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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2001
REGISTRATION NO. 333-60686
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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LENDINGTREE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7370 13-3931821
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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11115 RUSHMORE DRIVE
CHARLOTTE, NORTH CAROLINA 28277
(704) 541-5351
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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MR. DOUGLAS R. LEBDA
CHIEF EXECUTIVE OFFICER
LENDINGTREE, INC.
11115 RUSHMORE DRIVE
CHARLOTTE, NORTH CAROLINA 28277
(704) 541-5351
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
DAVID J. GOLDSCHMIDT, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036
(212) 735-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXI-
TITLE OF EACH CLASS OF AMOUNT MUM OFFERING
SECURITIES TO BE TO BE PRICE PER PROPOSED MAXIMUM AGGRE- AMOUNT OF
REGISTERED REGISTERED SHARE GATE OFFERING PRICE REGISTRATION FEE
- ---------------------- ---------- ------------- ---------------------- ----------------
Common stock Up to 25,000,000(1) (2) $24,000,000.00(3) $6,000.00(4)
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The price per share will vary based on the volume-weighted average
daily price of LendingTree's common stock during the drawdown periods
described in this registration statement. The purchase price will be
equal to 95% of the volume-weighted average daily price for each
trading day within such drawdown pricing periods. The agreement allows
for up to 24 draws over a period of 24 months for amounts up to the
greater of (i) $1,000,000, or (ii) 20% of the 22 day volume weighted
average price multiplied by the 22 day trading volume, per draw.
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(3) This represents the maximum purchase price that Paul Revere Capital
Partners, Ltd. is obligated to pay LendingTree under the common stock
purchase agreement. The maximum net proceeds LendingTree can receive is
$24,000,000 less a 4% cash placement fee payable to its placement
agent, Ladenburg Thalmann & Co. Inc. and $1,000 in escrow fees and
expenses per drawdown.
(4) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 29, 2001
LENDINGTREE, INC.
25,000,000 SHARES OF COMMON STOCK
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This prospectus relates to the resale by Paul Revere Capital Partners,
Inc., a British Virgin Islands Corporation, of up to 25,000,000 shares of common
stock that may be issued through a common stock purchase agreement with Paul
Revere, as further described in this prospectus. The total number of shares of
common stock that may be issued through the common stock purchase agreement and
sold by Paul Revere would constitute 133% of our issued and outstanding common
stock as of March 31, 2001. However, the agreement provides that we may not sell
more than 3,728,750 shares of common stock, or 19.9% of our issued and
outstanding common stock as of March 7, 2001, the date of the common stock
purchase agreement, unless and until we receive the prior approval of our
stockholders as required pursuant to NASD Rule 4350(i)(1)(D). We will receive
the net sale price of any common stock that we sell through the common stock
purchase agreement and Paul Revere may resell those shares pursuant to this
prospectus. The price at which we will sell the shares to Paul Revere will be
equal to 95% of the average of the volume weighted average price of our common
stock over the twenty-two trading days immediately prior to the date the shares
are issued. The registration of shares of our common stock that may be offered
pursuant to this prospectus does not necessarily mean that any of these shares
will ultimately be offered and sold.
Paul Revere is an "underwriter" within the meaning of the Securities
Act of 1933 in connection with its sales.
Our common stock is listed on the Nasdaq National Market System under
the symbol "TREE." The last reported sales price for our common stock on the
Nasdaq National Market on June 27, 2001 was $6.05 per share.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 11.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2001.
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LENDINGTREE, INC.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................4
THE OFFERING.................................................................7
SUMMARY FINANCIAL DATA.......................................................9
RISK FACTORS................................................................11
FORWARD-LOOKING STATEMENTS..................................................27
MARKET DATA.................................................................27
USE OF PROCEEDS.............................................................27
DIVIDEND POLICY.............................................................28
CAPITALIZATION..............................................................29
PRICE RANGE OF OUR COMMON STOCK.............................................34
SELECTED FINANCIAL DATA.....................................................35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................37
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........................89
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND MANAGEMENT...........................................95
DESCRIPTION OF CAPITAL STOCK...............................................100
SHARES ELIGIBLE FOR FUTURE SALE............................................113
COMMON STOCK PURCHASE AGREEMENT............................................114
THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES.............................116
SELLING STOCKHOLDERS.......................................................121
PLAN OF DISTRIBUTION.......................................................122
LEGAL MATTERS..............................................................126
EXPERTS ..................................................................126
WHERE YOU CAN FIND MORE INFORMATION........................................126
INDEX TO FINANCIAL STATEMENTS..............................................F-1
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PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the more detailed
information regarding LendingTree, the risks of purchasing our common stock
discussed under "Risk Factors," and our financial statements and the
accompanying notes.
LENDINGTREE, INC.
OVERVIEW
We offer an Internet-based lending exchange for consumers and lenders.
We attract consumer demand to the exchange through our proprietary website
www.lendingtree.com, as well as through private-label and co-branded exchanges
enabled by our technology platform, Lend-XSM. In addition, through our website,
we provide access to other services related to owning, maintaining or buying and
selling a home, including a network of real estate brokers.
We also license and host our Lend-X technology for use by other
businesses, enabling them to create their own customized co-branded or
private-label lending exchanges. Through these Lend-X partnerships, we can earn
revenue both from technology fees related to customization, licensing and
hosting the third-party exchange, as well as fees from network sources including
transmission fees, closed-loan fees and brokerage fees.
Consumers begin the LendingTree process on www.lendingtree.com by
completing a simple online information request, referred to as a qualification
form. Data from the qualification form, along with a credit score calculated
from credit reports retrieved by the system, is compared to the underwriting
criteria of lenders in our lender network. We currently have more than 100
participating lenders in our network. Consumers can receive up to four loan
offers in response to a single credit request and then compare, review and
accept the offer that best suits their needs. We believe that our participating
lenders can generate new business that meets their specific underwriting
criteria at a substantially lower cost of acquisition than they can through
traditional marketing channels. Our exchange encompasses most consumer credit
categories, including mortgages, home equity loans, automobile loans, credit
cards and personal loans.
We are not a lender. Rather, we are a lending exchange that seeks to
drive efficiency and cost savings in the consumer credit markets for both
consumers and lenders. We earn revenue from lenders that pay fees for every
qualification form that meets their underwriting criteria and is transmitted to
them, called transmission fees, and for loans that they close, called
closed-loan fees. Our website is powered by our lending exchange technology
platform, Lend-X.
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We were incorporated in the state of Delaware on June 7, 1996 and began
serving consumers across the United States on July 1, 1998. Our principal
executive offices are located at 11115 Rushmore Drive, Charlotte, North Carolina
28277, and our telephone number is (704) 541-5351.
RECENT DEVELOPMENTS
FIRST QUARTER RESULTS
During the first quarter of 2001, LendingTree recognized revenue of
$12.3 million, which was nearly $3 million, or 28%, greater than the prior
quarter and nearly 200% greater than the first quarter of 2000. Our net loss for
the first quarter of 2001 was $10.2 million, or $0.52 per share, which is
approximately $5.0 million, or 32%, less than our net loss for the prior
quarter. As of March 31, 2001, LendingTree had approximately $16.5 million in
cash, cash equivalents and restricted investments available.
MARCH 2001 FINANCING TRANSACTIONS
In March 2001, we consummated a series of debt and equity financing
transactions which are summarized below.
Private Equity-Line. On March 7, 2001, we entered into a common stock
purchase agreement with Paul Revere Capital Partners, Ltd. for the potential
future issuance and sale of up to $24.0 million of our common stock, subject to
restrictions and other obligations that are described throughout this
prospectus. Under this arrangement, we, at our sole discretion, may exercise up
to 24 drawdowns, pursuant to which Paul Revere is obligated to purchase that
number of shares of our common stock specified in the drawdown notice. We are
limited with respect to how often we can exercise a drawdown and the amount of
each drawdown.
Exercise of Specialty Finance Partners Equity Rights Certificate
On September 29, 2000, Capital Z Partners, our largest stockholder,
through its affiliate, Specialty Finance Partners, purchased an equity rights
certificate from us for $10 million. Pursuant to its terms, this equity rights
certificate was converted into 2,857,143 shares of our 8% convertible preferred
stock in conjunction with the March 2001 closing of the 8% convertible preferred
stock financing described below. Specialty Finance Partners also received a
commitment fee warrant to purchase 135,000 shares of our common stock with an
initial exercise price of $7.975 per share, which was reduced to $3.762 per
share in conjunction with the closing of the 8% convertible preferred stock
financing.
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8% Convertible Preferred Stock. On March 7, 2001, we entered into a
preferred stock purchase agreement with various investors, pursuant to which we
issued and sold, on March 20, 2001, 3,700,001 shares of series A 8% convertible
preferred stock for $12.95 million, or $3.50 per share, in cash. In addition, we
also sold 200,000 shares of 8% convertible preferred stock to our Chief
Executive Officer for $700,000 through a loan he obtained from us. In connection
with this transaction, we received commitments from two other investors,
including our Chief Financial Officer, to purchase an additional 128,751 shares
on April 30, 2001 for a total consideration of $450,000 plus accumulated but
unpaid dividends to the date of such closing. We completed the sale of the
additional 128,751 shares on April 30, 2001. In conjunction with the closing of
the 8% convertible preferred stock transaction, Specialty Finance Partners's
equity rights certificate, which is described above, was converted into
2,857,143 shares of 8% convertible preferred stock at an effective conversion
rate equal to $3.50 per share.
ULLICO Revolving Line of Credit. On March 7, 2001, we entered into a
two-year $5.0 million revolving credit agreement with ULLICO. Borrowings under
the revolving credit agreement are secured by substantially all of our assets.
Interest on borrowings accrues at 6% per annum in cash and additional interest
in the form of 5-year warrants to purchase our common stock with an exercise
price of $.01 per share. The number of interest warrants ULLICO will be entitled
to receive is based on the average loan amount outstanding multiplied by 14% per
annum and divided by $3.99. In addition, as a commitment fee, we issued ULLICO
warrants to purchase 40,000 shares of our common stock with an exercise price of
$.01 per share.
Freddie Mac Revolving Loan. On March 7, 2001, we entered into a
two-year $2.5 million revolving loan agreement with Freddie Mac and amended the
terms of our existing software licensing arrangement with Freddie Mac. Interest
on borrowings accrues at 10% per annum in cash and additional interest at the
rate of 10% per annum payable in the form of 5-year warrants to purchase our
common stock with an exercise price of $.01 per share. The number of interest
warrants Freddie Mac will be entitled to receive is based on an average amount
outstanding on the revolving line of credit multiplied by 10% per annum divided
by $3.99. In addition, as a commitment fee, we issued Freddie Mac warrants to
purchase 12,500 shares of our common stock with an exercise price of $.01 per
share.
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THE OFFERING
This prospectus covers up to 25,000,000 shares of LendingTree common
stock which may be sold by the selling stockholder, Paul Revere Capital
Partners, Ltd, a British Virgin Islands Corporation. The number of shares
subject to this prospectus represents 133% of our issued and outstanding common
stock as of March 31, 2000. To our knowledge, Paul Revere does not own any of
our securities and has had no material relationship with us during the past
three years, other than as set forth in the following paragraph. In accordance
with the common stock purchase agreement and NASD Rule 4350(i)(1)(D), we will
not be able to sell more than approximately 3,728,750 shares, or 19.9% of our
issued and outstanding shares on March 7, 2001, unless and until we receive the
prior approval of our stockholders. If we are able to issue additional shares
pursuant to the common stock purchase agreement after all of the shares
registered under this prospectus are issued, we may choose to file another
registration statement registering additional shares for resale issued pursuant
to the common stock purchase agreement based on our need to raise money at that
time.
On March 7, 2001, we entered into a common stock purchase agreement
with Paul Revere for the future issuance and sale of shares of our common
stock. This common stock purchase agreement establishes what is sometimes termed
an equity line of credit or an equity drawdown facility. Under this arrangement,
we, at our sole discretion, may make up to 24 drawdown requests over a two year
period, pursuant to which Paul Revere is obligated to purchase up to $24 million
of our common stock, at prices that will vary based on the market price of our
common stock, but will be below the market price of our common stock. Because
there is no way to determine how many shares, if any, we will eventually issue
and sell to Paul Revere and because the rules of the Nasdaq National Market
require that we obtain stockholder approval prior to issuing 20% or more of the
shares of common stock outstanding on March 7, 2001, we are seeking the approval
of our stockholders at our annual meeting to enable us, should the need arise,
to issue shares in such amount or above. If we do not receive stockholder
approval, we may nonetheless issue shares up to such 20% amount under the equity
line agreement.
In general, if we elect to sell shares or draw down on the equity
facility, the minimum amount we can draw down at any one time is $100,000 and
the maximum amount will be the greater of $1,000,000 or 20% of the weighted
average price of our common stock for the 22 days prior to the date we request a
drawdown multiplied by the total trading volume of our common stock for such 22
day period. We can make one drawdown request every 22 trading days, up to a
maximum of 24 drawdowns during the two-year period of the agreement, provided
that we cannot sell more than $24 million worth of shares in total under the
facility and may in practice only be able to sell a much lower amount.
The total number of shares that may be issued under the facility will
depend on a number of factors, including the market price and trading volume of
our common stock during each drawdown period. The purchase price for any shares
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issued under the facility will be equal to 95% of the volume-weighted average
price of our common stock over the 22 day period following our drawdown request.
The proceeds we receive from each drawdown will also be reduced by a 4% fee
payable to Ladenburg Thalmann & Co., the placement agent that introduced Paul
Revere to us, and a $1,000 escrow fee. If, after we make a drawdown request, the
price of our common stock drops below the minimum threshold price that we
specify in the drawdown request, we will not be obligated to sell shares to Paul
Revere below such minimum threshold price. The threshold price will be
established by our pricing committee at the time of each drawdown request and
will never be less than $0.75 per share.
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SUMMARY FINANCIAL DATA
The following table sets forth summary financial and balance sheet data
for our business. The statement of operations data for the quarters ended March
31, 2000 and 2001 and the balance sheet data as of March 31, 2001 are unaudited.
The statement of operations data for the years ended December 31, 1998, 1999 and
2000, and the balance sheet data as of December 31, 1999 and 2000, are derived
from, and are qualified by reference to, our financial statements which have
been audited by PricewaterhouseCoopers LLP and are included in this prospectus.
Historical results are not necessarily indicative of the results to be expected
in the future.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
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1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Network ................................................. $ 273 $ 6,112 $ 27,465 $ 4,373 $ 11,244
Lend-X technology ....................................... 136 852 3,348 110 1,012
-------- -------- -------- -------- --------
Total revenue ....................................... 409 6,964 30,813 4,483 12,256
-------- -------- --------
Cost of revenue:
Network ................................................. 235 2,209 7,568 1,536 3,036
Lend-X technology ....................................... 149 312 1,804 127 450
-------- -------- -------- -------- --------
Total cost of revenue ............................... 384 2,521 9,372 1,663 3,486
-------- -------- -------- -------- --------
Gross profit ............................................... 25 4,443 21,441 2,820 8,770
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Operating Expenses:
Product development ..................................... 1,051 1,109 2,677 515 1,085
Marketing and advertising ............................... 2,494 18,528 56,599 14,886 8,874
Sales, general and administrative ....................... 2,955 10,056 28,268 5,186 9,093
-------- -------- -------- -------- -------
Total operating expenses ............................ 6,500 29,693 87,544 20,587 19,052
-------- -------- -------- -------- -------
Loss from operations ....................................... (6,475) (25,250) (66,103) (17,767) (10,282)
Interest income, net ................................... 41 505 2,145 537 115
Loss on impaired investment ............................ -- -- (1,900) -- --
Miscellaneous expense, net ............................. -- -- (145) -- --
Accretion and dividends related to preferred stock ..... (24) (2,816) (2,461) (2,461) (73)
-------- -------- -------- -------- --------
Net loss attributable to common stockholders ............... $ (6,485) $(27,561) $(68,464) $(19,691) $(10,240)
======== ======== ======== ======== ========
Basic and diluted net loss per common share ................ $ (1.88) $ (7.74) $ (4.15) $ (2.07) $ (0.52)
======== ======== ======== ======== ========
Weighted average shares used in computing basic and
diluted net loss per common share ....................... 3,435 3,560 16,512 9,525 19,838
======== ======== ======== ======== ========
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AS OF DECEMBER 31, AS OF MARCH 31,
---------------------- ---------------
1999 2000 2001
-------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents, restricted and short term investments ..... $ 29,472 $ 12,716 $16,480
Working capital ...................................................... 26,474 7,937 11,435
Total assets ......................................................... 33,767 37,957 40,241
Long-term capital lease obligations .................................. -- 848 689
Mandatorily redeemable preferred stock ............................... -- -- 21,484
Convertible preferred stock .......................................... 59,118 -- --
Total stockholders' equity (deficit) ................................. 27,737 23,696 4,661
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
this case, the market price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR FINANCIAL CONDITION
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS FROM OTHER FINANCINGS WE MAY HAVE TO
SIGNIFICANTLY CURTAIL THE SCOPE OF OUR OPERATIONS AND ALTER OUR BUSINESS MODEL.
We must achieve profitability for our business model to succeed. Prior
to accomplishing this goal, we may need to raise additional funds, from equity
or debt sources. Our cash requirements are substantial, and, despite the fact
that we have raised approximately $13.4 million in a recent preferred stock
transaction and have $7.5 million available under our revolving credit
facilities, amounts available under the equity line may still not be sufficient
to meet our cash needs in the future. In addition, business and economic
conditions may make it unfeasible or undesirable to draw down under the common
stock purchase agreement at every opportunity, and drawdowns are available only
once every 22 trading days. If additional financing is not available when
required or is not available on acceptable terms, we may be unable to continue
our operations at current levels. In addition, any failure to raise additional
funds in the future may result in our inability to successfully promote our
brand name, develop or enhance our Lend-X technology or other services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on our financial condition and
results of operations.
OUR BUSINESS MODEL IS UNPROVEN AND COULD FAIL.
Our business model and profit potential are unproven and we cannot
assure you that we will be able to become profitable. To achieve profitability
in our exchange segment, our revenue per consumer must consistently exceed not
only the costs of attracting a consumer to our website, but also the costs of
inducing the consumer to use our services. Historically, this has not been the
case. Our revenue model depends heavily on revenue generated from lenders
participating in our network who pay us fees based upon their receipt of credit
requests, and fees based upon loan closings. We also license our Lend-X
technology to other companies, who can create single and multi-lender online
exchanges. To become profitable, we must achieve and maintain broad market
acceptance of our service by both lenders and consumers who have traditionally
used other means to lend and borrow money. In
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addition, we must attract a sufficient number of consumers with credit profiles
that our lenders target. Our online lending exchange model may not gain or
maintain the widespread acceptance necessary to support our business, in which
case we may find it necessary to alter our business model. We cannot accurately
predict what, if any, changes we would make to our business model in response to
the uncertainties in the online lending market. These changes might include
shifting all or a portion of our fees to consumers or reducing fees currently
charged to lenders to expand volume more quickly. Shifting fees to consumers may
not be feasible, as other companies may be able to offer comparable services
with no fees. If we are not able to anticipate and adapt to changes in the
industry or if our business model is not successful, we may be unable to expand
our business and the value of your investment could be significantly reduced.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES FOR 2001.
We have never been profitable. We incurred losses from operations of
approximately $66.1 million in 2000. As of December 31, 2000, we had an accumu-
lated net deficit of approximately $98.1 million. We anticipate that our future
expense levels will continue to exceed future revenue based on our operating
plans for 2001. We may find it necessary to accelerate expenditures relating to
our sales and marketing efforts or otherwise increase our financial commitment
to creating and maintaining brand awareness among consumers and lenders. If our
revenue grows at a slower rate than we anticipate, or if our spending levels
exceed our expectations or cannot be adjusted to reflect slower revenue growth,
we may not achieve or sustain profitability.
OUR LIMITED OPERATING HISTORY MAKES OUR BUSINESS AND PROSPECTS DIFFICULT TO
EVALUATE.
We have a limited operating history. We were formed in 1996 and began
serving consumers across the United States in July 1998. There is no significant
historical basis to assess how we will respond to competitive, economic or
technological challenges. Our business and prospects must be considered in
light of the risks and uncertainties frequently encountered by companies in the
early stages of development, particularly companies like ours, that operate in
new and rapidly developing online exchanges. Our failure to address these risks
and uncertainties could materially impact our results of operations and
financial condition.
OUR OPERATING RESULTS MAY BE NEGATIVELY IMPACTED BY FLUCTUATIONS IN INTEREST
RATES.
During the fiscal year ended December 31, 2000, revenue earned from
mortgage lenders, traditionally a market segment that is greatly impacted by
changes in interest rates, represented approximately 38% of our total revenue.
While interest rates were rising from January 2000 through July 2000 and
relatively steady from
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July 2000 through December 2000, our business continued to show increases in
website traffic, transmitted qualification forms for mortgages and revenue from
closed-loan fees for mortgages over the corresponding periods of 1999. However,
during future periods of rising interest rates we may experience a decline in
consumer traffic to our website and during periods of robust credit demand,
typically associated with falling interest rates, lenders may have less
incentive to use our exchange. Either of these events could reduce our revenue
and we cannot assess the effects of interest rates on our business over a broad
range of interest rate environments.
SUBSTANTIALLY ALL OF OUR ASSETS ARE PLEDGED UNDER AN EXISTING REVOLVING CREDIT
ARRANGEMENT AND CAPITAL LEASE OBLIGATIONS, AND WE MAY BE REQUIRED TO COLLATER-
ALIZE THE BALANCE OF ONE OF OUR CAPITAL LEASES WITH CASH.
Substantially all of our assets are pledged under the ULLICO revolving
credit arrangement and existing capital lease obligations. A covenant in one of
our capital lease agreements requires that we maintain a cash balance of not
less than $5 million throughout the term of the lease. If our cash balance falls
below $5 million at the end of a period, we will be required to collateralize
the balance of the lease with cash.
In addition, important components of our intellectual property are
subject to an amended software customization, license and services agreement by
and between LendingTree and the Federal Home Loan Mortgage Corporation, pursuant
to which our code software will be released to Freddie Mac from escrow if we
fail to meet specified repayment obligations, financial covenants or reporting
requirements.
RISKS RELATED TO OUR MARKETS AND STRATEGY
OUR FUTURE SUCCESS IS DEPENDENT UPON INCREASED ACCEPTANCE OF THE INTERNET BY
CONSUMERS AND LENDERS AS A MEDIUM FOR LENDING.
If consumer and lender acceptance of our online exchange does not
increase, our business will not succeed and the value of your investment may be
adversely affected. The online lending market is new and rapidly developing. The
adoption of online lending in general, and our exchange in particular, requires
the acceptance of a new way of conducting business, exchanging information and
applying for credit by consumers, as well as acceptance by lenders that have
historically relied upon traditional lending methods. As a result, we cannot be
sure that we will be able to compete effectively with traditional borrowing and
lending methods.
LENDERS IN OUR NETWORK ARE NOT PRECLUDED FROM OFFERING CONSUMER CREDIT PRODUCTS
OUTSIDE OUR EXCHANGE.
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If a significant number of our potential consumers are able to obtain
loans from our participating lenders without utilizing our service, our ability
to generate revenue may be limited. Because we do not have exclusive
relationships with the lenders whose loan products are offered on our online
exchange, consumers may obtain offers and loans from these lenders without using
our service. Our lenders can offer their products directly to consumers through
brokers, mass marketing campaigns, or through other traditional methods of
credit distribution. These lenders can also offer their products over the
Internet without using our Lend-X technology, either directly to prospective
borrowers, through one or more of our online competitors, or both.
IF OUR PARTICIPATING LENDERS DO NOT PROVIDE COMPETITIVE LEVELS OF SERVICE TO
CONSUMERS, OUR BRAND WILL BE HARMED AND OUR ABILITY TO ATTRACT CONSUMERS TO OUR
WEBSITE WILL BE LIMITED.
Our ability to provide a high-quality borrowing experience depends in
part on consumers receiving competitive levels of convenience, customer service,
pricing terms and responsiveness from our participating lenders. If our
participating lenders do not provide consumers with competitive levels of
convenience, customer service, price and responsiveness, the value of our brand
may be harmed, our ability to attract consumers to our website may be limited
and the number of consumers using our service may decline.
WE MAY NOT BE ABLE TO MANAGE OUR EXPANDING OPERATIONS EFFECTIVELY.
We have recently experienced a period of rapid expansion. In order to
execute our business plan, we must continue to expand significantly. Our
inability to expand our operations in an efficient manner could cause our
expenses to grow disproportionately to our revenue, or revenue to decline or
grow more slowly than expected, or could otherwise have a material adverse
effect on our business and the value of your investment. Our anticipated future
growth, combined with the requirements we now face as a public company, will
continue to place a significant strain on our management, systems and resources.
We will need to continue to expand and maintain close coordination among our
technical, accounting, finance and sales and marketing departments. We may not
succeed in these efforts.
OUR QUARTERLY OPERATING RESULTS ARE NOT AN INDICATION OF OUR FUTURE RESULTS.
Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors that affect our revenue or expenses
in any particular quarter. Our quarterly results will fluctuate in part based on
the demand for and supply of consumer loans which are a function of seasonal and
other fluctuations in interest rates and related economic factors, all of which
are outside of our control. These temporary fluctuations could adversely affect
our business.
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In addition, we expect that as our business matures we will experience
seasonal fluctuations in our operating results as a result of fluctuations in
consumer credit markets during the year. For example, home buying behavior is
seasonal. Typically there are a greater number of mortgage closings during the
second and third quarters of a year as compared to the first and fourth
quarters. Because of our limited operating history, it has not been possible for
us to assess the impact of seasonal effects on our business.
IF WE ARE UNABLE TO MAINTAIN OUR BRAND RECOGNITION, CONSUMER AND LENDER DEMAND
FOR OUR SERVICE MAY DWINDLE.
If we fail to promote and maintain our brand successfully, or incur
significant expenses in promoting our brand and fail to generate a corresponding
increase in revenue as a result of its branding efforts, our business could be
materially adversely affected. We believe we have successfully built a
recognizable brand. We believe that continuing to build and maintain brand
awareness of the LendingTree exchange and Lend-X is critical to achieving
increased demand for our service. Brand recognition is a key differentiating
factor among providers of online lending services, and we believe it will be
increasingly important as competition intensifies. In order to increase our
brand awareness, we must succeed in our marketing efforts, provide high-quality
services and increase the number of consumers using our exchange. If visitors to
our website do not perceive our existing service to be of high quality or if we
alter or modify our existing service, introduce new services or enter into new
business ventures that are not favorably received, the value of our brand could
be diluted, which could decrease the attractiveness of our service to consumers
and lenders.
WE CANNOT ASSURE YOU THAT ANY ACQUISITIONS WE MAY ELECT TO MAKE WILL BE
SUCCESSFUL.
Our future results of operations may be dependent, in part, upon the
ability of our management to assimilate the operations of any acquisitions and
to oversee these expanded operations. Our ability to manage any acquisitions
will depend upon a number of factors, including our capital resources, our
ability to retain key employees and our ability to control operating and
production costs. We cannot assure you that we will be successful in these
efforts or that these efforts may not, in certain circumstances, adversely
affect our operating results.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF MR. LEBDA.
If we lose the services of Douglas Lebda, our founder, Chief Executive
Officer, and a director, our ability to expand our business may be seriously
compromised. Mr. Lebda has been instrumental in determining our strategic
direction and
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focus and in promoting the concept of an Internet-based lending exchange for
consumers and lenders. We do not maintain key person insurance on Mr. Lebda.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE
WE MAY EXPERIENCE REDUCED VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR
REPUTATION IN THE EVENT OF UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM
FAILURES.
Any significant failure to maintain the satisfactory performance,
reliability, security and availability of our website, filtering systems or
network infrastructure may cause significant harm to our reputation, our ability
to attract and maintain a high volume of visitors to our website, and to attract
and retain participating consumers and lenders. Our revenue depends in large
part on the number of credit requests submitted by consumers. Any system
interruptions that result in the inability of consumers to submit these credit
requests, or more generally the unavailability of our service offerings, could
have an adverse impact on our revenue. In addition, we believe that consumers
who have a negative experience with our website may be reluctant to return to
our website or recommend LendingTree to other potential consumers.
In the past, our website has experienced outages and decreased
performance. In the worst such instance to date, in 1999 we experienced a
service outage for a period of approximately nine hours due to a database
software failure. If similar outages occur in the future, they may severely harm
our reputation and our ability to offer our service. Our computer hardware is
located in leased facilities in Beltsville, Maryland. A backup system is located
in Cupertino, California. If both of these locations experienced a system
failure, the performance of our website would be harmed. These systems are also
vulnerable to damage from fire, floods, power loss, telecommunications failures,
break-ins and similar events. Our insurance policies may not compensate us for
any losses that may occur as a result of any failures or interruptions in our
systems. Any extended period of disruptions could materially adversely affect
our business, results of operations and financial condition.
BREACHES OF OUR NETWORK SECURITY COULD SUBJECT US TO INCREASED OPERATING COSTS
AS WELL AS LITIGATION AND OTHER LIABILITIES.
Any penetration of our network security or other misappropriation of
our users' personal information could cause interruptions in our operations and
subject us to liability. Claims against us could also be based on other misuses
of personal information, such as for unauthorized marketing purposes. These
claims could result in litigation and financial liability. Security breaches
could also damage our reputation. We rely on licensed encryption and
authentication technology to effect secure
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transmission of confidential information. It is possible that advances in
computer capabilities, new discoveries or other developments could result in a
compromise or breach of the technology that we use to protect consumer
transaction data. We cannot guarantee that our security measures will prevent
security breaches. We may be required to expend significant capital and other
resources to protect against and remedy any potential or existing security
breaches and their consequences.
FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR ABILITY TO
COMPETE EFFECTIVELY.
Failure to protect our intellectual property could harm our brand and
our reputation, devalue our content in the eyes of our customers and adversely
affect our ability to compete effectively. Further, enforcing or defending
LendingTree's intellectual property rights, including our service marks, patent
applications, copyrights and trade secrets, could result in the expenditure of
significant financial and managerial resources. We regard our intellectual
property as critical to LendingTree's success. To protect the rights to
LendingTree's intellectual property, we rely on a combination of patent,
trademark and copyright law, trade secret protection, confidentiality
agreements, and other contractual arrangements with our employees, affiliates,
clients and others. The protective steps we have taken may be inadequate to
deter misappropriation of our proprietary information. We may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. We have applied for a U.S. patent and filed a
Patent Cooperation Treaty international patent application on our Lend-X
technology and its online loan market process. While the number of software and
business method patents issued by the U.S. Patent and Trademark Office has been
growing substantially in recent years, there is still a significant degree of
uncertainty associated with these patents. It is possible that our patent
applications will be denied or granted in a very limited manner such that they
offer little or no basis for us to deter competitors from employing similar
technology or processes or allow us to defend against third party claims of
patent infringement.
RISKS RELATED TO LEGAL AND REGULATORY UNCERTAINTY
As an online lending exchange we may be liable as a result of
information retrieved from our website or the websites of businesses with which
we maintain relationships.
We may be subject to legal claims relating to information that is
published or made available on our website and the other websites linked to it.
Our service may subject us to potential liabilities or claims resulting from:
- Lost or misdirected messages from our network lenders,
consumers or vendors;
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- Illegal or fraudulent use of e-mail; or
- Interruptions or delays in transmission of qualification forms
or lenders' offers.
In addition, we could incur significant costs in investigating and
defending such claims, even if LendingTree ultimately is not found liable. If
any of these events occur, our business could be materially adversely affected.
FAILURE TO COMPLY WITH LAWS GOVERNING LENDINGTREE'S SERVICE OR MATERIAL CHANGES
IN THE REGULATORY ENVIRONMENT RELATING TO THE INTERNET COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
The loan products and services available through our website and the
real estate agent referral and other business relationships in which we operate
essentially as a non-processing mortgage broker, are subject to extensive
regulation by various federal and state governmental authorities. Because of
uncertainties as to the applicability of some of these laws and regulations to
the Internet and, more specifically, to our business, and considering our
business has evolved and expanded in a relatively short period of time, we may
not always have been, and may not always be, in compliance with applicable
federal and state laws and regulations. Failure to comply with the laws and
regulatory requirements of federal and state regulatory authorities may result
in, among other things, revocation of required licenses or registrations, loss
of approved status, termination of contracts without compensation, loss of
exempt status, indemnification liability to lenders and others doing business
with us, administrative enforcement actions and fines, class action lawsuits,
cease and desist orders, and civil and criminal liability. The occurrence of one
or more of these events could materially affect our business and results of
operations.
MANY STATES REQUIRE US TO OBTAIN LICENSES TO OFFER MANY OF OUR PRODUCTS AND WE
HAVE NOT OBTAINED THOSE LICENSES IN EVERY STATE.
Many, but not all, states require licenses to solicit or broker to
residents of those states, loans secured by residential mortgages and other
consumer loans, including credit card, automobile and personal loans. We are
currently neither licensed nor able to accept credit requests for all loan
products in every state. We are not currently accepting credit requests for loan
products from residents of states in which we are not licensed to provide those
products. In many of the states in which we are licensed, we are subject to
examination by regulators.
In addition, we are required to obtain real estate broker licenses,
additional mortgage broker licenses and individual call center personnel
licenses in numerous states. Failure to obtain these licenses and approvals
could prevent us from receiving fees from the real estate agent referral and
mortgage services programs we offer and may subject us to the types of fines,
forfeitures and litigation discussed above.
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As a computer loan origination system or mortgage broker conducting
business through the Internet, we face an additional level of regulatory risk
given that most of the laws governing lending transactions have not been
substantially revised or updated to fully accommodate electronic commerce. Until
these laws, rules and regulations are revised to clarify their applicability to
transactions conducted through electronic commerce, any company providing
loan-related services through the Internet or other means of electronic commerce
will face compliance uncertainty. Federal law, for example, generally prohibits
the payment or receipt of referral fees in connection with residential mortgage
loan transactions. The applicability of referral fee prohibitions to the
compensation provisions of fee advertising, marketing, distribution and
cyberspace rental arrangements used by online companies like us may have the
effect of reducing the types and amounts of fees that we may charge or pay in
connection with real estate-secured products.
BECAUSE SOME STATE REGULATIONS IMPOSE FILING OBLIGATIONS ON SOME OF OUR LARGEST
STOCKHOLDERS AND CUSTOMERS, IF ANY OF THESE PARTIES FAIL TO COMPLY WITH THESE
FILING OBLIGATIONS, WE MAY BE UNABLE TO OBTAIN OR MAINTAIN NECESSARY LICENSES IN
THESE STATES FOR REASONS BEYOND OUR CONTROL.
Regulations promulgated by some states may impose compliance
obligations on any person who acquires 10% or more of our common stock,
including requiring that person to periodically file financial and other
personal and business information. If any person acquires 10% or more of
LendingTree's common stock and refuses or fails to comply with these
requirements, we may not be able to obtain a license and existing licensing
arrangements in particular states may be jeopardized. The inability to obtain,
or the loss of, required licenses could have a material adverse effect on our
operations or financial condition.
The parties conducting business with us, such as lenders and other
website operators, similarly may be subject to federal and state regulation.
These parties act as independent contractors and not as our agents in their
solicitations and transactions with consumers. Consequently, we cannot ensure
that these entities will comply with applicable laws and regulations at all
times. Failure on the part of a lender or other website operator to comply with
these laws or regulations could result in, among other things, claims of
vicarious liability or a negative impact on our reputation. The occurrence of
one or more of these events could materially adversely affect our business,
results of operation and financial condition.
REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD INHIBIT
THE GROWTH OF THE INTERNET, DECREASE THE NUMBER OF VISITORS TO LENDINGTREE'S
WEBSITE OR OTHERWISE MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Existing laws and regulations specifically regulate communications and
commerce on the Internet. Additional laws and regulations that address issues
such as user privacy, pricing, online content regulation, online real estate
referral services,
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taxation, and the characteristics and quality of online products and services
are under consideration by federal, state and local governments and agencies.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to the regulation of long distance telephone carriers and to
impose access fees on such companies. This regulation, if imposed, could
increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing
laws relating to issues such as intellectual property ownership and infringement
and personal privacy are applicable to the Internet. Many of these laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. The Federal Trade Commission and government agencies in
certain states have been investigating Internet companies regarding their use of
personal information. We could incur additional expenses if any new regulations
regarding the use of personal information are introduced or if these agencies
choose to investigate our privacy practices. Any new laws or regulations
relating to the Internet, or new application or interpretation of existing laws,
could inhibit the growth of the Internet as a medium for commerce or credit
procurement which could, in turn, decrease the demand for our service or
otherwise materially adversely affect our business, results of operation and
financial condition.
WE MAY BE LIMITED OR RESTRICTED IN THE WAY WE ESTABLISH AND MAINTAIN OUR ONLINE
RELATIONSHIPS BY LAWS GENERALLY APPLICABLE TO OUR BUSINESS.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or any other item
of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or
unearned fees in connection with the provision of residential real estate
settlement services, including mortgage brokerage and lending services.
Notwithstanding these prohibitions, RESPA permits payments for goods or
facilities furnished or for services actually performed, so long as those
payments bear a reasonable relationship to the market value of the goods,
facilities or services provided. Failure to comply with RESPA may result in,
among other things, administrative enforcement actions, class action lawsuits,
cease and desist orders and civil and criminal liability.
The mortgage and home equity products offered through LendingTree's
exchange are residential real estate secured loans subject to these provisions
of RESPA. Consequently, our online relationships with lenders, other companies
and websites on which we offer services are subject to RESPA's prohibitions on
payment or receipt of referral fees for referrals and for unearned fees or fee
splits. We believe that we have structured these relationships to comply with
RESPA. The applicability of RESPA's referral fee and fee splitting prohibitions
to these types of Internet-based
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relationships, however, is unclear and the appropriate regulatory agency has
provided limited guidance to date on the subject.
RISKS RELATED TO THIS OFFERING, OUR STOCK PRICE AND CORPORATE CONTROL
OUR COMMON STOCK PURCHASE AGREEMENT WITH PAUL REVERE AND THE ISSUANCE OF SHARES
TO PAUL REVERE THEREUNDER MAY CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS
AND, TOGETHER WITH GUIDANCE WE ISSUE TO ANALYSTS AND THE FINANCIAL COMMUNITY,
MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
The resale by Paul Revere of the common stock that it purchases from us
will increase the number of our publicly traded shares, which could depress the
market price of our common stock. Moreover, as all the shares we sell to Paul
Revere will be available for immediate resale, the mere prospect of our sales to
it could depress the market price for our common stock. The shares of our common
stock issuable to Paul Revere under the equity line facility will be sold at a
5% discount to the volume-weighted average daily price of our common stock
during the applicable drawdown period and the proceeds paid to us upon each
drawdown will be net of a 4% placement fee to our placement agent, Ladenburg
Thalmann, and an escrow agent fee of $1,000. If we were to require Paul Revere
to purchase our common stock at a time when our stock price is low, our existing
common stockholders will experience substantial dilution. The issuance of shares
to Paul Revere will therefore dilute the equity interest of existing
stockholders and could have an adverse effect on the market price of our common
stock.
The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of our
common stock. Moreover, the perceived risk of dilution and the resulting
downward pressure on our stock price could encourage investors to engage in
short sales of our common stock. By increasing the number of shares offered for
sale, material amounts of short selling could further contribute to progressive
price declines in our common stock.
In addition, from time to time, we issue guidance to analysts and the
financial community regarding our projected results for future periods and
revisions to guidance previously issued. The dissemination of guidance or
revisions to guidance previously issued may increase the volatility of our stock
price.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET, INCLUD-
ING SHARES ISSUABLE UPON THE CONVERSION OF SHARES OF 8% CONVERTIBLE PREFERRED
STOCK, COULD REDUCE THE VALUE OF YOUR INVESTMENT.
Sales of a substantial number of shares of our common stock in the
public market could cause a reduction in the market price of our common stock. A
substantial
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number of our outstanding shares of common stock will become eligible for resale
in the public market within one year. As of March 31, 2001, we had 18,737,441
common shares issued and outstanding. We also had shares of 8% convertible
preferred stock, convertible into 6,757,144 shares of common stock, outstanding
at March 31, 2001. Because the 8% convertible preferred stock accrues dividends
at 8% per annum, the accrued dividends will result in additional shares of
common stock being issued upon conversion of shares of 8% convertible preferred
stock. In addition, the price protection provisions of the 8% convertible
preferred stock may result in an upward adjustment to the number of shares of
common stock issuable upon conversion of the 8% convertible preferred stock,
which would result in further dilution to our common stockholders. The shares of
8% convertible preferred stock are not convertible unless and until we receive
the approval of our stockholders, which we anticipate will occur at our annual
meeting of stockholders in May 2001.
At March 31, 2001, we also had outstanding 5,009,944 stock options to
purchase shares and 1,045,385 warrants to purchase shares. Moreover, we may
issue additional shares in acquisitions and may grant additional stock options
to our employees, officers, directors and consultants under our stock option
plan. Any substantial sales of such shares, including shares to be registered
for resale in connection with our March 2001 financing transactions or shares
held by our principal investors, officers, directors, HomeSpace Services, Inc.
or other affiliates, my cause our stock price to decline.
HOLDERS OF OUR RECENTLY ISSUED 8% CONVERTIBLE PREFERRED STOCK HAVE SIGNIFICANTLY
GREATER RIGHTS AND PREFERENCES THAN OUR COMMON STOCKHOLDERS.
The holders of our 8% convertible preferred stock have rights and
preferences that are senior to those of our common stockholders in many
significant respects. The existence of these rights and preferences may, in a
given situation, result in a diminution in the value of your investment in our
common stock. Among the preferential rights afforded to the holders of our 8%
convertible preferred stock are the following:
- Dividends and Distributions. Dividends must be paid to the
holders of the 8% convertible preferred stock prior to and in
preference to the common stock.
- Redemption Premium. We are required to redeem all shares of 8%
convertible preferred stock that remain outstanding on March
20, 2006 at a 5% premium to the then current "stated value"
per share, which equals $3.50 per share, plus accrued
dividends. If a significant portion of the 8% convertible
preferred stock remains outstanding on March 20, 2006, all or
substantially all of our assets may be necessary to fund this
redemption.
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- Price Protection. In certain circumstances, the economic value
of the investment in our 8% convertible preferred stock is
protected against future sales of common stock by us at prices
below $3.50 per share. If we sell additional securities at a
price below $3.50 per share, the price at which the 8%
convertible preferred stock converts into common stock may be
adjusted downward, which would automatically entitle these
holders to receive additional shares of common stock upon
conversion. No such protection exists with respect to our
common stock.
- Protective Provisions. So long as more than 1,377,143 shares
of our 8% convertible preferred stock are outstanding, we are
restricted from engaging in a variety of corporate actions
without the consent of 68.5% of the shares of 8% convertible
preferred stock then outstanding. These provisions may impede
management's ability to conclude transactions that it believes
to be in the best interests of all stockholders.
- Liquidation Preference. In the event LendingTree is liquidated
or dissolves, the holders of our 8% convertible preferred
stock will be entitled to receive a liquidation preference
equal to 105% of the then current stated value per share,
before any distributions may be made to holders of our common
stock.
- Change in Control. Upon a merger or change in control, holders
of our 8% convertible preferred stock may have the right to
receive the greater of the liquidation preference described
above or the consideration that they would have received if
they had converted their shares of 8% convertible preferred
stock into common stock immediately prior to the consummation
of the merger or change in control event. In a non-cash
transaction, the holders of 8% convertible preferred stock may
effectively require that the counterparty to such transaction
redeem the convertible preferred stock for a cash amount equal
to the liquidation preference. These provisions may inhibit
our ability to consummate a merger or change in control
transaction and will likely reduce the proceeds of any such
transaction to our common stockholders.
Any of the foregoing rights and preferences may, in a given situation,
disadvantage the holders of our common stock and may reduce the market price of
our common stock.
IF OUR COMMON STOCK PRICE DROPS SIGNIFICANTLY, WE MAY BE DELISTED FROM THE
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NASDAQ NATIONAL MARKET, WHICH COULD ELIMINATE THE TRADING MARKET FOR OUR COMMON
STOCK.
Our common stock is quoted on the Nasdaq National Market. In order to
continue to be included in the Nasdaq National Market, a company must meet
Nasdaq's maintenance criteria. The maintenance criteria most applicable to us
requires a minimum bid price of $1.00 per share, $4,000,000 in net tangible
assets and $5,000,000 market value of the public float. The public float
excludes shares held directly or indirectly by any of our officers, directors
and holders of 10% or more of our outstanding common stock. As of December 31,
2000, we had approximately $17.5 million of net tangible assets, the market
value of our public float, excluding these persons, was approximately $9.2
million and the lowest bid price of our common stock since February 16, 2000 was
$1.781. We cannot assure you that we will continue to meet these listing
criteria. The issuance by us of shares of common stock to Paul Revere, or the
subsequent resale by Paul Revere of those shares, in either case at a discount
to the market price, may reduce the trading price of our common stock to a level
below the Nasdaq minimum bid price requirement. Failure to meet these
maintenance criteria may result in the delisting of our common stock from The
Nasdaq National Market. If our common stock is delisted and in order to have our
common stock relisted on The Nasdaq National Market, we would be required to
meet the criteria for initial listing, which are more stringent than the
maintenance criteria. Accordingly, we cannot assure you that if we were delisted
we would be able to have our common stock relisted on The Nasdaq National
Market.
If our common stock were delisted from the Nasdaq National Market, we
would not be able to draw down any additional funds on the equity line. Finally,
if our common stock is removed from listing on the Nasdaq National Market, it
may become more difficult for us to raise funds through the sale of our common
stock or securities convertible into our common stock.
