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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________ .
Commission File Number 000-29215
LENDINGTREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1795344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11115 Rushmore Drive
Charlotte, North Carolina 28277
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(Address of principal executive offices) (Zip Code)
(704) 541-5351
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(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the act: None
Securities registered pursuant to section 12(g) of the act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
herein, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting common equity held by
non-affiliates of the Registrant, based upon the closing sale price of common
stock on January 31, 2002 as reported on the NASDAQ National Market, was
approximately $88 million.
As of January 31, 2002 there were 19,296,939 shares of Common Stock,
$.01 par value, outstanding, excluding 661,996 shares of treasury stock.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be delivered to security
holders for the 2002 Annual Meeting of Stockholders to be held on April 24, 2002
are incorporated by reference into Part III of this Form 10-K.
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Forward-Looking Statements
This Annual Report on Form 10-K may contain certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended,
that represent our expectations or beliefs concerning future events or projected
financial results. Words such as "expect," "anticipate," "estimate," "intend,"
"believe," "plan" and similar expressions are used to identify these
forward-looking statements. Such forward-looking statements are about matters
that are inherently subject to risks and uncertainties. Factors that could
influence the matters discussed in certain forward-looking statements include
the timing and amount of revenue that may be recognized by us, continuation of
current expense trends, absence of unforeseen changes in our markets, continued
acceptance of our services and products and general changes in the economy. The
cautionary statements made in this Form 10-K should be read as being applicable
to all related forward-looking statements whenever they appear in this Form
10-K. Our actual results could differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the section
captioned "Factors That May Affect Future Results of Operations or Reported
Results" in Item 7 of this Form 10-K as well as those cautionary statements and
other factors set forth elsewhere herein.
Part I
Item 1. Description of Business
General Development of the Business and Overview
LendingTree, Inc. was incorporated in the state of Delaware on June 7,
1996 and commenced nationwide operations on July 1, 1998.
We are a lending exchange empowering consumers, lenders and related
service providers. We are not a lender; instead we attract consumers to our
Website through various forms of advertising and send their loan requests to the
network of banks, lenders and loan brokers ("Lenders") participating on our
exchange.
Our technology platform, Lend-X(SM), is the technology that powers our
Internet based lending exchange at www.lendingtree.com. Additionally, we have
also licensed the use of our Lend-X technology to other businesses and have
enabled them to create either private-labeled or co-branded exchanges on their
Websites.
Consumers begin the LendingTree process by completing a simple on-line
credit request (which we refer to as a "qualification form"). After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
scores are then automatically compared to the underwriting criteria of the more
than 140 Lenders participating on our lending exchange. Qualified consumers can
receive multiple loan offers on-line in response to a single credit request and
then compare, review, and accept the offer that best suits their needs. Lenders
can generate new business that meets their specific underwriting criteria at a
lower cost of acquisition than traditional marketing channels. Our lending
exchange encompasses most consumer credit categories, including mortgages, home
equity loans, automobile loans, credit cards, and personal loans. Additionally,
through our Website we also provide access to other Realty Services related to
owning, maintaining and buying and selling a home, including a network of real
estate brokers.
We earn revenue from the Lenders on our exchange which pay us fees for
qualification forms that meet their underwriting criteria and are transmitted to
them ("transmission fees"). Since a qualification form can be transmitted to
more than one lender, we may generate multiple transmission fees for the same
form. We also earn revenue for loans that the Lenders on our exchange close
with consumers that we referred to them ("closed-loan fees"). Additionally, in
most states, real estate brokers participating in our exchange pay us a fee when
consumers' requests that we transmit to them result in a purchase or sale of a
home ("realty services fees"). We refer to the aggregate of these fees as our
Exchange revenue.
We also license and host our Lend-X technology platform for use by
other businesses. This enables these businesses to create their own customized
co-branded or private-labeled lending exchanges. These exchanges, powered by
Lend-X, may be lender marketplaces or may provide access to the LendingTree
exchange with more
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than 140 participating Lenders. Through these Lend-X relationships, we can earn
revenue both from technology fees related to customizing, licensing and hosting
the third party exchange, as well as from transactional fees resulting from the
volume processed through such exchanges.
Industry Background
For Lenders, the traditional loan origination process is
paper-intensive, time-consuming, and usually accompanied by high fixed costs and
labor expense. This inefficient process often involves significant marketing and
origination costs.
For consumers, the traditional loan process is time-consuming, requires
completion of multiple forms, and can often be frustrating and confusing.
Consumers typically search through a variety of loan products from many
different lenders, apply to one lender at a time for that lender's offered
price, and then wait for that lender to approve or reject the application.
Competing online lending sites generally mirror the traditional loan origination
process. Consumers visit the Website, view a list of loan products, apply for
one product from one lender, and are either given an offer or rate quote or are
rejected by the lender. While the consumer proposition presented by online
lending Websites is the same as the traditional offline process, the business
models for online lending Websites generally fall into the following two
categories:
-- Lender/Broker Model. The operators of Websites such as
Mortgagebot.com and QuickenLoans and Ditech generate a large
portion of revenue in the same way as traditional lenders, from a
mark-up over their cost of capital, whether the source of capital
is a lender, secondary market purchaser, or warehouse line of
credit. In exchange for these mark-ups, the lender/broker
undertakes all of the document processing, verification, and
customer interaction. In addition, to the extent the
lenders/brokers fund originated loans with their own capital, they
are often directly exposed to interest rate risk, credit risk,
liquidity risk and must also effectively manage their loan
pipeline.
-- Referral Agent Model. The operators of Websites such as
Providian's GetSmart typically generate revenue by providing
referrals to lenders. Because referral agents typically do not
generate any revenue upon loan closings, there is little incentive
for these companies to ensure that lenders and consumers
consummate the loan transaction. Additionally, because referral
Websites do not offer the consumers multiple offers on their
sites, they are not able to continually give best practices and
pricing data to lender participants.
LendingTree believes that the inefficiencies of the traditional lending
process and the shortcomings of other online business models, combined with the
large and recurring nature of consumer loan demand, offer a substantial
opportunity for the exchange business model.
The LendingTree Process
The LendingTree process consists of the following steps:
- -- Credit Request. Consumers access our exchange at www.lendingtree.com or
sites enabled by Lend-X and select a loan product from our multiple loan
categories. Consumers complete a single qualification form for the selected
loan product with information such as income, assets and liabilities, loan
preferences and other data. Consumers also consent to our retrieval of
their credit report.
- -- Qualification Form Filtering and Transmission. Our filtering process
matches the consumer's qualification form data, credit profile, and
geographic location to the preset underwriting criteria provided by
participating Lenders. Lenders are able to modify their underwriting
criteria in real-time directly through a password-protected Website known
as our LenderWeb. Once qualification forms pass the filters, they are
transmitted to up to four Lenders whose lending criteria match that of the
consumers' profile.
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- -- Lender Evaluation and Response. Lenders evaluate and respond to the
qualification forms that pass their filters. This response takes place on
the LenderWeb or via automated interface technology that we have developed.
- -- Communication of Offer. Once a lender evaluates a qualification form,
renders a decision, and responds with an offer, our system automatically
notifies the consumer via e-mail and displays the offers on the Website
where the request originated. The e-mail contains instructions to return to
the Website and provides instructions directing the consumer to the Check
Status page where consumers can view and compare the terms of each offer
including: interest rate, closing costs, monthly payment amount, lender
fees and other information.
- -- Offer Acceptance. The consumer has the ability to accept, reject or request
more information about any particular loan offer. When the consumer selects
one of these options, our system automatically notifies the chosen lender
and the remainder of the process is conducted offline.
- -- Ongoing Consumer and Lender Support. We provide active email and telephone
follow-up and support to both Lenders and consumers during the loan
transaction process. This follow-up and support is designed to provide
technical support and increase overall satisfaction of the participants in
our exchange, as well as increase the percentage of consumers who accept
and close a loan from our lending exchange.
Lend-X
Lend-X is our online lending exchange technology that offers a fast,
adaptable and reliable online lending solution for lenders and non-lenders
alike, providing valuable access to our online lending exchange of more than 140
Lenders. We license our Lend-X technology to over 30 companies who create
lending exchanges using Lend-X on a private-label or co-branded basis to
leverage their own lender relationships or those that we have established.
The Lend-X technology platform is made up of the following integrated
components:
ConsumerWeb - Consumer interactions
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-- Consumer-tested online form with help tips
-- Resource center with more than 100 pages dedicated to
consumer education
-- Cross-sell opportunities
-- Online communication of offers
-- Customer care / call center support
-- Automated email tools and customer surveys
Automated Decision Engine - Product and pricing
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-- Product and pricing configuration for automated offers
-- Offer conditions and rules-based closing costs
-- Credit-pull capability
Exchange Platform - System integration
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-- Interfacing to connect front-end sources and back-end
systems
-- Routing capability based on loan request and business
model
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LenderWeb - Lender interactions
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-- Lead management tools
-- Point of sale tools
-- Configuration of workflow, product and pricing, and
administrative functions
-- Reporting capability
The benefits to our Lend-X clients include:
- -- Incremental Revenue. Lend-X offers lenders the ability to cross-sell
lending products to a wider consumer base and non-lenders to utilize Lend-X
and LendingTree's services to access a new market place.
- -- Lower Upfront Cost. Using our Lend-X proprietary technology can result in
lower upfront cost for our clients than if they developed a web-based
lending exchange themselves. As companies seek to develop proprietary
Internet capabilities, Lend-X can meet their needs in a more cost-effective
and scalable manner.
- -- Reduced Technology Obsolescence. Lend-X is continually updated as new
technologies develop. Companies that use Lend-X can take advantage of these
improvements and maintain the latest technology.
- -- Multi-lender Capability. We believe that financial institutions will adopt
a multi-lender approach over time. Lend-X facilitates transactions between
financial institutions. A multi-lender approach not only increases consumer
choice, but also provides additional transaction revenue to the Lend-X
customer.
- -- Time to Market Advantage. Because our Lend-X product typically runs in an
application service provider environment, a company can have a Website up
and running in as little as two weeks. This gives a valuable time-to-market
advantage compared to other solutions.
