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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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Commission File Number: 0-18108
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FINET HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of incorporation or organization)
235 MONTGOMERY STREET, SUITE 750 SAN FRANCISCO, CA 94104
(Address of principal executive office)
94-3115180
(IRS Employer Identification Number)
(415) 658-4150
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements within the past 90 days.
Yes 'X' No___
The number of shares outstanding of each of the issuer's classes of common
stock was 12,930,479 shares of common stock, par value $.01, outstanding as
of December 31, 1995.
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FINET HOLDINGS CORPORATION AND SUBSIDIARIES
NOTE: During 1996, as a result of the Company's lack of funds, an audit of
its operations for the fiscal year ended December 31, 1995 could not be
commenced as planned. Now that resources permit, to the best of the
Company's ability, the information in this report has been prepared and
expressed as it would have been if prepared and submitted at the regular
time, with material subsequent events noted.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
PRINCIPAL SERVICE.
In the past decade, consumer demand for more choice, convenience and cost
savings than any one mortgage lender can typically offer, has spurred the
growth of independent mortgage brokers, who represent and offer the
mortgage loan programs of many banks, savings and loans, mortgage bankers
and other lenders. Starting with a negligible market share in the 1970's,
since 1991 mortgage brokers have originated over 50% of all residential
mortgage loans in the US. In California, with the largest annual volume of
new loans, that percentage is over 60%.
Finet Holdings Corporation (NASDAQ BB: FNHC), a Delaware corporation (the
"Company"), through Finet Corporation, a California corporation ("Finet"),
is a mortgage broker, and one of the very few whose shares are publicly
traded.
MARKET.
Two of every three of US households are homeowners. Many more want to own a
home, if only they could qualify for financing. Both the general population
and the percentage of homeowners are expected to increase. In 1988, in an
article entitled "Mortgage Banking in the 1990's: The Decade Ahead,
Mortgage Banking Magazine said, "Overall, we expect the net annual
additions to the total number of US households to be between 1.1 million
and 1.2 million throughout the 1990's." Thus far, that forecast has been
accurate. The population is increasing and the number of homeowners as a
percentage of the population is rising (65.6% in 1994; forecast to hit
66.7% in 2000). Thus, both contribute to a steadily expanding market.
Housing is one of the largest US industries, one involving many large
specialized sectors, from development and construction to maintenance and
repair. Yet, housing is primarily a local business. The vast majority of
real estate-related businesses are as rooted in local communities as the
homes they deal with. Thus, the industry has evolved into a highly
fragmented, highly entrepreneurial collection of primarily small
independent businesses.
In our highly mobile society, the combination of new home sales, turnover
of existing housing and the refinancing of existing residential loans
generates millions of loan transactions each year that require a huge flow
of funds. The total dollar amount of mortgage loans outstanding and the
annual volume of new mortgage loans exceed any other type of domestic
public or private financing in the United States. Only the Government
itself is a bigger borrower.
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Since 1990, the annual volume of new loans on home purchases has averaged a
relatively steady $340 billion. Although the annual volume of new
refinancing loans also averaged a similar amount during this period, year
to year variations have been quite large, ranging from a low of $90 billion
to a high of $770 billion. In 1993, a year that included a 25-year low in
interest rates and a corresponding peak in refinancings, the national
volume of new residential loans was $1.1 trillion.
Over the past several decades, the supply of mortgage funds has changed
from deposit-based local sources to investment-based national sources.
Local and regional banks and savings and loan organizations have diminished
in both number and size. In the process they have transitioned from
"portfolio lenders" to "pass-through lenders" that sell most or all of
their residential loans to other investors in the secondary market. Today,
residential mortgage funds come primarily from pension plans, insurance
companies and investors in the national funds markets. In 1995, 11 million
new loans were sold in the secondary market.
DISTRIBUTION METHODS.
Mortgage lenders distribute loans with their own retail sales forces and/or
by wholesaling through mortgage brokers. Brokered mortgage loans are
distributed by licensed loan agents who assist borrowers to complete loan
applications and supply required personal information, which is compiled
into a loan file by loan processors for submission to the selected lender
for underwriting approval and funding. The typical mortgage brokerage firm,
of which at the peak of the 1993 refinance boom there were over 40,000, is
a small proprietorship representing many lenders, with an average of 5 loan
agents.
The Company plans to build a large loan distribution capability by offering
such brokers an affiliation opportunity that provides a variety of cost
effective support services that are typically beyond their experience and
capability.
Since entering the mortgage business in 1991, the Company's distribution
method has gone through several evolutions: initially Finex's mobile laptop-
equipped loan agents serviced Realtor offices from a centralized processing
center, then, after being acquired, they operated fromin decentralized
Company-owned branch offices which the Company planned to, but never did
not convert into franchises. Then, after troubled integration of an
acquired brokerage firm, to minimize continuing losses, all remaining
branches were sold and thereafter operated asconverted to affiliates. The
Company's current revised business development plan is an updated version
of its original strategy, using videoconferencing to service multiple
Realtor offices from a network of centralized support offices and offering
several Internet services to borrowers and real estate service providers.
Unlike the similar, but long since integrated, one-stop process of buying,
financing, registering and insuring an automobile whose cost can approach
that of a home, home buying is an antiquated, paper-intensive, frustrating,
costly, often month-long process that involves up to 10 independent service
vendors. This process is ripe for the improvements in speed, cost and
efficiency that are now possible with the use of current communications and
information handling technologies; a fact being increasingly recognized and
acted upon. The Company's current business plan is based on extensive use
of technology to achieve these objectives. Many other industries
experienced a pattern of consolidation following the introduction of modern
technology (computer controlled manufacturing, travel reservation systems,
electronic banking, etc.) A similar effect is beginning to occur in the
residential real estate industry. Since 1993, the industry has been
consolidating, with many mortgage brokers and mortgage bankers merging or
ceasing operations. In management's opinion, within a few years national
homebuying services delivery systems developed and controlled by a few
firms will dominate the market. The Company is positioning itself to be one
of them.
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POTENTIAL LIABILITY TO BORROWERS.
Borrowers could claim to have suffered adverse financial effects from
utilization of Finet's services. The most common instance of complaint in
the industry occurs when a borrower fails to lock in an interest rate and,
at the time of closing, the available interest rate has increased from the
rate available at the time of application. While assessment of such claims
is highly subjective, in a few instances where it was considered possible
that the borrower had not been made sufficiently aware of the possibility
of rate increases and the protection afforded by a rate lock, Finet has
resolved the matter to the borrower's satisfaction by discounting its fees.
GOVERNMENT REGULATION.
The Company's operations are subject to regulation by federal and state
authorities. The US Department of Housing and Urban Development ("HUD")
regulates certain aspects of the mortgage lending business. The Real Estate
Settlement Procedures Act of 1974 ("RESPA"), a federal statute, requires
that certain disclosures, such as a Truth-in-Lending Statement, be made to
borrowers and that certain information, such as the HUD Settlement Costs
booklet, be provided to borrowers.
Additionally, RESPA contains certain prohibitions regarding the giving or
taking of a fee, kickback, or anything of value for the referral of
business to any specific person or organization. However, there is no
prohibition regarding the payment of reasonable compensation for the
provision of goods, services and facilities.
Additionally, in California, regulation and licensing of mortgage brokers
falls under the California Department of Real Estate. Other than banking
industry employees, individuals engaged directly in the origination of
loans or the dissemination of certain information are required to be
licensed by that Department. Finet will also be required to be licensed in
accordance with the requirements of the various states in which affiliate
offices are established. Finet believes that it is presently in compliance
in all material respects with applicable federal, state and local laws and
regulations.
In the past, Finet's loan agents have been treated as independent
contractors rather than employees. The same is true of the loan agents in
affiliate offices. Although the Company believes that this treatment is
consistent with industry practice for mortgage brokers, neither the
Internal Revenue Service nor the California state tax authorities have
issued a definitive ruling on this practice. In the event that either the
Internal Revenue Service or state authorities were to take a position
adverse with respect to this practice, Finet may be held responsible for,
among other things, the payment of social security taxes and the
withholding of income taxes (to the extent not previously paid) for its
brokerage agents. In such event, it would be entitled to recover from such
brokerage agents a portion of such taxes. No assurance can be given that
the Internal Revenue Service or state authorities will not take a position
adverse with respect to this practice, or that in such event, Finet would
be able to recover any amounts from its brokerage agents.
COMPANY HISTORY.
The Company was organized in 1988 as William & Clarissa, Inc. to develop
and market upscale children's skin care products. After a successful
beginning and an initial public offering of its shares in 1989, it was
unable to compete against large, well capitalized, national firms that
rapidly came to market with competing products and promotions. In 1991, the
Company voluntarily reorganized and discontinued that business, having
incurred operating losses of $9.3 million.
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To save the Company, it was redirected into another business. Its remaining
senior executive had franchising experience, but no mortgage industry
experience. Various potentially franchisable fields were reviewed and the
mortgage brokerage industry was selected. In December, 1991, through an
exchange of stock, Finex Corporation, a mortgage brokerage firm, became a
wholly owned subsidiary. Shortly thereafter, the Company was renamed Finet
Holdings Corporation and Finex Corporation was renamed Finet Corporation
("Finet").
Finet was founded in 1990 and began operations in 1991. It was a technology
oriented mortgage brokerage firm that developed an integrated, computer
based loan information and delivery system to provide its loan agents with
a portable, point-of-sale presentation of a competitive array of lenders,
loan products and settlement services, and an electronically enhanced loan
application, processing and closing system that could be delivered on-site
in Realtor offices.
After acquiring Finet, the Company dropped the Realtor focus of its service
strategy and changed its growth strategy toward franchising. Eight Company
owned branch offices were then opened around the San Francisco Bay Area. By
1993, Finet represented over 100 mortgage lenders and, through more than 50
loan agents, had originated nearly $1 billion in new residential mortgage
loans. However, no franchises were ever licensed and the Company's approval
to franchise expired unrenewed.
In April 1993, a group of Mexican investors engaged Finet in a venture to
engage in the mortgage credit business in Mexico. Consummation of the
venture was subject to a number of conditions, including a $40 million
funding by the Mexican investors. In February 1994, Financiera
Inmobiliaria, an affiliate of the venture, received a permit to act as one
of a very limited number of companies engaged in the mortgage banking
business in Mexico. However, it was not funded as agreed and thus did not
commence operations within the period required. In July 1994, the Mexican
investors notified the Company that, in their opinion, the engagement
letter had expired according to its terms. Finet does not agree with this
interpretation and intends to pursue available remedies to collect related
receivables and protect its investment. In October, 1994, the Company was
contacted by a representative of the Mexican investors regarding a proposed
purchase of Finet's interest in the venture, to which the Company responded
with the objective of reaching a mutually agreeable sale. Discussions have
continued aperiodically since then with no current expectations available.
In August 1994, the Company acquired a comparably sized, multi-office Bay
Area mortgage broker. However, integration of the firm was troubled,
leading by late 1995 to the defection of three Finet branches, closing of
several others and the departure of four of the Company's five senior
executives: the Founder/Chairman, the CEO, the President and the CFO.
Since inception in 1988 through 1995, the Company experienced continuous
operating losses: $9.3 million in its previous discontinued business and
$12 million more in its continuing mortgage operations, all of which were
funded by equity and debt infusions.
During 1995, there was significant management turnover, reducing losses
from operations became an imperative, several offices were soldsignificant
operating changes were implemented, compensation and staffing was reduced,
the trend of continuing large operating losses was reversed and, in the
fourth quarter, alternative approaches to achieve the Company's goals were
reviewed new management team was formed. However, before profitability
could be reached, working capital was exhausted and the ability to continue
operations was threatened.
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In December 1995, the new management team advised shareholders that, in its
opinion, the opportunity to achieve the Company's original goal of building
a national brokerage loan distribution system was still viable, and
committed itself to that end, subject to development, approval and
successful completion of a recapitalization plan (the "Plan") that included
negotiated settlement of unsecured creditor liabilities, raising additional
equity capital, and significant revision to the Company's mission and
business strategy. Management prepared such a plan and, in January 1996, it
was approved by shareholders and implemented.
EMPLOYEES.
As of December, 1996, the Company employed two executives. A number of its
former employees have been employed by a firm that it intends to acquire as
part of the Plan. None of the Company's employees is represented by a
union. The Company believes its relations with its employees and affiliates
are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents a small executive office in San Francisco,
California on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
As a result of the Company's financial position, it has substantial past
due accounts payable and is a defendant in a number of legal proceedings,
primarily as a result of unsecured creditor actions, with claims ranging
from $1,000 to $101,000 and aggregating $500,000. As part of the Plan, the
Company expects to settle these proceedings under the same terms offered to
creditors that have not instituted such proceedings.
The Company is a defendant in three legal actions brought by individuals
who were formerly employees or independent contractors of one of the
Company's subsidiaries. The total of these claims is not material and the
Company expects either to prevail or to settle these actions as part of the
Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual shareholder meeting was held on December 18, 1995.
Including proxies, shareholders representing 75% of the shares outstanding
were present and unanimously approved: (a) reappointment of current
directors; (b) reappointment of current auditors; (c) approval of changes
to the stock option plan enacted by the Board of Directors in March, 1995.
To allow development of the Plan, the meeting was adjourned to January 30,
1996, at which time the Plan was approved by unanimous vote of those
present.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company has been advised that during 1992 through 1995 there was no
established public trading market for the Company's common stock and its
shares were either unpriced or periodically quoted in the pink sheets.
