UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED DECEMBER 31, 2004
Commission file number: 000-31413
BOTTOMLINE HOME LOAN, INC.
--------------------------
(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
State the number of outstanding shares of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of common stock,
$0.001 par value (the only class of voting stock), as of February 23, 2005, was
15,539,000.
Transitional Small Business Disclosure Format (check one): Yes No XX
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS..................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............12
ITEM 3. CONTROLS AND PROCEDURES..............................................18
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS.............................................................19
SIGNATURES....................................................................19
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Balance Sheet
December 31, 2004
Assets
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Current assets:
Cash and cash equivalents $ 232,072
Restricted cash 9,993
Receivables from sales of loans 2,366,280
Mortgage servicing rights, net 48,422
Prepaids and other current assets 3,378
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Total current assets 2,660,145
Equity builder finder's fee receivable 72,649
Property and equipment, net 150,391
Other assets 16,663
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$ 2,899,848
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Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Warehouse line of credit $ 2,163,301
Accounts payable and accrued expenses 225,114
Current maturities of long-term debt 19,907
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Total current liabilities 2,408,322
Long-term debt 30,942
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Total liabilities 2,439,264
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Minority interest 70,358
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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 624,608
Accumulated deficit (249,921)
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Total stockholders' equity 390,226
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Total liabilities and stockholders' equity $ 2,899,848
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See accompanying notes to consolidated financial statements.
3
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Operations
Three Months Ended Six Months Ended
December 31 December 31
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2004 2003 2004 2003
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Revenues:
Income from sale of loans and servicing rights $ 230,596 $ 147,167 408,152 $ 305,817
Origination fee revenue 211,149 218,805 362,893 579,556
Income from sale of servicing portfolio - 431,450 115,963 431,450
Real estate commission revenue 829,868 88,792 1,527,758 88,792
Servicing revenue 1,495 24,001 5,339 36,623
Other operating revenue 30,938 15,618 62,190 15,618
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Total revenues 1,304,046 925,833 2,482,295 1,457,856
----------------------------------------------------
Operating expenses:
Salaries and direct loan costs 340,327 369,075 643,639 766,582
Cost of servicing portfolio sold - 273,460 60,688 273,460
Real estate commissions paid 790,894 77,692 1,465,551 77,692
Interest 27,550 10,054 40,717 23,265
Selling, general and administrative 135,204 105,902 279,960 256,625
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Total operating expenses 1,293,975 836,183 2,490,555 1,397,624
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Income (loss) from operations 10,071 89,650 (8,260) 60,232
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Other income (expense):
Other expense (627) - (627) -
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Total other income (expense) (627) - (627) -
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Net income (loss) before
minority interest and taxes 9,444 89,650 (8,887) 60,232
Income tax expense - current - - - (19,287)
Minority share of (income) loss (1,601) (16,123) 1,332 (7,280)
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Net income (loss) $ 7,843 $ 73,527 $ (7,555) $ 33,665
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Net income (loss) per common share
- basic and diluted $ 0.00 $ 0.00 $ (0.00) $ 0.00
----------------------------------------------------
Weighted average shares outstanding
- basic and diluted 15,539,000 15,539,000 15,539,000 15,539,000
----------------------------------------------------
See accompanying notes to consolidated financial statements.
4
BOTTOMLINE HOME LOAN, INC.
Unaudited Consolidated Statement of Cash Flows
Six Months Ended December 31,
2004 2003
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Cash flows from operating activities:
Net (loss) income $ (7,555) $ 33,665
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 14,231 8,402
Minority interest in net (loss) income (1,332) 6,780
Decrease (increase) in:
Receivables from sales of loans (453,654) 2,015,962
Equity builder finder's fee receivable 12,127 49,291
Mortgage servicing rights (6,204) 70,789
Other assets 51 98
Increase (decrease) in:
Accounts payable and accrued expenses 53,788 37,273
Net change in warehouse line of credit 398,027 (1,941,340)
-----------------------------
Net cash provided by operating activities 9,479 280,920
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Cash flows from investing activities:
Increase in restricted cash (1,879) (135,882)
Purchase of property and equipment (11,971) (4,762)
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Net cash used in investing activities (13,850) (140,644)
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Cash flows from financing activities:
Net change in note payable - (89,618)
Payments of long-term debt (12,156) (10,409)
Buy-back of subsidiary common stock (24,000) (24,000)
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Net cash used in financing activities (36,156) (124,027)
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Net (decrease) increase in cash and cash equivalents (40,527) 16,249
Cash and cash equivalents at beginning of period 272,599 428,261
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Cash and cash equivalents at end of period $ 232,072 $ 444,510
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See accompanying notes to consolidated financial statements.