- -- Robust, Scalable Technology. Lend-X clients need to process significant
transaction volume. Lend-X was designed, and has proven its ability to
handle significant volume and a wide range of products.
- -- Access to Market Information. We provide Lend-X clients with access to a
comprehensive data warehouse and real-time reporting capabilities.
Additionally, we provide Lend-X clients with the benefits of our experience
and knowledge of the Internet lending arena.
Customers
LendingTree Exchange Customers
- ------------------------------
Our on-line exchange offers consumers the opportunity to obtain the
loan products and other services listed below. We do not charge consumers a fee
to use our services and our network of Lenders and real estate brokers ("our
customers") pay us fees for the transmitted qualification forms, closed loans or
closed real estate transactions.
As of December 31, 2001:
-- Home Mortgage. LendingTree had 95 Lenders providing home mortgage
loans.
-- Home Equity. LendingTree had 54 Lenders providing home equity
loans.
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-- Automobile Loans. LendingTree had 12 Lenders providing automobile
loans.
-- Credit Cards. LendingTree had 9 credit card issuers.
-- Personal Loans. LendingTree had 5 Lenders providing personal
loans.
Some Lenders provide more than one type of loan product through our
exchange. Accordingly, the sum of the Lenders by product category above exceeds
the total number of Lenders on our exchange.
In addition to these loan products, LendingTree offers other services
to our consumers:
-- Real Estate Services. We refer consumers from our exchange or
various third party sites to participants in our network of real
estate agents located in most states. As of December 31, 2001, we
had relationships with approximately 650 real estate brokerages
representing over 2,600 real estate offices to support referrals
supplied by LendingTree.
-- Other Products and Services. LendingTree also has other marketing
arrangements with a variety of providers that offer home ownership
and maintenance related products and services.
For the years ended December 31, 2001, 2000 and 1999, Exchange revenue
was 90%, 89% and 88% of our total revenue, respectively.
Lend-X Technology Customers
- ---------------------------
We have over 30 Lend-X technology customers, that are lenders or other
businesses that have created a loan marketplace using Lend-X on a private-label
or co-branded basis. These businesses leverage their own lender relationships or
those that LendingTree has established. We also perform certain other services
for some of our Lend-X technology customers. In these transactions, we typically
receive a basis point fee from the lender.
Revenue from sales of Lend-X technology represented $6.5 million (or
10% of total revenue) in 2001, $3.3 million (or 11% of total revenue) in 2000
and $0.9 million (or 12% of total revenue) in 1999.
Reference is made to our consolidated financial statements, included in
Item 14 herein, for further disclosures about our business segments.
Geographic Information
All of our revenue is generated from transactions originating in the
United States. All of our fixed assets are located in the United States,
principally in Charlotte, North Carolina at our headquarters.
Competition
Online Lending Exchange:
As previously stated, LendingTree operates a unique lending exchange,
matching the on-line requests of borrowers with up to four Lenders on
our network. The primary competitive factors for the exchange model are
as follows:
-- Brand awareness: To be competitive as an exchange, competitors
must have the ability to attract consumer demand in high volumes.
Competitors will need to make significant investments to build and
maintain a compelling brand that will compete against
LendingTree's established brand.
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-- Lender network: In order to provide value to prospective
borrowers, a competitor must create strategic alignment with a
critical mass of lenders to fulfill consumer demand. This takes
significant investments in time and resources and will require
learning about lending practices both on-line and through off-line
channels.
-- Online relationships: - access to consumers from other major
portals or Internet sites is essential for developing market
share;
-- Scalable technology: - infrastructure that integrates easily with
lenders and can adapt to support extended product offerings; and
-- Ease of use and convenience for consumers and lenders.
Our success depends upon capturing and maintaining a significant share
of consumers who obtain loans through the Internet. In order to do this, we must
continue to build on our first mover advantage, maintain brand awareness among
consumers and lenders, expand our network of Lenders, establish additional
Lend-X relationships, and continually upgrade our technology. Many of our
current competitors, however, have longer operating histories, larger customer
bases, and significantly greater financial, technical, and marketing resources
than we do. In addition, participants in other areas of the financial services
industry may enter the consumer loan marketplace.
We believe that our primary competition in online lending are
traditional lending institutions developing their own on-line lending channels
(a "Click and Mortar" approach). Established entities such as JPMorgan Chase,
GMAC and CountryWide have entered the online lending business as a way to
diversify their revenue streams, maintain growth and broaden their appeal to a
wider base of consumers. These companies do not operate a true exchange, rather
they are set up to process, close, and fund the loan as a stand-alone lender.
The single-lender model enables lenders with large brand names and established
customer bases to attract consumers to their own web site, creating potential
for efficient loan acquisition and processing. However, because the channel is
usually small as compared to the lender's traditional channels, service
standards may lag, and consumers may not receive a differentiated experience.
Because the Internet consumer is expecting a faster, more convenient experience,
and because other lending institutions are easily accessible via the Internet,
click and mortar competitors must refine their sales and fulfillment processes
to be effective. Also, they must resolve substantial channel conflict issues to
price the channel attractively, and large lenders in particular must resolve
internal barriers in order to distribute consumer leads to the right internal
departments and ensure appropriate follow-up. Like traditional channels, the
model exposes the lenders to interest rate risk, credit risk and liquidity risk.
Certain products such as personal loans and credit cards are particularly prone
to adverse selection, requiring stringent underwriting to manage risk.
Additional competition comes from lending Websites, including
Mortgagebot.com, Quicken Loans, and Ditech. These lenders originate the bulk of
their loans via their Websites, and are considered "e-lenders" and can also be
lenders on our exchange. In addition, some online financial services companies,
including the online brokerages and Internet banks, have extended consumer
products to include online lending. These companies typically operate a
consumer-branded website and attract consumers via online banner ads, key word
placement on search engines, partnering with affiliates and business development
deals with other Internet properties, including major portals. They may also
attract consumers via off-line advertising. The e-lenders process, close, and
fund loans and thus are subject to credit risk. As compared to click and mortar
competitors, the on-line lenders do not need to invest heavily in branch-offices
and infrastructure and given sufficient scale, may provide a cost-effective and
convenient way for consumers to obtain a loan. To be successful, the on-line
lenders must build and maintain a brand, develop relationships with on-line
portals and other sources of potential consumers and build out loan product
offerings to appeal to a mass audience.
LendingTree's chief competitor in the Exchange space is GetSmart.
Similar to LendingTree, GetSmart refers consumers to up to three lenders. The
consumer gets the name, email address and phone number of the lender, plus a
link to their web site. At that point GetSmart exits the process. By contrast
the LendingTree consumer gets up to four real loan offers upon which to make a
decision. LendingTree works with both the borrower and lender to move the loan
to closure. The key consumer benefit provided by LendingTree's lending exchange
is choice,
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combined with empowerment, speed and convenience. Additionally, LendingTree can
match consumers across the credit spectrum with a wide array of loan products.
Lenders gain access to consumers usually at a lower cost of acquisition. As an
exchange, LendingTree is not exposed to interest rate risk or credit risk. The
fees a lender charges are also typically greater than the fees paid by
LendingTree's network of Lenders. The challenges for on-line lending exchanges
are that they must build and maintain a brand as well as a lender network. The
exchange providers must also build and maintain their own technology.
Online Realty Services Exchange:
Our primary competitors in the area of offering online real estate
referral services are Homestore.com, Realtor.com and Homegain.com. In each of
these exchanges, including our own, the consumer completes an on-line form and
is referred to a realtor that is participating in the network of realtors. These
Websites offer a variety of real estate related tools and helpful hints for the
consumer.
Lend-X technology:
We believe that our primary competitors in this area are:
-- Traditional software companies and custom website development
companies (e.g. American Management Systems, Alltel, Cybertek,
CMSI, etc.). Traditional software companies and custom website
development companies generally develop large-scale custom
websites for financial institutions. These companies are
competitive to LendingTree because of the in-depth relationships
that these companies have in place. The benefit of these
companies' offerings is that they are customized and developed
specifically for a single institution. The challenges for these
offerings compared to Lend-X is that they typically require
substantially longer lead times, cost significantly more, do not
have multi-lender linkage capability, and must be updated and
changed as technologies advance.
-- Emerging Internet Software Development Companies (e.g. Expede,
Framework, S-1, Digital Insight, Corrillion). Other companies are
currently developing and marketing software to the financial
services industry. These companies generally are focused at the
front-end as Customer Relationship Management (CRM) software
providers or at the back-end as loan processing systems. Other
companies are focused on other banking-related applications like
bill payment and online banking. As these companies develop their
existing products and as functionality is added to Lend-X,
competition from these companies could emerge.
Business Development
Our business development teams target and establish relationships with
lenders to achieve an adequate array of credit products to meet consumer demand.
Additionally, Lend-X sales people cross-sell into the lender network and also
target non-lender clients that could utilize the Lend-X platform to establish a
single lender or co-branded Website to offer loan products. Our marketing
objective is to increase awareness of our lending exchange through trade
advertising, public relations, and attendance at trade shows and industry
conferences.
Customer Service
We employ a staff of customer service and technical support personnel
who provide support to all users of our services. They provide support via email
and telephone. The responsibilities of the customer service and technical
support personnel include:
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-- Responding to consumers' questions about the status of their
credit request, how to use our Website, and other frequently asked
questions.
-- Acting as a liaison between consumers and Lenders, to ensure
consumers receive prompt service from Lenders.
-- Acting as a facilitator for the consumer and real estate agent.
-- Providing technical support to lender technical and systems
questions 24 hours a day, seven days per week.
-- Providing technical support to Lend-X clients.
Marketing
Our principal marketing objectives are to maintain our leading brand
awareness position and to increase volume on our exchange. These efforts include
offline advertising, online advertising and direct marketing. We also collect
and analyze consumer data to enhance our consumer marketing programs, subject to
compliance with our privacy policy.
Offline Advertising
-- Television Advertising. Our television advertising has proven to
be an effective medium to drive both brand awareness and
transaction volume. Utilizing television we have created
significant brand awareness of our brand promise of "When Banks
Compete, You Win."
