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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
------------------------
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)
505 SANSOME STREET, #1420
SAN FRANCISCO, CA 94111
(Address of principal executive office)
94-3115180
(IRS Employer Identification Number)
(415) 263-5400
(Registrant's telephone number, including area code)
3021 CITRUS CIRCLE, WALNUT CREEK, CA 94598
(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'
The number of shares outstanding of each of the issuer's classes of common
stock was 32,475,862 shares of common stock, par value $.01, as of
September 18, 1998.
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<PAGE> 2
FINET HOLDINGS CORPORATION
INDEX
<TABLE>
Item Description
Page
- ---- -------------------------------------------------------------------
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<S> <C>
<C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Unaudited Balance Sheets............................................
3
July 31, 1998
Unaudited Statements of Operations
Three Months Ended July 31, 1998 and 1997........................
4
Unaudited Statements of Cash Flows..................................
5
Three Months Ended July 31, 1998 and 1997
Notes to Unaudited Financial Statements............................
6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................
11
PART II - OTHER INFORMATION
1. Legal Proceedings..................................................
15
2. Changes in Securities..............................................
15
4. Submission of Matters to a Vote of Security Holders................
15
5. Other Information..................................................
15
6. Exhibits and Reports on Form 8-K...................................
15
Signatures.........................................................
16
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
</TABLE>
<TABLE>
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
July 31,
April 30,
1998
1998
(unaudited)
(audited)
---------- ----
- -----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,111$ 1,993
Accounts receivable from sales of mortgage loans and servicing rights16,022
23,008
Mortgage loan servicing advances and other receivables 291 1,307
Notes and advances receivable from Mical Mortgage, Inc. ("Mical") -
1,930
Mortgages held for sale, net of allowances of $477 and $39687,439 20,226
Mortgages held for sale of behalf of Mical 52 42,808
Mortgage servicing rights (Note 3) 5,016 5,478
Furniture, fixtures and equipment, net of accumulated depreciation 2,103
1,448
of $3,513 and $1,854
Goodwill 5,148 -
Other assets 3,780 3,270
---------- ----
- -----
Total assets $122,962$ 101,468
==========
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line of credit (Note 4) $ 100,103 $42,851
Warehouse line of credit of behalf of Mical (Note 4) 52 42,808
Notes payable and capitalized leases (Note 4) 1,971 1,860
3% Convertible subordinated debentures (Note 4) 7,000 5,500
Accounts payable, accrued expenses and other liabilities10,988 5,090
---------- ----
- -----
Total liabilities 120,114 98,109
---------- ----
- -----
Commitments and contingencies (Note 5)
Stockholders' equity: (Note 6)
Preferred stock, $.01 par value, (100,000 shares authorized, none issued
and outstanding) - -
Common stock, $.01 par value, (60,000,000 shares authorized, 32,476,000
and 32,052,000
shares outstanding at July 31, 1998 and April 30, 1998, respectively)
391 386
Paid-in capital 15,642 13,610
Accumulated deficit (13,185) (10,637)
---------- ----
- -----
Total stockholders' equity 2,848 3,359
---------- ----
- -----
Total liabilities and stockholders' equity $122,962 $ 101,468
==========
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands - except per share amounts)
Three months ended
July 31,
---------------------
- --
1998 1997
--------- -------
- --
<S> <C> <C>
REVENUE
Gain on sale of mortgage sevicing reights, net of
loan origination costs $ 4,259 $ 2,598
Interest income 1,803 874
Loan servicing fees 678 129
Retail broker fees 523 31
Loan origination fees 408 -
Other 94 104
--------- -------
- --
Total revenue 7,765 3,736
--------- -------
- --
EXPENSES
Compensation and related expenses 4,514 2,640
Occupancy and other office expenses 1,832 933
Interest expense 2,792 743
Marketing expenses 499 265
Depreciation and amortization 321 134
Other operating expenses 355 122
--------- -------
- --
Total expenses 10,313 4,837
--------- -------
- --
Loss before income taxes (2,548) (1,101)
Income tax expense (29)
--------- -------
- --
NET LOSS $ (2,548) $ (1,130)
=========
=========
Basic and diluted net loss per common share (Note 1)$ (.08)$
(.04)
=========
=========
Shares used in computing basic and diluted share data32,489 28,936
=========