According to the Company's placement agent, during that period trades
occurred at prices that ranged between $1.00 and $4.00 per share, however
the Company was unable to determine the actual number of shares traded or
prices paid.
On the date of this report, the previous (12/23/96) closing price was $.04
per share, the opening and low prices per share were $1.625 per share, the
high and closing prices per share were $1.85, and the volume 2,000 shares.
30-day average share volume and 52-week high and low data were not
available.
Common Stock issued and outstanding as of December 31, 1995 was 12,930,479.
Not included in this total are the 1,242,438 shares of Common stock
underlying 874,443 unitholder warrants which expired November 9, 1996 and
262,333 underwriter warrants to purchase one share of Common Stock issued
pursuant to the Company's July 22, 1993 Private Placement, 9,501 other
warrants and 523,751 options to purchase one share of Common Stock.
As of March 30, 1995, there were approximately 4425 stockholders of record.
Effective with the Company's name change on or about March 30, 1992, the
Company's trading symbol was changed from WMCL to FTHC and further changed
in October, 1996 to FNHC (See Material Subsequent Events).
The Company has never paid a cash dividend on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interpretation of a company's financial condition and results of operation
should be viewed from the perspective of its management, business strategy
and operating policies during various periods and the concurrent market and
industry conditions. In the Company's case, very little about its
management, historical composition, strategy, and results are relevant to
its current and anticipated future operations.
ACCORDINGLY, IN MANAGEMENT'S OPINION, BECAUSE OF RECENT AND PLANNED CHANGES
IN THE COMPANY'S STRUCTURE AND OPERATIONS, COMPARISON OF VARIOUS REVENUE
AND OPERATING EXPENSE CATEGORIES DURING PRIOR PERIODS AS DISCUSSED HEREIN
IS IRRELEVANT AND POTENTIALLY MISLEADING. READERS ARE THEREFORE CAUTIONED
IN INTERPRETING ANY PERIOD TO PERIOD COMPARISONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's normal cash requirements are to meet operating expenses,
including sales and marketing efforts, to fund the expansion of the
business, to satisfy accrued liabilities and accounts payable, and to
satisfy other liabilities as they become due. The Company has incurred
operating losses and negative cash flow since inception to the present,
requiring its operations to be funded by equity and debt infusions.
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The Company's operations and financial condition changed materially in
1995. Notwithstanding a $925,000 institutional investor common stock
purchase in November, 1994 and the final closing of the Company's July 1993
$4 million Private Placement in December, 1994, as a result of 1994's
acquisition expenses, continuing operating losses, competitive market
conditions and troubled management, the Company ended 1995 in a weak
financial position with little liquidity. On February 21, October 5 and
November 3, 1995, the Company filed Form 8-K Reports indicating that its
working capital was insufficient to continue operations without additional
financing.
In March, 1995, the Company arranged for additional financing in the form
of an $800,000 convertible debenture secured by all Company assets and the
separate exercise of warrants for a consideration of $75,000. The Company's
subsequent mortgage operations did not enable it to meet or cure defaults
on financial tests of the convertible debenture, resulting in the full
vesting of 6 million penalty warrants. On November 2, 1995, these warrants
were exercised for a consideration of $180,000.
The Company ended 1995 with its working capital exhausted and its
continuing operations imperiled. Management reported at its annual
shareholder meeting that, although considerable progress had been achieved
in 1995 in reducing the Company's losses from operations, the Company's
continuing losses, lack of working capital and additional pending financial
obligations required additional capital if operations were to be continued.
The shareholders and the Board of Directors authorized management to
develop a recapitalization plan (the "Plan") and the meeting was adjourned
for that purpose. The Plan then created and recommended by management was
approved by shareholders on January 30, 1996.
The Plan's primary objective was to create a strategy, similar in its
fundamentals to the original Finex strategy but updated to reflect recent
technology developments and increased recognition of the need for improved
cost controls, for the Company to develop both a mortgage brokerage and a
lending capability. It calls for negotiated settlements with unsecured
creditors, a private placement to raise $2 million additional equity
capital, material concessions from the Company's majority shareholder and
secured creditor, temporary licensing of Finet's mortgage operations to an
affiliate office, a materially revised business plan, and for the Company
to be sustained by bridge loans until completion of the equity offering.
Management has begun to implement the Plan and the Company has entered a
period of operational dormancy from which it expects to emerge as
asubstantial more viable organization.
The Company has accrued liabilities and accounts payable, including
judgments on certain obligations, of approximately $1,200,000. As part of
the Plan, the Company expects to effect settlements with these unsecured
creditors and, to date, subject to completion of elements of the Plan, the
majority of them have agreed to settlements in the form of common stock
valued at the equity offering price per share for 40% of the amount owed.
Settlements to date have proceeded as planned. (See Material Subsequent
Events)
In the event that the Company is unable to obtain further relief from its
unsecured creditors and further financing from an equity offering or from
alternative sources, the Company likely will not be able to continue
mortgage operations. If the Company were not able to continue to operate
its business, it would be forced to consider other alternatives, including,
without limitation, sale, restructuring, or liquidation.
Management believes, although there can be no assurance, that successful
completion of the Plan, including proceeds of an equity offering and
completion of planned acquisitions together with anticipated revenues from
operations, will enable it to reach profitability and to satisfy its cash
requirements. (See Material Subsequent Events)
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SUMMARY OF CAPITAL SOURCES
Since the Company's 1991 reorganization and commencement of mortgage
operations, its operations have been sustained by operating revenues,
capital investments and loans, including from Montgomery Medical Ventures
II ("MMV") and Cumberland Partners ("Cumberland"), its two largest
shareholders, and the May '93 and July '93 Offerings. MMV invested
approximately $6,225,000 in the discontinued operations of W&C, and
continued to provide additional loans when the Company entered the mortgage
business. All MMV's loans to the Company, totaling $2,841,000, were
converted to common shares. MMV and Cumberland, which has invested
$1,980,000, have advised the Company that they are unable to make any
further investments in the Company.
In May 1993, the Company completed the May '93 Offering, a $500,000 private
placement consisting of 126,678 shares of Common Stock sold by the Company
and warrants, exercisable one (1) year from the date of the Offering, to
purchase from certain selling stockholders 75,627 shares of Common Stock at
$.08 per share. The warrants offered in the May '93 Offering were granted
by MMV (95% of the warrants) and William A. Meyer, the Company's founder
and then the Company's Chairman of the Board and CEO (5% of the warrants).
MMV converted $196,000 of existing debt and $5,600 of accrued interest owed
to it by the Company for 51,000 shares sold in the May '93 Offering, with
the remaining 75,678 shares and 75,678 warrants purchased by other
investors (resulting in gross proceeds to the Company of approximately
$298,500).
In July 1993, the Company entered into agreements with several bridge
lenders to provide the Company with bridge loans in the aggregate principal
amount of up to $200,000 to fund operations until the first closing of the
July '93 Offering.
On November 9, 1993, the Company effected a one-for-7.894 reverse stock
split and, as part of the first closing of the July '93 Offering, converted
the following liabilities as of September 30, 1993 into Common Stock:
$2,847,000 of MMV's Senior Preferred Stock and accumulated dividends to
728,806 shares, $881,800 of MMV's short term debt and accrued interest to
237,129 shares, $193,200 of FINEX notes to 58,494 shares, $127,200 of
deferred compensation and accrued claims to 32,235 shares, or a total of
$4,049,200 and additional accruals through November 9, 1993 were converted
into 1,056,664 shares. Additionally, each of the bridge lenders converted
the principal amount outstanding on their bridge loans into shares. MMV
issued to the converting bridge lenders warrants to purchase from MMV two
shares of Common Stock of the Company for every five Shares received upon
such conversion for a total of 35,555 warrants at an exercise price of $.01
per share. The MMV bridge warrants of two investors expired unexercised in
1995.
The Company had a total of thirteen closings of the $4 million July '93
Offering over a 13-month period. On December 16, 1994, the July '93
Offering was closed to further investment with total subscriptions of
$3,934,933 in the form of 874,443 units comprised of 1,748,886 shares of
Common stock and 874,443 Warrants. 262,333 Warrants were issued to the
Private Placement Agent. Total net proceeds after payment of expenses, fees
and commissions to the Placement Agent totaling 30% was $2,763,775. On
August 31, 1994, in exchange for all the outstanding shares of RPM
Partners, Inc., a California corporation, the Company issued 750,000 shares
of its common stock and 50,000 shares of Non-voting Series C Preferred
Stock.
As of November 8, 1994, the Company sold 533,327 shares of Common Stock:
33,327 shares to an accredited investor and 500,000 shares to Cumberland
Partners, a NY investment partnership. Proceeds to the Company were
$883,000 net of commissions paid to the Placement Agent. Also, the 50,000
shares of Non-voting Series C Preferred Stock in the amount of $562,500 (5
to 1 liquidation and dividend preference over common shares), which were
issued in connection with the purchase of RPM, were converted into 250,000
shares of Common Stock at $2.25 per share.
<PAGE>10
Prior to December 31, 1994, MMV converted the 35 shares of Series B
Convertible Redeemable Preferred Stock of $350,000 and accumulated
dividends of $28,000 as well as accounts payable owed by the Company to MMV
in the total amount of $197,929 into 200,000 shares of Common Stock. On
March 15, 1995, the Company completed additional financing agreements with
Cumberland, then the Company's second largest shareholder, whereby
Cumberland provided $800,000 of additional capital in the form of a
convertible debenture and increased its shareholdings to 1,000,000 shares
through the separate exercise of warrants for a consideration of $75,000.
The terms of the convertible debenture required the Company to meet certain
monthly financial performance tests through June 30, 1996, including
minimum positive earnings tests keyed to the Company's business plan. The
debenture is convertible at $1.25 per share into 640,000 shares of the
Registrant's stock, which, if converted, would bring Cumberland's holdings
to approximately 22.7% of the shares then outstanding. If not converted,
all outstanding principal and accrued interest is due and payable on June
30, 1996, with interest at ten percent (10%) per annum payable semiannually
on the last day of August, 1995 and February, 1996.
Additionally, the Company granted to Cumberland the Series B warrants to
acquire 6 million shares for $0.03 per share. These warrants vested in
inverse proportion to the Registrant's financial performance through June
30, 1996. If the Registrant experienced an operating loss for the month of
June, 1995, or failed to cure any default of monthly financial tests, or if
it earned, before deducting amortization, depreciation, interest and income
taxes, less than $330,000 for the six months ending June 30, 1996, the
warrants fully vested. If, on the same basis, the Company earned $1,000,000
or more for the six month period ending June 30, 1996, no warrants vested.
Intermediate earnings during that period would result in proportionate
vesting of warrants at a rate of 9.0 warrant shares for each dollar of
earnings below $1,000,000.
Since July 1995, the Company's operations did not enable it to meet or cure
defaults on various monthly financial tests imposed by the terms of the
convertible debenture, resulting in the full vesting of the Series B
warrants. On November 2, 1995, Cumberland exercised all 6 million Series B
warrants for an exercise price of $180,000. This action increased
Cumberland's total shares of the Company's stock to 7,000,000, 52.5% of
shares then outstanding.
Since commencing its continuing mortgage operations in 1991, the Company
has generated an NOL of over $12 million, a small portion of which the
Company believes is available to shelter future earnings.
OTHER FACTORS
Inflation has not had any material impact on the Company's operations. New
mortgage loan originations have modest seasonal variations (generally
higher in summer and lower in winter), but the primary cause of variation
is changes in short term interest rates. Loan originations tend to increase
as interest rates decline and to decrease as interest rates rise.
<PAGE> 11
RESULTS OF OPERATIONS
In the past several years, because of the Company's continuing losses from
operations and lack of financial strength, considerable management time and
financial resources were consumed in holding the Company together, with
little surplus capital to invest in growth. In August 1994, the Company
acquired RPM Partners, Inc., a comparably sized, brokerage firm with
offices in geographically complementary Bay Area locations. RPM was
recognized as a marketing innovator and had been profitable for several
prior years. The Company attempted to integrate the two firms. L. Daniel
Rawitch and E. Robert Hirt, the two RPM owners, became Finet executive
officers and directors. Mr. Hirt assumed responsibility as President for
all Finet and RPM branch operations and loan processing activities. Mr.
Rawitch was responsible for further development of the Company's marketing
capabilities.
Integrating the personnel, operating procedures and business practices of
the two firms was troubled, eventually resulting in the departure of four
senior executives and the loss of numerous other personnel and several
branch offices. Additionally, the downsizing required by cashflow
considerations eventually left the Company with minimal administrative and
accounting support. These weaknesses, in turn, increased competitive
pressures and added to the difficulty of recruiting additional affiliates
and being approved by certain desirable lenders.
The first quarter of 1995 was an active period. In January, in an exchange
of stock the Company acquired Diversified Capital Funding Corporation, a
mortgage brokerage office, from its owner, who remained as its manager.
Shortly thereafter, as a result of employment agreement changes imposed by
the terms of the Cumberland convertible debenture, a dispute arose between
the parties regarding the fulfillment of certain responsibilities and
obligations. A mutual release and settlement was negotiated, the
consideration was returned and the acquisition is treated as having been
unwound.
In February, the Company filed a Form 8-K Report indicating that its
working capital was insufficient to continue operations without additional
financing, after which a convertible debenture was arranged in March, as
described above.