WE MAY BE UNABLE TO ACCESS ALL OR PART OF OUR EQUITY LINE FACILITY.
If our stock price and trading volume fall below established levels,
then we will not be able to drawdown all $24 million pursuant to the proposed
equity line facility with Paul Revere. In addition, business and economic
conditions may not make it feasible to drawdown pursuant to this facility.
Furthermore, if we are unable to keep a registration statement effective for
those shares of common stock subject to the equity line, or if our common stock
is delisted from The Nasdaq National Market, or if we experience a material
adverse change to our business that is not cured within 45 days, the common
stock purchase agreement may terminate, or we may not be able to drawdown any
funds.
WE MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE.
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Net proceeds to us from any sales to Paul Revere will be used
principally for the continued development and implementation of our Lend-X
technology, advertising and marketing and for general corporate purposes. We
have not allocated any specific amount of our net proceeds for any particular
purpose. Consequently, our management will have broad discretion with respect to
the expenditure of the net proceeds of any sales to Paul Revere, including
discretion to use the proceeds in ways with which you may not agree.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE LENDINGTREE, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our amended and restated certificate or
incorporation and by-laws contain provisions that could have the effect of
delaying, deferring, or preventing a change in control of LendingTree or our
management and stockholders may consider favorable or beneficial. These
provisions could discourage proxy contests and make it more difficult for you
and other stockholders to elect directors and take other corporate actions.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. These provisions include:
- Authorization to issue blank check preferred stock, which is
preferred stock that can be created and issued by the board of
directors without prior stockholder approval, with rights
senior to our common stockholders;
- A staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
- A requirement that business combinations either be approved by
80% of our stockholders or a majority of our continuing
directors, or provide consideration to our stockholders in
excess of established amounts;
- Prohibition of stockholder action by written consent; and
- Advance notice requirements for the submission by stockholders
of nominations for election to the board of directors and for
proposing matters that can be acted upon by stockholders at a
meeting.
In addition, we have entered into a stockholder rights agreement which
makes it more difficult for a third party to acquire us without the support of
our board of directors and principal stockholders.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES AFFILIATED WITH THEM, WHOSE
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INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS, HAVE THE ABILITY TO EXERCISE
SIGNIFICANT CONTROL OVER US.
Our executive officers, directors and entities affiliated with them, as
a group, beneficially own approximately 59% of our common stock. These
stockholders are able to exercise significant influence over all matters
requiring approval by our stockholders, including the election of directors and
the approval of significant corporate transactions, including a change of
control of LendingTree. The interests of these stockholders may differ from the
interests of our other stockholders.
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FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not
based on historical facts. The words "expects," "anticipates," "estimates,"
"intends," "believes," "plans" and similar expressions are intended to identify
forward-looking statements. We believe that based on information available to
us on the date of this prospectus, but we cannot assure you, that these
assumptions and expectations will prove to have been correct or that we will
take any action that we may presently be planning. We disclosed several
important factors that could cause our actual results to differ materially from
our current expectations under "Risk Factors" and elsewhere in this prospectus.
You should understand that forward-looking statements made in connection with
this offering are necessarily qualified by these factors. We are not
undertaking to publicly update or revise any forward-looking statement if we
obtain new information or upon the occurrence of future events or otherwise.
MARKET DATA
This prospectus contains market data related to our business and the
Internet. This market data includes projections that are based on a number of
assumptions. The assumptions include the following:
- no catastrophic failure of the Internet will occur;
- the number of people online and the total number of hours
spent online will increase significantly over the next five
years; and
- Internet security and privacy concerns will be adequately
addressed.
If any one or more of these assumptions turns out to be incorrect, actual
results may differ from the projections based on these assumptions. The
Internet-related markets may not grow over the next three to four years at the
rates projected by these market data, or at all. The failure of these markets
to grow at these projected rates may have a material adverse effect on our
business and the market price of our common stock.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Paul Revere that it has obtained under the common stock purchase agreement.
However, we will receive the net sale price of any common stock we sell to Paul
Revere under
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the terms of the common stock purchase agreement described in this prospectus.
We intend to use the net proceeds from any sales to Paul Revere primarily for
the continued development and implementation of our Lend-X technology,
advertising and marketing, and general corporate purposes. Management will have
significant flexibility and discretion in applying the net proceeds of any
common stock sold to Paul Revere. Pending any use, we will invest the net
proceeds of any common stock sold to Paul Revere in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock
since inception and do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. The payment of dividends will be subject to the
preferences of our 8% convertible preferred stock and will depend upon factors
such as future earnings, capital requirements, our financial condition and
general business condition.
The holders of the 8% convertible preferred stock are entitled to
receive, whether or not declared by our board of directors, dividends on the 8%
convertible preferred stock equal to 8% of the stated value per share, as
defined in the preferred stock purchase agreement, payable at our option:
- in cash on each quarterly dividend date, or
- by an upward adjustment to the stated value per share on each
quarterly dividend payment date.
Dividends on the 8% convertible preferred stock are cumulative and
accrue daily from the date of original issuance.
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CAPITALIZATION
The following table sets forth our capitalization, as of December 31,
2000:
- on an actual basis;
- on a pro forma basis to give effect to:
- the issuance and sale of 6,885,715 shares of 8%
convertible preferred stock, which includes
3,700,001 shares of 8% convertible preferred stock
that were issued on March 20, 2001, the conversion
of the Specialty Finance Partners equity rights
certificate into 2,857,143 shares of 8% convertible
preferred stock and the issuance of 200,000 shares
of 8% convertible preferred stock to our CEO funded
by a $700,000 loan from us, and 128,571 shares of
8% convertible preferred stock that were issued on
April 30, 2001, as if such shares of 8% convertible
preferred stock were issued on December 31, 2000;
- on a pro forma as adjusted basis to give effect to:
- the sale of an assumed 7,096,393 shares of common
stock which may be offered by Paul Revere in this
offering and the application of the net proceeds we
may receive for our shares from Paul Revere under
the common stock purchase agreement. The 7,096,393
shares assumes that $24,000,000 is raised at a per
common share price of $3.38, the market price of the
common stock as of March 30, 2001, $3.56, less Paul
Revere's 5% discount per the common stock purchase
agreement. An additional placement fee of 4% of the
gross proceeds of the draw will be payable to
Ladenburg Thalmann. The actual change in common
stock and additional paid in capital will depend on
the actual amount raised and the market price of our
common stock at that time; and
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
financial statements and the accompanying notes, and the other financial
information appearing elsewhere in this prospectus.
The table excludes:
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- 1,045,385 shares issuable at a weighted average exercise
price of $6.08 per share upon the exercise of warrants
outstanding as of March 31, 2001;
- 3,316,228 shares reserved for future grants under our stock
option plans as of March 31, 2001;
- 412,044 shares reserved for issuance under our employee stock
purchase plan as of March 31, 2001;
- 5,009,944 shares issuable at a weighted average exercise
price of $5.00 per share upon exercise of stock options
outstanding as of March 31, 2001; and
- warrants which may be issued in connection with payment of
interest on the revolving debt facilities if we were to
borrow funds under such facilities.
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DECEMBER 31, 2000
----------------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(DOLLARS IN THOUSANDS)
Series A 8% convertible preferred stock, $.01 par
value, 6,885,715 authorized, no shares issued actual,
and 6,885,715 shares issued on a pro forma and an
adjusted pro forma basis ................................... -- $ 21,806 $ 21,806
Stockholders' equity:
Common stock, $.01 par value, 100,000,000
shares authorized, 19,653,956 shares issued
actual and on a pro forma basis, and 26,750,349
shares issued on an adjusted pro forma basis .......... $ 197 $ 197 $ 268
Deferred compensation ................................. (3,056) (3,056) (3,056)
Treasury stock (916,515 shares at cost) ............... (5,774) (5,774) (5,774)
Notes receivable from officers for option exercises ... (1,603) (2,303) (2,303)
Unrealized gain, available for-sale securities ........ 1 1 1
Additional paid-in capital ............................ 132,080 122,714 145,406
Accumulated deficit ................................... (98,149) (98,149) (98,149)
--------- --------- ---------
Total 8% convertible preferred stock and
stockholders' equity ................................ $ 23,696 $ 35,436 $ 58,199
========= ========= =========
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DILUTION
The issuance of further shares will dilute our common stock and may
lower the price of our common stock. If you invest in our common stock, your
interest will be diluted to the extent the price per share you pay for the
common stock is greater than the pro forma net tangible book value per share of
our common stock at the time of sale. Net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of common stock
outstanding. The net tangible book value of our common stock as of December 31,
2000 was $17.5 million, or approximately $.93 per share.
Pro forma net tangible book value per share represents the same
calculation as stated above, but assumes that the tangible book value includes
proceeds from the issuance and sale of 6,885,715 shares of 8% convertible
preferred stock, which includes 3,700,001 shares of 8% convertible preferred
stock that were issued on March 20, 2001 and the conversion of the Specialty
Finance Partners equity rights certificate into 2,857,143 shares of 8%
convertible preferred stock and the issuance of 200,000 shares of 8%
convertible preferred stock to our CEO funded by a $700,000 loan from us, and
128,571 shares of 8% convertible preferred stock that were issued on April 30,
2001, as if such shares of 8% convertible preferred stock were issued on
December 31, 2000.
Our pro forma net tangible book value as of December 31, 2000 would
have been $29.9 million, or $1.60 per share.
Adjusted pro forma net tangible book value per share represents the
same calculation as stated above for pro forma net tangible book value per
share, but further assumes that the total number of shares of common stock
outstanding on December 31, 2000 includes a total of approximately 7.1 million
shares issued to Paul Revere under the common stock purchase agreement at $3.38
per share, which is equal to the closing price for our common stock on March
30, 2001, as adjusted to reflect Paul Revere's 5% discount. The proceeds we
would receive from such a sale to Paul Revere under the common stock purchase
agreement would be net of a 4% placement fee to Ladenburg Thalmann and a $1,000
escrow agent fee per drawdown. Our adjusted pro forma net tangible book value
as of December 31, 2000 would have been $52.7 million, or $2.04 per share. This
would represent an immediate increase in the pro forma net tangible book value
of $.44 per share to existing stockholders, and, assuming you purchased shares
under this prospectus for $3.56 per share on December 31, 2000, which is the
closing price for our common stock on March 30, 2001, would represent dilution
to you of approximately $1.52 per share. The actual dilution to you may be
greater or less than in this example, depending on the actual price you pay for
shares, the actual prices at which we issue shares to Paul Revere under the
common stock purchase agreement and how many of the vested options and warrants
outstanding have been exercised at the time of your investment.
Furthermore, approximately 3.7 million stock options and warrants will
vest within the next five years, we may issue additional shares, options and
warrants and we may grant
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additional stock options to our employees, officers, directors and consultants
under our stock option plans, all of which may further dilute our net tangible
book value.
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PRICE RANGE OF OUR COMMON STOCK
Our common stock has been listed on The Nasdaq National Market System
under the symbol TREE since February 16, 2000. The following table sets forth
the high and low sale prices for the common stock for the periods indicated as
reported by Nasdaq. Such prices represent prices between dealers without
adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
HIGH LOW
------- ------
COMMON STOCK
2000
February 16, 2000
to March 31, 2000 $21.00 $10.75
Second Quarter 14.88 4.75
Third Quarter 9.56 4.22
Fourth Quarter 5.25 1.93
2001
First Quarter $ 4.41 $ 1.88
On March 30, 2001, the closing price of the common stock as reported
on Nasdaq was $3.56 and there were approximately 150 holders of record of our
common stock. The number of record holders does not reflect the number of
beneficial owners of our common stock for whom shares are held by brokerage
firms and other institutions. We have not paid any dividends on our common
stock since our inception and do not contemplate paying dividends on our common
stock in the foreseeable future.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our financial statements and accompanying notes, along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
quarters ended March 31, 2000 and 2001 and the balance sheet date as of March
31, 2001 are unaudited. The statement of operations data for the years ended
December 31, 1997, 1998, 1999 and 2000, and the balance sheet data as of
December 31, 1999 and 2000, are derived from, and are qualified by reference to,
our financial statements which have been audited by PricewaterhouseCoopers LLP
and are included in this prospectus. The balance sheet data as of December 31,
1997 and 1998 are derived from our financial statements which have been audited
by PricewaterhouseCoopers LLP but are not included in this prospectus. The
statement of operations data for the period from inception through December 31,
1996 and the balance sheet data as of December 31, 1996 are unaudited.
Historical results are not necessarily indicative of the results to be expected
in the future.
PERIOD FROM
INCEPTION YEAR ENDED DECEMBER 31,
THROUGH ------------------------------------------ THREE MONTHS ENDED
DECEMBER 31, MARCH 31
1996 1997 1998 1999 2000 2000 2001
------------ ------ ------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenue:
Network ............................... -- $ 2 $ 273 $ 6,112 $ 27,465 $ 4,373 $ 11,244
Lend-X technology ..................... -- -- 136 852 3,348 110 1,012
------ ------ ------- -------- -------- -------- --------
Total revenue ..................... -- 2 409 6,964 30,813 4,483 12,256
Cost of revenue:
Network ............................... -- -- 235 2,209 7,568 1,536 3,036
Lend-X technology ..................... -- -- 149 312 1,804 127 450
------ ------ ------- -------- -------- -------- --------
Total cost of revenue ............. -- -- 384 2,521 9,372 1,663 3,486
------ ------ ------- -------- -------- -------- --------
Gross profit ............................. -- 2 25 4,443 21,441 2,820 8,770
Operating Expenses:
Product development ................... -- 293 1,051 1,109 2,677 515 1,085
Marketing and advertising ............. -- 54 2,494 18,528 56,599 14,886 8,874
Selling, general and administrative ... 4 621 2,955 10,056 28,268 5,186 9,093
------ ------ ------- -------- -------- -------- --------
Total operating expenses .......... 4 968 6,500 29,693 87,544 20,587 19,052
------ ------ ------- -------- -------- -------- --------
Loss from operations ..................... (4) (966) (6,475) (25,250) (66,103) (17,767) (10,282)
Loss on impaired investment .......... -- -- -- -- (1,900) -- --
Interest income, net ................. -- 3 41 505 2,145 537 115
Miscellaneous expense, net ........... -- -- -- -- (145) -- --
Accretion and dividends related to
preferred stock ...................... -- -- (24) (2,816) (2,461) (2,461) (73)
------ ------ ------- -------- -------- -------- --------
Net loss attributable to common
stockholders ......................... $ (4) $ (963) $(6,458) $(27,561) $(68,464) $(19,691) $(10,240)
====== ====== ======= ======== ======== ======== ========
Basic and diluted net loss per common
share ................................ $(0.02) $(1.20) $ (1.88) $ (7.74) $ (4.15) $ (2.07) $ (0.52)
====== ====== ======= ======== ======== ======== ========
Weighted average shares used in computing
basic and diluted net loss per
common share .......................... 259 803 3,435 3,560 16,512 9,525 19,838
====== ====== ======= ======== ======== ======== ========
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PERIOD FROM
INCEPTION
THROUGH
DECEMBER 31, AS OF MARCH 31,
1996 1997 1998 1999 2000 2001
------------ ------ ------- -------- ------- ----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents, short term investments
and restricted investments ................... -- $402 $ 3,085 $29,472 $12,716 $16,480
Working Capital .............................. $(1) 333 2,666 26,474 7,937 11,435
Total assets ................................. -- 424 3,687 33,767 37,957 40,241
Long-Term capital lease obligations .......... -- -- -- -- 848 689
Mandatorily redeemable preferred securities .. -- 4,631 -- -- 21,484
Convertible preferred stock .................. -- -- 59,118 -- --
Total stockholders' equity (deficit) ......... $(1) $353 $(1,695) $27,737 $23,696 $ 4,661
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion includes "forward-looking" statements that reflect our
current views with respect to future events and financial performance. We use
words such as we "expect," "anticipate," "estimate," "intend," "believe,"
"plan" and similar expressions to identify forward-looking statements.
Investors should be aware that actual results may differ materially from our
expressed expectations because of risks and uncertainties inherent in future
events, particularly those risks identified in the "Risk Factors" section of
this prospectus, and should not unduly rely on these forward looking
statements. We will not necessarily update the information in this discussion
if any forward-looking statement later turns out to be inaccurate.
OVERVIEW
We incorporated in the state of Delaware on June 7, 1996 and began
serving consumers across the United States on July 1, 1998. In August 2000, we
acquired a nationwide network of real estate agents and other assets, and
assumed certain liabilities of HomeSpace Services, Inc.
We offer an Internet-based lending exchange for consumers and lenders.
We attract consumer demand to our exchange through our proprietary website
www.lendingtree.com as well as through private-label and co-branded exchanges
enabled by our technology platform, Lend-X(SM). In addition, through our
website, we provide access to other services related to owning, maintaining or
buying and selling a home, including a network of real estate brokers.
Consumers begin the LendingTree process on www.lendingtree.com by
completing a simple online credit information request, referred to as a
qualification form. Data from the qualification form, along with a credit score
calculated from credit reports retrieved by a credit scoring firm, is compared
to the underwriting criteria of lenders in our lender network. We currently
have more than 100 participating lenders in our network. Consumers can receive
multiple loan offers in response to a single credit request and then compare,
review, and accept the offer that best suits their needs. We believe that our
participating lenders can generate new business that meets their specific
underwriting criteria at a substantially lower cost of acquisition than through
traditional marketing channels. LendingTree's exchange encompasses most
consumer credit categories, including mort gages, home equity loans, automobile
loans, credit card, and personal loans.
We are not a lender. Rather, we are a lending exchange that seeks to
drive efficiency and cost savings in the consumer credit markets for both
consumers and lenders. We earn revenue from lenders that pay fees for every
qualification form that meets their underwriting criteria and is transmitted to
them, or transmission fees, and for loans that they close, or closed-loan fees.
Our website is powered by our lending exchange technology platform, Lend-X.
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We also license and host our Lend-X technology for use by other
businesses, enabling them to create their own customized co-branded or
private-label lending exchanges. Through these Lend-X partnerships, we can
earn revenue from technology fees related to customization, licensing and
hosting the third-party exchange, as well as from network sources such as
transmission fees, closed-loan fees and brokerage fees.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUE
Total revenue was approximately $12.3 million in the three months
ended March 31, 2001, an increase of $7.8 million from $4.5 million reported in
the same period in 2000.
Network
Our network revenue was approximately $11.2 million, or 92% of total
revenue, for the three months ended March 31, 2001, compared with approximately
$4.4 million, or 98% of total revenue, for the same period in 2000. This
revenue growth reflects a substantial increase in volume of qualification
forms we transmitted to our lenders and in the amount of revenue earned from
closed-loan fees. It also reflects the addition of realty services to our
product offerings. We attribute the increase in transmission volume, from
approximately 134,000 discrete transmitted qualification forms in the three
months ended March 31, 2000 to approximately 344,000 in the three months ended
March 31, 2001, primarily to increased brand awareness and a significant
increase in website traffic due to the effectiveness of our advertising
spending in 2000. This increased volume can also be partially attributed to
the recent lowering of interest rates. The increase in closed-loan fees is due
not only to the increased transmission volume, but also to an increase in the
number and variety of lenders on our network. Closed loans increased from
24,000 in the three months ended March 31, 2000 to 64,000 in the three months
ended March 31, 2001.
Lend-X Technology
Lend-X technology revenue totaled $1.0 million, or 8% of our revenue,
for the three months ended March 31, 2001. This is an increase of $.9 million
over the same period in 2000. The growth in Lend-X technology revenue in the
three months ended March 31, 2001 is the result of several significant new
customization, licensing and hosting contracts that have been entered into
since the first quarter of 2000. These new licensing and hosting contracts
contain certain upfront fees that are being recognized as revenue over their
expected service periods. The new contracts provide for transactional revenue
as well, based on volume that has been enabled by our technology through these
customers' sites. For the period ended March 31, 2001, two customers accounted
for 32% and 25%, respectively, of our total Lend-X technology revenue.
GROSS PROFIT AND COST OF REVENUE
Gross profit of $8.8 million, or 72% of total revenue, for the three
months ended March 31, 2001 was approximately $6.0 million higher than the same
period of 2000 which had gross profit of $2.8 million, or 63% of total
revenue. The improvement in gross margin and gross margin percentage is due to
the substantial increase in network revenue, as noted above, without similar,
proportionate increases in network costs of revenue.
Total cost of revenue increased $1.8 million from $1.7 in the first
quarter of 2000 to $3.5 in the first quarter of 2001. This is principally due
to increases in variable network cost of revenue and due to the addition of
realty services to our product offerings. The most significant portions of our
costs of revenue are volume-based. Costs such as credit scoring fees, consumer
promotional costs, network hosting expenses and direct costs to Lend-X partners
tend to increase as volume and revenue increase.
Network
For the period ending March 31, 2001, variable network costs of
revenue were $1.9 million or approximately $.5 million higher than the same
period in 2000. In the first quarter of 2001, variable network cost of revenue
included approximately $.9 million for direct consumer promotion costs
associated with customers that requested and qualified for rebates. These
promotional costs were approximately $.4 million during the first quarter of
2000. During the first quarter of 2000, the most significant direct consumer
promotion cost was associated with consumers that requested and qualified for a
credit card through the network and also closed a loan through our network of
lenders.
Costs of revenue that are not directly volume based, principally
personnel costs increased approximately $.2 million reflecting increased
staffing in our implementation and customer care departments.
Lend-X technology
Costs of revenue associated with Lend-X technology are principally
employment costs related to customizing and/or implementing Lend-X for
partners, as well as ongoing server costs related to hosting Lend-X for these
partners. Since we have entered into several new Lend-X technology arrangements
since first quarter 2000, these types of costs were $.3 million higher in the
first quarter of 2001 (at $.4 million) compared to the first quarter of 2000
(at $.1 million).
OPERATING EXPENSES
Product development expense was approximately $1.1 million for the
three months ended March 31, 2001 and $.5 million for the same period in 2000.
The increase from first quarter 2000 to first quarter 2001 is principally
related to increased personnel costs. Product development costs consist of
expenses incurred related to the ongoing efforts to enhance and maintain the
functionality of our Lend-X technology and our website.
Marketing and advertising expenses decreased $6.0 million to
approximately $8.9 million for the three months ended March 31, 2001 compared
to $14.9 million for the same period in 2000. During the first quarter of 2000,
we spent significantly more on advertising as we kicked off our national
brand-building advertising campaign with combinations of network and spot
television and radio as well as cable television advertising. During the first
quarter of 2001 we were already experiencing very high consumer volume on our
website as a result of prior advertising efforts and the Federal Reserve's
recent action of lowering interest rates and as a result we were able to reduce
our advertising spending.
Sales, general and administrative expenses increased to $9.1 million
for the three months ended March 31, 2001 from $5.2 million for the same period
in 2000. Approximately $1.6 of this increase is due to higher employee
compensation related costs due to the hiring of 80 additional people during the
period following the first quarter 2000 through first quarter 2001, reflecting
the growth in our business. The amortization of the excess purchase price
related to the acquisition of certain assets of HomeSpace contributed to $1.3
million of the increase. Depreciation expenses increased $.5 million from the
first quarter 2000 to first quarter 2001 reflecting new equipment and software
purchases. we believe that we have the current infrastructure and staff
necessary to support the forecasted growth and as such we do not expect sales,
general and administrative spending to continue to grow at these rates in the
foreseeable future.
Included in our operating expenses for the three months ended March
31, 2001 are non-cash compensation charges of $1.1 million. The most
significant component of this expenses relates to the charge taken as a result
of fair value changes of the securities collateralizing the Chief Executive
Officer note. This expense for the period ending March 31, 2001 was $.8
million. As of March 31, 2001, our balance sheet also reflected deferred
non-cash compensation charges of $2.2 million related to certain stock option
grants that were considered compensatory. This deferred charge is being
amortized over the four-year vesting period associated with the related
options, ending principally in the third quarter of 2003 and the first quarter
of 2004.
INTEREST INCOME
Interest income consists primarily of interest earned on cash and cash
equivalent and short-term investment. Interest income decreased to $.1 million
in the three months ended March 31, 2001 from $.5 million in the same period in
2000. This decrease was primarily due to a higher average cash balance in the
first quarter of 2000 as a result of the net proceeds from our initial public
offering in February 2000.
OTHER INFORMATION
For the three months ended March 31, 2000 and 2001, we had losses
before taxes, interest, depreciation and amortization and other non-cash
compensation charges ("EBITDA Losses") of $17.1 million and $7.2 million,
respectively. Non-cash compensation charges of $.5 million and $1.1 million are
excluded from the EBITDA Losses for the three months ended March 31, 2000 and
2001, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUE
Total revenue was approximately $30.8 million in the year ended
December 31, 2000, an increase of $23.8 million from $7.0 million in the same
period in 1999.
Network
Our network revenue was approximately $27.5 million, or 89% of total
revenue for the year ended December 31, 2000, compared with $6.1 million or 88%
of total revenue for the same period in 1999. This growth reflects a
substantial increase in volume of qualification forms we transmitted to our
lenders and a significant increase in the amount of revenue earned from
closed-loan fees. We attribute the increase in transmission volume, from
approximately 186,000 discrete transmitted qualification forms in the year
ended December 31, 1999 to approximately 716,000 in the same period of 2000,
primarily to our extensive advertising campaign run during 2000. Although
advertising expense was reduced in the third and fourth quarters of 2000, as
compared to the first and second quarters of 2000, we attribute effectiveness
of the increased brand awareness and a significant increase in website traffic
during 2000 to the effectiveness of the increased advertising spending. The
increase in closed-loan fees reflects not only the increased transmission
volume, but also an increase in the number and variety of lenders on our
network.
Added lenders create additional opportunities for consumer's credit
requests to be transmitted for evaluation and possible closure by a lender,
thereby creating revenue for us. Closed loans increased from 27,000 in 1999 to
approximately 145,000 in 2000.
We derive additional network revenue from credit requests that are
received through our Lend-X partners, private-label or co-branded websites of
other businesses that are enabled by our Lend-X technology and brokerage
services. If these qualification forms are successfully transmitted to or
fulfilled by one of our network lenders, we earn transmission fees and
closed-loan fees, if applicable, from that lender. In arrangements where we
broker loans to specific lenders for a Lend-X partner, we receive a fee at the
time the loan closes. For 2000, we recorded $2.3 million of Lend-X related
network revenue, compared to none in 1999.
Lend-X Technology
Lend-X technology revenue totaled $3.3 million or 11% of our revenue
for the year
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ended December 31, 2000 compared to $0.9 million, or approximately 12.2% of
total revenue in 1999. The increase in Lend-X technology revenue is principally
the result of a significant new customization, implementation and licensing
contract that we entered into in the second quarter of 2000. Lend-X technology
revenue recognized during the second and third quarters of 2000 under this
contract reflects our progress towards completion. For 2000, this single
customer accounted for $2.4 million, or 71% of the total Lend-X technology
revenue.
GROSS PROFIT AND COST OF REVENUE
Gross profit of $21.4 million, or 70% of total revenue, for the year
ended December 31, 2000 was $17.0 million higher than in 1999, when we had
gross profit of $4.4 million or 64% of total revenue. These improvements in
gross margin and gross margin percentage are the result of the substantial
increase in network revenue, as noted above, without similar proportionate
increases in network costs of revenue.
Total cost of revenue increased $6.9 million in 2000 to $9.4 million,
from $2.5 million in 1999, principally as a result of increases in variable
network costs of revenue. The most significant portions of our costs of revenue
are volume-based. Costs such as credit scoring fees, consumer rebates, network
hosting expenses and direct costs to Lend-X partners tend to increase as volume
and revenue increase.
Network
For the year ended December 31, 2000, variable network costs of
revenue were $6.1 million or approximately $4.3 million higher than in 1999. In
2000, variable network cost of revenue included $1.9 million for direct
consumer promotion costs associated with consumers that requested and qualified
for rebates. These promotional costs were $0.2 million in 1999. During 2000,
the most significant direct consumer promotion cost was associated with
consumers that requested and qualified for a credit card through network and
also closed a loan through our network of lenders. Other variable network costs
related to credit scoring, network hosting and Lend-X partners increased $1.0
million, $1.1 million and $0.5 million, respectively, as a result of increases
in customer volume.
Costs of revenue that are not directly volume-based, principally
personnel costs, increased approximately $1.0 million to $1.5 million in 2000,
reflecting an increased number of personnel in our implementation and customer
care departments.
Lend-X technology
Costs of revenue associated with Lend-X technology are principally
personnel and consultant costs related to projects to customize and implement
Lend-X for partners, as well as ongoing server costs related to hosting Lend-X
for these partners. Because we entered into several more Lend-X technology
arrangements in 2000, these types of costs were $1.5 million higher in 2000, at
$1.8 million, compared to $0.3 million in 1999.
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OPERATING EXPENSES
Product development expense was approximately $2.7 million for the
year ended December 31, 2000 and $1.1 million in 1999. The increase in product
development expense is principally related to increased personnel costs.
Product development costs represent costs incurred related to the ongoing
efforts to enhance and maintain the functionality of our Lend-X technology and
our website.
Marketing and advertising expenses increased $38.1 million to
approximately $56.6 million for the year ended December 31, 2000 compared to
$18.5 million in 1999. This increase is primarily due to substantially higher
advertising expenses in 2000 incurred in an effort to build and maintain our
brand awareness and attract users to our online lending exchange. During 2000,
we ran a national network and cable television advertising campaign and
expanded our radio and outdoor advertising campaigns to significantly more
markets than we did during 1999. We currently anticipate that marketing and
advertising will continue to be our most significant expense, as we will
continue to run promotional campaigns and maintains awareness for both our
LendingTree and Lend-X brands.
Sales, general and administrative expenses increased to $28.3 million
for the year ended December 31, 2000 from $10.1 million in 1999, an increase of
$18.2 million. Approximately $9.1 million of this increase is due to higher
employee-compensation related costs which are a result of the significant
growth in the business. Another $1.6 million of the increase relates to
employee related costs such as travel, relocation and recruiting fees.
Professional and consulting fees increased $1.6 million from 1999 to 2000,
reflecting increased professional development, technology consulting costs,
public relations and increased professional fees related to regulatory and
intellectual property matters. We also incurred $1.2 million in higher
facilities, telephone, utilities and related expenses primarily as a result of
our move to a larger facility and an increase in our number of personnel in
2000. The amortization of the excess purchase price related to the HomeSpace
asset acquisition contributed $2.1 million of the increase. Bad debt expense
increased $0.8 million from 1999. Depreciation expenses increased $0.8 million
from 1999 to 2000 reflecting new equipment and software purchased in 2000. We
do not expect sales, general and administrative spending to continue to grow at
these rates in the foreseeable future.
Included in our operating expenses for the year ended December 31,
2000 is amortization of deferred non-cash compensation charges of $2.3 million.
As of December 31, 2000, our balance sheet reflected deferred non-cash
compensation charges of $3.1 million related to certain stock option and
warrant grants that were considered compensatory. The deferred charge related
to stock options, $3.0 million, is being amortized over the four-year vesting
period associated with the related options, ending principally in the third
quarter of 2003 and the first quarter of 2004. The deferred charge related to
warrants, $0.1 million, is being amortized through January 2001, corresponding
to the initial term of the underlying service agreement.
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LOSS ON IMPAIRED INVESTMENT
In February 2000, we made a $2.5 million equity investment in a
company providing mortgage exchange services over the Internet. Our minority
investment represents approximately 8.3% of the outstanding equity of that
business and accordingly, it is accounted for using the cost method of
accounting. In December 2000, our management determined that the carrying value
of this investment was impaired as a result of a series of historical and
forecasted operating losses and the prospect that the company might be unable
to fund its operations in the future. As a result of this impairment, our
management wrote the investment down to its estimated fair value of $0.6
million, recording $1.9 million as a non-operating loss on impaired investment.
INTEREST INCOME
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased to $2.1
million in the year ended December 31, 2000 from $0.5 million in the same
period in 1999. This increase was primarily due to higher average cash,
short-term investment and restricted investment balances in 2000 as a result of
the net proceeds from our initial public offering in February 2000 and the net
proceeds from a private offering of preferred stock in September 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Total revenue was approximately $7.0 million in the year ended
December 31, 1999, an increase of $6.6 million from $0.4 million in 1998.
Network
Network revenue accounted for $6.1 million, or 88% of total revenue
for the year ended December 31, 1999, compared with 67% for the year ended
December 31, 1998. Network revenue in 1999 increased by $5.8 million from $0.3
million in 1998 primarily as a result of higher qualification form and closed
loan volume. Transmitted qualification form volume increased over nine times
from approximately 18,000 to approximately 186,000 during this period while the
number of loans closed increased nearly forty times from about 700 to 27,000.
Lend-X Technology
Lend-X technology revenue accounted for $0.9 million, or 12% of total
revenue for the year ended December 31, 1999, compared with $0.1 million for
the year ended December 31, 1998. The increase in Lend-X and other technology
revenue resulted primarily from the sale of more Lend-X licenses.
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COST OF REVENUE
Network
Cost of network revenue increased to $2.2 million for the year ended
December 31, 1999, up from $0.2 million for the year ended December 31, 1998.
This increase in cost was as a result of volume-related expenses such as credit
scoring and network hardware expense and from an increase in personnel in the
borrower relations department. Our gross margin increased to 64% from 6% for
the years ended December 31, 1999 and 1998, respectively.
Lend-X Technology
Cost of Lend-X increased to $0.3 million for the year ended December
31, 1999 from $0.1 million for the year ended December 31, 1998. This increase
is primarily the result of greater direct hours incurred for Lend-X projects.
OPERATING EXPENSES
Product Development
Product development expense was $1.1 million for each of the years
ended December 31, 1999 and 1998.
Marketing and Advertising
Marketing and advertising expense increased to $18.5 million for the
year ended December 31, 1999 from $2.5 million for the year ended December 31,
1998, an increase of $16.0 million. This increase is primarily the result of
higher advertising expenses in order to build brand awareness and increase
volume to our exchange.
Sales, General and Administrative
Sales, general and administrative expense increased to $10.1 million
for the year ended December 31, 1999, an increase of $7.1 million from the year
ended December 31, 1998. The increase is primarily the result of higher
employee-related costs such as compensation, recruiting and relocation
expenses, rent for a larger facility and professional fees.
QUARTERLY RESULTS OF OPERATIONS
The following table, table presented in thousands, except per share
amounts, sets forth a summary of our unaudited quarterly results of operations
for each of the eight quarters in the two-year period ended December 31, 2000
and for the quarter ended March 31, 2001. This information has been derived from
unaudited interim financial statements contained elsewhere in this prospectus or
in our quarterly report on Form 10-Q for the quarter ended March 31, 2001
incorporated herein by reference and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented. You should read this information in
conjunction with our financial statements and the accompanying notes
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included elsewhere in this prospectus. Historical results for any quarter are
not necessarily indicative of the results to be expected for any future period.
All share and per shares amounts referred to in the table below have been
adjusted to reflect the 1.27 for 1 stock split of our common stock effected on
February 22, 2000 upon the closing of our initial public offering.
Quarter Ended
--------------------------------------------------------------------------------------------------
Mar 31 Jun 30 Sept. 30 Dec. 31 Mar 31 Jun 30 Sept. 30 Dec. 31 March 31
1999 1999 1999 1999 2000 2000 2000 2000 2001
------- ------- -------- -------- -------- -------- -------- -------- --------
Revenue $ 637 $ 1,073 $ 2,318 $ 2,936 $ 4,483 $ 7,699 $ 9,030 $ 9,601 $ 12,256
Gross profit 245 609 1,621 1,968 2,820 5,632 6,433 6,556 8,770
Net loss attributable to common (4,263) (4,724) (8,266) (10,308) (19,691) (18,796) (15,031) (14,946) (10,240)
stockholders
Net loss per share (basic and $ (1.12) $ (1.25) $ (2.24) $ (3.39) $ (2.07) $ (1.04) $ (0.81) $ (0.75) $ (0.52)
diluted)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, LendingTree had approximately $16.5 million in
cash, cash equivalents, restricted investments and short-term investments.
Management believes that the existing cash and cash equivalents, including the
proceeds from the Series A Preferred Stock sales noted above, the availability
of the revolving credit facilities noted above and cash generated from
operations will be sufficient to fund our operating and capital needs through
2001.
During 2000, we required $59.2 million of cash to fund operations.
Such amounts were expended primarily for advertising, expansion of our
infrastructure and support personnel, and working capital needs. Since
inception, we have incurred significant losses and had an accumulated deficit
of $98.1 million as of December 31, 2000. These uses of cash, losses and
accumulated deficit have resulted from the significant costs incurred for
advertising and marketing efforts to build and maintain brand awareness.
Additionally, significant costs have been incurred for employment expenses
related to the establishment of relationships with lenders, real estate brokers
and other business partners and the development of Lend-X, as well as for other
general corporate purposes. Because we plan to continue to invest in these
items, we anticipate that we will continue to incur losses and experience
negative cash flow from operations throughout 2001. As of December 31, 2000, we
had approximately $12.7 million in cash, cash equivalents and short-term
investments. Of this amount, $5.1 million was restricted under an escrow
arrangement with our advertising agency.
As more fully described in the prospectus summary and in the notes to
our financial statements incorporated by reference herein, subsequent to 2000,
we signed definitive documents for the following financing transactions:
- - A preferred stock purchase agreement with various investors, pursuant
to which we issued and sold, on March 20, 2001, 3,700,001 shares of 8%
convertible preferred stock for $13.0 million or $3.50 per share, in
cash. On March 20, 2001, we also sold 200,000 shares of 8% convertible
preferred stock to our Chief Executive Officer for $700,000 through a
loan he obtained from us. On April 30, 2001, three other investors,
including our Chief Financial Officer, purchased an additional 128,751
shares for a total consideration of $450,000 plus accumulated but
unpaid dividends to the date of such closing.
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- - A two-year $5.0 million collateralized revolving credit agreement with
The Union Labor Life Insurance Company, or ULLICO, a current
stockholder. Interest on the outstanding balance accrues at a rate of
6% per annum in cash, and additional interest in the form of 5-year
warrants to purchase our common stock at a price of $.01 per share.
The number of warrants ULLICO is entitled to receive is based on the
average amount outstanding multiplied by 14% per annum divided by
$3.99. In addition, as a commitment fee, ULLICO received warrants to
purchase 40,000 fully paid shares of our common stock with an exercise
price of $.01 per share.
- - A two-year $2.5 million revolving loan agreement with the Federal Home
Loan Mortgage Corporation, or Freddie Mac, a current customer.
Interest on the outstanding balance accrues at a rate of 10% per annum
in cash, and additional interest in the form of 5-year warrants to
purchase the our common stock at a price of $.01 per share. The number
of warrants Freddie Mac will be entitled to receive is based on the
average amount outstanding on the revolving line of credit multiplied
by 10% per annum divided by $3.99. In addition, as a commitment fee,
Freddie Mac received warrants to purchase 12,500 fully paid shares of
our common stock with an exercise price of $.01 per share.
- - A common stock purchase agreement with Paul Revere Capital Partners,
Ltd. for the future issuance and sale of up to $24 million of our
common stock. Under this arrangement, we, at our discretion, may
exercise up to 24 drawdowns, pursuant to which Paul Revere is
obligated to purchase that number of shares of our common stock
specified in the drawdown notice, subject to shareholder approval if
the aggregate number of shares to be issued exceeds 19.9% of our
common stock, as more fully described in the section of this
prospectus entitled "Common Stock Purchase Agreement."
While the number of interest warrants to be issued under the $5
million revolving line of credit and the $2.5 million revolving loan facility
will be determined as described in the notes to our financial statements, the
actual amount of interest expense will be based on the fair value of these
securities on the date that they are issued. Accordingly, for every interest
warrant issued, each dollar that the price of our common stock on each warrant
issuance date exceeds $3.99 will increase the actual interest expense recorded
by us by approximately one dollar.
Management believes that the existing cash and cash equivalents, the
proceeds from the 8% convertible preferred stock sales noted above, the
availability of the revolving credit facilities and cash generated from
operations will be sufficient to fund our operating and capital needs through
2001.
Although we have historically experienced significant revenue growth
and plan to reduce negative cash flows from operations, the operating results
for future periods are subject to numerous uncertainties. Since there can be no
assurance that revenue growth will continue or that we will be able to achieve
or sustain profitability, our liquidity could be significantly
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affected. However, if revenue does not grow as anticipated or if we are unable
to successfully raise sufficient additional funds through the $24 million
equity-line referred to above, or in another manner, management would reduce
discretionary operating expenditures, including advertising, marketing,
administrative and overhead costs. While we believe that available funds will
be sufficient to fund our operations and capital expenditures through 2001,
after which management believes we will become cash flow positive, failure to
generate sufficient revenue or to reduce costs as necessary could have a
material adverse effect on our ability to continue as a going concern and
achieve our business objectives.
Additional financing may not be available when needed or, if
available, such financing may not be on terms favorable to us. If we raise
additional funds through the issuance of equity securities, our stockholders
may experience significant dilution.
On April 18, 2001, we announced that during the first quarter of 2001,
LendingTree recognized revenue of $12.3 million, which was nearly $3 million,
or 28%, greater than the prior quarter and nearly 200% greater than the first
quarter of 2000. Our net loss for the first quarter of 2001 was $10.2 million,
or $0.52 per share, which is approximately $5.0 million, or 32%, less than our
net loss for the prior quarter. As of March 31, 2001, LendingTree had
approximately $16.5 million in cash, cash equivalents and restricted
investments available.
Substantially all of our assets are pledged under the ULLICO revolving
credit arrangement and existing capital lease obligations. A covenant in one of
our capital lease agreements requires that we maintain a cash balance of not
less than $5 million throughout the term of the lease. If our cash balance
falls below $5 million at the end of a period, we will be required to
collateralize the balance of the lease with cash.
On September 29, 2000, we received $10 million from Capital Z
Partners, our largest investor, through its affiliate, Specialty Finance
Partners, in exchange for an equity rights certificate. In connection with the
8% convertible preferred stock sale described above, Specialty Finance Partners
converted the equity rights certificate into 2.86 million shares of 8%
convertible preferred stock.
On February 15, 2000, we sold 4,197,500 shares of our common stock at
an initial public offering price of $12.00 per share, raising approximately
$44.8 million net of offering costs, underwriting discounts and commissions.
Excluding our initial public offering and the September 29, 2000
financing noted above, we have financed our operations primarily through
private placements of securities, raising over $64 million, net of offering
costs since inception.
Restricted cash at December 31, 2000 of $5.1 million includes
investments that are maintained in an escrow account. This escrow account was
established by us and our advertising agency to maintain funds set aside by us
for non-cancelable and approved expenditures and services of the advertising
agency. Disbursements from the escrow account can only be made for advertising
expenditures we have approved in advance.
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On August 2, 2000, we acquired certain assets and assumed certain
liabilities of HomeSpace. The consideration paid for the acquired assets
consisted of $6.2 million in cash and 639,077 shares of our common stock.
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BUSINESS
We are a leading online lending exchange and technology provider. Our
lending exchange technology, Lend-X, powers our online lending exchange, as
well as the online lending offerings of other institutions. On our website,
qualified consumers may receive multiple loan offers, within one business day,
in response to a single loan request for home mortgages, home equity loans,
personal loans, automobile financing loans and credit cards. More than 100
banks and lenders compete for consumers' business on our website, enabling
consumers to compare and review multiple loan solicitations and accept the loan
offer that is best for that consumer. The banks and lenders in our exchange
generate new business that meets their specific underwriting criteria at
reduced acquisition costs.
INDUSTRY BACKGROUND
For lenders, the traditional lending process is paper-intensive,
time-consuming, and usually accompanied by high fixed costs and labor expense.
It generally involves defining loan product guidelines for specific segments of
consumers and establishing a pre-determined price for which the consumer
applies. This inefficient process results in significant marketing and
processing costs. In addition, the traditional lending process increases the
time it takes to implement a given lending strategy, thereby reducing
flexibility and the ability to respond to competition.
For consumers, the traditional loan process is time-consuming,
requires completion of multiple forms, and can often be frustrating and
confusing. Consumers typically search through a variety of loan products from
many different lenders, apply to one lender at a time for that lender's offered
price, and then wait for that lender to approve or reject the application.
Competing online lending sites generally mirror the traditional lending
process. Consumers visit the website, view a list of loan products, apply for
one product from one lender, and are either approved or rejected. While the
consumer proposition presented by online lending websites is the same as the
traditional offline process, the business models for online lending websites
generally fall into the following two categories:
- - Lender/Broker Model. The operators of websites such as E-Loan and
QuickenMortgage generate revenue in the same way as traditional
lenders, from a mark-up over their cost of capital, whether the source
of capital is a lender, secondary market purchaser, or warehouse line
of credit. In exchange for these mark-ups, the lender/broker
undertakes all of the document processing, verification, and customer
interaction. In addition, to the extent the lenders/brokers fund
originated loans with their own capital, they are directly exposed to
interest rate fluctuations, and must also effectively manage their
loan pipeline.
- - Referral Agent Model. The operators of websites such as GetSmart and
MSN Home Advisor typically generate revenue by providing referrals to
lenders. Because referral agents typically do not generate any revenue
upon loan closings, there is little incentive for these companies to
ensure that lenders and consumers consummate the
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loan transaction. Additionally, because referral websites do not offer
the consumers multiple offers on their sites, they are not able to
continually give best practices and pricing data to lender
participants.
LendingTree believes that the inefficiencies of the traditional
lending process and the shortcomings of other online business models, combined
with the large and recurring nature of consumer loan demand, offer a
substantial opportunity for the exchange business model.
