UNITED STATES
SECURITIES & 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 March 31,2004
[ ] 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 May 17, 2004, was 15,539,000.
Transitional Small Business Disclosure Format (check one): Yes No XX
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS.............................................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........
ITEM 3. CONTROLS AND PROCEDURES..........................................
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................
SIGNATURES................................................................
2
PART I
ITEM 1. FINANCIAL STATEMENTS
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Balance Sheet
March 31, 2004
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Assets
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Current assets:
Cash and cash equivalents $ 352,833
Restricted cash 59,195
Receivables from sales of loans 1,811,020
Equity builder finder's fee receivable 97,222
Receivable from sale of servicing portfolio 121,639
Prepaids and other current assets 4,005
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Total current assets 2,445,914
Property and equipment, net 104,247
Other assets 15,637
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$ 2,565,798
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Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Warehouse line of credit $ 1,665,804
Accounts payable and accrued expenses 209,584
Current maturities of long-term debt 24,330
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Total current liabilities 1,899,718
Long-term debt 44,487
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Total liabilities 1,944,205
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Minority interest 113,493
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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 638,669
Accumulated deficit (146,108)
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Total stockholders' equity 508,100
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Total liabilities and stockholders' equity $ 2,565,798
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See accompanying notes to consolidated financial statements.
3
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Operations
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Three Months Ended Nine Months Ended
March 31 March 31
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2004 2003 2004 2003
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Revenues:
Income from sale of loans and servicing rights $ 202,597 $ 451,153 $ 508,414 $ 1,344,758
Origination fee revenue 257,544 281,451 837,100 910,445
Income from sale of servicing portfolio 243,277 - 674,727 -
Real Estate Commission revenue 388,970 - 477,762 -
Servicing revenue 6,773 - 43,396 -
Other revenue 16,534 - 32,152 7,020
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Total revenues 1,115,695 732,604 2,573,551 2,262,223
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Operating expenses:
Salaries and direct loan costs 444,039 552,862 1,210,621 1,593,707
Cost of servicing portfolio sold 132,789 - 406,249 -
Real estate commissions paid 351,100 - 428,792 -
Interest 19,337 15,194 42,602 43,137
Selling, general and administrative 150,826 132,609 404,072 418,005
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Total operating expenses 1,098,091 700,665 2,492,336 2,054,849
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Income from operations 17,604 31,939 81,215 207,374
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Other income (expense):
Other expense 3,379 - 929 (11,588)
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Total other income (expense) 3,379 - 929 (11,588)
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Net income before
minority interest and taxes 20,983 31,939 82,144 195,786
Income tax expense - - (19,287) -
Minority share of income (3,944) (6,517) (11,224) (39,157)
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Net income $ 17,039 $ 25,422 $ 51,633 $ 156,629
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Net income per common share
- basic and diluted $ 0.00 $ 0.00 $ 0.00 $ 0.01
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Weighted average shares outstanding
- basic and diluted 15,539,000 15,539,000 15,539,000 15,621,000
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See accompanying notes to consolidated financial statements.
4
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Cash Flows
Nine Months Ended March 31,
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2004 2003
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Cash flows from operating activities:
Net income $ 51,633 $ 156,629
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,603 8,100
Minority interest in net income 8,564 39,157
Decrease (increase) in:
Receivables from sales of loans 1,827,527 (1,394,814)
Equity builder finder's fee receivable 54,885 155,903
Prepaid and other current assets (929) 12,500
Mortgage servicing rights 17,638 -
Other assets (1,310) -
Increase (decrease) in:
Accounts payable and accrued expenses (54,441) 64,704
Net change in warehouse line of credit (1,796,168) 1,344,756
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Net cash provided by operating activities 120,002 386,935
-----------------------------------
Cash flows from investing activities:
Increase in restricted cash (41,286) -
Purchase of property and equipment (6,896) (2,970)
-----------------------------------
Net cash used in investing activities (48,182) (2,970)
-----------------------------------
Cash flows from financing activities:
Net change in note payable (97,757) (181,783)
Payments of long-term debt (15,651) (11,529)
Buy-back of subsidiary common stock (33,840) (70,000)
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Net cash used in financing activities (147,248) (263,312)
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Net (decrease) increase in cash and cash equivalents (75,428) 120,653
Cash and cash equivalents at beginning of period 428,261 274,028
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Cash and cash equivalents at end of period $ 352,833 $ 394,681
-----------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 42,602 $ 43,137
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Income taxes $ 19,287 $ -
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See accompanying notes to consolidated financial statements.
