As filed with the Securities and Exchange Commission on April 23, 1998
--Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINET HOLDINGS CORPORATION
(Exact name of issuer specified in its charter)
DELAWARE 94-3115180
(State of incorporation) (I.R.S. Employer Identification No.)
3021 CITRUS CIRCLE, SUITE 150
WALNUT CREEK, CALIFORNIA 94598
(Address of Principal Executive Offices)
JAN C. HOEFFEL
PRESIDENT
FINET HOLDINGS CORPORATION
3021 CITRUS CIRCLE, SUITE 150
WALNUT CREEK, CALIFORNIA 94598
(510) 988-6550
(Name and Address and Telephone Number of Agent for Service)
COPIES TO:
ROGER S. MERTZ, ESQ.
SEVERSON & WERSON
ONE EMBARCADERO CENTER, 26th FLOOR
SAN FRANCISCO, CALIFORNIA 94111
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C> <C>
Title Of Each Class Of Proposed Maximum Proposed Maximum
Securities To Be Amount To Be Offering Price Aggregate Offering Amount Of
Registered Registered(1) Per Share(2) Price(2) Registration Fee(3)
- ------------------------ ------------- ---------------- -------------------- -------------------
Common Stock issuable
upon conversion of
Debentures 3,167,570 $3.32 $10,516,332 $3,102
Common Stock issuable 100,000 $5.71 $571,000 $168
upon exercise of Warrants 37,500 $4.88 $183,000 $54
Total $3,324
</TABLE>
(1) Shares of the Registrant's Common Stock, $0.01 par value per share, are
being registered for resale on behalf of certain selling security holders.
Pursuant to Rule 416, this Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Company's 3% Subordinated Convertible
Debentures (the "Debentures") and exercise of Warrants issued in connection
with the issuance of the Debentures (i) to prevent dilution resulting from
stock splits, stock dividends or similar transactions or (ii) by reason of
changes in the conversion price of the Debentures in accordance with the
terms thereof.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The fee with respect to these shares has been calculated pursuant to Rule
457(c) under the Securities Act of 1933, as amended, and is based upon the
average of the bid and asked prices per share of the Registrant's Common
Stock on April 17, 1998, as quoted on the NASDAQ SmallCap Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED APRIL 23, 1998
PROSPECTUS
FINET HOLDINGS CORPORATION
3,305,070 Common Shares
This Prospectus relates to 3,305,070 shares of the Common Stock, $0.01 par value
(the "Common Stock" or "Common Shares"), of Finet Holdings Corporation, a
Delaware corporation (the "Company"), which will be resold by the persons listed
herein as the Selling Shareholders (the "Selling Shareholders" or "Selling
Security Holders"). The Common Shares are being offered hereunder for the
respective accounts of the Selling Security Holders and will be sold from time
to time by the Selling Security Holders in the over-the-counter market or
otherwise at prevailing market prices or in negotiated transactions. A total of
3,167,570 shares are issuable by the Company to the Selling Security Holders
upon the conversion of 3% Subordinated Convertible Debentures (sold in two
tranches) due March 18 and April 20, 2001 in the principal amount of $5,500,000
(the "Debentures") (the "Debenture Shares"), and a total of 137,500 shares are
issuable to the Selling Security Holders upon exercise of Common Stock Purchase
Warrants (the "Warrants") (the "Warrant Shares"). The Debenture Shares and the
Warrant Shares are collectively referred to herein as the "Securities." Holders
of the Debentures have the right to convert 100% of the aggregate principal
amount of Debentures held by such holders, at any time after September 18, 1998
with regard to the First Tranch Debentures and at any time after October 20,
1998 with respect to the Second Tranch Debentures. The Warrants are immediately
exercisable at an exercise price of $5.71 per share of Common Stock for the
First Tranch and $4.88 for the Second Tranch, subject to adjustment. As of the
date of this Prospectus, no portion of the Debentures had been converted and
none of the Warrants had been exercised. The expenses of preparing and filing
the Registration Statement of which this Prospectus forms a part are being borne
by the Company. The Company will not receive proceeds from the sale of the
Securities by the Selling Security Holders of the shares of Common Stock to
which this Prospectus relates. Upon the exercise of a Warrant, the Company will
receive the applicable exercise price per share from the Selling Security
Holder. The Company will use such proceeds, if any, to increase working capital.
The number of shares of Common Stock issuable upon conversion of the Debentures
is determined by dividing the aggregate principal amount, plus any accrued
interest at 3% per annum and certain other possible obligations, by the lesser
of (i) $5.00 per share, or (ii) 78% (the "Applicable Discount") of the average
of the closing bid price for the Company's Common Stock for the 10 consecutive
trading days ending on the trading day immediately preceding such conversion
date.
For purposes of this Registration Statement the Company has computed the number
of shares issuable pursuant to each Tranch as follows. $4,000,000 in Debentures
were sold in the First Tranch and $1,500,000 in the Second. The number of shares
issuable pursuant to conversion of the First Tranch is computed by dividing the
aggregate principal and interest at maturity of $4,360,000 by $2.97. The $2.97
figure assumes a 78% discount rate and a conversion price of $3.81. The Second
Tranch number is computed by dividing the aggregate principal and interest at
maturity of $1,635,000 by $2.54, the latter number assumes a 78% discount rate
and a conversion price of $3.25. Pursuant to registration rights agreements
with the Selling Security Holders, the Company is registering 150% of what is
convertible based on the foregoing computations.
The Common Shares offered hereby were acquired by the Selling Security Holders
from the Company in private transactions and are "restricted securities" under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
has been prepared for the purpose of registering the Common Shares under the Act
to allow for future sales by the Selling Security Holders to the public without
restriction. To the knowledge of the Company, the Selling Security Holders have
made no arrangement with any brokerage firm for the sale of the Common Shares.
The Selling Security Holders may be deemed to be "underwriters" within the
meaning of the Act. Any commissions received by a broker or dealer in connection
with resales of the Common Shares may be deemed to be underwriting commissions
or discounts under the Act. See "Plan of Distribution."
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold, nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these
Securities, in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state.
The Common Stock of the Company is traded on the NASDAQ SmallCap Market under
the symbol "FNHC." On April 21, 1998, the last reported sale price for the
Common Stock was $3.75 per share.