OUR BUSINESS STRATEGY
Our mission is to become the dominant Internet-based lending exchange.
Currently, this mission is supported by the following key elements:
- - Make Lend-X "the" Operating System of Internet Lending. Becoming the
dominant lending exchange software requires a ubiquitous presence in
the lending space. We license Lend-X to traditional and
non-traditional financial institutions to originate loans in either a
single-or multi-lender environment. Most Lend-X implementations are
for multi-lender environments which utilize our exchange. As more
demand flows through the various sites, the value of our exchange
increases for participating lenders. We have licensed Lend-X to more
than 30 private-label and co-branded exchanges. Our plans for Lend-X
include deploying more multi-lender solutions at financial
institutions, aggressively marketing the product through reseller
relationships, and, installing Lend-X at traditional points of loan
origination, including bank branches, call centers and mortgage
brokers.
- - Continue to Build a Lasting and Sustainable LendingTree Brand and
Leverage that Brand to Websites of Lend-X Partners Over Time. We
believe that the LendingTree brand stands for empowerment and choice,
words that have not been traditionally associated with financial
services companies. We have built the LendingTree brand using a
combination of online and offline media that has been effective at
driving awareness and transaction volume. Over time, we will allow the
LendingTree brand to proliferate on the websites of Lend-X partners
where we believe consumers will view the "Powered By LendingTree"
symbol as a name they can trust.
To achieve our mission and objectives, we are currently undertaking
several strategic initiatives:
- - Strengthen Our Position As A Multi-Product Lending Exchange. Our
multi-lender website offers a wide breadth of loan categories. This
multi-category strategy enables us to become the consumer's primary
resource for their borrowing needs. By becoming a consumer's primary
borrowing destination and fostering repeat usage, we can increase
revenue per consumer and decrease acquisition costs for each new loan.
- - Continue to Expand Lender Coverage And Product Offerings. We seek to
provide consumers throughout the United States with a competitive
exchange for consumer credit products across a wide range of credit
risk profiles. The availability of multiple
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lenders for each type of loan product generally provides qualified
consumers with a choice of competitive offers. We will endeavor to
expand lender coverage by actively marketing the exchange solution to
new lenders and by expanding the range of product offerings of
existing lenders on the network.
- - Explore New Software Functionality and Channels of Lend-X
Distribution. In an initiative called Straight Through Processing, we
are seeking to expand the functionality of Lend-X to encompass more
of the functions that lenders are willing to outsource to third
parties. Decisioning systems, processing systems and more connectivity
to settlement service providers are among the components that we are
currently exploring. These new software functionalities will be
critical to penetrate new areas of distribution for the Lend-X
product, including real estate agents, mortgage brokers and auto
dealers.
THE LENDINGTREE LENDER NETWORK
Our exchange enables qualified consumers to receive up to four loan
offers in response to a single credit request while providing lenders with the
opportunity to generate new business that meets their specific underwriting
criteria at reduced acquisition costs. These advantages to both consumers and
lenders are available through lendingtree.com and over 30 other websites that
are powered by Lend-X.
For the year ended December 31, 2000, we derived 89% of our revenue
from transactions on our lender network, compared to 60% in 1999 and 67% in
1998.
No individual sources of network revenue exceeded 10% of our total
revenue or network segment revenue for the years ended December 31, 2000 and
1999. For the year ended December 31, 1998, four lenders comprised 27%, 13%,
12% and 11% of our total revenue.
THE LENDINGTREE PROCESS
The LendingTree process consists of the following steps:
- - Credit Request. Consumers access the exchange at www.lendingtree.com
or Lend-X enabled sites and select a loan product from our current
offering of five loan categories. Consumers complete a single
qualification form for the selected loan product with information such
as income, assets and liabilities, loan preferences and other data.
Consumers also consent to our use of their credit report.
- - Qualification Form Filtering and Transmission. A filtering process
matches the consumer's qualification form data, credit profile, and
geographic location to the preset underwriting criteria provided by
participating lenders. Lenders are able to modify their underwriting
criteria in real-time directly through a password-protected website
known as our LenderWeb. Once qualification forms pass the filters,
they are transmitted to up to four lenders. In the event that after
being filtered, the qualification
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form meets the lending criteria of more than four lenders, we forward
information from the qualification form to four lenders.
- - Lender Evaluation and Response. Lenders evaluate and respond to the
qualification forms that pass their filters. This response takes place
on the LenderWeb or via automated interface technology that we have
developed.
- - Communication of Offer. Once a lender evaluates a qualification form,
renders a decision, and responds with an offer, our system
automatically notifies the consumer via e-mail and displays the offers
on the website where the request originated. The e-mail contains
instructions to return to the website and provides instructions
directing the consumer to the Check Status page where consumers can
view and compare the terms of each offer including: interest rate,
closing costs, monthly payment amount, lender fees and other
information.
- - Offer Acceptance. The consumer has the ability to accept, reject or
request more information about any particular loan offer. When the
consumer selects one of these options, our system automatically
notifies the chosen lender and the remainder of the process is
conducted offline.
- - Ongoing Consumer and Lender Support. We provide active email and
telephone follow-up and support to both lenders and consumers during
the loan transaction process. This follow-up and support is designed
to provide technical support and increase overall satisfaction of the
participants in our exchange, as well as increase the percentage of
consumers who accept and close a loan from our lender network.
OUR LENDINGTREE LENDING EXCHANGE CUSTOMERS
Our network of lenders and real estate brokers are our customers. Our
customers pay us fees for transmitted qualification forms, closed loans and
closed real estate transactions. We do not charge consumers a fee to use our
network services. The following table summarizes the number of customers we
had providing each loan product or service on our network as of December 31,
2000:
NUMBER OF LOAN PROVIDERS OR
LOAN PRODUCTS AND SERVICES ISSUERS ON OUR NETWORK
- -------------------------- ---------------------------
Home Mortgage 74
Home Equity 61
Automobile Loans 14
Credit Cards 12
Personal Loans 9
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OTHER LENDINGTREE NETWORK SERVICES
In addition to our lending exchange products, we offer other services
to our consumers:
- - Real Estate Referrals. In addition to helping consumers secure a
mortgage loan, we can refer customers to real estate agents in most
states. As of December 31, 2000, we had relationships with
approximately 625 real estate brokerages and over 7,000 real estate
agents trained to support referrals that we supply.
- - Other Products and Services. We also have other marketing arrangements
with a variety of providers that offer home ownership and maintenance
related products and services.
THE LENDINGTREE LEND-X TECHNOLOGY
Lend-X is our online lending exchange technology that offers a fast,
adaptable and reliable online lending solution for lenders and non-lenders
alike, providing valuable access to our online lending exchange of more than 100
banks and lenders. We license our Lend-X technology to over 30 companies who
create single and multi-lender lending exchanges using Lend-X on a private-label
or co-branded basis to leverage their own lender relationships or those that we
have established. We also perform limited brokerage services for some of our
Lend-X technology customers. In these transactions, we typically receive a
traditional basis point fee from the lender when a loan closes.
Revenue from sales of Lend-X technology represented $0.1 million, or
33% of total revenue, $.9 million, or 12% of total revenue, and $3.3 million, or
11% of total revenue, in 1998, 1999 and 2000, respectively.
In 2000, a single customer accounted for 71% of the Lend-X technology
segment revenue and 7.7% of our total revenue. For the year ended December 31,
1999, two customers accounted for 49% and 45% of our Lend-X technology revenue,
respectively. In 1998, one customer accounted for 83% of our Lend-X technology
revenue.
THE LEND-X PLATFORM
The Lend-X technology platform is made up of six integrated components:
- - BorrowerWeb. BorrowerWeb is Lend-X's consumer interface, the primary
element of which is the qualification form. The qualification form is
simple, easy to complete, and flexible to change over time. Advanced
functionality includes Java-enabled tips for the consumer as he or she
completes the form, links to calculators and worksheets to simplify
form completion, and save-your-place functionality so the consumer can
complete the form over multiple sessions.
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- - Filtering Process. The filters enable lenders to perform
pre-qualification approvals and route potential borrowers to the
appropriate business unit within their organization. The filtering
process also allows a lender to refer certain consumers to financial
institutions more likely to close a given loan.
- - Loan Decisioning. Lend-X provides interfaces to the lenders' in-house
evaluation and response systems. Lend-X also retrieves credit scores
calculated from credit reports from any of the three major credit
bureaus to facilitate loan decisioning. Additionally, in conjunction
with the filtering process, Lend-X enables financial institutions to
automatically provide conditional approvals of a consumer's loan
request.
- - Lender Web. The Lend-X LenderWeb is a password-protected extranet where
lenders can manage their pipeline of loan requests. LenderWeb includes
workflow functionality, communication tools to assist in customized
responses to consumers, reporting and data warehouse access, status
tracking and loan tracking throughout the closing process.
- - StatusWeb. Lend-X includes a website where consumers can manage their
interactions with lenders. With StatusWeb, consumers can view and
compare loan offers, request more information from lenders, access
calculators and loan information, view closing cost data, accept or
reject loan offers and track the status of their loan file throughout
the closing process.
- - Gateway Functionality. The Lend-X gateway functionality facilitates
data interfacing needs between multiple points of loan origination and
multiple legacy systems that a lender may have. Websites that
LendingTree can connect to a legacy system include lendingtree.com, a
private-label website, competitor websites, and many others. This
functionality enables lenders to receive and manage all of their
Internet loan origination functions with one consistent interface.
THE BENEFITS WE OFFER OUR LEND-X CLIENTS
The benefits to our Lend-X clients include:
- - Incremental Revenue. Lend-X offers lenders the ability to cross-sell
lending products to a wider consumer base and non-lenders to utilize
Lend-X and LendingTree's services to access a new market place.
- - Lower Upfront Cost. The Lend-X proprietary technology results in lower
upfront cost compared to developing a web-based lending exchange
in-house. As companies seek to develop proprietary Internet
capabilities, Lend-X can meet their needs in a more cost-effective and
scalable manner.
- - Reduced Technology Obsolescence. Lend-X is continually updated as new
technologies develop. Companies that use Lend-X can take advantage of
these improvements and maintain the latest technology.
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- - Multi-lender Capability. We believe that financial institutions will
adopt a multi-lender approach over time. Lend-X facilitates
transactions between financial institutions. A multi-lender approach
not only increases consumer choice, but also provides additional
transaction revenue to the Lend-X partner.
- - Time to Market Advantage. Because our Lend-X product typically runs in
an application service provider environment, a company can have a
website up and running in as little as two weeks. This gives a valuable
time-to-market advantage compared to other solutions.
- - Robust, Scalable Technology. Lend-X clients need to process significant
transaction volume. Lend-X was designed, and has proven its ability, to
handle significant volume and a wide range of products.
- - Access to Market Information. We provide Lend-X clients with access to
a comprehensive data warehouse and real-time reporting capabilities.
Additionally, we provide Lend-X clients with the benefits of our
experience and knowledge of the Internet lending arena.
COMPETITION
ONLINE LENDER NETWORK COMPETITION
We believe that the primary competitive factors in the online financial
services market are:
- - Pricing and breadth of product offering;
- - Time of market entry;
- - Brand awareness;
- - Variety, quantity, and quality of partners and online relationships;
- - Proprietary and scalable technology infrastructure;
- - Ease of use and convenience; and
- - Strength of relationships and depth of technology integration with
consumers.
Our success depends upon capturing and maintaining a significant share
of consumers who obtain loans through the Internet. In order to do this, we must
continue to build on our first mover advantage, continue to increase brand
awareness among consumers and lenders, expand our network of lenders, establish
additional Lend-X relationships, and continually upgrade our technology. Many of
our current competitors, however, have longer operating histories, larger
customer bases, and significantly greater financial, technical, and marketing
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resources than we do. In addition, participants in other areas of the financial
services industry may enter the consumer lending exchange.
LEND-X COMPETITION
Competition for Lend-X generally falls into several categories:
- - Traditional software companies and custom website development
companies. Traditional software companies and custom website
development companies, such as American Management Systems, Alltel,
Cybertek, CMSI and iXL, among others, generally develop large-scale
custom websites for financial institutions. These companies are
clearly a competitive threat to us because of the in-depth
relationships that these companies have already established. The
benefit of these companies' products and services is that they are
customized and developed specifically for a single institution.
However, compared to Lend-X, these products and services require
substantially longer lead times, cost significantly more money, do not
have multi-lender linkage capability, and must be updated and changed
as technologies advance.
- - Multi-lender and Single-Lender Websites. Several companies, including
Microsoft Home Advisor Technologies, E-Loan and MortgageIT, operate
both a consumer-branded website and private-label technologies for
portals and other points of origination. Companies like E-Loan and
MortgageIT also process, close and fund mortgage loans. The benefits of
single-lender models are that they can provide a branded offering
quickly and, sometimes, cost-effectively. However, because the entities
behind the single-lender models are also lenders, it is difficult for
them to sell their product to companies that are also lenders since
their potential customers are also their competitors.
- - Emerging Internet Software Development Companies. Other companies, such
as Expede, Framework, S-1, Digital Insight and Corrillion, are
currently developing and marketing software to the financial services
industry. These companies generally are focused at the front-end as
customer relationship management, or CRM., software providers, or at
the back-end as loan processing systems. Other companies are focused on
other banking-related applications like bill payment and online
banking. As these companies develop their existing products and as we
add functionality to Lend-X, competition with these companies could
emerge. We are combating this threat by making some of these companies
our business partners and getting them to adopt the Lend-X technology
for their user base. We have entered into reseller arrangements with
S-1, Financial Fusion and HomeAccount network, and several other
arrangements are in various stages of development.
BUSINESS DEVELOPMENT
SALES AND CUSTOMER AND CONSUMER SERVICE
Our lender sales force consists of three lender development teams that
cover the following consumer loan categories: mortgage and home equity;
automobile; and credit cards
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and personal loans. Each team targets and establishes relationships with lenders
to achieve an adequate array of credit products to meet consumer demand.
Additionally, a separate Lend-X sales force supports the lender sales effort and
also targets non-lender clients. The Lend-X sales force is divided into the
following industry teams to target specific client groups: top 100 lending
institutions; mid-tier and small lending institutions; resellers; and non-lender
financial institutions such as insurance companies. The lender and Lend-X client
marketing objective is to support our sales efforts by increasing awareness of
our lender network and Lend-X platform through trade advertising, public
relations, and attendance at trade shows and industry conferences.
ACCOUNT MANAGEMENT
We strive to provide a high level of support and service to all of our
business clients. Each client receives comprehensive training on the Lend-X
technology as well as a dedicated support team following the sale. Additionally,
a technical support hotline operates 24 hours a day, seven days per week to
provide immediate answers for most technical problems. We have developed a best
practices program that helps lenders, including both network lenders and Lend-X
clients, achieve high levels of customer service and provide competitive product
offerings. We believe that the most successful Internet lenders adhere to best
practices that include the following:
- - Use of dedicated in-house teams to monitor their online loan
activities;
- - Rapid response to consumer credit requests;
- - Proactive solicitation of consumer feedback; and
- - Personalized service through outbound call centers.
CUSTOMER SERVICE
We employ a staff of customer service and technical support personnel
who provide support to all of our key constituencies. They provide support via
email and telephone. The responsibilities of the customer service and technical
support personnel include:
- - Responding to consumers' questions about the status of their credit
request, how to use our website, and other frequently-asked questions.
- - Acting as a liaison between consumers and lenders, to ensure consumers
receive prompt service from lenders.
- - Acting as a facilitator for the consumer and real estate agent.
- - Providing technical support to lender technical and systems questions
24 hours a day, seven days per week.
- - Providing technical support to Lend-X clients.
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MARKETING
Our principal marketing objectives are to build brand awareness and
increase volume on our exchange. These efforts include offline advertising,
online advertising and direct marketing. We also collect and analyze consumer
data to enhance our consumer marketing programs, subject to compliance with our
privacy policy.
OFFLINE ADVERTISING
- - Television Advertising. Our television advertising has proven to be an
effective medium to drive both brand awareness and transaction volume.
Utilizing network, spot, and cable television, we have created
significant brand awareness of our brand promise of "When Banks
Compete, You Win."
- - Radio Advertising. Our radio advertising directly increases transaction
volume on our website as well as consumer awareness of the LendingTree
brand. Radio advertising, through a combination of network and spot
buying, enables us to reach our target audience in a cost-effective
manner both nationally and locally. We select our spot radio markets
based on a variety of factors including population density, housing
starts, Internet-enabled households, and overall home buying activity.
- - Print Advertising. We have used print advertising in daily news
publications as well as periodicals to support our brand awareness
efforts. We will continue to explore use of the print medium to support
more targeted advertising initiatives, such as vertical marketing,
focusing on specific consumer groups.
ONLINE ADVERTISING
- - Online Advertising and Sponsorships. Online advertising and
sponsorships play an important role in our overall effort to reach
potential consumers. We focus on those websites having a high affinity
to consumer lending, such as real estate, personal finance and
automobile-related websites. We have also worked with major search
engine companies such as Yahoo! to sponsor keywords such as "loans,"
and incorporated banner advertising into our online strategy to
maximize consumer reach at relatively low cost.
- - The LendingTree Affiliate Network. We have agreements with other
websites that route consumers to www.lendingtree.com. We pay
advertising fees to our affiliates in exchange for the placement of
banner ads and links from their site to ours. Our affiliate program has
been a cost-effective source of loan request volume.
DIRECT MARKETING
We believe that direct marketing is an effective means of increasing
loan requests and closure rates, and a way to develop more sustainable relations
with consumers. Our direct marketing initiatives have been executed through both
offline and online channels, within the guidelines of our privacy policy. Our
direct marketing initiatives include:
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- - Direct Email. We use email to encourage customers to visit our website,
complete the loan request process, communicate with consumers
throughout the lending process, offer additional product and service
value and facilitate consumers' ability to obtain loans.
- - Direct Mail. We use direct mail to compliment our online email efforts
to build brand equity and increase overall transaction volume.
- - Cross-Selling. We use cross-selling and other adaptive marketing
activities to provide consumers the opportunity to purchase related
products and services from our partners at various points in the
LendingTree loan process. We recently added the cross-sell of real
estate services to consumers in addition to existing cross-sell
programs such as home, auto and credit card products.
TECHNOLOGY
Our information technology infrastructure consists of a combination of
custom-developed application software integrated with enterprise enabling
applications. The infrastructure can be classified into three areas: Transaction
Processing, Customer Relation ship Management and Business Intelligence.
- - Transaction Processing. The high-volume, transaction processing
infrastructure that enables our core business is Lend-X. The Lend-X
technology infrastructure runs our exchange and powers our client's
private-label and co-branded relationships. This technology was
designed with an emphasis on scalability, performance, reliability, and
security.
- - Customer Relationship Management. We have consumers shopping for loans
24 hours a day. In order to support this demand, we have developed a
sophisticated systems monitoring capability that tracks the performance
and availability of the system. We have established procedures to
minimize the likelihood of service interruptions, including periodic
equipment and software testing, monitoring, and maintaining error
records. We have also instituted and tested a contingency plan to limit
the duration of any database or other software-related system failure.
- - Business Intelligence. We use standard Microsoft languages and
development tools such as Visual Basic and Active Server Pages. We also
use C++ and Perl. We use Microsoft's SQL Server as our database engine
and our website and database servers run on the Windows NT operating
system. Communications to our website are protected with Secure Sockets
Layer, an industry-standard protocol that provides data encryption,
server authentication, and message integrity. Our website servers and
database servers are protected by firewalls that separate them from the
Internet. Our website is hosted by Digex at its facilities in
Beltsville, Maryland and Cupertino, California. Digex operates with
redundant communication lines, emergency power backup, and 24-hour
monitoring and engineering support. Physical access to all of our
servers at Digex is strictly controlled by a state-of-the-art physical
security architecture utilizing multi-redundant mechanics, utilities,
and environmental controls.
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The combination of our data warehouse, coupled with consumer
relationship and contact management tools, will enable us to continue to
maximize the value we can provide to our consumers. For more information
regarding Lend-X functionality, see "The Lend-X Solution" section of this
prospectus.
PRIVACY POLICY
We believe that issues relating to privacy and use of personal
information of Internet users are becoming increasingly important as the
Internet and its commercial use grow. As a result, we have adopted a detailed
privacy policy that outlines how we use consumer information and the extent to
which lenders and other third parties may have access to this information. This
policy is prominently noted on our website. We do not sell, license or rent any
personally identifiable information about our consumers to any third party, and
will use the information about its customers for internal purposes only.
Generally, the privacy provisions of the recently-enacted
Gramm-Leach-Bliley Act:
- - Bar financial institutions from disclosing to unaffiliated third
parties nonpublic personal information collected from consumers,
subject to several exceptions;
- - Require financial institutions to develop and disclose consumer privacy
policies;
- - Empower federal regulators with the authority to regulate information
sharing and enforce the provisions of the law; and
- - Allow states to pass stricter financial privacy laws.
Compliance with the Gramm-Leach-Bliley Act will be mandatory on July 1,
2001. We will be required to amend our privacy policy and implement new
procedures to make privacy disclosures to consumers and provide them the
opportunity to elect not to have their non-public personal information disclosed
to third parties. We are currently addressing these issues. In addition, we are
working with our lenders to assist them in complying with their obligations, to
the extent possible, through our website.
GOVERNMENT REGULATION
The loan products and real estate agent referral services available
through our website are subject to extensive regulation by various federal and
state governmental authorities. Because of uncertainties as to the applicability
of some of these laws and regulations to the Internet and, more specifically, to
our business, and considering our business has evolved and expanded in a
relatively short period of time, we may not always have been, and may not always
be, in compliance with applicable federal and state laws and regulations.
Failure to comply with the laws and regulatory requirements of federal and state
regulatory authorities may result in, among other things, revocation of required
licenses or registrations, loss of approved status, termination of contracts
without compensation, loss of exempt status, indemnification liability to
lenders and others doing business with us, administrative
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enforcement actions and fines, class action lawsuits, cease and desist orders,
and civil and criminal liability.
Many, but not all, states require licenses to solicit or broker to
residents of those states, loans secured by residential mortgages, and other
consumer loans, including credit card, automobile and personal loans. We are not
currently licensed and able to accept credit requests for all loan products in
every state. We are not currently accepting credit requests for loan products
from residents of states in which we are not licensed to provide those products.
In many of the states in which we are licensed, we are subject to examination by
regulators. In addition, as a result of the HomeSpace transaction, we are
required to obtain real estate broker licenses, additional mortgage broker
licenses and individual call center personnel licenses in numerous states.
Failure to obtain these licenses and approvals could prevent us from receiving
fees from the real estate agent referral and mortgage services programs we offer
and may subject us to the types of fines, forfeitures and litigation discussed
above.
As a computer loan origination system or mortgage broker conducting
business through the Internet, we face an additional level of regulatory risk
given that most of the laws governing lending transactions have not been
substantially revised or updated to fully accommodate electronic commerce. Until
these laws, rules and regulations are revised to clarify their applicability to
transactions conducted through electronic commerce, any company providing
loan-related services through the Internet or other means of electronic commerce
will face compliance uncertainty. Federal law, for example, generally prohibits
the payment or receipt of referral fees in connection with residential mortgage
loan transactions. The applicability of referral fee prohibitions to the
advertising, marketing, distribution and cyberspace rental arrangements used by
online companies like ours may have the effect of reducing the types and amounts
of fees that we may charge or pay in connection with real estate-secured
products.
Regulations promulgated by some states may impose compliance
obligations on any person who acquires 10% or more of our common stock,
including requiring that person to periodically file financial and other
personal and business information. If any person acquires 10% or more of our
common stock and refuses or fails to comply with these requirements, we may not
be able to obtain a license and existing licensing arrangements in particular
states may be jeopardized.
The parties conducting business with us, such as lenders and other
website operators, may similarly be subject to federal and state regulation.
These parties act as independent contractors and not as our agents in their
solicitations and transactions with consumers. Consequently, we cannot ensure
that these entities will comply with applicable laws and regulations at all
times. Failure on the part of a lender or other website operator to comply with
these laws or regulations could result in, among other things, claims of
vicarious liability or a negative impact on the our reputation.
In addition to licensing requirements, federal and state laws regulate
residential lending activities and record keeping requirements of brokers and
lenders. At the federal level, our services are regulated by, among other laws,
the Truth in Lending Act
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and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair
Housing Act, the Fair Credit Reporting Act, federal privacy laws, and the Real
Estate Settlement Procedures Act and Regulation X. These laws generally regulate
the manner in which loan services are made available, including advertising and
other consumer disclosures, payments for services, record keeping requirements,
and the privacy and reporting of consumer data. State and federal laws also
prohibit unfair and deceptive trade practices and require companies to adopt
appropriate policies and practices to protect consumer privacy.
Under the Truth in Lending Act, creditors are required to provide
consumers with uniform, understandable information concerning some of the terms
and conditions of loan and credit transactions being offered, which may include
disclosures in advertising. This particular federal law is generally applicable
to lenders and applies to us primarily in the context of advertising.
The Equal Credit Opportunity Act prohibits discrimination against
applicants on the basis of race, color, sex, age, religion, national origin, or
marital status, and the Fair Housing Act similarly prohibits discrimination in
residential lending. The regulations under the Equal Credit Opportunity Act also
restrict creditors from requesting various types of information from loan
applicants and require lenders to supply applicants with a notice, referred to
as an adverse action notice, when the lender denies its applicants credit. Our
lenders are generally obligated to provide the required disclosures. While the
applicability of these disclosure requirements to us is unclear, we nevertheless
provide such disclosures to consumers in the event that a qualification form
cannot be transmitted to any lender.
The Fair Credit Reporting Act is a consumer privacy statute that
generally governs the assemblage, evaluation, maintenance, and dissemination of
information on consumers that has been collected for the purpose of evaluating
their qualifications for credit. The Fair Credit Reporting Act also requires
that users of consumer credit reports notify consumers when their loan
applications are denied on the basis of those consumer credit reports. In
addition, recent consumer privacy legislation enacted as part of the
Gramm-Leach-Bliley Act will restrict the dissemination of nonpublic consumer
information to non-affiliated third parties and will require institutions to
maintain privacy policies, and give notice of such policies, when compliance
with the law becomes mandatory on July 1, 2001. As a regulated financial
institution for purposes of this law, we are currently addressing these issues.
The Real Estate Settlement Procedures Act, or RESPA, and related
regulations generally prohibit the payment or receipt of fees or any other item
of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or
unearned fees in connection with the provision of residential real estate
settlement services, including mortgage brokerage and lending services.
Notwithstanding these prohibitions, RESPA permits payments for goods or
facilities furnished or for services actually performed, so long as those
payments bear a reasonable relationship to the market value of the goods,
facilities or services provided. Failure to comply with RESPA may result in,
among other things, administrative enforcement actions, class action lawsuits,
cease and desist orders and civil and criminal liability.
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The mortgage and home equity products offered through our exchange are
residential real estate secured loans subject to these provisions of RESPA.
Consequently, our online relationships with lenders, other companies and
websites on which we offer services are subject to RESPA's prohibitions on
payment or receipt of referral fees for referrals and for unearned fees or fee
splits. We believe that we have structured these relationships to comply with
RESPA. The applicability of RESPA's referral fee and fee splitting prohibitions
to these types of Internet-based relationships, however, is unclear and the
appropriate regulatory agency has provided limited guidance to date on the
subject. See the section of this prospectus entitled "Risk Factors" for more
information.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
We regard our intellectual property as critical to our success. We rely
on a combination of trademark and copyright law, and trade secret protection to
protect our proprietary rights. We pursue the protection of our intellectual
property in part through trademark and copyright registration. We have
registered "LendingTree" as a trademark in the United States and have applied
for trademark registration in the United States for "Lend-X." In addition, in
connection with the HomeSpace transaction, we were assigned applications for
registration of marks for "HomeSpace," acquired certain patent applications from
HomeSpace, and were assigned other pending trademark registrations associated
with HomeSpace, Inc. We consider the protection of our trademarks to be
important for maintenance of our brand identity and reputation. We have applied
for a U.S. patent and filed a Patent Cooperation Treaty international patent
application on our Lend-X technology and our online loan market process. We
cannot assure you that any of these registrations or applications will not be
successfully challenged by others or invalidated through administrative process
or litigation. Further, if our trademark applications are not approved or
granted due to the prior issuance of trademarks to third parties or for other
reasons, there can be no assurance that we would be able to enter into
arrangements with such third parties on commercially reasonable terms allowing
us to continue to use such trademarks. It is possible that our patent
applications will be denied or granted in a very limited manner such that they
offer little or no basis for us to deter competitors from employing similar
technology or processes or allow us to defend ourselves against third-party
claims of patent infringement. Further, effective patent, trademark, copyright,
and trade secret protection may not be available in every country in which we
may offer our services.
A substantial portion of our intellectual property is licensed to third
parties. We license the right to use Lend-X to well-known regional and national
lenders, other online companies that create online exchanges, and other websites
providing lending services. In addition, a portion of the intellectual property
used in our business is based on licenses granted to us by third parties. We
depend on the third party owners from whom we license intellectual property and
technology to protect those rights, and therefore, cannot guarantee that the
measures taken by these third parties to protect their proprietary rights will
be sufficient. In these agreements, the licensors have generally agreed to
defend, indemnify and hold us harmless with respect to any claim by a third
party that the licensed property infringes any patent or other proprietary
right. We cannot assure you that these provisions will be adequate to protect us
from infringement claims.
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In addition, we seek to protect our proprietary rights through the use
of confidentiality agreements and other contractual arrangements with our
employees, affiliates, clients, Lend-X licensees, and others. We cannot assure
you that these agreements will provide adequate protection for our proprietary
rights in the event of any unauthorized use or disclosure, that employees, our
affiliates, clients, Lend-X licensees, or others will maintain the
confidentiality of such proprietary information, or that such proprietary
information will not otherwise become known, or be independently developed, by
competitors. Occasionally, we have been, and expect to continue to be, subject
to claims in the ordinary course of our business, including claims alleging that
we have violated a patent or infringed a copyright, trademark or other
proprietary right belonging to a third party. We cannot assure you that the
steps we have taken to protect our proprietary rights will be adequate or that
third parties will not infringe or misappropriate our proprietary rights. Any
infringement claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources on our part, which could
materially adversely affect our business, results of operations, and financial
condition.
EMPLOYEES AND RECRUITMENT
As of March 31, 2001, we had approximately 220 full-time employees.
Of these, 50 were in lender and borrower relations, 41 were in sales, marketing
and business development, 84 were in technology and project management, 22 were
in financial and legal, and the remainder were in human resources and
administrative positions. None of our employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
FACILITIES
Our principal executive offices are currently located in approximately
38,000 square feet of office space in Charlotte, North Carolina under a lease
that expires in 2010.
LEGAL PROCEEDINGS
We have been named as one of a number of defendants in a putative class
action law suit originally filed on September 7, 2000 in California Superior
Court in Contra Costa, California. This action for injunctive relief and class
action restitution was filed under Cal. Bus. Prof. Code sections 17200 and
17500. The lawsuit was removed to federal court on October 13, 2000, and was
caption Ainsworth, et al, V. Ohio Savings Bank, et at., Case No. 300-CV-3786
(N.D. Cal.). The lawsuit was remanded to California Superior Court in Contra
Costa, California on January 12, 2001, Case No. MS C00-03812, and is pending
there. The other defendants named in the action are Ohio Savings Bank, Costco
Wholesale Corp., Costco Financial Services Inc., First American Title Insurance
Company and First American Lenders Advantage. Plaintiff have sought limited
discovery from us and we in the process of complying with plaintiffs' discovery
request.
This case challenges the legality of the payment of premium spreads to
HomeSpace Services, Inc. through an affinity lending program with co-defendants
Costco Wholesale and Ohio Savings Bank. We acquired certain assets of HomeSpace
through an asset purchase on August 2, 2000. We intent to file a motion for
summary judgement in the case on the grounds
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that we are not liable for the actions of HomeSpace by virtue of our purchase of
its assets. Plaintiffs also assert that we are paid yield spread premiums as
part of the Costco relationship, and seek to enjoin our receipt of such payments
in the future and to require certain additional disclosures and consents from
borrowers. We do not receive any premium payments, and do not anticipate
receiving any premium payments in the future. We believe that it is too early to
make any judgements concerning the likelihood of an unfavorable outcome or to
make any further assessment of the amount or range of possible loss in this
action, since the complaint primarily challenges the actions of HomeSpace for
actions taken prior to our purchase of certain assets of HomeSpace, we have not
yet moved for summary judgement and the case has not progressed. We believe that
it would be incorrect for a Court to hold us liable for the actions of
HomeSpace, but such an outcome is possible. Moreover, plaintiffs' claims as to
requiring additional disclosures and consents in connection with the Costco
program loans are still in the process of being articulated at this stage of the
case. We do note that the disclosure and consent claims appear to be raised
primarily as the basis for injunctive relief, not for relief in damages.
We have retained counsel and are vigorously defending against these
claims. Although there can be no assurances, we do not believe that the outcome
of any proceeding will have a material effect on our financial condition, cash
flows or results of operations.
We recently were the subject of a routine examination conducted by the
New York State Banking Department, or NYSBD. At the close of the examination,
during the exit interview, NYSBD examiners verbally raised an issue as to
whether we are obligated to make certain mortgage broker disclosures to
consumers under New York state law. As of this date, NYSBD has not instituted
any investigation or enforcement action. We could face a possible administrative
fine, penalty or both. We believe that the NYSBD regulation which triggers the
disclosures in question is inapplicable to us. We intend to work with the NYSBD
to clarify the application of its regulations to our activities, and, if
necessary, to contest any fine or penalty. Although there can be no assurances,
we do not believe that the outcome of any proceeding will have a material effect
on our financial condition or the results of our operations.
We are involved in other litigation from time to time that is routine
in nature and incidental to the conduct of our business. We believe that the
outcome of any such litigation would not have a material adverse effect on our
financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
executive officers and directors as of March 31, 2001.
NAME AGE POSITION
---- --- --------
Douglas Lebda 31 Chief Executive Officer and Director
Keith Hall 47 Senior Vice President, Chief Financial Officer and
Treasurer
Thomas Reddin 40 Senior Vice President and Chief Operating Officer
David Anderson 35 Senior Vice President of New Business Initiatives
Richard Stiegler 44 Senior Vice President and Chief Technology Officer
Stephen J. Campbell 36 Senior Vice President and Chief Information Officer
Richard Field 60 Director
W. James Tozer, Jr. 60 Director
James Carthaus 60 Director
Robert Kennedy 65 Director
Daniel Lieber 38 Director
Robert Spass 45 Director
Dale Gibbons 40 Director
DIRECTORS
Our certificate of incorporation divides our board into three classes,
denominated as Class I, Class II and Class III. Members of each class hold
office for staggered three-year terms. At each annual meeting of our
stockholders commencing in 2001, the successors to the directors whose terms
expire at that meeting will be elected to serve until their successors have been
elected and qualified. With respect to each class, a director's term will be
subject to the election and qualification of his successors, or his earlier
death, resignation or removal. These provisions, when taken in conjunction with
other provisions of our amended and restated certificate of incorporation
authorizing the board of directors to fill vacant director ships, may delay a
stockholder from removing incumbent directors simultaneously gaining control of
the board of directors by filling the vacancies with its own nominees.
Listed below are the names and ages of all of our current directors,
the business experience during the past five years of each such person, and any
other directorships held by
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such person in companies that are subject to the reporting requirements of the
Securities Exchange Act of 1934 or in any company registered as an investment
company under the Investment Company Act of 1940. Each of the following
directors has served continuously as a director since the year in which he was
first elected as a director. None of the following persons serves as a director
pursuant to any arrangement or understanding between him and any other
person(s). However, in connection with the 8% convertible preferred stock
transaction in March 2001, we expanded our board from seven to eight members
and, at the request of Zions Bancorporation, we appointed Dale Gibbons to fill
the new board position.
CLASS I -- TERM EXPIRING AT THE 2004 ANNUAL MEETING
RICHARD FIELD has been a director since August 1997. Mr. Field has been
a private investor since May 1997. From 1978 until 1997, Mr. Field worked at The
Bank of New York in various capacities, most recently as Senior Executive Vice
President of Retail Banking and a member of its Policy Committee. Prior to 1978,
Mr. Field served in various marketing capacities at Chase Manhattan Corporation
and Citicorp. Mr. Field is also a former member of the Executive Committee for
MasterCard International's board of directors and the former Chairman of
MasterCard's U.S. board of directors.
W. JAMES TOZER, JR. has been a director since August 1997. Since 1990,
Mr. Tozer has been the Managing Director of Vectra Management Group, a real
estate firm. He is a former Senior Vice President of Citibank and a member of
its Policy Committee, Senior Executive Vice President of Shearson Hayden Stone,
Senior Executive Vice President of Marine Midland Bank, and President of
Prudential-Bache Securities. Until its sale in January 2001, he was Chairman of
the Executive Committee of Draper Bank and Trust and was co-founder of Vectra
Bank of Colorado.
CLASS II -- TERM EXPIRING AT THE 2002 ANNUAL MEETING
JAMES CARTHAUS had been a director since December 1998. He resigned as
a director of LendingTree at our 2001 annual meeting. Since 1989, Mr. Carthaus
has been the chairman of a New York investment bank, Scott-Macon, Ltd. He is a
former officer of Citibank, a Vice President and Senior Lending Officer of a
predecessor of FleetBoston Financial and an Executive Vice President and
director of Shearson Lehman Brothers where he headed its financial services
division. Mr. Carthaus is currently a director and Chairman of the Investment
Committee of The Franciscan Sisters of The Poor Foundation, Inc.
ROBERT KENNEDY has been a director since December 1998. Mr. Kennedy has
been the Director of Special Projects of ULLICO, Inc. since 1994. Mr. Kennedy is
currently a director of SuperShuttle International, Inc. and is a member of the
Advisory Board of Euclid Funds.
DANIEL LIEBER has been a director since September 1999. Mr. Lieber is a
partner at Equifin Capital Management, an investment firm affiliated with
Capital Z, where he has worked since October 1998. Prior to joining Equifin, Mr.
Lieber was a Senior Vice President at AT&T Capital. From 1995 to 1997, Mr.
Lieber was a Senior Vice President with GE Capital Services, RFS Ventures Group.
Between 1993 and 1995, he was employed as a Vice President in the Management
Consulting Group at Bankers Trust.
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CLASS III -- TERM EXPIRING AT THE 2003 ANNUAL MEETING
DOUGLAS LEBDA founded LendingTree in June 1996 and has served as a
director since that time. He has served as Chief Executive Officer since
September 1998. Prior to that time, Mr. Lebda served as Chairman of the Board
and President. Prior to founding LendingTree, Mr. Lebda was with Price
Waterhouse in various capacities since 1992.
ROBERT SPASS has been a director since April 2001. He has been Deputy
Chairman of the Board and director of Capital Z Management, L.L.C. and
affiliated companies from 1998 to the present. Mr. Spass has also been a Partner
of Capital Z since 1998 and Managing Partner of Insurance Partners Advisors I,
L.P., since 1994. Prior to joining Insurance Partners Advisors I, L.P., Mr.
Spass was President and Chief Executive Officer of International Insurance
Advisors, Inc. from 1990 to 1994. Mr. Spass is a director of Superior National
Insurance Group, Inc. and certain subsidiaries, Ceres Group, Inc., Universal
American Financial Corporation, USI Insurance Services, Corp., Highlands
Insurance Group, Inc., and Aames Financial, Corp.
DALE GIBBONS has been a director since March 2001, when he was elected
in connection with the closing of the issuance and sale of our 8% convertible
preferred stock. Mr. Gibbons has been the Chief Financial Officer of Zions
Bancorporation since August 1996. Prior to joining Zions Bancorporation, Mr.
Gibbons was a Senior Vice President of First Interstate Bancorp.
BOARD COMMITTEES
The board of directors has a compensation committee that is responsible
for determining salaries, incentives and other forms of compensation for our
directors, officers and other employees and administering various incentive
compensation and benefit plans. The members of the compensation committee are
James Carthaus, chairman, and Robert Spass.
The board of directors has an audit committee that provides assistance
to our board of directors in fulfilling its legal and fiduciary obligations with
respect to matters involving our accounting, auditing, financial reporting and
internal controls and legal compliance concerns. The board's audit committee
currently consists of Robert Kennedy, chairman, Richard Field and Daniel Lieber.
DIRECTOR COMPENSATION
Members of our board of directors are not paid director fees for their
attendance at meetings of the board or any of its committees. All of our
non-employee directors are reimbursed for out-of-pocket expenses incurred in
connection with their attendance at board of directors or committee meetings.
Under our 2001 Stock Incentive Plan, each non-employee director that
beneficially owns less than 5% of our voting power will automatically be granted
a non-qualified stock option for 15,000 shares upon his or her initial election
to the board, and a non-qualified stock option for 5,000 shares immediately
following each annual stockholders
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meeting. The terms of such options are set forth in more detail below in the
section of this prospectus entitled "Stock Plans-2001 Stock Incentive Plan."
Our directors are eligible to participate in a deferred compensation
program whereby a director may defer the income from any director's fees paid,
and from the exercise of stock options. Under that plan, in the event of a
change in control, we will be required to fund a so-called rabbi trust
sufficient to pay the deferred compensation.
EXECUTIVE OFFICERS
Certain information regarding our executive officers is set forth
below:
DOUGLAS LEBDA has served as a director since June 1996 and as Chief
Executive Officer since September 1998. Additional information about Mr. Lebda
can be found above under the caption "Class III Directors--Term Expiring at the
2003 Annual Meeting."
THOMAS REDDIN is Senior Vice President and Chief Operating Officer.
From 1995 to 1999, he was Vice President, Consumer Marketing for Coca-Cola USA.
Mr. Reddin was responsible for leading the strategy and all marketing activities
for Coca-Cola. Prior to joining The Coca-Cola Company, Mr. Reddin spent 13 years
with Kraft General Foods in various brand management capacities. Mr. Reddin
joined LendingTree in December 1999.
KEITH HALL is Senior Vice President, Chief Financial Officer and
Treasurer. From 1997 until 1999, Mr. Hall was the Chief Financial Officer of
Broadway & Seymour, Inc., a software product and services firm. Beginning in
1995, Mr. Hall was the Chief Financial Officer of Legent Corporation, a software
and services company. Between 1983 and 1995 Mr. Hall worked in various financial
positions at United Technologies Corporation, including Chief Financial Officer
of Carrier North America. Mr. Hall has been with LendingTree since June 1999.
RICHARD STIEGLER is Senior Vice President and Chief Technology Officer.
From 1993 until 1997, Mr. Stiegler served as vice president of Advanced
Technology at Greenwich Capital Markets. From 1987 until 1993, Mr. Stiegler was
a Vice President at Morgan Stanley. Mr. Stiegler has been with LendingTree since
November 1997.
STEPHEN CAMPBELL is Senior Vice President and Chief Information
Officer. From 1987 until November 1999, Mr. Campbell worked in various
capacities with American Management Systems Inc., an international business and
information technology consulting company, most recently as the director of
Software Development for the Consumer Financial Services Group. Mr. Campbell has
been with LendingTree since November 1999.
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EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by us for services rendered in all capacities
during the fiscal years ended December 31, 1998, 1999 and 2000 for our President
and Chief Executive Officer, and each of our four other most highly compensated
executive officers whose total salary and bonus exceeded $100,000 for the year
ended December 31, 2000.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------- ------------
OTHER
ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#)
- --------------------------- ---- --------- --------- ------------ -----------
Douglas Lebda 2000 258,000 135,000 228,383 (1) 418,749
Chief Executive Officer 1999 154,000 100,000 (2) 190,500
1998 65,000 -- 28,000 76,200
Thomas Reddin 2000 218,000 141,000 (2) 65,000
Senior Vice President and 1999 11,000 65,000 (2) 28,749
Chief Operating Officer(3) 1998 -- -- -- --
Keith Hall 2000 179,000 161,000 32,693 (4) 73,100
Senior Vice President, 1999 79,000 62,500 (2) 114,300
Chief Financial Officer 1998 -- -- -- --
and Treasurer(5)
Rick Stiegler 2000 191,000 100,000 (2) 88,099
Senior Vice President and 1999 120,000 122,000 (2) --
Chief Technology Officer 1998 141,000 139,000 90,000 25,400
Stephen Campbell 2000 186,000 117,000 -- 113,574
Senior Vice President and 1999 17,000 25,000 -- 28,575
Chief Information Officer(6) 1998 -- -- -- --
- ---------------
(1) Consists of an income tax gross-up paid to Mr. Lebda in connection with
his exercise of non-qualified stock options to purchase 168,134 shares
of our common stock. Excludes the amount realized by Mr. Lebda upon the
exercise of such stock options. See "Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values" and "Certain
Relationships and Related Party Transactions - Officer Loans."
(2) Such Named Executive Officer did not receive perquisites during the
listed year in excess of 10% of his annual salary and bonus for such
year.
(3) Mr. Reddin joined LendingTree in December 1999.
(4) Consists of an income tax gross-up paid to Mr. Hall in connection with
his exercise of a non-qualified stock option to purchase 12,260 shares
of our common stock. Excludes the amount realized by Mr. Hall upon the
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exercise of such stock option. See "Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values" and "Certain
Relationships and Related Party Transactions - Officer Loans."
(5) Mr. Hall joined LendingTree in June 1999.
(6) Mr. Campbell joined LendingTree in November 1999.
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OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the stock options and warrants granted
during the fiscal year ended December 31, 2000 to each of our executive officers
named in the Summary Compensation table above and the potential realizable value
of each grant of options assuming annualized appreciation in our common stock at
the rate of 5% and 10% over the term of the option.