5
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
December 31, 2004 and 2003
1. Summary Nature of Business
of The Company incorporated under the laws of the state of
Significant Nevada on February 15, 1996, as Cyberenergy, Inc. The
Accounting name of the Company was changed to Bottomline Home
Policies 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 85% as a result of the Company's
subsidiary buying back additional shares of its 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 an office location in Phoenix, Arizona. 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 85%
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.
6
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
1. Summary Concentration of Credit Risk
of The Company's primary business is originating
Significant conventional mortgage loans and mortgage loans based on
Accounting HUD Title II regulations. As an approved HUD Title II
Policies loan correspondent, the Company's subsidiary HUD
Continued 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 that 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 December 31, 2004 and 2003, the
Company had no common stock equivalents outstanding.
7
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
1. Summary Stock-Based Compensation
of The Company accounts for stock-based compensation under
Significant the recognition and measurement principles of
Accounting Accounting Principles Board Opinion No. 25, "Accounting
Policies for Stock Issued to Employees" ("APB Opinion No. 25"),
Continued and related interpretations. The Company has adopted
SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of
SFAS No. 123, the Company has elected to continue to
apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. No stock options
were outstanding as of December 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 three
months ended December 31, 2004 and 2003.
8
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
1. Summary Recognition of Mortgage Fee Income
of Mortgage fee income consists of service and release
Significant premiums, origination fees, processing fees and certain
Accounting other income related to mortgages. For mortgages sold,
Policies mortgage fee income and related expenses are recognized
Continued 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 its 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.
9
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
1. Summary Recognition of Mortgage Fee Income - Continued
of In connection with the sale of mortgage loans, the
Significant Company may also sell the servicing rights to such
Accounting loans. The Company recognizes revenue from the sale of
Policies such servicing rights when an agreement with the
Continued 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 that 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 prorated 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 three months ended December 31,
2004 and 2003, the Company did not refund any service
release premiums to a servicer.
Commitment fees received (nonrefundable 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.
10
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
1. Summary Real Estate Commission Revenue
of Real estate commissions are recognized at the point at
Significant which all Company services have been performed, and
Accounting title to real property has passed from seller to buyer.
Policies
Continued Recognition of Equity Builder Finder's Fees
Equity builder finder's fees represent 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 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 December
31, 2004, was $72,649, net of the allowance for
uncollectible receivables of $20,000, which is shown
under the caption equity builder finder's fee
receivable on the consolidated balance sheet.
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.
11
BOTTOMLINE HOME LOAN, INC.
Notes to Unaudited Consolidated Financial Statements
Continued
2. Unaudited The unaudited financial statements include the accounts
Financial of the Company and include all adjustments (consisting
Statements of normal recurring items) that are, in the opinion of
management, necessary to present fairly the financial
position as of December 31, 2004, and the results of
operations for the periods ended December 31, 2004 and
2003, and cash flows for the periods ended December 31,
2004 and 2003. The results of operations for the period
ended December 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 that 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 six months ended December 31, 2004, the
Disclosure of Company:
Cash Flow
Information o Reduced minority interest and increased additional
paid-in capital by $14,218, due to the buy-back of
subsidiary common stock by the subsidiary.
During the six months ended December 31, 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 $16,003, due to the buy-back of
subsidiary common stock by the subsidiary.
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. 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. in exchange for
10,000,000 of our common shares or a 62% interest in our issued and outstanding
12
shares. Bottomline Mortgage, Inc. then became our operating subsidiary effective
July 1, 2001. Our ownership percentage has increased to approximately 85% as a
result of our purchase of additional shares of our subsidiary. Our executive
office is located at 201 East Huntington Drive, Suite 202, Monrovia, CA 91016,
and our telephone number is (800) 520-5626. Our registered statutory office in
Nevada is located at 711 S. Carson Street, Suite 1, Carson City, Nevada 89701.
References to us in this report include Bottomline Home Loan, Inc. and our
subsidiary, Bottomline Mortgage, Inc., unless the context indicates otherwise.
