<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
------------------------
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)
2527 CAMINO RAMON, SUITE 200
SAN RAMON, CA 94583
(Address of Principal Executive Office)
94-3115180
(IRS Employer Identification Number)
(925) 242-6550
(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 August 7, 2000, 94,606,528 shares of the Registrant's Common
Stock, $.01 par value were issued and outstanding.
================================================================================
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<PAGE>
INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION PAGE
---- ----------- ----
<S> <C> <C>
1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet
June 30, 2000 and December 31, 1999..................................... 3
Condensed Consolidated Statements of Operations
Six Months and Three Months Ended June 30, 2000 and June 30, 1999....... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and June 30, 1999........................ 5
Notes to Condensed Consolidated Financial Statements......................... 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
3. Quantitative and Qualitative Analysis of Market Risk......................... 17
PART II - OTHER INFORMATION
1. Legal Proceedings............................................................ 18
4. Submission of Matters to a Vote of Security Holders.......................... 18
6. Exhibits and Reports on Form 8-K............................................. 18
Signatures................................................................... 19
</TABLE>
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINET.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
---------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 9,720 $ 18,626
Restricted cash 400 10,403
Available for sale marketable equity securities, cost basis of $0 194 2,674
Mortgage loans in process 10,395 -
Accounts and notes receivable, net of allowances of $1,013 and $1,793 1,180 2,363
Mortgage loans held for sale, net 69,378 78,691
Furniture, fixtures & equipment, net 3,412 4,471
Goodwill, net of accumulated amortization of $619 and $240 1,378 1,757
Other assets 1,282 823
---------- --------
Total assets $ 97,339 $119,808
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse and other lines of credit $ 73,936 $ 80,453
Accounts payable 704 2,379
Notes payable and capitalized leases 83 141
Accrued expenses and other liabilities 4,616 6,462
---------- --------
Total liabilities $ 79,339 $ 89,435
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share (150,000 shares
authorized, 94,603 and 93,441 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively) $ 946 $ 934
Additional paid-in capital 102,328 100,943
Accumulated deficit (85,274) (73,208)
Other comprehensive income - 1,704
---------- --------
Total stockholders' equity 18,000 30,373
---------- --------
Total liabilities and stockholders' equity $ 97,339 $119,808
========== ========
</TABLE>
See accompanying notes.
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<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2000 1999 2000 1999
------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 2,075 $ 2,548 $ 3,527 $ 4,978
Cost of revenues 2,254 3,432 3,969 12,134
------- --------- -------- --------
Gross profit (loss) (179) (884) (442) (7,156)
Operating expenses:
General and administrative 4,232 6,093 9,265 11,378
Marketing and advertising 423 679 1,287 1,414
Depreciation and amortization 516 90 1,010 329
Special charges (335) 816 964 4,926
Other operating expenses 98 1,118 83 1,110
------- --------- -------- --------
Total expenses 4,934 8,796 12,609 19,157
------- --------- -------- --------
Loss from operations (5,113) (9,680) (13,051) (26,313)
Other income and expense:
Gain (loss) on sale of marketable equity securities (455) - 866 -
Other interest income 52 - 152 -
Other interest expense - (267) - (267)
------- --------- -------- --------
Loss before income taxes (5,516) (9,947) (12,033) (26,580)
Income tax expense (10) (5) (33) (5)
------- --------- -------- --------
Net loss (5,526) (9,952) (12,066) (26,585)
------- --------- -------- --------
In-substance preferred dividend - - - (353)
Net loss attributable to common shareholders $(5,526) $ (9,952) $(12,066) $(26,938)
------- --------- -------- --------
Basic and diluted net loss per common share $ (0.06) $ (0.12) $ (0.13) $ (0.36)
------- --------- -------- --------
Weighted average common shares used in computing basic
and diluted net loss per common share 94,545 79,973 94,134 75,184
======= ========= ======== ========
</TABLE>
See accompanying notes.
