Let me preface this by saying I don't own any FNHC. But as the "best stock that nobody ever heard of", it got some space on the MSGI thread, so I thought I'd look into it. I'm always open to a new bet in internet related stocks.
FWIW, I don't mean to be a stickler for details or to rain on any parade, but I'm wondering if anybody has taken a moment to see if the company's business model has been validated in its latest unaudited 10QSB.
A few excerpts from their filing follow:
The number of shares outstanding of each of the issuer's classes of common
stock was 77,242,686 shares of common stock, par value $.01, as of March
12, 1999.
The company had an accumulated deficit of $35,694M as of January 31, 1999.
Does anyone think the magnitude of this accumulated loss validates their business model? BTW, there are no disclosures at all in the recently filed reports for related party transactions, borrowings by officers and directors, salaries and other compensation to the 5 highest paid individuals in the company, or ANY other details regarding proposed stock option agreements for insiders an other employees. Does this concern anyone?
The operations of the Company's principal lending subsidiaries include
Monument Mortgage, Inc. ("Monument"), a California mortgage banker
specializing in conforming prime loans, Coastal Federal Mortgage Company
("Coastal"), a New Jersey sub-prime mortgage banker, and Mical Mortgage,
Inc. ("Mical"), a California mortgage banker specializing in FHA and VA
loans.
I think the company agreed that its investment in Mical is dead money.
ACQUISITIONS
On May 19, 1998 the Company acquired all the issued and outstanding shares
of Mical, a non-public mortgage banker with principal offices in San Diego,
California, in exchange for 431,970 shares of the Company's common stock
valued at $1,400,000. Upon the resolution of specified contingencies,
120,460 additional common shares may be issued. In addition, 33,146 common
shares were issued as a finder's fee and 73,063 shares were issued under a
keep-well agreement with an existing shareholder.
The acquisition has been accounted for as a purchase, and Mical's financial
position and results of operations have been included in the Company's
financial statements since that date. The excess of the purchase price over
the fair market value of the acquired net assets was recorded as goodwill.
Goodwill was amortized on a straight-line basis over 10 years during the
nine months ended January 31, 1999 and totaled $144,000.
During the third quarter, the Company's Board of Directors approved a plan
to wind down its Mical operations located in San Diego, California. The
Company also reviewed the amount recorded as goodwill and determined that
there was no future economic value. Accordingly, the entire unamortized
balance of $2,898,000 (after purchase accounting adjustments) was expensed
in the third quarter.
FINET issued 33,146 shares of its stock as a finder's fee for a dead money deal and 73,063 shares for a "keep well" agreement. Would have been better just to pay cash for the finder's service instead of diluting the number of shares outstanding. Don't know for sure, but the shares issued for the keep well agreement were possibly issued to mollify a disgruntled shareholder who owned a substantial amount of shares with some kind of redemption provision and threatened to force redemption of the shares unless he received some sort of additional compensation in exchange for his non-exercise or modification of the redemption provision.
On June 23, 1998 the Company acquired certain assets from an individual
which include an internet site, "interloan.com" ("Interloan") in exchange
for 100,000 shares of the Company's common stock. The Company also entered
into an employment agreement with that individual which is effective until
June 31, 2001.
So who says you can't make money by filing for domain name registration and getting a company to pay up for the rights to use the domain name? I'm curious to know if it was a related party that filed for the domain name (you know, like an Uncle Fred), what the terms of the employment agreement are, and what the net cost is to the company beyond diluting shares of the existing shareholders.
The borrowing agreements (the "Agreements") for the warehouse lines of
credit contain various financial covenants including net worth computed in
accordance with generally accepted accounting principles, current ratio,
and tangible net worth leverage ratio requirements. Should an event of
default occur, as defined in the Agreements, outstanding principal and
interest on the Company's credit facilities are due on demand.
In the second quarter, one of the Company's warehouse lenders, Residential
Funding Corporation ("RFC"), notified the Company that it was in default of
its lending agreements, as the Company did not meet its required interest
and debt service obligations as they became due. The Company was also in
violation of certain financial covenants.
