UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-02252
Availent Financial, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 13-1976670
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2720 Stemmons Freeway, South Tower, Suite 600, Dallas, Texas 75207
(Address of principal executive offices)
214-637-2972
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of June 30, 2003, there
were 13,610,202 shares of common stock, par value $0.01 per share, of the issuer
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
Index Page Number
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2003 (unaudited)
and December 31, 2002 3
Consolidated Statement of Operations and Comprehensive Loss
for the three and six months ended June 30, 2003 and 2002 (unaudited) 4
Consolidated Statement of Cash Flows for the six months ended
June 30, 2003 and 2002 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Deficiency
for the six months ended June 30, 2003 (unaudited) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of Operation 23
Item 3. Controls and Procedures 26
PART II--OTHER INFORMATION
Item 1. Legal Proceedings. 26
Item 2. Changes in Securities and Use of Proceeds. 26
Item 3. Defaults Upon Senior Securities. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Item 5. Other Information. 28
Item 6. Exhibits and Reports on Form 8-K. 28
SIGNATURES
2
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, 2003 December 31,
(Unaudited) 2002
-------------- --------------
Current assets:
Cash and cash equivalents $ 1,310 $ 194,346
Mortgage loans held for sale, net 1,676,653 1,499,476
Other receivables 12,541 17,946
Prepaid expenses 13,900 46,217
Advances to employees 489 11,341
-------------- --------------
Total current assets 1,704,893 1,769,326
-------------- --------------
Property and equipment, net 145,755 134,291
Intangible assets, net 44,111 63,746
Deferred financing costs, net 21,346 37,354
Security deposits 2,757 2,757
Total assets $ 1,918,862 $ 2,007,474
============== ==============
See accompanying notes to consolidated
financial statements (unaudited).
3
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
June 30, 2003 December 31,
(Unaudited) 2002
-------------- --------------
Current liabilities:
Warehouse line of credit payable $ 1,612,915 $ 1,465,295
Note payable - bank 50,000 50,000
Mortgage escrow payable 5,887 6,856
Current portion of capital lease obligations 7,876 8,009
Notes payable - officers 45,012 249,000
Notes payable - stockholders 140,000 2,271,000
Notes payable 348,868 48,000
Accounts payable 817,912 289,372
Accrued expenses 360,808 465,555
Payroll taxes payable 486,820 266,816
Due to officers 19,278 22,784
-------------- --------------
Total current liabilities 3,895,376 5,142,687
Long term portion of capital lease obligations 3,932 5,913
-------------- --------------
Total liabilities 3,899,308 5,148,600
-------------- --------------
Commitment and contingencies
Minority interest 66,376 78,634
-------------- --------------
Stockholders' deficiency:
Preferred stock, $0.01 par value; 10,000,000
shares authorized - -
Common stock, $0.01 par value; 100,000,000 authorized,
13,610,202 and 9,096,568 respectively, issued and outstanding 136,105 90,966
Additional paid-in capital 7,886,452 4,006,321
Deferred compensation (692,245) (692,245)
Deferred consulting services (1,529,724) (2,725,868)
Accumulated deficit (7,846,196) (3,897,720)
(2,045,608) (3,218,546)
-------------- --------------
Less: common stock held in treasury at cost, 121 shares
(1,214) (1,214)
-------------- --------------
Total stockholders' deficiency (2,046,822) (3,219,760)
-------------- --------------
Total liabilities and stockholders' deficiency $ 1,918,862 $ 2,007,474
============== ==============
See accompanying notes to consolidated
financial statements (unaudited).
4
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three months ended Six months ended
------------------ ------------------
2002 2003 2002 2003
Revenue
Gain on sales of mortgages, brokerage
income and loan origination, fees, net $ 379,842 $ 63,013 $ 589,221 $ 112,816
------------- ------------- ------------ -------------
Total revenues
379,842 63,013 589,221 112,816
------------- ------------- ------------ -------------
Operating expenses:
Salaries and related expenses 347,833 263,380 924,715 437,588
Commissions 122,403 - 199,034 -
Occupancy and other office expenses 34,249 22,609 77,182 35,231
Warehouse interest 51,666 - 70,543 -
Other operating expenses 675,077 161,562 1,789,732 589,287
Total operating expenses 1,231,228 447,551 3,061,206 1,062,106
------------- ------------- ------------ -------------
Loss before minority interest and
other income (expense) (851,386) (384,538) (2,471,985) (949,290)
Minority interests
15,472 8,783 37,097 28,451
------------- ------------- ------------ -------------
Loss before other income (expense) (835,914) (375,755) (2,434,888) (920,839)
------------- ------------- ------------ -------------
Other income (expense):
Cancellation of consulting services
(contract in dispute see Note 14) (1,246,114) - (1,246,114) -
Interest and financing expense (126,799) (37,534) (268,397) (83,328)
Gain on sale of property
862 - 862 -
Interest income -
- 61 -
- - - -
Total other income (expense) (1,372,051) (37,534) (1,513,588) (83,328)
------------- ------------- ------------ -------------
Net loss from operations (2,207,965) (413,289) (3,948,476) (1,004,167)
Other comprehensive loss:
Net unrealized (loss) gain on securities - (278,688) - (593,956)
Comprehensive loss $(2,207,965) $ (691,977) $(3,948,476) $(1,598,123)
============= ============== ============= =============
Basic loss per common share $ (0.18) (1.60) $ (0.37) $ (1.60)
============= ============== ============= =============
See accompanying notes to consolidated
financial statements (unaudited).
5
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2002 2003
Cash flows from operating activities: -------------- --------------
Net loss $(3,948,476) $(1,004,167)
Adjustments to reconcile net less to net cash
used in operating activities:
Accretion of discount on notes payable
charged to interest expense 43,445 -
Depreciation and amortization 49,401 18,134
Gain on disposal of fixed asset 862 -
Non-cash interest expense and other 102,297 19,256
Minority interest in loss of limited partnerships (21,658) (28,451)
Amortization of deferred service costs 375,333 -
Cancellation of service contract 1,246,114 -
Issuance of shares in lieu of compensation 78,000 -
Issuance of shares for financing 25,000 -
Contribution of capital from officers through
forgiveness of unpaid salaries and interest 95,000 -
Changes in operating assets and liabilities:
Increase in mortgage loans held for sale (177,177) -
Decrease in other receivables 5,405 -
Decrease (increase) in prepaid expenses 32,317 (48,209)
Decrease in advances to employees 10,852 -
Increase in security deposits - (472)
Increase in warehouse line of credit 147,620 -
Decrease in mortgage escrow payable (969) -
Increase in accounts payable 528,540 174,400
Increase in accrued expenses 143,596 48,583
Increase in payroll taxes payable 220,004 -
Decrease in due to officers (3,506) -
-------------- --------------
Net cash used in operating activities (1,048,000) (820,926)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (36,634) (23,863)
-------------- --------------
Net cash used in investing activities (36,634) (23,863)
-------------- --------------
Net cash used in operating and investing activities $(1,084,634) $ (844,789)
-------------- --------------
See accompanying notes to consolidated
financial statements (unaudited).
6
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (cont'd)
(UNAUDITED)
2003 2002
-------------- --------------
Net cash used in operating and investing activities
(from previous page) $ (1,084,634) $ (844,789)
-------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 375,000 751,577
Payments on notes payable - officers (688) -
Payments on capital lease obligations (2,114) (1,946)
Contributed capital from limited partnerships-minority interest 12,300 53,770
Capital distribution to limited partner (2,900) -
Sale of common stock
510,000 37,000
-------------- --------------
Net cash provided by financing activities 891,598 840,401
Net decrease in cash and cash equivalents (193,036) (4,388)
Cash and cash equivalents, beginning of year
194,346 4,588
-------------- --------------
Cash and cash equivalents, end of year $ 1,310 $ 200
============== ==============
Supplemental disclosure of non-cash information: Cash paid during the year for:
Interest $ 28,715 $ 106,594
============== ==============
Income taxes $ - $ -
============== ==============
Schedule of non-cash investing and financing activities:
Issuance of common stock for redemption
of preferred stock $ - $ 120,000
============== ==============
Issuance of notes payable in exchange for
redemption of preferred stock $ - $ 80,000
============== ==============
Reduction of debt in connection with beneficial
conversion value of warrants $ 70,666 $ -
============== ==============
Conversion of notes payable to common stock $ 2,382,300 $ -
============== ==============
Contribution to capital from officers forgiveness of unpaid salaries $ 95,500 $ -
============== ==============
Conversion of accrued expenses to common stock $ 326,343 $ -
============== ==============
Issuance of common stock for financing $ 25,000 $ -
============== ==============
Issuance of common stock for services $ 425,303 $ -
============== ==============
See accompanying notes to consolidated
financial statements (unaudited).