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<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS )
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JUNE 30 JUNE 30
2000 1999
-------- -------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(12,066) $(26,938)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,010 445
Compensation attributable to warrant issuance 334 1,805
Expense from warrants issued upon conversion of debt - 739
Imputed interest from convertible debentures - 269
Asset valuation adjustments 964 4,967
(Gain) loss on sale of marketable securities (866) -
Changes in operating assets and liabilities:
Decrease in restricted cash 10,003 -
Decrease (increase) in mortgage loans held for sale and loans in process (1,082) 41,452
Decrease in receivables from sales of mortgage loans,
servicing rights and other receivables 812 3,976
Decrease (increase) in other assets 14 (277)
Decrease in warehouse borrowings (6,517) (42,268)
Decrease in accounts payable and accrued expenses (3,189) (2,269)
-------- ---------
Net cash used in operating activities (10,583) (18,099)
INVESTING ACTIVITIES:
Proceeds from sale of mortgage servicing rights 420 -
Purchase of furniture, fixtures and equipment (868) (611)
Proceeds from sale of marketable securities 1,593 -
-------- ---------
Net cash provided by (used in) investing activities 1,145 (611)
FINANCING ACTIVITIES:
Proceeds (costs) from issuance of common stock, net of expenses (204) 56,450
Proceeds from the exercise of common stock warrants and options 794 1,227
Redemption of preferred stock - (2,500)
Repayment of 3% Convertible Debenture - (1,500)
Repayment of note payable, capitalized leases and line of credit (58) (761)
Other equity - (227)
-------- ---------
Net cash provided by financing activities 532 52,689
-------- ---------
Net increase (decrease) in cash (8,906) 33,979
Cash at beginning of period 18,626 7,418
-------- ---------
Cash at end of period $ 9,720 $ 41,397
======== =========
</TABLE>
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<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
ORGANIZATION
FiNet.com ("FiNet" or "the Company") is a provider of mortgage
services to mortgage broker businesses and consumers, including online
mortgage services. The Company primarily markets its business to business
services to mortgage brokers, and to consumers 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 and fund mortgage loans in 50 states and the
District of Columbia. The majority of Monument's business activity is carried
out in California.
NOTE 2. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of June 30, 2000 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 period ended and as of June 30,
2000. The results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of the expected results for the year ending
December 31, 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.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financials
statements and notes thereto included in the Company's Annual Report on Form
10-K for the period ended December 31, 1999.
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 and deferred
transaction expenses are recognized and included in gain on sale of mortgage
loans.
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 the processing of mortgage loan applications for
third party lenders. The fees for providing these services are recognized at
such time as the lender funds the loan.
- 6 -
<PAGE>
The Company's revenue components for the period ended June 30 are:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(Unaudited) 2000 1999 2000 1999
-------- -------- ------ -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Warehouse interest income $ 777 $ 472 $1,864 $1,195
Gain on sale of servicing rights and mortgage loans 1,232 1,256 1,389 1,762
Loan servicing fees 11 292 11 625
Loan brokerage fees 51 427 178 1,225
Other 4 101 85 171
-------- -------- ------ -------
Total revenues $2,075 $2,548 $3,527 $4,978
======== ======== ====== =======
</TABLE>
COST OF REVENUE
Certain loan origination costs and other production costs attributable
to inventory are included in "Cost of revenues" in the Company's Consolidated
Statements of Operations. The Company includes costs of personnel attributable
to loan production, expense recorded for loan and receivables losses directly
related to loans and servicing assets held for sale, interest expense and other
costs of production. Direct loan origination costs are deferred until the
related loan is sold. Certain of these direct costs are included in gain on sale
of mortgage loans and other costs are included in cost of revenues.
NOTE 3. BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
WAREHOUSE AND OTHER LINES OF CREDIT WAREHOUSE LINES OF CREDIT:
$75 million committed, bearing interest at LIBOR + variable spread, $71,958 $73,125
expires October 15, 2000
Purchase/Repurchase agreements:
$10 million, bearing interest at prime (Mical) - 12
$15 million, bearing interest at Fed Funds + 0.70%, no expiration
date $ 1,978 7,316
----------- ----------------
$73,936 $80,453
=========== ================
NOTES PAYABLE AND CAPITALIZED LEASES:
Notes and capital leases (various rates) $ 83 $ 141
----------- ----------------
$ 83 $ 141
=========== ================
</TABLE>
WAREHOUSE LINES OF CREDIT
The Company's primary warehouse borrowing facility provides the Company
with a committed $75 million warehouse borrowing facility and carries an
interest rate of LIBOR plus 1.75%. On July 14, 2000, our warehouse lender
amended our agreement, extending the maturity date to October 15, 2000. For the
three month periods ended June 30, 2000 and 1999, the Company recorded warehouse
interest expense of $553,000 and $339,000, respectively, and for the six month
periods ended June 30, 2000 and 1999, the Company recorded warehouse interest
expense of $1,062,000 and $1,545,000 respectively. Warehouse interest expense is
included in the Condensed Consolidated Statement of Operations in "Cost of
revenues". Borrowings under this warehouse facility are secured by the mortgages
held for sale thereby financed. At June 30, 2000 and December 31, 1999, LIBOR
was 6.65% and 6.49%, respectively.