On March 1, citing the Company's failure to obtain D&O liability insurance,
CFO Michael G. Kasolas resigned after a 5-month tenure and later filed suit
for substantial compensation.
In anticipation of their later conversion to franchisees, on March 15th all
certain branch offices were sold and all offices operating under the Finet
name were treated as converted to affiliates status. The Company
transferred to each office rights to collect all its loan origination and
loan processing fee revenue and responsibility for paying all its operating
expenses. Each office agreed to pay the Company a monthly affiliation fee
of up to $1,250 and the Company agreed to share with the affiliates 50% of
any bonus fees it received. Based on bonus fees then being earned,
affiliates expected that their 50% share of bonus fees would equal or
exceed their monthly affiliation fee paid to the Company, i.e., the
benefits of affiliation (use of Finet name and logo, training, lender
relationships, marketing services, etc.) would be "free".
This change was intended to condition office managers to profit/loss
responsibility and to eliminate the Company's historically substantial
subsidy of branch operating losses, while providing much smaller, but more
predictable fee revenues. However, the Company was unable to realize
anticipated revenues.
<PAGE> 12
Managers of three large Finet branches found these responsibilities
unacceptable and they and their entire staffs resigned and moved to
competitors. Several other unprofitable Finet and RPM offices were closed,
leaving the Company with substantial expenses for operating leases of
unoccupied office space.
As higher interest rates slowed new loan activity and increased competition
squeezed profit margins, the Company's loan volume fell, and lender
payments of bonus fees to the Company declined and eventually ceased. The
Company's 50% share of bonus fee revenue disappeared and affiliation fee
revenue from the remaining affiliate offices declined as affiliates
increasingly resisted paying for benefits they expected to be "free."
In December, 1994, the Company subleased for 36 months an office into which
all Finet and former RPM administrative personnel were integrated. In
April, 1995, the space was vacated without terminating the lease, with
personnel moved either to the Company's San Ramon branch office or to a
small executive office in San Francisco.
Also in April, the Company established a correspondent lending subsidiary
to perform certain underwriting functions, close loans, and immediately
remarket them in the secondary market. By thus acting, the Company could
earn additional fees normally earned by the intermediaries who perform
these services. However, due to the Company's weak financial position, it
was unable to arrange the required mortgage lines of credit and, in early
July, its operations were terminated.
The terms of the convertible debenture modified certain executive
employment agreements to terminate on July 1, 1996 and to change the form
of their compensation after June 15, 1995 to compensation directly related
to financial performance in their respective areas of responsibility. Mr.
Rawitch's and Mr. Hirt's compensation was to be based on the profitability
of the San Ramon affiliate office. Mr. Kraatz's compensation as CEO was to
be based on his recruiting new affiliate offices.
In May, 1995, Mr. Kraatz resigned as an employee and CEO and, through an
unaffiliated corporation of which he was the president and sole
shareholder, entered into a commission based agreement with the Company to
recruit affiliate offices. That agreement, which the Company had the right
to terminate on December 1, 1995 if certain minimum performance was not
attained, was so terminated. No new affiliate offices were recruited and no
compensation was paid.
In September, 1995, Mr. Hirt executed an affiliate agreement with a Company
loan agent and together they opened a new affiliate office and began
recruiting personnel from other Company affiliates. In November, 1995,
without notice, that office changed its name to Residential Pacific
Mortgage (RPM) and became a direct competitor. After so abandoning his
executive duties, the Company's Board of Directors terminated Mr. Hirt as
President. Mr. Hoeffel, a FINEX co-founder, was appointed to that position.
On October 5, and November 2, 1995 the Company again filed a Form 8-K
Report indicating that its working capital was insufficient to continue
operations without additional financing.
In November, the Company's operations not having enabled it to meet or cure
defaults on the financial tests of its convertible debenture, Cumberland
exercised its warrants to purchase 6 million shares of the Company's common
stock for $180,000, increasing its holdings to 7 million shares, 53% of
shares outstanding.
As a result of material reductions in corporate personnel and operating
expenses, operating losses of the core mortgage business declined during
each quarter of 1995. In January, 1996, the shareholders, in an effort to
create an opportunity for the Company to continue operations, approved a
management plan of recapitalization.
<PAGE> 13
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
As discussed herein the operating structure of the business of the Company
changed significantly over the course of the year since December 31, 1994.
The Company incurred a net loss in 1995 of $5.0 million compared to $2.8
million in 1994, a 79% increase. $2,509,200 of the loss was from operations
as compared with $2,799,400 in 1994, a decline of 18%. There is little
basis for comparison of these two periods.
ACCORDINGLY, IN MANAGEMENT'S OPINION, BECAUSE OF CHANGES IN THE COMPANY'S
STRUCTURE AND OPERATIONS, COMPARISON OF VARIOUS REVENUE AND OPERATING
EXPENSE CATEGORIES DURING PRIOR PERIODS AS DISCUSSED HEREIN IS IRRELEVANT
AND POTENTIALLY MISLEADING. READERS ARE THEREFORE CAUTIONED IN INTERPRETING
ANY PERIOD TO PERIOD COMPARISONS.
REVENUES.
Revenues of continuing mortgage brokerage operations are dependent
primarily upon the closing and funding of mortgage loans. The level of loan
closings and fundings is affected by the level of home sales, short term
interest rates and trends, business and economic conditions and the mix of
loans for the purpose of refinancing as compared to home purchases. Loan
revenues consist primarily of loan origination and loan processing fees and
other administrative fees. Origination fees are based upon the loan amount
and the prepaid interest ("points") the Company is entitled to receive,
which is in turn based upon the financing program which each borrower
selects. Origination fees generally range from 1.0% to 1.5% of the loan
amount. Loan processing fees average $350 in most areas. Bonus fees are
additional fees received from certain lenders with whom the Company has a
closer relationship, transacts a higher than average amount of business,
and may perform additional portions of the underwriting process.
Continuing operations of the Company have not generated revenues sufficient
to cover operating expenses, due primarily to the manner in which the
Company's prior development strategies were implemented. The Company's
revenues of $4,207,400 in 1994 were comprised primarily of loan origination
and processing fees from the mortgage brokerage activities of Finet's owned
branch offices, whereas during most of 1995 revenues of $712,900 were
comprised of bonus fees and monthly affiliation fees.
EXPENSES.
Total operating expenses decreased to $3,222,100 in 1995 compared to
$6,989,200 in 1994, a decrease of 54%. The decrease was due primarily to
the transfer of branch office expenses to the individual managers of those
offices.
The primary operating expense is compensation and benefits. Compensation
expense in 1994 and early 1995 included the cost of loan processing,
underwriting, closing personnel, other service providers, as well as
salaries paid for corporate management and administration. During 1995,
responsibility for paying loan agent commissions and compensation of other
branch personnel was assumed by the respective offices. Such expenses were
$4,056,500 in 1994 and $1,438,600 in 1995, a decrease of 65%.
<PAGE> 14
Occupancy and equipment expenses were $371,100 in 1995 and $785,200 in
1994. In December, 1994, the Company sub-leased headquarters office space
in Walnut Creek, CA and, in April, 1995, returned to small temporary
offices in San Francisco. The 53% reduction was due primarily to
significantly reduced corporate office rent expense and the assumption of
branch office expenses by the individual managers of those offices, offset
by associated moving and storage expenses and lease cancellation expenses.
Communications expense was $208,000 in 1995 and $371,800 in 1994. The 44%
decrease was due primarily to the assumption of branch office expenses and
corporate staff reductions.
Loan related fees and costs were $172,500 in 1995 and $497,400 in 1994. The
65% decrease was due primarily to the assumption of branch office expenses.
General and administrative expenses include amortization and depreciation,
which totaled $458,000 in 1995, office expenses, and other miscellaneous
expenses incurred in connection with the development and management of the
business, including travel, legal, entertainment and corporate printing.
Such expenses were $1,031,900 in 1995 and $1,278,700 in 1994. The 19%
decrease is primarily due to cost control measures.
Interest expense increased from $2,100 in 1994 to $66,400 in 1995,
primarily due to interest on the convertible debenture.
The effective overall tax rate remained at 0%.
MATERIAL SUBSEQUENT EVENTS
In October, 1995, Jon M. Stark, an individual and consultant to the
Company, lent the Company $25,000 secured by a 50% interest in the
Company's San Ramon office. The arrangement included an option for Mr.
Stark to acquire the remaining 50% interest in the San Ramon office for a
like amount in the event the Company defaulted on its promissory note. In
November, 1995, Mr. Stark granted an extension on the note. In January,
1996, Mr. Stark perfected his security interest and exercised his option,
thereby becoming sole owner of that office in the name of National Mortgage
Network ("NMN"), a newly formed California corporation of which Mr. Stark
was the sole officer and shareholder. The Company has agreed to reacquire
that office and additional MNM business development activities at cost,
subject to successful completion of the Plan.
On January 15, 1996, the Company entered into a license agreement with NMN
whereby NMN would operate those elements of the Company's operating
business involving marketing services and lender and affiliate relations.
During the license period, NMN receives all operating revenues of the
licensed business and is responsible for all related expenses, including
all related personnel costs. The license agreement terminated on May 15,
1996, at which time responsibility for operating the licensed business
returned to the Company and the Company was due from NMN 50% of the net
profit, if any, earned by NMN as licensee. NMN did not earn a net profit as
licensee.
Also in January and subsequently, the Company entered into loan agreements
with certain shareholders to provide the Company with bridge loans in the
aggregate principal amount of $150,000 to fund operations until the
completion of the Plan. The bridge lenders were granted certain rights to
convert the principal and interest outstanding on the bridge loans into
shares of the Company's common stock. The Company expects to convert
$100,000 of these loans and to repay the remainder.
<PAGE> 15
Pursuant to the Plan, the Company's Certificate of Incorporation was
amended to provide for a one-for-two reverse split of all shares of the
Company's Common Stock effective October 21, 1996, and further amended to
increase the number of authorized shares of Common Stock to thirty million
(30,000,000) shares.
The reverse stock split resulted in reducing by half the number of shares
represented by each certificate for the Company's "new common" shares
(e.g., 1,000 shares becomes 500 shares). The reverse stock split resulted
in reducing by a factor of 15.788 (1-for-7.894 reverse split of November,
1993 times 1-for-2 reverse split of October, 1996) the number of shares
represented by each certificate for the Company's "common" shares (e.g.,
1,000 shares becomes 63 shares plus a cash adjustment of $0.17). To
identify this new post 1-for-2 reverse split common share designation, the
Company's trading symbol was changed from FTHC to FNHC.
ITEM 7. FINANCIAL STATEMENTS
The following documents appear in Appendix A to this Annual Report on Form
10-KSB and are filed as part hereof:
<TABLE>
Appendix A
<CAPTION>
Document Page
- --------------------------------------------------------------------- ----
<S> <C>
Consents of Accountant............................................... A-1
Independent Auditors' Report......................................... A-2
Consolidated Balance Sheets at December 31, 1995 and 1994............ A-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993................................... A-4
Consolidated Statements of Cash Flow for the years ended
December 31, 1995, 1994 and 1993................................... A-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................... A-6
Notes to Consolidated Financial Statements........................... A-7
</TABLE>
ITEM 8. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 16
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's bylaws provide for a maximum of nine directors that are
elected on an annual basis at the Company's annual meeting of stockholders.
The present term for each director will expire at the next annual meeting
of stockholders or at such time as his successor is duly elected and
qualified. Executive officers are elected annually and, except to the
extent governed by employment contracts, serve at the discretion of the
Board of Directors.
<TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
<CAPTION>
NAME AGE POSITION PERIOD SERVED
- ------------------------ --- -------- --------------------------------
<S> <C> <C> <C>
CURRENT DIRECTORS AND OFFICERS
Stephen J. Sogin, PhD... 53 Director March, 1990 to Present
L. Daniel Rawitch....... 38 Director September, 1994 to Present
Vice Chmn September, 1994 to May, 1995
CEO May, 1995 to Present
Jan C. Hoeffel.......... 60 Director November, 1995 to Present
COO July, 1995 to November, 1995
President November, 1995 to Present
FORMER DIRECTORS AND OFFICERS
Harry R. Kraatz......... 45 Director January, 1991 to November, 1995
CEO May, 1994 to May, 1995
President March, 1993 to September, 1994
Stephan R. Peers........ 42 Director November, 1993 to November, 1995
E. Robert Hirt.......... 35 Director September, 1994 to December, 1995
President September, 1994 to November, 1995
Joseph A. Cosio-Barron.. 50 Senior VP August, 1992 to April, 1995
Michael A. Kasolas...... 32 CFO November, 1994 to March, 1995
</TABLE>
Stephen J. Sogin, Ph.D. has been a Director of the Company since March,
1990. From 1982 until 1995 he was a general partner of the entity that is
the general partner of MMV. From 1980 to 1982, he was an Associate at the
venture capital firm of Adler and Company. Earlier he was a Research
Scholar of the American Cancer Society and a Fellow of the Medical
Foundation of Boston while at Brandeis University and an Assistant
Professor of Biology while at the University of Houston. Dr. Sogin is the
author of over 30 papers scientific papers on theoretical and applied
microbiology and is a member of the American Society for Microbiology and
the American Association for the Advancement of Science. The Company has
been informed that the SEC has instituted an enforcement proceeding
regarding the late filing of Form 3/4 reports by MMV at a time when Mr.
Sogin was a general partner, a matter which is expected to be settled and
which, regarding his service as a Director, the Company does not deem to be
material.
