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 September 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)
972-673-2972
(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 November 18, 2003, there
were 22,654,381 shares of common stock, par value $0.01 per share, of the issuer
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Controls and Procedures.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Item 1. Financial Statements.
The financial statements set forth below, along with filings for prior
quarters, are currently undergoing review by the Company's independent
public accountants, Massella & Associates, CPA, PLLC. The Company intends to
make additional or supplemental disclosure, if any, if such disclosure is
indicated by such review.
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
2003 December 31,
(Unaudited) 2002
----------- -----------
Current assets:
Cash and cash equivalents ........................................................ $ 4,804 $ 194,346
Mortgage loans held for sale, net ................................................ 107,200 1,499,476
Assets held for resale ........................................................... 7,500,000 --
Advances to employees ............................................................ 852 11,341
Other receivables ................................................................ 7,967 17,946
Prepaid expenses
19,138 46,217
----------- -----------
Total current assets ...................................................... 7,639,961 1,769,326
----------- -----------
Property and equipment, net ......................................................... 132,414 134,291
Intangible assets, net .............................................................. 39,570 63,746
Deferred financing costs, net ....................................................... 13,342 37,354
Security deposits ................................................................... 2,757 2,757
----------- -----------
Total assets .............................................................. $7,828,044 $2,007,474
See accompanying notes to consolidated financial statements (unaudited).
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
September 30,
2003 December 31,
(Unaudited) 2002
Current liabilities: ------------- -------------
Warehouse line of credit payable ...................................................... $ 105,057 $ 1,465,295
Note payable - bank .................................................................. 50,000 50,000
Mortgage escrow payable .............................................................. 57 6,856
Current portion of capital lease obligations ......................................... 11,809 8,009
Notes payable - convertible .......................................................... 53,000 --
Notes payable - officers ............................................................. 40,697 249,000
Notes payable - shareholders ......................................................... 135,000 2,271,000
Notes payable ........................................................................ 900,000 48,000
Accounts payable ..................................................................... 1,102,910 289,372
Accrued expenses ..................................................................... 433,315 465,555
Payroll taxes payable ................................................................ 533,524 266,816
Due to officers ...................................................................... 13,094 22,784
------------- -------------
Total current liabilities ...................................................... 3,378,463 5,142,687
Long term portion of capital lease obligations
-- 5,913
------------- -------------
Total liabilities .............................................................. 3,378,463 5,148,600
Commitment and contingencies
Minority interest
107,953 78,634
------------- -------------
Stockholders' equity (deficiency)
Convertible preferred stock, $0.01 par value; 10,000,000
shares authorized, 7,000,000 issued and outstanding (no liquidation
preference) ....................................................................... 70,000 --
Common stock, $0.01 par value; 100,000,000 authorized,
21,897,802 and 9,096,568 respectively, issued and outstanding ..................... 218,981 90,966
Additional paid-in capital ........................................................... 15,424,682 4,006,321
Deferred compensation ................................................................ (479,439) (692,245)
Deferred consulting services ......................................................... (1,378,644) (2,725,868)
Accumulated deficit .................................................................. (9,512,738) (3,897,720)
------------- -------------
4,342,842 (3,218,546)
Less: common stock held in treasury at cost, 121 shares .................................. (1,214) (1,214)
------------- -------------
Total stockholders' equity (deficiency) .............................................. 4,341,628 (3,219,760)
------------- -------------
Total liabilities and stockholders' equity (deficiency) .............................. $ 7,828,044 $ 2,007,474
------------- -------------
See accompanying notes to consolidated financial statements (unaudited).
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Three months ended Nine months ended
------------------ -----------------
2003 2002 2003 2002
Revenue ------------- ------------- ------------- -------------
Gain on sales of mortgages, brokerage
income and loan origination, fees, net $ 117,043 $ 293,472 $ 706,264 $ 406,288
------------- ------------- ------------- -------------
Total revenues 117,043 293,472 706,264 406,288
------------- ------------- ------------- -------------
Operating expenses:
Salaries and related expenses 504,659 398,349 1,429,374 835,937
Commissions 53,362 132,580 252,396 132,580
Occupancy and other office expenses 33,114 15,737 110,296 50,968
Warehouse interest 21,915 - 92,458 -
Other operating expenses 380,784 348,691 2,170,516 937,228
------------- ------------- ------------- -------------
Total operating expenses 993,834 895,357 4,055,040 1,956,713
------------- ------------- ------------- -------------
Loss before minority interest and
other income (expense) (876,791) (601,885) (3,348,776) (1,550,425)
Minority interests
(57,017) 17,090 (19,920) 45,541
------------- ------------- ------------- -------------
Loss before other income (expense) (933,808) (584,795) (3,368,696) (1,504,884)
------------- ------------- ------------- -------------
Other income (expense):
Cancellation of consulting services
(contract in dispute see Note 15) - - (1,246,114) -
Interest and financing expense (732,734) (97,163) (1,001,131) (180,491)
Gain on sale of property - - 862 -
Interest income - - 61 -
------------- ------------- ------------- -------------
Total other income (expense) (732,734) (97,163) (2,246,322) (180,491)
------------- ------------- ------------- -------------
Net loss from operations (1,666,542) (681,958) (5,615,018) (1,685,375)
Other comprehensive loss:
Net unrealized (loss) gain on securities - (29,340) - (623,296)
------------- ------------- ------------- -------------
Comprehensive loss $(1,666,542) $(711,298) $(5,615,018) $(2,308,671)
============= ============= ============= =============
Basic loss per common share $ (0.09) $ (1.08) $ (0.35) $ (2.68)
------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements (unaudited).
