<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
------------------------
Commission File Number: 0-18108
------------------------
FINET HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of
incorporation or organization)
3021 CITRUS CIRCLE
WALNUT CREEK, CA 94598
(Address of principal executive office)
94-3115180
(IRS Employer Identification Number)
(510) 988-6550
(Registrant's telephone number, including area code)
JANUARY 1 TO DECEMBER 31
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements within the past 90 days.
Yes 'X' No.
The number of shares outstanding of each of the issuer's classes of common
stock was 18,811,823 shares of common stock, par value $.01, as of January
31, 1997.
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<PAGE> 2
FINET HOLDINGS CORPORATION
INDEX
<TABLE>
Item Description
Page
- ---- -------------------------------------------------------------------
- ----
<S> <C>
<C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Unaudited Balance Sheet............................................
3
January 31, 1997
Unaudited Statements of Operations
Three Months Ended January 31, 1997 and 1996.....................
4
Nine Months Ended January 31, 1997 and 1996......................
5
Unaudited Statements of Cash Flow..................................
6
Nine Months Ended January 31, 1997 and 1996
Notes to Unaudited Financial Statements............................
8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................
14
PART II - OTHER INFORMATION
1. Legal Proceedings..................................................
19
2. Changes in Securities..............................................
19
6. Exhibits and Reports on Form 8-K...................................
20
Signatures.........................................................
21
<PAGE> 3
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
</TABLE>
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
January 31,
1997
------------
<S> <C>
ASSETS
Cash......................................................... $ 216,753
Accounts receivable from sales of mortgage
loans and servicing rights................................. 4,139,387
Mortgage loan servicing advances and
other receivables.......................................... 877,700
Notes receivable............................................. 72,000
Mortgages held for sale ................................. 6,964,472
Owned servicing rights....................................... 571,298
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,484,532..................... 1,098,919
Other assets................................................. 669,803
------------
Total assets............................................. $14,610,332
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line of credit (Note 6)............................ $10,755,526
Accounts payable............................................. 401,411
Note payable and capitalized leases (Note 6)................. 1,149,600
Accrued expenses and other liabilities....................... 995,760
Convertible debenture, net (Note 6).......................... 935,803
Liabilities subject to compromise (Note 11).................. 909,346
------------
Total liabilities........................................ 15,147,446
------------
Stockholders' equity:
Preferred stock, $.01 par value, (100,000 shares
authorized, 0 shares issued and outstanding)............... $ -
Common stock, $.01 par value, (30,000,000 shares
authorized, 18,811,823 shares issued and outstanding)...... 252,902
Paid in capital.............................................. 380,878
Accumulated deficit.......................................... (1,170,894)
------------
Total stockholders' equity (deficit)..................... (537,114)
------------
Total liabilities and stockholders' equity.............. $14,610,332
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4I
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
January 31,
-------------------------
- -
1997 1996
------------ -----------
- -
<S> <C> <C>
REVENUES
Gain on sale of servicing rights.(Note 10)...... $ 1,305,344 $ 1,327,047
Loss on sale of mortgage loans.................. (275,385)
(776,095)
Interest income................................. 339,843 599,425
Loan servicing fees............................. 167,518 244,167
Retail broker fees.............................. 11,380 1,092
Marketing leads................................. 40,552 -
Other........................................... (3,023) 12,184
------------ -----------
- -
Total revenues.............................. 1,586,229 1,407,820
EXPENSES
Compensation and employee benefits.............. 767,655 590,889
Interest expense................................ 345,300 562,485
Office.......................................... 154,063 192,591
Marketing....................................... 164,514 65,843
Professional fees............................... 142,504 94,063
Depreciation and amortization................... 112,901 75,823
Occupancy....................................... 85,636 55,849
Insurance....................................... 7,806 13,146
Data processing services........................ 24,217 18,968
Other........................................... 330,397 25,068
------------ -----------
- -
Total expenses.............................. 2,134,993 1,694,725
------------ -----------
Loss before income taxes and extraordinary
gain on liabilities subject to compromise..... (548,764)
(286,905)
Income tax expense.............................. - -
------------ -----------
- -
Net loss before extraordinary gain on
liabilities subject to compromise.............. (548,764)
(286,905)
Extraordinary gain on liabilities subject to
compromise (Note 11).......................... 33,026 -
NET LOSS AFTER EXTRAORDINARY GAIN ON
LIABILITIES SUBJECT TO COMPROMISE............. $ (515,738) $
(286,905)
============
============
NET LOSS PER COMMON SHARE (Note 4).............. $(.04)
$(.03)
============
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 4).......................... 13,605,912 8,400,000
============
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
