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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
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Commission File Number: 0-18108
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FINET HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of incorporation or organization)
3021 CITRUS CIRCLE
WALNUT CREEK, CA 94598
(Address of Principal Executive office)
94-3115180
(IRS Employer Identification Number)
(925) 988-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements within the past 90 days.
Yes X No ___
The number of shares outstanding of each of the issuer's classes of common
stock was 77,242,686 shares of common stock, par value $.01, as of March
12, 1999.
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<PAGE> 1
INDEX
PART I - FINANCIAL INFORMATION
Item Description
Page
1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet January 31, 1999
2
Unaudited Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended January 31, 1999 and 1998
3
Unaudited Condensed Consolidated Statements of Cash Flow
Nine Months Ended January 31, 1999 and 19984
Notes to Unaudited Condensed Consolidated Financial Statements5
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II - OTHER INFORMATION
1.Legal Proceedings 18
2.Changes in Securities 18
4.Submission of Matters to a Vote of Security Holders 19
5.Other Information 19
6.Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in thousands, except shares)
January 31 1999
------------
ASSETS
Cash and cash equivalents $ 2,508
Accounts receivable 5,080
Mortgages held for sale, net of allowances 31,178
Mortgage servicing rights 1,832
Furniture, fixtures & equipment, net of accumulated depreciation
1,853
Other assets 356
-------
Total assets $ 42,807
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse lines of credit $ 32,604
Notes payable and capitalized leases 323
Accounts payable, accrued expenses and other liabilities7,077
-------
Total liabilities 40,004
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.01 par value (100,000 shares authorized, 200
shares issued and
outstanding) -
Common stock, $.01 par value (150,000,000 shares authorized,
69,774,343 shares
issued and outstanding) 697
Paid-in capital 37,861
Preferred stock discount (61)
Accumulated deficit (35,694)
-------
Total stockholders' equity 2,803
=======
Total liabilities and stockholders' equity $ 42,807
=======
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 3
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Dollars and amounts in thousands - except shares and per share
data)
Three Months Ended Jan 31 Nine Months
Ended Jan 31
1999 1998 1999 1998
Revenues: ------ ------- ------- -----
- --
Warehouse interest income $1,378 $ 640 $5,335 $2,396
Gain on sale of mortgage loans and servicing rights 1,967 2,315
11,200 6,818
Loan servicing fees 674 14 1,425 267
Loan brokerage fees 720 187 2,150 262
Other 73 (44) 269 122
------- ------- ------ -------
Total revenues 4,812 3,112 20,379 9,865
Cost of Revenues:
Warehouse interest expense 1,964 589 5,850 2,009
Loan origination costs 2,862 266 5,278 758
Provision for loan losses 3,914 46 4,464 332
Servicing portfolio valuation adjustment 1,675 - 1,675
- -
------- ------- ------- -------
Total cost of revenues 10,415 901 17,267 3,099
------- ------- ------- -------
Gross profit (5,603) 2,211 3,112 6,766
Operating Expenses
Compensation and related expenses 3,292 2,198 11,282
6,313
General and administrative expenses 2,509 968 6,227
3,162
Marketing expenses 336 146 1,347 647
Mical reorganization charge 642 - 642 -
Depreciation and amortization 3,871 131 4,550 427
Other operating expense (income) (30) 266 423 623
------- ------- ------- -------
Total expenses 10,620 3,709 24,471 11,172
Loss from Operations (16,223) (1,498) (21,359) (4,406)
Other Expenses:
Other interest expense 811 - 3,054 -
Loss Before Income Taxes (17,034) (1,498) (24,413) (4,406)
Income taxes - (121) - (166)
------- ------- ------- -------
Net Loss (17,034) (1,619) (24,413) (4,572)
In-substance preferred dividend 644 - 644 -
------- ------- ------- -------
Net Loss for Common Shareholders $ (17,678) $(1,619) $(25,057)
$ (4,572)
======= ======= ======= =======
Basic and diluted net loss per common share $ (0.37) $(0.05) $
(0.66) $ (0.15)
======= ======= ======= =======
Shares used in computing basic and diluted
share data 47,884,650 31,324,897 37,738,670
30,450,211
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
FINET HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in thousands)
Nine months ended
January 31
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,057) $(4,572)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 5,193 600
Write down of goodwill and other asset valuation adjustments 5,043
295
Gain on sale of mortgage servicing rights (420) (47)
Changes in operating assets and liabilities:
(Increase) decrease in mortgage loans held for sale and receivables
94,932 (1,537)
(Increase) decrease in originated mortgage servicing rights, net
521 (582)
(Increase) decrease in other assets 1,273 129
Increase (decrease) in accounts payable and accrued expenses
(4,120) 3,678
Other 128 (176)
------- -------
Net cash provided (used) by operating activities 77,493
(2,212)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights - (3,490)
Proceeds from sale of mortgage servicing rights 1,509 75
Purchase of furniture, fixtures and equipment (238) (369)
Acquisition of purchased technology and intangibles (481) (722)
Cash acquired in acquisition 185 0
Other - (38)
------- -------
Net cash provided (used) by investing activities 975
(4,544)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 16,373 6,740
Proceeds from issuance of convertible debt 1,384 -
Net increase (decrease) in warehouse borrowings(91,928) 1,218
Proceeds from advances on note payable and line of credit 1,400
1,150
Redemption of convertible debt and preferred stock (2,000) -
Repayment of note payable, capitalized leases and line of credit
(3,890) (664)
Other equity 523 84
------- -------
Net cash provided (used) by financing activities (78,138)
8,528
------- -------
Net increase in cash 330 1,772
Cash at beginning of period 2,178 1,148
------- -------
Cash at end of period $ 2,508 $ 2,920
------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
FINET HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED 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.