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
<TABLE>
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three months
ended July 31,
1998
1997
-------- -------
- -
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,550) $ (1,233)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 321 144
Amortization of mortgage servicing rights 492 -
Amortization of imputed interest on convertible debt 636 -
Write down of other assets and provision for losses(180) 62
Gain on sale of mortgage servicing rights (274) (47)
Deferred tax benefit - (84)
Changes in operating assets and liabilities:
(Increase) decrease in receivables from sales of mortgage loans and
loan servicing rights (48,405) (6,004)
Decrease (increase) in mortgage loans held for sale(19,940) (12,794)
Increase in mortgage loans funded on behalf of Mical42,756 -
Increase in originated mortgage servicing rights, net(348) 27
(Increase) decrease in mortgage loan servicing advances and other
receivables 1,141 (97)
Net increase in other assets 4 (42)
Net increase in other liabilities (1,787) (25)
---------
- ---------
Net cash used by operating activities 67,853) (20,093)
---------
- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights - (165)
Proceeds from sale of mortgage servicing rights 1,577 75
Acquisition of mortgage loans held for investment - -
Principal payments on mortgage loans held for investment- 30
Purchase of furniture, fixtures and equipment 22 (76)
Acquisition of purchased technology and intangibles 356 (202)
Pre-acquisition advances to affiliates - (432)
---------
- ---------
Net cash used by investing activities 1,956 (806)
---------
- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 2,693
Proceeds from issuance of convertible debt 1,500 -
Proceeds from exercise of common stock warrants and other-. 4
Net increase (decrease) in warehouse borrowings (70,010) 18,477
Proceeds from advances on note payable and line of credit- 29
Repayment of note payable, capitalized leases and line of credit -
(207)
---------
- ---------
Net cash provided (used) by financing activities(68,766) 20,995
---------
- ---------
Net increase (decrease) in cash 933 96
Cash at beginning of period 2,178 1,148
---------
- ---------
Cash at end of period $ 3,111 $ 1,244
=========
=========
Supplemental cash flow information (Note 7)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE> 6
FINET HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Finet Holdings Corporation ("Finet" or the "Company") is an electronic
commerce firm operating in one business segment, homeownership services,
and is primarily engaged in wholesale and retail mortgage lending (as both
a mortgage banker and a mortgage broker) and the delivery of related real
estate sales and financing transaction settlement services. The majority of
its revenues, including those related to mortgage lending, is derived from
increasingly automated electronic business processes, including those
conducted over the Internet.
The operations of the Company's principal lending subsidiaries, Monument
Mortgage, Inc. ("MMI"), a California mortgage banker specializing in
conforming prime loans, Coastal Federal Mortgage Company ("Coastal"), a New
Jersey sub prime mortgage banker, and Mical Mortgage, Inc. ("Mical"), a
California mortgage banker specializing in FHA and VA loans, are in the
process of being combined into one subsidiary to be named Finet Homeowner
Services. The Company's business activity is carried out throughout the 42
states in which the Company is currently licensed, with additional state
license applications in process.
The acquisition of Coastal on April 30, 1998 was accounted for as a pooling
of interests. Accordingly, the Company's results for the fiscal quarter
ended July 31, 1997 have been restated to include Coastal's results of
operations for that period.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion
of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the results for the interim
period have been included. Operating results for the three months ended
July 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending April 30, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report on Form 10-KSB for the fiscal year
ended April 30, 1998 of Finet Holdings Corporation.
The consolidated financial statements of the Company include the accounts
of all active wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
PER SHARE AMOUNTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. SFAS No. 128 simplifies the standards for
computing earnings per share ("EPS") and makes them comparable to
international standards. SFAS No. 128 was effective for financial
statements issued for periods ending after December 15, 1997, with earlier
application not permitted. Upon adoption, all prior EPS data was restated.