January 31,
-------------------------
- -
1997 1996
------------ -----------
- -
<S> <C> <C>
REVENUES
Gain on sale of servicing rights................ $ 3,219,951 $ 2,853,801
Loss on sale of mortgage loans.................. (1,496,658)
(986,033)
Interest income................................. 927,910 1,640,407
Loan servicing fees............................. 529,822 751,609
Retail broker fees.............................. 30,774 2,497
Marketing leads................................. 18,350 -
Other........................................... 62,879 32,210
------------ -----------
- -
Total revenues.............................. 3,293,028 4,294,491
EXPENSES
Compensation and employee benefits.............. 2,059,056 1,395,939
Interest expense................................ 953,754 1,488,979
Office.......................................... 662,916 540,693
Marketing....................................... 269,842 187,741
Professional fees............................... 338,271 271,596
Depreciation and amortization................... 295,653 225,891
Occupancy....................................... 193,387 165,620
Insurance....................................... 23,321 32,643
Data processing services........................ 70,355 60,362
Other........................................... 366,236 39,795
------------ -----------
- -
Total expenses.............................. 5,232,791 4,409,259
------------ -----------
- -
Loss before income taxes and extraordinary
gain on liabilities subject to compromise..... (1,939,763)
(114,768)
Income tax expense.............................. - -
------------ -----------
- -
Net loss before extraordinary gain on
liabilities subject to compromise............. (1,939,763)
(114,768)
Extraordinary gain on liabilities subject to
compromise (Note 11).......................... 33,026 -
NET LOSS AFTER EXTRAORDINARY GAIN ON
LIABILITIES SUBJECT TO COMPROMISE............. $(1,906,737) $
(114,768)
============
============
NET LOSS PER COMMON SHARE (Note 4).............. $(.19)
$(.01)
============
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING(Note 4)........................... 10,135,304 8,400,000
============
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
January 31,
1997
1996
------------- --------
- -----
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (1,906,737) $
(114,768)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................... 295,653
225,891
Extraordinary gain on liabilities subject to
compromise....................................... (33,026)
- -
Provision for losses on loans and real
estate owned..................................... 49,407
(58,737)
Loss on disposition of property, plant and
equipment........................................ 9,052
3,179
Changes in operating assets and liabilities:
Decrease (increase) in receivables from sales
of mortgage loans and loan servicing rights...... 7,286,043
(238,131)
Mortgage loans originated......................... (278,512,500)
(375,391,740)
Mortgage loans sold............................... 282,173,357
366,540,570
Increase in originated mortgage servicing
rights, net...................................... (829,111)
(665,311)
Decrease (increase) in mortgage loan servicing
advances and other receivables................... 181,224
(276,543)
Increase in prepaids and other assets............. (430,622)
(126,478)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities................... (155,603)
210,863
------------- --------
- -----
Net cash provided by (used in) operating activities 8,127,137
(9,891,205)
------------- --------
- -----
Cash flows used in investing activities:
Purchase of mortgage servicing rights.............. (286,263)
- -
Purchase of furniture, fixtures and equipment...... (54,432)
(65,403)
Proceeds of sale of life insurance to officer...... 165,630
- -
Creditors' settlements paid with cash.............. (26,365)
- -
Purchase of common stock........................... (180,000)
- -
Acquisition of MMI and PAMN........................ 50,162
- -
------------- --------
- -----Net cash used in investing activities............... (331,268)
(65,403)
------------- --------
- -----
<PAGE> 7
Cash flows from financing activities:
Proceeds from issuance of common stock............. 2,825,000
- -
Net (decrease) increase in warehouse borrowings.... (8,976,181)
9,706,547
Proceeds from advances on note payable and line
of credit......................................... 1,850,000
2,650,000
Principal payments on note payable and line of
credit............................................ (2,208,441)
(2,250,000)
Proceeds of life insurance cash surrender value
loan.............................................. 158,983
- -
Repayment of life insurance cash surrender value
loan.............................................. (158,983)
- -
Cash distributed to former stockholders of MMI..... (1,040,008)
(106,250)
Proceeds from notes payable to officers............ 724,176
- -
Repayment of notes payable to officers............. (709,176)
- -
Proceeds of pre-acquisition advances to affiliates. (1,377,309)
- -
Repayment of pre-acquisition advances repaid by
affiliates........................................ 660,136
- -
------------- --------
- -----
Net cash (used in) provided by financing activities (8,251,803)
10,000,297
------------- --------
- -----
(Decrease) Increase in cash....................... (455,934)
43,689
Cash at beginning of period....................... 672,687
392,210
------------- -------
- ------
Cash at end of period............................. 216,753
435,899
=============
=============
Non-cash investing and financial activities (Note 12)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE 8
FINET HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. GENERAL
REPORTING ENTITY
Finet Holdings Corporation ("Finet" or the "Company") 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
MMI is considered the acquiring corporation for accounting and financial
statement presentation purposes and MMI's historical financial statements
are deemed to be the historical financial statements of the reporting
entity.
