<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
------------------------
Commission File Number: 0-18108
------------------------
FINET HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of
incorporation or organization)
3021 CITRUS CIRCLE
WALNUT CREEK, CA 94598
(Address of principal executive office)
94-3115180
(IRS Employer Identification Number)
(510) 988-6550
(Registrant's telephone number, including area code)
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 29,669,201 shares of common stock, par value $.01, as of December
12, 1997.
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<PAGE> 2
FINET HOLDINGS CORPORATION
INDEX
<TABLE>
Item Description
Page
- ---- -------------------------------------------------------------------
- ----
<S> <C>
<C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Unaudited Balance Sheet............................................
3
October 31, 1997
Unaudited Statements of Operations
Three Months Ended October 31, 1997 and 1996.....................
4
Six Months Ended October 31, 1997 and 1996.......................
5
Unaudited Statements of Cash Flow
Six Months Ended October 31, 1997 and 1996.......................
6
Notes to Unaudited Financial Statements............................
8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................
13
PART II - OTHER INFORMATION
1. Legal Proceedings..................................................
18
2. Changes in Securities..............................................
18
4. Submission of Matters to a Vote of Security Holders................
19
5. Other Information..................................................
19
6. Exhibits and Reports on Form 8-K...................................
19
Signatures.........................................................
20
<PAGE> 3
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
</TABLE>
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
October 31,
1997
------------
<S> <C>
ASSETS
Cash (Note 9)................................................ $ 1,234,658
Accounts receivable from sales of mortgage
loans and servicing rights................................. 13,191,253
Mortgage loan servicing advances and
other receivables (Note 5)................................. 722,616
Accounts receivable from affiliates (Note 4)................. 445,755
Notes receivable............................................. 72,000
Notes receivable - officers.................................. 85,000
Mortgages held for sale, net................................. 11,053,979
Mortgage servicing rights.................................... 401,335
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,667,379..................... 1,058,699
Intangible assets.(Note 7)................................... 1,012,241
Other assets................................................. 282,085
------------
Total assets............................................. $29,559,621
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line of credit (Note 6)............................ $23,095,860
Accounts payable............................................. 937,722
Revolving line of credit (Note 6)............................ 250,000
Note payable and capitalized leases (Note 6)................. 907,506
Accrued expenses and other liabilities....................... 771,928
Liabilities subject to compromise ........................... 441,678
------------
Total liabilities........................................ 26,404,694
------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value, (100,000 shares
authorized, none issued and outstanding)................... 0
Common stock, $.01 par value, (60,000,000 shares authorized,
29,594,201 shares issued and outstanding) (Note 9)......... 360,726
Common stock subscribed (74,999 shares) (Note 9)............. 750
Paid in capital.............................................. 8,324,494
Less: Stock subscription receivable (74,999 shares) (Note 9). (224,997)
Accumulated deficit.......................................... (5,306,046)
------------
Total stockholders' equity............................... 3,154,927
------------
Total liabilities and stockholders' equity.............. $29,559,621
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
October 31,
-------------------------
- -
1997 1996
------------ -----------
- -
<S> <C> <C>\
REVENUES
Gain on sale of servicing rights (Note 5)....... $ 1,356,265 $ 1,218,147
Loss on sale of mortgage loans.................. (735,979)
(945,472)
Interest income................................. 390,664 263,377
Loan servicing fees............................. 124,865 168,848
Retail broker fees.............................. 53,522 2,064
Marketing leads................................. 26,462 -
Other........................................... 32,013 26,863
------------ -----------
- -
Total revenues.............................. 1,247,812 733,827
EXPENSES
Compensation and employee benefits.............. 1,104,878 639,202
Interest expense................................ 380,661 277,335
Office.......................................... 361,001 230,912
Marketing....................................... 170,210 46,017
Professional fees............................... 470,080 99,755
Depreciation and amortization................... 119,314 95,455
Occupancy....................................... 101,089 54,074
Insurance....................................... 25,231 6,686
Data processing services........................ 21,758 21,230
Loss on disposition of assets................... 39,253 -
Other (Note 5).................................. 254,061 6,855
------------ -----------
- -
Total expenses.............................. 3,047,536 1,477,521
------------ -----------
Loss before income taxes and
before extraordinary gain..................... (1,799,724)
(743,694)
Income tax expense.............................. - -
Extraordinary gain, net of taxes................ 2,967
------------ -----------
- -
NET LOSS........................................ $(1,796,757) $
(743,694)
============
============
NET LOSS PER COMMON SHARE (Note 3).............. $ (.06) $
(.09)
============
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................... 29,088,049 8,400,000
============
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
October 31,
-------------------------
- -
1997 1996
------------ -----------
- -
<S> <C> <C>
REVENUES
Gain on sale of servicing rights (Note 5)....... $ 2,049,123 $ 1,914,607
Loss on sale of mortgage loans.................. (803,885)
(1,221,273)
Interest income................................. 725,700 588,067
Loan servicing fees............................. 253,323 362,304
Retail broker fees.............................. 84,379 19,394
Marketing leads................................. 97,041 -
Other........................................... 65,586 43,700