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is dated April 23, 1998
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Prospectus, including all documents incorporated by reference, includes
"forward-looking" statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act and the Private Securities Litigation
Reform Act of 1995. The forward-looking statements in this Prospectus reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including specifically an absence of significant revenues, a
history of losses, no assurance that technology can be completed or that it will
not be delayed, significant competition, the uncertainty of proprietary rights,
the uncertainty as to indemnification risks, possible adverse effects of future
sales of shares on the market, trading risks of low-priced stocks and those
other risks and uncertainties discussed herein, that could cause actual results
to differ materially from historical results or those anticipated. In this
Prospectus, the words "anticipates," "believes," "expects," "intends," "future"
and similar expressions identify forward-looking statements. Readers are
cautioned to consider the specific risk factors described herein and in "Risk
Factors," and not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that may arise after the date hereof. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
section.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities Exchange
Act of 1934 (the "Exchange Act"), and in accordance therewith, files periodic
reports and other information with the Securities and Exchange Commission (the
"Commission") as a "Small Business Issuer" pursuant to Regulation S-B of the
Commission. The Company has filed a Registration Statement (which term shall
include all amendments thereto) on Form S-3 under the Securities Act with the
Commission with respect to the Common Stock offered hereby. This Prospectus,
which constitutes part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Statements contained herein concerning the provisions of any documents are not
necessarily complete and, in each instance, reference is made to the copy of
such documents filed as an exhibit to the Registration Statement, and each such
statement shall be deemed qualified in its entirety by such reference.
With respect to each report or other information filed with the Commission
pursuant to the Exchange Act, and such contract, agreement or document filed as
an exhibit to the Registration Statement, reference is made to such exhibit for
a more complete description, and each such statement is deemed to be qualified
in all respect by such reference. Such reports, proxy statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained form the Public Reference Section of the Commission, at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company is
subject to the electronic filing requirements of the Commission. Accordingly,
pursuant to the rules and regulations of the Commission, certain documents,
including annual and quarterly reports and proxy statements, filed by the
Company with the Commission have been or will be filed electronically. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
The following documents, each of which has been filed with the Commission, are
incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-KSB/A for the fiscal
year ended April 30, 1997 (the "Annual Report")
(ii) the Company's Quarterly Reports on Form 10-QSB for the quarters
ended July 31, 1997, October 31, 1997 and January 31, 1998;
(iii) the Company's 1997 Proxy Statement on Schedule 14A; and
(iv) the Company's Current Reports on Form 8-K, filed January 6, 1998,
January 15, 1998, April 6, 1998 and a Form 8-K/A filed March 4,
1998.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the
offering of the Securities registered hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof
from the respective dates of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not
be deemed, except as to modified and superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this Prospectus
is delivered, upon written or oral request of such person, a copy of any and all
of the information that has been incorporated by reference in this Prospectus,
excluding exhibits. Written or telephone requests for such documents should be
directed to the Chief Financial Officer of the Company at its principal
executive offices.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. AS USED HEREIN, THE "COMPANY" MEANS FINET HOLDINGS CORPORATION
TOGETHER WITH ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
Finet is an electronic financial services company serving the residential real
estate market. The Company is organized around two electronic commerce groups:
Technology Systems and Services ("TS&S") and Homeowner Services ("HS"). Through
its subsidiary, The Property Transaction Network, homebuyers are provided with a
one-stop platform for electronically finding and financing a home. Finet's
mortgage financing activities are conducted through two subsidiaries: Monument
Mortgage, Inc., which originates, services and sells mortgage loans, and
PreferenceAmerica Mortgage Network, an electronic mortgage broker with retail
call centers providing access to the Property Transaction Network. Finet is
currently in negotiations to acquire two mortgage banking companies: MICAL
Mortgage, Inc. and Coastal Federal Mortgage Company. Coastal, a New Jersey
corporation, is active in 16 Eastern states as a mortgage banker and broker.
MICAL, a California corporation, is a full service mortgage banker operating in
18 states and specializing in FHA and VA loans. Pursuant to a pledge and
security agreement, as of April 20, 1998 Finet has lent MICAL $1,311,950, which
loan is secured by all of MICAL's assets. The acquisitions are planned to
be completed on or before May 1, 1998, however there can be no certainty that
either or both acquisitions will be successfully closed.
The residential mortgage market totaled over $3.6 trillion in 1995 and is the
second largest debt market in the world, exceeded only by the United States
Treasury market. The real estate services industry is highly fragmented, with
approximately 10 million independent providers, including realty, appraisal,
title search and verification, financing, escrow, inspections, and insurance
services. Until very recently, this diverse and geographically dispersed group
relied upon traditional channels of communicating with each other, with the
result that homebuying has been a paper-intensive, costly, often months-long
process. Technology is revolutionizing this process by more easily and cheaply
connecting the parties to the home acquisition and financing transaction.
Finet's business strategy is to combine emergent technologies with its own
proprietary systems to offer, via the Internet, all the essential services
required by prospective homebuyers to acquire a new home or refinance an
existing home.
The Property Transaction Network ("PTN") provides monthly fee-based electronic
connectivity services to realtors who acquire the Agent Connector, Finet's
proprietary, multi-media software, which operates in a vendor-neutral
environment on a realtor's camera-equipped laptop computer. The PTN offers,
among other services, the ability to take prospective home buyers on electronic
property tours, and private Web sites that consumers can access to check on the
status of their mortgage application. The PTN streamlines the loan application
and approval process and permits prospective homebuyers to: (a) connect with
trained mortgage loan personnel via user friendly workstations located in
Finet's Service Center; (b) complete the loan application directly on screen;
and (c) access lender programs anywhere in the country. PTN derives its revenue
from monthly realtor fees and advertising service fees.
PreferenceAmerica Mortgage Network ("PAMN") is a mortgage broker and Finet's
primary retail sales operation. It operates in call centers that take telephone,
fax, video conference and Internet calls from individuals and PTN realtors and,
as appropriate, directs the resulting transaction to the many mortgage lenders
with which it has brokerage relationships, including Monument Mortgage, Inc.
("MMI").
MMI is an independent mortgage banker and loan seller/servicer. It develops loan
programs, offers loan rates in competition with other residential real estate
lenders, and matches any lenders' APR on comparable loans. MMI also purchase,
sells and manages mortgage loan portfolios. It currently is Finet's largest
business unit and source of revenues, which are primarily from the sale of loans
in the secondary mortgage market and from the servicing and sale of mortgage
loans. MMI operates in 17 states and is the largest user of Fannie Mae's Desktop
Originator/ Underwriter software systems in the Western United States.
The proposed acquisitions of Coastal and MICAL will allow Finet to originate
mortgage loans on a near nationwide basis. Complementing Finet's small sub-prime
brokerage unit, Coastal concentrates in placing sub-prime mortgage loans for the
30% or more of borrowers with impaired credit. In 1997 Coastal originated over
$100 million of such loans. Approximately 65% of MICAL's loan originations are
VA and FHA loans, an area in which Finet seeks to become active. MICAL currently
originates a total of approximately $70 million in loans per month. The
acquisitions are planned to be completed on or before May 1, 1998, however there
can be no assurance that either or both acquisitions will be successfully
completed.
