<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999
------------------------
COMMISSION FILE NUMBER: 0-18108
------------------------
FINET.COM, INC.
(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 / /
As of September 8, 1999, 92,520,191 shares of the Registrant's Common Stock,
$.01 par value were issued and outstanding.
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<PAGE>
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM DESCRIPTION PAGE
- --------- -------------------------------------------------------------------------------- ---------
<C> <S> <C>
1. Unaudited Condensed Consolidated Financial Statements........................... 2
Unaudited Condensed Consolidated Balance Sheets
July 31, 1999 and April 30, 1999.............................................. 2
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended July 31, 1999 and 1998..................................... 3
Unaudited Condensed Consolidated Statements of Cash Flow
Three Months Ended July 31, 1999 and 1998..................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements.................. 5
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 11
3. Quantitative and Qualitative Analysis of Market Risk............................ 17
PART II--OTHER INFORMATION
1. Legal Proceedings............................................................... 18
2. Changes in Securities........................................................... 18
6. Exhibits and Reports on Form 8-K................................................ 18
Signatures...................................................................... 19
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31 APRIL 30
1999 1999
----------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 19,432 $ 4,202
Accounts receivable, net of allowances of $1,125 and $2,150............ 2,800 2,245
Mortgages held for sale, net of allowances of $3,636 and $3,851........ 26,035 33,438
Mortgage servicing rights.............................................. -- 2,693
Furniture, fixtures & equipment, net................................... 2,053 1,575
Other assets........................................................... 1,557 1,102
----------- ---------
Total assets........................................................... $ 51,877 $ 45,255
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse and other lines of credit.................................... $ 3,810 $ 33,038
Accounts payable....................................................... 182 517
Notes payable and capitalized leases................................... 458 481
Accrued expenses and other liabilities................................. 5,025 4,531
----------- ---------
Total liabilities................................................ 9,475 38,567
Commitments and contingencies........................................ -- --
Stockholders' equity:
Common stock, par value $.01 per share (150,000 shares authorized,
90,322 and 78,638 shares issued and outstanding at July 31 and April
30, 1999, respectively).............................................. 903 786
Additional paid-in capital............................................. 95,719 53,782
Accumulated deficit.................................................... (54,220) (47,880)
----------- ---------
Total stockholders' equity............................................. 42,402 6,688
----------- ---------
Total liabilities and stockholders' equity............................. $ 51,877 $ 45,255
----------- ---------
----------- ---------
</TABLE>
See accompanying notes.
2
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31
--------------------
1999 1998
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenues.................................................................................... $ 2,044 $ 8,141
Cost of revenues............................................................................ 2,814 5,653
--------- ---------
Gross profit................................................................................ (770) 2,488
Operating expenses
General and administrative................................................................ 4,312 3,264
Marketing and advertising................................................................. 842 451
Depreciation and amortization............................................................. 89 251
Other..................................................................................... 327 148
--------- ---------
Total expenses............................................................................ 5,570 4,114
--------- ---------
Loss from operations........................................................................ (6,340) (1,626)
Other interest expense...................................................................... -- 922
--------- ---------
Loss before income taxes.................................................................... (6,340) (2,548)
Income tax expense.......................................................................... -- --
--------- ---------
Net loss.................................................................................... $ (6,340) $ (2,548)
--------- ---------
--------- ---------
Basic and diluted net loss per common share................................................. $ (0.08) $ (0.08)
--------- ---------
Weighted average common shares used in computing basic and diluted net loss per common
share..................................................................................... 84,139 32,489
--------- ---------
</TABLE>
See accompanying notes.
