<PAGE>
Relates to Form S-1
Registration No. 333-82217
Filed under Rule 424(b)(3) and (c)
SUPPLEMENT TO PROSPECTUS OF FINET.COM, INC.
The following information supplements the prospectus, dated July 30, 1999,
of FiNet.com, Inc. related to 76,107,995 shares of its Common Stock. This
supplement should be read in conjunction with the prospectus.
THE DATE OF THIS SUPPLEMENT IS DECEMBER 17, 1999
S-1
<PAGE>
I. DEPARTURE OF CHIEF EXECUTIVE OFFICER AND EXECUTIVE VICE PRESIDENT OF SALES
AND MARKETING
On December 15, 1999, FiNet.com announced that Mark Korell, its Chairman,
President and Chief Executive Officer would retire from all positions he holds
with FiNet.com, effective January 15, 2000. Following Mr. Korell's retirement,
Stephen J. Sogin, a current member of FiNet.com's board of directors, will serve
as Interim Chief Executive Officer.
In November 1999, Kevin Gillespie, our Executive Vice President--Sales and
Marketing, resigned. He was replaced by Kellie Johnson Abreu.
II. RISK FACTORS
The risk factors titled "IF OUR MANAGEMENT IS NOT ABLE TO IMPROVE AND EXPAND
OUR OPERATIONS, OUR BUSINESS COULD SUFFER," "THE LOSS OF ANY OF OUR EXECUTIVE
OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE AN ADVERSE EFFECT ON OUR BUSINESS"
and "IF WE LOSE ACCESS TO CREDIT FACILITIES TO FINANCE OUR MORTGAGE LENDING
ACTIVITIES, OUR GROWTH PROSPECTS COULD BE SEVERELY LIMITED," beginning on
pages 4, 4 and 11, respectively, of the prospectus of which this supplement
forms a part, are deleted in their entirety and replaced with the following risk
factors:
"IF OUR MANAGEMENT IS NOT ABLE TO IMPROVE AND EXPAND OUR OPERATIONS, OUR
BUSINESS COULD SUFFER.
In 1999, we replaced most of our management team by hiring, among others,
Mark Korell, our Chairman, President and Chief Executive Officer, Gary Palmer,
our Executive Vice President--Chief Financial Officer, Michael Conway, our
Executive Vice President--Capital Markets, Kevin Gillespie, our Executive Vice
President--Sales and Marketing, Thomas Porter, our Executive Vice
President--Administration and Chris Skeadas, our Chief Operating Officer. Mark
Korell has announced his retirement effective January 15, 2000. Kevin Gillespie
resigned in November 1999. Our remaining management team has limited experience
worked together, and we can not be sure that they will be able to work together
effectively to improve and expand our operations. If FiNet.com's new President
and Chief Executive Officer, when appointed, and the current members of the
management team are not able to improve and expand our operations, our financial
condition, profitability and growth prospects could be materially adversely
affected.
THE LOSS OF ANY ADDITIONAL EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD LIKELY HAVE
AN ADVERSE EFFECT ON OUR BUSINESS.
Mr. Korell has recently announced his retirement as Chairman, President and
Chief Executive Officer and we have had to replace another key member of our
management team. We believe that our future success will depend to a significant
extent on the continued services of our remaining senior management and other
key personnel, including, among others: Gary Palmer, Michael Conway, Thomas
Porter and Chris Skeadas. The loss of the services of any of these employees, or
other key employees, could have a material adverse effect on our business,
results of operations and financial condition. We do not maintain "key person"
life insurance for any of our personnel.
FiNet.com is seeking to find a replacement for Mr. Korell. However, we have
not been successful in recruiting a permanent replacement for Mr. Korell. Delay
in recruiting a candidate to fill the Chief Executive Officer position, or any
other key position which may become vacant, could have a material adverse effect
on our business, results of operations and financial condition.
IF WE LOSE ACCESS TO CREDIT FACILITIES TO FINANCE OUR MORTGAGE LENDING
ACTIVITIES, OUR GROWTH PROSPECTS COULD BE SEVERELY LIMITED.