5
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2004 and 2003
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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 82% as
a result of the Company's subsidiary buying back
additional shares of it's stock. 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 82%
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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6
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 period 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 period. Common
stock equivalents are not included in the diluted per
share calculation when their effect is antidilutive. As
of March 31, 2004 and 2003, the Company had no common
stock equivalents outstanding.
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7
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
March 31, 2004 and 2003.
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 nine
months ended March 31, 2004 and 2003.
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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 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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9
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 nine months ended March 31, 2004
and 2003, 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.
Real Estate Commission Revenues
Real estate commissions are recognized at the point at
which all Company services have been performed, and
title to real property has passed from seller to buyer.
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10
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 March 31,
2004 was $97,222, 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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11
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 March 31, 2004 and the results of
operations for the periods ended March 31, 2004 and 2003
and cash flows for the periods ended March 31, 2004 and
2003. The results of operations for the period ended
March 31, 2004 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.
4. Supplemental During the nine months ended March 31, 2004, the
Disclosure of Company:
Cash Flow
Information o Purchased equipment with a capital lease
obligation totaling $24,882.
o Reduced minority interest and increased additional
paid in capital by $16,003, due to the buy-back of
subsidiary common stock by the subsidiary.
During the nine months ended March 31, 2003, the
Company:
o Reduced minority interest and increased additional
paid in capital by 31,722 due to the buy-back of
subsidiary common stock by the subsidiary
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12
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 CyberEnergy, Inc. On June 26, 2001, CyberEnergy, Inc. signed an
agreement to acquire a 76% interest in Bottomline Mortgage, Inc. 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 Mortgage, Inc., then
became an operating subsidiary of CyberEnergy effective July 1, 2001.
CyberEnergy's name was changed to Bottomline Home Loan, Inc. on July 20, 2001.
The Company's ownership percentage in the subsidiary has increased to
approximately 82% 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 9 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 15 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.
One of the trends affecting the mortgage industry in general and Bottomline in
particular is the decrease in mortgage refinancing activity resulting from the
increase in interest rates. As a result, Bottomline has worked to develop other
revenue sources. During the quarter ended March 31, 2004, Bottomline continued
its efforts to develop its Global Realty network, an activity it commenced in
the previous quarter. With Bottomline's President, Buster Williams, Jr., acting
as the supervising broker, the Global Realty network has established agreements
with approximately 100 real estate sales agents who pay Bottomline a monthly fee
and a $350 portion of each sales commission for the use of three satellite
offices established by Bottomline in the Los Angeles area for their use.
Bottomline is working to engage additional real estate sales agents and open
additional satellite offices in an effort to expand this program.
During the nine months ended March 31, 2004, Bottomline originated approximately
$49.3 million in loans, of which 94.5% were first mortgages and 5.5% were second
mortgages made to persons seeking to refinance their residential loans. This
represents a decrease of 21.7%, or $13.7 million, over the loans that closed in
the nine months ended March 31, 2003.
The increase in interest rates during 2004 continued to show a negative impact
on Bottomline's loan origination volume. The total volume of loans closed
decreased 21.7%. However, total revenues during the first nine months of this
fiscal year 2004 increased from the same period for fiscal year 2003 by
$311,328, to $2,573,551 from $2,262,223. The increase in revenue is a result of
the real estate commission revenue of $477,762, due to the expansion of the
Global Realty network during the nine months ended March 31, 2004. In the same
period in 2003, the real estate commission revenue was $0.
13
Beginning in April 2003, we decided to retain the servicing rights to our Fannie
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 servicing rights in bulk, which
we anticipate doing on a once or twice a year basis. The revenue from the sale
of servicing rights portfolio for the nine months ending March 31, 2004 was
$674,727. 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 was being amortized over the estimated life of the loans.
When the servicing rights are sold, these deferred costs are offset against the
proceeds from the sale of such servicing rights. All of the Company's remaining
loan servicing rights were sold during the quarter ended March 31, 2004. The
"receivable from sale of servicing portfolio" of $121,639 shown on the balance
sheet at March 31, 2004 represents the remaining amount due to us from the sale
of the entire portfolio.
Our net income for the nine months ended March 31, 2004 and March 31, 2003 was
$51,633 and $156,629 respectively.
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.
