SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter ended: Commission file number
December 31, 1996 0-19485
ADVANCED FINANCIAL, INC.
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(Name of small business issuer in its charter)
DELAWARE 84-1069416
- -------------------------------- -----------------------------------
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
5425 Martindale, Shawnee, KS 66218
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (913) 441-2466
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 25, 1997: 6,527,470.
Advanced Financial, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1.
Page - 2
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1996 and March 31, 1996
Assets Dec 31, 1996 March 31, 1996
------ ------------- --------------
(Unaudited)
Cash and investments $ - $ 585,643
Mortgage servicing advances and accounts receivable 897,309 520,620
Property and equipment, net 1,508,753 1,718,355
Mortgage loans held for sale 8,994,343 10,110,747
Mortgage loans held for investment 82,159 94,932
Purchased mortgage servicing rights, net 717,488 2,440,280
Excess of cost over fair value of assets acquired, net 486,763 524,798
Prepaid expenses 86,091 191,442
Deferred income taxes - 440,000
Other investment 192,781 235,800
Receivable from related party - 190,000
Other 299,186 260,899
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Total assets $ 13,264,873 $17,313,516
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Liabilities
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Accounts payable and accrued expenses $ 2,435,600 $ 2,507,103
Checks outstanding in excess of bank balance 140,954 -
Notes payable 10,348,097 13,412,419
Capitalized lease obligations 237,898 415,665
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Total liabilities $ 13,162,549 $16,335,187
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Stockholders' Equity
-------------------
Preferred stock, Series B, $.005 par value.
10,000,000 shares authorized; 372,000
shares issued $ 1,860 $ 1,860
Common stock, $.001 par value 25,000,000
shares authorized; 6,514,870 and 3,875,476
shares, respectively, issued and outstanding 6,515 4,256
Paid-in capital 10,373,910 8,877,493
Deficit (9,538,616) (7,463,935)
------------ ----------
843,669 1,419,674
Treasury stock, 99,869 shares of
common stock,at cost (441,345) (441,345)
Stockholders' notes receivable (300,000) -
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Total stockholders' equity 102,324 978,329
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Total liability and stockholders'equity $ 13,264,873 $17,313,516
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See accompanying notes to condensed consolidated financial statements.
Page - 3
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three month periods ended December 31, 1996
and December 31, 1995
Dec 31, 1996 Dec 31, 1995
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Revenues: (Unaudited) (Unaudited)
Servicing fee income $ 246,420 $ 591,137
Other fee income 137,244 213,522
Gain on sale of mortgage loans 408,115 811,483
Loss on sale of servicing rights (36,650) -
Interest income 155,610 189,111
Other income (2,079) 139,624
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Total operating revenues 908,660 1,944,877
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Expenses:
Servicing expense 349,753 284,257
Personnel 709,094 866,644
General and administrative 327,963 404,171
Interest expense 158,574 187,215
Depreciation and amortization 200,238 442,837
Consulting Expense 593,750 -
Other 7,919 13,100
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Total operating expenses 2,347,291 2,198,224
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Loss before income taxes (1,438,631) (253,347)
Income tax expense (101,884) -
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Net loss $(1,540,515) $ (253,347)
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Weighted average shares outstanding 6,342,177 3,778,478
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Loss per common share:
Primary $ ( 0.24) (0.08)
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Fully diluted $ (0.24) (0.08)
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See accompanying notes to condensed consolidated financial statements.