We act as a lender for many of the loans we originate. Because we are not a
bank, we are dependent upon specialized mortgage credit facilities from other
lenders to finance our mortgage lending activities. In August 1999, we entered
into a $75 million committed warehouse borrowing agreement with GMAC/RFC
S-2
<PAGE>
to replace an existing $35 million agreement with GMAC/RFC. In the agreement,
which expires on May 31, 2000, we make numerous representations, warranties and
operating and financial covenants. A material breach by FiNet.com of any of
these representations, warranties or covenants could result in the termination
of the agreement and an obligation to repay the entire amount outstanding under
the agreement. For instance, Mr. Korell's retirement will constitute a technical
default under the agreement, which will permit GMAC/RFC to refuse to continue to
make the credit facility available to FiNet.com. In the past, we have had to
obtain waivers from GMAC/RFC's for defaults under the agreement. We cannot
assure you that we will secure a waiver from GMAC/RFC for the default which will
occur due to Mr. Korell's retirement, or that financing will continue to be
available on favorable terms or at all. To the extent that we are unable to
access adequate capital to fund loans, we may have to curtail or cease our loan
funding activities entirely. This would have a material adverse effect on our
business, results of operations and financial condition."
S-3
<PAGE>
III. UNAUDITED FINANCIAL INFORMATION
The financial data presented below for the three months ended, and as of,
October 31, 1999 and for the three months ended October 31, 1998 is derived from
our unaudited consolidated financial statements. Such unaudited consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary and of a normal recurring nature to present fairly the
operating results for the interim periods reported. The results of operations
for the three months ended October 31, 1999 are not necessarily indicative of
the results to be expected for the fiscal year ending April 30, 2000. Our
balance sheet data as of April 30, 1999 is derived from our unaudited
consolidated financial statements. This information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in the prospectus.
The following information was included in our quarterly report on Form 10-Q
for the three months ended October 31, 1999, as filed with the Securities and
Exchange Commission on December 15, 1999.
<TABLE>
<CAPTION>
OCTOBER 31 APRIL 30
1999 1999
----------- ---------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 27,993 $ 4,202
Marketable equity securities................................ 2,700 --
Accounts receivable, net of allowances of $1,121 and
$2,150.................................................... 2,888 2,245
Mortgages held for sale, net of allowances of $2,701 and
$3,851.................................................... 42,280 33,438
Mortgage servicing rights................................... -- 2,693
Furniture, fixtures & equipment, net........................ 3,475 1,575
Goodwill.................................................... 1,704 --
Other assets................................................ 3,425 1,102
--------- ---------
Total assets................................................ $ 84,465 $ 45,255
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse and other lines of credit......................... 37,925 $ 33,038
Accounts payable............................................ 137 517
Notes payable and capitalized leases........................ 182 481
Accrued expenses and other liabilities...................... 5,895 4,531
--------- ---------
Total liabilities....................................... 44,139 38,567
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share (150,000 shares
authorized, 93,392 and 78,638 shares issued and
outstanding at October 31 and April 30, 1999,
respectively)............................................. 933 786
Additional paid-in capital................................ 100,966 53,782
Accumulated deficit....................................... (62,452) (47,880)
Other comprehensive income................................ 879 --
--------- ---------
Total stockholders' equity................................ 40,326 6,688
--------- ---------
Total liabilities and stockholders' equity.............. $ 84,465 $ 45,255
========= =========
</TABLE>
See accompanying notes.
