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US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
Commission file number: 0-18108
FINET HOLDINGS CORPORATION
(Name of small business issuer in its charter)
DELAWARE
94-3115180
(State or other jurisdiction of incorporation or organization) (IRS
Employer Identification No.)
3021 CITRUS CIRCLE, WALNUT CREEK, CA 94598
(Address of principal executive offices)
Issuer's telephone number: (510) 988-6550
JANUARY 1 TO DECEMBER 31
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: $.01 PAR
VALUE COMMON STOCK
Check whether the issue (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes........ No....X.....
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended April 30, 1997 were
$4,366,232
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of August 5, 1997 was $72,965,440.
The number of shares outstanding of the issuer's common stock, as of August
5, 1997 was 28,971,088
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes........
No....X.....
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FINET HOLDINGS CORPORATION
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This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Readers are cautioned that actual results could
differ materially from those indicated in such statements as a result of
certain factors, including those set forth under "Certain Business
Considerations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in, or incorporated by
reference into, this report.
TABLE OF CONTENTS
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Item Description
Page
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PART I
1 Description of
Business................................................ 3
2 Description of
Property................................................ 11
3 Legal
Proceedings...................................................... 11
4 Submission of Matters to a Vote of Security
Holders.................... 12
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters.. 13
6 Management's Discussion and Analysis of Financial Condition
and Results of
Operations............................................ 15
7 Financial
Statements................................................... 20
8 Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure............................... 20
PART III
9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange
Act.................... 21
10 Executive
Compensation................................................. 24
11 Security Ownership of Certain Beneficial Owners and
Management......... 28
12 Certain Relationships and Related
Transactions......................... 30
13 Exhibits and Reports on Form 8-
K....................................... 31
Signatures............................................................. 33
APPENDIX
Independent Auditors'
Report........................................... 34
Consolidated Balance Sheet at April 30,
1997........................... 35
Consolidated Statements of Operations for the years ended
April 30, 1997 and
1996............................................... 36
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1997 and 1996
.............................................. 37
Consolidated Statements of Cash Flows for the years ended
April 30, 1997 and 1996
.............................................. 38
Notes to Consolidated Financial
Statements............................. 40
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FINET HOLDINGS CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Finet Holdings Corporation is a vertically integrated, technology-focused
developer and provider of Internet and computer based residential real
estate services that offers all the elements essential to shop for a home,
shop for a loan, and close the transaction. Finet Holdings Corporation is
a systems and services integrator and marketer with a corporate mission of
providing faster, easier, lower cost homeownership. Its prior activities
and management, which focused solely on originating loans as a mortgage
broker, were restructured and repositioned in 1996 to encompass the entire
home acquisition and financing process and add additional revenue sources.
This new integrated business approach is structured to take advantage of
numerous opportunities presented by a highly fragmented industry and
current electronic communication and data handling trends that are
beginning to transform an outdated and unnecessarily tedious home
acquisition and financing process.
All references to the "Company" or "Finet" herein shall mean Finet Holdings
Corporation and its wholly owned subsidiaries unless the context otherwise
indicates. The Company's executive offices are located at 3021 Citrus
Circle, Walnut Creek, California 94598, and its telephone number is (510)
988-6550.
COMPANY HISTORIES
This annual report includes detailed information about both Finet, the
Registrant, and, as a result of a reverse acquisition, Monument Mortgage,
Inc., the entity deemed to be the reporting entity for accounting purposes.
Accordingly, summary historical information is provided about both firms.
Finet Holdings Corporation was founded in 1988 as William and Clarissa,
Inc. ("W&C"). In 1991, W&C was reorganized, its unrelated prior business
was discontinued, and all the outstanding stock of FINEX , a privately
owned mortgage brokerage business, was acquired. In l992, the Company
changed its name to Finet Holdings Corporation.
Thereafter, the Company has operated as a single service business offering
mortgage broker services but was not profitable. Until 1995, the Company
pursued the strategy of developing a national loan distribution network by
converting existing mortgage brokers into mortgage broker franchisees under
the Finet name. However, this narrowly focused strategy failed to license
any franchises or to integrate the emerging technologies that impact the
traditional process of buying a home.
In 1994 and 1995, losses were exacerbated by rapidly rising interest rates
and declining loan originations and the Company's founder/Chairman and the
CEO resigned. In early 1996, the Company undertook a voluntary
recapitalization that included negotiated settlements with creditors,
conversion of certain liabilities to equity and raising additional equity
capital through private placements of its common shares. (See Management's
Discussion and Analysis of Financial Condition and Results of Operation
("MD&A")) During that year the Company was operationally dormant and
repositioned its strategy toward a one-stop shopping enterprise by creating
the means to electronically connect prospective home buyers with a full
spectrum of homeowner service vendors. As part of that shift, the Company
acquired Monument Mortgage, Inc. ("MMI"), a private seller/servicer
mortgage banking company, and PreferenceAmerica Mortgage Network ("PAMN"),
a private mortgage broker. The Company had completed many of the elements
of its recapitalization plan and raised $3.5 million in new equity capital
by the end of 1996.
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MMI, a California corporation, was founded as an independent mortgage
banker in April 1987 by James W. Noack and two other minority investors
with an initial capitalization of $750,000. Until its acquisition by Finet,
MMI operated as a private S corporation. Using approvals from FHLMC, HUD
and several other investors, operations began in a single retail loan
production office in Walnut Creek, CA. The company sold all originated
loans with the loan servicing rights either retained or released. In its
first year of operations, one of the highest interest rate environments in
history, $60 million in loans were originated for an operating loss of
$327;000.
Over the next five fiscal years, MMI's business activity and profits
increased. Between fiscal 1989 to 1993, annual loan fundings grew to $844
million and annual profit increased to $2.8 million. Business development
focus shifted from retail to wholesale lending operations, three full-
service wholesale branches were opened, and retained loan servicing rights
grew to $760 million. The ability to retain servicing was a key component
in building an annuity and off balance sheet asset that could sustain
operations during down market down cycles. Loan products offered were
limited to a few popular FHLMC programs while very conservative
underwriting ensured a low risk, high quality portfolio of loans. This
strategy resulted in a loan servicing portfolio with historical delinquency
ratios less than half industry averages.
During fiscal year ended April 30, 1994, rapid increases in interest rates
resulted in a 40% decline in mortgage lending nationally. MMI maintain an
$842 million funding level, but increased competition and shrinking margins
resulted in operating losses which were offset by the sale of $140 million
in servicing to generate a profit of $210,000.
As the down market cycle continued into fiscal 1995, all branches were
closed, operations were consolidated at the headquarters location, staffing
was reduced from 150 to 50, salaries were reduced, and an aggressive
effort was begun to leverage its technology expertise to further reduce
costs and support expansion of the Company's products and market presence.
Recognized as a mortgage industry technology leader, it was invited to
participate in the development of FannieMae (FNMA) and FreddieMac (FHLMC)
automated underwriting systems and is now one of the most active users of
these systems. These actions, and sale of $156 million of servicing
rights, produced a profit of $237,000.
Concluding that traditional wholesale distribution channels alone would not
sustain prolonged, profitable growth, during fiscal 1996 an affiliate
mortgage broker, Preference America Mortgage Network, was formed to
establish technology based, lower cost methods to deliver loan products to
higher margin retail loan customers and it acquired all rights to the name,
concept and logo of the Property Transaction Network (PTN) ( On February
21, 1997, the PTN was incorporated as a wholly-owned subsidiary of Finet).
PAMN implementation began in the last quarter of fiscal 1996 with little
effect on MMI's operating results. The year ended with a profit of
$339,000.
To raise the additional capital required to create a technology based,
vertically integrated lending operation, fiscal 1997 began with a letter of
intent to merge MMI and PAMN with Finet. Significant investments were made
in fiscal 1997 to further develop and expand the technology agenda while
completing the acquisition transactions.
In January 1997, the Company emerged as a substantially different
organization with a new charter and strategy, as well as a new management
team and Board of Directors. In management's opinion, Finet's three new
operating subsidiaries, PTN, PAMN and MMI, form an integrated,
interdependent, synergistic trio. PTN's deployment of advanced
technology real estate services delivery systems, MMI's ability to place
conforming loans quickly and efficiently, and PAMN's ability to broker
remaining loans to other lenders comprise a more comprehensive homeowner
services offering than heretofore available.
In March, 1997 Cumberland Partners, holder of the Company's $800,000
convertible debenture, fulfilled their agreement to convert their debenture
and accrued interest to 1,850,000 shares of the Company's common stock. In
April/May 1997, the Company raised an additional $4.6 million in new equity
capital and, on June 12, 1997, it reached a preliminary agreement to
acquire the assets and certain liabilities of Real Estate Office Software,
Inc. (REOS), a private software developer and distributor of sophisticated
contact management software for Realtors.
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These acquisitions and technologies enabled the Company to evolve into a
consumer oriented, one-stop shopping, real estate services organization
offering faster, easier, lower cost methods of home ownership.
Additionally, the Company has formed strategic partnerships with
Homeseekers.com, a publicly-held Internet provider of national listings of
homes for sale, and with Help-U-Sell, a large, multi-location Realtor
network. The Company now employs the latest advances in computer and
electronic communications technology to address the entire home acquisition
and financing process, including Internet video-conferencing, Fannie Mae's
and Freddie Mac's automated artificial intelligence underwriting systems,
and a number of internally developed proprietary computer programs. Thus,
it is positioned as both a vendor-neutral technology and Realtor services
firm that is also a mortgage financing vendor.
THE HOMEOWNERSHIP BUSINESS
The real estate business and home buying process, taken as a single
industry, can be described as large, fragmented, antiquated, with many
nonstandardized processes and on the verge of a major restructuring.
Technology, principally data processing and communications technology, is
beginning to revolutionize the industry.
The real estate industry, including development, construction, sales,
financing, repair and maintenance, is one of the country's largest
industries. Nevertheless, the real estate industry remains essentially a
local business and not a national or regional business, with rare
exceptions. Both the population and the percentage of homeowners are
expected to gradually rise through the end of the century. At any given
time, two of every three American households are homeowners, but over time,
nine out of ten will own a home. The average price of the 66.86 million US
housing units continues to grow, up 4.2% to $166,900 in the twelve months
ended March 1997, of which 5.64 million homes changed owners in 1996. The
total of residential loans outstanding and the annual volume of new loans
in the US are second in size only to the Federal government's national debt
and annual borrowing. Since 1990, annual loan demand for home purchase has
been relatively flat at approximately $340 billion, while fluctuating
interest rates have caused refinancing demand to vary from $90 to $770
billion annually. This equates to an average of over 10 million new loans
annually requiring a flow of funds that can exceed $1.0 trillion dollars
annually.
Unlike many industries, change in the real estate market has been neither
significant nor rapid. To the contrary, it has been incremental and slow,
especially in the sales and financing sectors. Such gradual changes
include: the source of funds, the emergence of mortgage brokers, and a
trend toward consolidation.
Over the past several decades, the supply of mortgage funds has changed
from deposit based local sources to investment based national sources. As
a result, the local and regional sources, such as banks and savings and
loan institutions, have been reduced in both numbers and size. The slack
has been taken up by the secondary market, comprised of FNMA, FHLMC,
pension plans, insurance and investment companies and the like, which
purchase residential loans from local sources.
The transition to an impersonal secondary market has had several
consequences: (1) loan documentation and procedures have gradually become
more standardized to facilitate acceptance as well as transfer of loans
into a market composed of diverse and distant investor groups, and (2) loan
files consisting of various documents and verifications have become thicker
and much more impersonal compared to the previous more personal and
character based procedures of local institutions. At the forefront of this
gradual evolution is the recent emergence of efforts to collect, integrate
and analyze data electronically to the end of simplifying and speeding the
home sales and financing processes.
Another evolution has been the emergence of mortgage brokers. Mortgage
brokers do not lend money directly. They advise and assist borrowers in
originating a mortgage loan and obtain, process and package all the credit
and financial information necessary for a lender to approve the loan.
Unlike the captive sales force of retail lenders, mortgage brokers
represent and offer the loan products of many lenders. Starting with a
negligible national market share in the 1970's, and spurred by demand for a
greater selection of loan programs than a single lender typically can
offer, mortgage broker market share rose to exceed 50% in 1991 and peaked
in 1993. Since then, their numbers and share have declined as interest
rates rose and retail lenders have become more competitive.
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Many other industries experienced a pattern of consolidation following the
introduction of modern technology (computer controlled manufacturing,
airline reservation systems, electronic banking, etc.) The Company
believes a similar effect is beginning to occur in the residential real
estate industry. Since 1993 many mortgage brokers and mortgage bankers
have merged or ceased operations. Management believes within a few years
national service delivery systems developed and controlled by a few firms
will dominate the market. Finet has been repositioned to be one of them.
The real estate services industry is highly fragmented. There are well
over one million licensed Realtors and approximately ten million
independent real estate service providers (appraisal, financing, title
search and verification, escrow, appraisal, inspections of various natures,
warranty, moving, repair, maintenance, improvement and insurance, etc.).
Composed primarily of small, private firms, few firms in this industry have
a meaningful market share. The vast majority of such businesses are
resident in the local community. The typical mortgage broker
proprietorship, of which at the peak of the 1993 refinance boom there were
over 40,000 nationally, has an average of 5 loan agents. In 1996, there
were 690,000 members of the National Association of Realtors (NAR), down
100,000 from the prior year. Norwest and Countrywide Funding Corporation,
the two largest independent mortgage firms, each have less than 5% of the
estimated market.
Until very recently, this diverse and dispersed group of small independent
service businesses had no easy or inexpensive means by which to communicate
and relied upon traditional means such as mail, courier, and fax, which are
slow, expensive and paper intensive. Each real estate transaction requires
the fee-based services of up to ten independent providers, each of which
does its own marketing. This sales and marketing duplication results in an
expensive, antiquated process whose high cost is born by the home buyer.
Purchasing a home remains a paper intensive, frustrating, costly and
lengthy process.
According to Rick Amatucci, Director of Technology Initiatives for FNMA,
the mortgage industry remains in the technological dark ages, saying "I can
trade $100,000 worth of stock over the phone with my broker, conduct the
trade immediately, and get a statement. But when I refinanced my house
recently it took 35 days and a small binder full of forms. It doesn't make
sense."
Technological advances that more easily and cheaply connect the parties to
business transactions have revolutionized many business procedures and
restructured many industries. Computerized reservation systems, faxes,
satellite pagers, ATMs, electronic stock trading, cellular phones and touch-
tone banking are familiar examples. The acquisition of automobiles is
another. Within an hour or two it is now possible to select, purchase,
finance and insure an automobile. Data interchange standards facilitated
such changes in these industries.
The first electronic data interchange standards were introduced into the
mortgage industry in 1995. Its adoption is expected to have a major impact
on the entire home buying process, and will benefit both home buyers and
sellers. All signs point to the industry being transformed from its
historical network of local, sole proprietorships offering a single, and
typically expensive service, to larger, well financed corporations offering
integrated, increasingly electronic services. These may be regional or
national in scope, but will offer multi-services at a cost point well below
the cost of traditional methods.
There are several factors driving this transformation. Most sole
proprietorships lack both the expertise and financial resources to make the
transition into a much larger enterprise required to offer a multitude of
related products and services. The emergence of new technology, costly to
acquire and implement, will result in larger competitors with significant
competitive advantages. This will encourage consolidation and the
typically under-funded, technology starved firm will likely seek
association with a larger, full-service enterprise. Industry sources
estimate the NAR membership could decline to 350,000 by the year 2000, down
from 690,000 in 1996. Furthermore, as much as 95% of the dollar value of
residential real estate transactions is expected to be generated by only 5%
of those Realtors who remain.
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With each generation of technology, some companies adopt the newer
technology and become major success stories, while others hesitate or fail
to implement new technologies and eventually fall by the wayside.
Technological advances are continuing. The advent of ever more powerful
desktop and server computer systems coupled with advances in communications
technology are having a major impact on all businesses. The majority of
the nation's significant increases in worker productivity in other fields
during this decade is due directly to technology and automated processes.
The emergence of the "information highway" is a widely recognized
phenomena. Local and wide area Intranets and the Internet's world wide web
have had, and will continue to have, major impacts on the way business is
conducted.
According to a recent article in The Economist, "The Internet is perhaps
the single most important advance of our day. Often compared to the
emergence of the PC as a personal productivity tool, the Internet will
restructure entire businesses. Merchants are just beginning to tap the
resources and potential of the Internet. As a general rule, on-line
consumers are more interested in making better-informed decisions than
necessarily getting the lowest price. The more tiresome and difficult a
purchase is in the physical world, the more likely consumers are to try an
on-line alternative. For instance, because shopping for a home or mortgage
is both difficult and tedious, an Internet or Web site offering
straightforward and easy-to-understand comparisons will likely be a major
success. When the buying process is relatively simple, for instance a book
or a CD, the merchant must offer more than the physical product."
THE FINET APPROACH
The Company employs state-of-the-art technologies, including its own
proprietary programs, to develop and offer integrated systems that provide
faster, easier, lower cost homeownership. Tailored to specific needs and
capabilities of investors, mortgage brokers and Realtors, these systems
facilitate increasingly electronic transactions. These include:
1. PTN's newest system, the Agent Connector, is an Internet-based
relationship management tool for Realtors that includes the capability to
access all the services involved in acquiring and financing a home. It
provides point-to-point direct and Internet multi-media (voice, chat, email
and video-conferencing) connectivity between the Company, enrolled
Realtors, customers, and other service providers.
2. The Company is one of the nation's largest users of the automated
underwriting systems of FNMA and FHLMC, the two largest investors in
"conforming loans". Conforming loans are loans of $214,600 or less that
make up the single biggest market sector. These systems, FNMA's Desktop
Originator/Desktop Underwriter (DO/DU) and FHLMC's Loan Prospector (LP),
can approve up to 60% or more of loan applications within minutes, as well
as indicate the potential for approval of many more. The Company's
proprietary "IQualify" system allows individuals to complete a loan
application on the Internet and connect to these automated approval
systems.
3. MMI's proprietary GreenLight system integrates both FNMA's and FHLMC's
systems to determine that a loan can be closed as well as adding vital "how
to do it" details, enabling mortgage brokers in the field to enter loan
data directly for a highly competitive response time edge.
This broader, more balanced approach to the market provides more sources of
revenue, increased employee productivity, and increased margins and
earnings through a combination of factors: (1) separating the flow of loans
by type into several processing streams for more efficient and faster
throughput, (2) bundling many required separate services to lower marketing
costs, and (3) proactive cross-selling of services by Company units.
The Company now consists of three inter-related core businesses staged to
offer multiple doorways for customers to access homeownership services,
including its proprietary funding engines, so as to be able to contact and
capture customers at every stage in the process leading to homeownership:
(1) Property Transaction Network which incorporates Mortgage Marketing
Concepts, (2) PreferenceAmerica, and (3) Monument Mortgage, Inc. which
incorporates Monument Acceptance Corporation.
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TECHNOLOGY SERVICES
Property Transaction Network ("PTN") This new subsidiary houses the
Company's major technology thrust. A software developer and systems
integrator, it provides monthly fee-based electronic connectivity services
to Realtors who acquire the Agent Connector, a proprietary, multi-
dimensional connectivity program, which operates in a vendor-neutral
environment on a Realtor's camera equipped laptop computer. This multi-
level service package offers increasingly more capabilities to more active
Realtors, including: connectivity to a virtual electronic office, automated
personal Web pages, unlimited email, multi-media connectivity to customers
and the Company, Client Info Centers (private transaction Web site status
pages password accessible by customers through the Internet), contact and
relationship management tools, training and marketing support services, the
ability to take prospective home buyers on electronic property tours, and
access to various types of prospective homebuyer leads downloaded
electronically from the Internet.
The PTN will derive its revenues from both monthly Realtor fees and
advertising/marketing services fees. Customers are offered an array of
homeownership services and vendors to select. Users can conduct TV-like
video home tours, face to face interaction with trained sales
representatives, and on-screen completion and printing of required
applications and forms. Thus a customer can shop for a loan, home, etc.
and close electronically. Afterwards transaction documentation status is
routed to a confidential electronic file.
The PTN introduces and demonstrates these state-of-the-art technology
capabilities and services to the real estate industry through its ongoing
"Seminars in Excellence" around the country, at which Realtors can enroll
as a PTN member and purchase or lease a system for their personal use. In
seminars to date, advance reservations for the Agent Connector software
system, scheduled for initial distribution to PTN members in early
September, 1997 have exceeded historical results. Additionally,
approximately 80 experienced Bay Area Realtors have agreed to become PTN
members.
PTN has formed a relationship with NDS Software, Inc., operators of
Homeseekers.com, an Internet site providing daily updates of home listings
of a growing number of boards of realty and multiple listing services
around the country. The arrangement is intended to provide an ongoing
source of introductions of potential homebuyers to the Company's services
and its PTN Realtors. The Company is now receiving potential borrower leads
from this source on a daily basis.
Mortgage Marketing Concepts ("MMC") is a specialized fee-for-service
marketing division of PTN responsible for the generation and sale of
mortgage leads to the Company's retail centers and to other mortgage
brokers. MMC develops mortgage leads through a variety of methods
including direct mail, list purchases, and telemarketing. This service
allows MMC customers to purchase leads to match their loan placement
capabilities. MMC's telemarketers provide registration services for PTN
seminars and furnish personal marketing services to PTN Realtor members.
RETAIL LOAN SERVICES
PreferenceAmerica Mortgage Network ("PAMN") is a mortgage broker and the
Company's primary retail sales operation. It operates in call centers that
take telephone, fax, videoconference and Internet calls from individuals,
PTN Realtors, and the offices of large Realtor organizations with whom its
Proprietary Branch Systems Division has support agreements and, as
appropriate, directs the resulting transactions to the many mortgage
lenders with which it has brokerage relationships; other homeownership
service providers; and its sister companies MMI and MAC, described below.
The Proprietary Branch Systems Division is a new division that supports
large Realtor groups desiring to use this technology on a standardized
basis. The Company initially is providing home financing services to the
customers of Help-U-Sell, the largest and oldest fixed fee Realtor
franchise organization, and is in discussions with others. Currently the
Company's primary retail development effort is directed toward training and
equipping the approximately 180 Help-U-Sell offices to enable their
Realtors conduct business with the Company's call centers.