3
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31
----------------------
1999 1998
---------- ----------
(AMOUNT IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................................................. $ (6,340) $ (2,548)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 138 760
Imputed interest from convertible debentures............................................ -- 933
Asset valuation adjustments............................................................. 181 --
(Gain) loss on sale of mortgage servicing rights........................................ -- (465)
Changes in operating assets and liabilities
(Increase) decrease in mortgage loans held for sale................................... 7,403 (19,830)
(Increase) decrease in receivables from sales of mortgage loans, servicing rights and
other receivables................................................................... 1,552 47,663
(Increase) decrease in other assets................................................... (455) (2,892)
Net increase (decrease) in warehouse borrowings....................................... (29,228) (67,586)
Increase (decrease) in accounts payable and accrued expenses.......................... 36 (1,173)
Other operating....................................................................... 415 (200)
---------- ----------
Net cash used in operating activities..................................................... (26,298) (45,338)
INVESTING ACTIVITIES:
Proceeds from sale of mortgage servicing rights........................................... 710 1,445
Purchase of furniture, fixtures and equipment............................................. (798) (102)
Cash acquired in acquisition.............................................................. -- 185
Other investing........................................................................... -- 11
---------- ----------
Net cash provided by (used in) investing activities....................................... (88) 1,539
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of expenses................................... 41,473 1,494
Proceeds from issuance of convertible debt................................................ -- 1,384
Proceeds from the exercise of common stock warrants and options........................... 166 --
Repayment of note payable, capitalized leases and line of credit.......................... (23) (717)
Decrease in mortgage loans funded on behalf of Mical...................................... -- 42,756
---------- ----------
Net cash provided by financing activities................................................. 41,616 44,917
---------- ----------
Net increase in cash...................................................................... 15,230 1,118
Cash at beginning of period............................................................... 4,202 1,993
---------- ----------
Cash at end of period..................................................................... $ 19,432 $ 3,111
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................................................. $ 213 $ 294
Taxes paid................................................................................ $ 27 $ --
</TABLE>
See accompanying notes.
4
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
ORGANIZATION
FiNet.com ("FiNet" or "the Company") is a provider of mortgage services to
consumers and mortgage broker businesses, including online mortgage services.
The Company primarily markets its consumer mortgage services through marketing
agreements with general interest websites and co-branding arrangements with
financial services websites. FiNet operates its consumer direct and
business-to-business segments through Monument Mortgage, Inc. ("Monument"),
which is licensed to originate loans in 38 states and the District of Columbia,
and is licensed to fund and close mortgage loans in 41 states and the District
of Columbia. The majority of Monument's business activity is carried out in
California.
RISKS AND UNCERTAINTIES
The Company has a limited operating history under its current business
model, and its prospects are subject to the risks, expenses, and uncertainties
frequently encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include the failure to develop and
extend the Company's online service brands, the rejection of the Company's
services by consumers, vendors and/or advertisers, and the inability of the
Company to maintain and increase the levels of traffic on its online services,
as well as other risks and uncertainties.
The Company has experienced losses in recent fiscal years and had an
accumulated deficit at July 31, 1999. Net losses are expected for the
foreseeable future. Equity capital has been raised to fund operations. The
Company's cash on hand at July 31, 1999 was $19,432,000. Future capital
requirements depend on many factors including the Company's ability to execute
its business plan. To execute its business plan, the Company may need to raise
additional capital through the issuance of debt or equity. There can be no
assurance that the Company will be able to raise additional capital, or that
such capital will be available at all on satisfactory terms. Failure to raise
additional capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
NOTE 2. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of July 31, 1999 and July 31, 1998
are unaudited. The unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods ending and as of July 31,
1999 and 1998. These financials statements and notes thereto are unaudited and
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K. The results for the three
months ended July 31, 1999 are not necessarily indicative of the expected
results for the year ending April 30, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BASIS OF PRESENTATION (CONTINUED)
RECLASSIFICATION
Certain amounts in the prior quarter period financial statements have been
reclassified consistent with the current quarter presentation.
REVENUE RECOGNITION
Lending transaction fees are deferred until the related loan is sold. Upon
sale of the loan, deferred transaction fee income is recognized and included in
gain on sale of mortgage loans. Discounts and premiums from the origination of
mortgage loans held for sale are deferred and recognized as adjustments to gain
or loss upon sale.
Loan servicing fees represent fees earned for servicing loans for various
investors. The fees are either based on a contractual percentage of the
outstanding principal balance or a fixed dollar amount per loan. Fees are
credited to income when the related payments are received.
Loan brokerage fees represent fees earned by the Company's consumer-direct
segment for processing of mortgage loan applications for third party lenders.
The fees for providing these services are recognized at such time as the loans
are funded by the lender.
Direct loan origination costs and other production costs attributable to
inventory as well as other costs associated with revenues earned during the
period are included in "Cost of revenues" in the Company's Consolidated
Statement of Operations.
