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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 March 31, 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 offices) (Zip code)
(704) 541-5351
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(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 April 30, 2002 there were 20,672,484 shares of Common Stock,
$0.01 par value, outstanding, excluding 664,321 shares of treasury stock.
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LENDINGTREE, INC.
TABLE OF CONTENTS
PAGE
NUMBER
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PART I FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations
- Three months ended March 31, 2002 and March 31,
2001 (unaudited)
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001(unaudited)
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and March 31,
2001 (unaudited)
Consolidated Statement of Changes in Shareholders' Equity (Deficit)-
March 31, 2002 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
PRODUCTS MENTIONED IN THIS REPORT ARE USED FOR IDENTIFICATION PURPOSES ONLY AND
MAY BE TRADE NAMES OR TRADEMARKS OF LENDINGTREE, INC. OR THIRD PARTIES.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
LENDINGTREE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,325 $ 3,400
Restricted short-term investments 6,237 2,764
--------- ---------
Total cash and cash equivalents and restricted short-term investments 10,562 6,164
Accounts receivable, net of allowance for doubtful accounts 12,057 11,438
Prepaid expenses and other current assets 1,878 1,174
--------- ---------
Total current assets 24,497 18,776
Equipment, furniture and leasehold improvements, net 1,966 2,016
Software, net 2,202 2,854
Intangible assets, net 3,084 3,667
Other assets 543 618
--------- ---------
Total assets $ 32,292 $ 27,931
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,982 $ 4,508
Deferred revenue 1,297 2,013
Accrued incentive and other compensation 5,409 5,627
Accrued professional services and other fees 431 444
Accrued consumer promotional costs 1,269 1,619
Accrued other expenses 2,559 1,864
Short term borrowings 4,742 --
Current portion capital lease obligations 624 743
--------- ---------
Total current liabilities 20,313 16,818
Deposits by subtenants 126 145
Capital lease obligations 180 291
Commitments and contingencies (Note 7)
Mandatorily redeemable securities
Series A convertible preferred stock, $.01 par value, 8% cumulative,
6,885,715 shares authorized, 6,835,122 and 6,885,715 shares
issued and outstanding at March 31, 2002 and December 31, 2001, respectively 24,398 23,878
Shareholders' deficit:
Common stock, $.01 par value, 100,000,000 shares authorized,
20,323,208 and 19,907,034 shares issued at March 31, 2002
and December 31, 2001, respectively 203 199
Treasury stock (664,321 shares at March 31, 2002 and
661,996 shares at December 31, 2001, at cost) (4,206) (4,170)
Additional paid-in-capital 122,656 121,675
Accumulated deficit (127,776) (127,064)
Deferred compensation (1,261) (1,477)
Notes receivable from officers (2,341) (2,364)
--------- ---------
Total shareholders' deficit (12,725) (13,201)
--------- ---------
Total liabilities and shareholders' deficit $ 32,292 $ 27,931
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
LENDINGTREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2002 2001
-------- --------
(in thousands, except per share data)
Revenue:
Exchange $ 19,628 $ 11,244
Lend-X technology 1,640 1,012
-------- --------
Total revenue 21,268 12,256
-------- --------
Cost of revenue:
Exchange 2,914 3,036
Lend-X technology 320 450
-------- --------
Total cost of revenue 3,234 3,486
Gross profit:
Exchange 16,714 8,208
Lend-X technology 1,320 562
-------- --------
Total gross profit 18,034 8,770
Operating expenses:
Product development 743 1,085
Marketing and advertising 10,668 8,874
Sales, general and administrative 7,342 9,093
-------- --------
Total operating expenses 18,753 19,052
-------- --------
Loss from operations (719) (10,282)
Interest and other non-operating income 122 157
Interest expense, financing and other charges (115) (42)
-------- --------
Net loss (712) (10,167)
-------- --------
Accretion of mandatorily redeemable convertible preferred stock (169) (18)
Dividends on mandatorily redeemable convertible preferred stock (1,960) (55)
-------- --------
Net loss attributable to common shareholders $ (2,841) $(10,240)
======== ========
Net loss per common share - basic and diluted $ (0.15) $ (0.52)
======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 19,372 19,838
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2002 2001
-------- --------
($ in thousands)
Cash flows used in operating activities:
Net loss $ (712) $(10,167)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets -- 3
Depreciation and amortization 1,915 1,932
Provision for doubtful accounts 30 (14)
Amortization of deferred compensation 210 276
Amortization of deferred financing costs 27 --
Compensation charge related to officer note -- 852
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (649) 6
Prepaid expenses and other current assets (303) 278
Other assets 57 (643)
Accounts payable (526) (6)
Accrued expenses 437 (44)
Deferred revenue (716) 260
Deposits (18) (3)
-------- --------
Net cash used in operating activities (248) (7,270)
-------- --------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments -- (11,468)
Sales of short-term investments -- 14,991
Purchases of restricted short-term investments (10,432) (3,508)
Sales of restricted short-term investments 6,959 4,933
Investments in software (427) (41)
Purchases of equipment, furniture, and leasehold improvements (204) (103)
-------- --------
Net cash (used in) provided by investing activities (4,104) 4,804
-------- --------
Cash flows provided by financing activities:
Proceeds from sales of common stock and warrants
and exercise of stock options 742 --
Payment of capital lease obligations (230) (163)
Net short-term borrowings 4,742 --
Proceeds from issuance of preferred stock -- 11,342
Proceeds from repayment of officer note 23 --
-------- --------
Net cash provided by financing activities 5,277 11,179
-------- --------
Net increase in cash and cash equivalents 925 8,713
Cash and cash equivalents, beginning of period 3,400 2,666
-------- --------
