<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
OCTOBER 31, 1996
Date of report (Date of earliest event reported)
------------------------
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)
Telephone Number: (415) 658-4150
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements within the past 90 days.
Yes No X
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=
<PAGE> 2
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
Item F, Paragraph 1 of Form 8-K filed January 16, 1997 is hereby revised in
its entirety as follows:
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 acquisition 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.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
7 (a) Financial statements of business acquired
Interim financial statements at October 31, 1996 and prior audited
financial statements at April 30, 1996 for Monument are included herein as
follows:
<TABLE>
Statement Type Date Page
---------------------------- ------------ ----
<S> <C> <C>
Interim financial statements Oct 31, 1996 3
Audited financial statements Apr 30, 1996 10
</TABLE>
<PAGE> 3
<TABLE>
MONUMENT MORTGAGE, INC.
INTERIM FINANCIAL STATEMENTS
BALANCE SHEET AT OCTOBER 31, 1996
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 167,304
Accounts receivable from sales of mortgage
loans and servicing rights.................. 9,795,013
Mortgage loan servicing advances and other
receivables................................. 1,141,857
Mortgage loans held for sale, net............. 9,608,176
Originated mortgage servicing rights.......... 205,461
Purchased mortgage servicing rights........... 286,263
Property, plant & equipment, net of
accumulated depreciation of $1,101,432...... 950,666
Other assets.................................. 323,615
------------
Total assets................................ $22,478,355
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Warehouse borrowings.......................... $18,429,677
Accounts payable and accrued expenses......... 1,084,734
Distribution payable to stockholders.......... 9,938
Note payable and line of credit............... 1,404,167
Capitalized Leases............................ 93,365
------------
Total liabilities........................... 21,021,881
------------
Stockholders' equity:
Common stock, no par value, authorized,
issued and outstanding...................... 760,000
Contributed capital........................... 350,000
Retained Earnings............................. 346,474
------------
Total stockholders' equity.................. 1,456,474
------------
Totals.................................. $22,478,355
============
</TABLE>
<PAGE> 4
<TABLE>
MONUMENT MORTGAGE, INC.
STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE MONTH PERIODS ENDED OCTOBER 31, 1996 AND 1995
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED 10/31/96 ENDED 10/31/95
-------------- --------------
S> <C> <C>
REVENUE:
Gain on sale of servicing rights........ $ 1,218,147 $ 940,780
Loss on sale of mortgage loans.......... (945,472) (354,420)
Interest income......................... 263,377 612,355
Loan servicing fees..................... 168,848 243,051
Retail broker fees...................... 2,064 28,372
Other................................... 26,863 24,165
------------- --------------
TOTAL REVENUE $ 733,827 $ 1,494,303
EXPENSE:
Salaries and employee benefits........... 639,202 476,695
Interest expense......................... 277,335 463,992
Office................................... 230,912 193,406
Marketing................................ 46,017 53,035
Professional fees........................ 99,755 113,745
Depreciation & amortization.............. 95,455 75,125
Occupancy................................ 54,074 54,917
Insurance................................ 6,686 12,363
Data processing services................. 21,230 22,524
Other.................................... 6,855 18,656
------------- --------------
TOTAL EXPENSE 1,477,521 1,484,458
------------- --------------
Income (loss)before income taxes........... (743,694) 9,845
State income taxes......................... 0 644
------------- --------------
NET INCOME (LOSS) (743,694) 9,201
============= ==============
</TABLE>
<PAGE> 5
<TABLE>
MONUMENT MORTGAGE, INC.