The Company's revenue components for the quarter ended July 31 are:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Warehouse interest income.................................................. $ 449 $ 1,803
Gain on sale of servicing rights and mortgage loans........................ 821 5,401
Loan servicing fees........................................................ 248 527
Loan brokerage fees........................................................ 381 332
Other...................................................................... 145 78
--------- ---------
Total revenues............................................................. $ 2,044 $ 8,141
--------- ---------
--------- ---------
</TABLE>
In the quarter ended July 31, 1998, direct loan origination costs were
included in the computation of the gain or loss on sale of the related loans.
The components of the prior period statement of operations have been
reclassified and condensed to conform to the presentation of the quarter ended
July 31, 1999.
6
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights and the related valuation allowance activity were
as follows:
<TABLE>
<CAPTION>
JULY 31 JULY 31
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year............................................. $ 2,693 $ 5,478
Additions................................................................ -- 1,147
Sales.................................................................... (2,693) (1,178)
Scheduled amortization................................................... -- (431)
Impairment additions charged to operations............................... -- --
Impairment reductions credited to operations............................. -- --
--------- ---------
Ending balance........................................................... $ -- $ 5,016
--------- ---------
--------- ---------
</TABLE>
In connection with mortgage servicing activities, the Company segregates
escrow and custodial funds in a separate trust account and excludes this balance
of $6.5 million and $3.7 million at July 31, 1999 and April 30, 1999,
respectively, from its balance sheet.
NOTE 4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31 APRIL 30
1999 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures................................................... $ 438 $ 315
Computer equipment....................................................... 2,823 2,650
Office equipment......................................................... 1,608 1,622
Leasehold improvements................................................... 184 243
--------- ---------
Total cost............................................................... 5,053 4,830
Less: accumulated depreciation........................................... (3,000) (3,255)
--------- ---------
Net furniture, fixtures and equipment.................................... $ 2,053 $ 1,575
--------- ---------
--------- ---------
</TABLE>
7
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
JULY 31 APRIL 30
1999 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
WAREHOUSE AND OTHER LINES OF CREDIT
Warehouse lines of credit:
$35 million uncommitted, bearing interest at LIBOR + variable spread,
expired August 8, 1999............................................... $ 2,792 $ 30,906
$10 million committed, bearing interest at LIBOR + 2.5%, expired
December 31, 1998.................................................... -- 1,001
Purchase/Repurchase agreements:
$10 million, bearing interest at prime................................. -- 138
$10 million, bearing interest at prime................................. 1,018 993
--------- ---------
$ 3,810 $ 33,038
--------- ---------
--------- ---------
Notes payable and capitalized leases (various rates)..................... $ 458 $ 481
--------- ---------
--------- ---------
</TABLE>
WAREHOUSE LINES OF CREDIT
The Company's continuing operations employed a $35 million revolving
warehouse facility during the quarter. The remaining facilities were used by the
Company's discontinued operations, and, after the balances are liquidated, will
not be renegotiated. Subsequent to July 31, 1999, the Company entered into a new
lending agreement with its primary warehouse lender, GMAC/RFC. The new agreement
provides the Company with a committed $75 million warehouse borrowing facility
that carries an interest rate of LIBOR plus 1.75%. The agreement expires on
August 8, 2000. For the fiscal quarters ended July 31, 1999 and 1998, the
Company recorded warehouse interest expense of $135,000 and $505,000,
respectively. Borrowings under this warehouse facility are secured by the
mortgages held for sale thereby financed. At July 31, 1999, and April 30, 1999,
LIBOR was 5.18% and 4.9%, respectively, and the prime rate was 8.0% and 7.75%,
respectively.
WAREHOUSE FACILITY COVENANTS
The agreement for the warehouse line of credit (the "Agreement") contains
various financial covenants including minimum net worth, current ratio, tangible
net worth, and leverage ratio requirements. Should an event of default occur, as
defined in the Agreement, outstanding principal and interest are due on demand.
At April 30, 1999, the Company was in violation of various financial covenants
related to its non-primary warehouse lenders. The Company is negotiating the
closure of these warehouse lines.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION
Prior to the Mical acquisition, a lawsuit was filed which alleges, among
other things, that Mical made certain payments in violation of the Real Estate
Settlement Procedures Act and induced mortgage brokers to breach their alleged
fiduciary duties. The plaintiffs seek unspecified compensatory and punitive
damages. Management believes that its compensation programs comply with
applicable laws and with long
8
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
standing industry practices and that it has meritorious defenses to the action.