Basic EPS is determined using net income divided by the weighted average
shares outstanding during the period. Diluted EPS is computed by dividing
net income by the weighted average shares outstanding, assuming all
dilutive potential common shares were issued. Since the fully diluted loss
per share for the quarters ended July 31, 1998 and 1997, respectively, was
anti-dilutive, basic and diluted earnings per share are the same. The
effects of common stock equivalents have not been included because they
would have been anti-dilutive during the periods reported.
<PAGE> 7
NOTE 2. ACQUISITIONS
On May 19, 1998 the Company acquired all the issued and outstanding shares
of Mical, a non-public mortgage banker with offices in San Diego,
California and Las Vegas, Nevada, in exchange for 552,000 shares of the
Company's common stock. Due to the financial requirements of Mical, certain
transactions and advances were made in anticipation of the acquisition. The
acquisition has been accounted for as a purchase and its operations
included in the Company's financial statements since that date. The excess
of the purchase price over the fair market value of the acquired net
assets, which approximates $5.2 million has been recorded as goodwill. The
following condensed pro forma statements of operations of the Company for
the three months ended July 31, 1998 and 1997 give effect to the
acquisition of Mical as though the transaction had occurred at the
beginning of the periods:
<TABLE>
(In thousands) PRO FORMA
3 Months Ending July 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenue $ 8,626 $ 7,870
Expenses 12,621 9,823
----------- -----------
Net loss $(3,995) $ (1,953)
=========== ===========
</TABLE>
On June 23, 1998 the Company acquired, from an individual, certain assets
which include an internet site, "interloan.com", in exchange for 100,000
shares of the Company's common stock. The Company also entered into a
binding term sheet agreement that will result in a three-year employment
agreement with that individual.
NOTE 3. MORTGAGE SERVICING RIGHTS
During the quarter ended July 31, 1998, the activity in mortgage loan
servicing rights was as follows:
<TABLE>
July 31,
(Dollar amounts in thousands) 1998
- ------------------------------ ---------
<S> <C>
Mortgage Servicing Rights
Beginning balance $ 5,478
Additions 1,147
Sales (1,178)
Amortization/Payoff (430)
---------
Ending balance $ 5,016
=========
</TABLE>
Servicing rights for mortgages with outstanding principal balances of $75.8
million and $2.1 million were sold during the three months ended July 31,
1998 and 1997, respectively, resulting in net gains of 322,000 million and
$135,000, respectively.
Servicing rights to mortgage loans with an unpaid principal balance of
approximately $628 million were pledged as collateral to lenders as of July
31, 1998. Subsequent to July 31, 1998, the Company entered into an
agreement to sell a significant portion of its servicing rights portfolio
(See Note 8).
<PAGE> 8
NOTE 4. DEBT
The following table and comments present summary information regarding the
Company's debt as of July 31, 1998:
<TABLE>
(In thousands)
Interest
Expires or
Facility Balance Rate Due
- ---------------------------------- -------------- -------------- ------
- -------------
<S> <C> <C> <C>
REVOLVING
Warehouse lines of credit:
$55 million committed $ 34,288 LIBOR +
$25 million uncommitted gestation 52 variable spread
December 31, 1998
$60 million 58,271 NY Prime May 1,
1999
$24 million 7,544 Libor +2.5%
December 31, 1998
$ 5 million - Fed Funds + 1% Due in
2002
---------
100,155
Servicing acquisition
$1,870 committed 400 Prime + 0.625%
November 15, 1998
Revolving line of credit:
$1 million committed 1,000 Prime + 0.625%
Requires payment to
--------- zero 5
days per qtr
$ 101,555
=========
LONG TERM AND CAPITAL LEASES:
Various notes $ 352 Various Due in
2000
Capitalized leases 219 3.5% to 11.5% Varies
to 2002
---------
Total $ 571
=========
</TABLE>
The Company issued the third traunch of its 3% Subordinated Convertible
Debentures in May 1998 in the amount of $1.5 million. The debentures and
accrued interest are convertible into the Company's common stock at the
lesser of $5.00 per share or 78% of the determined market price prior to
conversion. In connection with this issue the Company has recorded $423,000
as additional paid-in capital for the discount related to imputed interest
represented by the market discount conversion factor. This discount,
together with the $1.6 million of discount recorded in March and April 1998
with the issue of the first two traunches, is being amortized to interest
expense over the period from the date of issue to the date the debentures
first become convertible. Subsequent to July 31, 1998, the Company and the
debenture holder renegotiated the debenture conversion terms (See Note 8).