On July 19, 2000, we entered into a loan participation agreement with
Gateway Bank, whereby we may sell a participation interest in mortgage loans to
Gateway. This agreement supports our working capital needs as it
- 7 -
<PAGE>
allows us to fund our planned volume increases without reducing our committed
warehouse borrowing capacity. The maximum total participation outstanding
allowed is $20 million. When participated interests are subsequently sold in
the secondary market, the total amount participated with Gateway will be
reduced. In connection with the participation agreement, Gateway will earn a
yield on participated balances of prime minus 1%. This agreement expires on
July 31, 2001.
The Company's available credit lines also include a $15 million
purchase/repurchase agreement with Fannie Mae's "As Soon as Pooled/Early
Purchase Option" (the "ASAP Plus" program). Under the ASAP Plus program,
Fannie Mae funds the Company on the loans delivered to them upon receipt of
appropriate mortgage collateral. Fannie Mae subsequently purchases the
mortgage loans for cash upon receipt of complete and accurate mortgage pool
and other documentation.
WAREHOUSE FACILITY COVENANTS
The agreement for the warehouse line of credit 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 June 30, 1999, the Company was not in compliance with the
liability growth covenants of its primary warehouse lending agreement. The
lender waiver this event of default and removed this covenant requirement
effective July 14, 2000.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LITIGATION
On January 14, 1998, prior to the Company's 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 Real Estate Settlement
Procedures Act and induced mortgage brokers to breach their alleged fiduciary
duties to their customers. The plaintiffs seek unspecified compensatory and
punitive damages as to certain claims. Management believes that its
compensation programs for mortgage brokers comply with applicable laws and
with long standing industry practices. The Company intends to defend
vigorously against this action and believes that the ultimate resolution will
not have a material adverse effect on its 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 then current and now former
directors. The original complaint alleged, among other things, that the
plaintiff and the Company's then 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 the Company issued to the then current director
1,800,000 shares of stock and that the Company's then current director failed
to provide the plaintiff one-half of the stock, or 900,000 shares. The
plaintiff has since filed a third amended complaint wherein he seeks either
to recover 1,800,000 shares of the Company's common stock based upon the
claim that plaintiff is entitled to the same number of shares issued to the
then current director or 900,000 shares based upon the claim that he is
entitled to half of the shares issued to the then current director or
monetary damages in lieu of shares and punitive damages as to certain of the
claims. FiNet.com and the Company's then current director have each filed a
general denial of all claims. The Company intends to defend vigorously
against the action and believes that the ultimate resolution will not have a
material adverse effect on its business, results of operations or financial
condition.
On December 16, 1999, a lawsuit was filed in the Judicial District
Court of Dallas County, Texas, by FC Capital Corp. d/b/a First City Capital
Corporation ("First City"). The complaint alleges breach of contract by
Coastal Federal Mortgage ("Coastal") for failure to repurchase loans in
accordance with the terms and conditions of a purchase agreement entered into
by Coastal and First City in March 1998. The plaintiff has named Finet as a
defendant alleging that Finet assumed all of Coastal's debts and obligations
when Finet acquired Coastal in April 1998. The plaintiff seeks to recover
actual damages in the amount of $1.7 million and premium rebates in the
approximate amount of $26,000. The action was removed to the United States
District Court, Northern District of Texas, Dallas Division ("Court") on
January 18, 2000. On May 31, 2000 the Court granted Finet's Motion to Dismiss
for Lack of Personal Jurisdiction and dismissed the action without prejudice.
Thereafter, the Company
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<PAGE>
and Coastal filed a declaratory relief action against First City in the San
Francisco Superior Court with respect to the issues that had been raised by
First City in the dismissed Texas action. First City removed the action to
the United States District Court, Northern District of California, and filed
a motion to dismiss or in the alternative to change venue to New York. A
hearing on the motion to dismiss is scheduled for August 28, 2000. The
Company intends to defend vigorously against the action and believes that the
ultimate resolution will not have a material adverse effect on its business,
results of operations or financial condition.
