions and discovery, the Complaint was dismissed with
prejudice.
On December 21, 1999, Charles Hamrick ("Hamrick") filed a complaint
against First Union Mortgage Corporation ("First Union") in the Circuit Court of
Shelby, Alabama, seeking an injunction to prevent First Union from foreclosing
on the plaintiff's residence. The case was removed to the U.S. District Court
for the Northern District of Alabama, and E-LOAN and Service Link, L.P. were
added as defendants. In the complaint, the plaintiff seeks compensatory and
punitive damages against First Union, E-LOAN and Service Link arising from their
actions in August and September of 1999, relating plaintiff's application for a
refinance loan that was not funded. On or about June 28, 2000, First Union filed
a cross-claim against E-LOAN and Service Link, alleging fraud and unjust
enrichment, and seeking compensatory and punitive damages. E-LOAN has filed a
response to the complaint and cross-claims, denying any liability. The parties
have agreed to a settlement of an immaterial amount.
15
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 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
E-LOAN's common stock has been quoted on the Nasdaq National Market
under the symbol "EELN" since its initial public offering on June 28, 1999.
Prior to this time, there was no public market for E-LOAN's common stock. The
following table shows the high and low sale prices per share of E-LOAN's common
stock as reported on the Nasdaq National Market for the periods indicated:
High Low
---- ---
Fiscal 1999:
Second Quarter ........................................ $ 51.00 $ 20.00
Third Quarter ......................................... $ 74.38 $ 18.25
Fourth Quarter ........................................ $ 29.88 $ 16.25
High Low
---- ---
Fiscal 2000:
First Quarter ......................................... $ 16.75 $ 7.00
Second Quarter ........................................ $ 9.34 $ 3.25
Third Quarter ......................................... $ 4.63 $ 3.13
Fourth Quarter ........................................ $ 4.88 $ 0.38
On March 16, 2001, the last reported sale price of E-LOAN's common
stock on the Nasdaq National Market was $0.875 per share. E-LOAN had
approximately 13,100 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 and our warehouse lines of credit with Cooper River Funding
Inc. and Greenwich Capital Products, Inc., prohibit us from paying cash
dividends.
In April 2000, E-LOAN entered into a Securities Purchase Agreement with
six institutional investors, including two current investors, Technology
Partners and Benchmark Capital. Pursuant to the agreement, E-LOAN sold an
aggregate of 10,666,664 shares of its common stock at a purchase price of $3.75
per share. The aggregate gross proceeds received from the sale were $40,000,000.
In connection with the agreement, E-LOAN registered these shares for resale
under applicable securities laws.
In April 2000, E-LOAN entered into a marketing agreement with Charles
Schwab & Co., Inc., pursuant to which Schwab agreed to provide certain marketing
services to the Company including the development of a co-branded website on
which the Company will offer its services to Schwab's customers. In addition to
certain cash payments to be made by E-LOAN to Schwab pursuant to the marketing
agreement, E-LOAN issued two warrants to purchase a total of 13.1 million shares
of common stock. The first warrant for 6.5 million shares has a three year term
and is exercisable at $3.75 per share. The second warrant for 6.6 million shares
has a three and a quarter year term and is exercisable at $15.00 per share.
E-LOAN has agreed to register for resale under the applicable securities laws
the shares issuable upon the exercise of the warrants.
16
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, 1999 and 2000 and the income statement data for each of the three
years in the period ended December 31, 2000 are derived from, and are qualified
by reference to, the audited financial statements of E-LOAN included elsewhere
in this document.
Years Ended December 31, 2000
--------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Revenues............................. $ 893 $ 1,043 $ 6,832 $ 22,097 $ 35,879
Operating expenses:
Operations........................ 903 1,319 8,257 22,779 31,747
Sales and marketing............... -- 470 5,704 30,286 28,506
Technology........................ -- 102 1,346 3,595 6,207
General and administrative........ 97 524 1,619 6,859 6,840
Non-cash marketing costs.......... -- -- -- -- 6,490
Amortization of unearned
compensation...................... -- -- 1,251 23,116 9,392
Amortization of goodwill and
intangible assets ................ -- -- -- 11,589 39,733
----------- ----------- ----------- ----------- -----------
Total operating expenses........ 1,000 2,415 18,177 98,224 128,915
----------- ----------- ----------- ----------- -----------
Loss from operations.......... (107) (1,372) (11,345) (76,127) (93,036)
Other income, net.................... (3) (2) 173 3,152 1,276
----------- ----------- ----------- ----------- -----------
Net loss............................. $ (110) $ (1,374) $ (11,172) $ (72,975) $ (91,760)
=========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted............. $ (0.01) $ (0.12) $ (0.98) $ (2.75) $ (1.91)
============ =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents............ $ 2 $ 4,218 $ 9,141 $ 37,748 $ 28,459
Loans held-for-sale (pledged)........ -- -- 42,154 35,140 22,745
Goodwill and intangible assets....... -- -- -- 67,878 28,144
Total assets......................... 40 4,680 55,523 152,967 99,743
Warehouse lines payable.............. -- -- 41,046 33,115 17,678
Long term obligations................ -- -- 1,289 2,525 1,088
Mandatorily redeemable
convertible preferred stock....... -- 5,049 21,393 -- --
Total stockholders' equity
(deficit)......................... (52) (966) (11,184) 103,007 67,486
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.
17
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, home equity and auto loans that it underwrites, funds and sells on
the secondary market.
MORTGAGE REVENUES
E-LOAN's mortgage revenues are derived from the origination and sale of
self-funded loans and, to a lesser extent, from the brokering 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. Self-funded loans are funded
through E-LOAN's own warehouse lines of credit and sold to mortgage loan
purchasers. Self-funded loan 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 during the period from funding to sale. E-LOAN
earns additional revenue from its self-funded loans as compared to brokered
loans because the sale of loans includes a service release premium.
HOME EQUITY REVENUES
In the fourth quarter of 2000, E-LOAN began home equity loan
origination and sale operations. E-LOAN's home equity revenues are derived from
the origination and sale of self-funded loans. Self-funded loans are funded
through E-LOAN's own warehouse lines of credit and sold to home equity loan
purchasers. Self-funded loan 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 during the period from funding to sale.
AUTO REVENUES
E-LOAN's auto revenues are derived from the origination and sale of
self-funded loans and from the brokering of auto loans. Auto brokerage revenues
are primarily comprised of the mark-up to the lending partner's loan price or a
set origination fee. These revenues are recognized at the time a loan is closed.
Self-funded loans are currently funded using E-LOAN's balance sheet and sold to
auto loan purchasers. Beginning in April 2001, E-LOAN will fund its auto loans
prior to sale with borrowings against an auto line of credit. Self-funded loan
revenues consist of the mark-up to the lending partners loan price or a set
origination fee. These revenues are recognized at the time a loan is sold.
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 Schwab, Yahoo!,
United Mileage Plus(R), Kelley Blue Book and bankrate.com to be the most
critical to its ability to generate revenues. Schwab and Yahoo! have made equity
investments in E-LOAN.
18
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,
1999 1999 1999 1999 2000 2000 2000 2000
------------------------------------------------------------------------------------------
(Unaudited)
Revenues $ 4,802 $ 4,562 $ 5,026 $ 7,707 $ 7,113 $ 8,483 $ 8,966 $ 11,317
Operating expenses:
Operations 4,442 4,835 6,470 7,032 6,836 7,170 8,442 9,299
Sales and marketing 3,698 7,574 9,362 9,652 9,134 7,596 6,295 5,481
Technology 529 749 972 1,345 1,122 1,707 1,650 1,728
General and administrative 996 2,473 1,598 1,792 1,789 1,953 1,548 1,550
Non-cash marketing costs -- -- -- -- -- 519 2,985 2,986
Amortization of unearned
compensation 6,554 5,785 5,599 5,178 3,468 2,918 1,723 1,283
Amortization of goodwill
and intangible assets -- -- 1,656 9,933 9,933 9,933 9,933 9,934
-------------------------------------------------------------------------------------------
Total operating expenses 16,219 21,416 25,657 34,932 32,282 31,796 32,576 32,261
-------------------------------------------------------------------------------------------
Loss from operations (11,417) (16,854) (20,631) (27,225) (25,169) (23,313) (23,610) (20,944)
Other income (loss), net 36 (66) 387 2,795 388 201 486 201
-------------------------------------------------------------------------------------------
Net loss $ (11,381) $ (16,920) $ (20,244) $ (24,430) $ (24,781) $ (23,112) $ (23,124) $ (20,743)
-------------------------------------------------------------------------------------------
AS A PERCENTAGE OF REVENUES:
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Operations 93% 106% 129% 91% 96% 85% 94% 82%
Sales and marketing 77% 166% 186% 125% 128% 90% 70% 48%
Technology 11% 16% 19% 17% 16% 20% 18% 15%
General and administrative 21% 54% 32% 23% 25% 23% 17% 14%
Non-cash marketing costs 0% 0% 0% 0% 0% 6% 33% 26%
Amortization of unearned
compensation 136% 127% 111% 67% 49% 34% 19% 11%
Amortization of goodwill 0% 0% 0% 0% 0% 0% 0% 0%
and intangible assets
Total operating expenses 338% 469% 478% 324% 314% 258% 253% 197%
Loss from operations -238% -369% -410% -353% -354% -275% -263% -185%
Other income (loss), net 1% -1% 8% 36% 5% 2% 5% 2%
Net loss -237% -371% -403% -317% -348% -272% -258% -183%
-------------------------------------------------------------------------------------------
REVENUES
Revenues increased throughout 1999 from $4.8 million to $7.7 million
and increased sequentially each quarter throughout 2000 from $7.1 million to
$11.3 million. A significant portion of these increases resulted from growth in
the number of mortgage loans closed and sold, and the initiation of E-LOAN's
auto loan origination and sale operations in September 1999 as a result of
E-LOAN's acquisition of CarFinance.com from Bank of America. E-LOAN received
approximately 2% of total revenues in the quarters throughout 2000 from an
alliance with a leading credit card provider. E-LOAN has also formed alliances
to offer small business loans and to process subprime mortgage loans. In the
fourth quarter of 2000, E-LOAN initiated the origination and sale of home equity
lines of credit. Previously, E-LOAN has worked through partnerships to provide
this service. Home equity loan operations provided approximately 2% of total
revenues in the quarter ended December 31, 2000. E-LOAN expects this portion of
the business to increase in absolute dollars going forward.