COLLATERAL
The warehouse lines of credit, the revolving line of credit and the note
payable are with the same lender. The collateral for these obligations is a
combination of mortgages held for sale, receivables from sales of mortgage
loans, servicing assets, other assets of the Company, and Finet's corporate
guarantee.
The collateral for the capitalized leases is the equipment thereby
financed.
DEBT COVENANTS
The Borrowing Agreements (Agreements) for the warehouse lines of credit,
the revolving line of credit and the note payable contain various financial
covenants including net worth computed in accordance with generally
accepted accounting principles, current ratio and tangible net worth
leverage ratio requirements. Should an event of default occur, as defined
in the Agreements, outstanding principal and interest on all three of the
Company's credit facilities are due on demand. At July 31, 1998, the
Company was in violation of one of its debt covenants related to its
warehouse line of credit, a note payable and its revolving line of credit.
The violation was related to the Company's tangible net worth. The lender
was notified and, subsequently, the lender issued a formal waiver of the
covenant violation. Some of the warehouse
<PAGE> 9
lines of credit and the revolving line of credit agreements expire in 1998.
The Company is in the process of negotiating an increase in the credit
facility with the lender, and has no reason to believe an increase of the
credit facilities will not be successful. However, no assurances can be
given that the credit facilities will be increased.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On January 14, 1998, prior to the acquisition of Mical, a lawsuit was filed
against Mical in the United States District Court for the Middle District
of Georgia (the "Action"). The complaint alleges, among other things, that
in connection with residential mortgage loan closings, Mical made certain
payments to mortgage brokers in violation of the Real Estate Settlement
Procedures Act and induced mortgage brokers to breach their alleged
fiduciary duties to their customers. The plaintiffs seek unspecified
compensatory and punitive damages as to certain claims.
Management believes that its compensation programs to mortgage brokers
comply with applicable laws and with long standing industry practices, and
that it has meritorious defenses to the Action. Management has been advised
by counsel, that the facts of the underlying transaction are not supportive
of a court order granting class certification. The Company intends to
defend vigorously against the Action and believes that the ultimate
resolution will not have a material adverse effect on the Company's results
of operations or consolidated financial position.
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business.
Although it is difficult to predict the outcome of such cases, after
reviewing with counsel all such proceedings, management does not expect the
aggregate liability or loss, if any, resulting therefrom will have a
material adverse effect on the consolidated financial position or results
of operations of the Company and its subsidiaries.
LOAN SALE COMMITMENTS
The Company has entered into optional and mandatory forward commitments to
deliver mortgage loans of $73 million as of July 31, 1998.
MORTGAGE LOAN APPLICATIONS IN PROCESS
The Company has open short-term commitments to fund mortgage loan
applications in process subject to credit approval. Such commitments,
which had interest rates that were committed to the borrower, amounted to
$41.8 million as of July 31, 1998. 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.
NOTE 6. STOCKHOLDERS' EQUITY
In May 1998, the Company issued 432,000 shares of common stock, valued at
$1.4 million, for the acquisition of Mical (See Note 2). Upon resolution of
specified contingencies, 120,000 additional common shares may be issued. As
a result of the acquisition, 33,000 common shares were issued as a finders
fee and 73,000 shares were issued under a keep well agrement with an
existing shareholder.