BUSINESS
Finet is a consumer oriented, technology and residential real estate
services integrator and marketing company that, through its wholly-owned
subsidiaries, MMI and PreferenceAmerica Mortgage and
PreferenceAmericaNetwork ("PAMN"), engages in the business of originating,
selling and servicing wholesale and retail mortgage loans and offering, and
offers to independent mortgage brokers support services such as call center
operations, video-conferencing and other related homeowner services. The
Company's other subsidiaries, Finet Corporation and FWC Shell Corporation
and its subsidiaries are all dormant at this time.
Note 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions of Form 10-QSB and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements presentation. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim period have been
included. Operating results for the three and nine months ended January
31, 1997 are not necessarily indicative of the results that may be expected
for the year ending April 30, 1997. The accompanying consolidated
financial statements and the information included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the consolidated financial
statements and related notes of the Company for the year ended April 30,
1996. (See Form 8-K filed May 14, 1997)
The consolidated financial statements of the Company include the accounts
of Monument and itsMI, PAMN and their wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Note 3. ACQUISITIONS
On December 31, 1996, the Company acquired all of the outstanding common
stock of MMI, a non-public mortgage banker, in exchange for 8.4 million
common shares and a cash payment of $1 million. For accounting purposes,
the cash payment is deemed a dividend payment to the shareholders of MMI
and the acquisition has been treated as a recapitalization of MMI with MMI
as the acquiror (reverse acquisition). 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 essentially
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.
The purchase was completed on December 31, 1996Also on December 31, 1996,
the Company acquired all of the outstanding stock of PAMN in exchange for a
$250,000 cash payment. PAMN is a California mortgage broker which
commenced operations February 1, 1996. Prior to the acquisition, PAMN
acquired the name, marketing concepts, logo and capabilities of the
Property Transaction Network ("PTN"). The acquisition of PAMN is being
accounted for as a purchase and the results of its operations are included
in
<PAGE> 9
the consolidated operations of the Company for the period January 1, 1997
through January 31, 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>
<CAPTION>
Nine Months Ended
January 31, 1997
-----------------
<S> <C>
Net sales $ 3,479,111
Net income/(loss) (2,569,412)
Income per common and common equivalent share $ (0.25)
</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.
Note 4. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number
of shares outstanding during the periods. The effects of common stock
equivalents has not been included because they would have been anti-
dilutive during all periods reported. The weighted average number of
shares outstanding for net loss per share was 13,605,912 and 8,400,000 for
the three months ended January 31, 1997 and 1996, respectively, and
10,135,304 and 8,400,000 for the nine months ended January 31, 1997 and
1996, respectively. The loss per common share computations, and the
weighted average common shares outstanding, for the three and nine month
periods ended January 31, 1997, were adjusted to reflect the effects of the
1:2 reverse stock split that occurred in October 1996.
Note 5. MORTGAGE LOAN SERVICING
The Company's origination and servicing activity is concentrated largely
within California. The Company's servicing portfolio is primarily
comprised of conventional mortgage loans which are not included in the
accompanying balance sheet and which had an outstanding principal balance
of $220169 million, representing 1,629 and 2,946178 loans, at January 31,
1997. The majority of loans are securitized through Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC")FNMA and FHLMC programs on a nonrecourse basis whereby foreclosure
losses are generally the responsibility of the investor and not the
Company. In connection with mortgage loan servicing activities, the
Company segregates escrow and custodial funds in a separate trust account
and excludes this balance of $2,468,433 at January 31, 1997 from the
accompanying balance sheet. The Company is required to maintain separate
accounting records for its escrow and custodial cash account and the
related liabilities.
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $220169 million was pledged as collateral to lenders as of
January 31, 1997.
The Company has issued various representations and warranties associated
with whole loan and bulk servicing sales which are standard in the
industry. These representations and warranties may require the Company to
repurchase defective loans as defined per the applicable servicing and
sales agreements. The Company experienced no significant losses during the
three andor nine months ended January 31, 1997 and 1996 with respect to
these representations and warranties.
