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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ________.
Commission File Number 000-29215
LENDINGTREE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1795344
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11115 RUSHMORE DRIVE
CHARLOTTE, NORTH CAROLINA 28277
------------------------- -----
(Address of principal executive (Zip code)
offices)
(704) 541-5351
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of July 31, 2002 there were 22,178,863 shares of Common Stock,
$0.01 par value, outstanding. Additionally, there are 392,590 shares of
treasury stock issued but not outstanding.
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LENDINGTREE, INC.
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001(unaudited) 3
Consolidated Statements of Operations -
Three and six months ended June 30, 2002 and June 30, 2001 (unaudited) 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and June 30, 2001 (unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity (Deficit)-
June 30, 2002 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 38
Item 2. Changes in Securities and Use of Proceeds 38
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits and Reports on Form 8-K 39
Signature 40
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PRODUCTS MENTIONED IN THIS REPORT ARE USED FOR IDENTIFICATION PURPOSES ONLY AND
MAY BE TRADE NAMES OR TRADEMARKS OF LENDINGTREE, INC. OR THIRD PARTIES.
----------------------------
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
LENDINGTREE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,044 $ 3,400
Restricted cash 8,844 2,764
---------- ----------
Total cash and cash equivalents and restricted cash 13,888 6,164
Accounts receivable, net of allowance for doubtful accounts (Note 4) 14,045 11,438
Prepaid expenses and other current assets 1,024 1,174
---------- ----------
Total current assets 28,957 18,776
Equipment, furniture and leasehold improvements, net 1,783 2,016
Software, net 1,425 2,854
Intangible assets, net (Note 4) 2,501 3,667
Other assets 502 618
---------- ----------
Total assets $ 35,168 $ 27,931
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 5,500 $ 4,508
Deferred revenue 1,156 2,013
Accrued incentive and other compensation 4,027 5,627
Accrued professional services and other fees 339 444
Accrued consumer promotional costs 1,186 1,619
Accrued other expenses 1,950 1,864
Dividends payable 513 --
Current portion capital lease obligations 500 743
---------- ----------
Total current liabilities 15,171 16,818
Deposits by subtenants 148 145
Capital lease obligations 70 291
Commitments and contingencies (Note 9)
Mandatorily redeemable securities
Series A convertible preferred stock, $.01 par value, 8% cumulative,
6,885,715 shares authorized, 6,038,940 and 6,885,715 shares
issued and outstanding at June 30, 2002 and December 31, 2001, respectively 21,520 23,878
Shareholders' deficit:
Common stock, $.01 par value, 100,000,000 shares authorized,
22,480,629 and 19,907,034 shares issued at June 30, 2002
and December 31, 2001, respectively 225 199
Treasury stock (398,681 shares at June 30, 2002 and
661,996 shares at December 31, 2001, at cost) (2,532) (4,170)
Additional paid-in-capital 132,208 121,675
Accumulated deficit (128,220) (127,064)
Deferred compensation (1,081) (1,477)
Notes receivable from officers (2,341) (2,364)
---------- ----------
Total shareholders' deficit (1,741) (13,201)
---------- ----------
Total liabilities and shareholders' deficit $ 35,168 $ 27,931
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
3
LENDINGTREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands, except (in thousands, except
per share data) per share data)
Revenue:
Exchange $ 23,139 $ 13,910 $ 42,767 $ 25,154
Lend-X technology 1,328 1,899 2,968 2,911
-------- -------- -------- --------
Total revenue 24,467 15,809 45,735 28,065
-------- -------- -------- --------
Cost of revenue:
Exchange 3,531 3,245 6,445 6,281
Lend-X technology 282 348 602 798
-------- -------- -------- --------
Total cost of revenue 3,813 3,593 7,047 7,079
Gross profit:
Exchange 19,608 10,665 36,322 18,873
Lend-X technology 1,046 1,551 2,366 2,113
-------- -------- -------- --------
Total gross profit 20,654 12,216 38,688 20,986
Operating expenses:
Product development 818 1,164 1,561 2,249
Marketing and advertising 12,200 10,600 22,868 19,474
Sales, general and administrative 8,279 11,472 15,621 20,565
-------- -------- -------- --------
Total operating expenses 21,297 23,236 40,050 42,288
-------- -------- -------- --------
Loss from operations (643) (11,020) (1,362) (21,302)
Loss on impaired investments -- (350) -- (350)
Interest and other non-operating income 301 188 423 346
Interest expense, financing and other charges (102) (85) (217) (128)
-------- -------- -------- --------
Net loss (444) (11,267) (1,156) (21,434)
-------- -------- -------- --------
Accretion of mandatorily redeemable convertible preferred stock (175) (188) (344) (206)
Dividends on mandatorily redeemable convertible preferred stock (517) (906) (2,477) (961)
-------- -------- -------- --------
Net loss attributable to common shareholders $ (1,136) $(12,361) $ (3,977) $(22,601)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.05) $ (0.66) $ (0.20) $ (1.17)
======== ======== ======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 20,805 18,765 20,092 19,299
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
4
LENDINGTREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------------
2002 2001
---------- ----------
($ in thousands)
Cash flows used in operating activities:
Net loss $ (1,156) $ (21,434)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets -- 3
Depreciation and amortization 3,804 3,894
Provision for doubtful accounts 304 (34)
Loss on impairment of investment -- 350
Compensation charge related to officer note -- 4,022
Amortization of deferred equity based compensation 442 562
Amortization of deferred financing costs 54 60
Non-cash equity based compensation 187 71
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (2,777) (934)
Prepaid expenses and other current assets 132 (26)
Other assets 81 (420)
Accounts payable 992 1,703
Accrued expenses (1,679) 2,003
Deferred revenue (857) 145
Deposits 4 13
---------- ----------
Net cash used in operating activities (469) (10,022)
---------- ----------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments -- (13,997)
Sales of short-term investments -- 18,438
Deposits to restricted cash (21,862) (15,351)
Use of restricted cash 15,782 11,725
Investments in software (822) (206)
Purchases of equipment, furniture, and leasehold improvements (289) (111)
---------- ----------
Net cash (used in) provided by investing activities (7,191) 498
---------- ----------
Cash flows provided by financing activities:
Proceeds from sales of common stock and warrants
and exercise of stock options 3,483 187
Sale of treasury stock for employee stock purchase plan 620 --
Payment of capital lease obligations (464) (341)
Proceeds from private placement of common stock 5,642 --
Proceeds from issuance of preferred stock -- 11,743
Proceeds from repayment of officer note 23 68
---------- ----------
Net cash provided by financing activities 9,304 11,657
---------- ----------
Net increase in cash and cash equivalents 1,644 2,133
Cash and cash equivalents, beginning of period 3,400 2,666
---------- ----------
Cash and cash equivalents, end of period $ 5,044 $ 4,799
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
5
LENDINGTREE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
JUNE 30, 2002
($ IN THOUSANDS)
(UNAUDITED)
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF TREASURY PAID-IN ACCUMULATED
SHARES AMOUNT STOCK CAPITAL DEFICIT
---------- ------ --------- --------- -----------
Balance at December 31, 2001 19,907,034 $ 199 $ (4,170) $ 121,675 $ (127,064)
Amortization of deferred compensation
Accrued dividends on Series A convertible
preferred stock (1,030)
Accretion of Series A convertible preferred stock (345)
Repayment of an officer note received for
option exercise
Exercise of common stock warrants 282,372 3 42
Proceeds from private sale of
common stock 500,000 5 5,637
Conversion of preferred stock to common stock 919,894 9 3,211
Deferred compensation adjustment for
forfeited and amended options (38)
Reissuance of treasury shares for employee
stock purchase plan participants 1,680 (1,060)
Stock issued in lieu of cash compensation 44,860 1 373
Non-cash equity based compensation 271
Exercise of common stock options 826,469 8 3,430
Acquired shares for stock option exercise (42) 42
Other comprehensive loss:
Net loss (1,156)
Total other comprehensive loss
---------- ------ --------- --------- -----------
Balance at June 30, 2002 22,480,629 $ 225 $ (2,532) $ 132,208 $ (128,220)
========== ====== ========= ========= ===========
DEFERRED NOTES RECEIVABLE SHAREHOLDERS'
COMPENSATION FROM OFFICERS DEFICIT
------------- ---------------- -------------
Balance at December 31, 2001 $ (1,477) $ (2,364) $(13,201)
Amortization of deferred compensation 442 442
Accrued dividends on Series A convertible
preferred stock (1,030)
Accretion of Series A convertible preferred stock (345)
Repayment of an officer note received for
option exercise 23 23
Exercise of common stock warrants 45
Proceeds from private sale of
common stock 5,642
Conversion of preferred stock to common stock 3,220
Deferred compensation adjustment for
forfeited and amended options 38 --
Reissuance of treasury shares for employee
stock purchase plan participants 620
Stock issued in lieu of cash compensation 374
Non-cash equity based compensation (84) 187
Exercise of common stock options 3,438
Acquired shares for stock option exercise --
Other comprehensive loss:
Net loss
Total other comprehensive loss (1,156)
--------- --------- --------
Balance at June 30, 2002 $ (1,081) $ (2,341) $ (1,741)
========= ========= ========
The accompanying notes are an integral part of these
consolidated financial statements
6
LENDINGTREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY
LendingTree, Inc. was incorporated in the State of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998. Our mailing address is 11115
Rushmore Drive, Charlotte, North Carolina 28277 and our telephone number is
(704) 541-5351.
We are an online exchange connecting consumers with Lenders, real estate agents
or other service providers. We attract consumers to our Website at
www.lendingtree.com through various forms of offline and online advertising and
arrangements with other online businesses. Our exchange is designed to empower
consumers, Lenders and real estate agents with convenience, choice and value.
Our technology platform, Lend-XSM, is the technology that powers our Internet
based exchange.
Once on our Lending Exchange, consumers begin the process by completing a
simple online credit request, or a qualification form. After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
score are then automatically compared to the underwriting criteria of the more
than 170 banks, lenders and loan brokers (which we refer to as "Lenders")
participating on our Lending Exchange. Qualified consumers can receive multiple
loan offers on-line in response to a single credit request and then compare,
review and accept the offer that best suits their needs. Lenders can generate
new business that meets their specific underwriting criteria at a lower cost of
acquisition than traditional marketing channels. Our Lending Exchange
encompasses most consumer credit categories, including mortgages, home equity
loans, automobile loans, credit cards, and personal loans.
Through our Realty Services Exchange we enable consumers to complete one simple
form describing their realty needs and then choose a real estate professional
in their desired area. Our Realty Services Exchange is made up of more than
6,500 real estate professionals who represent more than 650 real estate
companies nationwide. We also provide access, through our Website, to other
services related to owning, maintaining and buying and selling a home.
We earn revenue from the Lenders participating in our network that pay us fees
as qualification forms meet their underwriting criteria and are transmitted to
them (transmit fees). Since a qualification form can be transmitted to more
than one lender, we may generate multiple transmit fees for the same form. We
also earn revenue for services and facilities we provide in connection with
loans that the Lenders on our network close with consumers that we transmitted
to them (closed-loan fees). Additionally, in most states, real estate brokers
participating in our network pay us a fee when consumers' requests that we
transmit to them result in a purchase or sale of a home. We refer to the
aggregate of these fees as our Exchange revenue.
We also license and host our Lend-X technology platform for use by other
businesses. This enables these businesses to create their own customized
co-branded or private-labeled lending exchanges. These exchanges, powered by
Lend-X, may be single lender or multi-lender marketplaces or may provide access
to the LendingTree exchange with more than 170 participating Lenders. Through
these Lend-X relationships, we can earn revenue both from technology fees
related to customizing, licensing and hosting the third party exchange, as well
as from transactional fees resulting from the volume processed through such
exchanges.
NOTE 2 - BASIS OF PRESENTATION:
Interim Financial Information
Our consolidated financial statements include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a fair
presentation of our financial position as of June 30, 2002 and results of
operations and cash flows for the interim periods presented. The results of
operations for the quarter and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the entire year.
7
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnotes that are
required by generally accepted accounting principles are not included herein.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 2001 as reported by us in our Annual Report on Form 10-K, which
was filed with the Securities and Exchange Commission on March 5, 2002.
Use of Estimates and Judgments
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. We
base our estimates and judgments on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. On an
ongoing basis we evaluate our estimates and refine our judgments as actual
results and experiences develop. Significant estimates and judgments are
involved in the process of determining our accrual for incentive compensation,
liabilities for consumer promotional costs, revenue recognition for our Lend-X
technology arrangements and our allowance for doubtful accounts. Actual results
could differ from those estimates.
Reclassifications
Certain comparative period amounts have been reclassified to conform to current
period presentation.
NOTE 3 - FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 30, 2002, we had approximately $5.0 million in cash and cash
equivalents and $8.8 million in restricted cash. (See Note 4) For cash flow
purposes, we classify deposits to and uses of restricted cash as investing
activities. Including the net changes in restricted cash with cash used in
operating activities, our cash required for the six months ended June 30, 2002
was $6.5 million.
We believe that these existing sources and the availability of the credit
facilities we have in place, as well as cash generated from operations will be
sufficient to fund our operating and capital needs over the next year.
Although we have historically experienced significant revenue growth, the
operating results for future periods are subject to numerous uncertainties.