In June 1998, the Company issued 25,000 common shares with the execution of
a binding term sheet agreement for the acquisition of Interloan (See Note
2). An additional 75,000 common shares remain to be issued under the
provisions of the term sheet.
The Company recorded $423,000 as additional paid-in capital for the debt
discount related to imputed interest on the issuance of $1.5 million of 3%
Subordinated Convertible Debentures in May 1998 (See Note 4).
<PAGE> 10
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental investing and financing
activities for the periods ended July 31, 1998 and 1997:
<TABLE>
(Dollars in thousands) 1998 1997
------ ------
<S> <C> <C>
Cash paid during the period for:
Interest on line of credit and other borrowings $ 294 $ 294
Income taxes - -
Common stock issued during the period for:
Creditor settlements - 22
Purchase of intangible assets - 808
</TABLE>
NOTE 8. SUBSEQUENT EVENTS
Subsequent to July 31, 1998, the Company obtained several bids for and
entered into an agreement to sell a significant portion of its portfolio of
servicing rights for approximately $6.1 million. Final delivery and payment
pursuant to this transaction are expected to be completed in November,
1998.
In September, 1998, the Company and the holder of its 3% debenture reached
an agreement in principle whereby the right to convert the debenture to
equity would be extended for approximately six months at which time the
minimum conversion price per share would be $1.50 per share. The holder
additionally agreed to advance the Company $2.5 million to be retired from
the proceeds of the sale of servicing rights. A definitive agreement
pursuant to this transaction is expected to be executed in September, 1998.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on
Form 10-Q may contain forward-looking statements which 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 those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend,"
"estimate," "should" and other expressions which indicate future events and
trends identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only
as of their dates. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for homeownership services, including
mortgage credit, which is affected by such external factors as the level of
interest rates, the strength of the various segments of the economy and
demographics of the Company's markets; (2) the direction of interest rates;
(3) the relationship between mortgage interest rates and the cost of funds;
(4) federal and state regulation of the Company's operations; (5) the rate
of acceptance and growth of demand for on-line homeownership transactions
compared to traditional manual business processes; and (6) competition
within the residential real estate services industry.
RESULTS OF OPERATIONS
The Company has a growing base of electronic commerce revenues, including:
(a) from mortgage financing and settlement services provided directly to
consumers by the Company's retail activities (including both loans funded
by the Company's lending unit as well as loans funded by other lenders);
(b) from loans funded for mortgage brokers by the Company's wholesale
lending activities; (c) from loan servicing fees; (d) from the sale of
customer leads to other real estate service providers; and (e) from
providing Internet products and services to Property Transaction Network
(PTN) realtors, loan brokers and consumers.
While the Company provides certain real estate financing services that are
comparable to those provided by more traditional manual means within the
industry, the methods by which the Company earns revenues from delivering
them are increasingly electronic and non-traditional. The Company policy is
to use the most automated processes currently available and to fully
implement the business process simplifications that electronic commerce
enables. Over the past five years the Company has developed technology-
based Internet applications and business processes and is a leader in
delivering homeownership-related solutions to consumers and real estate
services providers through electronic commerce. The Company is a very
active sponsor of mortgage brokers to use Fannie Mae's Automated
Underwriting System and is one of only a few lenders to allow borrowers to
fully use the simplified loan documentation that this streamlined process
provides.
COMPARISON OF QUARTERS ENDED JULY 31, 1998 AND 1997
The Company is currently expanding its operations and the scope of its
electronic commerce homeownership transaction services. The 1998 period
include costs related to this plan. Revenues for the quarter ended July 31,
1998 include the operations of Mical and Interloan subsequent to their
acquisition by the company in May and June, respectively.
Revenues for the quarter ended July 31, 1998 increased 108% to $7.8 million
from $3.7 million for the quarter ended July 31, 1997. Net loss was $2.5
million for the quarter ended July 31, 1998 compared to $1.1 million for
the quarter ended July 31, 1997. The increase in revenues for the quarter
ended July 31, 1998 compared to the quarter ended July 31, 1997 was
attributable primarily to the added production of acquired entities and
generally higher loan production volume in all Company business units for
the quarter ended July 31, 1998. An increase in interest earned and in the
size of the Company's servicing portfolio also contributed to the increase
in revenues for the quarter ended July 31, 1998. These positive factors
were offset by increased compensation, occupancy and certain non-recurring
expenses related to the acquisitions of Coastal and Mical, and an increase
in interest charges resulting from greater use of mortgage warehouse credit
facilities.