As a routine part of servicing operations, the servicing portfolio contains
a number of loans that are in the process of foreclosure, or that have been
foreclosed upon by the Company (real estate owned). The dollar amount of
loans in foreclosure and real estate owned represented 3.4% and 1.4% of the
outstanding servicing portfolio balance as of January 31, 1997 and 1996,
respectively. The losses (recoveries) arising from foreclosed loans and
real estate owned were as follows:
<PAGE> 10
<TABLE>
<CAPTION>
Quarters Ended January 31, Nine Months Ended
January 31,
-------------------------- ------------------
- -----------
1997 1996 1997
1996
----- ----- ----- --
- ---
<S> <C> <C> <C> <C>
Losses (recoveries) $69,444 $ (4,209) $49,407
$(50,641)
</TABLE>
The Company carried fidelity bond coverage of $950,000 and errors and
omission coverage of $950,000 as of January 31, 1997.
Note 6. DEBT
The Company's warehouse borrowings as of January 31, 1997 were
approximately $9 million less than at January 31, 1996. The reduction is
directly attributable to the approximate $10.9 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 $0 at January 31, 1997 and 1996.
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, accrued interest and note 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 subsequent to January 31, 1997 and a
cash payment of $50,000 in January, 1997.
At January 31, 1997, the Company had one warehouse line of credit available
with a $10 million committed and an uncommitted $25 million gestation
facility expiring August 31, 1997. The warehouse line of credit bears
interest at the Federal Funds rate plus a variable spread, and is
collateralized by various combinations of mortgage loans held for sale,
receivables from sales of mortgage loans, other assets of the Company and
the personal guarantees of the Company's stockholdersformer shareholders of
MMI. The maximum amount outstanding under the warehouse line at any month
end during the nine months ended January 31, 1997 was $20 million3 million.
The weighted average interest rate during the nine months ended January 31,
1997 was 6.45% and 7.19%. The Warehouse Borrowing Agreements contain
various financial covenants including net worth computed in accordance with
generally accepted accounting principles, current ratio and tangible net
worth leverage ratio requirements. Should an event of default occur, as
defined in the credit agreement, outstanding principal and interest would
technically be due on demand. (See Notes 7 and 13)
Of notes payable, $791,667 is due in three and one quarter years, requires
monthly payments of interest at prime plus 0.625%, is secured by all
mortgage loans held for sale and receivables from sales of mortgage loans
which have not been otherwise pledged to secure the warehouse lines of
credit, and the pledging of FHLMC servicing rights. The remaining balance
of $106,525 is a pre-acquisition debt of FHC. In April, 1997, $100,000 of
the FHC debt and accrued interest was settled by the issuance of 233,000
shares of common stock.
From March, 1996 through October, 1996, the Company entered into several
capital leases to finance the purchase of equipment. The original
principal balance of the leases was $312,809. The lease terms were for 36
months. As of January 31, 1997, the present value of the lease obligations
was $251,408.
In fiscal year 1995, the Company obtained a revolving line of credit, with
a maximum borrowing limit of $1 million, of which $550,000 and $950 was
outstanding at January 31, 1997. The line of credit bears interest at the
highest prime rate quoted by the First National Bank of Chicago plus 0.625%
and expires on August 31, 1997. The line of credit is secured by mortgage
loans held for sale, receivables from sales of mortgage loans and a minimum
level of servicing assets. (See Note 7)
<PAGE> 11
Note 7. DEBT COVENANTS
At January 31, 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 were 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 formally notified and, to date, has not
restricted the Company's borrowing ability. The Company and the lender are
in the process of renegotiating the existing debt covenants and the Company
has no reason to believe that the negotiations will not be successful.
However, no assurances can be given that the credit facilities will be
renewed.
Note 8. INCOME TAXES
Prior to December 31, 1996 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 the responsibility of the
stockholders and, as such, the Corporation was not subject to federal
income taxes. The Corporation was subject to a state financial corporation
tax. No provision or benefit was recorded for the three months and nine
months ended January 31, 1997 and 1996.
Statement of 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.
At January 31, 1997, the Company has US federal and state NOL's of
approximately $21 million which will expire beginning in the fiscal year
2004. Due to ownership changes, virtually all of the US 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.
Note 9. COMMITMENTS AND CONTINGENCIES
Loan Sale Commitments - The Company has entered into optional and mandatory
forward commitments to deliver mortgage loans of $8.5 million as of January
31, 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 that were committed
to the borrower, amount to $10.7 million as of January 31, 1997.
Commitments to fund loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Interest rate risk is mitigated by the use of forward contracts to sell
loans to investors.
Contingencies - Certain claims arising in the ordinary course of business
have been filed against the Company, including one claim by two previous
stockholders of the CompanyMMI that was resolved on December 31, 1996. The
claim sought a rescission of prior contracts for the sale of plaintiff's
stock to the Company's currentMMI's prior stockholders to restore them to
their former status as minority stockholders of the CompanyMMI. This claim
was settled during the fiscal quarter ended January 31, 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 condition.
