UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005
COMMISSION FILE NUMBER: 000-31413
BOTTOMLINE HOME LOAN, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0356064
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 EAST HUNTINGTON DRIVE, SUITE 202, MONROVIA, CA 91016
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(Address of principal executive office) (Zip Code)
(800) 520-5626
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [XX] No [ ]
State the number of outstanding shares of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of common stock,
$0.001 par value (the only class of voting stock), as of April 27, 2006, was
4,553.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [XX]
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 12
ITEM 3. CONTROLS AND PROCEDURES 17
PART II--OTHER INFORMATION 18
ITEM 6. EXHIBITS 18
SIGNATURES 18
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOTTOMLINE HOME LOAN, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
DECEMBER 31, JUNE 30,
ASSETS 2005 2005
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Current assets:
Cash and cash equivalents $ 793,492 $ 1,066,428
Restricted cash 10,135 52,240
Receivables from sales of loans 1,925,863 3,206,115
Mortgage servicing rights, net 34,187 11,397
Prepaids and other current assets 3,568 42,487
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Total current assets 2,767,245 4,378,667
Property and equipment, net 131,111 154,353
Equity builder finder's fee receivable, net 42,059 48,725
Other assets 13,312 13,312
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Total assets $ 2,953,727 $ 4,595,057
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Warehouse line of credit $ 1,822,042 $ 2,998,849
Accounts payable and accrued expenses 168,855 308,200
Current maturities of long-term debt 17,690 17,690
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Total current liabilities 2,008,587 3,324,739
Long-term debt 23,069 30,691
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Total liabilities 2,031,656 3,355,430
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Minority interest 113,463 174,797
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Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares -- --
authorized; 0 shares issued and outstanding in
December 31,2005 and June 30, 2005 respectively
Common stock, $.001 par value, 500,000,000 shares
authorized; 45,539,000 and 15,539,000 shares issued
and outstanding in December 31, 2005 and
June 30, 2005, respectively 45,539 45,539
Additional paid-in capital 1,259,814 1,273,563
Accumulated deficit (496,745) (254,272)
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Total stockholders' equity 808,608 1,064,830
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Total liabilities and stockholders' equity $ 2,953,727 $ 4,595,057
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See accompanying note to financial statements
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BOTTOMLINE HOME LOAN, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
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Revenues:
Income from sale of loans and servicing rights $ 135,201 $ 230,596 $ 480,551 $ 408,152
Origination fee revenue 220,722 211,149 511,965 362,893
Income from sale of servicing portfolio -- -- -- 55,275
Real estate commission revenue 1,812,318 829,868 2,945,292 1,527,758
Servicing revenue (669) 1,495 71 5,339
Other operating revenue 48,870 30,938 89,097 62,190
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Total revenues 2,216,442 1,304,046 4,026,976 2,421,607
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Operating expenses:
Salaries and direct loan costs 440,571 340,327 986,829 643,639
Cost of servicing portfolio sold -- -- -- --
Real estate commissions paid 1,717,370 790,894 2,808,399 1,465,551
Interest 51,220 27,550 120,512 40,717
General and administrative 197,034 135,204 384,695 279,960
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Total operating expenses 2,406,195 1,293,975 4,300,435 2,429,867
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(Loss) income from operations (189,753) 10,071 (273,459) (8,260)
-------------------------------- --------------------------------
Other income (expense):
Other income 40 (627) (97) (627)
-------------------------------- --------------------------------
Total other income (expense) 40 (627) (97) (627)
-------------------------------- --------------------------------
Net loss before minority interest
and taxes (189,713) 9,444 (273,556) (8,887)
Income tax expense -- -- -- --
Minority share of loss (income) 21,022 (1,601) 31,083 1,332
-------------------------------- --------------------------------
Net (loss) income $ (168,691) $ 7,843 $ (242,473) $ (7,555)
================================ ================================
Net (loss) income per common share
- basic and diluted $ -- $ -- $ -- $ --
================================ ================================
Weighted average shares outstanding
- basic and diluted 45,539,000 15,539,000 45,539,000 15,539,000
================================ ================================
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See accompanying note to financial statements
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BOTTOMLINE HOME LOAN, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31,
2005 2004
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (242,473) $ (7,555)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 23,242 14,231
Minority interest in net income (loss) (31,083) (1,332)
Decrease (increase) in:
Receivables from sales of loans 1,280,252 (453,654)
Equity builder finder's fee receivable 6,666 12,127
Prepaid and other current assets 38,919 51
Mortgage servicing rights (22,790) (6,204)
Increase (decrease) in:
Accounts payable and accrued expenses (139,345) 53,788