Cash and cash equivalents, end of period $ 4,325 $ 11,379
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
LENDINGTREE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 2002
($ IN THOUSANDS)
(UNAUDITED)
COMMON STOCK
-----------------------
NUMBER OF TREASURY
SHARES AMOUNT STOCK
---------- ------ --------
Balance at December 31, 2001 19,907,034 $199 $(4,170)
Amortization of deferred compensation
Accrued dividends on Series A convertible preferred stock
Accretion of Series A convertible preferred stock
Repayment of an officer note received for option exercise
Cashless exercise of common stock warrants 2,236
Conversion of preferred stock to common stock 54,835 1
Deferred compensation adjustment for forfeited and amended options
Reissuance of treasury shares for employee stock purchase plan participants 6
Stock issued in lieu of cash compensation 40,848
Issuance of stock options to employee below fair market value
Exercise of common stock options 318,255 3
Stock option exercise with exchange of shares (42)
Other comprehensive loss:
Net loss
Total other comprehensive loss
---------- ---- -------
Balance at March 31, 2002 20,323,208 $203 $(4,206)
========== ==== =======
ADDITIONAL
PAID-IN ACCUMULATED DEFERRED
CAPITAL DEFICIT COMPENSATION
---------- ----------- ------------
Balance at December 31, 2001 $121,675 $(127,064) $(1,477)
Amortization of deferred compensation 210
Accrued dividends on Series A convertible preferred stock (513)
Accretion of Series A convertible preferred stock (169)
Repayment of an officer note received for option exercise
Cashless exercise of common stock warrants
Conversion of preferred stock to common stock 162
Deferred compensation adjustment for forfeited and amended options (39) 39
Reissuance of treasury shares for employee stock purchase plan participants (6)
Stock issued in lieu of cash compensation 322
Issuance of stock options to employee below fair market value 33 (33)
Exercise of common stock options 1,149
Stock option exercise with exchange of shares 42
Other comprehensive loss:
Net loss (712)
Total other comprehensive loss
-------- --------- -------
Balance at March 31, 2002 $122,656 $(127,776) $(1,261)
======== ========= =======
TOTAL
NOTES RECEIVABLE SHAREHOLDERS'
FROM OFFICERS DEFICIT
---------------- -------------
Balance at December 31, 2001 $(2,364) $(13,201)
Amortization of deferred compensation 210
Accrued dividends on Series A convertible preferred stock (513)
Accretion of Series A convertible preferred stock (169)
Repayment of an officer note received for option exercise 23 23
Cashless exercise of common stock warrants
Conversion of preferred stock to common stock 163
Deferred compensation adjustment for forfeited and amended options
Reissuance of treasury shares for employee stock purchase plan participants
Stock issued in lieu of cash compensation 322
Issuance of stock options to employee below fair market value
Exercise of common stock options 1,152
Stock option exercise with exchange of shares
Other comprehensive loss:
Net loss (712)
Total other comprehensive loss
------- --------
Balance at March 31, 2002 $(2,341) $(12,725)
======= ========
The accompanying notes are an integral part of these
consolidated financial statements
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.
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-X(SM), 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 150 banks, lenders and loan brokers ("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 local area. Our Realty Services Exchange is made up of approximately
7,000 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
for qualification forms that 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 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 150 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 March 31, 2002 and results of
operations and cash flows for the interim periods presented. The results of
operations for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the entire year.
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 is filed
with the Securities and Exchange Commission.
Use of 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 assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. We
base our estimates and judgments on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. On an
ongoing basis we evaluate our estimates and refine our judgments as actual
results and experiences develop. Significant estimates and judgments are
involved in the process of determining our Lend-X technology revenue
recognition, percentage complete under long-term contracts, the value and lives
of acquired intangible assets, accrual for incentive compensation, liabilities
for consumer promotional costs and the valuation of our common stock options
and warrants. Actual results could differ from those estimates.
Reclassifications
Certain comparative period amounts have been reclassified to conform to current
period presentation.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Capital Resources
As of March 31, 2002, we had approximately $4.4 million in cash and cash
equivalents and $6.2 million in restricted short-term investments. We believe
that these existing sources, the availability of existing revolving credit
facilities, the funds received from our April 2002 private placement (See Note
9, Subsequent Events), as well as cash generated from operations will be
sufficient to fund our operating and capital needs through 2002.
Although we have historically experienced significant revenue growth and we
plan to achieve positive net income and cash flows in 2002, the operating
results for future periods are subject to numerous uncertainties. There can be
no assurance that revenue growth will continue or that we will be able to
achieve or sustain profitability. Hence, our liquidity could be significantly
affected. However, if revenue does not grow as anticipated and if we are unable
to successfully raise sufficient additional funds through another manner,
management would reduce discretionary operating expenditures, including
advertising and marketing and certain administrative and overhead costs.
Failure to generate sufficient revenue or to reduce costs as necessary could
have a material adverse effect on our ability to continue as a going concern
and to achieve our business objectives.