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PAMN also supports several Net Branches, independently owned mortgage
brokers that meet certain operating criteria. Each Net Branch agrees to
place a percentage of its total loan volume through PAMN and to pay certain
fees per loan. In exchange, each Net Branch is entitled to valuable
support services including payroll and benefits administration and
disbursement services, access to all PAMN lending relationships, volume
purchasing arrangements, and use of MMC's marketing services.
LENDING SERVICES
Monument Mortgage, Inc. ("MMI") is an independent mortgage banker and loan
seller/servicer. It develops loan programs, offers loan rates in
competition with other residential real estate lenders. It also purchases,
sells and manages loan servicing portfolios. It currently is the Company's
largest business unit and source of revenues, which are primarily from the
sale of loans in the secondary mortgage market and from the servicing and
sale of originated and purchased loan servicing rights. MMI operates in 17
states and is the largest user of FNMA's DO/DU system in the western United
States. To date, over 1,000 loans have been originated through MMI with
this system. The Company continues to introduce and train brokers on this
system, with over 200 brokers now capable of using it. The number of DO/DU
loan submissions is increasing steadily.
MMI markets its capabilities through a network of wholesale relationships
with hundreds of traditional mortgage brokers, plus correspondent
relationships with certain more capable brokers who perform more services
for higher fees, as well as serving as a major funding engine for loans
originated through PAMN net branches and call centers.
Monument Acceptance Corporation ("MAC") is a new sub prime, alternative
lending division of MMI specializing in placing loans for borrowers with
impaired credit. Where MMI deals only in prime A paper loans to borrowers
who meet specified minimum financial and credit standards, MAC focuses on
the 30% or more of borrowers with sub prime A-, B, C, or D rated credit.
While more difficult and time consuming to package and close, these loans
generate much higher revenues.
By having a full spectrum of loan placement capability through both its
internal funding engines as well as by brokering loans to other lenders,
the Company is positioned to have a competitive solution for the widest
range of qualified borrowers.
COMPETITION
The traditional mortgage banking and broker businesses are mature and thus
highly competitive. Although Finet provides both services, a major area of
its anticipated growth lies elsewhere, more specifically in the
development, introduction and use of advanced technology to provide a
broader based of contact with Realtors and borrowers. The Company has
acquired and employed computer and communications technology to develop
systems that permit it to offer a proprietary product and service. Finet
pioneered the PTN's unique bundle of capabilities.
There are several companies that use an earlier video-conferencing
technology that has since been discarded by the Company. To date, these
systems have been proprietary, single or few lender-based systems and, in
the Company's opinion, have had relatively low utilization as a result.
Although some mortgage companies offer various Internet loan related
services, Finet is unaware of any other competitor employing a
comprehensive strategy or system similar to PTN. However there can be no
assurance that competitors, some of whom currrently offer one or more
competitive capabilities or services, will not seek to develop advanced
integrated Realtor connectivity systems similar to the Company's.
Since Finet provides both mortgage banking and mortgage broker services it
accordingly competes with traditional firms offering similar services,
including banks, savings and loans, other mortgage bankers, and
institutional lenders. This is a highly competitive arena in which many
firms are larger and have more current loan volume and financial resources
than the Company.
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DISTRIBUTION METHODS
Since entering the mortgage business in 1991, the Company's distribution
method has gone through several evolutions: initially, as a mortgage
broker, Finex's mobile laptop-equipped loan agents serviced Realtor offices
from a centralized processing center. The Company's current business
strategy is an updated version of that original approach, offering laptop-
equipped Realtors and their customers mortgage brokering and mortgage
banking services using Internet, virtual office, automated underwriting,
video-conferencing and other connectivity and processing technologies from
centralized support centers.
CERTAIN BUSINESS CONSIDERATIONS
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.
Some lenders may attempt to require that brokers repurchase certain
mortgage loans funded by such lenders when they assert a claim of fraud by
the broker or misrepresentations or inaccuracies in borrower's loan
applications. To date, the Company has been successful in modifying such
agreements and avoiding such claims. No lenders have required that PAMN
purchase any of the mortgage loans it originated.
As a lender, because such borrower misrepresentation or inaccuracy was
later determined, MMI on occasion has been required to repurchase a loan
from the institutional investor to whom it sold the loan. Normally, MMI
has been able to resell the loan to another investor or to otherwise
resolve the matter without material financial consequences. As interest
rates rise and the economy declines, the rate of mortgage loan foreclosures
tends to rise. As a result, MMI occasionally is required to hold
residential real estate in inventory until it can be resold. Normally,
such sales are for more than the outstanding loan balance, however there
can be no assurance that such transactions will not have a material adverse
effect on the Company's operations. In the fiscal year ended April 30,
1997, the Company's foreclosure related expense was $153,000.
The Company has embarked on a business development strategy that involves
new and advanced systems, new processes, policies and procedures, and
unproven activities. Many of these require fundamental changes in
traditional attitudes and habits and will require open, forward thinking
acceptance on the part of those real estate professionals doing business
with the Company. While management believes its activities are well
founded, appropriate, and supportive of the transformations now underway in
this industry and of successful development of the real estate services
distribution capability the Company has undertaken, no assurances can be
given as to the eventual outcome or results. Material strategy adjustments
may, and likely will, be required as experience is developed.
GOVERNMENT REGULATION
The Company's mortgage broker/banker operations are subject to extensive
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. The Fair Housing Act prohibits among other practices,
discrimination, unfair and deceptive trade practices, and requires
disclosure of certain basic information to mortgagors concerning credit
terms. If the Company fails to comply with such regulations, possible
consequences could include loss of approved status, demands for
indemnification, class action law suits, and administrative enforcement
actions.
<PAGE> 11
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.
From time to time in its debate over tax reform, Congress has discussed
eliminating deductibility of mortgage interest. Should this occur, it will
reduce the number of those who can afford homeownership. Additionally,
several large law firms have promoted class action claims that certain
industry fee practices violate RESPA. While the industry has responded
vigorously to these activities, no assurances can be given as to their
outcome and the impact on the industry.
Additionally, in California, regulation and licensing of mortgage brokers
falls under the California Department of Real Estate (DRE). Certain of
MMI's mortgage banking activities fall under the jurisdiction of the
California Department of Corporations (DOC). Other than banking industry
employees, who are exempt from DRE licensing requirements, individuals
engaged directly in the origination of loans or the dissemination of
certain information are required to be licensed by the DRE. The Company
and its affiliates will also be required to be licensed in accordance with
the differing requirements of the various states in which offices or
operations are established.
EMPLOYEES
As of April 30, 1997, including employees in net branches for whom various
benefits are provided at net branch cost, the Company employed 131 people
in various capacities: 25 executive, management and administrative
personnel, 26 technology services personnel, and 80 mortgage services
personnel. To minimize the effects of possible adverse determinations from
IRS and the state regulatory audits related to their ongoing objections to
the status of loan personnel as independent contractors, the Company has
taken the position that all net branch personnel are required to be
employees.
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's leases its 17,042 square foot headquarters in Walnut Creek,
CA. Mortgage Marketing Concepts leases an 1,100 square foot office in
Incline Village, NV and a 1,200 square foot telemarketing facility in
Modesto, CA. The Company had also rented on a month-to-month basis a two-
person executive office in San Francisco and a 2,890 square foot MMI branch
in Rancho Cucamonga, CA. Subsequent to April 30, 1997, the San Francisco
office was vacated and the Rancho Cucamonga branch was moved to a smaller
office in La Mirada, CA. The Company believes these facilities are adequate
for its current level of operations.
All net branch office leases remain the personal obligation of the
individual net branch manager.
ITEM 3. LEGAL PROCEEDINGS
As a result of its continuing operating losses and lack of working capital
during 1995, the Company developed past due accounts payable from
approximately 150 unsecured trade creditors, with the result that the
Company became involved in 22 legal proceedings, primarily unsecured
creditor actions and/or judgments. These ranged in individual amount from
$929.43 to $101,000 and aggregated to approximately $500,000. As of April
30, 1997, the Company had settled a majority of these proceedings and
subsequently has settled several more. The Company expects to settle the
remainder in the near future under similar terms as offered to creditors
that have not instituted such proceedings.
Including all unsecured creditor settlements to date, the Company has
settled accounts totaling $465,000 in the form of cash payments of $43,600
and the issuance of 225,500 shares of its common stock, for an average
settlement of 33.6% of the original amount owed., resulting in an
extraordinary gain of $312,000.
<PAGE 12
A claim by two previous stockholders of MMI had sought recession of prior
contracts for the sale of the plaintiff's stock to MMI's stockholders to
restore them to their former status as minority stockholders of MMI. This
claim was settled during the fiscal year ended April 30, 1997. The
settlement amount may not be disclosed as a condition of the settlement
agreement, however said settlement did not have a material adverse effect
on the Company's financial position.
Additionally, there were claims brought by past employees based on various
causes of action related to Finet's employment practices. All such actions
were dismissed with no liability to the Company subsequent to fiscal year
end April 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 27, 1997 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 30 million to 40 million.
Subsequently, In late March, 1997 individual shareholders of record
holding a total of 14,829,751 shares, which represented a majority (57.6%)
of shares outstanding, 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. Remaining shareholders
were then promptly notified by mail of the action approved.
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON EQUITY
The Common Stock of the Company is currently quoted on the OTC Bulletin
Board under the symbol FNHC. For the past several years, there has been no
established trading market for the Company's Common Stock, the Common Stock
was either unpriced or periodically quoted in the pink sheets, and there
was little or no trading volume. From the beginning of 1995 through August,
1996, no trading activity was reported.
Effective with the Company's 1-for-2 reverse stock split on October 21,
1996, its trading symbol was changed from FTHC to FNHC. Between October
21, 1996, and April 30, 1997, limited trading activity resumed with an
average monthly trading volume of 101,000 shares. The following table sets
forth the range of high and low closing bid prices per share of the Common
Stock.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997: HIGH BID LOW BID
- ----------------------------------------- -------- -------
<S> <C> <C>
First Quarter (F1) $ 1.25 $ 0.25
Second Quarter thru October 24, 1996 (F1) 2.625 0.25
October 25, 1996 - October 31, 1996 (F2) 1.75 0.75
Third Quarter (F2) 2.875 0.75
Fourth Quarter (F2) 2.625 0.875
<FN>
<F1>
Prices reflect activity while trading under the symbol FTHC
<F2>
Prices reflect activity while trading under the symbol FNHC
</FN>
</TABLE>
On August 5, 1997, the last sales price for the Common Stock was $3.18 per
share. The foregoing prices represent inter-dealer quotations without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions. Common Stock issued and outstanding as of April 30,
1997 was 24,763,030 shares which were held by approximately 475
stockholders, not including 3,991,250 shares subscribed but not yet issued,
6,507,947 warrants and 599,507 options.
UNREGISTERED SHARES
Pursuant to the revised requirements of Item 701 of Regulation S-B, the
following is information regarding all equity securities sold during the
period covered by the report that were not registered under the Securities
Act.
On December 16, 1996, a non-US citizen purchased 1 million common shares
under Regulation D as a sale to a foreign person, and was granted 5 year
warrants to purchase 1 million shares at an exercise price of $1.00. The
aggregate purchase price of $500,000 included conversion of $270,000 of
debt into common stock.
On March 21, 1997, a non-US citizen purchased 1 million common shares under
Regulation D as a sale to a foreign person for a purchase price of $600,000
and was granted 5 year warrants to purchase 200,000 shares at an exercise
price of $1.50 per share, 200,000 shares at an exercise price of $2.00 per
share and 200,000 shares at an exercise price of $2.50 per share.
<PAGE> 14
In April, 1997, a group of 28 individuals purchased 3,991,250 common shares
under Regulation D for a purchase price of $3,991,250. 13 of these
individuals were granted warrants to purchase 743,125 shares at an exercise
price of $1.50 to $3.50 per share until the year 2001.
In addition to the above sales of securities, on December 31, 1996, the
Company sold 6 million common shares under Regulation S to a group of non-
US investors for an aggregate purchase price of $3,000,000.
Commonwealth Associates acted as placement agent for each of the above
sales and received 859,125 warrants to purchase common shares at an
exercise price of $1.50 per share until the year 2006. Fees, commissions
and expenses of these offerings totaled $738,277.
DIVIDENDS
The Company has not paid, and the Company does not currently intend to pay,
cash dividends on its Common Stock. The current policy of the Company's
Board of Directors is to retain earnings, if any, to provide funds for
operation and expansion of the Company's business. The payment of cash
dividends in the future will be at the discretion of the Board of Directors
and will depend upon, among other things, the Company's earnings, capital
requirements and financial position. In addition, the Company's ability to
pay dividends may be limited under future loan agreements of the Company
which restrict or prohibit the payment of dividends.
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Finet acquired its two of its active subsidiaries, Monument Mortgage, Inc.
("MMI") and PreferenceAmerica Mortgage Network ("PAMN") on December 31,
1996. The acquisition of PAMN was accounted for as a purchase; the
acquisition of MMI was accounted for as a recapitalization of MMI as a
result of the reverse acquisition.
Due to the requirements of such accounting, MMI is deemed to be the
reporting entity although Finet is the Registrant. Accordingly, the
financial statements presented for the 1997 fiscal year include twelve
months of operations for MMI, and four months of operations for FHC and
PAMN (from acquisition date through April 30, 1997). The prior year's
financial statements are those of MMI alone. Further, the operations of
the Company after January 1, 1997 have been and will continue to be
materially different than prior periods. Thus, the meaningfulness of
comparisons below between the fiscal years ended April 30, 1997 and 1996
may be limited and therefore may not be representative of future events.
The consolidated operations of the Company include various real estate
technology services, mortgage brokerage and mortgage banking. During the
fiscal year ended April 30, 1996 the reported operations of the Company
involved only mortgage banking. During the fiscal year ended April 30,
1997, the Company's primary operations were mortgage banking, with start-up
costs incurred in technology services, mortgage brokering, and
telemarketing.
The Company incurred a net loss of $3.2 million for the fiscal year ended
April 30, 1997 compared to net income of $326 thousand for the fiscal year
ended April 30, 1996. This decline in operating results is attributable
primarily to a decrease in operating revenues, an increase in operating
expenses and start up costs, partially offset by an extraordinary gain from
liabilities subject to compromise.
REVENUES
Total revenues were affected by a broad decline in mortgage loan volume,
both in the industry and in MMI. In 1997, revenues decreased $2 million
(31%) to $4.4 million from $6.4 million in 1996. The decrease is primarily
attributable to reduced mortgage banking activity, since the Company's
start up operations did not earn significant revenues.
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 1997 was $1.37 million compared to $2.28 million
in 1996, a decrease of 40%.
Over the same time periods, total loan volume decreased 30% from $504
million in 1996 to $354 million in 1997. The margin earned on sales of
mortgage loans/servicing rights also declined from 45 basis points in 1996
to 39 basis points in 1997. The average volume of mortgages outstanding in
inventory declined 41% from $23.4 million in 1996 to $13.8 million in 1997,
a result of the decline in 1997 loan volume.
Interest income declined 44% from $1.98 million in 1996 to $1.11 million in
1997. Interest income is primarily attributable to mortgages that are held
in inventory, pending their sale and delivery to secondary market
investors. Interest yields on mortgages held in inventory declined slightly
over the same time periods, from 8.27% to 7.96%. Interest expense on the
Company's warehouse lines of credit (which finances the mortgages held in
inventory) declined 43% in the same time period.
<PAGE> 16
Loan servicing fees decreased 36% from $921 thousand in 1996 to $589
thousand in 1997. This fee income is derived from servicing mortgages for
secondary market investors. The Company's portfolio of off-balance sheet
serviced loans declined 30% from an average of $483 million in 1996 to $342
million in 1997, due to the routine sale of all servicing originated during
the year, as well as several bulk sales in 1997 of servicing rights for
loans originated in prior years.
Revenue from startup telemarketing operations was $61 thousand in 1997,
compared to $0 in 1996.
EXPENSES
Primarily as a result of the costs associated with the acquisitions and
funding the start up operations, total expenses increased 30% from $6.0
million in 1996 to $7.8 million in 1997. The increases were primarily in
compensation expenses, marketing, and professional fees.
Salaries and employee benefits expense increased 48% to $3.1 million in
1997 from $2.1 million in 1996, as the number of employees increased 36%
from 96 as of April 30, 1996 to 131 as of April 30, 1997.
Interest expense decreased 39% from $1.8 million in 1996 to $1.1 million in
1997, largely due to the decline in loan volume and the resultant 43%
decrease in the Company's borrowing on its warehouse line of credit from
$1.6 million in 1996 to $907 thousand in 1997. The Company's weighted
average cost to borrow on its warehouse line of credit declined from 6.95%
in 1996 to 6.62% in 1997.
Marketing expense increased from $176 thousand in 1996 to $440 thousand in
1997, primarily from start up operations and expanded MMI marketing.
Professional fees increased 44% to $640 thousand in 1997 from $402 thousand
in 1996. The increase is due primarily due to expenses related to the
acquisitions, including legal, accounting, auditing and consulting expense.
Other expense increased from $69.7 thousand in 1996 to $681 thousand in
1997. This material increase resulted from several factors: $153 thousand
is attributable to various start up operating costs; $156 thousand is
related to increases in unrecoverable costs on foreclosed loans and sale of
real estate owned; $300 thousand is related to miscellaneous expenses for
settlement of the pre acquisition litigation against MMI; an increase in
per use fees for FNMA's automated underwriting system; and write-off of an
account receivable related to a prior year bulk sale of servicing assets.
As previously discussed, in 1996 the Company negotiated settlements with a
number of past due unsecured trade creditor accounts payable. Creditors
owed $500 or less, or willing to reduce the amount owed to $500, were paid
in cash, while larger accounts were paid a discounted amount in the form of
shares of the Company's common stock. As of April 30, 1997, the Company
has settled accounts totaling $465,000 in the form of cash payments of
$43,600 and the issuance of 225,500 shares of its common stock, for an
average settlement of 33.6% of the original amount owed, resulting in an
extraordinary gain of $312 thousand.
CAPITAL EXPENDITURES, LIQUIDITY, AND CAPITAL RESOURCES
The following summary table presents comparative cash flows of the Company.
The activities for the fiscal year ended April 30, 1996 represent only the
mortgage banking activities of MMI, while the activities for the fiscal
year ended April 30, 1997 additionally represents PAMN's start up mortgage
brokerage activities and, subsequent to the acquisitions of December 31,
1996, the consolidated activities of Finet and its subsidiaries.
Accordingly, readers are cautioned that the meaningfulness of comparisons
between the fiscal years is limited and therefore may not be representative
of future events.
<PAGE> 17
<TABLE>
Fiscal Year Ended April
30
1997 1996
------------ -----------
- --
<S> <C> <C>
Net cash provided (used) by operating activities $ 7,837,210
$(8,985,038)
Net cash provided (used) by investing activities (239,400)
(90,409)
Net cash provided (used) by financing activities (7,417,201) 9,355,924
</TABLE>
Operating Activities
The Company's operating activity cash requirements are to fund ongoing
expenses, including sales and marketing and geographic and product line
expansion, and to satisfy accrued liabilities and payables as they become
due. Historically, these cash requirements have been satisfied through cash
receipts from lending activities, including loan origination fees, gains
from sale of loans to secondary market investors, loan servicing fees and
proceeds from the sale of servicing rights.
As a result of the organizational and business development strategy changes
during fiscal year 1997, additional revenue sources began to be developed.
However, the cash consumed from the commencement of these activities
exceeded total cash generated. Accordingly, cash from financing activities
was used to offset the operating cash shortfall. The Company experienced
negative monthly cash flows of $250,000 to $300,000 during the fourth
quarter of fiscal 1997. These negative amounts have declined and the
Company believes positive cash flow on a monthly basis will be achieved
during fiscal 1998 as business growth continues to generate increased
revenues.
Management believes its near term cash resources are adequate. In addition
to unused borrowing capacity, if required the Company's loan servicing
portfolio can be sold with an expectation of generating net cash in excess
of $1,000,000. Additionally, certain of the Company's warrants which are
now in the money have exercise prices that increase $1.00 each April until
expiration, which the Company expects will motivate some holders to
exercise their warrants and provide additional capital for operating
activities.
Investing Activities
The Company's investing activities included the purchase of loan servicing
rights, business acquisitions, purchase of capital assets to support the
expanded business development strategy, and expenses related to capital
raising. Investing activities were funded primarily from the proceeds of
the sale of common stock.
During fiscal year 1997, four private placements resulted in stock
subscriptions totaling $8.1 million to acquire 11,991,250 shares of the
Company's common stock. Of these subscriptions, $4.4 million were received
by April 30, 1997, with the remainder received shortly thereafter, for net
cash receipts of $7.35 million, as summarized below.
<TABLE>
<CAPTION>
Offering Shares $/share Subscription %
- --------------- ---------- ------- ------------ ----
<S> <C> <C> <C> <C>
December, 1996 7,000,000 $ 0.50 $ 3,500,000 43%
March, 1997 1,000,000 0.60 600,000 7%
April/May, 1997 3,991,250 1.00 3,991,250 50%
--------- ------------ ----
Totals 11,991,250 $ 8,091,250 100%
Less Fees, Commissions & Expenses (738,092) 9%
------------ ----
Net cash receipts $ 7,352,058 91%
</TABLE
<PAGE> 18
In addition to the capital raised from this sale of the Company's common
stock, warrants to purchase additional shares were issued to purchasers of
the above described shares. These warrants were issued at exercise prices
ranging from $0.50 per share to $6.00 per share for a total of 5,490,916
shares.
Financing Activities
The Company's primary financing activities involve the use of cash to fund
its residential mortgage lending activities. The Company must advance cash
on a daily basis to fund newly originated loans to its borrower customers.
The majority of these funds are provided through a conventional mortgage
warehouse line of credit from Residential Funding Corporation (RFC). The
Company maintains a $10 million committed warehouse facility and a $25
million uncommitted gestation facility with RFC. The warehouse and
gestation borrowing facilities function as short term (less than 45 days)
borrowing sources. RFC will advance up to 98% of the face amount of the
loans being funded by the Company with the remaining 2% "haircut" funded by
the Company. The warehouse and gestation lines bear an interest rate of
Fed Funds plus a variable margin. When loans are funded, the borrowings
are drawn from the warehouse line. When the loans are sold and shipped to a
secondary market investor, the borrowings are transferred to the gestation
line awaiting for receipt of the sale proceeds from the investor. The
borrowing is secured by the underlying mortgage loans and is repaid with
the proceeds from the sale of loans to secondary market investors. The
current warehouse and gestation borrowing arrangements are adequate to
support monthly loan originations up to $100 million. Should fundings
increase to that level, the Company does not anticipate difficulty in
arranging additional borrowing capacity.