Page - 4
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the nine month periods ended December 31, 1996 and
December 31, 1995
Dec 31, 1996 Dec 31, 1995
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Revenues: (Unaudited) (Unaudited)
Servicing fee income $ 1,312,943 $ 1,852,627
Other fee income 539,274 782,891
Gain on sale of mortgage loans 1,947,427 2,033,466
Gain on sale of servicing rights 764,595 99,759
Interest income 580,372 478,571
Other income 13,710 166,595
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Total operating revenues 5,158,321 5,413,909
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Expenses:
Servicing expense 873,116 813,837
Personnel 2,547,424 2,831,059
General and administrative 1,101,823 1,340,698
Interest expense 675,179 542,639
Depreciation and amortization 920,161 1,425,546
Consulting Expense 593,750 -
Other 79,664 88,407
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Total operating expenses 6,791,117 7,042,186
=========== ==========
Loss before income taxes $(1,632,796) $(1,628,277)
Income tax expense (441,884) 49,350
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Net loss $(2,074,680) $(1,677,627)
=========== ===========
Weighted average shares outstanding 4,776,110 3,787,147
=========== ==========
Loss per common share:
Primary $ (0.45) $ (0.47)
=========== ==========
Fully diluted $ (0.45) $ (0.47)
=========== ==========
See accompanying notes to condensed consolidated financial statements.
Page - 5
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended December 31, 1996 and
December 31, 1995
Dec 31, 1996 Dec 31, 1995
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(Unaudited) (Unaudited)
Net cash (used in) provided by operating activities $ (1,042,301) $ (2,974,346)
Cash flows from investing activities:
Acquisition of property and equipment (8,505) (27,616)
Proceeds from sale of mortgage servicing rights 2,054,847 -
Sale of real estate owned - 57,931
Acquisition/Principal payments on mortgage loans
held for investment 12,773 (67,999)
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Net cash provided by (used in)
investing activities 2,059,115 (37,684)
Cash flows from financing activities:
Notes payable, net (3,064,322) 2,645,737
Checks outstanding in excess of bank balance 140,955 99,217
Issuance of common stock 1,498,677 -
Payments on capitalized lease obligations (177,767) (166,960)
Payment of preferred dividends - (78,120)
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Net cash provided by (used in) financing activities (1,602,457) 2,499,874
Net decrease in cash (585,643) (512,156)
Cash at beginning of period 585,643 512,156
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Cash at end of period $ 0 $ 0
=========== ==========
Supplemental disclosures for cash flow:
Cash paid for interest $ 427,426 $ 451,501
Cash paid for income taxes $ 1,881 $ -
Supplemental disclosures of noncash
financing and investing activities:
Property acquired under capital leases $ - $ 35,646
See accompanying notes to condensed consolidated financial statements.
Page - 6
Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
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The Company's financial statements include the accounts of Advanced Financial,
Inc. (the Company) and its wholly-owned subsidiary AFI Mortgage Corp,
formally Continental Mortgage, Inc. (AFI Mortgage). AFI Mortgage is a full
service mortgage banking company currently servicing first and second
mortgage loans of approximately $174,000,000 as of December 31, 1996.
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-QSB. To the extent that
information and footnotes required by generally accepted accounting
principles for complete financial statements are contained in or consistent
with the audited financial statements incorporated by reference in the
company's Form 10-KSB for the year ended March 31, 1996, such information
and footnotes have not been duplicated herein. In the opinion of
management, all adjustments considered necessary for fair presentation of
financial statements have been reflected herein. The March 31, 1996
condensed consolidated balance sheet has been derived from the audited
balance sheet as of that date.
Page - 7
Advanced Financial, Inc.
ITEM II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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GENERAL
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Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
corporation formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991, the Company was
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed, due to expansion into additional states, to AFI Mortgage,
Corp. ("AFIM") in November 1994.
AFIM is a mortgage banking company servicing a principal balance of
approximately $174,000,000 mortgages as of December 31, 1996 and originated
approximately $103 million in single family housing mortgages for the nine
months ended December 31, 1996. AFIM is a full service residential mortgage
company and has all approvals needed to service mortgages for the Federal
National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC) and Government National Mortgage Association (GNMA). Due to the current
size of the servicing portfolio, the Company does not believe it is taking
advantage of the economies of scales for cost of servicing to maximize the
return on its investment in mortgage servicing rights. Also, the current price
the Company is receiving from investors for the servicing rights on originated
loan production is strong and beneficial to fund the operations of the Company.
As a result, the Company sold approximately $234,000,000 of its current
servicing portfolio as of September 30, 1996 for an adjusted gain of $764,595,
as well as future servicing rights generated from its own originations, to
reduce its outstanding debt and related interest expense.