19
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased
sequentially from the first quarter to the fourth quarter of 1999 from $16.2
million to $34.9 million and remained relatively flat in 2000. 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 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, home equity and auto loans and
interest expense paid by E-LOAN under the warehouse facilities it uses to fund
mortgage and home equity loans held for sale. Operations expense increased
sequentially from the first quarter to the fourth quarter of 1999 from $4.4
million to $7.0 million and increased from the first quarter to the fourth
quarter of 2000 from $6.8 million to $9.3 million. Operations expense decreased
as a percentage of revenues from 93% for the first quarter of 1999 to 82% for
the fourth quarter of 2000. The decrease in operations expense as a percentage
of revenue is due to the increased leverage of fixed costs from technology and
process improvements. E-LOAN expects operations expenses to continue decrease as
a percentage of 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 1999 from $3.7
million to $9.7 million and decreased sequentially from the first quarter to the
fourth quarter of 2000 from $9.1 million to $5.5 million. Sales and marketing
expense increased as a percentage of revenues from 77% for the first quarter of
1999 to 125% for the fourth quarter of 1999 and decreased as a percentage of
revenues from 128% for the first quarter of 2000 to 48% for the fourth quarter
of 2000. Sales and marketing expense increased in 1999 primarily due to a
substantial increase in expenses for advertising, promotion and distribution
partnerships. Sales and marketing expense decreased in 2000 as a percentage of
revenue due to increased leverage from new and existing advertising and partner
relationships. Sales and marketing expenses are expected to stay relatively
constant in absolute dollars in the upcoming quarters.
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 1999, from
$0.5 million to $1.3 million and increased from the first quarter to the fourth
quarter of 2000, from $1.1 million to $1.7 million. Technology expense increased
as a percentage of revenues from 11% for the first quarter of 1999 to 17% for
the fourth quarter of 1999 and remained relatively constant in 2000. 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 expects technology expense to moderately increase in absolute
dollars as it invests in systems that further automate the loan origination
process.
General and Administrative. General and administrative expense is
primarily comprised of salary, benefits and professional services. General and
administrative expense increased from the first quarter to the fourth quarter of
1999 from $1.0 million to $1.8 million and decreased from the first quarter to
the fourth quarter of 2000 from $1.8 million to $1.6 million. General and
administrative expense increased as a percentage of revenues from 21% for the
first quarter of 1999 to 23% for the fourth quarter of 1999, and decreased as a
percentage of revenues from 25% for the first quarter of 2000 to 14% for the
fourth quarter of 2000. General and administrative expense increased primarily
20
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.
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 $23.1
million and $9.4 million have been amortized for the years ended December 31,
1999 and 2000, respectively. Amortization of Unearned Compensation will continue
to decline in absolute dollars on a quarterly basis as the remainder is
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 in the third quarter of 1999 to $9.9 million per quarter from the fourth
quarter of 1999 through the fourth quarter of 2000. E-Loan is amortizing the
goodwill and acquired intangible assets on a straight-line basis over two years,
and the asset will be fully amortized by the end of the third quarter of 2001.
Other Income, Net. Other income, net, increased from the first quarter
to the fourth quarter of 1999 from $36,000 to $2.8 million and decreased from
the first quarter to the fourth quarter of 2000 from $0.4 million to $0.2
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.
21
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 2000
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,
---------------------------
1999 2000
--------- ---------
Revenues $ 22,097 $ 35,879
Operating expenses:
Operations 22,779 31,747
Sales and marketing 30,286 28,506
Technology 3,595 6,207
General and administrative 6,859 6,840
Non-cash marketing costs -- 6,490
Amortization of unearned
compensation 23,116 9,392
Amortization of goodwill
and intangible assets 11,589 39,733
--------- ---------
Total operating expenses 98,224 128,915
--------- ---------
Loss from operations (76,127) (93,036)
Other income (loss), net 3,552 1,276
--------- ---------
Net loss $ (72,575) $ (91,760)
--------- ---------
AS A PERCENTAGE OF REVENUES:
Revenues 100% 100%
Operating expenses:
Operations 103% 88%
Sales and marketing 137% 79%
Technology 16% 17%
General and administrative 31% 19%
Non-cash marketing costs -- 18%
Amortization of unearned
compensation 105% 26%
Amortization of goodwill
and intangible assets 52% 111%
Total operating expenses 445% 359%
Loss from operations -345% -259%
Other income (loss), net 16% 4%
Net loss -328% -256%
--------- ---------
REVENUES
Revenues for the year ended December 31, 2000 increased $13.8 million
from $22.1 million for the twelve months ended December 31, 1999 to $35.9
million for the twelve months ended December 31, 2000. This increase resulted
primarily from the growth in the number of mortgage loans closed and the growth
in auto loans closed as a result of the acquisition of CarFinance.com in
September 1999. Included in the total revenue for the year ended December 31,
2000 is $0.2 million in home equity revenue from the sale of home equity loans,
which E-LOAN began originating and selling internally in November of 2000. In
addition, E-LOAN received approximately 2% and 3% of total revenues from the
22
years ended December 31, 2000 and 1999, respectively, from an alliance with a
leading credit card provider. E-LOAN also has alliances to offer small business
loans and process subprime mortgage loans.
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased $30.7
million from $98.2 million for the twelve months ended December 31, 1999 to
$128.9 million for the twelve months ended December 31, 2000. The increase is
primarily due to an expansion of the auto loan portion of the business (which
was acquired from Bank of America in September of 1999), an increase of $28.1
million in the amortization of goodwill in connection with this acquisition and
$6.5 million in non-cash marketing costs related to the issuance of warrants to
purchase E-LOAN common stock. These amounts are off-set by a decrease of $13.7
million in the amortization of unearned compensation expense.
Operations. Operations expense increased $8.9 million from $22.8
million for the twelve months ended December 31, 1999 to $31.7 million for the
twelve months ended December 31, 2000. Operations expense as a percentage of
revenues decreased from 103% in 1999 to 88% in 2000. Operations headcount
increased by 33 to 266 as of December 31, 2000 from 233 as of December 31, 1999.
This increase is primarily due to the expansion of the Company's auto operations
which resulted from the acquisition of CarFinance.com in September 1999. E-LOAN
expects operations expense decrease as a percentage of revenue and intends to
increase operations capacity in anticipation of an increase in the number of
loans funded.
Sales and Marketing. Sales and marketing expenses decreased $1.8
million from $30.3 million for the twelve months ended December 31, 1999 to
$28.5 million for the twelve months ended December 31, 2000. Sales and marketing
expenses as a percentage of revenues decreased from 137% in 1999 to 79% in 2000.
The decreases are the result of reduced spending in the Company's national
advertising campaign and improved leverage from new and existing partner
relationships resulting in more cost-effective customer acquisitions. Sales and
marketing headcount increased by 2 to 19 as of December 31, 2000 from 17 as of
December 31, 1999.