RFC also provides the Company with a $1 million working capital facility.
The working capital facility is a revolving line of credit that the Company
can draw upon for intermediate term (3 months) cash needs. RFC requires
that the Company pay this line off entirely for at least 5 calendar days
each quarter. The working capital facility bears interest at Prime plus
0.625% and is secured by the Company's loan servicing rights and certain
other assets of the Company. RFC will advance up to 70% of the value of
the Company's loan servicing portfolio to the maximum amount of the working
capital line.
Additionally, the Company has a $1 million long term (5 years) term loan
agreement with RFC. This loan also carries an interest rate of Prime plus
0.625% and is repaid on a fully amortizing basis over the remaining term.
As with the working capital facility, the term loan is secured by the
Company's loan servicing portfolio and certain other assets. Typically,
this term loan is used to fund longer term investments such as Purchased
Mortgage Servicing Rights.
The change of ownership resulting from the acquisition of MMI on December
31, 1996 constituted a breach of the certain terms of these arrangements.
At that time, as a result of MMI's funding of startup costs prior to
Finet's completion of its December, 1996 equity offerings and acquisitions,
MMI also was in technical violation of several financial covenants. RFC
continued to allow the Company to operate without disruption and,
subsequent to April 30, 1997, RFC issued a formal waiver of all then
existing breaches and covenant violations on the condition that Finet issue
a parent company guarantee of MMI's borrowings and that the borrowing
arrangements expiration date be accelerated from December 31, 1997 to
August 31, 1997, at which time these agreements are expected to be
renegotiated and renewed. However, there can be no assurances that the
facilities will be renewed.
In the past the Company had maintained borrowing relationships with
multiple lenders. Multiple relationships provide the Company with
contingency options should one lender curtail, cancel or fail to renew its
borrowing agreement with the Company. Should RFC suddenly terminate or
suspend its borrowing agreements with the Company, lending operations would
experience a major disruption and the Company's business relationships with
its brokers, investors and borrowers would be seriously damaged. However,
multiple relationships are expensive in terms of commitment fees and
administrative overhead.
<PAGE> 19
The Company has had a borrowing relationship with RFC for nearly eight
years, and has never experienced a disruption in borrowing capability.
Accordingly, management determined that the additional costs of maintaining
multiple lender relationships was not warranted. Management believes that
replacement borrowing facilities could be obtained within 30 days, and it
is unlikely that RFC would terminate the existing borrowing agreements with
less than a 30 day notice unless the Company was to experience a sudden and
severe degradation in its financial position. In such an unlikely
scenario, multiple lending relationships would be of little value in that
they all would likely suspend borrowing agreements.
As previously discussed, an extraordinary gain of $312,000 was realized as
a result of settlement of certain unsecured creditor liabilities for less
than the amount owed.
MATERIAL SUBSEQUENT EVENTS
RECEIPT OF ADDITIONAL CAPITAL
At April 30, 1997 the Company had received subscriptions of $3,991,250 for
the purchase of 3,991,250 shares of the Company's common stock at $1.00 per
share pursuant to its April 1, 1997 private placement Proceeds totaling
$2,693,038 from these subscriptions were received shortly after April 30,
1997. Accordingly, this subscribed but uncollected amount is shown as a
Stock Subscription Receivable offset to Total Stockholders' Equity in the
Company's Consolidated Balance Sheet of April 30, 1997. On a pro forma
basis, had these subscriptions been received by April 30, 1997, Total
Stockholders' Equity would have increased from $1,041,070 to $3,734,013.
BORROWING ARRANGEMENTS
As previously discussed, RFC provides MMI several borrowing arrangements to
support MMI's mortgage banking activities. The change of ownership
resulting from the acquisition of MMI on December 31, 1996 constituted a
breach of the certain terms of these arrangements. At that time MMI also
was in technical violation of several financial covenants. RFC continued to
allow the Company to operate without disruption and subsequent to April 30,
1997 issued a formal waiver of all then existing breaches and covenant
violations on the condition that Finet issue a parent company guarantee of
MMI's borrowings and that the borrowing arrangements expiration date be
accelerated from December 31, 1997 to August 31, 1997, at which time these
agreements are expected to be renegotiated and renewed.
NDS SOFTWARE AGREEMENT
NDS Software, Inc. (NDS), a Nevada corporation, is a generic software
development company, the creator of a Realtor contact manager with an
installed customer base of several thousand, and the operator of
Homeseekers.com, a popular Internet site that gives daily updated
informational details on homes listed for sale by Multiple Listing Services
and Boards of Realtors in a growing number of areas around the country. On
May 29, 1997, the Company and NDS 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 development services and rights to
access and market to certain of NDS' installed customer base. 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 upon the earlier
of the Company's registration of NDS's shares or June 3, 1998, to maintain
a share value equal to $808,000 at that time, to a maximum additional
shares issuable of 1,414,000 shares.
REOS ACQUISITION
On June 12, 1997, the Company entered into a preliminary agreement with the
shareholders of Real Estate Office Software , Inc. (REOS), a Nevada
corporation, to acquire substantially all of the assets and certain of the
liabilities of REOS. The terms and consideration for this transaction are
being negotiated. REOS is a software development and marketing company
whose primary product is a proprietary Realtor productivity tool called
Real Estate Office. Pursuant to this agreement, all former REOS employees
are now employees of PTN engaged in final development of an enhanced
Relator relationship management tool called the Agent Connector scheduled
for initial introduction in August, 1997.
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
The following are filed in an Appendix as part of this report:
</TABLE>
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------- --
- --
<S>
<C>
(a) Financial Statements
Independent Auditors' Report.......................................... 34
Consolidated Balance Sheet at April 30, 1997.......................... 35
Consolidated Statements of Operations for the years ended
April 30, 1997 and 1996..... ........................................ 36
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1997 and 1996 .............................................. 37
Consolidated Statements of Cash Flows for the years ended
April 30, 1997 and 1996 .............................................. 38
Notes to Consolidated Financial Statements............................. 40
</TABLE>
ITEM 8. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Pursuant to Finet's previously reported reverse acquisition of MMI on
December 31, 1996, it has been determined by the Registrant's current
independent accountant that, for accounting purposes, MMI was the acquiring
entity.
The Registrant previously reported that Deloitte Touche L.L.P. ("DT"), the
independent certifying accountant of MMI, a wholly-owned subsidiary of the
Registrant acquired effective December 31, 1996, automatically became the
independent certifying accountant of the Registrant as the result of
accounting for the acquisition of MMI as a reverse acquisition transaction.
Upon further consideration, the Registrant has concluded that since the
Registrant was the legal acquirer of MMI, there has been no change in the
Registrant's independent certifying auditor. At no time did an auditor-
client relationship exist between DT and the Registrant. Reuben E. Price,
the independent certifying accountant of the Registrant prior to the MMI
acquisition, remained the independent certifying accountant of the
Registrant after the acquisition.
DT advised MMI on March 17, 1997, that the client-auditor relationship had
ceased between DT and MMI.
During the two fiscal years ended April 30, 1995 and 1996, respectively,
and the period through March 17, 1997, there have been no disagreements
between DT and MMI on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which
disagreement, if not resolved to DT's satisfaction would have caused them
to make reference in connection with its reports to the subject matter of
disagreement. In addition, DT's reports on the Company's financial
statements for such fiscal periods contained no adverse opinion or
disclaimers of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles.
<PAGE> 21
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>
Stephen J. Sogin, Ph.D.. 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.......... 61 Director November, 1995 to Present
COO July, 1995 to November, 1995
President November, 1995 to Present
James W. Noack.......... 45 Pres, MMI 1987 to Present
Director January, 1997 to Present
Jose Philipe Guedes..... 50 Director January, 1997 to Present
S. Lewis Meyer.......... 52 Director January, 1997 to Present
David Purvis............ 51 Director July, 1997 to Present
Paul R. Garrigues 41 MMI SVP/CFO March 1992 to Present
Lee Decker 33 Pres, PAMN March 1991 to Present
</TABLE>
L. Daniel Rawitch, 38, has served as Chief Executive Officer since May,
1995 and as a Director since September, 1994. He 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, at which time he became Vice Chairman of the Company and focused on
marketing capabilities development. In 1988-1989 he was Vice President and
San Jose Branch Manager of Pacific Coast Savings and Loan where he
developed wholesale loan originations through mortgage brokers. From 1986
until it was sold to Chicago-based UCB Services, Inc. in 1989, he was co-
founder and President of Data Fax Information Services, Inc., a mortgage
credit reporting company. In 1985-1986 as Vice President, Bear Stearns
Mortgage Capital Corporation, he led various mortgage related activities
throughout the Northwestern US. In 1984-1985 as a Vice President of Eureka
Federal Savings and Loan, he managed all secondary marketing operations.
From 1982 to 1985 he was President of West Coast Lending Group, Inc., a
loan production and secondary marketing organization.
Jan Hoeffel, 61, was a founder and President of Finex Corporation, a
technology-oriented mortgage broker acquired by the Company in December,
1991, after which he served as Executive Vice President until resigning in
mid-1992. He rejoined the Company in mid-1995 and became President and a
Director in November, 1995. In 1992 he incorporated a merchandise
advertising and marketing company providing custom multimedia kiosk
platforms, and served as its President until July, 1993. Since 1988, he
has been a director and major 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
<PAGE> 22
which became a $4 billion NYSE firm providing securities management and
syndication services to 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 completed the US Navy Test Pilot School. Following 4 years as
a Navy test pilot, in 1967 he joined Pan American World Airways, Inc. where
he became an Assistant to the Chief Pilot - Technical and Manager, Flight
Operations Publications.
James W. Noack, 45, the founder and President of Monument Mortgage, Inc.,
became a Director in January, 1997 after it was acquired by the Company.
MMI has originated over $5 billion in new loans under Mr. Noack's
leadership. In 1983 he joined Wells Fargo Mortgage as Senior Vice
President, Wholesale Mortgage Banking and developed eight high volume
wholesale production offices throughout California. When it was sold in
1985 and became IMCO Realty Services, he served on its Executive Committee
and was a senior member of its Loan Committee. In 1981 as a member of the
founding staff of Guarantee National Mortgage Corporation and, as Vice
President of Production, he led a department which amassed a servicing
portfolio of $260 million in 18 months. From 1977 to 1981, he held
positions of increasing responsibility in senior loan origination, business
development and loan approval positions for Oregon, Washington and Alaska
for the Federal National Mortgage Association (Fannie Mae). From 1973 to
1977, he was Loan Servicing Manager with Countrywide Funding Corporation of
Los Angeles, CA, the nation's largest mortgage banking firm. Mr. Noack
received a BA from UC Fullerton. He is a frequent author, speaker to
industry groups and is widely recognized as an innovative leader in the
application of technology to the loan industry.
Stephen J. Sogin, Ph.D., 55, 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 Montgomery Medical Ventures II, a
significant Finet shareholder. 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 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. Mr. Sogin is also a director
of Osteotech, Inc.
Jose Philipe Guedes, 50, became a Director in January, 1997. Mr. Guedes is
Managing Partner of Ceramic, a ceramic tile manufacturer, and Pinto Basil,
a real estate investment firm. From 1982-1995, he was Chief Executive
Officer of Cerexport/Vista Alegre, a ceramic manufacturer. From 1975-1982,
he was with Atlantica-Boavista Insurance Group in Brazil as Technical
Director and a Director. Earlier he was with Companhia Uniao Fabril, a
heavy chemicals and metal refining firm. He earned a degree in chemical
engineering from the University of Lisbon and has served as a Director of
R. Schedel, a Lisbon Stock Exchange broker, and SOCI, a newspaper
publisher, and is a past President of the Portuguese Ceramic Manufacturers
Association.
S. Lewis Meyer, 52, became a Director in January, 1997. Mr. Meyer has over
25 years of senior level management experience in the field of Computed
Tomography (CT) scanning. He is President and CEO of Imatron Inc., a
public, technology-based company engaged principally in Electron Beam
Computed Tomography (EBCT) scanning, both in Imatron's Coronary Artery
Scanning clinics and in R&D work for other firms. From 1991-1993 he was
Vice President Operations with Otsuka Electronics (USA), Inc. Between 1981-
1991, he was the founding senior executive officer of 4 startups in the CT
field. He held senior marketing and CT management positions with EMI
Medical, Inc. from 1976-1981 and with Varian Associates from 1971-1976.
Mr. Meyer received a BS in Physics from the University of Pacific and a MS
and Ph.D. in Physics from Purdue University. Mr. Meyer is also a director
of BSD Medical Company.
David Purvis, 51, became a Director in July 1997. Mr. Purvis has been an
independent investor and consultant and owner of Grey Fox Associates, a
residential real estate development company. He serves as an expert
witness in oil trading and transportation cases. From 1974-1990, he was a
Partner and Managing Director, US Operations of Vitol, S.A., Inc., a
leading international oil trading company. In 1972-1974, he was an analyst
and operations coordinator with Mobil Oil Corp. and earlier was Deputy
Director of the US Navy's largest Fuel Depot at Subic Bay, Philippines.
Mr. Purvis received a BA in Economics from Amherst College, is a guest
lecturer at Oxford's College of Petroleum Studies,
<PAGE> 23
is a member of the Smithsonian Institution's National Board and Executive
Committee, and has served as a Director or Trustee of various for profit
and non-profit organizations.
Paul R. Garrigues, 41, is MMI's Chief Financial Officer and Senior Vice
President, Finance and a Certified Public Accountant. He has been with MMI
since 1992. From 1988-1992, he was First Vice President/Assistant Director
with First Nationwide Bank's Loan Division in Sacramento, CA where he
managed a $24 billion servicing portfolio that included 200,000 loans in 43
states. From 1986-1988, he was Chief Financial Officer/Vice President of
Financial Savings and Loan Association of San Diego, CA. He holds a BS in
Accounting from the University of Southern California.
Lee Decker, 33, is President of PAMN and the Senior Vice President of MMI
responsible for investor/lender relationships, loan pricing and secondary
marketing operations. He is a member of FHLMC, AUS and AQUARIUS software
development teams and developed Loanware, MMI's PC program to
electronically evaluate mortgages and submit loan applications. From 1989-
1991, as Vice President of Hamilton Savings Bank, he supervised all loan
servicing operations. He earned a BA in Economics from the University of
Colorado and has a Certificate in Mortgage Banking from Cal State Hayward.
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 April 30, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
<PAGE> 24
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation received
by the Company's Chief Executive Officers and each of the Company's other
executive officers whose total annual compensation exceeded $100,000 with
respect to the fiscal years ended April 30, 1997, 1996, and 1995,
respectively. Effective January 1, 1997, Messrs. Hoeffel and Noack, each
of whom manages a different segment of the Company's business, voluntarily
elected to defer a portion of their annual salaries.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Awards Other
------------------- ---------------------- --------
Name and Other Restricted Securities All
Principal Fiscal Annual Stock Underlying Other
Position Year Salary Comp Awards Options Comp <F1>
- --------- ------ -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
L. Daniel 1997 $ 90,664 $ 58,341 - - $ 35,000
Rawitch 1996 60,840 38,789 - 100,000 -
CEO 1995 100,000 20,000 - 48,000 -
Harry R. 1997 - - - - -
Kraatz 1996 - - - - -
CEO/Pres 1995 <F2> 60,000 - - 184,320 -
Jan 1997 55,169 53,762 - - 18,000
Hoeffel, 1996 47,000 1,500 - 100,000 -
President 1995 0 - - 125,000 -
James W. 1997 116,990 8,735 - - -
Noack, MMI
President,
Director
Paul W. 1997 119,386 10,033 - - -
Garrigues,
MMI CFO
<FN>
<F1>
During fiscal year 1997 prior to the acquisition of PAMN by Finet, Mr.
Rawitch was employed by PAMN on a part time basis and received compensation
of $35,000, and Mr. Hoeffel received from PAMN consulting fees of $18,000.
<F2>
Mr. Kraatz , who resigned as Chief Executive Officer and voluntarily
surrendered 96,000 options on May 15, 1995, was engaged through November,
1995 to market brokerage franchises, for which no compensation was earned
or paid, and his remaining 88,320 options expired unexercised in December
1995.
</FN>
</TABLE>
<PAGE> 25
DIRECTOR COMPENSATION
Heretofore, the members of the Board of Directors have not received 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, in January, 1997 the
Board's Compensation Committee recommended and the Board resolved that
outside Directors receive $15,000 annually for their services and
attendance at all regular quarterly Board meetings and $1,000 for each
additional Board or committee meeting. Additionally, members of the Board
of Directors are eligible to participate under the Company's Stock Option
Plan.
EMPLOYMENT AGREEMENTS
All members of the Company's executive management, including certain
executives of subsidiaries, have entered into employment agreements with
the Company. Except for certain base salary and performance compensation
differences, the agreements are standard and contain specific
confidentiality and non-competitive language.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
- -----------------------------------------------------------------
% Total Exercise
Options Options Price Expiration
Name Granted Granted Price($/sh) Date
- ----------------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Stephen Sogin 40,000 33.3% .50 1/2002
Jose Philipe Guedes 40,000 33.3% .50 1/2002
S. Lewis Meyer 40,000 33.3% .50 1/2002
------- --------
120,000 100.0%
<FN>
<F1>
In February, 1997, options for 3,167 shares were exercised at $.06 per
share by a former employee.
</FN>
</TABLE>
The period covered in the above table is from May 1, 1996 to April 30,
1997. The most recent prior annual report covered the period from January
1, 1995 to December 31, 1995. During the intervening period from January 1,
1996 to April 30, 1996, the following options were granted.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
% Total Exercise
Options Options Price<F1> Expiration
Name Granted Granted Price($/sh) Date
- ----------------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Stephen J. Sogin 50,317 20.2% $ .06 1/2001
L. Daniel Rawitch 100,000 39.9% .06 1/2006
Jan C. Hoeffel 100,000 39.9% .06 1/2006
------- --------
250,317 100.0%
<PAGE> 26
<FN>
<F1>
Pursuant to the Company's plan of recapitalization approved by shareholders
in the first quarter of 1996, which included 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. As a result
of the reverse split of October, 1996, that value became $.06 per share.
The options granted and the exercise prices above have been adjusted for
the reverse stock split of October, 1996.
</FN>
</TABLE>
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. As a result of reverse stock
splits, the number of shares reserved for issuance has been reduced to
500,000. In January, 1997, the Compensation Committee recommended and the
Board of Directors amended the Option Plan to incorporate a 2.5% of
authorized shares non-qualified stock bonus plan in lieu of cash bonus
payments for performance and an increase in the number of shares reserved
for the Option Plan to 5% of authorized shares. These amendments will be
submitted for shareholder approval at the next shareholders' meeting
planned for later in 1997.
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.
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.
The Option Plan as modified by the Board of Directors in January, 1997
subject to shareholder approval, 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 40,000 shares at the then current fair
market value and, for each of the next three years on each anniversary date
of becoming a director, is granted an additional five-year option
exercisable for an additional 25,000 shares vesting at the rate of 6,250
shares per quarter, subject to continuing service as a director. Directors
may also be granted additional options at the discretion of the Board.
As of April 30, 1997 and including the 120,000 options granted to directors
in January, 1997, there were 559,032 options outstanding under the Option
Plan, of which 559,032 were vested.
<PAGE 27
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.
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 Indemnity 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.
<PAGE> 28
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 April 30, 1997: (i)
by each person known by the Company to own beneficially more than five
percent of the Company's outstanding shares of Common Stock; (ii) by each
director, director nominee and executive officer of the Company; and (iii)
by all officers, directors and director nominees 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 computing the percentage
of outstanding shares held by each person named below on a given date, any
security which such person has the right to acquire within 60 days after
such date is deemed to be outstanding, but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
<TABLE>
Beneficial Ownership
- -----------------------------------------------------------
<CAPTION>
Name and Address of ----Common Stock----
Beneficial Owner # owned % owned
- ------------ ---------------------- ---------- -------
<S> <C> <C> <C>
Beneficial Jose Salema Garcao 8,700,000 <F1> 28.9%
Owners of Quinta de Marinha
more than 5% Lote CT-14
of shares 2750 Cascais, Portugal
outstanding
James A. Umphryes 3,260,000 <F2> 12.7%
3741 Waterford Lane
Walnut Creek, CA 94598
Cumberland Partners 2,564,781 <F3> 9.9%
1114 Ave of Americas
New York, NY 10036
Directors James W. Noack 4,315,000 <F4> 16.7%
and Officers Jan Hoeffel 1,263,975 <F5> 4.9%
L. Daniel Rawitch 1,074,934 <F6> 4.1%
Jose Philipe Guedes 360,000 <F7> 1.4%
Stephen J. Sogin 156,266 <F8> 0.6%
Paul Garrigues 107,813 <F9> 0.4%
David Purvis 107,500 <F10> 0.4%
S. Lewis Meyer 40,000 <F11> 0.2%
9 Directors 7,425,488 28.6%
and Officers
as a group
<FN>
<F1>
Reflects 4,400,000 shares beneficially owned by him and currently
exercisable warrants to acquire 4,300,000 shares
<F2>
Reflects 3,220,000 shares beneficially owned by him, 20,000 beneficially
owned by his spouse and 20,000 shares beneficially owned by his minor
child.
<F3>
Reflects 2,350,000 shares beneficially owned and currently exercisable
warrants to acquire 214,781 shares.
<PAGE> 29
<F4>
Reflects 4,295,000 shares beneficially owned by him and 20,000 shares
beneficially owned by his minor child.
<F5>
Reflects 1,037,817 shares beneficially owned by him, 917 shares
beneficially owned by his spouse and currently exercisable options to
acquire 225,241 shares.
<F6>
Reflects 926,934 shares beneficially owned by him and currently exercisable
options to acquire 148,000 shares.
<F7>
Reflects 320,000 shares beneficially owned by him and currently exercisable
options to purchase 40,000 shares granted for his services as a director.
<F8>
Reflects 50,000 shares beneficially owned by him and currently exercisable
options to purchase 106,266 shares granted for his services as a director.
<F9>
Reflects 107,813 shares beneficially owned by him.
<F10>
Reflects 45,000 shares beneficially owned by him , currently exercisable
warrants to purchase 22,500 shares and currently exercisable options to
purchase 40,000 shares granted for his services as a director.
<F11>
Reflects currently exercisable options to purchase 40,000 shares granted
for his services as a director.
