UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
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Commission file number: 000-31413
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BOTTOMLINE HOME LOAN, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0356064
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 East Huntington Drive, Suite 202, Monrovia, CA 91016
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(Address of principal executive office) (Zip Code)
(800) 520-5626
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes XX No
The number of outstanding shares of the issuer's common stock, $0.001 par value
(the only class of voting stock), as of November 11, 2003, was 15,539,000.
Transitional Small Business Disclosure Format (check one): Yes No XX
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS............................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......... 11
ITEM 3. CONTROLS AND PROCEDURES............................................ 15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 16
SIGNATURES.................................................................. 16
PART I
ITEM 1. FINANCIAL STATEMENTS
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Balance Sheet
September 30, 2003
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Assets
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Current assets:
Cash and cash equivalents $ 182,088
Restricted cash 210,413
Receivables from sales of loans 1,829,283
Equity builder finder's fee receivable 125,033
Mortgage servicing rights, net 273,460
Prepaids and other current assets 3,076
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Total current assets 2,623,353
Property and equipment, net 89,042
Other assets 14,229
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$ 2,726,624
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Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Warehouse line of credit $ 1,729,529
Note payable 57,201
Accounts payable and accrued expenses 346,583
Current maturities of long-term debt 16,286
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Total current liabilities 2,149,599
Long-term debt 40,330
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Total liabilities 2,189,929
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Minority interest 103,668
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Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding -
Common stock, $.001 par value, 500,000,000 shares
authorized; 15,539,000 shares issued and outstanding 15,539
Additional paid-in capital 652,427
Accumulated deficit (234,939)
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Total stockholders' equity 433,027
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Total liabilities and stockholders' equity $ 2,726,624
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See accompanying notes to consolidated financial statements.
1
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Operations
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Three Months Ended
September 30
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2003 2002
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Revenues:
Income from sale of loans and servicing rights $ 158,650 $ 427,666
Origination fee revenue 360,751 257,488
Servicing revenue 12,622 -
Equity builder finder's fee - 7,020
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Total revenues 532,023 692,174
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Operating expenses:
Salaries and direct loan costs 397,507 491,240
Interest 13,211 12,286
Selling, general and administrative 150,723 137,309
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Total operating expenses 561,441 640,835
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(Loss) income from operations (29,418) 51,339
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Other income (expense):
Other income (expense) 2,450 -
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Total other income (expense) 2,450 -
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Net (loss ) income before minority interest
and taxes (26,968) 51,339
Income tax (expense) benefit (19,073) -
Minority share of loss (income) 8,843 (12,835)
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Net (loss) income $ (37,198) $ 38,504
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Net (loss ) income per common share
- basic and diluted $ 0.00 $ 0.00
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Weighted average shares outstanding
- basic and diluted 15,539,000 16,039,000
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See accompanying notes to consolidated financial statements.
2
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Cash Flows
Three Months Ended September 30,
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2003 2002
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Cash flows from operating activities:
Net (loss) income $ (37,198) $ 38,504
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 4,201 2,700
Minority interest in net (loss) income (8,843) 12,835
Decrease (increase) in:
Receivables from sales of loans 1,809,264 (2,180,806)
Equity builder finder's fee receivable 27,074 26,792
Prepaid and other current assets - (93,090)
Mortgage servicing rights (134,183) -
Other assets 98 -
Increase (decrease) in:
Accounts payable and accrued expenses 82,558 31,517
Net change in warehouse line of credit (1,732,443) 2,063,110
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Net cash provided by (used in)
operating activities 10,528 (98,438)
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Cash flows from investing activities:
Increase in restricted cash (192,504) -
Purchase of property and equipment (4,762) (2,970)
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Net cash used in investing activities (197,266) (2,970)
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Cash flows from financing activities:
Net change in note payable (40,556) (39,662)
Payments of long-term debt (6,379) (3,843)
Buy-back of subsidiary common stock (12,500) -
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Net cash used in financing activities (59,435) (43,505)
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Net decrease in cash and cash equivalents (246,173) (144,913)
Cash and cash equivalents at beginning of period 428,261 274,028
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Cash and cash equivalents at end of period $ 182,088 $ 129,115
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Non-Cash Investing and Financing Activities:
During the three months ended September 30, 2003, the Company:
o Purchased equipment with a capital lease obligation totaling
$3,409.