<PAGE> 17
L. Daniel Rawitch acquired the operating rights to Residential Pacific
Mortgage, Inc. (RPM) in 1989 and served as its Chief Executive Officer
until it was acquired by the Company in August, 1994. In 1988 and 1989 he
was Vice President and San Jose Branch Manager of Pacific Coast Savings and
Loan where he developed loan originations through mortgage brokers. From
1986 until it was sold to Chicago-based UCB Services, Inc. in 1989, he was
cofounder and President of Data Fax Information Services, Inc. a mortgage
credit reporting company. In 1985 and 1986 he was a Vice President, Bear
Stearns Mortgage Capital Corporation where he was responsible for various
mortgage related activities throughout the northwestern US. From 1984 to
1985, as Vice President he managed Eureka Federal Savings and Loan's
secondary marketing activities. He also served from 1982 to 1985 as
President of West Coast Lending Group, Inc., a loan production and
secondary marketing organization.
Jan C. Hoeffel was co-founder and President of Finex Corporation, a
mortgage brokerage firm acquired by the Company in December, 1991, at which
time he became an Executive Vice President of the Company, serving in that
capacity until mid-1992. In July, 1995, he rejoined the Company. In
December, 1992 he incorporated GolfNet, a golf merchandise advertising and
marketing company providing multimedia kiosk advertising and sales
platforms, and served as its President until July, 1993. Since 1988, he has
been a director and shareholder of Typography Express, a computer-based
national service bureau for graphic arts professionals. He was a founder in
1989 and first President of Sweet Factory, a licensed confectionery
retailer later sold privately and now a national chain. He was a founder
and Director of Healthworks, Ltd., an international specialty retailer
acquired in 1988 by Grand Metropolitan Retailing, Ltd. In 1973, he became
Vice President Marketing with Equitec Financial Group, Inc., a start-up
financial planning firm which became a $4 billion public firm providing
securities management and syndication services to 250,000 individual and
institutional investors, and later led its business development activities,
both domestic and international until 1989. After earning a BA from Ohio
State University, he became Naval Aviator and attended the US Navy Test
Pilot School. Following 4 years as a Navy test pilot, in 1967 he became an
Assistant to the Chief Pilot-Technical and Manager of Flight Operations
Publications for Pan American World Airways, Inc.
FORMER OFFICERS AND DIRECTORS
Harry R. Kraatz was a Director of the Company from February to October,
1990 and from January, 1991 until November, 1995. From February, 1992 until
March, 1993 he served as the Company's Chief Operating Officer. He assumed
the position of President in March, 1993 until September, 1994 and served
as Chief Executive Officer from May, 1994 to May, 1995. Since June, 1986,
Mr. Kraatz has been the sole officer and director of The Embarcadero Group
II, a franchise management and consulting company, and in such capacity has
provided consulting services to William & Clarissa, Montgomery Medical
Ventures and the Company.
Stephan R. Peers was a Director of the Company from November, 1993 to
November, 1995. From March, 1989 to May, 1993, he was a Vice President,
Corporate Finance, with Montgomery Securities. From January, 1987 to March,
1989, he was a Vice President, Capital Markets Desk, with The First Boston
Corporation. From January, 1984 to January, 1987, He was a Vice President,
Corporate Finance, with Salomon Brothers, Inc.
E. Robert Hirt was President of Residential Pacific Mortgage, Inc. (RPM)
from 1990 until it was acquired by the Company in August, 1994, at which
time he became a Director and President of the Company. He was terminated
as President in November, 1995 and resigned as a Director in December,
1995.
<PAGE> 18
Joseph A. Cosio-Barron joined the Company in August 1991 and served in
various executive capacities until his employment agreement expired in
April, 1995. Since then, he has served the Company as a project consultant.
From February, 1988 until August, 1991, he was an Associate and a Loan
Correspondent with First Affiliated, a commercial and multifamily financing
organization. From November, 1984 to February, 1988 he was Executive Vice
President of Charter Properties International, a real estate brokerage,
property management and syndication firm specializing in commercial
investments for international investors. In 1978 he was a founder and,
until November, 1984, the President of Terra West Construction, Inc., a
real estate brokerage and commercial development firm.
DIRECTOR AND EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION.
The members of the Board of Directors do not receive any cash compensation
for services on the Board of Directors or any committee thereof but are
reimbursed for expenses actually incurred in attending meetings of the
Board and its committees. However, the members of the Board of Directors
are eligible to participate under the Company's Stock Option Plan. See
"1989 Stock Option Plan."
EXECUTIVE COMPENSATION.
The following table sets forth information regarding compensation received
by the Company's Chief Executive Officer and each of the Company's other
executive officers whose total annual compensation exceeded $100,000 with
respect to the fiscal years ended December 31, 1993, 1994, and 1995,
respectively.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Awards
-------------------------- ----------
Name and Other Securities
Principal <F1> Annual Underlying
Position Year Salary Bonus Comp Options
- --------- ---- -------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
L. Daniel 1995 $ 75,600 - $38,800 -
Rawitch 1994 50,000 - 10,000 -
CEO
Harry R. 1995 $ 60,000 - - -
Kraatz 1994 144,000 - - -
CEO/Pres 1993 139,500<F1>- - -
<FN>
<F1>
Mr. Kraatz's 1993 compensation includes $66,000 for consulting services to
the Company by The Embarcadero Group II, of which Mr. Kraatz is President.
</FN>
</TABLE>
<PAGE> 19
The following table sets forth information regarding the grants of stock
options pursuant to the Company's 1989 Stock Option Plan during the fiscal
year ended December 31, 1995.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
- -----------------------------------------------------------------
% Total Exercise
Options Options Price<F3> Expiration
Name Granted Granted Price($/sh) Date
- ----------------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Stephen J. Sogin 30,128 3.4% $ 1.00 3/2000
Stephan R. Peers 50,064 5.6% 1.00 3/2000
Harry R. Kraatz 368,639 41.4% 1.00 <F1>
L. Daniel Rawitch 96,000 10.8% 1.00 5/2005
E. Robert Hirt 96,000 10.8% 1.00 <F2>
Jan C. Hoeffel 250,000 28.0% 1.85 3/2005
------- --------
890,831 100.0%
<FN>
<F1>
Upon his resignation as CEO in May, 1995, Mr. Kraatz voluntarily
surrendered 192,000 options. Pursuant to the Company's 1989 Stock Option
Plan, Mr. Kraatz's remaining options expired unexercised in December, 1995,
30 days after termination of the consulting agreement between the Company
and The Embarcadero Group II, of which Mr. Kraatz is President.
<F2>
Pursuant to the Company's 1989 Stock Option Plan, Mr. Hirt's options
expired unexercised in November, 1995, upon his termination as President of
the Company.
<F3>
Pursuant to the Company's plan of recapitalization approved by shareholders
in the first quarter of 1996, which includes the agreement to repurchase 6
million shares from Cumberland for $.03 per share, in the absence of an
active trading market for the Company's shares, the Company's Board of
Directors established $.03 as the share value for that period and the
exercise price of all outstanding options was reduced to that value.
<F4>
No options were exercised during 1995.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Harry Kraatz in
June of 1993 providing that he shall serve as President of both the Company
and Finet for a three year term at a base salary of $145,000 per year. In
March, 1995, pursuant to the terms of the Cumberland convertible debenture,
the agreement was modified to replace the base salary with performance
based compensation, commencing June 1, 1996. Effective May 15, 1995, Mr.
Kraatz resigned as an employee and CEO of the Company and the agreement
terminated.
PAGE> 20
On November 1, 1993, the Company entered into an employment agreement with
Joseph A. Cosio-Barron providing that he shall serve as a Senior Vice
President of the Company for a three year term with an initial salary of
$110,000. On November 1, 1994, his agreement was modified to reduce the
term of the agreement to expire on April 30, 1995 and to provide for the
payment of certain compensation due thereunder in the form of shares of the
Company's common stock.
On August 31, 1994, the Company entered into employment agreements with the
two principal officers of RPM, L. Daniel Rawitch and E. Robert Hirt,
engaging them as Vice Chairman and President of the Company, respectively.
The agreements include the provision whereby the Company will, if the
individuals remain employed with the Company, lend each individual up to
$60,000 upon execution of the agreement, $250,000 on the first anniversary
of the agreement, and $250,000 on the second anniversary of the agreement.
The term of each loan is two years with interest at the prime rate payable
annually. In the event either individual's employment with the Company
ceases prior to the reaching the term of a loan, the principal and interest
on all his loans then outstanding are due and payable. The consideration
given is accounted for, per APB16 paragraph 86, as compensation in a
contingent agreement and is recorded as expenses of the appropriate
periods. To meet the terms of the agreements, as of September 30, 1994, the
Company lent $30,000 to each individual and, on October 12, 1994, lent an
additional $30,000 to each principal. In March, 1995 these agreements were
substantially modified to reduce their terms to expire on July 1, 1996 and
to convert the consideration of the contingent loans to shares of the
Company's common stock. In November, 1995, Mr. Hirt's employment agreement
ended upon his termination as President and his loan became due. On
December 31, 1995, the Company and Mr. Rawitch agreed that the loan of
146,484 shares each to Mr. Rawitch and his spouse would be converted to a
grant of those shares at a value of $.03 per share as compensation for
services in exchange for cancellation of all remaining Company contingent
loan obligations.
In November 7, 1994, the Company entered into an employment agreement with
Michael G. Kasolas providing that he shall serve as the Chief Financial
Officer of the Company for a four year term with an initial salary of
$95,000 during the first year, with scheduled increases during each
subsequent year. The agreement included the granting of non-qualified ten
year options to purchase 50,000 shares of the Company's stock at a price of
$2.25 per share, with 10,000 options to vest upon execution of the
agreement and 10,000 options to vest on each of the subsequent four
anniversary dates. The agreement also included the right, at Mr. Kasolas'
sole option, to cease his employment upon 10 days notice if the Company did
not obtain Directors and Officers liability insurance by March 1, 1995. The
Company not having obtained said insurance by March 1, 1995, Mr. Kasolas
gave notice and ceased his employment on that date.
1989 STOCK OPTION PLAN
The Company's 1989 Stock Option Plan (the "Option Plan") was adopted by the
Company's Board of Directors in June 1989. In January 1990, the Option Plan
was amended to increase the number of shares reserved for issuance from
95,000 to 127,700 (equivalent to 1,000,000 shares prior to the 1993 reverse
split). The Company's stockholders approved the amendment in May 1990. In
March 1995, the Board of Directors amended to Plan to increase the number
of shares reserved for issuance back to 1,000,000. The Option Plan
amendment was approved by stockholders in December, 1995.
The Option Plan provides for grants to employees, which are intended to
qualify as "incentive stock options" under Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), as well as non-qualifying
options for employees, consultants and directors of the Company. The
purpose of the Plan is to encourage stock ownership by certain officer,
directors, consultants and full-time employees of the Company by giving
them a greater personal interest in the success of the Company's business.
<PAGE> 21
The Option Plan is administered by the Board of Directors or by a Stock
Option Committee appointed by the Board. The exercise price for all options
must be at least equal to the fair market value of the shares on the date
of grant. Payment may be made in cash or with the Company's approval, in
Common Stock or a combination of cash and Common Stock. The exercise of
incentive stock options granted to any participant who owns stock
possessing more than 10% of the voting rights of the Company's outstanding
capital stock must be at least equal to 110% of fair market value on the
date of grant. The Option Plan limits the amount of incentive stock options
that any one employee may be granted in any calendar year in accordance
with the Code's limitations. The maximum option term is ten years. The Plan
also authorizes stock appreciation rights in connection with the exercise
of an option. As of December 31, 1995 there were 523,751 options
outstanding under the Option Plan.