------------ -----------
- -
Total revenues.............................. 2,471,267 1,706,799
EXPENSES
Compensation and employee benefits.............. 2,110,449 1,291,401
Interest expense................................ 712,246 608,454
Office.......................................... 668,577 508,853
Marketing....................................... 266,473 105,328
Professional fees............................... 698,229 195,767
Depreciation and amortization................... 232,346 182,752
Occupancy....................................... 192,862 107,751
Insurance....................................... 37,738 15,515
Data processing services........................ 49,495 46,138
Loss on disposition of assets................... 39,253 -
Other.(Note 5).................................. 340,190 35,839
------------ -----------
- -
Total expenses.............................. 5,347,858 3,097,798
------------ -----------
Loss before income taxes and
before extraordinary gain..................... (2,876,591)
(1,390,999)
Income tax expense.............................. - -
Extraordinary gain, net of taxes................ 2,967
------------ -----------
- -
NET LOSS........................................ $(2,873,624)
$(1,390,999)
============
============
NET LOSS PER COMMON SHARE (Note 3).............. $ (.10) $
(.17)
============
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................... 28,762,868 8,400,000
============
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
October 31,
1997
1996
------------- --------
- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (2,873,624)
(1,390,999)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................... 232,346
182,752
Provision for losses on loans and real
estate owned..................................... 47,989
(20,038)
Loss on disposition of property, plant and
equipment........................................ 39,253
- -
Gain on sale of puchased mortgage servicing rights (47,447)
- -
Expense paid through the issue of common stock.... 122,598
- -
Changes in operating assets and liabilities:
(Increase) decrease in receivables from sales
of mortgage loans and loan servicing rights...... (9,738,054)
1,630,417
Mortgage loans originated......................... (182,268,737)
(193,419,745)
Mortgage loans sold............................... 178,435,646
194,486,305
Decrease (increase) in originating mortgage
servicing rights, net............................ 277,209
(49,539)
Increase in mortgage loan servicing
advances and other receivables................... (78,544)
(214,427)
Decrease in notes receivable - officers........... 59,350
- -
(Increase) decrease in prepaids and other assets.. (68,671)
55,026
Decrease in accounts payable, accrued expenses
and other liabilities........................... 458,628
275,139
------------- --------
- -----
Net cash (used) provided by operating activities (15,402,058)
1,534,891
------------- --------
- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights.............. (165,445)
(286,263)
Proceeds of sale of purchased servicing rights..... 75,331
- -
Purchase of furniture, fixtures and equipment...... (117,442)
(30,534)
Proceeds of sale of furniture, fixtures
and equipment..................................... 430
- -
Purchase of intangible assets...................... (204,241)
- -
Settlements of liabilities subject to compromise... (10,544)
- -
Advances to affiliates............................. (270,755)
- -
------------- --------
- -----Net cash used by investing activities............... (692,666)
(316,797)
------------- --------
- -----
<PAGE> 7
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............. 3,862,437
- -
Proceeds from exercise of common stock warrants.... 22,500
- -
Net increase (decrease) in warehouse borrowings.... 12,886,663
(1,302,030)
Proceeds from advances on note payable and
line of credit.................................... 250,000
1,550,000
Principal payments on note payable and line of
credit............................................ (259,514)
(1,933,985)
Proceeds from notes payable to officer............. -
- -
Cash distributions to former MMI shareholders..... -
(37,462)
------------ -------
- -----
Net cash provided (used) by financing activities 16,726,086
(1,723,477)
------------ -------
- -----
Increase (decrease) in cash....................... 631,362
(505,383)
Cash at beginning of period....................... 603,296
672,687
------------- -------
- -----
Cash at end of period............................. $ 1,234,658 $
167,304
============
============
Supplemental cash flow information (Note 10)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE> 8
FINET HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
REPORTING ENTITY
Finet Holdings Corporation ("Finet" or the "Company") acquired Monument
Mortgage, Inc. ("MMI") on December 31, 1996. The transaction was accounted
for as a reverse acquisition whereby MMI is considered the acquiring
corporation for accounting and financial statement presentation purposes
and MMI's historical financial statements are deemed to be the historical
financial statements of the reporting entity.
BUSINESS
Finet is engaged in electronic commerce in the residential real estate
industry. It develops and distributes Internet connectivity systems and
services through the Property Transaction Network (PTN), a wholly owned
subsidiary. The PTN's services include Internet connectivity using its
proprietary iQualify and Agent Connector software, customized Realtor
marketing services and access to a variety of mortgage financing services
and providers, including PreferenceAmerica Mortgage Network (PAMN), a
mortgage broker conducting business through electronic connections with its
customers; and MMI, a full-service prime and sub-prime mortgage lender and
leader in developing advanced automated loan origination and underwriting
systems. The Company also owns several inactive corporations.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions of Form 10-QSB and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim period have been
included. Operating results for the quarter and six months ended October
31, 1997 are not necessarily indicative of the results that may be expected
for the fiscal year ending April 30, 1998.
The consolidated financial statements of the Company include the accounts
of all wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
3. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number
of shares outstanding during the periods. The effects of common stock
equivalents have not been included because they would have been anti-
dilutive during all periods reported.
4 . PENDING ACQUISITION
On June 12, 1997, the Company entered into a preliminary agreement to
acquire 100% of the outstanding stock of Real Estate Office Software, Inc.