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. 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, 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.
NOTE 7. STOCKHOLDERS' EQUITY
During the quarter ended July 31, 1999, FiNet issued 11,120,000 shares of
common stock for net proceeds of $41,473,000 through private placements.
9
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SEGMENT INFORMATION
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which requires certain disclosures about
operating segments in a manner that is consistent with how management evaluates
the performance of the segment. The Company has identified two reportable
business segments: business-to-business and consumer-direct. Information related
to the Company's reportable operating segments is shown below.
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED JULY 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue
Business-to-business.................................................. $ 1,543 $ 7,168
Consumer-direct....................................................... 501 973
--------- ---------
Segment revenue......................................................... 2,044 8,141
--------- ---------
--------- ---------
Operating income
Business-to-business.................................................. $ (2,084) $ 185
Consumer-direct....................................................... (1,055) (1,169)
--------- ---------
Segment operating income................................................ (3,139) (984)
Corporate............................................................. (3,201) (1,564)
--------- ---------
$ (6,340) $ (2,548)
--------- ---------
--------- ---------
Capital expenditures
Business-to-business.................................................. $ 538 $ 83
Consumer-direct....................................................... 34 6
--------- ---------
Segment capital expenditures............................................ 572 89
Corporate............................................................. 226 13
--------- ---------
$ 798 $ 102
--------- ---------
--------- ---------
JULY 31 APRIL 30
1999 1999
--------- ---------
Identifiable assets
Business-to-business.................................................. $ 44,355 $ 22,147
Consumer-direct....................................................... 2,711 (3,782)
--------- ---------
Segment identifiable assets............................................. 47,066 18,365
Corporate............................................................. 4,811 26,890
--------- ---------
$ 51,877 $ 45,255
--------- ---------
--------- ---------
Long-lived assets
Business-to-business.................................................. $ 1,162 $ 624
Consumer-direct....................................................... 77 311
--------- ---------
Segment long-lived assets............................................... 1,239 935
Corporate............................................................. 814 640
--------- ---------
$ 2,053 $ 1,575
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SEGMENT INFORMATION (CONTINUED)
The remaining differences from the segment amounts to the consolidated
amounts relate principally to the corporate functions including administrative
costs, corporate cash and related interest income.
NOTE 9. SUBSEQUENT EVENTS
On August 20, 1999, FiNet acquired certain operations and assets of
Lowestrate.com, Inc. ("Lowestrate"). The assets included the trademark
"Lowestrate.com" and the related website and certain equipment and software. The
acquired assets and operations will be used in the Company's consumer-direct
segment. The purchase price was 1,400,000 shares of the Company's common stock.
560,000 of these shares were issued to the seller at the purchase date and are
valued at approximately $1,820,000. The remaining 840,000 shares were placed in
escrow subject to release to Lowestrate and will be valued as additional
purchase price if and when the contingencies are resolved. Certain ancillary
agreements were entered into in connection with the acquisition, including a
$500,000 non interest-bearing loan to Lowestrate, secured by 200,000 of the
escrowed shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS QUARTERLY REPORT ON FORM
10-Q THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS
INCLUDE INFORMATION CONCERNING OUR POSSIBLE OR ASSUMED FUTURE RESULTS OF
OPERATIONS. ALSO, WHEN WE USE SUCH WORDS AS "BELIEVE," "EXPECT," "ANTICIPATE,"
"PLAN," "COULD," "INTEND" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOTE THAT AN INVESTMENT IN OUR SECURITIES INVOLVES
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT OUR FUTURE FINANCIAL RESULTS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN "FACTORS THAT MAY AFFECT FUTURE PERFORMANCE" IN OUR ANNUAL REPORT ON
FORM 10-K.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS.
OVERVIEW
FiNet.com is a full service, on-line mortgage banker that offers an
easy-to-use, one stop mortgage source for consumers and mortgage brokers. We
operate one of the first sites on the Internet that enables the consumer to
apply for and receive credit approval on-line, and to electronically search,
analyze and select from a wide variety of mortgage loan products and rates
offered by us and other lenders. We make the mortgage process easier and more
understandable, while maintaining quality service by controlling the consumer's
entire mortgage lending experience. We also provide on-line and e-commerce
technologies and loan process management tools to mortgage broker businesses to
enable them to compete more effectively with on-line and other national lenders
and brokers and to help their customers make better informed borrowing
decisions.