Net change in warehouse line of credit (1,176,807) 398,027
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Net cash (used in) provided by operating activities (263,419) 9,479
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash 42,105 (1,879)
Purchase of property and equipment -- (11,971)
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Net cash provided by (used in) investing activities 42,105 (13,850)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (7,622) (12,156)
Buy-back of subsidiary common stock (44,000) (24,000)
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Net cash used in financing activities (51,622) (36,156)
------------------------------
Net decrease in cash and cash equivalents (272,936) (40,527)
Cash and cash equivalents at beginning of period 1,066,428 272,599
------------------------------
Cash and cash equivalents at end of period $ 793,492 $ 232,072
==============================
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See accompanying note to financial statements
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BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF NATURE OF BUSINESS
SIGNIFICANT The Company incorporated under the laws of the State of
ACCOUNTING Nevada on February 15, 1996 as CyberEnergy, Inc. The name
POLICIES of the Company was changed to Bottomline Home Loan, Inc. on
July 20, 2001. The Company was a developmental stage
company until June 26, 2001, when it acquired 76 of the
outstanding common stock of Bottomline Mortgage, Inc. The
transaction was accounted for as a reverse acquisition
using the purchase method of accounting, therefore, the
historical results presented in the financial statements
are those of Bottomline Mortgage, Inc., the accounting
acquirer, through June 27, 2001, after which historical
results represent the combined entity. The ownership
percentage has increased to approximately 88% as a result
of the Company's subsidiary buying back additional shares
of it's stock. The Company, primarily through its
subsidiary, Bottomline Mortgage, Inc., assists individuals,
brokers, and others in obtaining long-term trust deed
(mortgage) financing. The Company processes loan
applications, effects loan underwriting and receives
purchase commitments from investor groups for
mortgage-backed loans prior to funding the loans, primarily
at its corporate office in Monrovia, California. Loan
applications are also solicited and received at office
location in Phoenix, Arizona. The Company's subsidiary is a
loan correspondent, as defined by the U.S. Department of
Housing and Urban Development (HUD), and is therefore
required to conform to certain net worth, liquid assets and
other conditions and requirements and to follow certain
specific regulations issued from time to time by HUD.
Through a division of Bottomline Home Loan, Inc., dba
Global Realty, the Company acts as a real estate broker.
Global Realty has established agreements with approximately
175 real estate sales agents that pay us a monthly fee and
a $350 portion of each sales commission for the use of six
satellite offices established by the Company in the Los
Angeles, California area for their use. The Company is
working to engage additional real estate sales agents and
open additional satellite offices in an effort to expand
this program.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include
the accounts of Bottomline Home Loan, Inc. (formerly known
as Cyberenergy, Inc.) and its 88% subsidiary, Bottomline
Mortgage, Inc. Minority interest represents minority
shareholders' proportionate share of the equity in
Bottomline Mortgage, Inc. All significant intercompany
balances and transactions are eliminated.
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BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF ESTIMATES
SIGNIFICANT The preparation of financial statements in conformity
ACCOUNTING with accounting principles generally accepted in the United
POLICIES States of America requires management to make estimates and
(Continued) assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from
those estimates.
CONCENTRATION OF CREDIT RISK
The Company's primary business is originating conventional
mortgage loans and mortgage loans based on HUD Title II
regulations. As an approved HUD Title II loan
correspondent, the Company's subsidiary HUD mortgages are
insured by FHA. Title II regulations limit the size of
individual loans to specific dollar amounts, and contain
guidelines regarding borrower credit-worthiness. Company
management believes the credit risk associated with
specific borrowers and geographic concentrations is not
significant.
The Company maintains cash in bank deposit accounts, which
at times may exceed federally insured limits. The Company
has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Financial instruments, which potentially subject the
Company to concentration of credit risk include receivables
from investors and customers. In the normal course of
business, the Company provides credit terms to investors
and customers. Accordingly, the Company performs ongoing
credit evaluations of investors and customers.
EARNINGS PER SHARE
The computation of basic earnings per common share is based
on the weighted average number of shares outstanding during
each period.
The computation of diluted earnings per common share is
based on the weighted average number of shares outstanding
during the period plus the common stock equivalents which
would arise from the conversion of debt or equity
instruments convertible into common stock and the exercise
of stock options and warrants outstanding using the
treasury stock method and the average market price per
share during the period. Common stock equivalents are not
included in the diluted per share calculation when their
effect is antidilutive. As of December 31, 2005, the
company had no common stock equivalents outstanding.