STATEMENTS OF NET INCOME (LOSS)
FOR THE SIX MONTH PERIODS ENDED OCTOBER 31, 1996 AND 1995
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED 10/31/96 ENDED 10/31/95
-------------- --------------
S> <C> <C>
REVENUE:
Gain on sale of servicing rights......... $ 1,914,607 $ 1,900,493
Loss on sale of mortgage loans........... (1,221,273) (628,032)
Interest income.......................... 588,067 1,040,982
Loan servicing fees...................... 362,304 507,442
Retail broker fees....................... 19,394 45,760
Other.................................... 43,700 66,278
-------------- --------------
TOTAL REVENUE $ 1,706,799 $ 2,932,923
EXPENSE:
Salaries and employee benefits........... 1,291,401 805,050
Interest expense......................... 608,454 926,494
Office................................... 508,853 348,103
Marketing................................ 105,328 121,898
Professional fees........................ 195,767 202,532
Depreciation & amortization.............. 182,752 150,068
Occupancy................................ 107,751 109,771
Insurance................................ 15,515 19,496
Data processing services................. 46,138 41,394
Other.................................... 35,039 29,425
-------------- --------------
TOTAL EXPENSE 3,096,998 2,754,231
-------------- --------------
Income (loss)before income taxes........... (1,390,199) 178,692
State income taxes......................... 800 6,554
-------------- --------------
NET INCOME (LOSS) (1,390,999) 172,138
============== ==============
</TABLE>
<PAGE> 6
<TABLE>
MONUMENT MORTGAGE, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED OCTOBER 31, 1996 AND 1995
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED 10/31/96 ENDED 10/31/95
-------------- --------------
S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.......................... $ (1,390,999) $ 172,138
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization............... 182,752 150,068
Provision for losses on loans &
real estate owned........................ (20,038) (46,252)
Changes in assets & liabilities:
Increase in receivables from sales of
mortgage loans and loan servicing rights 1,630,417 (3,145,942)
Mortgage loans originated................ (193,419,745) (215,300,855)
Mortgage loans and servicing rights
sold to investors....................... 194,486,305 206,669,450
Increase in mortgage loan servicing
advances and other receivables.......... (214,427) (76,136)
Increase in originated mortgage
servicing rights........................ (49,539) (490,371)
Increase in purchased mortgage
servicing rights......................... (286,263) 0
Decrease(increase)in other assets......... 55,026 (101,337)
Increase in other liabilities............. 275,139 107,584
-------------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,248,628 (12,061,653)
INVESTING ACTIVITIES
Purchases of furniture & equipment.......... (30,534) (21,327)
-------------- ------------
FINANCING ACTIVITIES
Net (decrease) increase in
warehouse borrowings....................... (1,302,030) 11,689,064
Proceeds from advances on line of credit.... 1,550,000 1,200,000
Principal payments on note payable
and line of credit......................... (1,925,000) (550,000)
Principal payments on capitalized leases.... (8,985) 0
Cash distributions on behalf of stockholders (37,462) (19,312)
-------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,723,477) 12,319,752
(DECREASE) INCREASE IN CASH................. (505,383) 236,772
CASH AT BEGINNING OF PERIOD................. 672,687 392,210
-------------- ------------
CASH AT END OF PERIOD....................... 167,304 628,982
============== ============
<PAGE> 7
CASH PAID DURING THE YEAR FOR:
Interest on lines of credit
and other borrowings........................ 622,149 920,429
Income taxes................................. 800 800
NON-CASH FINANCING ACTIVITIES:
Equipment acquired by capital lease 102,350 -
Distributions declared (from) to stockholders (260,935) 92,566
Distributions paid on behalf of stockholders. (37,462) (19,312)
------------ ------------
CHANGE IN DISTRIBUTION PAYABLE TO STOCKHOLDERS (298,397) 73,254
============ ============
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Monument Mortgage, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management of the Company, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the
Company's audited financial statements for the years ended April 30, 1996
and 1995 included herein. Results of operations for interim periods are not
necessarily indicative of results for the full year.
2. MORTGAGE LOAN SERVICING
The Company's origination and servicing activity is concentrated primarily
within California. The Company's servicing portfolio is primarily comprised
of conventional mortgage loans which are not included in the accompanying
balance sheets and which had outstanding principal balance of $220 million
and $385 million, representing 1,629 and 2,946 loans, at October 31, 1996
and 1995, respectively. The majority of loans are securitized through
Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") programs on a nonrecourse basis whereby
foreclosure losses are generally the responsibility of the investor and not
the Company. In connection with mortgage loan servicing activities, the
Company segregates escrow and custodial funds in separate trust accounts
and excludes these balances ($1,688,452 and $4,030,932 at October 31, 1996
and 1995, respectively) from the accompanying balance sheets. The Company
is required to maintain separate accounting records for its escrow and
custodial cash accounts and the related liabilities.
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $220 million were pledged as collateral to lenders as of
October 31, 1996.
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
fiscal quarters and six months ended October 31, 1996 and 1995 with respect
to these representations and warranties.