14
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 collectability 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 nine months ended March
31, 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.
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.
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.
15
Results of Operations - Three Months Ending March 31, 2004 and 2003
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Revenues for the three months ended March 31, 2004, were $1,115,695, compared to
revenues of $732,604 for the three months ended March 31, 2003. This increase is
mainly due to the commencement of the Global Realty network and our decision to
sell loan servicing rights on approximately $19 million of Fannie Mae loans
written between October of 2003 and March 31, 2004. The Global Realty network
allows real estate agents to use three satellite offices established by
Bottomline in exchange for a fee of $350 per each sales commission. We currently
have agreements with approximately 100 real estate sales agents. Our intent is
to work with the real estate agents and provide the mortgage needs for their
clients, thus allowing us to increase our mortgage volume through the
relationships with the real estate agents. The Global Realty network generated
revenue, shown as "real estate commission revenue" on the income statement, of
approximately $389,000 during the quarter ended March 31, 2004 as compared to $0
in the same period in 2003. The decision to sell the loan servicing portfolio
during the quarter ended March 31, 2004 resulted in additional revenue of
approximately $243,000 as compared to $0 in the same period of 2003. During the
quarter ended March 31, 2003, 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 increase associated with the revenue from
the sale of servicing rights was partially offset by retaining servicing on all
Fannie Mae loans underwritten after October 1, 2003. Our loan origination volume
decreased 25.6% from $19.2 million in loans closed during the quarter ended
March 31, 2003, to $14.3 million in the quarter ended March 31, 2004. We believe
this decrease is a result of the continuing increase in mortgage interest rates.
The Company had loan origination income of $257,544 in the third quarter of
fiscal 2004 versus $281,451 in fiscal 2003, a decrease of 8.5%. In addition, we
had income from the sale of loans and servicing rights in the amount of $202,597
in the third quarter of fiscal 2004 compared with $451,153 in fiscal 2003, a
decrease of 55.1%, reflecting the Company's shift toward the retention of some
servicing rights rather than the sale of all such rights. Revenue from servicing
was $6,773 in the third 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 sold loan servicing rights on $19 million of our Fannie Mae
loans for $243,277 during the third quarter ended March 31, 2004 as compared to
$0 for the same period in 2003. Real Estate Commission revenue from our Global
Realty network was $388,970 for the quarter ended March 31, 2004, as compared to
$0 the same period 2003.
Selling, general and administrative expenses for the quarter ended March 31,
2004, were $150,826, and such expenses for the quarter ended March 31, 2003,
were $132,609, an increase of $ 18,217 or approximately 13.8%. Selling, general
and administrative expenses for 2004 and 2003 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, and accounting and legal services.
Salaries and direct loan costs for the quarter ended March 31, 2004, were
$444,039 compared to $552,862 for the quarter ended March 31, 2003, a decrease
of $108,823 or 19.7%. This decrease is mainly attributable to fact that due to
the retention of servicing rights, a percentage of the loan costs are deferred
and amortized over the servicing period, and that fewer loans were originated
during this period as compared with the same quarter in 2003.
Total operating expenses were $1,098,091 for the three months ended March 31,
2004, and $700,665 for the comparable period in 2003, a increase of $397,426, or
approximately 56.8%. This increase is mainly attributable to the costs
associated with the expansion of the Global Realty Network.
16
Net income for the quarters ended March 31, 2004 and 2003, was $17,039 and
$25,422, respectively. As a percentage of revenue, net income for the
three-month period ended March 31, 2004, was 1.6%, as compared to the income
equal to 3.5% of revenues for the three-month period ended March 31, 2003. The
increase in revenues over the comparable period can be attributed to Income from
Real Estate Commission revenue during the quarter.
Results of Operations - Nine Months Ending December 31, 2004 and 2003
- ---------------------------------------------------------------------
Revenues for the nine months ended March 31, 2004, were $2,573,551, compared to
revenues of $2,262,223 for the nine months ended March 31, 2003. This increase
is mainly due to the sale of our loan servicing and the real estate commission
revenue from the Global Realty network as discussed above.
