<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
------------------------
Commission File Number: 0-18108
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FINET HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of
incorporation or organization)
3021 CITRUS CIRCLE
WALNUT CREEK, CA 94598
(Address of principal executive office)
94-3115180
(IRS Employer Identification Number)
(510) 988-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements within the past 90 days.
Yes 'X' No.
The number of shares outstanding of each of the issuer's classes of common
stock was 29,006,018 shares of common stock, par value $.01, as of
September 12, 1997.
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<PAGE> 2
FINET HOLDINGS CORPORATION
INDEX
<TABLE>
Item Description
Page
- ---- -------------------------------------------------------------------
- ----
<S> <C>
<C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Unaudited Balance Sheet............................................
3
July 31, 1997
Unaudited Statements of Operations
Three Months Ended July 31, 1997 and 1996........................
4
Unaudited Statements of Cash Flow..................................
5
Three Months Ended July 31, 1997 and 1996
Notes to Unaudited Financial Statements............................
7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................
12
PART II - OTHER INFORMATION
1. Legal Proceedings..................................................
16
2. Changes in Securities..............................................
16
4. Submission of Matters to a Vote of Security Holders................
16
5. Other Information..................................................
16
6. Exhibits and Reports on Form 8-K...................................
17
Signatures.........................................................
18
<PAGE> 3
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
</TABLE>
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
July 31,
1997
------------
<S> <C>
ASSETS
Cash......................................................... $ 806,250
Accounts receivable from sales of mortgage
loans and servicing rights................................. 9,457,199
Mortgage loan servicing advances and
other receivables.......................................... 740,589
Accounts receivable from affiliates (Note 4)................. 431,787
Notes receivable............................................. 72,000
Notes receivable - officers.................................. 132,350
Mortgages held for sale, net................................. 7,967,308
Mortgage servicing rights.................................... 670,744
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,598,255..................... 1,020,047
Intangible assets (Note 7)................................... 1,010,000
Other assets................................................. 336,052
------------
Total assets............................................. $22,644,326
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line of credit (Note 6)............................ $16,568,596
Accounts payable............................................. 770,582
Note payable and capitalized leases (Note 6)................. 918,258
Accrued expenses and other liabilities....................... 443,420
Liabilities subject to compromise............................ 452,222
------------
Total liabilities........................................ 19,153,078
------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value, (100,000 shares
authorized, none issued and outstanding)................... -
Common stock, $.01 par value, (40,000,000 shares
authorized, 28,973,618 shares issued and outstanding)...... 354,520
Paid in capital.............................................. 6,646,017
Accumulated deficit.......................................... (3,509,289)
------------
Total stockholders' equity............................... 3,491,248
------------
Total liabilities and stockholders' equity.............. $22,644,326
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
FINET HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
July 31,
-------------------------
- -
1997 1996
------------ -----------
- -
<S> <C> <C>
REVENUES
Gain on sale of servicing rights.(Note 5)....... $ 692,858 $ 696,460
Loss on sale of mortgage loans.................. (67,906)
(104,018)
Interest income................................. 335,036 324,690
Loan servicing fees............................. 128,458 193,456
Retail broker fees.............................. 30,857 17,330
Marketing leads................................. 70,579 -
Income from affilites (Note 4).................. 9,808 -
Other........................................... 23,765 16,837
------------ -----------
- -
Total revenues.............................. 1,223,455 1,144,755
EXPENSES
Compensation and employee benefits.............. 1,005,571 823,981
Interest expense................................ 331,585 331,119
Office.......................................... 307,576 229,681
Marketing....................................... 96,263 107,571
Professional fees............................... 228,149 96,012
Depreciation and amortization................... 113,032 87,297
Occupancy....................................... 91,773 53,677
Insurance....................................... 12,507 8,829
Data processing services........................ 27,737 24,908
Other........................................... 86,129 28,985
------------ -----------
- -
Total expenses.............................. 2,300,322 1,792,060
------------ -----------
Loss before income taxes........................ (1,076,867)
(647,305)
Income tax expense.............................. - -
------------ -----------
- -
NET LOSS........................................ $(1,076,867) $