<PAGE> 12
Note 10. GAIN ON SALE OF SERVICING RIGHTS
In January 1997, the Company sold approximately $58 million of loans in the
servicing portfolio and recognized a gain of $581,777.
Note 11. LIABILITIES SUBJECT TO COMPROMISE AND EXTRAORDINARY GAIN
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 $909,346 at January 31, 1997. The reduction of this
liability gave rise to an extraordinary gain of $33,026 during January,
1997.
Note 12. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents non-cash investing and financing activities
for the periods ended January 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash paid during the period for:
Interest on line of credit and other borrowings 965,510
1,488,979
Income taxes -
- -
Distributions to prior shareholders:
Distributions declared to prior shareholders 740,695 4
47,442
Distributions paid to shareholders (1,040,008)
(106,250)
----------- --------
- ---
Change in distributions payable to shareholders (299,313)
341,192
Assets and lease obligations capitalized 165,221
- -
Common stock issued for creditor settlements 115,045
- -
Common stock issued for interest and lender fees 259,557
- -
Common stock issued in exchange for debt 1,170,000
- -
Assets acquired in acquisition:
Cash 50,162
- -
Furniture, fixtures and 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>
Note 13. SUBSEQUENT EVENTS
Stockholders' Equity - During the Company's fourth fiscal quarter, ending
April 30, 1997, the Company raised an additional $4,601,038 in private
placements through the sale of 4,991,250 shares of its common stock. Also
during the fourth quarter, the Company issued an additional 4,951,207
shares of common stock for debt and note payable conversions and creditors'
settlements, pursuant to an agreement with pre-acquisition creditors,
exercise of common stock rights and exercise of stock options. The amount
of capital thus raised was $1,274,792.
<PAGE> 13
Gain on Liabilities Subject to Compromise - The Company recognized an
additional extraordinary gain on creditors' settlements of $279,064 in the
fourth fiscal quarter ended April 30, 1997.
Formation of New Company - In February, 1997, the Company established and
incorporated a wholly-owned subsidiary, Property Transaction Network
("PTN"). PTN provides a variety of services, including access to the
Company's mortgage banking services, to Realtors and mortgage loan
borrowers through electronic medium such as the Internet. PTN became
active in the first quarter of the fiscal year ending April 30, 1998.
Gain on Sale of Servicing Rights - In February, 1997, the Company sold
approximately $45 million of loans in the servicing portfolio. The Company
recognized a gain of $455,081 on the sale.
Borrowing Arrangements - 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 January 31, 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 arrangements are expected to be
renegotiated and renewed. However, there can be no assurance that the
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 $1,101,000 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,
1997, to maintain a value equal to $808,000 at the time, to a maximum
additional shares issuable to 1,414,000 shares.
REOS Acquisition - One 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 who's 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 scheduled for initial introduction in August,
1997.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and as such may involve known and unknown risks and
uncertainties and other factors that may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
GENERAL
Finet is a consumer oriented, technology and residential real estate
services integrator and marketing company that, through its wholly-owned
subsidiaries, MMI and PreferenceAmerica Mortgage and
PreferenceAmericaNetwork ("PAMN"), engages in the business of originating,
selling and servicing wholesale and retail mortgage loans and offering, and
offers to independent mortgage brokers support services such as call center
operations, video-conferencing and other related homeowner services. The
Company's other subsidiaries, Finet Corporation and FWC Shell Corporation
and its subsidiaries are all dormant at this time.
On December 31, 1996, the Company acquired all of the outstanding common
stock of MMI, a non-public mortgage bank, in exchange for 8.4 million
common shares and a cash payment of $1 million. For accounting purposes,
the cash payment is deemed a dividend payment to the shareholders of MMI
and the acquisition has been treated as a recapitalization of MMI with MMI
as the acquirer (reverse acquisition). 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 essentially
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.
The purchase was completed on December 31, 1996Also on December 31, 1996,
the Company acquired all of the outstanding stock of PAMN in exchange for a
$250,000 cash payment. PAMN is a California mortgage broker which
commenced operations February 1, 1996. Prior to the acquisition, PAMN
acquired the name, marketing concepts, logo and capabilities of the
Property Transaction Network ("PTN"). 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 January 31, 1997. Unaudited pro forma information giving
effect to the acquisition of PAMN as if the acquisition took place May 1,
1996 is as follows:
During the quarter and nine months ended January 31, 1997, the Company's
primary business was mortgage banking under the auspices of MMI. The
Company's other businesses were in a start up mode in fiscal 1997 and made
no significant contributions to revenue, although they incurred some start
up costs. Therefore, during the periods ended January 31, 1997 and 1996,
results of operations varied primarily with the volume of loans originated
and sold.