-- Radio Advertising. Our radio advertising directly increases
transaction volume on our Website as well as consumer awareness of
the LendingTree brand. Radio advertising, through a combination of
network and spot buying, enables us to reach our target audience
in a cost-effective manner both nationally and locally. We select
our spot radio markets based on a variety of factors including
population density, housing starts, Internet-enabled households,
and overall home buying activity.
Online Advertising
-- Online Advertising and Sponsorships. Online advertising and
sponsorships play an important role in our overall effort to reach
potential consumers. We focus on those portals and Websites having
a high affinity to consumer lending, such as real estate, personal
finance and automobile-related Websites. We have also partnered
with major search engine companies such as Yahoo! Finance and
incorporated banner advertising into our online strategy to
maximize consumer reach at relatively low cost.
The LendingTree Affiliate Network
-- We have agreements with other Websites that route consumers to
www.lendingtree.com. We pay advertising fees to our affiliates in
exchange for the placement of banner ads and links from their site
to ours. Our affiliate program has been a cost-effective source of
loan request volume. These affiliates are independent third
parties and LendingTree does not have any ownership interest in
any such affiliate.
Direct Marketing
We believe that direct marketing is an effective means of increasing
loan requests and closure rates, and a way to develop more sustainable
relations with consumers. Our direct marketing initiatives have been
executed through both offline and online channels, within the
guidelines of our privacy policy. Our direct marketing initiatives
include:
-- Direct Email. We use email to encourage customers to visit our
Website, complete the loan request process, communicate with
consumers throughout the lending process, offer additional product
and service value and facilitate consumers' ability to obtain
loans.
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-- Direct Mail. We use direct mail to compliment our online email
efforts to build brand equity and increase overall transaction
volume.
-- Cross-Selling. We use cross-selling and other adaptive marketing
activities to provide consumers the opportunity to purchase
related products and services from selected third parties at
various points in the LendingTree loan process. We previously
added the cross-sell of real estate services to consumers in
addition to existing cross-sell programs such as home, auto and
credit card products.
Employees and Recruitment
As of December 31, 2001, we had 234 full-time employees. Of these, 92
were in technology and project management, 20 were in lender relations and 40
customer care, 51 were in sales, marketing, and business development, 23 were in
financial and legal, and the remaining 8 were in human resources and
administrative positions. None of our employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
Privacy Policy
We believe that issues relating to privacy and use of personal
information of Internet users are becoming increasingly important as the
Internet and its commercial use grow. As a result, we have adopted a detailed
privacy policy that outlines how we use consumer information and the extent to
which Lenders and other third parties may have access to this information. This
policy is prominently noted on our Website. We do not sell, license or rent any
personally identifiable information about our consumers to any third party, and
will use the information about its customers for internal purposes only.
Generally, the privacy provisions of the recently enacted
Gramm-Leach-Bliley Act:
-- Prohibit financial institutions from disclosing to unaffiliated
third parties nonpublic personal information collected from
consumers, subject to several exceptions;
-- Require financial institutions to develop and disclose consumer
privacy policies;
-- Empower federal regulators with the authority to regulate
information sharing and enforce the provisions of the law; and
-- Allow states to pass stricter financial privacy laws.
Compliance with the Gramm-Leach-Bliley Act became mandatory on
July 1, 2001. As a result, we amended our privacy policy and
implemented new procedures to make privacy disclosures to consumers. In
addition, we have worked with our Lenders to assist them in complying
with their obligations, to the extent possible, through our Website.
Government Regulation
The loan products and real estate agent referral services available
through our Website are subject to extensive regulation by various federal and
state governmental authorities. Because of uncertainties as to the applicability
of some of these laws and regulations to the Internet and, more specifically, to
our business, and considering our business has evolved and expanded in a
relatively short period of time, we may not always have been, and may not always
be, in compliance with applicable federal and state laws and regulations.
Failure to comply with the laws and regulatory requirements of federal and state
regulatory authorities may result in, among other things, revocation of required
licenses or registrations, loss of approved status, termination of contracts
without compensation, loss of exempt status, indemnification liability to
Lenders and others doing business with us, administrative enforcement actions
and fines, class action lawsuits, cease and desist orders, and civil and
criminal liability.
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Many, but not all, states require licenses to solicit or broker to
residents of those states, loans secured by residential mortgages, and other
consumer loans, including credit card, automobile and personal loans. We are not
currently licensed and able to accept credit requests for all loan products in
every state. We are not currently accepting credit requests for loan products
from residents of states in which we are not licensed to provide those products.
In many of the states in which we are licensed, we are subject to examination by
regulators. In addition, as a result of our Realty Services offerings, we are
required to obtain real estate broker licenses, additional mortgage broker
licenses and individual call center personnel licenses in numerous states.
Failure to obtain these licenses and approvals could prevent us from receiving
fees from the real estate agent referral and mortgage services programs we offer
and may subject us to the types of fines, forfeitures and litigation discussed
above.
As a computer loan origination system or mortgage broker conducting
business through the Internet, we face an additional level of regulatory risk
given that most of the laws governing lending transactions have not been
substantially revised or updated to fully accommodate electronic commerce. Until
these laws, rules and regulations are revised to clarify their applicability to
transactions conducted through electronic commerce, any company providing
loan-related services through the Internet or other means of electronic commerce
will face compliance uncertainty. Federal law, for example, generally prohibits
the payment or receipt of referral fees in connection with residential mortgage
loan transactions. The applicability of referral fee prohibitions to the
advertising, marketing, distribution and cyberspace rental arrangements used by
online companies like ours may have the effect of reducing the types and amounts
of fees that we may charge or pay in connection with real estate-secured
products.
Regulations promulgated by some states may impose compliance
obligations on any person who acquires 10% or more of our common stock,
including requiring that person to periodically file financial and other
personal and business information. If any person acquires 10% or more of our
common stock and refuses or fails to comply with these requirements, we may not
be able to obtain a license and existing licensing arrangements in particular
states may be jeopardized.
The parties conducting business with us, such as Lenders and other
Website operators, may similarly be subject to federal and state regulation.
These parties act as independent contractors and not as our agents in their
solicitations and transactions with consumers. Consequently, we cannot ensure
that these entities will comply with applicable laws and regulations at all
times. Failure on the part of a lender or other Website operator to comply with
these laws or regulations could result in, among other things, claims of
vicarious liability or have a negative impact on the our reputation.
In addition to licensing requirements, federal and state laws regulate
residential lending activities and record keeping requirements of brokers and
lenders. At the federal level, our services are regulated by, among other laws,
the Truth in Lending Act and Regulation Z, the Equal Credit Opportunity Act and
Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, federal
privacy laws, and the Real Estate Settlement Procedures Act and Regulation X.
These laws generally regulate the manner in which loan services are made
available, including advertising and other consumer disclosures, payments for
services, record keeping requirements, and the privacy and reporting of consumer
data. State and federal laws also prohibit unfair and deceptive trade practices
and require companies to adopt appropriate policies and practices to protect
consumer privacy.
Under the Truth in Lending Act, creditors are required to provide
consumers with uniform, understandable information concerning some of the terms
and conditions of loan and credit transactions being offered, which may include
disclosures in advertising. This particular federal law is generally applicable
to lenders and applies to us primarily in the context of advertising.
The Equal Credit Opportunity Act prohibits discrimination against
applicants on the basis of race, color, sex, age, religion, national origin, or
marital status, and the Fair Housing Act similarly prohibits discrimination in
residential mortgage lending. The regulations under the Equal Credit Opportunity
Act also restrict creditors from requesting various types of information from
loan applicants and require lenders to supply applicants with a notice, referred
to as an adverse action notice, when the lender denies its applicants credit.
Our Lenders are generally obligated to provide the required disclosures. While
the applicability of these disclosure requirements to us is unclear, we
nevertheless provide such disclosures to consumers in the event that a
qualification form cannot be transmitted to any lender.
11
The Fair Credit Reporting Act is a consumer privacy statute that
generally governs the assemblage, evaluation, maintenance, and dissemination of
information on consumers that has been collected for the purpose of evaluating
their qualifications for credit. The Fair Credit Reporting Act also requires
that users of consumer credit reports notify consumers when their loan
applications are denied on the basis of those consumer credit reports. In
addition, recent consumer privacy legislation enacted as part of the
Gramm-Leach-Bliley Act restricts the dissemination of nonpublic consumer
information to non-affiliated third parties and will require institutions to
maintain privacy policies, and give notice of such policies. We have made
numerous changes to our Website and procedures to address the consumer privacy
provisions of the Gramm-Leach-Bliley Act.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or any other item
of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or
unearned fees in connection with the provision of residential real estate
settlement services, including mortgage brokerage and lending services.
Notwithstanding these prohibitions, RESPA permits payments for goods or
facilities furnished or for services actually performed, so long as those
payments bear a reasonable relationship to the market value of the goods,
facilities or services provided. Failure to comply with RESPA may result in,
among other things, administrative enforcement actions, class action lawsuits,
cease and desist orders and civil and criminal liability.
The mortgage and home equity products offered through our exchange are
residential real estate secured loans subject to these provisions of RESPA.
Consequently, our online relationships with Lenders, other companies and
Websites on which we offer services are subject to RESPA's prohibitions on
payment or receipt of referral fees for referrals and for unearned fees or fee
splits. We believe that we have structured these relationships to comply with
RESPA. The applicability of RESPA's referral fee and fee splitting prohibitions
to these types of Internet-based relationships, however, is unclear and the
appropriate regulatory agency has provided limited guidance to date on the
subject. See the section of this Form 10-K entitled "Risk Factors" for more
information.
Copyrights, Trademarks, Patents and Licenses
We regard our intellectual property as important to our success. We
rely on a combination of patent, trademark, copyright law, and trade secret
protection to protect our proprietary rights. We have applied for a U.S. patent
and filed a Patent Cooperation Treaty international patent application on our
Lend-X technology and our online loan market process. We also pursue the
protection of our intellectual property through trademark and copyright
registrations. We have registered "LendingTree" and the phrase "When Banks
Compete You Win!" as trademarks in the United States. We have also applied for
trademark registration in the United States for "Lend-X". We consider the
protection of our trademarks to be important for maintenance of our brand
identity and reputation. We cannot assure you that any of these registrations or
applications will not be successfully challenged by others or invalidated
through administrative process or litigation. In fact, a company called Lendx,
Inc. has filed a formal opposition to the registration of our mark for "Lend-X",
alleging that its first use of the mark "Lendx" in the field of commercial
lending superceded our first use of the "Lend-X" mark. We dispute the
allegations and are vigorously litigating the matter before the Federal
Trademark Trail and Appeals Board. Further, if our trademark applications are
not approved or granted due to the prior issuance of trademarks to third parties
or for other reasons, there can be no assurance that we would be able to enter
into arrangements with such third parties on commercially reasonable terms
allowing us to continue to use such trademarks. It is possible that our patent
applications will be denied or granted in a very limited manner such that they
offer little or no basis for us to deter competitors from employing similar
technology or processes or allow us to defend ourselves against third-party
claims of patent infringement.