(647,305)
============
============
NET LOSS PER COMMON SHARE (Note 3).............. $ (.04) $
(.08)
============
============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................... 28,936,228 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 CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
July 31,
1997
1996
------------- --------
- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (1,076,867) $
(647,305)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................... 113,032
87,297
Provision for losses on loans and real
estate owned..................................... (2,278)
1,065
Loss on disposition of property, plant and
equipment........................................ 20,045
564
Gain on sale of puchased mortgage servicing rights (47,447)
- -
Changes in operating assets and liabilities:
(Increase) decrease in receivables from sales
of mortgage loans and loan servicing rights...... (6,004,000)
1,053,822
Mortgage loans originated......................... (82,716,807)
(107,545,920)
Mortgage loans sold............................... 82,020,654
111,696,527
Decrease (increase) in originated mortgage
servicing rights, net............................ 26,629
(388,968)
(Increase) decrease in mortgage loan servicing
advances and other receivables................... (96,517)
195,509
Decrease in notes receivable...................... 175,000
- -
Decrease in notes receivable - officers........... 12,000
- -
Increase in prepaids and other assets............. (123,378)
(89,046)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities................... (193,229)
128,569
------------- --------
- -----
Net cash (used) provided by operating activities (7,893,163)
4,492,114
------------- --------
- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights.............. (165,445)
- -
Proceeds of sale of purchased servicing rights..... 75,331
- -
Purchase of furniture, fixtures and equipment...... (36,514)
(17,465)
Purchase of intangible assets...................... (202,000)
- -
Advances to affiliates............................. (431,787)
(183,934)
Advances repaid by affiliates...................... -
5,411
------------- --------
- -----Net cash used by investing activities............... (760,415)
(195,988)
------------- --------
- -----
<PAGE> 6
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............. 2,693,038
- -
Exercise of common stock warrant.................. 3,750
- -
Net (decrease) increase in warehouse borrowings.... 6,359,399
(5,111,019)
Proceeds from advances on note payable and line
of credit......................................... -
1,000,000
Principal payments on note payable and line of
credit............................................ (199,655)
(862,500)
Proceeds from notes payable to officer............. -
83,850
Cash distributions to former MMI shareholders...... -
(34,000)
------------ -------
- -----
Net cash provided (used) by financing activities 8,856,532
(4,923,669)
------------ -------
- -----
Increase (decrease) in cash....................... 202,954
(627,543)
Cash at beginning of period....................... 603,296
672,687
------------- -------
- ------
Cash at end of period............................. $ 806,250 $
45,144
============
============
Supplemental cash flow information (Note 9)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE> 7
FINET HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
REPORTING ENTITY
Finet Holdings Corporation ("Finet" or the "Company") acquired
PreferenceAmerica Mortgage Network ("PAMN") on December 31, 1996. This
acquisition is accounted for as a purchase. Finet also acquired Monument
Mortgage, Inc. ("MMI") on December 31, 1996. 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.
In February, 1997, the Company established and incorporated a wholly-owned
subsidiary, Property Transaction Network ("PTN"), as a software developer,
systems integrator and services provider. PTN services, including access
to the Company's mortgage financing services, are provided to Realtors and
their customers primarily through electronic means. PTN became active in
the quarter ending April 30, 1997.
BUSINESS
Finet is a consumer-oriented, technology and residential real estate
services integrator and marketing company that conducts business through
three wholly-owned subsidiaries: PTN, described above; PAMN, a mortgage
broker conducting business through electronic connections with its
customers; and MMI, a full-service prime and sub-prime mortgage lender and
leader in developing advanced automated loan origination and underwriting
systems. The Company also owns several inactive corporations.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions of Form 10-QSB and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim period have been
included. Operating results for the three months ended July 31, 1997 are
not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 1998.
The consolidated financial statements of the Company include the accounts
of PTN, PAMN, MMI and all wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
3. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number
of shares outstanding during the periods. The effects of common stock
equivalents have not been included because they would have been anti-
dilutive during all periods reported.
4 . PENDING ACQUISITION
On June 12, 1997, the Company entered into a preliminary agreement to
acquire 100% of the outstanding stock of Real Estate Office Software, Inc.
("REOS") for a purchase price of $827,296 in the form of cash, forgiveness
of advances, and Finet common stock valued at $2.50 per share. REOS is a
software development and marketing company whose primary product is a
proprietary Realtor productivity tool called Real Estate Office.