An employment dispute exists between the Company and its former
Executive Vice President of Capital Markets, Michael Conway, who was
terminated by the Company effective February 1, 2000. Mr. Conway alleges that
his termination was not for "just cause" as that term is defined in his
written Employment and Compensation Agreement ("Agreement"), and that he is
therefore entitled to a continuation of his salary through the termination
date under the Agreement and the immediate vesting of all options or damages
in an equivalent amount and seeks punitive damages as to certain claims. The
dispute was submitted unsuccessfully for mediation in March and is now
scheduled for arbitration on October 30, 2000. The Company intends to defend
vigorously against the action and believes that the ultimate resolution will
not have a material adverse effect on its business, results of operations or
financial condition.
The Company and certain subsidiaries are defendants in various other
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 5. EMPLOYEE STOCK PURCHASE PLAN
During the first quarter of 2000, the Company implemented the
Company's 1999 Employee Stock Purchase Plan ("the Plan") under which all
employees, including executive officers, may purchase stock at a discount to
the market price. Employees pay for their stock purchases through payroll
deductions at a rate equal to two to ten percent of earnings. Shares issued
under the plan are immediately vested. There are 500,000 shares reserved for
issuance under the Plan. As of June 30, 2000, there are 17,373 shares issued
under the Plan.
NOTE 6. SPECIAL ITEMS
The Company replaced certain loan origination and tracking software
and systems. During the quarter ended March 31, 2000 the Company had recorded
expense of $1,299,000 related to this replacement. During the quarter ended
June 30, 2000, when amounts payable to the software vendor were reduced, we
recovered $335,000 of the amount previously expensed, resulting in net
expense for the six months ended June 30 of $964,000.
Special charges recorded during the six months ended June 30, 1999
relate to the Coastal Federal Mortgage and Mical Mortgage business unit
closures and to the write-off of capitalized costs of software that would no
longer be used in the Company's continuing business strategy. In connection
with Mical's closure, the Company assessed the remaining goodwill balance
relating to the acquisition of that unit and determined that the amount was
not recoverable from future cash flows. Therefore, the remaining unamortized
goodwill of $3,189,000 was expensed. In addition, Mical recorded $642,000 of
expense to recognize exit costs primarily for occupancy lease costs and
severance relating to employee terminations in connection with the closure.
In connection with Coastal's closure, Coastal wrote off $405,000 of net book
value of fixed assets. In addition, the Company expensed $690,000
representing the unamortized balance of its Real Estate Office Software
technology, upon determination that it would no longer employ this technology
in its future strategic direction.
NOTE 7. 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.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDING SIX MONTHS ENDING
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Business-to-business $ 1,697 $ 2,013 $ 2,971 $ 3,654
Consumer-direct 378 535 556 1,324
-------- -------- -------- --------
Segment Revenue 2,075 2,548 3,527 4,978
Corporate - - - -
-------- -------- -------- --------
$ 2,075 $ 2,548 $ 3,527 $ 4,978
======== ======== ======== ========
Operating income (loss)
Business-to-business $(2,956) $(7,420) $ (7,663) $(18,814)
Consumer-direct (1,060) (733) (2,684) (1,316)
-------- -------- -------- --------
Segment operating income (loss) (4,016) (8,153) (10,347) (20,130)
Corporate (1,097) (1,527) (2,704) (6,183)
-------- -------- -------- --------
$(5,113) $(9,680) $(13,051) $(26,313)
======== ======== ======== ========
Capital expenditures
Business-to-business $ 216 $ 153 $ 724 $ 519
Consumer-direct 41 10 71 31
-------- -------- -------- --------
Segment Capital expenditures 257 163 795 550
Corporate 13 19 73 61
-------- -------- -------- --------
$ 270 $ 182 $ 868 $ 611
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------- -----------
<S> <C> <C>
Identifiable assets
Business-to-business $82,738 $101,837
Consumer-direct 4,867 5,990
------- -----------
Segment Identifiable assets 87,605 107,827
Corporate 9,734 11,981
------- -----------
$97,339 $119,808
======= ===========
Long-lived assets
Business-to-business $ 2,900 $ 3,800
Consumer-direct 171 223
------- -----------
Segment long-lived assets 3,071 4,023
Corporate 341 448
------- -----------
$ 3,412 $ 4,471
======= ===========
</TABLE>
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 THAN 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 A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN "FACTORS THAT MAY AFFECT FUTURE PERFORMANCE" AND ELSEWHERE IN OUR
ANNUAL REPORT ON FORM 10-K DATED DECEMBER 31, 1999.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED HEREIN, AND OUR ANNUAL REPORT ON FORM 10-K DATED
DECEMBER 31, 1999.