Restricted Investments
As of March 31, 2002, the $6.2 million of restricted short-term investments
included $6.0 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 and at
March 31, 2002 will cover approximately 2 months of our offline advertising
expenditures. Disbursements from the escrow account are made no sooner than one
month following the invoice date for the expenditures. We receive all income
earned on funds held in this investment account.
Advertising Expenses
Advertising expenses consist of certain direct expenses, including television,
radio, outdoor advertising campaign costs and affiliate and partner marketing
fees, as well as certain indirect expenses, such as agency fees and production.
We expense advertising costs as incurred. For the quarter ended March 31, 2002
and 2001, advertising expenses were $10.2 million and $8.4 million,
respectively.
Segment Reporting
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 March 31, 2002 and 2001, as well as a
reconciliation to consolidated net loss.
For the Quarter Ended March 31, 2002
Exchanges
------------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
-------- -------- --------- ---------- ------------
Revenue $18,319 $1,309 $19,628 $1,640 $21,268
Cost of revenue 2,045 869 2,914 320 3,234
------- ------ ------- ------ -------
Gross profit $16,274 $ 440 $16,714 $1,320 18,034
------- ------ ------- ------ -------
Reconciling items:
Operating expenses 18,753
-------
Loss from operations (719)
-------
Interest income 122
Interest expense (115)
-------
Consolidated net loss $ (712)
=======
For the Quarter Ended March 31, 2001
Exchanges
-----------------------
Lending Realty Total Lend-X
Exchange Services Exchanges Technology Consolidated
-------- -------- --------- ---------- ------------
Revenue $10,496 $748 $11,244 $1,012 $ 12,256
Cost of Revenue 2,505 531 3,036 450 3,486
------- ---- ------- ------ --------
Gross Profit 7,991 217 8,208 562 8,770
------- ---- ------- ------ --------
Reconciling items:
Operating expenses 19,052
--------
Loss from operations (10,282)
--------
Interest income 157
Interest expense (42)
--------
Consolidated net loss $(10,167)
========
Supplemental Cash Flow Information
In both the quarters ended March 31, 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):
Quarter Ended
March 31,
--------------------
2002 2001
------ ----
Notes receivable issued to officers to acquire
stock in the company $ -- $700
Accretion of mandatorily
redeemable preferred stock $ 169 $ 18
Dividends on convertible preferred
stock $1,960 $ 55
Issuance of warrants in conjunction with
credit facility agreements $ -- $148
Conversion of preferred stock to common stock $ 163 $ --
Receivable from stock option exercises $ 410 $ --
Intangible Assets
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. SFAS No. 141 also establishes the
criteria for recognition of intangible assets separately from goodwill. The
implementation of SFAS No. 141 did not have a material impact on our results of
operations, financial condition or cash flows.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This new standard, 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 at March 31, 2002 and December
31, 2001:
As of March 31, 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 $3,615 $6,472 $3,080
Affinity program partner contracts 2 - 3.75 years 544 317 544 269
------ ------ ------ ------
Total $7,016 $3,932 $7,016 $3,349
====== ====== ====== ======
Amortization expense of our intangible assets was $0.6 million in both of the
quarters ended March 31, 2002 and March 31, 2001. Estimated amortization
expense for the years ended December 31, 2002, 2003, 2004, 2005 and 2006 is
$2.3 million, $1.3 million, less than $0.1 million, $0 and $0, respectively.
NOTE 4 - 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. As of March 31, 2002, we had eligible receivables
of approximately $5.9 million. We also pay GE a fee equal to 0.115% of the
eligible accounts receivable arising during the term of the facility.
As of March 31, 2002, we had borrowings of approximately $4.7 million
outstanding under the GE credit facility. Our borrowings have been used to fund
advance purchases of media advertising (cable television, network television
and spot radio) and for general working capital needs. The funds for the
advance purchases were put into the escrow account we set up with our
advertising agency and are included on our balance sheet as restricted
short-term investments.
Our agreement with GE contains certain financial and other covenants. We were
in compliance with all covenants contained in this agreement as of March 31,
2002.
NOTE 5 - 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 issued and sold 200,000 shares of Series A Preferred
Stock to our Chief Executive Officer, funded by a promissory note to us, for
$0.7 million.
In conjunction with the March 2001 closing of the Series A Preferred Stock
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 have 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.
As a result of these dividends, for the quarter ended March 31, 2002, we have
increased the carrying value of the Series A Preferred Stock on our balance
sheet by approximately $0.6 million. We have 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. In total we recorded $2.0 million of dividend
charges for the quarter ended March 31, 2002. If we were to continue to settle
the dividend obligations by increasing the stated value of the preferred stock
and if the market price of our common stock remains above $3.50 per share, we
will continue to incur these 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 (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 ended March 31, 2002, we recorded approximately $0.2 million of
accretion charges.
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 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 $3.79 and was calculated as
the sum of the then applicable stated value per share plus all accrued but
unpaid dividends at the conversion date. The conversion price was the initial
purchase price of $3.50. As of March 31, 2002, there were 6,835,122 shares of
Series A Preferred Stock outstanding.