</FN
</TABLE>
<PAGE> 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. At present, the Company
has no material related party relationships other than a 3 year consulting
agreement with James Umphryes, a shareholder and former 50% owner of MMI.
The agreement calls for payments of $15,000 per month through December,
2000.
Pending completion of the Offering and an increase in the Company's working
capital, James Noack lent the Company a total of $625,326 at an interest
rate of 8.5%. These loans were secured by 3 foreclosed residential
properties in inventory. The loans were retired as the properties were
sold. As of April 30, 1997, all borrowings had been fully repaid.
Effective December 31, 1996 the Company issued 8,400,000 shares of its
common stock and $1,000,000 in cash to James Noack and James Umphryes as
consideration for the acquisition of Monument Mortgage, Inc. At the same
time, the Company acquired PreferenceAmerica from its shareholders, two of
whom were Messrs. Noack and Umphryes, for $250,000.
The Company rents on a month-to-month basis a 3,500 square foot storage
facility from James Noack for $600 per month for the storage of furniture
and equipment.
During fiscal year 1997 and earlier, the Company made loans to several
officers and employees. As of April 30, 1997 total loan balances of
$144,350 to 4 individuals remained outstanding.
On December 16, 1996, Jose Maria Salema Garcao purchased 1,000,000 shares
of the Company's for $500,000 and was granted five year warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share. On December 28, 1996, he purchased 1,000,000
shares of the Company's for $500,000 and was instrumental in assisting the
Company to sell an additional 5,000,000 shares of its for $2,500,000, for
which he was granted 2,500,000 warrants at an average exercise price of
$.85 per share. On March 21, 1997, he purchased 1,000,000 shares of the
Company's common stock for $600,000 for which he was granted warrants to
purchase 600,000 shares of the Company's at an average exercise price of
$2.00 per share. In April 1997, he purchased 1,400,000 share for
$1,400,000, for which he was granted warrants to purchase 200,000 shares of
the Company's common stock at an average exercise price of $2.50 per share.
<PAGE> 31
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed in the accompanying index to exhibits on page 56 are
filed as part of this annual report.
<TABLE>
EXHIBITS
<CAPTION>
Exhibit Description
- -------- ---------------------------------------
<S> <C>
EX-3(i) Articles of Incorporation <F1>
1. Amendments of October, 1997
2. Amentment of January, 1997
EX-3(ii) By-laws <F1>
1. Amendments effecting a 1-for-2 reverse stock split and increasing
authorized shares to 30 million
2. Amendment increasing authorized shares to 40 million
EX-10 Material contracts:
1. Term Sheet Agreement between Finet, MMI and PAMN of May 22, 1996
2. Revised Term Sheet Agreement between Finet, MMI and PAMN of August 19,
1996
3. Merger Agreement and Plan of Reorganization between Finet and MMI of
December 20, 1996
4. Umphryes Consulting Agreement
EX-16 Letter on changes in certifying accountant are incorporated by
reference to Exhibit 16 of Form 8-K/A filed on 4/24/97.
EX-21 Description of the subsidiaries of the registrant
EX-23 Consent of independent accountant
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>
<PAGE> 32
<TABLE>
<CAPTION>
REPORTS ON FORM 8-K
Date Item Description
- -------- ---- -----------------------------------------------------------
- -----
<S> <C> <C>
5/22/96 2 Announce agreement to acquire MMI and PAMN
10/10/96 5 Announce reverse stock split and increase of authorized
shares
1/16/97 5 Summarize recapitalization plan items completed in 1996
4/10/97 4 Change in independent accountant
4/22/97 4 Amendment to 4/10/97 Form 8-K clarifying continuity of
independent accountant
5/9/97 4 Concurrence of MMI's former independent accountant with
4/10/97
Form 8-K and 4/22/97 Form 8-K/A
5/15/97 2,7 Clarify accounting basis of MMI acquisition and present
interim and prior audited MMI financial statements
<PAGE> 33
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>
<TABLE>
<S> <C>
Date: August 13, 1997 /S/ L. DANIEL RAWITCH
------------------------------------
L. DANIEL RAWITCH
(CEO AND PRINCIPAL EXECUTIVE OFFICER)
Date: August 13, 1997 /S/ JAN C. HOEFFEL
------------------------------------
JAN C. HOEFFEL
(PRESIDENT AND PRINCIPAL FINANCIAL OFFICER)
Date: August 13, 1997 /S/ JAMES W. NOACK
------------------------------------
JAMES W. NOACK
(DIRECTOR)
Date: August 13, 1997 /S/ S. LEWIS MEYER
------------------------------------
S. LEWIS MEYER
(DIRECTOR)
</TABLE>
<PAGE> 34
APPENDIX
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 sheet of
Finet Holdings Corporation and subsidiaries as of April 30,
1997 , and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended April
30, 1997 and 1996. 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
April 30, 1997, the results of their operations and their cash
flows for the years ended April 30, 1997 and 1996 in conformity
with generally accepted accounting principles.
Finet holdings Corporation acquired Monument Mortgage, Inc. on
December 16, 1996. As more fully discussed in Note 3 to the
financial statements, the transaction is accounted for as a
reverse acquisition whereby Monument Mortgage, Inc. is
considered the acquiring corporation for accounting and
financial statement presentation purposes and Monument
Mortgage, Inc.'s historical financial statements are deemed to
be the historical financial statements of the reporting entity.
/s/ REUBEN E. PRICE & CO.
REUBEN E. PRICE & CO.
San Francisco, CA
August 13, 1997
<PAGE> 35
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 1997
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
April 30,
1997
------------
<S> <C>
ASSETS
Cash......................................................... $ 603,296
Accounts receivable from sales of mortgage
loans and servicing rights................................ 3,453,199
Mortgage loan servicing advances and
other receivables.(Note 3)................................. 643,072
Notes receivable from officers.(Note 15)..................... 144,350
Notes receivable............................................. 247,000
Mortgages held for sale, net................................. 7,268,877
Owned servicing rights (Note 5).............................. 579,018
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,712,848 (Note 6)............ 1,096,666
Other assets................................................. 213,414
------------
Total assets............................................. $14,249,892
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line of credit (Note 8)............................ $10,209,197
Accounts payable............................................. 720,916
Revolving line of credit (Note 8)............................ 100,000
Note payable and capitalized leases (Note 8)................. 1,017,912
Accrued expenses and other liabilities....................... 686,318
Liabilities subject to compromise.(Note 9)................... 474,479
------------
Total liabilities........................................ 13,208,822
------------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 12 and 17)
Preferred stock: $.01 par value (100,000 shares authorized,
0 shares outstanding)...................................... $ -
Common stock: $.01 par value, (30,000,000 shares authorized,
24,763,030 shares issued and outstanding).................. 312,414
Common stock subscribed (3,991,250 shares)................... 39,913
Paid in capital.............................................. 5,814,203
Less: Stock subscription receivable (2,991,250 shares)....... (2,693,038)
Accumulated deficit.......................................... (2,432,422)
------------
Total stockholders' equity............................... 1,041,070
------------
Total liabilities and stockholders' equity.............. $14,249,892
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 36
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<CAPTION>
1997
1996
------------ -
- -----------
<S> <C>
<C>
REVENUES
Gain on sale of servicing rights.......................... $ 4,251,574 $
4,824,899
Loss on sale of mortgage loans (Note 7)................... (1,885,057)
(1,548,659)
Interest income........................................... 1,110,420
1,975,388
Loan servicing fees....................................... 588,698
921,220
Retail broker fees........................................ 93,997
86,409
Marketing leads........................................... 60,596
- -
Other..................................................... 146,004
115,479
------------ -
- -----------
Total revenues........................................ 4,366,232
6,374,736
EXPENSES
Compensation and employee benefits........................ 3,245,818
2,053,987
Interest expense.......................................... 1,134,581
1,829,357
Office.................................................... 854,270
758,325
Marketing................................................. 439,953
176,131
Professional fees......................................... 639,034
401,965
Depreciation and amortization............................. 436,958
398,630
Occupancy................................................. 286,550
228,836
Insurance................................................. 33,294
38,214
Data processing services.................................. 94,581
80,221
Other..................................................... 681,548
69,686
------------ -
- -----------
Total expenses........................................ 7,846,587
6,035,352
------------ -
- ----------
(LOSS) INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN
ON LIABILITIES SUBJECT TO COMPROMISE..................... (3,480,355)
339,384
INCOME TAX (Note 13)...................................... -
13,220
------------ -
- -----------
NET (LOSS) INCOME BEFORE EXTRAORDINARY GAIN
ON LIABILITIES SUBJECT TO COMPROMISE..................... (3,480,355)
326,164
EXTRAORDINARY GAIN ON LIABILITIES SUBJECT TO COMPROMISE... 312,090
- -
NET (LOSS) INCOME AFTER EXTRAORDINARY GAIN ON LIABILITIES
SUBJECT TO COMPROMISE.................................... $(3,168,265) $
326,164
============
============
Pro forma information: (Note 13)
Historical (loss) income before provision for
income taxes as shown above........................... $(3,480,355) $
339,384
Pro forma provision for income taxes.................... -
(112,648)
Pro forma net (loss) income before extraordinary gain... (3,480,355
226,736
Extraordinary gain from settlement of
liabilities subject to compromise..................... 312,090
- -
Pro forma net (loss) income............................. $(3,168,265)
226,736
Pro forma net (loss) income per share before ============
===========
extraordinary gain.................................... (0.26)
0.03
Extraordinary gain on liabilities subject to compromise. 0.02
- -
Pro forma net (loss) income per common share............ (0.24)
0.03
============
============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............. 13,187,876
8,400,000
============
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 37
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<CAPTION>
Capital in
Common Retained
-----------Common Stock------- Excess of
Stock Earnings
Shares Amount Sub- Par Value
Sub- (Accum Total
scribed
scription Deficit) Capital
---------- ----------- ------- ------------
- ----------- ------------ -----------
<S> <C> <C> <C> <C>
<C> <C> <C>
Balance April 30, 1995 100,000 $ 760,000 $ 350,000
$1,797,600 $2,907,600
Recapitalization to reflect shares
issued in reverse acquisition 8,300,000 (611,216) 611,216
Net income
326,164 326,164
Distribution to shareholders
(647,225) (647,225)
----------- --------- ------- ---------- -
- ----------- ------------ ----------
Balance April 30, 1996 8,400,000 148,784 961,216
1,476,539 2,586,539
Issue of common shares:
Common stock offerings 11,991,250 80,000 39,913 7,233,045
(2,693,038) 4,659,920
Reverse acquisition (Note 13) 6,411,823 64,118 (3,455,338)
(3,391,220)
Debt & note payable conversion 2,314,114 23,141 1,136,416
1,159,557
Liabilities subject to compromise 230,089 2,301 112,744
115,045
Common stock rights 2,403,837 24,038 (24,038)
Stock option exercise 3,167 32 158
190
Repurchase of common shares (3,000,000) (30,000) (150,000)
(180,000)
Distributions to shareholders
(740,695) (740,696)
Net loss
(3,168,265)(3,168,265)
----------- ---------- ------- ------------
- ------------ ----------- -----------
Balance at April 30, 1997 28,754,280 $ 312,414 $39,913 $ 5,814,203
$(2,693,038) $(2,432,422)$1,041,070
=========== ========== ======= ============
============ =======================
</TABLE
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 38
</TABLE>
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
1997
1996
------------
- - -------------
<S> <C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................ $
(3,168,265) $ 326,164
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization............................... 436,956
398,630
Extraordinary gain on liabilities subject to compromise.....
(312,090) -
Provision for losses on loans serviced & real estate owned.. 62,046
(126,326)
Loss on disposition of property, plant & equipment.......... 19,829
9,364
Changes in operating assets and liabilities:
Decrease (increase) in receivables from sales
of mortgage loans and loan servicing rights................ 7,972,231
(1,636,478)
Mortgage loans originated...................................
(354,096,235) (503,743,765)
Mortgage loans sold......................................... 357,502,094
497,200,685
Decrease (increase) in originated mortgage servicing
rights, net...............................................
(876,414) (1,054,538)
Decrease (increase) mortgage loan servicing advances
and other receivables..................................... 439,806
(740,973)
Increase in notes receivable and notes receivable from
officers..................................................
(391,350) -
Increase in prepaids and other assets....................... 25,767
(67,976)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities.....................
(27,165) 450,175
------------
- - -------------
Net cash provided (used) by operating activities............ 7,587,210
(8,985,038)
------------
- - -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of mortgage servicing rights........................
(286,263) -
Purchase of furniture and equipment..........................
(101,807) (90,409)
Proceeds of sale of life insurance to officer................ 165,630
- -
Settlement of liabilities subject to compromise..............
(67,122) -
Cash acquired with MMI and PAMN.............................. 50,162
- -
------------
- - -------------
Net cash used by investing activities.......................
(239,400) (90,409)
------------
- - -------------
<PAGE> 39
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock....................... 4,390,110
- -
Repurchase of common stock...................................
(180,000) -
Net increase (decrease) in warehouse borrowings..............
(9,522,510) 8,622,465
Proceeds from advances on note payable and line of credit.... 1,950,000
1,200,000
Principal payments on note payable and line of credit........
(2,297,620) (20,831)
Proceeds of life insurance cash surrender value loan......... 154,507
- -
Repayment of life insurance cash surrender value loan........
(154,507) -
Cash distributions to former MMI shareholders................
(1,040,008) (445,710)
Proceeds from notes payable to officers...................... 625,326
- -
Repayment of notes payable to officers.......................
(625,326) -
Proceeds of pre-acquisition advances to affiliates...........
(1,377,309) -
Repayment of pre-acquisition advances to affiliates.......... 660,136
- -
------------
- - -------------
Net cash (used) provided by financing activities.............
(7,417,201) 9,355,924
------------
- - -------------
Net increase (decrease)in cash................................
(69,391) 280,477
Cash at beginning of period................................... 672,687
392,210
------------
- - -------------
Cash at end of period......................................... $ 603,296
672,687
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 40
FINET HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
REPORTING ENTITY
Finet Holdings Corporation (FHC) acquired Monument Mortgage, Inc. (MMI) on
December 31, 1996. As more fully discussed in Note 3, the transaction is
accounted for as a reverse acquisition whereby Monument Mortgage, Inc. is
considered the acquiring corporation for accounting and financial statement
reporting purposes and Monument Mortgage, Inc.'s historical financial
statements are deemed to be the historical financial statements of the
reporting entity. At April 30, 1997, the consolidated financial statements
also include the financial statements of PreferenceAmerica Mortgage Network
(PAMN), a wholly owned FHC subsidiary. (See Note 3) All material
intercompany transactions and amounts have been eliminated in
consolidation.
ORGANIZATION.
Finet Holdings Corporation (the "Company") was founded as William &
Clarissa, Inc. (W&C) in February, 1988. W&C went public in 1989. In 1991,
after incurring substantial losses and experiencing severe liquidity
problems, W&C discontinued its prior unrelated business operations and
substantially completed an amended plan of reorganization. On December 5,
1991, W&C acquired Finex Corporation, a privately-held California mortgage
loan brokerage corporation that was organized in 1990 and began operations
in 1991, and began continuing operations in mortgage loan brokerage
business. On March 31, 1992, W&C changed its name 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), 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 and through a
reverse acquisition became Monument Mortgage, Inc. on December 31, 1996.
(See Note 3)
SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment, residential real estate
services, and is primarily engaged in mortgage lending, as both a retail
mortgage broker and as a wholesale mortgage banker. The majority of the
Company's business activity is carried out in California with lesser
activity in the western United States and Florida.
<PAGE> 41
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value as determined by outstanding commitments from investors or
current investor yield requirements calculated on the aggregate loan basis.
Mortgage loans sold to investors generally settle within fifteen days of
funding. Gains or losses on sales of mortgage loans are computed as the
difference between the selling price and the carrying value of the related
mortgage loans sold, net of applicable discounts.
OWNED MORTGAGE SERVICING RIGHTS
Statement of Financial Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, requires the allocation of the cost of originated or
purchased mortgage loans to the mortgage servicing rights and the loans
based on their relative fair values at the date of purchase or origination.
The fair values of the mortgage servicing rights are based upon prices
available in the secondary market for servicing rights of mortgage loans
with similar characteristics. When material, capitalized mortgage
servicing rights are amortized in proportion to, and, over the period of,
estimated net servicing income. In evaluating and measuring impairment,
capitalized servicing rights are tested for impairment based on the
expected future net servicing revenue stream.
LOAN SERVICING
The Company sells mortgages on both a servicing retained and servicing
released basis. Loan servicing fee income represents fees earned for
servicing real estate mortgages owned by institutional investors. The fees
are generally calculated on the outstanding principal balances of the loans
serviced and are recorded as income when earned. Servicing released
premiums are based on a contractual percentage of the outstanding principal
balance and credited to income when the loan servicing rights are sold.
LOAN ORIGINATION FEES
Loan origination fees on mortgage loans held for sale, net of certain
direct loan origination costs, are deferred until the time of sale and are
included in the computation of the gain or loss on sale of the related
loans. The sale of mortgage loan inventory is recorded when the loans are
shipped to the investor.
HEDGE ACCOUNTING
The Company does not project interest rates but rather uses a hedging
strategy to determine the portion of the pipeline loans that are at risk
given the current interest rates. The Company's hedging activity consists
of mandatory forward commitments on mortgage-backed securities which are
usually paired-off to hedge the gain (loss) experience from whole loan
sales. Additionally, the Company enters into either optional or mandatory
forward commitments to sell mortgage loans when funded. The Company
assesses the pipeline interest rate risk based upon a number of factors,
including the remaining term of the rate locks, the interest rate at which
the locks are provided, current interest rates and interest rate
volatility. The Company controls the credit risk of the pipeline through
credit evaluations, limits, and monitoring procedures. Unrealized hedging
losses are recorded through a valuation allowance that is shown as a
reduction in the carrying value of the related loan sale. Fees paid to
investors are deferred and recognized as expense as loans are delivered to
the investor in proportion to the percentage relationship of loans
delivered to the total commitment amount. Any remaining fee is recognized
as a period expense at the expiration of the commitment period or earlier
if exercise of the commitment is deemed remote.
<PAGE> 42
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS
No.123, "Accounting for Stock-Based Compensation." SFAS 123 is effective
for fiscal years beginning after December 15, 1995. SFAS 123 allows the
companies to choose whether to account for stock-based compensation under
the current method described in Accounting Principles board Opinion Number
25 (APB25) or to use the fair value method described in SFAS 123. The
Company plans to follow the accounting measurement provisions of APB 25 and
believes the impact of implementing the disclosure provisions of SFAS 123
would not be material to the Company's consolidated financial statements.
In June 1996, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). As amended, SFAS No. 125 applies to securities lending, repurchase
agreements, dollar rolls, other similar secured financial transactions, and
to all other transfers and servicing of financial assets occurring after
December 31, 1996. SFAS 125 will result in the recording of Originated
Mortgage Servicing rights (OMSR) on the date of the sale of a mortgage loan
as opposed to the current practice of recording OMSRs on the date that
loans are originated. Additionally, under SFAS 125, excess servicing fees
will be combined with OMSR for balance sheet presentation as well as for
transactions beginning in the first quarter of 1997. Based on current
circumstances, the Company believes that the application of the new rules
will not have a material impact on the financial statements.
DEPRECIATION METHOD.
Depreciation is computed over the estimated useful lives of the furniture,
fixtures and equipment of two to twelve years using the straight-line
method.
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 SFAS No. 109,
Accounting for Income Taxes. 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.
MMI elected S Corporation status effective March 1, 1987. The election
ceased effective with the acquisition at December 31, 1996 (Note 3). Prior
to December 31, 1996, MMI's items of taxable income, credit, and tax
preferences of the Corporation were primarily the responsibility of MMI
stockholders on their individual income tax returns.
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. Since the computation of fully
diluted loss per share for fiscal 1997 was antidilutive, primary and fully
diluted earnings per share are the same.
RECLASSIFICATIONS
Certain reclassifications have been made to the April 30, 1996 financial
statements to conform to the current year presentation.
<PAGE> 43
3. ACQUISITIONS
On December 31, 1996, the Company acuired all of the outstanding common
stock of Monument Mortgage, Inc. (MMI), a non-public mortgage banker, in
exchange for 8.4 million common shares of FHC and a cash payment of $1
million. For accounting purposes, the cash payment is deemed a dividend
payment to MMI shareholders and the acquisition has been treated as a
recapitalization of MMI, with MMI as the reverse acquisition acquiror. The
historical financial statements prior to December 31, 1996 are those of MMI
and are deemed to be those of the reporting entity. Since the Company's
operations were minimal or dormant during the years ended December 31, 1996
and 1995, the reverse acquisition is considered a capital transaction
rather than a business combination and, accordingly, pro forma information
is not presented.
Also on December 31, 1996, the Company acquired all of the outstanding
stock of PreferenceAmerica Mortgage Network (PAMN) in exchange for a
$250,000 cash payment. PAMN is a California mortgage broker which
commenced operations on February 1, 1996. Prior to its acquisition, PAMN
acquired all rights to the name, marketing concepts, logo, and capabilities
of Property Transaction Network. The acquisition of PAMN is being accounted
for as a purchase and the results of its operations are included in the
consolidated operations of the Company for the period January 1, 1997
through April 30, 1997. Unaudited pro forma information giving effect to
the acquisition of PAMN as if the acquisition took place May 1, 1996 is as
follows:
<TABLE>
Year ended April 30, 1997
-------------------------
<S> <C>
Total revenues $ 4,552,315
Net loss (3,830,940)
Net loss per weighted average common share $ (0.29)
</TABLE>
Following the reverse acquisition, the Company changed its fiscal year end
from December 31 to April 30 to conform to the fiscal year end of MMI and
PAMN.
4. MORTGAGE LOAN SERVICING
The Company's origination and servicing activity is concentrated primarily
within California. The Company's servicing portfolio is primarily
comprised of conventional mortgage loans which are not included in the
accompanying balance sheets and which had outstanding principal balances of
$168 million, representing 1,182 loans, at April 30, 1997. The majority of
loans are securitized through Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") programs on a
nonrecourse basis whereby foreclosure losses are generally the
responsibility of the investor and not the Company. In connection with
mortgage loan servicing activities, the Company segregates escrow and
custodial funds in separate trust accounts and excludes these balances ($
1,053,826 at April 30, 1997) from the accompanying balance sheet. The
company is required to maintain separate accounting records for its escrow
and custodial cash accounts and the related liabilities.