PERCENT
OF TOTAL POTENTIAL REALIZABLE
OPTIONS/ VALUE AT ASSUMED
NUMBER OF SARS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS/SARS IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1) YEAR ($/SH) DATE 5%($) 10%($)
---- ------------- ---------- -------- ---------- ------- ---------
Douglas Lebda 158,749 (2) 5.3% 9.25 1/07/10 923,487 2,340,296
100,000 (3) 3.4% 12.00 2/15/10 754,675 1,912,491
160,000 (4) 5.4% 2.80 12/06/10 281,242 712,722
Thomas Reddin 65,000 (5) 2.2% 2.80 12/06/10 114,254 289,543
Keith Hall 38,100 (6) 1.3% 9.25 1/07/10 221,638 561,675
35,000 (7) 1.2% 2.80 12/06/10 61,522 155,908
Rick Stiegler 38,099 (8) 1.3% 9.25 1/07/10 221,632 561,660
50,000 (9) 1.7% 2.80 12/06/10 87,888 222,726
Stephen Campbell 28,574 (10) 1.0% 9.25 1/07/10 166,223 421,241
50,000 (11) 1.7% 5.97 4/17/10 187,678 475,613
35,000 (12) 1.2% 2.80 12/06/10 61,522 155,908
------------ ---- ---- -------- ------- ---------
- ---------------
(1) Each option vests in four equal annual installments beginning on the
first anniversary of the date of grant.
(2) 13,752 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(3) All of the shares covered by the option will be subject to the rules
for nonqualified stock options.
(4) 77 of the shares covered by the option will be eligible for incentive
stock option treatment, and the remainder of the shares will be subject
to the rules for nonqualified stock options.
(5) 16,289 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(6) 9,525 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
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(7) 4,350 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(8) 35,059 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(9) 12,786 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(10) 26,799 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(11) 5,699 of the shares covered by the option will be eligible for
incentive stock option treatment, and the remainder of the shares will
be subject to the rules for nonqualified stock options.
(12) All of the shares covered by the option will be subject to the rules
for nonqualified stock options.
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
The following table summarizes the stock options and warrants exercised
during the fiscal year ended December 31, 2000 to each of our executive officers
named in the Summary Compensation Table above.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS MONEY OPTIONS/SARS
AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE (#) UNEXERCISABLE (#) EXCERCISABLE ($) UNEXERCISABLE ($)
---- --------------- ------------ --------------- ----------------- ---------------- -----------------
Douglas Lebda 168,134 481,617 134,141 480,865 44,101 0
Tom Reddin -- -- 71,436 279,313 0 0
Keith Hall 12,260 67,307 20,863 154,276 0 0
Rick Stiegler -- -- 55,033 96,566 24,079 0
Steve Campbell -- -- 7,143 135,006 0 0
STOCK PLANS
1997 STOCK OPTION PLAN
On January 15, 1997, we adopted the 1997 Stock Option Plan of
LendingTree, Inc., effective as of the same date. The purpose of the plan is to
promote our long-term growth and profitability by providing key people with
incentives to improve stockholder value and to contribute to our growth and
financial success and enabling us to attract, retain, and reward the best
available persons for positions of substantial responsibility.
General. A maximum of 1,377,950 shares of common stock is reserved for
issuance under the plan, subject to equitable adjustment upon the occurrence of
any stock dividend or other distribution, stock split, merger, consolidation,
combination, share repurchase or exchange, or other similar corporate
transaction or event. If an option granted under the plan expires or is
terminated for any reason without being exercised, the shares of common stock
underlying the grant will again be available for purposes of the plan.
Administration. The plan is administered by the compensation committee
of the board of directors. The compensation committee has full authority to
determine the persons to whom options will be granted, the type of options to be
granted, the number of shares to be made subject to options, the exercise price
and other terms and conditions of the options, and to interpret the plan and
prescribe, amend and rescind rules and regulations relating to the plan. Members
of the compensation committee who are either eligible for awards of stock
options or have been given stock options may vote on any matters affecting the
administration of the plan or the grant of options pursuant to the plan, except
that no such member may act upon the granting of an option to himself or
herself.
Grants. Options granted under the plan may be either "incentive stock
options," as such term is defined in Section 422 of the Internal Revenue Code,
or non-qualified stock options.
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Eligibility. Options may be granted under the plan to employees,
directors, including directors who are not employees, and consultants, as
selected by the compensation committee.
Terms and Conditions of Options. The exercise price of a stock option
granted under the plan was determined by the compensation committee at the time
the option was granted, and the exercise price of an incentive stock option is
not less than the fair market value per share of common stock on the date of
grant. Stock options are exercisable at the times and upon the conditions that
the compensation committee has determined, as reflected in the applicable option
agreement. The exercise period may not exceed 10 years from the date of grant.
Unless earlier terminated pursuant to the provisions of the plan or the
grant agreement, options will terminate in their entirety, whether vested in
whole or in part, three years after the date the grantee is no longer employed
by or providing services to us for any reason other than death, disability or
retirement. If a grantee's employment or service terminates for cause, all
options held by the grantee will terminate upon termination. In the event that
the employment or service of a grantee terminates as a result of death,
disability or retirement, all options that are not exercisable at the time of
termination will terminate and all options that are exercisable at the time of
termination may be exercised for a period of three years immediately following
termination, but in no case after the options expire in accordance with their
terms.
In the event of a proposed change in control, the compensation
committee may:
(6) accelerate or change the exercise dates of any option;
(7) make arrangements with grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any option;
and
(8) in any case where equity securities other than our common stock are
proposed to be delivered in exchange for or with respect to our common
stock, make arrangements providing that any option may become one or
more options with respect to such other securities.
In the event a change in control occurs, the vesting of any option that
is time-based only will be accelerated so that the unvested time-based portion
of the option will become 50% vested and exercisable.
In the event we dissolve or liquidate, other than pursuant to a plan of
merger or reorganization, then notwithstanding any restrictions on exercise set
forth in the plan or any option agreement:
(9) grantees will have the right to exercise their options at any time up
to 10 days prior to the effective date of the liquidation or
dissolution, after which time all options will expire; and
(10) the compensation committee may make arrangements with the grantees for
the payment to them of appropriate consideration for the cancellation
and surrender of
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any option that is canceled or surrendered at any time up to 10 days
prior to the effective date of the liquidation or dissolution.
1998 STOCK OPTION PLAN
On February 3, 1998, we adopted the 1998 Stock Option Plan of
LendingTree, Inc., effective as of the same date. The purpose of the plan is to
promote our long-term growth and profitability by providing key people with
incentives to improve stockholder value and to contribute to our growth and
financial success and enabling us to attract, retain and reward the best
available persons for positions of substantial responsibility.
General. A maximum of 1,377,950 shares of common stock is reserved for
issuance under the plan, subject to equitable adjustment upon the occurrence of
any stock dividend or other distribution, stock split, merger, consolidation,
combination, share repurchase or exchange, or other similar corporate
transaction or event. If an option granted under the plan expires or is
terminated for any reason without being exercised, the shares of common stock
underlying such grant will again be available for purposes of the plan. It is
currently anticipated that no further grants will be made under this plan.
Administration. The plan is administered by the compensation committee
of the board of directors. The compensation committee has full authority,
subject to the provisions of the plan, among other things, to determine the
persons to whom options will be granted, the type of options to be granted, the
number of shares to be made subject to options, the exercise price and other
terms and conditions of the options, and to interpret the plan and prescribe,
amend and rescind rules and regulations relating to the plan. Members of the
compensation committee who are either eligible for awards of stock options or
have been given stock options may vote on any matters affecting the
administration of the plan or the grant of options pursuant to the plan, except
that no such member may act upon the granting of an option to himself or
herself.
Grants. Options granted under the plan may be either "incentive stock
options," as such term is defined in Section 422 of the Internal Revenue Code,
or non-qualified stock options.
Eligibility. Options may be granted under the plan to employees,
directors, including directors who are not employees, and consultants, as
selected by the compensation committee.
Terms and Conditions of Options. The exercise price of a stock option
granted under the plan was determined by the compensation committee at the time
the option was granted, and the exercise price of an incentive stock option was
not less than the fair market value per share of common stock on the date of
grant. Stock options are exercisable at the times and upon the conditions that
the compensation committee has determined, as reflected in the applicable option
agreement. The exercise period may not exceed 10 years from the date of grant.
Unless earlier terminated pursuant to the provisions of the plan or the
grant agreement, options will terminate in their entirety, whether vested in
whole or in part, three years after the
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date the grantee is no longer employed by or providing services to us for any
reason other than death, disability or retirement. If a grantee's employment or
service terminates for cause, all options held by the grantee will terminate
upon termination. In the event that the employment or service of a grantee
terminates as a result of death, disability or retirement all options that are
not exercisable at the time of termination will terminate and all options that
are exercisable at the time of termination may be exercised for a period of
three years immediately following termination but in no case after the options
expire in accordance with their terms.
In the event of a proposed change in control, the compensation
committee may:
(11) accelerate or change the exercise dates of any option;
(12) make arrangements with grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any option;
and
(13) in any case where equity securities other than our common stock are
proposed to be delivered in exchange for or with respect to our common
stock, make arrangements providing that any option may become one or
more options with respect to such other securities.
In the event a change in control occurs, the vesting of any option that
is time-based only will be accelerated so that the unvested time-based portion
of the option will become 50% vested and exercisable.
In the event we dissolve or liquidate, other than pursuant to a plan of
merger or reorganization, then notwithstanding any restrictions on exercise set
forth in the plan or any option agreement:
(14) 10 days prior to the effective date of such liquidation and
dissolution, after which time all options will expire; and
(15) the compensation committee may make arrangements with the grantees for
the payment to them of appropriate consideration for the cancellation
and surrender of any option that is canceled or surrendered at any time
up to 10 days prior to the effective date of such liquidation and
dissolution.
AMENDED AND RESTATED 1999 STOCK INCENTIVE PLAN
On September 21, 1999 we adopted the 1999 Stock Option Plan of
LendingTree, Inc., effective as of the same date. On January 21, 2000, we
amended and restated that plan, which was renamed the Amended and Restated 1999
Stock Incentive Plan of LendingTree, Inc., effective as of the same date. The
purpose of the plan is to promote our long-term growth and profitability by
providing key people with incentives to improve stockholder value and to
contribute to our growth and financial success and by enabling us to attract,
retain and reward the best available persons for positions of substantial
responsibility.
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General. A maximum of 2,286,000 shares of common stock has been
reserved for issuance under the plan, subject to equitable adjustment upon the
occurrence of any stock dividend or other distribution, stock split, merger,
consolidation, combination, share repurchase or exchange, or other similar
corporate transaction or event. If an award granted under the plan expires or is
terminated for any reason, the shares of common stock underlying the award will
again be available for purposes of the plan.
Types of Awards. The following awards may be granted under the plan:
(16) stock options, including incentive stock options and
nonqualified stock options;
(17) restricted stock;
(18) phantom stock;
(19) stock bonuses; and
(20) other stock-based awards.
Administration. The plan is administered by the compensation committee
of the board of directors. The compensation committee has full authority,
subject to the provisions of the plan, among other things, to determine the
persons to whom awards will be granted, to determine the type of award to be
granted, the number of shares to be made subject to awards, the exercise price
and other terms and conditions of the awards, and to interpret the plan and
prescribe, amend and rescind rules and regulations relating to the plan. The
board of directors or the compensation committee may delegate to any of our
senior management the authority to make grants of awards to our employees who
are not executive officers or directors of LendingTree.
Eligibility. Awards may be granted under the plan to employees,
directors, including directors who are not employees, and consultants of
LendingTree or any of our affiliates, as selected by the committee.
Terms and Conditions of Options. Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue
Code, or nonqualified stock options. The exercise price of a stock option
granted under the plan is determined by the compensation committee at the time
the option is granted, but the exercise price of an incentive stock option may
not be less than the fair market value per share of common stock on the date of
grant. Stock options are exercisable at the times and upon the conditions that
the compensation committee may determine, as reflected in the applicable option
agreement. The exercise period will be determined by the compensation committee,
but in the case of an incentive stock option, generally, the exercise period may
not exceed 10 years from the date of grant.
The option exercise price must be paid in full at the time of exercise,
and may be payable by one or more of the following methods:
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(21) in cash or cash equivalents;
(22) the surrender of previously acquired shares of common stock
that have been held by the participant for at least six months
prior to the date of surrender;
(23) if so determined by the compensation committee as of the grant
date, authorization for LendingTree to withhold a number of
shares otherwise payable pursuant to the exercise of an
option; or
(24) through a broker cashless exercise procedure approved by
LendingTree.
The compensation committee may, in its sole discretion, authorize
LendingTree to make or guarantee loans to a participant to assist the
participant in exercising options.
The compensation committee may provide at the time of grant of an
option that the participant may elect to exercise all or any part of the option
before it becomes vested and exercisable. If the participant elects to exercise
all or part of a non-vested option, the participant will be issued shares of
restricted stock which will become vested in accordance with the vesting
schedule set forth in the original option agreement.
Outside Director Options. Non-employee directors who own less than five
percent of the common stock, or outside directors, are eligible for automatic
grants of non-qualified options under the plan. Immediately following each
annual stockholders meeting each outside director will be granted an option to
purchase 5,000 shares of common stock. Each option granted under this program to
an outside director will have an exercise price equal to the fair market value
of the common stock on the date of grant and will become exercisable in full on
the second anniversary of the date of grant of the option, provided that the
director is still serving as a director as of the date of vesting of the option.
Each option granted to an outside director will expire on the tenth anniversary
of the date of grant. The other terms of the options granted to outside
directors will be consistent with the terms of options granted to employees.
Restricted Stock. The plan provides for awards of common stock that are
subject to restrictions on transferability and other restrictions imposed by the
compensation committee. Except to the extent restricted under the award
agreement relating to the restricted stock, a participant granted restricted
stock will have all of the rights of a stockholder.
Phantom Stock. The plan provides for awards of phantom stock, which
upon vesting, entitles the participant granted such an award to receive an
amount in cash equal to the fair market value of the number of shares subject to
such award. Vesting of all or a portion of a phantom stock award may be subject
to various conditions established by the compensation committee.
Stock Bonuses; Other Awards. The plan provides that awards of shares of
common stock may be made to employees at the discretion of the compensation
committee. In addition, other awards valued in whole or in part by reference to,
or otherwise based on,
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common stock may be granted either alone or in addition to other awards under
the plan, in the compensation committee's discretion.
Change in Control. In the event of a change in control, the time-based
portion of an outstanding award that is not vested and exercisable at the time
of the change in control will become 50% vested and exercisable. In addition to
the automatic acceleration, the compensation committee will have the discretion
to accelerate the vesting or exercisability of the remainder of any award
granted under the plan.
Termination of Employment. Unless otherwise determined by the
compensation committee, the unvested portion of awards granted under the plan
will immediately be cancelled upon termination of a participant's employment or
service with LendingTree. If a participant's employment or service terminates
other than because of death, disability or retirement, all options that are
exercisable at the time of termination may be exercised by the participant for
no longer than 90 days after the date of termination. If a participant's
employment or service terminates for cause, all options held by the participant
will immediately terminate. If a participant's employment or service terminates
as a result of death, all options that are exercisable at the time of death may
be exercised by the participant's heirs or distributees for one year, provided
that options granted to non-employee directors may provide for a post-death
exercise period of up to three years. If a participant's employment or service
terminates because of disability or retirement, all options that are exercisable
at the time of termination may be exercised for a period of one year immediately
following termination. In no case may an option be exercised after it expires in
accordance with its terms.
Amendment, Termination of Plan. The board of directors may modify or
terminate the plan or any portion of the plan at any time, except that an
amendment that requires stockholder approval in order for the plan to continue
to comply with any law, regulation or stock exchange requirement will not be
effective unless approved by our stockholders. No awards may be granted under
the plan after the day immediately preceding the tenth anniversary of its
adoption date.
Since the amount of benefits to be received by any plan participant who
is an employee of Lending Tree or any of its affiliates is determined by the
compensation committee, the amount of future benefits to be allocated to any
employee or group of employees under the plan in any particular year is not
determinable.
Messrs. Carthaus, Field and Tozer are the directors currently eligible
to be granted options under the Amended and Restated 1999 Stock Incentive Plan's
outside director program for automatic grants of options. Following our annual
meeting, only Messrs. Carthaus and Tozer will be eligible under the outside
director program.
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2001 STOCK INCENTIVE PLAN
In October 2000, we adopted, subject to stockholder approval at our
2001 annual meeting, the 2001 Stock Incentive Plan of LendingTree, Inc. A copy
of the 2001 Stock Incentive Plan is attached as an exhibit to this prospectus.
General. The purpose of the 2001 Stock Incentive Plan is to promote our
long-term growth and profitability by providing key people with incentives to
improve stockholder value and to contribute to our growth and financial success
and enable us to attract, retain and reward the best available persons for
positions of substantial responsibility. A maximum of 4,000,000 shares of common
stock has been reserved for issuance under the 2001 Stock Incentive Plan
(including for issuance in connection with ISOs awarded under the 2001 Stock
Incentive Plan), subject to equitable adjustment upon the occurrence of any
stock dividend or other distribution, stock split, merger, consolidation,
combination, share repurchase or exchange or other similar corporate transaction
or event. No participant may receive awards under the 2001 Stock Incentive Plan
in any 12-month period relating to an aggregate of more than 4,000,000 shares.
If an award granted under the 2001 Stock Incentive Plan expires or is
terminated, surrendered or cancelled for any reason, the shares of common stock
underlying the award will again be available for grant under the 2001 Stock
Incentive Plan.
Types of Awards. The following awards may be granted under the 2001
Stock Incentive Plan:
(25) stock options, including incentive stock options and
nonqualified stock options;
(26) restricted stock;
(27) phantom stock;
(28) stock bonuses; and
(29) other stock-based awards.
Administration. The 2001 Stock Incentive Plan will generally be
administered by the compensation committee of the board of directors. Our
compensation committee has full authority, subject to the provisions of the 2001
Stock Incentive Plan, among other things, to determine the persons to whom
awards will be granted, to determine the type of award to be granted, the number
of shares to be made subject to awards, the exercise price and other terms and
conditions of the awards and to interpret the 2001 Stock Incentive Plan and
prescribe, amend and rescind the rules and regulations relating to the 2001
Stock Incentive Plan. It is intended that the members of the compensation
committee will be "non-employee directors" within the meaning of Section 16
under the Securities Exchange Act of 1934 and "outside directors" within the
meaning of Code Section 162(m). The board of directors or the compensation
committee may delegate to any of our senior management the authority to make
grants of awards to our employees who are not executive officers or directors of
LendingTree.
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Eligibility. Awards may be granted under the 2001 Stock Incentive Plan
to employees, directors, including directors who are not employees, and
consultants of LendingTree or any of our affiliates, as selected by the
compensation committee. As of March 31, 2001, approximately 230 employees and
directors were eligible to receive awards under the 2001 Stock Incentive Plan.
We have not allocated any specific number of shares to be granted or covered by
options under the Plan to any individual or any group of eligible persons.
Terms and Conditions of Options. Stock options granted under the 2001
Stock Incentive Plan may be either incentive stock options or nonqualified stock
options. The exercise price of a stock option granted under the 2001 Stock
Incentive Plan is determined by the compensation committee at the time the
option is granted, but the exercise price per share of an incentive stock option
may not be less than the fair market value per share of common stock on the date
of grant. Stock options are exercisable at the times and upon the conditions
that the compensation committee may determine, as reflected in the applicable
option agreement. The exercise period will be determined by the compensation
committee, but in the case of an incentive stock option, generally, the exercise
period may not exceed 10 years from the date of grant.
The option exercise price must be paid in full at the time of exercise,
and may be payable by one or more of the following methods:
(30) in cash or cash equivalents;
(31) the surrender of previously acquired shares of common stock
that have been held by the participant for at least six months
prior to the date of surrender;
(32) if so determined by the compensation committee as of the grant
date, authorization for LendingTree to withhold a number of
shares otherwise payable pursuant to the exercise of an
option; or
(33) through a broker cashless exercise procedure approved by
LendingTree.
Our compensation committee may, in its sole discretion, authorize
LendingTree to make or guarantee loans to a participant to assist the
participant in exercising options.
The compensation committee may provide at the time of grant an option
that the participant may elect to exercise all or any part of the option before
it becomes vested and exercisable. If the participant elects to exercise all or
part of a non-vested option, the participant will be issued shares of restricted
stock which will become vested in accordance with the vesting schedule set forth
in the original option agreement.
Outside Director Options. Non-employee directors who beneficially own
less than five percent of LendingTree's common stock, referred to as outside
directors, will be eligible for automatic grants of nonqualified options under
the 2001 Stock Incentive Plan. Each outside director will be granted upon his or
her first election or appointment to the board an option to purchase 15,000
shares of common stock. In addition, immediately following each annual
stockholders meeting, each outside director then serving will be granted an
option to
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purchase 5,000 shares of common stock. Each option granted under this program to
an outside director will have an exercise price per share equal to the fair
market value per share of our common stock on the date of grant and will become
exercisable in full on the second anniversary of the date of grant, provided
that the director is still serving as a director as of the vesting date. Each
option granted to an outside director will expire on the tenth anniversary of
the date of grant. The other terms of the options granted to outside directors
will be consistent with the terms of options granted to other 2001 Stock
Incentive Plan participants.
Restricted Stock. The 2001 Stock Incentive Plan provides for awards of
common stock that are subject to restrictions on transferability and other
restrictions imposed by the compensation committee. Except to the extent
restricted under the award agreement relating to the restricted stock, a
participant granted restricted stock will have all of the rights of a stock
holder, including voting rights.
Phantom Stock. The 2001 Stock Incentive Plan provides for awards of
phantom stock, which, upon vesting, entitle the participant to receive cash
and/or shares of common stock, as determined by the compensation committee,
equal in value to the fair market value of the number of shares subject to such
award. Awards of phantom stock under the 2001 Stock Incentive Plan also accrue
dividend equivalents during the period prior to payment that are also payable in
cash or shares at the applicable payment date. Vesting of all or a portion of a
phantom stock award may be subject to various conditions established by the
compensation committee. Unless and until a participant receives actual shares in
payment of the award, the participant does not have any voting rights with
respect to the shares subject to a phantom stock award.
Stock Bonuses; Other Awards. The 2001 Stock Incentive Plan provides
that awards of unrestricted shares of common stock may be granted to Plan
participants at the discretion of the compensation committee. In addition, other
awards valued in whole or in part by reference to, or otherwise based on, common
stock may be granted either alone or in addition to other awards under the 2001
Stock Incentive Plan, in the compensation committee's discretion.
Change in Control. In the event of a change in control of LendingTree,
the time-vested portion of an outstanding award that is not vested or
exercisable at the time of the change in control will become 50% vested and, in
the case of options, exercisable. In addition to the automatic acceleration, the
compensation committee will have the discretion to accelerate the vesting or
exercisability of the remainder of any award granted under the 2001 Stock
Incentive Plan.
Termination of Employment. Unless otherwise determined by our
compensation committee, the unvested portion of awards granted under the 2001
Stock Incentive Plan will immediately be cancelled upon termination of a
participant's employment or service with LendingTree and, in the case of
restricted stock purchased upon exercise of a non-vested option, the purchase
price of such stock will be refunded. Unless otherwise determined by our
compensation committee, the post-termination exercise period for stock options
awarded under the 2001 Stock Incentive Plan will vary depending on the reason of
termination as follows: (i) if a participant's employment or service terminates
other than because of death,
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disability or retirement, all options that are exercisable at the time of
termination may be exercised by the participant for no longer than 90 days after
the date of termination; (ii) if a participant's employment or service
terminates for cause, all options held by the participant will immediately
terminate; (iii) if a participant's employment or service terminates as a result
of death, all options that are exercisable at the time of death may be exercised
by the participant's heirs or distributees for one year, provided that options
granted to non-employee directors may provide for a post-death exercise period
of up to three years; and (iv) if a participant's employment or service
terminates because of disability or retirement, all options that are exercisable
at the time of termination may be exercised for a period of one year immediately
following termination. In no case may an option be exercised after it expires in
accordance with its terms.
Amendment, Termination of Plan. Our board of directors may modify or
terminate all or any portion of the 2001 Stock Incentive Plan at any time,
except that an amendment that requires stockholder approval in order for the
2001 Stock Incentive Plan to continue to comply with any law, regulation or
stock exchange requirement will not be effective unless approved by our
stockholders. No awards may be granted under the 2001 Stock Incentive Plan after
the day immediately preceding the tenth anniversary of its adoption date.
Code Section 162(m). Code Section 162(m) precludes a publicly held
corporation from claiming a compensation deduction for compensation in excess of
$1.0 million paid to the chief executive officer or any of the four most highly
compensated officers other than our chief executive officer. This limitation
does not apply, however, to qualified "performance-based compensation."
Stock options granted under the 2001 Stock Incentive Plan that have an
exercise price equal at least to fair market value at the date of grant should
qualify as "performance-based compensation" under Section 162(m).
In addition, the 2001 Stock Incentive Plan authorizes our compensation
committee to make, or provide for the vesting of, awards of restricted stock and
phantom stock that are conditioned on the satisfaction of certain performance
criteria. For such awards intended to qualify as "performance-based
compensation" under Section 162(m), our compensation committee will establish
prior to or within 90 days after the start of the applicable performance period
the applicable performance conditions. Our compensation committee may select
from the following performance measures, the Performance Goals, for such
purpose, but may also develop other criteria: (i) pre-tax income or after-tax
income; (ii) operating profit; (iii) return on equity, assets, capital or
investment; (iv) earnings or book value per share; (v) sales or revenues; (vi)
operating expenses; (vii) common stock price appreciation; (viii) implementation
or completion of critical projects or processes; (ix) increase in the volume of
qualification forms completed or submitted, which goals may be expressed in
terms of absolute numbers and/or as a percentage increase; (x) comparison of
actual performance during a performance period against budget for such period;
(xi) increase in the number of loans closed, which increase may be measured by
type(s) of loan or in the aggregate; (xii) growth of revenue, which growth may
be expressed in terms of absolute numbers and/or as a percentage increase; or
(xiii) reductions in expenses, which reductions may be expressed in terms of
absolute numbers and/or as a percentage decrease; provided that
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with respect to clauses (xi) through (xiii), such achievement may be measured
against budget for the same period.
Where applicable, Performance Goals may be expressed in terms of
attaining a specified level of the particular criteria or the attainment of a
percentage increase or decrease in the particular criteria, and may be applied
to one or more of LendingTree, a subsidiary or affiliate, or a division or
strategic business unit of LendingTree, or may be applied to the performance of
LendingTree relative to a market index, a group of other companies or a
combination thereof, all as determined by the compensation committee.
Performance Goals may include a threshold level of performance below which no
vesting will occur, levels of performance at which specified vesting will occur,
and a maximum level of performance at which full vesting will occur. Each
Performance Goal will be determined in accordance with generally accepted
accounting principles; provided that our compensation committee will have the
authority to make equitable adjustments to Performance Goals in recognition of
unusual or non-recurring events affecting LendingTree or any subsidiary or
affiliate, or the financial statements of LendingTree or any subsidiary or
affiliate in response to changes in applicable laws, regulations or accounting
principles, or to account for extraordinary or unusual items of gain, loss or
expense or items related to the disposal of a segment of a business.
Performance Goals and the related compensation formula for determining
the awards or vesting of awards will be stated in the form of an objective,
nondiscretionary formula, and our compensation committee will certify in writing
the attainment of such performance conditions prior to any payout or vesting of
such awards.
Grants. Options to purchase a total of 1,059,300 shares of common stock
have been issued to date under the 2001 Stock Incentive Plan, subject to
stockholder approval. Each such option was granted with an exercise price equal
to the fair market value of the common stock on the grant date. As of March 30,
2001, the fair market value of the common stock was $3.25 per share, based on
the average of the highest and lowest price reported for such date.
Stock options covering the following number of shares have been granted
under the 2001 Stock Incentive Plan to the following persons and groups, subject
to stockholder approval of the Plan: Douglas Lebda - 160,000 shares; Keith Hall
- - 35,000 shares; Stephen Campbell - 35,000 shares; Thomas Reddin - 65,000
shares; Richard Stiegler - 50,000 shares; all executive officers as a group -
467,200 shares; non-executive officer directors as a group - 0 shares;
non-executive officer employees as a group - 592,100 shares.
Messrs. Carthaus, Field and Tozer are the directors currently eligible
to be granted options under the 2001 Stock Incentive Plan's outside director
program for automatic grants of options. It is anticipated that Messrs.
Carthaus, Field and Tozer will each be granted options to purchase 5,000 shares
of common stock under this program during our current year. Following our annual
meeting, we anticipate that only Messrs. Carthaus and Tozer will be
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eligible under the outside director program since Mr. Carthaus has announced his
intention to resign as a director of LendingTree at our 2001 annual meeting.
Because the amount of benefits to be received by any 2001 Stock
Incentive Plan participant, other than an outside director in connection with
the outside director award formula described above, is determined by our
compensation committee in its discretion, the amount of future benefits to be
allocated to any person or group of persons under the 2001 Stock Incentive Plan
in any particular year is not determinable.
EMPLOYEE STOCK PURCHASE PLAN
In January 2000, we adopted, and our stockholders approved, the
LendingTree, Inc. Employee Stock Purchase Plan. The employee stock purchase plan
is designed to encourage our employees to purchase shares of our common stock.
General. The employee stock purchase plan is intended to comply with
the requirements of Section 423 of the Internal Revenue Code, and to assure the
participants of the tax advantages provided thereby. The employee stock purchase
plan will be administered by a committee established by the board of directors
comprising solely of non-employee directors who are not eligible to participate
in the employee stock purchase plan. The committee may make such rules and
regulations and establish such procedures for the administration of the employee
stock purchase plan as it deems appropriate.
Shares Available. The committee initially authorized for issuance under
the plan a total of 444,500 shares of common stock. The committee also has
authority to add, on the first day of each fiscal year, an additional number of
shares equal to 508,000 shares, or a lesser amount determined by the committee.
In each of the above cases, the number of shares is subject to adjustment by the
committee in the event of a recapitalization, stock split, stock dividend or
similar corporate transaction. The committee did not authorize the issuance of
any additional shares on the first day of our 2001 fiscal year.
Eligibility. Subject to procedural requirements, employees of
LendingTree who have at least six months of service and work more than 20 hours
per week will be eligible to participate in the employee stock purchase plan,
except that employees who own five percent or more of the common stock of
LendingTree or any subsidiary of LendingTree will not be eligible to
participate. All of our full-time employees will be eligible to participate in
the first offering period under the plan.
Stock Purchases. Under the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of the common stock through
regular payroll deductions or cash payments in an amount equal to 1% to 20% of
the employee's compensation for each payroll period. The fair market value of
the shares of common stock which may be purchased by any employee under this or
any other LendingTree plan that is intended to comply with Section 423 of the
Internal Revenue Code during any calendar year may not exceed $25,000.
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The employee stock purchase plan provides for a series of consecutive,
overlapping offering periods that generally will be 24 months long. Successive
six-month purchase periods will run during each offering period. Offering
periods generally will commence on January 1 and July 1 of each year during the
term of the plan, and purchase periods will run from January 1 to June 30 and
from July 1 to December 31; provided, that the first offering period will begin
on the first day of regular trading and end on the last trading day on or before
December 31, 2001.
During each offering period, participating employees will be able to
purchase shares of common stock at a purchase price equal to 85% of the fair
market value of the common stock at either the beginning of each offering period
or the end of each purchase period within the offering period, whichever price
is lower.
To the extent permitted by applicable laws, regulations, or stock
exchange rules, if the fair market value of the shares at the end of any
purchase period is lower than the fair market value of the shares on the date
the related offering period began, then all participants in that offering period
will be automatically withdrawn from the offering period immediately after the
exercise of their option on the date the purchase period ends. The participants
will automatically be re-enrolled in the immediately following offering period
when that offering period begins.
The options granted to a participant under the employee stock purchase
plan are not transferable other than by will or the laws of descent and
distribution, and are exercisable, during the participant's lifetime, only by
the participant.
Amendment, Termination of Plan. The employee stock purchase plan and
all offering periods under the plan will automatically terminate on the tenth
anniversary of the first offering period under the plan. The board of directors
may from time to time amend or terminate the employee stock purchase plan;
provided, that no such amendment or termination may adversely affect the rights
of any participant without the consent of such participant and, to the extent
required by Section 423 of the Internal Revenue Code or any other law,
regulation or stock exchange rule, no such amendment will be effective without
the approval of stockholders entitled to vote thereon. Additionally, the
committee may make such amendments as it deems necessary to comply with
applicable laws, rules and regulations.
Since the amount of benefits to be received by each participant in the
employee stock purchase plan is determined by his or her elections, the amount
of future benefits to be allocated to any individual or group of individuals
under the plan in any particular year is not determinable.
MANAGEMENT INCENTIVE PLAN
On January 21, 2000, we adopted the LendingTree, Inc. Management
Incentive Plan. The purposes of the management incentive plan are to reinforce
corporate business goals and to promote the achievement of annual and long-range
financial business and other objectives by providing for the payment of cash
bonuses to our officers and other key employees. The plan will be administered
by the compensation committee of our board of directors. The
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compensation committee will have the authority to determine who will participate
in the plan and to determine the terms and conditions of incentive awards
granted under the plan. The payment of bonuses under the management incentive
plan will be based on the achievement during a performance period determined by
the compensation committee of certain performance goals set by the compensation
committee, which may include any or all or none of the following:
(34) income, profits or earnings per share;
(35) increase in the volume of qualification forms submitted;
(36) increase in the number of loans closed;
(37) growth of revenue;
(38) reductions in expenses; or
(39) increases in the market price of the common stock or total return to
our stockholders.
Minimum bonuses will be based on achievement of 80% of the performance
goals and maximum bonuses will be based on achievement of 150% of the
performance goals. A bonus will be paid only if the participant is employed by
LendingTree or its affiliates on the day the bonus is to be paid. Under the
plan, no payment may be made to one of our executive officers that exceeds 150%
of the officer's annual base salary. In the event of a change in control, the
performance period in effect at the time of the change in control will be deemed
to have been completed, the maximum targets will be deemed to have been
attained, and a pro rata portion of the award will be paid in cash to the
participant.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Douglas Lebda. We have an employment agreement with Douglas Lebda with
a term commencing on September 2, 1999 and expiring on September 2, 2003, unless
earlier terminated as provided under the agreement. In addition to providing for
salary and benefits, Mr. Lebda's agreement provides for his participation in our
bonus programs, with a maximum bonus opportunity equal to 50% of his salary, and
for the grant of an initial option to purchase 190,500 shares of common stock.
This grant will be referred to later as the "initial option." In the event Mr.
Lebda's employment is terminated by us either without cause or for bad
performance, or if Mr. Lebda terminates his employment for good reason, Mr.
Lebda is entitled to receive as severance pay a continuation of his then current
base salary until the first anniversary of the effective date of termination,
provided that the severance payments are to be reduced to the extent he receives
any compensation from any subsequent employment during the one-year severance
period.
In the event Mr. Lebda's employment is terminated as a result of any
merger, acquisition, share exchange or other business combination, Mr. Lebda is
entitled to receive a lump sum payment in an amount equal to 12 months of his
then current base salary. This
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amount will offset benefits payable under Mr. Lebda's employment continuity
agreement described below in the section entitled "Change of Control
Arrangements."
With respect to his stock options, in the event that Mr. Lebda's
employment is terminated:
(40) by us without cause,
(41) by Mr. Lebda for good reason, or
(42) if his employment is terminated as a result of a merger, acquisition,
share exchange or other business combination,
Mr. Lebda's stock options will continue to vest in accordance with their vesting
schedules in effect prior to termination and he will have a right to exercise
the options for a period of 30 days following the final vesting date. In the
event Mr. Lebda's employment is terminated for bad performance, the stock
options granted to Mr. Lebda prior to the effective date of his employment
agreement will vest in accordance with the schedule set forth in the agreement
evidencing the initial option and he will have a right to exercise the options
for a period of 30 days following the final vesting date. Mr. Lebda will be
subject to a non-compete and non-solicitation covenant for one year following
termination of his employment and will be required to give a general release to
us in order to receive severance payments.
Thomas Reddin. We have an employment agreement with Thomas Reddin with
a term commencing on December 10, 1999. In addition to providing for salary and
benefits, Mr. Reddin's agreement provides for the payment of an annual
discretionary bonus of up to 50% of his salary. In the event Mr. Reddin's
employment is terminated by us other than for cause, he is entitled to receive
his then-current salary for one year, provided, that if he becomes employed
elsewhere during that period, our obligation to continue salary payments will be
reduced on a dollar-for-dollar basis by salary and bonus received from the
subsequent employer. This amount will offset benefits payable under Mr. Reddin's
employment continuity agreement described below in the section entitled "Change
of Control Arrangements." In addition, Mr. Reddin would be entitled to
additional vesting of a pro-rata portion of the option tranche that would have
vested on the next following anniversary of his employment, had he remained
employed on that date. Any exercisable options held by Mr. Reddin at the time of
such termination without cause will remain exercisable for 90 days thereafter.
Mr. Reddin is subject to non-competition and non-solicitation covenants during
his employment with LendingTree and he will be subject to such covenants during
the one-year period following termination of his employment.
Change of Control Arrangements. We have entered into employment
continuity agreements with each of our executive officers named in the Summary
Compensation Table on page 70 that provide for their continued employment with
LendingTree for one year following certain change of control events. If any such
executive's employment is terminated within one year of such change of control
for reason other than death, disability or cause, or if any such executive
resigns because of a constructive termination, he will be entitled to a lump sum
payment equal to the sum of (1) his unpaid annual base salary and any accrued
time off
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through the termination date, (2) his target annual bonus for the performance
period in which the termination occurs, prorated for the number of days he
actually worked during the performance period, (3) any amounts previously
deferred by such executive under any nonqualified deferred compensation plan,
together with earnings accrued thereon, and (4) an amount in cash equal to two
times the sum of the executive's then-current base salary and bonus for the
12-month period before the termination date, reduced, in the case of Messrs.
Lebda and Reddin, by the amount of any severance benefit payable to such
executive under the terms of his employment agreement with us. In addition, each
such executive's stock options granted under our 1999 stock incentive plan or
any similar plan or arrangement would become immediately vested, any restricted
stock, phantom unit stock, stock bonus or other stock award would become
immediately vested and he and his family would continue to receive family
welfare benefits for the remainder of the year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists
of James Carthaus, chairman, and Robert Spass. Adam Mizel served as a member of
the compensation committee until his resignation from the board of directors in
April 2001. Messrs. Spass and Mizel are both affiliated with Capital Z. See
"Certain Relationships and Related Party Transactions." None of Messrs.
Carthaus, Spass or Mizel has ever been an officer or employee of LendingTree.
No interlocking relationship exists between any member of our board of directors
or our compensation committee and any members of the board of directors or
compensation committee of any other company, and no such interlocking
relationship has existed in the past, except that Messrs. Spass and Mizel
participate in compensation decisions for Capital Z.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
FINANCING TRANSACTIONS
Specialty Finance Partners Equity Rights Transaction. In September
2000, Capital Z, through its affiliate, Specialty Finance Partners, purchased an
equity rights certificate from us for approximately $10.0 million. This
certificate was initially convertible into 1,253,918 shares of our stock,
equivalent to $7.975 per share, and warrants to purchase 225,000 shares of our
common stock with an initial exercise price of $7.975. The equity rights
certificate contained anti-dilution and price protection provisions, including,
among others, a provision that in the event we successfully consummated a series
of subsequent financing transactions with aggregate proceeds of at least $15.0
million prior to June 30, 2001, the certificate could, at the election of
Specialty Finance Partners, be converted into $10.0 million of the type of
securities issued to investors in the subsequent financing transaction, on the
same terms and conditions as afforded investors in the subsequent financing.
Capital Z also received a commitment fee warrant to purchase 135,000 shares of
our common stock, which expires on September 29, 2005 and had an initial
exercise price of $7.975 per share, subject to adjustment in the event of a
subsequent financing. In March 2001 upon the closing of our 8% convertible
preferred stock financing, Specialty Finance Partners converted its equity
rights certificate into 2,857,143 shares of our 8% convertible preferred stock
and the exercise price of the commitment fee warrant was reduced to $3.762 per
share.
8% Convertible Preferred Stock Transaction. In March 2001, we sold a
total of 3,900,001 shares of our 8% convertible preferred stock for $13.7
million or $3.50 per share to Zions Bancorporation (1,428,571 shares), Specialty
Finance Partners (1,142,857 shares), Douglas Lebda (200,000 shares), Richard
Field (200,000 shares), W. James Tozer, Jr. (200,000 shares), and a group of
eleven accredited investors (728,573 shares). We also received commitments from
Keith Hall, W. James Tozer, Jr. and W. James Tozer to purchase an additional
28,571 and 100,000 shares, respectively, on or before April 30, 2001 for total
consideration of $450,000 or $3.50 per share, plus accrued but unpaid dividends
to the closing date. We completed the sale of the additional shares on April 30,
2001.
ULLICO Revolving Line of Credit. On March 7, 2001, we entered into a
two-year $5.0 million revolving credit agreement with ULLICO. Borrowings under
the revolving credit agreement are secured by substantially all of our assets.
Interest on borrowings accrues at 6% per annum in cash and additional interest
in the form of 5-year warrants to purchase our common stock with an exercise
price of $.01 per share. The number of warrants ULLICO will be entitled to
receive is based on the average amount outstanding multiplied by 14% per annum
divided by $3.99. In addition, as a commitment fee, we issued ULLICO warrants to
purchase 40,000 shares of our common stock with an exercise price of $.01 per
share. No amounts have been borrowed under this line of credit as of March 31,
2001.
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OFFICER LOANS
In February 2000, we granted Mr. Lebda an option to purchase an
additional 100,000 shares of our common stock at an exercise price equal to our
initial public offering price of $12.00. This option was exercised in full prior
to the commencement of trading of our common stock on the Nasdaq National
Market. In connection with the exercise of this option, Mr. Lebda issued a full
recourse promissory note to us for the full exercise price of this option of
$1.2 million. The note was initially secured by all of the shares purchased
pursuant to the option. The note bears interest at the "applicable federal rate"
as defined in Section 1274(d) of the Internal Revenue Code, compounded annually.
Interest on the unpaid principal balance, along with two equal principal
installments, is due on January 31, 2004 and 2005, respectively.
On February 9, 2000, Mr. Lebda and Keith Hall, our Chief Financial
Officer and Senior Vice President, exercised options to purchase 68,134 and
12,260 shares of our common stock, respectively, at weighted average exercise
prices of $3.93 and $5.51 per share, respectively. In connection with these
option exercises and the payment of related income taxes, we loaned Messrs.
Lebda and Hall $500,000 and $100,000, respectively, as permitted under our
benefit plans. Each of these loans was originally evidenced by a full recourse
promissory note bearing interest at the applicable federal rate, compounded
annually, and secured by all of the shares purchased under the respective
options. Interest on the unpaid principal balance of each note, along with three
equal installments of principal, is due and payable on February 9, 2002, 2003
and 2004, respectively.
In March 2001, in connection with the sale of the 8% convertible
preferred stock, we entered into a promissory note and an amended and restated
pledge agreement with Mr. Lebda to provide him with a $700,000 loan to acquire
200,000 shares of our 8% convertible preferred stock. This loan is to be repaid
in two installments of $35,000 due on January 31, 2002 and 2003, respectively,
and three installments of $210,000, plus interest, due on January 31, 2004, 2005
and 2006, respectively. Interest on the outstanding balance accrues at the
applicable federal rate. To collateralize the loan, we have entered into a note
and an amended and restated pledge agreement with Mr. Lebda. This amended and
restated pledge agreement amends and restates the existing pledge agreement
discussed above and covers all three loans totaling $2.4 million. Under the
amended and restated pledge agreement, we have a security interest in all of the
shares of our common and preferred stock that he beneficially owns, other than
88,900 shares held through a family trust. Mr. Lebda is precluded from selling
or transferring any of our securities or options or warrants to purchase any of
our securities without our prior consent. The shares described above are the
sole collateral securing the three loans for as long as Mr. Lebda remains our
employee. If Mr. Lebda voluntarily terminates his employment other than for
"good reason" or if we terminate his employment for "cause," as those terms are
defined in his employment agreement, the loans will become full recourse.
INVESTMENTS BY DIRECTORS AND OFFICERS.
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In July 1998, we sold 42,333 shares of our common stock at a price of
approximately $4.72 per share to H. Eugene Lockhart for $200,000. Mr. Lockhart
served as a member of our board of directors until September 1999.
In November 1998, we sold 12,700 shares of our common stock at a price
of approximately $4.72 per share to James Carthaus for $60,000. Mr. Carthaus is
a member of our board of directors.
In May 1999, we sold 333,334 shares of convertible preferred stock at a
price of $6.00 per share and warrants to purchase 33,020 shares of our common
stock for $2.0 million to W. James Tozer, Jr. and Richard Field, each of whom
serves as a member of our board of directors. These warrants have an exercise
price of approximately $7.87 per share and expire in May 2004. The shares of
preferred stock and accumulated dividends thereon were converted into 434,997
shares of common stock at our initial public offering.
In July 1999, we issued a $500,000 principal amount 8% convertible
promissory note and a warrant to purchase 15,240 shares of our common stock at
an exercise price of approximately $7.87 per share to Garrity Investment LLC,
which is controlled by a family member of Douglas Lebda, our Chief Executive
Officer. This financing was part of our issuance of 8% convertible promissory
notes in an aggregate principal amount of $1,750,000 and warrants to purchase
53,340 shares of our common stock to five investors. In September 1999, all of
the promissory notes along with accrued interest thereon were exchanged for
214,076 shares of our Series D convertible preferred stock, of which Garrity
Investments received 61,165 shares, which, along with accumulated dividends
thereon, were converted into 80,342 shares of common stock at our initial public
offering.