("REOS") for a purchase price of $827,296 in the form of cash, forgiveness
of advances, and Finet common stock valued at $2.50 per share. REOS is a
software development and marketing company whose primary product is a
proprietary Realtor productivity tool called Real Estate Office.
<PAGE> 9
The structure of the transaction was later revised to include only the
purchase of certain REOS assets and liabilities for a comparable
consideration. The Company expects to complete the purchase before December
31, 1997. In the interim, the Company and REOS have combined certain
business activities. Former REOS employees are now employees of PTN and
participated in the development of the Agent Connector. The Company had
advanced $445,755 to REOS at October 31, 1997 to support development and
marketing costs for the Agent Connector.
5. MORTGAGE LOAN SERVICING
The Company's loan origination and servicing activity is concentrated
largely within California. The Company's servicing portfolio is primarily
comprised of conventional mortgage loans some of whose servicing rights
values are not included in the accompanying balance sheet, and which had an
outstanding principal balance of $136.6 million, representing 1,017 loans,
at October 31, 1997. The majority of loans are securitized through FNMA
and FHLMC programs on a nonrecourse basis whereby foreclosure losses are
generally the responsibility of the investor and not the Company. In
connection with mortgage loan servicing activities, the Company segregates
escrow and custodial funds in a separate trust account and excludes this
balance of $1.8 million at October 31, 1997 from the accompanying balance
sheet. The Company is required to maintain separate accounting records for
its escrow and custodial cash account and the related liabilities.
In addition to the ongoing sale of servicing rights for mortgages as they
are originated, the Company sold servicing rights for mortgages, originated
and retained in the servicing portfolio in prior fiscal years, with
outstanding principal balances of $44.9 million during the six months ended
October 31, 1997, compared to zero in the same period of the prior year.
These sales of prior fiscal year originations resulted in a net gain of
$161,070 for the six months ended October 31, 1997. Servicing rights to
mortgage loans with an unpaid principal balance of approximately $136.6
million were pledged as collateral to lenders as of October 31, 1997.
The Company has issued various representations and warranties associated
with whole loan and bulk servicing sales which are standard in the
industry. These representations and warranties may require the Company to
repurchase defective loans as defined per the applicable servicing and
sales agreements. The Company established a reserve of $205,000 in the
quarter ended October 31, 1997 for possible losses arising from these
representations and warranties.
As a routine part of servicing operations, the servicing portfolio contains
a number of loans that are in the process of foreclosure, or that have been
foreclosed upon by the Company (real estate owned). The dollar amount of
loans in foreclosure and real estate owned represented 3.4% of the
outstanding servicing portfolio balance as of October 31, 1997. The losses
(recoveries) to the Company arising from the foreclosed loans and real
estate owned were $66,166 and ($20,038) for the six months ended October
31, 1997 and 1996, respectively.
The Company carried fidelity bond coverage of $950,000 and errors and
omission coverage of $950,000 as of October 31, 1997.
6. DEBT
The following table and comments present summary information regarding the
Company's debt as of October 31, 1997:
<TABLE>
<CAPTION>
Interest
Facility Balance Rate
Expires or Due
- -------------------------------- -------------- -------------- --------
- -----------
<S> <C> <C> <C>
REVOLVING/CURRENT
Warehouse line of credit $ 23,095,860 LIBOR + 2.00; December
31, 1998
($10 million committed, $25 LIBOR + 2.25
million uncommitted gestation) for sub-prime
Revolving line of credit 250,000 Prime plus December
31, 1998
($1 million committed) 0.625%
------------
Total revolving/current debt 23,345,860
------------
<PAGE> 10
LONG TERM
Note payable 604,167 Prime plus April
30, 2000
($1 million original note) 0.625%
Capitalized leases 303,339 1999 to
2000
------------
Total long term debt 907,506
------------
Total debt $ 24,253,366
============
</TABLE>
COLLATERAL
The warehouse line of credit, the revolving line of credit and the note
payable have been with the same lender for eight years. The collateral for
these obligations is a combination of mortgages held for sale, receivables
from sales of mortgage loans, servicing assets, other assets of the
Company, and Finet's corporate guarantee. These facilities were granted to
MMI prior to the December 31, 1996 acquisition.
The collateral for the capitalized leases is the equipment thereby
financed.
DEBT COVENANTS
The Borrowing Agreements (Agreements) for the warehouse line of credit, the
revolving line of credit and the note payable contain various financial
covenants including net worth computed in accordance with generally
accepted accounting principals, current ratio and tangible net worth
leverage ratio requirements. Should an event of default occur, as defined
in the Agreements, outstanding principal and interest on all three of the
Company's credit facilities technically would be due on demand.
7. PURCHASE OF INTANGIBLE ASSETS
On May 29, 1997, the Company and NDS Software, Inc. ("NDS"), a generic
software development company and operator of a nationwide multiple listing
of homes for sale Internet site, entered into an agreement whereby the
Company purchased for $1,010,000, in the form of $202,000 in cash and
202,000 shares of its common stock valued at $4.00 per share, a combination
of Internet mortgage leads, software products, software development
services, and rights to access certain of NDS' installed customer base for
marketing purposes.