The Company sold servicing rights for mortgages originated and retained in
the servicing portfolio in prior fiscal years with outstanding principal
balances of $103 million and $179 million during the years ended April 30,
1997 and 1996, respectively. These sales of prior fiscal year originations
resulted in net gains of $1.04 million and $1.00 million for the years
ended April 30, 1997 and 1996, respectively.
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $168 million were pledged as collateral to lenders as of
April 30, 1997.
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 3.2% of the
outstanding servicing portfolio balance as of April 30, 1997. The losses
(recoveries) to the Company arising from the foreclosed loans and real
estate owned were as follows:
<TABLE>
Years ended April 30,
1997 1996
<S> <C> <C>
Losses (recoveries).......... $111,386 $ (44,802)
</TABLE>
<PAGE> 44
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 experienced no significant losses during the
years ended April 30, 1997 and 1996 with respect to these representations
and warranties.
The Company carried fidelity bond coverage of $ 950,000 and errors or
omission coverage of $950,000 as of April 30, 1997.
5. OWNED MORTGAGE SERVICING RIGHTS
ORIGINATED MORTGAGE SERVICING RIGHTS
The Company's policy during the fiscal years ended April 30, 1997 and 1996
has been to sell all servicing originated in those years. Generally,
servicing rights that have been capitalized as originated mortgage
servicing rights (OMSR) are sold within thirty to ninety days of
origination and capitalization. Since each servicing right is generally
retained in inventory for less than one fiscal quarter, the Company does
not calculate or record amortization on these assets. For the same reason,
a distinct market valuation allowance account has not been established for
the assets. However, the assets are reported at each balance sheet date at
management's estimate of the current prevailing market value, based on
information available from independent brokers and recent sales of
servicing rights. The outstanding balance in the OMSR account was $332,336
at April 30, 1997.
PURCHASED MORTGAGE SERVICING RIGHTS
During the year ended April 30, 1997, the Company purchased servicing
rights for mortgages with a principal balance of $49.7 million. The
activity in this account for the years ended April 30, 1997 was as follows:
<TABLE>
1997
-------
<S> <C>
Beginning Balance, May 1
Purchases............................ $286,263
Sales................................ -
Amortization......................... (39,581)
---------
Ending Balance, April 30 $246,682
=========
</TABLE>
The Company amortizes PMSR's over four years, using a declining balance
method at a rate approximates the rate of its working capital/PMSR
borrowing facilities.
6. FURNITURE, FIXTURES AND EQUIPMENT
The total net book value of furniture, fixtures and equipment at April 30,
1997 was comprised of the following:
<TABLE>
<S> <C>
Cost:
Furniture and fixtures................... $ 493,317
Computer equipment....................... 1,211,872
Office equipment......................... 215,480
Video conferencing equipment............. 374,954
Leasehold improvements................... 183,953
Capitalized software costs............... 329,938
-------------
Total cost........................... 2,809,514
Less: Accumulated Depreciation............... (1,712,848)
-------------
Furniture, Fixture and equipment, Net........ $ 1,096,666
============
</TABLE>
<PAGE> 45
7. LOSS ON SALES OF MORTGAGE LOANS
Loss on sale of mortgage loans for the years ended April 30, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Loan origination fees, net.................. $ 999,143 $ 1,492,612
Direct loan origination costs............... (1,231,224) (1,557,187)
Investor discounts.......................... (1,773,133) (2,364,484)
Servicing rights capitalized, net........... 176,414 1,054,538
Commitment fees and hedging activities, net. (42,356) (42,356)
Other....................................... (13,901) (131,782)
------------ -----------
Total................................... $(1,885,057) $ (1,548,659)
============ =============
</TABLE>
8. DEBT
The Company's warehouse borrowings as of April 30, 1997 were approximately
$9.5 million less than at April 30, 1996. The reduction is directly
attributable to the approximate $11.3 million decrease in Accounts
Receivable from Sales of Mortgage Loans and Servicing Rights, and Mortgage
Loans Held for Sale, as the warehouse line of credit is the financing
source for these investments. The outstanding balance on the revolving
line of credit was reduced from $800,000 at April 30, 1996 to $100,000 at
April 30, 1997. During the year ended April 30, 1997, all 1997 borrowings
on the line were repaid, and an additional $700,000 payment was made
pursuant to the sale of servicing assets which had been pledged as
collateral for the line of credit.
On December 31, 1996, in conjunction with the reverse acquisition of MMI by
FHC, and the acquisition of PAMN, the Company acquired capitalized leases
related to PAMN operations in the amount of $169,247. The Company also
acquired convertible debt and notes payable related to pre-acquisition
operations of FHC for approximately $1,240,000. Of this amount,
approximately $1,170,000 was retired through the issuance of 2,373,000
shares of FHC common stock, and a cash payment of $50,000.
The following table and comments present summary information regarding the
Company's debt as of April 30, 1997:
<TABLE>
<CAPTION>
Balance at Interest
Facility April 30, 1997 Rate
Terms
- -------------------------------- -------------- -------------- --------
- -----------
<S> <C> <C> <C>
REVOLVING/CURRENT
Warehouse line of credit $ 10,209,197 Fed Funds Rate Expires
($10 million comitted, $25 plus variable August
31, 1997
million uncommitted gestation) spread
Revolving line of credit 100,000 Prime plus Expires
($1 million committed) 0.0625% August
31, 1997
------------
Total revolving/current debt $ 10,309,197
------------
LONG TERM
Note payable $ 729,167 Prime plus Due
($1 million original note) 0.0625% April
30, 2000
Capitalized leases 288,745 All are
36 months,
------------ expiring
between Mar
1999 and
Feb 2000
Total long term debt $ 1,017,912
------------
Total debt $ 11,327,109
============
</TABLE>
<PAGE> 46
Principal payments on long-term debt outstanding at April 30, 1997 for the
five years ending April 30, 1997 are as follows:
<TABLE>
<CAPTION>
Capitalized Total
Year Note Payable Leases Payments
----------- ----------- ---------
<S> <C> <C> <C>
1998 $250,000 $145,264 $ 395,264
1999 250,000 133,434 383,434
2000 229,167 36,027 265,194
2001 - - -
2002 - - -
----------- ----------- ----------
Total Payments $729,167 $314,725 $1,043,892
Less interest on capitalized leases - (25,980) (25,980)
----------- ----------- ----------
Total principal payments $729,167 $288,745 $1,017,912
=========== =========== ===========
</TABLE>
COLLATERAL
The warehouse line of credit, the revolving line of credit and the note
payable are with the same lender. 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 the personal
guarantees of the former MMI shareholders. 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 ration requirements. Should an event of default occur, as defined
in the Agreement, outstanding principal and interest on all three of the
Company's credit facilities technically would be due on demand.
As of April 30, 1997, the Company was in default of three of its debt
covenants. The violations were related to the Company's tangible net
worth, adjusted tangible net worth and required minimum servicing portfolio
balance. The legal acquisition of MMI by FHC on December 31, 1996 created
an additional breach of the terms of the Agreement.
The lender has been formally notified of all debt covenant violations and,
to date, has continued to provide necessary funding to the Company without
disruption. Subsequent to April 30, 1997, the lender issued a formal
waiver of all then existing breaches and covenant violations on the
condition that FC issue a parent company guarantee of MMI's borrowings, and
that the expiration date of the Agreements be accelerated to August 31,
1997 from December 31, 1997.
The Company is in the process of negotiating new Borrowing Agreements with
the lender, and has no reason to believe that negotiations will not be
successful. However, no assurances can be given that the Agreements will be
renewed.
9. LIABILITIES SUBJECT TO COMPROMISE
Prior to the December 31, 1996 acquisition, FHC had incurred $968,736 of
unsecured trade creditor payables. The Company had settled a majority of
these claims by April 30, 1997. The creditors agreed to accept, on
average, 33.8% of what they were owed. The payments were made in the form
of cash and shares of FHC common stock. The balance of liabilities subject
to compromise was $474,479 at April 30, 1997. The reduction of this
liability gave rise to extraordinary gain of $312,090 for the year April
30, 1997.
<PAGE> 47
10. COMMITMENTS AND CONTINGENCIES
DEBT COVENANTS
As discussed in Note 8, at April 30, 1997, the Company was in violation of
three of its debt covenants related to its warehouse line of credit, its
note payable and its revolving line of credit. The violations are related
to the Company's tangible net worth, adjusted tangible net worth and
required minimum servicing portfolio balance. Additionally, the
acquisition of MMI by Finet created a breach of the terms of these
borrowing activities as of December 31, 1996. The lender was notified and,
to date, has not restricted the Company's borrowing ability. The warehouse
line of credit and the revolving line of credit agreements expire on August
31, 1997. The Company is in the process of negotiating new agreements with
the lender, and has no reason to believe the negotiations will not be
successful. However, no assurances can be given that the credit facilities
will be renewed.
LOAN SALE COMMITMENTS
The Company has entered into optional and mandatory forward commitments to
deliver mortgage loans of $12.5 million as of April 30, 1997.
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 which were committed to the borrower, amounted to
$17.5 million as of April 30, 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.
LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases. As of April 30, 1997, future minimum annual rental
payments and related sublease receipts under these leases are as follows:
<TABLE>
<CAPTION>
Lease Sublease Net Lease
Year ending April 30: Expense Income Expense
- --------------------- ---------- --------- ----------
<S> <C> <C> <C>
1998....................... $ 395,485 $ 25,482 $ 370,003
1999....................... 316,653 0 316,653
2000....................... 313,173 0 313,173
2001....................... 234,335 0 234,335
---------- -------- ----------
Total.................... $1,259,646 $ 25,482 $1,234,164
========== ========= ==========
</TABLE>
Rental expense amounted to $372,671 in fiscal year 1997. There is no
sublease rental income expected beyond 1998.
<PAGE> 48
GUARANTEES
Subsequent to fiscal year end April 30, 1997, Finet issued a corporate
guarantee to Residential Funding Corporation on behalf of its
subsidiary,MMI. This guarantee is for a $10 million committed warehouse
line of credit, a $25 million uncommitted gestation line of credit, a $1
million term loan of with a remaining unpaid balance of $729,167, and a $1
million revolving line of credit with a remaining balance of $100,000 at
April 30, 1997.
CONTINGENCIES
Certain claims arising in the ordinary course of business had been filed
against the Company. One claim by two previous stockholders of MMI had
sought recession of prior contracts for the sale of the plaintiff's stock
to MMI's stockholders to restore them to their former status as minority
stockholders of MMI. This claim was settled during the fiscal year ended
April 30, 1997. The settlement amount may not be disclosed as a condition
of the settlement agreement, however said settlement did not have a
material adverse effect on the Company's financial position.
Additionally, there were claims brought by past employees based on various
causes of action related to Finet's employment practices. All such actions
were dismissed with no liability to the Company subsequent to fiscal year
end April 30, 1997.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate methodologies. However, considerable judgment
is necessarily required to interpret market data to develop the estimates
of fair value. Accordingly, the estimates presented herein may not be
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts disclosed in the following paragraph.
The estimated fair values of the Company's financial instruments at April
30, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair
Value)
- -------------------------------------------- --------------- -----------
<S> <C> <C>
Assets:
Cash $ 603,296 $
603,296
Receivables from sales of mortgage loans
and loan servicing rights 3,453,199
3,453,199
Mortgages loans held for sale 7,268,877
7,268,877
Mortgage loan servicing advances and
other receivables 644,072
644,072
Owned servicing rights 579,018
579,018
Liabilities:
Warehouse borrowings 10,209,197
10,209,197
Revolving line of credit 100,000
100,000
Note payable and capitalized leases 1,017,912
1,017,912
Contract or
Unrealized
Notional Gain
Amount (Loss)
Off-balance-sheet financial instruments:
Loan commitments to fund 17,474,851
77,092
Loan commitments to sell 12,500,000
(97,261)
</TABLE>
<PAGE> 49
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate such value:
CASH, RECEIVABLES FROM SALES OF MORTGAGE LOANS AND LOAN SERVICING RIGHTS,
MORTGAGE LOANS HELD FOR SALE, MORTGAGE LOAN SERVICING ADVANES AND OTHER
RECEIVABLES, WAREHOUSE BORROWINGS AND NOTE PAYABLE AND LINE OF CREDIT
The carrying value is considered to be a reasonable estimate of fair value,
based on interest rates of similar financial instruments in the
marketplace.
MORTGAGE SERVICING RIGHTS
The fair value is determined based on projected net cash flows (including
flows from servicing offset by estimated costs of servicing), using the
consensus projected prepayment levels published by several large securities
dealers that approximate the characteristics of the underlying portfolios
and discounted using rates of return required for financial assets with
similar risk characteristics.
OWNED SERVICING RIGHTS
The fair value is determined based on projected net cash flows (including
inflows from servicing offset by estimated costs of servicing), using the
consensus projected prepayment levels published by several large securities
dealers that approximate the characteristics of the underlying portfolios
and discounted using rates of return required for financial assets with
similar risk characteristics.
LOAN COMMITMENTS
The fair value of mortgage loan commitments is estimated using quoted
prices at April 30, 1997. The fair value of commitments to sell can be
estimated by the amount the Company would receive or pay to terminate the
forward delivery contract at the reporting date based upon market prices
for similar financial instruments. The fair value of commitments to fund
can be estimated by comparing the Company's cost to acquire mortgages to
the current prices for similar mortgages, taking into account the terms of
the commitment and the creditworthiness of the counterparts.
The Company does not acquire or issue derivative financial instruments.
12. STOCKHOLDERS' EQUITY
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $.01 per share, and 100,000 shares of Preferred Stock, par value $.01
per share. An increase in the number of shares authorized from 20,000,000
to 30,000,000 was approved by shareholders in January, 1995 as part of the
plan of recapitalization. As of April 30, 1997, the Company had
outstanding 28,754,280 shares of Common Stock. In January, 1997, the Board
of Directors resolved to increase the number of shares authorized to
40,000,000, to which a required majority of shareholders have indicated
their assent. The Company has filed this amendment with the State of
Delaware.
COMMON STOCK
On March 15, 1995, Cumberland Partners, a New York partnership and then the
Company's second largest shareholder, provided $800,000 of additional
capital in the form of a convertible debenture secured by all the Company's
assets. The debenture was 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 was 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.
<PAGE> 50
As part of that transaction, 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 Company's financial performance through
June 30, 1996. 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.
As part of the Company's recapitalization plan approved by shareholders in
January, 1996 and subject to its completion, Cumberland agreed to resell
the 6 million shares acquired with the Series B warrants to the Company for
$180,000 and to convert its debenture and all accrued interest to shares.
In early 1997, the Company repurchased the shares and issued 1,850,000
shares of its common stock to Cumberland as consideration for the principal
and interest then due on the convertible debenture.
During fiscal year 1997, four private placements resulted in stock
subscriptions totalling $8.1 million to acquire 11,991,250 shares of the
Company's common stock. Of these subscriptions, $4.2 million were received
by April 30, 1997, with the remainder received shortly thereafter, for net
cash receipts of $7.35 million, as summarized below. As part of these
offerings, a total of 4,843,125 investor warrants and 859,125 placement
agent warrants were granted, as indicated in the warrant table below.
<TABLE>
<CAPTION>
Offering Shares $/share Subscription
- --------------- ---------- ------- ------------
<S> <C> <C> <C>
December, 1996 7,000,000 $ 0.50 $ 3,500,000
March, 1997 1,000,000 0.60 600,000
April/May, 1997 3,991,250 1.00 3,991,250
--------- ------------
Totals 11,991,250 8,091,250
Less Fees, Commissions & Expenses (738,242)
Total offerings 7,352,958
Less subscriptions receivable at April 30, 1997 (2,693,038)
-------------
Total to April 30, 1997 $ 4,659,920
=============
</TABLE
On April 30, 1997, the Company had 28,754,280 shares of its common stock
issued and outstanding. As of April 30, 1997, the Company had outstanding
subscriptions receivable for an additional 2,991,250 shares of its common
stock.
PREFERRED STOCK
At April 30, 1997, 100,000 shares of preferred stock with a par value of
$.01 were authorized and none were issued and outstanding.
STOCK OPTIONS
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>
<TABLE>
<CAPTION>
Shares under Option
1997 1996
---------- --------
<S> <C> <C>
Outstanding, beginning of year 884,242 806,724
Granted during the year 120,000 542,158
Canceled during the year 442,043<F1> 464,640
Exercised during the year 3,167 -
------- -------
Outstanding, end of 4/30/96 559,032 884,242
Eligible for exercise, end of year 559,032 884,242
<PAGE> 51
<FN>
<F1>
All of the cancelled shares are the result of the 1-for-2 reverse stock
split on October 21,1996.
</FN>
</TABLE>
WARRANTS
Current warrants outstanding are summarized below:
<TABLE>
Holder # shares Exercise $/sh Expiration
- --------------------- --------- ------------- --------------
<S> <C> <C> <C>
Jose Salema Garcao 3,500,000 $0.50-3.00 December, 2001
600,000 1.50-2.50 March, 2002
April, 1997 investors 743,125 1.50-3.50 April, 2000
Placement Agent 859,125 1.50 December, 2006
Cumberland Partners 214,781 1.50 December, 2006
Bridge lenders 17,776 1.50-3.50 April, 2000
July, 1993 investors 437,223 1.50-3.50 April, 2000
Placement Agent 131,167 4.50 November, 2003
Former employee 4,750 2.68 October, 2001
---------
Total 6,507,947
</TABLE>
At April 30, 1997 the Company had outstanding exercisable warrants to
purchase 5,490,916 shares of the Company's common stock at prices that
ranged from $.50 to $4.50 per share.
ARRANGEMENTS FOR FUTURE ISSUANCE OF STOCK, OPTIONS AND WARRANTS
As of April 30, 1997, the number of shares outstanding including stock
subscriptions receivable approximate 28,754,280 shares. Consequently,
there would have been insufficient authorized but unissued shares remaining
in the event of the exercise of all of the warrants and/or options
outstanding. In order to reserve and assure an adequate number of
authorized but unissued shares to accommodate warrant and option exercises,
the Company recommended, its Board of Directors resolved, and a majority of
shareholders have indicated their written assent to increase the number of
shares authorized from 30,000,000 shares to 40,000,000 shares to provide
for these requirements. The Company expects to record this amendment in
the near future.
As of April 30, 1997, 5,904,791 shares of Common Stock were subject to
currently exercisable options and warrants issued by the Company. The
Company contemplates the future issuance of other options to certain
members of management pursuant to its stock option plan.
The Company applies Accounting Principles Board Opinion. 25 and related
interpretations in accounting for the Company's stock plans. Under APB 25,
because the exercise price of the Company's employee stock options are
equal to the underlying stock on the date of grant. Accordingly, no
compensation cost has been recognized for the activity under the stock
plans. The Company intends to follow the provisions of APB 25 for future
years.
STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
Company's to provide pro forma information, and has been determined if the
Company hadaccounted for its employee stock options under the fair value
method of that Statement. The fair value of stock options at date of grant
was estimated using the Black-Shoals Option-Pricing model. The following
weighted-average assumptions were used for grants in fiscal 1997 and 1996,
respectively: 0 dividend yield since the Company does not intend to pay
dividends on it common stock; volatility factors of the expected market
price of the Company's common stock of .50 and .50 ; risk-free interest
rates of 6.509% to 6.675% based on US Government Treasury securities with
maturities comparable to the related option expiration dates and expected
lives equal to remaining option terms for options granted in both years.
The Company's pro forma net income and earnings per share determined as if
the Company had accounted for its employee stock options under Statement
123 as follows:
<PAGE> 52
<TABLE>
1997 1996
---------- ---------
<S> <C> <C>
Estimated stock-based compensation cost..$ 125,146 $ 490
Net (loss) income as reported $(3,186,265) $226,736
Pro forma net (loss) income $(4,179,272) $221,837
(Loss)earnings per share as reported $ (.24) $ .03
Pro forma (loss) earnings per share $ (.32) $ .03
</TABLE>
The effect of stock-based compensation on net income for 1997 and 1996 may
not be representative of the effect on pro forma net income in future years
because compensation expense related to grants made prior to 1996 is not
considered.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, such
estimates may not be a measure of the fair value of its employee stock
options.
13. INCOME TAXES
Prior to December 31, 1997 the Company had elected S Corporation status.
Accordingly, prior to that date items of taxable income, credit, and tax
preferences of the Corporation were primarily that responsibility of the
stockholders and, as such, the Corporation was not subject to federal
income taxes. The Corporation was subject to state financial corporation
tax of approximately 3.9% which comprised the Company's tax provision for
the fiscal year ended April 30, 1996. No provision or benefit was recorded
for the fiscal year ended April 30, 1997.
Statement on Financial Accounting Standards No. 109 requires an asset and
liability approach for financial accounting and reporting for income taxes.
A valuation allowance for all or a portion of deferred tax assets is
established if it is more likely than not that all or some of a deferred
tax asset will not be realized.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred
tax assets and liabilities at April 30, 1997 are comprised of the
following:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards(NOL's) $ 8,732,038
Goodwill 1,232,310
Deferred compensation 40,901
------------
Total deferred tax assets 10,005,249
Valuation allowance, net (9,683,557)
------------
Total deferred tax assets 321,693
------------
Deferred tax liabilities:
Originated mortgage servicing rights 231,607
Property plant and equipment, net of
accumulated depreciation 90,086
-----------
Total deferred tax liabilities 321,693
-----------
Total net deferred tax assets and liabilities $ -
===========
</TABLE>
<PAGE> 53
At April 30, 1997, the Company has U.S. federal and state NOL's of
approximately $22 million which will expire beginning in the fiscal year
2004. Due to ownership changes, approximately $21 million of the U.S.
federal and state NOL's are subject to restrictions. Such restrictions
generally limit the Company to using a portion of the NOL's existing at the
date of the ownership changes, based on the fair market values of the
Company's stock immediately before the ownership changes. A significant
portion of the NOL's subject to restriction, approximately $19 million,
will be limited to approximately $20,000 per year until they expire in the
year 2011. Accordingly, the Company has established a valuation allowance
against deferred tax assets, except to the extent that future years'
deductible items will offset future years' taxable items.