<PAGE> 12
Gain on sale of mortgage loans and servicing rights, net of loan
origination costs, increased 64% to $4.3 million from $2.6 million as the
total volume of loans produced increased 260% to $401 million from $112
millon for the quarters ended July 31, 1998 and 1997, respectively.. The
increase in loan production was primarily due to the expansion of lending
activities resulting from acquisitions as well as to generally lower
interest rates that prevailed during the quarter ended July 31, 1998
compared to the quarter ended July 31, 1997.
Total loan volume in the Company's production units is summarized below.
(Dollar amounts in thousands) Three Months Ended July 31,
- ---------------------------------- ---------------------------
1998 1997
----------- ------------
Retail $ 58,504 $ 4,696
Wholesale Prime 310,460 73,138
Wholesale Sub-Prime 32,159 33,685
--------- ---------
Total Loan Volume $401,123 $111,519
======== =========
The factors which affect the relative volume of production among the
Company's units include the price competitiveness of each unit's product
offerings, the level of mortgage lending activity in each unit's market and
the success of each unit's sales and marketing efforts.
Interest income increased to $1.8 million for the quarter ended July 31,
1998 from $0.9 million for the quarter ended July 31, 1997. The Company
earns interest on, and incurs interest expense to carry, mortgage loans
held in inventory. The higher interest earned was due to increased loan
production and, due to the higher borrowing costs of Mical compared to the
remainder of the Company, was more than offset by a corresponding increase
in interest expense. Through consolidation of mortgage credit facilities
enterprise-wide currently in process, the Company expects to lower its
average interest expense and increase its total net interest income.
During the quarter ended July 31, 1998, loan servicing fees was positively
affected by the growth of the loan servicing portfolio, increasing 426% to
$679,000 in the quarter ended July 31, 1998 from $129,000 in the quarter
ended July 31, 1998. The increase in the Company's servicing portfolio
during the quarter ended July 31, 1998 was the result of mortgage servicing
rights purchased in December 1997 and the addition of loans serviced by
Mical.
In connection with mortgage loan servicing activities, the Company
segregates escrow and custodial funds in a separate trust account and
excludes this balance of $16.4 million at July 31, 1998 and $16.0 million
at April 30, 1998 from the Company's assets on the accompanying balance
sheet.
Retail broker fees increased to $523,000 from $31,000 and loan origination
fees increased to $408,000 from $0, respectively, during the quarter ended
July 31, 1998 as compared to the quarter ended July 31, 1997. The increases
were due to higher retail production and the additional activity of
acquired entities. In general, these fees are affected by numerous factors
including the volume and mix of loans produced and sold, loan pricing
decisions, interest rate volatility and the general direction of interest
rates.
Expenses increased for the quarter as a result of higher loan volumes and
the acquisition of Mical. Compensation and related employee expenses
increased 71% to $4.5 million for the quarter ended July 31, 1998 from $2.6
million for the quarter ended July 31, 1997. The increase is due primarily
to the increase of personnel as a result of acquisitions, reflecting the
Company's strategy of expanding and enhancing its revenue base. In
addition, a larger servicing portfolio and growth in the Company's non-
mortgage banking activities also contributed to the personnel increase.
<PAGE> 13
Occupancy and other office expenses for the quarter ended July 31, 1998
increased to $1.8 million from $0.9 million for the quarter ended July 31,
1997 primarily due to: (i) acquisitions of Coastal and Mical to expand the
Company's distribution network; (ii) higher loan production; (iii) a larger
servicing portfolio; and (iv) growth in the Company's non-mortgage banking
activities. Included in this increase was a 182% increase in professional
fees to $711,000, most of which were legal, consulting and accounting
expenses related to the acquisitions and should be mostly non-recurring.