Now these financial covenants were cured in March, 1999, but only by issuing more stock at penny stock prices, further diluting the equity of the company
As a result of the default, RFC imposed additional fees of $280,000
resulting from excess borrowings over the committed amount. Also, during
the period from October 1998 until February 1999, RFC increased the
interest rates on the Company's borrowings to 4% in excess of the rates
otherwise applicable, which significantly increased interest expense
recorded for the three and nine months periods ended January 31, 1999.
RFC also reduced the total committed lines from $79 million to $49 million.
It's hardly a wonder that the company has a deficit balance in retained earnings as a result of paying non-compliance penalties such as these.
Effective March 1, 1999 RFC lowered the rates charged the Company to its
normal, non-default rates of LIBOR plus 225 - 275 basis points.
The Company and RFC have discussed entering into a new committed warehouse
credit agreement. There can be no assurance that the Company and RFC will
enter into such agreement. The inability to cure the default could result
in a major disruption to the Company's sub-prime business, and the
Company's business relationships with its sub-prime brokers, investors and
borrowers could be seriously damaged. There could be a material adverse
impact on results of operations and financial condition if the Company is
unable to maintain its credit facilities or obtain additional credit
facilities.
So once they pull your warehouse lines of credit, you can't fund loan commitments.
NOTE 5. COMMITMENTS AND CONTINGENCIESLEGAL PROCEEDINGS
On January 14, 1998, prior to the acquisition of Mical, a lawsuit was filed
against Mical in the United States District Court for the Middle District
of Georgia (the "Action"). The complaint alleges, among other things, that
in connection with residential mortgage loan closings, Mical made certain
payments to mortgage brokers in violation of the Real Estate Settlement
Procedures Act and induced mortgage brokers to breach their alleged
fiduciary duties to their customers. The plaintiffs seek unspecified
compensatory and punitive damages as to certain claims.
Management believes that its compensation programs for mortgage brokers
comply with applicable laws and with long standing industry practices, and
that it has meritorious defenses to the Action. Management has been advised
by counsel that the facts of the underlying transaction are not supportive
of a court order granting class certification. The Company intends to
defend vigorously against the Action and believes that the ultimate
resolution will not have a material adverse effect on the Company's results
of operations or consolidated financial position.
The Company and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business.
Although it is difficult to predict the outcome of such cases, after
reviewing with counsel all such proceedings, management does not expect the
aggregate liability or loss, if any, resulting therefrom will have a
material adverse effect on the consolidated financial position or results
of operations of the Company and its subsidiaries.
LOAN SALE COMMITMENTS
The Company has entered into optional and mandatory forward commitments to
deliver mortgage loans of $25,000,000 as of January 31, 1999.
Well, here you go. If you can't deliver on a mandatory forward commitment because your warehouse lines have been pulled, another series of penalties - if that just doesn't plain put you out of business.
NOTE 6. STOCKHOLDERS' EQUITY
In May 1998, the Company issued 431,970 shares of common stock, valued at
$1,400,000, as consideration for the acquisition of Mical. Upon the
resolution of specified contingencies, 120,460 additional common shares may
be issued. As a result of the acquisition, 33,146 common shares were issued
as a finders fee and 73,063 shares were issued under a keep-well agreement
with an existing shareholder.
Was it Uncle Fred who got the finder's fee and the keep-well agreement? Or an unrelated third party?
In November 1998, the Company issued 2,500,000 shares of common stock at
eighty cents per share, for proceeds of $2,000,000 in a private placement.
Per the agreement, an additional 1,000,000 shares were issued, bringing the
total issuance to 3,500,000 shares and the price per share to fifty-seven
cents per share, as adjusted In connection with the issuance, the
Company agreed to reduce the exercise price of 1.0 million common stock
purchase warrants owned by the investor from $5.00 to $1.00 per share.
In December 1998, the Company received $12.1 million cash proceeds, net of
expenses, from additional private placements of 21.9 million shares of
common stock at sixty cents per share. The Company used these proceeds to
satisfy debt obligations, to redeem a portion of the Preferred and to fund
operations.