The structure of the transaction is still under negotiation and the Company
is conducting a due diligence review of REOS. In the interim, the Company
and REOS have combined certain business activities. All former REOS
employees
<PAGE> 8
are now employees of PTN and REOS is now engaged in development of an
enhanced Realtor Internet connectivity and relationship management tool
called the Agent Connector, which began initial introduction in September,
1997. The Company had advanced $431,787 to REOS at July 31, 1997 to
support development and marketing costs for the Agent Connector and had
earned revenues of $9,808 from REOS for telemarketing services to market
the Agent Connector.
5. MORTGAGE LOAN SERVICING
The Company's loan origination and servicing activity is concentrated
largely within California. The Company's servicing portfolio is primarily
comprised of conventional mortgage loans whose servicing rights value is
not included in the accompanying balance sheet, and which had an
outstanding principal balance of $193.6 million, representing 1,411 loans,
at July 31, 1997. The majority of loans are securitized through FNMA and
FHLMC programs on a nonrecourse basis whereby foreclosure losses are
generally the responsibility of the investor and not the Company. In
connection with mortgage loan servicing activities, the Company segregates
escrow and custodial funds in a separate trust account and excludes this
balance of $2.1 million at July 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.
The Company sold servicing rights for mortgages, originated and retained in
the servicing portfolio in prior fiscal years, with outstanding principal
balances of $9.7 million during the three months ended July 31, 1997,
compared to zero in the same period of the prior year. These sales of
prior fiscal year originations resulted in a net gain of $135,268 for the
three months ended July 31, 1997.
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $193.6 million were pledged as collateral to lenders as of
July 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 months ended July 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 2.8% of the
outstanding servicing portfolio balance as of July 31, 1997. The losses
(recoveries) to the Company arising from the foreclosed loans and real
estate owned were ($2,278) and $1,065 for the three months ended July 31,
1997 and 1996, respectively.
The Company carried fidelity bond coverage of $950,000 and errors and
omission coverage of $950,000 as of July 31, 1997.
6. DEBT
The following table and comments present summary information regarding the
Company's debt as of July 31, 1997:
<TABLE>
<CAPTION>
Interest
Facility Balance Rate
Expires or Due
- -------------------------------- -------------- -------------- --------
- -----------
<S> <C> <C> <C>
REVOLVING/CURRENT
Warehouse line of credit $ 16,568,596 Fed Funds Rate October
31, 1997
($10 million committed, $25 plus variable
million uncommitted gestation) spread
Revolving line of credit - Prime plus October
31, 1997
($1 million committed) 0.625%
------------
Total revolving/current debt 16,568,596
------------
<PAGE> 9
LONG TERM
Note payable 666,667 Prime plus April
30, 2000
($1 million original note) 0.625%
Capitalized leases 251,591 1999 to
2000
------------
Total long term debt 918,258
------------
Total debt $ 17,486,854
============
</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, the personal
guarantees of the former MMI shareholders, and Finet's corporate guarantee.
These facilities were granted to MMI prior to the December 31, 1996
acquisition.
The collateral for the capitalized leases is the equipment thereby
financed.
DEBT COVENANTS
The Borrowing Agreements (Agreements) for the warehouse line of credit, the
revolving line of credit and the note payable contain various financial
covenants including net worth computed in accordance with generally
accepted accounting principals, current ratio and tangible net worth
leverage ratio requirements. Should an event of default occur, as defined
in the Agreement, outstanding principal and interest on all three of the
Company's credit facilities technically would be due on demand.
As of July 31, 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 July 31, 1997, the lender 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
expiration date of the Agreements be accelerated to August 31, 1997 from
December 31, 1997. On August 15, 1997, the Agreements were extended to
October 31, 1997 to allow sufficient time for the lender to complete a
normal review and annual renewal. The Company has no reason to believe
that negotiations will not be successful; however, no assurances can be
given that the Agreements will be renewed.
8. PURCHASE OF INTANGIBLE ASSETS
On May 29, 1997, the Company and NDS Software, Inc. ("NDS"), a generic
software development company and operator of a nationwide multiple listing
of homes for sale Internet site, entered into an agreement whereby the
Company purchased for $1,010,000, in the form of $202,000 in cash and
202,000 shares of its common stock valued at $4.00 per share, a combination
of Internet mortgage leads, software products, software development
services, and rights to access certain of NDS' installed customer base for
marketing purposes.