SECURITIES OFFERED
No securities will be offered or sold by the Company pursuant to this
Prospectus, which relates solely to the resale of 3,305,070 shares of the Common
Stock of the Company held and beneficially owned by persons listed herein as the
Selling Security Holders. The Common Shares are being offered hereunder for the
respective accounts of the Selling Security Holders and will be sold from time
to time by the Selling Security Holders in the over-the-counter market or
otherwise at prevailing market privies or in negotiated transactions. See "Plan
of Distribution," "Selling Security Holders" and "Description of Capital Stock."
OUTSTANDING SHARES
As of April 14, 1998, 30,639,184 shares of the Company's Common Shares are
outstanding. See "Description of Capital Stock."
COSTS; USE OF PROCEEDS
The expenses of preparing and filing the Registration Statement of which this
Prospectus forms a part are being borne by the Company. The Company will receive
no proceeds from the sale of the Common Shares by the Selling Security Holders.
Upon the exercise of a Warrant, the Company will receive the applicable exercise
price per share from the Selling Security Holder. The Company will use such
proceeds, if any, to increase working capital.
RISK FACTORS
The Securities offered involve a high degree of risk. See "Risk Factors."
RISK FACTORS
HISTORY OF LOSSES
Finet has been operating in the residential mortgage brokerage business since
December, 1991 and has incurred net losses in each quarter since that date. To
date, the Company's losses have been funded by loans and invested capital.
Current management believes that Finet's losses were primarily attributable to
earlier business practices, including the costs of leasing, staffing and
equipping branch offices, the lack of profit/loss accountability by branch
managers, excessive loan agent commissions, and the costs of building and
housing, in advance, an executive and management organization sufficient to
support the significantly larger operation the Company had hoped to achieve but
did not. In 1994 and 1995, losses were exacerbated by rapidly rising interest
rates and an attendant decline in loan originations.
The Company has since changed its operating structure and management, cut
expenses and personnel significantly, and reduced its losses in 1996, however as
of December 31, 1996 its revenues were still insufficient to cover its operating
expenses, at which time it acquired Monument Mortgage, Inc. (MMI) and its
affiliate PreferenceAmerica Mortgage Network. The acquisition of MMI, a mortgage
banker, was a reverse acquisition whereby MMI's historical financial statements
became the Company's financial statements for accounting purposes. MMI was
profitable from 1988 through the fiscal year ended April 30, 1996, however,
combined with Finet's operations following its acquisition, MMI posted a loss of
$3,168,265 for the fiscal year ended April 30, 1997. MMI's profitability during
this period varied in accordance with the cycles of interest rate increases and
loan origination declines, that is, as interest rates increased originations
tended to decline, and vice versa. Since the peak of the mortgage loan
refinancing market in 1993, MMI's operating results gradually declined to a $1.9
million loss for the fiscal year ended April 30, 1997. PAMN has been in the
startup phase and has incurred losses to date. There can be no assurance that
the Company will not continue to incur losses or that it will be able to achieve
significant revenues or profitability in the future. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" in
the Company's 1934 Act reports incorporated by reference herein for a discussion
of the operating history and financial circumstances of the Company.
GOING CONCERN QUALIFICATION
During every Company December 31 fiscal year end through 1995, the reports of
the Company's accountants on the financial statements of the Company contained a
qualification as to the uncertainty of the Company's ability to continue as a
going concern. See "Experts." The Company changed its fiscal year end from
December 31 to April 30 immediately following the reverse acquisition by the
Company of Monument Mortgage, Inc. on December 31, 1996. The Company's
accountants removed the going concern qualification in the annual report for the
fiscal year ended April 30, 1997. However, the Company's ability to continue as
a going concern must be considered in light of the problems, expenses and
complications frequently encountered in connection with the development and
marketing of new products or services. The Company's accountants have informed
management that they are evaluating whether the audit opinion for the Company's
fiscal year ended April 30, 1998 will contain a going concern qualification.
POSSIBLE NEED FOR ADDITIONAL FINANCING
To achieve the sustained growth envisioned, the Company will require significant
capital and other resources which the Company does not currently possess. The
Company anticipates continuing to incur operating losses for the remainder of
1998, and until such time, if ever, as the Company's operations generate
sufficient revenue to offset its costs. The Company expects to incur substantial
expenses principally as the result of the various costs associated with
corporate acquisitions, implementation of a sales and marketing program and
distribution channels, recruitment and training of personnel and other operating
activities. The Company issued equity and debt securities in fiscal 1996, 1997
and 1998 to finance its operations, and is exploring the possibility of
additional equity issuances in the first quarter of fiscal 1999. The Company has
no commitments from others to provide such additional financing and there can be
no assurance that any such additional financing will be available if needed or,
if available, will be on terms acceptable to the Company.
NEED FOR ADDITIONAL PERSONNEL
The Company's ability to grow will depend in part upon its ability to attract
and retain experienced professionals to staff a significant expansion of its
activities. There can be no assurance that the Company will not need to hire
additional management and other personnel to meet its long term goals or that
the Company will be able to find and attract qualified persons to fill such
additional positions.
CYCLICAL INDUSTRY
The residential real estate and mortgage business is dependent upon the sale and
refinancing of residential real estate and on mortgage loan interest rates and
is, therefore, a cyclical industry. Shifts in the economy as well as in
residential real estate values generally affect the number of home sales and new
housing starts. As the number of home sales increases, the need for mortgage
loan financing increases, and as the number of home sales decreases, so does the
need for mortgage loan financing. Declining interest rates generally increase
mortgage loan financing activity as home owners refinance existing mortgage
loans to obtain the benefits of the lower interest rates. Increasing interest
rates discourage refinancing and generally have a negative effect on the number
of home sales. The volume of closed loan originations, and consequently of
revenues, will, in part, be dependent on the level of and trend in interest
rates and, therefore, the Company's earnings could be adversely affected.
The effect of interest rate changes tends to be greater on the market for
refinancing loans than on purchase loans, in that refinancing is voluntary and
motivated primarily by the opportunity to lower financing costs, whereas
purchasers are motivated by a need or desire for a new home. The annual volume
of new purchase loans is relatively stable, whereas the annual volume of new
refinance loans is quite volatile. Realtors are primarily involved in purchase
transactions, whereas refinancings are the province of lenders and mortgage
brokers. A major thrust of the Company's business strategy is developing
relationships with realtors, which is intended to provide a more stable flow of
loan originations. However, no assurances can be given as to future interest
rate trends, their impact on the Company's business, or the Company's ability to
manage its business mix.
MARKET ACCEPTANCE BY CUSTOMERS AND SERVICE PROVIDERS
The Company's revenues are, and will be, derived primarily from fees for
services related to the purchase and financing of homes. The Company's revised
business strategy is materially different than its earlier operations.