NOTE 6 - DEFERRED COMPENSATION
As of March 31, 2002, we have approximately $1.3 million of deferred
compensation recorded on our balance sheet primarily related to options granted
below fair market value in late 1999 and early 2000. In the quarter ended March
31, 2002, we have
adjusted the balance of deferred compensation to reflect forfeited options. We
are amortizing the deferred compensation to expense over the options' four-year
vesting periods. For both quarters ended March 31, 2002 and 2001, we recorded
compensation expense of $0.2 million related to these option grants.
NOTE 7 - 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 March 31,
2002, we were in compliance with this covenant and the balance of this lease
was approximately $0.5 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 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 this agreement as of March 31, 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.
A third party had opposed the federal registration of LendingTree's Lend-X
mark. In March 2002 we reached an agreement with the third party on this matter
and have agreed to pay less than $0.1 million in three installments in exchange
for all rights to the Lend-X mark and certain related domain names previously
owned by the third party. The third party has also withdrawn its objection to
our trademark registration for the name "Lend-X". We have accrued for this
settlement in our consolidated financial statements for the quarter ended March
31, 2002.
We are involved in litigation from time to time that is routine in nature and
incidental to the conduct of our business. We believe that the outcome of any
such litigation would not have a material adverse effect on our financial
condition, cash flows or results of operations.
NOTE 8 - NET LOSS PER COMMON SHARE
We compute net loss per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"). Under the
provisions of SFAS No. 128 basic net loss per common share is computed by
dividing net loss available to common shareholders by the weighted average
number of common shares outstanding. Diluted net loss available to common
shareholders is computed by dividing net loss by the weighted average number of
common shares and dilutive potential common shares then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants and shares issuable upon conversion of convertible preferred stock.
The calculation of net loss per common share for quarters ended March 31, 2002
and 2001 does not include 3.0 million and 0.8 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
quarters ended March 31, 2002 and 2001 does not include 7.4 million and 6.9
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 9 - SUBSEQUENT EVENTS
In April 2002 we entered into definitive 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 have agreed to file a registration
statement covering resales of the common stock by investors within 45 days of
the closing. 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.
In April 2002, we paid out approximately $2.5 million in incentive compensation
amounts due employees. We will pay out the remaining $2.0 million of 2001
incentive compensation in July 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
LendingTree, Inc. was incorporated in the state of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998.
We are 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-X(SM), 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 150 banks, lenders and loan brokers ("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 local area. Our Realty Services Exchange is made up of approximately
7,000 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
for qualification forms that 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 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 150 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.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002 COMPARED TO
QUARTER ENDED MARCH 31, 2001
As described above, our business is focused on two primary activities,
operating our Exchanges 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 is a third operating segment. Management regularly reviews the
revenue, cost of revenue and gross margins for these segments. No other
operating expenses, measure of profitability or assets or liabilities are
consistently segregated or allocated into these segments for regular review by
management or in determining allocations of resources. There are no
inter-segment revenues.
OVERALL EXCHANGE BUSINESS
Exchange Revenue
For the quarter ended March 31, 2002, revenue from our Exchanges was
approximately $19.6 million, or 92% of our total revenue, compared with
approximately $11.2 million, or 92% of total revenue, for the same period of
2001. Our Lending Exchange segment accounted for approximately 93% of our
Exchange revenue in both quarters ended March 31, 2002 and 2001. Our Realty
Services segment accounted for 7% of our Exchange revenue in both quarters
ended March 31, 2002 and 2001. See details by segment below.
Exchange Gross Profit
For the quarter ended March 31, 2002, the gross profit from our Exchanges was
$16.7 million, or 85.2% of exchange revenue, compared to $8.2 million or 73.0%
of exchange revenue for the quarter ended March 31, 2001, an increase of over
100%. Our Lending Exchange segment contributed to $8.3 million of the increase
in gross profit from the quarter ended March 31, 2001. We attribute this
increase in gross profit primarily to the scalability of our Lending Exchange
business model. Our Realty Services segment added approximately $0.2 million of
the increase.
LENDING EXCHANGE SEGMENT
Lending Exchange Revenue
Lending Exchange revenue increased approximately $7.8 million to $18.3 million
in the quarter ended March 31, 2002 from $10.5 million in the quarter ended
March 31, 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 resulting from one discrete qualification
form. A discrete qualification form can be transmitted to more than one lender
generating multiple transmit fees for the same form.
Our business model has demonstrated revenue growth for the Lending Exchange
both in periods of rising and falling interest rates. In periods when rates
have declined, we have experienced an increase in the volume of consumers
completing loan requests on our Website, particularly consumers looking to
refinance existing debt. Conversely, in periods of rising interest rates, we
have seen lenders on our network focus more aggressively on the qualification
forms we send them as volume from their traditional channels decreases. This
has increased our transmit rates and our average number of transmits per
qualification form. Additionally, as interest rates increase, consumers have a
greater incentive to receive multiple, competitive loan offers to ensure they
are finding the loan best suited for them. Looking forward, we believe that
improvements in these key operating metrics and the rate of growth in online
lending will more than offset decreases caused by lower levels of consumer
refinance activity.
The table below illustrates several key components of our Lending Exchange
revenue for the quarters ended March 31, 2002 and 2001.