The Company intends to continue its expansion through the implementation of
a convenient, low cost and rate competitive national network known as the
Desktop Mortgage Loan Origination System (Desktop). The Company's Desktop
installations are primarily targeted at respected residential real estate
brokerage offices. This market is targeted due to the fact that current mortgage
loan production volume is driven by real estate transactions versus refinancing
transactions. However, if the market provides for a decrease in interest rates ,
an active refinancing market will be established through not only such real
estate brokers but the placement of terminals with respected mortgage brokers.
On February 3, 1997 the Company entered into an agreement to sell First
Mortgage Investment Co. (FMIC) the retail loan production operations of AFIM.
The agreement calls for FMIC to acquire AFI's mortgage pipeline and assume the
operating expenses related to mortgage originations as of February 3, 1997. FMIC
has hired 24 of AFIM's salaried employees and 23 loan officers. FMIC has also
agreed to lease 10,000 square feet of the Company's 20,000 square foot
facilities along with leasing various furniture and equipment. The rental rate
for the office space leased by FMIC is $10 per square foot. This will result in
monthly leasing revenue to the Company of $8,333. FMIC also agreed to lease
various furniture and equipment from the Company for a monthly fee of $15,000.
The February 3, 1997 sale of the Company's mortgage production operations
will reduce the Company's income by approximately $790,000 each quarter.
Additionally, the Company anticipates that it will be able to reduce its expense
by approximately $ 900,000 each quarter, thereby reducing the Company's net loss
and cash flow requirements by approximately $110,000.
The companies continue to pursue negotiations of consolidating and
combining both companies, but have not reached a Definitive Agreement. The sale
of the production operations will allow AFI to significantly reduce its expenses
and cash requirements immediately while it continues negotiations. FMIC is a
privately held mortgage company based in the suburban Kansas City areas. FMIC
orginates approximately $10 million per month in retail loan originations
through 6 branch offices in the Kansas and Missouri markets and has a mortgage
servicing portfolio of approximately $730 million.
On October 2, 1996 the Company announced that it had signed a Letter of
Intent to acquire a California based mortgage bank. However, during the due
diligence process, AFI discovered a potential liability in excess of $1million.
This liability could potentially be incurred by AFI if the transaction were to
close at this time. Therefore, AFI has informed the California based mortgage
bank that this issue must be resolved prior to completing any transaction
between the parties. As a result, the Company is no longer pursuing this
acquisition.
Page - 8
Advanced Financial, Inc.
RESULTS OF OPERATIONS
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Quarter ended December 31, 1996 Compared To The Quarter Ended December 31, 1995
- -------------------------------------------------------------------------------
The Company had operating revenues of $908,660 for the quarter ended
December 31, 1996 compared to $1,944,877 for the quarter ended December 31,
1995. Net loss for the quarter ended December 31, 1996 was $1,540,515 or .24
cents per share primary and fully diluted compared to net loss $253,347 or .08
cents per share primary and fully diluted for the quarter ended December 31,
1995. Primary earnings per share for the quarter ended December 31, 1996 and
1995 are calculated after deducting, from net income/loss, $39,060 for preferred
stock dividends. No preferred stock dividends were paid in the quarter ended
December 31, 1996.
Nine months ended December 31, 1996 Compared To The Nine months
ended December 31, 1995
- ----------------------------------------------------------------
The Company had operating revenues of $5,158,321 for the nine months ended
December 31, 1996 compared to $5,413,909 for the nine months ended December 31,
1995. Loss before taxes for the nine months ended December 31, 1996 was
$1,632,796 compared to $1,628,277 for the nine months ended December 31, 1995.
Net loss for the nine months ended December 31, 1996 was $2,074,6810or .45 cents
per share primary and fully diluted compared to a net loss of $1,677,627 or .47
cents per share primary and fully diluted for the nine months ended December 31,
1995. Primary earnings per share for the quarter ended December 31, 1996 and
1995 are calculated after deducting, from net loss, $78,120 for preferred stock
dividends. No preferred stock dividends were actually paid in the nine months
ended December 31, 1996.