7
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
Common Stock, $0.01 Par Value Additional
Number of Paid In Deferred Deferred
Accumulated
Treasury Date Shares Amount Capital Services Compensation Stock
---------- ---------- ---------- ---------- ----------- ---------- ----------
Balance - beginning of period Feb-03 9,096,568 $90,967 $ 4,006,321 $(2,725,868) $(692,245) $ (1,214)
Issuance of shares for services Feb-03 30,000 300 29,370 (29,670) - -
Fair market value of warrants
issued in connection with debt and
beneficial conversion value Feb-03 - - 61,847 - - -
Fair market value of warrants issued
in connection with debt and
beneficial conversion value Mar-03 - - 44,798 - - -
Sales of common stock for cash Mar-03 10,000 100 9,900 - - -
Contribution of officers salaries Mar-03 - - 95,000 - - -
Transfer of debt for stock
consideration Apr-03 1,000,000 10,000 1,307,932 - - -
Issuance of shares for financing Apr-03 600,000 6,000 294,000 - - -
Issuance of shares for extension of
debt terms Apr-03 50,000 500 24,500 - - -
Issuance of shares in lieu of
compensation Apr-03 78,000 780 37,220 - - -
Conversion of notes payable Apr-03 381,250 3,813 193,144 - - -
Sale of common stock May-03 220,000 2,200 107,800 - - -
Issuance of stock for services and
accrued expenses May-03 120,000 1,200 63,583 - - -
Officers conversion of notes
payable to common stock May-03 836,500 8,365 982,805 - - -
Issuance of shares for services Jun-03 791,266 7,913 387,720 (395,633) - -
Sale of common stock Jun-03 180,000 1,800 88,200 - - -
Conversion of notes
payable-stockholders to common stock Jun-03 216,618 2,167 106,147 - - -
Full expensing of deferred services
related to contract cancellation in
dispute Jun-03 - - - 1,246,114 - -
Amortization of deferred services
for period Jun-03 - - - 375,333 - -
Fair market value of warrants
issued in connection with debt and
beneficial conversion value Jun-03 - - 46,165 - - -
- -
Net loss for the period Jun-03 - - - - - -
============ ============ ============ ============ ============ ============
Balance at June 30, 2003 13,610,202 $ 136,105 $ 7,886,452 $(1,529,724) $(692,245) $ (1,214)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated
financial statements (unaudited).
8
NOTE 1. ORGANIZATION, HISTORY AND NATURE OF BUSINESS
Availent Financial, Inc. (Formerly SeaCrest Industries Corporation)
Availent Financial, Inc. ("Availent-DE") was incorporated in the state of
Delaware on November 16, 1959 under the name of SeaCrest Industries
Corporation ("SeaCrest") with authorized common stock of 12,500,000 shares
having a par value of $0.01. SeaCrest had not transacted business since
February 1984 and since that time, has sought to acquire acquisitions
through the issuance of common stock such that SeaCrest would have
operations. On December 4, 2002 SeaCrest changed its name to Availent
Financial, Inc., and its year-end from September 30 to December 31, as a
result of the merger described below.
Availent Financial, Inc.
Availent Financial, Inc. (collectively with its subsidiaries,
("Availent-TX")) was incorporated in the state of Texas in December 2000.
Availent-TX is a holding company that wholly owns the following
subsidiaries: Availent Mortgage, Inc. and Subsidiaries ("Mortgage"),
Availent Leasing, Inc. ("Leasing") and Availent Management, Inc.
("Management").
Merger
Pursuant to an agreement and plan of merger dated March 1, 2002, between
Availent-TX and Availent-DE, which became effective on December 4, 2002,
Availent-DE acquired all of the issued and outstanding common stock of
Availent-TX in exchange for 54,000,000 shares of Availent-DE's common
stock, which represents 90% of the outstanding shares of Availent-DE's
common stock after the issuance. Concurrent with the above acquisition,
Availent-TX was merged into Availent-DE, with Availent-DE as the surviving
corporation. Availent-DE and all of its subsidiaries are collectively
referred to as the "Company".
The merger of Availent-DE and Availent-TX has been treated as a
recapitalization and purchase by Availent-TX as the acquirer (reverse
acquisition) of Availent-DE, as control rests with the former Availent-TX
shareholders, although prior to the acquisition, Availent-DE had been the
registrant. Therefore, the historical financial statements prior to
December 4, 2002 are those of Availent-TX. The transaction is considered a
capital transaction whereby Availent-TX contributed its stock for the net
assets of Availent-DE.
In connection with the merger on December 4, 2002, as described above, a
one for two reverse stock split of the common stock, par value $0.01 per
share became effective. The authorized common stock was then increased to
100,000,000 shares. The corporation also became authorized to issue
10,000,000 shares of Preferred Stock, par value $0.01. Shares of Preferred
Stock may be issued from time to time in one or more series with voting
rights, designations, powers or preferences fixed by the Board of
Directors.
Availent Mortgage, Inc. and Subsidiaries
Mortgage was incorporated in the state of Texas in December 2000 but had no
activity until February 2001. The Company is certified as a Federal Housing
Administration ("FHA"), Title II Nonsupervised Mortgager by the Department
of Housing and Urban Development ("HUD") and it originates single-family
residential mortgage loans in Texas and the Southwestern United States. The
Company primarily originates conforming conventional loans, and sells those
loans to investors, servicing released. The origination of HUD loans is
considered a major program.
During the six months ended June 30, 2003, Mortgage had a majority interest
in seventeen limited liability partnerships that are considered
subsidiaries of the Company. Eleven limited partnerships have terminated
operations at the request of the limited partners as of June 30, 2003; the
expenses to wind down will be deminimus. The limited liability partnerships
originate mortgages, which are processed by the Company. Although
partnership interests vary, Mortgage owns a majority interest in each of
the partnerships. Each entity has acquired state approvals or licenses
required to broker residential mortgage loans. Subsequent to the quarter
ended June 30, 2003 an additional partnership has terminated operations at
the request of the limited partner.
Mortgage, as a general partner, is responsible for managing the business
affairs of the partnerships, and in addition, the Company provides certain
administrative and managerial services to the partnerships for which
nominal fees are paid.
The arrangement between Mortgage and the partnerships follow the provisions
of the Real Estate Settlement Procedures Act of 1974 ("RESPA"), which
prohibits the payment, or receipt of fees for the referral of settlement
service business. The arrangement does not violate the RESPA provisions due
to the fact that the total compensation received by the partnership
9
and any related payments to the general or limited partners are reasonably
related to the value of the services actually performed or received by the
joint venture of Mortgage and the partnerships. Additionally, any payments
for office space are reasonably related to the value of the office space.
Availent Leasing, Inc.
Leasing was incorporated in the state of Texas in February 2001. Leasing
purchases and, subsequently, leases computer and related equipment to
affiliated entities. At June 30, 2003, the Company has ceased its leasing
operations.
Availent Management, Inc.
Management was incorporated in the state of Texas in April 2002. Management
provides certain managerial services to affiliated entities.
Stock split
In January 2003, the Board of Directors resolved to reverse split (the
"Reverse Split") their issued and outstanding common stock, par value $0.01
per share, on a one for ten basis. All share and per share amounts have
been adjusted to reflect the reverse stock split.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America for interim financial information, the instructions to
Form 10-QSB and Items 303 and 310(B) of Regulation S-B. In the opinion of
management, the unaudited financial statements have been prepared on the
same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present
fairly the financial position as of June 30, 2003 and the results of the
operations and cash flows for the six months ended June 30, 2003 and 2002.
The results for the six months ended June 30, 2003, are not necessarily
indicative of the results to be expected for any subsequent quarter or the
entire fiscal year ending December 31, 2003. The balance sheet at December
31, 2002 has been derived from the audited financial statements at that
date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted
pursuant to the Securities and Exchange Commission's ("SEC") rules and
regulations.
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 2002 as included in the Company's report on Form 10-KSB filed
on April 15, 2003.
Loss per common share is computed pursuant to Financial Accounting
Standards Board, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" ("EPS"). Basic income (loss) per share is
computed as net income (loss) available to common shareholders divided by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
stock issuable through stock based compensation including stock options,
restrictive stock awards, warrants and other convertible securities.
Diluted EPS is not presented since the effect would be anti-dilutive.
NOTE 3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities in the
normal course of business. As of June 30, 2003, the Company's accumulated
deficit was $7,846,196 and its working capital deficiency was $2,190,483.
In addition, the Company has had losses from operations of $3,039,935 and
$857,785 for the years ended December 31, 2002 and 2001, respectively, and
$2,719,021 for the six months ended June 30, 2003. As a result of these
factors, the auditor's report on the December 31, 2002 financial statements
included a paragraph indicating that there was substantial doubt about the
Company's ability to continue as a going concern.
In addition, the Company has failed to pay the required payroll tax returns
for the last two quarters of 2002, and the first two quarters of 2003. As a
result, the Company has delinquent payroll tax liabilities of approximately
$633,000, inclusive of accrued interest and penalties.
10
Mortgage has also failed to comply with certain covenants of its warehouse
loan agreement. The covenants are to maintain a required tangible net worth
or debt leverage ratios, as defined in the warehouse lending agreement. The
failure to file and pay timely payroll tax returns also violates the
agreement. These factors could cause the loss of the warehouse line and
impact future loan agreements, as well as future warehouse lending
agreements.
To maintain its FHA lending certification, Mortgage is subject to certain
net worth requirements for HUD. At December 31, 2002, Mortgage's adjusted
net worth for HUD requirement purposes amounted to a deficit of $201,900.
HUD requires an adjusted net worth of $250,000; therefore Mortgage's
adjusted net worth was below the HUD requirement by $451,900. This net
worth deficiency could be detrimental to the operations and financial
position of the Company if Mortgage were to lose its FHA certification.
The Company is aggressively attempting to increase revenues in order to
mitigate future losses. Management is seeking to raise additional capital
and to renegotiate certain liabilities in order to alleviate the working
capital deficiency. However, there can be no assurance that it will be able
to increase revenues, pay its payroll taxes or to raise additional capital.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
adjustments relating to the recoverability and realization of assets and
classification of liabilities that might be necessary should the Company be
unable to continue in operation.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This
statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of
APB Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The changes related to lease accounting are
effective for transactions occurring after May 15, 2002 and the changes
related to debt extinguishment are effective for fiscal years beginning
after May 15, 2002. The adoption of SFAS No. 145 did not have a material
impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. This statement also establishes
that fair value is the objective for initial measurement of the liability.
SFAS No. 146 did not have a material impact on the Company's financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. During the
quarter ended June 30, 2003, the Company adopted a fair value method of
accounting for stock-based compensation. The adoption of SFAS No. 148 did
not have a material impact on the Company's financial position or results
of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The adoption of SFAS No. 150 is not expected to have a material
impact on the Company's financial position or results of operations.