There can be no assurance that revenue growth will continue or that we will be
able to achieve or sustain profitability. Hence, our liquidity could be
significantly and adversely affected. However, if revenue does not grow as
anticipated and if we are unable to successfully raise sufficient additional
funds through another manner, management would reduce discretionary operating
expenditures, including advertising and marketing and certain administrative
and overhead costs. Failure to generate sufficient revenue or to reduce costs
as necessary could have a material adverse effect on our ability to continue as
a going concern and to achieve our business objectives.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
As of June 30, 2002, restricted cash included $8.8 million that was held in an
escrow account that has been established by us and our advertising agency to
maintain funds set aside for approved expenditures and services of the
advertising agency. Disbursements from the escrow account can only be made with
the approval of both parties. The fund is used only for advertising costs we
have previously approved. Disbursements from the escrow account are made no
sooner than one month following the invoice date for the expenditures. We
receive all income earned on funds held in this account.
8
Accounts Receivable
Our accounts receivable are presented net of an allowance for doubtful
accounts. Management estimates the amount of the necessary allowance using its
judgment about current factors, such as customers' financial condition, and
based on historical trends of receivable write-offs. Receivables are
written-off against this allowance when management determines the amount is
uncollectible.
Trade accounts receivable consists of the following:
June 30, December 31,
2002 2001
---------- ------------
Accounts receivable $ 14,627 $ 11,750
Less: allowance for doubtful accounts (582) (312)
---------- ----------
$ 14,045 $ 11,438
========== ==========
Software Development Costs
Software development costs primarily include expenses incurred by us to develop
our proprietary software, which powers our Website. Statement of Position No.
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1") provides guidance regarding when software developed
or obtained for internal use should be capitalized. SOP 98-1 requires that
certain costs incurred during the application development stage be capitalized,
while costs incurred during the preliminary project stage and
post-implementation/operation stage should be expensed as incurred. We account
for our Website development costs and other internal use software in accordance
with SOP 98-1.
During the three months ended June 30, 2002 and 2001, we capitalized internal
use software development costs (including compensation costs) of approximately
$0.3 million and $0.1 million, respectively. During the six-month periods
ending 2002 and 2001, we capitalized internal use software development costs
(including compensation costs) of approximately $0.7 million and $0.2 million,
respectively.
Capitalized internal use software development costs are amortized over the
estimated life of the related application, which range from 1 to 3 years.
Intangible Assets
On July 20, 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." This new standard,
effective January 1, 2002, changed the accounting for goodwill and
indefinite-lived intangible assets from an amortization method to an
impairment-only approach and required that amortization of goodwill and
indefinite-lived intangible assets cease. We have no goodwill or
indefinite-lived intangible assets.
Our intangible assets consisted of the following as of June 30, 2002 and
December 31, 2001:
As of June 30, 2002 As of December 31, 2001
-------------------------- ---------------------------
(in 000's) (in 000's)
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Amount Amortization
------------- -------- ------------- ---------- -------------
Amortized Intangible Assets
Realtor Network 3 years $ 6,472 $ 4,151 $ 6,472 $ 3,080
Affinity program partner contracts 2 - 3.75 years 544 364 544 269
-------- ------- ------- --------
Total $ 7,016 $ 4,515 $ 7,016 $ 3,349
======== ======= ======= ========
Amortization expense of our intangible assets was $0.6 million in both of the
quarters ended June 30, 2002 and 2001. Amortization expense of our intangible
assets was $1.2 million in both of the six-month periods ended June 30, 2002
and
9
2001. Estimated amortization expense for the years ending December 31,
2002, 2003, 2004, 2005 and 2006 is $2.3 million, $1.3 million, less than $0.1
million, $0 and $0, respectively.
Revenue Recognition
Exchange:
Our Lending Exchange revenue principally represents transmission fees and
closed-loan fees paid by Lenders that received a transmitted loan request or
closed a loan for a consumer that originated through our Website,
www.lendingtree.com. Transmission fees are recognized at the time qualification
forms are transmitted, while closed-loan fees are recognized at the time the
lender reports the closed loan to us, which may be several months after the
qualification form is transmitted.
Additionally, we earn revenue through a network of real estate brokers who
compensate us for real estate transactions that close with consumers that were
referred to them through our Exchange or our client's Website. Revenue earned
through our network of real estate brokers is recognized upon notification by
the broker that a real estate transaction has closed.
We also derive Lending and Realty Exchange revenue from loan requests and
realty referrals that are received through private-label or co-branded Websites
of other businesses that are enabled by our Lend-X technology. If these
requests are successfully transmitted to or closed by one of the Lenders or
realtors on our Exchange, we earn fees as described above.
Technology:
Lend-X technology revenue is related primarily to hosting, licensing access to
and modifying our proprietary software for use by Lenders and other third
parties.
Our typical Lend-X technology arrangement involves licensing access to and
hosting our software for use by third parties. These arrangements typically
include implementation, consulting and/or other services bundled together with
the access and hosting fees. In accordance with SAB No. 101, the revenue for
the entire arrangement is deferred and recognized over the longer of the term
of the related contract or the expected service period. Our hosting
arrangements typically do not permit customers to take possession of our
software.
Revenue from arrangements involving only consulting or other services (that is
not bundled with access or hosting services) is recognized as the services are
performed. Maintenance is recognized ratably over the longer of the term of the
underlying agreement or the expected service period. Maintenance includes
technical support and updates and upgrades to our software.
When a contractual arrangement requires us to provide services for significant
implementation, customization or modification of the software or when the
customer considers these services essential to the functionality of the
software product, both the software fees and consulting services revenue are
recognized in accordance with the provisions of Statement of Position ("SOP")
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." We recognize revenue from these arrangements using
the percentage-of-completion method primarily based on labor hour inputs.
Therefore, during the implementation period, both the software fee and the
consulting service revenue are recognized as work progresses.
Losses, if any, are recognized when identified.
Advertising Expenses
Advertising expenses consist of certain direct expenses, including television,
radio, outdoor advertising campaign costs and affiliate and partner marketing
fees, as well as certain indirect expenses, such as agency fees and production
costs. We expense advertising costs as incurred. For the quarter ended June 30,
2002 and 2001, advertising expenses were $11.6 million and $9.9 million,
respectively. For the six months ended June 30, 2002 and 2001, advertising
expenses were $21.7 million and $18.3 million, respectively.
Incentive Compensation
10
Under our incentive compensation plan, employees can earn awards based on
achievement of various financial and operational performance factors or other
specific goals. The actual award formula may vary by individual and the goals
are not the same from year to year. During the year, management makes monthly
estimates of the amount of an award each employee has earned based on actual
and forecasted levels of Company achievement relative to pre-established goals
and historical averages of personal performance. . These monthly estimates are
accrued with a charge to operating income for that period. The awards are
typically paid to the employee following the completion of a year.
Consumer Promotional Costs
At our discretion, we may offer consumers that utilize our exchange services
certain promotional incentives to complete a transaction. We may offer these
consumers the opportunity to receive cash payments, gift certificates, airline
miles or other discounts or coupons in the event they complete a transaction
utilizing our services. We estimate the liability for these consumer
promotional costs each month based on the number of consumers that are
presented such offers, the cost of the item being offered and the historical
trends of consumers qualifying for the offer and our payout rates. The
estimated costs of the consumer promotional incentives are charged to operating
income each period.
Stock-Based Compensation
We account for the effect of our stock-based compensation plans for employees
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") using the optional intrinsic value
method. The intrinsic value method results in compensation cost equal to the
excess of the fair value of the stock over the exercise or purchase price at
the date of award. Such compensation costs (if any) are recorded over the
vesting period of the respective option and presented in the consolidated
statement of operations as a cost of revenue or operating expense, consistent
with where the optionees' compensation is recorded. On an annual basis, we also
disclose the pro forma income statement effect of our stock-based compensation
plans as if we had adopted the fair value approach. The fair value approach
results in compensation cost using an option-pricing model that takes into
account the fair value at the grant date, the exercise price, the expected life
of the award, the expected dividends, and the risk-free interest rate expected
over the life of the award.
We account for the effect of its stock-based compensation for non-employees
under SFAS No. 123, using the fair value approach.
Supplemental Cash Flow Information
In both the quarters ended June 30, 2002 and 2001, we paid interest of less
than $0.1 million and paid no income taxes during those periods. In both the
six months ended June 30, 2002 and 2001, we paid interest of approximately $0.1
million and paid no income taxes during those periods.
A supplemental schedule of non-cash financing and investing activities follows
(in thousands):
Six Months Ended
June 30,
----------------------------
2002 2001
---------- --------
Note receivable issued to officer to acquire Series A
preferred stock $ -- $ 700
Acquisition of assets through a capital lease -- 28
Accretion of Series A preferred stock 344 206
Stated value dividends on Series A preferred stock 1,964 961
Cash dividends on Series A preferred stock 513 --
Issuance of warrants in conjunction with credit facility
agreements -- 149
Issuance of warrants in connection with Series A
preferred stock financing -- 431
Conversion of Series A preferred stock to common stock 3,220 --
11
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 146 (SFAS 146) which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. We
will adopt SFAS 146 on January 1, 2003. Because we do not presently have any
exit or disposal activities planned, do not expect the impact of adopting this
statement will have a material impact on our results of operations, financial
condition or cash flows.
NOTE 5 - SEGMENT DATA
Based on the nature of our products and services, the types of customers and
the regulatory environment, we have organized our business into three operating
segments: our Lending Exchange, our Realty Services Exchange, and Lend-X
Technology operations.
We regularly review the revenue, cost of revenue and gross margins for these
segments. No other operating expenses, measure of profitability or assets or
liabilities are consistently segregated or allocated into these segments for
regular review by management or in determining allocations of resources. There
are no inter-segment revenues.
The following tables present the revenue and gross profits for each of our
three segments for the quarter ended June 30, 2002 and 2001, as well as a
reconciliation to consolidated net loss.
12
For the Quarter Ended June 30, 2002
---------------------------------------------------------------------
Exchanges
------------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
--------- -------- --------- ---------- ------------
Revenue $ 20,$94 2,645 23,139 1,328 $24,467
Cost of revenue 2,075 1,456 3,531 282 3,813
--------- ----- ------- ----- -------
Gross profit $ 18,419 1,189 19,608 1,046 $20,654
--------- ----- ------- ----- -------
Reconciling items:
Operating expenses 21,297
-------
Loss from operations $ (643)
-------
Non-operating income 301
Non-operating expense (102)
-------
Consolidated net loss $ (444)
=======
For the Quarter Ended June 30, 2001
---------------------------------------------------------------------
Exchanges
------------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
--------- -------- --------- ---------- ------------
Revenue $ 12,598 1,312 13,910 1,899 $ 15,809
Cost of Revenue 2,304 941 3,245 348 3,593
--------- ----- ------ ----- --------
Gross Profit $ 10,294 371 10,665 1,551 $ 12,216
--------- ----- ------ ----- --------
Reconciling items:
Operating expenses 23,236
--------
Loss from operations $(11,020)
--------
Loss on impaired investment (350)
Non-operating income 188
Non-operating expense (85)
--------
Consolidated net loss $(11,267)
========
The following tables present the revenue and gross profits for each of our
three segments for the six months ended June 30, 2002 and 2001, as well as a
reconciliation to consolidated net loss.
13
For the Six Months Ended June 30, 2002
---------------------------------------------------------------------
Exchanges
------------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
--------- -------- --------- ---------- ------------
Revenue $ 38,813 3,954 42,767 2,968 $ 45,735
Cost of revenue 4,119 2,326 6,445 602 7,047
--------- ----- ------- ----- --------
Gross profit $ 34,694 1,628 36,322 2,366 $ 38,688
--------- ----- ------- ----- --------
Reconciling items:
Operating expenses $ 40,050
--------
Loss from operations (1,362)
--------
Non-operating income 423
Non-operating expense (217)
--------
Consolidated net loss $ (1,156)
========
For the Six Months Ended June 30, 2002
---------------------------------------------------------------------
Exchanges
------------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
--------- -------- --------- ---------- ------------
Revenue $ 23,094 2,060 25,154 2,911 $ 28,065
Cost of Revenue 4,809 1,472 6,281 798 7,079
--------- ----- ------- ----- --------
Gross Profit $ 18,285 588 18,873 2,113 $ 20,986
--------- ----- ------- ----- --------
Reconciling items:
Operating expenses 42,288
--------
Loss from operations $(21,302)
--------
Loss on impaired investment (350)
Non-operating income 346
Non-operating expense (128)
--------
Consolidated net loss $(21,434)
========
NOTE 6 - REVOLVING LINE OF CREDIT
On July 13, 2001, we entered into a loan and security agreement and revolving
credit note with GE Capital Commercial Services, Inc. ("GE"). Under these
arrangements, GE has provided a two-year senior revolving credit facility
providing for a maximum availability of up to $15.0 million. Under this
facility we have pledged our trade accounts receivable and borrowings are
limited to 90% of our eligible accounts receivable and bear interest at the
prime rate. We also pay GE a fee equal to 0.115% of the eligible accounts
receivable arising during the term of the facility. As of June 30, 2002, we had
eligible receivables of approximately $6.3 million and we had no borrowings
outstanding under the GE credit facility.
Our agreement with GE contains certain financial and other covenants. We were
in compliance with all covenants contained in this agreement as of June 30,
2002.
NOTE 7 - MANDATORILY REDEEMABLE SERIES A 8% CONVERTIBLE PREFERRED STOCK
In March 2001, we issued 3,700,001 shares of mandatorily redeemable Series A 8%
Convertible Preferred Stock ("Series A Preferred Stock") to a group of
investors for $12.95 million or $3.50 per share. We issued an additional
128,571 shares of Series A Preferred Stock on April 30, 2001 at $3.50 per share
plus accumulated dividends. After deducting fees and expenses related to both
transactions, this resulted in net proceeds to us totaling approximately $12.2
million. In addition, we loaned our Chief Executive Officer $0.7 million to
acquire 200,000 shares of the Series A Preferred Stock that is evidenced by a
promissory note from him to us.