Finet is 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 operations of the Company's principal lending subsidiaries include
Monument Mortgage, Inc. ("Monument"), 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. The Company operates or intends to operate throughout the 40 states
in which the Company is currently licensed.
The acquisition of Coastal on April 30, 1998 was accounted for as a pooling
of interests. Accordingly, the Company's results for the quarter and the
nine months ended January 31, 1998 have been restated to include Coastal's
results of operations for that period.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statement presentation. In the opinion of management,
all adjustments considered necessary for a fair presentation of the results
for the interim period have been included. Operating results for the nine
months ended January 31, 1999 are not necessarily indicative of the results
that may be expected for the fiscal year ending April 30, 1999. This report
should be read in conjunction with the consolidated financial statements
and footnotes 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 wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications of the 1998 amounts were made to conform to the 1999
presentation.
PER SHARE AMOUNTS
Basic EPS is determined by dividing net loss for common shareholders by the
weighted average shares outstanding during the period. Since the fully
diluted loss per share for the quarters and year to date periods ended
January 31, 1999 and 1998, respectively, were 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.
OTHER
In connection with mortgage loan servicing activities, the Company
segregates escrow and custodial funds in a separate trust account and
excludes this balance of $8.5 million at January 31, 1999 from the
Company's assets on the accompanying balance sheet.
NOTE 2. ACQUISITIONS
On May 19, 1998 the Company acquired all the issued and outstanding shares
of Mical, a non-public mortgage banker with principal offices in San Diego,
California, in exchange for 431,970 shares of the Company's common stock
valued at $1,400,000. Upon the resolution of specified contingencies,
120,460 additional common shares may be issued. In addition, 33,146 common
shares were issued as a finder's fee and 73,063 shares were issued under a
keep-well agreement with an existing shareholder.
<PAGE> 6
The acquisition has been accounted for as a purchase, and Mical's financial
position and results of operations have been 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 was recorded as goodwill.
Goodwill was amortized on a straight-line basis over 10 years during the
nine months ended January 31, 1999 and totaled $144,000.
During the third quarter, the Company's Board of Directors approved a plan
to wind down its Mical operations located in San Diego, California. The
Company also reviewed the amount recorded as goodwill and determined that
there was no future economic value. Accordingly, the entire unamortized
balance of $2,898,000 (after purchase accounting adjustments) was expensed
in the third quarter. (See Footnote 7)
On June 23, 1998 the Company acquired certain assets from an individual
which include an internet site, "interloan.com" ("Interloan") in exchange
for 100,000 shares of the Company's common stock. The Company also entered
into an employment agreement with that individual which is effective until
June 31, 2001.
NOTE 3. MORTGAGE SERVICING RIGHTS
During the nine months ended January 31, 1999, the activity in mortgage
loan servicing rights was as follows:
(In thousands) January 31,
1999
-------
Mortgage Servicing Rights
Beginning balance $5,478
Additions 1,231
Sales (1,825)
Amortization/Payoff (1,377)
Valuation adjustment (1,675)
-------
Ending balance $1,832
=======
In the third quarter the Company recorded expense of $1,675,000 for the
permanent impairment of the servicing rights portfolio. The write down
reflects the rapid runoff and current condition of the portfolio and
includes costs to prepare it for sale.
NOTE 4. DEBT
The following table and comments present summary information regarding the
Company's debt as of January 31, 1999: (In thousands)
Facility Balance Interest Rate
Expires or Due
REVOLVING
Warehouse lines of credit:
$35 million committed $19,859 LIBOR+ variable spread December 31,
1998
$14 million committed 9,180 LIBOR +2.5% December 31, 1998
$60 million 3,565 NY Prime May 1, 1999
-------
32,604
NOTES AND CAPITAL LEASES:
Notes and capital leases 323 Various Various though 2002
-------
TOTAL DEBT $32,927
=======
<PAGE> 7
The Company issued $1,500,000, the final tranch, of its 3% Subordinated
Convertible Debentures (the "Debentures") in May 1998 bringing the total
issue of Debentures to $7,000,000. In connection with this final tranch,
the Company recorded a discount and corresponding additional paid-in
capital of $423,000, in addition to amounts recorded in the previous fiscal
year. The discount represents imputed interest for the market discount
conversion factor, and totaled $1,974,358 for all tranches of the
Debentures. The discount was amortized to interest expense during the
period from the date of issue to the date the Debentures first became
convertible. Through January 31, 1999, the Company has amortized the
entire discount to interest expense. $304,110 and $1,687,077 of debt
discount amortization are included in the Company's Consolidated Statement
of Operations in "Other interest expense" for the three and nine month
periods ended January 31, 1999 respectively. The company also recorded
$563,000 of expense related to debt issuance costs.
In January 1999, the Company converted $1,100,000 of the total $7,000,000
Debentures into 2,200,000 common shares at a conversion price of fifty
cents per share and converted an additional $4,400,000 of Debentures into
7,333,333 common shares at a conversion price of sixty cents per share.
The remaining $1,500,000 of Debentures were redeemed at 100 percent of face
value. (See Note 6)
COLLATERAL
The collateral for the capitalized leases is the equipment thereby
financed.