Quarter Ended March 31, 2002 Quarter Ended March 31, 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 $ 9,256 143 395 13 $ 4,776 158 332 6
Home Equity 6,485 75 216 16 3,316 48 149 9
Auto, Personal, Credit Card 1,591 164 358 28 2,194 138 214 49
All Other Exchange Fees 987 210
------- --- --- -- ------- --- --- --
Total Lending Exchange $18,319 382 968 57 $10,496 344 695 64
======= === === == ======= === === ==
Mortgage revenue increased by $4.5 million, or 94%, to $9.3 million in the
quarter ended March 31, 2002 from $4.8 million in the quarter ended March 31,
2001. For the quarters ended March 31, 2002 and 2001, mortgage revenue
accounted for 51% and 46%, respectively, of our Lending Exchange revenue.
Although discrete transmission volume for mortgages decreased by approximately
9% in 2002 (as is shown in the table above), our multiple transmission volume
increased 19% allowing us to generate more transmit fees from fewer
qualification forms. This reflects both the greater willingness of lenders to
find low-cost business in a post-refinance boom period as well as the expanding
size of our lender network. In addition, an increase in our transmit fee
pricing from $8.00 to $9.00 in November 2001 resulted in a $0.4 million
increase in transmit fee revenue this quarter.
The number of closed mortgage transactions increased over 100% to 13,000
closings in the quarter ended March 31, 2002 from 6,000 closings in the same
period of 2001. Due to the typical lag between completion of a qualification
form and closing of a loan, we attribute the increase in closings to more
completed qualification forms and transmission volume in the fourth quarter of
2001 as compared to the fourth quarter of 2000. We believe that this increase
was due to the lower interest rate environment in 2001, the effectiveness of
our advertising and the expanded use of the Internet as a means to find a loan.
This volume increase as well as a 9% increase in our mortgage close rates and
our November 2001 pricing change for mortgage closings from a $400 flat fee to
a tiered structure, resulted in a $0.6 million increase in mortgage closed-loan
fees this quarter.
Home Equity revenue increased approximately $3.2 million, or 95%, to $6.5
million in the quarter ended March 31, 2002 from $3.3 million in the quarter
ended March 31, 2001. For the quarters ended March 31, 2002 and 2001, home
equity revenue accounted for 35% and 32%, respectively, of our Lending Exchange
revenue. Home equity discrete transmission volume increased by approximately
56% and multiple transmission volume increased by approximately 45%. We
attribute these increases, in part, to our new advertisements focusing on and
targeting our home equity product. We also have seen an increase in home equity
demand as the demand for mortgage refinancings has subsided. In addition, the
number of closed home equity transactions increased by 78% to 16,000 closings
in the quarter ended March 31, 2002 from 9,000 closings in the same period of
2001. The volume increase, as well as our November 2001 pricing change for home
equity closings from $250 to $275, resulted in increased closed-loan fees this
quarter.
Auto, Personal and Credit Card products accounted for approximately 9% of our
Lending Exchange revenue in the quarter ended March 31, 2002 and approximately
21% in the quarter ended March 31, 2001. This was a decrease of approximately
$0.6 million from period to period. This decrease can primarily be attributed
to lower revenue generated from our credit card product. This decrease reflects
recent high default rates in the sub prime credit card segment. The default
rates caused our credit card providers to accept fewer qualification forms from
higher risk customers and caused some of our credit card providers to disengage
from our exchange.
All Other Lending Exchange Fees, as shown in the table above, increased by
approximately $0.8 million to $1.0 million in the quarter ended March 31, 2002
compared to $0.2 million in the same period of 2001. The increase can primarily
be attributed to fees that we earned from lending transactions involving
arrangements with third-party membership programs, such as Delta's Skymiles,
USAirways Dividend Miles, Continental Airlines One Pass Miles, Northwest
Airlines World Perks and Costco Wholesale, which allow us to provide lending
services to their members. We provide the loan transmits, completed by the
third-party member, to selected Lenders and earn a fee from the Lender for each
loan that closes. We have also generated
more revenue as a result of new partnerships with other online businesses that
offer various complementary products to our customers through their Websites.
In order to continue to generate increasing Lending Exchange revenue, we have
implemented several significant initiatives aimed at improving the rate at
which loans close through our exchange. An ongoing initiative has been to add
to the number and variety of Lenders on our exchange, thus increasing capacity
and our ability to handle different types of loan requests. At March 31, 2002
we had 163 participating Lenders on our exchange compared to 117 participating
Lenders at March 31, 2001. Additionally, we have begun offering several new
tools to enable our Lenders to process qualification forms and close loans more
efficiently, including automation tools and benchmark studies. We have also
utilized several closed-loan incentives, including gift certificates and other
payments to reward borrowers for closing loans through our network of Lenders.
Lending Exchange Cost of Revenue and Gross Profit
Lending Exchange costs of revenue decreased by $0.5 million, or 18%, to $2.0
million in the quarter ended March 31, 2002 from $2.5 million in the quarter
ended March 31, 2001, while our Lending Exchange revenue grew approximately 75%
over the same period. 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, as well as decreased credit-scoring fees and
direct costs to third parties for referring consumers to our Website. This
resulted in a gross profit for the Lending Exchange segment of $16.3 million,
or 88.8%, for the three months ended March 31, 2002. This is an $8.3 million
improvement from the same period in 2001, with gross profit of $8.0 million, or
76.1%.
REALTY SERVICES SEGMENT
Realty Services Revenue
Realty Services revenue increased to $1.3 million in the quarter ended March
31, 2002 from $0.7 million in the same period of 2001. This $0.6 million
increase is due to a higher number of closed transactions in the quarter.