14
In conjunction with the March 2001 closing of the Series A Preferred Stock
transaction, an Equity Rights Certificate issued to an affiliate of Capital Z
on September 29, 2000, for $10 million, was converted into 2,857,143 shares of
Series A Preferred Stock at an effective rate of $3.50 per share.
The holders of the Series A Preferred Stock are entitled to receive dividends
on the Series A Preferred Stock equal to eight percent (8%) of the stated value
per share payable at our option (i) in cash on each quarterly dividend payment
date or (ii) by an upward adjustment to the stated value per share on a
quarterly dividend payment date. The initial stated value per share was $3.50.
Through March 31, 2002 we elected to pay the Series A Preferred Stock dividends
by increasing the stated value per share such that as of March 31, 2002 the
stated value per share was $3.80. For the quarter ended June 30, 2002, we
declared cash dividends to the holders of our Series A Preferred Stock in the
amount of $0.5 million, payable on July 1, 2002.
As a result of the dividends that we will pay in cash for the quarter ended
June 30, 2002, we recorded a liability of $0.5 million in our accompanying
consolidated financial statements. As a result of the stated value dividends
through March 31, 2002, we increased the carrying value of the Series A
Preferred Stock on our balance sheet by approximately $0.6 million. We also
recognized in the three months ended March 31, 2002, as an increase to our net
loss attributable to common shareholders, an additional $1.4 million of
dividend charges resulting from the excess of the fair value of the common
stock that the 8% dividends on the Series A Preferred Stock will convert into
over the $3.50 conversion price. For the quarter ended June 30, 2002, we did
not record these additional charges as we elected to settle the quarterly
dividend obligation in cash rather than by an increase to the stated value.
Thus, in total for the six months ended June 30, 2002, we have recorded
approximately $2.5 million of total dividend charges. If, in future periods, we
were to settle the dividend obligations by increasing the stated value of the
preferred stock and if the market price of our common stock remains above $3.50
per share, we will incur additional fair value dividend charges.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on March 20, 2006 at a price of 105% of the then current value per
share. The current value per share is defined as the stated value per share,
plus cumulative adjustments for dividends. We are accreting the value of the
preferred stock up to the redemption value of the shares using the effective
interest method. This is increasing the value of the Series A Preferred Stock
and the charge is included in the computation of net loss attributable to
common shareholders. For the quarter and six months ended June 30, 2002, we
recorded approximately $0.2 million and $0.3 million, respectively, of dividend
accretion charges.
Beginning March 20, 2004, at our option, the shares of Series A Preferred Stock
will be redeemable for cash at a price per share equal to the applicable
percentage multiplied by the then current value per share. The applicable
percentage is initially 120% and declines to 105% on a quarterly basis over the
two-year period ending March 21, 2006. If we continue to pay quarterly cash
dividends, on March 20, 2004 the shares of Series A Preferred Stock will be
redeemable for cash at a price per share of $4.56 and will decline to a price
per share of $3.99 at March 21, 2006.
Each share of Series A Preferred Stock is convertible at the option of the
holder at any time into the number of shares of common stock as is determined
by dividing the current value per share by the conversion price. The conversion
price is $3.50 per share, subject to adjustment for the stock splits and
similar events.
In June 2002, one holder of our Series A Preferred Stock converted 42,857
preferred shares and accrued dividends into 47,183 shares of our common stock.
The number of shares of common stock issued upon conversion was determined by
dividing the current value per share by the conversion price. The current value
per share on the conversion date was $3.85 and was calculated as the sum of the
then applicable stated value per share plus all accrued but unpaid dividends at
the conversion dates. Also in June 2002, following the cash dividend record
date of June 17, 2002, one holder of our Series A Preferred Stock converted
714,286 preferred shares into 775,019 shares of our common stock. The number of
shares of common stock issued upon conversion was determined by dividing the
current value per share in effect prior to the cash dividend record date by the
conversion price. The current value per share in effect prior to the cash
dividend record date was $3.80 and was calculated as the sum of the applicable
stated value per share plus accrued dividends through March 31, 2002. In May
2002, one of the holders of our Series A Preferred Stock converted 39,039
preferred shares and accrued dividends into 42,857 shares of our common stock.
The current value per share on that conversion date was $3.84. In March 2002,
one of the holders of our Series A Preferred Stock converted 50,593 preferred
shares and accrued dividends into 54,835 shares of our common stock. The
current value per share on that conversion date was $3.79. The conversion price
for all these conversions was the initial purchase price of $3.50.
As of June 30, 2002, there were 6,038,940 shares of Series A Preferred Stock
outstanding.
15
NOTE 8 -EQUITY BASED COMPENSATION
In May 2002, 50,499 unexercised options of the wife of our Chief Executive
Officer expired in connection with her earlier termination of employment. We
also granted non-qualified stock options to her as recognition for prior
un-compensated services and as a co-founder of LendingTree, Inc. The newly
granted options were to purchase approximately 9,000 shares of common stock at
an exercise price of $5.19 per share and to purchase approximately 41,000
shares of common stock at an exercise price of $9.25 per share. Based on the
difference between the exercise prices of these options and the fair market
value at the date of grant ($12.25), we recorded a charge of approximately $0.2
million in the quarter ended June 30, 2002.
As of June 30, 2002, we have approximately $1.1 million of deferred equity
based compensation remaining on our consolidated balance sheet primarily
related to common stock options granted in late 1999 and early 2000 before our
initial public offering with exercise prices below fair market value. In the
quarter ended June 30, 2002, we have adjusted the balance of deferred
compensation by less than $0.1 million to reflect forfeited and expired
options. We are amortizing the deferred compensation to expense over the
options' four-year vesting periods. For both the quarters ended June 30, 2002
and 2001, this amortization resulted in compensation expense of $0.2 million.
For both the six months ended June 30, 2002 and 2001, this amortization
resulted in compensation expense of $0.4 million.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
A covenant in one of our capital lease agreements requires that we maintain a
cash balance of not less than $3.0 million throughout the term of the lease. If
our cash balance falls below $3.0 million at the end of a period, we will be
required to collateralize the balance of the lease with cash. As of June 30,
2002, we were in compliance with this covenant and the balance of this lease
was approximately $0.4 million.
Important components of our intellectual property are subject to an amended
software customization, license and services agreement between LendingTree and
the Federal Home Loan Mortgage Corporation, or Freddie Mac. Pursuant to this
agreement and our credit agreement with Freddie Mac, a version of our core
software that was customized to operate according to certain standards
established by Freddie Mac will be released to Freddie Mac from escrow if we
fail to meet specified repayment obligations, financial covenants or reporting
requirements. We were in compliance with all covenants contained in the credit
agreement as of June 30, 2002.
On September 10, 2001, Block Financial Corporation, or Block, filed a complaint
in the United States District Court for the Western District of Missouri [Block
Financial Corporation v. LendingTree, Inc., Case Number 01-1007-CV-W-3],
against us, alleging that our financial card (credit card) qualification form
processing system infringes its U.S. Patent No. 6,014,645 entitled, "Real-Time
Financial Card Application System." The complaint seeks both monetary damages
in the form of a reasonable royalty and injunctive relief. On November 19,
2001, we filed an answer to the complaint denying infringement of the Block
patent. We also filed a counterclaim against Block seeking a declaratory
judgment of non-infringement and invalidity of the Block patent. The lawsuit is
in an early stage, and discovery is just beginning to get underway. We believe
that we have meritorious defenses to their claim and we do not believe that it
will have a material impact on our financial condition, cash flows or results
of operations.
We are involved in other litigation from time to time that is routine in nature
and incidental to the conduct of our business. We believe that the outcome of
any such litigation would not have a material adverse effect on our financial
condition, cash flows or results of operations.
NOTE 10 - NET LOSS PER COMMON SHARE
We compute net loss per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"). Under the
provisions of SFAS No. 128 basic net loss per common share is computed by
dividing net loss available to common shareholders by the weighted average
number of common shares outstanding. Diluted net loss available to common
shareholders is computed by dividing net loss by the weighted average number of
common shares and dilutive potential common shares then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants and shares issuable upon conversion of the Series A Preferred Stock.
16
The calculation of net loss per common share for quarters ended June 30, 2002
and 2001 does not include 3.9 million and 1.5 million, respectively, of
weighted average potential common shares, as their impact would be
antidilutive. In addition, the calculation of net loss per common share for the
quarters ended June 30, 2002 and 2001 does not include 6.6 million and 7.0
million, respectively, of shares that would be issued upon conversion of our
Series A Preferred Stock, including accrued dividends, as their impact would be
antidilutive.
The calculation of net loss per common share for the six months ended June 30,
2002 and 2001 does not include 3.3 million and 1.2 million, respectively, of
weighted average potential common shares, as their impact would be
antidilutive. In addition, the calculation of net loss per common share for the
six months ended June 30, 2002 and 2001 does not include 6.6 million and 7.0
million, respectively, of shares that would be issued upon conversion of our
Series A Preferred Stock, including accrued dividends, as their impact would be
antidilutive.
NOTE 11 - OTHER TRANSACTIONS
In April 2002, we entered into purchase agreements for the sale of a total of
500,000 newly issued shares of restricted common stock to a group of three
institutional and accredited investors in a private placement at $11.88 per
share for gross proceeds of $5.9 million. Documents relating to the transaction
were entered into on April 11, 2002 and the transaction closed on April 16,
2002. We filed a registration statement covering resales of the common stock by
investors on May 31, 2002, and this registration statement was declared
effective by the Commission on June 11, 2002. We are using the net proceeds
from this private placement for general corporate purposes, including the cash
payment of quarterly dividends to the holders of our Series A Preferred Stock.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
LendingTree, Inc. was incorporated in the State of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998. Our mailing address is 11115
Rushmore Drive, Charlotte, North Carolina 28277 and our telephone number is
(704) 541-5351.
We are an online exchange connecting consumers with Lenders, real estate agents
or other service providers. We attract consumers to our Website at
www.lendingtree.com through various forms of offline and online advertising and
arrangements with other online businesses. Our exchange is designed to empower
consumers, Lenders and real estate agents with convenience, choice and value.
Our technology platform, Lend-XSM, is the technology that powers our Internet
based exchange.
Once on our Lending Exchange, consumers begin the process by completing a
simple online credit request, or a qualification form. After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
score are then automatically compared to the underwriting criteria of the more
than 170 banks, lenders and loan brokers (which we refer to as "Lenders")
participating on our Lending Exchange. Qualified consumers can receive multiple
loan offers on-line in response to a single credit request and then compare,
review and accept the offer that best suits their needs. Lenders can generate
new business that meets their specific underwriting criteria at a lower cost of
acquisition than traditional marketing channels. Our Lending Exchange
encompasses most consumer credit categories, including mortgages, home equity
loans, automobile loans, credit cards, and personal loans.
Through our Realty Services Exchange we enable consumers to complete one simple
form describing their realty needs and then choose a real estate professional
in their desired area. Our Realty Services Exchange is made up of more than
6,500 real estate professionals who represent 650 real estate companies
nationwide. We also provide access, through our Website, to other services
related to owning, maintaining and buying and selling a home.
We earn revenue from the Lenders participating in our network that pay us fees
as qualification forms meet their underwriting criteria and are transmitted to
them (transmit fees). Since a qualification form can be transmitted to more
than one lender, we may generate multiple transmit fees for the same form. We
also earn revenue for services and facilities we provide in connection with
loans that the Lenders on our network close with consumers that we transmitted
to them (closed-loan fees). Additionally, in most states, real estate brokers
participating in our network pay us a fee when consumers' requests that we
transmit to them result in a purchase or sale of a home. We refer to the
aggregate of these fees as our Exchange revenue.
We also license and host our Lend-X technology platform for use by other
businesses. This enables these businesses to create their own customized
co-branded or private-labeled lending exchanges. These exchanges, powered by
Lend-X, may be single lender or multi-lender marketplaces or may provide access
to the LendingTree exchange with more than 170 participating Lenders. Through
these Lend-X relationships, we can earn revenue both from technology fees
related to customizing, licensing and hosting the third party exchange, as well
as from transactional fees resulting from the volume processed through such
exchanges.
18
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED TO
QUARTER ENDED JUNE 30, 2001
As described above, our business is focused on two primary activities,
operating our Exchange and licensing and hosting our Lend-X Technology. Our
Exchange business includes revenue and costs from two operating segments, our
Lending Exchange and our Realty Services Exchange. Our Lend-X Technology
business constitutes a third operating segment. Management regularly reviews
the revenue, cost of revenue and gross margins for these segments. No other
operating expenses, measure of profitability or assets or liabilities are
consistently segregated or allocated into these segments for regular review by
management or in determining allocations of resources. There are no
inter-segment revenues.
CONSOLIDATED RESULTS
Revenue
For the quarter ended June 30, 2002, our consolidated revenue was approximately
$24.5 million, compared with approximately $15.8 million, for the same period
of 2001. Our Lending Exchange segment accounted for approximately 84% of our
revenue in the quarter ended June 30, 2002 contributing $7.9 million to the
overall $8.7 million increase in consolidated revenue. Our Realty Services
segment accounted for 11% of our revenue in the quarter ended June 30, 2002 and
accounted for $1.3 million of our increase in consolidated revenue. Lend-X
technology revenue was the remaining 5% of our revenue in the quarter ended
June 30, 2002, which was about $0.5 million lower than the same period last
year. See additional details by segment below.
Gross Profit
For the quarter ended June 30, 2002, our consolidated gross profit was $20.7
million, or 84.4% of revenue. In the same period a year ago, our consolidated
gross profit was $12.2 million or 77.3% of revenue. Our Lending Exchange
segment contributed to $8.1 million of the $8.4 million increase in gross
profit. We attribute this increase in gross profit primarily to the scalability
of our Lending Exchange business model. Our Realty Services segment added
approximately $0.8 million to the increase in gross profit while Lend-X
technology decreased $0.5 million. See additional details by segment below.