Technology. Technology expenses increased $2.6 million from $3.6
million for the twelve months ended December 31, 1999 to $6.2 million for the
twelve months ended December 31, 2000. Technology expenses as a percentage of
revenues increased from 16% in 1999 to 17% in 2000. This increase is primarily
due to an increase in recruiting, compensation and benefits related to the
hiring and retention of technology staff. Technology headcount decreased by 1 to
30 as of December 31, 2000 from 31 as of December 31, 1999.
General and Administrative. General and administrative expenses
remained constant for both the twelve months ended December 31, 1999 and 2000.
General and administrative expenses as a percentage of revenues decreased from
31% in 1999 to 19% in 2000. General and administrative headcount decreased by 1
to 40 as of December 31, 2000 from 41 as of December 31, 1999.
Non-Cash Marketing Costs. On June 15, 2000, E-LOAN issued two warrants
to purchase up to 13.1 million shares of common stock to Charles Schwab & Co.,
Inc. pursuant to the Marketing Services Agreement. The first warrant for 6.5
million shares has a three-year term and is exercisable at $3.75 per share. The
second warrant for 6.6 million shares has a three and a quarter year term and is
exercisable at $15.00 per share. E-LOAN recorded the $12.5 million value of the
warrants as a marketing services receivable, a contra-equity account. This
amount is being amortized on a straight-line basis over a one-year period. For
the nine twelve months ended December 31, 2000, E-LOAN incurred a $6.5 million
non-cash charge related to the amortization of the marketing services
receivable.
23
Amortization of Unearned Compensation. Amortization of unearned
compensation decreased from $23.1 million for the twelve months ended December
31, 1999 to $9.4 million for the twelve months ended December 31, 2000.
Amortization of Goodwill. Amortization of goodwill increased from $11.6
million for the twelve months ended December 31, 1999 to $39.7 million for the
twelve months ended December 31, 2000.
Other Income, net. Other income, net, decreased from $3.6 million for
the twelve months ended December 31, 1999 to $1.3 million for the twelve months
ended December 31, 2000. The decrease is primarily due to the inclusion of a
one-time, non-cash gain in the amount of $2.9 million from the settlement of a
strategic alliance agreement in the fourth quarter of 1999. This amount was
off-set by a one-time expense of $400,000 related to the settlement of a
trademark dispute, which was also included in the 1999 amounts.
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
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 (loss), net 173 3,552
-------- --------
Net loss $(11,172) $(72,575)
======== ========
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
compensation 18% 105%
Amortization of Goodwill 0% 52%
Total operating expenses 266% 445%
Loss from operations -166% -345%
Other income (loss), net 3% 16%
Net loss -164% -328%
======== ========
24
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.
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 $2.2 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 $5.2 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
25
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
E-LOAN's sources of cash flow include cash from the sale of mortgage,
home equity and auto loans, borrowings under warehouse lines of credit and other
credit facilities, 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, home equity and auto 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 ($27.8) million and ($26.6)
million for the twelve months ended December 31, 1999 and 2000, respectively.
Net cash used in operating activities decreased primarily due to a decrease in
net loss adjusted for non-cash charges and a decrease in loans held for sale.
Net cash used in investing activities was ($2.1) million and ($6.1)
million for the twelve months ended December 31, 1999 and 2000, 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 $58.5 million and $23.5
million for the twelve months ended December 31, 1999 and 2000, respectively.
Net cash provided in these periods was primarily from the Company's initial
public offering on June 28, 1999, notes payable, borrowings under E-LOAN's
warehouse lines of credit and other credit facilities, and proceeds from the
Company's private placement on June 15, 2000, partially offset by repayments of
warehouse lines of credit and issuance costs related to the initial public
offering.
As of December 31, 2000, E-LOAN had a warehouse line of credit for
borrowings of up to $50 million for the 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 June 30, 2001. Upon expiration, management believes it will
either renew its existing line or obtain sufficient additional lines. This line
of credit agreement generally requires E-LOAN to comply with various financial
and non-financial covenants. In particular, E-LOAN must maintain a minimum cash
and cash equivalents balance of $15 million in addition to the requirement that
E-LOAN maintain at least one other warehouse facility of no less than $100
million. Failure to comply with these, or any other covenants, could result in
the obligation to repay all amounts then outstanding at the time of termination.
E-LOAN was in compliance with these covenants during the year ended and at
December 31, 2000.
26
E-LOAN 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 borrowings against these funds is based on LIBOR plus various
percentage points. The line expires February 23, 2002. This agreement includes
various financial and non-financial covenants. In particular, E-LOAN must
maintain a minimum cash and cash equivalents balance of the higher of $20
million or the highest amount required by any other lender or agreement.
Additionally, E-LOAN is required to maintain at least one other warehouse
facility of no less than $50 million. Failure to comply with these, or any other
covenants, could result in the obligation to repay all amounts then outstanding
at the time of termination. E-LOAN was not in compliance with certain of these
covenants during the year ended December 31, 2000 and subsequently obtained a
waiver from the lender. E-LOAN was in compliance with these covenants at
December 31, 2000.
On April 2, 2001, the Company entered into an agreement for a $25
million line of credit for the interim financing of auto loans. The interest
rate charged on this line is based on LIBOR plus 2.5%. The committed line
expires on April 1, 2002. This line includes various financial and non-financial
covenants. These covenants are no more restrictive than those on the Company's
existing credit facilities.
On March 31, 2001, the Company obtained $5 million in interim financing
through the issuance of promissory notes to two existing stockholders. The
borrowings have an interest rate of 8%. These borrowings are due and payable in
full by April 15, 2001. In addition, on April 2, 2001, the Company entered into
a loan agreement with an officer and stockholder of the Company that provides
the Company with the ability to draw funds up to an aggregate of $7.5 million
upon demand. The borrowings have an interest rate of the lower of 12% or the
maximum legal rate allowed. Any amounts outstanding under this agreement are
due and payable no earlier than January 5, 2002.
E-LOAN believes that its existing cash and cash equivalents as of
December 31, 2000 of $28.5 million and subsequent funds raised through April 2,
2001, will be sufficient to fund its operating activities, capital expenditures
and other obligations for the next 12 months. However, if during that period or
thereafter E-LOAN is not successful in generating sufficient cash flow from
operations, or in raising additional funds when required in sufficient amounts
and on terms acceptable to E-LOAN, these failures could have a material adverse
effect on E-LOAN's business, results of operations and financial condition. 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 $73.0
million and $91.8 million for the years ended December 31, 1999 and 2000,
respectively. As of December 31, 2000, our accumulated deficit was $177.3
million. Because we expect 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.
27
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. We cannot assure you that we will be able to operate successfully if a
downturn in the mortgage business occurs. As a result of our limited operating
history, our recent growth and our reporting responsibilities as a public
company, we may 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.
OUT QUARTERLY FINANCIAL RESULTS ARE VULNERABLE TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
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 mortgage and auto
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. 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.
INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL WAYS,
INCLUDING CUSTOMERS' INCENTIVE TO REFINANCE EXISTING MORTGAGE LOANS
A significant percentage of our mortgage 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
have recently implemented a hedging program to manage the risk of loss due to
fluctuations in interest rates, but our hedging efforts may not be successful,
and no hedging strategy can completely eliminate interest rate risk. 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.
OUR HEDGING STRATEGY MAY NOT SUCCEED IN REDUCING OUR EXPOSURE TO LOSSES CAUSED
BY FLUCTUATIONS IN INTEREST RATES
We attempt to manage our interest rate risk exposure through hedging
transactions using a combination of forward sales of mortgage-backed securities
and forward whole-loan sales to fix the sales price of loans we expect to fund.
An effective hedging strategy is complex, and we have limited experience
administering a hedging program. A successful hedging program depends in part on
28
our ability to properly estimate the number of loans that will actually close
and is subject to fluctuations in the prices of mortgage-backed securities,
which do not necessarily move in tandem with the prices of loans we originate
and close. To the extent that we implement a hedging strategy but are unable to
effectively match our purchases and sales of mortgage-backed securities with the
sale of the closed loans we have originated, our gains on sales of mortgage
loans will be reduced, or we will experience a net loss on those sales.
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 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, 1998, we had 226
full-time employees, at December 31, 1999, we had 275 full-time employees, and
at December 31, 2000 we had 355 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 mortgage 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:
o the growth of the Internet as a commerce medium generally, and
as a market for consumer financial products and services,
specifically;
o our ability to successfully and cost-effectively market our
services to a sufficiently large number of customers; and
o 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.
29
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 38% and 57% of our mortgage and auto loan
applications, respectively, were derived from the websites of our distribution
partners during the year ended December 31, 2000. Our agreements with our
distribution partners are typically short-term, from one to four years in
length, and most 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.