The Company carried fidelity bond coverage of $950,000 and errors or
omission coverage of $950,000 as of October 31, 1996.
<PAGE> 8
3. WAREHOUSE BORROWINGS, NOTE
PAYABLE , LINE OF CREDIT AND CAPITAL LEASE
At October 31, 1996, the Company had one warehouse line of credit
available with a $10 million committed and an uncommitted $25 million
gestation facility expiring December 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 stockholders. The maximum amount
outstanding under the warehouse line at any month-end during the six months
ended October 31, 1996 and 1995 was $20.3 million. The weighted average
interest rate during the six months ended October 31, 1996 and 1995 was
6.45% and 7.1%, respectively. The Warehouse Borrowing Agreement 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.
The note payable is due in three and one half years, requires monthly
payments of interest at prime plus .625%, and 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. Aggregate annual principal payments are
as follows:
<TABLE>
<CAPTION>
Year ending April 30 Principal payments
-------------------- ------------------
<S> <C>
1997 (six months) $125,000
1998 250,000
1999 250,000
2000 229,169
--------
Total $854,169
</TABLE>
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 $950,000 was
outstanding at October 31, 1996 and 1995, respectively. The line of credit
bears interest at the highest prime rate quoted by the First National Bank
of Chicago plus .625% and expires on December 31, 1997. The line of credit
is secured by mortgage loans held for sale and receivables from sales of
mortgage loans and requires the Company to maintain a minimum loan
servicing portfolio of $200 million.
In August 1996, the Company entered into a capital lease to finance the
purchase of video conferencing equipment. The original principal balance of
the lease was $102,350. The lease expires in 36 months. As of October 31,
1996, the present value of the lease obligation was $93,365.
4. DEBT COVENANTS
At October 31, 1996, the Company was in violation of two of its debt
covenants, tangible net worth and adjusted tangible net worth, related to
its warehouse lines of credit, its note payable and its revolving line of
credit. The lender was 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.
5. EMPLOYEE BENEFIT PLAN
The Company adopted in 1993 a contributory pension plan (the "Plan) which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan
covers all employees meeting certain eligibility requirements and provides
for matching employer contributions. There was no contribution expense for
the six months ended October 31, 1996 and 1995.
6. COMMITMENTS AND CONTINGENCIES
a. Loan Sale Commitments - The Company has entered into optional and
mandatory forward commitments to deliver mortgage loans of $38.5 million as
of October 31, 1996.
<PAGE> 9
b. Mortgage Loan Applications in Process - The Company has open short-term
commitments to fund mortgage loan applications in process subject to credit
approval. Such commitments, which had interest rates which were committed
to the borrower, amounted to $53.7 million as of October 31, 1996.
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.
c. 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 Company. The claim seeks a rescission of prior
contracts for the sale of plaintiff's stock to the Company's current
stockholders to restore them to their former status as minority
stockholders of the Company. It is the opinion of management, after
consultation with outside counsel, that the resolution of all these matters
will not have a material adverse effect on the Company's financial
position.
7. SUBSEQUENT EVENTS
On December 31, 1996, the stockholders of the Company completed an exchange
of 100% of the Company's common stock for 8.4 million shares of the common
stock of Finet Holdings Corporation, a financial services holding company
(Holding Company) plus $1 million in cash. This transaction resulted in
the Company becoming a wholly owned subsidiary of the Holding Company. The
transaction will be accounted for as a reverse acquisition with the Company
being treated as the acquiring entity for accounting purposes and the
historical financial statements of the Company will be reported as the
historical financial statements of the Company.
On December 31, 1996, the stockholders and the Company settled the litigation
action described in Note 6.c. above 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
stockholders and the Company obtained full releases from the complainants and
expect no further costs or impact from this action.
<PAGE> 10
DELOITTE & TOUCHE LLP
50 Fremont Street
San Francisco, CA 94105
INDEPENDENT AUDITORS REPORT
To the Board of Directors of
Monument Mortgage, Inc.
We have audited the accompanying balance sheets of Monument Mortgage, Inc.
(the "Company") as of April 30, 1996 and 1995, and the related statements
of income and retained earnings and of cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Monument Mortgage, Inc. as of April 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in fiscal year 1996 the
Company changed its method of accounting for mortgage servicing rights to
conform with Statement of Financial Accounting Standards No. 122.