NOTE 5. WAREHOUSE LINE OF CREDIT PAYABLE
At June 30, 2003, the Company has a warehouse line of credit with a
financial institution providing up to $5,000,000 of funds, secured by
mortgage loans held for sale. The line is to be used specifically to fund
mortgage loans in the normal course of business. In addition, the loans
must have purchase commitments before any amounts may be drawn against the
line. The line of credit is subject to interest at the greater of LIBOR and
4% per annum or the Federal Funds rate and 4% annum. Interest is increased
by 4% and principal is reduced by 5% if the loan is not purchased within 45
days of acquisition date.
11
The line is collateralized by a security interest in and to all of
Mortgage's right, title and interest in each mortgage loan pledged to the
Company, each purchase commitment in existence and the proceeds of the
foregoing. The line of credit is subject to termination at the discretion
of the lender. The line requires certain escrow funds being held, insurance
requirements and financial covenants. At June 30, 2003, the Company is in
violation of the minimum corporate tangible net worth and maximum leverage
financial covenants, as defined by the warehouse agreement. The agreement
also considers delinquent tax filings to governmental authorities as a
violation of the agreement. At June 30, 2003 the Company had violated this
stipulation of the agreement through delinquent payroll tax deposits and
filings.
NOTE 6. MORTGAGE ESCROW PAYABLE
At June 30, 2003, $5,887 of mortgage escrow payable is due for escrows on
unsold loans. The related cash is being held in the Company's operating
account and is included as a component of current assets, and its related
liability is reflected as a component of current liabilities. According to
HUD guidelines, the escrow amounts should be segregated and not commingled
with any operating funds. The Company is currently not in compliance with
this requirement.
NOTE 7. NOTE PAYABLE - BANK
Note payable at June 30, 2003 consists of a note due to a financial
institution in the amount of $50,000 bearing interest at a rate of 7.5%.
The note matures on September 30, 2003 and is secured by certain equipment,
leasehold improvements, and furniture and fixtures.
Interest expense on the note totaled $1,875 for the six months ending June
30, 2003 and is included in the consolidated statement of operations in the
accompanying financial statements.
NOTE 8. OBLIGATIONS UNDER CAPITAL LEASES
At June 30, 2003, the Company has computer equipment it acquired under the
provisions of capital leases. Under the leases, the cost of the equipment
has been capitalized and is subject to the Company's depreciation policies.
The obligations are due in varying monthly installments of principal and
interest.
At December 31, 2002, the aggregate future minimum lease payments due,
pursuant to the above capital lease obligations are as follows:
Year Ended December 31:
2003 9,359
2004 4,954
2005 1,430
----------------
Total minimum lease payments 15,743
Less: amount representing interest (1,821)
-----------------
Net present value of capital lease obligations 13,922
Less: current portion (8,009)
-----------------
Long-term portion $ 5,913
=================
NOTE 9. NOTES PAYABLE - SHAREHOLDERS
In July 2001, the Company executed promissory notes aggregating $50,000 to
two shareholders bearing interest at 15% per annum with principal and all
accrued interest payable in full in July 2002. In July 2002 the Company
extended the maturity date of the notes. The notes were currently due in
June 2003, and at June 30, 2003, the notes are in default and are currently
continuing to accrue interest. No penalty has been accrued for this default
at June 30, 2003, as there was no stated penalty provision in the
promissory note and the note holders have not taken any action. The notes
have accrued interest of $14,688, which is included in accrued expenses on
the accompanying consolidated balance sheet.
In August 2001, the Company executed promissory notes aggregating $60,000
to two shareholders bearing interest at 15% per annum with principal and
all accrued interest payable in full in August 2002. In August 2002 the
Company extended the maturity of the date of one note, within principal
amount of 10,000. The note is currently due in June 2003. The other note
12
for a principal balance of $50,000 is currently in default and is
continuing to accrue interest. No penalty has been accrued for this default
at June 30, 2003, as there was no stated penalty provision in the
promissory note and the note holder has not taken any action. The notes
have accrued interest of $16,867, which is included in accrued expenses on
the accompanying consolidated balance sheet.
In November 2002, the Company executed promissory notes aggregating $22,000
to two shareholders bearing interest at 15% per annum with principal and
all accrued interest payable in full in March 2003. In addition, the
shareholders are to receive 275 post-split shares of the Company's common
stock as additional consideration. These shares are to be issued at the
time of the Company's filing of a Form SB-2 with the SEC. In March 2003,
the shareholders extended the terms and maturity date of the notes to June
2003. On June 30, 2003, one note, with a principal balance of $12,000, was
satisfied through a conversion of the note, including accrued interest, to
26,328 shares of common stock (see Note 14). The remaining note is in
default and is continuing to accrue interest. No penalty has been accrued
for this default at June 30, 2003, as there was no stated penalty provision
in the promissory note and the note holder has not taken any action. The
remaining note has accrued interest of $976, which is included in accrued
expenses on the accompanying consolidated balance sheet.
In December 2002, the Company executed promissory notes aggregating $20,000
to two shareholders bearing interest at 15% per annum with principal and
all accrued interest payable in full in April 2003. In April 2003, the
shareholders extended the terms and maturity date of the notes. In
addition, the shareholders are to receive 250 post-split shares of the
Company's common stock as additional consideration. These shares are to be
issued at the time of the Company's filing of a Form SB-2 with the SEC. The
notes are currently due in June 2003. One note with a principal balance of
$10,000 was satisfied through the conversion of the note, including accrued
interest, to 21,578 shares of common stock (see Note 14). The remaining
note has accrued interest of $857, which is included in accrued expenses on
the accompanying consolidated balance sheet.
The Company executed four promissory notes aggregating $34,000 to an
individual shareholder as follows: $14,000 originating in February 2002,
$10,000 originating in March 2002 and $3,000 and $7,000 originating in
November 2002. In addition, the shareholder is to receive 125 post-split
shares of the Company's common stock as additional consideration. These
shares are to be issued at the time of the Company's filing of a Form SB-2
with the SEC. The notes bear interest at a rate of 15% per annum and due
and payable in the first quarter of fiscal 2003. The shareholder has
extended the terms and maturity dates of the notes to June 2003. At June
30, 2003, the notes, which originated in February and March 2002,
aggregating $24,000, were satisfied through a conversion of the notes to
57,536 shares of common stock (see Note 14). The remaining notes,
aggregating $10,000, are in default and are continuing to accrue interest.
No penalty has been accrued for this default at June 30, 2003, as there was
no stated penalty provision in the promissory note and the note holder has
not taken any action. The remaining notes have accrued interest of $923
included in accrued expenses on the accompanying consolidated balance
sheet.
The Company executed two promissory notes to an individual shareholder
aggregating $150,000. The first note for $100,000 originated November 2001
and bore interest at a rate of 18% per annum through August 2002 and 12%
per annum thereafter, and the second a $50,000 note which originated April
2002, bears interest at 15% per annum. The notes were due during the last
quarter of fiscal 2002 and were extended to June 2003. For the extension,
the note holder received 1,525 post-split shares of the Company's common
stock, which was held by Availent-TX. In April 2003 the notes were
converted to 381,250 shares of common stock (see Note 14).
The Company issued promissory notes aggregating $1,355,000 to a
shareholder/investment management company ("the Lender") in four promissory
notes during the year ended December 31, 2002, with interest rates ranging
from 14% to 18% in consideration for certain fees, common stock, and
warrants. In April 2003, the obligation for the principal amounts of the
notes has been satisfied through an agreement between the Lender and the
Company (See Note 14). Total accrued interest on these notes to April 2003
aggregated $99,099 and is included in accrued expenses on the consolidated
balance sheet at June 30, 2003.
NOTE 10. NOTES PAYABLE
The Company executed four promissory notes aggregating $48,000 to an
individual as follows: $15,000 originating in February 2002, $27,000
originating in October 2002, $3,000 originating in November 2002, and
$3,000 originating in December 2002. The notes bear interest at rates of
15% to 18% per annum and were due and payable in the first quarter of
fiscal 2003. The Company has extended the maturity dates of the notes to
June 2003. The notes have accrued interest of $7,591 included in accrued
expenses on the accompanying consolidated balance sheet, and interest
expense on the consolidated statement of operations and comprehensive loss.
On June 30, 2003, the notes were satisfied through the conversion of the
debt, and related accrued interest, to common stock. (See Note 14).
13
On February 12, 2003 the Company entered into a loan agreement with an
individual, whereby the individual will loan the Company $500,000, for
working capital purposes, at a rate of 15% per annum. Principal amounts are
due in August 2003 and interest is due and payable monthly. As additional
consideration for the loan, the Company issued 275,000 warrants to purchase
the Company's common stock at an exercise price of $1.00 per share. The
warrants expire within 60 months of the execution of the note. The Company
has valued the warrants at $44,798 using the Black-Scholes pricing model,
thereby allocating a portion of the proceeds from the related debt to the
warrants using the relevant fair value of the debt and warrants to the
actual proceeds from the debt. The Company recorded $44,798 as a discount
to the debt and this amount will be accreted to interest expense over the
life of the debt. The Company also recorded $18,666 of interest expense for
the six months ended June 30, 2003 for amortization of the beneficial
conversion value over the six-month life of the debt.
Interest expense for the six months ended June 30, 2003 on the above notes
aggregated $42,050.
NOTE 11. ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 2003:
Payroll tax penalties and interest $ 146,195
Interest 19,336
Commissions 21,409
Payroll 5,502
Other 48,366
-----------
Total $ 320,808
===========
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company has entered into a non-cancelable operating lease for office
space. The lease is subject to escalation for the Company's proportionate
share of increases in real estate taxes and certain other operating
expenses.