In addition, we seek to protect our proprietary rights through the use
of confidentiality agreements and other contractual arrangements with our
employees, affiliates, clients, Lend-X licensees, and others. We cannot assure
you that these agreements will provide adequate protection for our proprietary
rights in the event of any unauthorized use or disclosure, that employees, our
affiliates, clients, Lend-X licensees, or others will maintain the
confidentiality of such proprietary information, or that such proprietary
information will not otherwise become known, or be independently developed, by
competitors. Occasionally, we have been, and expect to continue to be, subject
to
12
claims in the ordinary course of our business, including claims alleging that we
have violated a patent or infringed a copyright, trademark or other proprietary
right belonging to a third party. We cannot assure you that the steps we have
taken to protect our proprietary rights will be adequate or that third parties
will not infringe or misappropriate our proprietary rights. Any infringement
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources on our part, which could materially adversely
affect our business, results of operations, and financial condition.
A substantial portion of our intellectual property is licensed to third
parties. We license the right to use Lend-X technology to well-known regional
and national Lenders, other online companies that create single and multi-lender
online marketplaces, and other websites providing lending services.
Item 2. Properties
Our principal executive offices are currently located in approximately
38,000 square feet of office space in Charlotte, North Carolina under a lease
that expires in 2010.
Item 3. Legal Proceedings
On September 10, 2001, Block Financial Corporation {"Block") filed a
complaint in the United States District Court for the Western District of
Missouri [Block Financial Corporation v. LendingTree, Inc., Case Number
01-1007-CV-W-3], against the Company, alleging that the Company's financial card
(credit card) qualification form processing system infringes its U.S. Patent No.
6,014,645 entitled, "Real-Time Financial Card Application System." The complaint
seeks both monetary damages in the form of a reasonable royalty and injunctive
relief. On November 19, 2001, the Company filed an answer to the complaint
denying infringement of the Block patent. The Company also filed a counterclaim
against Block seeking a declaratory judgment of non-infringement and invalidity
of the Block patent. The lawsuit is in an early stage, and discovery is just
beginning to get underway.
In October 2000, we were the subject of a routine examination conducted
by the New York State Banking Department ("NYSBD"). At the close of the
examination, during the exit interview, the NYSBD examiners raised an issue as
to whether the Company was obligated to make certain mortgage broker disclosures
to consumers under New York state law. Following correspondence with the NYSBD
and discussions with local counsel and NYSBD officials, the Company agreed to
provide certain disclosures requested by the NYSBD. Moreover, based upon the
guidance of local counsel following discussions with NYSBD officials, the
Company believes that this matter has been resolved without a finding of a
violation and without imposition of fines or forfeitures against it.
A third party has opposed the federal registration of LendingTree's
Lend-X mark. The case is currently in the discovery phase. The matter is pending
before the Trademark Trial and Appeal Board of the U.S. Patent and Trademark
Office. Management intends to contest the case vigorously and is aggressively
pursuing the matter.
We are involved in other litigation from time to time that is routine
in nature and incidental to the conduct of its business. We believe that the
outcome of any such litigation would not have a material adverse effect on our
financial condition, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the
fourth quarter of the fiscal year ended December 31, 2001.
13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholders' Matters
Market for Common Stock
Our common stock is traded on the NASDAQ National Market System under
the symbol "TREE". The following table sets forth the high and low sale prices
for the common stock for the periods indicated as reported by NASDAQ. Such
prices represent prices between dealers without adjustment for retail mark-ups,
markdowns, or commissions and may not necessarily represent actual transactions.
Price Ranges
------------
High Low
---- ---
Year Ended
December 31, 2001
-----------------
Fourth Quarter $ 6.10 $ 3.00
Third Quarter $ 6.74 $ 3.35
Second Quarter $ 7.39 $ 2.81
First Quarter $ 4.41 $ 1.88
Year Ended
December 31, 2000
-----------------
Fourth Quarter $ 5.25 $ 1.78
Third Quarter $ 9.56 $ 4.22
Second Quarter $14.88 $ 4.75
First Quarter (beginning
February 15, 2000) $21.00 $10.75
Holders of Record
As of January 31, 2002, there were approximately 120 holders of record
of our common stock. This number does not include stockholders whose shares are
held by brokers and other institutions.
Dividends
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The holders of our Series A Preferred Stock are entitled to
receive dividends on their shares equal to eight percent (8%) per annum of the
stated value per share payable at our option (i) in cash on each quarterly
dividend date or (ii) by an upward adjustment to the stated value per share on a
quarterly dividend payment date. We intend to evaluate the alternative dividend
payment options on the Series A Preferred Stock prior to each quarterly dividend
payment date. The Series A Preferred Stock ranks senior to any class of our
common stock with respect to dividend rights. Our revolving credit agreement
with GE Capital Commercial Services prohibits us from paying cash dividends on
common stock or Series A Preferred Stock without the prior written consent of
GE.
14
Item 6. Selected Financial Data
The following table sets forth selected financial and operating data
for our business. You should read the information together with our consolidated
financial statements and the accompanying notes included in this Form 10-K and
the information under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The statement of operations data for the
years ended December 31, 2001, 2000 and 1999, and the balance sheet data as of
December 31, 2001 and 2000, are derived from, and are qualified by reference to,
our consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP and are included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 1998 and 1997 and
the balance sheet data as of December 31, 1999, 1998 and 1997 are derived from
our consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP and are not included in this Form 10-K. Historical
results are not necessarily indicative of the results to be expected in the
future.
2001 2000 1999 1998 1997
------------- ------------ ------------ ----------- --------
Statement of Operations Data: (Amounts in thousands, except per share and per transmit data)
Revenue
Exchange $ 57,478 $ 27,465 $ 6,112 $ 273 $ 2
Lend-X technology 6,541 3,348 852 136 --
------------- ------------ ------------ ----------- --------
Total revenue 64,019 30,813 6,964 409 2
------------- ------------ ------------ ----------- --------
Net loss attributable to common shareholders $ (31,827) $ (68,464) $ (27,561) $ (6,458) $ (963)
============= ============ ============ =========== ========
Net loss per common share - basic and diluted $ (1.66) $ (4.15) $ (7.74) $ (1.88) $ (1.20)
============= ============ ============ =========== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 19,160 16,512 3,560 3,435 803
============= ============ ============ =========== ========
Operating Data:
Qualification Forms transmitted:
Number (in thousands) 1,416 716 186 18 --
Dollar volume (in thousands) $ 115,557,000 $ 54,997,000 $ 16,210,000 $ 1,597,000 $ --
Lending exchange revenue (1) per transmitted
Qualification Form $ 37.21 $ 37.31 $ 32.90 $ 14.96 $ --
Variable cost (2) per transmitted Qualification Form $ (21.70) $ (64.20) $ (95.12) $ (99.30) $ --
------------- ------------ ------------ ----------- --------
Contribution margin (3) per transmitted
Qualification Form $ 15.51 $ (26.89) $ (62.22) $ (84.34) $ --
------------- ------------ ------------ ----------- --------
Loans closed:
Number (in thousands) 290 145 27 1 --
Dollar volume (in thousands) $ 12,148,000 $ 4,641,000 $ 941,000 $ 26,000 $ --
Balance Sheet Data:
Cash, cash equivalents, short term investments $ 6,164 $ 12,716 $ 29,472 $ 3,085 $ 402
Working capital $ 1,958 $ 7,937 $ 26,474 $ 2,666 $ 333
Total assets $ 27,931 $ 37,957 $ 33,767 $ 3,687 $ 424
Capital lease obligations $ 1,034 $ 1,580 $ -- $ -- $ --
Total liabilities $ 17,254 $ 14,261 $ 6,030 $ 751 $ 71
Preferred stock $ 23,878 $ -- $ 59,118 $ -- $ --
Total shareholders' equity (deficit) $ (13,201) $ 23,696 $ 27,737 $ (1,695) $ 353
(1) Computed by dividing exchange revenue derived from our Lenders by the
number of qualification forms transmitted in the period.
(2) Computed by dividing variable marketing and advertising costs (including
media advertising and affiliate network costs) by the number of
qualification forms transmitted in the period.
(3) Computed by subtracting the variable cost per transmit from the lending
exchange revenue per transmit.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview:
LendingTree, Inc. was incorporated in the state of Delaware on June 7,
1996 and commenced nationwide operations on July 1, 1998.
We are a lending exchange empowering consumers, lenders and related
service providers. We are not a lender; instead we attract consumers to our
Website through various forms of advertising and send their loan requests to the
network of banks, lenders and loan brokers ("Lenders") participating on our
exchange.
Our technology platform, Lend-X(SM), is the technology that powers our
Internet-based lending exchange at www.lendingtree.com. Additionally, we have
also licensed the use of our Lend-X technology to other businesses and have
enabled them to create either private-labeled or co-branded exchanges on their
Websites.
Consumers begin the LendingTree process by completing a simple on-line
credit request (which we refer to as a "qualification form"). After the consumer
completes the qualification form, our Lend-X technology automatically retrieves
the credit score for the particular consumer. The consumers' data and credit
scores are then automatically compared to the underwriting criteria of the more
than 140 Lenders participating on our lending exchange. Qualified consumers can
receive multiple loan offers on-line in response to a single credit request and
then compare, review, and accept the offer that best suits their needs. Lenders
can generate new business that meets their specific underwriting criteria at a
lower cost of acquisition than traditional marketing channels. Our lending
exchange encompasses most consumer credit categories, including mortgages, home
equity loans, automobile loans, credit cards, and personal loans. Additionally,
through our Website we also provide access to other realty services related to
owning, maintaining and buying and selling a home, including a network of real
estate brokers.