A summary of the Federal and State NOL's and years of expiration follows:
<TABLE>
<S> <C>
2004 $2,210,062
2005 7,051,825
2006 -
2007 2,308,598
2008 1,600,301
2009-2012 8,659,309
----------
Total $21,830,095
</TABLE>
14. ADDITIONAL STATEMENT OF CASH FLOW INFORMATION
The following table presents additional cash flow information for the two
years ended April 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997
1996
----------
- --- -----------
<S> <C>
<C>
Cash paid during the year for:
Interest on line of credit and other borrowings
1,165,472 $1,742,679
Income taxes -
27,500
Distributions to prior shareholders:
(Reversal of)distributions) declared to prior shareholders $
(259,305) 647,225
Distributions paid to shareholders
(40,008) (445,710)
----------
- --- ----------
Change in distributions payable to shareholders
(299,313) 201,515
Assets and lease obligations capitalized
165,221 -
Common stock issued for liabilities subject to compromise
115,045 -
Common stock issued for interest and lender fees
259,557 -
Common stock in exchange for debt
1,170,000 -
Assets acquired in acquisition:
Cash
50,162 -
Furniture, fixtures & equipment
246,307 -
Other assets
279,702 -
Accounts payable and other accrued expenses
(1,609,408) -
Debt
(1,389,247) -
Liabilities subject to compromise
(968,736) -
Accumulated deficit
3,391,220 -
</TABLE>
<PAGE> 54
15. RELATED PARTY TRANSACTIONS
LOANS TO OFFICERS
The Company has outstanding at April 30, 1997 loans to various officers as
follows:
<TABLE>
<CAPTION>
Loan Interest
Officer Title Amount Rate Term Collateral
- ----------------- --------- -------- ------- ---- ---------------
- --
<S> <C> <C> <C> <C> <C>
L. Daniel Rawitch CEO $ 73,000 8.0% 1 yr Securities
Jan C. Hoeffel President 12,000 Prime 1 yr Unsecured
T. Lee Decker MMI SVP 53,350 5.27% 5 yrs 2nd Deed of
Trust
William Dullagham MMI SVP 6,000 8.0% 2 yrs Securities
--------
Total Loans to Officers $144,350
</TABLE
CONSULTING AGREEMENTS
The Company entered into a consulting agreement with James Umphryes, a
greater than 5% shareholder. The contract term is 3 years beginning
January 1, 1997 at a monthly fee of $15,000 for a total contract cost of
$540,000.
BORROWINGS
During the year ended April 30, 1997 the Company borrowed a total of
$625,326 from James Noack, President of Monument Mortgage and a greater
than 5% shareholder. These borrowings were all at 8.5% with terms of 10
to 91 days. All such borrowings were fully repaid as of April 30, 1997.
FACILITY LEASE
The Company leases a 3,500 suare foot storage facility from James Noack,
President of Monument Mortgage and a greater than 5% shareholder. The
facility is utilized by the Company to store excess office furniture. The
monthly lease payment is $600 and the term of the lease is on a month to
month basis.
16. EMPLOYEE BENEFIT PLAN
The Company adopted a contributory pension plan (the "Plan") which
qualifies under Section 401(k) of the Internal Revenue Code in 1993. The
Plan covers all employees meeting certain eligibility requirements and
provides for matching employer contributions. There was no contribution
expense for the years ended April 30, 1997 and 1996.
17. MATERIAL SUBSEQUENT EVENTS
RECEIPT OF ADDITIONAL CAPITAL
At April 30, 1997 the Company had received subscriptions of $3,991,250 for
the purchase of 3,991,250 shares of the Company's common stock at $1.00 per
share pursuant to its April 1, 1997 private placement. Of the total
proceeds to be received, $1,000,000 in cash was received before April 30,
1997 and proceeds totaling $2,693,038 were received shortly after April 30,
1997. Accordingly, the subscribed but uncollected amount is shown as a
Stock Subscription Receivable offset to Total Stockholders' Equity in the
Company's Consolidated Balance Sheet of April 30, 1997. On a pro forma
basis, had theremaining cash subscribed been received by April 30, 1997,
Total Stockholders' Equity would have increased from $1,041,070 to
$3,734,108.
<PAGE>55
BORROWING ARRANGEMENTS
As discussed in Note 8 and 10, Residential Funding Corporation (RFC)
provides MMI several borrowing arrangements to support MMI's mortgage
banking activities. The change of ownership resulting from the acquisition
of MMI on December 31, 1996 constituted a breach of the certain terms of
these arrangements. At that time MMI also was in technical violation of
several financial covenants. RFC continued to allow the Company to operate
without disruption and subsequent to April 30, 1997 issued a formal waiver
of all then existing breaches and covenant violations on the condition that
Finet issue a parent company guarantee of MMI's borrowings and that the
borrowing arrangements expiration date be accelerated from December 31,
1997 to August 31, 1997, at which time these agreements are expected to be
renegotiated and renewed. However no assurancws can be given that the
credit facilities will be renewed.
NDS SOFTWARE AGREEMENT
NDS Software, Inc. (NDS), a Nevada corporation, is a generic software
development company, the creator of a Realtor contact manager with an
installed customer base of several thousand, and the operator of
Homeseekers.com, a popular Internet site that gives daily updated
informational details on homes listed for sale by Multiple Listing Services
and Boards of Realtors in a growing number of areas around the country. On
May 29, 1997, the Company and NDS 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 development services and rights to
access and market to certain of NDS' installed customer base. 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 upon the earlier
of the Company's registration of NDS's shares or June 3, 1998, to maintain
a value equal to $808,000 at that time, to a maximum additional shares
issuable of 1,414,000 shares.
REOS ACQUISITION
On June 12, 1997, the Company entered into a preliminary agreement with the
shareholders of Real Estate Office Software , Inc. (REOS), a Nevada
corporation, to acquire substantially all of the assets and certain of the
liabilities of REOS. The consideration for this transaction is in the
process of being negotiated. REOS is a software development and marketing
company whose primary product is a proprietary Realtor productivity tool
called Real Estate Office. Pursuant to this agreement, all former REOS
employees are now employees of PTN engaged in final development of an
enhanced Realtor relationship management tool called the Agent Connector
which is scheduled for initial introduction in early September, 1997.
<PAGE> 56
</TABLE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Description
Page
- -------- --------------------------------------------------------------
- ----
<S> <C>
<C>
EX-3.(i) Articles of Incorporation <F1>
EX-3.(i).1 Amendment of October, 1997
57
EX-3.(i).2 Amendment of January, 1997
59
EX-3.(ii) By-laws <F1>
EX-10.1 Term Sheet Agreement
61
EX-10.2 Revised Term Sheet Agreement
67
EX-10.3 Merger Agreement and Plan of Reorganization
73
EX-10.4 Consulting Agreement
78
EX-16 Letter on changes in certifying accountant are incorporated by
reference to Exhibit 16 of Form 8-K/A filed on 4/24/97.
EX-21 Description of the subsidiaries of the registrant
81
EX-23 Consent of independent accountant
82
EX-27 Financial data schedule
83
<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>
<PAGE> 57
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
FINET HOLDINGS CORPORATION
FINET HOLDINGS CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That at a duly noticed and constituted meeting of the Board of
Directors of said corporation, the Board, pursuant to a Plan of
Reorganization approved at such meeting, unanimously adopted the following
resolutions:
WHEREAS, this Board of Directors has determined that certain
amendments to the corporation's Restated Certificate of Incorporation are
advisable for the best interests of the corporation and that said
amendments should be submitted to the shareholders for their consent and
authorization at the corporations annual meeting as provided for by Section
222 and 242 of the General Corporation Law of the State of Delaware.
NOW, THEREFORE, BE IT RESOLVED: That Article FOURTH of the Restated
Certificate of Incorporation of this corporation be amended to read as
follows:
"FOURTH: Capital Stock. The total number of shares which the
Corporation shall have authority to issue is Thirty Million One
Hundred Thousand (30,100,000) shares, consisting of One Hundred
Thousand (100,000) shares of Preferred Stock, of the par value of one
cent ($.01) per share (hereinafter called "Preferred Stock"), and
Thirty Million (30,000,000) shares of Common Stock, of the par value
of one cent ($.01) per share (hereinafter called "Common Stock").
RESOLVED FURTHER, that Article FIFTH of the Restated Certificate of
Incorporation of this corporation be amended by adding a subsection 5 to
Section C thereof as follows:
"5. Upon the filing of this Amendment to the Restated Certificate of
Incorporation of the Corporation, every two (2) shares of outstanding
Common Stock shall be automatically reclassified, changed and
converted into one (1) share of Common Stock. No fractional shares of
Common Stock shall be issued upon such conversion, but in lieu
thereof, the Corporation shall pay a cash adjustment for such
fractional interest at the rate of $.50/share. Unless otherwise
requested by the holders thereof, the share certificates
<PAGE> 58
representing the shares outstanding prior to the filing of this
Amendment shall represent such shares as reclassified, changed and
converted following the filing of this amendment."
SECOND: That, at the annual meeting of the stockholders of the
corporation, duly notice and held in compliance with the provisions of
Sections 222 and 242 of the General Corporation Law of the State of
Delaware, the holders of a majority of the issued and outstanding shares of
stock of the corporation entitled to vote, voted in favor of these
amendments as adopted, pursuant to resolution, by the Board of Directors
and thus the necessary number of shares required by the statute were voted
in favor of, and consented to, the amendments.
IN WITNESS WHEREOF, FINET HOLDINGS CORPORATION has caused this
certificate to be signed by L. Daniel Rawitch, its Chief Executive Officer,
on this 9th day of October, 1996.
FINET HOLDINGS CORPORATION
By /s/ L. Daniel Rawitch
L. Daniel Rawitch,
Chief Executive Officer
Attest: /s/ Jan Hoeffel
Jan Hoeffel, Secretary
I hereby acknowledge that the signing of this Certificate is my act
and deed and the act and deed of the Corporation, and that the facts stated
therein are true.
Executed under penalty of perjury on the 9th day of October, 1996.
/s/ L. Daniel Rawitch
L. Daniel Rawitch
<PAGE> 59
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
FINET HOLDINGS CORPORATION
FINET HOLDINGS CORPORATION, a corporation organized and
existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify:
FIRST: That at a duly noticed and constituted meeting of the Board of
Directors of said corporation, the Board unanimously adopted the following
resolutions:
WHEREAS, this Board of Directors has determined that certain
amendments to the Corporation's Restated Certificate of Incorporation are
advisable for the best interests of the corporation and that said
amendments should be submitted to the shareholders for their consent and
authorization as provided for by Section 228 of the General Corporation Law
of the State of Delaware,
NOW, THEREFORE, BE IT RESOLVED: That Article FOURTH of the Restated
Certificate of Incorporation of this corporation be amended to read as
follows:
"FOURTH: Capital Stock. The total number of shares which the
Corporation shall have authority to issue is Forty Million One Hundred
Thousand (40,100,000) shares, consisting of One Hundred
Thousand(l00,000) shares of Preferred Stock, of the par value of one
cent ($ .01) per share (hereinafter called "Preferred Stock"), and
Forty Million (40,000,000) shares of C Common Stock of the par value
of one cent ($.01) per share (hereinafter called "Common Stock")
SECOND: That, pursuant to Section 228 of the General Corporation Law
of the State of Delaware, the holders of a majority of the issued and
outstanding shares of stock of the
corporation entitled to vote, voted, via written consent, in
favor of this amendment, as adopted, pursuant to resolution by the
Board of Directors, and thus the necessary number of shares
required by the statute were voted in favor of, and consented to,
the amendments.
<PAGE> 60
IN WITNESS WHEREOF, FINET HOLDINGS CORPORATION has caused this
certificate to be signed by L. Daniel Rawitch, its Chief Executive Officer,
on this day January 27, 1997
FINET HOLDINGS CORPORATION
By: /s/ L. Daniel Rawitch
L. Daniel Rawitch, CEO
Attest: /s/ Jan Hoeffel
Jan Hoeffel, Secretary
I hereby acknowledge that the signing of this Certificate is my act
and deed and the act and deed of the Corporation, and that the facts stated
herein are true.
Executed under penalty of perjury on January 27, 1997.
L. Daniel Rawitch
<PAGE> 61
FINET HOLDINGS CORPORATION,
MONUMENT MORTGAGE, INC.
AND
PREFERENCEAMERICA MORTGAGE NETWORK
TERM SHEET AGREEMENT
THIS TERM SHEET AGREEMENT, which is effective as of the 22nd day of
May, 1996 is intended to set forth the understanding of the parties as to
their respective commitments.
RECITALS
A. FINET HOLDINGS CORPORATION, a Delaware corporation ("Finet"),
MONUMENT MORTGAGE, INC., a California corporation ("MMI") and PREFERENCE
AMERICA MORTGAGE NETWORK, a California corporation ("PAMN"), wish to
combine their respective businesses by means of MMI and PAMN becoming
subsidiaries of Finet through an appropriate method of acquisition to be
determined, with the objectives of minimizing MMI tax consequences and
retaining existing MMI Lender approvals.
B. Two individuals, Mr. James Noack and Mr. James Umphryes, are the
sole shareholders of MMI, and together with a third individual, Mr. E. E.
Umphryes, are the sole shareholders of PAMN.
C. The parties agree that upon consummation of the acquisitions of
MMI and PAMN, they intend to continue to operate under their respective
names; however, for purposes of relationships with the market, each will
become a wholly owned subsidiary of Finet and shall indicate that it is a
Finet company by use of the Finet name and logo in an appropriate manner.
D. The purpose of this Term Sheet Agreement is to set forth the
understanding of the parties relative to the matters above. After
execution of this Term Sheet Agreement, more Definitive Acquisition
Agreements (DAA) will be prepared which will contain the representations,
warranties, covenants and indemnities that are usual and customary in
transactions of this nature, and will be consistent in all material
respects with the terms of this Agreement. It is intended that this
Agreement will be a binding contract, subject to its terms and conditions.
AGREEMENT AND TERMS
In consideration of the mutual covenants contained herein, the parties
hereto hereby agree as follows:
I. Recitals
The above recitals are incorporated herein by reference.
II. MMI Shareholder Distribution
It is hereby acknowledged that, on or before May 31, 1996, the Board
of Directors of MMI intends to declare a distribution payable to the
shareholders of record in the amount of Two Million Dollars ($2,000,000).
Further, it is MMI's intent to distribute one half this amount
($1,000,000) in cash, and to issue a convertible subordinated debenture in
the amount of the remaining half ($1,000,000) which bears interest at the
Applicable Federal Rate (AFR) as established by the Internal Revenue
Service, and is convertible into MMI's common shares. These distributions
will be made prior to the acquisition of MMI by Finet.
<PAGE> 62
III. Acquisition of MMI
In consideration for the acquisition of all (100%) of the issued and
outstanding stock of MMI, Finet will (a.) retire the Monument convertible
subordinated debenture described in section II above by (i) issuing its own
subordinated convertible debenture with a face amount of one million
dollars ($1,000,000) or, at Finet's option, by (ii) issuing two million
(2,000,000) shares of Finet Common Stock to the debenture holders, (b.)
issue the number of shares of Finet's Common Stock equal to the sum of (i)
the 4/30/96 audited GAAP book value of MMI, adjusted for the results of
operations through the date of acquisition of MMI by Finet, plus (ii) the
value of MMI's loan servicing rights, net of recorded intangible servicing
rights, as established by independent appraisal as of said acquisition
date, divided by the price per share of the shares offered by Finet in its
current private placement, said price expected to be fifty cents ($0.50)
per share, and (c.) by issuing an additional Two Million (2,000,000) shares
of Finet Common Stock. The parties agree that subsequent changes in the
market price of Finet stock will not cause a change in the number of shares
issued.
Should Finet chose to retire the MMI convertible subordinated
debenture in accordance with section III(a)(i) above, the convertible
subordinated debenture issued by Finet in exchange for MMI's convertible
subordinated debenture shall have a term of five (5) years, bear interest
at the Applicable Federal Rate (AFR) as established by the IRS, payable
monthly, and at the option of Finet, may at any time, be retired for cash,
in part or entirely, upon thirty (30) days written notice, however, upon
such notice, the holders(s) shall have the right to chose shares in lieu of
cash at the rate of two (2) shares per retirement dollar.
IV. Acquisition of PAMN
Subject to completion of an acceptable employment contract revision
for Mr. Gregg Pasternak, Executive Vice President and Regional Manager of
PAMN, and in consideration for the acquisition of all (100%) of the issued
and outstanding stock of PAMN, Finet will pay Two Hundred Fifty Thousand
Dollars ($250,000) in cash to the shareholders of PAMN. In the event that
Mr. Pasternak refuses to enter into an employment agreement with PAMN, the
purchase price for PAMN will be renegotiated. The close of the PAMN
acquisition will be concurrent with the MMI close, and if the acquisition
of either MMI or PAMN fails to occur, the acquisition of the other is
hereby canceled.
V. Audit
Prior to July 15, 1996, MMI and PAMN will each provide complete
financial statement audits, at their respective expenses, to comply with
the requirements of the Securities and Exchange Commission for a registered
Section 12(g) company. Normally this would require three years of income
statements and two years of balance sheets.
VI. Retention
Twenty percent (20%) of the shares issued to MMI shareholders by Finet
for the acquisition of MMI will be escrowed in a Retention Account. During
the twenty-four month period after the closing of the acquisition, the
Retention account ledger balance, with an initial value of zero, shall be
adjusted upward for the dollar value of any liabilities that are not
reflected on the balance sheets of Finet (or are not otherwise disclosed)
and to cover any and all damages that may arise out of the violations, if
any, of Finet's representations and warranties in the DAA, and adjusted
downward for (i) any liabilities that are not reflected on the balance
sheets of MMI and/or PAMN (or are not otherwise disclosed) and to cover any
and all damages that may arise out of the violations, if any, of their
representations and warranties in the DAA and (ii) any expenses incurred
for tax payments pursuant to VIII(m) below. At the expiration of the twenty-
four month period, the final balance of the Retention Account ledger shall
be calculated and, if said balance is negative, the equivalent number of
shares calculated, at CMV as herein defined, shall be retained by Finet and
the remaining shares in the Retention Account, if any, shall be distributed
to the MMI shareholders. If the final Retention Account balance is
positive, the equivalent number of shares, calculated at CMV as herein
defined, shall be issued by Finet and, together with all the shares in the
Retention Account, be distributed to the MMI shareholders. The maximum
number of additional shares issued by Finet, if any, shall be equal to the
initial number of shares escrowed in the Retention Account. All shares held
in the Retention Account shall continue to grant full voting rights to the
shareholders while in escrow.
It is understood that the calculation of the above items shall be based on
continuation of the same accounting methods currently used by Finet, MMI
and PAMN.
<PAGE> 63
VII. Board of Directors
Finet will nominate Mr. Noack and Mr. Umphryes to be Members of the
Board of Directors of Finet, and will use its best efforts to cause their
election to the Board at its first regular meeting after the acquisition
date. Each officer of Finet who is a Director will vote in favor of these
nominations at said meeting.
VIII. Employment & Consulting Contracts
Key management employees of MMI and PAMN have been identified as
Paul Garrigues, Senior VP and CFO of MMI
Lee Decker, Senior VP/Secondary Marketing of MMI
Bill Dullaghan, Senior VP/National Wholesale Loan Production
Manager of MMI
Gregg Pasternak, ExecutiveVP and Regional Manager of PAMN.
Existing employment contracts for these individuals will be revised
prior to the acquisition date to address their respective terms of
employment with the post-acquisition organization, including retention
commitments, stock options, non-compete & non-disclosure clauses, and
other critical terms. These agreements will be subject to review and
approval by Finet.
The parties hereto state their intent to require that the payment of
a fixed base salary in excess of $150,000 per year to any employee have the
recommendation of the compensation committee of the board and the approval
by not less than 75% of the members of the board of directors not
abstaining.
Mr. Noack and Mr. Umphryes will be employed by Finet on the following
basis: It is understood that the following terms shall be in effect until
replaced by individual employment contracts that are consistent in form and
content with the standards to be established by the compensation committee
for executive officers.
a) Title: Mr. Noack: President of MMI
Mr. Umphryes: Executive VP of MMI and PAMN
b) Base Salary: $150,000 per annum, payable twice per month, net
of the cost of insurance
benefits and personal use of leased vehicles
c) Term: Three years from the closing of the acquisitions.
d) Participation in management stock option plan and/or incentive
plan as determined by the Board
of Directors for Noack only.
e) Deleted
f) Benefits to include four weeks paid vacation and two weeks sick
leave annually and, subject to
applicable employer anti-discrimination requirements, if any,
full payment of all premiums for
company offered medical, dental, vision, life and disability
coverage.
g) Full time employment and no other competitive employment for
Noack and Umphryes.
h) Termination only for cause as determined by the Board of
Directors with the definition of cause to be mutually agreed upon
in the DAA.
I) Location: as determined by the Board of Directors, and it is
hereby acknowledged that Umphryes
primary office may be in his home.
j) A reasonable non-compete, non-disclosure agreement.
k) Legal Fees: Finet acknowledges that Messrs. Noack and Umphryes
and MMI are defendants in a
current legal action brought by prior shareholders which seeks
the restoration of shares previously sold. Finet agrees to
continue to bear the costs of defending this action up to a
maximum of $250,000. Legal costs in excess of that amount, if
any, and all settlement costs are the responsibility of Messrs.
Noack and Umphryes as individuals.
<PAGE> 64
l) Currently Leased Vehicles: Finet will assume the current leased
vehicle obligations of MMI on
behalf of Messrs. Umphryes and Noack, and will continue payment
of all lease and, up to a maximum personal use amount of $3,000
per year, all related operating costs (insurance, fuel, oil,
repairs and maintenance) for the lesser of the existing lease
period or one year from the acquisition of MMI. Thereafter,
Finet's obligation will be limited to a maximum lease cost of
$750 per month and payment of related operating costs as
above.
m) As sole shareholders of MMI, an S corporation, Messrs. Noack and
Umphryes will have personal
Federal and California State income tax liabilities for the tax
year 1996 based on the taxable income generated by MMI during the
period of time from January 1, 1996 through the acquisition date.
Finet agrees to pay said tax liability on behalf of Messrs. Noack
and Umphryes with said tax payments(s) to be a Section VI
Retention Account adjustment item.
IX. Stand Still
Finet, MMI, PAMN and their shareholders will not, so long as this
Agreement is in effect, take any action out of the ordinary course of
business, such as a sale of assets, termination of employment, modification
of employment contracts, or distribution of dividends or bonuses (except
as described in section II. above). The parties agree that Finet intends
to enter employment agreements with certain of its managers which will be
consistent in form and content with those referred to herein for MMI and
PAMN employees and be subject to review and approval by MMI and Finet. The
balance sheet attached to the DAA will reflect any activities to the date
of the balance sheet, which will be dated as near to the closing date as is
practical.