The approximate future minimum rentals under the non-cancelable operating
lease in effect on December 31, 2002 is as follows:
2003 $ 54,344
2004 6,793
-----------
$ 61,137
===========
Total rent expense under the operating lease for the six months ended June
30, 2003 was $31,491.
The Company is obligated to the limited liability partnerships for rent
payments for office space in varying amounts for each office. The
approximate future minimum payments for rent under the service agreements
with each partnership, adjusted for partnerships terminated during fiscal
2003, in effect on December 31, 2002 are as follows:
2003 $ 17,250
2004 16,200
2005 16,200
2006 16,200
2007 16,200
-------------
$ 82,050
=============
Total rent expense related to the above agreements for the six months ended
June 30, 2003 was $31,266. The agreements are for a term of ten years each.
Market rate risk
The Company, in order to assure itself of a market place to sell its loans,
has agreements with investors who will accept all loans meeting certain
investor criteria and to deliver the loans at the agreed upon rate to the
investor within a specific period. In order to insulate itself from the
impact of interest rate fluctuations regarding the locked-in commitments,
the Company has obtained mandatory and best efforts commitments from
investors to accept delivery at predetermined interest rates.
14
Employment Agreements
In April 2003, the Company entered into a formal employment agreement with
the Regional Sales Manager of Mortgage. The agreement is for a term of
three years with an annual salary of $78,000. The employee is to receive
80,000 shares of the Company common stock as additional consideration for
the agreement. At June 30, 2003, the Company has not issued these shares.
The obligation is included in accrued expenses, valued at $40,000. The
employee will also receive 10 basis points per month on gross mortgage loan
volume the employee is responsible for creating. The employee also became a
participant in the Company's 2003 Equity Incentive Plan and was granted
non-qualified options to purchase 170,800 share of the Company's Common
stock at $1.00 per share. The options vest pursuant to a vesting schedule
as defined under the stock option agreement.
Repurchase contingency
Loans sold under FHA or investor programs are subject to repurchase or
indemnification if they fail to meet the origination criteria of those
programs. In addition, loans sold to investors are also subject to
repurchase or indemnification if the loan is two or three months delinquent
during a set period, which usually varies from the first six months to a
year after the loan is sold. Additional losses on these mortgages, if any,
are not expected to be material. There are no current requests for
repurchase or indemnification pending.
Lack of Insurance
The Company had not maintained any liability insurance or any other form of
general insurance prior to June 2002. In July 2002, the Company obtained
professional liability and general insurance, which was retroactive to May
2001. The policy, however, does not specifically mention the wholly owned
subsidiaries or the majority owned partnerships and therefore coverage for
these entities is uncertain. The Company is also lacking insurance coverage
for workmen's compensation, disability, and business discontinuance.
Management plans to obtain coverage in the third quarter of 2003. In
December 2002, the Company obtained Directors and Officers Liability
Insurance. Although the Company is not aware of any claims resulting from
periods of non-coverage, there is no assurance that none exist.
Payroll taxes
As of June 30, 2003, the Company owes approximately $633,000 of payroll
taxes and related estimated penalties and interest. Although the Company
has not entered into any formal repayment agreements with the respective
tax authorities, management plans to make payment as funds become
available.
Litigation
On April 2, 2003, the Company received a demand letter from legal counsel
to an individual who is a related party to SeaCrest prior to the merger
("Ball") seeking delivery of 700,000 shares of common stock in connection
with claims regarding a disputed oral agreement between Availent-TX and
Ball prior to the merger. The Company disputes Ball's claims regarding the
oral agreement and believes that Ball has not earned, is not entitled to,
and has otherwise forfeited all rights, if any ever existed, to the 700,000
shares of common stock, in part, because of material misrepresentations
made by, and nonperformance on the part of Ball. On June 30, 2003, the
Company and Ball entered into a settlement agreement, whereby each party
releases the other and for such Ball will receive 250,000 shares of the
Company's common stock, which will entitle Ball to registration and
piggyback registration rights. At June 30, 2003, the Company had not yet
cancelled the 700,000 shares, nor issued the new 250,000 shares to Ball.
Upon the issuance and cancellations of shares, the Company will record an
increase in stockholders equity of $568,630, as a result of the net
decrease in the shares issued to Ball previously recorded as deferred
merger costs.
The Company has also received a demand from legal counsel to a former
employee whom is seeking delivery of 700,000 shares of common stock in
connection with claims regarding a disputed oral agreement between
Availent-TX and the former employee prior to the merger. The Company
disputes the former employee's claims regarding the oral agreement and
believes that the former employee has not earned, is not entitled to, and
has otherwise forfeited all rights, if any ever existed, to the 700,000
shares of common stock, in part, because of material misrepresentations
made by, and nonperformance on the part of, the former employee. The
Company intends to vigorously defend against and contest the claims of the
former employee and pursue any potential counterclaims that may be
available to the Company. The Company has previously offered to settle the
dispute with the former employee, but may withdraw the offer at any time
without prior notice. In addition, the Company reserves the right to seek
recovery against the former employee if the Company discovers, during the
course of its investigations with respect to the claims of the former
employee and the dispute with the former employee, that
15
the former employee has in any way damaged the Company. The Company and
legal counsel believe the Company will prevail in this matter.
The Company is party to various legal proceedings generally incidental to
its business as is the case with other companies in the same industry.
NOTE 13. MINORITY INTERESTS
The Company's minority interest on the consolidated balance sheet includes
the minority interest in seventeen limited liability partnerships, which
Mortgage has a controlling interest in. These partnerships originate
mortgages, which are processed by Mortgage. These partnerships
predominantly operate in the Southwestern United States. As of June 30,
2003, eleven partnerships have terminated their operations at the request
of the limited partners. Subsequent to June 30, 2003, an additional
partnership has terminated operations at the request of the limited
partner. Expenses related to winding down these partnerships are expected
to be deminimus. The assets of each partnership remain on the Company's
consolidated balance sheet and are managed by the Company. All of the
partnerships, which the Company has an agreement with, are majority owned
and are for a term of 10 years. Profits and losses are allocated pro rata,
based on the partner respective percentage partnership interest. However,
after the allocation of pro rata losses a limited partners capital balance
cannot have a negative balance. If the limited partner has no remaining
capital balance, all losses are allocated to the general partner, which is
the Company. For the six months ended June 30, 2003, net operating losses
include operations from the limited liability partnerships in operation
during the first two quarters of fiscal 2003 totaled $97,782, of which the
limited partners were allocated $21,625, which has been classified as
minority interest on the statement of operations. At June 30, 2003, assets
of $66,250 and liabilities of $150,589 for these limited liability
partnerships are included on the balance sheet along with the minority
interest balance of $66,376.
NOTE 14. STOCKHOLDERS' DEFICIENCY
Issuance of Common Stock and Warrants in Consideration for Debt Financing
On February 26, 2002, Availent-TX entered into a loan agreement with the
Lender and executed a promissory note, bearing interest at 14% per annum,
wherein Availent-TX received $500,000 from the Lender for working capital
purposes. The note was to mature on December 31, 2002. In consideration for
the loan the Lender received, a commitment fee of $7,500, reimbursement of
related legal fees and 25,000 post-split shares of the Company's common
stock held by Availent-TX, valued at $24,739, which has been recorded as
interest expense for the year ended December 31, 2002, as well as a
commitment to provide warrants to purchase shares of the Company's common
stock. The shares of Company common stock issued by Availent- TX were
obtained in the Ball transaction as described later on. The spouse of one
of the founding shareholders of Availent-TX has personally guaranteed this
loan and pledged an annuity contract as collateral to the Lender. As
consideration for this guarantee the spouse was compensated by the Company.
On October 15, 2002, Availent-TX entered into a loan agreement with the
Lender and executed a promissory note, bearing interest at 18% and maturing
on December 31, 2002, in the amount of $75,000 as received from the Lender.
In consideration for the loan, the Lender received a commitment fee of
$3,750, reimbursement of related legal fees and a commitment to provide
warrants to purchase shares of the Company's common stock.
On November 12, 2002, Availent-TX entered into a loan agreement with the
Lender and executed a promissory note, bearing interest at 15% and maturing
on December 31, 2002, in the amount of $280,000 as received from the
Lender. In consideration for the loan, the Lender received a commitment fee
of $14,000, reimbursement of related legal and travel fees and warrants to
purchase shares of the Company's common stock. The founding shareholders of
Availent-TX have personally guaranteed this loan and pledged all of their
shares as collateral to the Lender.
On December 27, 2002, the Company and the Lender entered into an agreement
that the Lender will increase the November 12, 2002 loan by an additional
$500,000, change the interest rate to 13.08% and agree to extend the
maturity date of the loan from December 31, 2002 to April 30, 2003. In
addition, the Lender also agreed to extend the maturity date of the loans
on February 26, 2002 and October 15, 2002 from December 31, 2002 to April
30, 2003. Included in the agreement, the Lender provided the Company with
an option that if the Company chooses to prepay the interest for each of
the loans listed above, which aggregates $1,355,000, by January 31, 2003,
the Lender will extend the loan from April 30, 2003 to June 30, 2003. In
consideration for the provisions in this agreement the Lender received
commitment and extension fees totaling $32,750, reimbursement of related
legal and travel fees of $6,000 and 236,000 post-split shares of the
Company's common stock, valued at $233,404 which have been recorded as a
interest expense for the year ended December 31, 2002 and a commitment to
provide warrants to purchase shares of the Company's common stock. In
addition, one of the founding shareholders and his spouse have granted a
second lien to the Lender on a real property located in New Mexico ("the
New Mexico property") 16
16
as collateral for the new $780,000 note.