Realty Services transmission volume increased approximately 25% to 20,000 in
the quarter ended March 31, 2002 from 16,000 in the quarter ended March 31,
2001. Realty Services closed transactions was 610 in the quarter ended March
31, 2002 compared to 349 in the same period of 2001, a 75% increase. We have
grown this business by increasing our marketing efforts and adding to the
number of real estate professionals participating in our exchange.
Realty Services Cost of Revenue and Gross Profit
Realty Services cost of revenue increased approximately $0.3 million, or 64%,
from the quarter ended March 31, 2001 compared to the same period in 2002. This
increase is primarily a result of an increase in the number of closed Realty
Services transactions that lead to more incentives and promotional payments
made directly to consumers for using our services. Realty Services gross profit
and gross profit percentage improved in first quarter 2002 from the same period
of 2001. Gross profits were $0.4 million, or 33.6%, and $0.2 million, or 29.0%,
in the quarters ended March 31, 2002 and 2001, respectively. We have recently
decreased the incentive amounts offered to realty consumers and we anticipate
that costs will continue to decrease as a percentage of Realty Services
revenue.
LEND-X TECHNOLOGY SEGMENT
Lend-X Technology Revenue
Lend-X Technology revenue totaled $1.6 million, or 8% of our revenue, for the
quarter ended March 31, 2002 compared to $1.0 million, or 8% of revenue for the
same period of 2001. The growth in Lend-X Technology revenue is the result of
several new customizing, licensing and hosting contracts that have been entered
into since the first quarter of 2001. These new arrangements typically contain
certain up-front fees that are recognized as revenue over the expected term of
the arrangement. For the quarter ended March 31, 2002, two customers accounted
for 56% and 16%, respectively, of our total Lend-X Technology revenue. For the
quarter ended March 31, 2001 these same two customers accounted for 32% and 20%
of our total Lend-X Technology revenue. Additionally, some of our Lend-X
arrangements provide for transactional exchange revenue derived from volume
from these third party sites that have been enabled by our technology.
Lend-X Technology Cost of Revenue and Gross Profit
For the quarter ended March 31, 2002, Lend-X Technology gross profit was $1.3
million, or 80.5% of Lend-X Technology revenue, compared to $0.6 million, or
55.5% of Lend-X Technology revenue, for the quarter ended March 31, 2001.
Costs of revenue associated with Lend-X Technology are principally employment
costs related to customizing and/or implementing Lend-X for third parties, as
well as ongoing server costs related to hosting Lend-X for these companies.
These costs decreased approximately $0.1 million in the quarter ended March 31,
2001 compared to the quarter ended March 31, 2001 due to less labor-intensive
consulting and implementation projects in the quarter ended March 31, 2002.
Total Company Operating Expenses
Product development expense was approximately $0.7 million for the quarter
ended March 31, 2002 compared to $1.1 million for the quarter ended March 31,
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, purchased software and consulting
costs. Compensation costs accounted for 92% of product development expense for
the quarter ended March 31, 2002 and 2001. The decrease in expense is primarily
due to $0.3 million more capitalized technology department employment expenses
in the quarter ended March 31, 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 versus system maintenance and customizing our software for
customers in the first quarter of 2002 as compared to the same period in 2001.
Marketing and advertising expenses of $10.7 million were approximately 50% of
our total revenue in the quarter ended March 31, 2002 compared to $8.9 million,
or 72% of our total revenue, in the quarter ended March 31, 2001. Management
monitors our variable marketing cost and contribution margin per transmitted
qualification form as key measures of our advertising efficiency. The table
below illustrates these key measures for the quarters ended March 31, 2002 and
2001.
Quarter Ended
March 31,
----------------------
2002 2001
------ ------
Exchange revenue per transmit $47.93 $30.80
Variable marketing cost per transmit 23.49 20.98
Cost of revenue per transmit 5.21 6.83
------ ------
Contribution margin per transmit $19.23 $ 2.99
====== ======
As can be seen in the table above, our exchange revenue per transmit increased
approximately 56% while our variable marketing costs per transmit increased
only 12%. The substantial improvement in our contribution margin per transmit
from first quarter 2001 compared to first quarter 2002 primarily reflects the
scalability of our Exchange. During much of 2001 and in the first quarter of
2002, our focus has been on maintaining and building on the high-level of
awareness for our brand. We have been able to improve on the cost-effectiveness
of our advertising by selecting cable television as a primary medium and
expanding our advertisements to include home equity and auto-specific messages.
Sales, general and administrative expenses for the quarter ended March 31, 2002
decreased to 35% of total revenue, or $7.3 million, from 74% of total revenue,
or $9.1 million in the quarter ended March 31, 2001. The most significant
reason for this $1.8 million decrease was lower overall compensation expense in
the first quarter 2002 compared to the same period in 2001. The following
describes the components of compensation expense that contributed to the
decrease from quarter to quarter:
- Our 2001 incentive compensation was estimated and accrued throughout
2001 based on an incentive compensation plan that was designed such
that a portion of each employee's bonus was based on our financial
performance against pre-established targets and a portion was based on
the employee's personal performance against goals established with
their manager. The plan was designed to allow for proportionate
increases in employee's bonuses when company performance exceeded
targets.