-7-
BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF STOCK-BASED COMPENSATION
SIGNIFICANT For the stock options granted to employees, the Company
ACCOUNTING utilizes the footnote disclosure provisions of Statement of
POLICIES Financial Accounting Standards (SFAS) No. 123, Accounting
(Continued) for Stock-Based Compensation. SFAS No. 123 encourages
entities to adopt a fair-value based method of accounting
for stock options or similar equity instruments. However,
it also allows an entity to continue measuring compensation
cost for stock-based compensation using the intrinsic value
method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company has elected to continue to apply the
provisions of APB No. 25, pro forma footnote disclosures
required by SFAS No. 123 are not applicable during the
periods presented as no options were granted or vested
during those periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Standard No. 123(R),
Share-Based Payment, an amendment of FASB No. 123 and 95.
SFAS No. 123(R) replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. This
statement requires companies to recognize the fair value of
stock options and other stock-based compensation to
employees prospectively beginning with fiscal periods
beginning after June 15, 2005, however, the Securities and
Exchange Commission has deferred this date for public
companies. The new rule allows companies to implement SFAS
No 123(R) no later than July 1, 2006. The company has no
granted options outstanding. The Company anticipates
adopting the modified prospective method of SFAS No 123(R)
on July 1, 2006, The impact on the Company's financial
condition or results of operations will depend on the
number and terms of stock options outstanding on the date
of change, as well as future options that may be granted.
-8-
BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF MORTGAGE SERVICING RIGHTS
SIGNIFICANT The Company originates mortgage loans of sale to the
ACCOUNTING secondary market and sells the loans on either a servicing
POLICIES retained or servicing released basis. Servicing rights
(Continued) represent the right to receive payments from the
mortgagees, administer the escrow accounts and remit the
mortgage payments to the investor. The investor pays the
servicer a predetermined rate in exchange for servicing the
loans. Servicing rights are recognized as assets based on a
percentage of the direct loan costs incurred to originate
the loan. The percentage of direct costs is calculated by
taking the estimated revenue from the sale of the servicing
rights divided by the total revenue from the origination of
the mortgage, including sale of servicing rights. The
servicing rights asset is amortized over the expected life
of the asset, which has been estimated by management to be
an average of nine years. Mortgage servicing rights are
periodically evaluated for impairment. Impairment
represents the excess of unamortized cost over its
estimated fair market value. Impairment is evaluated based
upon the fair value of the assets, using groupings of the
underlying loans as to interest rates. Fair market value is
determined using prices for similar assets with similar
characteristics or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is
reported as a valuation allowance. There were no impairment
charges incurred during the three and six month periods
ended December 31, 2005.
RECOGNITION OF MORTGAGE FEE INCOME
Mortgage fee income consists of service and release
premiums, origination fees, processing fees and certain
other income related to mortgages. For mortgages sold,
mortgage fee income and related expenses are recognized at
the time the loan meets the sales criteria for financial
assets which are; (1) the transferred assets have been
isolated from the Company and its creditors, (2) the
transferee (investor) has the right to pledge or exchange
the mortgage, and (3) the Company does not maintain
effective control over the transferred mortgage loan. The
Company does not carry any mortgage loans for investment
purposes. A firm commitment is obtained from the investor
on a loan-by-loan basis before closing a loan, therefore
each loan is sold virtually at the same time it is closed,
removing exposure to interest rate changes. The loans are
sold on a pure pass-through basis, meaning there is no
yield differential between the loan rate less servicing
fees and the yield to the purchaser of the loan. Such loans
are sold at premiums or discounts depending on the ultimate
yield required by the investor. All premiums or discounts
are paid by the investor at the time the loan is sold.
Immediately after closing, the loan documents are sent to
the investor endorsed in blank, thus allowing the holder of
the loan to sell or transfer the loan at their discretion.
This means that title and effective control have
transferred to the investor. At such time, revenue,
calculated as the amount due from the investor in excess of
the loan funded by the Company, is recorded. Payment of
most receivables from the sale of loans is received within
one week of closing. Because title of the loan has
transferred, the Company is not exposed to market risk
during this time period.