The common stock was issued on June 5, 1997. The agreement terms require
an adjustment to the share consideration if the market price of the
Company's shares is not at or above $4.00 per share on the earlier of the
Company's registration of the common shares issued to NDS or June 3, 1998,
to maintain a value equal to $808,000 at the time, subject to a maximum
additional shares issuable of 1,414,000 shares. The assets acquired will
be amortized to expense of future periods as they are used to produce
revenue.
8. COMMITMENTS AND CONTINGENCIES
LOAN SALE COMMITMENTS
The Company has entered into optional and mandatory forward commitments to
deliver mortgage loans of $11.5 million as of October 31, 1997.
<PAGE> 11
MORTGAGE LOAN APPLICATIONS IN PROCESS
The Company has open short-term commitments to fund mortgage loan
applications in process subject to credit approval. Such commitments,
which had interest rates that were committed to the borrower, amount to
$19.0 million as of October 31, 1997. Commitments to fund loans are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Interest rate risk is mitigated by
the use of forward contracts to sell loans to investors.
GUARANTEES
Subsequent to fiscal year end April 30, 1997, Finet issued to Residential
Funding Corporation ("RFC") on behalf of its wholly owned subsidiary, MMI,
a corporate guarantee of all MMI's borrowing agreements with RFC (See Note
6).
Under the terms of an agreement with NDS, the Company has a contingent
obligation to adjust the share consideration of that agreement if the
market price of the Company's common shares is not at or above $4.00 per
share on the earlier of the Company's registration of NDS' shares or June
3, 1998 (See Note 8).
The Common Stock Purchase Agreement for the December 30, 1996 sale of 6
million common shares under Regulation S of the U.S. Securities Act of 1933
provides that in the event a registration of the subject shares does not
become effective within 150 days of the final closing (January 15, 1997)
for any reason other than matters beyond the control of the Company, the
purchasers shall be granted common stock purchase warrants in an aggregate
amount of 500,000 shares at $.50 per share and 500,000 shares at $1.00 per
share.
9. COMMON STOCK AND STOCK SUBSCRIPTION RECEIVABLE
INCREASE IN AUTHORIZED SHARES
In October, 1997 the Company's Board of Directors resolved to amend the
Company's certificate of incorporation to increase the number of common
shares authorized from 40 million to 60 million and obtained the written
consent of a majority of shareholders. This amendment was filed with the
State of Delaware on October 30, 1997.
PRIVATE PLACEMENT
In October, 1997, a total of 466,667 shares of the Company's common stock
were subscribed in a private placement under Regulation D for total
proceeds of $1,400,000 and warrants to purchase 466,667 common shares at an
exercise price of $5.00 per share and expiring in 2002 were issued. Of
these proceeds, $1,175,000 are designated for investment purposes.
Accordingly, these funds have been placed in an account restricted to this
purpose.
Additionally, during the quarter a total of 228,917 shares and warrants
expiring in 2002 to purchase 2,237,494 common shares at exercise prices of
$1.50 to $4.00 per share were issued to fulfill the terms of various
agreements. At October 31, 1997 a total of 9,539,864 warrants were
outstanding.
STOCK SUBSCRIPTION RECEIVABLE
Of the shares subscribed, 74,999 shares were not issued or paid for in
October, 1997. The proceeds of $224,997 for these shares were received in
early November, 1997 and, accordingly are reflected herein as a
subscription receivable as of October 31, 1997.
<PAGE> 12
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental investing and financing
activities for the six month periods ended October 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
- -
<S> <C> <C>
Cash paid during the period for:
Interest on line of credit and other borrowings $ 643,792 $
622,149
Income taxes - -
Non-cash financing activities
Equipment acquired by capital lease -
102,350
Distributions (declared) to former MMI shareholders -
(260,935)
Distributions paid to former MMI shareholders -
(37,462)
----------- --------
- ---
Common stock issued for:
Expenses 122,598 -
Settlement of liabilities subject to compromise 22,257 -
Settlement of accrued liabilities 149,689 -
Purchase of intangible assets 808,000 -
</TABLE>
11. SUBSEQUENT EVENTS
STOCK OPTION PLAN AMENDMENT
On August 28, 1997, the Company's Board of Directors unanimously resolved
to amend the Company's 1989 Stock Option Plan (the "Plan") to increase the
number of shares of common stock subject to the Plan from 500,000 shares to
1,750,000 shares and to provide for the granting of immediately
exerciseable five-year options to purchase 40,000 shares upon initial
appointment of outside (non-employee) directors and, for each of the next
four years of service as a director, the granting of five-year options to
purchase 25,000 shares, vested at the rate of 6,250 shares per quarter.
Option exercise prices per share are the current market price at the time
of grant. These amendments were approved by shareholders on November 20,
1997.
PURCHASE OF MORTGAGE SERVICING RIGHTS
During November, 1997, the Company signed two letters of intent to purchase
the rights to service approximately 2,600 FHLMC and FNMA mortgage loans
with a total principal balance in excess of $318 million for approximately
$2.4 million. These transactions are expected to close on December 31, 1997
and to increase the Company's net loan servicing income by more than
$50,000 per month.