We earn revenues through both the origination and sale of mortgage loans. As
a retail originator of loans, we generate loan origination income and
loan-related fees through loans funded and brokered by us. Our loan origination
income consists of origination points paid to us by borrowers or discount points
paid to us by wholesale lenders. Our loan-related fees consist of application,
documentation and processing fees paid by borrowers.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On the loans that we sell, we generate revenues from net premium income and
interest income. Net premium income consists of the net gain on the sale of
mortgage loans and mortgage servicing rights. This net gain is recognized based
upon the difference between the combined selling price of the loans and their
related servicing rights, and the carrying value of the mortgage loans and
servicing rights sold. Interest income consists of the interest we receive on
our mortgage loans held for sale.
Our costs and expenses consist largely of:
- interest paid under our warehouse credit facilities;
- loan-related expenses, consisting of fees paid to third parties for
appraisal and credit report services and reserves for potential loan
repurchase and premium recapture obligations;
- salaries, commissions and benefits paid to employees;
- general and administrative expenses such as occupancy costs, office
expenses and professional services; and
- depreciation and amortization expense related principally to our
facilities, computers and goodwill associated with our acquisitions.
IMPACT OF OUR DISCONTINUED UNITS--MICAL, COASTAL AND OUR SERVICING BUSINESS
We incurred significant losses at both our Mical and Coastal subsidiaries in
fiscal 1999. New management elected to discontinue these business units in the
last half of fiscal 1999. In addition, management determined that servicing
loans would not be a part of on-going operations and began preparing the
servicing portfolios for sale. The servicing portfolio was sold late in the
quarter ended July 31, 1999. Additional expense of $279,000 was recognized upon
its sale, and is included in Cost of revenues in our Consolidated Statement of
Operations. The following table summarizes the impact these discontinued
business units had on our consolidated operating results for the quarters ended
July 31, 1999 and 1998:
<TABLE>
<CAPTION>
JULY 31 JULY 31
1999 1998
--------- ---------
<S> <C> <C>
Revenues.................................................................. $ 300 $ 4,591
Cost of revenues.......................................................... 1,335 3,404
--------- ---------
Gross profit.............................................................. (1,035) 1,187
Other expenses
General and administrative.............................................. 587 1,460
Marketing and advertising............................................... 5 181
Depreciation and amortization........................................... 30 10
Other................................................................... 29 67
--------- ---------
Total expenses............................................................ 651 1,718
--------- ---------
Loss from operations...................................................... (1,686) (531)
Other interest expense.................................................... -- 126
--------- ---------
Loss before income taxes.................................................. (1,686) (657)
Income tax expense........................................................ -- --
--------- ---------
Net loss.................................................................. $ (1,686) $ (657)
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JULY 31, 1999 COMPARED TO JULY 31, 1998
REVENUES AND VOLUMES
Total loan volume for FiNet's production units is summarized below.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
JULY 31,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Business-to-business............................................... $ 112,995 $ 342,619
Consumer-direct.................................................... 52,151 58,504
---------- ----------
Total Loan Volume.............................................. $ 165,146 $ 401,123
---------- ----------
---------- ----------
</TABLE>
Loan volume decreased $236.0 million, or 59%, to 165.1 million for the
quarter ended July 31, 1999 from $401.1 million for the quarter ended July 31,
1998. Revenues decreased $6.1 million, or 75%, to $2.0 million for the quarter
ended July 31, 1999 from $8.1 million for the quarter ended July 31, 1998. The
volume decrease was attributable primarily to the volume of the discontinued
business units that were no longer operating in the quarter ended July 31, 1999.
Additionally, business-to-business segment volumes decreased in our continuing
units. Mortgage lending rates have increased in the current fiscal year relative
to the prior fiscal year, slowing mortgage industry originations. In addition,
price decreases in effect during the quarter ended July 31, 1999 negatively
impacted revenues since they were not offset by volume increases. We expect to
increase revenues through acquisitions and strategic relationships, through the
planned expansion of our sales force and through increased marketing and
advertising. Subsequent to July 31, 1999 we acquired certain assets and
operations of an east coast-based mortgage brokerage operation, Lowestrate.com,
Inc. However, there can be no assurance that increased revenues will be
achieved.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $2.8 million, or 50%, to $2.8 million for the
quarter ended July 31, 1999 from $5.6 million for the quarter ended July 31,
1998. However, as a percentage of revenues, cost of revenues increased,
decreasing our gross profit to (38%) of revenues. Compensation costs of
production-related personnel, the primary component of cost of revenues in our
continuing businesses, does not decrease proportionately with volume decreases.