In February 2003, the Company and the Lender entered in to an Agreement
that included the Lender's release of the collateral held relating to the
November 12, 2002 agreement, which was the founding shareholders of
Availent-TX pledged common shares of the Company. In consideration for the
provisions in this agreement the Lender nullified all previous warrant
agreements and was issued four warrants to purchase 100,000, 31,100,
360,000 and 100,000, or a total of 590,100 shares of the common stock of
the Company for an exercise price of $1.00 per share at any time during a
thirty six (36) month period commencing on the date shares of the Company
are registered with the Securities and Exchange Commission for sale to the
public. Additional provisions provide that if the Company receives funding
of $5 million or more, including the proceeds from the sale of common stock
following the registration of such stock with the SEC for sale in the
public markets, the payment terms of the Lender's loans are accelerated.
The Company has valued the warrants at $61,947 using the Black-Scholes
pricing model, thereby allocating a portion of the proceeds from the
related debt to the warrants using the relevant fair value of the debt and
warrants to the actual proceeds from the debt. The Company recorded $61,947
as a discount to the debt and this amount was accreted to interest expense
over the life of the debt, which was fully expensed during the six months
ended June 30, 2003.
In April 2003, the Company and the Lender entered into an additional
Agreement regarding the notes aggregating $1,355,000 of which $500,000 is
guaranteed by the annuity contract of the spouse of the founding
shareholder of Availent-TX. The agreement, gave the Lender the right to
make demand for payment of the annuity in the amount of $500,000 against
the outstanding notes, any balance of the proceeds of the annuity will be
immediately repaid to the founding shareholder and spouse. In the event the
proceeds of the annuity is insufficient to pay the $500,000, the Company
and the Lender agree to extend the balance of the notes. With regards to
the remaining notes of $855,000, the Company and the Lender agree to issue
and place 1,700,000 shares of the Company's common stock into an escrow
account as shares to be held as collateral to secure repayment of the notes
("Escrow Agreement"). It was further agreed upon that with the transfer of
the shares into the escrow account the Lender agrees to release the Company
of all liabilities relating to the $855,000 remaining in notes and to
convey the second lien covering the New Mexico property held as collateral
to the escrow account. The personal guarantees of the founding shareholder
and the spouse will not be terminated. The 1,700,000 shares held in escrow
are to be sold within the anticipated Form SB-2, with the proceeds to be
used to repay the $855,000 to the Lender including any interest and other
charges accrued and the balance of the proceeds remaining along with the
second lien covering the New Mexico property will be transferred to the
Company. In addition, the founding shareholder and the spouse agree to
convey, subject to the outstanding balance of the first lien mortgage, the
title and ownership of the New Mexico property, however they do retain the
right to repurchase the property for the consideration paid to the Lender.
If the remaining notes of $855,000 are not repaid by September 30, 2003,
the Escrow Agreement will terminate and all shares will be returned to the
Company and the second lien returned to the Lender. In consideration for
the transfer of the annuity to the Lender and the transfer of the New
Mexico property to the Company, the Company will issue the founding
shareholder and spouse 1,000,000 shares of the Company's common stock. In
addition, the Agreement requires the purchase of 600,000 shares of the
Company's common stock by the Lender for $300,000, the issuance of 60,000
common stock warrants which may be exercised at any time for a period of
five years at a purchase price of $1.00 per share, the Company's commitment
to obtain additional investors to match the $300,000 common stock purchase
by the Lender. If the Company is able to obtain financing in a form of a
loan or equity in excess of $600,000 it is required to repurchase the
Lender's 600,000 shares of common stock at $.67 per share with 50% of the
amount in excess of the $600,000 received by the Company.
Stock Transfer and Consulting Agreement
In April and May 2003, two key founding officers entered into a stock
transfer and consulting agreement with a consulting company, currently
doing business with the Company (the "Consultant") for additional financial
and investment banking and consulting services. The term of the agreement
is over a period of one year from the effective date of the agreement. As
consideration for the future services by the Consultant, the officers were
to transfer 3,376,382 of their common shares to the Consultant. This
agreement was subject to approval by the Board of Directors, which was
subsequently denied, thereby voiding this agreement.
Common Stock and Warrants Issued for Services
On February 21, 2003, the Company entered into a letter of agreement with a
consultant, whereby the consultant received $10,000 for entering into the
agreement. The term of the agreement contained the following provisions:
The consultant shall receive a 15% commission for selling rights to the
South Florida area, which will only be paid on total sales in excess of
$1,000,000.
17
The consultant shall receive a 10% commission on the funding of the
$8,000,000 banking opportunity for the Company. The
consultant will receive compensation for equity funding received by the
Company between the agreement date and any date an offering or registration
is filed with the SEC by the Company. The compensation will be based on the
"Lehman Brothers formula" if introduced by the consultant or 20% for all
other parties. The consultant will be issued warrants to purchase 500,000
shares of the Company's common stock at an exercise price of $1.00 per
share, with a term of 36 months, in anticipation of an investment banking
letter from Lehman Brothers. In addition, the consultant will also be
awarded 750,000 shares of the Company's common stock at the time of a
Lehman Brothers capital equity funding that is acceptable to the Company.
To date, the Company has not received the banking letter from Lehman
Brothers.
On February 27, 2003, the Company issued warrants to purchase 30,000 shares
of the Company's common stock at an exercise price of $1.00 per share
expiring within five years plus $5,000 to a financial services company, in
exchange for financial advisory and investment banking services. The
Company has valued the warrants at $11,814 using the Black-Scholes pricing
model, thereby allocating a portion of the exercise price to include the
value of the warrants. The warrants were exercised in February, 2003 and
the related value of the warrants have been expensed.
On June 18, 2003, the Company entered into an agreement with a consultant
for investment banking and advisory services for a period of eighteen
months. In exchange for the services to be rendered, the consultant
received 500,000 shares of the Company's common stock valued at $250,000.
In addition, the consultant will receive cash compensation based on pro
rata amounts, as defined by the agreement, of debt financing received by
the Company as a direct result of the consultant's efforts.
On June 30, 2003, the Company amended a previously existing consulting
agreement wherein the consultant is engaged to provide investor relations,
public relations and corporate communication services. The new agreement
supersedes the December 5, 2002 agreement and calls for the termination of
certain provisions relating to fees for capital raised, merger and
acquisitions, and additional provisions. In consideration for the extension
of the agreement, an additional 291,266 shares of common stock, valued at
$145,663, was issued to the consultant.
Stock Warrants
The Company has issued various warrants to purchase shares of the Company's
common stock to certain note holders, stock subscribers, and consultants,
in conjunction with certain financing or arrangements. The exercise prices
of the warrants are at prices equal to or less than the fair market value
of the shares at the dates of the grant. The warrants issued total
1,225,227, which expire within 36 to 120 months from issuance and have
exercise prices ranging from $0.50 to $1.60 per share.
Sale of Stock
On March 6, 2003, an existing individual shareholder purchased from the
Company 10,000 shares of the Company's common stock for $10,000.
On May 27, 2003, an individual purchased for $10,000 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 2,000
shares of the Company's common stock. The warrants have an exercise price
of $0.50 per share and expire within five years. The Company has valued the
warrants at $394 using the Black-Scholes pricing model. The value of the
warrants have been expensed.
On June 26, 2003, an individual purchased for $40,000 from the Company
80,000 shares of common stock plus warrants to purchase 8,000 shares of the
Company's common stock. The warrants have an exercise price of $0.50 per
share and expire within five years. The Company has valued the warrants at
$1,575 using the Black-Scholes pricing model. The value of the warrants
have been expensed.
On June 13, 2003, an individual purchased for $50,000 from the Company
100,000 shares of the Company's common stock plus warrants to purchase
10,000 shares of the Company's common stock. The warrants have an exercise
price of $0.50 per share and expire within five years. The Company has
valued the warrants at $1,969 using the Black-Scholes pricing model. The
value of the warrants have been expensed.
Conversion of Debt
In April 2003, the Company entered into an agreement whereby an individual
stockholder converted two notes payable aggregating $150,000 into shares of
common stock for $.50 per share for a total of 300,000 shares.
Additionally, for $100,000, the stockholder purchased 200,000 shares of the
Company's common stock plus 20,000 warrants with an exercise price of $0.50
per share, to purchase the Company's common stock, within a 5-year term.
The Company has valued the warrants at $3,938 using the Black-Scholes
pricing model. The value of the warrants has been expensed. The Company and
18
the shareholder agreed to convert $46,957 of interest payable on the notes
payable to the shareholder into a total of 81,250 shares of common stock in
lieu of payments due.
The Company was indebted to an attorney for legal fees incurred in the
amount of $64,783. On May 15, 2003 the debt was satisfied through the
issuance of 120,000 of the Company's common stock to the debtor, valued at
$0.54 per share.
On June 30, 2003, the Company was indebted to an individual for four
separate notes payable aggregating $48,000. Total amounts owed to the
individual, including accrued interest at June 30, 2003, aggregated
$55,588. The notes, inclusive of accrued interest, have been satisfied
through the issuance of 111,176 shares of the Company's common stock.
On June 30, 2003, the Company was indebted to three individuals through
four notes payable with principal amounts aggregating $46,000. Total
amounts owed to the individuals, including accrued interest, at June 30,
2003 aggregated $52,721. The notes, inclusive of accrued interest, have
been satisfied through the issuance of 105,442 shares of the Company's
common stock.
Conversion of Notes Payable - Officers to Common Stock
The Company was indebted to an officer of the Availent Mortgage, inc., and
the officers' spouse, through the issuance of promissory notes aggregating
$221,500, and bearing interest at 12% per annum. On May 16, 2003, the
Company and the officer agreed to satisfy the debt the issuance of 221,500
of the Company's common stock, the conversion included $26,152 of accrued
interest.