LENDING EXCHANGE SEGMENT RESULTS
Revenue
We earn Lending Exchange revenue primarily from Lenders on our network that pay
us fees as qualification forms are transmitted to them (transmit fees) and for
loans they make to consumers that we transmitted to them (closed-loan fees). In
order to enhance our customers' experience and provide them with the best
opportunity to find a loan that best fits their needs, our on-line Lending
Exchange was designed such that a consumer's discrete qualification form can be
transmitted to up to four Lenders. In this way, we generate multiple
transmission fees for the same qualification form and increase the likelihood
that the consumer will close a loan with one of the Lenders on our Exchange.
On an ongoing basis, we undertake initiatives aimed at improving the number of
multiple transmissions of a qualification form and at increasing the rate at
which a qualification form results in a closed loan.
- An ongoing initiative has been to add to the number and
variety of Lenders on our exchange, thus increasing capacity
and our ability to handle different types of loan requests.
At June 30, 2002 we had more than 170 participating Lenders
on our exchange compared to more than 130 participating
Lenders at June 30, 2001.
- Additionally, we offer advisory services and have begun
offering several new tools to enable our Lenders to process
qualification forms and close loans more efficiently,
including benchmark and best practices studies and automation
tools, including our Automated Decisioning Engine (ADE)
feature in our Lend-X Technology offering. As of June
19
30, 2002, we had 35 Lenders utilizing our ADE compared to no
Lenders as of June 30, 2001. In addition to the increased
utilization of our ADE feature, we have also seen an increase
in the number of Lenders utilizing their own version of
automated decisioning, from 20 Lenders as of June 30, 2001
to 25 Lenders as of June 30, 2002. We have also held two
best-practices seminars and have initiated our second round
of benchmark studies for our Lenders.
- Recently, several of our Lenders have agreed to participate
in our "Choice Model" program. Under the Choice Model, when a
consumer receives fewer than four offers, we run the
consumer's request through a set of broader filters that the
participating Lenders have agreed upon and attempt to obtain
the consumer up to four offers. The Choice Model gives the
Lenders the opportunity to participate in under-served
markets at a reduced fee and gives the consumer a better
experience and an improved chance at closing a loan.
- We also undertake initiatives directed to the consumer.
Recently we began offering a more dynamic filtering process.
This process provides the consumer an opportunity to change
their down payment or loan value on their mortgage or home
equity qualification form in an effort to successfully pass
the filters of more Lenders in an attempt to receive up to 4
loan offers. Additionally, from time to time we also test the
impact of providing consumers with incentives or rewards for
using our services.
For the quarter ended June 30, 2002, Lending Exchange revenue increased
approximately $7.9 million, or 63%, to $20.5 million from $12.6 million in the
same period of 2001. This increase in Lending Exchange revenue primarily
reflects (1) an increase in the number of mortgage and home equity closed
loans, (2) an increase in our mortgage and home equity product pricing and (3)
an increase in the number of multiple transmissions of each discrete
qualification form.
The table below illustrates several key components of our Lending Exchange
revenue for the quarters ended June 30, 2002 and 2001.
Quarter Ended June 30, 2002 Quarter Ended June 30, 2001
(in thousands)
Discrete Multiple Number Discrete Multiple Number
Transmission Transmission of Closed Transmission Transmission of Closed
Lending Exchange Revenue Volume Volume Transactions Revenue Volume Volume Transactions
Mortgage $10,622 144 449 15 $ 6,003 126 277 10
Home Equity 7,497 76 232 20 4,426 48 152 14
Auto, Personal, Credit Card 1,756 146 334 34 2,017 148 271 53
All Other Exchange Fees 619 152
------- --- ----- -- ------- --- --- --
Total Lending Exchange $20,494 366 1,015 69 $12,598 322 700 77
======= === ===== == ======= === === ==
Mortgage Revenue
Mortgage revenue increased by $4.6 million, or 77%, to $10.6 million in the
quarter ended June 30, 2002 from $6.0 million in the quarter ended June 30,
2001.
As seen in the table above, the number of closed mortgage transactions
increased 50% to approximately 15,000 in the quarter ended June 30, 2002 from
approximately 10,000 closed transactions in the same period of 2001. This
increase of 5,000 additional closed-loan transactions contributed approximately
$2.1 million to the overall increase in mortgage revenue.
This increase reflects a number of initiatives, including expanding the
capacity of our lender network, training Lenders in best practices and
providing automation tools. As a result, we have seen an increase in our
average closing rate for mortgages to 7.9% in the quarter ended June 30, 2002
compared to 5.7% in the same period of 2001. Additionally, due to the typical
time lag between the transmission of a qualification form and the closing of a
mortgage loan, the higher level of multiple transmission volume that we had
experienced in the first quarter of 2002 (395,000 transmits) as compared to the
first quarter of 2001 (335,000 transmits) also contributed to the $2.1 million
increase in revenue from closed mortgage loan transactions. Accordingly, if our
close rates remain at or near current levels we anticipate that the higher
multiple transmission volume shown in the table above for the 2002 period
compared to 2001 will result in higher closed mortgage loan revenue in the
quarter ending September 30, 2002 compared to the same period of 2001.
We also attribute a small portion of the increase in closed transactions to a
new program implemented late in the first quarter of 2002. Through an ongoing
arrangement with an outside consultant, we are independently identifying
mortgage and home
20
equity transactions originated through our Exchange that have closed, but that
have not been reported to us through the normal reporting process. These closed
transactions have been found by matching our transmission data from June 2000
to September 2001 against public real estate records and then determining if
the loan did close with the Lender to whom we transmitted a qualification form.
Fees from these transactions accounted for approximately 7% of our mortgage
closed transactions in the quarter ended June 30, 2002 and $0.4 million of the
increase in mortgage revenue over the quarter ended June 30, 2001. We expect
the impact of this program on our closed transactions to decrease as we perform
the matching process over a shorter time period going forward and as a result
of improved Lender processes.
Approximately $0.2 million of the increase in mortgage revenue is related to
fees that we earn from lending transactions involving arrangements with
third-party membership programs, such as Delta Skymiles, USAirways Dividend
Miles, Continental Airline One Pass Miles, Northwest Airlines World Perks and
Costco Wholesale, which allow us to provide lending services to their members.
We transmit the qualification form completed by the third-party member to
certain selected Lenders and earn closed loan fees from the Lender for each
loan that closes.
From a transmit fee standpoint, multiple transmissions of mortgage
qualification forms increased by approximately 172,000 in the quarter ended
June 30, 2002 from the same period of 2001. This resulted in an increase in
mortgage revenue of approximately $1.3 million. As the table above
demonstrates, on average, we were able to transmit each discrete qualification
form 3.1 times in the quarter ended June 30, 2002, compared to 2.3 times for
the same period in 2001. We believe that the increase in our multiple
transmissions and transmit rate reflects the greater willingness of Lenders to
find low-cost business in a post-refinance boom period, the expanding capacity
of our Lender network and the effect of some of our initiatives to increase the
number of offers a consumer receives.
Our November 2001 closed-mortgage-loan fee pricing change from a flat fee to a
tiered structure had the effect of raising our average revenue per closing and
contributed $0.9 million to the increase in mortgage revenue this quarter.
Additionally, in November 2001 we increased our standard transmit fee from
$8.00 per transmit to $9.00 per transmit. This price increase contributed $0.3
million of additional mortgage revenue in this quarter.
Home Equity Revenue
Home Equity revenue increased approximately $3.1 million, or 69%, to $7.5
million in the quarter ended June 30, 2002 from $4.4 million in the same period
of 2001.
As can be seen in the table above, the number of closed home equity
transactions increased by 48% to approximately 20,000 closed transactions in
the quarter ended June 30, 2002 from approximately 14,000 closed transactions
in the same period of 2001. This increase in closed transactions contributed
$1.6 million to the increase in Home Equity revenue. Most of this increase can
be attributed to higher consumer demand for home equity loans driven by a low
interest rate environment and the success of our marketing campaigns (see
discussion regarding volume below).
We also attribute a small portion of this increase in closed transactions to
the program discussed above that was implemented to identify closed
transactions that were not reported to us through the normal reporting process.
These closed home equity transactions accounted for approximately 4% of our
total home equity transactions during the quarter ended June 30, 2002 and $0.2
million of the increase in home equity revenue over the same period in 2001. We
also expect the magnitude of these transactions to decrease going forward as we
perform the matching process over a shorter time period going forward and as a
result of improved Lender processes.
From a transmit fee standpoint, multiple transmissions of home equity
qualification forms increased by approximately 53% or 80,000 transmissions in
the quarter ended June 30, 2002 from the same period in 2001. This increase
contributed $0.6 million to home equity revenue in the quarter ended June 30,
2002. While the average rate at which we were able to transmit each discrete
home equity qualification form remained flat at about 3.1 times, we had an
increase of 58% in the number of discrete home equity transmissions. We
attribute this increase in discrete transmissions, in part, to our 2002
advertisements focusing on and targeting our home equity product. We also have
seen an increase in home equity demand as the demand for mortgage refinancing
has subsided.
Our November 2001 closed-loan fee pricing change for home equity transactions
increased our standard fee from $250 to $275 and resulted in a $0.7 million
increase in closed loan fees this quarter. Additionally, in November 2001 we
increased
21
our standard transmit fee from $8.00 per transmit to $9.00 per transmit. This
price increase contributed an additional $0.2 million of home equity revenue.
Auto, Personal and Credit Card Revenue
Auto, Personal and Credit Card products accounted for $1.8 million of Lending
Exchange revenue in the quarter ended June 30, 2002 compared to $2.0 million in
the same period of 2001, a decrease of approximately $0.2 million which can
primarily be attributed to $0.6 million lower revenue generated from our credit
card product. This decrease reflects a general reluctance by credit card
providers to accept sub-prime qualification forms from higher risk customers
and has caused some of our credit card providers to disengage from our
Exchange.
Partially offsetting this decrease was a $0.4 million increase in auto revenue
with 67% more closed auto loan transactions in the quarter ended June 30, 2002
as compared to the same period in 2001. This increase is due to increased
volume generated through new and expanded business relationships with on-line
portals and better lender coverage.
All Other Lending Exchange Revenue
All other Lending Exchange revenue, as shown in the table above, increased by
approximately $0.4 million to approximately $0.6 million in the quarter ended
June 30, 2002 compared to $0.2 million in the same period of 2001. The increase
can be attributed to new business arrangements with other online businesses
that offer various complementary products to our customers through their
Websites.
Cost of Revenue and Gross Profit
For the quarter ended June 30, 2002 gross profit for the Lending Exchange
segment was $18.4 million, or 89.9%. This is an $8.1 million improvement from
the same period in 2001 in which we had a gross profit of $10.3 million, or
81.7%. We attribute this increase in gross profit primarily to the scalability
of our Lending Exchange business model. As our multiple transmit rate and
closing volume increase, our costs do not necessarily increase in proportion.
Additionally, as we add Lenders to our Exchange, we increase our capacity to
provide the growing number of consumers using our services the ability to find
and close loans. As a result, when more loans close through our Lending
Exchange and our revenue increases, it has a positive impact on our gross
profit and gross profit percentage because many of our costs are fixed or
controllable. The November 2001 changes in pricing for our transmit fees and
closed-loan fees, as discussed above, also favorably impacted our gross profit
this period.
Lending Exchange costs of revenue decreased by $0.2 million, or 10%, to $2.1
million in the quarter ended June 30, 2002 from $2.3 million in the quarter
ended June 30, 2001. During this same period our Lending Exchange revenue grew
approximately 63%.
The decrease in cost of revenue primarily reflects a $0.5 million reduction in
promotional payments and gift certificates to consumers who closed a loan
through our Exchange. From time-to-time we adjust the incentives offered to
consumers based on evaluations of the responsiveness of consumers to such
incentives.
Partially offsetting this decrease in expense was a $0.2 million increase in
our employment expenses (employees and independent contractors) primarily
related to increases in our call center to help better manage and direct our
consumer call volume. We also incurred approximately $0.1 million of fees
related to the program identified above to identify closed loans that were not
reported to us through the normal reporting process.
REALTY SERVICES SEGMENT RESULTS
Revenue
We earn Realty Services revenue from real estate brokers participating in our
network that pay us a fee when consumers' requests that we transmit to them
result in a purchase or sale of a home.
22
Realty Services revenue increased 100% to $2.6 million in the quarter ended
June 30, 2002 from $1.3 million in the same period of 2001. This $1.3 million
increase is due to a higher number of closed transactions in the quarter. While
Realty Services transmission volume increased 13% to 18,000 in the quarter
ended June 30, 2002 from 16,000 in the same period in 2001, our closed
transactions increased 100% to 1,200 in the quarter ended June 30, 2002 from
600 in the same period of 2001. We have grown this business by increasing the
number of real estate professionals participating in our exchange, coupled with
expanding our training and best-practices programs. Additionally, we have
increased our marketing efforts to improve consumer awareness of the benefits
of closing a transaction through our services. Additionally, throughout 2002 we
have entered into arrangements with several new affinity groups or membership
programs to provide their members with benefits for using our services. We are
able to market our services directly to the members in these groups and provide
them with benefits that are affiliated with their membership such as airline
miles, store gift certificates or other incentives.
Cost of Revenue and Gross Profit
Realty Services gross profit and gross profit percentage improved in second
quarter 2002 from the same period of 2001. Gross profits were $1.2 million, or
45.0%, and $0.4 million, or 28.3%, in the quarters ended June 30, 2002 and
2001, respectively. In the fourth quarter of 2001, we decreased the amount of
incentives offered to each realty consumer. Accordingly, we anticipate that
costs will continue to decrease as a percentage of Realty Services revenue.