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BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF RECOGNITION OF MORTGAGE FEE INCOME - CONTINUED
SIGNIFICANT In connection with the sale of mortgage loans, the Company
ACCOUNTING may also sell the servicing rights to such loans. The
POLICIES Company recognizes revenue from the sale of such servicing
(Continued) rights when an agreement with the purchaser of such
servicing rights exists, ownership to such servicing rights
has been transferred to the purchaser, the selling price of
such servicing rights is fixed or determinable, and
collectibility is reasonable assured. The Company's
contracts with investors or servicers that purchase these
rights require certain warrants and representations by the
Company which guarantee the mortgages will be serviced for
a minimum of three to twelve months after they are
purchased. Should for any reason the loan be paid off or
prepaid during the first year, the servicer may request the
return of all or a pro-rated portion of the service release
premium paid to the Company. The Company's accounting
policy is to provide a reserve for the amount of fees that
are estimated to be refunded to the servicers. To date,
such estimates have not been material. During the six
months ended December 31, 2005 and 2004, the Company did
not refund any service release premiums to a servicer.
Commitment fees received (non-refundable fees that arise
from agreements with borrowers that obligate the Company to
make a loan or satisfy an obligation under a specified
condition) are initially deferred and recognized as revenue
as loans are delivered to investors, or when it is evident
that the commitment will not be utilized.
Loan origination fees received and direct costs of
originating loans are deferred and recognized as income or
expense when the loans are sold to investors.
Mortgage loans are primarily funded by lending institutions
under warehouse line of credit agreements.
RECOGNITION OF LOAN SERVICING INCOME
The Company recognizes revenue from servicing loans monthly
as the services are performed.
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BOTTOMLINE HOME LOAN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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1. SUMMARY OF REAL ESTATE COMMISSION REVENUE
SIGNIFICANT Real estate commissions are recognized at the point at which
ACCOUNTING all Company services have been performed, and title to real
POLICIES property has passed from seller to buyer. The Company has
(Continued) performed an analysis of EITF Issue 99-19, and determined
that the gross commission should be recorded as revenue and
the amounts paid to the agents should be recorded as a
separate expense.
INCOME TAXES
Deferred taxes are computed using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date.
2. BASIS OF The accompanying unaudited consolidated financial statements
PRESENTATION have been prepared by management in accordance with the
instructions in Form 10-QSB and, therefore, do not include
all information and footnotes required by accounting
principles generally accepted in the United States of
America and should, therefore, be read in conjunction with
the Company's Form 10-KSB, filed with the Securities and
Exchange Commission. These statements do include all normal
recurring adjustments, which the Company believes necessary
for a fair presentation of the statements. The interim
operations results are not necessarily indicative of the
results for the entire year.
3. SUPPLEMENTAL During the six months ended December 31, 2005, the Company:
DISCLOSURE OF
CASH FLOW o Reduced minority interest by $28,856 and additional
INFORMATION paid-in capital by $13,749, due to the buy-back of
subsidiary common stock by the subsidiary.
RECOGNITION OF EQUITY BUILDER FINDER'S FEES
Equity builder finder's fees represent fees charged to
customers to initiate the Equity Builder Program (the
program). The program allows the customer to make biweekly
payments by automatic transfer, which results in a quicker
loan payoff. Equity builder revenue is recognized upon the
Company receiving confirmation from the servicing agent that
the loan payments will be processed in accordance with the
program. The unpaid balance from the program due from
customers at December 31, 2005 was $42,059, net of the
allowance for uncollectible receivables of $40,000, which is
shown under the caption equity builder finder's fee
receivable on the consolidated balance sheet.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Bottomline Home Loan, Inc. was formed under Nevada law on February 15, 1996,
under the name Cyberenergy, Inc. The name was changed to Bottomline Home Loan,
Inc. on July 20, 2001. On June 26, 2001, Bottomline Home Loan, Inc. signed an
agreement to acquire a 76% interest in Bottomline Mortgage, Inc. in exchange for
10,000,000 of our common shares or a 62% interest in our issued and outstanding
shares. Bottomline Mortgage, Inc. then became our operating subsidiary effective
July 1, 2001. Our ownership percentage has increased to approximately 88% as a
result of our purchase of additional shares of our subsidiary. Our executive
office is located at 201 East Huntington Drive, Suite 202, Monrovia, CA 91016,
and our telephone number is (800) 520-5626. Our registered statutory office in
Nevada is located at 711 S. Carson Street, Suite 1, Carson City, Nevada 89701.
References to us in this report include Bottomline Home Loan, Inc. and our
subsidiary, Bottomline Mortgage, Inc., unless the context indicates otherwise.