X. Due Diligence
The parties shall use their best efforts in promptly undertaking
respective due diligence reviews. The parties hereby agree to complete
said reviews within 30 days of the date of this Agreement, unless extended
by mutual consent, which consent not to be unreasonably withheld. All
parties will cooperate in providing materials and access reasonably
necessary for an adequate due diligence effort. In the event any party is
of the opinion that a material fact has been revealed by their due
diligence, and that party wished to terminate this Agreement, the matter
will be submitted to mediation and arbitration as per the provisions of
Paragraph XIV below. The failure to discover a material fact during the
course of the respective due diligence reviews shall not be deemed a waiver
of a representation or warranty, nor a defense against potential damage
from the undiscovered matter.
XI. Closing
The parties to this Agreement will use their best efforts to be in a
position to sign DAA as soon as practicable, but, unless extended by mutual
consent, said consent not to be unreasonably withheld, not more than the
later of 60 days after the date of this Term Sheet Agreement or 30 days
after the first closing of Finet's private placement now in process.
XII. Success of Private Placement
It is hereby acknowledged that this agreement has been entered into on
the basis that the Finet private placement, now in preparation, will be
successful in raising equity capital of not less than Two Million Dollars
($2,000,000). The success of this private placement is critical to the
desire and ability for MMI and PAMN to be acquired as described herein and
therefore, the failure to raise said equity capital shall be considered
cause for termination of this Agreement by, and at the option of, the
shareholders of MMI.
XIII. Non Refundable Advance Payment
In consideration for the promise to stand still by MMI and PAMN,
within five (5) business days following receipt by Finet of the proceeds of
the first closing of its private placement now in preparation, Finet will
issue to the MMI shareholders Two Hundred Thousand (200,000) shares of
Finet's common stock. Said shares shall be considered as part of the share
consideration to be issued pursuant to Section III.
<PAGE> 65
XIV. Mediation and Arbitration
Initially all claims and controversies of any kind relating to this
Term Sheet Agreement shall within 30 days of notice of claim to the other
party be submitted to mediation pursuant to the services of an established
mediation service with the venue of the mediation being San Francisco,
California.
In the event the matter cannot be disposed of by mediation, all claims
and controversies of any kind relating to this Agreement shall be finally
settled by arbitration before a single arbitration in San Francisco in
accordance with the rules then obtaining of the American Arbitration
Association. All parties to this Agreement shall be bound by the decision
in any such arbitration, and judgment upon such arbitration may be entered
by any court of proper jurisdiction. In any such arbitration, the
arbitrators: (i) shall apply the provisions of this Term Sheet Agreement
without varying therefrom in any respect, and they shall not have the power
to add to, modify or change the provisions of this Agreement; (ii) shall
make specific written findings of fact and law; and (iii) shall apply the
law of California to all substantive issues of law. The foregoing shall
not preclude the parties from seeking injunctive or other inequitable
relief from any court of proper jurisdiction pending the outcome of any
arbitration.
Attorney fees and costs shall be allocated by agreement in mediation
and by the arbitrators in arbitration.
XV. Miscellaneous
a) The Current Market Value (CMV) of Finet Common Shares shall be
defined for this Agreement
as the average bid price over the 20 business day period ending
10 days prior to the date of valuation.
b) Any press releases or formal filings concerning this Agreement
and the acquisitions shall be
subject to the mutual consent of the parties, which consents may
not be unreasonably withheld.
c) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of
California.
d) If any portion of this Agreement is found to be illegal and/or
unenforceable, the remainder will
continue in full force and effect.
e) It is acknowledged that an existing Finet shareholder has agreed
to sell privately certain of its
shares to certain key employees of Finet and that, by separate
agreement as consideration for the bridge loan described below,
15% of said shares shall be made available for purchase by
certain MMI and PAMN employees. This private sale of shares is
considered by MMI and PAMN to be a critical element to the
acquisition herein described.
f) It is acknowledged that PAMN has made a bridge loan in the amount
of Forty Thousand Dollars
($40,000) to National Mortgage Network (NMN) and that Finet has
an option to, and intends to, acquire NMN. Upon successful
completion of the first close of its private placement, Finet
agrees to repay that loan and accrued interest within five (5)
business days.
g) All parties to this agreement acknowledge that the acquisition
described herein will require
approvals of certain third parties (FHLMC, FNMA, DRE, DOC, etc.)
and that the parties agree that they will use their best efforts
to obtain said approvals as quickly as possible. It is agreed
that, to the extent that an approval is not obtained and such
denial does not create a legal prohibition to the acquisition or
a material diminution in value, it will not be cause for
termination of this Agreement.
h) The shareholders of MMI and PAMN have been required, in the
normal course of business, to
make personal guarantees for certain financing transactions and
general business relationships. Finet hereby agrees to negotiate
with holders of said guarantees to release the shareholders of
MMI and PAMN from these obligations. If releases are not
possible, then Finet will offer to assume these obligations, or
in the event that assumption is not possible, to indemnify the
MMI and PAMN shareholders for any losses suffered as a result of
these personal guarantees.
<PAGE> 66
i) The shareholders of MMI are aware that the public sale of shares
of Finet Common Stock issued
as consideration for the acquisition of MMI stock may be
restricted by means of a "lock up" agreement. However, said
agreement shall include, unless prohibited by Finet's investment
banker, the right to sell to sell up to 100,000 shares per year
for each MMI shareholder and shall not apply to private transfers
of Finet shares between MMI shareholders or transfers for estate
planning purposes to closely held trusts or family members,
The undersigned, having been duly authorized by their respective
Boards of Directors, have signed this Term Sheet Agreement as a binding
contract effective as of the date indicated above.
FINET HOLDINGS CORPORATION MONUMENT MORTGAGE, INC.
By: /s/ L. Daniel Rawitch By:
/s/ James W. Noack
L. Daniel Rawitch, CEO James W. Noack, President
PREFERENCE AMERICA MORTGAGE NETWORK
By: /s/ James A. Umphryes
James A. Umphryes, Director
<PAGE> 67
MONUMENT MORTGAGE, INC.
AND
PREFERENCEAMERICA MORTGAGE NETWORK
AMENDED TERM SHEET AGREEMENT
THIS AMENDED TERM SHEET AGREEMENT (the "Agreement"), made and entered
into as of August 19, 1996, is intended to set forth the understanding of
the parties ("Parties") as to their respective commitments.
RECITALS
A. FINET HOLDINGS CORPORATION, a Delaware corporation ("Finet"),
MONUMENT MORTGAGE, INC., a California corporation ("MMI") and PREFERENCE
AMERICA MORTGAGE NETWORK, a California corporation ("PAMN"), wish to
combine their respective businesses by means of MMI and PAMN becoming
subsidiaries of Finet through an appropriate method of acquisition to be
determined, with the objectives of minimizing MMI tax consequences and
retaining existing MMI Lender approvals.
B. Two individuals, Mr. James Noack and Mr. James Umphryes, are the
sole shareholders of MMI, and together with a third individual, Mr. E. E.
Umphryes, are the sole shareholders of PAMN.
C. The parties agree that upon consummation of the acquisitions of
MMI and PAMN, they intend to continue to operate under their respective
names; however, for purposes of relationships with the market, each will
become a wholly owned subsidiary of Finet and shall indicate that it is a
Finet company by use of the Finet name and logo in an appropriate manner.
D. Prior to the execution of this Agreement, the Parties entered
into a similar agreement related to the transaction described herein. This
Agreement shall serve to modify, amend and supersede any and all prior
agreements between the parties with respect to said transactions.
E. The purpose of this Agreement is to set forth the understanding
of the parties relative to the transaction described herein. After
execution of this Agreement, more Definitive Acquisition Agreements (DAA)
will be prepared which will contain the representations, warranties,
covenants and indemnities that are usual and customary in transactions of
this nature, and will be consistent in all material respects with the terms
of this Agreement. It is intended that this Agreement will be a binding
contract, subject to its terms and conditions.
AGREEMENT AND TERMS
In consideration of the mutual covenants contained herein, the parties
hereto hereby agree as follows:
I. Recitals
The above recitals are incorporated herein by reference.
II. MMI Shareholder Distribution
It is hereby acknowledged that, on or before May 31, 1996, the Board
of Directors of MMI intends to declare a distribution payable to the
shareholders of record in the amount of Two Million Dollars ($2,000,000).
Further, it is MMI's intent to distribute one half this amount
($1,000,000) in cash, and to issue a convertible subordinated debenture in
the amount of the remaining half ($1,000,000) which bears interest at the
Applicable Federal Rate (AFR) as established by the Internal Revenue
Service, and is convertible into MMI's common shares.
<PAGE> 68
III. Acquisition of MMI
In consideration for the acquisition of all (100%) of the issued and
outstanding stock of MMI, Finet will (a.) retire the Monument convertible
subordinated debenture described in section II above by (i) issuing its own
subordinated convertible debenture with a face amount of one million
dollars ($1,000,000) or, at Finet's option, by (ii) issuing two million
(2,000,000) shares of Finet Common Stock to the debenture holders, (b.)
issue the number of shares of Finet's Common Stock equal to the sum of (i)
the 4/30/96 audited GAAP book value of MMI, plus (ii) the value of MMI's
loan servicing rights, net of recorded intangible servicing rights, as
established by independent appraisal as of 4/30/96, divided by the price
per share of the shares offered by Finet in its current private placement,
said price expected to be fifty cents ($0.50) per share, and (c.) by
issuing an additional Two Million (2,000,000) shares of Finet Common Stock.
The parties agree that subsequent changes in the market price of Finet
stock will not cause a change in the number of shares issued.
Should Finet chose to retire the MMI convertible subordinated
debenture in accordance with section III(a)(i) above, the convertible
subordinated debenture issued by Finet in exchange for MMI's convertible
subordinated debenture shall have a term of five (5) years, bear interest
at the Applicable Federal Rate (AFR) as established by the IRS, payable
monthly, and at the option of Finet, may at any time, be retired for cash,
in part or entirely, upon thirty (30) days written notice, however, upon
such notice, the holders(s) shall have the right to chose shares in lieu of
cash at the rate of two (2) shares per retirement dollar.
IV. Acquisition of PAMN
In consideration for the acquisition of all (100%) of the issued and
outstanding stock of PAMN, Finet will pay Two Hundred Fifty Thousand
Dollars ($250,000) in cash to the shareholders of PAMN. The close of the
PAMN acquisition will be concurrent with the MMI close, and if the
acquisition of either MMI or PAMN fails to occur, the acquisition of the
other is hereby canceled.
V. Audit
Prior to July 15, 1996, MMI and PAMN will each provide complete
financial statement audits, at their respective expenses, to comply with
the requirements of the Securities and Exchange Commission.
VI. Retention
Twenty percent (20%) of the shares issued to MMI shareholders by Finet
for the acquisition of MMI will be escrowed in a Retention Account. During
the twenty-four month period after the closing of the acquisition, the
Retention account ledger balance, with an initial value of zero, shall be
adjusted upward for the dollar value of any liabilities that are not
reflected on the balance sheets of Finet (or are not otherwise disclosed)
and to cover any and all damages that may arise out of the violations, if
any, of Finet's representations and warranties in the DAA, and adjusted
downward for (i) any liabilities that are not reflected on the balance
sheets of MMI and/or PAMN (or are not otherwise disclosed) and to cover any
and all damages that may arise out of the violations, if any, of their
representations and warranties in the DAA and (ii) any expenses incurred
for tax payments pursuant to VIII(m) below. At the expiration of the twenty-
four month period, the final balance of the Retention Account ledger shall
be calculated and, if said balance is negative, the equivalent number of
shares calculated, at CMV as herein defined, shall be retained by Finet and
the remaining shares in the Retention Account, if any, shall be distributed
to the MMI shareholders. If the final Retention Account balance is
positive, the equivalent number of shares, calculated at CMV as herein
defined, shall be issued by Finet and, together with all the shares in the
Retention Account, be distributed to the MMI shareholders. The maximum
number of additional shares issued by Finet, if any, shall be equal to the
initial number of shares escrowed in the Retention Account. All shares held
in the Retention Account shall continue to grant full voting rights to the
shareholders while in escrow.
It is understood that the calculation of the above items shall be based on
continuation of the same accounting methods currently used by Finet, MMI
and PAMN.
VII. Board of Directors
Finet will nominate Mr. Noack and Mr. Umphryes to be Members of the
Board of Directors of Finet, and will use its best efforts to cause their
election to the Board at its first regular meeting after the acquisition
date. Each officer of Finet who is a Director will vote in favor of these
nominations at said meeting.
<PAGE> 69
VIII. Employment & Consulting Contracts
Key management employees have been identified as
Paul Garrigues, Senior VP and CFO
Lee Decker, Senior VP/Secondary Marketing
Bill Dullaghan, Senior VP/National Wholesale Loan Production
Manager
Existing employment contracts for these individuals will be revised
prior to the acquisition date to address their respective terms of
employment with the post-acquisition organization, including retention
commitments, stock options, non-compete & non-disclosure clauses, and
other critical terms. These agreements will be subject to review and
approval by Finet.
The parties hereto state their intent to require that the payment of
a fixed base salary in excess of $150,000 per year to any employee have the
recommendation of the compensation committee of the board and the approval
by not less than 75% of the members of the board of directors not
abstaining.
Mr. Noack and Mr. Umphryes will be employed by Finet on the following
basis: It is understood that the following terms shall be in effect until
replaced by individual employment contracts that are consistent in form and
content with the standards to be established by the compensation committee
for executive officers.
a) Title: Mr. Noack: President of MMI, Executive Vice President
of Finet Holdings, Inc.
Mr. Umphryes: Executive VP of MMI and PAMN
b) Base Salary: $150,000 per annum, payable twice per month, net
of the cost of insurance
benefits and personal use of leased vehicles
c) Term: Three years from the closing of the acquisitions.
d) Participation in management stock option plan and/or incentive
plan as determined by the Board
of Directors for Noack only.
e) Benefits to include four weeks paid vacation and two weeks sick
leave annually and, subject to
applicable employer anti-discrimination requirements, if any,
full payment of all premiums for
company offered medical, dental, vision, life and disability
coverage.
f) Full time employment and no other competitive employment for
Noack and Umphryes.
g) Termination only for cause as determined by the Board of
Directors with the definition of cause to
be mutually agreed upon in the DAA.
h) Location: as determined by the Board of Directors, and it is
hereby acknowledged that Umphryes
primary office may be in his home.
i) A reasonable non-compete, non-disclosure agreement.
j) Legal Fees: Finet acknowledges that Messrs. Noack and Umphryes
and MMI are defendants in a
current legal action brought by prior shareholders which seeks
the restoration of shares previously sold. Finet agrees to
continue to bear the costs of defending this action up to a
maximum of $250,000. Legal costs in excess of that amount, if
any, and all settlement costs are the responsibility of Messrs.
Noack and Umphryes as individuals.
k) Currently Leased Vehicles: Finet will assume the current leased
vehicle obligations of MMI on
behalf of Messrs. Umphryes and Noack, and will continue payment
of all lease and, up to a maximum personal use amount of $3,000
per year, all related operating costs (insurance, fuel, oil,
repairs and maintenance) for the lesser of the existing lease
period or one year from the acquisition of MMI. Thereafter,
Finet's obligation will be limited to a maximum lease cost of
$750 per month and payment of related operating costs as
above.
l)
<PAGE> 70
As sole shareholders of MMI, an S corporation, Messrs. Noack and
Umphryes will have personal
Federal and California State income tax liabilities for the tax
year 1996 based on the taxable income generated by MMI during the
period of time from January 1, 1996 through the acquisition date.
Finet agrees to pay said tax liability on behalf of Messrs. Noack
and Umphryes with said tax payments(s) to be a Section VI
Retention Account adjustment item.
IX. Stand Still
Finet, MMI, PAMN and their shareholders will not, so long as this
Agreement is in effect, take any action out of the ordinary course of
business, such as a sale of assets, termination of employment, modification
of employment contracts, or distribution of dividends or bonuses (except
as described in section II. above). The parties agree that Finet intends
to enter employment agreements with certain of its managers which will be
consistent in form and content with those referred to herein for MMI and
PAMN employees and be subject to review and approval by MMI and Finet. The
balance sheet attached to the DAA will reflect any activities to the date
of the balance sheet, which will be dated as near to the effective date of
the Agreement effective date as is practical.
X. Due Diligence
The parties shall use their best efforts in promptly undertaking
respective due diligence reviews. The parties hereby agree to complete
said reviews within 30 days of the date of this Agreement, unless extended
by mutual consent, which consent not to be unreasonably withheld. All
parties will cooperate in providing materials and access reasonably
necessary for an adequate due diligence effort. In the event any party is
of the opinion that a material fact has been revealed by their due
diligence, and that party wished to terminate this Agreement, the matter
will be submitted to mediation and arbitration as per the provisions of
Paragraph XIV below. The failure to discover a material fact during the
course of the respective due diligence reviews shall not be deemed a waiver
of a representation or warranty, nor a defense against potential damage
from the undiscovered matter.
XI. Closing
The parties to this Agreement will use their best efforts to be in a
position to sign DAA as soon as practicable, but, unless extended by mutual
consent, said consent not to be unreasonably withheld, not more than the
later of 60 days after the date of this Term Sheet Agreement or 30 days
after the first closing of Finet's private placement now in process.
XII. Success of Private Placement
It is hereby acknowledged that this agreement has been entered into on
the basis that the Finet private placement, now in preparation, will be
successful in raising equity capital of not less than Two Million Dollars
($2,000,000). The success of this private placement is critical to the
desire and ability for MMI and PAMN to be acquired as described herein and
therefore, the failure to raise said equity capital shall be considered
cause for termination of this Agreement by, and at the option of, the
shareholders of MMI.
XIII. Non Refundable Advance Payment
In consideration for the promise to stand still by MMI and PAMN,
within five (5) business days following receipt by Finet of the proceeds of
the first closing of its private placement now in preparation, Finet will
issue to the MMI shareholders Two Hundred Thousand (200,000) shares of
Finet's common stock. Said shares shall be considered as part of the share
consideration to be issued pursuant to Section III.
XIV. Mediation and Arbitration
Initially all claims and controversies of any kind relating to this
Term Sheet Agreement shall within 30 days of notice of claim to the other
party be submitted to mediation pursuant to the services of an established
mediation service with the venue of the mediation being San Francisco,
California.
In the event the matter cannot be disposed of by mediation, all claims
and controversies of any kind relating to this Agreement shall be finally
settled by arbitration before a single arbitration in San Francisco in
accordance with the rules then obtaining of the American Arbitration
Association. All parties to this Agreement shall be bound by the decision
in any such arbitration, and judgment upon such arbitration may be entered
by any court of proper jurisdiction. In any such arbitration, the
arbitrators: (i) shall apply the provisions of this Term Sheet Agreement
without varying therefrom in any respect, and they shall not have the power
to add to, modify or change the provisions of this Agreement; (ii) shall
make specific written findings of fact and law;
<PAGE> 71
and (iii) shall apply the law of California to all substantive issues of
law. The foregoing shall not preclude the parties from seeking injunctive
or other inequitable relief from any court of proper jurisdiction pending
the outcome of any arbitration.
Attorney fees and costs shall be allocated by agreement in mediation
and by the arbitrators in arbitration.
XV. Miscellaneous
a) The Current Market Value (CMV) of Finet Common Shares shall be
defined for this Agreement
as the average bid price over the 20 business day period ending
10 days prior to the date of valuation.
b) Any press releases or formal filings concerning this Agreement
and the acquisitions shall be
subject to the mutual consent of the parties, which consents may
not be unreasonably withheld.
c) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of
California.
d) If any portion of this Agreement is found to be illegal and/or
unenforceable, the remainder will
continue in full force and effect.
e) It is acknowledged that an existing Finet shareholder has agreed
to sell privately certain of its
shares to certain key employees of Finet and that, by separate
agreement as consideration for the bridge loan described below,
15% of said shares shall be made available for purchase by
certain MMI and PAMN employees. This private sale of shares is
considered by MMI and PAMN to be a critical element to the
acquisition herein described.
f) It is acknowledged that PAMN has made a bridge loan in the amount
of Forty Thousand Dollars
($40,000) to National Mortgage Network (NMN) and that Finet has
an option to, and intends to, acquire NMN. Upon successful
completion of the first close of its private placement, Finet
agrees to repay that loan and accrued interest within five (5)
business days.
g) All parties to this agreement acknowledge that the acquisition
described herein will require
approvals of certain third parties (FHLMC, FNMA, DRE, DOC, etc.)
and that the parties agree that they will use their best efforts
to obtain said approvals as quickly as possible. It is agreed
that, to the extent that an approval is not obtained and such
denial does not create a legal prohibition to the acquisition or
a material diminution in value, it will not be cause for
termination of this Agreement.
h) The shareholders of MMI and PAMN have been required, in the
normal course of business, to
make personal guarantees for certain financing transactions and
general business relationships. Finet hereby agrees to negotiate
with holders of said guarantees to release the shareholders of
MMI and PAMN from these obligations. If releases are not
possible, then Finet will offer to assume these obligations, or
in the event that assumption is not possible, to indemnify the
MMI and PAMN shareholders for any losses suffered as a result of
these personal guarantees.
i) The shareholders of MMI are aware that the public sale of shares
of Finet Common Stock issued
as consideration for the acquisition of MMI stock may be
restricted by means of a "lock up" agreement. However, said
agreement shall include, unless prohibited by Finet's investment
banker, the right to sell to sell up to 100,000 shares per year
for each MMI shareholder and shall not apply to private transfers
of Finet shares between MMI shareholders or transfers for estate
planning purposes to closely held trusts or family members,
The undersigned, having been duly authorized by their respective
Boards of Directors, have signed this Term Sheet Agreement as a binding
contract effective as of the date indicated above.
FINET HOLDINGS CORPORATION MONUMENT MORTGAGE, INC.
By: /s/ L. Daniel Rawitch By:
/s/ James W. Noack
L. Daniel Rawitch, CEO James W. Noack, President
<PAGE> 72
PREFERENCE AMERICA MORTGAGE NETWORK
By: /s/ James A. Umphryes
James A. Umphryes, Director
<PAGE> 73
FINET HOLDINGS CORPORATION AND MONUMENT MORTGAGE, INC.
MERGER AGREEMENT AND PLAN OF REORGANIZATION
This Merger Agreement and Plan of Reorganization ("Agreement") is made as
of December 20, 1996, at San Francisco, California, among Finet Holdings
Corporation ("Finet"), a Delaware Corporation, having its principal office
at San Francisco, California; Finet Correspondent, Inc. ("Ficor"), a
California Corporation, having its principal office at San Francisco,
California; and Monument Mortgage, Inc. ("MMI"), a California Corporation,
having its principal office at Walnut Creek, California.