Our operations are conducted through our subsidiary Bottomline Mortgage, Inc. We
are an independent retail mortgage banking company primarily engaged in the
business of originating and selling residential mortgage loans. We offer a broad
array of residential mortgage products targeted primarily to high-credit-quality
borrowers over the Internet, as well as through six commission-compensated loan
originators. We operate primarily as a mortgage banker, underwriting, funding
and selling our loan products to various buyers. Operations are conducted from
our offices in Monrovia, California, and Phoenix, Arizona, which operate as
community loan centers and call centers to service the 15 states in which we are
currently approved to originate mortgages. We have loan officers working in
Clearwater, Florida, and San Marcos, Texas, who telecommute and close loans
through our Monrovia, California, office.
One of the trends affecting the mortgage industry in general and us in
particular is the decrease in mortgage refinancing activity resulting from the
increase in interest rates. As a result, we have worked to develop other revenue
sources. During the quarter ended December 31, 2003, we began to receive
revenues from our Global Realty Network. With our President, Buster Williams,
Jr., acting as the supervising broker, the Global Realty Network has established
agreements with approximately 150 real estate sales agents that pay us a monthly
fee and a $350 portion of each sales commission for the use of six satellite
offices established by us in the Los Angeles, California area for their use. We
are working to engage additional real estate sales agents and open additional
satellite offices in an effort to expand this program.
During the six months ended December 31, 2004, we originated approximately $23.0
million in loans, of which 93% were first mortgages and 7.0% were second
mortgages made to persons seeking to refinance their residential loans. This
represents a decrease of 34%, or $11.9 million, from the loans that closed in
the six months ended December 31, 2003.
The increase in interest rates during 2004 continued to show a negative impact
on our loan origination volume. The total volume of loans closed decreased 34%.
Loan revenues during the first six months of fiscal year 2004 declined from the
same period for fiscal year 2003 by $461,099, to $892,347 from $1,353,446. The
decline in revenue is a result in our retaining some of the loan servicing on
our Fannie Mae loans and a slow down in the volume of loan origination volume on
refinance loans originated during the six months ended December 31, 2004.
Servicing rights on approximately $35 million of our Fannie Mae loans were sold
in the six months ended December 31, 2003. Beginning in April 2003, we decided
to retain some of 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 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. When 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
balance sheet as mortgage servicing rights, net at $48,422.
13
Our net loss was $7,555 for the six months ended December 31, 2004, as compared
with net income of $33,665 for the six months ended December 31, 2003.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the audited financial statements
and accompanying notes and the other financial information appearing in our
annual report on Form 10-KSB for the year ended June 30, 2004.
The following information is based upon the Consolidated Statements of
Operations for Bottomline Home Loan, Inc. and Bottomline Mortgage, Inc., our
majority-owned subsidiary.
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 us and our creditors, (2) the transferee (investor) has the right to pledge
or exchange the mortgage, and (3) we do not maintain effective control over the
transferred mortgage loan. We do 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 us, 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, we are not exposed to market
risk during this time period. We 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. Our
accounting policy is to reserve for the estimated loan repurchases.
In connection with the sale of mortgage loans, we also may sell the servicing
rights to such loans. We recognize 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. Our contracts with investors or servicers
that purchase these rights require certain warrants and representations by us
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 us. Our 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 six months ended December 31, 2004 and 2003, we did not
refund any service release premiums to a servicer.
14
Commitment fees received, which are nonrefundable fees that arise from
agreements with borrowers that obligate us 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.
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 our receipt of
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 on December 31, 2004, was $72,649, compared with $102,816 at June 30,
2004, which is shown under the caption "Equity Builder finder's fee receivable"
on the balance sheet. We stopped initiating customers in the Equity Builder
Program in September 2002, and do not anticipate enrolling customers in the
future.
Revenue from servicing loans is recognized monthly as the services are
performed.
Mortgage Servicing Rights. We originate mortgage loans for sale to the secondary
market and sell 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
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Three Months Ended December 31, 2004 and 2003
Revenues for the three months ended December 31, 2004, were $1,304,046, compared
to revenues of $925,833 for the three months ended December 31, 2003. This
increase is mainly due to our decision to hire 70 new commission-only real
estate agents for the Global Realty Network, which increased our real estate
sales force to 150 agents during this period, and to open three new satellite
real estate offices in the Los Angeles, California area. Our real estate
commission revenue has increased from $88,792 for the three months ended
December 31, 2003, to $829,868 for the same period in 2004. During the three
months ended December 31, 2003, all loan servicing rights were sold, with the
income from the sale of the loan servicing rights amounting to $431,450 versus
no revenue received for the same period in 2004 due to our decision to retain
the loan servicing rights until we have a larger portfolio of servicing rights
to sell. The income from the sale of servicing portfolio can vary greatly from
period to period as we accumulate servicing rights and sell such rights as a
portfolio only a few times each year. Our loan origination volume decreased less
than 1% from $13.3 million in loans closed during the three months ended
December 31, 2003, to $13.1 million in the three months ended December 31, 2004.