Realty Services cost of revenue increased approximately $0.5 million, or 55%,
from the quarter ended June 30, 2001 compared to the same period in 2002. This
increase is primarily due to an increase in the number of closed Realty
Services transactions that resulted in a higher number of incentives and
promotional payments made directly to consumers for using our services.
LEND-X TECHNOLOGY SEGMENT RESULTS
Revenue
We license and host our Lend-X technology platform for use by other businesses.
This enables these businesses to create their own customized co-branded or
private-labeled lending exchanges. Through these relationships, we can earn
Lend-X Technology revenue from technology fees related to customizing,
licensing and hosting the third party exchange.
Lend-X Technology revenue totaled $1.3 million, or 5% of our revenue, for the
quarter ended June 30, 2002 compared to $1.9 million, or 12% of revenue for the
same period of 2001. While we do continue to generate revenue from the
licensing and use of our software, it can be irregular based on the size and
timing of new contracts. The primary strategy for Lend-X is to support the
growth of our Exchange. Accordingly, our focus for Lend-X is to facilitate the
delivery of consumer demand to our Lending and Realty Services Exchanges. We
achieve this through using our technology in arrangements with other online
businesses that transmit consumers to our Exchanges. While we do not generate
Lend-X technology revenue from these arrangements, the Exchange revenue driven
by them in the quarter ended June 30, 2002 increased $1.1 million, or 200%,
over the same period in 2001.
Cost of Revenue and Gross Profit
For the quarter ended June 30, 2002, Lend-X Technology gross profit was $1.0
million, or 78.8% of Lend-X Technology revenue, compared to $1.6 million, or
81.7% of Lend-X Technology revenue, for the quarter ended June 30, 2001.
Costs of revenue associated with Lend-X Technology are employment costs related
to customizing and/or implementing Lend-X for third parties and ongoing server
costs related to hosting Lend-X for these companies. These costs decreased
approximately $0.1 million in the quarter ended June 30, 2002 compared to the
quarter ended June 30, 2001 primarily due to less labor-intensive consulting
and implementation projects in the quarter ended June 30, 2002.
CONSOLIDATED OPERATING EXPENSES
23
Product development expense was approximately $0.8 million for the quarter
ended June 30, 2002 compared to $1.2 million for the quarter ended June 30,
2001. Product development costs consist of expenses incurred related to the
ongoing efforts to enhance and maintain the functionality of our exchange
technology and include compensation costs and server costs as well as other
hardware. Compensation costs accounted for 93% of product development expense
for both the quarter ended June 30, 2002 and for the same period of 2001.
The decrease in expense is primarily due to $0.3 million more capitalized
technology department employment expenses in the quarter ended June 30, 2002 as
compared to the same period in 2001. This increase in capitalization is due to
our technology department incurring more time on development for our Website
and Exchange and adding increased functionality in the second quarter of 2002
versus system maintenance and customizing our software for customers in the
same period in 2001. The overall decrease in product development expense is
also due to fewer employees in this department in 2002 as compared to 2001.
Marketing and advertising expenses of $12.2 million were approximately 50% of
our consolidated revenue in the quarter ended June 30, 2002 compared to $10.6
million, or 67% of our consolidated revenue, in the quarter ended June 30,
2001. Although we had an overall increase of $1.6 million in marketing and
advertising expense in the quarter ended June 30, 2002 compared to the same
period of 2001, we were able to achieve a decrease in these costs expressed as
a percentage of revenue. We attribute the decrease in marketing and advertising
as a percentage of revenue to a number of factors:
- The substantial increases in revenue, which as discussed
above, are attributable to a number of factors, including,
improvements in our closing rates, transmit rates and the
impact of our pricing changes;
- We have adjusted our advertising mix to grow our home equity
product. Among our offerings, the home equity product
contributes the highest revenue-per-consumer and therefore
has the greatest impact on our marketing and advertising
costs as a percentage of revenue;
- We have also established new and expanded business
relationships with a number of high-profile on-line portals
and businesses that cater to consumers that are more likely
to have an interest in one or more of our lending or realty
related services; and
- We have seen continued improvements in consumer awareness of
LendingTree which has resulted in brand momentum.
The $1.6 million increase in marketing and advertising expenses in the quarter
ended June 30, 2002 as compared to the same period of 2001 is primarily the
result of $2.7 million more in spending for ad delivery costs such as cable
television commercials, network radio and internet-based advertisements.
Additionally, we incurred $0.9 million more marketing and advertising expense
with on-line portals and businesses and for the costs of promoting our
affiliations with various third-party membership programs. Partially offsetting
these increases was $1.5 million less expense for new ad production in the
quarter ended June 30, 2002 compared the same period in 2001 and $0.4 million
less on direct-mail campaigns and $0.2 million less expense for marketing
research.
Management intends to continue to spend significant amounts on marketing and
advertising, primarily using cable television and network radio as our primary
advertising strategy. However, we will periodically evaluate other mediums such
as broadcast television advertisements, direct mail and e-mail campaigns as a
way to determine if we can generate more consumer volume to our site in a
cost-effective manner. Additionally, from time to time, we will invest in new ad
production. There can be no assurances that such spending or changes in our
strategy will result in improved cost-effectiveness.
Sales, general and administrative expenses for the quarter ended June 30, 2002
decreased to $8.3 million or 34% of consolidated revenue from $11.5 million or
73% of consolidated revenue in the quarter ended June 30, 2001. The most
significant reason for this $3.2 million decrease was due to non-cash
compensation expenses in the quarter ended June 30, 2001 as a result of
variable accounting treatment on the underlying securities of our Chief
Executive Officer's promissory note. This promissory note was amended in August
2001 resulting in fixed accounting treatment for the underlying securities
going forward and therefore no such charge was recorded in the quarter ended
June 30, 2002.
Additionally, incentive compensation expenses were approximately $0.5 million
lower in the quarter ended June 30, 2002 as compared to the same period of
2001. Throughout the quarter ended June 30, 2001, our results significantly
exceeded our
24
bonus-plan targets and this was reflected in the higher incentive compensation
accruals for that period. For 2001, the bonus plan did not have upper limits
established for payouts until after the end of the year. Conversely, for the
same period in 2002 we have established limits on incentive plan payouts and we
have substantially increased our bonus-plan targets. We currently estimate that
we will meet, but not significantly exceed these higher targets. Accordingly,
the incentive compensation expense accrued for the quarter ended June 30, 2002
is lower than for the same period of 2001.
The above decreases in administrative expenses were partially offset by
increases in other employment expenses. We experienced a $0.6 million increase
in employment related expenses in the quarter ended June 30, 2002 compared to
the same period in 2001 due to more employees and increased health insurance
costs. We had 240 employees at June 30, 2002 compared to 225 employees at June
30, 2001.
Loss on Impaired Investment
In June 2001, we determined that the value of our minority investment in
another company was impaired after its merger with a third company.
Accordingly, we wrote down the investment to its estimated fair value of $0.25
million, recording $0.35 million as a non-operating loss on impaired investment
in the quarter ended June 30, 2001.
Interest and Other Non-Operating Income
Interest and other non-operating income consists of interest earned on cash and
cash equivalents and restricted cash, as well as other non-operating income
including late fees and penalties. In the quarter ended June 30, 2002, we
earned approximately $0.2 million of income related to penalties charged to
Lenders resulting from the program to find closed loan transactions that were
not reported through the normal reporting process. Interest income was
approximately $0.1 million in the quarter ended June 30, 2002 and $0.2 million
in the quarter ended June 30, 2001.
Interest Expense, Financing and Other Charges
Interest expense, financing and other charges were approximately $0.1 million
for both the quarters ended June 30, 2002 and 2001. This line item consists of
bank service charges, interest on capital leases and borrowings and other
expenses related to our credit facilities.
Dividends and Accretion of Series A Convertible Preferred Stock
The holders of our Series A Preferred Stock are entitled to receive quarterly
dividends on the Series A Preferred Stock equal to eight percent (8%) per annum
of the stated value per share payable at our option (i) in cash or (ii) by
increasing the stated value per share on the dividend payment date. The stated
value per share is the sum of the initial purchase price of $3.50 per share as
cumulatively adjusted from time to time by accumulated dividends.
For the quarter ended June 30, 2002, we have elected to pay the quarterly
dividends in cash. We paid the second quarter dividends on July 1, 2002. This
has resulted in a $0.5 million liability being recorded on our accompanying
consolidated balance sheet as of June 30, 2002.
For the quarter ended June 30, 2002, we recorded a total of $0.5 million of
dividend charges. For the quarter ended June 30, 2001, we had elected to pay
the quarterly dividends by increasing the stated value per share of the Series
A Preferred Stock. As a result of these stated value dividends, we increased
the carrying value of the Series A Preferred Stock on our balance sheet by
approximately $0.6 million. We also recognized, as an increase to our net loss
attributable to common shareholders, an additional $0.4 million of dividend
charges resulting from the excess of the fair value of the common stock that
the 8% dividends on the Series A Preferred Stock will convert into over the
$3.50 conversion price that will be paid upon such conversion. Therefore, for
the quarter ended June 30, 2001, we recorded a total of $1.0 million of
dividend charges.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on March 20, 2006 at a price of 105% of the then current value per
share. Accordingly, we are accreting the value of the Series A Preferred Stock
up to the redemption value of the shares using the effective interest method.
This is increasing the carrying value of the Series A Preferred Stock and the
charge is included in the computation of net loss attributable to common
shareholders. In both the quarters ended June 30, 2002 and 2001, we recorded
approximately $0.2 million of accretion charges.
25
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2001
CONSOLIDATED RESULTS
Revenue
For the six months ended June 30, 2002, consolidated revenue was approximately
$45.7 million compared with approximately $28.1 million for the same period of
2001. Our Lending Exchange segment accounted for approximately 85% of our
consolidated revenue in the six months ended June 30, 2002 and $15.7 million of
the overall $17.6 million increase in consolidated revenue over the six months
ended June 30, 2001. Our Realty Services segment accounted for 9% of our
consolidated revenue in the six months ended June 30, 2002 and $2.0 million of
the increase in consolidated revenue over the six months ended June 30, 2001.
Lend-X Technology revenue was 6% of our consolidated revenue in the six months
ended June 30, 2002 and was less than $0.1 million higher than the same period
in 2001. See details by segment below.
Gross Profit
For the six months ended June 30, 2002, the consolidated gross profit was $38.7
million, or 84.6% of consolidated revenue, compared to $20.9 million or 74.8%
of revenue for the six months ended June 30, 2001, an increase of 84%. Our
Lending Exchange segment contributed to $16.4 million of the overall $17.8
million increase in gross profit from the six months ended June 30, 2001. We
attribute this increase in gross profit primarily to the scalability of our
Lending Exchange business model. Our Realty Services segment added
approximately $1.0 million of the increase and our Lend-X Technology segment
added another $0.3 million of the increase.
LENDING EXCHANGE SEGMENT RESULTS
Revenue
We earn Lending Exchange revenue primarily from Lenders on our network that pay
us fees as qualification forms are transmitted to them (transmit fees) and for
loans they make with consumers that we transmitted to them (closed-loan fees).
A consumer's discrete qualification form can be transmitted to up to four
Lenders. In this way, we generate multiple transmission fees for the same
qualification form and increase the likelihood that the consumer will close a
loan with one of the Lenders on our Exchange.
See the Management's Discussion and Analysis above for the quarter ended June
30, 2002 compared to the quarter ended June 30, 2001 for a summary of various
initiatives to increase revenue.
For the six months ended June 30, 2002, Lending Exchange revenue increased
approximately $15.7 million, or 68%, to $38.8 million from $23.1 million in the
quarter ended June 30, 2001. This increase in Lending Exchange revenue
primarily reflects (1) an increase in the number of closed mortgage and home
equity loans, (2) an increase in our mortgage and home equity product pricing
and (3) an increase in the number of multiple transmissions of each discrete
qualification form.
The table below illustrates several key components of our Lending Exchange
revenue for the six months ended June 30, 2002 and 2001.
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
(in thousands)
Discrete Multiple Number Discrete Multiple Number
Transmission Transmission of Closed Transmission Transmission of Closed
Lending Exchange Revenue Volume Volume Transactions Revenue Volume Volume Transactions
Mortgage $ 20,311 287 844 26 $ 10,823 287 612 16
Home Equity 13,982 151 448 36 7,742 96 301 23
Auto, Personal, Credit Card 3,347 310 692 62 4,211 286 485 102
All Other Exchange Fees 1,173 318
-------- --- ----- --- -------- --- ----- ---
Total Lending Exchange $ 38,813 748 1,984 126 $ 23,094 669 1,398 141
======== === ===== === ======== === ===== ===
26
Mortgage Revenue
Mortgage revenue increased by $9.5 million, or 88%, to $20.3 million in the six
months ended June 30, 2002 from $10.8 million in the six months ended June 30,
2001.
As seen in the table above, the number of closed mortgage transactions
increased 75% to approximately 28,000 closed transactions in the six months
ended June 30, 2002 from approximately 16,000 closed transactions in the same
period of 2001. This increase of 12,000 additional closed-loan transactions in
2002 contributed approximately $5.3 million to the overall increase in mortgage
revenue.
This increase reflects a number of initiatives, including expanding the
capacity of our lender network, training Lenders in best practices and
providing automation tools. As a result, we have seen continual increases in
our average closing rate for mortgages. For the three months ended March 31,
2002 the average closing rate was 7.2% as compared to 6.6% in the same period
of 2001 and for the three months ended June 30, 2002 the average closing rate
was 7.9% as compared to 5.7% in the same period of 2001.