RECITALS
A. Finet and MMI wish to combine their respective businesses by
means of MMI becoming a subsidiary of Finet.
B. The parties wish to effectuate such a reorganization by means of
a reverse subsidiary triangular merger whereby Ficor, a wholly owned
subsidiary of Finet, will merge with MMI and Ficor will cease to exist.
C. The parties agree that after the merger and reorganization, that
MMI will be a wholly owned subsidiary of Finet and shall indicate that it
is a Finet company by appropriate use of the Finet name and logo.
TERMS OF REORGANIZATION
1. Tax-Free Reorganization.
Finet, Ficor and MMI adopt this agreement as a merger and plan of
reorganization under Section 368(a)(2)(E) of the Internal Revenue Code.
2. Effect of Merger.
On the Effective Date, as defined in this Agreement, a merger shall
take place ("the Merger") whereby Ficor shall be merged with and into MMI,
and MMI shall be the Surviving Corporation. (The term "Surviving
Corporation" appearing in this Agreement denotes MMI after consummation of
the Merger.) MMI's corporate name, existence, and all its purposes,
powers, and objectives shall continue unaffected and unimpaired by the
Merger, and as the Surviving Corporation it shall be governed by the laws
of the State of California and succeed to all of Ficor's rights, assets,
liabilities, and obligations in accordance with the California General
Corporation Law.
3. Closing Date; Effective Date.
Consummation of the Merger shall be effected as soon as practicable
after all the conditions established in this Agreement have been satisfied.
The closing shall be held at 1:00 pm, December 31, 1996 at the offices of
Miller, Mailliard & Culver in San Francisco, California, or at such other
time and place as the parties may agree. The time and date of closing are
called the "Closing Date," and will be the same day as the Effective Date.
4. Governance of Surviving Corporation.
4.1. Articles of Incorporation.
The articles of incorporation of MMI in effect on the Effective
Date of the Merger shall become the articles of incorporation of the
Surviving Corporation. From and after the Effective Date of the Merger,
said articles of incorporation, as they may be amended from time to time as
provided by law, shall be, and may be separately certified as, the articles
of incorporation of the Surviving Corporation.
<PAGE> 74
4.2. Bylaws.
The bylaws of MMI in effect on the Effective Date of the Merger
shall be the bylaws of the Surviving Corporation until they are thereafter
duly altered, amended, or repealed.
4.3. Directors and Officers.
The directors of MMI on the Effective Date of the Merger shall be
the directors of the Surviving Corporation. They shall hold office until
their successors have been elected and qualified. The officers of MMI
shall be the officers on the effective date of the Merger shall be the
officers of Surviving Corporation. Each shall hold office subject to the
bylaws and the pleasure of the directors of Surviving Corporation.
5. The Shares.
5.1. Capital Shares of MMI.
The authorized capital stock of MMI consists of one million
shares (1,000,000) of Common Stock of no par value of which 10,000 shares
are issued and outstanding. All shares are validly issued, fully paid, and
non-assessable, and such shares have been so issued in substantial
compliance with all federal and state securities laws.
5.2. Capital Shares of Finet.
The authorized capital stock of Finet consists of thirty million,
one hundred thousand shares (30,100,000), which consists of thirty million
shares (30,000,000) of Common Stock (par value $.01) and one hundred
thousand (100,000) shares of Preferred Stock (par value $.01), of which
13,037,719 common shares are currently issued and outstanding. There are
existing warrants that may result in up to an additional 4,935,917 common
shares being issued. There are existing stock options that may result in
up to an additional 511,876 common shares being issued. There are existing
convertible debt instruments that may result in up to an additional
2,000,000 shares being issued. All shares are validly issued, fully paid,
and non-assessable, and such shares have been so issued in substantial
compliance with all federal and state securities laws.
5.3. Conversion of Shares.
5.3.1. Each share of Ficor's common stock issued and
outstanding shall be canceled and no shares of MMI shall be issued in
exchange therefor;
5.3.2. Each and every share of MMI's common stock issued and
outstanding immediately before the Effective Date (the "Target Common
Stock'), shall by virtue of the Merger and without action on the part of
MMI be converted into the right to receive from and to be delivered by
Finet the following items per share: 840 shares of Finet common stock and
$100 cash, both items to be delivered upon surrender to Finet for
cancellation of the certificate representing such share of MMI.
6. MMI Representations and Warranties.
MMI represents and warrants to Finet and Ficor as follows:
a) MMI is duly organized, validly existing, and in good standing
under the laws of California, and has the corporate power to own all of its
properties and assets and to carry on its business as it is now being
conducted.
b) MMI's board of directors has authorized the execution of this
Reorganization Agreement, and MMI has the corporate power and is duly
authorized, subject to the approval of this Reorganization Agreement by its
shareholders, to merge Ficor into MMI pursuant to this Agreement.
c) MMI's issued and outstanding shares have been validly issued in
full compliance with all federal and state securities law, are fully paid
and nonassessable, and have voting rights. There are no outstanding
subscriptions, options, rights, warrants, convertible securities, or other
agreements or commitments obligating MMI to issue or to transfer any
additional shares of its stock.
<PAGE> 75
7. Representations of Acquiring corporation.
Finet represents and warrants to MMI as follows:
a) Finet is duly organized, validly existing, and in good standing
as a Delaware corporation, and Ficor is a wholly owned subsidiary of Finet
and is duly organized, validly existing, and in good standing under the
laws of the State of California.
b) Finet and Ficor have full corporate power and authority to
execute and deliver this Agreement and to perform the obligations under,
and consummate the transactions contemplated by this Agreement. This
Agreement is a valid and binding agreement of Finet and Ficor in accordance
with its terms.
c) Finet's issued and outstanding shares have been validly issued in
full compliance with all federal and state securities law, are fully paid
and nonassessable, and have voting rights. There are no outstanding
subscriptions, options, rights, warrants, convertible securities, or other
agreements or commitments obligating Finet to issue or to transfer any
additional shares of its stock that are not disclosed to MMI.
8. Entire Agreement; Modification; Waiver.
This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter contained in said agreement and it
supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in writing by all the
parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or
not similar, nor shall any waiver constitute a continuing waiver. No
waiver shall be binding unless executed in writing by the party making the
waiver.
9. Prohibited Acts.
MMI agrees not to do any of the following things prior the closing
date, and Finet and Ficor agree that prior to the closing date they will
not request or permit MMI to do any of the following things: Issue any
stock or other securities, including any right or option to purchase or
otherwise acquire any of its stock, or issue any notes or other evidences
of indebtedness not in the usual course of business;
10. Employment Contracts.
Prior to the Effective Date, James Noack and James Umphryes shall have
entered into employment agreements on terms satisfactory to such executives
and their respective counsel and to Finet and its counsel.
11. Delivery of records.
MMI agrees that on or before the Closing Date, it will cause to be
delivered to Finet such corporate records or other documents of MMI in its
possession or control as Finet may reasonably request.
12. Successors.
This Agreement shall be binding upon and inure to the benefit of the
heirs, personal representatives, successors, and assigns of the parties.
13. Post-Closing
13.1. Board Seats.
Finet shall nominate and use its best efforts to elect James
Noack and James Umphryes, currently officers at MMI, or their designees, to
the Board of Directors of Finet.
<PAGE> 76
13.2. Share Registration.
Finet will, at Finet's expense, use its diligent best efforts to
cause the shares issued to the MMI Shareholders pursuant to this Agreement
( and desired to be sold by MMI Shareholders) to be registered with the
Securities and Exchange Commission so as to permit and facilitate their
sale and distribution to the public at the earliest available opportunity
in calendar year 1997. Finet further agrees that it will, at Finet's
expense, cause the MMI Shareholders to be allowed to participate (on the
most favored basis permitted to any other Finet shareholder, whether by
separate registration rights agreement or otherwise) in all other future
registered public sales and distributions of Finet shares. Finet further
acknowledges that the MMI Shareholders may transfer all or any part of the
shares issued to them by Finet pursuant to this Agreement so long as such
transfers are made in compliance with applicable securities laws, including
sales made pursuant to Rules 144 and Regulation S as promulgated by the
Securities and Exchange Commission.
13.3. Indemnification of MMI Shareholders.
James Noack and James Umphryes ("MMI Shareholders") are the sole
shareholders of MMI. Finet agrees to indemnify, defend, and hold harmless
MMI Shareholders against and in respect of any and all claims, demands,
losses, costs, expenses, obligations, liabilities, damages, recoveries, and
deficiencies, including interest, penalties, and reasonable attorneys'
fees, that it shall incur or suffer, which arises, result from, or relate
to any of the following:
a) Activities by Finet or its affiliates or subsidiaries
related to their obligations to perform under this Agreement.
b) Activities by Finet or its affiliates or subsidiaries prior
to the closing of this Agreement.
13.4. Indemnification of Finet Shareholders.
MMI Shareholders agree to indemnify, defend, and hold harmless
Finet against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys' fees, that it
shall incur or suffer, which arises, result from, or relate to any of the
following:
a) Activities by MMI Shareholders or its affiliates related to
their obligations to perform under this Agreement.
b) Activities by MMI Shareholders or its affiliates prior to
the closing of this Agreement.
13.5. Releases.
Finet acknowledges that the MMI Shareholders intend to revoke and
terminate any personal guaranties previously given by them on behalf of MMI
and its affiliates, and that Finet agrees to use its best efforts to secure
releases of those personal guaranties promptly following the merger. In
the event Finet, after reasonable effort is not able to obtain the
aforementioned release of personal guaranties, then Finet shall agree to
indemnify, defend, and hold harmless MMI Shareholders against and in
respect of any and all claims, demands, losses, costs, expenses,
obligations, liabilities, damages, recoveries, and deficiencies, including
interest, penalties, and reasonable attorneys' fees, that it shall incur or
suffer, which arises, result from, or relate to any personal guaranties
given by MMI Shareholders in performance of their duties as officers of
MMI, after the closing date.
14. Remedies.
14.1 Mediation and Arbitration.
Initially all claims and controversies of any kind relating to
this Agreement shall be submitted to mediation pursuant to the services of
an established mediation service with the venue of the mediation being San
Francisco, California.
In the event the matter cannot be disposed of by mediation, all
claims and controversies of any kind relating to this Agreement shall be
finally settled by arbitration before a single arbitrator in San Francisco,
in accordance with rules then obtaining of the American Arbitration
Association. Said arbitration shall be subject to the laws of the State of
California and all parties to this Agreement shall be bound by the decision
in any such arbitration. Judgment upon such arbitration may be entered by
any court of proper jurisdiction. In any such arbitration, the
arbitrators: (i) shall apply the provisions of this Agreement without
varying therefrom in any respect, and they shall not have the power to add
to, modify or change the provisions of this Agreement; (ii) shall make
specific
<PAGE> 77
written findings of fact and law; and (iii) shall apply the law of
California to all substantive issued of law. The foregoing shall not
preclude the parties from seeking injunctive or other equitable relief from
any court of proper jurisdiction pending the outcome of any arbitration.
Attorney fees and costs shall be allocated by agreement in
mediation and by the arbitrators in arbitration. In the event of
injunctive relief, the prevailing party shall be entitled to reasonable
attorney=s fees and costs.
14.2. Litigation Costs.
If any legal action, or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party or parties shall be
entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it or
they may be entitled.
14.3. "As Is" Transaction; Disclaimer of Other Representations and
Warranties.
Except for the matters specifically provided for in this
Agreement, each party acknowledges and agrees that it is entering into the
transactions contemplated by this Agreement solely in reliance on its own
investigation and that each party has had the opportunity to review such
information, books, and records concerning the other party and its business
as the party and its advisors have deemed necessary or desirable for such
investigation. Each party further acknowledges that no representations or
warranties of any kind other than those expressly provided for in this
Agreement have been made by the other party. ALL OTHER WARRANTIES, EITHER
EXPRESS, IMPLIED OR STATUTORY, ARE DISCLAIMED.
14.4. Limitation of Liability.
IN NO EVENT SHALL EITHER PARTY OR ITS SHAREHOLDERS, DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, SUCCESSORS, NOMINEES OR ASSIGNS BE LIABLE FOR
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES INCLUDING LOSS OF PROFITS, OR
FOR PUNITIVE DAMAGES ARISING OUT OF OR CONNECTED WITH THIS AGREEMENT.
15. Governing Laws.
This Agreement shall be construed in accordance with, and governed by,
the laws of State of California as applied to contracts that are executed
and performed entirely in California.
16. Severability.
If any provision of this Agreement is held invalid or unenforceable by
any court of final jurisdiction, it is the intent of the parties that all
other provisions of this Agreement by construed to remain fully valid,
enforceable, and binding on the parties.
Executed in multiple counterparts, each of which shall be deemed a
duplicate original, as of the date first above written.
Finet Holdings Corporation
By: /s/ L. Daniel Rawitch By:
/s/ James W. Noack
L. Daniel Rawitch, CEO James W. Noack, President
PREFERENCE AMERICA MORTGAGE NETWORK
By: /s/ James A. Umphryes
James A. Umphryes, Director
<PAGE> 78
Consulting Agreement
This Consultation Agreement (the "Agreement") is entered into in Contra
Costa County, California, as of the first day of January, 1997, by and
between Finet Holdings Corporation ("Finet"), a Delaware corporation, and
James Umphryes ("Consultant"), who agree as follows:
1. Description of Services
Consultant shall provide such consulting services as shall be requested
from time to time during the Consultation Period by James W. Noack,
President of Finet's Monument Mortgage, Inc., ("MMI") subsidiary, and
for such other consulting assignments as may be agreed upon in writing
between Consultant and Finet. Consulting services shall be provided
from Consultant's place of business, currently in Walnut Creek and from
such other location as may be agreed upon by Consultant and Finet from
time to time.
2. Term of Consultation
The Consulting Period shall be for an initial fixed term of three years
commencing January 1, 1997 and concluding on December 31, 1999.
Thereafter, the Consulting Period may be extended and altered upon
mutual agreement of the parties.
3. Competitive activities
During the Consulting Period, Consultant shall not actively participate
in any business directly in competition with MMI without the prior
consent of MMI. Permission for any activity which is not harmful to MMI
shall not be unreasonably withheld.
4. Compensation
As compensation for the services to be rendered by Consultant hereunder
during the Consulting Period, Finet shall cause MMI to pay Consultant
$15,000 per month. Consultant shall be paid once each month, in
advance.
5. Expenses
Finet shall cause MMI to reimburse Consultant, upon submission of
documentation in accordance with MMI's usual policy for consultants, for
reasonable business expenses incurred on behalf of MMI by Consultant.
Consultant agrees not to incur any expenses in excess of $100 without
prior approval from MMI.
6. Confidential Information
a.Consultant recognizes that, during the course of this Consultation
Period and as a direct result of his consultation work, MMI will cause
him to be exposed to certain nonpublic, confidential information, the
disclosure of which to third parties would cause competitive injury to
MMI. Such confidential information includes but is not limited to
MMI's investment plans or strategies, trade secrets, sources of
supply, customer lists, lists of potential customers, customer or
consultant contracts and the details thereof, pricing policies,
operational methods, marketing and merchandising plans or strategies,
business acquisition plans, personnel acquisition plans, unannounced
products and services, research and development activities, processes,
formulas, methods, techniques, technical data, know-how, inventions,
designs, financial or accounting data, inventory reports, production
schedules, cost and sales data, strategies, forecasts, and all other
information not publicly available pertaining to the business of
Employer or any of its affiliates. Such information is hereinafter
referred to as Confidential Information.
b.Confidential information shall not include (i) any information which
is or becomes publicly available other than through breach of this
Agreement, or (ii) any information which is or becomes known or
available to Consultant on a non-confidential basis and not in
contravention of applicable law from a source which is entitled to
disclose such information to Consultant.
<PAGE> 79
c.Consultant agrees that he will not divulge Confidential Information to
any person, directly or indirectly, except to MMI or its officers and
agents, or as reasonably required in connection with his duties on
behalf of MMI. During the Consultation Period, Consultant further
agrees not to use except on behalf of MMI, any Confidential
Information acquired by Consultant.
7. Voice Mail and Electronic Mail
All voice mail and electronic mail on MMI's telephone or computer
systems are the property of MMI and shall be non-personal, non-private
and non-privileged to consultant, and upon request Consultant shall
disclose to MMI all codes and passwords necessary for MMI to access such
voice mail and electronic mail.
8. Cooperation
As a condition of his Consulting Agreement, Consultant agrees that he
will not disrupt, damage, impair or interfere with the business of MMI,
such as by interfering with the duties of MMI's employees, disrupting
relationships with MMI's customers, agents, representatives, or vendors,
or otherwise.
9. Termination
a.Employer may terminate this Agreement immediately upon written notice
to Consultant prior to its expiration date only for just cause. For
Purposes of this section, "just cause" is limited to convictions of
fraud or grand theft, or drunkenness or use of illegal narcotics on
MMI's premises, or for physical assault of anyone or any damage to
property on MMI's premises.
b.In the event of termination pursuant to this paragraph, Consultant
agrees that he will return to MMI all records, papers and computer
software and data, and any copies thereof relating to the Confidential
Information. Consultant acknowledges that all such papers, records,
computer software and data, or copies therof are and remain the
property of MMI.
c.At the time of termination pursuant to this paragraph, MMI will
conduct an exit interview wherein Consultant will certify that he has
returned to MMI all tangible Confidential Information disclosed to
him.
10. Assignment
The rights and liabilities of the parties hereto shall bind and inure to
the benefit of their respective successors, executors and
administrators, as the case may be; provided that, as MMI has
specifically contracted for Consultant's services, Consultant may not
assign or delegate his obligations under this agreement either in whole
or part without the prior written consent of MMI except tht Consultant
may assign this contract to a not yet formed corporation, partnership or
other entity in which Consultant chooses to organize his post employment
activities. MMI may assign its rights and obligations to a successor in
interest to MMI, provided such successor assumes all obligations and
liabilities hereunder.
11. Severability of Provisions
In the event any provision of this Agreement is held to be illegal,
invalid or unenforceable under any present or future law, (a) such
provision will be fully severable, (b) this Agreement will be construed
and enforced as if such illegal, invalid, or unenforceable provision had
never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected
by the illegal, invalid, or unenforceable provision, or by its severance
here from, and (d) in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as a part of this Agreement
a legal, valid and enforceable provision as similar in terms to such
legal, invalid or unenforceable provision as may be possible.
12. Injunctive relief
Consultant acknowledges that the breach of a covenant contained in
Section 3 and/or Section 6 of this Agreement may cause irreparable
damage to employer, the exact amount of which will be difficult to
ascertain, and that the remedies at law for any such breach will be
inadequate. Accordingly, Consultant acknowledges that the breach of a
covenant contained in Section 3 and/or Section 6 of this Agreement, in
addition to any other remedy that may be available at law or in equity,
Employer shall be entitled to specific performance and injunctive
relief.
<PAGE> 80
13. Arbitration
All claims and controversies of any kind relating to this Agreement
shall be finally settled by binding arbitration before a single
arbitrator in Walnut Creek, CA, in accordance with the rules then in
effect from the American Arbitration Association. All parties to this
Agreement shall be bound by the decision in any such arbitration, and
judgment upon such arbitration may be entered by any court of proper
jurisdiction. Attorney's fees and costs shall be allocated by the
arbitrator in arbitration.
14. Notices
Any notice provided for in this Agreement must be in writing and must be
either personally delivered, or mailed by certified mail (postage
prepaid and return receipt requested). Or sent by reputable overnight
courier service, to the recipient at the address below indicated:
To Consultant: James A. Umphryes
3741 Waterford Lane
Walnut Creek, CA 94598
To MMI and Finet: Board of Directors
Finet Holdings Corporation
3021 Citrus Circle, #150
Walnut Creek, CA 94598
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the
sending party. Any notice under this Agreement will be deemed to have
been given when so delivered or sent, or if mailed, five days after so
mailed.
15. Entire Agreement: Amendment and Waivers:
This agreement and any other agreement or document referred to herein
constitute the complete final and exclusive statement of the agreement
among the parties pertaining to the Consultation Agreement, and
supersede all prior agreement, understandings, negotiations and
discussions, whether oral or written, of the parties. No amendment,
supplement, modification, rescission or waiver of this Agreement shall
be binding unless executed in writing by the parties. No waiver of any
of the provisions of this Agreement shall be deemed or shall constitute
a continuing waiver unless otherwise expressly provided. the parties
expressly acknowledge that they have not relied upon any prior
agreements, understandings, negotiations and discussions, whether oral
or written.
16. Choice of Law
The rights and duties of the parties will be governed by the laws of the
State of California, excluding any choice-or-law rules tht would require
the application of laws of any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to duly
executed as of the day and year first above written.
Finet Holdings Corporation Consultant
By: /s/ L. Daniel Rawitch By: /s/ James A. Umphryes
Its: C.E.O
<PAGE> 81
The Company has five wholly owned subsidiaries: Property Transaction
Network, Preference America Mortgage Network and Monument Mortgage, Inc.,
Finet Corporation and FWC Shell Corporation, 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.
Finet Corporation and FWC Shell Corporation, Inc. and its subsidiaries are
inactive. As a result of the reverse acquisition of Monument Mortgage, Inc.
by Finet, Finet Correspondent, Inc., a wholly owned inactive subsidiary,
became Monument Mortgage, Inc.
<PAGE> 82
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 of our independent auditors report dated
August 13,1997 in your 1997 Annual Report on Form 10-K.
REUBEN E. PRICE & CO., C.P.A.'S
/s/ Reuben E. Price & Co.
August 13, 1997
<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> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 603,296
<SECURITIES> 0
<RECEIVABLES> 4,488,621
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,939,812
<PP&E> 2,809,514
<DEPRECIATION> 1,712,848
<TOTAL-ASSETS> 14,249,892
<CURRENT-LIABILITIES> 12,190,910
<BONDS> 0
0
0
<COMMON> 312,414
<OTHER-SE> 728,656
<TOTAL-LIABILITY-AND-EQUITY> 14,249,982
<SALES> 0
<TOTAL-REVENUES> 4,366,232
<CGS> 0
<TOTAL-COSTS> 7,846,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,134,581
<INCOME-PRETAX> (3,480,355)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,480,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 312,090
<CHANGES> 0
<NET-INCOME> (3,186,265)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