In September 1999, Robert G. Wilson, who served as our Chairman until
September 1999, received $3,400,000 upon our repurchase of 539,750 shares of our
common stock at a price per share of approximately $6.30. Donald Colby, who
served as a member of our board of directors until September 1999, received
$800,000 upon our repurchase of 127,000 shares of our common stock at a price
per share of approximately $6.30. Also in September 1999, we repurchased 282,222
shares of our common stock at a price per share of approximately $6.30 from
Phoenix Strategic Capital for $1,777,776. Richard Shaw was designated as a
member of our board of directors by Phoenix in March 1998 and served until
September 1999.
In January 2000, we granted options to Douglas Lebda to purchase up to
158,750 shares of our common stock at an exercise price of $9.25 per share which
vest over a four year period. In addition, we also granted Mr. Lebda an option
to purchase up to 100,000 shares of our common stock at an exercise price equal
to the initial public offering price. This option was exercised in full prior to
the commencement of trading of our common stock on the Nasdaq National Market.
In connection with the exercise of this option, Mr. Lebda issued to us a full
recourse promissory note for the full exercise price of the option. The note was
initially secured by all of the shares purchased pursuant to the option. The
note bears interest at the "applicable federal rate" as defined in Section
1274(d) of the Internal Revenue Code, compounded annually. Interest on the
unpaid principal balance, along with two equal principal installments, is due on
January 31, 2004 and 2005, respectively.
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On February 9, 2000 Douglas Lebda, Keith Hall and James Bennett, Jr.,
our former Senior Vice President of Corporate Development, exercised options,
which were granted prior to December 31, 1999, to purchase 68,134, 12,260, and
12,260, shares of our common stock, at weighted average exercise prices of
$3.93, $5.51, and $5.51 per share, respectively. In connection with these option
exercises and the payment of related income taxes, we agreed to lend Messrs.
Lebda, Hall and Bennett $500,000, $100,000 and $100,000, respectively, as
permitted under our benefit plans. Each of these loans was originally evidenced
by a full recourse promissory note bearing interest at the applicable federal
rate, compounded annually, and secured by all of the shares purchased under the
respective options. Interest on the unpaid principal balance of each note, along
with three equal installments of principal, is due and payable on February 9,
2002, 2003 and 2004, respectively.
In March 2001, in connection with the sale of the 8% convertible
preferred stock, we entered into a promissory note and an amended and restated
pledge agreement with Mr. Lebda to provide him with a $700,000 loan to acquire
200,000 shares of our 8% convertible preferred stock. This loan is to be repaid
in two installments of $35,000 due on January 31, 2002 and 2003, respectively,
and three installments of $210,000, plus interest, due on January 31, 2004, 2005
and 2006, respectively. Interest on the outstanding balance accrues at the
applicable federal rate. To collateralize the loan, we have entered into an
amended and restated pledge agreement with Mr. Lebda. This amended and restated
pledge agreement amends and restates the existing pledge agreement discussed
above and covers all three loans totaling $2.4 million. Under the amended and
restated pledge agreement, we have a security interest in all of the shares of
our common and preferred stock that he beneficially owns, other than 88,900
shares held through a family trust. Mr. Lebda is precluded from selling or
transferring any of our securities or options or warrants to purchase any of our
securities without our prior consent. The shares described above are the sole
collateral securing the three loans for as long as Mr. Lebda remains our
employee. If Mr. Lebda voluntarily terminates his employment other than for
"good reason" or if we terminate his employment for "cause," as those terms are
defined in his employment agreement, the loans will become full recourse.
As of March 31, 2001, Mr. Lebda and his wife owned 1,130,408 shares of
common and preferred stock which are pledged as collateral securing the notes
discussed above.
On March 20, 2001, Douglas Lebda, Richard Field and W. James Tozer Jr.,
purchased shares of our 8% convertible preferred stock and W. James Tozer, Jr.
and Keith Hall committed to purchase additional shares of 8% preferred stock on
April 30, 2001. For more information, see the section above entitled "Series A
8% Convertible Preferred Stock Financing."
RELATIONSHIPS BETWEEN THE COMPANY, DIRECTORS AND STOCKHOLDERS
Robert Kennedy, a member of our board of directors, is the director of
special projects of ULLICO, Inc.
Daniel Lieber, a member of our board of directors, is a partner of
Equifin Capital Management, an entity affiliated with Capital Z Partners.
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Adam Mizel, who served as a member of our board of directors until he
resigned in April 2001, is a partner of Capital Z Partners.
Robert Spass, a member of our board of directors, is a partner of
Capital Z Partners.
Dale Gibbons, who was elected to our board of directors in March 2001
to fill a vacancy created by expanding the board from seven to eight members, is
the Chief Financial Officer of Zions Bancorporation, a purchaser of 1,428,571
shares of our 8% convertible preferred stock.
OTHER RELATIONSHIPS
PRICELINE.COM
In September 1999, priceline.com acquired an equity position in
LendingTree representing less than 2% of our total outstanding shares. During
1999 and 2000, through contractual relationships with priceline.com and related
entities, we recorded revenue of $0.2 million and $0.1 million, respectively.
Also, under these arrangements with priceline.com and its related entities, we
paid $0.6 million and $1.1 million in 1999 and 2000, respectively. Subsequent to
December 31, 2000, priceline.com sold its equity interest LendingTree.
CNBC.COM
In January 2000, we entered into an agreement with CNBC.com, an
interactive media company. CNBC.com agreed to cooperate with us exclusively in
developing and operating a series of lending exchange websites using our Lend-X
software. These websites appear to the consumer to be part of the CNBC.com
website, and will incorporate our lending exchange content and transaction
capability. The agreement also includes joint marketing and promotional
arrangements, and contains provisions requiring us to conduct television
advertising on the CNBC cable network channel. In return, we granted CNBC.com
the non-exclusive license to our intellectual property and we agreed to pay
CNBC.com a variable monthly fee based on the number of completed qualification
forms. In addition, on February 2, 2000 we granted CNBC.com warrants to purchase
up to 190,500 shares of our common stock, or approximately 1.0% of our common
stock, at an exercise price of approximately $7.87 per share. All of these
warrants are currently exercisable. CNBC.com is an affiliate of General
Electric, a shareholder in LendingTree.
INVESTMENT IN LOANTRADER.COM
On February 1, 2000 we consummated a $2.5 million equity investment in
LoanTrader.com, Inc., a company that provides mortgage exchange services over
the internet. In this transaction we acquired approximately 8.5% of
LoanTrader.com's outstanding equity. The carrying value of this investment was
written down to $600,000 in December of 2000. Capital Z Partners and Goldman
Sachs, two of our significant stockholders, also invested in this company.
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PRUDENTIAL SECURITIES INCORPORATED
Prudential Securities Incorporated acted as an underwriter in the
Company's initial public offering and acted as a placement agent in connection
with a private placement of our Series D convertible preferred stock in
September 1999. Prudential Securities Incorporated received a warrant to
purchase 127,000 shares of common stock at an exercise price of $7.52 per share.
On January 25, 2000 Prudential Securities Incorporated exchanged the warrant for
a new warrant to purchase 127,000 shares of common stock at an exercise price
equal to the initial public offering price of $12.00 per share. The new warrant
is exercisable for a five-year period ending on September 21, 2004.
ACQUISITION
On August 2, 2000, we acquired certain assets and assumed certain
liabilities of HomeSpace Services, Inc., a Delaware company engaged in the
business of maintaining a website offering consumers access to real estate
broker referral services, residential mortgage loans and a full array of related
home services. The aggregate consideration for the HomeSpace transaction was
approximately $11.2 million, consisting of $6.2 million in cash, 639,077 shares
of our restricted common stock, valued at $4.7 million and $0.3 million of
assumed liabilities. At closing, 169,851 shares of our common stock were placed
in escrow in the event of any post-closing indemnification claims and $4.2
million in cash was placed in escrow to be paid to trade creditors of HomeSpace.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND MANAGEMENT
The following table provides information about the beneficial ownership
of our common stock as of March 31, 2001. We have listed each person that
beneficially owns more than 5% of the outstanding common stock, each of our
directors and executive officers identified in the summary compensation table
and all directors and executive officers as a group. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
Common stock percentage ownership is based on 18,737,441 shares of
common stock outstanding as of March 31, 2001. Preferred stock percentage
ownership is based on 6,885,715 shares of 8% convertible preferred stock
outstanding as of April 30, 2001. A total of 6,757,144 shares of our 8%
convertible preferred stock were actually outstanding as of March 31, 2001. We
completed the sale of an additional 128,571 shares of 8% convertible preferred
stock on April 30, 2001. Shares of common stock issuable upon the exercise or
conversion of options, warrants or preferred stock that are currently
exercisable or convertible or exercisable or convertible within 60 days of March
31, 2001 are deemed outstanding for the purpose of computing the common stock
percentage ownership of the person holding such options, warrants or preferred
stock, but are not deemed outstanding for computing the common stock percentage
ownership of any other person. Since our 8% convertible preferred stock became
convertible into shares of our common stock when the conversion terms were
approved by our stockholders at our annual meeting in May 2001. We have included
shares of common stock issuable upon conversion of the preferred stock in
calculating such ownership amounts.
In connection with the sale of 6,885,715 shares of our 8% convertible
preferred stock in March 2001, stockholders holding approximately 59% of our
outstanding common stock entered into a voting agreement and executed
irrevocable proxies pursuant to which these stockholders agreed, among other
things, to vote their shares of common stock at our 2001 annual meeting in favor
of the approval of the conversion terms and general voting rights of our 8%
convertible preferred stock and the issuance of our common stock upon conversion
of the 8% convertible preferred stock. By virtue of the voting agreement, and
only for such time as the voting agreement was in effect, the parties to the
voting agreement may have been deemed to constitute a "group" within the meaning
of Rule 13d-5(b) under the Exchange Act and thereby may have been deemed to be
beneficial owners of all shares of 8% convertible preferred stock and common
stock held by each member of the deemed group. The voting agreement terminated
immediately following our annual meeting in May 2001 when the conversion terms
and general voting rights of our 8% convertible preferred stock were approved by
our stockholders. Each of the stockholders listed below that was a party to the
voting agreement has disclaimed its membership in such group and, for purposes
of Section 13(d) of the Exchange Act, has disclaimed beneficial ownership of any
shares of 8% convertible preferred stock or common stock held by any party to
the voting agreement other than itself, if applicable.
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COMMON STOCK PREFERRED STOCK
BENEFICIALLY PERCENTAGE OF BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS(1) OWNED CLASS OWNED CLASS
- --------------------------------------- ------------ ------------- --------------- -------------
Specialty Finance Partners(2) 7,956,420 35.0% 4,000,000 58.1%
ULLICO(3) 2,271,604 11.9% -- --
GE Capital Residential Connections 1,266,053 6.8% -- --
Corporation(4)
General Electric Capital Assurance
Company(5) 316,514 1.7% -- --
The Goldman Sachs Group, Inc.(6) 1,424,310 7.6% -- --
Zions Bancorporation(7) 1,428,571 7.1% 1,428,571 20.7%
Capital Group International, Inc.(8) 1,337,400 7.2% -- --
Douglas Lebda(9) 1,420,848 7.4% 200,000 2.9%
Keith Hall(10) 131,600 * 28,571 *
Stephen J. Campbell(11) 28,187 * -- --
Thomas Reddin(12) 73,536 * -- --
Richard Stiegler(13) 98,740 * -- --
Richard Field(14) 1,070,682 5.5% 200,000 2.9%
W. James Tozer, Jr.(15) 953,943 4.9% 300,000 4.4%
James Carthaus(16) 50,025 * -- --
Robert Kennedy(17) 2,271,604 11.9% -- --
Daniel Lieber(18) -- -- -- --
Dale Gibbons(19) 1,436,771 7.1% 1,428,571 20.7%
Robert Spass(20) -- -- -- --
Theodore W. Kheel(21) 213,413 1.1% 142,857 2.1%
All executive officers and directors as 15,476,003 59.2% 6,107,142 88.7%
a group (18 persons)
- ---------------
* Less than one percent.
(1) Addresses are provided only for the beneficial owners of 5% or more of
our common stock or preferred stock.
(2) Specialty Finance Partners, an affiliate of Capital Z, is located at 54
Thompson Street, New York, New York. Specialty Finance Partners
beneficially owns 7,956,420 shares of common stock, which includes
4,000,000 shares of common stock that will be issuable upon conversion
of our 8% convertible preferred stock. Specialty Finance Partners has
sole voting and dispositive power with respect to such shares. In
addition, Specialty Finance Partners may be deemed to have the shared
power to vote or direct the vote of 15,576,032 shares or 66.7% of the
outstanding shares of common stock by virtue of its being party to the
voting agreement. Capital Z Fund II, Capital Z L.P. and Capital Z Ltd.
may be deemed to beneficially own 7,956,420 shares of our common stock
by virtue of Specialty Finance Partners' beneficial ownership of shares
of common stock and 8% convertible preferred stock discussed above.
Each of Capital Z Fund II, Capital Z L.P. and Capital Z Ltd. has shared
voting and dispositive power with respect to such shares.
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(3) The Union Labor Life Insurance Company, on behalf of its separate
account P (ULLICO), is located at 111 Massachusetts Avenue, N.W., 8th
Floor, Washington, D.C. ULLICO beneficially owns 2,271,604 shares of
common stock, which includes 421,000 shares that are issuable upon
exercise of currently exercisable warrants. ULLICO has sole voting and
dispositive power with respect to all of such shares.
(4) GE Capital Residential Connections Corporation (GECRCC) is located at
6601 Six Forks Road, Raleigh, North Carolina. GECRCC beneficially owns
1,266,053 shares of common stock. GECRCC has sole voting and
dispositive power with respect to all of such shares.
(5) General Electric Capital Assurance Company (GECAC) is located at 6604
West Broad Street, Richmond, Virginia. GECAC beneficially owns 316,514
shares of common stock. GECAC has sole voting and dispositive power
with respect to all of such shares.
(6) The Goldman Sachs Group, Inc. (Goldman Sachs) is located at 85 Broad
Street, New York, New York. Goldman Sachs beneficially owns 1,424,310
shares of common stock. Goldman Sachs has sole voting and dispositive
power with respect to all of such shares. The shares beneficially owned
by Goldman Sachs may also be deemed to be beneficially owned by Stone
Street Fund 1999, L.P. and by Goldman, Sachs & Co. Goldman Sachs & Co.
is the manager of the general partner of Stone Street Fund 1999, L.P.,
and Goldman Sachs & Co. is a direct and indirect wholly-owned
subsidiary of Goldman Sachs.
(7) Zions Bancorporation is located at One South Main, Suite 1660, Salt
Lake City, Utah. Zions Bancorporation beneficially owns 1,428,571
shares of common stock, all of which consists of shares of common stock
that will be issuable upon conversion of our 8% convertible preferred
stock.
(8) The information concerning beneficial ownership set forth above and in
this note is derived from a Schedule 13G dated February 12, 2001.
Capital Group International, Inc. beneficially owns 1,337,400 shares of
common stock as a parent holding company of a group of investment
management companies that hold investment power and, in some cases,
voting power over such shares. Capital Group International, Inc. does
not have
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voting or investment power over any of the shares. Capital Guardian
Trust Company, a bank and a wholly-owned subsidiary of Capital Group
International, Inc., beneficially owns the same 1,337,400 shares as a
result of its serving as the investment manager of various
institutional accounts.
(9) Mr. Lebda's business address is 11115 Rushmore Drive, Charlotte, North
Carolina. Mr. Lebda beneficially owns 1,420,848 shares of common stock,
which includes (a) 200,000 shares that will be issuable upon conversion
of our 8% convertible preferred stock, (b) 173,648 shares that are
issuable upon the exercise of stock options that are currently
exercisable or exercisable within the next 60 days, (c) 589,820 shares
held jointly with his spouse, (d) 88,900 shares held by a family trust
and (e) 23,812 shares that are issuable upon the exercise of currently
exercisable stock options held by his spouse. Dispositive power over
all of Mr. Lebda's shares of common stock and preferred stock is
subject to a pledge arrangement with LendingTree. See "Certain
Relationships and Related Party Transactions."
(10) Mr. Hall beneficially owns 131,600 shares of common stock, which
includes (a) 28,571 shares that will be issuable upon conversion of
shares of preferred stock purchased by Mr. Hall's IRA account on April
30, 2001, (b) 30,388 shares that are issuable upon the exercise of
currently exercisable stock options that are currently exercisable or
exercisable within the next 60 days and (c) an aggregate of 11,525
shares held by his spouse's IRA account and by trusts established for
the benefit of members of Mr. Hall's family. Mr. Hall has sole voting
and dispositive power with respect to all of such shares.
(11) Mr. Campbell beneficially owns 28,187 shares of common stock, which
includes 26,787 shares that are issuable upon the exercise of stock
options that are currently exercisable or exercisable within the next
60 days.
(12) Mr. Reddin beneficially owns 73,536 shares of common stock, which
includes 71,436 shares that are issuable upon the exercise of stock
options that are currently exercisable or exercisable within the next
60 days.
(13) Mr. Stiegler beneficially owns 98,740 shares of common stock, which
includes 64,557 shares of common stock that are issuable upon the
exercise of stock options that are currently exercisable or exercisable
within the next 60 days.
(14) Mr. Field's address is 49 Locust Avenue, Suite 104, New Canaan,
Connecticut. Mr. Field beneficially owns 1,070,682 shares of common
stock, which includes (a) 85,714 shares that will be issuable upon the
conversion of shares of preferred stock held by Mr. Field, (b) 392,511
shares that will be issuable upon the conversion of shares of preferred
stock held in Mr. Field's IRA account, (c) 16,510 shares that are
issuable upon the exercise of warrants that are currently exercisable
or exercisable within the next 60 days
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and (d) 392,511 shares that are issuable upon the exercise of currently
exercisable stock options. Mr. Field has sole voting and dispositive
power with respect to all of such shares.
(15) Mr. Tozer beneficially owns 935,943 shares of common stock, which
includes (a) 200,000 shares that will be issuable upon conversion of
shares of preferred stock held by Mr. Tozer's IRA account, (b) 40,000
shares that will be issuable upon the conversion of shares of preferred
stock purchased by Mr. Tozer on April 30, 2001, (c) 2,540 shares that
are issuable upon the exercise of warrants held by Mr. Tozer's wife
that are currently exercisable or exercisable within the next 60 days,
(d) 50,000 shares that will be issuable upon conversion of shares of
preferred stock held by the W. James Tozer Family Trust for which Mr.
Tozer is the trustee and (e) 43,000 shares of LendingTree common stock
held by the Virginia S. Tozer Family Trust for which Mr. Tozer is the
trustee. Mr. Tozer has sole voting and dispositive power with respect
to the shares identified in (a) & (b) above, and shared voting and
dispositive power with respect to the shares identified in (c) above.
Mr. Tozer disclaims beneficial ownership with respect to the shares
identified in (d) and (e) above.
(16) Mr. Carthaus beneficially owns 84,850 shares of common stock, which
includes 67,150 shares that are issuable upon the exercise of stock
options that are currently exercisable or exercisable within the next
60 days.
(17) Amounts shown reflect shares owned by ULLICO. Mr. Kennedy disclaims
beneficial ownership of all such shares.
(18) Excludes shares owned by Specialty Finance Partners and its affiliates.
(19) Amounts shown include 1,428,571 shares of common stock and preferred
stock beneficially owned by Zions Bancorporation. Mr. Gibbons is the
Chief Financial Officer of Zions Bancorporation. Mr. Gibbons disclaims
beneficial ownership of all such shares.
(20) Excludes shares owned by Specialty Finance Partners and its affiliates.
(21) Amounts shown include 142,857 shares of preferred stock beneficially
owned by the TASK Foundation, a family-owned, not-for-profit foundation
of which Mr. Kheel is the President. Mr. Kheel disclaims beneficial
ownership of all such shares.
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DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation authorizes us to
issue up to 100,000,000 shares of common stock, $0.01 par value per share, and
10,000,000 shares of preferred stock, par value $0.01 per share, 1,000,000
shares of which are designated as series A junior participating preferred stock,
and 6,885,715 shares of which are designated as 8% convertible preferred stock
As of March 31, 2000, 19,653,956 shares of common stock were issued, including
916,515 shares of treasury stock, for a net total of 18,737,441 shares of common
stock outstanding. All of the outstanding capital stock is and will be, fully
paid and non-assessable.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available for this purpose
at the times and in the amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the occurrence of a liquidation, dissolution or
winding-up of LendingTree, the holders of shares of common stock would be
entitled to share ratably in the distribution of all of the LendingTree's assets
remaining available for distribution after satisfaction of all its liabilities
and the payment of the liquidation preference of any outstanding preferred
stock.
PREFERRED STOCK
BLANK CHECK PREFERRED STOCK
The board of directors has the authority to provide by resolution for
the issuance of shares of preferred stock, in one or more classes or series, and
to fix the rights, preferences, privileges and restrictions of this preferred
stock, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock and could
adversely affect the voting and other rights of the holders of common stock.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
We have entered into a stockholder rights agreement designated to
protect stockholders from attempts to acquire control of LendingTree at an
inadequate price. Under our stock holder rights agreement, each outstanding
share of LendingTree common stock has attached to it one right to purchase
one-hundredth of a share of junior participating preferred stock at an exercise
price of four times the average closing price of our common stock for the
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first five days trading. The rights are not currently exercisable or
transferable, and no separate certificates evidencing such rights will be
distributed, unless certain events occur.
A holder can exercise the rights to purchase shares of the junior
participating preferred stock if a person, group, or other entity acquires from
sources other than us or commences a tender offer or an exchange offer for 15%
or more of our common stock.
After the rights become exercisable, the rights generally will entitle
the holders to purchase either LendingTree common stock or the common stock of
the potential acquiror, in lieu of the junior participating preferred stock, at
a substantially reduced price.
We can generally redeem the rights at $0.01 per right at any time prior
to the earlier of:
the time that an acquiror obtains 15% or more of our outstanding common
stock from sources other than us; or
the final expiration date of the rights agreement.
Our rights agreement provides that the provisions of the rights
agreement may be amended by the board of directors prior to 10 days after
someone acquires or commences a tender offer for 15% of our outstanding common
stock without the approval of the holders of the rights. However, after that
date, the rights agreement may not be amended in any manner which would
adversely effect the interests of the holders of the rights, excluding the
interests of any acquiror. In addition, our rights agreement provides that no
amendment may be made to adjust the time period governing redemption at a time
when the rights are not redeemable.
8% CONVERTIBLE PREFERRED STOCK
On March 20, 2001, we issued and sold 3.7 million shares of 8%
convertible preferred stock for $12.95 million, or $3.50 per share. This
excludes 200,000 shares that were pur chased by our Chief Executive Officer with
funds he obtained from a $700,000 loan from us. On April 30, 2001, we issued an
additional 128,571 shares for $450,000 plus accumulated but unpaid dividends to
that date. In conjunction with the closing of the 8% convertible preferred stock
transaction, Capital Z Partners' equity rights certificate was converted into
2,857,143 shares of 8% convertible preferred stock at an effective conversion
rate equal to $3.50 per share. No additional purchase price was required to be
paid for the shares of 8% convertible preferred stock issued upon conversion of
the equity rights certificate.
The material terms of our 8% convertible preferred stock are as
follows:
Title, Authorized Shares; Priority. There are 6,885,715 authorized
shares of our 8% convertible preferred stock, all of which are currently issued
and outstanding. Our 8% convertible preferred stock ranks senior to our common
stock and to any other classes or series of preferred stock the terms of which
specifically provide that they are junior to our 8% convertible preferred stock,
or junior securities, with respect dividend rights and with respect to rights
upon liquidation, winding up or dissolution.
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Dividends. The holders of our 8% convertible preferred stock are
entitled to receive dividends on the preferred stock equal to 8% of the stated
value per share payable at our option:
- - in cash on a quarterly dividend payment date; or
- - by an upward adjustment to the stated par value per share on a
quarterly dividend payment date.
The stated value per share is equal to the original purchase price for
the 8% convertible preferred stock of $3.50 per share, subject to adjustment for
dividends that are not paid in cash. Dividends on the 8% convertible preferred
stock are cumulative and accrue daily from the date of original issuance.
Dividends are payable on the last day of March, June, September and December of
each year, commencing June 30, 2001.
The holders of common stock and other junior securities may not receive
dividends or have their shares repurchased or redeemed unless all accumulated
but unpaid dividends on the 8% convertible preferred stock have been paid.
Dividends that are paid by increasing the stated value of the preferred stock
will be recorded based on the fair value of the underlying common stock into
which the additional value is convertible.
Redemption. The shares of 8% convertible preferred stock will be
redeemable at our option for cash commencing on and after March 31, 2004 at a
price per share equal to the product of the applicable percentage described
below, multiplied by the then current stated value per share. The applicable
percentage is initially 120% and declines to 105% ratably on a quarterly basis
as follows:
PERIOD APPLICABLE PERCENTAGE
- ----------------------------------------- ---------------------
March 20, 2004 through June 30, 2004 118.333%
July 1, 2004 through September 30, 2004 116.666%
October 1, 2004 through December 31, 2004 115.000%
January 1, 2005 through March 31, 2005 113.333%
April 1, 2005 through June 30, 2005 111.666%
July 1, 2005 through September 30, 2005 110.000%
October 1, 2005 through December 31, 2005 108.333%
January 1, 2006 through March 21, 2006 106.666%
On and after March 21, 2006 105.000%
We are required to redeem all shares of 8% convertible preferred stock
that remain outstanding on March 20, 2006 at a price of 105% of the then current
stated value per share. If we do not redeem the 8% convertible preferred stock
on that date, the dividend rate will increase to 15% of the stated value per
share for so long as such shares remain outstanding.
Conversion. Since our stockholders approved the conversion features of
the 8% convertible preferred stock at our 2001 annual meeting, each share is
convertible into the number of shares of
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common stock determined by dividing the then current stated value per share plus
accrued but unpaid dividends by the conversion price. The conversion price is
the initial purchase price of $3.50 per share, subject to adjustment from time
to time as described in the section "Dilution and Price Protection" below.
Dilution and Price Protection. The shares of 8% convertible preferred
stock are subject to protection from certain dilutive events. If any of these
dilutive events occurs, the conversion price of the 8% convertible preferred
stock will be adjusted in the manner described below. Dilutive events that would
trigger an adjustment in the conversion price include the following:
- - the issuance of shares of common stock or common stock equivalents in
financing transactions involving greater than $5.0 million in net
proceeds to us before we have reported positive cash flow, as defined
below, for any two consecutive fiscal quarters, in which case the
conversion price would be adjusted as follows:
- if the net proceeds of such financing transactions are between
$5.0 million and $10.0 million, the conversion price may be
decreased to the net volume-weighted average purchase price
per share of the common stock or common stock equivalents sold
in such financings;
- if the net proceeds are greater than $10.0 million, the
conversion price will be adjusted to the net volume-weighted
average purchase price per share of the common stock or common
stock equivalents issued in any dilutive transaction or series
of dilutive transactions with proceeds equal to any $10.0
million that would yield the lowest net volume-weighted
average purchase price per share; and
- in no such event, however, will the conversion price be
reduced below $2.00 per share or increased above $3.50 per
share.
- - stock dividends, subdivisions, splits or combinations, in which case
the conversion price will be proportionately increased or decreased;
and
- - mergers, consolidations, reorganizations or other similar business
combinations or any other change of control event described in
"Liquidation Preference" below that results in our common stock being
changed into securities of another company or a sale of substantially
all of our assets, in which case the conversion terms will be adjusted
to provide the holders of our 8% convertible preferred stock with the
right to convert their shares of preferred stock into the cash,
securities or property that they would have been entitled to receive
had they converted their preferred stock into common stock immediately
prior to such transaction.
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Cash flow is generally defined to mean our consolidated net income
determined in accordance with generally accepted accounting principles, but
excluding extraordinary and non-recurring gains and extraordinary and
non-recurring non-cash losses, plus the following items to the extent they were
deducted:
- - certain non-cash interest expenses;
- - depreciation and certain amortization expenses;
- - all non-cash charges for compensation attributable to options, warrants
and other equity instruments; and
- - certain paid-in-kind dividends and other non-cash dividends or
equity-related charges.
The dilution and price protection provisions described above do not
extend to the following transactions:
- - any issuance of securities to our employees, officers, consultants or
directors pursuant to employee benefit plans in the ordinary course of
business;
- - any issuance of securities pursuant to the conversion or exercise of
securities outstanding on or as of March 20, 2001;
- - any issuance of securities pursuant to the provisions described above
providing dilution protection to the holders of our 8% convertible
preferred stock;
- - any issuance of securities pursuant to the terms of our revolving
credit facilities with ULLICO and Freddie Mac; and
- - any issuance of securities to business partners in transactions
approved by the board of directors that do not have capital raising as
their principal objective.
General Voting Rights. Our stockholders approved the voting rights
provisions of the 8% convertible stock at our 2001 annual meeting. Each share of
our 8% convertible preferred stock will vote together with our common stock on
an as-if-converted basis on all matters that are presented to our common
stockholders after the date of the annual meeting.
Protective Provisions. So long as more than 1,377,143 shares of our 8%
convertible preferred stock are outstanding, we cannot do any of the following
without the prior approval of 68.5% of the shares of 8% convertible preferred
stock then outstanding, voting separately as a class:
- - amend our certificate of incorporation or bylaws in a manner adverse to
the holders of our 8% convertible preferred stock;
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- - increase or decrease the authorized number of shares of our common or
preferred stock;
- - authorize, create or issue any class or series of capital stock ranking
senior to or on parity with our 8% convertible preferred stock in any
respect;
- - repurchase, redeem or pay any dividends on any equity securities, other
than on our 8% convertible preferred stock and repurchases pursuant to
employee benefit plans;
- - subject our assets to any lien other than
- liens in connection with revolving credit facilities or sales
of accounts receivable in transactions approved by our board
of directors; or
- liens arising in the ordinary course of business that do not
materially impair the value of the assets they encumber;
- - incur any indebtedness for borrowed money in excess of $10.0 million,
other than in connection with revolving credit facilities approved by
our board of directors;
- - issue any debt security or class or series of capital stock that is not
common stock or convertible into or exercisable for common stock,
called a non-equity security, or issue or become subject to any
debt-type obligation, in either case, that bears an annual interest
rate, dividend rate or yield greater than the six-month LIBOR rate plus
15%;
- - issue any non-equity security or issue or become subject to any
debt-type obligation that provides for both:
- an annual interest rate, dividend rate or yield greater than
the six-month LIBOR rate plus 10%; and
- the issuance of or the right to receive 1,000,000 or more
shares of our common stock or any other class or series of our
common or preferred stock that is not a non-equity security;
or
- - increase the size of our board of directors to more than 10 directors.
Preemptive Rights. Holders of our 8% convertible preferred stock have a
preemptive right to acquire up to 50% of any equity securities that we propose
to issue in the future on terms and conditions no less favorable than those that
we are offering to a third party. Each holder of preferred stock has the
preemptive right to acquire his or her proportional share of such 50% amount,
subject to increase for over-allotment if some holders do not fully exercise
their rights.
The following issuances of equity securities are not subject to the
preemptive rights:
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- - the issuance of securities to our employees, officers, consultants and
directors pursuant to employee benefit plans in the ordinary course of
business;
- - any issuance of securities upon the conversion of securities
outstanding on or as of March 20, 2001;
- - underwritten public offerings of securities;
- - issuances of common stock under the Paul Revere equity line;
- - any issuance of securities as part of revolving credit facilities;
- - any issuance of securities in connection with acquisitions; and
- - any issuance of securities to business partners in transactions
approved by our board of directors that do not have capital raising as
their principal objective.
Liquidation Preference. In the event LendingTree is liquidated or
dissolves, the holders of our 8% convertible preferred stock will be entitled to
receive a liquidation preference before any distributions may be made to holders
of our common stock or any other junior securities. This liquidation preference
will be equal to 105% of the then current stated value per share.
In connection with certain change in control events, holders of our 8%
convertible preferred stock may have the right at their option to:
- - treat the change in control event as a liquidation and receive the
greater of
- the liquidation preference described above; or
- the consideration that they would have received if they had
converted their shares of 8% convertible preferred stock into
common stock immediately prior to the consummation of the
change in control event;
- - require as a condition to any change of control transaction in which
the consideration is other than cash that the counterparty to such
transaction redeem the convertible preferred stock for a cash amount
equal to the then current liquidation preference; or
- - continue to hold the convertible preferred stock in which case, the
change of control event may result in or trigger an adjustment to the
conversion price.
These change in control events generally include:
- - the sale of all or substantially all of our assets;
- - the consummation of a transaction in which any person or group, other
than Capital Z and its affiliates, becomes the owner of 50% or more of
our voting stock;
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- - during any period of two consecutive years, directors in office at the
beginning of a period together with other directors approved by our
board of directors cease to constitute a majority of our board; and
- - mergers or business combinations, other than certain mergers or
business combinations in which holders of our voting securities hold
the same voting power after the merger or business combination as they
held before the transaction and mergers effected to change our
jurisdiction of organization.
WARRANTS
As of March 31, 2001, we had the following outstanding warrants to
purchase shares of common stock:
(1) a warrant to purchase up to 381,000 shares at an exercise
price of approximately $4.72 per share that is held by ULLICO
on behalf of its Separate Account P;
(2) seven warrants to purchase up to a total of 16,510 shares at
an exercise price of approximately $7.87 per share that are
held by Katherine Tozer Roddy; James Roddy, Jr.; Farran Tozer
Brown; Robert Brown; Elizabeth Tozer; Charlotte Tozer and Raju
Shah;
(3) a warrant to purchase up to a total of 16,510 shares at an
exercise price of approximately $7.87 per share that is held
by Richard Field;
(4) a warrant to purchase up to 15,240 shares at an exercise price
of approximately $7.67 per share that is held by a family
member of Douglas R. Lebda;
(5) warrants to purchase an aggregate of 38,100 shares at an
exercise price of approximately $7.87 per share that are held
by Hovde Financial Institution Partners II, L.P., Hovde
Investment Corp., L.L.C., William N. Schiebler, Barbara A. and
Peter A. Georgescu, and John B. Prince;
(6) a warrant to purchase up to 63,500 shares at an exercise price
of approximately $4.72 per share that is held by Seacris
Group, Ltd.;
(7) a warrant to purchase up to 127,000 shares at an exercise
price equal to $12.00 per share that is held by Prudential
Securities, as amended on January 25, 2000;
(8) a warrant to purchase up to 9,525 shares at an exercise price
of approximately $4.72 per share that is held by Phoenix
Strategic Capital;
(9) warrants to purchase up to 190,500 shares at an exercise price
of approximately $7.87 per share that are held by CNBC.com;
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(10) a warrant to purchase up to 40,000 shares at an exercise price
of $0.01 per share that is held by ULLICO on behalf of its
Separate Account P;
(11) a warrant to purchase up to 12,500 shares at an exercise price
of $0.01 per share that is held by Freddie Mac; and
(12) warrants to purchase up to an aggregate of 135,000 shares at
an exercise price of $3.762 per share that are held by persons
associated with Capital Z.
OPTIONS
As of March 31, 2001:
(i) options to purchase a total of 5,009,944 shares of common stock
were outstanding of which 1,506,314 have vested;
(ii) up to 3,316,228 additional shares of common stock may be subject
to options granted in the future; and
(iii) 412,044 shares reserved for issuance under our employee stock
purchase plan.
For more information, see the section of this prospectus entitled
"Management--Executive Compensation."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND LENDINGTREE'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS.
Some provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, which provisions are summarized
in the following paragraphs, may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider it its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors. Our board of directors is divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
These provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies created by such removal with
its own nominees.
Cumulative Voting. Our amended and restated certificate of
incorporation expressly denies stockholders the right to cumulate votes in the
election of directors.
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Stockholder Action; Special Meeting of Stockholders. Our amended and
restated certificate of incorporation eliminates the ability of stockholders to
act by written consent. It further provides that special meetings of our
stockholders may be called only by the chairman of the board of directors, the
president or a majority of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 90 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. However, in the event that the annual meeting is called
for a date that is not within thirty (30) days before or after such anniversary
date, notice by the stock holder in order to be timely must be received not
later than the close of business on the 10th day following the date on which
notice of the date of the annual meeting was mailed to stockholders or made
public, whichever first occurs. In the case of a special meeting of stockholders
called for the purpose of electing directors, notice by the stockholder in order
to be timely must be received not later than the close of business on the tenth
(10th) day following the day on which notice of the date of the special meeting
was mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated bylaws also specify certain
requirements as to the form and content of a stock holder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
Super Majority Vote Requirements. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless either a corporation's certificate of
incorporation or bylaws require a greater percentage. Our amended and restated
certificate of incorporation imposes supermajority vote requirements to amend
any provisions of our amended and restated certificate of incorporation,
including those provisions relating to the classified board of directors, action
by written consent and the ability of stockholders to call special meetings. In
addition, our amended and restated certificate of incorporation provides that
certain business combinations such as mergers and stock and asset sales with an
interested stockholder, typically a beneficial owner of more than 15% of the
outstanding voting shares of our capital stock, be approved by:
- - the holders of 80% or more of the voting power of the then outstanding
voting shares voting together as a single class, and
- - at least the majority of the voting power of the then outstanding
voting shares voting as a single class which are not owned
beneficially, directly or indirectly by the interested stockholder,
unless the transaction approved by a majority of certain directors or
meets certain share price provisions.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These
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additional shares may be utilized for a variety of corporate purposes, including
future public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
DELAWARE GENERAL CORPORATION LAW SECTION 203.
LendingTree is subject to Section 203 of the Delaware General
Corporation Law. Under Section 203, an interested stockholder, defined generally
as a person owning 15% or more of a corporation's outstanding voting stock, is
prevented from engaging in a business combination with the corporation for three
years after becoming an interested stockholder unless:
- - the board approved the transaction in which the interested stockholder
became an interested stockholder,
- - the interested stockholder owns more than 85% of the stock after the
consummation of the transaction in which the stockholder became
interested; or
- - the board approves the business combination and two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder approves the business combination.
RIGHTS AGREEMENT.
Under Delaware law, every corporation may create and issue rights
entitling the holders of such rights to purchase from the corporation shares of
its capital stock of any class or classes, subject to any provisions in its
certificate of incorporation. The price and terms of such shares must be stated
in the certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
We have entered into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of our rights agreement are complex and
not easily summarized, particularly as they relate to the acquisition of our
common stock and to exercisability. This summary may not contain all of the
information that is important to you. Accordingly, you should carefully read our
rights agreement, which has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
Our rights agreement provides that each share of our common stock
outstanding has one right to purchase one-hundredth of a preferred share
attached to it. The purchase price per one one-hundredth of a share of junior
participating preferred stock under the stockholder rights agreement is four
times the average closing price of our common stock for the first five days of
trading after the consummation of our initial public offering.
Initially, the rights under our rights agreement are attached to
outstanding certificates
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representing our common stock and no separate certificates representing the
rights will be distributed. The rights will separate from our common stock and
be represented by separate certificates approximately 10 days after someone
acquires or commences a tender offer for 15% of our outstanding common stock
other than through purchases directly from us.
After the rights separate from our common stock, certificates
representing the rights will be mailed to record holders of our common stock.
Once distributed, the rights certificates alone will represent the rights.
All shares of our common stock issued prior to the date the rights
separate from the common stock will be issued with the rights attached. The
rights are not exercisable until the date the rights separate from the common
stock. The rights will expire on the tenth anniversary of the date of the
completion of this offering unless earlier redeemed or exchanged by us.
If an acquiror obtains or has the rights to obtain 15% or more of our
common stock, then each right will entitle the holder to purchase a number of
shares of our common stock equal to two times the purchase price of each right.
Each right will entitle the holder to purchase a number of shares of
common stock of the acquiror having a then current market value of twice the
purchase price if an acquiror obtains 15% or more of our common stock other than
through purchases directly from us and any of the following occurs:
- - we merge into another entity;
- - an acquiring entity merges into us; or
- - we sell more than 50% of our assets or earning power.
Under our rights agreement, any rights that are or were owned by an acquiror of
more than 15% of our outstanding common stock will be null and void.
Our rights agreement contains exchange provisions which provides that
after an acquiror obtains 15% or more, but less than 50% of our respective
outstanding common stock other than through purchases directly from us, our
board of directors may, at its option, exchange all or part of the then
outstanding and exercisable rights for shares of our common stock. In such an
event, the exchange ratio is one common share per right, adjusted to reflect any
stock split, stock dividend or similar transaction.
Our board of directors may, at its option, redeem all of the
outstanding rights under our rights agreement prior to the earlier of (1) the
time that an acquiror obtains 15% or more of our outstanding common stock or (2)
the final expiration date of the rights agreement. The redemption price under
our rights agreement is $0.01 per right, subject to adjustment. The right to
exercise the rights will terminate upon the action of our board ordering the
redemption of the rights and the only right of the holders of the rights will be
to receive the redemption price.
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Holders of rights will have no rights as our stockholders including the
right to vote or receive dividends, simply by virtue of holding the rights.
Our rights agreement provides that the provisions of the rights
agreement may be amended by the board of directors prior to 10 days after
someone acquires or commences a tender offer for 15% of our outstanding common
stock without the approval of the holders of the rights. However, after that
date, the rights agreement may not be amended in any manner which would
adversely effect the interests of the holders of the rights, excluding the
interests of any acquiror. In addition, our rights agreement provides that no
amendment may be made to adjust the time period governing redemption at a time
when the rights are not redeemable.
Our rights agreement contains rights that have anti-takeover effects.
The rights may cause substantial dilution to a person or group that attempts to
acquire us without conditioning the offer on a substantial number of rights
being acquired. Accordingly, the existence of the rights may deter acquirors
from making takeover proposals or tender offers. However, the rights are not
intended to prevent a takeover, but rather are designed to enhance the ability
of our board to negotiate with an acquiror on behalf of all the stockholders. In
addition, the rights should not interfere with a proxy contest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union
National Bank. Its address is 1525 W. WT, Harris Blvd, 3C3, Charlotte, NC
28288-1153.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
or the prospect of such sales by existing stockholders and warrant holders could
materially adversely affect the market price of our common stock. As of March
31, 2001, we had outstanding 18,737,441 shares of common stock. A large majority
of our outstanding shares of common stock are either registered and therefore
freely tradable or may be transferred pursuant to Rule 144(k) under the
Securities Act, unless held by our "affiliates" as that term is defined in Rule
144 under the Securities Act.
In June 2000, we filed a registration statement on Form S-8 under the
Securities Act covering 1,820,008 shares of common stock issuable under our 1999
stock incentive plan, 365,992 shares of common stock reserved for issuance under
our 1999 stock incentive plan, 100,000 shares of common stock issued under our
1999 stock incentive plan, 1,324,429 shares of common stock issuable under our
1998 stock option plan, 103,254 shares of common stock issued under our 1998
stock option plan, 792,144 shares of our common stock issuable under our 1997
stock option plan, 123,827 shares of our common stock reserved for issuance
under our 1997 stock option plan, 291,048 shares of our common stock issued
under our 1997 stock option plan, 444,500 shares of our common stock reserved
for issuance under our employee stock purchase plan, and 100,583 shares of our
common stock issued to consultants and service providers outside of plans. As of
March 31, 2001, there were 105,327 remaining shares available for grant under
the 1997 plan, 66,885 remaining shares available for grant under the 1998 plan,
182,866 remaining shares available for grant under the 1999 plan, and 412,044
remaining shares available for grant under our employee stock purchase plan.
Upon issuance, shares registered under such registration statement will be,
subject to Rule 144 volume limitations applicable to our affiliates, available
for sale in the open market. See also "Dilution."
In October 2000, we adopted, subject to shareholder approval at our
2001 annual meeting, the 2001 stock incentive plan. As of March 31, 2001, there
were 2,961,150 remaining shares available for grant under the 2001 plan. We
intend to file a registration statement on Form S-8 under the Securities Act
covering 4,000,000 shares of common stock reserved for issuance under our
2001 stock incentive plan, including 1,038,850 shares of common stock issuable
upon exercise of options granted under our 2001 stock incentive plan as of March
31, 2001. Once the registration statement covering the shares covered by our
2001 stock incentive plan is declared effective, upon issuance, the shares
registered under such registration statement will be subject to Rule 144 volume
limitations applicable to our affiliates, available for sale in the open market.
See also "Dilution."
Holders of 12,822,353 outstanding shares of common stock, 6,885,715
outstanding shares of 8% convertible preferred stock and warrants to purchase up
to an additional 2,770,922 shares of common stock have certain rights with
respect to registration of their common shares and the common shares underlying
their 8% cumulative convertible preferred shares and warrants.
Since Paul Revere is an underwriter, Rule 144 of the Securities Act of
1933 is not available to Paul Revere to sell its shares.
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COMMON STOCK PURCHASE AGREEMENT
On March 7, 2001, we entered into a common stock purchase agreement
with Paul Revere Capital Partners, Ltd., a British Virgin Islands corporation,
for the future issuance and purchase of shares of our common stock. This common
stock purchase agreement establishes what is sometimes termed an equity line of
credit or an equity drawdown facility.