We earn revenue from the Lenders on our exchange which pay us fees for
qualification forms that meet their underwriting criteria and are transmitted to
them ("transmission fees"). Since a qualification form can be transmitted to
more than one lender, we may generate multiple transmission fees for the same
form. We also earn revenue for loans that the Lenders on our exchange close
with consumers that we referred to them ("closed-loan fees"). Additionally, in
most states, real estate brokers participating in our exchange pay us a fee when
consumers' requests that we transmit to them result in a purchase or sale of a
home ("realty services fees"). We refer to the aggregate of these fees as our
Exchange revenue.
We also license and host our Lend-X technology platform for use by
other businesses. This enables these businesses to create their own customized
co-branded or private-labeled lending exchanges. These exchanges, powered by
Lend-X, may be lender marketplaces or may provide access to the LendingTree
exchange with more than 140 participating Lenders. Through these Lend-X
relationships, we can earn revenue both from technology fees related to
customizing, licensing and hosting the third party exchange, as well as from
transactional fees resulting from the volume processed through such exchanges.
16
2001 Compared to 2000
As described above, our business is focused on two primary activities,
operating our Exchange and licensing and hosting our Lend-X technology. Our
Exchange business includes revenue and costs from two operating segments, our
lending exchange and our Realty Services operations. Our Lend-X technology
business is a third operating segment. Management regularly reviews the revenue,
cost of revenue and gross margins for these segments. No other operating
expenses, measure of profitability or assets or liabilities are consistently
segregated or allocated into these segments for regular review by management or
in determining allocations of resources. There are no inter-segment revenues.
Revenue
Total revenue was approximately $64.0 million in the year ended
December 31, 2001, an increase of $33.2 million, or 108%, from $30.8 million for
the year ended December 31, 2000.
Exchange Revenue
For 2001, our Exchange revenue was approximately $57.5 million, or 90%
of our total revenue, compared with approximately $27.5 million, or 89% of total
revenue, for 2000. This is an increase of 109% from year to year. As shown in
the following table, this revenue growth reflects a substantial increase across
all products in the volume of discrete transmissions of qualification forms (a
discrete qualification form can be transmitted to more than one lender
generating multiple transmission fees for the same form) and in the number of
closed loans. Realty Services also contributed $3.9 million to the increase in
total Exchange revenue.
Year Ending December 31, 2001 Year Ending December 31, 2000
(in thousands)
Discrete Number Discrete Number
Transmission of Closed Transmission of Closed
Exchange Transactions - Revenue Volume Loans Revenue Volume Loans
Mortgage $25,764 577 38 $11,133 277 15
Home Equity 17,660 216 51 10,308 141 32
Auto, Personal, Credit Card 7,331 623 201 4,453 298 98
All Other Exchange Fees 2,170 879
------- ------------ --------- ------- ------------ ---------
Subtotal Lending Exchange $52,925 1,416 290 $26,773 716 145
======= ============ ========= ======= ============ =========
Realty Services 4,553 692
------- -------
Total Exchange $57,478 $27,465
======= =======
Discrete transmission volume increased 98% to approximately 1,416,000
qualification forms in 2001 from approximately 716,000 in 2000. We attribute
this increase to several factors:
First, we believe the effectiveness of our advertising has
elevated and maintained consumer awareness of the LendingTree brand.
Throughout 2001, we have continued to sharpen the focus of our media
expenditures, particularly cable television and on-line advertising,
targeting key audiences to keep the LendingTree brand name recognition
high. A recent study performed by a third party for us showed that we
enjoy an overall brand awareness of 59% nationally among our key target
audience, adults 18-54, improving from overall brand awareness of 41%
in the prior year.
17
Second, there continues to be an expanding acceptance of the
use of the Internet to find a loan. According to various industry
publications, in 2001 the volume of mortgage loans applied for through
the Internet is estimated to have more than doubled when compared to
2000.
Third, although our revenue and exchange volume have shown
growth both in periods of rising and falling interest rates, we also
believe that the lower interest rate environment over the past year has
contributed to the increase in the number of consumers applying for
loans and refinancing existing debt through our exchange. For example,
in 2001, when interest rates were generally declining, 76% of our
mortgage revenue was derived from mortgage refinancings; approximately
double our rate in 2000. Mortgage revenue was approximately 40% of our
total revenue, accordingly the higher mix of refinancings contributed
to 17% of our total revenue growth in 2001 over 2000. Conversely, in
periods of rising interest rates, we have seen Lenders on our network
focus more aggressively on the qualification forms we send them as
volume from their traditional channels slows down. This also increases
our average number of transmits per qualification form and our closing
rates. Additionally, as interest rates increase, consumers have a
greater incentive to receive multiple, competitive loan offers to
ensure they are finding the loan best suited for them. Looking forward,
management believes improvements in these key operating metrics and the
rate of growth in online lending will more than offset decreases caused
by lower levels of consumer refinancing activity.
Closed loan volume increased 100% to 290,000 in 2001 from 145,000 in
2000. This increase is substantially all due to the increase in transmission
volume as discussed above.
In order to continue to capitalize on the substantial increases in
transmission volume we have implemented several significant initiatives aimed at
improving the rate at which loans close through our exchange. An ongoing
initiative has been to add to the number and variety of Lenders on our exchange,
thus increasing capacity and our ability to handle different types of loan
requests. At December 31, 2001 we had 145 active participating Lenders on our
exchange compared to 114 active participants at December 31, 2000. Additionally,
we have begun offering several new tools to enable our Lenders to process and
close loans more efficiently; including automation tools and benchmark studies.
We have also implemented several closed-loan incentives, including gift
certificates and other payments to reward borrowers for closing loans through
our network of Lenders.
In addition to the volume increases, our revenue is also impacted by
our pricing structure. Through October 2001 we generally charged a set fee to
all Lenders for mortgage and home equity transmissions and closed loans.
However, beginning in November of 2001 our revenue was impacted by a pricing
change. The standard fee for a transmitted loan request increased from $8.00 to
$9.00 for both our mortgage and home equity services. The standard fee for
closed-loans also changed, beginning with loans that originated from
qualification forms completed on and after November 5, 2001. For a closed home
equity loan the fee increased from $250 to $275. The standard fee for a closed
mortgage loan changed from a flat $400 to a tiered structure with fees ranging
from $300 to $750 depending on the amount of the loan. We do not currently have
plans to significantly change pricing arrangements for our auto, personal and
credit card products.
All other lending exchange revenue, as shown in the table above,
increased 147% to $2.2 million in 2001 compared to $0.9 million in 2000. The
$1.3 million increase is primarily attributed to fees that we earned from
transactions involving arrangements with third party membership programs, such
as Delta's Skymiles and Costco Wholesale, which allow us to provide mortgage
brokerage services to their members. We provide the loan referral to selected
Lenders and earn a fee from the lender for each loan that closes.
Realty Services revenue increased to $4.6 million in 2001 from $0.7
million in 2000. Because we first added Realty Services in August 2000, the
first full year of realty revenue on our exchange was 2001. Although the growth
in Realty Services revenue in 2001 is substantially due to 2000 being a partial
year, we have also grown this business by increasing our marketing efforts and
adding to the number of real estate professionals participating in our exchange.
18
Lend-X Technology Revenue
Lend-X technology revenue totaled $6.5 million, or 10% of our revenue,
for 2001 compared to $3.3 million, or 11% of revenue for 2000. The growth in
Lend-X technology revenue is the result of several significant new customizing,
licensing and hosting contracts that have been entered into since 2000. These
new arrangements typically contain certain up-front fees that are being
recognized as revenue over the expected term of the arrangement. For 2001, two
customers accounted for 35% and 32%, respectively, of our total Lend-X
technology revenue. For 2000 one of these customers accounted for 71% of our
total Lend-X technology revenue. Additionally, some of our Lend-X arrangements
provide for transactional exchange revenue derived from volume from these third
party sites that have been enabled by our technology. The total of Lend-X
technology and transactional exchange revenue derived from Lend-X customer
sources was approximately $9.6 million and $5.6 million for 2001 and 2000,
respectively, which represents 15% of 2001 and 18% of 2000 total revenue.
Gross Profit and Cost of Revenue
Our 2001 gross profit of $50.3 million, or (79% of total revenue
improved by $28.9 million over the 2000 gross profit of $21.4 million, or 70% of
total revenue. The improvement in gross profit and gross profit percentage is
primarily due to the substantial increase in closed-loans as noted above.
Because closed-loans generate a higher fee for us and because a significant
portion of our costs of revenue are incurred up-front related to the
transmission of a loan request, when more loans close our gross profit tends to
increase. Additionally, some of our costs of revenue did not increase in direct
proportion to the increase in volume. As an example, our volume based
credit-scoring fees increased only 58% and network- hosting fees decreased 42%
as a result of negotiated vendor price reductions that were successful in
lowering our monthly costs.
Overall, our revenue increased over 100% while our total cost of
revenue increased only 46% to $13.7 million in 2001 from $9.4 million in 2000.
As further discussed below, this increase is principally due to costs related to
an increase in the number of closed-loan transactions such as consumer
incentives and other promotional costs.
Exchange Gross Profit and Cost of Revenue
For 2001, our exchange gross profit was $45.0 million, or 78% of
exchange revenue, compared to $20.0 million or 73% of exchange revenue for 2000,
an increase of 125%. Our lending exchange segment contributed $24.7 million of
the $25 million increase in gross profit over 2000 while our Realty Services
segment added $0.3 million of the increase.
We attribute this increase to the scalability of our exchange business
model. Although our volume has increased approximately 100% in 2001 compared to
2000, a proportional increase in costs was not necessary.
Overall, exchange related cost of revenue expenses increased only $4.9
million, or 66%, to $12.4 million in 2001 from $7.5 million in 2000.
The addition of Realty Services in August 2000 contributed to $3.5
million of this increase in 2001 and reflects the full year impact of increased
staffing and incentives and promotional payments made directly to consumers that
closed a realty transaction with a Real Estate professional on our exchange.