Our operations are conducted through our subsidiary Bottomline Mortgage, Inc. We
are an independent retail mortgage banking company primarily engaged in the
business of originating and selling residential mortgage loans. We offer a broad
array of residential mortgage products targeted primarily to high-credit-quality
borrowers over the Internet, as well as through six commission-compensated loan
originators. We operate primarily as a mortgage banker, underwriting, funding
and selling our loan products to various buyers. Operations are conducted from
our offices in Monrovia, California, and Phoenix, Arizona, which operate as
community loan centers and call centers to service the 10 states in which we are
currently approved to originate mortgages.
One of the trends affecting the mortgage industry in general and us in
particular is the decrease in mortgage refinancing activity resulting from the
increase in interest rates. As a result, we have worked to develop other revenue
sources. During the quarter ended December 31, 2004, we began to receive
revenues from our Global Realty Network. With our President, Buster Williams,
Jr., acting as the supervising broker, the Global Realty Network has established
agreements with approximately 175 real estate sales agents that pay us a monthly
fee and a $350 portion of each sales commission for the use of seven satellite
offices established by us in the Los Angeles, California area for their use. We
are working to engage additional real estate sales agents and open additional
satellite offices in an effort to expand this program.
During the six months ended December 31, 2005, we originated approximately $32.3
million in loans, of which 94% were first mortgages and 6.0% were second
mortgages made to persons seeking to refinance their residential loans. This
represents a increase of 40%, or $ 9.3 million, from the loans that closed in
the six months ended December 31, 2004.
The loans referred by Global Realty have shown a positive impact during 2005 on
our loan origination volume. The total volume of loans closed increased 40%.
Loan revenues during the first six months of fiscal year 2005 increased from the
same period for fiscal year 2004 by $110,513, to $992,516 from $826,320. The
increase in revenue is a result in our loan volume increasing during the six
months ended December 31, 2005. Servicing rights of approximately $3.26 million
of our Fannie Mae loans were retained in December 2005. Beginning in April 2003,
-12-
we decided to retain some of the servicing rights to our Fannie Mae loans for
later sale in bulk portfolios rather than selling them with the loans on a flow
basis. We contract with a third party for the actual servicing of these loans.
This enables us to create a stream of income by retaining a portion of the
servicing fee before selling the servicing rights in bulk, which we anticipate
doing on a once or twice a year basis. The estimated costs incurred relating to
the mortgage servicing rights portion of the loan are capitalized and carried on
the balance sheet under the caption, "mortgage servicing rights, net." This
asset represents the deferral of a percentage of the actual costs incurred to
originate the loans. The mortgage servicing rights asset is being amortized over
the estimated life of the loans. When the servicing rights are sold, these
deferred costs will be offset against the proceeds from the sale of such
servicing rights. This portfolio of loan servicing rights is shown in the
balance sheet as mortgage servicing rights, net at $34,187.
Our loss was $242,473 for the six months ended December 31, 2005, as compared
with loss of $7,555 for the six months ended December 31, 2004.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the audited financial statements
and accompanying notes and the other financial information appearing in our
annual report on Form 10-KSB for the year ended June 30, 2005.
The following information is based upon the Consolidated Statements of
Operations for Bottomline Home Loan, Inc. and Bottomline Mortgage, Inc., our
majority-owned subsidiary.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a discussion of our critical accounting policies and estimates
that management believes are material to an understanding of our results of
operations and that involve the exercise of judgment or estimates by management.
REVENUE RECOGNITION. Income from the sale of loans and servicing rights consists
of service and release premiums, origination fees, processing fees and certain
other income related to mortgages. For mortgages sold, mortgage fee income and
related expenses are recognized at the time the loan meets the sales criteria
for financial assets, which are: (1) the transferred assets have been isolated
from us and our creditors, (2) the transferee (investor) has the right to pledge
or exchange the mortgage, and (3) we do not maintain effective control over the
transferred mortgage loan. We do not carry any mortgage loans for investment
purposes. A firm commitment is obtained from the investor on a loan-by-loan
basis before closing a loan; therefore, each loan is sold virtually at the same
time it is closed, removing all exposure to interest rate changes. Such loans
are sold at premiums or discounts depending on the ultimate yield required by
the investor. All premiums or discounts are paid by the investor at the time the
loan is sold. Immediately after closing, the loan documents are sent to the
investor endorsed in blank, thus allowing the holder of the loan to sell or
transfer the loan at its discretion. This means title and effective control have
transferred to the investor. At such time, revenue, calculated as the amount due
from the investor in excess of the loan funded by us, is recorded. Payment of
most receivables from the sale of loans is received within one week of closing.