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss ........................................ $(5,615,018) $(1,685,375)
Adjustments to reconcile net less to net cash
used in operating activities:
Accretion of discount on notes payable
charged to interest expense ............... 44,798 --
Depreciation and amortization ............... 78,287 29,385
Gain on disposal of fixed asset ............. 862 --
Non-cash interest expense and other ......... 10,550 19,256
Minority interest in limited partnerships ... 19,920 (68,285)
Amortization of deferred service costs ...... 526,413 --
Cancellation of service contract ............ 1,246,114 --
Issuance of shares in lieu of compensation .. 179,694 --
Issuance of shares for financing ............ 712,412 --
Contribution of capital from officers through
forgiveness of unpaid salaries and interest 95,000 --
Changes in operating assets and liabilities:
Decrease in mortgage loans held for sale .... 1,392,276 --
Decrease in other receivables ............... 9,979 --
Decrease (increase) in prepaid expenses ..... 27,079 (29,723)
Decrease in advances to employees ........... 10,489 --
Increase in security deposits ............... -- (472)
Decrease in warehouse line of credit ........ (1,360,238) --
Decrease in mortgage escrow payable ......... (6,799) --
Increase in accounts payable ................ 813,538 389,463
Increase in accrued expenses ................ 376,932 246,601
Increase in payroll taxes payable ........... 266,708 --
Decrease in due to officers
(9,690) --
------------ ------------
Net cash used in operating activities ..... (1,180,694) (1,099,150)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .............. (36,634) (86,065)
------------ ------------
Net cash used in investing activities ..... (36,634) (86,065)
------------ ------------
Net cash used in operating and investing activities . $(1,217,328) $(1,185,215)
------------ ------------
See accompanying notes to consolidated financial statements (unaudited).
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (cont'd)
(UNAUDITED)
2003 2002
------------ ------------
Net cash used in operating and investing activities
(from previous page) ........................................... $(1,217,328) $(1,185,215)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable .................................... 400,000 1,096,577
Proceeds from notes payable - convertible ...................... 53,000 --
Payments on notes payable - shareholders ....................... (5,000) --
Payments on capital lease obligations .......................... (2,114) (4,192)
Contributed capital from limited partnerships-minority interest 12,300 53,770
Capital distribution to limited partner ........................ (2,900) --
Sale of common stock 572,500 37,000
------------ ------------
Net cash provided by financing activities .............. 1,027,786 1,183,155
Net decrease in cash and cash equivalents .......................... (189,542) (2,060)
Cash and cash equivalents, beginning of year........................ 194,346 4,588
------------ ------------
Cash and cash equivalents, end of year ............................. $ 4,804 $ 2,528
============ ============
Supplemental disclosure of non-cash information:
Cash paid during the year for:
Interest ............................................ $ 42,815 $ 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 ........................ $ 2,388,000 $ --
============ ============
Contribution to capital from officers forgiveness of unpaid salaries $ 95,500 $ --
============ ============
Conversion of accrued expenses to common stock ..................... $ 431,939 $ --
============ ============
Issuance of common stock for services .............................. $ 425,303 $ --
============ ============
See accompanying notes to consolidated financial statements (unaudited).