S-4
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................................................ $ 2,371 $ 6,586 $ 4,415 $14,727
Cost of revenues........................................ 2,220 5,178 5,034 10,831
------- ------- ------- -------
Gross profit (loss)..................................... 151 1,408 (619) 3,896
Operating expenses
General and administrative............................ 4,477 3,731 8,789 6,995
Marketing and advertising............................. 3,231 188 4,073 639
Depreciation and amortization......................... 301 290 390 541
Other................................................. 373 709 700 857
------- ------- ------- -------
Total expenses...................................... 8,382 4,918 13,952 9,032
------- ------- ------- -------
Loss from operations.................................... (8,231) (3,510) (14,571) (5,136)
------- ------- ------- -------
Other interest expense.................................. -- 1,321 -- 2,243
------- ------- ------- -------
Loss before income taxes................................ (8,231) (4,831) (14,571) (7,379)
Income tax expense...................................... -- -- -- --
------- ------- ------- -------
Net loss................................................ $(8,231) $(4,831) $(14,571) $(7,379)
======= ======= ======= =======
Basic and diluted net loss per common share............. $ (0.09) $ (0.15) $ (0.17) $ (0.23)
------- ------- ------- -------
Weighted average common shares used in computing basic
and diluted net loss per common share................. 92,276 32,913 88,221 32,693
------- ------- ------- -------
</TABLE>
See accompanying notes.
S-5
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31
----------------------
1999 1998
---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (14,571) $ (7,379)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 444 1,569
Imputed interest from convertible debentures.............. -- 1,959
Asset valuation adjustments............................... 181 --
(Gain) loss on sale of mortgage servicing rights.......... -- (420)
Changes in operating assets and liabilities:
(Increase) decrease in mortgage loans held for sale..... (8,841) 9,244
(Increase) decrease in receivables from sales of
mortgage
loans, servicing rights and other receivables......... 200 4
(Increase) decrease in other assets..................... (2,682) (467)
Net increase (decrease) in warehouse borrowings......... 4,887 (9,820)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 896 (2,216)
--------- --------
Net cash used in operating activities....................... (19,486) (7,526)
INVESTING ACTIVITIES:
Proceeds from sale of mortgage servicing rights............. 1,848 1,509
Purchase of furniture, fixtures and equipment............... (2,408) (248)
Cash acquired in acquisition................................ -- 185
Acquisition of purchased technology and intangibles......... -- (481)
Other....................................................... -- 12
--------- --------
Net cash provided by (used in) investing activities......... (560) 977
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of expenses..... 41,893 --
Proceeds from issuance of convertible debt.................. -- 1,384
Proceeds from issuance of preferred stock................... -- 2,286
Proceeds from the exercise of common stock warrants and
options................................................... 2,153 197
Proceeds from advances on note payable and line of credit... -- 1,400
Repayment of note payable, capitalized leases and line of
credit.................................................... (209) (309)
Other equity................................................ -- (450)
--------- --------
Net cash provided by financing activities................... 43,837 4,508
--------- --------
Net increase (decrease) in cash............................. 23,791 (2,041)
Cash at beginning of period................................. 4,202 2,178
--------- --------
Cash at end of period....................................... $ 27,993 $ 137
========= ========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 267 $ 3,779
Taxes paid................................................ $ 49 $ 2
</TABLE>
See accompanying notes.
S-6
<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 47 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 October 31, 1999 of $62,452,000. Net losses are expected
for the foreseeable future. Equity capital has been raised to fund operations.
The Company's cash on hand at October 31, 1999 was $27,993,000. 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 October 31, 1999 and October 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
October 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 and six month periods ended October 31, 1999 are not necessarily
indicative of the expected results for the year ending December 31, 1999.
Beginning December 31, 1999, FiNet.com, Inc. will change its year end from a
fiscal year ending April 30, to a calendar year ending December 31. Results for
the eight-month transition period ending December 31, 1999 will be reported in
the next annual reporting period on Form 10-K which will be dated December 31,
1999.
S-7
<PAGE>
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.
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 period ended October 31 are:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
OCTOBER 31 OCTOBER 31
(IN THOUSANDS) (IN THOUSANDS)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Warehouse interest income.................................. $ 660 $2,154 $1,109 $ 3,957
Gain on sale of servicing rights and mortgage loans........ 848 3,216 1,669 8,618
Loan servicing fees........................................ 38 217 286 570
Loan brokerage fees........................................ 248 890 629 1,375
Other...................................................... 577 109 722 207
------ ------ ------ -------
Total revenues............................................. $2,371 $6,586 $4,415 $14,727
====== ====== ====== =======
</TABLE>
For the three month and six month periods ended October 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 statements of
operations have been reclassified and condensed to conform to the presentation
of the quarter ended October 31, 1999.