What a great deal. The golen rule appears to be "he who has the gold rules…" What do we have to do as public shareholders to get this kind of deal? Kind of expensive financing for equity capital, eh?
Before non-recurring items, the Company incurred a loss from operations of
$3.6 million for the quarter compared to a loss from operations of $1.5
million for the same 1998 quarter. Including non-recurring items, the
Company's operating loss was $16.2 million, and the net loss was $17.7
million. Mical's operating results and associated goodwill impairment
expense accounts for $8.6 million of the loss. The Company is winding down
its Mical's operations, and the Company expects that losses related to
Mical will not extend beyond the end of the current fiscal year. The
remaining non-recurring expenses are due to increased reserves to cover
potential loan losses, asset valuation adjustments and excess interest and
loan fees incurred in connection with the Company's warehouse financing
default, as described in Note 4 to the Condensed Consolidated Financial
Statements.
Any idea of the individual behind the Mical acquisition is still with of company? Hope not.
The Company's loan originations declined through the third quarter and into the
fourth quarter as the lack of working capital and the related default on
the company's warehouse financing arrangements caused the Company to
default on its commitments to its mortgage broker customers. The Company
has just recently begun to show month-to-month increases in its loan
originations.
Ever had a similar problem? Apply for a loan, get a whippy-cool rate, and find out there's no money to fund the loan? Seems this business model is broken.
Warehouse interest expense increased $1.4 million. $0.7 million was the
result of loan fees charged for excess borrowings and default interest
rates equal to 4% above normalized rates which were imposed the entire
quarter.
Can't run a mortage origination business on razor thin margins if we can't control interest expense. Wonder how they manage an operating budget.
Before non-recurring items, the Company incurred a loss from operations of
$7.1 million for the nine months compared to a loss from operations of $4.4
million for the same 1998 period. Including non-recurring items, the
Company's loss from operations was $21.4 million, and the net loss for
common shareholders was $25.1 million. Mical's operating results and
associated goodwill impairment expense accounts for $10.1 million of the
loss.
So as a potential shareholder I think I ought to be entitled to know how much the brilliant individuals who managed this strategy were paid and if we're betting on hope (or an IPO) to bail them out.
The Company is currently spending cash resources to support its business
development activities. The revenues being generating, though increasing,
are currently insufficient to cover start-up and operating costs. All
business units, except Mical, are expected to generate monthly revenues
sufficient to cover their respective operating expenses by the end of the
fiscal year 2000.
So cut salaries. What's the big deal? Isn't stock at a few quarters on the dollar enough compensation?
BUSINESS DEVELOPMENT ACTIVITIES
The Company's business development activities are focused on becoming the
leading electronic mortgage banker. This includes increasing the
electronic origination and fulfillment of prime conforming loans and
increasing other electronic commerce revenues from: (a) offering sub-prime
and government subsidized loans (b) selling additional homeowner related
products and services; (c) selling business leads to real estate service
providers; and (d) originating loans through Interloan.
Over the past several years, the Company has expanded its mortgage banking
operations through acquisitions and internal growth, but, believing the
growth of market acceptance and demand for on-line homeownership services
represents the greatest near term market opportunity, is now concentrating
on expanding its e-commerce origination and fulfillment capabilities in
these areas.
Well that's convincing. Couldn't manage a non-internet loan origination business , but once we're on the WEB and shareholders have paid up, things will be different…
FINANCIAL CONDITION
The Company's operating losses, net of capital contributions, have had an adverse affect on the
Company's financial position, causing stockholders' equity to decrease from
$3.4 million at April 30, 1998 to $2.8 million at January 31, 1999.
However, subsequent to January 31, 1999, the Company received $12.9 million
in additional equity contributions and expects to redeem the remaining $2.0
million of its preferred stock outstanding, the net effects of which will
increase equity by $ 10.9 million.
Great job at incinerating shareholder value so far. What's different in the future?