/s/ Deloitte & Touche LLP
June 14, 1996
<PAGE> 11
<TABLE>
MONUMENT MORTGAGE, INC.
BALANCE SHEETS AT APRIL 30, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................ $ 672,687 $ 392,210
Receivables from sales of mortgage loans and
mortgage loan servicing rights................ 11,425,430 9,788,952
Mortgage loans held for sale - net (Note 1)..... 10,674,736 3,196,475
Mortgage loan servicing advances and
other receivables............................. 927,430 186,457
Mortgage servicing rights (Note 3).............. 155,922 -
Prepaid expenses and deposits................... 358,603 298,717
Furniture and equipment - net (Note 1).......... 1,000,534 1,228,358
------------ ------------
Total assets................................ $25,215,342 $15,091,169
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse borrowings (Note 5)................. $19,731,707 $11,109,242
Accounts payable and accrued expenses......... 809,592 367,507
Distribution payable to stockholders......... 308,335 106,820
Note payable and line of credit (Note 5)...... 1,779,169 600,000
------------ ------------
Total liabilities........................... 22,628,803 12,183,569
------------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, no par value - authorized,
issued and outstanding: 100,000 shares...... 760,000 760,000
Contributed capital........................... 350,000 350,000
Retained earnings............................. 1,476,539 1,797,600
------------ ------------
Total stockholders' equity.................. 2,586,539 2,907,600
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $25,215,342 $15,091,169
============ ============
</TABLE>
See notes to financial statements
<PAGE> 12
<TABLE>
MONUMENT MORTGAGE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED APRIL 30, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUE
Gain on sales of servicing rights............ $ 4,824,899 $ 3,284,047
Loss on sales of mortgage loans (Note 4)..... (1,548,659) (418,511)
Interest income.............................. 1,975,388 561,816
Loan servicing fees.......................... 921,220 1,319,231
Retail broker fees........................... 86,409 286,826
Other........................................ 115,479 203,635
------------ -----------
TOTAL 6,374,736 5,237,044
EXPENSE:
Salaries and employee benefits............... 1,952,247 1,796,145
Interest expense............................. 1,829,357 463,690
Office....................................... 934,456 710,595
Professional fees............................ 401,965 471,890
Depreciation & amortization.................. 398,630 354,626
Occupancy.................................... 228,836 365,963
Insurance.................................... 139,954 156,171
Data processing services..................... 80,221 87,085
Other........................................ 69,686 584,611
------------ -----------
TOTAL 6,035,352 4,990,776
------------ -----------
INCOME BEFORE INCOME TAXES..................... 339,384 246,268
STATE INCOME TAXES............................. 13,220 8,890
------------ -----------
NET INCOME..................................... 326,164 237,378
RETAINED EARNINGS, BEGINNING OF YEAR........... 1,797,600 1,840,285
DISTRIBUTIONS TO STOCKHOLDERS.................. (647,225) (280,063)
------------ -----------
RETAINED EARNINGS, END OF YEAR................. $ 1,476,539 $ 1,797,600
============ ===========
</TABLE>
See notes to financial statements
<PAGE> 13
<TABLE>
MONUMENT MORTGAGE, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
S> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 326,164 $ 237,378
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization.................. 398,630 354,626
Loss on sale of assets....................... 9,364 78,550
Provision for losses on loans
and real estate owned....................... - 86,794
Changes in assets & liabilities:
Increase in receivables from sales of
mortgage loans and loan servicing rights... (1,636,478) (1,513,799)
Mortgage loans originated................... (503,743,765) (129,534,045)
Mortgage loans and servicing rights
sold to investors.......................... 497,074,359 127,207,741
(Increase) decrease in mortgage loan
servicing advances and other receivables... (740,973) 22,964
Originated mortgage servicing rights........ (1,054,538) -
(Increase) decrease in other assets......... (67,976) 6,372
Increase (decrease) in other liabilities.... 450,175 (257,190)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (8,985,038) (3,310,609)
------------ ------------
INVESTING ACTIVITIES
Purchases of furniture & equipment (90,409) (258,062)
------------ ------------
FINANCING ACTIVITIES
Net increase in warehouse borrowings.......... 8,622,465 5,417,476
Proceeds from advances on note payable
and line of credit........................... 1,200,000 600,000
Principal payments on note payable
and line of credit........................... (20,831) (2,816,420)
Cash distributions to stockholders............ (445,710) (209,890)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,355,924 2,991,166
------------ ------------