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and as such may involve known and unknown risks and
uncertainties and other factors that may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
REPORTING ENTITY
The acquisition of MMI by Finet on December 31, 1997 was accounted for as a
reverse acquisition whereby MMI is considered the acquiring corporation for
accounting and financial statement reporting purposes and MMI's historical
financial statements are deemed to be the historical financial statements
of the reporting entity. The consolidated financial statements at October
31, 1997 include the financial statements of Finet's wholly owned
subsidiaries MMI, PAMN and PTN. The Company also owns several inactive
corporate entities. All material intercompany transactions and amounts
have been eliminated in consolidation. All references herein to a year
(e.g. 1998) refer to the fiscal year ended April 30 of that year.
BUSINESS
Finet is engaged in electronic commerce in the residential real estate
industry. It develops and distributes Internet connectivity systems and
services through its wholly-owned subsidiary, PTN. Through wholly-owned
subsidiaries PAMN and MMI, it also offers support services to independent
Realtors and mortgage brokers, including the business of originating,
selling and servicing wholesale and retail mortgage loans.
The Company has developed and recently introduced two unique software
products: Agent Connector and iQualify.
With Finet's iQualify.com Website, consumers can submit a mortgage loan
application directly to FannieMae's automated underwriting system and
receive a decision in minutes. With the decision comes instructions for
closing and the ability to connect to a Finet service center or
participating lenders to close the loan.
Agent Connector is provided to PTN Realtor members. this product includes
Internet features that enable Realtors to maintain a virtual electronic
office, post and edit personal Websites and home listings to the Internet,
exchange e-mail, conduct video home tours, and electronically connect
directly to Finet loan counselors, all from a laptop computer.
During the six months ended October 31, 1997, the Company's primary revenue
source was mortgage financing activities. The PTN was in a start-up phase.
Therefore, during the periods ended October 31, 1997 and 1996, revenues
were primarily related to the volume of loans originated and sold. As the
Company's operations are expanding and its electronic commerce revenues are
increasing, the results of operations for the six month period ended
October 31, 1997 are not necessarily indicative of results that can be
expected in future periods.
COMPARISON OF QUARTERS ENDED OCTOBER 31, 1997 AND 1996
The Company is currently implementing a business development plan to expand
the scope of its services. The fiscal year (FY) 1998 periods include costs
related to this plan. The Company reported a net loss of $1.8 million for
the quarter ended October 31, 1997, compared to a net loss of $744 thousand
for the quarter ended October 31, 1996. The $1.06 million increase in the
FY1998 net loss is largely attributable to start-up costs of its electric
commerce activities. Combined PTN and PAMN revenues were $57 thousand and
expenses were $581 thousand, for a loss of $524 thousand
<PAGE> 14
from these activities during the quarter ended October 31, 1997. Company-
wide expense increases were attributable primarily to $466 thousand in
compensation and employee benefit expense resulting from staff increases to
implement the business development plan and a related $130 thousand
increase in office expense, a $370 thousand increase in professional fees,
and an $247 thousand increase in other expense.
REVENUES
Revenues for the quarter ended October 31, 1997 increased 63% to $1.2
million from $734 thousand for the quarter ended October 31, 1996. The
increase in revenues was attributable to an increase in the net gain on
sale of mortgage loans, an increase in net income of $99 thousand on bulk
sales of servicing originated in prior fiscal years and income from
telemarketing services.
The total gain or (loss) on the sale of mortgages is determined by
combining the Loss on Sale of Mortgage Loans with the Gain on Sale of
Servicing Rights, excluding any gains on sales of servicing rights earned
from bulk sales of servicing originated in prior fiscal years. The total
gain on sale of mortgages/servicing rights (excluding bulk sales of prior
year loan production) in the second quarter of 1998 was $548.6 thousand
compared to $272.7 thousand in the second fiscal quarter of 1997, an
increase of 101%.
Over the same time periods, total loan volume increased 16% from $85.9
million in second fiscal quarter 1997 to $99.6 million in second quarter
1998. The margin earned on sales of mortgage loans/servicing rights
increased from 29 basis points in 1997 to 55 basis points in 1998. The
increase in the margin was due primarily to a change in the product mix in
1998.
In fiscal 1998, the Company started offering mortgage loans to borrowers
with credit ratings below the "A" level ("sub-prime borrowing"). The
margin on these loans was significantly higher than the margin on "A"
quality loans, thus increasing the overall margin in 1998 as compared to
1997.
Loan servicing fee revenues decreased 26% to $125 thousand in the quarter
ended October 31, 1997 from $169 thousand in the prior year's first
quarter. The decrease is a result of a 20% decline in 1998 from the 1997
average outstanding balance of loans serviced for others. The portfolio
balance declined due to several bulk sales of servicing assets that
occurred between October 31, 1996 and October 31, 1997.
Marketing lead sales revenue increased from zero in 1996 to $26 thousand in
1997. The revenue was generated by a Finet telemarketing activity that
began operations in October, 1996.
EXPENSES
Compensation and employee benefits expenses increased 72% to $1.1 million
for the quarter ended October 31, 1997 from $639 thousand for the quarter
ended October 31, 1996. The increase is due to adding personnel as the
Company implemented its growth plan, as well as the impact of consolidating
the operating results of Finet, MMI, PTN and PAMN for the quarter ended
October 31, 1997. Prior year results are for MMI only.
Office expense increased 56% from $230.9 thousand in 1997 to $361 thousand
in 1998, primarily due to the Company's expansion.