S-8
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITION
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 when the contingencies are satisfied. 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. The $500,000 note is included in the Company's "Accounts
Receivable" on its Consolidated Balance Sheet at October 31, 1999.
Subsequent to the asset and operations purchase date and until appropriate
licensing requirements were completed, Monument performed certain processing and
marketing services for Lowestrate and recorded fees and expenses related to
these services. The licensing requirements were completed subsequent to October
31, 1999. Accordingly, subsequent to the licensing date, Monument Mortgage will
employ the remaining Lowestrate employees, and FiNet's results of operations
will include the activities of those employees.
On October 28, 1999, the Company acquired the remaining 50% interest of a
joint venture, increasing its interest to 100%. The purchase price was 600,000
shares of the Company's common stock. The only assets of the joint venture are
marketable equity securities. The joint venture has no operating activities.
NOTE 4. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights and the related valuation allowance activity were
as follows:
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 31
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year................................ $ 2,693 $ 5,478
Additions................................................... -- 1,231
Sales....................................................... (2,693) (1,330)
Scheduled amortization...................................... -- (919)
Impairment additions charged to operations.................. -- --
Impairment reductions credited to operations................ -- --
------- -------
Ending balance.............................................. $ - $ 4,460
======= =======
</TABLE>
In connection with mortgage servicing activities, the Company segregates,
escrow and custodial funds in a separate trust account and excludes this balance
of $138,000 and $3.7 million at October 31, 1999 and April 30, 1999,
respectively, from its balance sheet.
S-9
<PAGE>
NOTE 5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31 APRIL 30
1999 1999
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures...................................... $ 781 $ 315
Computer equipment.......................................... 3,946 2,650
Office equipment............................................ 1,722 1,622
Leasehold improvements...................................... 215 243
------- -------
Total cost.................................................. 6,664 4,830
Less: accumulated depreciation.............................. (3,189) (3,255)
------- -------
Net furniture, fixtures and equipment....................... $ 3,475 $ 1,575
======= =======
</TABLE>
NOTE 6. BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31 APRIL 30
1999 1999
---------- --------
(IN THOUSANDS)
<S> <C> <C>
WAREHOUSE AND OTHER LINES OF CREDIT
Warehouse lines of credit:
$75 million committed and $35 million
uncommitted respectively, bearing interest at
LIBOR + variable spread, expires May 31, 2000........... 37,913 $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.................... 12 993
------- -------
37,925 $33,038
======= =======
Notes payable and capitalized leases (various rates)........ 182 $ 481
======= =======
</TABLE>
WAREHOUSE LINES OF CREDIT
The Company's continuing operations employed a $75 million revolving
warehouse facility during the period. The remaining facilities with balances at
April 30, 1999 were used by the Company's discontinued operations, and, after
the balances are liquidated, will not be renegotiated. In August, 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 May 31, 2000. For the three month periods ended October
31, 1999 and 1998, the Company recorded warehouse interest expense of $162,000
and $2,228,000, respectively. For the six month periods ended October 31, 1999
and 1998, the Company recorded interest expense of $297,000 and $3,886,000
respectively. Borrowings under this warehouse facility are secured by the
mortgages held for sale thereby financed. At October 31, 1999, and April 30,
1999, LIBOR was 5.41% and 4.90%, respectively, and the prime rate was 8.25 % and
7.25%, respectively.
Our available credit lines also include Fannie Mae's "As Soon as
Pooled/Early Purchase Option" (the "ASAP Plus" program). Under the ASAP Plus
program, Fannie Mae funds us on the loans we deliver to them upon receipt of
appropriate mortgage collateral. Fannie Mae subsequently purchases the mortagage
S-10
<PAGE>
loans for cash upon receipt of complete and accurate mortgage pool and other
documentation. While approximately 66% of loans funded by Monument Mortgage in
fiscal 1999 were sold to Fannie Mae, we have not used the ASAP Plus program
since Fannie Mae reinstituted our eligibility on February 1, 1999 after a period
of ineligibility due to our financial condition and management structure.