INCREASE (DECREASE) IN CASH................... 280,477 (577,505)
CASH AT BEGINNING OF YEAR..................... 392,210 969,715
------------ ------------
CASH AT END OF YEAR........................... $ 672,687 $ 392,210
============ ============
CASH PAID DURING THE YEAR FOR:
Interest on lines of credit and
other borrowings............................ $ 1,742,679 $ 472,053
Income taxes................................. 27,500 -
NON-CASH FINANCING ACTIVITIES:
Distributions declared to stockholders...... 647,225 280,063
Distributions paid to stockholders.......... (445,710) (209,890)
------------ ------------
Change in Distribution Payable to Stockholders $ 201,515 70,173
============ ============
</TABLE> See notes to financial statements
<PAGE> 14
MONUMENT MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30,1996 AND 1995
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Monument Mortgage, Inc. (the "Company"), a California corporation, began
operations in 1987. The common stock of the Company is equally owned by two
stockholders. The Company is engaged in the mortgage banking business,
which consists of both the wholesale and retail origination, sale and
servicing of residential mortgage loans.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value as determined by outstanding commitments from investors or
current investor yield requirements calculated on the aggregate loan basis.
Mortgage loans sold to investors generally settle within fifteen days of
funding. Gains or losses on sales of mortgage loans are computed as the
difference between the selling price and the carrying value of the related
mortgage loans sold, net of applicable discounts. Mortgage loans held for
sale are reported net of allowances for market discounts of $100,150 and
$245,606 at April 30, 1996 and 1995, respectively.
MORTGAGE SERVICING RIGHTS
Effective May 1, 1995, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards ('"SFAS") No. 122, Accounting
for Mortgage Servicing Rights. This Statement was issued in May 1995 by the
Financial Accounting Standards Board as an amendment to SFAS No. 65,
Accounting for Certain Mortgage Banking Activities, and is effective for
fiscal years beginning after December 15, 1995 with earlier application
encouraged. SFAS No. 122 requires the allocation of the cost of originated
or purchased mortgage loans to the mortgage servicing rights and the loans
based on their relative fair values at the date of purchase or origination.
The fair values of the mortgage servicing rights are based upon prices
available in the secondary market for servicing rights of mortgage loans
with similar characteristics. The capitalized mortgage servicing rights are
amortized in proportion to, and, over the period of, estimated net
servicing income. In evaluating and measuring impairment, the capitalized
servicing rights are stratified based on predominant risk characteristics.
The stratified servicing rights are tested for impairment based on the
expected future net servicing revenue stream.
The impact of adoption of SFAS No. 122 to the Company's financial
statements for the year ended April 30, 1996 was to increase net income by
approximately $150,000.
LOAN SERVICING
The Company sells mortgages on both a servicing retained and servicing
released basis. Servicing fee income represents fees earned for servicing
real estate mortgages owned by institutional investors. The fees are
generally calculated on the outstanding principal balances of the loans
serviced and are recorded as income when earned. Servicing released
premiums are based on a contractual percentage of the outstanding principal
balance and credited to income when the loan servicing rights are sold.
LOAN ORIGINATION FEES
Loan origination fees on mortgage loans held for sale, net of certain
direct loan origination costs, are deferred until the time of sale and are
included in the computation of the gain or loss on sale of the related
loans. The sale of mortgage loan inventory is recorded when the loans are
shipped to the investor.
<PAGE> 15
HEDGE ACCOUNTING
The Company does not project interest rates but rather uses a hedging
strategy to determine the portion of the pipeline loans that are at risk
given the current market rates. The Company's hedging activity consists of
mandatory forward commitments on mortgage-backed securities which are
usually paired-off to hedge the gain (loss) experience from whole loan
sales. Additionally, the Company enters into either optional or mandatory
forward commitments to sell mortgage loans when funded. The Company
assesses the pipeline interest rate risk based upon a number of factors,
including the remaining term of the rate locks, the interest rate at which
the locks are provided, current interest rates and interest rate
volatility. The Company controls the credit risk of the pipeline through
credit evaluations, limits, and monitoring procedures. Unrealized hedging
losses are recorded through a valuation allowance that is shown as a
reduction in the carrying value of the related loans held for sale.