The Company was indebted to an officer of Availent Financial, Inc., and the
officers' spouse, through the issuance of promissory notes aggregating
$615,000. One note for $290,000 and bearing interest at 13.8% per annum,
and three notes aggregating $325,000 and bearing interest at 15% per annum.
Total accrued interest owed related to these notes aggregated $128,518
through May 16, 2003. The debt was satisfied on May 16, 2003 through the
issuance of 615,000 shares of the Company's common stock, the conversion
included $128,519 of accrued interest.
Conversion of Commissions Payable
In April 2003, an employee of the Company agreed to convert $39,000 of
commissions payable to him into 78,000 shares of the Company's common
stock.
Issuance of Common Stock in Consideration for Extension of Debt Terms
The Company was indebted to a law firm for certain legal fees in the amount
of $35,420. At April 30, 2003, the Company and the law firm agreed to a
payment plan wherein the debt would be paid off in monthly installment of
$3,542 beginning August 1, 2003. No interest will accrue on said debt. As
consideration for the payment plan, the Company issued to the law firm
50,000 of the Company's common stock, which have been valued at $25,000 and
have been recorded as a financing expense.
Termination of Consulting Services Contract
On May 15, 2003 the Company terminated the disputed consulting agreements
dated December 5, 2002, which superseded the agreements dated November 7,
2002 with Consolidated American Energy Resources, Inc ("CAER") and
Consolidated American Financial Services Group, LLC ("CAFSG"). The
agreements called for a distribution of 1,417,467 common shares valued at
$1,401,875 on the date of grant to CAER and CAFSG. In August 2003 the
Company cancelled the shares it issued due to its claim of non-performance
of the consulting agreements, however, CAER and CAFSG is disputing the
claim of non-performance. In connection with the dispute and cancellation
of the consulting agreements the Company has expensed the remaining value
of the contract of $1,246,114 in the quarter ended June 30, 2003, which
represents the amount not yet amortized and shown on the consolidated
statement of operations and comprehensive loss as cancellation of
contracted services on other income (expense). While CAER and CAFSG are
disputing the Company's claims, litigation may arise, however the Company
believes it will prevail in this matter.
NOTE 15. STOCK OPTIONS
Equity Incentive Plan
The Company adopted the 2003 Equity Incentive Plan (the "Plan") effective
as of January 1, 2003. The Company or a subsidiary are eligible to be
participants in the plan. The Plan grants awards of common stock to
participants through
19
incentive stock options, nonqualified stock options or restricted stock.
The maximum number of shares of common stock that may be delivered pursuant
to awards granted under the Plan is 5,000,000 shares in one year. The award
period for any share option shall be no more than ten years from the date
of grant of the stock option. The Company will not grant any awards at an
exercise price of less than 100% of the fair market value.
Grant of Stock Options
In March 2003, the President of the Company was granted options under the
2003 Equity Incentive Plan to purchase 100,000 shares of the Company's
common stock at $1.00 per share. The options became fully exercisable on
the date of the grant, with an expiration date on the tenth anniversary of
the grant date.
In April 2003, the President of the Company was granted stock options,
pursuant to the 2003 Equity Incentive Plan to purchase 550,000 shares of
the Company common stock at $1.00 per share and an additional 100,000
shares of the Company's common stock at $1.50 per share. The options became
fully exercisable on the date of the grant, with an expiration date on the
tenth anniversary of the grant, with an expiration date on the tenth
anniversary of the grant date.
In April 2003, the President of Mortgage was granted options, under the
2003 Equity Incentive Plan, to purchase 250,000 shares of the Company's
common stock at $1.00 per share. The options became fully exercisable on
the date of the grant, with an expiration date on the tenth anniversary of
the grant date.
On June 30, 2003, the President of the Company and the President of
Mortgage were granted options. Under the 2003 Equity Incentive Plan, to
purchase 1,450,000 and 521,250 shares, respectively, of the Company's
common stock at $0.50 per share. The options became fully vested on the
grant date of June 30, 2003, with an expiration date on the tenth
anniversary of the grant date. The options are exercisable provided that
the Company was able to reduce their negative reported net worth, as
reported on June 30, 2003, by $1,000,000, from the net worth reported at
March 31, 2003.
On June 30, 2003, the President of the Company and the President of
Mortgage, pursuant to the 2003 Equity Incentive Plan, were each granted
options to purchase 1,250,000 shares of the Company's common stock at $0.50
per share. The shares vest at a rate of 250,000 on December 31, 2003 and
250,000 on each succeeding date of December 31st until all options are
vested with an expiration date on the tenth anniversary of the grant dates.
The vesting of these options is contingent upon the continued employment of
the individuals.
On June 30, 2003, the Company granted a consultant, whose functions are
commonly associated with the Chief Financial Officer (see Note 15) stock
options, under the 2003 Equity Incentive Plan, to purchase 250,000 shares
of the Company's common stock at $0.50 per share. The options became fully
exercisable on the date of the grant, with an expiration date on the tenth
anniversary of the grant date.
The following information summarizes the Company's stock option activity
for the six months ended June 30, 2003:
Average
Number of Exercise
Options Price
----------------- -----------------
Options outstanding at
beginning of the period - $ -
Granted 5,709,550 0.69
Exercised - -
Forfeited - -
----------------- -----------------
Options outstanding at
end of the period 5,709,550 $ 0.69
================= =================
20
At June 30, 2003, an aggregate of 5,709,550 nonqualified stock options were
granted to employees with exercise prices ranging between $0.50 and $1.50.
The options vest as follows for the years ended December 31:
Year Options Vested
------- -----------------
2003 3,563,550
2004 569,000
2005 569,000
2006 504,000
2007 504,000
-----------------
5,709,550
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123." SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for
an entity that chooses to change to the fair-value-based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of that statement to require prominent disclosure
about the effects that accounting for stock-based employee compensation
using the fair-value-based method would have on reported net income and
earnings per share and to require prominent disclosure about the entity's
accounting policy decisions with respect to stock-based employees
compensation. Certain of the disclosure requirements are required for all
companies, regardless of whether the fair value method or intrinsic value
method is used to account for stock-based compensation arrangements. The
amendments to SFAS No. 123 are effective for financial statements for
fiscal years ended after December 15, 2002 and for interim periods
beginning after December 15, 2002.
The Company accounted for its employee incentive stock option plans using
the intrinsic value method in accordance with the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as permitted by SFAS No. 123.
The adoption of SFAS No. 148 did not have a material effect on the
Company's financial position or results of operations.
NOTE 16. RELATED PARTY TRANSACTIONS
Employment Agreements
In April 2003, the Company entered into formal employment agreements with
two key officers/shareholders, the chief executive officer and president of
the Company and the president of Mortgage. These agreements supercede any
previously existing agreements between the two parties. The agreements are
for a term of five years with annual minimum salaries of $150,000 per anum,
with 15% annual increases. The employees are also entitled to receive
quarterly bonuses in amounts equal to five percent of the Company's net
income before taxes. The employers are also entitled to participate in the
Company's 2003 Equity Incentive Plan.
Consulting Agreement
On June 30, 2003, the Company amended a previously existing consulting
agreement wherein the consultant is engaged to perform services, which
include, but not restricted to, those functions commonly associated with
the Chief Financial Officer. The original agreement, dated December 5,
2002, was for a three-year period for investor relations' services. The new
agreement supercedes the December 5, 2002 agreement, is for a term of three
years commencing on the date of the amendment, terminates certain
anti-dilution provisions included in the original agreement, and calls for
a base fee of $72,000 per annum, payable in twelve equal installments. The
consultant is also entitled to participate in the Company's 2003 Equity
Incentive Plan. On June 30, 2003, the consultant was granted stock options
to purchase 250,000 shares of the Company's common stock at $0.50 per
share, under the plan. The options became fully exercisable on the date of
the grant. The Company has valued the options at $26,475 using the
Black-Scholes pricing model. The value of the options have been fully
expensed at June 30, 2003.
NOTE 17. SUBSEQUENT EVENTS
Asset Purchase Agreement
In July 2003, the Company entered into an agreement to purchase equipment
from a vendor for a purchase price of $7,500,000. The equipment purchased
was designed for the function of baking and food processing. As the Company
is not engaged in this type of activity, the purpose of the purchase was
for the Company to sell the equipment for cash in order to
21
mitigate against any current or future instances of non-compliance with HUD
guidelines regarding net worth and liquidity requirements in mortgage.
The purchase price was paid through the issuance of 7,000,000 shares of the
Company's common stock, valued at $3,500,000, and 7,000,000 shares of the
Company's convertible preferred stock, valued at $3,500,000. The preferred
stock is convertible at a ratio of one for one for common stock. One
hundred and eighty days from the stock issuance, if the common stock price
is not $0.25 per share, an additional 1,500,000 shares of common stock, and
1,500,000 shares of convertible preferred stock will be issued to the
vendor.
The remaining $500,000 due to the vendor will be paid in cash from the
funds from the resale of the equipment. Installment payments on the amount
due are equal to 20% of the gross proceeds from any resale of the
equipment.
The Company is currently negotiating securing a loan from a financial
institution in the amount of $3,500,000 by collateralizing the equipment.
For loans obtained by collateralizing the equipment, as set forth in the
agreement, the balance due to the vendor shall be paid on a pro rata basis
from any loan proceeds up to $3,000,000. Currently, the Company has not
obtained insurance on the assets against any type of loss or liability, but
intends on obtaining it as soon as possible.
22
Item 2. Management's Discussion and Analysis or Plan of Operation.
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB. The results of operations for interim periods are not
necessarily indicative of the results for the entire fiscal year.