Management believes its current staffing levels are sufficient to handle the
planned growth in realty services and we have recently decreased the incentive
amounts offered to consumers. As such, costs will decrease as a percentage of
Realty Services revenue.
The lending exchange accounted for the other $1.4 million of the
increase in exchange cost of revenue in 2001, reflecting the growth in the
number of closed loans in 2001 over 2000, which resulted in an increase in the
promotional payments and gift certificates to consumers who closed a loan
through our exchange.
19
Lend-X technology Gross Profit and Cost of Revenue
For 2001, Lend-X technology gross profit was $5.3 million, or (81% of
Lend-X technology revenue, compared to $1.5 million, or 44% of Lend-X technology
revenue, for 2000. The lower gross profit percentage in 2000 reflects the impact
of expending significant hours on a large fixed-price customization contract.
Comparatively, in 2001, substantially all of our technology revenue was earned
from the revenue recognition of certain fees that are being recognized over the
expected term of each arrangement and from less labor intensive consulting and
implementation projects, resulting in a significantly improved gross profit for
2001.
Costs of revenue associated with Lend-X technology are principally
employment costs related to customizing and/or implementing Lend-X for third
parties, as well as ongoing server costs related to hosting Lend-X for these
companies. These costs decreased approximately $0.6 million from 2000 compared
to the same period in 2001.
Operating Expenses
Product development expense was approximately $4.6 million for 2001
compared to $2.7 million for 2000. Product development costs consist of expenses
incurred related to the ongoing efforts to enhance and maintain the
functionality of our Lend-X technology and our Website and include compensation
costs, purchased software and consulting costs. Compensation costs accounted for
93% of product development expense in 2001 compared to 74% in 2000. The overall
increase from 2000 to 2001 is principally related to higher staff levels in the
technology department. Additionally, in 2000 there were approximately $0.9
million more compensation costs classified in cost of revenue primarily related
to a significant labor-intensive, fixed fee contract.
Marketing and advertising expenses decreased $16.7 million to
approximately $39.9 million for 2001 compared to $56.6 million for 2000.
Marketing and advertising expenses were approximately 62% of our total revenue
in 2001 compared to 184% of our total revenue in 2000. Management uses variable
marketing cost and contribution margin per transmitted qualification form as key
measures of our advertising efficiency. In 2001 our exchange revenue per
transmission was $37.21 while our variable marketing cost per transmission was
$21.70, resulting in a contribution margin of $15.50 per transmission.
Comparatively, in 2000 our exchange revenue per transmission was $37.31 and
advertising cost per transmission was $64.20 for a negative contribution of
$26.89 per transmission. The substantial improvement in contribution margin per
transmission, as well as the decrease in advertising costs in 2001 reflect the
following:
-- In 2000, following the launch of our national advertising
campaign, we spent significantly on combinations of
television, radio and other forms of advertising in order to
establish and grow awareness of the LendingTree brand.
Comparatively, during 2001, our focus shifted more to
maintaining and building on the high-level of awareness for
our brand. By improving the targeting of our advertisements,
such as selecting cable television as a primary medium and
expanding our advertisements to include home equity and
auto-specific messages, we were able to improve the cost
effectiveness of our ads.
-- In 2001, as a result of the continued adoption of on-line
lending, a declining interest rate environment and decreasing
prices in the advertising market we were able to decrease
advertising spending by 30% over the prior year and still
achieve 108% growth in revenue.
Sales, general and administrative expenses in 2001 decreased to 53% of
total revenue, or $33.6 million, from 92% of total revenue, or $28.3 million in
2000. While our revenue increased $33.2 million in 2001, our sales, general and
administrative costs increased only $5.4 million. We had hired approximately 130
people throughout 2000; accordingly, the increase in expense in 2001 is
primarily the result of the full year impact, or $3.4 million, of higher
employee compensation and other related costs. Currently management does not
anticipate the need for any significant staffing increases to facilitate our
planned growth. Accordingly, we believe that sales, general and administrative
expenses will continue to decline as a percentage of total revenue.
20
Another $1.4 million of the 2001 increase in sales, general and
administrative expenses is due to non-cash charges incurred as a result of
variable accounting charges related to a loan to our Chief Executive Officer
that was secured by shares of our common stock and Series A Preferred Stock.
This loan was modified in August 2001 resulting in fixed accounting treatment
for this arrangement going forward.
Additionally, the amortization of the intangible assets and software
related to an acquisition made in August 2000 contributed to $2.8 million of the
increase in sales, general and administrative expenses. Depreciation expense
also increased $1.6 million from 2000 to 2001, reflecting new equipment and
software purchases.
Through improved cost management, we were able to reduce our spending
on consulting and travel by approximately $1.9 million in 2001 compared to 2000.
Our recruiting and relocation expenses were approximately $1.0 million lower due
to decreased hiring efforts in 2001. We have the approximately the same number
of people at December 31, 2001 (234) that we had at the end of 2000 (230). Bad
debt expenses were approximately $1.0 million lower in 2001 compared to 2000 due
to improved collection efforts.
Loss on Impaired Investment
In February 2000, we made a $2.5 million equity investment in a company
providing wholesale mortgage marketplace services for brokers and lenders over
the Internet. In December 2000, we determined that the carrying value of this
investment was impaired and we wrote the investment down to its estimated fair
value of $0.6 million, recording $1.9 million as a non-operating loss on
impaired investment. In June 2001, this company and another company merged and
received an additional investment of $9.5 million. We determined that the value
of our investment in this combined company was further impaired based on our
reduced ownership percentage of the combined company, the financial condition of
the combined company, the terms of the preferred securities issued to the new
investors, and the historical losses from operations of both companies before
the merger. Accordingly in June 2001, we wrote down the investment to its
estimated fair value of $0.25 million, recording $0.35 million as a
non-operating loss on impaired investment. In December 2001, this company began
evaluating strategic alternatives in light of its deteriorating financial
condition. The company announced its plans to sell its assets to third party in
a transaction in which we received no proceeds. Accordingly, we wrote off the
remaining $0.25 million investment as a non-operating loss on impaired
investment for the period ending December 31, 2001.
Interest Income
Interest income consists of interest earned on cash and cash
equivalents and restricted and short-term investments. Interest income decreased
to $0.6 million in 2001 from $2.2 million in 2000. This decrease was primarily
due to lower average interest earning account balances in 2001 than in 2000.
Interest Expense, Financing and Other Charges
Interest expense, financing and other charges consists of bank service
charges, interest on capital leases and borrowings and other expenses related to
our credit facilities. The $0.9 million increase in interest and financing
charges in 2001 from 2000 is primarily due to $0.6 million of charges related to
the termination of a credit facility and the issuance of a warrant to purchase
shares of our common stock and a $0.3 million charge related to the write off of
deferred costs associated with an equity line. The equity line had not yet been
used and in the fourth quarter of 2001 management determined any possible use
would be remote. Footnote 7 to our consolidated financial statements, contained
herein, provides further details of the terminated credit facility and the
equity line.
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Dividends and Accretion of Series A Convertible Preferred Stock
Each share of our Series A Preferred Stock is convertible, at the
option of the holder, into the number of shares of common stock determined by
dividing (a) the current value per share by (b) the conversion price.
The current value per share is the sum of the stated value per share
plus any accrued but unpaid dividends. The conversion price is the initial
purchase price of $3.50, subject to certain revisions from time to time for
stock splits and similar adjustments.
The holders of our Series A Preferred Stock are entitled to receive
quarterly dividends on the Series A Preferred Stock equal to eight percent (8%)
per annum of the stated value per share payable at our option (i) in cash or
(ii) by increasing the stated value per share on the dividend payment date.
The stated value per share is the sum of the initial purchase price of
$3.50 per share as cumulatively adjusted from time to time by accumulated
dividends.
Through December 31, 2001 we had elected to pay the quarterly dividends
by increasing the stated value per share of the Series A Preferred Stock. As a
result of these dividends, through December 31, 2001, we have increased the
carrying value of the Series A Preferred Stock on our balance sheet by
approximately $1.5 million. We have also recognized, as an increase to our net
loss attributable to common shareholders, an additional $0.9 million of dividend
charges resulting from the excess of the fair value of the common stock that the
8% dividends on the Series A Preferred Stock will convert into over the $3.50
conversion price that will be paid upon such conversion. In total we recorded
$2.4 million of dividend charges for the year ending December 31, 2001. If we
continue to settle the dividend obligations by increasing the stated value of
the preferred stock and if the market price of our common stock were to increase
$2.00 per quarter over the next twelve months, we would incur additional
fair-value dividend charges of approximately $4.5 million during that
twelve-month period. Conversely, if the market price of our common stock were to
decrease $1.00 per quarter over the next twelve months, we would incur
additional fair-value dividend charges of approximately $0.3 million during that
twelve-month period.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on the fifth anniversary of the issue date of such shares at a price
of 105% of the then current value per share. Accordingly, we are accreting the
value of the Series A Preferred Stock up to the redemption value of the shares
using the effective interest method. This is increasing the carrying value of
the Series A Preferred Stock and the charge is included in the computation of
net loss attributable to common shareholders. As of December 31, 2001, we have
recorded approximately $0.5 million of accretion charges.
For the year ended December 31, 2000 we recorded dividend charges of
$2.5 million on our Series D Preferred Stock, including additional dividend
charges related to the increasing value of the common stock underlying the
dividends on the preferred stock. Effective upon the closing of our initial
public offering of common stock on February 22, 2000, all outstanding shares of
Series D Preferred Stock and accumulated undeclared dividends were converted
into shares of common stock.
Other Information
For the years ended December 31, 2001 and December 31, 2000, net losses
included non-cash compensation charges of $2.5 million and $2.3 million,
depreciation and amortization of $7.9 million and $3.2 million, and
non-operating income (expense) of $(0.8) million and $0.1 million, respectively.
Net losses excluding such items, which management refers to as EBITDA, were
$17.4 million and $60.6 million for the years ended December 31, 2001 and 2000,
respectively, a 71% decrease. Because of the significance of non-cash and
one-time charges included in net losses, management regularly reviews EBITDA as
one measure or our operating performance. EBITDA as determined by LendingTree is
not a substitute for operating performance measures under generally accepted
accounting principles (GAAP) and may be different from the presentation of
financial information by other companies. GAAP measures of operating performance
are included in the accompanying consolidated financial statements and are
discussed elsewhere in this management discussion and analysis section.