The common stock was issued on June 5, 1997. The agreement terms require
an adjustment to the share consideration if the market price of the
Company's shares is not at or above $4.00 per share on the earlier of the
Company's registration of the common shares issued to NDS or June 3, 1998,
to maintain a value equal to $808,000 at the time, subject to a maximum
additional shares issuable of 1,414,000 shares. The assets acquired will
be amortized to expense of future periods as they are used to produce
revenue.
<PAGE> 10
8. COMMITMENTS AND CONTINGENCIES
DEBT COVENANTS
As discussed in Note 6, at July 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 notified and,
subsequently, the lender issued a formal waiver of all breaches and
covenant violations. The warehouse line of credit and the revolving line of
credit agreements expire on October 31, 1997. The Company is in the
process of an annual review with the lender, and has no reason to believe
renewal of the credit facilities 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 $8 million as of July 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
$14.7 million as of July 31, 1997. Commitments to fund loans are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Interest rate risk is mitigated by
the use of forward contracts to sell loans to investors.
GUARANTEES
Subsequent to fiscal year end April 30, 1997, Finet issued to Residential
Funding Corporation ("RFC") on behalf of its wholly owned subsidiary, MMI,
a corporate guarantee of all MMI's borrowing agreements with RFC (See Note
6).
Under the terms of an agreement with NDS, the Company has a contingent
obligation to adjust the share consideration of that agreement if the
market price of the Company's common shares is not at or above $4.00 per
share on the earlier of the Company's registration of NDS' shares or June
3, 1998 (See Note 8).
The Common Stock Purchase Agreement for the December 30, 1996 sale of 6
million common shares under Regulation S of the U.S. Securities Act of 1993
provides that in the event a registration of the subject shares does not
become effective within 150 days of the final closing (January 15, 1997)
for any reason other than matters beyond the control of the Company, the
purchasers shall be granted common stock purchase warrants in an aggregate
amount of 500,000 shares at $.50 per share and 500,000 shares at $1.00 per
share.
<PAGE> 11
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental investing and financing
activities for the periods ended July 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 $ 294,049 $
333,455
Income taxes -
- -
Non-cash investing and financing activities
Distributions (reversal of distributions
declared) to former MMI shareholders -
(264,397)
Distributions paid -
(34,000)
----------- --------
- ---
Change in distributions payable -
(298,397)
Common stock issued for creditor settlements 22,257
- -
Common stock issued for purchase of
intangible assets 808,000
- -
</TABLE>
10. SUBSEQUENT EVENTS
BORROWING ARRANGEMENTS
Subsequent to July 31, 1997, Residential Funding Corporation 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. On August 15, 1997, the expiration
date was extended to October 31, 1997 to allow sufficient time to complete
an annual review and renewal. The Company has no reason to expect the
credit facilities will not be renewed; however, there can be no assurance
that they will be renewed (See Note 6).
STOCK OPTION PLAN AMENDMENT
On August 28, 1997, the Company's Board of Directors unanimously resolved
to amend the Company's 1989 Stock Option Plan (the "Plan") to increase the
number of shares of common stock subject to the Plan from 500,000 shares to
1,750,000 shares and to provide for the granting of immediately
exerciseable five-year options to purchase 40,000 shares upon initial
appointment of outside (non-employee) directors and, for each of the next
four years of service as a director, the granting of five-year options to
purchase 25,000 shares, vested at the rate of 6,250 shares per quarter.
These amendments are subject to shareholder approval.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and as such may involve known and unknown risks and
uncertainties and other factors that may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
REPORTING ENTITY
The acquisition of MMI by Finet is accounted for as a reverse acquisition
whereby MMI is considered the acquiring corporation for accounting and
financial statement reporting purposes and MMI's historical financial
statements are deemed to be the historical financial statements of the
reporting entity. The consolidated financial statements at July 31, 1997
also include the financial statements of Finet's wholly owned subsidiaries
PAMN and PTN. The Company also owns several inactive corporate entities.