DEBT COVENANTS
The borrowing agreements (the "Agreements") for the warehouse lines of
credit 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 the Company's credit facilities are due on demand.
In the second quarter, one of the Company's warehouse lenders, Residential
Funding Corporation ("RFC"), notified the Company that it was in default of
its lending agreements, as the Company did not meet its required interest
and debt service obligations as they became due. The Company was also in
violation of certain financial covenants. During the third quarter, the
Company paid the outstanding interest due and all principal amounts
outstanding on its servicing acquisition loan of $1,800,000, its working
capital revolving facility of $1,000,000 and on its term note of $354,000.
In March 1999, the Company cured all monetary defaults with RFC. The
financial ratio default has not been cured, but RFC has continued to
provide the warehouse line without interruption. The warehouse lines of
credit with RFC expired on December 31, 1988. RFC and the Company have
executed monthly extension agreements to these warehouse lines, with the
most recent extension expiring on March 31, 1999.
As a result of the default, RFC imposed additional fees of $280,000
resulting from excess borrowings over the committed amount. Also, during
the period from October 1998 until February 1999, RFC increased the
interest rates on the Company's borrowings to 4% in excess of the rates
otherwise applicable, which significantly increased interest expense
recorded for the three and nine months periods ended January 31, 1999.
RFC also reduced the total committed lines from $79 million to $49 million.
Effective March 1, 1999 RFC lowered the rates charged the Company to its
normal, non-default rates of LIBOR plus 225 - 275 basis points.
The Company and RFC have discussed entering into a new committed warehouse
credit agreement. There can be no assurance that the Company and RFC will
enter into such agreement. The inability to cure the default could result
in a major disruption to the Company's sub-prime business, and the
Company's business relationships with its sub-prime brokers, investors and
borrowers could be seriously damaged. There could be a material adverse
impact on results of operations and financial condition if the Company is
unable to maintain its credit facilities or obtain additional credit
facilities.
<PAGE> 8
At the date of and subsequent to the Company's acquisition of Mical, Dryson
Acceptance Corporation ("Dryson") provided warehouse financing to Mical
through a purchase and repurchase agreement. During March 1999, Mical
repurchased all remaining loans sold to Dryson under the terms of this
agreement. In the third quarter, Dryson expanded its lending relationship
with the Company, providing Monument with additional warehouse financing
for prime mortgage loans. Dryson will make advances (will purchase) 98% or
97% of the loan value and the Company will provide the remaining 2% to 3%
to complete the funding of the loan. From the time Dryson has advanced
(purchased) the 97% or 98% until the Company repays (repurchases) the
amount, the Company will incur interest of LIBOR plus 225 - 275 basis
points. Amounts are not considered "committed" by Dryson until the Company
receives a written commitment for the purchase of a particular loan.
Accordingly, the Company does not incur commitment fees or unused credit
facility charges. The Company is required to remit periodic financial
statements to Dryson.
Additionally, the Company received approval for $15 million of warehouse
borrowing capacity to be provided by Fannie Mae. The interest rate is
LIBOR plus 85 - 100 basis points. There are no borrowings outstanding at
January 31, 1999 on either of the new Dryson or Fannie Mae facilities. The
outstanding balance of the Dryson warehouse financing with Mical at January
31, 1999 was $2.0 million, which was reduced to zero in March 1999.
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 for 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.
MORTGAGE LOAN APPLICATIONS IN PROCESS
The Company has open short-term commitments to fund mortgage loan
applications in process subject to credit approval. 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.
LOAN SALE COMMITMENTS
The Company has entered into optional and mandatory forward commitments to
deliver mortgage loans of $25,000,000 as of January 31, 1999.
NOTE 6. STOCKHOLDERS' EQUITY
In May 1998, the Company issued 431,970 shares of common stock, valued at
$1,400,000, as consideration for the acquisition of Mical. Upon the
resolution of specified contingencies, 120,460 additional common shares may
be issued. As a result of the acquisition, 33,146 common shares were issued
as a finders fee and 73,063 shares were issued under a keep-well agreement
with an existing shareholder.
<PAGE> 9
In June 1998, the Company purchased Interloan. 100,000 shares of the
Company's common stock were issued in connection with this purchase.
In September 1998, the Company issued 250 shares of its $2,500,000 Series A
Convertible Preferred Stock ("Preferred") in a private placement generating
$2,286,250 of proceeds, net of expenses. In addition, the Company issued
Warrants to the Preferred investors to purchase 250,000 shares of the
Company's common stock at $1.00 per share. The Preferred shareholders are
not entitled to vote or to receive dividends. Upon any liquidation,
dissolution or winding up, the holders of the Preferred are entitled to
receive a cash liquidated value (representing $10,000 per share plus 6%
interest), to the extent there are funds sufficient to pay, in preference
to all common shareholders. The Company recorded a preferred stock
discount of $705,000 upon issuance of the preferred stock. This discount
is amortized to the date the preferred stock first becomes convertible.
$644,000 of this discount has been amortized and is reported as "In-
substance preferred dividend" on the Company's Consolidated Statements of
Operations. The unamortized portion of the discount is reported on the
Company's Consolidated Balance Sheet as "Preferred stock discount".
In the third quarter, the Company reached an agreement with its Preferred
shareholders to redeem the entire $2,500,000 outstanding at face value.
$500,000 of the redemption price was paid in the third quarter, and the
Company expects to pay the remaining $2,000,000 of the redemption price
during the fourth quarter of the current fiscal year. The Company also
agreed to issue 840,000, 5-year warrants, exercisable at $1.50 per share to
the Preferred shareholders.