Therefore, the success and growth of the Company cannot be forecast with
confidence and will depend upon the acceptance of the Company's approach by
customers and service providers, including Realtors, lenders, brokers,
settlement services providers and homeowner services firms. While the initial
acceptance of its new approach appears favorable to date, there can be no
assurance of such acceptance generally and, therefore, no assurance that the
Company will be able to achieve its plans for growth. Although the Company has
established relationships with a number of national service providers (i.e., who
operate in various areas throughout the country), to operate successfully in
other geographical areas, the Company also will have to develop relationships
with regional and local providers in such areas. While the Company believes it
will be able to establish these relationships, there is no assurance that a
sufficient number in any given area will be willing to cooperate with the
Company or its affiliates.
DEPENDENCE ON LENDERS AS A MORTGAGE BROKER
Lenders which the Company represents as a mortgage broker are under no
obligation to continue the relationship or to make loans to any potential
borrower presented by the Company or its affiliates. While the Company has had
relationships with over 100 lenders to date, most of the loans originated by
Finet have been originated through a much smaller number of lenders. This has
been due primarily to the favorable rates and other terms offered by such
lenders, and the Company believes that if and when other lenders offer
comparable terms, the sources of loans would shift accordingly. If lenders with
the most competitive terms do not continue to accept loans originated by the
Company or its affiliates, if any, its business will be adversely affected.
As a mortgage broker, some lenders attempt to require that the Company
repurchase certain mortgage loans funded by such lenders in the event of fraud
by the Company or misrepresentations or inaccuracies in borrower's loan
applications. To date, the Company has been successful in modifying such
agreements and no lenders have requested that the Company purchase any of the
mortgage loans originated by the Company, however no assurance can be given that
such a request may not occur in the future. Should a lender prevail in such a
request, the Company may not have the financial resources to make such a
purchase. Finet intends to apply for errors and omissions liability insurance to
partially protect itself from this risk, although there can be no assurance that
the Company's application, if filed, would be approved, or that, if approved,
the Company would be able to afford this insurance.
As a lender, because such borrower misrepresentation or inaccuracy was later
determined, MMI on occasion has been required to repurchase a loan from the
institutional investor to whom it sold the loan. In the past, MMI has been able
to resell the loan to another investor or to otherwise resolve the matter
without material financial consequences. However, there can be no assurances
that the required repurchase of a loan in the future will not have material
adverse consequences.
POTENTIAL LIABILITIES TO BORROWERS
Borrowers could claim to have suffered adverse financial effects from
utilization of Finet's services. The most common instance of complaint in the
industry occurs when a borrower fails to lock in an interest rate and, at the
time of closing, the available rate has increased from the rate available at the
time of application. While assessment of such claims is highly subjective, in a
few instances where it was considered possible that the borrower had not been
made sufficiently aware of the possibility of rate increases and the protection
afforded by a rate lock, Finet has resolved the matter to the borrower's
satisfaction by discounting its fees.
MORTGAGE BANKING RISKS
Through its subsidiary MMI, the Company also functions as a lender for some of
the loans it originates. The real estate financing sector is in a period of
consolidation, with many lenders closing or ceasing mortgage banking operations.
As a non-depository mortgage banker, MMI is dependent upon a specialized
mortgage credit facility to finance its mortgage lending activities. Its current
mortgage banking lines of credit are provided by a single lender with whom it
has had a relationship since 1988. The warehouse facility currently has an $80
million limit. The Company's loan volume has increased to the point where, as is
common in the industry, its increasing credit facility needs are best provided
by a group of such lenders sharing the total credit risk. The Company is
currently negotiating with its current and other lenders who are interested in
acting as the lead manager of such group. There can be no assurance that the
Company will be successful in arranging such a syndicated credit facility or
that the relationship with its single current lender can be sustained until such
time.
As interest rates rise and the economy declines, the rate of mortgage
loan foreclosures tends to rise. As a result, the Company occasionally is
required to hold foreclosed residential real estate in inventory ("REO") until
it can be resold. Depending on the circumstances of the transaction, the Company
may or may not be able to sell the property for more than the outstanding loan
balance. There can be no assurance that such transactions will not have a
material adverse effect on the Company's operations.
MARKET ACCEPTANCE BY POTENTIAL AFFILIATES
The Company's ability to operate profitably will depend on its ability to
achieve a substantial increase in loan originations, which will, in turn, depend
on a significant expansion of the number of Realtors, mortgage brokers and loan
agents offering its services. The Company believes that it has developed several
profitable means of expanding the number of loan closings, including the PTN's
systems and services, Finet's Service Center, and Monument Mortgage's mortgage
banking and alternative lending activities. While the Company believes it offers
attractive advantages to homebuyers and mortgage brokers, there can be no
assurance that others will perceive such advantages to be attractive.
UNPROVEN PLAN OF OPERATION
The Company's prior franchise-based business plan was not implemented as
planned. Although not all aspects of its revised business development plan are
new, the integrated real estate services distribution system the Company has
developed is at an early stage of operation, and there can be no assurance that
such plan will operate efficiently or profitably. There can be no assurance that
the Company will not experience unforeseen difficulties in the implementation of
its business plan on the contemplated basis.
COMPETITION
The online commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive, which competition the Company expects to
intensify in the future. Barriers to entry are minimal, and current and new
competitors can launch new sites at a relatively low cost. In addition, the
residential mortgage loan business is intensely competitive. The Company
currently or potentially competes with a variety of other companies. These
competitor include: (i) various online mortgage companies, including E-Loan
Inc., HomeShark and AllTell Information Services; (ii) a number of indirect
competitors that specialize in online commerce or derive a substantial portion
of their revenues from online commerce, including Yahoo! and Microsoft
Corporation, through which other online mortgage companies may offer products;
(iii) mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions which originate mortgage loans; and (iv)
mortgage brokers.
Most of these financial institutions have greater financial strength, larger
organizations, more experience and larger, more established market shares than
the Company. Competition for borrowers and loan personnel is intense, especially
in California. In addition, the barriers to entry in the mortgage brokerage
industry are relatively few, thus there can be no assurance that the Company
will not face increased competition from new entrants to this industry. Many of
the Company's mortgage banking and mortgage brokerage competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company. In addition, many of these competitors
offer a wider range of services and financial products than the Company, and
thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Many current and potential competitors
also have greater name recognition and more extensive customer bases that could
be leveraged, thereby gaining market share to the Company's detriment. Such
competitors may be able to undertake more extensive promotional activities,
offer more attractive terms to customers than the Company and adopt more
aggressive pricing policies, possibly even sparking a price war in the
electronic mortgage business. Moreover, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their services and products. For example, E-Loan has
formed a joint venture with the Internet browser Yahoo! that gives E-Loan a
presence on a highly visited site on the World Wide Web. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
EARLY STAGE OF MARKET DEVELOPMENT, DEPENDENCE ON CONTINUED GROWTH OF ONLINE
COMMERCE AND THE INTERNET
The market for electronic residential real estate services, particularly over
the Internet, is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainty. With respect to the Company, this uncertainty is compounded by the
risks that consumers will not adopt online commerce and that an appropriate
infrastructure necessary to support increased commerce on the Internet will fail
to develop, in each case, to a sufficient extent and within an adequate time
frame to permit the Company to succeed.