22
2000 Compared to 1999
Revenue
Total revenue was approximately $30.8 million in 2000, an increase of
$23.8 million, or 340%, from $7.0 million in 1999.
Exchange
Our exchange revenue was approximately $27.5 million, or 89% of total
revenue for 2000, compared with $6.1 million, or 88% of total revenue for 1999,
an increase of 349%. The August 2000 addition of Realty Services to our product
offerings resulted in two operating segments within our exchange. The lending
exchange accounts for $26.8 million, or 97% of the exchange revenue, while
Realty Services contributed $0.7 million.
Other than the added $0.7 million of Realty Services revenue in 2000,
the overall exchange revenue growth reflects a substantial increase in volume of
qualification forms we transmitted to our Lenders and a significant increase in
the amount of revenue earned from closed-loan fees.
We attribute the increase in transmission volume (from approximately
186,000 discrete transmitted qualification forms in 1999 to approximately
716,000 in 2000) primarily to our extensive advertising campaign in 2000.
Although advertising expense was reduced in the second half of 2000 (compared to
the first half of 2000), we attribute increased brand awareness and a
significant increase in Website traffic year-over-year to the effectiveness of
the increased advertising spending. The increase in closed-loan fees reflects
not only the increased transmission volume, but also to an increase in the
number and variety of Lenders on our exchange. Added Lenders create additional
opportunities for consumer's credit requests to be transmitted for evaluation
and/or closure by a lender, thereby creating revenue for us. Closed loans
increased to approximately 145,000 in 2000 from approximately 27,000 in 1999.
Lend-X technology
Lend-X technology revenue totaled $3.3 million, or approximately 11% of
total revenue for 2000, compared with $0.9 million, or approximately 12% of
total revenue for 1999. The increase in Lend-X technology revenue is principally
the result of a significant new customization, implementation and licensing
contract that was entered into in the second quarter of 2000. Lend-X technology
revenue recognized during the 2000 under this contract reflects our progress
towards completion. For 2000, this single customer accounted for $2.4 million,
or 71% of the total Lend-X technology revenue.
Additionally, some of our Lend-X arrangements provide for transactional
exchange revenue derived from volume from the sites that have been enabled by
our technology. The total of Lend-X technology and transactional exchange
revenue derived from Lend-X customer sources was approximately $5.6 million for
the year ending December 31, 2000, compared to none in 1999.
Gross Profit and Cost of Revenue
Gross profit of $21.4 million, or 70% of total revenue, for 2000 was
$17.0 million higher than 1999 that had gross profit of $4.4 million, or (64% of
total revenue. These improvements in gross profit and gross profit percentage
are due to the substantial increase in exchange revenue, as noted above, without
similar, proportionate increases in exchange costs of revenue.
Total cost of revenue increased $6.9 million to $9.4 million in 2000
from $2.5 million in 1999, principally due to increases in variable exchange
costs of revenue. The most significant portions of our costs of revenue are
volume-based. Costs such as credit scoring fees, consumer rebates, network
hosting expenses and other direct costs tend to increase as volume and revenue
increase.
23
Exchange
Gross profit from our exchange in 2000 was $20.0 million, or 73% of
exchange revenue. In 1999 our exchange gross profit was $3.9 million, or 64% of
exchange revenue. For both years, all of the exchange gross profit was
contributed by the lending exchange segment. Realty Services, added in August of
2000, did not generate any gross profit in 2000.
The $16.1 million increase in exchange gross profit is due to the
substantial increases in exchange revenue noted above. Exchange costs, on the
other hand, increased only $5.3 million in 2000 over 1999.
In 2000, our lending exchange segment had $6.8 million in costs of
revenue, an increase of $4.5 million over 1999. In 2000, variable cost of
revenue for the lending exchange included $1.4 million for direct consumer
promotion costs associated with consumers that requested and qualified for
rebates. These promotional costs were $0.2 million in the same period of 1999. .
Other variable exchange costs related to credit scoring, network hosting and
other direct costs increased $1.0 million, $1.1 million and $0.5 million,
respectively, due to increases in customer volume on the lending exchange.
Costs of revenue that are not directly volume based, principally
personnel costs, increased approximately $0.7 million to $1.2 million in 2000
reflecting increased staffing in our customer care department.
The addition of our Realty Services segment in August of 2000
contributed $0.7 million of costs of revenue to the exchange, principally
consumer promotional costs and additional staffing in our customer care center.
Lend-X technology
Costs of revenue associated with Lend-X technology are principally
employment and consultant costs related to projects to customize and/or
implement Lend-X for third parties as well as ongoing server costs related to
hosting Lend-X for these companies. Due to the fact that we entered into several
more Lend-X technology arrangements in 2000, these types of costs were $1.5
million higher in 2000 (at $1.8 million) compared to 1999 ($0.3 million).
Operating Expenses
Product development expense was approximately $2.7 million for 2000 and
$1.1 million for the same period of 1999. The increase over the prior year is
principally related to increased personnel costs. Product development costs
represent costs incurred related to the ongoing efforts to enhance and maintain
the functionality of our Lend-X technology and our Website.
Marketing and advertising expenses increased $38.1 million to
approximately $56.6 million for 2000 compared to $18.5 million for 1999. This
increase is primarily due to substantially higher advertising expenses in 2000
incurred in an effort to build and maintain our brand awareness and attract
users to our Website. During 2000, we ran a national network and cable
television advertising campaign and expanded our radio and outdoor advertising
campaigns to significantly more markets than we did during 1999.
Sales, general and administrative expenses increased to $28.3 million
for 2000 from $10.1 million in 1999, an increase of $18.2 million. Approximately
$9.1 million of this increase is due to higher employee-compensation related
costs due to significant growth in the business. Another $1.6 million of the
increase relates to employee related costs such as travel, relocation and
recruiting fees. Professional and consulting fees increased $1.6 million from
1999 to 2000 reflecting increased professional development; technology
consulting costs; public relations and increased professional fees related to
regulatory and intellectual property matters. We also incurred $1.2 million in
higher facilities, telephone and utilities related expenses due primarily to a
larger facility and employee growth in
24
2000. The amortization of the excess purchase price related to an acquisition
contributed $2.1 million of the increase. Bad debt expense increased $0.8
million from 1999. Depreciation expenses increased $0.8 million from 1999 to
2000 reflecting new equipment and software purchased in 2000.
Included in our operating expenses for 2000 is amortization of deferred
non-cash compensation charges of $2.3 million. As of December 31, 2000, our
consolidated balance sheet reflected deferred non-cash compensation charges of
$3.1 million related to certain stock option and warrant grants that were
considered compensatory. The deferred charge related to stock options ($3.0
million) is being amortized over the four-year vesting period associated with
the related options, ending principally in the third quarter of 2003 and the
first quarter of 2004. The deferred charge related to warrants ($0.1 million) is
being amortized through January 2001, corresponding to the initial term of the
underlying service agreement.
Loss on Impaired Investment
In February 2000, we made a $2.5 million equity investment in a company
providing mortgage marketplace services over the Internet. Our minority
investment represented approximately 8.3% of the outstanding equity of that
business and accordingly, it is accounted for using the cost method of
accounting. In December 2000, we determined that the carrying value of this
investment was impaired as a result of a series of historical and forecasted
operating losses and the prospect that the investment might be unable to fund
its operations in the future. As a result of this impairment, we wrote the
investment down to its estimated fair value of $0.6 million, recording $1.9
million as a non-operating loss on impaired investment.
Interest Income
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased to $2.2
million in 2000 from $0.5 million in 1999. This increase was primarily due to
higher average interest earning account balances in 2000 as a result of the net
proceeds from our initial public offering in February 2000 and the net proceeds
from a private offering of preferred stock in September 1999.
Interest Expense, Financing and Other Charges
Interest expense, financing and other charges consists of bank service
charges and interest expense on capital leases. The increase from 1999 to 2000
is due primarily to new capital leases entered into in 2000.
Dividends and Accretion of Series A Convertible Preferred Stock
For the years ended December 31, 2000 and December 31, 1999, dividends
on preferred stock, including additional dividend charges related to the
increasing value of the common stock underlying the dividends on the preferred
stock, were $2.5 million and $1.7 million, respectively. For the year ended
December 31, 1999, we incurred approximately $0.1 million of accretion charges
related to our preferred stock. We were accreting the value of the mandatorily
redeemable preferred stock up to the redemption value of the shares.
Additionally, for the year ended December 31, 1999, we also incurred $0.5
million of charges related to the conversion of preferred stock warrants to
common stock warrants and $0.5 million of accumulated, undeclared dividends on
preferred stock. See Item 8. Consolidated financial statements, Note 8, for more
details.
Other Information
For the years ended December 31, 2000 and December 31, 1999, net losses
included non-cash compensation charges of $2.3 million and $0.6 million,
depreciation and amortization of $3.2 million and $0.2 million, and
non-operating income (expense), net of $0.1 million and $0.5 million,
respectively. Net losses excluding such items were $60.6 million and $24.4
million, respectively. Because of the significance of non-cash and one-time
charges included in net losses, management regularly reviews EBITDA as one
measure or our operating performance. EBITDA as determined by LendingTree is not
a substitute for operating performance measures under generally accepted
accounting principles (GAAP) and may be different from the presentation of
25
financial information by other companies. GAAP measures of operating performance
are included in the accompanying consolidated financial statements and are
discussed elsewhere in this management discussion and analysis section.
Liquidity and Capital Resources
During 2001, 2000 and 1999 we required $17.2 million, $59.2 million and
$21.2 million of cash to fund operations; such amounts were expended primarily
for advertising, expansion of the infrastructure and support personnel, and
working capital needs. Since inception, we have incurred significant losses and
had an accumulated deficit of $127.1 million as of December 31, 2001. These uses
of cash, losses and accumulated deficit have resulted from the significant costs
incurred for growing our overall business and building our LendingTree brand. As
of December 31, 2001, we had approximately $6.2 million in cash, cash
equivalents and restricted short-term investments.