THE TERMINATION OF ONE OR MORE OF OUR MORTGAGE FUNDING SOURCES WOULD ADVERSELY
AFFECT OUR BUSINESS
We depend on GE Capital Mortgage Services, Inc. ("GE Capital") to
finance our self-funded mortgage loan activities through the warehouse credit
facility they provide. We also depend on Greenwich Capital Financial Products,
Inc. ("Greenwich Capital") to finance portions of our mortgage loan inventory
pending ultimate sale to mortgage loan purchasers. If either of these warehouse
credit facilities becomes unavailable, 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 on either or
both lines 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 February 2002 and our agreement with GE Capital
expires in June 2001. Upon expiration, management believes it will either renew
its existing lines or obtain sufficient additional lines.
THE TERMINATION OF OUR AUTO LINE OF CREDIT WOULD ADVERSELY AFFECT OUR BUSINESS
We have obtained a line of credit from Bank One, NA, to finance the
funding of our auto loans, and it is our sole facility for auto loan fundings.
If this credit facility becomes unavailable, our business would be adversely
affected. Under our line of credit agreement, 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 the facility and an obligation to repay all amounts outstanding at the time
of termination. In the past, with respect to our mortgage warehouse lines, 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 line of credit
with Bank One, NA expires April 1, 2002. Upon expiration, management believes it
will either renew its existing lines or obtain sufficient additional lines.
WE ARE DEPENDENT ON PRIMARILY ONE LENDING SOURCE FOR ALL OF OUR HOME EQUITY
BUSINESS
Currently, the majority of our home equity loans are funded through
Wells Fargo Bank pursuant to a Home Equity Loan/Line Purchase Agreement. We
currently rely on Wells Fargo Bank's underwriting system for the processing of
the majority of our home equity loans. If Wells Fargo Bank is unable to
underwrite or fund our home equity loans, we may experience delays in processing
loans or an inability to accept or process home equity loan applications until
we are able to secure new sources of funding. Sufficient additional sources of
funding for our home equity loans may not be available on favorable terms or at
all.
30
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. In order to fund auto loans to
applicants throughout the credit spectrum, 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 sufficient 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.
THE LOSS OF OUR RELATIONSHIP WITH ANY OF OUR SIGNIFICANT PROVIDERS 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 ("Agencies"), to help ensure that our mortgage services can be
offered efficiently and on a timely basis. We currently have an agreement with
the Agencies that authorizes our use of their automated underwriting services
and enables us to sell qualified first mortgages to these Agencies. We cannot
assure you that we will remain in good standing with the Agencies or that the
Agencies will not terminate our relationship. We expect to continue to process a
significant portion of our conforming mortgage loans using the Agencies' systems
until we are able to obtain automated underwriting services from other
providers. Our agreement with the Agencies can be terminated by either party. We
utilize an automated underwriting system provided by ZOOT for our home equity
loan business. The termination of our agreements with the Agencies or ZOOT would
adversely affect our business by reducing our ability to streamline the mortgage
origination process.
WE MAY INCUR LOSSES ON LOANS IF WE BREACH REPRESENTATIONS OR WARRANTIES TO
MORTGAGE LOAN PURCHASERS
In connection with the sale of mortgage and auto loans, we make
customary representations and warranties to 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 loans and bear any subsequent losses on the
repurchased loans. We may also be required to indemnify mortgage and auto loan
purchasers for these losses and claims with respect to loans for which there was
a breach of representations and warranties. In addition, many of our agreements
with mortgage and auto loan purchasers prohibit our solicitation of borrowers
with respect to the refinancing of loans we originate and sell. The loan
purchasers under our mortgage loan purchase 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 and auto loan purchasers prohibit us from refinancing
mortgage and auto loans for specified time periods, unless we pay penalties to
the loan purchasers or obtain their consent. Many of these agreements also
require us to return any premiums paid by a mortgage or auto loan purchaser if
the loans purchased are prepaid in full during periods of up to 12 months
following the date the loan is purchased.
31
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.
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 all applicable state and federal laws,
and 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 mortgage and auto loan
brokering and lending activities. In particular, these rules limit the 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 loans sold to loan purchasers, rescission of mortgage loans, class
action lawsuits, administrative enforcement actions and civil and criminal
liability.
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 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 Chairman of the Board of
Directors, as well as Joseph Kennedy, President and Chief Operating Officer. The
loss of the services of Mr. Larsen and Mr. Kennedy 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 we do not maintain "key person" life
insurance for any of our personnel.
32
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 ensure 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 ensure that we will
be successful in achieving this goal. To date, we have received 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 brand could
be diluted, thereby decreasing the attractiveness of our service to potential
customers.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADOPT 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.
33
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 OUR 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 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.
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 loans, HELOCs, 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, LendingTree, and PeopleFirst. 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
34
enter the market and current competitors expand their services. Many of these
potential competitors are likely to enjoy substantial competitive advantages,
including:
o longer operating histories;
o greater name recognition;
o larger, established customer bases; and
o 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.
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.
E-LOAN attempts to minimize the interest rate risk associated with the
time lag between when loans are rate-locked and when they are committed for sale
or exchanged in the secondary market, through its hedging activities. Individual
mortgage loan risks are aggregated by note rate, mortgage loan type and stage in
the pipeline, and are then matched, based on duration, with the appropriate
hedging instrument, thus mitigating basis risk until closing and delivery.
E-LOAN currently hedges its mortgage pipeline through mandatory forward sales of
Fannie Mae mortgage-backed securities and non-mandatory forward sale agreements
with the ultimate investor. E-LOAN determines which alternative provides the
best execution in the secondary market.
E-LOAN believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in the market value of
its fixed-rate mortgage loans held for sale. However, an effective strategy is
complex and no hedging strategy can completely insulate the Company against such
changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, Financial Statements and Notes
to Financial Statements begin on page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
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 to be filed with the Securities and
Exchange Commission (the "2001 Proxy Statement") and relating to its Annual
Meeting of Stockholders to be held on May 8, 2001.
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 2001 Proxy Statement sections "Further Information Concerning the Board of
Directors--Director Compensation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
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 2001 Proxy Statement section
"Principal Stockholders."
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 2001 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, 2000:
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 the 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 during the
second quarter of 2000, as follows:
36
Current Report on Form 8-K filed May 11, 2000 for the purpose of
reporting under item 5 thereof the sale of 10,666,664 common shares and the
signing of a Marketing Agreement with Charles Schwab & Co., Inc.
(c) Exhibits.
10.1 Cooper River Funding, Inc. and GE Capital Mortgage Services,
Inc. - Fourth Modification Agreement
10.2 Greenwich Capital Financial Products, Inc. - Amendment Number
One to the Master Loan and Security Agreement
10.3 Cooper River Funding, Inc. and GE Capital Mortgage Services,
Inc. - Fifth Modification Agreement
10.4 Greenwich Capital Financial Products, Inc. - Amendment to
Warehouse and Mortgage Loan Purchase and Sale Agreement
10.5 Greenwich Capital Financial Products, Inc. and Bankers Trust
Company of California - Whole Loan Custodial Agreement
10.6 Cooper River Funding, Inc. and GE Capital Mortgage Services,
Inc. - Sixth Modification Agreement
10.7 Washington Mutual Bank - Correspondent Purchase and Sale
Agreement
10.8 Pagoo, Inc. - Standard Sublease
10.9 Pagoo, Inc. - Addendum to Sublease
10.10 Greenwich Capital Financial Products - Covenant Waiver
10.11 Creekside South Trust - Landlord Consent to Sublease
10.12 Cooper River Funding, Inc. and GE Capital Mortgage Services,
Inc. - Seventh Modification Agreement
10.13 Providian Bancorp Services - Website Linking Agreement*
10.14 Pagoo, Inc. - Second Addendum to Sublease
10.15 Wells Fargo Bank West, N.A. and Wells Fargo Bank, N.A. - Home
Equity Loan/Line Purchase Agreement*
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors.