The Option Plan provides for automatic grants of non-qualified options to
outside directors (directors who are not full-time employees). Upon
becoming a director, each outside director is granted a five-year option
exercisable for 127 shares (originally 1,000 shares) at the then current
fair market value and on each anniversary date of becoming a director, is
granted another five-year option exercisable for an additional 127 shares
in annual 25% installments beginning one year after date of grant, subject
to continuing service as a director. Directors may also be granted
additional options at the discretion of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Commission initial reports of ownership and reports of changes in ownership
of common stock and other equity securities of the Company. Officers,
directors, and greater than ten percent shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1995, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
LIMITATIONS ON LIABILITY
The Company's Restated Certificate of Incorporation and By-laws include a
provision that eliminates or limits the personal financial liability of the
Company's directors, except for any breach of the director's duty of
loyalty to the Company or its stockholders; acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of the
law; dividend payments or stock repurchases illegal under Delaware law; or
for any transaction from which the directors derive an improper personal
benefit. In addition, the Company's By-laws include provisions to indemnify
its officers and directors and other persons against expenses, judgments,
fines and amounts paid in settlement in connection with threatened, pending
or completed suits or proceedings against such persons by reason of serving
or having served as officers, directors or in other capacities, except in
relation to matters with respect to which such persons shall be
indemnified only to the extent of expenses actually and reasonably incurred
by him in connection with the defense or settlement thereof and no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of such person's duty to the Company
unless and only to the extent that the court in which such corporate suit
or proceeding was pending shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
<PAGE> 22
Under Delaware law, to the extent that an Indemnity is successful on the
merits in defense of a suit or proceeding brought against him or her by
reason of the fact that he or she is or was a director, officer of agent of
the Registrant, or serves or served any other enterprise or organization at
the request of the Registrant, the Registrant shall indemnify him or her
against expenses (including attorneys' fees) actually and reasonably
incurred in connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit,
or if such a suit is settled, an Indemnity may be indemnified under
Delaware law against both (1) expenses, including attorney's fees; and (2)
judgments, fines and amounts paid in settlement if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Company, and, with respect to any
criminal action, had no reasonable cause to believe his or her conduct was
unlawful. If unsuccessful in defense of a suit brought by or in the right
of the Registrant, where the suit is settled, an Indemnity may be
indemnified under Delaware law only against expenses (including attorney's
fees) actually and reasonably incurred in the defense or settlement or the
suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to , the best interest of the Registrant
except that if the Indemnitee is adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the Registrant, he or
she cannot be made whole even for expenses unless a court determines that
he or she is fully and reasonably entitled to indemnification for such
expenses.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Registrant in advance of the final disposition of the suit, action or
proceeding upon receipt of an undertaking by or on behalf of the officer or
director to repay such amount if it is ultimately determined that he or she
is not entitled to be indemnified by the Registrant. The Registrant may
also advance expenses incurred by other employees and agents of the
Registrant upon such terms and conditions, if any, that the Board of
Directors of the Registrant deems appropriate.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that
in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock at December 31, 1995 by:
(1) each person known by the Company to own beneficially more than five
percent of the Company's outstanding shares of Common Stock; (2) each
director and executive officer of the Company; and (3) all officers and
directors as a group. Except as otherwise indicated in the notes to this
table, the holders listed below have sole voting and investment power with
respect to such shares. For purposes of this table, a person is deemed to
have "beneficial ownership" of any shares as of a given date which such
person has the right to acquire within 60 days after such date. For
purposes of each computation of the percentage of outstanding shares held
by a person named below on a given date, any shares which such person has
the right to acquire within 60 days after such date are deemed to be
outstanding, but such shares are not deemed to be outstanding for the
purpose of computing the shares owned by any other persons.
<PAGE> 23
<TABLE>
Beneficial Ownership
- -----------------------------------------------------------
<CAPTION>
Name and Address of ---Common Stock----
Beneficial Owner # owned % owned
- ------------ ---------------------- --------- -------
<S> <C> <C> <C>
Beneficial Cumberland Partners 7,640,000 53.0%
Owners of 1114 Ave of Americas <F1>
more than 5% New York, NY 10036
of shares
outstanding Montgomery Medical 1,504,635 11.6%
Ventures II, LP <F2>
and/or
Dr. Steven Weiss
505 Sansome Street
San Francisco, CA 94111
Directors Stephen J. Sogin 30,762 .2%
and Officers 18835 Fitzpatrick <F3>
Occidental, CA 95465
L. Daniel Rawitch 837,468 6.5%
235 Montgomery St <F4>
San Francisco, CA 94104
Jan C. Hoeffel 399,012 3.0%
235 Montgomery St <F5>
San Francisco, CA 94104
3 Directors 1,267,242 9.8%
and Officers
as a group
<FN>
<F1>
Includes 7,000,000 beneficially owned and an $800,000 debenture convertible
into 640,000 shares of common stock.
<F2>
Of these shares, 1,497,668 are owned of record by MMV and 6,967 of these
shares are owned of record by MMV Holding II Co., which is wholly-owned by
MMV. Montgomery Medical Partners II, L.P. ("MMP"), the general partner of
MMV, may be deemed to share beneficial ownership of the shares beneficially
owned by MMV. Furthermore, as a general partner of MMP, Dr. Steven Weiss
may also be deemed to be a beneficial owner of MMV's shares.
<F3>
Reflects options to purchase 30,762 shares granted to Dr. Sogin for his
services as a director.
<F4>
Reflects 198,500 shares owned by him and 250,000 shares owned by his spouse
as consideration for the purchase of RPM Partners, Inc., 125,000 of which
are held in escrow and are subject to adjustment, conversion of employment
contract loans to 146,484 shares owned by him and 146,484 shares owned by
his spouse, and currently exercisable options to purchase 96,000 shares.
<PAGE> 24
<F5>
Reflects 147,178 shares beneficially owned by him and 1,834 shares
beneficially owned by his spouse and currently exercisable options to
acquire 250,000 shares.
</FN
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Harry R. Kraatz, CEO of the Company from May, 1994 to May, 1995, is also an
officer and director and principal stockholder of The Embarcadero Group II
("TEG II"), a franchise consulting company located in San Francisco,
California. MMV, a major Company shareholder, has hired TEG II on several
occasions to provide consulting services. MMV paid TEG II $66,000 in 1993
for such services. In addition, payments of $104,400 in 1991 and $156,500
in 1990 were made to TEG II, for consulting services primarily related to
the Company's reorganization, the sale of the inventories of discontinued
operations, financing and franchise development. When Mr. Kraatz resigned
as President in May, 1995, the Company entered into a performance-based
agreement with TEG II. That agreement terminated on November 30, 1995 with
no compensation having been earned by or paid to TEG II. Subsequently, TEG
II was engaged by Commonwealth Associates, the Company's Placement Agent,
to consult in connection with the Company's plan of recapitalization. The
Company has no current plans or agreements to use the services of TEGII.
In March, 1995, pursuant to the terms of the convertible, the Company
entered into a contingent sales agreement to sell the San Ramon office to
TDF, Inc. (TDF), a new California corporation formed by the two officers
for the purpose of operating that office. The Agreement required a
consideration of $50,000 be paid to the Company on or before December 31,
1995 and included the right, at TDF's sole option, to resell the office to
the Company prior to that date upon payment of any decrease in the value
of the office. In October, 1995, subsequent to Mr. Hirt's
terminationdeparture, the option was exercised, the office was resold to
the Company and the agreement terminated without a payment due.
In October, 1995, Jon M. Stark, an individual and consultant to the
Company, lent the Company $25,000 secured by a 50% interest in the
Company's San Ramon office. The arrangement included an option for Mr.
Stark to acquire the remaining 50% interest in the San Ramon office for a
like amount in the event the Company defaulted on its promissory note. In
November, Mr. Stark granted an extension on the note. In January,1996, Mr.
Stark perfected his security interest and exercised his option, thereby
becoming sole owner of that office in the name of National Mortgage Network
("NMN"), a newly formed California corporation of which Mr. Stark was the
sole officer and shareholder. The Company has agreed to reacquire that
office and additional MNM business development activities, subject to
successful completion of the Plan.
It is the Company's policy not to enter into transactions with affiliates
of the Company, unless such transactions are for bona fide business
purposes and are on terms at least as favorable to the Company as those
which could be obtained from unaffiliated parties.
<PAGE>25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed in the accompanying index to exhibits are filed as part
of this annual report.
<TABLE>
EXHIBITS
<CAPTION>
Exhibit Description
- ------- ---------------------------------------
<S> <C>
EX-3(ii) By-laws <F1>
EX-21 Subsidiaries of the registrant
EX-27 Financial data schedule
<FN>
<F1>
Restated Bylaws of Finet Holdings Corporation, July 14, 1993 are
incorporated by reference pursuant to the provisions of Exchange Act
Regulations 240.12b-1, 240.12b-32 and 201.24, as filed with the Commission
as part of Finet Holdings Corporation's Form SB-2 Registration Statement
under the Securities Act of 1933 on March 18, 1994.
</FN>
</TABLE>
<TABLE>
REPORTS ON FORM 8-K
<CAPTION>
Date Item Description
- -------- ---------------------------------------
<S> <C> <C>
10/5/95 5 Inadequate Working Capital to continue operations
11/3/95 5 Inadequate Working Capital to continue operations
</TABLE>
<PAGE> 26
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
FINET HOLDINGS CORPORATION
<TABLE>
<S> <C>
Date: December 27, 1996 L. DANIEL RAWITCH
------------------------------------
L. DANIEL RAWITCH
(CEO AND PRINCIPAL EXECUTIVE OFFICER)
Date: December 27, 1996 JAN C. HOEFFEL
------------------------------------
JAN C. HOEFFEL
(PRESIDENT AND PRINCIPAL FINANCIAL OFFICER)
</TABLE>
<PAGE> A-1
APPENDIX A
CONSENT OF ACCOUNTANTS
REUBEN E. PRICE & CO.
PUBLIC ACCOUNTANCY CORPORATION
703 MARKET STREET
SAN FRANCISCO, CA 94103
To the Board of Directors and Stockholders
Finet Holdings Corporation
San Francisco, CA
We hereby consent to incorporation by reference of our report dated
December 23, 1995 in your 1995 Annual Report on Form 10-K.
REUBEN E. PRICE & CO., C.P.A.'S
/s/ Reuben E. Price & Co.
December 27, 1995
<PAGE> A-2
REUBEN E. PRICE & CO.
PUBLIC ACCOUNTANCY CORPORATION
703 MARKET STREET
SAN FRANCISCO, CA 94103
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
Finet Holdings Corporation
San Francisco, CA
We have audited the accompanying consolidated balance sheets of Finet
Holdings Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present
fairly, in all material respects, the financial position of Finet Holdings
Corporation and subsidiaries as of December 31, 1995 and 1994, the results
of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Finet
Holdings Corporation will continue as a going concern. As discussed in Note
12, conditions exist which raise substantial doubt about the Company's
ability to continue as a going concern unless it is able to generate
sufficient cash flows and obtain additional financing to meet its
obligations and sustain its operations. Management's plans in regards to
these matters are also discussed in Note 12. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ REUBEN E. PRICE & CO.
REUBEN E. PRICE & CO.
December 27, 1996
<PAGE> A-3
<TABLE>
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995 AND 1994
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ - $ 316,100
Accounts receivable........................... 89,100 279,400
Prepaid expenses and deposits................. 33,700 325,200
Notes receivable.............................. 72,000 -
------------ ------------
Total current assets........................ 194,800 920,700
Investment in unconsolidated subsidiaries....... - 146,500
Furniture, fixtures and equipment,
net of accumulated depreciation
of $445,400 and $197,200...................... 51,700 296,900
Intangible assets, net of accumulated
amortization of $856,500 and $646,100......... 195,400 2,585,300
Organization expense............................ - 130,000
------------ ------------
Total assets................................ $ 441,900 $ 4,079,400
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Note payable.................................. $ 25,000 $ 62,500
Accounts payable.............................. 996,600 801,800
Accrued liabilities........................... 175,200 177,700
Convertible debenture......................... 800,000 -
Liabilities of discontinued operations........ 2,500 10,800
------------ ------------
Total current liabilities................... 1,999,300 1,052,800
------------ ------------
Total liabilities........................... 1,999,300 1,052,800
------------- -----------
Stockholders' equity(deficit):
Common stock, par value $.01, 20 million
authorized, 12,930,479 shares and 6,063,190
shares issued and outstanding................. 129,300 60,600
Additional paid-in capital.................... 19,759,600 19,402,700
Accumulated deficit........................... (21,446,300) (16,436,700)
------------ ------------
Total stockholders' equity(deficit)......... (1,557,400) 3,026,600
------------ ------------
Totals.................................. $ 441,900 $ 4,079,400
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> A-4
<TABLE>
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Continuing operations:
Revenues......................... $ 712,900 $ 4,207,400 $ 5,255,500
------------ ------------ ------------
Operating expenses:
Compensation and benefits...... 1,438,600 4,056,500 4,461,300
Occupancy and equipment........ 371,100 785,200 636,300
Communications................. 208,000 371,800 220,400
Loan related fees and costs.... 172,500 497,400 559,700
General & administrative....... 1,031,900 1,278,700 749,800
------------ ------------ ------------
Total operating expenses 3,222,100 6,989,600 6,627,500
------------ ------------ ------------
(Loss) from operations.......... (2,509,200) (2,782,200) (1,372,000)
Other expenses:
Intangible asset write down.... (2,075,900) - -
Fixed asset partial impairment. (156,100) - -
Organization expenses.......... (147,100) - -
Investment loss................ (63,200) - -
Equity in share of loss of
unconsolidated subsidiary.... - (15,100) -
Interest expense............... (66,400) (2,100) (103,100)
------------ ------------ -----------
(Loss) from continuing operations (5,017,900) (2,799,400) (1,475,100)
Discontinued operations.......... 8,300 - 79,100
Minority interest in share of loss - 4,100 -
------------ ------------ -----------
Net income (loss)................ (5,009,600) (2,795,300) (1,396,000)
Mandatory preferred stock
dividends...................... - (28,000) (221,600)
------------ ------------ -----------
Net income (loss) attributable to
stockholders................... $(5,009,600) $(2,823,300) $(1,617,600)
============ ============ ============
Net income (loss) per common share
Primary and fully diluted:
Continuing Operations.......... $(.67) $(.69) $(.99)
Discontinued operations........ -- -- .05
Dividends on preferred stock... -- (.01) (.15)
------------ ------------ ------------
Net income (loss).............. $ (.67) $ (.70) $ (1.09)
============ ============ ============
Weighted average common shares. 7,443,697 4,023,500 1,484,100
============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> A-5
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Continuing operations:
Loss from operations.............. $(5,009,600) $(2,795,300) $(1,475,100)
Adjustments to reconcile loss to cash used in operating activities:
Depreciation and amortization.... 394,400 340,100 242,800
Liabilities converted to equity.. - - 206,700
Expenses converted to common stock 170,900 55,600 83,300
Equity in loss of unconsol subs.. - 15,100 -
Minority interest in operating loss - (4,100) -
Intangible asset writedown........ 2,075,900 - -
Fixed asset partial impairment.... 156,100 - -
Changes in assets and liabilities:
Accounts receivable............... 190,300 (180,800) (10,800)
Prepaid expenses and deposits..... 291,500 (134,300) 19,600
Accounts payable.................. 194,800 450,200 (33,200)
Accrued liabilities............... (2,500) (348,600) (91,300)
Customer advance deposits......... - (48,100) 48,100
Other............................. - 1,800 -
Notes Payable..................... (37,500) - -
Discontinued operations........... (8,300) - -
Notes receivable.................. (72,000) - -
Organization expense.............. 130,000 - -
Investment........................ 146,500 - -
------------ ------------ ------------
Net cash used in continuing operations(1,379,500) (2,648,400) (1,009,900)
Net cash used by discontinued operations - - (30,000)
----------- ------------ ------------
Net cash used by operating activities (1,379,500) (2,648,400) (1,039,900)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock.. 255,000 3,433,500 1,305,000
Proceeds from convertible debenture. 800,000 - -
Offering expenses................... - (723,600) (424,200)
Proceeds of short term borrowing.... - - 1,092,400
Repayment of short term borrowing... - - (582,800)
----------- ------------ ------------
Net cash from financing activities.. 1,055,000 2,709,900 1,390,400
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Organization expense................ - (50,000) (80,000)
Sale (acquisition) of equipment..... 8,400 (59,400) (9,900)
----------- ------------ ------------
Net cash used by investing activities 8,400 (109,400) (89,900)
----------- ------------ ------------
CHANGE IN CASH AND EQUIVALENTS...... (316,100) (47,900) 260,600
----------- ------------ ------------
CASH & EQUIVALENTS Beginning of Year. 316,100 364,000 103,400
End of Year....... $ - $ 316,100 $ 364,000
=========== ============ ============
</TABLE>
<PAGE> A-6
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995,1994 AND 1993
<CAPTION>
Common Stock Additional
Preferred ----------------- Paid-in Accumulated
Stock Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1993 $ 350,000 3,056,001 $30,500 $13,518,500 $(13,613,400)
Private Placement.... 1,620,559 16,200 3,417,300
Offering Expenses.. (723,600)
Merger - exchange
of stock........... 562,500 750,000 7,500 1,680,000
Preferred dividends.. 28,000
Conversion of
preferred stock
to common:
Preferred B..... (378,000) 131,266 1,300 376,700
Preferred C..... (562,500) 250,000 2,500 560,000
Acquisitions for stock:
60% of RPM Fremont 13,529 100 16,100
50% of RPM Affiliates 42,333 400 94,800
Conversion of debt
to common stock... 93,178 1,000 252,000
Stock issued for
services.......... 106,324 1,100 210,900
Net loss............ (2,795,300)
-------- --------- -------- ----------- -------------
December 31,1994 - 6,063,190 60,600 19,402,700 (16,436,700)
---------- --------- -------- ----------- -------------
Warrant exercise... 6,500,000 65,000 190,000
Conversion of debt
to common stock.. 2,402
Stock issued for
services......... 364,887 3,700 167,000
Net loss........... (5,009,600)
----------- --------- -------- ----------- -------------
December 31, 1995 $ - 12,930,479 $129,300 $19,759,700 $(21,446,300)
=========== ========= ======== =========== =============
</TABLE>
See notes to consolidated financial statements
<PAGE> A-7
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION.