Marketing expense increased $124.1 thousand, or 270% in the second quarter
of 1998 as compared to the second quarter of 1997. The increase was due to
the Company's expenditures for marketing its technology services,
particularly the Agent Connector software.
Professional fees increased 371% from $99.8 thousand in 1997 to $470
thousand in 1998. The increase is attributable primarily to the Company's
acquisitions and expansion. Audit and accounting fees increased $131
thousand due to the increase in complexity arising from being a single
private company during most of 1997 and being a public company with three
subsidiaries in 1998. Consulting fees increased by $256 thousand in 1998,
primarily due to expenses related to developing new technologies as part of
the Company's business development activities.
<PAGE> 15
Other expenses increased 3,600% from $7 thousand in 1997 to $254 thousand
in 1998. The increase is due primarily to a $205 thousand provision for
estimated losses for repurchase of non-performing mortgage loans from the
investors to whom they were sold.
COMPARISON OF YEAR TO DATE PERIODS ENDED OCTOBER 31, 1997 AND 1996
The Company is currently implementing a business development plan to expand
the scope of its services. The 1998 periods include costs related to this
plan. The Company reported a net loss of $2.87 million for the six months
ended October 31, 1997, compared to a net loss of $1.4 million for the six
months ended October 31, 1996. The $1.47 million increase in the 1998 net
loss is largely attributable to PTN and PAMN start-up costs, and the costs
of operating a publicly-held company. Combined PTN and PAMN revenues were
$85 thousand and expenses were $1.02 million, for a loss of $934 thousand
from these activities during the period ended October 31, 1997. The most
significant expense category increases were $819 thousand in compensation
and employee benefit expense resulting from staff increases to implement
the business development plan and a related $160 thousand increase in
office expense, a $502 thousand increase in professional fees, and an $305
thousand increase in other expense.
REVENUES
Revenues for the six months ended October 31, 1997 increased 45% to
$2.47million from $1.7 million for the six months ended October 31, 1996.
The increase in revenues was attributable to an increase in the net gain on
sale of mortgage loans, an increase in net income of $207 thousand on bulk
sale of servicing originated in prior fiscal years and income from
telemarketing services.
The total gain or (loss) on the sale of mortgages is determined by
combining the Loss on Sale of Mortgage Loans with the Gain on Sale of
Servicing Rights, excluding any gains on sales of servicing rights earned
from bulk sales of servicing originated in prior fiscal years. The total
gain on sale of mortgages/servicing rights (excluding bulk sales of prior
year loan production) in the first six months of 1998 was $991 thousand
compared to $673 thousand in the first six months of 1997, an increase of
47%.
Over the same time periods, total loan volume decreased 5.7% from $193.4
million in 1997 to $182.3 million in 1998. The margin earned on sales of
mortgage loans/servicing rights increased from 35 basis points in 1997 to
54 basis points in 1998.
The increase in the margin was due primarily to a change in the product mix
in 1998. In fiscal 1998, the Company started offering mortgage loans to
borrowers with credit ratings below the "A" level ("sub-prime borrowing").
The margin on these loans was significantly higher than the margin on "A"
quality loans, thus increasing the overall margin in 1998 as compared to
1997.
Loan servicing fee revenues decreased 30% to $253 thousand in the six
months ended October 31, 1997 from $362 thousand in the prior year's first
six months. The decrease is a result of a 24% decline in 1998 from the
1997 average outstanding balance of loans serviced for others. The
portfolio balance declined due to several bulk sales of servicing assets
that occurred between October 31, 1996 and October 31, 1997.
Marketing lead sales revenue increased from zero in 1996 to $97 thousand in
1997. The revenue was generated by a Finet telemarketing activity that
began operations in October, 1996.
EXPENSES
Compensation and employee benefits expenses increased 62% to $2.1 million
for the six months ended October 31, 1997 from $1.3 million for the same
period in the prior year. The increase is due to adding personnel as the
Company implemented its growth plan, as well as the impact of consolidating
the operating results of Finet, MMI, PTN and PAMN for the six months ended
October 31, 1997. Prior year results are for MMI only.
<PAGE> 16
Office expense increased 31% from $508.9 thousand in 1997 to $668.6
thousand in fiscal 1998, primarily due to the Company's expansion.
Marketing expense increased from $105 thousand in fiscal 1997 to $266
thousand in fiscal 1998, an increase of 153%. The increase was due to the
Company's expenditures for marketing its technology services, particularly
the Agent Connector software.
Professional fees increased 257% from $195.8 thousand in the first six
months of fiscal 1997 to $698.2 thousand in the same period in 1998. The
increase is attributable primarily to the Company's acquisitions and
expansion. Audit and accounting fees increased $161 thousand due to the
increase in complexity arising from being a single private company during
most of 1997 and being a public company with three subsidiaries in 1998.
Consulting fees increased by $385 thousand in 1998, primarily due to
expenses related to developing new technologies as part of the Company's
business development activities.
Occupancy expense increased 79%, from $107.8 thousand in fiscal 1997 to
$192.9 thousand in fiscal 1998. The increase is due to the Company's need
for additional facilities arising from its expansion and business
development activities.