As the Company's operations are expanding and changing rapidly, the results
of operations for the quarter and nine month period ended January 31, 1997
are not necessarily indicative of results that can be expected in future
periods.
<PAGE> 15
For the Quarter Ended January 31, 1997 Compared to Quarter Ended January
31, 1996
At this time, the Company is in the process of implementing a growth plan
which will expand the scope of its products and offerings. The 1997
periods include some costs (primarily personnel) in connection with this
plan. The Company reported a net loss of $515.7 thousand for the third
quarter ended January 31, 1997, compared to a net loss of $286.9 thousand
for the third quarter ended January 31, 1996. The increase in the net loss
in 1997 is primarily the result of an increase in other expenses of $300
thousand; for the purchase of X.attributable largely to an increase of
$73.7 thousand in expenses incurred on foreclosed loans and loans in
bankruptcy held in the servicing portfolio, an increase in miscellaneous
expense of approximately $204.5 thousand attributable primarily to the
settlement of outstanding litigation, the write-off of an unrecoverable
amount owing from a bulk sale of servicing in a prior year.
REVENUES
Revenues for the quarter ended January 31, 1997 increased 13% to $1.6
million from $1.4 million for the quarter ended January 31, 1996. The
increase in revenues was attributable to improvement in loss on sale of
mortgage loans.
The total gain or (loss) on the sale of mortgages is evaluated 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 third fiscal quarter of 1997 was $448 thousand compared to
$551 thousand in the third fiscal quarter of 1996, a decrease of 19%.
Over the same time periods, total loan volume decreased 47% from $160
million in 1996 to $85 million in 1997. The margin earned on sales of
mortgage loans/servicing rights improved from 34 basis points in 1996 to 53
basis points in 1997.
Net interest income (interest earned net of interest charges) This change
between the third quarters and the nine months ended is not material.does
not show a material change for the third quarter of 1997 from the same
period in 1996. However, the individual components of net interest income
each decreased by approximately 40% in 1997 as compared to 1996. The
decrease is due to the 47% decrease in loan volume (and consequently the
number of mortgages held and financed in inventory) from 1996 to 1997.
Loan servicing fee revenues decreased in the quarter ended January 31, 1997
by 31% to $167.5 thousand from $244.2 thousand in the prior year quarter.
The decrease is a result of ...an approximate 40% decline in 1997 from 1996
in the average outstanding balance of loans serviced for others. The
portfolio balance declined due to several bulk sales of servicing assets
that occurred between January 31, 1996 and January 31, 1997.
EXPENSES
Salaries and employee benefits expenses increased 30% to $767.7 thousand
for the quarter ended January 31, 1997 from $590.9 thousand for the quarter
ended January 31, 1996. The increase is due to
adding personnel in 1997 as the Company started to implement its
Interest expense Not material as a net figure - May want to explain on
a gross level??growth plan, as well as to the impact of consolidating the
operating results of Finet, MMI and PAMN for the month of January, 1997.
Pre-acquisition (December 31, 1996 and prior) results are for MMI only.
Interest expense decreased 39% or $217.2 thousand to $345.3 thousand for
the three months ended January 31, 1997 from $562.5 thousand for the three
months ended January 31, 1996. The decrease is due to the 47% decrease in
loan volume (and consequently the number of mortgages held and financed in
inventory) from 1996 to 1997.
<PAGE> 16
Other expenses, which is comprised of XXXconsists of various items
including expenses related to the servicing portfolio, bank charges and
processing fees, clerical errors and losses and other, increased 972% to
$330.4 thousand for the quarter ended January 31, 1997 as compared to $30.8
thousand for the comparable quarter in 1996. This increase is a result of
...ttributable largely to an increase of $73.7 thousand in expenses
incurred on loans and loans in bankruptcy held in the servicing portfolio,
an increase in miscellaneous expense of approximately $204.5 thousand
attributable primarily to the settlement of outstanding litigation, the
write-off of an unrecoverable amount owing from a bulk sale of servicing in
a prior year, and the recognition of the cost of discontinuing the
Company's operational facility in Denver in fiscal year 1997.
RESULTS OF OPERATIONS
Nine Months Ended January 31, 1997 Compared to Nine Months Ended January
31, 1996
GENERAL
The Company reported a net loss of $1.9 million for the nine months ended
January 31, 1997, compared to a net loss of $114.8 thousand for the nine
months ended January 31, 1996. The increase in the net loss is primarily
the result of a decrease in revenues of $1.0 million and an increase in
personnel expenses of $663.1 thousand.