The decrease in service fee income to $1,312,943 for the nine months ended
December 31, 1996 from $1,852,627 for the nine months ended December 31, 1995
reflected the decrease in the servicing portfolio to $174,000,000 of servicing
at December 31, 1996 from $468,000,000 at December 31, 1995. In the first
quarter of fiscal 1997, the Company completed the sale and transfer of
approximately $20 million of servicing for a slight loss of $13,482. At
September 30, 1996, the Company sold $234,000,000 of servicing for an adjusted
gain of $764,595. The related deferred tax asset was expensed as tax expense in
the amount of $340,000 resulting in a net gain after tax of approximately
$424,595. Approximately $100,000 of estimated transfer cost are reflected in the
servicing expense for the nine months ended December 31, 1996. Also, in the
first quarter of fiscal 1996, the Company completed the sale and transfer of
approximately $4.6 million in second mortgages. A gain of $99,759 was recognized
on the sale in fiscal 1996. The Company continues to evaluate the need to sell
its remaining servicing portfolio.
The decrease in other fee income to $539,274 for the nine months ended
December 31, 1996 from $782,891 is also the result of the decrease in the
servicing portfolio to $174,000,000 at December 31, 1996 from $468,000,000 at
December 31, 1995.
Gain on sale of mortgage loans for the nine months ended December 31, 1996
was $1,947,427 compared to a gain on sale of mortgage loans of $2,033,466 for
the nine months ended December 31, 1995. The gain on sale of mortgages is
derived through the sale of loans originated and sold to investors, such as
FNMA, FHLMC or GNMA as well as private investors. This gain also includes all
servicing release premiums, origination fee income and is net of all direct
origination expenses and hedging losses. For the nine months ended December 31,
1996, the Company closed and funded approximately $103 million of retail loan
production compared to $79 million for the nine months ended December 31, 1995.
The slight decrease in gain on sale of mortgage loans despite increased
production is due to hedging losses experienced in the third quarter of fiscal
1997. As a result of the capital needed to expand the Desktop product as well as
other avenues for originations, substantially all loans are being sold servicing
released resulting in a premium paid by the purchaser for these loans of
approximately 1.25 percent of unpaid principal balance.
The increase in interest income to $580,372 for the nine months ended
December 31, 1996 from $478,571 for the nine months ended December 31, 1995 is
due to increased loan production to $103 million from $79 million, respectively.
The Company's total operating expenses for the nine months ended December
31, 1996 were $6,791,117 compared to $7,042,186 for the nine months ended
December 31, 1995. Included in the operating expenses for nine months ended
December 31, 1995 is expense relating to the Washington operations of $576,000.
Effective October 1995, the Company sold its two Washington operations to two
independent companies.
Page - 9
Advanced Financial, Inc.
In connection with a review of the Company's servicing operation by Federal
Home Loan Mortgage Corporation (FHLMC), the Company was advised in April 1996
that unreconciled shortages existed in certain bank accounts used to accumulate
funds related to loans serviced by the Company for FHLMC. The Company was
advised that the shortage either be researched and resolved or otherwise paid by
the Company. During the fiscal quarter ending September 30, 1996, the Company
did complete its research and determined the shortage to be approximately
$694,000. Approximately $255,000 of the shortage had already been identified and
reflected in accounts payable and accrued expenses in the Company's consolidated
balance sheet at March 31, 1996. Approximately $56,000 represents unfunded
penalties over the past 3 years, approximately $112,000 represents unfunded
monthly interest and approximately $46,000 is unidentified due to incomplete
records at the time of original transfer of the servicing to the Company. These
items are expensed in the current periods income statement, $102,000 in
servicing expense and $112,000 in interest expense. The remaining $225,000
represents claims the Company is currently filing with previous servicers for
errors in cash balances transferred to the Company at the time the servicing was
originally purchased. These claims are reflected in mortgage servicing advances
and accounts receivable in the Company's consolidated balance sheet at December
31, 1996. The $694,000 was paid to FHLMC during the third fiscal quarter from
the proceeds received from the sale of the related servicing at September 30,
1996.