Other expenses increased 871% from $35 thousand in 1997 to $340 thousand in
1998, The increase is due primarily to a $205 thousand provision for
estimated losses on repurchase of non-performing loans from investors. The
remainder of the increase was due to the Company's business development
expenditures.
CAPITAL EXPENDITURES, LIQUIDITY AND CAPITAL RESOURCES
The Company's normal cash requirements are to meet operating expenses,
including sales and marketing activities, to fund further expansion of the
Company's technology related business activities, to satisfy accrued
liabilities and accounts payable, and to satisfy other liabilities as they
become due.
CASH FLOWS
The Company experienced an increase in cash of $631.4 thousand in the first
six months of 1998, compared to a decrease in cash of $505.4 thousand in
same period in the prior year.
Cash Flow From Operations
Since MMI is curently the largest business unit in the consolidated group,
the Company's cash flows are reflective of fluctuations in mortgage loans
originated and sold during the period. While loan originations decreased
from $193.4 million to $182.3 million in the first six months of 1997 and
1998, respectively, the amount of loans and servicing rights in inventory
increased in fiscal 1998 by approximately $16.3 million. This increase in
inventory was largely financed by an increase in warehouse borrowings. The
inventory increase was the primary factor that contributed to the $15.4
million decrease in cash used by operating activities in the first six
months of 1998, compared to $1.5 million of cash provided by operating
activities in the first six months of the prior year.
Cash Used for Investing Activities
The Company began to implement its business growth strategy in fiscal 1998.
Consequently, mortgage servicing rights were purchased ($165 thousand),
intangible assets were purchased from NDS ($202,000 in cash and $808,000 in
common stock issued) and advances of $270,755 were made to REOS to support
the development of Agent Connector. Thus, investing activities used
$692,666 in cash in 1998 compared to using $316,797 in 1997.
Cash Provided by Financing Activities
The Company experienced a $16.7 million increase in cash provided by
financing activities in 1998, compared to cash used by financing activities
of $1.7 million in 1997. Due to the increase in loans in inventory in
1998 as compared to the same period in the prior year, warehouse line of
credit borrowings increased $12.9 million in 1998, compared to a
<PAGE> 17
decrease of $1.3 million in 1997. The Company also received $3.9 million
in cash proceeds in 1998 from stock issued from April through October 31,
1997, compared to zero in 1997. Management intends to use these funds
primarily for investments, including acquisitions of servicing rights and
the development and marketing of its technology services.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $35 million warehouse borrowing facility that is
capable of supporting a monthly loan funding volume of up to $100 million,
given current loan sales and settlement turnaround times. The Company does
not expect to exceed that level before January 1998, at which time
additional warehouse lending authority can be obtained. Funded loans are
immediately sold to investors in the secondary market with the proceeds
used to reduce warehouse balances. The Company also maintains a $1 million
working capital line of credit at competitive borrowing rates.
The Company mitigates its mortgage banking risks through several common
industry practices. The first is to purchase and originate mortgage
servicing rights ("PMSRs/OMSRs"). When the volume of loan originations
declines due to the rise in interest rates, PMSRs/OMSRs increase in value
and provide a predictable source of earnings and cash flow. The second is
to offset unfavorable interest rate movements when funding loans by hedging
the interest rate locks.
The Company's business development activities are focused on diversifying
and increasing revenues from sources other than mortgage banking, including
the sale of proprietary software, the provision of Internet-based real
estate services, and brokering of loans to other mortgage lenders.
The Company is currently expending cash resources to support its business
development activities in PTN and PAMN, as the revenues they are
generating, though increasing, are currently insufficient to cover start-up
and operating costs. The Company expects within this business cycle that
all business units will generate revenues sufficient to cover their
respective operating expenses. Management believes it has sufficient cash
and short term financing alternatives to finance operations until they
reach positive cash flow.
CAPITAL EXPENDITURES
The Company is in the process of completing the purchase of certain assets
and liabilities of Real Estate Office Software, Inc. for a purchase price
of $827,296. The Company has advanced $455,755 to REOS to support
development and marketing costs for the Agent Connector. The Company
expects the remainder of the consideration to be a combination of cash used
to retire certain liabilities and the remainder in the form of common
stock.
The Company purchased $1,010,000 in intangible assets from NDS Software
(NDS) for $202,000 in cash and $808,000 in common stock issued. The assets
consisted of software, contract programming services, mortgage leads and
marketing access to certain NDS customers.
In the third quarter of 1997, the Company implemented a Purchased Mortgage
Servicing Rights ("PMSR") acquisition strategy. To date, $73 million of
PMSRs have been purchased, of which $5.4 million have subsequently been
resold, for a gain of $47.4 thousand. The Company plans to acquire
approximately $800 million of additional PMSRs in 1998 to add to its
current servicing portfolio of $193.6 million and, thus far, has committed
to purchased approximately $318 million of servicing rights on December 31,
1997 for approximately $2.4 million. The PMSR's may be acquired directly or
through an open market auction process. Prices vary for servicing rights,
however this strategy represents a planned investment of approximately $8
million, which the Company plans to finance on a secured basis. The
Company has begun discussions to arrange the financing required for these
planned investments. The Company's ability to acquire this additional
servicing is dependent on the servicing available on the market,the
Company's success in pricing and bidding, and the ability to arrange the
credit facilities to do so. Accordingly, the remaining potential capital
expenditures are not assured.