In general, the drawdown facility operates like this: the investor,
Paul Revere, has committed to provide us up to $24 million as we request it over
a 24 month period, in return for common stock we issue to Paul Revere. Once
every 22 trading days, we may request a draw. The amount we can draw at each
request must be at least $100,000. The maximum amount we can actually draw for
each request is also limited to the greater of $1,000,000 and 20% of the
weighted average price of our common stock for the 22 days prior to the date of
our request multiplied by the total trading volume of our common stock for the
22 days prior to our request. We may request a maximum of 24 draws during the 24
month period. We are under no obligation to issue any shares to Paul Revere or
to request a drawdown during any period.
Each 22-day trading period following a drawdown request is divided into
two 11 trading day settlement periods. After each 11 trading day settlement
period, the final drawdown amount for that settlement period is determined. We
are entitled to receive funds on the 13th day and the 23rd day following the
delivery of a drawdown notice, one day after the end of each settlement period.
The final drawdown amount will be reduced by 1/22 for each day during the 22
trading day period that the volume-weighted average stock price falls below a
threshold set by us. We then use the formulas in the common stock purchase
agreement to determine the number of shares that we will issue to Paul Revere in
return for that money. The formulas for determining the actual drawdown amounts,
the number of shares that we issue to Paul Revere and the price per share paid
by Paul Revere are described in detail beginning on page 115. The aggregate
total of all drawdowns under the equity drawdown facility cannot exceed $24
million.
The per share dollar amount that Paul Revere pays for our common stock
for each drawdown includes a 5% discount to the average daily market price of
our common stock for each day during the 22 day trading period after our
drawdown request, weighted by trading volume during each such trading day. We
will receive the amount of the drawdown less an escrow agent fee of $1,000 and a
placement fee equal to 4% of gross proceeds payable to the placement agent,
Ladenburg Thalmann & Co., which introduced Paul Revere to us. The price per
share that Paul Revere ultimately pays is determined by dividing the final
drawdown amount by the number of shares that we issue to Paul Revere.
We are required to comply with NASD Rule 4350(i)(1)(D) which prevents
us from issuing more than 3,728,750 shares, or 19.9% of our outstanding common
stock on March 7, 2001 unless and until we receive the prior approval of our
stockholders. If we fail to comply with NASD Rule 4350(i)(1)(D), our common
stock could be delisted from Nasdaq. We intend to seek stockholder approval at
or prior to our 2002 annual meeting of stockholders in case we opt to issue
shares of common stock pursuant to the common stock purchase agreement in excess
of such amount. The common stock purchase agreement does not permit us to draw
funds if the issuance of shares of common stock to Paul Revere pursuant
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to the drawdown would exceed 8% of our outstanding common stock on the drawdown
exercise date. In such cases, we will not be permitted to issue the shares
otherwise issuable pursuant to the drawdown and Paul Revere will not be
obligated to purchase those shares.
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THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES
We may request a drawdown by faxing to Paul Revere a drawdown notice,
stating the amount of the drawdown that we wish to exercise and the minimum
threshold price at which we are willing to sell the shares.
AMOUNT OF THE DRAWDOWN
No drawdown can be less than $100,000 or more than the greater of $1
million and 20% of the weighted average price of our common stock for the sixty
days prior to the date of our request multiplied by the total trading volume of
our common stock for the 22 days prior to our request.
The amount of the drawdown request, subject to the limit set forth
above, will be reduced by 1/22 for every day in the 22 trading days after our
drawdown request that:
- - the volume weighted average price is less than the minimum threshold
price we designate;
- - the common stock is suspended for more than three hours, in the
aggregate, or if any trading day is shortened because of a public
holiday; or
- - if sales of previously drawn down shares pursuant to the registration
statement of which this prospectus is a part are suspended by us
because of certain potentially material events for more than three
hours, in the aggregate.
The volume weighted average price of any trading day during a pricing
period will have no effect on the pricing of the shares purchased during that
pricing period.
Thus, with respect to the first bullet above, if our pricing committee
sets a threshold price too high, and if our stock price does not consistently
meet that level during the 22 trading days after our drawdown request, then the
amount that we can draw and the number of shares that we will issue to Paul
Revere will be reduced. On the other hand, if we set a threshold price too low
and our stock price falls significantly but stays above the threshold price,
then we will be able to drawdown the lesser of our drawdown request and the
capped amount, but we will have to issue a greater number of shares to Paul
Revere at the reduced price. If we draw on the equity drawdown facility, then we
cannot make another drawdown request until the following drawdown period.
NUMBER OF SHARES
The 22 trading days immediately following the drawdown notice are used
to determine the number of shares that we will issue in return for the money
provided by Paul Revere, which then allows us to calculate the price per share
that Paul Revere will pay for our shares.
To determine the number of shares of common stock that we can issue in
connection with a drawdown, take 1/22 of the drawdown amount determined by the
formulas above, and
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for each of the 22 trading days immediately following the date on which we give
notice of the drawdown, divide it by 95% of the volume-weighted average daily
trading price of our common stock for that day. The 95% accounts for Paul
Revere's 5% discount. The sum of these 22 daily calculations produces the
maximum number of common shares that we can issue, unless the volume-weighted
average daily price for any given trading day is below the threshold amount, in
which case that day is ignored in the calculation.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of the drawdown amount
and the number of shares we would issue to Paul Revere in connection with that
drawdown based on the assumptions noted in the discussion below.
SAMPLE DRAWDOWN AMOUNT CALCULATION
For purposes of this example, suppose that we provide a drawdown notice
to Paul Revere, and that we set the threshold price at $1.00 per share, below
which we will not sell any shares to Paul Revere during this drawdown period.
Suppose further that the total daily trading volume for the 22 days prior to our
drawdown notice is 1,749,700 shares and that the average of the volume-weighted
average daily prices of our common stock for the 22 days prior to the notice is
$2.9852. Under these hypothetical numbers, the maximum amount of the drawdown is
as follows:
the total trading volume for the 22 days prior to our drawdown
notice, 1,749,700, multiplied by
the average of the volume-weighted average daily prices of our
common stock for the 22 days prior to the drawdown notice, $2.9852,
multiplied by
20%
equals $1,044,641.
The maximum amount we can drawdown under the formula is therefore
capped at $1,044,641, subject to further adjustments if the volume-weighted
average daily price of our common stock for any of the 22 trading days following
the drawdown notice is below the threshold price we set of $1.00. For example,
if the volume-weighted average daily price of our common stock is below $1.00 on
two of those 22 days, the $1,044,641 would be reduced by 1/22 for each of those
days and our drawdown amount would be 20/22 of $1,044,641, or $949,674.
SAMPLE CALCULATION OF NUMBER OF SHARES
Using the same hypothetical numbers set forth above, and assuming that
the volume-weighted average daily price for our common stock is as set forth in
the table below, the
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number of shares to be issued based on any trading day during the drawdown
period can be calculated as follows:
1/22 of the drawdown amount of $1,044,641 divided by
95% of the volume-weighted average daily price.
For example, for the first trading day in the example in the table
below, the calculation is as follows: 1/22 of $1,044,641 is $47,484. Divide
$47,484 by 95% of the volume-weighted average daily price for that day of
$3.6102 per share, to get 13,844 shares. Perform this calculation for each of
the 22 measuring days during the drawdown period, excluding any days on which
the volume-weighted average daily price is below the $1.00 threshold price, and
add the results to determine the number of shares to be issued. In the table
below, there are two days which must be excluded: days 21 and 22.
After excluding the days that are below the threshold price, the amount
of our drawdown in this example would be $949,674, $474,837 of which would be
settled on day 13 for the first settlement period, and $474,837 of which would
be settled on day 23 for the second settlement period. The total number of
shares that we would issue to Paul Revere for this drawdown request would be
328,707 shares, so long as those shares do not exceed 8% of our then outstanding
common stock. Paul Revere would pay $949,660, or $2.889 per share, for these
shares.
VOLUME WEIGHTED DRAWDOWN NUMBER OF SHARES
TRADING DAY AVERAGE PRICE(1) AMOUNT SOLD
1 $3.6102 $47,483.68 13,844
2 3.7355 47,483.68 13,380
3 3.8262 47,483.68 13,063
4 3.7452 47,483.68 13,345
5 3.7001 47,483.68 13,508
6 3.7502 47,483.68 13,328
7 3.7362 47,483.68 13,377
8 3.7388 47,483.68 13,368
9 3.3621 47,483.68 14,866
10 3.2475 47,483.68 15,391
11 2.9190 47,483.68 17,123
12 2.4654 47,483.68 20,273
13 2.5300 47,483.68 19,756
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VOLUME WEIGHTED DRAWDOWN NUMBER OF SHARES
TRADING DAY AVERAGE PRICE(1) AMOUNT SOLD
14 2.8174 47,483.68 17,740
15 2.8543 47,483.68 17,511
16 2.1737 47,483.68 22,944
17 2.4308 47,483.68 20,562
18 2.7425 47,483.68 18,225
19 2.7622 47,483.68 18,095
20 2.6365 47,483.68 18,958
21 0.7500 0 0
22 0.7500 0 0
---------- -------
Total $949,673.6 328,707
- ---------------
(1) The share prices are illustrative only and should not be interpreted as
a forecast of share prices or the expected or historical volatility of
the share prices of our common stock.
(2) Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical drawdown notice.
We would receive the amount of our drawdown $949,674 less a 4% cash fee
paid to the placement agent of $37,987 less a $1,000 escrow fee, for net
proceeds to us of approximately $910,687. The delivery of the requisite number
of shares and payment of the drawdown will take place through an escrow agent,
Epstein, Becker & Green, P.C. of New York. The escrow agent pays the net
proceeds to us, after subtracting its escrow fee, and 4% to Ladenburg Thalmann,
our placement agent, in satisfaction of placement agent fees.
NECESSARY CONDITIONS BEFORE PAUL REVERE IS OBLIGATED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Paul Revere is
obligated to purchase any common shares that we may request from time to time:
- a registration statement for the shares must be declared
effective by the Securities and Exchange Commission and must
remain effective and available as of the drawdown settlement
date for making resales of the common shares purchased by Paul
Revere;
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- trading in our common shares must not have been suspended by
the Securities and Exchange Commission or The Nasdaq National
Market, nor shall minimum prices have been established on
securities whose trades are reported on The Nasdaq National
Market;
- we must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets
to another company, unless the acquiring company has agreed to
honor the common stock purchase agreement; and
- no statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of
the transactions contemplated by the common stock purchase
agreement.
A further condition is that Paul Revere may not purchase more than
19.9% of our common shares issued and outstanding on March 7, 2001, without us
first obtaining approval from our stockholders for such excess issuance.
COSTS OF CLOSING THE TRANSACTION
At the initial closing of the transaction on March 7, 2001, we paid
$35,000 to cover the fees and expenses of Paul Revere's counsel. Ladenburg
Thalmann also received $35,000 to cover its expenses. Ladenburg Thalmann is not
obligated to purchase any of our shares pursuant to the stock purchase
agreement.
TERMINATION OF THE COMMON STOCK PURCHASE AGREEMENT
The equity drawdown facility established by the common stock purchase
agreement will terminate 24 months from the effective date of the registration
statement of which this prospectus forms a part. The facility shall also
terminate if we file for protection from creditors, if our common stock is
delisted from The Nasdaq National Market, and not promptly relisted on Nasdaq,
Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock
Exchange, or us if we complete another private placement and we pay a $75,000
termination fee.
INDEMNIFICATION OF PAUL REVERE
Paul Revere is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the common stock purchase agreement, registration statement and
the prospectus, except as they relate to information supplied by Paul Revere to
us for inclusion in the registration statement and prospectus.
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SELLING STOCKHOLDERS
The following table sets forth as of the date of this prospectus, the
name of the selling stockholder, the number of shares that the selling
stockholder owns as of such date, the number of shares the selling stockholder
may offer for sale from time to time by this prospectus, and the number of
shares to be held by the selling stockholder assuming the sale of all of the
shares that may be offered by this prospectus. Common shares registered for
resale under this prospectus by the selling stockholder, Paul Revere, constitute
133% of our issued and outstanding common shares as of March 31, 2001.
Number of Shares of
Common Stock Common Stock Offered
Beneficially Owned through this Offering Common Stock Held
Name of Selling Stockholder Prior to the Offering (1) After the Offering
- --------------------------- --------------------- -------------------- ------------------
Paul Revere Capital Partners 0 25,000,000 0
(1) The common stock purchase agreement provides that we may not sell more than
3,728,750 shares of common stock, or 19.9% of our issued and outstanding
common stock as of March 7, 2001, the date of the common stock purchase
agreement, unless and until we receive the prior approval of our
stockholders as required pursuant to NASD Rule 4350(i)(1)(D). The number of
shares we are registering is based in part on our good faith estimate of
the maximum number of shares we may issue to Paul Revere under the common
stock purchase agreement. We are under no obligation to issue any shares to
Paul Revere under the common stock purchase agreement. Accordingly, the
number of shares we are registering for issuance under the common stock
purchase agreement may be higher than the number we actually issue under
the common stock purchase agreement.
Paul Revere is engaged in the business of investing in publicly traded
equity securities for its own account. Paul Revere's principal offices are
located at Harbour House, 2nd Floor, Road Town, Tortolla, British Virgin
Islands. Investment decisions for Paul Revere are made by its board of
directors. To our knowledge, Paul Revere does not currently own any of our
securities as of the date of this prospectus. Other than its obligation to
purchase common shares under the common stock purchase agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
There have been no material relationships between Paul Revere and us over the
past three years, other than as contemplated by the common stock purchase
agreement.
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PLAN OF DISTRIBUTION
GENERAL
Paul Revere is offering the common shares for its account as statutory
underwriter, and not for our account. We will not receive any proceeds from the
sale of common shares by Paul Revere. Paul Revere may be offering for sale up to
25,000,000 common shares which it may acquire pursuant to the terms of the stock
purchase agreement more fully described under the section of this prospectus
entitled "The Common Stock Purchase Agreement." Paul Revere is a statutory
underwriter within the meaning of the Securities Act of 1933 in connection with
such sales of common shares and will be acting as an underwriter in its resales
of the common shares under this prospectus. Paul Revere has, prior to any sales,
agreed not to effect any offers or sales of the common shares in any manner
other than as specified in the prospectus and not to purchase or induce others
to purchase common shares in violation of any applicable state and federal
securities laws, rules and regulations and the rules and regulations of The
Nasdaq National Market. We will pay the costs of registering the shares under
this prospectus, including legal fees.
To permit Paul Revere to resell the common shares issued to it under
the stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Paul Revere that we will
prepare and file such amendments and supplements to the registration statement
and the prospectus as may be necessary in accordance with the Securities Act
and the rules and regulations promulgated thereunder, to keep it effective until
the earliest of any of the following dates:
- the date after which all of the common shares held by Paul
Revere or its transferees that are covered by the registration
statement have been sold by Paul Revere or its transferees
pursuant to such registration statement;
- the date after which all of the common shares held by Paul
Revere or its transferees that are covered by the registration
statement may be sold, in the opinion of our counsel, without
restriction under the Securities Act of 1933; or
- the date that is twenty-five (25) months from the effective
date of the registration statement.
Shares of common stock offered through this prospectus may be sold from
time to time by Paul Revere, or by pledgees, donees, transferees or other
successor in interest to Paul Revere. We will supplement this prospectus to
disclose the names of any pledges, donees, transferees, or other successors in
interest that intend to offer common stock through this prospectus.
Sales may be made on The Nasdaq National Market, on the over-the-
counter market or otherwise at prices and at terms then prevailing or at prices
related to the then current market price, or in negotiated private transactions,
or in a combination of these methods. Paul Revere will act independently of us
in making decisions with respect to the form, timing, manner and size of each
sale. We have been informed by Paul Revere that there are no
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existing arrangements between it and any other stockholder, broker, dealer,
underwriter or agent relating to the distribution of this prospectus. Paul
Revere is an underwriter in connection with resales of its shares.
The common shares may be sold in one or more of the following manners:
- a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
- purchases by a broker or dealer for its account under this
prospectus; or
- ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by Paul Revere may
arrange for other brokers or dealers to participate. Except as disclosed in a
supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares
by Paul Revere. Brokers or dealers may receive commissions, discounts or other
concessions from the selling stockholders in amounts to be negotiated
immediately prior to the sale. The compensation to a particular broker-dealer
may be in excess of customary commissions. Profits on any resale of the common
shares as a principal by such broker-dealers and any commissions received by
such broker-dealers may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933. Any broker- dealer participating in such
transactions as agent may receive commissions from Paul Revere, and, if they act
as agent for the purchaser of such common shares, from such purchaser.
Broker-dealers who acquire common shares as principal may thereafter
resell such common shares from time to time in transactions, which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common
shares commissions computed as described above. Brokers or dealers who acquire
common shares as principal and any other participating brokers or dealers may be
deemed to be underwriters in connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. However, since Paul Revere is an underwriter, Rule 144 of the
Securities Act is not available to Paul Revere to sell its shares. We will not
receive any of the proceeds from the sale of these common shares, although we
have paid the expenses of preparing this prospectus and the related registration
statement of which it is a part, and have reimbursed Paul Revere $35,000 for its
legal, administrative and escrow costs.
Paul Revere is subject to the applicable provisions of the Exchange
Act, including without limitation, Rule 10b-5 thereunder. Under applicable rules
and regulations under the
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Exchange Act, any person engaged in a distribution of the common shares may not
simultaneously purchase such securities for a period beginning when such person
becomes a distribution participant and ending upon such person's completion of
participation in a distribution. In addition, in connection with the
transactions in the common shares, Paul Revere will be subject to applicable
provisions of the Exchange Act and the rules and regulations under that Act,
including, without limitation, the rules set forth above. These restrictions may
affect the marketability of the common shares.
Paul Revere will pay all commissions and its own expenses, if any,
associated with the sale of the common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
UNDERWRITING COMPENSATION AND EXPENSES
The underwriting compensation for Paul Revere will depend on the amount
of financing that we are able to obtain under the stock purchase agreement, up
to a maximum of approximately $1,263,000 if we are able to obtain the entire
$24,000,000 in financing. Paul Revere will purchase shares under the stock
purchase agreement at a price equal to 95% of the volume-weighted average daily
price of our common stock reported on The Nasdaq National Market, for each day
in the pricing period with respect to each drawdown request.
In addition, we are obligated to pay Ladenburg Thalmann, as
compensation for its services as Paul Revere's placement agent, a cash fee equal
to 4% of the gross proceeds received from Paul Revere under the stock purchase
agreement for draw downs under the equity line. The placement agent compensation
to Ladenburg Thalmann will depend on the amount of financing that we are able to
obtain under the stock purchase agreement, up to a maximum of approximately
$960,000 if we obtain the entire $24,000,000 in financing.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Paul Revere to enable it to sell the
common stock it purchases under the common stock purchase agreement. In
connection with any such registration, we will have no obligation:
- to assist or cooperate with Paul Revere in the offering or
disposition of such shares;
- to indemnify or hold harmless the holders of any such shares,
other than Paul Revere, or any underwriter designated by such
holders;
- to obtain a commitment from an underwriter relative to the
sale of any such shares; or
- to include such shares within any underwritten offering we do.
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We will assume no obligation or responsibility whatsoever to determine
a method of disposition for such shares or to otherwise include such shares
within the confines of any registered offering other than the registration
statement of which this prospectus is a part.
We will use our best efforts to file, during any period during which we
are required to do so under our registration rights agreement with Paul Revere,
one or more post-effective amendments to the registration statement of which
this prospectus is a part to describe any material information with respect to
the plan of distribution not previously disclosed in this prospectus or any
material change to such information in this prospectus. This obligation may
include, to the extent required under the Securities Act of 1933, that a
supplemental prospectus be filed, disclosing
- the name of any broker-dealers;
- the number of common shares involved;
- the price at which the common shares are to be sold;
- the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, as supplemented; and
- any other facts material to the transaction.
Our registration rights agreement with Paul Revere permits us to
restrict the resale of the shares Paul Revere has purchased from us under the
common stock purchase agreement for a period of time sufficient to permit us to
amend or supplement this prospectus to include material information. If we
restrict Paul Revere during any pricing period or the ten (10) consecutive
business days after a pricing period and our stock price declines during the
restriction period, we are required to pay to Paul Revere cash to compensate
Paul Revere for its inability to sell shares during the restriction period. The
amount we would be required to pay would be the difference between the highest
daily volume weighed average price of the common stock during the restriction
period and the price at which the shares were eventually sold, provided the
sales are made within five (5) business days of the end of the restriction
period.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for LendingTree by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York.
EXPERTS
Our financial statements as of December 31, 1999 and 2000 and for the
three years ended December 31, 1998, 1999 and 2000 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules filed therewith. For further information with respect to LendingTree
and the common stock offered hereby, reference is made to the registration
statement and the exhibits and schedule filed therewith. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement and the
exhibits and schedule filed therewith may be inspected without charge at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330. The Commission maintains a
World Wide website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
Page
Balance Sheets as of December 31, 2000 and March 31, 2001 (unaudited)...........................................F-2
Statements of Operations for the three months ended March 31, 2000 and 2001 (unaudited).........................F-3
Statement of Changes in Shareholders' Equity as of March 31, 2001 (unaudited)...................................F-4
Statements of Cash Flows for the three months ended March 31, 2000 and 2001 (unaudited).........................F-5
Notes to Financial Statements...................................................................................F-6
LendingTree, Inc.
Report of Independent Accountants...............................................................................F-13
Balance Sheets as of December 31, 1999 and 2000.................................................................F-14
Statements of Operations for the years ended December 31, 1998, 1999 and 2000...................................F-15
Statements of Changes in Shareholders' Equity (Deficit) for the years ended
December 31, 1998, 1999 and 2000..............................................................................F-16
Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000...................................F-18
Notes to Financial Statements...................................................................................F-19
F-1
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LendingTree, Inc.
Balance Sheets
December 31, March 31,
2000 2001
------------ -----------
(unaudited)
($ in thousands)
Assets
Current assets:
Cash and cash equivalents $ 2,666 $ 11,379
Short-term investments 4,991 1,467
Restricted short-term investments 5,059 3,634
-------- ---------
Total cash and cash equivalents, short-term
investments and restricted short-term investments 12,716 16,480
Accounts receivable, net of allowance for doubtful
accounts 7,510 7,519
Prepaid expenses and other current assets 1,010 732
-------- ---------
Total current assets 21,236 24,731
Equipment, furniture and leasehold improvements, net 2,866 2,678
Software, net 6,475 5,377
Intangible assets, net 6,204 5,489
Other assets 576 1,366
Investment in other business 600 600
-------- ---------
Total assets $ 37,957 $ 40,241
======== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,778 $ 4,772
Accrued expenses 7,790 7,800
Current portion capital lease obligations 732 724
-------- ---------
Total current liabilities 13,300 13,296
Deposits by subtenants 113 111
Capital lease obligations 848 689
Commitments and contingencies
Mandatorily redeemable securities (Note 4):
Series A convertible preferred stock, $.01 par value, 8%
cumulative, 6,885,715 shares authorized, 0 and 6,757,144
shares issued and outstanding at December 31, 2000 and
March 31, 2001, respectively -- 21,484
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized,
19,653,966 and 19,653,956 shares issued at December 31,
2000 and March 31, 2001, respectively 197 197
Treasury stock (948,971 shares at December 31, 2000 and
916,515 shares at March 31, 2001, at cost) (5,774) (5,774)
Additional paid-in-capital 132,080 123,034
Accumulated deficit (98,149) (108,316)
Deferred compensation (3,056) (2,177)
Notes receivable from officers (1,603) (2,303)
Unrealized gain on available-for-sale securities 1 --
-------- ---------
Total shareholders' equity 23,696 4,661
-------- ---------
Total liabilities and shareholders' equity $ 37,957 $ 40,241
======== =========
The accompanying notes are an integral part of these financial statements
F-2
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LendingTree, Inc.
Statements of Operations
For the Three Months Ended March 31,
2000 2001
-------- --------
(unaudited)
(in thousands, except per share data)
Revenue:
Network $ 4,373 $ 11,244
Lend-X technology 110 1,012
-------- --------
Total revenue 4,483 12,256
-------- --------
Cost of revenue:
Network 1,536 3,036
Lend-X technology 127 450
-------- --------
Total cost of revenue 1,663 3,486
Gross profit:
Network 2,837 8,208
Lend-X technology (17) 562
-------- --------
Total gross profit 2,820 8,770
Operating expenses:
Product development 515 1,085
Marketing and advertising 14,886 8,874
Sales, general and administrative 5,186 9,093
-------- --------
Total operating expenses 20,587 19,052
-------- --------
Loss from operations (17,767) (10,282)
Interest income, net 537 115
-------- --------
Net loss (17,230) (10,167)
-------- --------
Accretion of mandatorily redeemable preferred stock -- (18)
Accrued, undeclared dividends on mandatorily redeemable preferred stock -- (55)
Dividends on convertible preferred stock (2,461) --
-------- --------
Net loss attributable to common shareholders $(19,691) $(10,240)
======== ========
Net loss per common share - basic and diluted $ (2.07) $ (0.52)
======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 9,525 19,838
======== ========
The accompanying notes are an integral part of these financial statements
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LendingTree, Inc.
Statements of Changes in Shareholders' Equity
March 31, 2001
(unaudited)
($ in thousands)
Common Stock
------------------ Additional
Number of Treasury Paid-In Accumulated
Shares Amount Stock Capital Deficit
---------- ------ -------- ---------- -----------
Balance at December 31, 2000 19,653,956 $ 197 $ (5,774) $ 132,080 $ (98,149)
Amortization of deferred compensation
Accrued dividends on Series A convertible preferred stock (55)
Accretion on Series A convertible preferred stock (18)
Officer's note received for Series A convertible preferred stock (Note 4)
Compensation charge on officer note 848
Issuance of warrants in conjunction with credit facility agreements 149
Conversion of equity share rights to Series A preferred stock (Note 4) (9,367)
Deferred compensation reduction for forfeited options (603)
Other comprehensive income:
Unrealized gain, available-for-sale securities
Net loss -- -- -- -- (10,167)
---------- ----- -------- --------- ---------
Balance at March 31, 2001 19,653,956 $ 197 $ (5,774) $ 123,034 $(108,316)
========== ===== ======== ========= =========
Total
Unrealized Deferred Notes Receivable Shareholders'
Gains Compensation from Officers Equity
---------- ------------ ---------------- -------------
Balance at December 31, 2000 $ 1 $ (3,056) $ (1,603) $ 23,696
Amortization of deferred compensation 276 276
Accrued dividends on Series A convertible preferred stock (55)
Accretion on Series A convertible preferred stock (18)
Officer's note received for Series A convertible preferred stock (Note 4) (700) (700)
Compensation charge on officer note 848
Issuance of warrants in conjunction with credit facility agreements 149
Conversion of equity share rights to Series A preferred stock (Note 4) (9,367)
Deferred compensation reduction for forfeited options 603 --
Other comprehensive income:
Unrealized gain, available-for-sale securities (1) (1)
Net loss -- -- -- (10,167)
---- -------- -------- --------
Balance at March 31, 2001 $ -- $ (2,177) $ (2,303) $ 4,661
==== ======== ======== ========
The accompanying notes are an integral part of these financial statements
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LendingTree, Inc.
Statements of Cash Flows
For the Three Months Ended March 31,
------------------------------------
2000 2001
--------- --------
(unaudited)
($ in thousands)
Cash flows used in operating activities:
Net loss $ (17,230) $(10,167)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 113 1,932
Provision for doubtful accounts 138 (14)
Common stock options issued in lieu of
compensation/services rendered 14 --
Amortization of deferred compensation 493 276
Compensation charges on officer note -- 852
Changes in assets and liabilities:
Accounts receivable (1,436) 6
Prepaid expenses and other current assets (220) 278
Other assets (375) (643)
Accounts payable 9,613 (6)
Accrued expenses and long term liabilities 603 213
--------- --------
Net cash used in operating activities (8,287) (7,273)
--------- --------
Cash flows from (used in) investing activities:
Purchase of short-term investments (47,192) (11,468)
Liquidation of short-term investments 45,516 14,991
Purchase of restricted investments (35,517) (3,508)
Liquidation of restricted investments 2,569 4,933
Investment in another business (2,500) --
Purchases of equipment, furniture, leasehold improvements (621) (141)
--------- --------
Net cash (used in) provided by investing activities (37,745) 4,807
--------- --------
Cash flows from financing activities:
Proceeds from sales of common stock and
warrants and exercise of stock options 82 --
Payment of capital lease obligations -- (163)
Proceeds from sale of mandatorily redeemable
Series A convertible preferred stock and warrants,
net of offering costs -- 11,342
Proceeds from initial public offering, net of offering costs 44,904 --
--------- --------
Net cash provided by financing activities 44,986 11,179
--------- --------
Net (decrease) increase in cash and cash equivalents (1,046) 8,713
Cash and cash equivalents, beginning of period 2,419 2,666
--------- --------
Cash and cash equivalents, end of period $ 1,373 $ 11,379
========= ========
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY
LendingTree, Inc. was incorporated in the state of Delaware on June 7, 1996 and
commenced nationwide operations on July 1, 1998. In August 2000, we acquired
certain assets (principally a nationwide network of real estate agents) and
assumed certain liabilities of HomeSpace Services, Inc.
LendingTree offers an Internet-based lending exchange for consumers and lenders.
We attract consumer demand to the exchange through our proprietary website,
www.lendingtree.com, as well as through private-label and co-branded exchanges
enabled by our technology platform, Lend-X(SM). Our website is powered by our
lending exchange technology platform, Lend-X. Through our website we also
provide access to other services related to owning, maintaining or buying and
selling a home, including a network of real estate brokers.
Consumers begin the LendingTree process by completing a simple on-line credit
request (referred to as a "qualification form"). Data from the qualification
form along with a credit score calculated from credit reports retrieved by the
system is compared to the underwriting criteria of more than 100 participating
lenders in the Company's lender network. Consumers can receive multiple loan
offers in response to a single credit request and then compare, review, and
accept the offer that best suits their needs. Lenders can generate new business
that meets their specific underwriting criteria at a substantially lower cost of
acquisition than traditional marketing channels. The Company's marketplace
encompasses most consumer credit categories, including mortgages, home equity
loans, automobile loans, credit cards, and personal loans.
The Company is not a lender. Rather, it is a loan marketplace that seeks to
drive efficiency and cost savings in the consumer credit markets for both
consumers and lenders. The Company earns revenue from lenders that pay fees for
every qualification form that meets their underwriting criteria and is
transmitted to them ("transmission fees") and for loans that they close
("closed-loan fees").
We also license and/or host our Lend-X technology for use by other businesses.
This enables them to create their own customized co-branded or private-label
lending exchanges. Through these Lend-X partnerships, we can earn revenue both
from technology fees related to customization, licensing and hosting the third
party exchange, as well as from transactional fees resulting from the volume
generated through these partners' exchanges.
NOTE 2 - BASIS OF PRESENTATION:
Interim Financial Information
The financial statements of LendingTree include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a fair
presentation of its financial position as of March 31, 2001 and results of
operations and cash flows for the interim periods presented. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the entire year.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnotes required by generally accepted
accounting principles are not included herein. These interim financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 2000 as reported by us in our Form 10-K,
which is filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
F-6
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period. Significant estimates include percentage complete calculations under
long-term contracts, useful lives of long-term assets and the valuation of our
common stock, options and warrants. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In January 2001, the Emerging Issues Task Force (EITF) came to conclusions
regarding the appropriate recognition and measurements by an issuer for a
convertible instrument that is issued in exchange for goods or services or a
combination of goods or services and cash. It was determined that SFAS No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), should be applied first
to determine the fair value of a convertible instrument issued in exchange for
goods or services or a combination of goods or services and cash that is in
equity form or, if debt in form, that can be converted into equity instruments
of the issuer. Then, the requirements of Issue No 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjusted Conversion Ratios" (EITF 98-5), and Issue No. 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments" (EITF 00-27), should be
applied such that the fair values determined pursuant to SFAS 123 are considered
the proceeds from issuing the instrument for purposes of determining whether a
beneficial conversion option exists. The measurement of the intrinsic value, if
any, of the conversion option under EITF 98-5, as interpreted by EITF 00-27, is
then computed by comparing the proceeds received for the instrument to fair
value of the common stock that the counterparty would receive upon exercising
the conversion option. In February 2001, the EITF issued a new consensus on
Issue No. 98-5. The new consensus clarifies that the accounting conversion price
should be used to measure the beneficial conversion features contained in such
instrument. We do not anticipate that the adoption of the provisions of EITF
00-27 will result in any material impact to our financial position or results of
operations.
Reclassifications
Certain comparative period amounts have been reclassified to conform to current
period presentation.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Investments
As of March 31, 2001, we had $3.4 million of investments held in an escrow
account that has been established by us and our advertising agency to maintain
funds set aside for non-cancelable and approved expenditures and services of the
advertising agency. Disbursements from the escrow account can only be made with
signatures from both parties. The fund is used only for advertising costs we
have approved in advance. Disbursements from the escrow account are made no
sooner than one month following the invoice date for the expenditures. We
receive all income earned on funds held in this investment account.
Advertising Expenses
Advertising expenses consist of certain direct expenses, including television,
radio and outdoor advertising campaign costs as well as certain indirect
expenses, such as agency fees. We expense advertising costs as incurred or the
first time the advertising takes place. For the three months ending March 31,
2000 and 2001, advertising expenses were $14.1 million and $8.4 million,
respectively.
F-7
135
Cash Flow Information
For the quarters ended March 31, 2000 and 2001, we paid interest of less than
$.1 million in each quarter and paid no income taxes during those quarters.
A supplemental schedule of non-cash financing activities follows:
Quarter Ended
March 31,
--------------
2000 2001
--------------
Notes receivable issued to officers $1,603 $700
Accretion of mandatorily
redeemable preferred stock $ -- $ 18
Accrued, undeclared dividends on convertible
preferred stock $ -- $ 55
Issuance of warrants in conjunction
with credit facility agreements $ -- $148
NOTE 4 - SIGNIFICANT TRANSACTIONS
Mandatorily Redeemable Series A 8% Convertible Preferred Stock
In March 2001, LendingTree and various investors closed on an arrangement
whereby we issued 3,700,001 shares of Series A 8% Convertible Preferred Stock
for $12.95 million or $3.50 per share. After deducting fees related to this
transaction, this resulted in net proceeds to us totaling approximately $11.3
million. In addition, we issued and sold 200,000 shares to our Chief Executive
Officer, funded by a loan from us, for $700,000. An additional 128,571 shares
of Series A Preferred Stock were issued on April 30, 2001 at $3.50 per share
plus accumulated dividends. As of March 31, 2001, we had recorded approximately
$52,000 in offering costs (related to this April transaction) as an asset on
our balance sheet. When the proceeds from this sale were received, these
offering costs were offset against the preferred stock carrying value. (See
Note 6)
Additionally, in conjunction with the March 2001 closing of the Series A
Preferred Stock, an Equity Rights Certificate issued to an affiliate of Capital
Z on September 29, 2000, for $10 million, was converted into 2,857,143 shares
of Series A Preferred Stock. We recorded the conversion of the Equity Rights
Certificate through a credit to mandatorily redeemable preferred stock of
approximately $9.4 million (net of offering and other related costs) with a
corresponding charge to additional paid-in capital. This amount was determined
as the gross proceeds received net of offering costs (of approximately
$156,000) and the estimated fair value of the warrants to acquire 135,000
shares of common stock, that were issued on September 29, 2000. Using a
valuation model, the estimated fair value of the warrants was determined to be
approximately $.5 million.
The holders of the Series A Preferred Stock are entitled to receive when, and
if declared by our Board of Directors, dividends on the Series A Preferred
Stock equal to eight percent (8%) of the stated value per share (as defined)
payable at our option (i) in cash on each quarterly dividend date or (ii) by an
upward adjustment to the stated value per share on a quarterly dividend payment
date. Dividends on the Series A Preferred Stock are cumulative and accrue daily
from the date of original issuance. Dividends are payable on the last day of
March, June, September and December of each year, commencing on June 30, 2001.
Dividends that are paid by increasing the stated value of the preferred stock
will be recorded based on the fair value of the preferred stock and will
consider the fair value of the underlying common stock into which the
additional value is convertible. As of March 31, 2001, approximately $55,000 of
dividends had accrued on the 6,757,144 total outstanding Series A Preferred
Stock shares. These dividends have increased the carrying value of the Series A
preferred stock and are a component of net
F-8
136
loss attributable to common shareholders. The accrued dividends on the 200,000
shares sold to our Chief Executive Officer have been recorded as non-cash
compensation expense.
Each share of Series A Preferred Stock is convertible, at the option of the
holder, into common stock after the date on which our stockholders approve the
conversion provisions of the Series A Preferred Stock.
Each share of Series A Preferred Stock is convertible into the number of shares
of common stock determined by dividing (a) the current value per share by (b)
the conversion price. The current value per share is the sum of the initial
purchase price ($3.50) per share as adjusted for accumulated dividends. The
conversion price is the initial purchase price, subject to revision from time
to time, as described in the agreement.
The shares of Series A Preferred Stock will be redeemable at the option of
LendingTree for cash commencing on and after March 31, 2004 at a price per
share equal to the product of (a) the "Applicable Percentage" multiplied by the
(b) then current value per share. The Applicable Percentage is initially 120%
and declines to 105% ratably on a daily basis over the two-year period ending
March 21, 2006.
We are required to redeem all Series A Preferred Stock shares remaining
outstanding on the fifth anniversary of the issue date of such shares at a
price of 105% of the then current value per share. We are accreting the value
of the preferred stock up to the redemption value of the shares using the
effective interest method. This is increasing the value of the preferred stock
and the charge is included in the computation of net loss attributable to
common shareholders.
Revolving line of credit
In March 2001, LendingTree and the Union Labor Life Insurance Company, on
behalf of its separate account P, ("ULLICO"), a current shareholder, entered
into an agreement whereby ULLICO provided us with a two year collateralized
credit agreement under which we may borrow funds on a revolving basis, up to
$5.0 million, subject to certain covenants and restrictions.
Under the terms of the ULLICO agreement, we are required to pay interest
quarterly on the average quarterly outstanding balance at a rate of 6% per
annum in cash and additional interest in the form of warrants to purchase our
common stock at a price of $.01 per share. The number of warrants ULLICO is
entitled to receive is based on the average amount outstanding on the revolving
line of credit during the quarter multiplied by an annual interest rate of 14%
divided by $3.99 (subject to certain adjustments as defined in the agreement).
These warrants expire five years after their date of grant. We will record
interest expense based on the estimated fair value of the warrants on the date
that they are issued.
In addition, as a commitment fee, ULLICO received warrants to purchase 40,000
shares of our common stock with an exercise price of $.01 per share. The
estimated fair value of those warrants, approximately $.1 million, calculated
using a valuation model, was recorded as a long-term asset and is being
amortized to interest expense over the life of the revolving line of credit.
Additionally, approximately $.2 million of other related offering costs have
been recorded as a long-term asset and are also being amortized to interest
expense over the life of the revolving line of credit.
The ULLICO line of credit is senior to all indebtedness of LendingTree for
borrowed money. ULLICO has a security interest in substantially all of our
assets (tangible and intangible).
The ULLICO credit agreement contains customary covenants, representations and
warranties. Additionally, we must meet certain financial targets quarterly for
revenue and earnings before interest, taxes, depreciation and amortization
("EBITDA") as defined in the agreement.
As of March 31, 2001 we had not borrowed and there was no balance outstanding
under this line of credit.
Revolving Loan
In March 2001, LendingTree and the Federal Home Loan Mortgage Corporation
("Freddie Mac") (a current customer) entered into a two-year revolving loan
agreement whereby Freddie Mac provided us a two-year credit agreement under
which we may borrow up to $2.5 million on a revolving basis, subject to certain
covenants and restrictions.
F-9
137
Under the terms of the Freddie Mac agreement, we are required to pay interest
quarterly on the average daily outstanding balance at a rate of 10% per annum in
cash and additional interest in the form of warrants to purchase our common
stock at price of $.01 per share. The number of warrants Freddie Mac is entitled
to receive is based on the average amount outstanding on the revolving loan
during the quarter multiplied by an annual interest rate of 10% divided by $3.99
(subject to certain adjustments as defined in the agreement). These warrants
expire five years after their date of grant. We will record interest expense
based on the estimated fair value of the warrants on the date that they are
issued.
In addition, as a commitment fee, Freddie Mac received warrants to purchase
12,500 fully paid up shares of our common stock with an exercise price of $.01
per share. The $35,000 estimated fair value of these warrants, calculated using
a valuation model, was recorded as a long-term asset and is being amortized to
interest expense over the life of the revolving loan. Additionally,
approximately $.1 million of other related offering costs have been recorded as
a long-term asset and are also being amortized to interest expense over the life
of the revolving loan.
This revolving loan agreement contains customary covenants, representations and
warranties. Additionally, we must meet certain financial targets quarterly for
revenue and earnings before interest, taxes, depreciation and amortization
("EBITDA"), as defined in the agreement.
The Freddie Mac revolving loan allows for Freddie Mac to exercise certain rights
to a version of our core software that has been specifically customized for
Freddie Mac (the "PLV"), in the event of default. Upon default, such rights
would become exercisable and entitle Freddie Mac to obtain and maintain, modify,
enhance and market the PLV for its use.
As of March 31, 2001 we had not borrowed and there was no balance outstanding
under this revolving loan.
Equity Line
In March 2001, we entered into a common stock purchase agreement with Paul
Revere Capital Partners, Ltd. ("Paul Revere") for the potential future issuance
and purchase of up to $24 million of our common stock. Under this arrangement,
we, at our sole discretion, may issue and exercise up to twenty-four drawdowns
under which Paul Revere is obligated to purchase a certain number of shares of
our common stock.
If we choose to drawdown the equity line, the minimum amount of any drawdown is
$0.1 million and the maximum amount is the greater of (i) $1 million and (ii)
20% of the average of the daily volume weighted average price of our common
stock for the twenty-two (22) day trading period immediately prior to the date
we request a drawdown multiplied by the total trading volume of the common stock
for such period. Only one drawdown shall be allowed in each period of 22 trading
days beginning on the date of the drawdown notice. Subject to certain
adjustments, the number of shares to be issued on each settlement date shall be
a number of shares equal to the sum of the quotients (for each trading day
within the settlement period) of (x) 1/22nd of the investment amount and (y) the
purchase price on each trading day within the settlement period.
Under this arrangement, the price at which we can sell shares of our common
stock to Paul Revere is equal to 95% of the daily volume weighted average price.
We may set a threshold (lowest) price during any drawdown period at which we
will sell our common stock in accordance with this agreement.
The commitment period of this arrangement is the 24 consecutive month period
immediately following the effective date of this arrangement. The effective date
is defined, as the date when the Registration Statement of LendingTree covering
the shares being subscribed for is declared effective by the Securities and
Exchange Commission. The maximum net proceeds we can receive are $24.0 million
less a 4% placement fee payable to its placement agent. A registration statement
for the shares must be declared effective by the Securities Exchange Commission
before Paul Revere is obligated to purchase any common shares that we may
request from time to time.
As of March 31, 2001 there have been no drawdowns under this equity line.
Other Arrangements
In March 2001, in connection with the sale of the Series A Preferred Stock, we
entered into a promissory note and pledge agreement with our Chief Executive
Officer ("CEO") to provide him with a $700,000 loan to acquire 200,000 shares of
the Series A Preferred Stock. The loan is to be repaid in two installments of
F-10
138
$35,000 due on January 31, 2002 and 2003,
F-11
139
respectively, and three installments of $210,000, plus interest due on January
31, 2004, 2005 and 2006, respectively. Interest on the outstanding balance
accrues at the applicable Federal Rate. To collateralize these loans, the CEO
and LendingTree have entered into a pledge agreement. This note and pledge
agreement amends and restates existing notes and pledge agreements that the CEO
and LendingTree have entered into with respect to $1.7 million in loans for
option exercises. The new pledge agreement covers all three loans totaling $2.4
million. Under the pledge agreement, the CEO has granted us a security interest
in all of the CEO's shares of common and preferred stock that he beneficially
owns, other than 88,900 shares held through a irrevocable family trust. The CEO
is precluded from selling or transferring securities or options or warrants to
purchase our securities without our prior consent. The pledge agreement
specifies that as long as the CEO is employed by LendingTree, our sole
recourse for satisfaction of the obligations will be our rights to the CEO's
shares of our common and preferred stock. As a result of these agreements, we
will report periodic changes in the fair value of the underlying securities,
including accretion of the underlying preferred shares to their redemption
value, as non-cash compensation charges. As of March 31, 2001, total non-cash
compensation charges related to changes in fair value of the common stock and
preferred stock pledged as collateral were approximately $.8 million.
Option Grants
In January 2000, we granted stock options to purchase 769,225 shares of common
stock to employees at an exercise price of $9.28 per share. Based on the
difference between the strike price of these options and the fair market value
at the date of grant ($11.00), we recorded a deferred compensation charge and
have been amortizing it to expense over the options' four year vesting period.
In the first quarter of 2001, we adjusted the balance of deferred compensation
to reflect forfeited options. The remaining deferred compensation balance at
March 31, 2001 is approximately $2.0 million. For the three months ended March
31, 2000 and 2001, we recorded compensation expenses of $.3 million and $.2
million, respectively, related to these options.
NOTE 5 -- NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing net loss
attributable to common shareholders by the weighted average number of common
shares outstanding. Common stock equivalents, including stock options and
warrants, are excluded from the calculation, as their effect would be
anti-dilutive. The calculation of diluted loss per share for the three months
ended March 31, 2001 excludes options and warrants to purchase approximately .8
million shares of common stock as their impact would be anti-dilutive.