This Form 10-QSB contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of the Company's management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," and words or phrases of similar import, as they
relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements (the "cautionary statements")
reflect the current view of the Company's management with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices, and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company does not assume any responsibility to
publicly update any of its forward-looking statements regardless whether factors
change as a result of new information, future events, or for any other reason.
The Company advises you to review any additional disclosures made in its 10-QSB,
8-K, and 10-KSB reports filed with the Commission.
Plan of Operation
We are not currently able to satisfy our ongoing cash requirements and will
have to raise significant additional funds in the next three months in order to
continue to operate our business. We have experienced difficulties meeting our
payroll obligations and making timely payments to our existing creditors and
have significantly reduced the total number of employees and closed a
significant number of our offices and limited partnerships in the past three
months in an effort to reduce our total operating expenses. In addition, we are
currently not in compliance with the debt covenants under our existing financing
agreements and have failed to pay required employee payroll taxes. There can be
no guarantee that we will be able to obtain additional or adequate financing in
the next three months or that we will be able to comply with our debt covenants
under our existing financing agreements or arrange for satisfactory payment of
the employee payroll taxes. A failure to obtain additional and adequate
financing, comply with the debt covenants under our existing financing
agreements, or arrange for payment of the delinquent employee payroll taxes
could have a material adverse effect on our financial condition, business, and
results of operations.
Results of Operations for the Three Months Ended June 30, 2003 Compared to Three
Months Ended June 30, 2002
REVENUES
Our principal sources of mortgage banking revenues are gains from the sale
of mortgage loans, which are derived based on the secondary capital market
pricing and borrower-paid fees earned on these loans. Availent also derives a
portion of its revenues from the brokering of loans funded through our private
lending partners. Availent also generates revenues from limited partnership-paid
general partner fees and loan origination and processing fees. Loan origination
and processing fee revenues have historically represented a significant
percentage of our total revenues.
Total Revenues. Total revenues for the three months ended June 30, 2003
increased $316,829 from $63,013 for the three months ended June 30, 2002 to
$379,842 for the three months ended June 30, 2003. However, management believes
that a comparison of revenues from the second quarter of 2002 to the same period
in 2003 is not meaningful because we operated as a mortgage broker only during
the second quarter of 2002 and commenced our mortgage banking operations after
the second quarter of 2002 and that revenues for the three months ended June 30,
23
2003 are not necessarily indicative of future operating results because we
have closed a significant number of our offices and limited partnerships that
existed during this quarterly period. There can be no guarantee that we will not
have to close additional offices and limited partnerships or that we will be
able to replace the revenue previously generated by our closed offices and
limited partnerships with increased loan volume at our remaining offices and
limited partnerships or newly opened offices and limited partnerships.
OPERATING EXPENSES
Salaries and Related Expenses. Salaries and related expenses increased
$84,453 from $263,380 for the three months ended June 30, 2002 to $347,833 for
the three months ended June 30, 2003. This increase was primarily due to the
establishment of the mortgage banking operations.
Commissions. Commissions increased $122,403 from $0 for the three months
ended June 30, 2002 to $122,403 for the three months ended June 30, 2003. This
increase was primarily attributable to the hiring of employees with
commission-based compensation subsequent to the quarterly period ended June 30,
2002.
Other Operating Expenses. Other operating expenses increased $513,515 from
$161,562 for the three months ended June 30, 2002 to $675,077 for the three
months ended June 30, 2003. This increase was primarily attributable to the
creation and development of our in-house loan-processing department and expenses
related to the opening of additional offices.
Warehouse Interest. Warehouse interest increased $51,666 from $0 for the
three months ended June 30, 2002 to $51,666 for the three months ended June 30,
2003 due to the establishment of our mortgage banking operations.
Occupancy and Other Office Expenses. Occupancy and other office expenses
increased $11,640 from $22,609 for the three months ended June 30, 2002 to
$34,249 for the three months ended June 30, 2003. This increase was primarily
due to the increased number of offices and limited partnerships from
approximately six as of June 30, 2002 to 17 as of June 30, 2003. Other office
expenses include rent, telephone, and miscellaneous office expenses.
Total Operating Expenses. Total operating expenses increased $783,677 from
$447,551 for the three months ended June 30, 2002 to $1,231,228 for the three
months ended June 30, 2003. This increase was primarily due to increase in the
total number of offices and limited partnerships and the general increase in
loan volumes. We intend to focus on reducing our total operating expenses in the
remainder of fiscal 2003 including, without limitation, by reducing the total
number of offices, limited partnerships, and employees.
OTHER INCOME (EXPENSE)
Interest Expense--Other. Interest & financing expense-other increased
$89,445 from $37,354 for the three months ended June 30, 2002 to $126,799 for
the three months ended June 30, 2003. This increase was primarily attributable
to the establishment of our mortgage loaning operations and increased borrowings
under our credit facilities. See Note 14 of the financial statements
Liquidity and Capital Resources
Availent's sources of liquidity include cash from the sale of mortgage
loans, borrowings under its warehouse line of credit and other credit
facilities, and the sale of debt and equity securities in private transactions.
Availent's uses of cash include the funding of mortgage loans, repayment of
amounts borrowed under warehouse and other lines of credit, salaries and
commissions, other operating expenses, payment of interest, and capital
expenditures primarily comprised of furniture, fixtures, computer equipment,
software, and leasehold improvements.
Net cash provided by financing activities was $608,677 and $391,977 for the
three months ended June 30, 2002 and 2003, respectively. Net cash provided by
financing activities for quarterly periods ended June 30, 2002 and 2003 was
primarily from borrowings under our existing financing agreements and cash sales
of stock.
Net cash used in operating activities was $594,675 and $544,147 for the
three months ended June 30, 2002 and 2003, respectively.
24
Availent has a warehouse line of credit that provides for borrowings up to
$5.0 million for the interim financing of mortgage loans with WarehouseOne. The
line may only be used to fund mortgage loans in the ordinary course of business.
In addition, the loans must have purchase commitments before any amounts may be
drawn against the line. The line of credit is subject to interest at the greater
of LIBOR plus 4% per annum or the Federal Funds rate plus 4% per annum. Interest
is increased by 4% and principal is reduced by 5% if the loan is not purchased
within 45 days of acquisition date. The line is collateralized by a security
interest in and to all of Availent's right, title, and interest in each mortgage
loan pledged to Availent, each purchase commitment in existence, and the
proceeds of the foregoing. The warehouse line of credit is subject to
termination at the discretion of WarehouseOne. Upon expiration of the warehouse
line of credit, Availent believes it will be able to either renew the warehouse
line of credit or obtain other sufficient financing. The warehouse line of
credit agreement generally requires Availent to comply with various financial
and non-financial covenants. Failure to comply with these, or any other
covenants, could result in the obligation to repay all amounts then outstanding.
Availent has not been able to maintain the required tangible net worth or debt
leverage ratios, as defined in the warehouse lending agreement, and has failed
to comply with other covenants under the warehouse line of credit. Availent's
failure to file and pay timely payroll tax returns also violates the warehouse
line of credit. These factors could cause the loss of the warehouse line and
impact future loan agreements, as well as future warehouse lending agreements.
On February 12, 2002, Availent issued a $375,000 convertible note to Bobby
Lutz, which note is convertible into shares of common stock at a conversion
price of $1.00 per share and which is scheduled to mature on or about August
2003. The convertible note bears interest at a rate of 15% per annum and
requires monthly interest payments. Availent is in compliance with all debt
covenants under this note.
To maintain its FHA lending certification, Availent must also comply with
certain net worth requirements for HUD. HUD requires an adjusted net worth of
$250,000. Availent's current adjusted net worth for HUD requirement purposes, as
of June 30, 2003, amounted to $286,413. In addition, Subsequent to June 30,
2003, the Company entered into an agreement to purchase equipment from a vendor
for a purchase price of $7,500,000. The equipment purchased was designed for the
function of baking and food processing. As the Company is not engaged in this
type of activity, the purpose of the purchase was for the Company to sell the
equipment for cash in order to mitigate against any current or future instances
of non-compliance with HUD guidelines regarding net worth and liquidity
requirements in mortgage. The purchase price was paid through the issuance of
7,000,000 shares of the Company's common stock, valued at $3,500,000, and
7,000,000 shares of the Company's convertible preferred stock, valued at
$3,500,000. The preferred stock is convertible at a ratio of one for one for
common stock. The Company is currently negotiating securing a loan from a
financial institution in the amount of $3,500,000 by collateralizing the
equipment. The equipment currently is not covered by insurance for any type of
loss, and an independent appraisal has not been performed on the property to
verify the value. The Company intends to obtain insurance coverage as soon as
possible, and an independent appraisal will be performed by the financial
institution negotiating the loan with the Company. The loss of the FHA
certification could be detrimental to the operations and financial condition of
Availent.
In addition, Availent failed to pay the required employee payroll tax
returns for the last two fiscal quarters of 2002. As a result, Availent has
delinquent payroll tax liabilities and related estimated penalties and interest
of approximately $633,000. Although Availent has not entered into any formal
repayment agreements with the respective tax authorities, Availent plans to make
these required payroll tax payments as soon as practicable.
Availent currently is unable to make timely payments to certain of its
creditors, and has had to rely substantially on additional borrowings to fund
its continuing operations and working capital needs. As of June 30, 2003,
Availent had past due accounts payables and accrued expenses in the amount of
approximately $1.275 million. Extensions have been offered and, in some cases,
are being negotiated with certain of these creditors. If Availent is unable to
make timely payments or is unable to negotiate extensions or favorable discounts
and payment terms, Availent may not be able to fund its continuing operations
and working capital needs and the operations, financial condition, and business
of Availent may suffer materially or fail. Availent is currently seeking
financing sources in order to fund Availent's outstanding payables and meet its
ongoing trade obligations. These factors raise substantial doubt about
Availent's ability to continue as a going concern. The auditor's report on the
December 31, 2002 financial statements included a paragraph indicating that
there was substantial doubt about the Company's ability to continue as a going
concern. Availent is attempting to increase revenues and reduce operating
expenses in order to mitigate future losses and management is seeking to raise
additional capital and to renegotiate certain liabilities in order to alleviate
the working capital deficiency. However, there can be no assurance that Availent
will be able to increase revenues, pay its payroll taxes or to raise additional
capital.