We believe that we have been able to maintain this loan origination volume as a
result of the continuing availability of low mortgage interest rates for home
purchases despite the decline in home refinances.
15
We had loan origination income of $211,149 in the three months ended December
31, 2004, versus $218,805 in the three months ended December 31, 2003, a
decrease of 4%. Revenue from servicing was $1,495 in the three months ended
December 31, 2004, compared with $24,001 in the three months ended December 31,
2003. This amount reflects the revenue recognized from the servicing rights
retained by us. We anticipate this amount to grow in future periods as we
continue to increase our holdings in servicing rights.
Selling, general and administrative expenses for the three months ended December
31, 2004, were $135,204, and such expenses for the three months ended December
31, 2003, were $105,902, an increase of $29,302 or approximately 28%. The
increase is due mainly to additional costs associated with the opening of three
new satellite real estate offices. Selling, general and administrative expenses
for 2004 and 2003 consisted of expenses to keep our corporate good standing,
fees to transfer agents, and operating expenses, including rent, telephone,
licensing fees, equipment leases, accounting and legal services.
Salaries and direct loan costs for the three months ended December 31, 2004,
were $340,327, compared to $369,075 for the three months ended December 31,
2003, a decrease of $28,748 or 7.8%. This decrease is mainly attributable to
fact that fewer loans were originated during this period as compared with the
same quarter in 2003.
Total operating expenses were $1,293,975 for the three months ended December 31,
2004, and $836,183 for the comparable period in 2003, an increase of $457,792,
or approximately 54.7%. This increase is mainly due to the real estate
commissions paid to the commission-only real estate agents at Global Realty
Network.
Net income for the three months ended December 31, 2004 and 2003, was $7,843 and
$73,527, respectively. As a percentage of revenue, net income for the
three-month period ended December 31, 2004, was 0.6%, as compared to the income
equal to 7.9% of revenues for the three-month period ended December 31, 2003.
The decrease in net income as a percentage of revenue is primarily attributable
to increased operating expenses and expenses associated with the opening of the
three new satellite real estate offices and a decrease in loan origination
volume.
Six Months Ended December 31, 2004 and 2003
Revenues for the six months ended December 31, 2004, were $2,482,295, compared
to revenues of $1,457,856 for the six months ended December 31, 2003. This
increase is mainly due to our decision to hire 70 new commission-only real
estate agents for the Global Realty Network, which increased our sales force to
150 agents during this period, and to open three new satellite real estate
offices in the Los Angeles, California area. We now have a total of six
satellite offices in the Los Angeles, California area.
We had loan origination income of $362,893 in the six months ended December 31,
2004, versus $579,556 in the six months ended December 31, 2003, a decrease of
37.4%. In addition, we had income from the sale of loans and servicing rights in
the amount of $408,152 in the six months ended December 31, 2004, compared with
$305,817 in the six months ended December 31, 2003, an increase of 33.5%,
reflecting our sale of servicing rights upon closing some of the loans
originated during the six months ended December 31, 2004. Revenue from servicing
was $5,339 in the six months ended December 31, 2004, compared with $36,623 in
the six months ended December 31, 2003. This amount reflects the revenue
recognized from the servicing rights retained by us. We anticipate this amount
to grow in future periods as we continue to increase our holdings in servicing
rights. We sold servicing rights on approximately $9.3 million of our Fannie Mae
loans for $115,963 during the six months ended December 31, 2004, which is shown
under the caption "Income from sale of servicing portfolio" on the statement of
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operations. The income from the sale of servicing rights portfolio can vary
greatly from period to period as we accumulate servicing rights and sell such
rights as a portfolio a few times a year. Real estate commission revenue from
our Global Realty Network was $1,527,758 for the six months ended December 31,
2004, as compared to $88,792 for the six months ended December 31, 2003.
Selling, general and administrative expenses for the six months ended December
31, 2004, were $279,960, and such expenses for the six months ended December 31,
2003, were $256,625, an increase of $23,335, or approximately 9.1%. The increase
is due partly to additional costs associated with the opening of three new
satellite real estate offices Selling, general and administrative expenses for
2004 and 2003 consisted of expenses to keep our corporate good standing, fees to
transfer agents, and operating expenses, including rent, telephone, licensing
fees, equipment leases, accounting and legal services.