The increase in servicing expense, with a decrease in the servicing
portfolio, to $873,116 for the nine months ended December 31, 1996 compared to
$813,837 for the nine months ended December 31, 1995 is due to the expensing of
the items discussed above related to the FHLMC shortage as well as the $100,000
estimated transfer costs associated with the sale of the servicing.
The decrease in personnel expense to $2,547,424 for nine months ended
December 31, 1996 compared to $2,831,059 for nine months ended December 31, 1995
is due primarily to internal reorganization as well as the selling of the
Washington operation in October 1995. With increased production and the growth
of the Desktop installations anticipated by management during fiscal 1997, a
further decrease in personnel costs is not anticipated.
The increase in interest expense to $675,179 for the nine months ended
December 31, 1996 from $542,639 for the nine months ended December 31, 1995 is
the result of increased loan production to $103 million from $79 million,
respectively. The Company has a banking relationship that provides more
favorable warehouse interest rates because of compensating escrow balances from
the servicing portfolio. With the sale of a portion of the servicing portfolio,
the Company will want to make sure the mortgage loans held for sale are shipped
to investors timely for funding to ensure the benefit of the positive spread due
to the remaining compensating balances. The increase is also attributable to the
FHLMC shortage discussed above.
In connection with the acquisition of mortgage servicing rights, the
Company capitalizes the price paid for the mortgage servicing rights acquired.
The resulting asset is amortized on an accelerated basis and evaluated for
impairment on a quarterly basis. Amortization for the nine months ended December
31, 1996 was $469,180 compared to $774,184 for the nine months ended December
31, 1995.
The Company's servicing portfolio is subject to reduction by normal
amortization, by sales of servicing rights, by prepayment or by foreclosure of
outstanding loans. The value of the Company's loan servicing portfolio may be
adversely affected if mortgage interest rates decline and loan prepayments
increase. The value is also adversely affected by unanticipated rates of
default. Conversely, as mortgage interest rates increase or as rates of default
decrease, the value of the Company's loan servicing portfolio may be positively
affected. The weighted average interest rate on the underlying mortgage loans
being serviced by the Company at December 31, 1996 was 9.94%. The Company's
PMSRs are subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments or defaults in excess of those anticipated
at the time PMSRs are recorded result in decreased future net servicing income.
Such decreases in future net servicing income would result in accelerated
amortization and/or impairment of PMSRs. The Company's net earnings, future net
earnings and liquidity are adversely affected by unanticipated prepayments of
the mortgage loans underlying its PMSRs.
On October 1, 1996, the Company entered into two consulting agreements with
two independent consulting firms to perform public relation services for the
Company. Each agreement provided the issuance of 250,000 shares of common stock
in exchange for the service. Although the consulting agreements were finalized
on October 1, 1996, the Company entered into a letter of agreement on August 27,
1996 at which time the Company's common stock was $1.1875. The resulting value
of the service of $593,750 is reflected as expense in the current period income
statement as well as equity on the balance sheet at December 31, 1996. The
agreements continue for a 24 month period.
Page - 10
Advanced Financial,Inc.
The Company has a net operating loss carryforward for tax purposes of
approximately $7 million at December 31, 1996. No income tax benefits were
recognized for the nine months ended December 31, 1996 or 1995 since a valuation
allowance for the same amount would have been required under FASB 109. In
determining the amount of the valuation allowance, management has relied on a
potential tax-planning strategy whereby an unrealized taxable gain in the
Company's purchased mortgage servicing rights portfolio could be recognized
through the sale of such servicing rights. As a result of the sale of
$234,000,000 of the servicing portfolio, $340,000 of the deferred tax asset has
been recognized as tax expense on the September 30, 1996 income statement. The
remaining $100,000 has been recognized as tax expense on the December 31, 1996
income statement since the evaluation of the remaining portfolio does not
support a gain to be recognized through the sale of such servicing rights.