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. At October 31, 1999, the Company was in
default of certain financial covenants with its primary warehouse lender. The
Company has obtained a waiver of this default.
NOTE 7. 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 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 8. STOCKHOLDERS' EQUITY
During the six months ended October 31, 1999, FiNet issued 11,059,120 shares
of common stock for net proceeds of $41,205,000 through private placements.
FiNet recorded $879,000 of "Other comprehensive income" relating to
unrealized gains on marketable equity securities held as available for sale at
October 31, 1999.
S-11
<PAGE>
NOTE 9. 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>
THREE MONTHS SIX MONTH ENDED
ENDED OCTOBER 31 OCTOBER 31
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Business-to-business................................. $ 1,511 $ 5,110 $ 3,054 $ 12,278
Consumer-direct...................................... 296 1,366 797 2,339
------- ------- ------- --------
Segment Revenue........................................ 1,807 6,476 3,851 14,617
Corporate............................................ 564 110 564 110
------- ------- ------- --------
$ 2,371 $ 6,586 $ 4,415 $ 14,727
======= ======= ======= ========
Operating income
Business-to-business................................. (5,853) (653) (7,937) (468)
Consumer-direct...................................... (741) (832) (1,796) (2,001)
------- ------- ------- --------
Segment operating income............................... (6,594) (1,485) (9,733) (2,469)
Corporate............................................ (1,637) (3,346) (4,838) (4,910)
------- ------- ------- --------
$(8,231) $(4,831) $(14,571) $ (7,379)
======= ======= ======= ========
Capital expenditures
Business-to-business................................. 1,507 24 2,045 107
Consumer-direct...................................... 96 52 130 58
------- ------- ------- --------
Segment Capital expenditures........................... 1,603 76 2,175 165
Corporate............................................ 7 336 233 349
------- ------- ------- --------
$ 1,610 $ 412 $ 2,408 $ 514
======= ======= ======= ========
October April 30
31 1999
------- --------
Identifiable assets
Business-to-business................................. 75,083 40,141
Consumer-direct...................................... 4,571 3,211
------- --------
Segment Identifiable assets............................ 79,654 43,352
Corporate............................................ 4,811 1,903
------- --------
$84,465 $ 45,255
------- --------
Long-lived assets
Business-to-business................................. 2,477 624
Consumer-direct...................................... 185 311
------- --------
Segment long-lived assets.............................. 2,662 935
Corporate............................................ 813 640
------- --------
$ 3,475 $ 1,575
======= ========
</TABLE>
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.
S-12
<PAGE>
NOTE 10. SUBSEQUENT EVENTS
Mark L. Korell, Chairman, Chief Executive Officer and President retired
effective January 15, 2000. His retirement will trigger an event of default
under the Company's warehouse lending agreement with GMAC/RFC.
S-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS SUPPLEMENT 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 "RISK FACTORS" BEGINNING ON PAGE 8 OF THE PROSPECTUS OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART.
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.
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 related to revenues 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.