Sales of many of the Company's services and products will depend upon the
adoption of the Internet by consumers as a widely used medium for commerce and
communication. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as a
reliable network backbone, or timely development of complementary services and
products, such as high speed modems and high speed communication lines. The
Internet has experienced, and is expected to continue to experience, significant
growth in the number of users and amount of traffic. There can be no assurance
that the Internet infrastructure will continue to be able to support the demands
placed on it by this continued growth. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of Internet activity or due to increased
governmental regulation. Moreover, critical issues concerning the commercial use
of the Internet (including security, reliability, cost, ease of use,
accessibility and quality of service) remain unresolved and may negatively
affect the growth of Internet use or the attractiveness of commerce and
communication on the Internet. Because global commerce and online exchange of
information on the Internet and other similar area networks are new and
evolving, there can be no assurance that the Internet will prove to be a viable
commercial marketplace. If critical issues concerning the commercial use of the
Internet are not favorably resolved, if the necessary infrastructure is not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, financial condition and operating results may be
materially adversely affected.
Adoption of online commerce, particularly by those individuals that have
historically relied upon traditional means of commerce, will require a broad
acceptance by such individuals of new and substantially different methods of
conducting business. Moreover, the Company's online mortgage services over the
Internet involve a new approach to home acquisition and financing and, as a
result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of the Company's online
services and products. For example, consumers who already obtain mortgage
services from more traditional providers, may be reluctant or slow to change to
obtaining mortgage services over the Internet. Moreover, the security and
privacy concerns of existing and potential users of the Company's services may
inhibit the growth of online commerce generally, and online application for
mortgages in particular, which could have a material adverse effect on the
Company's business, financial condition and operating results.
RAPID TECHNOLOGICAL CHANGE; LACK OF PROPRIETARY TECHNOLOGY
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of its online services. The Internet
and the online commerce industry are characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's existing
technology and systems obsolete. While the Company believes it currently offers
capabilities and services which would be difficult for independent mortgage
brokers to duplicate, little of its computer software, information databases or
applications is proprietary. Consequently, it may be possible for competitors to
develop programs similar or even superior to that currently marketed by the
Company. Additionally, although the connectivity features offered by the
Property Transaction Network and iQualify are currently unique, proprietary and
operational, there can be no assurance that others will not develop and offer
competitive services, or that, if so offered that they will not gain greater
acceptance among potential customers.
The Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of Web sites and other technology entails significant technical
and business risks. There can be no assurance that the Company will successfully
use new technologies effectively or adapt its Web site, technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, its business, prospects, financial condition and
results of operations would be materially adversely affected.
RISKS OF SYSTEMS FAILURES
A key element of the Company's strategy is to generate high volume of traffic
on, and use of, its Web sites. Accordingly, the satisfactory performance,
reliability and availability of the Company's Web sites, transaction-processing
systems and network infrastructure are critical to the Company's reputation and
its ability to attract and retain customers and maintain adequate customer
service levels. The Company's revenues depend in part on the number of customers
who visit its Web sites and the volume of transactions processed via the sites.
Any system interruptions that result in the unavailability of the Company's Web
sites or reduced transaction performance would reduce the volume of services
provided and the attractiveness of the Company's product and service offerings.
The Company has experienced periodic system interruptions, which it believes
will continue to occur from time to time. Any substantial increase in the volume
of traffic on the Company's Web sites may require the Company to expand and
upgrade further its technology, transaction-processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Web sites or timely expand and upgrade its systems and infrastructure to
accommodate such increases.
ONLINE COMMERCE SECURITY RISKS
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as homebuyers' financial
statements. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used by the Company
to protect customer transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
business, financial condition and operating results.
GOVERNMENT REGULATION AND LICENSING
The Company's mortgage brokerage operations, and the mortgage banking operations
of MMI, are subject to extensive regulation by federal and state authorities.
The US Department of Housing and Urban Development ("HUD") regulates certain
aspects of the mortgage lending business. The Real Estate Settlement Procedures
Act of 1974 ("RESPA"), a Federal statute, requires that certain disclosures,
such as a Truth-in-Lending Statement, be made to borrowers and that certain
information, such as the HUD Settlement Costs booklet, be provided to borrowers.
The Fair Housing Act prohibits among other practices, discrimination, unfair and
deceptive trade practices, and requires disclosure of certain basic information
to mortgagors concerning credit terms. If the Company fails to comply with such
regulations, possible consequences could include loss of approved status,
demands for indemnification, class action law suits, and administrative
enforcement actions.
Additionally, RESPA contains certain prohibitions regarding the giving or taking
of a fee, kickback, or anything of value for the referral of business to any
specific person or organization. However, there is no prohibition regarding the
payment of reasonable compensation for the provision of goods, services and
facilities.
From time to time in its debate over tax reform, Congress has discussed
eliminating deductibility of mortgage interest. Should this occur, it will
reduce the number of those who can afford home ownership. Additionally, several
large law firms have promoted class action claims that certain industry fee
practices violate RESPA. While the industry has responded vigorously to these
activities, no assurances can be given as to their outcome and the impact on the
industry.
Additionally, in California, regulation and licensing of mortgage brokers falls
under the California Department of Real Estate (DRE). Certain of MMI's mortgage
banking activities fall under the jurisdiction of the California Department of
Corporations (DOC). Other than banking industry employees, who are exempt from
DRE licensing requirements, individuals engaged directly in the origination of
loans or the dissemination of certain information are required to be licensed by
the DRE. The Company and its net branch affiliates will also be required to be
licensed in accordance with the differing requirements of the various states in
which offices or operations are established.
RISKS ASSOCIATED WITH SALES OF MORTGAGE LOANS; FEDERAL PROGRAMS AND RELATED
AGREEMENTS
The Company funds its mortgage loan production operations ultimately by selling
or exchanging all mortgage loans that it originates in the secondary markets,
such as to Fannie Mae and Freddie Mac. The Company's ability to sell mortgage
loans is largely dependent upon the continuation of programs administered by
Fannie Mae and Freddie Mac, which facilitate the pooling of those mortgage loans
into mortgage-backed securities, as well as the Company's continued eligibility
to participate in such programs. The discontinuation of, or a significant
reduction in, the operation of such programs would have a material adverse
effect on the Company's operations. The Company expects that it will continue to
remain eligible to participate in these programs but any significant impairment
of such eligibility would also materially adversely affect its operations. In
addition, the products offered under these programs may be changed from time to
time by the sponsor. The profitability of specific products may vary depending
on a number of factors, including the administrative costs to the Company of
originating these products.