FINANCIAL POSITION
- ------------------
The Company has seen a decrease in its total assets and a decrease in its
stockholders' equity. The Company's total assets were $13,264,873 at December
30, 1996 compared to $17,313,516 at March 31, 1996. The decrease is due
primarily to the decrease in mortgage loans held for sale at December 31, 1996
as well as the $1,038,000 reduction of the PMSR related to the servicing sale.
Stockholders' equity has decreased to $102,324 at December 31, 1996 from
$978,329 at March 31, 1996. The decrease in stockholder's equity is lower than
would be expected due to year to date losses due to several capital infusions
totaling approximately $1,403,375 during the nine months ended December 31,
1996. AFIM's net worth is currently satisfactory for those financial
institutions purchasing loans from the Company on a servicing release basis.
However, AFIM is not currently in compliance with minimum net worth requirements
for GNMA and FHA. AFIM plans to increase the net worth to meet both agency
requirements through additional capital infusion as well as the sale of the
origination platform and anticipated acquisition of another mortgage company
discussed above. To help preserve the net worth, preferred stock dividends have
been suspended until the cash flow of the Company permits payment. The preferred
stock carries a $.42 per share annual cumulative dividend.
Management believes that the items noted above will enable the Company to
meet its obligations and maintain its financial ratios and balances required by
its lenders and mortgage investors; however, there are no assurances that the
Company will ultimately be able to realize its assets' values and discharge its
liabilities in the normal course of business.
The mortgage servicing advances and accounts receivable were $897,309 at
December 31, 1996 compared to $520,620 at March 31, 1996. The increase is due
primarily to a portion of the proceeds to be received for the sale of servicing
being recorded as a receivable at September 30, 1996. The balance is also
comprised of advances made related to servicing functions. There are some pools
in the servicing portfolio that require the servicer to pass on to the investor
all principal and interest payments regardless of whether the payment has been
collected. If customers are delinquent, an advance is required by the Company.
As payments are made by borrowers during the month, the advance is repaid to the
Company.
At December 31, 1996, the Company had a $300,000 outstanding notes
receivable from related party that is recognized as a contra equity item on the
Balance Sheet since it is the result of stock issuance compared to the
outstanding receivable of $190,000 at March 31, 1996, which was subsequently
collected and shown on as an asset on the Balance Sheet. The receivables
resulted from consulting agreements entered into in February 1996 with four
companies. Under the terms of each agreement, the Company is provided with
financial and public relations services, including advice concerning marketing
surveys, investor profiles and increasing investor awareness of the Company and
its products and services. The term of each agreement was six months. As
compensation for this service, the Company has granted options to purchase
1,000,000 shares of common stock at $.50 per share. As of September 30, 1996,
all options have been exercised generating $500,000 capital for the Company. The
Company used the $350,000 of the proceeds to pay down a working capital line. At
December 31, 1996, there was a note receivable from related party of $ 300,000.
The $300,000 note receivable from related party represents the completion of a
private placement of the Company's common stock. The original receivable of
$500,000 consists of three collateralized promissory notes from three separate
companies to purchase 1,000,000 shares of common stock at $.50 per share. During
the third fiscal quarter $200,000 of the notes was received. The remaining notes
which originally expired during the third fiscal quarter of 1997 were extended
to March 31, 1997 and carry an 8% interest rate. The shares of stock purchased
are held in escrow pending receipt of the funds to satisfy the promissory notes.
The above transactions do not involve any officers or directors of the Company;
however, the people involved in such transactions are being referred to as
related parties due to the number of shares issued in conjunction with the two
transactions.
The Company had $8,994,343 in mortgage loans held for sale at December 31,
1996 (which were pledged to collateralize the Company's warehouse lines)
compared to $10,110,747 at March 31, 1996, which reflects the timing of the sale
of the mortgage loans in the secondary market.
Page - 11
Advanced Financial, Inc.
As noted above, on October 1, 1996, the Company entered into two consulting
agreements with two independent consulting firms to perform public relation
services for the Company. Each agreement provided the issuance of 250,000 shares
of common stock in exchange for the service. Although the consulting agreements
were finalized on October 1, 1996, the Company entered into a letter of
agreement on August 27, 1996 at which time the Company's common stock was
$1.1875. The resulting value of the service of $593,750 is reflected as expense
in the current period income statement as well as equity on the balance sheet at
December 31, 1996. The agreements continue for a 24 month period.