S-14
<PAGE>
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, and $279,000 of additional expense was recognized
upon its sale. The following table summarizes the impact these discontinued
business units had on our consolidated operating results for the three and six
month periods ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................................................... $ 101 $ 3,204 $ 401 $ 7,795
Cost of revenues........................................... 218 2,752 1,553 6,156
----- ------- ------- -------
Gross profit............................................... (117) 452 (1,152) 1,639
Other expenses
General and administrative............................... 294 1,158 881 2618
Marketing and advertising................................ (2) 86 3 267
Depreciation and amortization............................ -- 134 30 144
Other.................................................... 73 676 102 743
----- ------- ------- -------
Total expenses............................................. 365 2,054 1,016 3,772
----- ------- ------- -------
Loss from operations....................................... (482) (1,602) (2,168) (2,133)
Other interest expense..................................... -- (84) -- 42
----- ------- ------- -------
Loss before income taxes................................... (482) (1,518) (2,168) (2,175)
Income tax expense......................................... -- -- -- --
Net loss................................................... $(482) $(1,518) $(2,168) $(2,175)
===== ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 31, 1999 COMPARED TO OCTOBER 31, 1998
REVENUES AND VOLUMES
Total loan volume for FiNet's production units is summarized below.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED OCTOBER 31
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
---------------------
<S> <C> <C>
Business to Business........................................ $172,022 $330,581
Consumer-direct............................................. 24,371 87,287
-------- --------
Total Loan Volume....................................... $196,393 $417,868
======== ========
</TABLE>
Loan volume decreased $221.5 million, or 53%, to $196.4 million for the
quarter ended October 31, 1999 from $417.9 million for the quarter ended October
31, 1998. Revenues decreased $4.2 million, or 64%, to $2.4 million for the
quarter ended October 31, 1999 from $6.6 million for the quarter ended October
31, 1998. The volume decrease was attributable primarily to the volume of the
discontinued
S-15
<PAGE>
business units that were no longer operating in the quarter ended October 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 October 31, 1999
negatively impacted revenues since they were not offset by volume increases. We
expect to increase revenues through the planned expansion of our sales force and
increased emphasis on the business to business segment, through acquisitions and
through strategic relationships. However, there can be no assurance that
increased revenues will be achieved.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $3.0 million, or 57%, to $2.2 million for the
quarter ended October 31, 1999 from $5.2 million for the quarter ended October
31, 1998. However, as a percentage of revenues, cost of revenues increased,
decreasing our gross profit to 6% 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.
Warehouse interest expense decreased $2.1 million or 93% to $162,000 for the
quarter ended October 31, 1999 from $2.2 million for the quarter ended October
31, 1998 primarily due to the volume decrease. In addition, in October of 1998,
RFC increased the interest rates on the Company's borrowings to 4% in excess of
the rates otherwise applicable; in fiscal 1999, the excess rates were not
levied. Also, in fiscal 1999, RFC allowed certain excess cash balance accounts
to be offset against amounts due on warehouse borrowings, thereby further
reducing the company's warehouse interest expense for the current fiscal period
compared to the comparable period of the prior year.
In addition, we employed our excess cash to fund a large portion of our
mortgage inventory during a portion of the six months ended October 31, 1999,
whereas for the six months ended October 31, 1998, we financed over 95% of our
mortgage inventory. The decrease in inventory financing in the period ending
October 1999 compared to the quarter ending October 1998 contributed to lower
warehouse facility borrowings, contributing to the decrease in interest expense.
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our continuing
businesses increased
$1.7 million, or 63%, to $4.2 million in the quarter ended October 31, 1999 from
$2.5 million in the quarter ended October 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 increased its management team and hired additional sales and
production employees. 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, with the intent of
increasing revenues. As a result, marketing and advertising has increased $3.0
million to $3.2 million for the quarter ended October 31, 1999 from $188,000 in
the quarter ended October 31, 1998. FiNet intends to significantly decrease its
spending on branding over the subsequent twelve months relative to spending
incurred in the current quarter.
S-16
<PAGE>
OTHER INTEREST EXPENSE
Other interest expense decreased $1.3 million to zero for the quarter ended
October 31, 1999. During the quarter ended October 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 was 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 October 31, 1999.
SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO SIX MONTHS ENDED
OCTOBER 31, 1998
REVENUES AND VOLUMES
Total loan volume for FiNet's production units is summarized below.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED OCTOBER 31
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
-------------------
<S> <C> <C>
Business to Business........................................ $285,017 $145,791
Consumer-direct............................................. 76,522 673,200
-------- --------
Total Loan Volume....................................... $361,539 $818,991
======== ========
</TABLE>
Loan volume decreased $457.4 million, or 56%, to $361.6 million for the six
months ended October 31, 1999 from $819.0 million for the six months ended
October 31, 1998. Revenues decreased $10.3 million, or 70%, to $4.4 million for
the six months ended October 31, 1999 from $14.7 million for the six months
ended October 31, 1998. The volume decrease was attributable primarily to the
volume of the discontinued business units that were no longer operating in the
six months ended October 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 negatively impacted revenues
since they were not offset by volume increases. We expect to increase revenues
through the planned expansion of our sales force and increased emphasis on the
business to business segment, and through acquisitions and strategic
relationships. However, there can be no assurance that increased revenues will
be achieved.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $5.8 million, or 54%, to $5.0 million for the six
months ended October 31, 1999 from $10.8 million for the six months ended
October 31, 1998. However, as a percentage of revenues, cost of revenues
increased, decreasing our gross profit to (14)% 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 six months ended October 31, 1998.