NOTE 6 -- SUBSEQUENT EVENTS
On April 30, 2001, we issued an additional 128,571 shares of Series A Preferred
Stock for approximately $.45 million. As of April 30, 2001, there are
6,885,715 shares of Series A Preferred Stock outstanding. The offering costs
related to these shares will be recorded as an offset to the preferred stock
carrying value.
On April 24, 2001, one of the three officer loans, issued for the purpose of
exercising non-qualified stock options in February 2000, was repaid. We
received approximately $.1 million for payment in full of the outstanding loan
balance and interest.
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140
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of LendingTree, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of LendingTree,
Inc. at December 31, 1999 and 2000, and the results of its operations and its
cash flows for the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Charlotte, North Carolina
February 2, 2001, except for the information presented in Note 14 for which the
date is March 20, 2001
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141
DECEMBER 31,
1999 2000
-------- ---------
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,419 $ 2,666
Short-term investments 27,053 4,991
Restricted short-term investments -- 5,059
-------- ---------
Total cash and cash equivalents, short-term investments and
restricted short-term investments 29,472 12,716
Accounts receivable, net of allowance for
doubtful accounts 2,037 7,510
Prepaid expenses and other current assets 995 1,010
-------- ---------
Total current assets 32,504 21,236
Equipment, furniture and leasehold improvements, net 739 2,866
Software, net 347 6,475
Intangible assets, net -- 6,204
Other assets 177 576
Investment in other business -- 600
-------- ---------
Total assets $ 33,767 $ 37,957
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,530 $ 4,778
Accrued expenses 2,500 7,790
Current portion capital lease obligations -- 732
-------- ---------
Total current liabilities 6,030 13,300
Deposits by subtenants -- 113
Capital lease obligations -- 848
Commitments and contingencies (Note 8)
Shareholders' equity:
Series A Convertible Preferred stock, $.01 par value, 8%
cumulative, 3,049,031 shares authorized, 1,754,484 shares and none
issued and outstanding at December 31, 1999 and 2000,
respectively 9,884 --
Series B and C Convertible Preferred stock, $.01 par value, 911,450
and 268,074 shares authorized, respectively, none issued -- --
Series D Convertible Preferred stock, $.01 par value, 8%
cumulative, 6,238,639 shares authorized; 6,238,172 shares and none
issued and outstanding at December 31, 1999 and 2000,
respectively 49,234 --
Common stock, $.01 par value, 100,000,000 shares authorized,
4,070,655 and 19,653,956 shares issued at December 31,
1999 and 2000, respectively 41 197
Treasury stock (948,971 shares at December 31, 1999 and
916,515 shares at December 31, 2000, at cost) (5,978) (5,774)
Additional paid-in-capital 9,423 132,080
Accumulated deficit (32,146) (98,149)
Deferred compensation (2,767) (3,056)
Notes receivable from officers for option exercises -- (1,603)
Unrealized gain on available-for-sale securities 46 1
-------- ---------
Total shareholders' equity 27,737 23,696
-------- ---------
Total liabilities and shareholders' equity $ 33,767 $ 37,957
======== =========
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1998 1999 2000
------- -------- --------
($ in thousands, except per share data)
Revenue:
Network $ 273 $ 6,112 $ 27,465
Lend-X technology 136 852 3,348
------- -------- --------
Total revenue 409 6,964 30,813
------- -------- --------
Cost of revenue:
Network 235 2,209 7,568
Lend-X technology 149 312 1,804
------- -------- --------
Total cost of revenue 384 2,521 9,372
Gross profit:
Network 38 3,903 19,897
Lend-X technology (13) 540 1,544
------- -------- --------
Total gross profit 25 4,443 21,441
Operating expenses:
Product development 1,051 1,109 2,677
Marketing and advertising 2,494 18,528 56,599
Sales, general and administrative 2,955 10,056 28,268
------- -------- --------
Total operating expenses 6,500 29,693 87,544
------- -------- --------
Loss from operations (6,475) (25,250) (66,103)
Miscellaneous expense, net -- -- (145)
Loss on impaired investment (1,900)
Interest income, net 41 505 2,145
------- -------- --------
Net loss (6,434) (24,745) (66,003)
------- -------- --------
Accretion of mandatorily redeemable preferred stock -- (131) --
Dividends issued to preferred shareholders on conversion of
preferred stock warrants to common stock warrants (525)
Accumulated, undeclared dividends on convertible preferred stock (24) (506) --
Dividends on convertible preferred stock -- (1,654) (2,461)
------- -------- --------
Net loss attributable to common shareholders $(6,458) $(27,561) $(68,464)
======= ======== ========
Net loss per common share - basic and diluted $ (1.88) $ (7.74) $ (4.15)
======= ======== ========
Weighted average shares used in basic and diluted net
loss per common share calculation 3,435 3,560 16,512
======= ======== ========
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
------------------------ ---------------------
NUMBER OF NUMBER OF TREASURY
SHARES AMOUNT SHARES AMOUNT STOCK
--------- ------- --------- ------ -------
Balance at December 31, 1997 -- $ -- 2,654,373 $27 $ --
Sale of common stock 1,041,401 10
Issuance of warrants in conjunction
with sale of Series A Convertible
Preferred stock and line of credit
Issuance of common stock in lieu
of compensation/services offered 54,398 1
Issuance of stock options
Dividends on mandatorily redeemable
preferred stock
Net loss
--------- ------- --------- --- -------
Balance at December 31, 1998 -- -- 3,750,172 38 --
Exercise of common stock options 274,419 3
Issuance of common stock in lieu
of compensation 46,064
Sale of Series D Convertible Preferred
stock, net 6,024,096 47,457
Issuance of warrants in conjunction
with sale of Series A Convertible
Preferred stock
Conversion of preferred stock from
mandatorily redeemable 1,666,667 9,378
Conversion of preferred stock warrants
to common stock warrants
Conversion of convertible notes into
Series D Convertible Preferred stock 214,076 1,777
Repurchase of common stock (5,978)
Issuance of stock options in conjunction
with consulting and severance agreements
Issuance of stock options to employees at
or below fair market value
Amortization of deferred compensation
Accretion of mandatorily redeemable
preferred stock
In-kind dividends on Series A convertible
preferred stock 87,817 506
Other comprehensive income:
Unrealized gain, available-for-sale securities
Net loss
Total comprehensive loss
--------- ------- --------- --- -------
Balance at December 31, 1999 7,992,656 $59,118 4,070,655 $41 $(5,978)
TOTAL
SHARE-
ADDITIONAL ACCUM- DEFERRED RECEIVABLES HOLDER'S
PAID-IN ULATED UNREALIZED COMP- ON OPTION EQUITY
CAPITAL DEFICIT GAINS (LOSSES) ENSATION EXERCISES (DEFICIT)
---------- -------- -------------- -------- ----------- ---------
Balance at December 31, 1997 $1,293 $ (967) $-- $ -- $-- $ 353
Sale of common stock 3,918 3,928
Issuance of warrants in conjunction
with sale of Series A Convertible
Preferred stock and line of credit 56 56
Issuance of common stock in lieu
of compensation/services offered 210 211
Issuance of stock options 215 215
Dividends on mandatorily redeemable
preferred stock (24) (24)
Net loss (6,434) (6,434)
------ -------- --- ------- --- --------
Balance at December 31, 1998 5,668 (7,401) -- -- (1,695)
Exercise of common stock options 494 497
Issuance of common stock in lieu
of compensation 310 310
Sale of Series D Convertible Preferred
stock, net 47,457
Issuance of warrants in conjunction
with sale of Series A Convertible
Preferred stock 25 25
Conversion of preferred stock from
mandatorily redeemable 9,378
Conversion of preferred stock warrants
to common stock warrants 303 303
Conversion of convertible notes into
Series D Convertible Preferred stock 1,777
Repurchase of common stock (5,978)
Issuance of stock options in conjunction
with consulting and severance agreements 684 (335) 349
Issuance of stock options to employees at
or below fair market value 2,576 (2,576) --
Amortization of deferred compensation 144 144
Accretion of mandatorily redeemable
preferred stock (131) (131)
In-kind dividends on Series A convertible
preferred stock (506) --
Other comprehensive income:
Unrealized gain, available-for-sale securities 46
Net loss (24,745)
Total comprehensive loss (24,699)
------ -------- --- ------- --- --------
Balance at December 31, 1999 $9,423 $(32,146) $46 $(2,767) $-- $ 27,737
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) - CONTINUED
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
----------------------- ---------------------- ADDITIONAL
NUMBER OF NUMBER OF TREASURY PAID-IN
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
---------- -------- ---------- ------- -------- ----------
Balance at December 31, 1999 7,992,656 $ 59,118 4,070,655 $ 41 $ (5,978) $ 9,423
Issuance of stock options to employees
below fair market value 1,320
Issuance of warrants to business partner for
services provided 1,279
Amortization of deferred compensation
Initial public offering of common stock 4,197,500 42 44,770
In-kind dividends on Series A and D preferred
stock 269,996 4,115 (4,115)
Conversion of Series A and D preferred
stock to common stock (8,262,652) (63,233) 10,493,503 105 63,128
Exercise of common stock options 253,221 3 1,846
Notes receivable from officers for option exercises
Issuance of common stock in connection with
business acquisition 639,077 6 4,733
Issuance of equity rights certificate 9,844
Reissuance of treasury shares for employee stock
purchase plan participants 204 (148)
Other comprehensive income:
Unrealized gain, available-for-sale securities
Net loss
Total comprehensive loss -- -- -- -- -- --
---------- -------- ---------- ------- -------- --------
Balance at December 31, 2000 -- $ -- 19,653,956 $ 197 $ (5,774) $132,080
========== ======== ========== ======= ======== ========
NOTE TOTAL SHARE-
ACCUM- DEFERRED RECEIVABLES HOLDERS'
ULATED UNREALIZED COMP- ON OPTION EQUITY
DEFICIT GAINS (LOSSES) ENSATION EXERCISES (DEFICIT)
-------- -------------- -------- ----------- ------------
Balance at December 31, 1999 $(32,146) $ 46 $(2,767) $ -- $ 27,737
Issuance of stock options to employees
below fair market value (1,320) --
Issuance of warrants to business partner for
services provided (1,279) --
Amortization of deferred compensation 2,310 2,310
Initial public offering of common stock 44,812
In-kind dividends on Series A and D preferred
stock --
Conversion of Series A and D preferred --
stock to common stock --
Exercise of common stock options 1,849
Notes receivable from officers for option exercises (1,603) (1,603)
Issuance of common stock in connection with
business acquisition 4,739
Issuance of equity rights certificate 9,844
Reissuance of treasury shares for employee stock
purchase plan participants 56
Other comprehensive income: --
Unrealized gain, available-for-sale securities (45)
Net loss (66,003)
Total comprehensive loss -- -- -- -- (66,048)
-------- ---- ------- ------- --------
Balance at December 31, 2000 $(98,149) $ 1 $(3,056) $(1,603) $ 23,696
======== ==== ======= ======= ========
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
--------- --------- ---------
($ in thousands)
Cash flows used in operating activities:
Net loss $ (6,434) $ (24,745) $ (66,003)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 46 249 3,232
Loss on the impairment of investment 1,900
Loss on the disposal of fixed assets -- -- 148
Provision for doubtful accounts 8 129 945
Common stock issued in lieu of compensation/
services rendered 210 310 --
Common stock options issued in lieu of
compensation/services rendered 223 362 --
Amortization of deferred compensation -- 144 2,310
Issuance of Series D Convertible Preferred
stock in lieu of interest -- 27 --
Changes in assets and liabilities:
Accounts receivable (251) (1,911) (6,402)
Prepaid expenses and other current assets (87) (918) (15)
Other assets (58) (117) (398)
Accounts payable 665 2,843 1,126
Accrued expenses and long term liabilities 15 2,436 3,963
--------- --------- ---------
Net cash used in operating activities (5,663) (21,191) (59,194)
--------- --------- ---------
Cash flows from (used in) investing activities:
Purchase of short-term investments -- (27,007) (134,207)
Liquidation of short-term investments -- -- 156,221
Purchase of restricted investments -- -- (62,415)
Liquidation of restricted investments -- -- 57,358
Acquisition of certain assets of another business -- -- (6,200)
Investment in another business -- -- (2,500)
Investments in software (5) (415) (2,326)
Purchases of equipment, furniture, leasehold improvements (226) (710) (1,105)
--------- --------- ---------
Net cash from (used in) investing activities (231) (28,132) 4,826
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sales of common stock and
warrants and exercise of stock options 3,921 497 246
Payment of capital lease obligations -- -- (287)
Repurchase of common stock -- (5,978) --
Proceeds from issuance of convertible notes -- 1,750 --
Proceeds from sale of mandatorily redeemable
Series A Convertible Preferred stock and warrants,
net of offering costs 4,656 4,931 --
Proceeds from initial public offering, net of offering costs -- -- 44,812
Proceeds from the sale of an equity rights certificate, -- --
net of offering costs 9,844
Proceeds from sale of Series D Convertible
Preferred stock, net of offering costs -- 47,457 --
--------- --------- ---------
Net cash provided by financing activities 8,577 48,657 54,615
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,683 (666) 247
Cash and cash equivalents, beginning of period 402 3,085 2,419
--------- --------- ---------
Cash and cash equivalents, end of period $ 3,085 $ 2,419 $ 2,666
========= ========= =========
The accompanying notes are an integral part of these financial statements
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LENDINGTREE, INC.
NOTES TO FINANCIAL STATEMENTS
($ PRESENTED IN TABLES HEREIN ARE IN THOUSANDS
ALL OTHER AMOUNTS ARE AS SHOWN)
1. THE COMPANY
LendingTree, Inc. (the "Company" or "LendingTree") was incorporated in
the state of Delaware on June 7, 1996 and commenced nationwide operations on
July 1, 1998. In August 2000, the Company acquired certain assets (principally a
nationwide network of real estate agents) and assumed certain liabilities of
HomeSpace Services, Inc.
LendingTree offers an Internet-based loan marketplace for consumers and
lenders. The Company attracts consumer demand to the marketplace through its
proprietary website www.lendingtree.com as well as through private-label and
co-branded marketplaces enabled by its technology platform, Lend-X(SM). In
addition, through its website the Company provides access to other services
related to owning, maintaining or buying and selling a home, including a network
of real estate brokers.
Consumers begin the LendingTree process by completing a simple on-line
credit request (referred to as a "qualification form"). Data from the
qualification form along with a credit score calculated from credit reports
retrieved by the system is compared to the underwriting criteria of more than
100 participating lenders in the Company's lender network. Consumers can receive
multiple loan offers in response to a single credit request and then compare,
review, and accept the offer that best suits their needs. Lenders can generate
new business that meets their specific underwriting criteria at a substantially
lower cost of acquisition than traditional marketing channels. The Company's
marketplace encompasses most consumer credit categories, including mortgages,
home equity loans, automobile loans, credit cards, and personal loans.
The Company is not a lender. Rather, it is a loan marketplace that
seeks to drive efficiency and cost savings in the consumer credit markets for
both consumers and lenders. The Company earns revenue from lenders that pay fees
for every qualification form that meets their underwriting criteria and is
transmitted to them ("transmission fees") and for loans that they close
("closed-loan fees"). The Company's website is powered by its loan marketplace
technology platform, Lend-X.
The Company also licenses access to and/or hosts its Lend-X technology
for use by other businesses, enabling them to create their own customized
co-branded or private-label lending exchanges. Through these Lend-X
partnerships, the Company can earn revenue both from technology fees related to
customization, licensing and hosting the third party exchange, as well as from
network sources (transmission fees and closed-loan fees).
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2. BUSINESS CONDITIONS AND LIQUIDITY CONSIDERATIONS
During 2000, the Company required $59.2 million of cash to fund
operations; such amounts were expended primarily for advertising, expansion of
the infrastructure and support personnel, and working capital needs. Since
inception, the Company has incurred significant losses and had an accumulated
deficit of $98.1 million as of December 31, 2000. These uses of cash, losses and
accumulated deficit have resulted from the significant costs incurred for
advertising and marketing efforts to build and maintain brand awareness.
Additionally, significant costs have been incurred for employment expenses
related to the establishing relationships with lenders, real estate brokers and
other business partners and the development of Lend-X as well as for other
general corporate purposes. Because the Company plans to continue to invest in
these items, the Company anticipates that it will continue to incur losses and
experience negative cash flow from operations throughout 2001. As of December
31, 2000, the Company had approximately $12.7 million in cash, cash equivalents
and short-term investments. Of this amount, $5.1 million was restricted under an
escrow arrangement with the Company's advertising agency.
As more fully described in note 14, subsequent to 2000, the Company
signed definitive documents for the following financing transactions:
- - The sale of 3.8 million Series A 8% Convertible Preferred shares of
stock for $ 13.4 million (excluding 200,000 shares sold to the
Company's Chief Executive Officer, funded by a loan from the Company
for $700,000 and excluding approximately 2.9 million shares of Series A
Convertible Preferred issued to Capital Z in exchange for the Equity
Rights Certificate issued to them on September 29, 2000, for which the
Company received $10 million).
- - A two year, $5 million secured revolving line of credit with the Union
Labor Life Insurance Company ("ULLICO"). Amounts outstanding under the
ULLICO line of credit bear interest at a rate of 6% payable in cash and
an additional amount payable in warrants ("Interest Warrants") as more
fully described in the note 14.
- - A 24-month facility to provide a $2.5 million revolving loan with the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Amounts
outstanding under the Freddie Mac facility bear interest at a rate of
10% payable in cash and an additional amount payable in warrants
("Interest Warrants") as more fully described in the note 14.
- - A $24 million equity line whereby the Company may, at its discretion
sell shares of its common stock to an investor from time-to-time
subject maximum sale limitations in any one monthly period, for up to a
total of $24 million. With respect to the shares to be sold under this
arrangement, in addition to other requirements, the Company must file a
registration statement and have it declared effective by the Securities
and Exchange Commission "SEC" before it can sell such shares to the
investor in this arrangement.
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While the number of Interest Warrants to be issued under the $5 million
revolving line of credit and the $2.5 million revolving loan will be determined
as described in the notes to the Company's financial statements, the actual
amount of interest expense will be based on the fair value of these securities
on the date that they are issued. Management believes that the existing cash and
cash equivalents, the proceeds from the Series A Preferred Stock sales noted
above, the availability of the revolving credit facilities noted above and cash
generated from operations will be sufficient to fund the Company's operating and
capital needs through 2001.
Although the Company has historically experienced significant revenue
growth and plans to reduce negative cash flows from operations, the operating
results for future periods are subject to numerous uncertainties. There can be
no assurance that revenue growth will continue or that the Company will be able
to achieve or sustain profitability. Hence, the Company's liquidity could be
significantly affected. However, if revenue does not grow as anticipated or if
the Company is unable to successfully raise sufficient additional funds through
the $24 million equity line referred to above, or in another manner, management
would reduce discretionary operating expenditures, including advertising and
marketing and certain administrative and overhead costs. While the Company
believes that available funds will be sufficient to fund its operations and
capital expenditures through 2001, after which management believes the Company
will become cash flow positive, failure to generate sufficient revenue or to
reduce costs as necessary could have a material adverse effect on the Company's
ability to continue as a going concern and achieve its business objectives.
Additional financing may not be available when needed or, if available,
such financing may not be on terms favorable to the Company. If additional funds
are raised through the issuance of equity securities, the Company's shareholders
may experience significant dilution.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include percentage complete under
long-term contracts and the valuation of the Company's common stock, options and
warrants. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
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SHORT-TERM INVESTMENTS
The aggregate fair values of the Company's short-term investments (all
available-for-sale investments in short-term corporate commercial paper) as of
December 31, 1999 and 2000 were as follows:
[GRAPHIC OMITTED]
The specific identification cost basis is used to determine realized
gains on the Company's available-for-sale securities. The unrealized holding
gains of $46,000 and $1,000 are included as a separate component of
shareholders' equity for the years ended December 31, 1999 and 2000. Investments
in available-for-sale securities are carried at fair value.
RESTRICTED INVESTMENTS
As of December 31, 2000, the Company had $5.1 million of investments
held in an escrow account. This account was established by the Company and its
advertising agency to maintain funds set aside by the Company for non-cancelable
and approved expenditures and services of the advertising agency. Disbursements
from the escrow account can only be made with signatures from both the Company
and the advertising agency. The fund is used only for advertising costs the
Company has approved in advance. Disbursements from the escrow account are made
no sooner than one month following the invoice date for the expenditures. The
Company receives all income earned on funds held in this escrow account.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1999 and 2000 approximated their fair value
due to the short-term
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150
nature of these items. The carrying value of the Company's short-term
investments at December 31, 2000 approximated their fair values.
EQUIPMENT, FURNITURE, LEASEHOLD IMPROVEMENTS AND INTANGIBLE ASSETS
The Company's equipment and furniture are stated at cost less
accumulated depreciation and are being depreciated using the straight-line
method over their estimated useful lives, which range from one to five years.
Leasehold improvements are stated at cost and are depreciated over the shorter
of the lease period or the estimated useful life of the improvement. Ordinary
maintenance and repair costs are expensed as incurred.
Intangible assets consist of identifiable intangible assets and are
amortized on a straight- line basis over periods ranging from 2.75 years to 3.75
years. See notes 5 and 13.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its property and equipment
and intangible assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets or the business to which such assets relate. No impairments were required
to be recognized during the years ended December 31, 1998, 1999 or 2000.
INCOME TAXES
The Company accounts for income taxes using the liability method
whereby deferred tax assets or liabilities are recognized for the temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactment of changes in tax law or rates. If it is "more likely than not"
that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recorded.
REVENUE RECOGNITION
Network:
The Company's network revenue principally represents transmission fees
and closed-loan fees paid by lenders that received a transmitted credit request
or closed a loan for a consumer that originated through the Company's website,
www.lendingtree.com. Additionally, the Company earns revenue through a network
of real estate brokers who compensate the Company for real
F-23
151
estate transactions that generally originate from a consumer on the Company's or
a partner's website. Transmission fees are recognized at the time qualification
forms are transmitted, while closed-loan fees are recognized at the time the
lender reports the activity to the Company, which may be up to four months after
the qualification form is transmitted. Revenue earned through the Company's
network of real estate brokers is recognized upon notification by the broker
that a real estate transaction has closed.
Additional network revenue is derived from credit requests that are
received through private-label or co-branded websites of other businesses
("Lend-X partners") that are enabled by the Company's Lend-X technology. If
these qualification forms are successfully transmitted to or fulfilled by one of
the Company's network lenders, the Company earns transmission fees and/or
closed-loan fees, if applicable, from that lender, which are recognized as
described above. In arrangements where the Company brokers loans to a specific
lender for a Lend-X partner, the Company receives a fee at the time the loan
closes.
Technology:
Lend-X technology revenue is related primarily to hosting, licensing
access to and modifying the Company's proprietary software for use by lenders
and other third parties.
When the fees for implementation, consulting and other services are
bundled with hosting services fees, they are unbundled using the Company's
objective evidence of the fair value of the multiple elements represented by the
Company's customary pricing for each element in separate transactions. If such
evidence of fair value for each element of the arrangement does not exist, then,
in accordance with SAB No. 101, the revenue for the entire arrangement is
deferred and recognized over the longer of the term of the related contract or
the expected service period.
Revenue from implementation, customization and training services is
recognized as the services are performed. Maintenance and hosting service
revenues are recognized ratably over the longer of the term of the underlying
agreement or the expected service period. Maintenance includes technical support
and updates and upgrades to the Company's software. The Company's hosting
arrangements do not permit customers to take possession of the Company's
software.
When the contractual arrangement requires the Company to provide
services for significant implementation, customization or modification of the
software or when the customer considers these services essential to the
functionality of the software product, both the software license revenue and
consulting services revenue are recognized in accordance with the provisions of
Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." The Company recognizes
revenue from these arrangements using the percentage-of-completion method
primarily based on labor hour inputs. Therefore, during the implementation
period, both product license and consulting services revenue are recognized as
work progresses.
The Company recognizes revenue from sales of software licenses upon
persuasive evidence of an arrangement (as provided by agreements or contracts
executed by both parties),
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152
delivery of the software and determination that collection of a fixed or
determinable license fee is considered probable.
Maintenance and support revenue is recognized ratably over the period
the services are provided.
Losses, if any, are recognized when identified.
COST OF REVENUE
Network:
The Company's network cost of revenue includes salary and benefit costs
of the borrower relations and implementation groups, credit agency scoring fees,
consumer promotion costs, and the costs of website hosting hardware. Network
cost of revenue also includes amounts the Company pays its Lend-X partners.
Technology:
Cost of revenue related to Lend-X technology includes direct costs of
modifying the Company's proprietary software for licensing to lenders and the
cost of servers related to hosting the systems for these licensees. When revenue
has been deferred for hosting contracts, the Company defers the related direct
costs incurred and recognizes these costs pro rata with the related revenue.
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expenses consist primarily of costs of
advertising, trade shows, fees paid to affiliates, and certain indirect costs.
All costs of advertising the services and products offered by the Company are
expensed as incurred. Advertising expense totaled approximately $1.8 million,
$17.1 million and $50.7 million in the years ended December 31, 1998, 1999 and
2000, respectively.
SOFTWARE DEVELOPMENT COSTS
Software development costs primarily include expenses incurred by the
Company to develop its proprietary software and to enhance and upgrade its
website.
The Company accounts for the software development costs associated with
software to be sold or marketed in accordance with Statement of Financial
Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," which requires software development costs
to be capitalized beginning when a product's
F-25
153
technological feasibility is established and ending when a product is available
for general release. For 2000, the Company capitalized development costs related
to software to be sold or marketed of approximately $.1 million.
The Company accounts for the software development costs associated with
internal use software in accordance with Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which provides guidance regarding when software
developed or obtained for internal use should be capitalized. SOP 98-1 requires
that certain costs incurred during the application development stage be
capitalized, while costs incurred during the preliminary project stage and
post-implementation/operation stage should be expensed as incurred.
For 2000, the Company capitalized internal use software development
costs of approximately $2.2 million, respectively, (including compensation
costs, purchased software and consulting costs related to internal use software
projects). Additionally, the Company has recorded capitalized software costs for
its purchase of technology through an acquisition. Prior to the year ended
December 31, 2000, capitalized software costs included only software purchased
from third parties.
Capitalized software development costs are amortized over the estimated
life of the related application, which range from 1 to 3 years.
STOCK-BASED COMPENSATION
The Company accounts for the effect of its stock-based compensation
plans for employees under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") using the optional
intrinsic value method. The intrinsic value method results in compensation cost
equal to the excess of the fair value of the stock over the exercise or purchase
price at the date of award. Such compensation costs are recorded over the
vesting period of the respective option and presented in the statement of
operations as a cost of revenue or operating expense, consistent with where the
options' compensation is recorded. The Company also discloses the pro forma
income statement effect of its stock-based compensation plans as if the Company
had adopted the fair value approach. The fair value approach results in
compensation cost using an option-pricing model that takes into account the fair
value at the grant date, the exercise price, the expected life of the award, the
expected dividends, and the risk- free interest rate expected over the life of
the award.
The Company accounts for the effect of its stock-based compensation for
non-employees under SFAS No. 123, using the fair value approach.
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154
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash equivalents are invested in repurchase agreements on an
overnight basis with high credit quality financial institutions. Short-term
investments are comprised of commercial paper from a diverse group of high
credit quality issuers.
For the years ended December 31, 1999 and 2000, no lender exceeded 10%
of the Company's revenue. For the year ended December 31, 1998, four lenders
comprised 27%, 13%, 12%, and 11% of the Company's total revenue. All of the
Company's revenues are from transactions originating in the United States.
In 2000, one customer accounted for 71% of the Company's Lend-X
technology revenue. In 1999, two customers accounted for 49% and 45% of the
Company's Lend-X technology revenue. In 1998, one customer accounted for 83% of
the Company's Lend-X technology revenue.
As of December 31, 2000 one customer accounted for approximately 22% of
the accounts receivable balance. At December 31, 1999 no customer exceeded 10%
of the Company's accounts receivable balance. As of December 31, 1998, two
lenders comprised 41% and 13% of the Company's accounts receivable balance.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of lenders comprising the Company's customer base.
NET LOSS PER COMMON SHARE
The Company computes net loss per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS No. 128") Under the provisions of SFAS No. 128 basic net loss per common
share is computed by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding. Diluted net loss
available to common shareholders is computed by dividing net loss by the
weighted average number of common shares and dilutive potential common shares
then outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
convertible preferred stock.
The calculation of net loss per common share for years ended December
31, 1998, 1999 and 2000 does not include .7 million, 5.2 million and 1.7
million, respectively, of weighted average potential common shares as their
impact would be antidilutive.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related
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Information," ("SFAS No. 131"). This statement establishes standards for the way
companies report information about business segments in annual and interim
financial statements.
Management has organized the Company's operations into three operating
segments: the LendingTree network, Lend-X Technology and Realty Services.
However, for purposes of reporting, the LendingTree network and the Realty
Services operating segments are aggregated into one reportable segment based on
a consistent type of customer, methods used to reach the consumer and the
relative small size of the Realty Services operating segment in comparison to
the total business.
The network is primarily focused on enabling consumers to receive
multiple loan offers in response to a single, on-line, credit request and then
compare, review and accept the offer that best suits their needs. The network is
also focused on providing lenders the ability to generate new business that
meets their specific underwriting criteria. Consumers can reach the network
through the Company's website, www.lendingtree.com or through a variety of
private-label or co-branded websites sponsored by the Company's Lend-X
partners. Once on the network, consumers can apply for a variety of loan
products and in certain cases request connection with a real-estate broker.
The Lend-X Technology segment is focused on enabling other businesses
with the technology they need to create their own single or multi-branded online
loan centers.
Management regularly reviews the revenue, cost of revenue and gross
margins, (which are presented on the statement of operations) for these
segments. No other operating expenses or assets or liabilities of the Company
are segregated or allocated into these segments for review by management. There
are no inter-segment revenues.
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CASH FLOW INFORMATION
For the years ended December 31, 1998, 1999 and 2000 the Company paid
interest of less than $.1 million in each year and paid no income taxes during
such periods.
A supplemental schedule of non-cash financing activities follows:
Year Ended
December 31,
------------
1998 1999 2000
---------- ------------ ---------
Conversion of preferred stock and accumulated
dividends into common stock $ -- $ -- $ 63,233
Notes receivable issued to officers for option
exercises $ -- $ -- $ 1,603
Acquisition of assets through capital leases $ -- $ -- $ 1,867
Accretion of mandatorily
redeemable preferred stock $ -- $ 131 $ --
Dividends issued to preferred
shareholders on conversion of
preferred stock warrants to
common stock warrants $ -- $ 525 $ --
Dividends on convertible preferred
stock $ 24 $ 506 $ 2,461
Conversion of convertible notes and
accrued interest into Series D
Convertible Preferred stock $ -- $ 1,777 $ --
Issuance of warrants in conjunction
with Series A financing and
convertible promissory notes $ 56 $ 63 $ --
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial
statements to conform them to the current presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 140 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"). This statement replaces FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
It revises the standards for accounting for securitizations and others transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of Statement 125's provisions without reconsideration. SFAS
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March
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31, 2001. The Company does not anticipate that adoption of this standard will
have any material impact on its financial condition or results of operations.
At the November 15-16, 2000 Emerging Issue Task Force ("EITF") meeting,
the EITF discussed and reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives". The issue addresses the recognition, measurement, and
income statement classification for sales incentives offered voluntarily by a
vendor and without charge to customers that can be used in, or that are
exercisable by a customer as a result of, a single exchange transaction. The
effective date of EITF Issue 00-14 will be April 1, 2001. The Company does not
anticipate that adoption of the provisions of EITF Issue 00-14 will result in
any material impact to the Company's financial position or results of
operations.
In June 1998, the FASB issued SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" which was to become effective January 1,
2000 for most entities. Because of significant adoption related issues, the
original standard has been amended twice: first by SFAS 137 to defer the
effective date for one year (January 1, 2001), and second by FAS 138 to ease
implementation difficulties. The Company adopted SFAS 133 on January 1, 2001 and
does not anticipate this standard will have any material impact on its financial
condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which provides guidance on the recognition, presentation, and
disclosures of revenue in financial statements filed with the SEC. SAB 101, as
amended by SAB 101A and SAB 101B, outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a significant impact
on the Company's financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB 25. This Interpretation clarifies:
(a) the definition of employee for purposes of applying Opinion
25,
(b) the criteria for determining whether a plan qualifies as a non
compensatory plan,
(c) the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in
a business combination.
This Interpretation became effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects
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of applying this Interpretation are recognized on a prospective basis from
July 1, 2000. The adoption of FIN 44 did not have a material impact on the
Company's financial condition or results of operations.
In March 2000, the EITF reached a consensus on the issues in Issue
00-03, Application of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware. The Task Force determined that a software element
covered by SOP 97-2 is only present in a hosting arrangement if the customer has
the contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. Arrangements that do not give the
customer such an option are service contracts and are outside the scope of 97-2.
The Company's current revenue recognition policies and practices are consistent
with existing industry practice and with EITF Issue No. 00-3.
4. ACCOUNTS RECEIVABLE
Trade accounts receivable consists of the following at December 31:
December 31,
-----------------------------
1999 2000
--------- --------
Accounts receivable $ 2,155 $ 8,159
Less: allowance for doubtful accounts (118) (649)
--------- --------
$ 2,037 $ 7,510
========= ========
The provision for doubtful accounts, in dollars and as a percentage of
sales, was $8,000 (2%), $129,000 (1.9%) and $945,000 (3.1%) for the years ended
December 31, 1998, 1999 and 2000, respectively. Write-offs of accounts
receivable, in dollars and as a percentage of sales, were $0 (0%), $18,000
(0.3%) and $414,000 (1.3%) for the years ended December 31, 1998, 1999 and 2000,
respectively.
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5. NON-CURRENT ASSETS
The Company's non-current assets consist principally of the following:
December 31,
Expected Life -------------------------------
(Years) 1999 2000
------------- -------- --------
Equipment, furniture and
leasehold improvements
Computer hardware 2 to 3 $ 545 $ 1,834
Office furniture and equipment 3 to 5 381 1,801
Leasehold improvements Life of lease -- 37
-------- --------
926 3,672
Accumulated depreciation (187) (806)
-------- --------
Net $ 739 $ 2,866
======== ========
Software
Computer systems software 1 to 3 $ 420 $ 7,168
Work in progress -- 794
-------- --------
420 7,962
Accumulated amortization (73) (1,487)
-------- --------
Net $ 347 $ 6,475
======== ========
Intangible Assets
Realtor network 3 $ -- $ 6,644
Affinity program partner contracts 2.75 to 3.75 -- 559
-------- --------
-- 7,203
Accumulated amortization (999)
-------- --------
Net $ -- $ 6,204
======== ========
Depreciation expense for equipment, furniture and leasehold
improvements for the years ended December 31, 1998, 1999 and 2000 was
approximately $.1 million, $.2 million and $0.7 million, respectively.
Amortization expense for software for the years ended December 31,
1998, 1999 and 2000 was negligible, $.1 million and $1.5 million, respectively.
Amortization expense for intangible assets for the year ended December
31, 2000 was $1 million.
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6. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
December 31,
--------------------------
1999 2000
------- -------
Professional services and other fees $ 706 $ 516
Advertising 460 744
Lease Termination Charge 454 176
Incentive and other compensation 385 3,638
Deferred revenues 209 1,601
Consumer promotional costs -- 769
Other 237 346
------- -------
Total Accrued Expenses $ 2,451 $ 7,790
======= =======
7. SHAREHOLDERS' EQUITY
EQUITY RIGHTS CERTIFICATE
On September 29, 2000, Capital Z Partners ("Capital Z"), the Company's
largest shareholder, purchased an Equity Rights Certificate from the Company for
$10 million. This Certificate is initially exercisable for 1,253,918 shares of
the Company's common stock (equivalent to $7.975 per share), and warrants to
purchase 225,000 shares of the Company's common stock with an initial exercise
price of $7.975. Capital Z also received a commitment fee warrant to purchase
135,000 shares of the Company's common stock with an initial exercise price of
$7.975.
The Equity Rights Certificate may be exercised at the election of
Capital Z anytime up to and including the fifth business day following June 30,
2001. The Equity Rights Certificate contains anti-dilution provisions, including
provisions that allow Capital Z to receive additional shares of the Company's
common stock if certain events occur prior to the expiration of the Certificate.
Such events include, among others, a subsequent financing in which the Company
receives consideration of at least $15 million, a Sale Transaction or a Going
Private Transaction (as those terms are defined in the Equity Rights
Certificate). If the Equity Rights Certificate has not been exercised by June
30, 2001 and the price of the Company's stock is less than $7.975, Capital Z
will receive additional shares of the Company's common stock upon exercise of
the Certificate. Upon exercise of the Equity Rights Certificate, the warrants
issued therewith will have an exercise period that starts September 29, 2001 and
ends September 29, 2005. The anti-dilution provisions described above also
apply to the warrants and therefore the actual exercise price of the warrants
will be determined at the time of issuance. See Subsequent Events in Note 14.
The commitment fee warrant is exercisable at any time on or after
September 29, 2001 and until September 29, 2005 at an exercise price of $7.975
per share. This exercise price is
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161
subject to adjustment upon the occurrence of the events described above. See
Subsequent Events in Note 14.
COMMON STOCK
On February 15, 2000, the Company completed the sale of 4,197,500
shares of its common stock at an initial public offering ("IPO") price of $12.00
per share, raising approximately $44.8 million, net of offering expenses,
underwriting discounts and commissions. Simultaneous with the closing of the
initial public offering, all previously outstanding shares of convertible
preferred stock including accumulated, unpaid in-kind dividends through that
date were automatically converted into an aggregate of 10.5 million shares of
common stock.
STOCK SPLIT
In January 2000, the Board of Directors approved a 1.27-for-1 common
stock split that was effective February 22, 2000 upon the closing of the
Company's initial public offering. The financial statements for all periods
presented have been restated to reflect the effect of this stock split. In
addition, the Board approved an amendment to the Company's certificate of
incorporation, effective in conjunction with the Company's Form S-1
Registration Statement, increasing the authorized capital stock to 100,000,000
shares of common stock and 10,000,000 shares of preferred stock, each with a par
value of $0.01 per share.
PREFERRED STOCK
SERIES A SALE
Effective December 9, 1998, the Company entered into a Convertible
Preferred Stock and Warrant Purchase Agreement (the "Preferred Stock Agreement")
under which it sold, in the Initial Closing, 833,334 shares of Series A
Convertible Preferred stock at $6.00 per share and a warrant to purchase 260,000
shares of Series A Convertible Preferred stock with an exercise price of $6.00
per share (the "Series A Warrant"). The Series A Warrant was recorded by
allocating the fair value of this warrant determined using an option valuation
model, from the proceeds received in the Initial Closing. Proceeds from the
Initial Closing totaled $4.7 million, net of expenses of approximately $.3
million. In addition, the Company issued a warrant to purchase 63,500 shares of
common stock at approximately $4.72 per share (the "Common Warrant") to a broker
in connection with the Agreement, the fair value of which (approximately
$48,000) is included in offering costs. The fair value of the common warrants
was calculated utilizing an option valuation model.
During March 1999 (the "Second Closing") the Company sold 500,000
shares of Series A Convertible Preferred stock at a price of $6.00 per share and
a warrant to purchase 40,000 shares of Series B Convertible Preferred stock at
$9.00 per share (the "Series B Warrant"), for gross proceeds of $3.0 million.
During May 1999 (the "Third Closing") the Company sold 333,334
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162
shares of Series A Convertible Preferred stock at $6.00 per share for gross
proceeds of $2.0 million. The Company also granted a warrant to the investors in
the Third Closing to purchase 33,020 shares of common stock at approximately
$7.87 per share. The fair value of these warrants was approximately $12,000 and
was calculated using an option valuation model.
On September 20, 1999, the shareholders approved an amendment of the
Company's certificate of incorporation, under which the Company authorized
10,467,194 shares of preferred stock, $.01 par value per share, consisting of
four series of convertible preferred stock (the "Series A Preferred," "Series B
Preferred," "Series C Preferred" and "Series D Preferred" stock). Preferred
shareholders were entitled to cumulative dividends that accrued on a daily basis
at a rate of 8% per annum.
SERIES D SALE
On September 20, 1999, the Company entered into a Series D Convertible
Preferred Stock Purchase Agreement (the "Series D Agreement") under which it
sold 6,024,096 shares of Series D Convertible Preferred stock at $8.30 per share
for total gross proceeds of approximately $50 million. The Company utilized
approximately $6.0 million of these proceeds to repurchase 948,971 shares of
common stock (of which 666,750 shares were purchased from Board members for
approximately $4.2 million in connection with their departure from the Board)
which has been reflected as treasury stock in the accompanying financial
statements. The Company also incurred approximately $2.5 million in offering
costs, which have been netted against the proceeds.
Effective upon the closing of the Company's public offering of common
stock on February 22, 2000, all outstanding shares of preferred stock and
accumulated undeclared dividends automatically converted into 10.5 million
shares of common stock.
CONVERTIBLE PROMISSORY NOTES
During June and July 1999, the Company entered into Convertible
Promissory Note Agreements (the "Notes") with certain individuals from which the
Company received a total of $1.75 million. The Company also issued 53,340
warrants to purchase common stock at approximately $7.87 per share to the
purchasers of these Notes. These warrants were valued at approximately $19,000
using an option valuation model. The value of these warrants was recognized as
interest expense during the year ended December 31, 1999.
The Notes bore interest at 8% per annum, compounded quarterly. The
Notes plus accrued interest converted to 214,076 shares of Series D Convertible
Preferred stock in connection with the Series D Convertible Preferred stock sale
described above.
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SERIES A AND B WARRANTS
In conjunction with the sale of Series D Convertible Preferred stock,
the Series A Convertible Preferred shareholders exchanged their Series A and
Series B Warrants for warrants to purchase 381,000 shares of common stock at
approximately $4.72 per share. The exchange has been reflected in the financial
statements as a distribution to the preferred shareholders equivalent to the
excess of the current fair value of the new warrant over the carrying value of
the existing warrants, and has been included in the calculation of net loss
attributable to common shareholders for the year ended December 31, 1999. The
new warrants issued were valued at approximately $.8 million utilizing an option
valuation model.
COMMON WARRANTS
The Company granted a warrant to purchase 127,000 shares of common
stock at approximately $7.52 per share to Prudential Securities Incorporated
("Prudential"), a broker in connection with the Series D Agreement, the fair
value of which (approximately $.5 million) was calculated using an option
valuation model and was included in offering costs of the Series D sale.
In January 2000, Prudential, an underwriter for the Company's initial
public offering agreed to exchange its existing warrant to purchase 127,000
shares of the Company's common stock at an exercise price of $7.52 per share for
a new warrant to purchase 127,000 shares of common stock at an exercise price
equal to the initial public offering price of common stock. The new warrant is
exercisable for a five year period from the date of the first warrant or through
September 21, 2004. Upon the exchange of these warrants, the Company recorded an
offset to the IPO proceeds of approximately $.1 million based upon the fair
value of the new warrant issued in excess of the existing warrant based upon an
option valuation model.
Also during January 2000, the Company entered into an agreement for an
initial one-year period with CNBC to co-brand a web site. In February 2000, the
Company granted two warrants to CNBC in connection with this agreement. Each
warrant is for the purchase of 95,250 shares of the Company's common stock at
$7.87 per share. The first warrant, granted February 2, 2000, with an underlying
fair value of $11.00, was immediately vested and exercisable at the date of
grant. The second warrant was granted February 15, 2000 with an underlying fair
value of $12.00 and was also immediately vested and exercisable. An expense of
approximately $1.3 million, calculated using an option valuation model, is being
recognized ratably for services provided CNBC over the initial one-year period
of the agreement. For the year ended December 31, 2000, the Company recognized a
charge for these warrants of approximately $1.2 million.
In addition to common warrants issued as described above, the Company
also issued a warrant to purchase 9,525 shares of common stock at approximately
$4.72 per share in connection with a line of credit provided by a shareholder.
The fair value of this warrant (approximately $7,000) was recognized in expense
during the year ended December 31, 1998. This warrant was valued using an option
valuation model. The line of credit is no longer available and no amounts were
outstanding as of December 31, 1998.
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164
At December 31, 2000, the Company had outstanding warrants to purchase
992,885 shares of common stock, with exercise prices ranging from approximately
$4.72 - $12.00. Expiration dates range from November 2003 through September
2005.
EMPLOYEE STOCK OPTIONS AND OTHER BENEFIT PLANS
The Company has established the 1997, 1998 and 1999 Stock Option Plans
(the " Plans"). The Plans, as amended, provide for the granting of both
incentive stock options and non-qualified stock options to employees,
officers, directors and consultants of the Company. The Plans
authorized approximately 5 million shares for option grants to be
issued prior to September 2009.
On October 25, 2000, the Board of Directors approved the 2001 Stock
Option Plan (the "2001 Plan") which provides for the granting of both incentive
stock options and non-qualified stock options to employees, officers, directors
and consultants of the Company. The 2001 Plan is subject to shareholder approval
and allows for a maximum of 4,000,000 shares for option grants to be issued
prior to October 25, 2010.
Under all of the Company's stock option plans, the exercise price of
any incentive stock option shall not be less than the fair value of the stock on
the date of grant or less than 110% of the fair value in the case of options
holding more than 10% of the total combined voting power of all classes of stock
of the Company. Options under the Company's stock option plans are exercisable
for ten years from the date of grant, except for incentive stock options granted
to options holding more than 10% of the total combined voting power of all
classes of stock, which must be exercised within five years.