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has continued to seek resolution of all remaining previously
reported legal proceedings, which resulted primarily from unsecured
creditor actions and/or judgments instituted in prior years. During the six
month period ended October 31, 1997, the Company completed the settlement
of two such unsecured creditor actions.
Item 2. CHANGES IN SECURITIES
Authorized common shares were increased to 60 million from 40 million,
effective October 30, 1997 (See Note 4).
During the quarter ended October 31, 1997, a total of 695,583 shares of the
Company's common stock and 2,704,167 warrants to purchase shares were
issued, as follows:
A group of ten individuals purchased 300,000 common shares and
warrants to purchase 300,000 common shares at an exercise price of
$5.00 per share which expire in 2002 for $900,000 under Regulation D.
An individual agreed to purchase 1,000,000 common shares and warrants
to purchase 1,000,000 common shares at an exercise price of $5.00 per
share which expire in 2002 for $3,000,000 under Regulation D. Of these
shares, 166,667 were purchased for $500,000 and 166,667 warrants were
issued during the quarter. The remainder of the purchase will be
completed on December 29, 1997.
159,942 common shares were issued to three individuals as a correcting
adjustment to fully comply with the terms of a loan agreement entered
into by the Company in 1996.
33,974 common shares were issued to two individuals: 21,474 shares
pursuant to the exercise of net exercise options granted as
consideration for consulting services and 12,500 shares pursuant to
the exercise of warrants for a consideration of $18,750.
33,000 shares were issued in settlement of a judgement obtained by a
former employee.
2,000 common shares were issued to an individual as consideration for
services.
Warrants to purchase 2,000,000 common shares at an exercise price of
$4.00 per share and expiring in 2002 were granted to an individual as
consideration for services.
Warrants to purchase a total of 237,500 common shares at an exercise
price of $1.50 per share and expiring in 2002 were granted to the
Company's former placement agent and a former debenture holder
pursuant to the terms of agreements.
In May, 1997 the Company applied to have its Common Stock listed on the
Nasdaq SmallCap Market. In November, 1997 its application was approved.
Accordingly, on November 11, 1997 trading of shares of its Common Stock
under the symbol FNHC commenced on the Nasdaq SmallCap Market.
<PAGE> 19
The following table sets forth the range of high, low and average closing
prices per share of the Common Stock and total number of shares traded
during the period since April 30, 1997.
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER MONTHLY
PERIOD: HIGH/ASK LOW/BID CLOSE/AVG AVG VOL
- ---------------------- --------- -------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter $ 6.375 $ 2.188 $ 2.875 454,900
Second Quarter 8.000 2.875 7.250 1,105,900
Third Quarter (thru 12/10) 7.375 4.500 5.6875 3,164,600
</TABLE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the second quarter, the Company's Board of Directors resolved
unanimously to recommend to shareholders that the number of shares
authorized of the Company's common stock be increased from 40 million to 60
million. Subsequently, a majority of shareholders of record approved by
written consent a certificate of amendment of the Company's restated
certificate of incorporation to so increase the number of common shares
authorized. The amendment was recorded by the Secretary of State of
Delaware on October 30, 1997.
On November 20, 1997, at the Company's annual shareholder meeting,
individuals and proxies representing a total of approximately 61% of shares
outstanding at the record date of October 31, 1997 unanimously approved
three items, as described in the proxy statement sent to all shareholders:
a) relection of all seven current directors (Jose Maria Salema Garcao, Jose
Filipe Guedes, Jan Hoeffel, S. Lewis Meyer, James W. Noack, L. Daniel
Rawitch and Stephen J. Sogin), b) reappointment of Reuben E. Price & Co. as
independent auditors for the year ending April 30, 1998, and c) approval of
a resolution of the Board of Directors to amend the Company's stock option
plan. (See Note 11)
Item 5. OTHER INFORMATION
During November, 1997, the Company signed two letters of intent to purchase
the servicing rights for approximately 2,600 FHLMC and FNMA mortgage loans
with a principal balance in excess of $318 million. These transactions are
expected to close on December 31, 1997 and to increase the Company's net
loan servicing income by more than $50,000 per month.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EX-27 Financial Data Schedule
REPORTS ON FORM 8-K
No reports on Form 8-K were submitted during the second quarter.
<PAGE> 20
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FINET HOLDINGS CORPORATION
Date: December 15, 1997 /s/ L. Daniel Rawitch
L. Daniel Rawitch
(CEO and Principal Executive
Officer)
Date December 15, 1997 /s/ George Winkel
George Winkel
(CFO and Principal Financial
Officer)
</TEXT?
<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> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 1,234,658
<SECURITIES> 0
<RECEIVABLES> 13,913,869
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,726,078
<DEPRECIATION> 1,667,379
<TOTAL-ASSETS> 29,559,621
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 360,726
<OTHER-SE> 2,794,201
<TOTAL-LIABILITY-AND-EQUITY> 29,559,621
<SALES> 0
<TOTAL-REVENUES> 2,471,267
<CGS> 0
<TOTAL-COSTS> 5,347,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 712,246
<INCOME-PRETAX> (2,876,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,876,591)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,967
<CHANGES> 0
<NET-INCOME> (2,873,624)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