- 10 -
<PAGE>
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.
IMPACT OF OUR DISCONTINUED UNITS-MICAL, COASTAL AND OUR SERVICING BUSINESS
We incurred significant losses at both our Mical and Coastal
subsidiaries in 1999. Management elected to discontinue these business units
during the first half of 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 following table summarizes
the impact these discontinued business units had on our consolidated
operating results for the three month and six month periods ended June 30,
2000 and 1999:
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2000 1999 2000 1999
------- ------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 45 $ 276 $ 77 $ 968
Cost of revenues 128 786 339 8,193
------- ------- ------- --------
Gross profit (83) (510) (262) (7,225)
Other expenses
General and administrative 306 421 648 2,428
Marketing and advertising - 16 - 49
Special charges - 696 - 4,236
Depreciation and amortization - 142 - 252
------- ------- ------- --------
Total expenses 306 1,275 648 6,965
------- ------- ------- --------
Loss from operations (389) (1,785) (910) (14,190)
Other interest expense - (2) - (38)
------- ------- ------- --------
Net loss $ (389) $(1,787) $ (910) $(14,228)
======= ======= ======= ========
</TABLE>
We may incur additional losses from these discontinued business units,
which would be included in our consolidated results.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
REVENUES AND VOLUMES
The total volume of closed loans for FiNet's production units for the
quarter ended June 30 is summarized below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JUNE 30 JUNE 30
2000 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Business to Business $ 174,994 $ 120,956
Consumer-direct 37,712 61,158
----------- ------------
Total Closed Loan Volume $ 212,706 $ 182,114
=========== ============
</TABLE>
Closed loan volume increased $30.6 million, or 17%, to $212.7 million
for the quarter ended June 30, 2000 from $182.1 million for the quarter ended
June 30, 1999. However, revenues decreased $473,000, or 19%, to $2.1 million for
the quarter ended June 30, 2000 from $2.5 million for the quarter ended June 30,
1999.
A significant increase in closed loan volume in our
business-to-business segment, primarily the result of expanding our business
to business sales force, was partially offset by a decrease in closed loan
volume of our consumer-direct segment, attributable to the increase in
lending rates and an increased focus on the business to business market
segment. Significant closed loan volume increases occurred late in the
quarter, and the revenue associated with these loans will not be recorded
until the loan inventory is sold in the quarter ending September
- 12 -
<PAGE>
30, 2000. Therefore, although closed loan volumes have increased
significantly, revenues that result from those volumes will not be reflected
in the current quarter revenues.
In addition, during the 1999 quarter, we maintained servicing
rights, recording servicing revenue of $292,000. We sold the portfolio of
servicing rights in July of 1999, and therefore, we recorded only a small
amount of servicing income during the six months ended June 30, 2000. We
expect revenues to increase as our expanded sales force penetrates markets
outside of our historically California market and as we expand our product
offerings. However, there can be no assurance that increased revenues will be
achieved. In addition, our quarterly revenues and operating results are
likely to continue to vary significantly.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $1.1 million, or 34% for the quarter
ended June 30, 2000 to $2.3 million from $3.4 million for the quarter ended
June 30, 1999. The decrease is due primarily to a significant decrease in
loan loss expense recorded by the discontinued units during the first
quarter of 1999 (not recorded in 2000 since the units were discontinued) as
well as a decrease in loan loss expense at the continuing units. Offsetting
this improvement was the impact of a market valuation adjustment of our
servicing portfolio. In 1999 the market valuation adjustment resulted in a
decrease in expense of $750,000 while in the six months ended June 30, 2000,
related expenses of selling the portfolio resulted in expenses of $221,000.
The impact of these two items (increased expense in 2000) partially offset
the reduction of cost of revenues quarter over quarter attributable to the
decrease in loan loss reserves at all units.