Unrealized gains are deferred and recognized at the time revenue is
realized on the related loan sale. Fees paid to investors are deferred and
recognized as expense as loans are delivered to the investor in proportion
to the percentage relationship of loans delivered to the total commitment
amount. Any remaining fee is recognized as a period expense at the
expiration of the commitment period or earlier if exercise of the
commitment is deemed remote.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets or terms of the leases. Accumulated depreciation and
amortization was $828,960 and $606,178 at April 30, 1996 and 1995,
respectively.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. This Statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The financial statement impact of adopting SFAS No. 121 is not
expected to be material.
INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. The Company
elected S Corporation status effective March 1, 1987. The items of taxable
income, credit, and tax preferences of the Corporation are primarily the
responsibility of the stockholders on their individual income tax returns.
The Corporation is not subject to federal income taxes but is subject to a
California financial corporation tax rate, which approximated 3.9% and 3.6%
in fiscal year 1996 and 1995, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal year 1995 financial
statements to conform to the current year presentation.
2. MORTGAGE LOAN SERVICING
The Company's origination and servicing activity is concentrated within
California. The Company's servicing portfolio is primarily comprised of
conventional mortgage loans which are not included in the accompanying
balance sheets and which had outstanding principal balances of $241 million
and $355 million, representing 1,736 and 2,589 loans, at April 30, 1996 and
1995, respectively. The majority of loans are securitized through Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") programs on a nonrecourse basis whereby foreclosure
losses are generally the responsibility of the investor and not the
Company. In connection with mortgage loan servicing activities, the Company
segregates escrow and custodial funds in separate trust accounts and
excludes these balances ($2,904,800 and $3,743,535 at April 30, 1996 and
1995, respectively) from the accompanying balance sheets. The Company is
required to maintain separate accounting records for its escrow and
custodial cash accounts and the related liabilities.
The Company sold servicing rights for mortgages with outstanding principal
balances of $179 million and $186 million during the years ended April 30,
1996 and 1995, respectively. These sales resulted in net gains of $1
million and $2.37 million for the years ended April 30, 1996 and 1995,
respectively.
<PAGE> 16
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $241 million were pledged as collateral to lenders as of
April 30, 1996.
The Company has issued various representations and warranties associated
with whole loan and bulk servicing sales which are standard in the
industry. These representations and warranties may require the Company to
repurchase defective loans as defined per the applicable servicing and
sales agreements. The Company experienced no significant losses during the
years ended April 30, 1996 and 1995 with respect to these representations
and warranties.
The Company carried fidelity bond coverage of $900,000 and errors or
omission coverage of $900,000 as of April 30, 1996.
3. MORTGAGE SERVICING RIGHTS
The following summarizes activity with respect to mortgage servicing rights
during the year ended April 30, 1996:
<TABLE>
<S> <C>
Balance at May 1, 1995 $ -
Originated 1,054,538
Sales (808,855)
Amortization (89,761)
-----------
Balance at April 30, 1996 $ 155,922
===========
</TABLE>
4. LOSS ON SALES OF MORTGAGE LOANS
Loss on sales of mortgage loans for the years ended April 30 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Loan origination fees..................... $ 1,492,612 $ 459,901
Direct loan origination costs............. (1,557,187) (612,348)
Investor discounts........................ (2,364,484) (178,295)
Servicing rights capitalized.............. 1,054,538 -
Commitment fees & hedging activities, net. (42,356) (95,920)
Other..................................... (131,782) 8,151
------------ ----------
Total $(1,548,659) $(418,5ll)
============ ==========
</TABLE>
5. WAREHOUSE BORROWINGS, NOTE PAYABLE AND LINE OF CREDIT
At April 30, 1996, the Company had three warehouse lines of credit
available: $15 million expiring August 31, 1996, $5 million expiring June
5, 1996, and $10 million expiring December 31, 1996. The warehouse lines of
credit bear interest at the Federal Funds rate plus a variable spread, at
LIBOR plus 1.625%, and prime plus 1%, respectively, and are 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 stockholders. The maximum amount outstanding
under the warehouse lines at any month-end during fiscal years 1996 and
1995 was $41.2 million and $11.1 million, respectively. The weighted
average interest rate during fiscal years 1996 and 1995 was 7% and 6.3%,
respectively. The line of credit 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.