* Confidential Treatment Requested
(d) Financial Statement Schedules. See Item 14(a)(2) above.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
E-LOAN, Inc. a Delaware corporation
By: /s/ CHRISTIAN A. LARSEN
-------------------------------------
Christian A. Larsen, CEO
Dated: April 2, 2001
Pursuant to the requirements of the Securities and Exchange Act of
1934, this amended report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Christian A. Larsen and Matthew Roberts, 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
- --------- ----- ----
/s/ CHRISTIAN A. LARSEN Chief Executive Officer and April 2, 2001
- ------------------------ Chairman of the Board of Directors
Christian A. Larsen
/s/ JOSEPH J. KENNEDY President, Chief Operating Officer April 2, 2001
- ------------------------ and Director
Joseph J. Kennedy
/s/ MATTHEW ROBERTS Chief Financial Officer and April 2, 2001
- ------------------------ Secretary (Principal Financial
Matthew Roberts and Accounting Officer)
/s/ IRA M. EHRENPREIS Director April 2, 2001
- ------------------------
Ira M. Ehrenpreis
/s/ Director April 2, 2001
- ------------------------
Robert C. Kagle
/s/ WADE RANDLETT Director April 2, 2001
- ------------------------
Wade Randlett
/s/ DANIEL O. LEEMON Director April 2, 2001
- ------------------------
Daniel O. Leemon
38
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 the Financial Statements F-7
F-1
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, 1999 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHUOSE COOPERS LLP
- -------------------------------
April 2, 2001
F-2
E-LOAN, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 37,748 $ 28,459
Loans held-for-sale 35,140 22,745
Accounts receivable, prepaids and other current assets 6,462 10,360
--------- ---------
Total current assets 79,350 61,564
Furniture and equipment, net 4,053 8,025
Deposits and other assets 1,686 2,010
Goodwill and intangible assets 67,878 28,144
--------- ---------
Total assets $ 152,967 $ 99,743
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Warehouse lines payable $ 33,115 $ 17,678
Accounts payable, accrued expenses and other current liabilities 12,901 11,928
Capital lease obligation, current portion 252 396
Notes payable, current portion 1,167 1,167
--------- ---------
Total current liabilities 47,435 31,169
Capital lease obligations, long term 483 213
Notes payable, long term 2,042 875
--------- ---------
Total liabilities 49,960 32,257
--------- ---------
Commitments and contingencies (Note 15):
Stockholders' equity:
Preferred stock, 5,000,000 $0.001 par value shares authorized at
December 31, 1999 and December 31, 2000; 0 shares issued and
outstanding at December 31, 1999 and December 31, 2000 -- --
Common stock, 70,000,000 and 150,000,000 $0.001 par value shares
authorized at December 31, 1999 and December 31, 2000; 41,679,243
and 53,449,236 shares issued and outstanding at December 31, 1999
and December 31, 2000 42 53
Less: subscription receivable (4) (4)
Marketing services receivable -- (5,970)
Unearned compensation (21,195) (8,625)
Additional paid-in capital 209,738 259,366
Accumulated deficit (85,574) (177,334)
--------- ---------
Total stockholders' equity 103,007 67,486
--------- ---------
Total liabilities and stockholders' equity $ 152,967 $ 99,743
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
E-LOAN, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998 1999 2000
------------ ------------- ------------
Revenues (Note 12) $ 6,832 $ 22,097 $ 35,879
Operating expenses:
Operations 8,257 22,779 31,747
Sales and marketing 5,704 30,286 28,506
Technology 1,346 3,595 6,207
General and administrative 1,619 6,859 6,840
Non-cash marketing costs -- -- 6,490
Amortization of unearned compensation 1,251 23,116 9,392
Amortization of goodwill and intangible assets -- 11,589 39,733
------------ ------------- ------------
Total operating expenses 18,177 98,224 128,915
------------ ------------- ------------
Loss from operations (11,345) (76,127) (93,036)
Other income, net 173 3,152 1,276
------------ ------------- ------------
Net loss $ (11,172) $ (72,975) $ (91,760)
============ ============= ============
Net loss attributable to common stockholders $ (12,185) $ (74,017) $ (91,760)
============ ============= ============
Net loss per share: (Note 2)
Basic and diluted $ (0.98) $ (2.75) $ (1.91)
============ ============= ============
Weighted-average shares - basic and diluted 12,400,284 26,900,863 48,071,654
============ ============= ============
The accompanying notes are an integral part of these financial statements.
F-4
E-LOAN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------- ------- -------- ------ ---------- ------ --------------
Balance at December 31, 1997 428,635 $ 91 430,207 $ 411 12,255,000 $ 12 $ (4)
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 compensation
Net loss
-------- -------- -------- -------- ---------- ------- -----------
Balance at December 31, 1998 428,635 $ 91 430,207 $ 411 12,524,010 $ 13 $ (4)
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 compensation
Net loss
-------- -------- -------- -------- ---------- ------- -----------
Balance at December 31, 1999 - $ - - $ - 41,679,243 $ 42 $ (4)
Common stock issued for cash upon
exercise of stock options 915,287 1
Exercise of warrants issued for
capital lease 43,148 -
Proceeds from Private Placement, net
of issuance costs of $889 10,666,664 10
Issuance of common stock through ESPP 144,894 -
Marketing Services Receivable, net of
of amortization
Unearned compensation
Net loss
-------------------------------------------------------------------------------
Balance at December 31, 2000 - $ - - $ - 53,449,236 $ 53 $ (4)
======== ======== ======== ======== ========== ======= ===========
TOTAL
UNEARNED ADDITIONAL MARKETING STOCKHOLDERS'
COMPEN- PAID-IN SERVICES ACCUMULATED EQUITY
SATION CAPITAL RECEIVABLE DEFICIT (DEFICIT)
-------- ---------- ---------- --------- ---------
$ - $ (49) $ - $ (1,427) $ (966)
19 20
3 3
(500) (500)
(513) (513)
29 29
640 640
24 24
(4,477) 5,728 1,251
(11,172) (11,172)
-------- ---------- ---------- --------- ---------
$ (4,477) $ 5,381 $ - $ (12,599) $ (11,184)
207 208
(260) (260)
(782) (782)
900 900
290 290
198 198
62,552 62,557
23,767 23,285
80,274 80,277
(3,081) (3,081)
458 458
(16,718) 39,834 23,116
(72,975) (72,975)
- -------------------------------------------------------------------
$(21,195) $ 209,738 $ - $ (85,574) $ 103,007
616 617
30 30
39,100 39,110
600 600
12,460 (5,970) 6,490
12,570 (3,178) 9,392
(91,760) (91,760)
- -------------------------------------------------------------------
$ (8,625) $ 259,366 $ (5,970) $(177,334) $ 67,486
======== ========== ========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
E-LOAN, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
1998 1999 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (11,172) $ (72,975) $ (91,760)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of unearned compensation 1,251 23,116 9,392
Charitable contribution of common stock -- 900 --
Non-cash gain on settlement of dispute -- (2,891) --
Amortization of goodwill and intangible assets -- 11,589 39,733
Non-cash marketing costs -- -- 6,490
Depreciation and amortization of fixed assets 513 1,188 2,351
Loss on disposal of furniture and equipment 41 -- --
Changes in operating assets and liabilities:
Accounts receivable, prepaids, deposits
and other assets (1,019) (5,973) (4,222)
Net change in loans held for sale (42,154) 7,014 12,395
Accounts payable, accrued expenses and
other payables 2,136 10,227 (973)
------------ ------------ ------------
Net cash used in operating activities (50,404) (27,805) (26,594)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of furniture, equipment and software (1,609) (2,874) (6,187)
Net cash received in connection with acquisition
of CarFinance.com -- 813 --
------------ ------------ ------------
Cash used in investing activities (1,609) (2,061) (6,187)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 23 63,223 40,357
Payments on obligations under capital leases, net (27) (236) (262)
Proceeds from notes payable 642 7,859 --
Payments on notes payable (79) (5,291) (1,167)
Proceeds from warehouse lines payable 241,242 1,095,860 960,684
Repayments of warehouse lines payable (200,196) (1,103,791) (976,120)
Proceeds from issuance of preferred stock, net 15,331 849 --
----------- ----------- -----------
Net cash provided by financing activities 56,936 58,473 23,492
----------- ----------- -----------
Net increase (decrease) in cash 4,923 28,607 (9,289)
Cash and cash equivalents, beginning of period 4,218 9,141 37,748
----------- ----------- -----------
Cash and cash equivalents, end of period $ 9,141 $ 37,748 $ 28,459
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 589 $ 5,335 $ 5,994
=========== =========== ===========
Noncash investing and financing activities:
Furniture, equipment and software under capital leases $ 999 $ -- $ 136
Acquisition of CarFinance.com for common stock -- 80,277 --
----------- ----------- -----------
$ 999 $ 80,277 $ 136
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
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. 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 April 25, 2000, the Company entered
into a Securities Purchase Agreement with six institutional investors to
sell an aggregate of 10,666,664 shares of common stock at a purchase price
of $3.75 per share in a private placement. The aggregate gross proceeds of
$40.0 million were received on June 15, 2000.
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 $1.4 million of acquired intangible assets,
which is being amortized on a straight-line basis over a two-year period.
This acquisition was accounted for as a purchase transaction.
The following is a proforma summary of the unaudited consolidated statement
of operations of the Company for the years ended December 31, 1998 and
1999, assuming the above acquisition had taken place as of January 1, 1998
and 1999:
DECEMBER 31,
---------------------------------
1998 1999
-------------- --------------
($ 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 financial statements have been reclassified to
conform to the 2000 presentation.
The accompanying notes are an integral part of these financial statements.