Gross profit was also negatively affected by loan loss provisions of $833,000
established for one of our discontinued business units and $279,000 of
additional expense related to the sale of our servicing portfolio, neither of
which were incurred in the quarter ended July 31, 1998.
Warehouse interest expense decreased $370,000 or 73% to $135,000 for the
quarter ended July 31, 1999 from $505,000 for the quarter ended July 31, 1999
primarily due to the volume decrease. In addition, we employed our excess cash
to fund a large portion of our mortgage inventory during the quarter ended July
31, 1999, whereas for the quarter ended July 31, 1998, we financed over 95% of
our mortgage inventory. The decrease in inventory financing in the July 1999
quarter compared to the 1998 quarter resulted in lower warehouse facility
borrowings, contributing to the decrease in interest expense.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our continuing
businesses increased $1.0 million, or 30%, to $4.3 million in the quarter ended
July 31, 1999 from $3.3 million in the quarter ended July 31, 1998. Decreases
attributable to the discontinued units were offset by significant increases in
personnel costs as well as professional fees at the continuing units. Personnel
costs have increased as FiNet invests in the management team necessary to
improve operations and financial condition. In addition, general and
administrative expenses have increased significantly as the result of our
spending associated with becoming Year 2000 compliant.
MARKETING AND ADVERTISING
We have initiated a number of marketing relationships in recent months
designed to attract prospective customers to our website, ultimately, to
increase revenues. As a result, marketing and advertising has increased $391,000
or 87% to $842,000 for the quarter ended July 31, 1999 from $451,000 in the
quarter ended July 31, 1998. FiNet intends to continue to significantly increase
its spending on these relationships and branding, potentially spending up to $18
million in the next twelve months to achieve brand awareness and increase
volumes.
OTHER INTEREST EXPENSE
Other interest expense decreased $922,000, or 100%, to zero for the quarter
ended July 31, 1999 from $922,000 for the quarter ended July 31, 1998. During
the quarter ended July 31, 1998, we incurred other interest expense as we
amortized our 3% subordinated convertible debt discount. We also incurred
interest expense related to certain notes payable, a working capital line of
credit, and borrowings for the previous purchase of servicing assets. These
obligations were reduced to zero during the year ended April 30, 1999;
therefore, we did not incur material interest expense other than warehouse
interest expense during the quarter ended July 31, 1999.
FINANCIAL CONDITION
FiNet continues to rely on external sources of equity financing to fund
operations, to complete acquisitions and to make capital investments. The $35.7
million increase in stockholders' equity to $42.4 million at July 31, 1999 from
$6.7 million at April 30, 1999 is due to increases resulting from private
placements, partially offset by a loss of $6.3 million incurred during the
current quarter.
Our cash increased by $15.2 million to $19.4 million at July 31, 1999 from
$4.2 million at April 30, 1999, as the result of cash received from private
placements partially offset by our use of cash to fund some of our mortgage
origination activities. During the prior year, we used our warehouse facility
exclusively to finance approximately 95% of the funds advanced to the borrower
in a mortgage origination transaction. During the current year, we employed
either our excess cash or a combination of our cash and our warehouse facility
to fund originations.
Mortgage servicing rights decreased from $2.7 million at April 30, 1999 to
zero at July 31, 1999. The servicing portfolio was sold late in the current
fiscal quarter. We received cash of $710,000, and we recorded the balance due in
"Accounts receivable" on our Consolidated Balance Sheet at July 31, 1999. We
expect to collect substantially all of the balance due on this sale during the
second and third quarters of the current fiscal year.
Warehouse borrowings decreased $29.2 million, or 88%, from $33.0 million at
April 30, 1999 to $3.8 million at July 31, 1999, as proceeds from loan sales
repaid the associated borrowings and cash was
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
used to fund new loan inventory. We began using our excess cash to fund 100% of
some originations instead of 5% of an origination, decreasing the amounts
outstanding on our warehouse facilities. In addition, amounts outstanding on the
warehouse facilities employed in our discontinued units are being paid, but no
additional amounts will be drawn against those facilities. Accrued expenses
increased as we increased our spending on professional services relating to the
implementation of systems infrastructure required for Year 2000 preparedness and
as marketing expenses increased in connection with our emphasis on branding our
name.