o Reduced minority interest and increased additional paid in capital
by $7,921, due to the buy-back of subsidiary common stock by the
subsidiary.
See accompanying notes to consolidated financial statements.
3
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003 and 2002
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1. Summary of Nature of Business
Significant The Company incorporated under the laws of the State of
Accounting Nevada on February 15, 1996 as CyberEnergy, Inc. The
Policies name of the Company was changed to Bottomline Home Loan,
Inc. on July 20, 2001. The Company was a developmental
stage company until June 26, 2001, when it acquired 76%
of the outstanding common stock of Bottomline Mortgage,
Inc. The transaction was accounted for as a reverse
acquisition using the purchase method of accounting,
therefore, the historical results presented in the
financial statements are those of Bottomline Mortgage,
Inc., the accounting acquirer, through June 27, 2001,
after which historical results represent the combined
entity. The ownership percentage has increased to 81% as
a result of the Company's purchase of additional shares
of its subsidiary. The Company, primarily through its
subsidiary, Bottomline Mortgage, Inc., assists
individuals, brokers, and others in obtaining long-term
trust deed (mortgage) financing. The Company processes
loan applications, effects loan underwriting and
receives purchase commitments from investor groups for
mortgage backed loans prior to funding the loans,
primarily at its corporate office in Monrovia,
California. Loan applications are also solicited and
received at office locations in Phoenix, Arizona; and
Clearwater, Florida. The Company's subsidiary is a loan
correspondent, as defined by the U.S. Department of
Housing and Urban Development (HUD), and is therefore
required to conform to certain net worth, liquid assets
and other conditions and requirements and to follow
certain specific regulations issued from time to time by
HUD.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Bottomline Home Loan, Inc.
(formerly known as Cyberenergy, Inc.) and its 81%
subsidiary, Bottomline Mortgage, Inc. Minority interest
represents minority shareholders' proportionate share of
the equity in Bottomline Mortgage, Inc. All significant
intercompany balances and transactions are eliminated.
Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results
could differ from those estimates.
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4
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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1. Summary of Concentration of Credit Risk
Significant The Company's primary business is originating
Accounting conventional mortgage loans and mortgage loans based on
Policies HUD Title II regulations. As an approved HUD Title II
Continued loan correspondent, the Company's subsidiary HUD
mortgages are insured by FHA. Title II regulations limit
the size of individual loans to specific dollar amounts,
and contain guidelines regarding borrower
credit-worthiness. Company management believes the
credit risk associated with specific borrowers and
geographic concentrations is not significant.
The Company maintains cash in bank deposit accounts,
which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Financial instruments, which potentially subject the
Company to concentration of credit risk include
receivables from investors and customers. In the normal
course of business, the Company provides credit terms to
investors and customers. Accordingly, the Company
performs ongoing credit evaluations of investors and
customers.
Earnings Per Share
The computation of basic earnings per common share is
based on the weighted average number of shares
outstanding during each period.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the quarter plus the common stock
equivalents which would arise from the conversion of
debt or equity instruments convertible into common stock
and the exercise of stock options and warrants
outstanding using the treasury stock method and the
average market price per share during the quarter.
Common stock equivalents are not included in the diluted
per share calculation when their effect is antidilutive.
As of September 30, 2003 and 2002, the Company had no
common stock equivalents outstanding.