REVENUES
Revenues for the nine months ended January 31, 1997 decreased 23% to $3.3
million from $4.3 million for the nine months ended January 31, 1996. The
decrease in revenues was primarily attributable to a drop in funding volume
of $97 million from 1996 to 1997, or 26%.
The total gain or (loss) on sale of mortgage loans is evaluated by
combining the Gain on Sale of Servicing Rights with the Loss on Sale of
Mortgage Loans, excluding any gains on sales of servicing rights earned
from bulk sales of servicing originated in prior years. The total gain on
sale of mortgages thus calculated was $1.1 million for the nine months
ended January 31, 1997 as compared to $1.9 million for the nine months
ended January 31, 1996, a decrease of 42%. Funding volume dropped 26% in
1997 as compared to 1996 from $375.4 million in 1997 to $278.5 million in
1996. The remainder of the decrease in revenue is attributable to a drop
in the margin on loans sold from approximately 51 basis points in 1996 to
approximately 39 basis points in 1997.
Interest income decreased for the nine months ended January 31, 1997 by 43%
to $927.9 thousand from $1,6 million for the nine months ended January 31,
1996. The decrease is largely attributable to a 26% decrease in loans
funded and held in inventory from 1996 to 1997. As well, the average yield
on loans held in inventory declined from approximately 8.25% in 1996 to
approximately 7.83% in 1997.
Loan servicing fee revenues decreased in the nine months ended January 31,
1997 by 30% to $529.8 thousand from $751.6 thousand in the prior year nine
months. The decrease is a result of a 38% drop in the average balance of
the loan servicing portfolio from approximately $389.5 million in 1996 to
approximately $241.7 million in 1997.
EXPENSES
Salaries and employee benefits expenses increased 48% to $2.1 million for
the nine months ended January 31, 1997 from $1,4 million for the nine
months ended January 31, 1996. The increase is due to
staffing increases which occurred in 1997 as the Company started to
implement its
Interest expense Not material as a net figure - May want to explain on
a gross level??growth plan, as well as the impact of consolidating the
operating results of Finet, MMI and PAMN for the month of January, 1997.
Pre-acquisition (December 31, 1996 and prior) results are for MMI only.
<PAGE> 16
Interest expense decreased 36% to $953.8 thousand in the nine months ended
January 31, 1997 from $1.49 million for the nine months ended January 31,
1996. This is primarily a result of the 26% decrease in the dollar volume
of loans funded from 1996 to 1997, as well as a slight decline in the
Company's cost of funds over the same periods. Interest paid to warehouse
banks on mortgages held in inventory declined approximately $569 thousand
in 1997, or 42%, while interest earned on those same mortgages declined by
43%. However, interest paid on other borrowings (long-term and working
capital debt) rose from $90 thousand in 1996 to $103 thousand in 1997, an
increase of 14%.
Other expenses, which is comprised of XXXconsists of various items
including expenses related to the servicing portfolio, bank charges and
processing fees, clerical errors and losses and other, increased to $366.2
thousand for the nine months ended January 31, 1997 as compared to $40.0
thousand for the nine months ended January 31, 1996. This increase is
attributable largely to an increase of $100 thousand in expenses incurred
on foreclosed loans and loans in bankruptcy held in the servicing
portfolio, an increase in miscellaneous expense of approximately $188
thousand attributable primarily to the settlement of outstanding
litigation, the write-off of an unrecoverable amount owing from a bulk sale
of servicing in a prior year.
CAPITAL EXPENDITURES, LIQUIDITY AND CAPITAL RESOURCES
The following summary table (unaudited) presents comparative cash flows of
the Company for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1997
1996
------ ----
- --
<S> <C> <C>
Net cash provided (used) by operating activities $ 8,127,137 $
(9,894,384)
Net cash used by investing activities (331,268)
(65,403)
Net cash (used) provided by financing activities (8,251,803) 10,
000,297
<?TABLE>
The Company's cash flows are greatly impacted by fluctuations in changes in
the volume of loans originated and sold from period to period. Total loan
volume dropped from $375.4 million for the first nine months in fiscal 1997
to $278.5 million for the same period in 1996. Consequently, there was a
decrease of $7.29 million in Receivables from Sales of Mortgage Loans and
Servicing Rights in 1997. This decrease was the primary contributor to the
$8.1 million of Net Cash Provided by Operating Activities. Similarly, the
net decrease of $9.0 million in Warehouse Borrowings in 1997 was the
primary contributor to the $8.3 million of net cash provided by financing
activities in 1997.
The Company's normal cash requirements are to meet operating expenses,
including sales and marketing efforts, to fund the expansion of the
business, to satisfy accrued liabilities and accounts payable, and to
satisfy other liabilities as they become due.