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 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.
For 2002, the incentive compensation plan caps bonus payouts. This
limitation, coupled with more challenging financial targets for 2002,
has resulted in a bonus accrual that was $0.7 million lower for the
quarter ended March 31, 2002 compared to the same period in 2001.
- Another $0.8 million of the decrease in compensation expense was due
to non-cash compensation expenses related to net charges taken in the
quarter ended March 31, 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 March 31, 2002.
- Partially offsetting these decreased costs were employee salary and
benefits compensation costs that were approximately $0.3 million
higher in the quarter ended March 31, 2002 as compared to the quarter
ended March 31, 2001. These increased costs were primarily the result
of 16 more employees at March 31, 2002 compared to March 31, 2001. We
had 237 employees at March 31, 2002 and 221 employees at March 31,
2001.
Interest and Other Non-Operating Income
Interest and other non-operating income consists primarily of interest earned
on cash and cash equivalents and restricted short-term investments. Interest
income was approximately $0.1 million in the quarter ended March 31, 2002 and
$0.2 million in the quarter ended March 31, 2001.
Interest Expense, Financing and Other Charges
Interest expense, financing and other charges were approximately $0.1 million
for the quarter ended March 31, 2002 and less than $0.1 million for the quarter
ended March 31, 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.
Through 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 dividends, for the quarter ended March 31, 2002, we have
increased the carrying value of the Series A Preferred Stock on our balance
sheet by approximately $0.6 million. We have 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. Thus,
for the quarter ended March 31, 2002, we recorded a total of $2.0 million of
dividend charges. For the quarter ended March 31, 2001, we recorded a total of
$0.1 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 quarters
ended March 31, 2002 and 2001, we recorded approximately $0.2 million and less
than $0.1 million, respectively, of accretion charges.
Other Information
For the quarters ended March 31, 2002 and March 31, 2001 our net losses were
$0.7 million and $10.2 million, respectively. Our net losses included non-cash
compensation charges of $0.2 million and $1.1 million, depreciation and
amortization of $1.9 million and $1.9 million, and net non-operating income of
less than $0.1 million and $0.1 million, respectively. Net income (losses)
excluding such items, which we refer to as EBITDA, were $1.4 million and $(7.2)
million for the quarters ended March 31, 2002 and 2001, respectively. Because
of the significance of these non-cash and one-time charges included in net
losses, we regularly review EBITDA as one measure or our operating performance.
EBITDA as determined by LendingTree is not a substitute for operating
performance measures under generally accepted accounting principles (GAAP) and
may be different from the presentation of financial information by other
companies. GAAP measures of operating performance are included in the
accompanying consolidated financial statements and are discussed elsewhere in
this Management's Discussion and Analysis section.
Net losses attributable to common shareholders, which includes accretion and
dividend charges related to our Series A Preferred Stock, were $2.8 million and
$10.2 million for the quarters ended March 31, 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 2002 we required $0.2 million of cash to
fund operations; such amounts were expended primarily for advertising,
expansion of the infrastructure and support personnel, and other working
capital needs. Since inception, we have incurred significant losses and have an
accumulated deficit of $127.8 million as of March 31, 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 March 31, 2002, we had approximately $10.6 million in cash, cash
equivalents and restricted short-term investments. As described below,
subsequent to March 31, 2002, we sold $5.9 million of common stock in a private
placement transaction.
Restricted cash at March 31, 2002 of $6.2 million primarily includes funds that
are maintained in an escrow account. This escrow account was established by us
and our advertising agency to maintain funds set aside by us for future
expenditures and services of the advertising agency. Disbursements from the
escrow account can only be made for advertising expenditures we have approved
in advance. At March 31, 2002, the balance in this escrow account will cover
approximately 2 months of our offline advertising 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.
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. Borrowings are limited to 90% of our
eligible accounts receivable and bear interest at the prime
rate. As of March 31, 2002 we had eligible receivables of
approximately $5.9 million and we had a $4.7 million balance
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 March 31, 2002,
we have not borrowed under this credit facility and
accordingly, have not paid any interest or issued any
warrants.
- An equity line whereby we may, at our discretion sell shares
of our common stock to an investor from time-to-time subject
to maximum sale limitations in any one monthly period, for up
to a total of $24 million during the term beginning March 6,
2001 and ending March 6, 2003. If we choose to drawdown the
equity line, the minimum amount of any drawdown is $0.1
million and the maximum amount is the greater of (i) $1.0
million or (ii) 20% of the average of the daily volume
weighted average price of our common stock for the twenty-two
(22) day trading period immediately prior to the date we
request a drawdown multiplied by the total trading volume of
the common stock for such period. Only one drawdown is
allowed in each period of 22 trading days beginning on the
date of the
drawdown notice. Subject to certain adjustments, the number
of shares to be issued on each settlement date will be a
number of shares equal to the sum of the quotients (for each
trading day within the settlement period) of (x) 1/22nd of
the investment amount and (y) the purchase price on each
trading day within the settlement period. As of March 31,
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.
- Additionally, in April 2002, we sold 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
for gross proceeds of $5.9 million. The purchase price per
share was $11.88, and the transaction closed on April 16,
2002. We intend to use the net proceeds for general corporate
purposes, including the cash payment of quarterly dividends
to the holders of our Series A Preferred Stock.