Warehouse interest expense decreased $3.6 million or 92% to $297,000 for the
six months ended October 31, 1999 from $3.9 million for the six months ended
October 31, 1998 primarily due to the volume decrease. In addition, we employed
our excess cash to fund our mortgage inventory during a portion of the six month
period, whereas for the period ended October 31, 1998, we financed over 95% of
our mortgage inventory. Also, in fiscal 1999, our primary warehouse lender
allowed certain excess cash balance accounts
S-17
<PAGE>
to be offset against amounts due on warehouse borrowings, thereby further
reducing the company's warehouse interest expense for the current fiscal period
compared to the comparable period of the prior year. The decrease in inventory
financing in the period ended October 1999 compared to the 1998 period resulted
in lower warehouse facility borrowings, contributing to the decrease in interest
expense.
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our continuing
businesses increased
$3.5 million, or 81%, to $7.9 million in the six months ended October 31, 1999
from $4.4 million in the quarter ended October 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 increased its management team and hired additional sales and
production employees. 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, with the intent of
increasing revenues. As a result, marketing and advertising has increased $3.4
million to $4.1 million for the six months ended October 31, 1999 from $639,000
in the six months ended October 31, 1998. FiNet intends to significantly
decrease its spending on branding over the subsequent twelve months relative to
spending incurred in the current six month period.
OTHER INTEREST EXPENSE
Other interest expense decreased $2.2 million to zero for the six months
ended October 31, 1999 from $2.2 million for the six months ended October 31,
1998. During the quarter ended October 31, 1998, we incurred other interest
expense as we amortized of 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 was 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 October 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 $33.6
million increase in stockholders' equity to
$40.3 million at October 31, 1999 from $6.7 million at April 30, 1999 is due to
increases in equity resulting primarily from private placements and warrant
exercises, partially offset by a loss of $14.6 million incurred for the the six
month period ended October 31, 1999.
Our cash increased by $23.8 million to $28.0 million at October 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 and to make capital investments. In addition, 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 October 31, 1999. The servicing portfolio was sold late in the quarter
ended July 31, 1999. We received cash of $1.8 million, 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 balance of the current fiscal year and the first half of the year
beginning January 1, 2000.
S-18
<PAGE>
Warehouse borrowings increased $4.9 million, or 15%, from $33.0 million at
April 30, 1999 to
$37.9 million at October 31, 1999 as the Company's loan originations increased
late in the period ended October 31, 1999.
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 are used to satisfy its 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 $19.5 million of cash
during the six months ended October 31, 1999.
Our investing activities included investments of $2.4 million in furniture,
fixtures and equipment and the divestiture of our servicing portfolio. We
received cash of $1.8 million from our portfolio sale, and we expect to receive
the balance of the cash due during the remainder of the current fiscal year and
in the first quarter of the year beginning January 1, 2000. We expect our
capital spending to decrease significantly as we have completed our Year 2000
remediation program and we have consolidated our west coast operations into one
facility.
Financing activities, primarily the issuance of common stock through private
placements and warrant exercises, provided $43.8 million during the six months
ended October 31, 1999.
On August 9, 1999 we entered into a new, $75 million committed warehouse
borrowing agreement with GMAC/RFC. The new agreement replaced the existing $35
million extended agreement. The agreement expires May 31, 2000. The new facility
may be used for the origination or the acquisition of mortgage loans, and it is
secured by mortgages 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.
S-19
<PAGE>
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 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 have complied
with Nasdaq's special reporting request and required ratio criteria.
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 was completed on schedule during the quarter
ended October 31, 1999. The project consisted 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. 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 successfully completed, 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 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.
S-20