In November 1998, the Company issued 2,500,000 shares of common stock at
eighty cents per share, for proceeds of $2,000,000 in a private placement.
Per the agreement, an additional 1,000,000 shares were issued, bringing the
total issuance to 3,500,000 shares and the price per share to fifty-seven
cents per share, as adjusted. In connection with the issuance, the
Company agreed to reduce the exercise price of 1.0 million common stock
purchase warrants owned by the investor from $5.00 to $1.00 per share.
In December 1998, the Company received $12.1 million cash proceeds, net of
expenses, from additional private placements of 21.9 million shares of
common stock at sixty cents per share. The Company used these proceeds to
satisfy debt obligations, to redeem a portion of the Preferred and to fund
operations.
The Company received additional equity contributions subsequent to January
31, 1999. (See Note 8).
NOTE 7. MICAL REORGANIZATION
During the third quarter, the Company reviewed the operations and quality
and compliance procedures of Mical Mortgage, Inc., acquired in May, 1998 to
determine how best to maximize shareholder value. The Company's Board of
Directors approved a plan to wind down Mical's operations which includes
closing the operation located in San Diego, California. The Company
assessed the remaining goodwill balance and determined that the amount had
no future economic value. Accordingly, goodwill of $2,898,000, net of
purchase accounting adjustments, was expensed and is included in the
Company's Consolidated Statement of Operations in "Depreciation and
amortization".
The Company also recorded reorganization expense of $642,000 during the
third quarter to recognize costs that are incremental to on-going normal
operations as follows:
(In thousands) 1999
-------
Severance, employee costs $ 242
Excess consulting costs 100
Excess lease costs 300
-------
Total reorganization expense $ 642
=======
<PAGE> 10
Except for the items detailed above totaling $642,000, all other financial
statement effects of winding down Mical are included in results from
operations as incurred.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to January 31, the Company received a total of $12,929,000 from
the private placement of 7,010,000 shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following information should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of this
Quarterly Report, the financial statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on
Form 10-QSB 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 the sale of customer leads to other real
estate service providers; and (d) from providing Internet products and
services to realtors, loan brokers and consumers.
COMPARISON OF QUARTERS ENDED JANUARY 31, 1999 AND 1998
The Company is currently expanding the scope of its electronic commerce
mortgage financing transaction services. The 1999 period includes costs
related to this plan. Revenues for the three months ended January 31, 1999
include the operations of Mical and Interloan, which were both acquired in
purchase accounting transactions in the first quarter of 1999. Both
periods include the results of the Company's Coastal unit, as it was
acquired in the prior fiscal year in a pooling transaction.
<PAGE> 11
Revenues for the quarter ended January 31, 1999 increased $1.7 million or
55%, from $3.1 million to $4.8 million over the 1998 quarter. Increases in
warehouse interest income and loan servicing fees were offset by a decrease
in gain on sale of mortgage loans and servicing rights. The Company also
experienced increases in most operating expenses as it is investing in its
people and technology infrastructure to grow the business. However, a
significant portion of these increases were non-recurring, as follows:
January 31,
(In thousands) 1999 1998
------- -------
Loss from operations before non-recurring items $ (3,573) $
(1,498)
Non-recurring items:
Loss attributable to Mical (8,625) -
Loan loss (except Mical) (1,178) -
Loan servicing portfolio valuation (except Mical) (1,587)
- -
Write off of REOS technology purchase (571) -
Excess warehouse interest and loan fees (689) -
------- -------
Loss from operations $(16,223) $(1,498)
======= =======
Before non-recurring items, the Company incurred a loss from operations of
$3.6 million for the quarter compared to a loss from operations of $1.5
million for the same 1998 quarter. Including non-recurring items, the
Company's operating loss was $16.2 million, and the net loss was $17.7
million. Mical's operating results and associated goodwill impairment
expense accounts for $8.6 million of the loss. The Company is winding down
its Mical's operations, and the Company expects that losses related to
Mical will not extend beyond the end of the current fiscal year. The
remaining non-recurring expenses are due to increased reserves to cover
potential loan losses, asset valuation adjustments and excess interest and
loan fees incurred in connection with the Company's warehouse financing
default, as described in Note 4 to the Condensed Consolidated Financial
Statements. The Company does not expect significant additional expenses in
the fourth quarter related to any of these items.
Revenues increased 55% from $3.1 million to $4.8 million. All of this
increase was due to the incremental contributions of Mical ($1.9 million)
and Interloan ($0.7 million). Excluding the incremental effects of Mical
and Interloan, although volumes were up, revenues declined to $2.2 million
from $3.1 million in the same prior quarter primarily due to lower prices
received from investors for the Company's sub-prime loans and lower pricing
margins implemented by the Company in the second fiscal quarter for its
prime loans. Excluding contributions from Mical and Interloan, revenues
were slightly down as increases in loan servicing fees were more than
offset by losses on the sale of mortgage loans and servicing rights. The
Company's loan originations declined through the third quarter and into the
fourth quarter as the lack of working capital and the related default on
the company's warehouse financing arrangements caused the Company to
default on its commitments to its mortgage broker customers. The Company
has just recently begun to show month-to-month increases in its loan
originations.