We believe that the existing cash and cash equivalents, restricted short-term
investments (including the proceeds received in our April 2002 private
placement discussed above), 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 through 2002. We
believe cash from operations will be generated from revenue growth resulting
from the continued growth in online-lending, expansion of our network of
Lenders and by more consumers utilizing our exchange. We expect to be able to
drive more consumers to our exchange by leveraging our existing high brand
awareness, 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.
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 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; 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; our operating results may be negatively impacted by
fluctuations in interest rates; our quarterly operating results are not an
indication of our future results; our quarterly operating results are not an
indication of our future results; and the guidance we provide to analysts may
prove to be incorrect; substantially all of our assets are pledged under
existing revolving credit arrangements and capital lease obligations; and we
may be required to collateralize the balance of one of our capital leases with
cash.
Risks related to our markets and strategy include the following: our future
success is dependent upon increased acceptance of the Internet by consumers and
lenders as a medium for lending; Lenders in our network are not precluded from
offering consumer credit products outside of our exchange; if our participating
Lenders do not provide competitive levels of service to our consumers, our
brand will be harmed and our ability to attract consumers to our Website will
be limited; we may not be able to manage our expanding operations effectively;
if we are unable to maintain our brand recognition, consumer and lender demand
for our service may decrease; and our business could suffer if we lose the
services of our Chief Executive Officer.
Risks related to the Internet and our technology infrastructure include the
following: we may experience reduced visitor traffic, reduced revenue and harm
to our reputation in the event of unexpected network interruptions caused by
system failures; breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities; and failure to
protect our intellectual property rights could impair our ability to compete
effectively.
Risk related to legal and regulatory uncertainty include the following: 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 have not obtained those licenses in every state; because some
state regulations impose filing obligations on some of our largest stockholders
and customers, if any of these parties fail to comply with these filing
obligations, we may be unable to obtain or maintain necessary licenses in these
states for reasons beyond our control; regulation of the Internet is unsettled,
and future regulations could inhibit the growth of the Internet, decrease the
number of visitors to our Website or otherwise materially adversely affect our
business; and we may be limited or restricted in the way we establish and
maintain our online relationships by laws generally applicable to our business.
Risks related to our stock price and corporate control include the following:
our Common Stock Purchase Agreement with Paul Revere and the issuance of shares
to Paul Revere thereunder may cause significant dilution to our shareholders
and may have an adverse impact on the market price of our common stock; 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 reduce the value of our current shareholders' investments; holders of our
Series A Preferred Stock have greater rights and preferences than our common
shareholders; we will continue experiencing dividend charges related to our
Series A Preferred Stock if the price of our common stock stays above $3.50 and
we are unable to or do not pay dividends on our Series A Preferred Stock in
cash; if our common stock price drops significantly, we may be delisted from
the Nasdaq National Market, which could eliminate the trading market for our
common stock; we may be unable to access all or part of our equity line
facility; it may be difficult for a third party to acquire us, which could
depress our stock price; and our executive officers and directors and entities
affiliated with them, whose interests may differ from other shareholders, have
the ability to exercise significant control over us.
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 March 31, 2002 the
interest rate in effect for us was 4.75% and we had $4.7 million of borrowings
outstanding under this facility. With an assumed average borrowings outstanding
of $5.0 million over a 12-month period, a 1.0% increase in the prime rate would
result in additional interest expense of approximately $50,000 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.
Dividends on our Series A Preferred Stock that are paid by increasing the
stated value will be recorded based on the fair value of the underlying common
stock into which the 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. If we were to continue to settle the dividend obligations by increasing
the stated value of the preferred stock and if the market price of our common
stock were to increase $2.00 per quarter for the next four quarters, we would
incur additional fair-value dividend charges of approximately $9.1 million
during that twelve-month period. If instead we elect to pay cash dividends, we
would incur total dividend charges of approximately $2.1 million during that
twelve-month period.
Additionally, our credit facility agreement with Freddie Mac requires that a
portion of the quarterly interest payments be in the form of warrants to
purchase our common stock at an exercise price of $.01 per share. The amount of
warrants to be issued will be calculated by dividing the amount of interest to
be paid in the form of warrants by $3.99. The amount of interest expense that
we will record will be based upon the estimated fair value of the warrants on
the date that they are issued. As of March 31, 2002, no amounts had been
borrowed under this facility and no warrant-based interest charges had been
incurred.
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.
A third party had opposed the federal registration of LendingTree's Lend-X
mark. In March 2002 we reached an agreement with the third party on this matter
and have agreed to pay less than $0.1 million in three installments in exchange
for all rights to the Lend-X mark and certain related domain names previously
owned by the third party. The third party has also withdrawn its objection to
our trademark registration for the name "Lend-X". We have accrued for this
settlement in our consolidated financial statements for the quarter ended March
31, 2002.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
NUMBER DESCRIPTION
------ -----------
None.
(B) REPORTS ON FORM 8-K:
On March 28, 2002, we filed a report on Form 8-K to report pursuant to Item 5
thereof (Other Events) that institutional investors acquired 2.75 million
shares of our common stock from two early investors who also signed agreements
not to sell additional shares of our stock for a period of 120 days.
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.
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: May 13, 2002 By: /s/ Keith B. Hall
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Keith B. Hall, Senior Vice President,
Chief Financial Officer and Treasurer