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5
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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1. Summary of Stock-Based Compensation
Significant The Company accounts for stock-based compensation under
Accounting the recognition and measurement principles of APB
Policies Opinion No. 25, Accounting for Stock Issued to
Continued Employees, and related interpretations. The Company has
adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". In accordance with the provisions of SFAS
123, the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB Opinion No. 25"),
and related interpretations in accounting for its stock
option plans. No stock options were outstanding as of
September 30, 2003 or 2002.
Mortgage Servicing Rights
The Company originates mortgage loans for sale to the
secondary market and sells the loans on either a
servicing retained or servicing released basis.
Servicing rights represent the right to receive payments
from the mortgagees, administer the escrow accounts and
remit the mortgage payments to the investor. The
investor pays the servicer a predetermined rate in
exchange for servicing the loans. Servicing rights are
recognized as assets based on a percentage of the direct
costs incurred to originate the loan. The percentage of
direct costs is calculated by taking the estimated
revenue from the sale of the servicing rights divided by
the total revenue from the origination of the mortgage,
including sale of servicing rights. The servicing rights
asset is amortized over the expected life of the asset,
which has been estimated by management to be an average
of nine years. Mortgage servicing rights are
periodically evaluated for impairment. Impairment
represents the excess of unamortized cost over its
estimated fair value. Impairment is evaluated based upon
the fair value of the assets, using groupings of the
underlying loans as to interest rates. Fair value is
determined using prices for similar assets with similar
characteristics or based upon discounted cash flows
using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance. There
were no impairment charges incurred during the quarters
ended September 30, 2003 and 2002.
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6
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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1. Summary of Recognition of Mortgage Fee Income
Significant Mortgage fee income consists of service and release
Accounting premiums, origination fees, processing fees and certain
Policies other income related to mortgages. For mortgages sold,
Continued mortgage fee income and related expenses are recognized
at the time the loan meets the sales criteria for
financial assets which are; (1) the transferred assets
have been isolated from the Company and its creditors,
(2) the transferee (investor) has the right to pledge or
exchange the mortgage, and (3) the Company does not
maintain effective control over the transferred mortgage
loan. The Company does not carry any mortgage loans for
investment purposes. A firm commitment is obtained from
the investor on a loan-by-loan basis before closing a
loan, therefore each loan is sold virtually at the same
time it is closed, removing exposure to interest rate
changes. The loans are sold on a pure pass-through
basis, meaning there is no yield differential between
the loan rate less servicing fees and the yield to the
purchaser of the loan. Such loans are sold at premiums
or discounts depending on the ultimate yield required by
the investor. All premiums or discounts are paid by the
investor at the time the loan is sold. Immediately after
closing, the loan documents are sent to the investor
endorsed in blank, thus allowing the holder of the loan
to sell or transfer the loan at their discretion. This
means that title and effective control have transferred
to the investor. At such time, revenue, calculated as
the amount due from the investor in excess of the loan
funded by the Company, is recorded. Payment of most
receivables from the sale of loans is received within
one week of closing. Because title of the loan has
transferred, the Company is not exposed to market risk
during this time period.
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7
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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1. Summary of Recognition of Mortgage Fee Income - Continued
Significant In connection with the sale of mortgage loans, the
Accounting Company may also sell the servicing rights to such
Policies loans. The Company recognizes revenue from the sale of
Continued such servicing rights when an agreement with the
purchaser of such servicing rights exists, ownership to
such servicing rights has been transferred to the
purchaser, the selling price of such servicing rights is
fixed or determinable, and collectibility is reasonable
assured. The Company's contracts with investors or
servicers that purchase these rights require certain
warrants and representations by the Company which
guarantee the mortgages will be serviced for a minimum
of three to twelve months after they are purchased.
Should for any reason the loan be paid off or prepaid
during the first year, the servicer may request the
return of all or a pro-rated portion of the service
release premium paid to the Company. The Company's
accounting policy is to provide a reserve for the amount
of fees that are estimated to be refunded to the
servicers. To date, such estimates have not been
material. During the quarters ended September 30, 2003
and 2002, the Company did not refund any service release
premiums to a servicer.