Because title of the loan has been transferred, we are not exposed to market
risk during this time period. We may be required to repurchase the loans from
investors if specific original documents specified by the investor are not
delivered, if there was fraud in the origination of the loan, or if the borrower
becomes delinquent during the first several months after the loan is sold. Our
accounting policy is to reserve for the estimated loan repurchases.
-13-
In connection with the sale of mortgage loans, we also may sell the servicing
rights to such loans. We recognize revenue from the sale of such servicing
rights when an agreement with the purchaser of such servicing rights exists,
ownership to such servicing rights has been transferred to the purchaser, the
selling price of such servicing rights is fixed or determinable, and
collectibility is reasonably assured. Our contracts with investors or servicers
that purchase these rights require certain warrants and representations by us
that guarantee the mortgages will be serviced for a minimum of three to 12
months after they are purchased. Should for any reason the loan be paid off or
prepaid during the first year, the servicer may request the return of all or a
pro rata portion of the service release premium paid to us. Our accounting
policy is to provide a reserve for the amount of fees that are estimated to be
refunded to the servicers; however, to date such estimates have not been
material. During the six months ended December 31, 2005 and 2004, we did not
refund any service release premiums to a servicer. Commitment fees received,
which are nonrefundable fees that arise from agreements with borrowers that
obligate us to make a loan or satisfy an obligation under a specified condition,
are initially deferred and recognized as revenue as loans are delivered to
investors or when it is evident that the commitment will not be utilized. Loan
origination fees received and direct costs of originating loans are deferred and
recognized as income or expense when the loans are sold to investors.
Equity Builder finder's fees represent finders' fees charged to customers to
initiate the Equity Builder Program (the program). The program allows the
customer to make biweekly payments by automatic transfer, which results in a
quicker loan payoff. Equity Builder revenue is recognized upon our receipt of
confirmation from the servicing agent that the loan payments will be processed
in accordance with the program. The unpaid balance from the program due from
customers on December 31, 2005, was $42,059, compared with $48,725 at June 30,
2005, which is shown under the caption "Equity Builder finder's fee receivable"
on the balance sheet. We stopped initiating customers in the Equity Builder
Program in September 2002, and do not anticipate enrolling customers in the
future. Revenue from servicing loans is recognized monthly as the services are
performed.
MORTGAGE SERVICING RIGHTS. We originate mortgage loans for sale to the secondary
market and sell the loans on either a servicing-retained or servicing-released
basis. Mortgage servicing rights represent the right to receive payments from
the mortgages, administer the escrow accounts, and remit the mortgage payments
to the investor. The investor pays the servicer a predetermined rate in exchange
for servicing the loans. Servicing rights are recognized as assets based on a
percentage of the direct costs incurred to originate the loan. The percentage of
direct costs is calculated by taking the estimated revenue from the sale of
servicing rights divided by the total revenue from the origination of the
mortgage, including the sale of servicing rights. The servicing rights asset is
amortized over the expected life of the asset, which has been estimated by
management to be an average of nine years. Mortgage servicing rights are
periodically evaluated for impairment. Impairment represents the excess of
unamortized cost over its estimated fair value. Impairment is evaluated based
upon the fair value of the assets, using groupings of the underlying loans as to
interest rates. Fair value is determined using prices for similar assets with
similar characteristics or based upon discounted cash flows using market-based
assumptions. Any impairment of a grouping is reported as a valuation allowance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
Revenues for the three months ended December 31, 2005, were $2,216,442, compared
to revenues of $1,304,046 for the three months ended December 31, 2004. This
increase is mainly due to our decision to hire 25 new commission-only real
estate agents for the Global Realty Network, which increased our real estate
sales force to 175 agents during this period, and to open one new satellite real
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estate office in the Los Angeles, California area. Our real estate commission
revenue has increased from $829,868 for the three months ended December 31,
2004, to $1,812,318 for the same period in 2005. During the three months ended
December 31, 2005, all loan servicing rights were retained, with no income from
the sale of the loan servicing rights for the same period in 2004 due to our
decision to retain the loan servicing rights until we have a larger portfolio of
servicing rights to sell. The income from the sale of servicing portfolio can
vary greatly from period to period as we accumulate servicing rights and sell
such rights as a portfolio only a few times each year.
We had loan origination income of $220,722 in the three months ended December
31, 2005, versus $211,149 in the three months ended December 31, 2004, a
increase of 4.5%. Loss from servicing was ($669) in the three months ended
December 31, 2005, compared with a revenue of $1,495 in the three months ended
December 31, 2004. This amount reflects the revenue recognized from the
servicing rights retained by us. We anticipate this amount to grow in future
periods as we continue to increase our holdings in servicing rights.