All material intercompany transactions and amounts have been eliminated in
consolidation. All references herein to a year (e.g. 1998) refer to the
fiscal year ended April 30 of that year.
BUSINESS
Finet is a consumer oriented, technology and residential real estate
services integrator and marketing company that, through its wholly-owned
subsidiaries, PTN, PAMN and MMI, offers to independent Realtors and
mortgage brokers support services such as call center operations, video-
conferencing and other related homeowner services, including the business
of originating, selling and servicing wholesale and retail mortgage loans.
During the three months ended July 31, 1997, the Company's primary business
activity was MMI's mortgage banking. PTN and PAMN were in a start-up
phase. Therefore, during the periods ended July 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 three month period ended July 31, 1997 are
not necessarily indicative of results that can be expected in future
periods.
COMPARISON OF QUARTERS ENDED JULY 31, 1997 AND 1996
The Company is currently implementing a business development plan to expand
the scope of its services. The 1998 periods include costs related to this
plan. The Company reported a net loss of $1.1 million for the quarter
ended July 31, 1997, compared to a net loss of $647 thousand for the
quarter ended July 31, 1996. The $430 thousand increase in the 1998 net
loss is primarily attributable to PTN and PAMN start-up costs. Combined
PTN and PAMN revenues were $28 thousand and expenses were $438 thousand,
for a loss of $410 thousand from these activities during the quarter ended
July 31, 1997. Primary expense category increases were $182 thousand in
compensation and employee benefit expense resulting from staff increases to
implement the business development plan and a related $77.9 thousand
increase in office expense, a $132 thousand increase in professional fees,
and an $57 thousand increase in other expense.
REVENUES
Revenues for the quarter ended July 31, 1997 increased 9% to $1.2 million
from $1.1 million for the quarter ended July 31, 1996. The increase in
revenues was attributable to a decrease in the loss on sale of mortgage
loans and income from telemarketing services.
<PAGE> 13
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 first quarter of 1998 was $442 thousand compared
to $592 thousand in the first fiscal quarter of 1997, a decrease of 25%.
Over the same time periods, total loan volume decreased 23% from $107
million in 1997 to $83 million in 1998. The margin earned on sales of
mortgage loans/servicing rights declined slightly from 55 basis points in
1997 to 53 basis points in 1998.
Loan servicing fee revenues decreased 34% to $129 thousand in the quarter
ended July 31, 1997 from $194 thousand in the prior year's first quarter.
The decrease is a result of a 28% decline in 1998 from the 1997 average
outstanding balance of loans serviced for others. The portfolio balance
declined due to several bulk sales of servicing assets that occurred
between July 31, 1996 and July 31, 1997.
Marketing lead sales revenue increased from zero in 1996 to $71 thousand in
1997. The revenue was generated by a Finet telemarketing activity that
began operations in October, 1996.
Income from affiliates represents telemarketing services provided to Real
Estate Office Software, an affiliate.
EXPENSES
Compensation and employee benefits expenses increased 21% to $1 million for
the quarter ended July 31, 1997 from $824 thousand for the quarter ended
July 31, 1996. The increase is due to adding personnel as the Company
implemented its growth plan, as well as the impact of consolidating the
operating results of Finet, MMI, PTN and PAMN for the quarter ended July
31, 1997. Prior year results are for MMI only.
Office expense increased 34% from $230 thousand in 1997 to $308 thousand in
1998, primarily due to the Company's expansion.
Professional fees increased 138% from $96 thousand in 1996 to $228 thousand
in 1997. The increase is attributable primarily to the Company's
acquisitions and expansion. Audit and accounting fees increased $19
thousand due to the increase in complexity arising from being a single
private company during most of 1997 and being a public company with three
subsidiaries in 1998. Consulting fees increased by $128 thousand in 1998,
primarily due to expenses of developing and initiating technologies for the
Company's business development activities.
Other expenses increased 197% from $29 thousand in 1997 to $86 thousand in
1998, due primarily to business development expenditures.
CAPITAL EXPENDITURES, LIQUIDITY AND CAPITAL RESOURCES
The Company's normal cash requirements are to meet operating expenses,
including sales and marketing activities, to fund further expansion of the
Company's technology related business activities, to satisfy accrued
liabilities and accounts payable, and to satisfy other liabilities as they
become due.