Commitment fees received (non-refundable fees that arise
from agreements with borrowers that obligate the Company
to make a loan or satisfy an obligation under a
specified condition) are initially deferred and
recognized as revenue as loans are delivered to
investors, or when it is evident that the commitment
will not be utilized.
Loan origination fees received and direct costs of
originating loans are deferred and recognized as income
or expense when the loans are sold to investors.
Mortgage loans are primarily funded by lending
institutions under warehouse line of credit agreements.
Recognition of loan Servicing Income
The Company recognizes revenue from servicing loans
monthly as the services are performed.
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8
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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1. Summary of Recognition of Equity Builder Finder's Fees
Significant Equity builder finder's fees represent fees charged to
Accounting customers to initiate the Equity Builder Program (the
Policies program). The program allows the customer to make
Continued bi-weekly payments by automatic transfer, which results
in a quicker loan payoff. Equity builder revenue is
recognized upon the Company receiving confirmation from
the servicing agent that the loan payments will be
processed in accordance with the program. The unpaid
balance from the program due from customers at September
30, 2003 was $125,033, which is shown under the caption
equity builder finder's fee receivable on the
consolidated balance sheet. To date the Company has not
incurred any losses related to amounts due from
customers under the equity builder program. The Company
estimates that future losses, if any, will be immaterial
and therefore has not recorded any reserve for losses on
the equity builder finder's fee receivable.
Income Taxes
Deferred taxes are computed using the asset and
liability method. Under the asset and liability method,
deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that
includes the enactment date.
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9
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
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2. Unaudited The unaudited financial statements include the accounts
Financial of the Company and include all adjustments (consisting
Statements of normal recurring items), which are, in the opinion of
management, necessary to present fairly the financial
position as of September 30, 2003 and the results of
operations for the quarters ended September 30, 2003 and
2002 and cash flows for the quarters ended September 30,
2003 and 2002. The results of operations for the quarter
ended September 30, 2003 are not necessarily indicative
of the results to be expected for the entire year.
3. Basis of The accompanying unaudited consolidated financial
Presentation statements have been prepared by management in
accordance with the instructions in Form 10-QSB and,
therefore, do not include all information and footnotes
required by accounting principles generally accepted in
the United States of America and should, therefore, be
read in conjunction with the Company's Form 10-KSB,
filed with the Securities and Exchange Commission. These
statements do include all normal recurring adjustments,
which the Company believes necessary for a fair
presentation of the statements. The interim operations
results are not necessarily indicative of the results
for the entire year.
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10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
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Bottomline Home Loan, Inc. was formed under Nevada law on February 15, 1996,
under the name Cyber Energy, Inc. The name was changed to Bottomline Home Loan,
Inc. on July 20, 2001. On June 26, 2001, Bottomline Home Loan, Inc. signed an
agreement to acquire a 76% interest in Bottomline Mortgage, Inc. (Bottomline) in
exchange for 10,000,000 of the common shares of the Company or a 62% interest in
the issued and outstanding shares of its common stock. Bottomline then became an
operating subsidiary of the Company effective July 1, 2001. The ownership
percentage has increased to approximately 80% as a result of the Company's
purchase of additional shares of its subsidiary. The executive office is located
at 201 East Huntington Drive, Suite 202, Monrovia, CA 91016, and our telephone
number is (800) 520-5626. The registered statutory office in Nevada is located
at 711 S. Carson Street, Suite 1, Carson City, Nevada 89701. We use the terms
"Bottomline," "Company" and "we" in this report to refer to Bottomline Home
Loan, Inc., unless the context indicates otherwise.