25
Availent does not have sufficient liquidity to fund its operations and
working capital and capital expenditure requirements for the next 12 months.
Availent will have to seek additional financing in order to satisfy its existing
and ongoing liquidity needs within the next three months. In addition, there can
be no assurance that changes in the operating plans, the acceleration or
modification of expansion plans, lower than anticipated revenues, increased
expenses, or other events will not cause Availent to seek additional financing
sooner than anticipated, prevent Availent from achieving its goals, or force
additional office closings. There can be no assurance that any additional
financing will be available on terms acceptable to Availent or at all.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Availent maintains disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) of the Exchange Act) designed to ensure that
information required to be disclosed in the reports of Availent filed under the
Exchange Act is recorded, processed, summarized, and reported within the
required time periods. Availent's Chief Executive Officer and Chief Financial
Officer have concluded, based upon their evaluation of these disclosure controls
and procedures as of a date within 90 days of the filing date of this report,
that, as of the date of their evaluation, these disclosure controls and
procedures were effective at ensuring that the required information will be
disclosed on a timely basis in the reports of Availent filed under the Exchange
Act.
(b) Changes in Internal Controls.
Availent maintains a system of internal controls that is designed to
provide reasonable assurance that the books and records of Availent accurately
reflect Availent's transactions and that the established policies and procedures
of Availent are followed. There were no significant changes to the internal
controls of Availent or in other factors that could significantly affect such
internal controls subsequent to the date of the evaluation of such internal
controls by the Chief Executive Officer and the Chief Financial Officer,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There were no material developments in our previously reported legal
proceedings during the period covered by this report. No material legal
proceedings were initiated or terminated during the period covered by this
report. In addition to our previously reported legal proceedings, we are
subject, from time to time, to routine legal proceedings incidental to the
business of Availent. Our business, financial condition, and results of
operations could be materially adversely affected by an outcome that is adverse
to Availent with respect to any legal proceeding, the legal fees or expenses
related to investigating, contesting, and defending against the claims related
to any legal proceeding (whether or not we are successful in defending against
the claims), or the diversion of the time and resources of management in
connection with any legal proceeding.
Item 2. Changes in Securities.
Availent issued the following securities during the period covered by this
report without registering the securities under the Securities Act. All of the
below issuances, offerings and sales were deemed to be exempt under Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of the Company or executive officers of the Company, and transfer was
restricted by the Company in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons, we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment.
Issuance of Stock
On May 27, 2003, an individual purchased for $10,000 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 2,000
shares of the Company's common stock. The warrants have an exercise price of
$0.50 per share and expire within five years.
On June 26, 2003, an individual purchased for $40,000 from the Company
80,000 shares of common stock plus warrants to purchase 8,000 shares of the
Company's common stock. The warrants have an exercise price of $0.50 per share
and expire within five years.
On June 13, 2003, an individual purchased for $50,000 from the Company
100,000 shares of the Company's common stock plus warrants to purchase 10,000
shares of the Company's common stock. The warrants have an exercise price of
$0.50 per share and expire within five years.
27
In July 2003, the Company entered into an agreement to purchase equipment
from a vendor. The purchase price was partially paid through the issuance of
7,000,000 shares of the Company's common stock, valued at $3,500,000 and
7,000,000 shares of the Company's convertible preferred stock, valued at
$3,500,000. The preferred stock is convertible at a ratio of one for one for
common stock. On hundred and eighty days from the stock issuance, if the common
stock price is not at $0.25 per share, an additional 1,500,000 shares of common
stock and 1,500,000 shares of convertible preferred stock will be issued to the
vendor.
Conversion of Debt
In April 2003, the Company entered into an agreement whereby an individual
stockholder converted two notes payable aggregating $150,000 into shares of
common stock for $.50 per share for a total of 300,000 shares. Additionally, for
$100,000, the stockholder purchased 200,000 shares of the Company's common stock
plus 20,000 warrants with an exercise price of $0.50 per share, to purchase the
Company's common stock, within a 5-year term. The Company and the shareholder
agreed to convert $46,957 of interest payable on the notes payable to the
shareholder into a total of 81,250 shares of common stock in lieu of payments
due.
The Company was indebted to an attorney for legal fees incurred in the
amount of $64,783. On May 15, 2003 the debt was satisfied through the issuance
of 120,000 of the Company's common stock to the debtor, valued at $0.54 per
share.
On June 30, 2003, the Company was indebted to an individual for four
separate notes payable aggregating $48,000. Total amounts owed to the
individual, including accrued interest at June 30, 2003, aggregated $55,588. The
notes, inclusive of accrued interest, have been satisfied through the issuance
of 111,176 shares of the Company's common stock.
On June 30, 2003, the Company was indebted to three individuals through
four notes payable with principal amounts aggregating $46,000. Total amounts
owed to the individuals, including accrued interest, at June 30, 2003 aggregated
$52,721. The notes, inclusive of accrued interest, have been satisfied through
the issuance of 105,442 shares of the Company's common stock.
Conversion of Notes Payable - Officers to Common Stock
The Company was indebted to an officer of the Availent Mortgage, inc., and
the officers' spouse, through the issuance of promissory notes aggregating
$221,500, and bearing interest at 12% per annum. On May 16, 2003, the Company
and the officer agreed to satisfy the debt the issuance of 221,500 of the
Company's common stock, the conversion included $26,152 of accrued interest.
The Company was indebted to an officer of Availent Financial, Inc., and the
officers' spouse, through the issuance of promissory notes aggregating $615,000.
One note for $290,000 and bearing interest at 13.8% per annum, and three notes
aggregating $325,000 and bearing interest at 15% per annum. Total accrued
interest owed related to these notes aggregated $128,518 through May 16, 2003.
The debt was satisfied on May 16, 2003 through the issuance of 615,000 shares of
the Company's common stock, the conversion included $128,519 of accrued
interest.
Conversion of Commissions Payable
In April 2003, an employee of the Company agreed to convert $39,000 of
commissions payable to him into 78,000 shares of the Company's common stock.
Issuance of Common Stock in Consideration for Extension of Debt Terms
28
The Company was indebted to a law firm for certain legal fees in the amount
of $35,420. At April 30, 2003, the Company and the law firm agreed to a payment
plan wherein the debt would be paid off in monthly installment of $3,542
beginning August 1, 2003. As consideration for the payment plan, the Company
issued to the law firm 50,000 of the Company's common stock.
Grant of Stock Options
In April 2003, the President of the Company was granted stock options,
pursuant to the 2003 Equity Incentive Plan to purchase 550,000 shares of the
Company common stock at $1.00 per share and an additional 100,000 shares of the
Company's common stock at $1.50 per share. The options became fully exercisable
on the date of the grant, with an expiration date on the tenth anniversary of
the grant, with an expiration date on the tenth anniversary of the grant date.
In April 2003, the President of Mortgage was granted options, under the
2003 Equity Incentive Plan, to purchase 250,000 shares of the Company's common
stock at $1.00 per share. The options became fully exercisable on the date of
the grant, with an expiration date on the tenth anniversary of the grant date.
On June 30, 2003, the President of the Company and the President of
Mortgage were granted options under the 2003 Equity Incentive Plan, to purchase
1,450,000 and 521,250 shares, respectively, of the Company's common stock at
$0.50 per share. The options became fully vested on the grant date of June 30,
2003, with an expiration date on the tenth anniversary of the grant date. The
options are exercisable provided that the Company was able to reduce their
negative reported net worth, as reported on June 30, 2003, by $1,000,000, from
the net worth reported at March 31, 2003.
On June 30, 2003, the President of the Company and the President of
Mortgage, pursuant to the 2003 Equity Incentive Plan, were each granted options
to purchase 1,250,000 shares of the Company's common stock at $0.50 per share.
The shares vest at a rate of 250,000 on December 31, 2003 and 250,000 on each
succeeding date of December 31st until all options are vested with an expiration
date on the tenth anniversary of the grant dates. The vesting of these options
is contingent upon the continued employment of the individuals.
On June 30, 2003, the Company granted a consultant, whose functions are
commonly associated with the Chief Financial Officer (see Note 15) stock
options, under the 2003 Equity Incentive Plan, to purchase 250,000 shares of the
Company's common stock at $0.50 per share. The options became fully exercisable
on the date of the grant, with an expiration date on the tenth anniversary of
the grant date.
Item 3. Defaults Upon Senior Securities.
Mortgage has failed to comply with certain covenants of its warehouse loan
agreement. The covenants are to maintain a required tangible net worth or debt
leverage ratios, as defined in the warehouse lending agreement. The failure to
file and pay timely payroll tax returns also violates the agreement. These
factors could cause the loss of the warehouse line and impact future loan
agreements, as well as future warehouse lending agreements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Description of Exhibit
No.
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
32.1 Certification by the Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32.2 Certification by the Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
(b) Reports on Form 8-K.
None.
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 26, 2003 Availent Financial, Inc.
By:/s/PATRICK A. MCGEENEY
--------------------------
Name: Patrick A. McGeeney
Title: President
Date: August 26, 2003 By:/s/ DARREN J. CIOFFI
--------------------------
Name: Darren J. Cioffi
Title: Chief Financial Officer
30
INDEX OF EXHIBITS
Exhibit Description of Exhibit
No.
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
32.1 Certification by the Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32.2 Certification by the Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
31