In response to these operating trends, Finet has installed new leadership,
including a new chairman and chief executive officer. Management's charter
is to improve operations and to take full advantage of Finet's technology
capabilities, ultimately improving results from operations and financial
position. Improvement in the Company's financial condition is dependent on
its ability to successfully integrate and consolidate its operations, to
improve operating processes and procedures, to cure its warehouse lending
defaults, and to manage interest expense.
Well, I guess if CPQ can install new leadership, Finet can too.
Although new operating revenue sources were developed during 1998 and 1999,
cash generated by operations has been insufficient to meet the Company's on-
going requirements. Therefore, the Company has employed servicing-secured
credit facilities and private placements of debentures and common and
preferred stock as additional resources to meet operating and investing
cash needs.
Gotta pay for those California mortgages and those lease vehicles.
POTENTIAL FOR NASDAQ DELISTING
There are several requirements for continued listing on the Nasdaq SmallCap
Market ("Nasdaq"), including a minimum stock price of $1.00 per share. If
the Company's common share price closes below $1.00 per share for 30
consecutive days, the Company may receive notification from Nasdaq that its
common stock will be delisted from the Nasdaq unless the stock closes at or
above $1.00 per share for at least 10 consecutive days during the 90 day
period following such notification.
Delisting from the Nasdaq Market and inclusion of the Company's common
stock on the OTC Bulletin Board or similar quotation medium could adversely
affect the liquidity and price of the stock and make it more difficult for
investors to obtain quotations or trade the stock.
In December 1998, the Company received notice from Nasdaq that it had not
met required financial ratio criteria for continued listing on the Nasdaq.
Nasdaq requested that the Company maintain a minimum net worth of $2
million and complete and submit for its review certain periodic financial
reporting. Nasdaq could initiate delisting procedures if the Company fails
to comply. Finet has subsequently complied and intends to comply with all
special financial reporting requests and ratio criteria required by Nasdaq.
Well thank the market for bailing us out and buying into the dream of an internet IPO. At least those of us who got in under a dollar per share can make a ten-bagger their money.
YEAR 2000 COMPLIANCE
The Company has made and will continue to make investments to identify,
modify or replace any computer systems which are not Year 2000 (Y2K)
compliant and to address other issues associated with the change of the
millennium. These costs are expensed by the Company during the period in
which they are incurred. The financial impact to the Company of
implementing the systems changes necessary to become Y2K compliant is not
anticipated to be material to its financial position or results of
operations in any given year. However, the Company's expectations about
future costs associated with the Y2K are subject to uncertainties that
could cause the actual results to differ materially from the Company's
expectations. Factors that could influence the amount and timing of future
costs include the success of the Company in identifying systems and
programs that are not Y2K compliant, the nature and amount of programming
required to upgrade or replace each of the affected programs, the
availability, rate and magnitude of related labor and consulting costs and
the success of the Company's business partners, vendors and clients in
addressing the Y2K issue.
So just tell us, are you compliant or not?
Company's state of readiness:
The Y2K project planning calls for a fall back to manual
procedures if absolutely necessary, but the Company considers Y2K to be a
critical project and is addressing it as such.
Great, we'll do manually after the IPO what we couln't do before the IPO and make a profit. Hey wait a minute. This is an internet play. We don't have to make any profits!
All current Directors were re-elected for an additional one-
year term and the following measures detailed and recommended by the
Company's Board of Directors in the proxy statement were approved by the
indicated percentage of shares voted:
Increase in authorized common shares to 150,000,000 99.3%
Ratification of issuance of Common Stock, Debentures, Preferred Stock
and Warrants: 77.0%
Ratification of the 1998 Stock Option Plan 99.4%
Ratification of the 1998 Stock Bonus Plan 99.5%
Ratification of the 1998 Non-Employee Director Stock Option Plan 99.5%
Somebody give me a link to the stock option plan, the stock bonus plan, and the director stock option plan. Couldn't find it on Edgar. So everyone thinks the plans are normal, customary, reasonable, and in the best interest of the shareholders?
So what are we buying here? I'm just trying to figure out how much confidence to place in the management group that's delivering the business plan to build shareholder value. Any opinions out there?
Best regards,
Mark A. Peterson
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