The Company's stock option plans generally provide for a four-year
vesting requirement with one-quarter of such shares vesting at the end of one
full year and on an annual basis thereafter. Upon a change of control, as
defined, 50% of all unvested stock options shall vest. If a change of control
occurs, the compensation committee to the Company's Board of Directors has
authority to vest the remaining 50% of unvested options that are otherwise not
automatically vested.
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165
A summary of incentive stock options awarded to employees during the
years ended December 31, 1998, 1999 and 2000 follows (exercise prices are
expressed in actual dollars):
Weighted
Average Exercise
Number of Exercise Price
Options Price Range
--------- -------- -------------
Outstanding as of December 31, 1997 112,533 $ 1.43 $ 4.00
Granted at fair value 571,695 4.56 1.43 - 5.20
Exercised (65,087) 3.09 1.43 - 4.72
--------- ------ -------------
Outstanding as of December 31, 1998 619,141 4.15 1.43 - 5.20
Granted at fair value 521,660 5.09 4.72 - 6.06
Granted below fair value 530,466 5.68 5.51 - 6.53
Cancelled/Forfeited (218,377) 4.85 4.72 - 5.20
--------- ------ -------------
Outstanding as of December 31, 1999 1,452,890 4.93 1.43 - 6.53
Granted at fair value 1,632,743 5.32 2.38 - 16.31
Granted below fair value 537,924 9.30 9.25 - 10.43
Exercised (56,757) 4.22 3.54 - 5.51
Cancelled/Forfeited (465,352) 6.71 3.54 - 16.31
--------- ------ -------------
Outstanding as of December 31, 2000 3,101,448 $ 5.65 $1.43 -$16.13
========= ====== =============
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166
A summary of non-qualified stock options awarded during the years ended
December 31, 1998, 1999 and 2000 follows (exercise prices are expressed in
actual dollars):
Weighted
Average Exercise
Number of Exercise Price
Options Price Range
---------- ------ ------------
Outstanding as of December 31, 1997 938,262 $ 1.43 $ 1.43-$1.57
Granted at fair value 274,439 4.76 3.54-5.20
---------- ------ ------------
Outstanding as of December 31, 1998 1,212,701 2.19 1.43-5.20
Granted at fair value 287,752 5.81 4.72-6.06
Granted below fair value 403,682 5.23 4.72-5.51
Exercised (274,419) 1.80 1.43-4.72
Canceled/forfeited (111,610) 4.80 4.72-5.20
---------- ------ ------------
Outstanding as of December 31, 1999 1,518,106 3.56 1.43-4.72
Granted at fair value 584,970 4.92 2.80-12.00
Granted below fair value 229,844 9.43 9.25-12.00
Exercised (196,464) 8.19 1.43-12.00
Cancelled/Forfeited (42,186) 5.51 5.51-5.51
---------- ------ ------------
Outstanding as of December 31, 2000 2,094,270 $ 4.11 $1.43-$12.00
========== ====== ============
Exercisable as of December 31, 2000 1,037,801 $ 2.73 $ 1.43-$6.06
========== ====== ============
The following table summarizes information about the Company's stock
options (exercise prices are actual dollars):
Options Outstanding at
December 31, 2000
-----------------------------
Exercise Number Remaining Options
Price Outstanding Contractual Life Exercisable
- ----------- ----------- ---------------- -----------
$ 0 -$1.63 778,094 6.8 years 778,094
1.63-3.26 1,152,250 9.9 years --
3.26-4.89 651,445 6.8 years 361,304
4.89-6.53 1,354,127 8.7 years 349,933
6.53-8.16 426,525 9.4 years 16,983
8.16-9.79 676,439 9.0 years --
9.79-11.42 65,338 9.1 years --
11.42-13.05 56,000 9.2 years --
13.05-14.68 19,500 9.3 years --
14.68-16.31 16,000 9.2 years --
--------- --------- ---------
5,195,718 8.6 years 1,506,314
========= ========= =========
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Compensation costs recognized during the years ended December 31, 1998,
1999 and 2000 for stock-based compensation awards totaled $.2 million, $.8
million and $1.1 million, respectively. The weighted average fair value at date
of grant for options granted at fair value during the years ended December 31,
1998, 1999 and 2000 was $0.83, $1.10 and $3.74, respectively.
The weighted average fair value at the date of grant for options
granted below fair value during the years ended December 31, 1999 and 2000 was
$4.66 and $3.90, respectively.
In September 1999, a consulting agreement was entered into with a
former member of the Board of Directors and a severance agreement was entered
into with a former executive. Both individuals had their existing incentive
stock options cancelled, and new non-qualified stock options were issued at the
current fair value. They received 76,200 and 114,300 options, respectively, to
purchase common stock at $5.20 and $4.72 per share, respectively. The fair value
of these options, as determined using an option valuation model range from $2.39
to $4.40. Compensation expense related to the consulting agreement is being
recognized over the three year term ending October 12, 2002. For the years ended
December 31, 1999 and 2000, the Company recorded expense of less than $.1
million and approximately $.1 million, respectively. Compensation expense of $.3
million related to the severance agreement was recognized immediately in
September 1999.
During the third and fourth quarter of 1999, the Company granted stock
options to purchase approximately 740,000 shares of our common stock to
employees at exercise prices ranging from $5.51 to $6.54 per share. Based on the
difference between the strike price of these options and the fair market value
at the date of grant (ranging from $6.54 to $9.70 per share), the Company
recorded a deferred compensation charge of approximately $2.6 million and is
amortizing it to expense over the options' four year vesting period.
In January 2000, the Company granted stock options to purchase
approximately 770,000 shares of common stock to employees at an exercise price
of $9.25 per share. Based on the difference between the exercise price of these
options and the fair market value at the date of grant ($11.00), we recorded a
deferred compensation charge of approximately $1.3 million and we are amortizing
it to expense over the options' four-year vesting period.
At December 31, 2000 the Company has approximately $3.1 million of
deferred compensation recorded on its balance sheet related to these options.
Deferred compensation is being expensed over the vesting period of the related
options (principally four years) with approximately 2.75 to 3 years remaining.
Had compensation expense for all of the Company's stock options been
recorded based on the fair value of the options at the grant date, as prescribed
by SFAS No 123, the Company's net loss and net loss per common share basic and
diluted would have been as follows:
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Year Ended
December 31,
------------------------------------------
1998 1999 2000
---------- ---------- ----------
Net loss attributable to common shareholders $ (6,458) $ (27,561) $ (68,464)
Pro forma adjustment for stock
compensation expense (392) (748) (4,182)
---------- ---------- ----------
Pro forma net loss attributable to common
shareholders $ (6,850) $ (28,309) $ (72,646)
========== ========== ==========
Net loss per common share -
basic and diluted $ (1.88) $ (7.74) $ (4.15)
Pro forma adjustment for stock
compensation expense (0.11) (0.21) (0.25)
---------- ---------- ----------
Pro forma net loss per common
share - basic and diluted $ (1.99) $ (7.95) $ (4.40)
========== ========== ==========
Because options vest over several years and additional options are
expected to be granted in subsequent years, the pro forma impact on periods
presented may not be representative of the pro forma effects on reported net
income or loss in future years.
The fair value of each option grant in 1998, 1999 and until the
Company's initial public offering of common stock in February 2000 was estimated
on the date of grant using the minimum value method based upon the following
assumptions: dividend yield -- 0%; risk free interest rate -- 5.1% (1998); 4.75
- -- 5.75% (1999) and 5.3% (2000) and weighted average expected option term - 4
years (1998); 5 years (1999) and 5 years (2000).
Following the Company's initial public offering of common stock in
February 2000, the fair value of each option grant was estimated on the date of
the grant using the Black-Scholes method based on the following assumptions: A
risk-free interest rate of 5.3%, a weighted average expected option term of 5
years and a volatility factor of 117%.
In January 2000, the Company adopted the LendingTree, Inc. Employee
Stock Purchase Plan ("ESPP"). The ESPP is intended to comply with the
requirements of Section 423 of the Internal Revenue Code and to assure the
participants of the tax advantages thereby. The ESPP is administered by a
committee established by the board of directors. The committee has authorized
for issuance under the plan a total of 444,500 shares of common stock. All
full-time employees are eligible to participate in the ESPP, except employees
who own five percent or more of the common stock of the Company.
The ESPP provides for a series of consecutive, overlapping offering
periods that generally will be 24 months long. Successive six-month purchase
periods will run during each offering period. During each offering period,
participating employees will be able to purchase shares, subject to limitations,
of common stock at a purchase price equal to 85% of the fair market value of the
common stock at either the beginning of each offering period or the end of each
purchase period within the offering period, whichever price is lower.
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On December 29, 2000 the Company sold and participants in the ESPP
acquired 32,456 shares of the Company's common stock from treasury stock at a
purchase price of $1.75 per share.
The Company also provides a 401(k) Retirement Savings Plan to its
employees. The Company matches 100% of an employees savings up to 1% of an
employees' salary, and these contributions vest ratably over a four-year period.
Company matching contributions for the year ending December 31, 2000 were less
than $.1 million.
8. INCOME TAXES
There is no current income tax provision or benefit for the years ended
December 31, 1998, 1999 or 2000 as the Company has generated net operating
losses for income tax purposes since inception. There is no deferred provision
or benefit for income taxes recorded as the Company is in a net deferred tax
asset position for which a full valuation allowance has been recorded because
the realization of these benefits could not be reasonably assured.
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1999 and 2000 consist of the following:
December 31,
----------------------
1999 2000
-------- --------
Deferred tax assets:
Current
Accounts receivable $ 46 $ 356
Compensation accruals 49 1,400
Noncurrent
Domestic net operating loss carryforwards 11,761 24,276
Unrealized investment loss -- 740
Stock compensation 406 1,159
Intangible amortization -- 677
Other 298 203
-------- --------
Gross deferred tax assets 12,560 28,811
Less: Valuation allowance (12,540) (28,774)
-------- --------
Net deferred tax assets $ 20 $ 37
-------- --------
Deferred tax liabilities:
Fixed assets 20 37
-------- --------
Total deferred tax liabilities 20 37
-------- --------
Net deferred tax asset (liability) $ -- $ --
======== ========
The increase in the valuation allowance resulted primarily from the
additional net operating loss carryforward generated.
The Company has net operating loss carryforwards for income tax
purposes of approximately $65.1 million available at December 31, 2000 to offset
future federal and state taxable income. These net operating loss carryforwards
begin to expire in 2011. Should the Company undergo an ownership change as
defined in Section 382 of the Internal Revenue Code, the Company's tax net
operating loss carryforwards generated prior to the ownership change may be
subject to annual limitation which could reduce or defer the utilization of
these losses. As of
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December 31, 2000, the Company has research and development credit carryforwards
of less than $.1 million. The credits begin to expire in 2019.
Taxes computed at the statutory Federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
For the years ended December 31,
-----------------------------------------------------------------------------
% of Pretax % of Pretax % of Pretax
1998 Loss 1999 Loss 2000 Loss
-------- ----------- -------- ----------- -------- -----------
U.S. Federal tax benefit at statutory rate $ (2,188) -34.0% $ (8,413) -34.0% $(22,441) -34.0%
State taxes (net of federal benefit) (317) -4.9% (1,222) -4.9% (3,260) -4.9%
Change in valuation allowance 2,550 39.6% 9,615 38.9% 25,653 38.9%
Other nondeductible expenses (45) -0.7% 20 -% 48 -%
-------- ----- -------- ----- -------- -----
Provision for income taxes $ - -% $ -- -% $ -- -%
======== ===== ======== ===== ======== =====
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain office facilities and equipment under
operating leases. These leases are generally renewable. The Company also leases
certain furniture and computer equipment under capital leases with terms of
approximately 2 to 3 years.
The following is a schedule of future minimum rental payments required
under the leases as of December 31, 2000:
Capital Operating
Leases Leases
------- ---------
2001 $ 824 $ 2,353
2002 663 995
2003 276 688
2004 -- 683
2005 -- 735
Thereafter -- 4,380
------- ---------
Total minimum lease payments 1,763 $ 9,834
Less: amount representing interest (183) =========
-------
Present value of net minimum lease
payments 1,580
Less: current portion (732)
-------
Long-term portion capital leases $ 848
=======
Rent expense totaled $.1 million, $.5 million and $1.4 million for the
years ended December 31, 1998, 1999 and 2000.
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A covenant in one of the Company's capital lease agreement's requires
that the Company maintain a cash balance of not less than $5 million throughout
the term of the lease. If the Company's cash balance is below $5 million at the
end of a period, the balance of the lease shall be collateralized with cash.
The Company has been named as one of a number of defendants in a
putative class action lawsuit originally filed on September 7, 2000 in
California Superior Court in Contra Costa, California. The lawsuit was removed
to federal court on October 13, 2000, and is now captioned Thomas E. Ainsworth,
et als. v. Ohio Savings Bank, et als., Case No. C-00-3786, (N.D. Cal.). The
other defendants named in the action are Ohio Savings Bank, Costco Wholesale
Corp., Costco Financial Services Inc., First American Title Insurance Company
and First American Lenders Advantage. The complaint alleges various claims under
California law arising from a loan that plaintiffs obtained through HomeSpace
Services, Inc. ("HomeSpace") and Ohio Savings Bank in February 1999. In
particular, the complaint raises claims regarding the legality of certain
compensation paid to HomeSpace. The complaint seeks damages in the amount of $10
million, plus unenumerated punitive damages. Although the Company was not a
party to plaintiffs' loan transaction, the lawsuit alleges that the Company is
liable as a result of its acquisition of certain assets of HomeSpace on August
2, 2000. The Company filed its answer to the complaint on November 8, 2000,
denying all liability. The Company believes that it has strong defenses against
both liability and class certification. It has retained counsel and intends to
defend vigorously against the claims. Although there can be no assurances, the
Company does not believe that the outcome of any proceeding will have a material
effect on its financial condition, cash flows or the results of its operations.
The Company recently was the subject of a routine examination conducted
by the New York State Banking Department ("NYSBD"). At the close of the
examination, during the exit interview, NYSBD examiners raised an issue orally
as to whether the Company is obligated to make certain mortgage broker
disclosures to consumers under New York state law. As of this date, NYSBD has
not instituted any investigation or enforcement action. The Company could face a
possible administrative fine and/or penalty. The Company believes that the NYSBD
regulation which triggers the disclosures in question is inapplicable to it. The
Company intends to work with the NYSBD to clarify the application of its
regulations to the Company's activities, and, if necessary, to contest any fine
or penalty. Although there can be no assurances, the Company does not believe
that the outcome of any proceeding will have a material effect on its financial
condition, cash flows or the results of its operations.
The Company is involved in other litigation from time to time that is
routine in nature and incidental to the conduct of its business. The Company
believes that the outcome of any such litigation would not have a material
adverse effect on its financial condition, cash flows or results of operations.
10. OFFICER LOANS
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In February 2000, the Company entered into full recourse promissory
notes and pledge agreements with three of the Company's executive officers to
provide a these officers loans in the amount of $1.9 million for the purpose of
exercising non-qualified stock options and for paying the related withholding
taxes on such exercises. The loans are to be repaid to the Company, plus
interest at the federal rate (as defined) in equal annual installments beginning
on January 31, 2002, and through January 31, 2005. The officers have pledged to
the Company a security interest in the stock issued as a result of these options
being exercised. The pledged stock may not be sold by the officers without prior
written consent by the Company.
11. INVESTMENT
In February 2000, the Company made a $2.5 million equity investment in
a company providing mortgage marketplace services over the internet. The
Company's minority investment represents approximately 8.3% of the outstanding
equity of that business and accordingly, it is accounted for using the cost
method of accounting. In December 2000, management determined that the carrying
value of this investment was impaired as a result of a series of historical and
forecasted operating losses and the prospect that the investee might be unable
to fund its operations in the future. As a result of this impairment, management
wrote the investment down to its estimated fair value of $.6 million, recording
$1.9 million as a non-operating loss on impaired investment.
12. RELATED PARTIES
In September 1999, priceline.com acquired an equity position in the
Company representing less than 2% of the Company's total outstanding shares.
During 1999 and 2000, through contractual relationships with priceline.com and
related entities, the Company recorded revenue of $.2 million and $.1 million,
respectively. Also, under these arrangements with priceline.com and its related
entities, the Company paid $.6 million and $1.1 million in 1999 and 2000,
respectively. The Company also generates indirect revenue from priceline.com by
sending consumer credit requests sourced from priceline.com to our network of
lenders. Subsequent to December 31, 2000, priceline.com sold its equity interest
in the Company.
13. ACQUISITION
On August 2, 2000, the Company acquired certain assets and assumed
certain liabilities of HomeSpace Services, Inc. The consideration paid by the
Company (approximately $11.2 million) for the acquired assets consisted of $6.2
million in cash, 639,077 shares of the Company's restricted common stock,
valued at $4.7 million (using the average closing stock price 3 days before and
after the closing date) and $.3 million of assumed liabilities. At closing,
169,851 shares of the common stock were placed in escrow in the event of any
post-closing indemnification claims and $4.2 million in cash was placed in
escrow to be paid to trade creditors of HomeSpace. The Company agreed to file a
registration statement relating to the shares of restricted common stock issued
in connection with the acquisition by March 31, 2001
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and agreed to use its reasonable best efforts to cause such registration
statement to be declared effective by the Securities and Exchange Commission.
The cash portion of the purchase price was funded from the Company's short-term
investments, the source of which was its February 2000 initial public offering
of common stock.
The total purchase price (including $1.2 million of transaction related
costs) resulted in a purchase price of $12.4 million, which was allocated
primarily to certain intangible assets based on a third party valuation study.
The allocation of the purchase price is summarized below:
PURCHASE PRICE:
Cash $ 6,200
Stock 4,740
Assumed Liabilities:
Note payable plus interest 232
Accrued other liabilities 71
--------
Total consideration 11,243
Estimated transaction costs 1,191
--------
Total purchase price $ 12,434
========
ALLOCATION OF PURCHASE PRICE:
Accounts receivable $ 16
Intangible Assets:
Realtor network 6,644
Software and technology 5,215
Affinity program partner contracts 559
--------
$ 12,434
========
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The following unaudited pro forma consolidated financial information
reflects the results of operations of the Company for the years ended December
31, 1999 and 2000 as if the acquisition of the HomeSpace assets had occurred on
January 1, 1999 and 2000, respectively, and after giving effect to certain
purchase accounting adjustments. These pro forma results are not necessarily
indicative of what the Company's operating results would have been had the
acquisition actually taken place on January 1, 1999 or 2000, and may not be
indicative of future operating results.
Pro forma (unaudited) 1999 2000
-------- --------
Revenue $ 11,470 $ 33,087
Net loss attributable to common shareholders $ 65,340 $ 94,252
Net loss per common share - basic and diluted $ (11.99) $ (5.14)
Weighted average shares outstanding -
basic and diluted (in thousands) 5,450 18,336
14. SUBSEQUENT EVENTS
Revolving line of credit
In March 2001, the Company and the Union Labor Life Insurance Company
("ULLICO"), a current shareholder, entered into an agreement whereby ULLICO
provided the Company with a 2 year collateralized credit agreement under which
the Company may borrow funds on a revolving basis, up to $5.0 million, subject
to certain covenants and restrictions.
Under the terms of the ULLICO agreement, the Company is required to pay
interest quarterly on the average quarterly outstanding balance at a rate of 6%
per annum in cash and additional interest in the form of warrants to purchase
the Company's common stock at price of $.01 per share. The number of warrants
the lender is entitled to receive is based on the average amount outstanding on
the revolving line of credit during the quarter multiplied by an annual interest
rate of 14% divided by $3.99 (subject to certain adjustments as defined in the
agreement). These warrants expire five years after their date of grant. The
Company anticipates that the actual amount of interest expense recorded will be
based on the estimated fair value of the warrants on the date that they are
issued.
In addition, as a commitment fee, ULLICO received warrants to purchase
40,000 fully paid-up shares of the Company's common stock with an exercise price
of $.01 per share. The estimated fair value of these commitment fee warrants
will be recorded as an asset and amortized over the life of the revolving line
of credit.
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The ULLICO line of credit is senior to all indebtedness of the Company
for borrowed money. ULLICO has a security interest in substantially all assets
(tangible and intangible) of the Company.
The ULLICO credit agreement contains customary covenants,
representations and warranties. Additionally, the Company must meet certain
financial targets quarterly for revenue and earnings before interest, taxes,
depreciation and amortization ("EBITDA") as defined in the agreement.
Revolving Loan
In March 2001, the Company and Federal Home Loan Mortgage Corporation
("Freddie Mac") (a current customer) entered into a loan agreement whereby
Freddie Mac will provide revolving loans of up to $2.5 million from time to time
until February 2003.
Under the terms of the Freddie Mac agreement, the Company is required
to pay interest quarterly on the average daily outstanding balance at a rate of
10% per annum interest in cash and additional interest in the form of warrants
to purchase the Company's common stock at price of $.01 per share. The number of
warrants Freddie Mac is entitled to receive is based on the average amount
outstanding on the revolving line of credit during the quarter multiplied by an
annual interest rate of 10% divided by $3.99 (subject to certain adjustments as
defined in the agreement). These warrants expire five years after their date of
grant. The Company anticipates that the actual amount of interest expense
recorded will be based on the estimated fair value of the warrants on the date
that they are issued.
In addition, as a commitment fee, Freddie Mac received warrants to
purchase 12,500 fully paid up shares of the Company's common stock with an
exercise price of $.01 per share. The estimated fair value of these commitment
fee warrants will be recorded as an asset and amortized over the life of the
revolving loan.
This revolving loan agreement contains customary covenants,
representations and warranties. Additionally, the Company must meet certain
financial targets quarterly for revenue and earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the agreement.
For the year ended December 31, 2000, Freddie Mac accounted for $2.4
million (about 8%) of the Company's total revenue.
The Freddie Mac revolving loan allows for Freddie Mac to exercise
certain rights to a version of the Company's core software that has been
specifically customized for Freddie Mac (the "PLV"), in the event of default.
Such rights would become exercisable and entitle Freddie Mac to obtain and
maintain, modify, enhance and market the PLV for its use.
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Convertible Preferred Stock
In March 2001, the Company and various investors (50% of which are
current investors) closed on a arrangement whereby the Company issued and sold
3.8 million shares of Series A 8% Convertible Preferred Stock ("Series A
Preferred Stock") for $13.4 million or $3.50 per share (excluding 200,000 shares
sold to the Company's Chief Executive Officer, funded by a loan from the Company
for $700,000).
The holders of the Series A Preferred Stock are entitled to receive
when, as and if declared by the Company's Board of Directors, dividends on the
Series A Preferred Stock equal to eight percent (8%) of the stated value per
share (as defined) payable at the Company's option (i) in cash on each quarterly
dividend date or (ii) by an upward adjustment to the stated value per share on
the initial quarterly dividend payment date. Dividends on the Series A Preferred
Stock shall be cumulative and shall accrue daily from the date of original
issuance.
Each share of Series A Preferred Stock is convertible, at the option of
the holder, to common stock after the date on which the Company's stockholders
approve the conversion provisions of the Preferred Stock.
Each share of Series A Preferred Stock is convertible into the number
of shares of common stock determined by dividing (a) the current value per share
by (b) the conversion price. The current value per share is the sum of the
initial purchase price ($3.50) and adjustments per share for accumulated
dividends. The conversion price is the initial purchase price, subject to
revision from time to time.
The shares of Series A Preferred Stock will be redeemable at the option
of the Company for cash commencing on and after March 31, 2004 at a price per
share equal to the product of (a) the "Applicable Percentage" multiplied by the
then current value per share. The Applicable Percentage is initially 120% and
declines to 105% ratably on a daily basis of the two-year period ending March
21, 2006.
The Company shall redeem for retirement all remaining Series A
Preferred Stock shares remaining outstanding on the fifth anniversary of the
issue date of such shares at a price of 105% of the then current value per
share.
In conjunction with the closing of the Series A Preferred Stock, the
Equity Rights Certificate issued to Capital Z (see note 7) was converted into
2,857,143 shares of Series A Preferred Stock. The Company will record the
conversion of the Equity Rights Certificate through a credit to mandatorily
redeemable preferred stock of $9.8 million with a corresponding charge to
additional paid-in capital.
Equity Line
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In March 2001, the Company entered into a common stock Purchase
Agreement with Paul Revere Capital Partners, Ltd. ("Paul Revere") for the future
issuance and purchase of up to $24 million of the Company's common stock. Under
this arrangement, the Company, at its sole discretion, may issue and exercise up
to twenty-four draw downs under which Paul Revere is obligated to purchase a
certain number of shares of the Company's common stock.
If the Company chooses to draw on the equity line, the minimum amount
of any draw down is $0.1 million and the maximum amount is the greater of (i) $1
million and (ii) 20% of the average of the daily volume weighted average price
of the Company's common stock for the twenty-two (22) day trading period
immediately prior to the commencement date multiplied by the total trading
volume of the common stock for such period. Only one draw down shall be allowed
in each period of 22 trading days beginning on the date of the draw down notice.
Subject to certain adjustments, the number of shares to be issued on each
settlement date shall be a number of shares equal to the sum of the quotients
(for each trading day within the settlement period) of (x) 1/22nd of the
investment amount and (y) the purchase price on each trading day within the
settlement period.
Under this arrangement, the price at which the Company can sell shares
of its common stock to Paul Revere is equal to 95% of the daily volume weighted
average price. The Company may set a threshold (lowest) price during any draw
down period at which the Company will sell its common stock in accordance with
this agreement.
The commitment period of this arrangement is the 24 consecutive month
period immediately following the effective date of this arrangement. The
effective date is defined as the date when the Registration Statement of the
Company covering the shares being subscribed for is declared effective by the
Securities and Exchange Commission. The maximum net proceeds the Company can
receive are $24.0 million less a 4% placement fee payable to its placement
agent.
Other Arrangements
In connection with the sale of the Series A Preferred Stock, the
Company entered into a promissory note and pledge agreement with the Company's
Chief Executive Officer ("CEO") to provide him with a $700,000 loan to acquire
200,000 shares of the Series A Preferred Stock. The loan is to be repaid with
two installments of $35,000 due on January 31, 2002 and 2003, respectively, and
three installments of $210,000, plus interest due on January, 31, 2004, 2005 and
2006, respectively. Interest on the outstanding balance accrues at the
applicable Federal Rate. To collateralize these loans, the Company and the CEO
have entered into a Pledge Agreement. This note and pledge agreement amends and
restates existing notes and pledge agreements that the CEO and the Company had
entered into with respect to $1.7 million in loans for option exercises (see
Note 10). The new Pledge Agreement covers all three loans totaling $2.4 million
and under which the CEO has granted the Company a security interest in all of
the CEO's shares of common and preferred stock (the "collateral"). The CEO is
also precluded from selling or transferring securities or options or warrants to
purchase the Company's securities without the Company's prior consent. The
Company has taken possession and control of the
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collateral. The Pledge Agreement also specifies that as long as the CEO is
employed by the Company sole recourse for satisfaction of the obligations will
be its rights to the collateral. As a result of these agreements, the Company
will report periodic changes in the fair value of the underlying securities;
including accretion of the underlying preferred shares to their redemption value
as non-cash compensation charges.
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================================================================================
Through and including ________ (the 25th day after the date of this prospectus),
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to a dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to unsold allotments or subscriptions.
25,000,000 SHARES OF COMMON STOCK
LendingTree
-------------------------------
PROSPECTUS
-------------------------------
, 2001
================================================================================
180
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses,
other than the underwriting discounts and commissions, payable by the Registrant
in connection with the sale of the Common Stock being registered.
AMOUNT
TO BE PAID
SEC registration fee $ 6,000
NASD filing fee 2,900
NASDAQ National Market listing fee 16,245
Legal fees and expenses 141,000
Accounting fees and expenses 100,000
Printing and engraving 5,000
Blue sky fees and expenses (including legal fees) 0
Miscellaneous 10,000
--------
Total $281,145
* To Be Filed by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law (DGCL), as amended,
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that the Company
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding, other
than an action by or in the right of the Company, by reason of the fact that the
person is or was a director, officer, agent or employee of the Company or is or
was serving at the Company's request as a director, officer, agent, or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably
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believed to be in the best interest, or not opposed to the best interest, of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The power to indemnify
applies to actions brought by or in the right of the Company as well, but only
to the extent of defense expenses, including attorneys' fees but excluding
amounts paid in settlement, actually and reasonably incurred and not to any
satisfaction of judgment or settlement of the claim itself, and with the further
limitation that in such actions no indemnification shall be made in the event of
any adjudication of negligence or misconduct in the performance of his duties to
the Company, unless the court believes that in light of all the circumstances
indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director,
who willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to such
actions to be entered in the books containing the minutes of the meetings of the
board of directors at the time such action occurred or immediately after such
absent director receives notice of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to
LendingTree or its stockholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- under the section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
- for any transaction from which the director derived an
improper personal benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that:
- we must indemnify our directors and officers to the fullest
extent permitted by Delaware law;
- we may indemnify our other employees and agents to the same
extent that we indemnified our officers and directors, unless
otherwise determined by our Board of Directors; and
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- we must advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to
the fullest extent permitted by Delaware Law.
The indemnification provisions contained in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws are not
exclusive of any other rights to which a person may be entitled by law,
agreement, vote of stockholders or disinterested directors or otherwise. In
addition, the Company maintains insurance on behalf of its directors and
executive officers insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From our inception in June of 1996, until October 1997, we were
financed through contributions from our founders and through issuances of common
stock. In return for their contributions, our founders received certain amounts
of our common stock.
In October 1997, we sold 54,946 shares of our common stock to Donald
Colby, a former director, in exchange for $100,000.
In March 1998, we sold 564,444 shares of our common stock and a warrant
to purchase 7,500 shares of our common stock to Phoenix Strategic Capital in
exchange for an aggregate price of $2,000,000.
In July 1998, we sold 423,333 shares of our common stock to H. Eugene
Lockhart, a former director, in exchange for $200,000.
In November 1998, we sold 12,700 shares of our common stock to James
Carthaus, currently a director, in exchange for $60,000.
In December 1998, we sold 833,334 shares of our 8% convertible
preferred stock and a warrant to purchase 260,000 shares of our 8% convertible
preferred stock to The Union Labor Life Insurance Company in exchange for an
aggregate price of $5,000,000. In March 1999, we sold an additional 500,000
shares of our 8% convertible preferred stock and a warrant to purchase 40,000
shares of our series B convertible preferred stock to The Union Labor Life
Insurance Company in exchange for an aggregate price of $3,000,000.
In May 1999, we sold 333,334 shares of our convertible preferred stock
and a warrant to purchase 26,000 shares of our common stock to W. James Tozer,
Jr. and Richard Field, both of whom are currently directors, in exchange for an
aggregate price of $2,000,000.
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In July 1999, we issued convertible promissory notes bearing an annual
rate of interest at a rate of 8% in an aggregate amount of $1,750,000 and
warrants to purchase 42,000 shares of our common stock to certain investors in
exchange for an aggregate price of $1,750,000.
In September 1999, we sold 6,024,096 shares of our series D convertible
preferred stock for an aggregate price of $50,000,000 to Capital Z, Goldman
Sachs Group, Inc., General Electric, priceline.com Incorporated and Marsh &
McLennan Risk Capital Holdings, Ltd.
In connection with the September 1999 transaction, the warrants to
purchase 8% convertible preferred stock and series B convertible preferred stock
held by Phoenix Strategic Capital were exchanged for a warrant to purchase
300,000 shares of our common stock, and the convertible promissory notes with
face amount of $1,750,000 held by certain investors were exchanged for 214,076
shares of series D convertible preferred stock. The Company redeemed 282,221,
127,000 and 539,750 shares of common stock from Phoenix Strategy Capital Corp.,
Don Colby and Robert G. Wilson respectively for an aggregate price of
$5,977,776. In addition, we granted a warrant to purchase 127,000 shares of
common stock valued at $450,000 to Prudential Securities Inc. in exchange for
services rendered in connection with the September 1999 private placement.
On September 29, 2000, we issued to Specialty Finance Partners an
Equity Rights Certificate in exchange for $10 million. This certificate was
initially exercisable for 1,253,918 shares of our common stock and warrants to
purchase 225,000 shares of our common stock. Capital Z also received a
commitment fee warrant to purchase $135,000 shares of our common stock with an
initial exercise price of $7.975, which was adjusted in March 2001 to $3.762.
In March 2001, we sold 3,900,001 shares of our 8% convertible preferred
stock for an aggregate purchase price of $13,650,000 to Zions Bancorporation,
Specialty Finance Partners, Douglas Lebda, our Chief Executive Officer and
director, W. James Tozer, Jr. and Richard D. Field, both of whom are currently
directors, and certain other investors.
In March 2001, as a commitment fee in connection with the a two-year
$5.0 million collateralized revolving credit agreement with The Union Labor Life
Insurance Company, or ULLICO, a current stockholder, we issued to ULLICO
warrants to purchase 40,000 fully paid shares of our common stock with an
exercise price of $.01 per share.
In March 2001, as a commitment fee in connection with a two-year $2.5
million revolving loan agreement with the Federal Home Loan Mortgage
Corporation, or Freddie Mac, a current customer, we issued to Freddie Mac
warrants to purchase 12,500 fully paid shares of our common stock with an
exercise price of $.01 per share.
In April 2001, we will sell 128,571 shares of our 8% convertible
preferred stock for an aggregate purchase price of $450,000 to Keith Hall, our
Chief Financial Officer, and James Tozer, a director.
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From time to time, we have granted stock options to employees. The
following table sets forth information regarding the grants during the past
three fiscal years:
NUMBER OF
SHARES
--------- WEIGHTED AVERAGE
GRANTED EXERCISE PRICE
--------- ----------------
January 1, 1998 through December
31, 1998................................ 846,134 $ 4.62
January 1, 1999 through December
31,1999................................. 1,743,560 $ 5.42
January 1, 2000 through December
31, 2000.................................... 2,985,481 $ 6.28
No underwriters were involved in connection with these sales and
issuances. The sales and issuances of these securities were exempt from
registration under the Securities Act pursuant to (1) Section 4(2) thereof, on
the basis that the transactions did not involve a public offering, or (2) Rule
701 promulgated thereunder on the basis that these options were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to consideration, as provided by Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
Some of the following exhibits have been previously filed with the
Securities and Exchange Commission pursuant to the requirements of the
Securities Act or the Securities Exchange Act. Such exhibits are identified by
the parenthetical references following the listing of each such exhibit and are
incorporated herein by reference.
Exhibit
Number Description of Exhibits
- ------- -----------------------
2.1** Asset Purchase Agreement, dated July 31, 2000, by and among
HomeSpace Services, Inc., LendingTree, Inc., and HomeSpace
Acquisition Company (Incorporated by reference to Exhibit 10.2
in the LendingTree, Inc. Form 10-Q filed with the Commission
on August 14, 2000). The Exhibits and Schedules referenced in
the table of contents and elsewhere in the Asset Purchase
Agreement have been omitted and will be furnished to the
Commission upon request.
3.1* Amended and Restated Articles of Incorporation.
3.2* Amended and Restated Bylaws.
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4.1* Specimen certificate for shares of Registrant's common stock.
4.2++++ LendingTree's Rights Plan, as amended by Amendment No. 1 thereto.
4.3+++ Certificate of Designations, Rights and Preferences of Series
A 8% Convertible Preferred Stock of LendingTree, Inc., as
filed with the Secretary of State of the State of Delaware on
March 19, 2001.
5.1++++ Legal Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as
to legality of securities.
10.1+++ Common Stock Purchase Agreement, dated as of March 7, 2001,
between Registrant and Paul Revere Capital Partners, Ltd.
10.2+++ Registration Rights Agreement dated as of March 7, 2001,
between Registrant and Paul Revere Capital Partners, Ltd.
10.3+++ Escrow Agreement dated as of March 7, 2001, among Registrant,
Paul Revere Capital Partners, Ltd. and Epstein Becker & Green,
P.C.
10.4+++ Letter Agreement dated January 22, 2001, between the
Registrant and Ladenburg Thalmann & Co. Inc.
(a) Amendment to Letter Agreement
10.5+++ Credit Agreement, dated as of March 7, 2001, between
LendingTree, Inc., as Borrower and The Union Labor Life
Insurance Company, on behalf of its Separate Account P, as
Lender.
10.6+++ Warrant to Purchase 40,000 shares of Common Stock issued to
The Union Labor Life Insurance Company, on behalf of its
Separate Account P, dated March 7, 2001.
10.7+++ Security Agreement, dated as of March 7, 2001, between
LendingTree, Inc., as Borrower, and The Union Labor Life
Insurance Company, on behalf of its Separate Account P, as
Lender.
10.8+++ Stock Pledge Agreement, dated as of March 7, 2001, entered
into between LendingTree, Inc., and The Union Labor Life
Insurance Company, on behalf of its Separate Account P.
10.9+++ Subsidiary Guarantee Agreement, dated as of March 7, 2001,
between LendingTree, Inc., HomeSpace Acquisition Company, and
The Union Labor Life Insurance Company, on behalf of its
Separate Account P.
10.10+++ Revolving Credit Facility, dated as of March 7, 2001, by and
between LendingTree, Inc., as Borrower and the Federal Home
Loan Mortgage Corporation, as Lender.
10.11+++ Warrant to Purchase 12,500 shares of Common Stock issued to
the Federal Home Loan Mortgage Corporation, dated March 7,
2001.
10.12+++ Subsidiary Guarantee Agreement, dated as of March 7, 2001,
between LendingTree, Inc., HomeSpace Acquisition Company, and
the Federal Home Loan Mortgage Corporation.
10.13+++ First Amendment to the Software Customization, License and
Services Agreement dated July 20, 2000 and the Marketing
Alliance Agreement dated July 7, 2000, dated as of March 7,
2001, by and between LendingTree, Inc., and the Federal Home
Loan Mortgage Corporation.
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10.14+++ First Amendment to the Software Escrow Agreement dated as of
December 20, 2000, dated as of March 7, 2001, by and between
LendingTree, Inc., the Federal Home Loan Mortgage Corporation,
and Fort Knox Escrow Services, Inc.
10.15+++ Series A 8% Convertible Preferred Stock Purchase Agreement,
dated as of March 7, 2001, between LendingTree, Inc. and the
investors named in Schedule I thereto.
10.16+++ Registration Rights Agreement, dated as of March 7, 2001, by
and among LendingTree, Inc. and the signatories thereto.
10.17+++ Voting Agreement, dated as of March 7, 2001, by and among
LendingTree, Inc. and each of the stockholders listed on
Schedule I attached thereto.
10.18** LendingTree, Inc. Securities Purchase Agreement, dated
September 29, 2000 among LendingTree, Inc., Capital Z
Financial Services Fund II, L.P. and Capital Z. Financial
services Private Fund II, L.P.
10.19** Equity Rights Certificate dated September 29, 2000
representing the right to receive Securities of LendingTree,
Inc.
10.20** Form of Commitment Fee Warrant, dated September 29, 2000 among
LendingTree, Inc. and Capital Z Management LLC.
10.21** Form of Warrant of LendingTree, Inc.
10.22** Consolidated Financial Statements of HomeSpace, Inc. for the
years ended March 31, 2000 and 1999 with Report of Independent
Auditors.
10.23*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Stephen James Campbell, Chief
Information Officer.
10.24*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Richard M. Stiegler, Chief Technology
Officer.
10.25*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Virginia P. Rebata, Senior Vice
President of Human Relations.
10.26*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and David N. Anderson, Senior Vice President
of Operations.
10.27*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Thomas J. Reddin, Senior Vice President,
Chief Marketing Officer.
10.28*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Keith B. Hall, Senior Vice President,
Chief Financial Officer and Treasurer.
10.29*** Employment Continuity Agreement dated April 27, 2000 between
LendingTree, Inc. and Douglas R. Lebda, Chief Executive
Officer and Director.
10.30*** Form Promissory Note Issued by Keith B. Hall, for the benefit
of LendingTree, Inc.
10.31*** Form Pledge Agreement by Keith B. Hall, for the benefit of
LendingTree, Inc.
10.32*** Form Promissory Note Issued by James F. Bennett, Jr., for the
benefit of LendingTree, Inc.
10.33*** Form Pledge Agreement by James F. Bennett, Jr., for the
benefit of LendingTree, Inc.
10.34+ Temporary Continuation of Employment Agreement between James,
F. Bennett, Jr., and LendingTree, Inc.
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10.35+ Asset Purchase Agreement by and among HomeSpace Service, Inc.,
HomeSpace Acquisition Company and LendingTree, Inc.
10.36++ Promissory Note dated November 7, 2000 from David Anderson to
LendingTree, Inc.
10.37++ Stock Pledge Agreement dated November 7, 2000 by David
Anderson for the benefit of LendingTree, Inc.
10.38* Employment Agreement between LendingTree, Inc. and Douglas R.
Lebda, dated September 2, 1999.
10.39* Employment Agreement between LendingTree, Inc. and Thomas J.
Reddin, dated November 26, 1999.
10.40* 1999 Stock Option Plan of LendingTree, Inc., dated November
20, 1999.
10.41* 1998 Stock Option Plan of LendingTree, Inc., dated February 3,
1998.
10.42* 1997 Stock Option Plan of CreditSource USA, Inc. (formerly
knows Lewisburg Ventures, Inc. and a predecessor to
LendingTree, Inc.), dated January 15, 1997.
10.43* Internet, Marketing and Licensing Agreement between
LendingTree, Inc. and priceline.com Incorporated, dated as of
August 1, 1998.
10.43.1* Amendment No. 1 to Internet, Marketing and Licensing Agreement
between LendingTree, Inc. and priceline.com Incorporated,
dated as of January 26, 2000.
10.44* Registration Rights Agreement, dated September 20, 1999.
10.45* Warrant to Purchase 7,500 shares of Common Stock issued to
Phoenix Strategic Capital, dated November 30, 1998.
10.46* Warrant to Purchase 50,000 shares of Common Stock issued to
Seacris Group, Ltd., dated December 9, 1998.
10.47* Form of Warrant to purchase 13,000 shares of Common Stock
issued to Richard D. Field, dated May 25, 1999, as amended
September 20, 1999.
10.48* Warrant to Purchase 13,000 shares of Common Stock issued to W.
James Tozer, Jr., dated May 25, 1999, as amended September 20,
1999.
10.49* Form of Warrant to grant a right to purchase an aggregate of
42,000 shares of Common Stock dated July 13, 1999.
10.50* Warrant to Purchase 300,000 shares of Common Stock issued to
the Union Labor Life Insurance Company, on behalf of its
Separate Account P, dated September 20, 1999.
10.51* Warrant to Purchase 100,000 shares of Common Stock issued to
Prudential, dated September 20, 1999.
10.52* Co-Branded Site Agreement between LendingTree, Inc. and
CNBC.com LLC, dated January 14, 2000.
10.53* Warrant to Purchase 150,000 shares of Common Stock issued to
CNBC.com LLC, dated January 14, 2000.
10.54* Amended and Restated 1999 Stock Incentive Plan of LendingTree,
Inc.
10.55* Management Incentive Plan.
10.56* LendingTree, Inc. Deferred Compensation Plan for Employees.
10.57* LendingTree, Inc. Non-Employee Director Deferred Compensation
Plan.
10.58* Form of Promissory Note Issued by Douglas Lebda, for the
benefit of LendingTree, Inc.
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10.59* Form of Pledge Agreement by Douglas Lebda for the benefit of
LendingTree, Inc.
10.60* LoanTrader.com, Inc. 8% Convertible Preferred Stock Purchase
Agreement, dated February 1, 2000.
21.1++++ Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2++++ Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included
in Exhibit 5.1).
24.1++++ Power of Attorney.
- ---------------
* Incorporated by reference from the registrant's Form S-1
(333-91839).
** Incorporated by reference from the registrant's current report
on Form 8-K, dated October 12, 2000 (000-29215).
*** Incorporated by reference from the registrant's quarterly
report on Form 10-Q for the quarter ended May 12, 2000
(000-29215).
+ Incorporated by reference from the registrant's quarterly
report on Form 10-Q for the quarter ended August 14, 2000
(000-29215).
++ Incorporated by reference from the registrant's quarterly
report on Form 10-Q for the quarter ended November 14, 2000
(000-29215).
+++ Incorporated by reference from the registrant's annual report
on Form 10-K for the year ended December 31, 2000 (000-29215).
++++ Filed previously.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of
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the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the Effective Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in
the registration statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) above do not apply if the information required
to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission
by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities being offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Charlotte,
State of North Carolina, on this 29th day of June, 2001.
LENDINGTREE, INC.
By: /s/ Keith B. Hall
-----------------------------
Name: Keith B. Hall
Title: Senior Vice President,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated and on the date below:
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Signature Title(s) Date
--------- -------- ----
DOUGLAS R. LEBDA Chief Executive Officer and June 29, 2001
- ---------------------------------- Director (Principal Executive
Douglas R. Lebda Officer)
Chief Financial Officer, Senior June 29, 2001
* /s/ Keith B. Hall Vice President, and Treasurer
- ---------------------------------- (Principal Financial and Account-
Keith B. Hall ing Officer)
Senior Vice President and Chief June 29, 2001
* Operating Officer (Principal
- ---------------------------------- Operating Officer)
Thomas Reddin
* Director June 29, 2001
- ----------------------------------
James Carthaus
* Director June 29, 2001
- ----------------------------------
Richard Field
* Director June 29, 2001
- ----------------------------------
Robert Kennedy
* Director June 29, 2001
- ----------------------------------
Daniel Charles Lieber
* Director June 29, 2001
- ----------------------------------
Robert Spass
* Director June 29, 2001
- ----------------------------------
W. James Tozer, Jr.
* Director June 29, 2001
- -----------------------------------
Dale Gibbons
*By: /s/ KEITH B. HALL
-------------------------------
Attorney-in-Fact
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