The Company had loan origination income of $837,100 in the first nine months of
fiscal 2004 versus $910,445 in fiscal 2003, a decrease of 8.1%. In addition, we
had income from the sale of loans and servicing rights in the amount of $508,414
in the first nine months of fiscal 2004 compared with $1,344,758 in fiscal 2003,
reflecting the Company's shift toward the retention of some servicing rights,
selling in bulk only two or three times during the year rather than selling such
rights on a flow basis. Revenue from servicing was $43,396 in the first nine
months of fiscal 2004 compared with $0 in fiscal 2003. This amount reflects the
revenue recognized from the servicing rights retained by the Company. We sold
servicing rights on approximately $54 million of our Fannie Mae loans for
$674,727 during the first nine months of fiscal year 2004, which is shown under
the caption "Income from sale of servicing portfolio" on the statement of
operations. Real Estate Commission revenue from our Global Realty network was
$477,762 for the first nine months of fiscal year 2004 as compared to $0 in
2003.
Selling, general and administrative expenses for the six months ended March 31,
2004, were $404,072, and such expenses for the nine months ended March 31, 2003,
were $418,005, a decrease of $13,933 or approximately 3.4%. Selling, general and
administrative expenses for 2004 and 2003 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.
Salaries and direct loan costs for the nine months ended March 31, 2004, were
$1,210,621 compared to $1,593,707 for the nine months ended March 31, 2003, a
decrease of $383,086 or 24.1%. This decrease is mainly attributable to the
reduction in loan origination volume.
Total operating expenses were $2,492,336 for the nine months ended March 31,
2004, and $2,054,849 for the comparable period in 2003, a increase of $437,487,
or approximately 21.3%. This increase is mainly attributable to the Real Estate
Commissions paid and costs associated with the Global Realty Network.
Net income for the nine-months ended March 31, 2004 and 2003, was $51,633 and
$156,629, respectively. As a percentage of revenue, net income for the
nine-month period ended March 31, 2004, was 2.0%, as compared to the net income
equal to 7.0% of revenues for the nine-month period ended March 31, 2003. The
increase in revenues over the comparable period can be attributed to Real Estate
Commission revenue and Income from sale of servicing portfolio during the
period.
17
Liquidity and Capital Resources
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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 on June 30, 2004. The balance of the
warehouse facility as of March 31, 2004, was $1,665,804, which matures on June
30, 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 June of 2005. There can
be no assurance that Bottomline will be successful in renewing the credit
facility on its maturity date of June 30, 2004. If Bottomline is not successful
in renewing the credit facility, it will be unable to continue its loan
origination business.
Cash Flow Activities
- --------------------
Bottomline had an ending cash balance of $352,833 at March 31, 2004, as compared
to $428,261 at June 30, 2003. The slight decrease in cash is a direct result of
the sale of servicing portfolio on Fannie Mae loans and subsequent sale of
servicing rights on approximately $19 million of Fannie Mae loans at the end of
March 2004 and the creation of the receivable from sale of servicing portfolio.
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 is
impacted, 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 $120,002 for the nine-months ended
March 31, 2004, as compared to cash provided by operations of $386,935 for the
nine-month period ended March 31, 2003.
Cash used in investing activities was ($48,182) for the nine months ended March
31, 2004, as compared to ($2,970) for the nine month period ended March 31,
2003. The increase in cash used in investing activities is due to the increase
in restricted cash for the escrow funds received on the loans serviced by the
Company. As of March 31, 2004, all servicing rights had been sold but the
restricted cash had not been transferred to the purchaser. We began servicing
loans in April 2003.
18
Cash used in financing activities was ($147,248) for the nine months ended March
31, 2004, as compared to ($263,312) for the nine-month period ended March 31,
2003. The decrease is mainly a result of the Net change in notes payable,
payments of long-term debt and the buy-back of additional shares of subsidiary
stock in the amount of $33,840 as compared to $70,000 in 2003.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
- ----------------------------------------------------
Based on their evaluations as of the filing date of this report, the principal
executive officer and principal financial officer of the Company have concluded
the the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934) are
effective to ensure that information required to be disclosed by the Company in
reports that the Company files or submits under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.
(b) Changes in internal controls.
- ---------------------------------
There were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect internal
controls subsequent to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
19
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 and Chief Financial Attached
Officer Pursuant to Rule 13a-14
Item 32 Section 1350 Certifications
- -----------------------------------------------------------------------------------------------
32.01 32 Certification of Chief Executive Officer and Chief Financial Attached
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 December 31, 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 17th day of May 2004.
BOTTOMLINE HOME LOAN, INC.
By /s/Buster Williams, Jr.
-------------------------------
Buster Williams, Jr., President
Chief Executive Officer and
Chief Financial Officer
20