While FiNet's financial condition has improved as a result of equity
issuances, our ability to improve our financial condition through improved
results of operations is dependent on our ability to significantly increase loan
origination volumes, to achieve highly efficient operations, and to manage
warehouse and operating expenses given the level of volumes. Our financial
condition is further dependent on economic conditions such as the general health
of the economy and demand for mortgage loans. There can be no assurance that we
will be able to improve our financial condition through profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
The nature of the mortgage lending business requires us to advance cash on a
daily basis to fund newly originated loans. These funds are provided either
through conventional mortgage warehouse lines of credit, through "purchase
repurchase" arrangements, or through the use of our cash balances. Additional
cash resources, obtained primarily through the private placement of our common
stock is used to satisfy our obligations to lenders, to fund ongoing expenses
such as administration and marketing, to invest in product development and to
expand our business geographically. Currently operations are not generating
sufficient cash to meet our operating requirements.
Operating activities including daily operating expenditures, repayment of
warehouse borrowings and funding new originations used $26.3 million of cash
during the quarter ended July 31, 1999.
Our investing activities included investments of $798,000 in furniture,
fixtures and equipment and the divestiture of our servicing portfolio. We
received cash of $710,000 from our portfolio sale, and we expect to receive the
balance of the cash due in the second quarter of fiscal 2000. We expect our
capital spending to continue at comparatively higher levels as we complete our
Year 2000 remediation program.
Financing activities, primarily the issuance of common stock through private
placements, provided $41.6 million during the fiscal quarter.
On August 9, 1999 we entered into a new, one-year $75 million committed
warehouse borrowing agreement with GMAC/RFC. The new agreement replaced the
existing $35 million extended agreement. The new facility may be used for the
origination or the acquisition of mortgage loans, and it is secured by mortgage
loans which it funds. Borrowings under this agreement bear interest at LIBOR
plus 1.75%. The agreement contains a number of covenants that, among other
things, require us to maintain a minimum current ratio, a minimum ratio of total
liabilities to tangible net worth and maintain a minimum level of tangible net
worth.
If we continue to maintain at least our current level of working capital
borrowing resources, we believe that our cash resources will be sufficient to
finance our minimum working capital requirements for the coming twelve months.
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 our
common share price closes below $1.00 per
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
share for 30 consecutive days, we may receive notification from Nasdaq that our
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 and inclusion of our common stock on the OTC
Bulletin Board or similar quotation system could adversely affect the liquidity
and price of our common stock and make it more difficult for investors to obtain
quotations or trade this stock.
In December 1998, we received notice from Nasdaq that we had not met
required financial ratio criteria for continued listing on the Nasdaq. Nasdaq
requested that we maintain a minimum net worth of $2 million and submit to
Nasdaq certain periodic financial reporting until July 1999. We complied with
Nasdaq's special reporting request and required ratio criteria during the
quarter.
YEAR 2000 READINESS
The Year 2000 issue concerns the ability of automated applications to
process date-dependent processes, calculations and information by properly
interpreting the year. The year 2000 issue could potentially impact our
business-critical computerized applications relating to, among others, loan
origination, servicing, pipeline management, hedging, payroll, financing and
financial accounting and reporting. In addition, other non business-critical
systems and services may also be affected. We have assembled a project team of
consultants, executive personnel and personnel from the information technology,
operations and finance departments to:
- assess the readiness of our systems, and the systems of our vendors and
suppliers, third-party service providers, customers and financial
institutions;
- replace or correct through program changes all our non-compliant
applications; and
- develop contingency plans in the event that systems and services are not
compliant.
The Year 2000 readiness project is scheduled to be complete on September 30,
1999. The project consists of eight phases: inventory, assessment, planning,
remediation, loan origination testing, loan origination interface testing, other
interfaces and core business systems validation and testing, and business
community planning. In addition, we expect to spend up to an additional $200,000
remedying our desktop computers and network. We do not expect any additional
significant costs of making our computer systems year 2000 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 are 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.