Loan servicing fee income increased $0.6 million over the prior year, as
the Company's loan servicing portfolio balance is higher for the 1999
period as a result of assets purchased in December of 1997. However, the
Company's loan servicing portfolio balance is decreasing rapidly quarter
over quarter as borrowers refinance to take advantage of decreasing
borrowing rates. In addition, to reflect the rapid runoff and the current
condition of the portfolio, the Company recorded $1.7 million of expense to
reflect a permanent impairment of the servicing portfolio and costs to
prepare it for sale. The Company expects loan servicing fee income to
continue to decrease for the balance of the fiscal year.
<PAGE> 12
Loan brokerage fee revenue increased significantly, from $0.2 million in
the third quarter of 1998 to $0.7 million for the third quarter of 1999
quarter, reflecting the Company's acquisition and growth of Interloan.
Total loan volume in the Company's production units is summarized below.
(In thousands) Three Months Ended January 31,
1999 1998
------- -------
FHA/VA (Mical) $27,920 $ -
Retail 70,011 10,455
Wholesale Prime 189,185 88,665
Wholesale Sub-Prime 17,927 23,632
------- -------
Total Loan Volume $305,043 $122,752
======= =======
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,
the success of each unit's sales and marketing efforts and the operational
level of loan processing efficiency achieved. The increase over the same
1998 quarter of $182.3 million resulted primarily from increases in FHA/VA,
retail and wholesale prime volume offset by a decline in wholesale sub-
prime volumes. (Because the Company had begun winding down its Mical
operations during the current quarter, the impact of Mical is not
representative of future periods.)
The Company intends to increase its loan production volumes in the coming
quarters, except in its government (FHA/VA) offerings. With respect to sub-
prime offerings, the Company expects to continue to decrease those volumes
in the fourth quarter while reviewing its sub-prime operations, then
increase them as improvements in operations and profitability of those
products are achieved.
Warehouse interest income increased $0.7 million due to increased balances
of mortgages held from the time of origination until the time they are sold
in the secondary market. The Company expects that warehouse interest income
will decrease in the coming quarter as loans in inventory are turning over
more rapidly. Although warehouse interest income will decrease, warehouse
interest expense related to the period the loans are in inventory will also
decrease, netting an overall improvement in results from operations.
Warehouse interest expense increased $1.4 million. $0.7 million was the
result of loan fees charged for excess borrowings and default interest
rates equal to 4% above normalized rates which were imposed the entire
quarter. The remainder of the increase was due to an increase in average
warehouse borrowings related to the Company's increased loan volume. The
Company expects warehouse interest expense to decrease, as the Company
returned to its "normalized" warehouse borrowing rates in the fourth
quarter. The Company secured additional warehouse borrowing capacities at
favorable interest rates and expects that the removal of default rates
coupled with improved rates on new facilities will have a positive impact
on the Company's results from operations
Compensation and related employee expenses increased $1.1 million, due
mostly to the incremental expenses of Mical and Interloan incurred since
the acquisition dates in the current year.
General and administrative expenses increased $1.5 million, with $0.5
million attributable to Mical and $1.0 million attributable to other
operating units. This increase reflects the company's efforts to expand
its Interloan originations and volume increases at Monument.
Other interest expense is attributable to the amortization of the imputed
interest on the Company's 3% Convertible Subordinated Debentures, the
amortization of debt issue costs and interest on other borrowings. The
debt discount has been fully amortized.
<PAGE> 13
COMPARISON OF NINE MONTHS ENDED JANUARY 31, 1999 AND 1998
Revenues for the nine months ended January 31 increased 107% from $9.9
million in 1998 to $20.4 million in 1999. Of this $10.5 million increase,
the incremental effects of Mical and Interloan accounted for $7.5 million
and $1.4 million, respectively, with the remaining units recording an
increase of $1.6 million or 16 % over the prior period primarily due to
increased volumes. The Company incurred a net loss for common shareholders
for the period of $25.1 million compared to $4.6 million for the comparable
prior year period.
Excluding the incremental effects of Mical and Interloan, although volumes
were up, revenues for the rest of the units were slightly down over the
same prior year to date period. Increases in warehouse interest income,
loan servicing fees and retail loan brokerage fees were partially offset by
a decrease in gain on sale of mortgage loans and servicing rights. The
Company also experienced increases in most operating expenses as it is
investing in its people and technology infrastructure to grow the business.
However, a significant portion of these increases were non-recurring, as
follows.
For the nine months ended January 31,
(In thousands) 1999 1998
------- -------
Loss from operations before non-recurring items $ (7,087) $
(4,406)
Non-recurring items:
Loss attributable to Mical (10,114) -
Loan loss (except Mical) (1,178) -
Loan servicing portfolio valuation (except Mical) (1,587)
- -
Write off of REOS technology purchase (571) -
Excess warehouse interest and loan fees (822) -
------- -------
Loss from operations $(21,359) $(4,406)
======= =======
Before non-recurring items, the Company incurred a loss from operations of
$7.1 million for the nine months compared to a loss from operations of $4.4
million for the same 1998 period. Including non-recurring items, the
Company's loss from operations was $21.4 million, and the net loss for
common shareholders was $25.1 million. Mical's operating results and
associated goodwill impairment expense accounts for $10.1 million of the
loss. The Company is winding down Mical's operations, and the Company
expects that losses related to Mical will not extend beyond the end of the
current fiscal year. The remaining non-recurring expenses are due to asset
valuation adjustments and due to excess interest and loan fees incurred in
connection with the Company's warehouse lending default. The Company does
not expect significant additional expenses in the fourth quarter related to
any of these items.
The Company is currently spending cash resources to support its business
development activities. The revenues being generating, though increasing,
are currently insufficient to cover start-up and operating costs. All
business units, except Mical, are expected to generate monthly revenues
sufficient to cover their respective operating expenses by the end of the
fiscal year 2000.