Common Stock, Preferred Stock,
$0.01 Par Value $0.01 Par Value
--------------- ---------------- Additional
Number of Number of Paid In Deferred
Date Shares Amount Shares Amount Capital Services
------ ------------ -------------------- --------------------- --------------
Carryforward balance 13,610,202 $136,105 - $ - $7,886,452 $ (1,905,057)
Issuance of
shares for services Jul-03 80,000 800 - - 39,200 -
Issuance of shares
for guarantee of financing Jul-03 435,000 4,350 - - 213,150 -
Issuance of shares for change
in financing terms Jul-03 200,000 2,000 - - 98,000 -
Issuance of shares in lieu of
compensation Jul-03 127,500 1,275 - - 62,475 -
Issuance of shares in lieu of
compensation Aug-03 84,500 845 - - 41,405 -
Issuance of shares for extension
of debt terms Aug-03 200,000 2,000 - - 98,000 -
Issuance of shares for financing Aug-03 22,500 225 - - 17,137 -
Issuance of shares for purchase
of assets
to be held for sale. Aug-03 7,000,000 70,000 7,000,000 70,000 6,860,000 -
Sale of common stock Aug-03 6,000 60 - - 2,940 -
Issuance of shares in lieu of
compensation Sep-03 2,500 25 - - 1,225 -
Sale of common stock Sep-03 119,000 1,190 - - 58,310 -
Issuance of shares for
financing Sep-03 10,600 106 - - 5,194 -
Fair market value of warrants
issued in
connection with financing Sep-03 - - - - 41,194 -
Amortization of deferred services
for the period Sep-03 - - - - - 526,413
Pending settlement Sep-03 - - - - - -
Net loss for the period Sep-03 - - - - - -
-------- ----------- ---------- ----------- --------- ------------ --------------
Balance at September 30, 2003 21,897,802 $218,981 7,000,000 $70,000 $15,424,682 $ (1,378,644)
=========== ========== =========== ======== ============ ==============
Deferred Treasury Accumulated
Compensation Stock Deficit Total
--------------- ------------ ------------- -------------
Carryforward balance $ (692,245) $ (1,214) $(3,897,720) $ 1,526,321
Issuance of
shares for services Jul-03
- - - 40,000
Issuance of shares
for guarantee of financing Jul-03
- - - 217,500
Issuance of shares for change
in financing terms Jul-03
- - - 100,000
Issuance of shares in lieu of
compensation Jul-03
- - - 63,750
Issuance of shares in lieu of
compensation Aug-03
(34,444) - - 7,806
Issuance of shares for extension
of debt terms Aug-03
- - - 100,000
Issuance of shares for financing Aug-03
- - - 17,362
Issuance of shares for purchase
of assets
to be held for sale. Aug-03
- - - 7,000,000
Sale of common stock Aug-03
- - - 3,000
Issuance of shares in lieu of
compensation Sep-03
- - - 1,250
Sale of common stock Sep-03
- - - 59,500
Issuance of shares for
financing Sep-03
- - - 5,300
Fair market value of warrants
issued in
connection with financing Sep-03
- - - 41,194
Amortization of deferred services
for the period Sep-03
- - - 526,413
Pending settlement Sep-03
247,250 - - 247,250
Net loss for the period Sep-03
- - (5,615,018) (5,615,018)
Balance at September 30, 2003 -------------- ----------- ------------- -------------
$ (479,439) $ (1,214) $(9,512,738) $ 4,341,628
============== =========== ============= =============
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
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.
F-8
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1 - ORGANIZATION, HISTORY AND NATURE OF BUSINESS (cont'd)
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 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.
F-9
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1 - ORGANIZATION, HISTORY AND NATURE OF BUSINESS (cont'd)
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.
Assets held for resale
In July 2003, Availent-TX purchased equipment held for resale in
exchange for stock and a note payable (see Note 5). The purpose of the
equipment purchase was to enter into a business endeavor in order to
increase cash flows as well as the Company's net worth.
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
September 30, 2003 and the results of the operations and cash flows
for the nine months ended September 30, 2003 and 2002. The results for
the nine months ended September 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.
F-10
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
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 September 30,
2003, the Company's accumulated deficit was $9,432,081. 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
$5,615,018 for the nine months ended September 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.
The Company is in default of various debt obligations as more fully
described forthwith. In addition, the Company has failed to pay the
required payroll tax returns for the last two quarters of 2002, and
the first three quarters of 2003. As a result, the Company has
delinquent payroll and related payroll tax liabilities of
approximately $730,000, inclusive of accrued interest and penalties.
The delinquent payroll tax filings are also a violation of the
Company's warehouse loan agreement. The failure to file and pay timely
payroll tax returns violates the agreement, and therefore could cause
the loss of the warehouse line and impact future loan agreements, as
well as future warehouse lending agreements.
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.
F-11
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)
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 - ASSETS HELD FOR RESALE
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 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 eighty days from the date of stock
issuance, if the common stock price is not at least $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 convertible preferred stock is convertible one year and one day
from the date of the agreement, and continues for a period of up to
three years. The shares are non-voting, bear no liquidation
preferences and are subordinate to certain senior debt secured by the
assets.
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 amount due to the vendor is included in notes
payable on the accompanying consolidated balance sheet.