Bottomline's operations are conducted through its subsidiary Bottomline
Mortgage, Inc. Bottomline is an independent retail mortgage banking company
primarily engaged in the business of originating and selling residential
mortgage loans. Bottomline offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers over the Internet, as well
as through 14 commission-compensated loan originators. Operations are conducted
from Company offices in Monrovia, California, Clearwater, Florida, San Marcos,
Texas, and Phoenix, Arizona, which operate as community loan centers and call
centers to service the 18 states in which Bottomline is currently approved to
originate mortgages. Bottomline operates primarily as a mortgage banker,
underwriting, funding and selling its loan products to various buyers.
During the quarter ended September 30, 2003, Bottomline originated approximately
$21.5 million in loans, of which 95.9% were first mortgages and 4.1% were second
mortgages made to persons seeking to refinance their residential loans. This
represents an increase of 5.9%, or $3.0 million, over the loans that closed in
the quarter ended September 30, 2002.
Bottomline's quarter ended September 30, 2003 continued to show a positive
impact from the continuing favorable interest rates during the two years.
Although the total volume of loans closed increased, our revenues decreased
23.1% during the first three months of this fiscal year from $692,174 to
$532,023. The decline in revenue is a result in our retaining the loan servicing
on our Fannie Mae loans during the quarter ended September 30, 2003 whereas in
the same period in 2002, all servicing rights were sold upon loan closing.
Beginning in April 2003, we decided to retain the servicing rights to our Fanny
Mae loans for later sale in bulk portfolios rather than selling them with the
loans on a flow basis. We contract with a third party for the actual servicing
of these loans. This enables us to create a stream of income by retaining a
portion of the servicing fee before selling the loans in bulk, which we
anticipate doing on a once or twice a year basis. The estimated costs incurred
relating to the mortgage servicing rights portion of the loan are capitalized
and carried on the balance sheet under the caption, "mortgage servicing rights,
net". This asset represents the deferral of a percentage of the actual costs
incurred to originate the loans. The mortgage servicing rights asset is being
amortized over the estimated life of the loans. If the servicing rights are
sold, these deferred costs will be offset against the proceeds from the sale of
such servicing rights. This portfolio of loan servicing rights is shown in the
financial statements as mortgage servicing rights, net at $273,460.
Our net income/(loss) for the three months ended September 30, 2003 and
September 30, 2002 was ($37,198) and $38,504 respectively.
11
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements and
accompanying notes and the other financial information appearing in our annual
report on Form 10-KSB.
The following information is based upon the Consolidated Statements of
Operations for Bottomline Home Loan, Inc. and Bottomline Mortgage, Inc., now a
majority owned subsidiary of Bottomline.
Critical Accounting Policies and Estimates
- ------------------------------------------
The following is a discussion of our critical accounting policies and estimates
that management believes are material to an understanding of our results of
operations and that involve the exercise of judgment or estimates by management.
Revenue Recognition. Income from the sale of loans and servicing rights consists
of service and release premiums, origination fees, processing fees and certain
other income related to mortgages. For mortgages sold, mortgage fee income and
related expenses are recognized at the time the loan meets the sales criteria
for financial assets, which are: (1) the transferred assets have been isolated
from Bottomline and its creditors, (2) the transferee (investor) has the right
to pledge or exchange the mortgage, and (3) Bottomline does not maintain
effective control over the transferred mortgage loan. Bottomline does not carry
any mortgage loans for investment purposes. A firm commitment is obtained from
the investor on a loan-by-loan basis before closing a loan; therefore, each loan
is sold virtually at the same time it is closed, removing all exposure to
interest rate changes. Such loans are sold at premiums or discounts depending on
the ultimate yield required by the investor. All premiums or discounts are paid
by the investor at the time the loan is sold. Immediately after closing, the
loan documents are sent to the investor endorsed in blank, thus allowing the
holder of the loan to sell or transfer the loan at its discretion. This means
title and effective control have transferred to the investor. At such time,
revenue, calculated as the amount due from the investor in excess of the loan
funded by Bottomline, is recorded. Payment of most receivables from the sale of
loans is received within one week of closing. Because title of the loan has been
transferred, Bottomline is not exposed to market risk during this time period.