Loan servicing fee income increased $1.2 million over the prior year, as
the Company's loan servicing portfolio balance is higher for the 1999
period as a result of assets purchased in December of 1997. However, the
Company's loan servicing portfolio balance is decreasing rapidly quarter
over quarter as borrowers refinance to take advantage of decreasing
borrowing rates. In addition, the Company recorded $1.7 million of expense
to reflect a permanent impairment of the servicing portfolio and expenses
to prepare the portfolio for sale. The Company expects loan servicing fee
income to continue to decrease for the balance of the fiscal year.
Loan brokerage fee revenue increased significantly, from $0.3 million for
the nine months ended January 31, 1998 to $2.2 million for the current year
period, reflecting the Company's acquisition and growth of Interloan.
<PAGE> 14
Total loan volume in the Company's production units is summarized below.
(In thousands) Nine Months Ended January 31,
1999 1998
--------- ---------
FHA/VA (Mical) $323,956 $ -
Retail 149,389 15,073
Wholesale Prime 578,372 234,270
Wholesale Sub-Prime 72,317 108,891
--------- ---------
Total Loan Volume $ 1,124,034 $ 358,234
========= =========
The increase in volumes was due equally to Mical and to the remaining
units. However, the Company has begun winding down Mical's operations so
volumes contributed by Mical will rapidly decline to zero. The Company
intends to increase its loan production volumes in the coming quarters,
except in its government (FHA/VA) offerings. With respect to sub-prime
offerings, the Company intends to continue to decrease those volumes in the
fourth quarter while reviewing its sub-prime operations, then increase them
as improvements in operations and profitability of those products are
achieved.
Warehouse interest income increased $2.9 million due to increased balances
of mortgages held from the time of origination until the time they are sold
in the secondary market. The Company expects that warehouse interest income
will decrease in the coming quarter as loans in inventory are turning over
more rapidly. Although warehouse interest income will decrease, warehouse
interest expense related to the period the loans are in inventory will also
decrease, netting an overall improvement in results from operations.
Warehouse interest expense increased $3.8 million. $0.8 million was the
result of loan fees charged for excess borrowings and default interest
rates equal to 4% above normalized rates that were imposed from October
1998 through January 1999 for Monument and February 1999 for Coastal. The
remainder of the increase was due to an increase in average warehouse
borrowings related to the Company's increased loan volume. The Company
expects warehouse interest expense to decrease, as the Company returned to
its "normalized" warehouse borrowing rates in the fourth quarter. The
Company secured additional warehouse borrowing capacities at favorable
interest rates and expects that the removal of default rates coupled with
improved rates on new facilities will have a positive impact on the
Company's results from operations.
Compensation and related employee expenses increased $5.0 million,
primarily due to the incremental expenses of Mical and Interloan, but
partially due to the Company's additional investment in human resources
necessary to improve the operations.
General and administrative expenses increased $3.1 million, with about half
attributable to Mical and half attributable to other operating units. This
increase reflects the company's efforts to expand its distribution network
and costs associated with additional employees.
Other interest expense is primarily the amortization of the imputed
interest on the Company's 3% Convertible Subordinated Debentures and the
amortization of debt issue costs. The debt discount is now fully
amortized.
BUSINESS DEVELOPMENT ACTIVITIES
The Company's business development activities are focused on becoming the
leading electronic mortgage banker. This includes increasing the
electronic origination and fulfillment of prime conforming loans and
increasing other electronic commerce revenues from: (a) offering sub-prime
and government subsidized loans (b) selling additional homeowner related
products and services; (c) selling business leads to real estate service
providers; and (d) originating loans through Interloan.
<PAGE> 15
Over the past several years, the Company has 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, is now concentrating
on expanding its e-commerce origination and fulfillment capabilities in
these areas.
FINANCIAL CONDITION
Although Finet's revenue is growing, during its limited operating history
it has experienced operating losses and has relied on external sources of
debt and equity financing to fund operations, to service debt and to
complete acquisitions and capital investments. The Company's operating
losses, net of capital contributions, have had an adverse affect on the
Company's financial position, causing stockholders' equity to decrease from
$3.4 million at April 30, 1998 to $2.8 million at January 31, 1999.
However, subsequent to January 31, 1999, the Company received $12.9 million
in additional equity contributions and expects to redeem the remaining $2.0
million of its preferred stock outstanding, the net effects of which will
increase equity by $ 10.9 million.
In response to these operating trends, Finet has installed new leadership,
including a new chairman and chief executive officer. Management's charter
is to improve operations and to take full advantage of Finet's technology
capabilities, ultimately improving results from operations and financial
position. Improvement in the Company's financial condition is dependent on
its ability to successfully integrate and consolidate its operations, to
improve operating processes and procedures, to cure its warehouse lending
defaults, and to manage interest expense. As of March 1, 1999, the Company
has returned to more favorable borrowing terms. The Company's financial
condition is further dependent on economic conditions such as the general
health of the economy and demand for homeownership related services.
Management is committed to the Company's future success; however, there can
be no assurance that the Company will attain future profitability.