Finet Holdings Corporation (the "Company") was founded as William &
Clarissa, Inc. in February, 1988 to develop, contract for production of,
and market personal care products and accessories primarily for children.
The Company went public in 1989. After incurring substantial losses and
experiencing severe liquidity problems, in 1991 the Company discontinued
normal operations related to personal care products and accessories.
On December 5, 1991, the Company substantially completed an Amended Plan of
Reorganization which provided for the settlement of substantially all
claims by unsecured creditors, settlement of secured borrowings by issuance
of preferred and common stock, and the acquisition of Finex Corporation
(Finex). (See Note 4.) Finex, a privately-held California mortgage loan
brokerage corporation, was organized in 1990 and began operations in 1991.
Since December 5, 1991, the Company's operations consist of the business of
mortgage loan brokerage.
On March 31, 1992, the Company changed its name from William & Clarissa,
Inc. to Finet Holdings Corporation and changed Finex's name to Finet
Corporation (Finet).
On August 31, 1994, the Company completed the acquisition of RPM Partners,
Inc. (RPM) (See Note 4.), a California mortgage loan corporation that was
organized and began operations in 1991, and, in a simultaneous transaction,
merged RPM into the Company's wholly-owned corporation, FWC Shell
Corporation, Inc. (FWC Shell).
On April 10, 1995, the Company organized Finet Correspondent, Inc., a
wholly-owned California corporation (Ficor), to engage in correspondent
lending activities. Ficor became inactive in July, 1995.
BASIS OF PRESENTATION.
The accompanying financial statements have been prepared on the basis that
the Company and its subsidiaries, Finet, FWC Shell and Ficor, will continue
as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed
in Note 12, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
CONSOLIDATION.
These consolidated financial statements include the accounts of the
following subsidiaries: Finet (100% owned), FWC Shell (100% owned) and
Ficor (100% owned). FWC Shell includes the accounts of the following
subsidiaries: RPM Mortgage, Inc. (100% owned), RPM Affiliates, Inc. (100%
owned at December 31,1994 and 50% owned at October 25, 1994) and Fremont
Mortgage, Inc. (100% owned at December 31, 1994 and 60% owned at October
25, 1994). The acquisition of RPM is accounted for as a purchase.
All material intercompany amounts have been eliminated in consolidation.
<PAGE> A-8
LOAN BROKERAGE REVENUE AND EXPENSE RECOGNITION.
Loan origination and processing fees and direct loan brokerage costs are
recognized as revenue and expense when the applicable loans are funded.
Such fees are typically received within a few days after the close of
escrow of the related loan. In 1995, rights to these fees and
responsibilities for these expenses were assumed by the respective
affiliate office originating each loan.
CASH AND EQUIVALENTS.
Investments with original maturities of three months or less are classified
as cash equivalents.
DEPRECIATION METHOD.
Depreciation is computed over the estimated useful lives of the property
and equipment of two to twelve years using the straight-line depreciation
method.
INTANGIBLE ASSETS.
Intangible assets represent the excess of estimated fair value of common
stock issued and liabilities assumed over identifiable assets in connection
with the acquisitions of Finex and of RPM. Such intangible assets are
considered to represent the value of the personnel, technology and
marketing experience of Finex and RPM. The Company's policy governing the
measurement of the intangible assets is to recognize the impairment of the
intangible asset when a diminished future economic benefit can be
reasonably determined. (See Note 4)
INCOME TAXES.
The Company and its consolidated subsidiaries file consolidated federal and
combined state income tax returns. Income taxes are accounted for by the
asset/liability approach in accordance with the provisions of Statement of
Accounting Standards No. 109 (SFAS 109). Under this pronouncement, deferred
income taxes, if any, reflect the estimated future tax consequences when
reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of
assets and liabilities and are adjusted for changes in tax laws and tax
rates when those changes are enacted. The provision for income taxes
represents the total income taxes paid or payable for the current year,
plus the change in deferred taxes during the year. The tax benefits related
to operating loss carryforwards are recognized if management believes,
based on available evidence, that it is more likely than not that they will
be realized.
NET INCOME (LOSS) PER COMMON SHARE.
Net income (loss) per common share is based on the weighted average number
of shares of common stock and the dilutive effects of common stock
equivalents outstanding during the period.
DISCONTINUED OPERATIONS.
Because of the cessation of operations in early 1991 of William & Clarissa,
Inc. and before the acquisition of the Finex mortgage brokerage business,
the liquidation of the William & Clarissa, Inc. assets, the results of
operations and the related net assets and liabilities have been presented
as discontinued operations. The net liabilities of discontinued operations
consist of amounts due to unsecured creditors for accounts payable and
reserves for liabilities not settled under the plan of recapitalization.
During 1993 and 1995, management either
<PAGE> A-9
paid, settled, or determined that payment of certain liabilities of the
discontinued operations was remote. Accordingly, the recorded liabilities
related to such former operations was reduced by $109,000 and $8,300,
respectively.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES.
The Company owned 50% of the stock of RPM Affiliates, Inc. (Affiliates)
from August 31, 1994 to October 25, 1994 and owned 50% of Hillside Funding,
Inc. Affiliates owns 10% of the stock of two mortgage brokerages, Daly City
and San Rafael. Since ownership and control were equally shared, the
investments have been accounted for under the equity method.
During 1995, these unconsolidated subsidiaries either ceased operations or
were continued by owners having no affiliation with the Company.
Accordingly, the Company's investment in these unconsolidated subsidiaries
has no value and management has determined that a charge off of $146,500 is
appropriate. The results of operations of these entities, singly or in
combination, are not material to the financial statements of the Company
for the periods presented.
2. CHANGES IN METHOD OF ACCOUNTING FOR INCOME TAXES AND
BORROWER TRUST ACCOUNT
CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES.
The Company adopted the asset and liability method of accounting for income
taxes effective for the fiscal year ending December 31, 1993 as required by
Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes".
CHANGE IN METHOD OF ACCOUNTING FOR BORROWER TRUST ACCOUNT.
During 1994, the Company changed its method of accounting for borrowers'
credit and appraisal revenue and expense. The Company maintains trust
accounts for appraisal and credit report fees collected from borrowers
prior to the close of escrow and had accounted for the receipt of and
payment for such fees as revenue and expense, respectively. Based on the
pass-through nature of these fees, the Company believes that borrower
credit report and appraisal fees should not be included in the consolidated
statements herein and that the change in its method of accounting for these
fees will more accurately reflect the Company's actual earned revenue and
incurred expenses.
The change had no effect on net income (loss) or on earnings per share
because credit report and appraisal revenue equalled credit report and
appraisal expense. The combined credit report and appraisal funds recorded
as both revenue and expense for the year ended December 31, 1993 was
$486,000.
<PAGE> A-10
3. INCOME TAXES
No provision for or benefit from income taxes is included in the financial
statements due to the valuation allowance discussed below.
Deferred tax liabilities (assets) at December 31, 1995, 1994 and 1993 are
comprised of the following:
<TABLE>
<CAPTION>
------------At December 31-----------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax liability-depreciation $ 5,200 $ 5,100 $ 5,000
----------- ----------- -----------
Gross deferred tax liability 5,200 5,100 5,000
Deferred tax asset-
loss carryforwards (533,500) (6,453,700) (5,324,300)
----------- ----------- -----------
Gross deferred tax asset (533,500) (6,453,700) (5,324,300)
Valuation allowance-
deferred tax asset 528,300 6,448,600 5,319,300
----------- ----------- -----------
Net deferred tax liability (asset) $ -0- $ -0- $ -0-
=========== =========== ===========
</TABLE>
The valuation allowance for deferred taxes relates to loss carryforwards, to
the extent they exceed the deferred tax liabilities related to depreciation.
Based on available evidence, it does not appear more likely than not they
will be realized.
<PAGE> A-11
4. ACQUISITIONS
ACQUISITION OF FINEX.
As discussed in Note 1., the Company completed the major provisions of the
Company's acquisition of Finex on December 5, 1991. The acquisition has
been accounted for as a purchase and the results of its operations have
been consolidated since that date. The Company acquired Finex for 117,211
(post 1993 reverse split) shares of the Company's common stock. Prior to
the acquisition, certain officer/stockholders of the Company made loans to
Finex totaling $100,000 and the Company had loaned Finex $150,000. The
estimated fair values of the assets acquired and the liabilities assumed
from the acquisition are summarized below:
<TABLE>
<CAPTION>
----------1991------------
<S> <C> <C>
Assets acquired
Tangible assets $ 88,500
Intangible assets 1,051,700
-----------
$ 1,140,200
Liabilities assumed
Notes and loans payable (primarily to
related parties 588,300
Accounts payable and accrued liabilities 487,200
-----------
(1,075,500)
------------
Total cost of acquisition 64,700
Less: common stock issued 64,700
Cash overdraft assumed 16,400
-----------
81,100
------------
Net cash effect of acquisition $ (16,400)
============
</TABLE>
The fair value of the Company's common stock issued in connection with the
acquisition was estimated to be $.55 per share (post 1993 reverse split).
As discussed in Note 1., the Company's policy governing the measurement of
the intangible asset is to recognize the impairment of the intangible asset
when a diminished future economic benefit can reasonably be determined. The
Company has experienced operating losses from continuing operations since
the acquisition of Finex. The Company believes such losses do not reflect a
value of the future economic value of the intangible asset less than the
current carrying value and accordingly continues to amortize the intangible
asset on a straight line basis over a period of five years. At December 31,
1995, the balance of the intangible asset related to the Finex acquisition
is $195,400, net of accumulated amortization.
<PAGE> A-12
ACQUISITION OF RPM.