Bottomline may be required to repurchase the loans from investors if specific
original documents specified by the investor are not delivered, if there was
fraud in the origination of the loan, or if the borrower becomes delinquent
during the first several months after the loan is sold. Bottomline's accounting
policy is to reserve for the estimated loan repurchases.
In connection with the sale of mortgage loans, Bottomline also may sell the
servicing rights to such loans. Bottomline recognizes revenue from the sale of
such servicing rights when an agreement with the purchaser of such servicing
rights exists, ownership to such servicing rights has been transferred to the
purchaser, the selling price of such servicing rights is fixed or determinable,
and collectibility is reasonably assured. Bottomline's contracts with investors
or servicers that purchase these rights require certain warrants and
representations by Bottomline that guarantee the mortgages will be serviced for
a minimum of three to 12 months after they are purchased. Should for any reason
the loan be paid off or prepaid during the first year, the servicer may request
the return of all or a pro rata portion of the service release premium paid to
Bottomline. Bottomline's accounting policy is to provide a reserve for the
amount of fees that are estimated to be refunded to the servicers; however, to
date such estimates have not been material. During the quarters ended September
30, 2003 and 2002, Bottomline did not refund any service release premiums to a
servicer.
Commitment fees received, which are non-refundable fees that arise from
agreements with borrowers that obligate Bottomline to make a loan or satisfy an
obligation under a specified condition, are initially deferred and recognized as
revenue as loans are delivered to investors or when it is evident that the
commitment will not be utilized.
12
Loan origination fees received and direct costs of originating loans are
deferred and recognized as income or expense when the loans are sold to
investors.
Equity Builder finder's fees represent finders' fees charged to customers to
initiate the Equity Builder Program (the program). The program allows the
customer to make biweekly payments by automatic transfer, which results in a
quicker loan payoff. Equity Builder revenue is recognized upon Bottomline
receiving confirmation from the servicing agent that the loan payments will be
processed in accordance with the program. The unpaid balance from the program
due from customers at September 30, 2003 and 2002, was approximately $125,000,
compared with approximately $152,000 at June 30, 2003, which is shown under the
caption "Equity Builder finder's fee receivable" on the balance sheet.
Bottomline stopped initiating customers in the Equity Builder Program in
September 2002, and does not anticipate enrolling customers in the future.
Revenue from servicing loans is recognized monthly as the services are
performed.
Mortgage Servicing Rights. Bottomline originates mortgage loans for sale to the
secondary market and sells the loans on either a servicing retained or servicing
released basis. Mortgage servicing rights represent the right to receive
payments from the mortgages, administer the escrow accounts, and remit the
mortgage payments to the investor. The investor pays the servicer a
predetermined rate in exchange for servicing the loans. Servicing rights are
recognized as assets based on a percentage of the direct costs incurred to
originate the loan. The percentage of direct costs is calculated by taking the
estimated revenue from the sale of servicing rights divided by the total revenue
from the origination of the mortgage, including the sale of servicing rights.
The servicing rights asset is amortized over the expected life of the asset,
which has been estimated by management to be an average of nine years. Mortgage
servicing rights are periodically evaluated for impairment. Impairment
represents the excess of unamortized cost over its estimated fair value.
Impairment is evaluated based upon the fair value of the assets, using groupings
of the underlying loans as to interest rates. Fair value is determined using
prices for similar assets with similar characteristics or based upon discounted
cash flows using market-based assumptions. Any impairment of a grouping is
reported as a valuation allowance.