The Company is also dependent upon private investors other than Freddie Mac and
Fannie Mae for the sales of mortgage loans that do not qualify (primarily as a
result of limitations as to maximum loan size) for programs conducted by these
agencies. To the extent that private investors reduce their purchases, the price
and level of the market for those mortgage loans will be negatively affected,
which would adversely impact the Company's mortgage loan production volume and
potentially its profitability.
POSSIBLE ADVERSE EFFECTS OF FUTURE SALES OF SHARES ON MARKET
Future sales of Common Stock by existing stockholders of the shares registered
herein, or pursuant to contemplated future registrations on Form S-3 or Form
SB-2, or pursuant to Rule 144 of the Securities Act could have an adverse effect
on the price of the Common Stock. In addition to the 3,305,070 shares being
registered herein, the Company is preparing a Form S-3 registration statement on
behalf of selling security holders which will register approximately 29,715,000
shares of Common Stock and which the Company expects to file with the SEC by
July 1998. Sales of significant numbers of registered shares into the open
market may have a depressive effect on the market for and the trading price of
the Common Stock, but the Company cannot predict the likely timing or extent of
any sales or the long- or short-term market effect of any sales. In addition, a
total of an additional approximately 1,597,000 shares of Common Stock currently
outstanding may be deemed "restricted securities" as that term is defined in the
Securities Act, and may only be sold pursuant to a registration statement under
the Securities Act, in compliance with Rule 144 under the Securities Act, or
pursuant to another exemption therefrom.
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING FROM THE NASDAQ SYSTEM AND
MARKET ILLIQUIDITY
The Company's Common Stock is included in The Nasdaq SmallCap Market. For
continued inclusion on The Nasdaq SmallCap Market, (i) the Company will have to
maintain at least $2,000,000 in total assets and $1,000,000 in capital and
surplus, (ii) the minimum bid price of the Common Stock will have to be $1.00
per share, (iii) there must be at least 500,000 shares in the public float
valued at $1,000,000 or more, (iv) the Common Stock must have at least two
active market makers, and (v) the Common Stock must be held by at least 300
holders. If the Company is unable to satisfy Nasdaq's requirements for continued
listing, such securities may be delisted from The Nasdaq SmallCap Market. In
such event, trading, if any, in such securities would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" or the Nasdaq's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than might otherwise be attained.
RISKS OF LOW-PRICED STOCKS; PENNY STOCK REGULATIONS
If the Company's Common Stock was delisted from The Nasdaq SmallCap Market it
may become subject to Rule 15g-9 under the 1934 Act, which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's Common Stock and
Warrants and may affect the ability of purchasers in this Offering to sell any
of the Common Stock or Warrants acquired pursuant to this Memorandum in the
secondary market.
The Commission's regulations define a "penny stock" to be any equity security
that has a market price (as therein defined) less than $5.00 per share or with
an exercise price of less than $5.00 per share, subject to certain exceptions.
The penny stock restrictions will not apply to the Company's Common Stock,
Units, Preferred Stock and Warrants if the Common Stock remains listed on The
Nasdaq SmallCap Market and certain price and volume information is provided on a
current and continuing basis and the Company meets certain minimum net tangible
assets or average revenue criteria. There can be no assurance that the Company's
securities will continue to qualify for exemption from these restrictions. If
the Company's securities were subject to the rules on penny stocks, the market
liquidity for the Common stock or Warrants could be materially adversely
affected.
NO DIVIDENDS ON COMMON STOCK
To date, the Company has not paid any dividends on its Common Stock, and the
Company anticipates that no dividends will be paid on the Common Stock in the
foreseeable future. See "Dividend Policy."
USE OF PROCEEDS
The Company will receive no proceeds from the sale by the Selling Security
Holders of the shares of Common Stock offered hereby. Upon the exercise of a
Warrant, the Company will receive the applicable exercise price per share from
the Selling Security Holder. The Company will use such proceeds, if any, to
increase working capital.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $0.01 par value per share, and 100,000 shares of Preferred Stock,
$0.01 par value per share, of which 30,639,184 shares of Common Stock were
issued and outstanding as of April 14, 1998. No shares of Preferred Stock
were outstanding at that date.
CONVERSION OF THE DEBENTURES
In March and April 1998 the Company issued $5,500,000 of 3% Subordinated
Convertible Debentures with a scheduled maturity date three years from their
issuance date. At the option of the holders thereof, the Debentures are
convertible into the Company's Common Stock at a conversion rate determined by
dividing the aggregate principal amount, plus any accrued interest at 3% per
annum and certain other possible obligations, by the lesser of (i) $5.00 per
share, or (ii) 78% (the "Applicable Discount") of the average of the closing bid
price for the Company's Common Stock for the 10 consecutive trading days ending
on the trading day immediately preceding such conversion date. The Common Stock
into which the Debentures are convertible is offered hereby. Pursuant to the
terms of the Debentures, the Company is obligated to register the Common Stock
into which the Debentures are convertible and provide the Selling Security
Holders with a current prospectus upon request for such Selling Security Holders
to use in the resale of the Common Stock. The conversion price is subject to
adjustment if the Company (i) subdivides or combines its outstanding shares of
Common Stock or declares a dividend payable in Common Stock of the Company; or
(ii) reorganizes or reclassifies its capital stock, consolidates or merges with
another corporation or sells all or substantially all of its assets to another
corporation.
EXERCISE OF WARRANTS
In connection with the Company's offering of the Debentures, the Company issued
Warrants to investors to purchase 100,000 shares of the Company`s Common Stock
at $5.71 per share and 37,500 shares at $4.88 per share (the "Exercise Price").
The Exercise Price is subject to adjustment if the Company (i) subdivides or
combines its outstanding shares of Common Stock or declares a dividend payable
in Common Stock of the Company; or (ii) reorganizes or reclassifies its capital
stock, consolidates or merges with another corporation or sells all or
substantially all of its assets to another corporation. The investor warrants
are immediately exercisable and expire three years from their issuance date.
SELLING SECURITY HOLDERS
An aggregate of up to 3,305,070 shares of Common Stock are being offered for
resale by certain Security Holders of the Company pursuant to this Prospectus.
Of those shares, a total of 3,167,570 are issuable upon conversion by the
holders of 3% Subordinated Convertible Debentures in the principal amount of
$5,500,000, and up to 137,500 shares are issuable upon exercise of Warrants held
by the holders of the Debentures. All shares, to the extent they are being
offered, are being offered for the account of the following Security Holders and
their donees or pledgees (the "Selling Security Holders").