The Company is considering various contingency actions including alternative
vendors. The Year 2000 project plan calls for a fall back to manual procedures
if absolutely necessary, but the Company considers Year 2000 to be a critical
project and is addressing it as such.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
FiNet's primary market risk of loss is interest rate risk. From the time we
extend an interest rate commitment to the borrower until the loan is priced for
sale to an investor, we are subject to interest rate risk. If interest rates
rise during that period, the price at which the loan can be sold to an investor
declines,
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
resulting in a loss on the sale of the loan. We attempt to mitigate such losses
and manage our interest rate risk exposure through hedging transactions using a
combination of forward sales of mortgage-backed securities and forward
whole-loan sales to fix the sales price of loans we expect to fund. Before
entering into hedging transactions, we analyze our loans with committed interest
rates (pipeline loans). We consider factors such as the estimated portion of
loans that will ultimately be funded, note rates, interest rates, inventory of
loans and applications and other factors to determine the type and amount of
forward commitment and hedging transactions.
FiNet attempts to make forward commitments for, and hedge substantially all,
of its estimated interest rate risk on the loans. We had mandatory and optional
forward commitments at July 31 and April 30, 1999 aggregating $41.0 million and
$43.8 million, respectively. These commitments covered the market risk
associated with mortgages held for sale to investors of $26.0 million and $33.4
million, and our pipeline loans for which interest rates were committed at July
31 and April 30, 1999 of $32.4 million and $25.6 million, respectively. We
attempt to limit our credit exposure on forward sales arrangements by entering
into these arrangements with institutions that we believe are sound credit risks
and by limiting exposure to any single institution.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 14, 1998, prior to our acquisition of Mical, a lawsuit was filed
against Mical in the United States District Court for the Middle District of
Georgia. 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 RESPA 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. We believe that our
compensation programs for mortgage brokers comply with applicable laws and with
long standing industry practices. We intend to defend vigorously against this
action and believe that the ultimate resolution will not have a material adverse
effect on our business, results of operations and financial condition.
On April 16, 1999, a lawsuit was filed in the Superior Court of the State of
California, County of San Francisco by a former director and officer of
FiNet.com against FiNet.com and one of its current directors. The complaint
alleges, among other things, that the plaintiff and our current director entered
into an oral contract, wherein they agreed to share all profits from bonus
shares that were issued to either party under certain specific circumstances. It
is further alleged that we issued to our current director 1,800,000 shares of
stock and that our current director failed to provide the plaintiff one-half of
the stock, or 900,000 shares. The plaintiff seeks to recover 900,000 shares of
our common stock and punitive damages as to certain of the claims. FiNet.com and
our current director have each filed a general denial of all claims. We intend
to defend vigorously against the Action and believe that the ultimate resolution
will not have a material adverse effect in our business, results of operations
or financial condition.
FiNet.com and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. We do not
expect that the aggregate liability or loss, if any, resulting therefrom or from
the matters described above will have a material adverse effect on our business
results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, FiNet issued 3,347,039 shares of common stock in a private
placement for net proceeds of $13,019,000.
In June 1999, FiNet issued 7,712,081 shares of common stock in a private
placement for net proceeds of $28,964,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEM DESCRIPTION
- --------- ----- ------------------------------------------------------------------------------------------------
<C> <C> <S>
06/24/99 5 Announcement of earnings for the fiscal year ended April 30, 1999
06/28/99 5 Announcement of the completion of a $30 million private placement of common shares
</TABLE>
18
<PAGE>
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.
<TABLE>
<S> <C>
FINET.COM, INC.
Date: September 14, 1999 /s/ MARK L. KORELL
------------------------------------------
Mark L. Korell
(CEO AND PRINCIPAL EXECUTIVE OFFICER)
Date: September 14 , 1999 /s/ GARY A. PALMER
------------------------------------------
Gary A. Palmer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<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-31-1999
<CASH> 19,432,000
<SECURITIES> 0
<RECEIVABLES> 3,925,000
<ALLOWANCES> 1,125,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,053,000
<DEPRECIATION> 3,000,000
<TOTAL-ASSETS> 51,877,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 903,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,877,000
<SALES> 0
<TOTAL-REVENUES> 2,044,000
<CGS> 2,814,000
<TOTAL-COSTS> 5,570,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,340,000)
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<NET-INCOME> (6,340,000)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