Results of Operations - Three Months Ending September 30, 2003 and 2002
- -----------------------------------------------------------------------
Revenues for the three months ended September 30, 2003, were $532,023, compared
to revenues of $692,174 for the three months ended September 30, 2002. This
decrease is mainly due to our decision to retain loan servicing rights on our
Fannie Mae loans written during the quarter. During the same quarter in 2002,
all servicing rights were sold upon loan closing. As explained above, the
decision to temporarily retain the loan servicing rights permits us to retain a
revenue stream until we sell the servicing rights in bulk on a once or twice a
year basis. The decline associated with the lack of revenue from the sale of
servicing rights was partially offset by an increase in the volume of loans
closed. Our volume increased 5.9% from $18.5 million in loans closed during the
quarter ended September 30, 2002 to $21.5 million in the quarter ended September
30, 2003. We believe this increase is a result of the continuing favorable
interest rates.
The Company had loan origination income of $360,751 in the first quarter of
fiscal 2004 versus $257,488 in fiscal 2003, an increase of 40%. In addition, we
had income from the sale of loans and servicing rights in the amount of $158,650
in the first quarter of fiscal 2004 compared with $427,666 in fiscal 2003, a
decrease of 63%, reflecting the Company's shift toward the retention of some
servicing rights rather than the sale of all such rights. Revenue from servicing
was $12,622 in the first quarter of fiscal 2004 compared with $0 in fiscal 2003.
This amount reflects the revenue recognized from the servicing rights retained
by the Company. We anticipate this amount to grow in future periods as the
Company continues to increase its holdings in servicing rights.
13
Selling, general and administrative expenses for the quarter ended September 30,
2003, were $150,723, and such expenses for the quarter ended September 30, 2002,
were $137,309, an increase of $13,414 or approximately 10%. Selling, general and
administrative expenses for 2003 and 2002 consisted of expenses to keep the
Company in good corporate standing, fees to transfer agents, and expenses to
operate the Company, including rent, telephone, licensing fees, equipment
leases, accounting and legal services.
Additional expenses in the form of salaries and direct loan costs for the
quarter ended September 30, 2003, were $397,507 compared to $491,240 for the
quarter ended September 30, 2002, a decrease of $93,733 or 19%. This decrease is
mainly attributable to the fact that due to the retention of servicing rights, a
percentage of the loan costs are deferred and amortized over the servicing
period.
Total operating expenses were $561,441 for the three months ended September 30,
2003, and $640,835 for the comparable period in 2002, a decrease of $79,394, or
approximately 12.4%, mainly due to the fact that due to the retention of
servicing rights, a percentage of the loan costs are deferred and amortized over
the servicing period. In addition, an item that contributed to additional
expenses in 2002 was related to the Company's efforts to complete a Form SB-2
Registration Statement and the related costs and audit information required in
that process.
Net (loss) income for the quarters ended September 30, 2003 and 2002, was
($37,198) and $38,504, respectively. As a percentage of revenue, net loss for
the three-month period ended September 30, 2003, was 6.99%, as compared to the
income equal to 5.5% of revenues for the three-month period ended September 30,
2002. The decrease in revenues over the comparable period can be attributed to
retaining loan servicing on our Fannie Mae loans during the quarter.
Liquidity and Capital Resources
- -------------------------------
Current cash balances and funds available to Bottomline under its working
capital credit facilities, in addition to its cash flows from operations, are
expected to be sufficient to meet its liquidity requirements at its current
level of operations through at least the remainder of the fiscal year ending
June 30, 2004. Bottomline does expect to continue its plans for expansion for
the remainder of the fiscal year ending June 30, 2004, and believes that cash
flows from operations will support those plans over that time period. At the
present, Bottomline does not have any commitments for any additional equity or
loan arrangements and cannot provide any level of assurance that Bottomline
would be able to obtain any additional equity or loan financing if needed.
Bottomline anticipates that revenue generated from its current operations will
provide sufficient funds to satisfy the cash needs of Bottomline through the
fiscal year ending June 30, 2004.