The following table sets forth certain information with respect to the Selling
Security Holders for whom the Company is registering the Common Stock for resale
to the public, including: (i) beneficial ownership of Common Stock as of the
date of this Prospectus, (ii) the principal amount of Debentures owned by each
Selling Security Holder, (iii) the number of shares issuable upon conversion of
the Debentures and accrued interest thereon, (iv) the number of shares issuable
upon exercise of Warrants, (v) the percentage of class owned (assuming the
number of shares were issued upon conversion); and (vi) the number of shares
offered by each Selling Security Holder (assuming the maximum number of shares
were issued upon conversion and exercise). The Company has no knowledge of the
intentions of any Selling Security Holder to actually sell any of the shares
listed under the columns "Shares Issuable Upon Conversion" or "Shares Issuable
Upon Exercise of Warrants." There are no material relationships between any of
the Selling Security Holders and the Company other than as disclosed below. All
such persons have (or will have, upon the conversion or exercise of outstanding
Debentures or Warrants) sole voting and investment power with respect to the
Shares being offered.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shares
Issuable Upon
Beneficial Conversion of
Ownership of Principal Debentures and Shares Issuable
Common Stock Amount of Interest(2) Upon Exercise of Percent
at Prospectus Debenture Owned Warrants(3) Shares of
Selling Security Holder Date(1) Offered(4) Class(5)
- ----------------------- -------------- ---------------- -------------- ----------------- ---------- ---------
Atlantis Capital Fund 454,928 $750,000 436,178 18,750 454,928 1.5%
Limited
Sovereign Partners, L.P. 1,726,515 $3,000,000 1,651,515 75,000 1,726,515 5.6%
Dominion Capital Fund, 1,123,627 $1,750,000 1,079,877 43,750 1,123,627 3.7%
Ltd.
Total 3,305,070 $5,500,000 3,167,570 137,500 3,305,070 10.8%
========= ========== ========== ======= ========= ====
</TABLE>
(1) Includes shares owned prior to this offering and the shares which are
issuable upon the conversion of the Debentures and exercise of the Warrants
held by the Selling Security Holders.
(2) The number of shares of Common Stock issuable upon conversion of the
Debentures is determined by dividing the aggregate principal amount, plus
any accrued interest at 3% per annum by the lesser of (i) $5.00 per share,
or (ii) 78% (the "Applicable Discount") of the average of the closing bid
price for the Company's Common Stock for the 10 consecutive trading days
ending on the trading day immediately preceding such conversion date. For
purposes of this Registration Statement the Company has computed the number
of shares issuable pursuant to each Tranch as follows. $4,000,000 in
Debentures were sold in the First Tranch and $1,500,000 in the Second. The
number of shares issuable pursuant to conversion of the First Tranch is
computed by dividing the aggregate principal and interest at maturity of
$4,360,000 by $2.97. The $2.97 figure assumes a 78% discount rate and a
conversion price of $3.81. The Second Tranch number is computed by dividing
the aggregate principal and interest at maturity of $1,635,000 by $2.54,
the latter number assumes a 78% discount rate and a conversion price of
$3.25. Pursuant to registration rights agreements with the Selling Security
Holders, the Company is registering 150% of what is converted based on the
foregoing computations.
(3) Assumes the exercise of 100 percent of the Warrants granted to each
Debenture holder based on the exercise price of $5.71 per share for the
First Tranch and $4.88 per share for the Second Tranch.
(4) Assumes issuance of the shares on conversion of the Debentures at a
conversion price of $3.81 per share for the First Tranch and $3.25 per
share for the Second Tranch (the closing bid price for the Company's Common
Stock on the trading day prior to each Tranch closing) and the exercise of
100 percent of the Warrants.
(5) Represents maximum shares obtainable through conversion or exercise divided
by the current outstanding shares as of the date of this Prospectus of
30,639,184. An asterisk (*) represents less than 1%.
PLAN OF DISTRIBUTION
The purpose of the Prospectus is to permit the Selling Security Holders, if they
desire, to offer 3,305,070 shares of Common Stock (the "Selling Security Holder
Shares") at such times and at such places as the Selling Security Holders
choose.
The decision to convert the Debentures into shares, to exercise the Warrants, or
to sell any shares, is within the sole discretion of the holders thereof. There
can be no assurance that any of the Debentures will be converted or that any of
the Warrants will be exercised, or any shares will be sold by the Selling
Security Holders.
Subsequent to conversion or exercise, if any, each Selling Security Holder is
free to offer and sell his or her Common Shares at such times, in such manner
and at such prices as he or she shall determine. The Selling Security Holders
have advised the Company that sales of Common Shares may be effected from time
to time in one or more types of transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions through
the writing of options on the Common Shares, settlement of short sales of Common
Shares, or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers or dealers. The Selling Security Holders have advised the
Company that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale of the Common Shares by the Selling Security
Holders.
The Selling Security Holders may effect such transactions by selling Common
Stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the Selling Security Holders
and/or the purchasers of Common Shares for whom such broker-dealer may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection with
the sale of Common Shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
such broker-dealer and any profit on the resale of the Common Shares sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The Selling Security Holders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the Common Shares against certain liabilities including
liabilities arising under the Securities Act.
Because Selling Security Holders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Security Holders
will be subject to the prospectus delivery requirements of the Securities Act.
Selling Security Holders also may resell all or a portion of the Common Shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
The Company will not receive any proceeds from any sales of the Selling Security
Holder Shares, but will receive the proceeds from the exercise of certain
Warrants held by the Selling Security Holders, which proceeds, if any, will be
used for general corporate purposes.
In connection with this registration by the Company, the Company shall use its
best efforts to prepare and file with the Commission such amendments and
supplements to the Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of the shares covered by the Registration Statement for the period
required to effect the distribution of such shares.
This Registration Statement is being filed by the Company pursuant to a
Registration Rights Agreement dated March 18, 1998, by and between the Company
and certain Selling Security Holders. The Registration Rights Agreement provides
for indemnities from the Company in favor of certain Selling Security Holders.
EXCLUSION OF DIRECTOR LIABILILTY
Pursuant to the General Corporation Law of Delaware, the Company's Certificate
of Incorporation excludes personal liability on the part of its directors to the
Company for monetary damages based upon any violation of their fiduciary duties
as directors, except as to liability for any breach of the duty of loyalty, acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, acts in violation of Section 174 of the General
Corporation Law of Delaware, or any transaction from which a director receives
an improper personal benefit. This exclusion of liability does not limit any
right which a director may have to be indemnified and does not affect any
director's liability under federal or applicable state securities laws.
LEGAL OPINION
The validity of the Common Stock offered hereby will be passed on for the
Company by Severson & Werson, A Professional Corporation, One Embarcadero
Center, 26th Floor, San Francisco, California 94111.