F-7
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
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 and
documentary drafts, 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. As more
fully described in Note 17, the Company must maintain a minimum cash
and cash equivalents balance of the higher of $20 million or the
highest amount required by any other lender or agreement. The following
summarizes cash and cash equivalents at December 31, 1999 and 2000:
DECEMBER 31,
1999 2000
----------- ---------
($ IN THOUSANDS)
Cash $ 4,651 $ 12,290
Commercial paper 33,097 8,524
Documentary drafts -- 7,645
----------- ----------
$ 37,748 $ 28,459
=========== ==========
DOCUMENTARY DRAFTS
The Company originates auto loans directly to consumers through the use
of a documentary draft process. This process requires the borrower and
the auto dealer to provide a series of supporting documents in order to
complete the loan. Examples of required supporting documentation
include copies of the borrower's driver's license, bill of sale, proof
of insurance, and application for title registration.
Documentary drafts consist of cash allocated to satisfy documentary
drafts presented by borrowers before the required supporting documents
are received by the Company to complete the loan. If the required
documentation is not provided as agreed to by the borrower and auto
dealer, then the allocation of cash is reversed and the cash balance is
restored. The Company's documentary draft process allows for at least
two business days to process the required supporting documentation
prior to determining whether to reverse or honor the original
presentment by the auto dealer. Of the $7.6 million included in cash
and cash equivalents at December 31, 2000, $6.3 million converted to
loans in January 2001.
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
The accompanying notes are an integral part of these financial statements.
F-8
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999 or 2000.
In May 2000, the Company began funding auto loans. Auto loans
held-for-sale consists of automobile loans having maturities up to 72
months. Pursuant to the loan terms, the borrowers have pledged the
value of the automobile as collateral for the loan. It is the Company's
practice to sell these loans to auto loan purchasers shortly after they
are funded. Auto loans held-for-sale are recorded at the lower of cost
or aggregate market value. No valuation adjustment was required at
December 31, 2000.
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 one to three years on a straight-line basis. As of
December 31, 2000, the Company had capitalized approximately $1.8
million in internally developed software costs.
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 is being amortized on a
straight-line basis over a two-year period. Amortization of goodwill
and acquired intangible assets for the years ended December 31, 1999
and 2000 was $11.6 million and $39.7 million, respectively.
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 No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. There was no impairment charge in the
Company's financial statements for the years ended December 31, 1999
and 2000.
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.
The accompanying notes are an integral part of these financial statements.
F-9
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 loan purchaser.
Brokerage fees represent compensation earned for the processing of
loan applications for third party lenders. The Company does not
take title to the collateral 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.
MARKETING FEE REVENUE
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 AND MARKETING COSTS
Advertising and marketing costs 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.
MARKETING SERVICES RECEIVABLE
The marketing services receivable relates to the issuance of two
warrants issued in connection with a strategic marketing agreement (see
Note 10). The fair value of these warrants has been recorded as a
contra equity account called marketing services receivable and is being
amortized on a straight-line basis over one-year. In association with
this marketing agreement, there are a series of cash payments to be
made over the course of the agreement, which are not included in the
marketing services receivable. Amounts payable under this agreement are
included within the future minimum payments table under marketing
agreements disclosed in Note 15.
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.
The accompanying notes are an integral part of these financial statements.
F-10
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations, and complies with the disclosure requirements 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, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO NON-EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES.
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 potential
dilutive shares outstanding during the period, to the extent such
potential dilutive shares are dilutive. Potential dilutive shares are
composed of incremental common shares issuable upon the exercise of
stock options and warrants.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
YEARS ENDED DECEMBER 31,
1998 1999 2000
------------ ---------------- ------------
($ IN THOUSANDS)
Numerator:
Net loss $ (11,172) $ (72,975) $ (91,760)
Accretion of Series C and D mandatorily
redeemable convertible preferred
stock to redemption value (1,013) (1,042) --
------------ ------------ ------------
Net loss available to common
stockholders $ (12,185) $ (74,017) $ (91,760)
============ ============ ============
Denominator:
Weighted average common shares
basic and diluted 12,400,284 26,900,863 48,071,654
------------ ------------ ------------
Net loss per share:
Basic and diluted $ (0.98) $ (2.75) $ (1.91)
============ ============ ============
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 other comprehensive income.
The accompanying notes are an integral part of these financial statements.
F-11
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DERIVATIVE INSTRUMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No.
133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives will
be recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
adopted SFAS 133 on January 1, 2001. Adoption of this pronouncement will
result in a transition adjustment of a $0.2 million gain, which will be
recorded as a cumulative effect of a change in accounting principle. The
FASB is currently reviewing certain implementation guidance which could
affect the transition adjustment amounts for commitments to purchase and
originate loans.
3. 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, 1999 and 2000, the Company had net mortgage loans
held-for-sale of $35.1 million and $22.7 million, all of which are on
accrual basis. All mortgage loans held-for-sale are pledged as collateral
for borrowings at December 31, 1999 and 2000 (see Note 8).
The inventory of auto loans consists primarily of loans against new and
used automobiles located throughout the United States. As of December 31,
1999 and 2000, the Company had loans held-for-sale of $0 and $4.1 million,
all of which are on accrual basis. None of the auto loans held-for-sale at
December 31, 2000 were pledged as collateral.
4. ACCOUNTS RECEIVABLE, PREPAIDS AND OTHER CURRENT ASSETS
Accounts receivable, prepaids and other current assets as of December 31,
1999 and 2000, was $6.5 million and $10.4 million, respectively. This
balance consists primarily of the receivable due to the Company from sales
of mortgage loans on its gestation warehouse line facility in the amounts
of $1.8 million and $6.6 million at December 31, 1999 and 2000,
respectively.
5. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Cash and cash equivalents totaling $4.7 million and $19.9 million at
December 31, 1999 and 2000, respectively, is held by federally insured
financial institutions and exceeds existing federal deposit insurance
coverage limits at each institution. Commercial paper totaling $33.0
million and $8.5 million at December 31, 1999 and 2000, respectively, is
deposited with high credit quality financial institutions and has original
maturities of three months or less.
Approximately 41% and 20% of all mortgage loans sold during the years
ended December 31, 1999 and 2000, respectively, were sold to one mortgage
loan purchaser and approximately 87% of all auto loans sold during the
year ended December 31, 2000 were sold to one auto loan purchaser. All
brokered auto loans in 2000 were brokered to one lender.
The accompanying notes are an integral part of these financial statements.
F-12
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and consist of the following:
DECEMBER 31,
1999 2000
---------- ----------
($ IN THOUSANDS)
Computer equipment and software $ 3,408 $ 7,629
Furniture and fixtures 871 1,556
Equipment and software under capital leases 999 1,133
Leasehold improvements 317 1,600
---------- ----------
5,595 11,918
Accumulated depreciation and amortization (1,542) (3,893)
---------- ----------
$ 4,053 $ 8,025
========== ==========
Depreciation and amortization expense for the years ended December 31, 1999
and 2000 was $1.2 million and $2.4 million respectively.
As of December 31, 1999 and 2000, respectively, the accumulated
amortization for equipment under capital leases was $0.5 million and $0.7
million. All equipment under capital lease serves as collateral for the
related lease obligations (see Note 15).
7. INCOME TAXES
There was no benefit for income taxes for the years ended December 31,
1998, 1999 and 2000 due to the Company's inability to recognize the benefit
of net operating losses. At December 31, 2000 the Company had net operating
loss carryforwards of approximately $89.1 million for federal purposes and
$65.0 million for state tax purposes. The federal carryforwards expire in
the years 2012 through 2020. For federal and state tax purposes, a portion
of the Company's net operating loss may be subject to certain limitations
on annual utilization in case of changes in ownership, as defined by
federal and state tax laws.
The accompanying notes are an integral part of these financial statements.
F-13
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The primary components of temporary differences, which give rise to
deferred taxes are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
($ IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards $ 4,193 $ 16,660 $ 34,102
Other 228 1,258 600
-------- -------- --------
Total deferred tax assets 4,421 17,918 34,702
Valuation allowance (4,421) (17,918) (34,702)
-------- -------- --------
$ -- $ -- $ --
======== ======== =========
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, 1998, 1999 and 2000. 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.
8. WAREHOUSE LINES PAYABLE
As of December 31, 2000, the Company had a warehouse line of credit for
borrowings of up to $50 million for the 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 June 30, 2001. Upon
expiration, management believes it will either renew its existing line or
obtain sufficient additional lines. At December 31, 1999 and 2000
approximately $31.7 million and $17.2 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 during the year ended and
at December 31, 2000.
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 borrowings against these funds is based on
LIBOR plus various percentage points. The line expires February 23, 2002.