Bottomline's warehouse facility or line of credit presently used to fund loans,
in the amount of $3 million, with an interest rate of prime plus 0.75%, is with
First Collateral Services. First Collateral requires that Bottomline maintain a
minimum tangible net worth of $275,000 and pay a fee or penalty of 0.25% of 1%
in the event that Bottomline fails to utilize at least 50% of the line during a
month. Loans funded by this line must be paid off or purchased within 45 days of
the funding date. The original Master Loan Warehousing Agreement was dated
November 27, 1998, and is up for renewal March 31, 2004. The balance of the
warehouse facility as of September 30, 2003, was $1,729,529, which matures on
March 31, 2004, and is secured by the notes and deeds of trust from the loans
that are funded on the line of credit. Bottomline anticipates rolling over the
warehouse credit facility into a new facility that will mature in March of 2005.
There can be no assurance that Bottomline will be successful in renewing the
credit facility on its maturity date of March 31, 2004. If Bottomline is not
successful in renewing the credit facility, it will be unable to continue its
loan origination business.
14
Cash Flow Activities
- --------------------
Bottomline had an ending cash balance of $182,088 at September 30, 2003, as
compared to $428,261 at June 30, 2003. The decline in cash is a direct result of
the retention of servicing rights on Fannie Mae loans. In previous periods, such
servicing rights were sold at the same time the loan was sold, therefore the
Company received immediate cash flow from the sale of the servicing rights.
Although by retaining the servicing rights for a period of time the Company's
immediate cash flow is negatively impacted, management believes that the
ultimate return received upon the sale of a portfolio of servicing rights will
be greater than that received by selling servicing rights on a loan by loan
basis. Management believes that although its cash position has declined,
existing working capital combined with the revenue from ongoing operations and
the sale of loan servicing rights on an annual or semiannual basis will be
sufficient to sustain operations for the next twelve months.
Cash provided by operating activities was $10,528 for the three months ended
September 30, 2003, as compared to cash used by operations of $98,438 for the
three-month period ended September 30, 2002.
Cash used in investing activities was $197,266 for the three months ended
September 30, 2003 , as compared to $2,970 for the three month period ended
September 30, 2002. The significant increase in cash used in investing
activities is due to the restricted cash received upon loan closing for escrow
payments that must be maintained by the company servicing the loans. We began
servicing loans in April 2003.
Cash used in financing activities was $59,435 for the three months ended
September 30, 2003, as compared to $43,505 for the three-month period ended
September 30, 2002. The increase is mainly a result of the buy-back of
additional shares of subsidiary stock in the amount of $12,500.
ITEM 3. CONTROLS AND PROCEDURES
Bottomline maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of its financial statements
and other disclosures included in this report. Bottomline's board of directors
provides oversight to its financial reporting process.
Within the 90-day period prior to the date of this report, Bottomline evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, Bottomline's Chief Executive Officer and Chief Financial
Officer concluded that its disclosure controls and procedures are effective in
alerting him in a timely manner to material information relating to Bottomline
required to be included in this quarterly report on Form 10-QSB.
There have been no significant changes in Bottomline's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date that it carried out its evaluation and there were no corrective actions
regarding significant deficiencies or material weaknesses.
15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are included as part of this report at the
location indicated:
SEC
Exhibit Reference
Number Number Title of Document Location
- --------------------------------------------------------------------------------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- --------------------------------------------------------------------------------
31.01 31 Certification of Chief Executive Officer Attached
and Chief Financial Officer Pursuant to
Rule 13a-14
Item 32 Section 1350 Certifications
- --------------------------------------------------------------------------------
32.01 32 Certification of Chief Executive Officer Attached
and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended September 30, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized, this 14th day of November, 2003.
BOTTOMLINE HOME LOAN, INC.
By /s/Buster Williams, Jr
-------------------------------
Buster Williams, Jr., President
Chief Executive Officer and
Chief Financial Officer
16