CASH FLOWS
The Company experienced an increase in cash of $203 thousand in the first
quarter of 1998, compared to a decrease in cash of $628 thousand in same
period in the prior year.
<PAGE> 14
Cash Flow From Operations
Since MMI is curently the largest business segment in the consolidate
group, the Company's cash flows are significantly affected by fluctuations
in mortgage loans originated and sold during the period. While loan
originations decreased from $108 million to $83 million in the first
quarters of 1997 and 1998, respectively, the loans in inventory increased.
This was the primary factor that contributed to a $7.9 million use of cash
by operating activities in the first quarter of 1998, compared to $4.5
million of cash provided by operating activities in the first quarter of
the prior year.
Cash Used for Investing Activities
After completing the acquisitions of PAMN and MMI, several equity
offerings, and integrating the structure of the newly combined entities by
April 30, 1997, the Company began to agressively implement its business
development plans in the first quarter of 1998 by advancing $431 thousand
to affiliates and purchasing $165 thousand of mortgage servicing rights,
$1 million of NDS intangible assets ($202,000 in cash and $808,000 in
common stock issued), and additional computer equipment. Thus, net cash
used in investing activities increased from $196 thousand to $760 thousand
in the first quarters of 1997 and 1998, respectively.
Cash Provided by Financing Activities
The Company experienced a $13.7 million increase in cash from financing
activities, from a negative $4.9 million in 1997 to a positive $8.8 million
in 1998. Due to the increase in loans in inventory in the first quarter of
1998 as compared to the same period in the prior year, warehouse line of
credit borrowings increased $6.4 million in 1998, compared to a decrease of
$5.1 million in 1997. The Company also received $2.7 million in cash
proceeds in 1998 from stock issued, compared to zero in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $35 million warehouse borrowing facility that is
capable of supporting a monthly loan funding volume of up to $60 million,
given current loan sales and settlement turnaround times. The Company does
not expect to exceed that level before January 1998, at which time
additional warehouse lending authority can be obtained. Funded loans are
immediately sold to investors in the secondary market with the proceeds
used to reduce warehouse balances. The Company also maintains a $1 million
working capital line of credit at competitive borrowing rates.
The Company's warehouse and working capital lines of credit are held by the
same lender. At July 31, 1997, the Company was in violation of debt
covenants related to the Company's tangible net worth, adjusted tangible
net worth, and required minimum servicing portfolio balance. The
acquisition of MMI by Finet on December 31, 1996 also created a breach of
the borrowing agreements ("Agreements")
The lender was informed of all covenant violations and continued to provide
funding without interruption. Subsequent to July 31, 1997, the lender
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 Agreement expiration date be accelerated from
December 31, 1997 to August 31, 1997. On August 15, 1997, the Agreements
were extended to October 31, 1997 to allow sufficient time for the lender
to complete a normal review and annual renewal. The Company has no reason
to believe that negotiations will not be successful; however, no assurances
can be given that the Agreements will be renewed.
The Company mitigates its mortgage banking risks through several common
industry practices. The first is to purchase and originate mortgage
servicing rights ("PMSRs/OMSRs"). When the volume of loan originations
declines due to the rise in interest rates, PMSRs/OMSRs increase in value
and provide a predictable source of earnings and cash flow. The second is
to offset unfavorable interest rate movements when funding loans by hedging
the interest rate locks.
The Company's business development activities are focused on diversifying
and increasing revenues from sources other than mortgage banking, including
the sale of proprietary software, the provision of Internet-based real
estate services, and brokering of loans to other mortgage lenders.
<PAGE> 15
The Company is currently expending cash resources to support its business
development activities in PTN and PAMN, as the revenues they are
generating, though increasing, are currently insufficient to cover start-up
and operating costs. The Company expects within this business cycle that
all business units will generate revenues sufficient to cover their
respective operating expenses. Management believes it has sufficient cash
and short term financing alternatives to reach positive cash flow.
CAPITAL EXPENDITURES
The Company is in the process of negotiating the terms and structure of an
agreement to acquire 100% of the outstnding stock of Real Estate Office
Software, Inc for a purchase price of $827,296. The Company has advanced
$431,387 to REOS to support development and marketing costs for the Agent
Connector. The Company expects the remainder of the consideration to be in
the form of common stock.