As discussed in Note 1., the Company completed by an exchange of stock the
acquisition of RPM on August 31, 1994. The acquisition has been accounted
for as a purchase and the results of its operations have been consolidated
since August 31, 1994. The Company acquired all the assets and liabilities
of RPM for 750,000 (post 1993 reverse split) shares of the Company's common
stock and 50,000 shares of the Company's Series C Preferred Stock. The
estimated fair values of the assets acquired and the liabilities assumed
from the acquisition are summarized below:
<TABLE>
<CAPTION>
----At August 31, 1994----
<S> <C> <C>
Assets acquired
Tangible assets $ 360,200
Intangible assets 2,204,300
-----------
$ 2,564,500
Liabilities assumed
Accounts and notes payable 294,200
Minority interest 20,300
-----------
314,500
------------
Total cost of acquisition 2,250,000
Less: common stock issued 2,250,000
------------
Net cash effect of acquisition -0-
============
</TABLE>
The 50,000 shares of Series C Preferred Stock issued in connection with the
acquisition were issued at $.01 par value with a preference on liquidation
of five times per share of the amount of the Company's common stock would
be entitled to per share, in liquidation, over and above the common stock
and subordinate to the Company's Series B Preferred Stock. (See Note 8.) In
calculating the amount of common stock the Series C Preferred Stock is
entitled to in liquidation, each share of the Series C Preferred Stock
counts as five shares of the Company's common stock.
The fair value of the Company's common stock issued in connection with the
acquisition was valued at the price of $2.25 per share (post 1993 reverse
split). The valuation was based upon the Company's $4,000,000 Private
Placement (See Note 7.) to accredited investors of 888,441 Units for $4.50
(each Unit consisting of two shares of common stock for $2.25 and a warrant
to purchase one share of common stock for $3.25) which was closed in
December, 1994.
The Company recognized an intangible asset of $2,204,300 from the
acquisition of RPM. As a result of the closing of brokerage offices related
to RPM, and the loss of experienced personnel and market presence during
the year ended December 31, 1995, the future economic value of the acquired
intangible asset was diminished. Accordingly, management has determined
that the remaining unamortized balance of the intangible asset should be
taken as a charge against current period earnings. Accumulated amortization
of the intangible asset is $128,400, which results in a net intangible
asset charge off of $2,075,900. The specific contribution of RPM to the
Company's 1995 operating results cannot be determined at this time.
<PAGE> A-13
In conjunction with the purchase of RPM, the Company entered into
agreements with the two principal officers of RPM which included the
provision whereby the Company will, if the individuals remained employed
with the Company, lend each individual up to $60,000 upon execution of the
agreement, $250,000 on the first anniversary and $250,000 on the second
anniversary of the agreement. The term of each loan is two years with
interest at the prime rate payable annually. In the event each individual
is still in the employ of the Company on the second anniversary of each
loan, the loan principal will be forgiven.
To meet the terms of the agreements, as of September 30, 1994, the Company
lent $30,000 to each individual and, on October 12, 1994, lent an
additional $30,000 to each individual. The consideration is accounted for,
per Accounting Principles Bulletin No. 16, Paragraph 86, as compensation in
a contingent agreement and is recorded as expense of the appropriate
period. Pursuant to the terms of the Company's March 15, 1995 $800,000
convertible debenture, the form of consideration for subsequent loans was
modified to be in the form of shares of the Company's common stock.
In November, 1995, the employment of one of the individuals was terminated.
That individual's loans, totaling $60,000, became due and payable. No loan
of shares was made to that individual.
On December 31, 1995, the Company and the other individual agreed to a
modification of his contingent loan agreement whereby 292,968 shares of
common stock valued at $.03 per share were issued as compensation in
exchange for cancellation of the remaining contingent loan obligations.
5. CAPITALIZED ORGANIZATION COSTS
In April, 1993, the Company joined a group of Mexican investors for the
purpose of organizing a mortgage credit business in Mexico. The Company
carries a balance of $130,000 in capitalized organization cost related to
this transaction. There is uncertainty regarding any recovery or return
from this investment. Accordingly, management has taken the position that
the entire investment should be written off at this time.
Additional organization expense of $8,300 was incurred during 1995.
6. FURNITURE, FIXTURES AND COMPUTER EQUIPMENT
By the end of 1995, the Company's operations were near dormant and much of
its furniture, fixtures and computer equipment was in storage or otherwise
not being used. Management believes that upon the expected resumption of
business activities in late 1996, these assets will continue to provide
economic value. However, this period of inactivity necessitated an
evaluation of their probable fair market value upon return to service.
Based on this evaluation, management has determined that a reduction in the
carrying value of these assets of $156,100 is needed to properly reflect
the impairment to economic value during the period of underutilization.
<PAGE> A-14
7. BORROWING ARRANGEMENTS
Following is a summary of bank loans and other loans payable at December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bank loan $ - $ - $ -
Other notes and loans payable 25,000 62,500 -
Convertible debenture 800,000 - -
</TABLE>
During 1993, the Company received from Montgomery Medical Ventures II, L.P.
(MMV), then the Company's principal stockholder, advances aggregating
$1,591,760, secured by substantially all of the assets of the Company. In
May, 1993, $196,000 of debt and $5,600 of interest owed by the Company to
MMV and a $95,000 advance from a Company employee and interest were
converted into common stock in connection with the May 1993 offering (See
Note 8). In July, 1993 the Company obtained bridge loans in the aggregate
principal amount of $200,000 which were converted into common stock and
warrants in connection with the July 1993 offering (See Note 7). In a
separate transaction, MMV converted $889,800 of existing debt and $46,100
of accrued interest into common stock in connection with the July 1993
offering. On December 31, 1993, the balances of the then outstanding loans
from MMV of $342,000 plus accrued interest were converted into a new Series
B Cumulative Redeemable Preferred Stock (See Note 8).
The note payable outstanding at December 31, 1994 reflects an 8% note
assumed by the Company in the acquisition of RPM on August 31, 1994. This
note was subsequently retired in connection with a settlement related to
the disposition of an RPM minority interest.
On March 15, 1995, Cumberland, then the Company's second largest
shareholder, provided $800,000 of additional capital in the form of a
convertible debenture. The convertible debenture was secured by all the
Company's assets and its terms required the Company to meet certain monthly
financial performance tests through June 30, 1996, including minimum
positive earnings tests keyed to the Company's business plan. The debenture
is convertible at $1.25 per share into 640,000 shares of the Company's
common stock. If not converted, all outstanding principal and accrued
interest is due and payable on June 30, 1996, with interest at ten percent
(10%) per annum payable semiannually on the last day of August, 1995 and
February, 1996.
(See Note 8.)
The note payable outstanding at December 31, 1995 reflects a 10% note
assumed by the Company in October, 1995, secured by a 50% interest in the
Company's San Ramon office. In January, 1996, the lender's security
interest was perfected and a related option to acquire the remaining 50%
interest in the San Ramon office was exercised. (See Note 14.)
<PAGE> A-15
8. STOCKHOLDERS' EQUITY
On March 30, 1992, the Company's authorized common stock was increased from
10 million shares to 20 million shares with a par value of $.01 per share.
The Company elected not to legally enact a Company authorization on
November 20, 1993 which would reduce authorized common stock to 6 million
shares with a par value of $.01 per share and reduce authorized preferred
stock to 100 shares. At December 31, 1995, authorized common stock remains
at 20 million shares with a par value of $.01 per share and authorized
preferred stock remains at 100,000 preferred shares. On October 21, 1996,
the Company's authorized common stock was increased from 20 million shares
to 30 million shares with a par value of $.01 per share. (See Note 14.)
COMMON STOCK
On November 9, 1993, immediately prior to the first closing of the
Company's July 1993 offering, the Company initiated a 1-for-7,894 reverse
stock split. All common share quantities referred to herein have been
restated for this reverse stock split.
In connection with the reorganization and debt restructuring on December 5,
1991, 535,394 common shares were issued to the Company's secured creditors
(principally MMV); 59,064 shares were issued to the Company's Chairman; and
all outstanding warrants and options were cancelled in exchange for 3,058
common shares. Also on December 5, 1991, 117,211 common shares were issued
in connection with the acquisition of Finex. An entity exchanged notes
totaling $100,000 at December 31, 1991 and related accrued interest of
$7,100 for 30,403 shares of the Company's common stock on January 1, 1992
pursuant to an understanding reached in connection with the reorganization
and debt restructuring.
In May, 1993, the Company issued 126,678 shares of common stock in
connection with the private placement of 126,678 Units (1,000,000 Units pre
reverse split), each Unit consisting of one share of common stock sold by
the Company for $3.95 per share ($.50 pre-reverse split) and a warrant to
purchase from the "selling shareholders" one share of common stock for one
year at $.01. The "selling shareholder" warrants were sold by MMV (95% of
warrants issued) and the Company's Chairman (5% of warrants issued). MMV
purchased 51,051 of the units (403,000 Units pre-reverse split) in exchange
for cancellation of $196,000 of debt and $5,600 of accrued interest owed by
the Company. Outside investors purchased the other 75,627 Units (597,000
Units pre-reverse split) with proceeds to the Company of $298,500.
On July 22, 1993, the Company commenced the private placement of up to
888,889 units maximum at $4.50 per Unit. Each Unit consists of two shares
of the Company's common stock, par value $.01 per share, and one separable
redeemable warrant to purchase one share of the Company's common stock at
an exercise price of $3.25 per share, subject to adjustment. Each warrant
is exercisable immediately and through November 9, 1996, three years after
the date of the first closing of the Units offered. Under certain
circumstances, the Company may call all warrants for redemption at $.05 per
warrant. The private placement was closed to further subscription on
December 16, 1994. The following summarizes closings of the private
placement and the net proceeds received after payment of expenses directly
related to the offering and payment of fees and commissions to the
Placement Agent:
<PAGE> A-16
<TABLE>
JULY 1993 PRIVATE PLACEMENT CLOSINGS
<CAPTION>
# Date Units Shares Warrants Net Proceeds
<S> <C> <C> <C> <C><F1> <C>
1 11/9/93 334,443 668,886 334,443 $1,305,000<F2>
2 1/21/94 65,000 130,000 65,000 260,000
3 2/25/94 32,500 65,000 32,500 130,000
4 3/14/94 15,000 30,000 15,000 60,750
5 3/28/94 70,000 140,000 70,000 283,500
.6 4/8/94 22,500 45,000 22,500 91,125
.7 6/3/94 70,000 140,000 70,000 283,500
.8 6/24/94 65,000 130,000 65,000 263,500
.9 6/30/94 40,000 80,000 40,000 162,000
10 7/13/94 40,000 80,000 40,000 162,000
11 10/6/94 40,000 80,000 40,000 162,000
12 11/8/94 60,000 120,000 60,000 243,000
13 11/25/94 20,000 40,000 20,000 81,000
------- --------- ------- ----------
Totals 874,443 1,748,886 874,443 $2,763,775
<FN>
<F1>
Ten year Placement Agent warrants to purchase one share of the Company's
common stock at $2.25 per share were issued at the rate of three for each
ten units sold, or a total of 262,333 warrants.
<F2>
Includes $200,000 advanced to the Company as bridge loans to sustain
operations until the first closing and converted to Units at that time.
Concurrently, the bridge lenders were issued warrants to purchase two
shares of the Company's common stock from the issuers (See Note 8) for each
five units received in the conversion (35,555 total warrants).
</FN>
</TABLE>
Also in conjunction with the first closing , the following items were
converted into the Company's common stock:
<TABLE>
<CAPTION>
Common
Amount Totals Shares
---------- ---------- -------
<S> <C> <C> <C>
Senior preferred stock $2,559,000
plus accumulated dividends 317,600
$2,876,600 728,806
Short debt to MMV 889,800
plus accumulated interest 46,100
2,876,600 728,806
Notes from shareholders 193,000
plus accrued interest 41,900 234,900 58,494
<PAGE> A-17
Deferred compensation
and accrued claims 127,700 32,235
</TABLE>
MMV converted all of the Company's Senior Cumulative Exchangeable Preferred
Stock (See Note 7) into 728,806 shares of common stock and $935,900 in
short term debt owed by the Company into 237,139 shares of common stock.
The fair value of the debt and preferred stock conversion was determined by
the more evident fair value of the consideration received for the stock
issued to the Company's majority shareholder and, accordingly, recorded to
the Company's equity.
As of November 8, 1994, the Company sold 533,327 shares of common stock to
an accredited investor (33,327 shares) and to Cumberland Partners, a NY
investment partnership (Cumberland), (500,000 shares). Net proceeds to the
Company after payment of commissions to the Placement Agent were $883,000.
On November 8, 1994, the holders of the 50,000 shares of the Company's Non-
voting Series C Preferred Stock in the amount of $562,500 (5 to 1
liquidation and dividend preference over common stock) issued in connection
with the acquisition of RPM (See Note 4) were converted into 250,000 shares
of the Company's common stock at $2.25 per share.
Prior to December 31, 1994, MMV converted the 35 shares of Series B
Cumulative Redeemable Preferred Stock of $350,000 and accumulated dividends
of $28,000 as well as $197,929 of accounts payable owed by the Company to
MMV into a total of 200,000 shares of the Company's common stock.
Additionally, the Company issued 13, 529 shares of common stock to obtain
100% ownership from the 40% minority shareholders of RPM Fremont, Inc. and
42,333 shares of common stock to obtain 100% ownership from the 50% partner
investors of RPM Affiliates, Inc (See Note 4). The Company also issued
24,444 shares of common stock as part of negotiated settlements to convert
$55,000 of obligations from a trade creditor and a terminated office lease
and issued 106,324 shares of common stock related to $184,792 in employee
and consultant compensation.
On March 15, 1995, Cumberland, then the Company's second largest
shareholder, provided $800,000 of additional capital in the form of a
convertible debenture and acquired an additional 500,000 shares of the
Company's common stock through the separate exercise of warrants for a
consideration of $75,000.