Restricted cash at December 31, 2001 ($2.8 million) and 2000 ($5.1
million) primarily includes funds that are maintained in an escrow account. This
escrow account was established by us and our advertising agency to maintain
funds set aside by us for future expenditures and services of the advertising
agency. Disbursements from the escrow account can only be made for advertising
expenditures we have approved in advance. We anticipate that advertising costs
will continue to represent a significant portion of operating expenses and that
we will continue to be required to set aside funds in order to secure favorable
advertising spots at reasonable costs.
As more fully described in our notes to our consolidated financial
statements included herein, we have the following sources of financing in place:
-- A revolving credit facility with GE Capital Commercial
Services, Inc. ("GE") that provides for borrowings of up to
$15.0 million. Borrowings are limited to 85% of our eligible
accounts receivable and bear interest at the prime rate. As of
December 31, 2001 we had eligible receivables of $9.0 million
and we had no balance outstanding under this facility.
Eligible receivables fluctuate frequently as a result of
ongoing invoicing and collecting of balances from customers.
We also pay GE a fee of 0.115% of the eligible accounts
receivable arising during the term of the facility.
-- A $2.5 million revolving loan with the Federal Home Loan
Mortgage Corporation ("Freddie Mac") that expires in March
2003. Any amounts outstanding under the Freddie Mac facility
would bear interest at a rate of 10% payable in cash and an
additional amount payable in warrants as more fully described
in the notes to our consolidated financial statements. As of
December 31, 2001, we have not borrowed under this credit
facility and accordingly, have not paid any interest or issued
any warrants.
-- An equity line whereby we may, at our discretion sell shares
of our common stock to an investor from time-to-time subject
to maximum sale limitations in any one monthly period, for up
to a total of $24 million during the term beginning March 6,
2001 and ending March 6, 2003. If we choose to drawdown the
equity line, the minimum amount of any drawdown is $0.1
million and the maximum amount is the greater of (i) $1.0
million or (ii) 20% of the average of the daily volume
weighted average price of our common stock for the twenty-two
(22) day trading period immediately prior to the date we
request a drawdown multiplied by the total trading volume of
the common stock for such period. Only one drawdown is allowed
in each period of 22 trading days beginning on the date of the
drawdown notice. Subject to certain adjustments, the number of
shares to be issued on each settlement date will be a number
of shares equal to the sum of the quotients (for each trading
day within the settlement period) of (x) 1/22nd of the
investment amount and (y) the purchase price on each trading
day within the settlement period. As of December 31, 2001 we
have not used this equity line.
We believe that the existing cash and cash equivalents, restricted
short-term investments and the availability of the two revolving credit
facilities noted above as well as cash generated from operations will be
sufficient to fund
26
our operating and capital needs through 2002. We believe cash from operations
will be generated from revenue growth resulting from the continued growth in
online-lending, expansion of our network of lenders and by more consumers
utilizing our exchange. We expect to be able to drive more consumers to our
exchange by leveraging our existing high brand awareness and utilizing our new,
product focused advertisements and by developing business relationships with
significant web-portals and financially oriented on-line businesses.
Although we have historically experienced significant revenue growth
and have plans to generate positive cash flows from operations in 2002, the
operating results for future periods are subject to numerous uncertainties.
There can be no assurance that revenue growth will continue or that we will be
able to achieve or sustain profitability. Our liquidity could be significantly
affected if this does not happen. However, if revenue does not grow as
anticipated or if we are unable to successfully raise sufficient additional
funds, management would reduce discretionary operating expenditures, including
advertising and marketing and certain administrative and overhead costs. Failure
to generate sufficient revenue or to reduce costs as necessary could have a
material adverse effect on our ability to continue as a going concern and
achieve our business objectives.
If needed, additional financing may not be available or, if available,
such financing may not be on terms favorable to us. If additional funds are
raised through the issuance of equity securities, our shareholders may
experience significant dilution.
Factors That May Affect Results of Our Operations or Reported Results
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating LendingTree. If any of the events or
circumstances described in the following risk factors actually occur, our
business, financial condition or results of operations may suffer.
Use of Estimates and Judgments
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We base our estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. On an ongoing basis we evaluate our estimates and refine our
judgments as actual results and experiences develop.
The significant accounting policies listed in Note 3 to the
consolidated financial statements, included herein beginning on page F-1, affect
our estimates and judgments in preparing the consolidated financial statements.
Specifically, our most significant accounting policies affect our
results of operations and financial condition in the following ways:
-- For most of our Lend-X technology arrangements we host our
Lend-X technology for use by third parties that pay us various
fees for the right to access and use our software. For each
arrangement we estimate the term that the customer will use
our services and recognize the applicable revenue over that
period if it is longer than the stated term of the related
contract.
-- At December 31, 2001 we have $3.7 million of intangible
assets, net of accumulated amortization on our balance sheet.
We are amortizing these assets over their estimated useful
lives ranging from 2 to 3.75 years. We estimate the useful
lives of these assets considering our expected use of the
assets, technological advances and the competitive
environment.
-- We estimate liabilities for payouts under various consumer
promotional programs. In order to estimate the expected payout
for any period we consider historical payout levels, the
number of consumers the
27
promotions are being offered to and the rate at which
consumers have historically responded to the promotions.
Actual results could differ from our estimates.
Risks Related to our Financial Condition
Our Limited Operating History Makes our Business and Prospects
Difficult to Evaluate.
We have a limited operating history. We were formed in 1996 and began
serving consumers across the United States in July 1998. There is no significant
historical basis to assess how we will respond to competitive, economic or
technological challenges. Our business and prospects must be considered in light
of the risks and uncertainties frequently encountered by companies in the early
stages of development, particularly companies like LendingTree, Inc., which
operate in new and rapidly developing online marketplaces. Our failure to
address these risks and uncertainties could materially impact our results of
operations and financial condition.
We Have A History of Losses.
We have never been profitable. We incurred losses from operations of
approximately $27.8 million in 2001. As of December 31, 2001, we had an
accumulated net deficit of approximately $127.1 million.
Based on our operating plans and primarily as a result of revenue
growth, management anticipates revenue will exceed operating expenses excluding
depreciation, amortization, non-cash compensation and dividend charges for 2002.
If our revenue grows at a slower rate than we anticipate, or if our spending
levels exceed our expectations or cannot be adjusted to reflect slower revenue
growth, we may not achieve or sustain profitability.
The Long-Term Viability of Our Business Model is Unproven and Could
Fail.
The long-term viability of our business model and profit potential are
unproven and no assurances can be made that we will be able to sustain
profitability. Our revenue model depends heavily on revenue generated from
Lenders participating in our network who pay us fees based upon their receipt of
credit requests (referred to as transmission fees) and fees based upon loan
closings (referred to as closed-loan fees). We also license our Lend-X
technology to other companies who can create single and multi-lender online
marketplaces. We have rapidly achieved broad market acceptance of our service by
both Lenders and consumers who have traditionally used other means to lend and
borrow money. However, to achieve and maintain profitability, we must maintain
such broad market acceptance. In addition, although we have attracted a
sufficient number of consumers with credit profiles targeted by our Lenders and
the revenue per consumer has exceeded the cost of attracting such consumer there
is no guarantee that we will continue to be able to attract sufficient customers
or that the revenue per customer will exceed the costs of attracting the
customer. We cannot accurately predict what, if any, changes we would make to
our business model in response to any uncertainties in the online lending
market.
Our Operating Results May Be Negatively Impacted By Fluctuations in
Interest Rates.
Although we have historically demonstrated growth during periods of
either rising or falling interest rates, future operating results may be
negatively impacted by fluctuations in key interest rates.
During 2001, revenue earned from mortgages, traditionally a market
segment that is greatly impacted by changes in interest rates represented
approximately 40% of our total revenue. While interest rates during this period
were generally falling, our business continued to show increases in Website
traffic, transmitted qualification forms for mortgages and revenue from
closed-loan fees from mortgages.
28
Conversely, during 1999 and through the middle of 2000, interest rates
were generally increasing and our business continued to show increases in
Website traffic, transmitted qualification forms and revenue from closed-loan
fees.
However, there can be no assurances that during future periods of
rising interest rates that we will not experience a decline in consumer traffic
to our Website due to shrinking credit demand. Conversely, during periods of
robust credit demand, typically associated with falling interest rates, Lenders
may have less incentive to use our marketplace. Either of these events could
reduce our revenue and we cannot assess the effects of interest rates on our
business over a broad range of interest rate environments.
Our Quarterly Operating Results Are Not an Indication of Our Future
Results.
Our quarterly operating results may fluctuate significantly in the
future due to a variety of factors that affect our revenue or expenses in any
particular quarter. Our quarterly results will fluctuate in part based on the
demand for and supply of consumer loans, which are a function of seasonal and
other fluctuations in interest rates and related economic factors, all of which
are outside of our control. These temporary fluctuations could adversely affect
our business. If revenue falls below our expectations in any quarter and we are
unable to quickly reduce our spending in response, our operating results would
be lower than expected.
In addition, we expect that as our business matures we will experience
seasonal fluctuations in our operating results due to fluctuations in consumer
credit markets during the year. For example, home buying behavior is seasonal.
Typically there are a greater number of mortgage closings in the second and
third quarters of a year as compared to the first and fourth quarters. Because
of our limited operating history, it has not been possible for us to assess the
impact of seasonal effects on its business.
Pledged Assets
Important components of our intellectual property are subject to an
amended software customization, license and services agreement by and between
LendingTree and the Federal Home Loan Mortgage Corporation, or Freddie Mac.
Pursuant to this agreement a version of our core software, that was customized
to operate according to certain standards established by Freddie Mac, will be
released to Freddie Mac from escrow if we fail to meet specified repayment
obligations, financial covenants or reporting requirements.
A covenant in one of our capital lease agreements requires that we
maintain a cash and cash equivalents balance of not less than $3.0 million
throughout the term of the lease. If our cash balance falls below $3.0 million
at the end of a period, we will be required to collateralize the balance of the
lease with cash. As of December 31, 2001, the balance of this lease was
approximately $0.5 million
Under our revolving credit facility with GE we have pledged our
accounts receivable as collateral security.
Risks Related To Our Markets And Strategy
Our Future Success Is Dependent Upon Increased Acceptance Of The
Internet By Consumers And Lenders As A Medium For Lendi