Additionally, due to the typical lag between the transmission of a
qualification form and the closing of a mortgage loan, the higher level of
multiple transmission volume that we had experienced in the fourth quarter of
2001 and the first quarter of 2002 (744,000 transmits) as compared to the
fourth quarter of 2000 and the first quarter of 2001 (510,000 transmits) also
contributed to the $5.6 million increase in revenue from closed mortgage loan
transactions. Accordingly, if our close rates remain at or above current levels
we anticipate that the higher multiple transmission volume shown in the table
above for the 2002 period compared to 2001 will result in higher closed
mortgage loan revenue in the quarter ending September 30, 2002 compared to the
same period of 2001.
Approximately $0.5 million of this increase is related to fees that we earn
from lending transactions involving arrangements with third-party membership
programs, such as Delta Skymiles, USAirways Dividend Miles, Continental Airline
One Pass Miles, Northwest Airlines World Perks and Costco Wholesale, which
allow us to provide lending services to their members. We transmit the
qualification form completed by the third-party member, to certain selected
Lenders and earn closed loan fees for our services from the Lender for each
loan that closes.
We also attribute a small portion of the increase in closed transactions to a
new program implemented in 2002 that has identified closed mortgage
transactions that were not reported to us through our normal reporting process.
These transactions accounted for approximately 4% of our mortgage closed
transactions in the six months ended June 30, 2002 and $0.5 million of the
increase in mortgage revenue over the six-month period ended June 30, 2001. We
expect the impact of this program on our closed transactions to decrease as we
perform the matching process over a shorter time period going forward and as a
result of improved Lender processes.
From a transmit fee standpoint, multiple transmissions of mortgage
qualification forms increased by approximately 232,000 in the six months ended
June 30, 2002 from the six months ended June 30, 2001 and resulted in an
increase in revenue of $1.8 million. As the table above demonstrates, on
average, we were able to transmit each discrete mortgage qualification form
approximately 3.0 times in the six month period ended June 30, 2002 compared to
approximately 2.2 times in the same period of 2001. We believe that the
increase in our multiple transmissions reflects the greater willingness of
Lenders to find low-cost business in a post-refinance boom period, the
expanding capacity of our lender network and the effect of some of our
initiatives to increase the number of offers a consumer receives.
Additionally, our November 2001 pricing change for closed mortgage transactions
from a flat fee to a tiered structure had the effect of raising our average
revenue per closing and contributed $1.6 million to the increase in mortgage
revenue for the six months ended June 30, 2002. In November 2001 we also
increased our standard transmit fee from $8.00 per transmit to $9.00 per
transmit. This price increase contributed $0.8 million of mortgage revenue.
Home Equity Revenue
Home Equity revenue increased approximately $6.3 million, or 81%, to $14.0
million in the six months ended June 30, 2002 from $7.7 million in the same
period of 2001.
27
As can be seen in the table above, the number of closed home equity
transactions increased by 57% to approximately 36,000 closed transactions in
the six months ended June 30, 2002 from approximately 23,000 closed
transactions in the same period of 2001. This increase of 13,000 closed
transactions contributed $3.3 million to the increase in home equity revenue.
We believe most of this increase can be attributed to higher consumer demand
for home equity loans driven by a low interest rate environment and the success
of our marketing campaigns. An additional small portion of this increase is
attributed to a new program implemented in 2002 that has identified closed home
equity transactions that were not reported to us through our normal reporting
process. These transactions accounted for approximately 2% of our closed home
equity transactions in the six months ended June 30, 2002 and $0.2 million of
the increase in home equity revenue over the same period in 2001.
Multiple transmission volume of home equity qualification forms increased by
approximately 49% or by approximately 147,000 transmissions in 2002 compared to
2001 and resulted in an increase of home equity revenue of $1.1 million. While
the average rate at which we were able to transmit each discrete home equity
qualification form decreased slightly from 3.1 times in the first half of 2001
to 3.0 times in the first half of 2002, we had an increase of 57% in the number
of discrete home equity transmissions. We attribute this increase in discrete
transmissions, in part, to our 2002 advertisements focusing on and targeting
our home equity product. We also have seen an increase in consumer demand for
home equity loans, as the key interest rates underlying these types of loans
have remained relatively low.
Additionally, our November 2001 closed-loan fee pricing change for home equity
transactions increased our standard fee from $250 to $275 and resulted in a
$1.3 million increase in home equity revenue this period. In November 2001 we
also increased our standard transmit fee from $8.00 per transmit to $9.00 per
transmit. This price increase contributed an additional $0.5 million of home
equity revenue.
Auto, Personal and Credit Card Revenue
Auto, Personal and Credit Card products accounted for approximately 9% of our
Lending Exchange revenue in the six months ended June 30, 2002 and
approximately 18% in the six months ended June 30, 2001. This was a decrease of
approximately $0.9 million, or 21%, from period to period. This decrease can
primarily be attributed to approximately $1.5 million lower revenue generated
from our credit card product. This decrease reflects a general reluctance by
credit card providers to accept sub-prime qualification forms from higher risk
customers and has caused some of our credit card providers to disengage from
our Exchange.
Partially offsetting this decrease in revenue was an increase in our auto
revenue of approximately $0.6 million with 64% more closed auto loan
transactions in the six months ended June 30, 2002 as compared to the same
period in 2001. This increase is due to increased volume generated through new
and expanded business relationships with on-line portals and better lender
coverage.
All Other Lending Exchange Revenue
All other Lending Exchange revenue, as shown in the table above, increased by
approximately $0.5 million to $1.2 million in the six months ended June 30,
2002 compared to $0.6 million in the same period of 2001. The increase can be
attributed to new arrangements with other online businesses that offer various
complementary products to our customers through their Websites.
Cost of Revenue and Gross Profit
For the six months ended June 30, 2002 the gross profit for the Lending
Exchange segment was $34.7 million, or 90.1%. This is a $16.4 million
improvement from the same period in 2001, in which we had a gross profit of
$18.3 million, or 79.2%. We attribute this increase in gross profit primarily
to the scalability of our Lending Exchange business model. As our multiple
transmit rate and closing volume increase, our costs do not necessarily
increase in proportion. Additionally, as we add Lenders to our Exchange we
increase our capacity to provide the growing number of consumers using our
services the ability to find and close loans. As a result, when more loans
close through our Lending Exchange, and our revenue increases, it has a
positive impact on our gross profit and gross profit percentage because many of
our costs are fixed or controllable. The November 2001 changes in pricing for
our transmit fees and closed-loan fees, as discussed above, also favorably
impacted our gross profit this period.
28
Lending Exchange costs of revenue decreased by $0.7 million, or 14%, to $4.1
million in the six months ended June 30, 2002 from $4.8 million in the six
months ended June 30, 2001. During this same period, our Lending Exchange
revenue grew approximately 68%.
The decrease in cost of revenue primarily reflects a reduction in promotional
payments and gift certificates to consumers who closed a loan through our
exchange. From time-to-time we adjust the incentives offered to consumers based
on evaluations of the responsiveness of consumers to such incentives. Our
spending on consumer incentives and promotions decreased by $1.0 million in the
first half of 2002 compared to the first half of 2001. Additionally, as a
result of our volume increases, we have been able to negotiate a decrease in
our per-transaction credit-scoring costs and for the six months ended June 30,
2002 had $0.2 million lower costs in this area.
Partially offsetting these decreases in expense was a $0.4 million increase in
our employment expenses (employees and independent contractors) related to
increases in our call center to help better manage and direct our consumer call
volume. We also incurred approximately $0.1 million of fees related to the
program identified above to closed loans that were not reported to us through
the normal reporting process.
REALTY SERVICES SEGMENT RESULTS
Revenue
We earn Realty Services revenue from real estate brokers participating in our
network that pay us a fee when consumers' requests that we transmit to them
result in a purchase or sale of a home.
Realty Services revenue increased to $4.0 million in the six months ended June
30, 2002 from $2.1 million in the same period of 2001. This $1.9 million
increase is due to a higher number of closed transactions in the quarter. While
Realty Services transmission volume increased only 19% to 38,000 in the six
months ended June 30, 2002 from 32,000 in the six months ended June 30, 2001,
the number of closed transactions for this segment increased 80% to
approximately 1,800 in the six months ended June 30, 2002 from 1,000 in the
same period of 2001. We have grown this business by increasing the number of
real estate professionals participating in our exchange, coupled with expanding
our training and best-practices programs. Additionally, we have increased our
marketing efforts to improve consumer awareness of the benefits of closing a
transaction through our services. Additionally, throughout 2002 we have entered
into arrangements with several new affinity groups or membership programs to
provide their members with benefits for using our services. We are able to
market our services directly to the members in these groups and provide them
with benefits that are affiliated with their membership such as airline miles,
store gift certificates or other incentives.
Cost of Revenue and Gross Profit
Realty Services gross profit and gross profit percentage improved in the six
months ended June 30, 2002 from the same period of 2001. Gross profits were
$1.6 million, or 41.2%, and $0.6 million, or 28.5%, in the six months ended
June 30, 2002 and 2001, respectively. We have decreased the incentive amounts
offered to Realty Services consumers in 2002 and several incentive offers are a
fixed dollar amount. Accordingly, we anticipate that costs associated with our
Realty Services segment will continue to decrease as a percentage of its
revenue.
Realty Services cost of revenue increased approximately $0.9 million, or 58%,
from the six months ended June 30, 2001 compared to the same period in 2002.
This increase is primarily due to an increase in the number of closed Realty
Services transactions that resulted in a higher number of incentives and
promotional payments made directly to consumers for using our services.
LEND-X TECHNOLOGY SEGMENT RESULTS
Revenue
29
We license and host our Lend-X technology platform for use by other businesses.
This enables these businesses to create their own customized co-branded or
private-labeled lending exchanges. Through these relationships, we can earn
Lend-X Technology revenue from technology fees related to customizing,
licensing and hosting the third party exchange.
Lend-X Technology revenue totaled $3.0 million, or 6% of our revenue, for the
six months ended June 30, 2002 compared to $2.9 million, or 10% of revenue for
the same period of 2001. While we do continue to generate revenue from the
licensing and use of our software, it can be irregular based on the size and
timing of new contracts. The primary strategy for Lend-X is to support the
growth of our Exchange. Accordingly, our focus for Lend-X is to facilitate the
delivery of consumer demand to our Lending and Realty Services Exchanges. We
achieve this through using our technology in arrangements with other online
businesses that transmit consumers to our Exchanges. While we do not generate
Lend-X technology revenue from these arrangements, the exchange revenue driven
by these Lend-X users in the six months ended June 30, 2002 increased $2.2
million, or 200%, over the same period in 2001.
Cost of Revenue and Gross Profit
For the six months ended June 30, 2002, Lend-X Technology gross profit was $2.4
million, or 79.7% of Lend-X Technology revenue, compared to $2.1 million, or
72.6% of Lend-X Technology revenue, for the quarter ended June 30, 2001.
Costs of revenue associated with Lend-X Technology are employment costs related
to customizing and/or implementing Lend-X for third parties and ongoing server
costs related to hosting Lend-X for these companies. These costs decreased
approximately $0.2 million in the six months ended June 30, 2001 compared to
the six months ended June 30, 2001 primarily due to less labor-intensive
consulting and implementation projects in the six months ended June 30, 2002.
CONSOLIDATED OPERATING EXPENSES
Product development expense was approximately $1.6 million for the six months
ended June 30, 2002 compared to $2.2 million for the six months ended June 30,
2001. Product development costs consist of expenses incurred related to the
ongoing efforts to enhance and maintain the functionality of our exchange
technology and include compensation costs, server and other hardware costs.
Compensation costs accounted for 93% of product development expense for the six
months ended June 30, 2002 and 92% for the same period of 2001.
The decrease in expense is primarily due to $0.4 million more capitalized
technology department employment expenses in the six months ended June 30, 2002
as compared to the same period in 2001. This increase in capitalization is due
to our technology department incurring more time on development for our Website
and Exchange and adding increased functionality in 2002 versus system
maintenance and customizing our software for customers in 2001. The overall
decrease in product development expense is also due to fewer employees in this
department in 2002 as compared to 2001.
Marketing and advertising expenses of $22.9 million were approximately 50% of
our consolidated revenue in the six months ended June 30, 2002 compared to
$19.5 million, or 69% of our consolidated revenue, in the six months ended June
30, 2001. Although we had an overall increase of $3.4 million in marketing and
advertising expense in the six months ending June 30, 2002 compared to 2001, we
were able to achieve a decrease in these costs expressed as a percentage of
revenue. We attribute the decrease in marketing and advertising as a percentage
of revenue to a number of factors:
- The substantial increases in revenue, which as discussed
above, are attributable to a number of factors including,
improvements in our closing rates, transmit rates and the
impact of our pricing changes;
- We have adjusted our advertising mix to grow our home equity
product. Among our offerings, the home equity product
contributes the highest revenue-per-consumer and therefore
has the greatest impact on our marketing and advertising costs
as a percentage of revenue;
- We have also established new and expanded business
relationships with a number of high-profile on-line portals
and businesses that cater to consumers that are more likely
to have an interest in one or more of our lending or realty
related services; and
- We have seen continued improvements in consumer awareness of
LendingTree which has resulted in brand momentum.
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The $3.4 million increase in marketing and advertising expenses in the six
months ended June 30, 2002 as compared to the same period in 2001 is primarily
the result of $4.1 million more in spending for ad delivery costs such as cable
television commercials, network radio and internet-based advertisements.
Additionally, we incurred $1.7 more marketing and advertising expense with
on-line portals and businesses and for the costs of promoting our affiliations
with various third-party membership programs. Partially offsetting these
increases was a $1.0 million decrease in direct-mail campaign spending.