The convertible debenture was secured by all the Company's assets and its
terms required the Company to meet certain monthly financial performance
tests through June 30, 1996, including minimum positive earnings tests
keyed to the Company's business plan. The debenture is convertible at $1.25
per share into 640,000 shares of the Company's common stock at the option
of Cumberland. If not converted, all outstanding principal and accrued
interest is due and payable on June 30, 1996, with interest at ten percent
(10%) per annum payable semiannually on the last day of August, 1995 and
February, 1996.
Also on March 15, 1995, the Company granted to Cumberland the Series B
warrants to acquire 6 million shares for $0.03 per share. These warrants
vest in inverse proportion to the Company's financial performance through
June 30, 1996. If the Company experienced an operating loss for the month
of June, 1995, or failed to cure any default of subsequent monthly
financial tests, or if it earned, before deducting amortization,
depreciation, interest and income taxes, less than $330,000 for the six
months ending June 30, 1996, the warrants fully vest. Full exercise of
warrants would increase Cumberland's holdings to a majority of shares then
outstanding. If the Company earned $1,000,000 or more for the six month
period ending June 30, 1996, no warrants vest. Intermediate earnings during
that period would result in proportionate vesting of warrants at a rate of
9.0 warrant shares for each dollar of earnings below $1,000,000.
<PAGE> A-18
After July 1995, the Company's operations did not enable it to meet or cure
defaults on the convertible debenture, resulting in the full vesting of the
Series B warrants. On November 2, 1995, Cumberland exercised all 6 million
Series B warrants for an exercise price of $180,000, increasing
Cumberland's total holdings of the Company's stock to 7,000,000 shares,
53.6% of shares then outstanding.
The Company also issued 2,402 shares to its counsel to adjust its prior
consideration for legal services to a value of $1.85 per share and issued
71,919 shares at $2.25 per share to an affiliate office manager as
consideration for the release of a prior grant of certain territorial
rights.
On December 31, 1995, 292,968 shares at $.03 per share were issued to an
officer and recorded as compensation expense (See Note 4.)
At December 31, 1995, the Company had 12,930,479 shares of its common stock
issued and outstanding.
PREFERRED STOCK
At December 31, 1992, 2,559 shares of 10% Senior Cumulative Convertible
Exchangeable Preferred Stock were issued and outstanding. The Preferred
Stock had a liquidation preference of $1,000 per share, provided for a 10%
cumulative dividend, was exchangeable, at the Company's option, into 10%
Junior Subordinated Debentures due September 30, 2002, and was convertible
into the Company's common stock, subject to certain conditions, at an
initial price of $.75 per common share.
On November 9, 1993, in connection with the first closing of the Company's
July 1993 private placement, MMV converted all of the Company's Senior
Cumulative Convertible Exchangeable Preferred Stock ($2,559,000) and
accumulated dividends ($317,600) into 727,806 shares of the Company's
common stock at $3.95 per share. On December 31, 1993, the then outstanding
remaining debt owed to MMV by the Company and related accrued interest
($350,000) were exchanged for 35 shares of newly authorized 8% Series B
Cumulative Redeemable Preferred Stock with a liquidation preference of
$10,000 per share. The Series B preferred stock was redeemable at par in
whole or in part at the option of the Company upon the closing of at least
$2,500,000 from the private placement.
On August 31, 1994, the Company issued 50,000 shares of Series C Non-voting
Preferred Stock, par value $.01 per share, with a liquidation preference of
five times the per common share ratio and subordinate to the Series B
Preferred Stock. Based on the five times per common share ratio, the Series
C Preferred Stock was valued at five times the common stock price of $2.25
per share (total of $562,500) and could participate in dividends, if any,
with the common stock on a basis of five times the dividend on each share
of common stock. The Series C Preferred Stock was redeemable at the option
of the Company after December 31, 1996. The Company has not declared or
issued common stock dividends. In November, 1994, the Series C Preferred
Stock was converted by the holders into 250,000 shares of the Company's
common stock at a price of $2.25 per common share. The 250,000 shares of
common stock, as the Series C Preferred Stock was previously, are escrowed
pending possible adjustments associated with the RPM purchase agreement.
On December 31, 1994, MMV converted the 35 shares of Series B Cumulative
Redeemable Preferred Stock ($350,000), accrued dividends ($28,000), and
accounts payable ($197,929,) into 200,000 shares of the Company's common
stock.
<PAGE> A-19
At December 31, 1995, 100,000 shares of preferred stock with a par value of
$.01 were authorized and none were issued and outstanding.
STOCK OPTIONS AND WARRANTS
The Company adopted a Stock Option Plan (the Option Plan) in June, 1989
which is intended to qualify for certain grants to employees as "incentive
stock options" under Section 422A of the 1986 Internal Revenue Code as well
as provide non-qualifying options to employees, consultants and directors
of the Company. Under the terms of the Option Plan, the exercise price for
all options must equal or exceed the fair value of common shares on date of
grant and, for any participant possessing more than 10% of the voting
rights in the Company's outstanding capital stock, must equal or exceed
110% of the fair value of the common shares on date of grant. The maximum
term is ten years. Following is a summary of transactions:
<TABLE>
Shares under Option
<CAPTION>
1995 1994
--------- ------
<S> <C> <C>
Outstanding, beginning of year 51,370 1,116
Granted during the year 891,020 50,254
Canceled during the year (418,639) -
Exercised during the year - -
Outstanding, end of year 523,751 51,370
Eligible for exercise, end of year 523,751 1,370
</TABLE>
At December 31, 1995 and 1994 the Company had outstanding exercisable
warrants to purchase 1,146,277 shares of the Company's common stock at
prices that ranged from $2.25 to $12.10 per share. 874,443 of the warrants
expire on November 9, 1996, 9,501 expire in December, 2001 and the
remainder expire November 9, 2003.
ARRANGEMENTS FOR FUTURE ISSUANCE OF STOCK, OPTIONS AND WARRANTS
In March 1995, the Company's Board of Directors resolved to increase the
number of shares reserved for issuance under the Stock Option Plan from
126,700 (1,000,000 pre-1993 reverse split) to 1,000,000 shares, subject to
shareholder approval. That amendment was approved by shareholders on
December 18, 1995.
<PAGE> A-20
9. LEASES
The Company rents its corporate office on a month-to-month basis.
At December 31, 1995, the Company was in default on unoccupied premise
lease obligations in the amount of $157,500 and equipment lease obligations
of $56,200, both of which relate to closed branch offices. In 1996, these
obligations increased to $235,700 and $117,200, respectively. The Company
is a defendant in a number of legal proceedings related to these
obligations and, as of December 10, 1996, is negotiating settlements. The
Company has no other minimum future non-cancellable operating leases.
Lease rent expense was $203,600 in 1995, $770,000 in 1994 and $550,000 in
1993.
10. RELATED PARTY TRANSACTIONS
MMV's equity investments in and debt financings to the Company are
discussed in Notes 6,7, and 8. Cumberland's equity investments in and debt
financings to the Company are discussed in Notes 7 and 8.
On August 31, 1994, the Company received the resignation of its Founder and
Chairman. On December 31, 1994, he sold 80,000 of his shares of the
Company's common stock to an accredited foreign investor.
Pursuant to the employment agreement modifications required by the terms of
the Cumberland debenture, In March, 1995, tthe Company entered into a
contingent sales agreement transferring ownership of the San Ramon office to
a new corporation formed by two officers, for a consideration of $50,000 due
and payable on or before December 31, 1995. The agreement included an option
for the office to be reacquired by the Company prior to that date upon
payment of any decrease in its value. In October, 1995, the option was
exercised and the office returned to the Company without payment.
On May 15, 1995, the Company received the resignation of its Chief
Executive Officer (CEO), at which time he voluntarily surrendered 192,000
of his 368,639 stock options. The Company then entered into a performance
based services agreement with a franchise consulting company, of which he
is the President and sole shareholder. The agreement expired on November
30, 1995 and, the required minimum performance not having been achieved,
no payments were made. On December 31, 1995, the remaining 176,639 options
of the former CEO expired unexercised.
11. ADDITIONAL STATEMENT OF CASH FLOW INFORMATION
The information concerning the conversions of equity and debt are set forth
in detail in Notes 7 and 8.
Cash paid for interest was $36,600 in 1995, $2,100 in 1994 and $45,600 in
1993.
<PAGE> A-21
12.UNCERTAINTIES
As discussed in Note 1, the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has incurred losses and negative cash flow from continuing
operations through December 31, 1995. The Company has sustained losses from
continuing operations of $5,017,900 and $2,799,400 for the years ended
December 31, 1995 and 1994, respectively. Such conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements herein do not include any adjustments
that might result from the outcome of this uncertainty.
Additional growth in loan related activities and corresponding containment
of costs will be required for the Company to generate revenues adequate to
reach profitability and positive cash flow from operations. It is uncertain
that the Company will be able to achieve such growth.
On February 21, October 5 and November 3, 1995, the Company reported on
Form 8-K that its working capital was insufficient to sustain operations.
The $800,000 convertible debt and $75,000 equity financing in March, 1995
and the $180,000 equity financing in November, 1995 were insufficient to
meet this need. Shareholders were notified and, a recapitalization plan was
approved on January 30, 1996 by the shareholders. The plan currently
providesd for the Company to raise $5 million in equity financing, to
convert the debenture to shares of common stock and to negotiate
settlements of unsecured liabilities.
13. OTHER
On November 7, 1994, the Company entered into an employment agreement with
a Company officer which provided for, among other conditions, that should
the Company fail to obtain directors and officers liability insurance by
March 1, 1995, that officer may cease employment and receive all benefits,
including vesting of 10,000 options to purchase the Company's common stock,
and severance pay. As of March 1, 1995, the Company not having obtained
such insurance, the officer ceased his employment. The accompanying
financial statements as of December 31, 1995 reflect a provision for the
estimated aggregate settlement of $30,000. The vested options expired
unexercised on April 1, 1995.
As of December 31, 1995, the Company has accounts payable of $996,600,
which included breach of lease complaints and judgements on certain
obligations. The Company is negotiating for settlements either through cash
payments or issuances of stock. There can be no assurance that such
settlements will be effected.
The Company is a defendant in three legal actions brought by individuals
who were formerly employees or independent contractors of one of the
Company's subsidiaries. The total of these claims is not material and the
Company expects either to prevail or to settle these actions.
<PAGE> A-22
14. MATERIAL SUBSEQUENT EVENTS
In October, 1995, an individual and consultant to the Company, lent the
Company $25,000 secured by a 50% interest in the Company's San Ramon
office. The arrangement included an option to acquire the remaining 50%
interest in the San Ramon office for a like amount in the event the Company
defaulted on its promissory note. In November, 1995, an extension on the
note was granted. In January, 1996, the security interest was perfected and
the option exercised. The Company has agreed to reacquire that office and
additional business development activities at cost, subject to successful
completion of the recapitalization. On January 15, 1996, the Company
entered into a license agreement with that office to operate the Company's
marketing services and lender and affiliate relations. During the license
period, which ended May 15, 1996, the office received all operating
revenues of the licensed business and was responsible for all related
expenses, including all related personnel costs. The Company was due from
50% of the net profit, if any, earned by the office as licensee. A net
profit was not earned.
In January, 1996 and subsequently, the Company entered into loan agreements
with certain shareholders to provide the Company with bridge loans in the
aggregate principal amount of $150,000 to fund operations until the
completion of the recapitalization. The bridge lenders were granted certain
rights to convert the principal and interest outstanding on the bridge
loans into shares of the Company's common stock. The Company expects to
convert $100,000 of these loans into common stock and to repay $50,000.
On May 22, 1996, the Company modified its recapitalization plan to increase
its equity offering from $2 million to a minimum of $3 million and to
acquire an independent mortgage banking corporation and a mortgage
brokerage corporation. The Company expects to complete these acquisitions
in 1996 upon completion of the equity offering.
On October 16, 1996, the Company entered into an agreement on behalf of a
group of non-US investors to acquire 6 million shares of the Company's
postreverse split common stock for $3 million. Additionally, five year
warrants to purchase 2.5 million common shares at an average price of $1.65
per share were granted. The agreement is contingent upon completing certain
elements of its recapitalization plan.
The Company's Certificate of Incorporation was amended to provide for a one
for-two reverse split of all shares of the Company's Common Stock effective
October 21, 1996, and further amended to increase the number of authorized
shares of Common Stock to thirty million (30,000,000) shares.
On December 13, 1996, the Company reached agreement with the group of non US
investors to acquire an additional 1 million shares at $.50 per share and to
grant an additional 1 million warrants at $1.00 per share.
The Company has three wholly owned subsidiaries: Finet Corporation, FWC
Shell Corporation, Inc., Finet Correspondent, Inc. FWC Shell Corporation,
Inc. has three wholly owned subsidiaries: RPM Mortgage, Inc., RPM Fremont,
Inc. and RPM Affiliates, Inc. All subsidiaries are California corporations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's audited financial reports and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 89,100
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 194,800
<PP&E> 497,100
<DEPRECIATION> 445,400
<TOTAL-ASSETS> 441,900
<CURRENT-LIABILITIES> 1,999,300
<BONDS> 0
0
0
<COMMON> 129,300
<OTHER-SE> (1,557,400)
<TOTAL-LIABILITY-AND-EQUITY> 441,900
<SALES> 0
<TOTAL-REVENUES> 712,900
<CGS> 0
<TOTAL-COSTS> 3,222,100
<OTHER-EXPENSES> 2,442,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,400
<INCOME-PRETAX> (5,017,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,017,900)
<DISCONTINUED> 8,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,009,600)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