<PAGE> 17
The note payable is due in four years, requires monthly payments of
interest at prime plus .625%, and 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. Aggregate annual principal payments are as
follows:
<TABLE>
<CAPTION>
Year ending April 30
--------------------
<S> <C>
1997 $250,000
1998 250,000
1999 250,000
2000 229,169
--------
Total $979,169
========
</TABLE>
In fiscal year 1995, the Company obtained a revolving line of credit, with
a maximum borrowing limit of $1 million, of which $800,000 and $0 was
outstanding at April 30, 1996 and 1995, respectively. The line of credit
bears interest at the highest prime rate quoted by the First National Bank
of Chicago plus .625% and expires on December 31, 1996. The line of credit
is secured by mortgage loans held for sale and receivables from sales of
mortgage loans and requires the Company to maintain a minimum loan
servicing portfolio of $200 million.
6. STOCKHOLDERS' EQUITY
Stockholder distributions for the years ended April 30, 1996 and 1995 were
for the following purposes:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payment of taxes $620,853 $106,820
Payment on notes to repurchase shares
from minority stockholders 6,374 152,862
Other 19,998 20,381
-------- --------
Total stockholder distributions $647,225 $280,063
======== ========
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company adopted a contributory pension plan (the "Plan") which
qualifies under Section 401(k) of the Internal Revenue Code in 1993. The
Plan covers all employees meeting certain eligibility requirements and
provides for matching employer contributions. There was no contribution
expense for the years ended April 30, 1996 and 1995.
8. COMMITMENTS AND CONTINGENCIES
a. Loan Sale Commitments - The Company has entered into optional and
mandatory forward commitments to deliver mortgage loans of $19 million and
$4.6 million as of April 30, 1996 and 1995, respectively.
<PAGE> 18
b. Mortgage Loan Applications in Process - The Company has open short-term
commitments to fund mortgage loan applications in process subject to credit
approval. Such commitments, which had interest rates which were committed
to the borrower, amounted to $31 million and $8.5 million as of April 30,
1996 and 1995, respectively. 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.
c. Leases - The Company leases office facilities and equipment under
noncancellable operating leases. Future minimum lease payments and related
sublease receipts under these leases as of April 30, 1996 are as follows:
<TABLE>
<CAPTION>
Lease Sublease Net Lease
Year ending April 30 Expense Income Expense
- -------------------- -------- -------- ---------
<S> <C> <C> <C>
1997 $278,447 $ 31,368 $247,079
1998 93,200 20,912 72,288
1999 30,943 1,307 29,636
2000 20,947 - 20,947
-------- -------- --------
Total $423,537 $ 53,587 $369,950
======== ======== ========
</TABLE>
Rental expense amounted to $310,191 and $426,675 in fiscal year 1996 and
1995, respectively.
d. 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 Company. The claim seeks a rescission of prior
contracts for the sale of plaintiff's stock to the Company's current
stockholders to restore them to their former status as minority
stockholders of the Company. It is the opinion of management, after
consultation with outside counsel, that the resolution of all these matters
will not have a material adverse effect on the Company's financial
position.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate methodologies. However, considerable judgment
is necessarily required to interpret market data to develop the estimates
of fair value. Accordingly, the estimates presented herein may not be
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts disclosed in the following paragraph.
The estimated fair values of the Company's financial instruments at April
30, 1996 are as follows:
<PAGE> 19
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
----------- -----------
<S> <C> <C>
Assets:
Cash $ 672,687 $ 672,687
Receivables from sales of mortgage loans
and loan servicing rights 11,425,430 11,425,430
Mortgage loans held for sale 10,674,736 10,674,736
Mortgage loan servicing advances and
other receivables 927,430 927,430
Mortgage servicing rights 155,922 155,922
Liabilities:
Warehouse borrowings 19,731,707 19,731,707
Note payable and line of credit 1,779,169 1,779,169
<CAPTION>
Contract or Unrealized
Notional Gain
Amount (Loss)
----------- -----------
Off-balance-sheet financial instruments:
Loan commitments to fund $30,845,504 $ 118,201
Loan commitments to sell 19,000,000 (86,250)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate such value:
CASH, RECEIVABLES FROM SALES OF MORTGAGE LOANS AND LOAN SERVICING RIGHTS,
MORTGAGE LOANS HELD FOR SALE, MORTGAGE LOAN SERVICING ADVANCES AND OTHER
RECEIVABLES, WAREHOUSE BORROWINGS AND NOTE PAYABLE AND LINE OF CREDIT
The carrying value is considered to be a reasonable estimate of fair value,
based on interest rates of similar financial instruments in the
marketplace.