Management intends to continue to spend significant amounts on marketing and
advertising, primarily using cable television and network radio in our primary
advertising strategy. However, we will periodically evaluate other mediums such
as broadcast television advertisements, direct mail and e-mail campaigns as a
way to determine if we can generate more consumer volume to our site in a
cost-effective manner. Additionally, from time to time we will invest in new ad
production. There can be no assurances that such spending or changes in our
strategy will result in improved cost-effectiveness.
Sales, general and administrative expenses for the six months ended June 30,
2002 decreased to 34% of consolidated revenue, or $15.6 million, from 73% of
consolidated revenue, or $20.6 million in the six months ended June 30, 2001.
The most significant reason for this $4.9 million decrease was due to lower
overall compensation expense in the six months ended June 30, 2002 as compared
to the same period of 2001. The following describes the components of
compensation expense that contributed to the decrease:
- - $4.0 million of non-cash compensation expenses related to net charges
taken in the six months ended June 30, 2001 as a result of variable
accounting treatment on the underlying securities of our Chief
Executive Officer's promissory note. This promissory note was amended
in August 2001 resulting in fixed accounting treatment for the
underlying securities going forward and therefore no such charge was
recorded in the six months ended June 30, 2002.
- - $1.8 million decrease in incentive compensation expense from period to
period. Throughout the six months ended June 30, 2001, our results
significantly exceeded our bonus-plan targets and this was reflected
in the higher incentive compensation accruals for that period. For
2001, the bonus plan did not have upper limits established for payouts
until after the end of the year. Conversely, for the same period in
2002 we have established limits on incentive plan payouts and we have
substantially increased our bonus-plan targets. We currently estimate
that we will meet, but not significantly exceed these higher targets.
Accordingly, the incentive compensation expense accrued for the six
months ended June 30, 2002 is lower than for the same period of 2001.
Additionally, on March 20, 2002, after taking into consideration the
beneficial impact that the favorable interest rate environment had on
our 2001 financial results, the Board of Directors approved 2001
bonuses at a level that limited the maximum amount of the payouts. The
approved bonus amounts were approximately $0.6 million below the
December 31, 2001 accrued amount and resulted in a credit to our
operating results for the first quarter 2002.
- - Partially offsetting these decreased costs were employee salary and
benefits compensation costs that were approximately $0.9 million
higher in the six months ended June 30, 2002 as compared to the six
months ended June 30, 2001. These increased costs were primarily the
result of 15 more employees at June 30, 2002 compared to June 30, 2001
and increased health insurance costs. We had 240 full-time employees
at June 30, 2002 compared to 225 at June 30, 2001.
Loss on Impaired Investment
In June 2001, we determined that the value of our minority investment in
another company was impaired after its merger with a third company.
Accordingly, we wrote down the investment to its estimated fair value of $0.25
million, recording $0.35 million as a non-operating loss on impaired investment
in the six month period ended June 30, 2001.
Interest and Other Non-Operating Income
Interest and other non-operating income consists of interest earned on cash and
cash equivalents and restricted cash, as well as other non-operating income
including late fees and penalties. In the six months ended June 30, 2002, we
earned approximately $0.2 million of income related to penalties charged to
Lenders resulting from the program to find closed-loan transactions that were
not reported through the normal reporting process. Interest and other
non-operating income was approximately $0.4 million in the six months ended
June 30, 2002 and $0.3 million in the six months ended June 30, 2001.
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Interest Expense, Financing and Other Charges
Interest expense, financing and other charges were approximately $0.2 million
and $0.1 million for six months ended June 30, 2002 and 2001, respectively.
This line item consists of bank service charges, interest on capital leases and
borrowings and other expenses related to our credit facilities.
Dividends and Accretion of Series A Convertible Preferred Stock
The holders of our Series A Preferred Stock are entitled to receive quarterly
dividends on the Series A Preferred Stock equal to eight percent (8%) per annum
of the stated value per share payable at our option (i) in cash or (ii) by
increasing the stated value per share on the dividend payment date. The stated
value per share is the sum of the initial purchase price of $3.50 per share as
cumulatively adjusted from time to time by accumulated dividends.
For the quarter ended June 30, 2002, we have elected to pay the quarterly
dividends in cash. We paid the quarterly dividends on July 1, 2002. This has
resulted in a $0.5 million liability being recorded on our accompanying
consolidated balance sheet as of June 30, 2002. As a result of electing to pay
in cash instead of increasing the stated value per share, we did not record any
additional dividend charges resulting from the excess of the fair value of our
common stock that the 8% dividends on the Series A Preferred Stock will convert
into over the $3.50 conversion price.
For the quarter ended March 31, 2002 we had elected to pay the quarterly
dividends by increasing the stated value per share of the Series A Preferred
Stock. As a result of these stated value dividends, for the quarter ended March
31, 2002, we increased the carrying value of the Series A Preferred Stock on
our balance sheet by $0.6 million. We also recognized, as an increase to our
net loss attributable to common shareholders, an additional $1.4 million of
dividend charges resulting from the excess of the fair value of the common
stock that the 8% dividends on the Series A Preferred Stock will convert into
over the $3.50 conversion price that will be paid upon such conversion.
Therefore, for the six months ended June 30, 2002, we recorded a total of $2.5
million of dividend charges.
For the six months ended June 30, 2001, we had elected to pay both quarterly
dividends by increasing the stated value per share of the Series A Preferred
Stock. We increased the carrying value of the Series A Preferred Stock on our
balance sheet by approximately $0.6 million. We also recognized, as an increase
to our net loss attributable to common shareholders, an additional $0.4 million
of dividend charges resulting from the excess of the fair value of the common
stock that the 8% dividends on the Series A Preferred Stock will convert into
over the $3.50 conversion price that will be paid upon such conversion.
Therefore, for the six months ended June 30, 2001, we recorded a total of $1.0
million of dividend charges.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on March 20, 2006 at a price of 105% of the then current value per
share. Accordingly, we are accreting the value of the Series A Preferred Stock
up to the redemption value of the shares using the effective interest method.
This is increasing the carrying value of the Series A Preferred Stock and the
charge is included in the computation of net loss attributable to common
shareholders. In the six months ended June 30, 2002 and 2001, we recorded
approximately $0.3 million and $0.2 million, respectively, of accretion
charges.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Significant Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of our assets, liabilities, revenues and expenses.
We base our estimates and judgments on historical experience and on various
other assumptions that we believe are reasonable under the circumstances. We
evaluate our estimates and refine our judgments on an ongoing basis as actual
results and experiences develop. Actual results could differ from our
estimates.
The most significant accounting estimates that effect our financial position
and results of operations and financial condition in the following ways:
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- - Under our incentive compensation plan for the 2002 calendar year,
employees can earn bonus awards based on a combination of the
Company's achievement of certain revenue and earnings targets for the
year and individual achievement of specified personal goals. Through
June 30, 2002, based on actual results to date and forecasts through
the remainder of the year, management has estimated that the Company
will achieve the incentive plan revenue and earnings targets for the
year. Further, based on historical trends, management has assumed that
employees will achieve 80% of their individual performance goals.
During the year, management makes monthly estimates of the amount of
an award each employee has earned based on the Company's performance
and expected achievement levels by employees relative to their pre-set
goals. These monthly estimates are accrued with a charge to operating
income for that period. The awards are typically paid to the employee
following the completion of a year when actual results are known and
individual performance against goals is evaluated. As of June 30, 2002
we had a $2.1 million accrued liability related to expected costs of
payouts for the 2002 incentive compensation plan and had charged $2.2
million to operating income for the six-month period ending June 30,
2002. As an example of the impact that changes in key variables
relating to this estimate could have on our financial results we have
calculated the following:
- If the Company's results were to fall 10% below the incentive
plan's revenue and earnings targets for the year, the
expected payout for the year would decrease by approximately
$0.2 million and our incentive compensation charged to
operating income through June 30, 2002 would have been $0.1
million lower.
- Conversely, if the Company were to exceed the incentive plan
revenue and earnings targets for the year by 10%, additional
incentives could be earned and the expected payout for the
year would increase by approximately $0.6 million and our
incentive compensation charged to operating income through
June 30, 2002 would have been $0.3 million higher.
- - We estimate liabilities for payouts under various consumer promotional
programs. At our discretion, we may offer consumers that utilize our
exchange services certain promotional incentives to complete a
transaction. We may offer these consumers the opportunity to receive
cash payments, gift certificates, or other discounts or coupons in the
event they complete a transaction utilizing our services. We estimate
the liability for these consumer promotional costs each month based on
the number of consumers the promotions are being offered to,
historical levels of completed transactions and the rate at which
consumers have historically responded to the same or similar
promotions. As of June 30, 2002 we had $0.3 million of liabilities
recorded related to expected costs of payouts for consumer promotions
and had charged $0.1 million to operating income for the six month
periods ending June 30, 2002. As an example of the impact that changes
in key variables relating to this estimate could have on our financial
results we have calculated the following:
- If the rate at which consumers respond to our promotions were
to increase 10% from the estimated rates we are using at June
30, 2002, the accrual for consumer promotion payouts would
increase less than $0.1 million, resulting in an additional
charge to cost of revenue of the same amount.
- Conversely, if the rate at which consumers respond to our
promotions were to decrease 10% from the estimated rates we
are using at June 30, 2002, the accrual for consumer
promotion payouts would decrease less than $0.1 million,
resulting in an additional charge to cost of revenue of the
same amount.
- - For most of our Lend-X technology arrangements, we host our Lend-X
technology for use by third parties that pay us various fees for the
right to access and use our software. For each arrangement we estimate
the term that the customer will use our services and recognize the
applicable revenue and costs over that period if it is longer than the
stated term of the related contract. Our estimates of the expected
arrangement term vary by customer and type of service we agree to
provide, but are generally between one and three years. If the
expected term of any arrangement were to be extended beyond our
current estimates, we would defer the remaining revenue and costs of
that arrangement and recognize them over that new term.
- - Our allowance for doubtful accounts is an estimate based on our
assessment of the collectibility of specific customer accounts, the
aging of accounts receivable and our historical trends related to
uncollectible receivables. When
33
management determines that there is substantial doubt about the
collectibility of a specific customer account, we provide a reserve
for the amount that we estimate to be uncollectible. Additionally,
based on historical experience, management estimates a reserve of 2%
of the accounts receivable balance to provide for the general exposure
of unspecific uncollectible amounts. As of June 30, 2002 our allowance
for doubtful accounts was approximately $0.6 million and for the six
months ended June 30, 2002, we had recorded bad debt expense of $0.3
million. If there were a deterioration of our customers' credit
worthiness or if actual defaults were higher than our historical
experience, our allowance for doubtful accounts could be insufficient
and additional bad debt expense would be incurred.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002 we required $0.5 million of cash to
fund operations. We classify deposits to and uses of restricted cash as
investing activities. Including the net changes in restricted cash with cash
used in operating activities, our cash required for the six months ended June
30, 2002 was $6.5 million. Since inception, we have incurred significant losses
and have an accumulated deficit of $128.2 million as of June 30, 2002. These
uses of cash, losses and accumulated deficit have resulted from the significant
costs incurred for growing our overall business and building our LendingTree
brand. As of June 30, 2002, we had approximately $13.9 million in cash, cash
equivalents and restricted cash.
Restricted cash at June 30, 2002 of $8.8 million primarily includes funds that
are maintained in an escrow account. This escrow account was established by us
and our advertising agency to maintain funds set aside by us for current and
future expenditures by our advertising agency. Disbursements from the escrow
account can only be made for advertising expenditures we have approved in
advance. As of June 30, 2002, the balance in this escrow account covers our June
and July media expenditures. We anticipate that advertising costs will continue
to represent a significant portion of operating expenses and that we will
continue to be required to set aside funds in order to secure favorable
advertising spots at reasonable costs.
As described below, in April 2002, we sold $5.9 million of common stock in a
private placement transaction. Additionally, during the six months ended June
30, 2002, we received $3.4 million from the exercise of stock options.
We have the following additional sources of financing in place:
- - A revolving credit facility with GE Capital Commercial Services, Inc.
("GE") that provides a maximum availability of up to $15.0 million.
Under this arrangement, we have pledged our trade accounts receivable
and borrowings are limited to 90% of our eligible accounts receivable
and bear interest at the prime rate. As of June 30, 2002 we had
eligible receivables of approximately $6.3 million and we had no
borrowings outstanding under this facility.
- - A $2.5 million revolving loan with the Federal Home Loan Mortgage
Corporation ("Freddie Mac") that expires in March 2003. Any amounts
outstanding under the Freddie Mac facility would bear interest at a
rate of 10% payable in cash and an additional amount payable in
warrants. As of June 30, 2002, we have not borrowed under this credit
facility and accordingly, have not paid any interest or issued any
interest-warrants.
- - An equity line whereby we may, at our discretion, sell shares of our
common stock to an investor from time-to-time subject to maximum sale
limitations in any one monthly period with a term ending March 6,
2003. If we choose to drawdown the equity line, the minimum amount of
any drawdown is $0.1 million and the maximum amount is the greater of
(i) $1.0 million or (ii) 20% of the average of the daily volume
weighted average price of our common stock for the twenty-two (22) day
trading period immediately prior to the date we request a drawdown
multiplied by the total trading volume of the common stock for such
period. Only one drawdown is allowed in each period of 22 trading days
beginning on the date of the drawdown notice. Subject to certain
adjustments, the number of shares to be issued on each settlement date
will be a number of shares equal to the sum of the quotients (for each
trading day within the settlement period) of (x) 1/22nd of the
investment amount and (y) the purchase price on each trading day
within the settlement period. As of June 30, 2002 we have not used
this equity line. Further, based on our current cash position and
projected financial results, the likelihood of any use of this equity
line, in management's judgment, is remote.