The Company maintains a $35 million warehouse borrowing facility that is
capable of supporting a monthly loan funding volume of up to $100 million,
given current loan sales and settlement turnaround times. The Company does
not expect to exceed that level before September 1997, at which time
additional warehouse lending authority can be obtained. Funded loans are
immediately sold to investors in the secondary market with the proceeds
used to reduce warehouse balances. The Company also maintains a $1 million
working capital line of credit at competitive borrowing rates.
Additionally, the Company plans on acquiring approximately $200 million of
purchased mortgage servicing rights ("PMSR's") in 1997 to add to its
current servicing portfolio of $180 million. The PMSR's are usually
acquired through an open market auction process. The Company's ability to
ultimately acquire $200 million in PMSR's is dependent on the servicing
available on the market and the Company's success in pricing and bidding.
Accordingly, potential capital expenditure can not be assured.
<PAGE> 18
Further, the Company is mitigating risks pertaining to the mortgage banking
industry through several practices. The first method is to purchase and
originate mortgage servicing rights ("PMSRs/OMSRs"). When the volume of
loan originations declines due to the rise in interest rates, PMSRs/OMSRs
provide a predictable source of earnings and cash flow. The second method
is to offset unfavorable interest rate movements when funding loans by
hedging the interest rate locks. Also, the Company is attempting to
increase revenue by expanding its retail market share through establishing
relationships with Realtors via video-conferencing.
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On December 31, 1996, the plaintiffs, MMI and the prior stockholders and
the companyof MMI settled the litigation action for an amount significantly
less than the anticipated cost to continue the defense of this litigation.
The amount of the settlement is confidential by order of the court,
however, the settlement amount was not material to the operating results of
the Company. The prior stockholders and the Company obtained full releases
from the complainants and expect no further costs or impact forrom this
action.
The Company has been involved in 22 legal proceedings, primarily as a
result of unsecured creditor actions and/or judgments. These ranged in
individual amounts from $929 to $101,000 and aggregated to approximately
$500,000. The Company has negotiated a settlement of 38% of the amount
owed for the majority of these proceedings prior to December 31, 1996.
Item 2. CHANGES IN SECURITIES
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>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31, 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
<FN>
<F1>
Prices reflect activity while trading under the symbol FTHC
<F2>
Prices reflect activity while trading under the symbol FNHC
</FN>
</TABLE>
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, a majority of shareholders of record approved by written
consent a certificate of amendment of the Company's restated certificate of
incorporation to so increase the number of common shares authorized.
<PAGE> 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits NONE
Reports on Form 8-K
On April 10, 1997, the Registrant filed a report on Form 8-K effective
December 31, 1996 regarding the change in principal independent accountants
as a result of the reverse acquisition of MMI by the Company. The report
stated that MMI was the acquiring entity and therefore, its independent
accountant, Deloitte Touche LLP, automatically became the principal
independent accountant of the Company, succeeding Reuben E. Price & Co..
Subsequently, on April 22, 1997, the Registrant filed Form 8-K/A regarding
the change in principal independent accountant and the change in fiscal
year end from December 31 to April 30. Reuben E. Price & Co. was reengaged
as the principal independent accountant and the client-auditor relationship
between the Registrant and Deloitte Touche LLP voluntarily ceased.
On May 14, 1997, the Registrant filed an amended report on Form 8-K/A
regarding Item F, Paragraph 1 of Form 8-K filed January 16, 1997. The
following is hereby revised in its entirety:
Effective December 31, 1996, Finet Holdings Corporation ("the
Company") completed its previously announced merger with Monument
Mortgage, Inc. ("Monument"), a California mortgage banker, and its
acquisition of PreferenceAmerica Mortgage Network ("PAMN"), a
California mortgage broker.
The Company issued 8.4 million common shares and paid cash of $1
million to acquire all of the outstanding shares of Monument. The
transaction is accounted for as a reverse in which Monument is
considered the acquirer for accounting purposes, even though it
legally became a wholly owned subsidiary of the Company. As the
acquirer, Monument's historical financial statements are deemed to be
the historical financial statements of the reporting entity, although
they will be labeled as those of the Company. 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 Monument.
The Form 8-K/A filed on May 14, 1997 by the Registrant also included the
interim financial statements at October 31, 1996 and prior audited
financial statements at April 30, 1996 for Monument.
<PAGE> 21
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FINET HOLDINGS CORPORATION
Date: August 13, 1997 /s/ L. Daniel Rawitch
L. Daniel Rawitch
(CEO and Principal Executive
Officer)
Date August 13, 1997 /s/ Jan Hoeffel
Jan Hoeffel
(President and Principal Financial
Officer)
</TEXT?