Upon expiration, management believes it will either renew its existing
line or obtain sufficient additional lines. At December 31, 1999 and 2000
there were no outstanding amounts under this financial commitment. This
agreement includes various financial and non-financial covenants. The
Company was not in compliance with certain of these covenants during the
year ended December 31, 2000 and subsequently obtained a waiver from the
lender. The Company was in compliance with these convenants at December
31, 2000.
9. NOTES PAYABLE
In December 1998, the Company entered into a credit facility in the
principal amount of $3 million for equipment financing, which has an
interest rate of prime plus 0.50%. At December 31, 2000, $2.0 million was
The accompanying notes are an integral part of these financial statements.
F-14
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
outstanding under this credit facility. This credit facility requires the
Company to meet various financial covenants. The Company was not in
compliance with certain of these covenants during the year ended December
31, 2000 and subsequently obtained a waiver from the lender. The Company
was in compliance with these covenants at December 31, 2000.
10. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
At December 31, 1999 and 2000, the Company was authorized to issue
70,000,000 and 150,000,000 shares of common stock and 5,000,000 shares
of preferred stock, respectively. As of December 31, 2000 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.
WARRANTS
In March 1998, the Company issued a warrant 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
February 2000, this warrant was net exercised for 43,148 shares of
common stock.
In connection with two separate strategic alliance agreements, the
Company issued a warrant to purchase 200,000 shares of Series C
convertible preferred stock at an exercise price of $2.40 per share in
March 1998 and a warrant to purchase 53,996 shares of Series D
convertible preferred stock at an exercise price of $9.26 per share in
September 1998. In January 1999, the warrant to purchase 200,000 shares
of 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. In October 1999, the warrant
to purchase 53,996 shares of Series D convertible preferred stock was
returned as part of a negotiated settlement.
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. In May 2000, this warrant
expired.
In connection with a strategic marketing agreement signed in July 2000,
the Company issued two warrants to purchase a total of 13.1 million
shares of common stock. The first warrant to purchase 6.5 million
shares of common stock has a three year term and is exercisable at
$3.75 per share. The second warrant to purchase 6.6 million shares of
common stock has a three and a quarter year term and is exercisable at
$15.00 per share. The fair value of the warrants, as determined at the
date of grant using the Black-Scholes option pricing model was $12.5
million and was recorded as a contra-equity account called marketing
services receivable. The marketing services receivable is being
amortized on a straight-line basis over a one-year term. At December
31, 2000 both of these warrants remained outstanding.
In February 2001, the Company issued a warrant to purchase 300,000
shares of common stock at an exercise price of $1.55 per share to a
lender in connection with a warehouse agreement.
The accompanying notes are an integral part of these financial statements.
F-15
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. 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. The
Company did not match employee contributions during the years ended
December 31, 1999 or 2000.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
As of December 31, 2000, the Company had reserved up to 12,100,000
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. Initial
optionee grants have 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, 1998, 1999 and 2000, 3,084,627, 4,961,910 and 6,458,404 options had
been granted and 888,133 options were still available for grant under
the Company's stock option plan at December 31, 2000.
Options granted during the years ended December 31, 1998, 1999 and 2000
resulted in unearned compensation of $5.7 million, $38.2 million and
$0, 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 unearned compensation is being charged to operations on
an accelerated basis over the four-year vesting period of the options.
For the years ended December 31, 1998, 1999 and 2000, the amortization
of unearned compensation related to stock options was $1.3 million,
$21.6 million and $11.9 million, respectively. In addition, unearned
compensation in stockholders' equity was reduced by $2.5 million for
terminated employees during the year ended December 31, 2000.
In February 1999, the Company sold 40,000 shares of Series D
mandatorily redeemable convertible preferred stock at a price of $9.26
per share for aggregate proceeds of $0.4 million 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 $1.5 million which was equal
to the difference between the deemed fair market value of the Series D
mandatorily redeemable 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.
The accompanying notes are an integral part of these financial statements.
F-16
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Sales under the Purchase Plan for the years ended December 31, 1999 and
2000 were 38,491 and 144,894 shares of common stock at an average price
of $11.90 and $4.14, respectively. As of December 31, 2000, 1,316,615
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 models with the following weighted average assumptions.
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
------ ------- --------
Stock option plan:
Expected stock price volatility 0.00% 80.00%(1) 80.00%
Risk-free interest rate 5.00% 6.54% 5.88%
Expected life of options (years) 5 5 5
Stock purchase plan:
Expected stock price volatility 0.00% 80.00% 80.00%
Risk-free interest rate 0.00% 6.54% 6.34%
Expected life of options (years) -- 2 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
option pricing model.
As a result of the above assumptions, the weighted average fair value
of options granted during the years ending December 31, 1998, 1999 and
2000 was $2.02, $5.20, and $3.33, respectively. The weighted average
fair value of stock purchased during the three years ending December
31, 1998, 1999 and 2000 was $0.00, $8.42, and $6.05, respectively.
The following pro forma net loss information has been prepared as if
the Company had followed the provisions of SFAS No. 123:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
----------- ----------------- -------------
($ IN THOUSANDS)
Net loss:
As reported $ (11,172) $ (72,975) $ (91,760)
Pro forma $ (11,210) $ (75,483) $ (99,535)
Net loss per share:
As reported $ (0.98) $ (2.75) $ (1.91)
Pro forma $ (0.99) $ (2.80) $ (2.07)
The accompanying notes are an integral part of these financial statements.
F-17
E-LOAN, INC.
NOTES TO THE 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,
--------------------------------------------------------------------------------------------
1998 1999 2000
----------------------------- ------------------------- ------------------------------
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 7,375,614 $ 0.05 - $46.00
Granted 3,084,627 $0.05 - $1.33 4,961,910 $2.00 - $46.00 6,458,404 $0.375 - $16.75
Exercised (132,522) $0.05 - $0.22 (687,763) $0.05 - $ 2.00 (915,287) $ 0.05 - $10.00
Terminated/forfeited (1,041,636) $0.05 - $1.33 (644,651) $0.05 - $46.00 (3,442,436) $ 0.05 - $46.00
----------- ------------- --------- -------------- ---------- ---------------
Outstanding,
at end of year 3,746,118 $0.05 - $1.33 7,375,614 $0.05 - $46.00 9,476,295 $0.05 - $46.00
=========== ============= ========= ============== ========= ==============
Options exercisable
at end of year 496,437 $0.05 - $1.00 932,779 $0.05 - $23.38 2,067,531 $0.05 - $46.00
=========== ============= ========= ============== ========= ==============
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
========== ========
The accompanying notes are an integral part of these financial statements.
F-18
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2000:
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 5,252,429 $1.36 8.64 1,629,449 $1.39
$2.06 - $19.13 3,915,535 $7.12 9.29 344,868 $14.22
$20.44 - $26.25 284,331 $22.27 8.80 85,553 $22.20
$32.63 - $46.00 24,000 $35.11 8.68 7,661 $35.35
---------- -----------
9,476,295 2,067,531
========== ===========
12. REVENUES AND OTHER INCOME, NET
The following table provides the components of revenues:
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
------- -------- --------
($ IN THOUSANDS)
Revenues:
Mortgage revenues $ 6,166 $ 13,569 $ 16,400
Interest income on mortgage and home
equity loans 666 5,049 5,448
Home equity line of credit - - 192
Auto revenues - 2,887 13,019
Credit card and other - 592 820
------- -------- --------
Total revenues $ 6,832 $ 22,097 $ 35,879
======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-19
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table provides the components of other income, net:
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
------- -------- --------
($ IN THOUSANDS)
Interest on short-term investments $ 237 $ 1,104 $ 1,707
Interest expense on non-warehouse
facility borrowings (64) (311) (314)
Equity investment loss - (132) (117)
Non-cash gain on settlement of dispute - 2,891 -
Settlement of trademark dispute - (400) -
------ ------- -------
$ 173 $ 3,152 $ 1,276
====== ======= =======
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 $0.4 million as
at December 31, 1999.
13. OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
------- -------- --------
($ IN THOUSANDS)
Compensation and benefits $ 7,387 $ 17,423 $ 22,119
Processing costs 1,220 2,495 5,171
Advertising and marketing 5,119 26,937 25,323
Professional services 308 4,356 6,075
Occupancy costs 375 2,715 3,978
Computer and internet 249 704 843
General and administrative 1,510 3,470 4,356
Interest expense on warehouse borrowings 758 5,419 5,435
Amortization of unearned compensation 1,251 23,116 9,392
Amortization of goodwill and intangible
assets - 11,589 39,733
Non-cash marketing costs - - 6,490
-------- -------- --------
Total operating expenses $ 18,177 $ 98,224 $128,915
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-20
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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, 1999 and 2000, 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 $0.5 million and $0.4 million, respectively. At December 31,
1999 and 2000, the fair value of commitments to originate mortgage loans
and the related commitments to sell those loans resulted in an unrecognized
gain of approximately $0.5 million and $0.2 million, 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.