Selling, general and administrative expenses for the three months ended December
31, 2005, were $197,034, and such expenses for the three months ended December
31, 2004, were $135,204, an increase of $61,830 or approximately 46%. The
increase is due mainly to additional costs associated with the opening of new
satellite real estate office. Selling, general and administrative expenses for
2005 and 2004 consisted of expenses to keep our corporate good standing, fees to
transfer agents, and operating expenses, including rent, telephone, licensing
fees, equipment leases, accounting and legal services.
Salaries and direct loan costs for the three months ended December 31, 2005,
were $440,571, compared to $340,327 for the three months ended December 31,
2004, a increase of $100,244 or 29.5%. This increase is mainly attributable to
the fact that additional loans were originated during this period as compared
with the same quarter in 2004.
Total operating expenses were $2,406,195 for the three months ended December 31,
2005, and $1,293,975 for the comparable period in 2004, an increase of
$1,112,220 or approximately 86%. This increase is mainly due to the real estate
commissions paid to the commission-only real estate agents at Global Realty
Network.
Net income (loss) for the three months ended December 31, 2005 and 2004, was
($168,771) and $7,843, respectively. As a percentage of revenue, net (loss) for
the three-month period ended December 31, 2005, was 7%, as compared to the
income equal to .06% of revenues for the three-month period ended December 31,
2004. The increase in (loss) as a percentage of revenue is primarily
attributable to increased operating expenses and expenses associated with the
opening of the new satellite real estate offices.
SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
Revenues for the six months ended December 31, 2005, were $4,026,976, compared
to revenues of $2,421,607 for the six months ended December 31, 2004. This
increase is mainly due to our decision to hire 25 new commission-only real
estate agents for the Global Realty Network, which increased our sales force to
175 agents during this period, and to open one new satellite real estate office
in the Los Angeles, California area. We now have a total of seven satellite
offices in the Los Angeles, California area.
We had loan origination income of $511,965 in the six months ended December 31,
2005, versus $362,893 in the six months ended December 31, 2004, a increase of
41.1%. In addition, we had income from the sale of loans and servicing rights in
the amount of $480,551 in the six months ended December 31, 2005, compared with
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$408,152 in the six months ended December 31, 2004, an increase of 17.7%,
reflecting our sale of servicing rights upon closing some of the loans
originated during the six months ended December 31, 2005. Revenue from servicing
was $71 in the six months ended December 31, 2005, compared with $5,339 in the
six months ended December 31, 2004. This amount reflects the revenue recognized
from the servicing rights retained by us. We anticipate this amount to grow in
future periods as we continue to increase our holdings in servicing rights. We
sold servicing rights on approximately $3.3 million of our Fannie Mae loans at
par during the six months ended December 31, 2005, which is shown under the
caption "Income from sale of servicing portfolio" on the statement of
operations. The income from the sale of servicing rights portfolio can vary
greatly from period to period as we accumulate servicing rights and sell such
rights as a portfolio a few times a year. Real estate commission revenue from
our Global Realty Network was $2,945,292 for the six months ended December 31,
2005, as compared to $1,527,758 for the six months ended December 31, 2004.
Selling, general and administrative expenses for the six months ended December
31, 2005, were $384,695, and such expenses for the six months ended December 31,
2004, were $279,960, an increase of $104,735, or approximately 37%. The increase
is due partly to additional costs associated with the opening of one new
satellite real estate office. Selling, general and administrative expenses for
2005 and 2004 consisted of expenses to keep our corporate good standing, fees to
transfer agents, and operating expenses, including rent, telephone, licensing
fees, equipment leases, accounting and legal services.
Salaries and direct loan costs for the six months ended December 31, 2004, were
$986,829 compared to $643,639 for the six months ended December 31, 2004, a
increase of $343,190 or 53.3%. This increase is mainly due to the increase of
loan originations during the same period. Total operating expenses were
$4,300,435 for the six months ended December 31, 2005, and $2,429,867 for the
comparable period in 2004, an increase of $1,870,568, or approximately 73%. This
increase is mainly attributable to the real estate commissions paid to the
Global Realty Network's commission-only real estate agents.