The net decrease in cash of the Company was $726,598 for the nine months
ended December 31, 1996. At the end of fiscal 1996, the Company received
proceeds from a loan financing of $750,000. The proceeds were used to pay down a
servicing escrow advance line and pay $50,000 down on the working capital line
with Bank One. The Company paid an additional $350,000 down on the working
capital line during the nine months ended December 31, 1996 from the proceeds
received due to the exercise of the stock options discussed above. The Company
also paid $120,090 in capital lease payments for the purchase of the IBM AS/400,
office furniture and Desktop computers and equipment. During fiscal 1997, the
Company expects to generate cash through a possible acquisition , liquidation of
the notes receivable from purchase of common stock and the raising of additional
capital, if necessary.
As previously noted, the Company sold approximately $234,000,000 of its
outstanding servicing portfolio for an adjusted gain of $764,595 before expense
for the related deferred tax asset of $340,000. A portion of the proceeds from
the sale were used to fund the shortage in the FHLMC account of approximately
$694,000. In fiscal 1996, the Company had a note payable come due of
approximately $550,000 secured by a portion of the servicing portfolio currently
sold. Management paid $330,000 on the note with proceeds from the sale and
refinanced the remaining $222,000. An additional $300,000 of the proceeds were
used to pay down additional outstanding debt related to the servicing sold, thus
reducing that debt to approximately $400,000. The Company also paid off $400,000
of the $750,000 loan financed at March 31, 1996. The remaining $100,000 of the
BankOne working capital line was also paid off with proceeds from the servicing
sale. The Company believes that the decrease in the servicing income will be
offset by the decrease in expenses related to that servicing as well as the
decrease in monthly debt payments.
PROSPECTIVE TRENDS
- ------------------
As noted previously, on February 3, 1997 the Company entered into a
non-binding Letter of Intent to acquire FMIC. The Company also entered into an
agreement with FMIC to sell them the retail mortgage loan production operations.
FMIC currently closes approximately $10 million per month in retail loan
originations and has a mortgage servicing portfolio of approximately $730
million. The Letter of Intent calls for a definitive agreement to be completed
by March 1, 1997 and is subject to a fairness opinion and a vote of the
shareholders.
A key technology that the Company implemented in the first quarter of
fiscal 1997, is the use of Automated Underwriting. Automated Underwriting is the
use of artificial intelligence through computer technology to make underwriting
and credit decisions on residential mortgage loans. The use of automated
underwriting will reduce the time needed to process and underwrite a residential
mortgage loan from approximately 30 to 45 days to as few as 5 to 14 days. It
will also significantly lower the cost of processing and underwriting those
loans since the technology will increase the number of loans processed and
underwritten per employee.
To compliment the Desktop sites, the Company will be recruiting loan
originators to set up "net branches". The originator, who will be employed by
AFIM, will be credited all revenues generated from the loan above the Company's
par price which will be netted against all the expenses related to the
origination site. The Company feels this is another cost efficient method of
originating loans in comparison to the traditional retail branch.
Page - 12
Advanced Financial, Inc.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 114 and
118, "Accounting by Creditors for Impairment of Loan-Income Recognition and
Disclosures," during the first quarter of fiscal 1996. This statement requires
the accounting by creditors for impairment of certain loans. The impact of
adopting the statement on the Company's consolidated financial statements was
not material.
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment to FASB Statement No.