We believe that the existing cash and cash equivalents, restricted cash, the
availability of the two revolving credit facilities noted above, as well as cash
generated from operations will be sufficient to fund our ongoing operating and
capital needs over the next year including the payment of cash dividends to the
holders of our Series A Preferred Stock. We believe cash from operations will be
generated from revenue growth resulting from the continued growth in
34
online-lending, expansion of our network of Lenders and by more consumers
utilizing our Exchange. We expect to be able to drive more consumers to our
Exchange by leveraging our existing high brand awareness, utilizing our
product-focused advertisements and by developing business relationships with
significant web-portals and other financially oriented on-line businesses.
Although we have historically experienced significant revenue growth and expect
to generate net income in the third quarter of 2002, the operating results for
future periods are subject to numerous uncertainties. There can be no assurance
that revenue growth will continue or that we will be able to achieve or sustain
profitability. Our liquidity could be significantly affected if this does not
happen. Further, if revenue does not grow as anticipated and if we are unable
to successfully raise sufficient additional funds, management would reduce
discretionary operating expenditures, including advertising and marketing and
certain administrative and overhead costs. Failure to generate sufficient
revenue or to reduce costs as necessary could have a material adverse effect on
our ability to continue as a going concern and achieve our business objectives.
If needed, additional financing may not be available or, if available, such
financing may not be on terms favorable to us. If additional funds are raised
through the issuance of equity securities, our shareholders may experience
significant dilution.
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS
For the quarter ended June 30, 2002, two customers accounted for 47% and 22%,
respectively, of our total Lend-X Technology revenue. For the quarter ended
June 30, 2001 these same two customers accounted for 29% and 49%, respectively,
of our total Lend-X Technology revenue.
For the six months ended June 30, 2002, two customers accounted for 52% and
18%, respectively, of our total Lend-X Technology revenue. For the six months
ended June 30, 2001 these same two customers accounted for 30% and 41% of our
total Lend-X Technology revenue.
No customer accounted for greater than 10% of our accounts receivable balance
as of June 30, 2002 or 2001. Additionally, no customer accounted for more than
10% of our Lending exchange revenue in the quarters or six months ended June
30, 2002 or June 30, 2001.
INCOME TAXES
LendingTree has not generated taxable income for federal or state purposes to
date and therefore has not paid any federal or state income taxes since
inception. Utilization of our net operating loss carryforwards, which begin to
expire in 2011, may be subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended. We have provided a full valuation
allowance on the deferred tax asset, consisting primarily of net operating loss
carryforwards, due to the uncertainty regarding its realization.
FORWARD-LOOKING STATEMENTS AND CERTAIN RISKS
This quarterly report on Form 10-Q contains certain forward-looking statements
and information based on our beliefs as well as assumptions made by, and
information currently available to us. Many statements made in the 10-Q are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not
based on historical facts but are based on beliefs as well as assumptions made
by us and information currently available to us. The words "expects,"
"anticipates," "estimates," "intends," "believes," "plans" and similar
expressions are intended to identify forward-looking statements. These
statements include, among others, those relating to our belief that we will
have sufficient sources of liquidity to fund our operations through 2002; our
plans to reduce discretionary expenditures if our revenues do not grow as
anticipated or if we have a liquidity shortfall; our belief that our pending
litigation will not have an outcome that will have a material adverse effect on
our financial condition, cash flows or results of operations; our intention to
use the proceeds from our private placement of common stock for general
corporate purposes, including the cash payment of quarterly dividends to the
holders of our Series A Preferred Stock; our expectation that the impact of our
new program to identify loans that closed due to our transmissions that were
not reported to us in our normal reporting process will decrease in the future;
our belief that improvements in our key operating metrics and the growth in
online lending will more than offset decreases in our business caused by lower
levels of consumer refinance activity; our belief that our initiatives designed
to improve the rate at which loans close through our exchange will be
effective; our
35
expectation that if our mortgage close rates remain at or near current levels
that the higher transmission volume in the year to date period for 2002 as
compared to 2001 will result in higher closed mortgage loan revenue in the
third quarter of 2002 and compared to the same period of 2001; our expectation
that advertising costs will continue to represent a significant portion of our
operating expenses; our intention to continue to use cable television and
network radio in our core advertising strategy; our belief that we will be able
to draw more customers to our Exchange; and our belief that the costs
associated with our Realty Services Exchange segment will continue to decrease
as a percentage of Realty Services revenues. Our actual results could differ
materially from the results discussed in any of our forward-looking statements.
We are not undertaking to publicly update or revise any forward-looking
statement if we obtain new information or upon the occurrence of future events
or otherwise.
The forward-looking statements reflect our current views with respect to future
events and are subject to a number of risks, including, among others, the
following: risks related to our financial condition; risks related to our
markets and strategy; risks related to the Internet and our technology
infrastructure; risks related to legal and regulatory uncertainty; and risks
related to our stock price and corporate control.
Risks related to our financial condition include the following: our limited
operating history makes our business and prospects difficult to evaluate; we
have a history of losses; the long-term viability of our business model is
unproven and could fail; the estimates and judgments we use in preparing our
financial statements may be incorrect or need adjustment; our operating results
may be negatively impacted by fluctuations in interest rates; our quarterly
operating results are not an indication of our future results; we may not be
able to achieve our projected financial and operating results, which could
cause a decline in our stock price; and certain of our assets are subject to
encumbrances.
Risks related to our markets and strategy include the following: our future
success is dependent upon increased acceptance of the Internet by consumers and
lenders as a medium for lending; Lenders in our network are not precluded from
offering consumer credit products outside of our exchange; if our participating
Lenders do not provide competitive levels of service to our consumers, our
brand will be harmed and our ability to attract consumers to our Website will
be limited; we may not be able to manage our expanding operations effectively;
if we are unable to maintain our brand recognition or high levels of consumer
satisfaction, consumer and lender demand for our service may decrease; and our
business could suffer if we lose the services of Douglas R. Lebda, our Chief
Executive Officer.
Risks related to the Internet and our technology infrastructure include the
following: we may experience reduced visitor traffic, reduced revenue and harm
to our reputation in the event of unexpected network interruptions caused by
system failures; breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities; and failure to
protect our intellectual property rights could impair our ability to compete
effectively.
Risk related to legal and regulatory uncertainty include the following: we may
be subject to liability or legal claims relating to information that is posted
on our Website or on Websites linked to our Website; our failure to comply with
laws governing our service or material changes in the regulatory environment
relating to the Internet could have a material adverse effect on our business;
many states require us to obtain licenses to offer our products and we may not
be able to obtain or retain licenses in every state; some state regulations
impose filing obligations on some of our largest stockholders and customers, we
may be unable to obtain or maintain necessary licenses in these states for
reasons beyond our control, if any of these parties fail to comply with these
filing obligations; we may not be able to satisfy state or federal net worth or
bond requirements necessary to obtain or maintain required licenses; regulation
of the Internet is unsettled, and future regulations could inhibit the growth
of the Internet, decrease the number of visitors to our Website or otherwise
materially adversely affect our business; we may be limited or restricted in
the way we establish and maintain our online relationships by laws generally
applicable to our business; and we may be liable for damages resulting from
infringement of third parties' intellectual property rights.
Risks related to our stock price and corporate control include the following:
sales of substantial amounts of our common stock in the public market,
including shares issuable upon the conversion of shares of our Series A
Preferred Stock, could have an adverse impact on the market price of our common
stock; holders of our Series A Preferred Stock have greater rights and
preferences than our common shareholders; if our common stock price drops
significantly, we may be delisted from the NASDAQ National Market, which could
eliminate the trading market for our common stock; it may be difficult for a
third party to acquire us, which could depress our stock price; our executive
officers and directors and entities affiliated with them, whose interests may
differ from other shareholders, have the ability to exercise significant
control over us; the price of our common stock may be volatile; and agreements
with our creditors and preferred stockholders restrict our ability to pay
dividends.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On July 13, 2001, LendingTree and GE Capital Commercial Services, Inc. entered
into a loan and security agreement and revolving credit note. Under these
arrangements, borrowings will bear interest at the prime rate determined on the
last business day of the preceding calendar month. As of June 30, 2002 the
interest rate in effect for us was 4.75% and we had no borrowings outstanding
under this facility. With an assumed average borrowings outstanding of $2.0
million over a 12-month period, a 1.0% increase in the prime rate would result
in additional interest expense of approximately $20,000 during that period.
We currently hold no derivative instruments and do not earn foreign-sourced
income. All of our transactions occur in U.S. dollars and we do not have any
investments in foreign countries. Accordingly, changes in currency exchange
rates related to these types of transactions do not have a direct effect on our
financial position or results of operations.
We are subject to market risk due to the terms of our Series A Preferred Stock.
If we elect to pay dividends on our Series A Preferred Stock by increasing the
stated value per share, we will record an expense based on the fair value of
the underlying common stock into which the preferred shares are convertible.
For the quarter ended March 31, 2002, we recorded $1.4 million of dividend
charges related to the changes in the fair value of our common stock underlying
the Series A Preferred Stock. For the quarter ended June 30, 2002, we did not
record these additional charges as we elected to settle the quarterly dividend
obligation in cash rather than by an increase to the stated value. If, in the
future, we were to settle the dividend obligations by increasing the stated
value of the preferred stock, and if the market price of our common stock were
to stay above $3.50, we would continue to incur additional fair value charges.
If we continue to pay cash dividends, we would incur total dividend charges of
approximately $2.1 million during the next twelve-month period.
Additionally, our credit facility agreement with Freddie Mac requires that a
portion of the quarterly interest payments be in the form of warrants to
purchase our common stock at an exercise price of $.01 per share. The amount of
warrants to be issued will be calculated by dividing the amount of interest to
be paid in the form of warrants by $3.99. The amount of interest expense that
we will record will be based upon the estimated fair value of the warrants on
the date that they are issued. As of June 30, 2002, no amounts had been
borrowed under this facility and therefore no warrant-based interest charges
had been incurred.
37
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
On September 10, 2001, Block Financial Corporation, or Block, filed a complaint
in the United States District Court for the Western District of Missouri [Block
Financial Corporation v. LendingTree, Inc., Case Number 01-1007-CV-W-3],
against us, alleging that our financial card (credit card) qualification form
processing system infringes its U.S. Patent No. 6,014,645 entitled, "Real-Time
Financial Card Application System." The complaint seeks both monetary damages
in the form of a reasonable royalty and injunctive relief. On November 19,
2001, we filed an answer to the complaint denying infringement of the Block
patent. We also filed a counterclaim against Block seeking a declaratory
judgment of non-infringement and invalidity of the Block patent. The lawsuit is
in an early stage, and discovery is just beginning to get underway. We believe
that we have meritorious defenses to their claim and we do not believe that it
will have a material impact on our financial condition, cash flows or results
of operations.
We are involved in other litigation from time to time that is routine in nature
and incidental to the conduct of its business. We believe that the outcome of
any such litigation would not have a material adverse effect on our financial
condition, cash flows or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 16, 2002, we issued a total of 500,000 shares of common stock to a
group of three institutional and accredited investors in a private placement
exempt under Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder
for gross proceeds of $5.9 million. Allen & Company acted as placement agent
and received a fee of $237,600. We are using the proceeds for general corporate
purposes including the cash payment of dividends to the holders of our Series A
Preferred Stock. We filed a registration statement covering resales of the
common stock by investors on May 31, 2002 and this registration statement was
declared effective by the Commission on June 11, 2002.
During the six months ended June 30, 2002, we issued a total of 919,894 shares
of common stock upon the conversion of shares of our Series A Preferred Stock.
Such securities were acquired in a private placement transaction under Section
4(2) of the Securities Act of 1933. We received no cash proceeds upon such
conversions.
During the six months ended June 30, 2002, we issued a total of 282,372 shares
of common stock upon the exercise of outstanding warrants. Such securities were
acquired in a private placement transaction under Section 4(2) of the
Securities Act of 1933. We received cash proceeds totaling $45,000 upon payment
of the applicable exercise prices. We are using such proceeds for general
corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2002, we held our annual meeting of stockholders. At the meeting,
we elected two directors to serve until our 2005 annual meeting of stockholders
as follows:
DIRECTOR VOTES FOR VOTES AGAINST ABSTENTIONS
-------- ---------- ------------- -----------
Robert Kennedy 23,370,106 114,815 -
Daniel Lieber 23,369,099 115,822 -
At our 2002 annual meeting, our stockholders also ratified our selection of
PricewaterhouseCoopers LLP as independent accountants to examine our financial
statements for the fiscal year ending December 31, 2002. The votes on such
matter were as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS
---------- ------------- -----------
23,377,973 99,243 7,705
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
NUMBER DESCRIPTION
- ------- --------------------
99.1 Press Release Announcing our Second Quarter 2002 Financial Results
(B) REPORTS ON FORM 8-K:
On April 17, 2002, we filed a report on Form 8-K to report that we had entered
into definitive purchase agreements for the sale of 500,000 newly issued shares
of restricted common stock, at a purchase price per share of $11.88, to a group
of three institutional and accredited investors in a private placement for
gross proceeds of $5.9 million. We intend to use the net proceeds from this
private placement for general corporate purposes, including the cash payment of
quarterly dividends to the holders of our Series A Preferred Stock.
On April 24, 2002, we filed a report on Form 8-K to report that we had issued a
press release announcing our first quarter 2002 financial results and updating
our current financial guidance for the remainder of 2002.
39
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LENDINGTREE, INC.
Date: August 14, 2002 By: /s/ Keith B. Hall
--------------------------------------
Keith B. Hall, Senior Vice President,
Chief Financial Officer and Treasurer
40