Salaries and direct loan costs for the six months ended December 31, 2004, were
$643,639 compared to $766,582 for the six months ended December 31, 2003, a
decrease of $122,943 or 16.0%. This decrease is mainly due to the reduction of
loan originations during the same period.
Total operating expenses were $2,490,555 for the six months ended December 31,
2004, and $1,397,624 for the comparable period in 2003, an increase of
$1,092,931, or approximately 78.2%. This increase is mainly attributable to the
real estate commissions paid to the Global Realty Network's commission-only real
estate agents.
We had a net loss of $7,555 for the six months ended December 31, 2004, compared
with net income of $33,665 for the six months ended December 31, 2003. As a
percentage of revenue, net loss for the six-month period ended December 31,
2004, was 0.3%, as compared to net income equal to 2.3% of revenues for the
six-month period ended December 31, 2003. This decrease can be attributed to
increased operating expenses and expenses associated with the opening of the
three new satellite real estate offices and a decrease in loan origination
volume.
Liquidity and Capital Resources
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Current cash balances and funds available to us under our working capital credit
facilities, in addition to our cash flows from operations, are expected to be
sufficient to meet our liquidity requirements at our current level of operations
through at least the remainder of the fiscal year ending June 30, 2005. We
expect to continue our plans for expansion for the remainder of the fiscal year
ending June 30, 2005, and believe that cash flows from operations will support
those plans over that time period. At the present, we do not have any
commitments for any additional equity or loan arrangements and cannot provide
any level of assurance that we would be able to obtain any additional equity or
loan financing if needed. We anticipate that revenue generated from our current
operations will provide sufficient funds to satisfy our cash needs through the
fiscal year ending June 30, 2005.
Our 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 we maintain a minimum
tangible net worth of $275,000 and pay a fee or penalty of 0.25% of 1% in the
event that we fail 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, 2005. The balance of the warehouse
facility as of December 31, 2004, was $2,163,301, which matures on March 31,
2005, and is secured by the notes and deeds of trust from the loans that are
funded on the line of credit. We anticipate rolling over the warehouse credit
facility into a new facility that will mature in March of 2006. There can be no
assurance that we will be successful in renewing the credit facility on its
maturity date of March 31, 2005. If we are not successful in renewing the credit
facility, we will be unable to continue our loan origination business.
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Cash Flow Activities
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We had an ending cash balance of $232,072 at December 31, 2004, as compared to
$272,599 at June 30, 2004. The decrease in cash is a direct result of the
purchase of office equipment and the buyback of our subsidiary's common stock.
Cash provided by operating activities was $9,479 for the six months ended
December 31, 2004, as compared to cash provided by operations of $280,920 for
the six-month period ended December 31, 2003. The main reason for the decrease
is due to the income from the sale of servicing rights portfolio of $115,963 in
the six months ended December 31, 2004 as compared to $431,450 in the comparable
period of 2003. As noted above, the income from the sale of servicing portfolio
can vary greatly from period to period because we accumulate such rights and
then sell them as a portfolio only a few times each year. Although by retaining
the servicing rights for a period of time our 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 our
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 12
months.
Cash used in investing activities was $13,850 for the six months ended December
31, 2004, as compared to $140,644 for the six-month period ended December 31,
2003. The significant decrease 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 $36,156 for the six months ended December
31, 2004, as compared to $124,027 for the six-month period ended December 31,
2003. The decrease is mainly a result of the payment of note payables of $89,618
in 2003.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of December 31, 2004, the principal
executive/principal financial officer of the Company has concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act) 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
During the last fiscal quarter, the Company engaged an outside public
accounting firm to assist in the preparation of the financial statements to be
included in the Form 10-QSB. There were no other significant changes in the
Company's internal controls over financial reporting or in other factors that
occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect these internal controls subsequent to the
date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included as part of this report at the location
indicated:
Exhibit
Number Title of Document Location
- --------------- --------------------------------------------------------------------------- ----------------------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- --------------------------------------------------------------------------------------------
31.01 Certification of Chief Executive Officer and Chief Financial Officer Attached
Pursuant to Rule 13a-14
Item 32 Section 1350 Certifications
- --------------------------------------------------------------------------------------------
32.01 Certification of Chief Executive Officer and Chief Financial Officer Attached
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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 28th day of February, 2005.
BOTTOMLINE HOME LOAN, INC.
By /s/ Buster Williams, Jr.
-------------------------------
Buster Williams, Jr., President
Chief Executive Officer and
Chief Financial Officer
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