65", during the first quarter of fiscal 1997. The statement generally requires
entities that sell or securitize loans to retain the mortgage servicing rights
to allocate the total cost of mortgage servicing rights to the loan and the
related servicing right based on their relative fair values. Costs allocated to
mortgage servicing rights should be recognized as a separate asset and amortized
over the period of estimated net servicing income and periodically evaluated for
impairment based on fair value. The impact of adopting this statement will not
be material on the Company's 1997 consolidated financial statements since the
Company intends on selling primarily all originated loans servicing released
during fiscal 1997.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
required for fiscal year beginning April 1,1996. The Statement requires that
certain long-lived assets be reviewed for impairment when events or
circumstances indicates that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell. The impact of
adopting this Statement on the Company's consolidated financial statements has
not been determined by Management.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," will be adopted by the Company during fiscal year
ending March 31, 1997. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. These plans
include all arrangements by which employees receive shares of stock or other
equity investments of the employer or where an employer issues its equity
instruments to acquire goods and services from nonemployees. This statement will
require pro forma disclosures of net income and earnings per share as if a new
accounting method based on the estimated fair value of employee stock options
had been adopted. The Company has not decided if the optional accounting
treatment proposed by SFAS No. 123 will be adopted.
Page - 13
Advanced Financial, Inc.
PART II
ITEM 1 Legal Proceedings
- ------------------------
The Company reached a settlement with two former officers of the Company who had
named the Company as a codefendant in a law suit filed in the United States
District Court for the District of Nebraska. The Company settled the litigation
by agreeing to issue the plantiffs a total of 300,000 shares of restricted AFI
common stock. In turn, one of the parties will pledge 100,000 shares as
collateral for a note receivable of $214,000 due the Company. The Company has
already reserved $74,815 against the note and $140,000 towards the settlement of
this litigation. The parties settled this litigation to avoid any further
uncertainty and expense of litigation.
ITEM 2. Changes in Securities. none.
- ------------------------------
ITEM 3. Defaults upon Senior Securities.
- ----------------------------------------
The Company postponed the payment of its regular quarterly dividend on its
Series "A" Cumulative Convertible Preferred Stock. The dividend will accumulate
until such time as the Company has determined that its cash flows have improved
enough to pay the dividend from the cash flow of its operations. The total
arrearage is currently $156,240.
ITEM 4. Submission Matters to a Vote of Securities Holders. none.
- ----------------------------------------------------------
ITEM 5. Other Information
- -------------------------
On December 6, 1996 the Company was notified by the American Stock Exchange that
trading in its common stock would be halted due to the fact that the Company had
fallen below certain of the Exchange's continued listing guidelines. On December
9, 1996 the Exchange also notified the Company that it had issued 1.0 million
shares of its common stock, through a private placement, prior to receiving
notification from the Exchange that the securities had been approved for
listing. This is a violation of the Exchange's listing agreement and is a factor
considered by the Exchange when reviewing a Company's continued listing
eligibility. On December 11, 1996 the Exchange informed the Company that it
would proceed with a filing of an application with the Securities and Exchange
Commission to strike the Company's common stock from listing and registration on
the Exchange. On December 13, 1996 the Company informed the Exchange that it had
decided to pursue its right to appeal this decision to the Exchange's Board of
Governors and requested a hearing. On February 5, 1997 the Company had its
hearing with the Exchange's Board of Governors. At that time the Company
presented to the Board of Governors its plans on how it intended to meet the
Exchange's continued listing requirements through the acquisition of another
mortgage company. Also the investors who had received the 1.0 million shares of
common stock through a private placement had returned all 1.0 million shares to
the transfer agent. The investors have agreed to let the transfer agent hold
such shares until such time as the issues have been resolved with the Exchange.
At this time the Company has not received a final ruling from the Exchange in
reference to its delisting. Should the Exchange choose to delist the Company's
common stock, the Company will pursue having its shares traded on NASDAQ's
Electronic Bulletin Board until such time as it is able to make application to
the small cap market.
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
a. Exhibit 10.1 Asset Purchase Agreement By and Among AFI Mortgage
Corp., as Seller and, and First Mortgage Investment Co.,
as Buyer
b. None
Page - 14
Advanced Financial, Inc.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED FINANCIAL, INC.
(Registrant)
Dated: February 11, 1997 By: /S/ Debbie K. Towery
-----------------------------
Debbie K. Towery
Chief Financial Officer
Dated: February 11, 1997 By: /S/ William E. Moffatt
------------------------------
William E. Moffatt
President/Director
Page - 15