For the quarter ended July 31, 1998 compared to the quarter ended July 31,
1997, marketing expenses increased to $499,000 from $265,000 and
depreciation and amortization expenses increased to $321,000 from $134,000,
respectively, for similar reasons.
Interest expense for the quarter ended July 31, 1998 increased to $2.8
million from $0.7 million in the quarter ended July 31, 1997. The increase
was due primarily to the additional interest expense from Coastal's and
Mical's warehouse lines of credit. Additionally, during the quarter ended
July 31, 1998 the Company incurred an interest amortization charge related
to a total of $7 million 3% subordinated convertible debentures issued in
three traunches between March 18, 1998 and May 26, 1998. In accordance with
certain accounting requirements, the Company previously recorded $1.6
million as additional paid-in capital for the discount deemed related to
the imputed interest in the debentures. The discount is being amortized
over the period from the date of issue to the date each traunch first
becomes convertible six months later. $287,000 was amortized during the
preceding quarter and $777,000 was amortized during the quarter ended July
31, 1998.
Other operating expenses for the quarter ended July 31, 1998 increased to
$355,000 from $122,000 for the quarter ended July 31, 1997. This increase
was due primarily to higher provisions for credit losses and Mical's losses
on the sales of real estate owned in the quarter ended July 31, 1998 as
compared to the quarter ended July 31, 1997.
BUSINESS DEVELOPMENT ACTIVITIES
The Company's business development activities are focused on diversifying
and increasing electronic commerce revenues from sources other than
mortgage banking of prime conforming loans, including: (a) the offering of
sub prime and government subsidized loans; (b) the distribution and use of
its proprietary Agent Connector and iQualify software; (c) promotion of the
Property Transaction Network as a vendor-neutral alliance of real estate
settlement service providers who conduct business on-line and the marketing
of those services by the Company's retail centers; (d) the sale of
additional homeowner related products and services; (e) the sale of
business leads to real estate service providers; and (f) the origination of
loans as a mortgage broker.
Over the past several years, some lenders have expanded their mortgage
banking operations through acquisition of formerly independent mortgage
banking companies or through internal growth. The Company believes that
these transactions and activities have not had a material impact on the
Company or on the degree of competitive pricing in the market. The Company
has similarly expanded its mortgage banking operations through acquisitions
and internal growth, but, believing the growth of market acceptance and
demand for on-line homeownership services represents the greatest near term
market opportunity, has also concentrated on expanding its e-commerce
origination and fulfillment capabilities in these areas.
The Company is currently expending cash resources to support these business
development activities as the revenues they are generating, though
increasing, are currently insufficient to cover start-up and operating
costs. The Company expects, within this business cycle, that all business
units will generate revenues sufficient to cover their respective operating
expenses. Management believes it has sufficient cash and short term
financing alternatives to reach positive cash flow and, thereafter,
profitability.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and technology investments, and, as working capital permits,
investments in servicing rights. To meet these needs, the Company currently
utilizes its mortgage warehouse credit facility and cash flows from
operations. In addition, the Company has utilized servicing-secured credit
facilities, private placements of debentures and offerings of common and
preferred stock. Certain of the debt obligations of the Company contain
various provisions that may affect the ability of the Company to remain in
compliance with such obligations. These provisions include requirements
concerning net worth, current ratio and other financial covenants. The
Company continues to consider other methods to finance its operations
through the public and private capital markets.
CASH FLOWS
OPERATING ACTIVITIES
In the quarter ended July 31, 1998, the Company's operating activities used
cash of approximately $67 million on a short-term basis primarily to
support the increase in its mortgage loans held for sale. Mortgage loans
held for sale are generally financed with short-term borrowings.
INVESTING ACTIVITIES
Investing activity provided $1.9 million for the quarter ended July 31,
1998.
FINANCING ACTIVITIES
Net cash provided by financing activities amounted to$68.8 million for the
quarter ended July 31, 1998.