At December 31, 2000, the fair value of auto loans held-for-sale including
the related commitments to sell those auto loans exceeds the carrying value
of the auto loans held-for-sale by approximately $0.1 million.
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.
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under two operating leases, which
provide for renewal in November 2004 and May 2005, respectively. Rent
expense under operating leases amounted to $0.4 million, $1.1 million
and $1.3 million for the years ended December 31, 1998, 1999 and 2000,
respectively.
The Company's lease obligations under capital and operating leases are
as follows:
YEARS ENDING DECEMBER 31, CAPITAL OPERATING
------------ -------------
($ IN THOUSANDS)
2001 $ 513 $ 1,641
2002 179 1,598
2003 -- 1,637
2004 -- 1,557
2005 and thereafter -- 178
-------- ---------
Total minimum lease payments 692 $ 6,611
=========
Less amount representing interest (83)
--------
Present value of minimum lease payments 609
Less current portion of capital lease obligations (396)
--------
Long-term portion $ 213
========
The accompanying notes are an integral part of these financial statements.
F-21
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the terms of the office leases, the Company maintains stand-by
letters of credit in favor of the lessors, in the amounts of $1.3
million and $0.5 million, respectively.
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 or liquidity of the Company.
MORTGAGE BANKERS' BLANKET BOND
At December 31, 1999 and 2000, the Company carried a mortgage bankers'
blanket bond and errors and omissions insurance coverage for $3.0
million and $5.0 million, respectively. The premiums for the bond and
insurance coverage are paid through September 2001.
MARKETING AGREEMENTS
The Company has entered into several marketing agreements with third
parties. Under these agreements the third parties will display the
Company's logo and loan information on their internet websites and
provide related marketing services. The Company pays for these services
in minimum monthly and quarterly installments plus, in some cases, a
per view charge for each time the information is displayed. Future
minimum payments under these agreements are as follows:
YEARS ENDING DECEMBER 31, ($ IN THOUSANDS)
2001 $ 2,737
2002 7,713
2003 12,316
2004 6,678
-----------
$ 29,444
===========
Two of these marketing agreements are with stockholders of the Company.
The Company has incurred approximately $4.4 million and $3.1 million in
marketing expenses under these agreements during the years ended
December 31, 1999 and December 31, 2000, respectively.
LOAN COMMITMENTS AND HEDGING ACTIVITIES
Upon receiving a lock commitment from a borrower ("rate lock"), the
Company simultaneously enters into either a mandatory sell forward
agreement with certain institutional counterparties or a non-mandatory
forward sale agreement with the ultimate investor. At December 31,
2000, the Company was a party to commitments to fund loans at interest
rates previously agreed (locked) by both the Company and the borrower
for specified periods of time. Rate locks with the borrowers are on a
best effort basis, borrowers are not obligated to enter into the loan
agreement. A rate lock, which does not result in a funded loan, is
referred to as fallout. As the Company is exposed to movements in
interest rates after entering into rate locks, the Company must
estimate fallout if interest rate risk is to be hedged with a mandatory
sell forward agreement. At December 31, 2000, the Company had provided
locks to originate loans amounting to approximately $57.2 million (the
"locked pipeline").
The Company originates mortgage loans and sells them primarily through
whole loan sales. The market values of mortgage loans are sensitive to
changes in market interest rates. If interest rates rise between the
The accompanying notes are an integral part of these financial statements.
F-22
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
time the Company enters into a rate lock with the borrower, the
subsequent funding of the loan and the time the mortgage loans are
committed for sale, there may be a decline in the market value of the
mortgage loans. To protect against such possible declines, the Company
has adopted a hedging strategy.
The Company retains the services of Tuttle Decision Systems ("TDS"), an
unaffiliated advisory firm specializing in mortgage loan pipeline
management to assist the Company in minimizing the interest rate risk
associated with the time lag between when loans are rate-locked and
when they are committed for sale or exchanged in the secondary market.
Individual mortgage loan risks are aggregated by note rate, mortgage
loan type and stage in the pipeline, and are then matched, based on
duration, with the appropriate hedging instrument, thus mitigating
basis risk until closing and delivery. The Company currently hedges its
mortgage pipeline through mandatory forward sales of Fannie Mae
mortgage-backed securities and non-mandatory forward sale agreements
with the ultimate investor. The Company determines which alternative
provides the best execution in the secondary market. As a managed
account of TDS, the Company is able to take advantage of Tuttle's
reporting services, including pipeline, mark-to-market, commitment and
position reporting.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in the market
value of its fixed-rate mortgage loans held for sale. However, an
effective strategy is complex and no hedging strategy can completely
insulate the Company against such changes.
At December 31, 2000, the Company had entered into mandatory sell
forward commitments amounting to approximately $44.7 million. The
Company adjusts the amount of mandatory sell forward commitments held
to offset changes in the locked pipeline and changes in the market.
At December 31, 2000, the Company had entered into non-mandatory
forward loan sale agreements amounting to approximately $31.5 million.
These 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 meet the terms of these agreements to date.
16. 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.
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 accompanying notes are an integral part of these financial statements.
F-23
E-LOAN, INC.
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company depends on two warehouse credit facilities to finance the
mortgage loan inventory pending ultimate sale to mortgage loan
investors. Both of these warehouse facilities have operating and
financial covenants including the requirement that the Company maintain
two facilities (with minimum borrowing capacity limits) and the
maintenance of certain financial ratios. In particular, the Company
must maintain a minimum cash and cash equivalents balance of $20
million and the highest amount required by any other lender or
agreement. Failure to comply with these covenants on either or both
lines could result in the obligation to repay all amounts outstanding
at the time of termination. In the past, the Company has obtained
waivers from these lenders due to failure to comply with certain
covenants.
The Company sells 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 2000, 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. If the
Company is not successful in generating sufficient cashflow from
operations, or in raising additional funds when required in sufficient
amounts and on terms acceptable to the Company, such failure could have
a material adverse effect on the Company's business, results of
operations and financial condition. Management believes that its cash
and cash equivalents held at December 31, 2000 and additional funds
raised through April 2, 2001 will be sufficient to fund its operating
activities and capital expenditures, and meet all other obligations
including its minimum cash and cash equivalent covenants through at
least December 31, 2001.
17. SUBSEQUENT EVENTS
On March 31, 2001, the Company obtained $5 million in interim financing
through the issuance of promissory notes to two existing stockholders.
The borrowings have an interest rate of 8%. These borrowings are due
and payable in full by April 15, 2001.
On April 2, 2001, the Company entered into an agreement for a $25
million line of credit for the interim financing of auto loans. The
interest rate charged on this line is based on LIBOR plus 2.5%. The
committed line expires on April 1, 2002. This line includes various
financial and non-financial covenants. These covenants are no more
restrictive than those on the Company's existing credit facilities.
On April 2, 2001, the Company entered into a loan agreement with an
officer and stockholder of the Company that provides the Company with
the ability to draw funds up to an aggregate of $7.5 million upon
demand. The borrowings have an interest rate of the lower of 12% or
the maximum legal rate allowed. Any amounts outstanding under this
agreement are due and payable no earlier than January 5, 2002.
The accompanying notes are an integral part of these financial statements.
F-24
Index to Exhibits
Item 14(c)
10.1 Cooper River Funding, Inc. and GE Capital Mortgage Services, Inc. -
Fourth Modification Agreement
10.2 Greenwich Capital Financial Products, Inc. - Amendment Number One to the
Master Loan and Security Agreement
10.3 Cooper River Funding, Inc. and GE Capital Mortgage Services, Inc. -
Fifth Modification Agreement
10.4 Greenwich Capital Financial Products, Inc. - Amendment to Warehouse and
Mortgage Loan Purchase and Sale Agreement
10.5 Greenwich Capital Financial Products, Inc. and Bankers Trust Company of
California - Whole Loan Custodial Agreement
10.6 Cooper River Funding, Inc. and GE Capital Mortgage Services, Inc. -
Sixth Modification Agreement
10.7 Washington Mutual Bank - Correspondent Purchase and Sale Agreement
10.8 Pagoo, Inc. - Standard Sublease
10.9 Pagoo, Inc. - Addendum to Sublease
10.10 Greenwich Capital Financial Products - Covenant Waiver
10.11 Creekside South Trust - Landlord Consent to Sublease
10.12 Cooper River Funding, Inc. and GE Capital Mortgage Services, Inc. -
Seventh Modification Agreement
10.13 Providian Bancorp Services - Website Linking Agreement*
10.14 Pagoo, Inc. - Second Addendum to Sublease
10.15 Wells Fargo Bank West, N.A. and Wells Fargo Bank, N.A. - Home Equity
Loan/Line Purchase Agreement*
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors.
* Confidential Treatment Requested