MORTGAGE SERVICING RIGHTS
The fair value is determined based on projected net cash flows (including
inflows from servicing offset by estimated costs of servicing), using the
consensus projected prepayment levels published by several large securities
dealers that approximate the characteristics of the underlying portfolios
and discounted using rates of return required for financial assets with
similar risk characteristics.
LOAN COMMITMENTS
The fair value of mortgage loan commitments is estimated using quoted
prices at April 30, 1996. The fair value of commitments to sell can be
estimated by the amount the Company would receive or pay to terminate the
forward delivery contract at the reporting date based upon market prices
for similar financial instruments. The fair value of commitments to fund
can be estimated by comparing the Company's cost to acquire mortgages to
the current prices for similar mortgages, taking into account the terms of
the commitment and the creditworthiness of the counterparts.
<PAGE> 20
10. SUBSEQUENT EVENT
On May 22, 1996, the stockholders of the Company signed a letter of intent
with a financial services holding company ("holding company"), whereby the
Company would be merged with and into the holding company via an exchange
of 100% of the Company's common stock for common stock of the holding
company.
The proposed merger is subject to certain conditions, including the
completion of mutual due diligence procedures, as well as the approval by
the stockholders of both companies. As such, the Company's management
cannot predict at this time whether the proposed merger will occur.
<PAGE> 21
7 (B) Forma Financial Information
Since the acquisition of Monument is treated for accounting purposes as a
reverse acquisition between the Company, an inactive public entity at the
time of the acquisition, and Monument, a non public company, the
combination is treated as an issuance of shares by Monument. Accordingly,
pro forma information is not presented since the merger is not considered
to be a business combination.
7 (C) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedule
<PAGE> 22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
FINET HOLDINGS CORPORATION
<TABLE>
<S> <C>
Date: May 14, 1997 /s/ L. DANIEL RAWITCH
------------------------------------
L. DANIEL RAWITCH
(CEO AND PRINCIPAL EXECUTIVE OFFICER)
Date: May 14, 1997 /s/ JAN C. HOEFFEL
------------------------------------
JAN C. HOEFFEL
(PRESIDENT AND PRINCIPAL FINANCIAL OFFICER)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited interim financial reports and is qualified in its
entirety by reference to such financial statements included herein.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> OCT-31-1996
<CASH> 167,304
<SECURITIES> 0
<RECEIVABLES> 10,936,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 950,666
<DEPRECIATION> 1,101,432
<TOTAL-ASSETS> 22,478,355
<CURRENT-LIABILITIES> 20,928,516
<BONDS> 0
0
0
<COMMON> 760,000
<OTHER-SE> 696,474
<TOTAL-LIABILITY-AND-EQUITY> 22,478,355
<SALES> 0
<TOTAL-REVENUES> 1,706,799
<CGS> 0
<TOTAL-COSTS> 3,096,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608,454
<INCOME-PRETAX> (1,390,199)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,390,199)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,390,199)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</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 included herein.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 672,687
<SECURITIES> 0
<RECEIVABLES> 12,352,860
<ALLOWANCES> 0
<INVENTORY> 10,674,736
<CURRENT-ASSETS> 0
<PP&E> 1,000,534
<DEPRECIATION> 828,960
<TOTAL-ASSETS> 25,215,342
<CURRENT-LIABILITIES> 22,628,803
<BONDS> 0
0
0
<COMMON> 760,000
<OTHER-SE> (1,826,539)
<TOTAL-LIABILITY-AND-EQUITY> 25,215,342
<SALES> 4,399,348
<TOTAL-REVENUES> 6,374,736
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,205,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,829,357
<INCOME-PRETAX> 339,384
<INCOME-TAX> 13,220
<INCOME-CONTINUING> 326,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,164
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