MARKET FACTORS
Loan production increased 260% from the quarter ended July 31, 1997 to the
quarter ended July 31, 1998. This increase was primarily due to the effect
of acquisitions as well as several market related factors including:
mortgage interest rates generally decreased in the quarter ended July 31,
1998; and home purchase market activity was stronger during the quarter
ended July 31, 1998 than in the quarter ended July 31, 1997.
POTENTIAL FOR NASDAQ DELISTING
There are several requirements for continued listing on the Nasdaq SmallCap
Market, including a minimum stock price of $1.00 per share. If the
Company's common shares closes below $1.00 per share for 30 consecutive
days, the Company may receive notification from Nasdaq that its common
stock will be delisted from the SmallCap Market unless the stock closes at
or above $1.00 per share for at least 10 consecutive days during the 90 day
period following such notification.
Delisting from the Nasdaq SmallCap Market and inclusion of the Company's
common stock on the OTC Bulletin Board or similar quotation medium could
adversely affect the liquidity and price of the stock and make it more
difficult for investors to obtain quotations or trade the stock.
YEAR 2000 COMPLIANCE
The Company has made and will continue to make investments to identify,
modify or replace any computer systems which are not Year 2000 compliant
and to address other issues associated with the change of the millennium.
These costs are being expensed by the Company during the period in which
they are incurred. The financial impact to the Company of implementing the
systems changes necessary to become Year 2000 compliant has not been and is
not anticipated to be material to its financial position or results of
operations in any given year. However, the Company's expectations about
future costs associated with the Year 2000 are subject to uncertainties
that could cause the actual results to differ
<PAGE> 15
materially from the Company's expectations. Factors that could influence
the amount and timing of future costs include the success of the Company in
identifying systems and programs that are not Year 2000 compliant, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the availability, rate and magnitude of related labor
and consulting costs and the success of the Company's business partners,
vendors and clients in addressing the Year 2000 issue.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business.
Although it is difficult to predict the outcome of such cases, after
reviewing with counsel all such proceedings, management does not expect the
aggregate liability or loss, if any, resulting therefrom will have a
material adverse effect on the consolidated financial position or results
of operations of the Company and its subsidiaries.
Item 2. CHANGES IN SECURITIES
During the three months ended July 31, 1998, the Company issued a total of
533,000 shares of common stock, as follows: 432,000 shares for the
acquisition of Mical and 33,000 shares as a finders fee, 73,000 shares
under a keep well agreement, and 25,000 shares toward the acquisition of
Interloan.
The Company recorded $423,000 as additional paid-in capital for the debt
discount related to imputed interest on the issuance of $1.5 million of 3%
Subordinated Convertible Debentures.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EX-27 Financial Data Schedule
REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
REPORTS ON FORM 8-K
Date Item Description
- -------- ---- -----------------------------------------------------
<S> <C> <C>
5/18/98 2 Announcement of the acquisition of 100% of the issued and
outstanding stock of Coastal Federal Mortgage Company
5/28/98 2 Announcement of the acquisition of 100% of the issued and
outstanding stock of Mical Mortgage, Inc.
<PAGE> 16
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FINET HOLDINGS CORPORATION
Date: September 18, 1997 /s/ L. Daniel Rawitch
L. Daniel Rawitch
(CEO and Principal Executive
Officer)
Date September 18, 1997 /s/ George Winkel
George Winkel
(Principal Financial Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited financial reports and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JUL-31-1998
<CASH> 3,111,000
<SECURITIES> 0
<RECEIVABLES> 16,313,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,616,000
<DEPRECIATION> 3,513,000
<TOTAL-ASSETS> 122,962,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 391,000
<OTHER-SE> (2,547,000)
<TOTAL-LIABILITY-AND-EQUITY> 122,962,000
<SALES> 0
<TOTAL-REVENUES> 7,765,000
<CGS> 0
<TOTAL-COSTS> 10,313,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,792,000
<INCOME-PRETAX> (2,548,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,548,000)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,548,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