We had a net loss of ($242,473) for the six months ended December 31, 2005,
compared with a loss of ($7,555) for the six months ended December 31, 2004. As
a percentage of revenue, net loss for the six-month period ended December 31,
2005, was 6%, as compared to (loss) equal to .03% of revenues for the six-month
period ended December 31, 2004. This increase can be attributed to increased
operating expenses and expenses associated with the opening of the one new
satellite real estate office and recruiting additional commissioned real estate
agents into the six existing satellite real estate offices.
LIQUIDITY AND CAPITAL RESOURCES
Current cash balances and funds available to us under our working capital credit
facilities, in addition to our cash flows from operations, are expected to be
sufficient to meet our liquidity requirements at our current level of operations
through at least the remainder of the fiscal year ending June 30, 2006. We
expect to continue our plans for expansion for the remainder of the fiscal year
ending June 30, 2006, and believe that cash flows from operations will support
those plans over that time period. At the present, we do not have any
commitments for any additional equity or loan arrangements and cannot provide
any level of assurance that we would be able to obtain any additional equity or
loan financing if needed. We anticipate that revenue generated from our current
operations will provide sufficient funds to satisfy our cash needs through the
fiscal year ending June 30, 2005.
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Our warehouse facility or line of credit presently used to fund loans, in the
amount of $5 million, with an interest rate of prime plus 0.75%, is with First
Collateral Services. First Collateral requires that we maintain a minimum
tangible net worth of $350,000 and pay a fee or penalty of 0.25% of 1% in the
event that we fail to utilize at least 50% of the line during a month. Loans
funded by this line must be paid off or purchased within 45 days of the funding
date. The original Master Loan Warehousing Agreement was dated November 27,
1998, and is up for renewal March 31, 2006. The balance of the warehouse
facility as of December 31, 2005, was $1,822,042, which matures on March 31,
2006, and is secured by the notes and deeds of trust from the loans that are
funded on the line of credit. We anticipate rolling over the warehouse credit
facility into a new facility that will mature in March of 2006. There can be no
assurance that we will be successful in renewing the credit facility on its
maturity date of March 31, 2006. If we are not successful in renewing the credit
facility, we will be unable to continue our loan origination business.
CASH FLOW ACTIVITIES
We had an ending cash balance of $793,492 at December 31, 2005 as compared to
$1,066,428 at June 30, 2005. The decrease in cash is a direct result of one time
expenses associated with the opening of new satellite real estate offices and
recruiting commissioned only real estate agents.
Cash provided by operating activities was ($263,419) for the six months ended
December 31, 2005, as compared to cash provided by operations of $9,479 for the
six-month period ended December 31, 2004. The main reason for the decrease is
due to the increase in receivables from sale of loans of $1,280,252 in the six
months ended December 31, 2005 as compared to decrease $453,654 in the
comparable period of 2004.
Cash provided in investing activities was $42,105 for the six months ended
December 31, 2005, as compared to cash used of $13,850 for the six-month period
ended December 31, 2004. The significant increase in cash provided in investing
activities is due to the fact that restricted cash was not held at loan closing
for escrow payments that must be maintained by the company servicing the loans
and since there were less loans serviced by our company during the same period
for 2005 than 2004. We began servicing loans in April 2003.
Cash used in financing activities was $51,622 for the six months ended December
31, 2005, as compared to $36,156 for the six-month period ended December 31,
2004. The increase is mainly a result of the buy-back of subsidiary common stock
in the amount of $ 44,000 in 2005.
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluations as of December 31, 2005, the principal
executive/principal financial officer of the Company has concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act) are effective to ensure that
information required to be disclosed by the Company in reports that the Company
files or submits under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC.
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(b) CHANGES IN INTERNAL CONTROLS
During the last fiscal quarter, the Company engaged an outside public
accounting firm to assist in the preparation of the financial statements to be
included in the Form 10-QSB. There were no other significant changes in the
Company's internal controls over financial reporting or in other factors that
occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect these internal controls subsequent to the
date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included as part of this report at the location
indicated:
EXHIBIT
NUMBER TITLE OF DOCUMENT LOCATION
- --------------- --------------------------------------------------------------------------- ----------------------
ITEM 31 RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
- --------------------------------------------------------------------------------------------
31.01 Certification of Chief Executive Officer and Chief Financial Officer Attached
Pursuant to Rule 13a-14
ITEM 32 SECTION 1350 CERTIFICATIONS
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32.01 Certification of Chief Executive Officer and Chief Financial Officer Attached
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized, this 5th day of May, 2006.
BOTTOMLINE HOME LOAN, INC.
By /s/ Buster Williams, Jr.
----------------------------------
Buster Williams, Jr., President
Chief Executive Officer and
Chief Financial Officer
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