EXPERTS
The financial statements of the Company incorporated by reference in the
Prospectus and Registration Statement for the fiscal year ended April 30, 1997
have been audited by Reuben E. Price & Co., independent certified public
accountants, as set forth in their report incorporated by reference elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH
ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
Page
Disclosure Regarding Forward-Looking Statements...............................3
Available Information.........................................................3
Incorporation By Reference....................................................4
Prospectus Summary............................................................5
Risk Factors..................................................................7
Use Of Proceeds..............................................................16
Description Of Capital Stock.................................................16
Selling Security Holders.....................................................17
Plan Of Distribution.........................................................18
Exclusion Of Director Liability..............................................19
Legal Opinion................................................................20
Experts......................................................................20
3,305,070 Shares
of Common Stock
offered by Selling Security Holders
FINET HOLDINGS CORPORATION
PROSPECTUS
APRIL 23, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company in
connection with the sale of the Securities being registered hereby. All of the
amounts shown are estimated, except the SEC registration fee and the Nasdaq
SmallCap Market listing fee.
Securities and Exchange Commission Registration Fee $3,324
Nasdaq Small Cap Market listing fee $7,500
Legal fees and expenses $25,000
Accounting fees and expenses $25,000
Printing expenses $ 5,000
Miscellaneous expenses $ 2,000
-------
TOTAL $67,824
ITEM 15. INDEMNIFICAITON OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware permits
indemnification of directors, officers, employees and agents of corporations
under certain conditions and subject to certain limitations. Article VI of the
Company's Bylaws provides for indemnification of the directors and officers of
the Company to the fullest extent permissible under Delaware law.
Directors and officers of the Company are insured, at the expense of the
Registrant, against certain liabilities which might arise out of their
employment and which might not be subject to indemnification under the Bylaw.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed herewith or incorporated herein by reference.
Exhibit No. Description of Exhibits
4.1* Form of Securities Purchase Agreement among the
Registrant and each Selling Security Holder
4.2* Form of 3% Subordinated Convertible Debenture
issued by the Registrant to each Selling Security
Holder
4.3* Form of Common Stock Purchase Warrant issued by the
Registrant to each Selling Security Holder
4.4* Form of Registration Rights Agreement among the
Registrant and each Selling Security Holder
5.1 Opinion of Severson & Werson, A Professional
Corporation, as to legality
23.1 Consent of Severson & Werson, A Professional
Corporation (included in Exhibit 5.1)
23.2 Consent of Reuben E. Price & Co.
24.1 Power of Attorney (included on signature page)
* Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 6, 1998.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or
events arising after the effective date of this registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in this
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in this
registration statement or any material change to such information in
this registration statement;
PROVIDED, HOWEVER, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Company pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in
this registration statement.
(2) That for the purpose of determining any liability under
the Securities Act, each such post-effective amendment any of the
securities being registered which remain unsold at the termination of
the offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant
to section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the Prospectus, to each person to whom the Prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the Prospectus and furnished pursuant to
and meeting requirements of Rule 13a-3 or Rule 14c-3 under the Exchange
Act; and, where interim financial information required to be presented
by Article 3 of Regulation S-X are not set forth in the Prospectus, to
deliver or cause to be delivered to each person to whom the prospectus
is sent or given, the latest quarterly report that is specifically
incorporated by reference in the Prospectus to provide such interim
financial information.
(d) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
15 (other than the provisions relating to insurance), or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Walnut Creek, State of California, on April 23,
1998.
FINET HOLDINGS CORPORATION
By: /s/ Jan C. Hoeffel
--------------------------------------
JAN C. HOEFFEL, President
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints L. Daniel Rawitch and Jan C. Hoeffel, and each of
them, his true and lawful attorney-in-fact and agent, each with full power of
substitution for him in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or his substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Signature Title Date
--------- ----- -----
/s/ L. Daniel Rawitch
- -------------------------------- Chief Executive Officer and Director
L. Daniel Rawitch (Principal Executive Officer) April 23, 1998
/s/ Jan C. Hoeffel
- -------------------------------- President and Director April 23, 1998
Jan C. Hoeffel
/s/ George P. Winkel
- --------------------------------- Chief Financial Officer (Principal April 23, 1998
George P. Winkel Financial Officer and Principal
Accounting Officer)
/s/ Jose Filipe Nobre Guedes
- --------------------------------- April 23, 1998
Jose Filipe Nobre Guedes Director
/s/ S. Lewis Meyer
- --------------------------------- April 23, 1998
S. Lewis Meyer Director
/s/ James W. Noack
- --------------------------------- April 23, 1998
James W. Noack Director
/s/ Stephen J. Sogin
- --------------------------------- April 23, 1998
Stephen J. Sogin Director
- ---------------------------------
Jose Maria Salema Garcao Director April , 1998
</TABLE>
EXHIBIT 5.1
Opinion of Severson & Werson, A Professional Corporation
As To Legality
SEVERSON & WERSON
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
ONE EMBARCADERO CENTER, 26TH FLOOR
SAN FRANCISCO, CALIFORNIA 94111
FAX 9415) 956-0439
TELEPHONE (415 398-3344
APRIL 22, 1998
Finet Holdings Corporation
3021 Citrus Circle, Suite 150
Walnut Creek, California 94598
Gentlemen:
You have requested our opinion with respect to certain matters in
connection with the filing by Finet Holdings Corporation (the "Company") of a
Registration Statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission on behalf of certain Selling Security
Holders covering the offering of up to 3,305,070 shares of the Company's Common
Stock (the "Shares"), of which total 3,167,570 Shares are issuable upon the
conversion of the Company's 3% Subordinated Convertible Debentures, and a
total of 137,500 shares are issuable upon exercise of Warrants to purchase the
Company's Common Stock.
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, as amended, and such other records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below. We have
assumed the genuineness and authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies thereof, and the due execution and delivery of all documents where due
execution and delivery are a prerequisite to the effectiveness thereof.
We are admitted to practice law in the State of California. Our opinion
is rendered solely with respect to California law, Delaware General
Corporation Law, and federal law.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that:
The Shares, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid, and
nonassessable.
This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other person, firm or entity without
our prior written consent.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement.
SEVERSON & WERSON
A Professional Corporation
By: /s/ Roger S. Mertz
------------------------------
ROGER S. MERTZ
EXHIBIT 23.2
Consent of Reuben E. Price & Co., Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form S-3 and related Prospectus of Finet Holdings
Corporation for the registration of 3,305,070 shares of its Common Stock and to
the incorporation by reference therein of our independent auditors report dated
August 13, 1997 with respect to the consolidated financial statements of Finet
Holdings Corporation included in its 1997 Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997.
REUBEN E. PRICE & CO.
April 22, 1998