Total assets decreased from $101.5 million at April 30, 1998 to $42.8
million at January 31, 1999. This decrease is due to the Company's winding
down of the Mical operation and liquidating Mical's mortgages held for sale
and due to improved turnover of mortgages held for sale. Warehouse
borrowings decreased as proceeds from loan sales were used to reduce the
warehouse line of credit. The Company's $7.0 million of convertible debt
was partially redeemed and partially converted to equity. As a result of
these effects, liabilities decreased from $98.1 million to $40.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The nature of the mortgage lending business requires the Company to advance
cash on a daily basis to fund newly originated loans to its borrowing
customers. The majority of these funds are provided through conventional
mortgage warehouse lines of credit from Residential Funding Corporation
("RFC") and from other warehouse lenders. The Company uses cash from its
operating activities to satisfy its obligations to RFC, to fund ongoing
expenses such as administration and marketing, to invest in product
development and geographic expansion, and to satisfy debt and other
obligations as they come due.
Although new operating revenue sources were developed during 1998 and 1999,
cash generated by operations has been insufficient to meet the Company's on-
going requirements. Therefore, the Company has employed servicing-secured
credit facilities and private placements of debentures and common and
preferred stock as additional resources to meet operating and investing
cash needs.
Operating Activities
In the nine months ended January 31, 1999, the Company's operating
activities generated cash of $77.5 million compared to cash used by
operations of $2.2 million during the comparable 1998 period.
<PAGE> 16
Subsequent to January 31, 1999, the Company ceased originating loans at
Mical and is selling the remaining loans. The cash generated from those
sales is being withheld by the purchaser of those loans pending the
completion of certain documentation and other work necessary to properly
support those prior sales. The Company expects to receive the sales
proceeds in the fourth quarter, upon completion of the work required.
The Company expects its cash flow from the sale of mortgage loans to
increase in the fourth quarter as it intends to increase both its
originations and sales through additional marketing and sales efforts.
During the third quarter, loan production was curtailed to reduce the
balance of loans held for sale and reduce warehouse line borrowings in
response to the Company's default on its warehouse line of credit. The
Company has subsequently accelerated its sale of loans, reduced its
warehouse borrowings below the committed amounts and expects to increase
loan production during the fourth quarter.
Financing Activities
Cash used by financing activities was $78.1 million for the first nine
months of fiscal 1999. Increased net repayments of warehouse borrowings,
repayments of other debt, and the partial redemption of the Company's
convertible debt preferred stock were partially offset by the issuance of
convertible debt and the issuance of common stock through private
placements.
The Company's net warehouse borrowings decreased significantly reflecting
the Company's reorganization at its Mical subsidiary. Warehouse borrowings
were reduced without additional offsetting new borrowings. Warehouse
borrowings are also lower at the Company's on-going operations at January
31, 1999 as volumes were decreasing at the end of the current quarter
compared to activity at the end of the prior fiscal year (April 30, 1998).
The Company received $1.4 million from the final tranch of its Debenture
private placement issue initiated in the prior year. In September 1998,
the Company issued 250 shares of its $2.5 million Preferred stock in a
private placement generating $2.3 million of proceeds, net of expenses.
During the third quarter, the Company received $14.1 million, net of
expenses from the issuance of common shares in a series of private
placements. The proceeds were used to repay debt and other obligations, to
redeem $1.5 million of the Company's Debentures, to redeem $0.5 million of
the Company's Preferred stock and to fund operations.
If RFC continues to provide warehouse financing for the Company's sub-prime
mortgage loans, and the Company continues to maintain at least the current
level of working capital borrowing resources, the Company believes that its
cash resources will be sufficient to finance the Company's minimum working
capital requirements for the coming twelve months. The Company has
identified the release of loan sales proceeds withheld by RFC as a
significant source of funds in the fourth quarter. The Company has secured
additional working capital warehouse resources through Dryson Acceptance
Corporation and Fannie Mae. The Company intends to seek additional
sources of warehouse financing, to fund capital expenditures, and to make
investments in its infrastructure. Failure to maintain existing levels of
warehouse financing would have a material, adverse effect on the Company's
financial condition and results of operations.
See also Note 4 to the Consolidated Financial Statements.
During the fourth quarter, the Company will file a Form SB-2 to register
51.8 million common shares previously issued and 16.9 million shares
issuable under warrants. The Company has 17.1 million outstanding warrants
to issue common shares at prices ranging from $0.50 to $5.71. The Company
has received notice that warrants for approximately 1.2 million shares will
be exercised upon registration of the underlying common shares and
anticipates that additional warrants will be exercised. The issuance of
common shares through warrant exercises will add to the liquidity and
capital resources of the Company.
<PAGE> 17
Investing Activities
Investing activities providing cash of $1.0 million, consisting primarily
of a reduction in the balance of mortgage servicing rights through sales of
$1.5 million for the nine months ended January 31, 1999. The Company does
not intend to purchase additional mortgage servicing rights and anticipates
selling its servicing rights portfolio. A sale, if consummated, would
generate cash for general operating purposes.
The Company's capital expenditures totaled $0.2 million for the nine months
ended January 31, 1999. The Company expects its level of capital spending
for the rest of the fiscal year to increase to several million dollars to
make information systems investments to improve infrastructure.
SUBSEQUENT EVENTS
See Note 8 to the Consolidated Financial Statements.
POTENTIAL FOR NASDAQ DELISTING
There are several requirements for continued listing on the Nasdaq SmallCap
Market ("Nasdaq"), including a minimum stock price of $1.00 per share. If
the Company's common share price 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 Nasdaq 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 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.
In December 1998, the Company received notice from Nasdaq that it had not
met required financial ratio criteria for continued listing on the Nasdaq.