Warehouse interest expense increased $214,000 or 63% to $553,000 for
the quarter ended June 30, 2000 from $339,000 for the quarter ended June 30,
1999 primarily due to increased interest rates and somewhat due to higher
average outstanding balances on our warehouse borrowing facilities.
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our
continuing businesses decreased $1.9 million, or 30%, to $4.2 million for the
quarter ended June 30, 2000 from $6.1 million for the quarter ended June 30,
1999, due to stock based compensation valued for services received in the
1999 period that was significantly less in the quarter ended June 30, 2000.
MARKETING AND ADVERTISING
Marketing and advertising decreased $256,000 or 38% to $423,000 from
$679,000 for the same quarter of the prior year. During the June 1999
quarter, we launched our consumer-direct marketing campaign. In the June 2000
our focus is on the business to business segment, and as a result in that
change in focus, we decreased our consumer-direct marketing spending. The
Company expects to stabilize its marketing spending for the remainder of 2000.
SPECIAL ITEMS
During the quarter ended March 31, 2000, we replaced certain systems
and software and therefore expensed the remaining book value of $1,299,000 of
the replaced systems and software. Subsequently, when amounts payable to the
software vendor were reduced, we recovered expense of $335,000 for the
quarter ended June 30, 2000.
During the second quarter of 1999, we incurred charges of $291,000
representing additional goodwill write off resulting from the Mical
acquisition. We also incurred additional expense of $120,000 related charge
relating to the write-off of our Real Estate Office Software (REOS). We
determined in the first quarter of 1999 that the REOS technology would no
longer be employed in our future strategy. In addition, Coastal Federal
Mortgage recorded $405,000 of nonrecurring expenses to liquidate certain
assets and settle certain liabilities in connection with its closure.
- 13 -
<PAGE>
LOSS FROM OPERATIONS
Loss from operations for the three months ended June 30, 2000
decreased $4.6 million to $5.1 million from $9.7 million for the three months
ended June 30, 1999. Significant decreases in operating expenses and loan
loss expenses more than offset the decrease in revenue associated with our
discontinued business units.
GAIN (LOSS) ON SALE OF MARKETABLE SECURITIES
We recorded a $455,000 loss on the sale of available for sale
marketable securities for the quarter ended June 30, 2000 compared to $0 for
the quarter ended June 30, 1999. We acquired these marketable securities in
October of 1999, therefore marketable securities transactions did not occur
in the prior period.
NET LOSS
Net loss for the three months ended March 31, 2000 decreased $4.4
million or 44% to $5.5 million from $9.9 million for the quarter ended March
31, 1999. The improvement is due primarily to the impact of losses in the
discontinued business units in the 1999 period which were not incurred in the
current period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES AND VOLUMES
The total volume of closed loans for FiNet's production units for
the six months ended June 30 is summarized below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30 JUNE 30
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Business to Business $305,128 $249,774
Consumer-direct 62,082 149,271
-------- --------
Total Closed Loan Volume $367,210 $399,045
======== ========
</TABLE>
Closed loan volume decreased $31.8 million, or 8%, to $367.2 million
for the six months ended June 30, 2000 from $399.0 million for the six months
ended June 30, 1999. Revenues decreased $1.5 million or 29%, to $3.5 million for
the six months ended June 30, 2000 from $5.0 million for the six months ended
June 30, 1999.
While closed loan volume increased in our continuing units'
business-to-business segment, significant volume decreases in our
consumer-direct segment, attributable to the increase in lending rates and a
change in business focus, more than offset the business to business increase.
Revenues decreased due to the impact of the discontinued units' revenue in 1999
that did not occur in 2000 as well as a decrease in revenues for the continuing
units corresponding to the decrease in closed loan volumes. We expect to
increase revenues through the planned expansion of our sales force and increased
emphasis on the business to business segment through strategic relationships.
However, there can be no assurance that increased revenues will be achieved. In
addition, our quarterly revenues and operating results are likely to continue to
vary significantly.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $8.2 million, or 67% for the six months
ended June 30, 2000 to $4.0 million from $12.1 million for the six months ended
June 30, 1999. The decrease is due primarily to a significant decrease
- 14 -
<PAGE>
in loan loss expenses recorded by the discontinued units during the first
quarter of 1999 of as well as a decrease at the continuing units totaling $6.0
million, a decrease in expense associate with servicing portfolio valuation
adjustments of $681,000 and decreases in other costs associated with the
discontinued units.