The Company purchased $1,010,000 in intangible assets from NDS Software
(NDS) for $202,000 in cash and $808,000 in common stock issued. The assets
consisted of software, contract programming services, mortgage leads and
marketing access to certain NDS customers.
In the third quarter of 1997, the Company implemented a Purchased Mortgage
Servicing Rights ("PMSR") acquisition strategy. To date, $73 million of
PMSRs have been purchased, of which $5.4 million have subsequently been
resold, for a gain of $47.4 thousand. The Company plans to acquire
approximately $800 million of additional PMSRs in 1998 to add to its
current servicing portfolio of $193.6 million. The PMSR's may be acquired
directly or through an open market auction process. Prices vary for
servicing rights, however this represents a planned investment of
approximately $8 million, which the Company plans to finance on a secured
basis. The Company has begun discussions to arrange the financing required
for these planned investments. The Company's ability to acquire this
additional servicing is dependent on the servicing available on the
market,the Company's success in pricing and bidding, and the ability to
arrange the credit facilities to do so. Accordingly, these potential
capital expenditures are not assured.
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 at December 31, 1996. The Company negotiated settlements
averaging 33.8% of the amount owed for the majority of these proceedings
prior to December 31, 1996 and is continuing to seek resolution of the
remainder.
Item 2. CHANGES IN SECURITIES
Authorized common shares were increased to 40 million from 30 million,
effective August 5, 1997 (See Note 4).
The Common Stock of the Company is quoted on the OTC Bulletin Board under
the symbol FNHC.
The following table sets forth the range of high, low and average closing
prices per share of the Common Stock and total number of shares traded
during the period since April 30, 1997.
<TABLE>
<CAPTION>
MONTH'S MONTH'S MONTH END MONTH'S
PERIOD: HIGH/ASK LOW/BID CLOSE/AVG VOLUME
- ---------------------- --------- -------- --------- -------
<S> <C> <C> <C> <C>
May,1997 $ 6.375 $ 2.500 $ 3.344 680,000
June, 1997 3.750 2.188 3.531 250,000
July, 1997 3.500 2.375 2.875 434,700
August, 1997 4.375 2.625 3.734 646,000
September (1st to 11th) 5.125 4.125 4.625 649,100
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 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. The
amendment was recorded by the Secretary of State of Delaware on August 5,
1997
Item 5. OTHER INFORMATION
The Company purchased intangible assets from NDS Software, Inc. on May 29,
1997 and entered into a pending acquisition agreement with Real Estate
Office Software, Inc. on June 12, 1997.
On September 8, 1997, the Company announced the appointment of Mr. George
Winkel, CPA,to the position of Executive Vice President and Chief Financial
Officer of Finet Holdings Corporation. Mr. Winkel succeeds Mr. Jan
Hoeffel, President of Finet, as the Company's Principal Financial Officer.
Mr. Paul R. Garrigues, Senior Vice President and Chief Financial Officer of
Monument Mortgage, Inc., continues in that position, but will assume
different duties and responsibilities.
<PAGE> 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EX-27 Financial Data Schedule
REPORTS ON FORM 8-K
On May 14, 1997, the Registrant filed an amended report on Item 2,
Acquisition of Assets, on Form 8-K/A regarding Item F, Paragraph 1 of Form
8-K filed July 16, 1997. It included the interim financial statements at
October 31, 1996 and prior audited financial statements at April 30, 1996
for MMI.
<PAGE> 18
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: September 12, 1997 /s/ L. Daniel Rawitch
L. Daniel Rawitch
(CEO and Principal Executive
Officer)
Date September 12, 1997 /s/ George Winkel
George Winkel
(Principal Financial Officer)
</TEXT?
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 806,250
<SECURITIES> 0
<RECEIVABLES> 10,629,575
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,618,302
<DEPRECIATION> 1,598,255
<TOTAL-ASSETS> 22,644,326
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 354,520
<OTHER-SE> 3,136,728
<TOTAL-LIABILITY-AND-EQUITY> 22,644,326
<SALES> 0
<TOTAL-REVENUES> 1,223,455
<CGS> 0
<TOTAL-COSTS> 2,300,322
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,585
<INCOME-PRETAX> (1,076,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,076,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,076,867)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