Nasdaq requested that the Company maintain a minimum net worth of $2
million and complete and submit for its review certain periodic financial
reporting. Nasdaq could initiate delisting procedures if the Company fails
to comply. Finet has subsequently complied and intends to comply with all
special financial reporting requests and ratio criteria required by Nasdaq.
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 (Y2K)
compliant and to address other issues associated with the change of the
millennium. These costs are 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 Y2K compliant 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 Y2K are subject to uncertainties that
could cause the actual results to differ 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 Y2K 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 Y2K issue.
Company's state of readiness:
The Company, together with outside consultants it has engaged, has
formulated its overall plan to address the Y2K issue. The Company plans to
be substantially Y2K compliant by September 30, 1999. The Company has
taken or is taking the following steps to assure readiness by its business
partners, vendors and clients:
<PAGE> 18
(a)Established a senior management steering committee;
(b) Taking inventory of internally used hardware and software as well as
software developed for customers and peripheral devices and equipment;
(c) Identifying outside parties with whom the Company interfaces
electronically or operationally, such as business partners, loan
providers, customers, vendors and any others, to confirm that their state
of readiness will not pose any financial or operational risk to the
Company, and to understand Finet's responsibility to its business
partners;
(d)Developing an external assessment process in order to adequately assess
the readiness of outside parties;
(e) Determined the additional human resources necessary to implement its
overall plan;
(f) Estimated the cost of compliance and determined it to be reasonable
but not material to the financial condition of the Company or its results
of operations; and
(g) Is ensuring that new applications are Y2K compliant.
The Company believes that given the hardware and software
replacement/modifications that it foresees, the risk of material financial
loss or operational disruption that might lead to financial loss is low to
medium. However, due to the nature of the mortgage banking industry there
is a significant number of outside third party interfaces that the Company
relies on for conducting business effectively. Their level of compliance
significantly influences the Company's level of risk of disruption to
operations which ultimately impacts the Company's results of operations
and financial condition.
Finet is considering various contingency actions including alternative
vendors. The Y2K project planning calls for a fall back to manual
procedures if absolutely necessary, but the Company considers Y2K to be a
critical project and is addressing it as such.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and certain subsidiaries are defendants in various legal
proceedings. After reviewing with counsel all such proceedings pending
against or involving the Company and its subsidiaries, management does not
expect the aggregate liability or loss, if any, resulting therefrom will
have a material adverse effect on the Company's results of operations or
consolidated financial position.
On May 19, 1998, the Company acquired 100% of the issued and outstanding
stock of Mical from its shareholders. Prior to said acquisition, on January
14, 1998, 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's compensation program for its mortgage brokers was in
violation of the Real Estate Settlement Procedures Act which induced
mortgage brokers to breach their alleged fiduciary duties to their
customers. The plaintiffs seek unspecified compensatory and punitive
damages as to certain claims.
Mical's management believes that the broker compensation programs complied
with applicable laws and with long standing industry practices, and that it
has meritorious defenses to the Action. Management has been advised by
litigation 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.
Item 2. CHANGES IN SECURITIES
See Notes 6 and 8 to the Consolidated Financial Statements.
<PAGE> 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 21, 1998 the Company filed a definitive proxy statement
soliciting the written consent of the shareholders of Finet Holdings
Corporation (the "Company") to approve the issuance, offering and sale by
the Company of up to 30,000,000 shares of its Common Stock in a private
placement (the "Offering") at a price of $0.60 per share. The Company
solicited the shareholders' consent, as the offering, if fully subscribed,
would result in the issuance in excess of 20% of the Company's outstanding
Common Stock. The offering was previously presented to and approved by
shareholders of the Company at the 1998 Annual Meeting. However, to ensure
that the Company had obtained the informed consent of its shareholders to
the offering, the consent clarified the price at which the shares of common
stock were expected to be sold. The Company received the requisite consent
necessary to complete the offering.
Item 5. OTHER INFORMATION
On November 24, 1998, the Company's annual meeting of shareholders was held
in San Francisco, California. A quorum of 57% of the 33,033,105 shares
eligible to vote on the October 15, 1998 record date were represented at
the meeting. All current Directors were re-elected for an additional one-
year term and the following measures detailed and recommended by the
Company's Board of Directors in the proxy statement were approved by the
indicated percentage of shares voted:
Increase in authorized common shares to 150,000,000 99.3%
Ratification of issuance of Common Stock, Debentures, Preferred Stock
and Warrants: 77.0%
Ratification of the 1998 Stock Option Plan 99.4%
Ratification of the 1998 Stock Bonus Plan 99.5%
Ratification of the 1998 Non-Employee Director Stock Option Plan 99.5%
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EX-27 Financial Data Schedule
REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
Date Item Description
11/30/98 5 Filing of pro forma financial information per the request of
Nasdaq
12/07/98 2 Amendment of previously filed 8-K providing
proforma information related to the Company's acquisition of
100% of the issued and outstanding stock of Mical Mortgage,
Inc.
01/05/99 5 Announcement of private placement of common shares and
results of operations for the
period ending October 31, 1998
01/15/99 5 Announcement of agreements to restructure the terms of the
original 3% Subordinated
Convertible Debentures and Series A Convertible Stock
agreements
02/19/99 5 Change in Registrant's Certifying Accountants
<PAGE> 20
SIGNATURES
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: March 17, 1999 /s/ Mark L. Korell
Mark L. Korell
(CEO and Principal Executive
Officer)
Date: March 17, 1999 /s/ Gary A. Palmer
Gary A. Palmer
(Principal Financial Officer)
<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>
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