Warehouse interest expense decreased $483,000 or 31% to $1.1 million
for the six months ended June 30, 2000 from $1.5 million for the six months
ended June 30, 1999 primarily due to warehouse interest expense associated with
the discontinued units that was not incurred in 2000. Although volumes of the
discontinued units were insignificant during the first quarter of 1999, they
incurred interest expense on loans in inventory as those loans were being sold.
In addition, during a portion of the six months ended June 30, 1999 we incurred
significantly higher interest rates associated with our warehouse lending
default which were not incurred in the 2000 period.
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our
continuing businesses decreased $2.1 million, or 19%, to $9.3 million for the
six months ended June 30, 2000 from $11.4 million for the six months ended June
30, 1999, due to the terminated operations of the Coastal and Mical units in the
March 1999 quarter, partially offset by increased professional services costs.
MARKETING AND ADVERTISING
Marketing and advertising decreased $127,000 or 9% to $1.3 million from
$1.4 million for the same six month period of the prior year. In the prior year
we had just launched our consumer-direct marketing campaign in the quarter ended
June 30, 1999. Early during the six months ended June 30, 2000, we wound down
our consumer marketing campaign, decreasing spending significantly and focused
on business to business promotions and programs. The Company expects to
stabilize its marketing spending for the remainder of 2000.
SPECIAL ITEMS
During the quarter ended March 31, 2000, we replaced certain systems
and software and therefore expensed the remaining book value of $1,299,000 of
the replaced systems and software. Subsequently, when amounts payable to the
software vendor were reduced, we recovered expense of $335,000 for the quarter
ended June 30, 2000 resulting in a net year to date expense of $964,000.
Special charges recorded during the six months ended June 30, 1999
relate to the Coastal Federal Mortgage and Mical Mortgage business unit closures
and to the write-off of capitalized costs of software that would no longer be
used in the Company's continuing business strategy. In connection with Mical's
closure, the Company assessed the remaining goodwill balance relating to the
acquisition of that unit and determined that the amount was not recoverable from
future cash flows. Therefore, the remaining unamortized goodwill of $3,189,000
was expensed. In addition, Mical recorded $642,000 of expense to recognize exit
costs primarily for occupancy lease costs and severance relating to employee
terminations in connection with the closure. In connection with Coastal's
closure, Coastal wrote off $405,000 of net book value of fixed assets. In
addition, the Company expensed $690,000 representing the unamortized balance of
its Real Estate Office Software technology, upon determination that it would no
longer employ this technology in its future strategic direction.
LOSS FROM OPERATIONS
Loss from operations for the six months ended June 30, 2000 decreased
$13.3 million to $13.0 million from $26.3 million for the six months ended June
30, 1999. Significant decreases in operating expenses and loan loss expenses
more than offset the decrease in revenue associated with our discontinued
business units.
GAIN (LOSS) ON SALE OF MARKETABLE SECURITIES
- 15 -
<PAGE>
We recorded an $866,000 gain on the sale of available for sale
marketable securities for the six months ended June 30, 2000 compared to $0 for
the six months ended June 30, 1999. We acquired these marketable securities in
October of 1999, therefore marketable securities transactions did not occur in
the prior period.
NET LOSS
Net loss for the six months ended June 30, 2000 decreased $14.9
million, or 55%, to $12.0 million from $26.6 million for the six months ended
March 31, 1999. The improvement is due primarily to the impact of losses in the
discontinued business units in the 1999 period which were not incurred in the
current period.
FINANCIAL CONDITION
FiNet's stockholders' equity decreased $12.3 million to $18.0 million
at June 30, 2000 from $30.3 million at December 31, 1999 due to the Company's
losses and due to a decrease in Other Comprehensive Income due to the
recognition of gains on the sale of available-for-sale marketable equity
securities, offset by increases from issuance of common shares in connection
with stock option exercises and increases due to warrant issuances.
Our cash decreased by $8.9 million to $9.7 million at June 30, 2000
from $18.6 million at December 31, 1999. We used cash for general operations,
for working capital needs such as funding mortgages and for capital
expenditures. We generated cash from sales of marketable equity securities and
the collection of the proceeds on the sale of our servicing portfolio.
We recorded loans in process of $10.4 million at June 30 relating to
funds disbursed to closing agents for which the loan had not closed by June 30,
2000. At December 31, there were no fundings on the last working day of the
month due to year 2000 concerns. At December 31, 1999 all loans for which fund
were disbursed were also closed and were therefore recorded as mortgage loans
held for sale.
Warehouse borrowings decreased $6.5 million, or 8%, from $80.5 million
at December 31, 1999 to $73.9 million at June 30, 2000, corresponding to the
decrease in mortgages held for sale inventory from $78.7 million to $69.4
million at June 30, 2000.
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 general operating expenditures,
repayment of warehouse borrowings and funding new originations, used $10.6
million of cash during the six months ended June 30, 2000. In addition to cash
use for on-going operations, we used cash to invest in mortgages held for sale.
Our investing activities included investments of $868,000 in furniture,
fixtures and equipment and collections on the sale of our portfolio of servicing
rights which was sold in a prior period. We do not expect our capital spending
to increase significantly in the coming quarters.
- 16 -
<PAGE>
We obtained additional warehouse credit facilities during the quarter
from Gateway Bank ("Gateway"). We entered into a loan participation agreement
with Gateway, whereby we may sell a participation interest in mortgage loans to
Gateway. This agreement supports our working capital needs as it allows us to
fund our planned volume increases without reducing our committed warehouse
borrowing capacity. The maximum total participation outstanding allowed is $20
million. When participated interests are subsequently sold in the secondary
market, the total amount participated with Gateway will be reduced. In
connection with the participation agreement, Gateway will earn a yield on
participated balances of prime minus 1%. This agreement expires on July 31,
2001.
If we continue to maintain at least our current level of working
capital borrowing resources, and if we execute our business plan, we believe
that our cash resources will be sufficient to finance our minimum working
capital requirements for the coming twelve months. We do, however, expect that
in the future we may need to arrange for additional sources of capital through
additional warehouse facilities or through the issuance of debt or equity
securities. We have no commitments for any additional financings, and we cannot
be sure that we will be able to obtain any such additional financing at the
times required and on terms and conditions acceptable to us. In such event, our
growth could slow and operations could be adversely affected.
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.
SUBSEQUENT EVENTS
Gary A. Palmer, the Company's Chief Financial Officer, has
resigned, effective August 15, 2000 citing personal reasons.
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, 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. 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 to hedge substantially all
of its estimated interest rate risk on the loans. We had mandatory and optional
forward commitments at June 30, 2000 and December 31, 1999 aggregating
$82,404,000 and $110,233,000, respectively. At June 30, 2000 and December 31,
1999, these commitments covered the market risk associated with mortgages held
for sale to investors of $69,328,000 and $78,691,000, respectively, and loans
for which interest rates were committed at June 30, 2000 and December 31, 1999
of $67,664,000 and $36,458,000, respectively. We attempt to limit our credit
exposure on forward sales
- 17 -
<PAGE>
arrangements by entering into these arrangements with institutions that we
believe are sound credit risks and by limiting exposure to any single
institution.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required by this Item is incorporated by reference from Part I, Item
I, Notes to Consolidated Condensed Financial Statements, Note 5 Commitments and
Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 24, 2000, the following
proposal was adopted by the margins indicated:
To ratify the appointment of Ernst & Young as independent auditors for the
fiscal year ending December 31, 2000. The motion was carried as follows:
For 64,217,149
Against 165,942
Abstaining 66,914
To elect the Company's Board of Directors. The motion was carried as follows:
<TABLE>
<CAPTION>
For Abstaining
<S> <C> <C>
Cossano 64,017,652 417,289
Rawitch 64,009,842 472,907
Sogin 63,922,130 648,331
Meyer 64,013,680 465,131
Wilkes 64,039,082 414,427
Falcao 64,019,676 453,239
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
10.1 First Amendment to Loan and Security Agreement
between the Registrant and Lowestrate.com, Inc. and
Robert J. Ross dated May 24, 2000.
10.2 Assignment and Assumption Agreement between the
Registrant and Lowestrate.com, Inc., Robert J. Ross.
27.1 Financial Data Schedule
</TABLE>
Reports on Form 8-K:
None.
- 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.
FINET.COM, INC.
<TABLE>
<S> <C>
Date: August 14, 2000 /s/Gary A. Palmer
--------------------------------------------
Gary A. Palmer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: August 14, 2000 /s/Rick Cossano
--------------------------------------------
Rick Cossano
(PRESIDENT & CHIEF EXECUTIVE OFFICER)
</TABLE>
- 19 -