F-12
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 5 - ASSETS HELD FOR RESALE (cont'd)
The Company is negotiating 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, or above $3,000,000.
NOTE 6 - WAREHOUSE LINE OF CREDIT PAYABLE
At September 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.
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. The agreement
considers delinquent tax filings to governmental authorities as a
violation of the agreement. At September 30, 2003 the Company had
violated this stipulation of the agreement through delinquent payroll
tax deposits and filings.
NOTE 7 - MORTGAGE ESCROW PAYABLE
At September 30, 2003, $57 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 8 - NOTE PAYABLE - BANK
Note payable at September 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 notes maturity date has been extended to November 1,
2003 and is secured by certain equipment, leasehold improvements, and
furniture and fixtures.
Interest expense on the note totaled $2,813 for the nine months ending
September 30, 2003 and is included in the consolidated statement of
operations in the accompanying financial statements.
NOTE 9 - OBLIGATIONS UNDER CAPITAL LEASES
At September 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
F-13
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 9 - OBLIGATIONS UNDER CAPITAL LEASES (cont'd)
to the Company's depreciation policies. The obligations are due in
varying monthly installments of principal and interest. The Company is
delinquent on the obligations and therefore, under the terms of the
lease agreements, the leases are in default status. The obligations,
therefore, have been classified as current on the accompanying
consolidated balance sheet.
NOTE 10 - 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 as of September 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 $16,562, 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 to June 2003. As of September 30,
2003, the notes are currently in default and are continuing to accrue
interest. No penalties have been accrued for these defaults at
September 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 $19,117, 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 15). The remaining note has a balance due of
$5,000 at September 30, 2003 and in default and is continues to accrue
interest. No penalty has been accrued for this default at September
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 $1,351, 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 to June 2003. 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. On June 30, 2003, one
note with a
F-14
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 10 - NOTES PAYABLE - SHAREHOLDERS (cont'd)
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 15). The remaining note is in default and is continuing to
accrue interest. No penalty has been accrued for this default at
September 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 $1,232, 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 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 15). The remaining notes, aggregating $10,000, are in
default and are continuing to accrue interest. No penalty has been
accrued for this default at September 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 $1,298
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, bore 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 15).
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 15). Total
accrued interest on these notes to April 2003 aggregated $63,359 and
is included in accrued expenses on the consolidated balance sheet at
September 30, 2003.
NOTE 11 - NOTES PAYABLE - CONVERTIBLE
On September 18, 2003, the Company entered into a loan agreement with
an individual whereby the individual lent the Company $53,000. The
loan is due January 13, 2004 and bears interest at a rate of 15% per
annum. As additional consideration for the loan, the Company issued
the individual 10,600 shares of its common stock, which contains
"piggyback" registration rights. The individual, at any time prior to
the maturity date, has the right to convert the loan into shares
F-16
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 11 - NOTES PAYABLE - CONVERTIBLE (cont'd)
of the Company's common stock at a 20% discount of the trading price
per share on the conversion date. As collateral to secure repayment of
the loan, the Company executed a security agreement covering certain
equipment. Such equipment is encumbered only by a lien securing a
$375,000 promissory note. The Company recorded $5,300 as interest and
financing expense in the accompanying consolidated statement of
operations for the value of the 10,600 shares of common stock issued.
Accrued interest of $331 is included in accrued expenses in the
accompanying consolidated balance sheet. On November 3, 2003, the
Company amended the loan agreement whereby the conversion price into
which the loan maybe converted is equal to the trading price per share
on the conversion date, less 60%. If the Company's common stock is not
trading at the time of conversion, then the conversion price will be
equal to $0.50, less 60%.
NOTE 11 - 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 bore interest at rates
of 15% to 18% per annum and were due and payable in the first quarter
of fiscal 2003. The Company extended the maturity dates of the notes
to June 2003. On June 30, 2003, the notes had accrued interest of
$7,591 and were satisfied through the conversion of the debt, and
related accrued interest, to common stock. (See Note 15).
On February 12, 2003 the Company entered into a loan agreement with an
individual, whereby the individual lent the Company $375,000, for
working capital purposes, at a rate of 15% per annum. The individual
agreed to lend the Company an additional $125,000 upon the filing of
an SB-2 registration statement with the SEC. Principal amounts were
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 has been accreted to interest expense as of September 30, 2003.
In July 2003, the individual and the Company entered into an agreement
regarding new repayment terms and order of preference regarding the
repayment of the principal amount of 375,000. In consideration for
these new terms, the Company issued 200,000 shares of the Company`s
common stock valued at $100,000. In August 2003, the Company extended
the terms of the note until September 30, 2003. As consideration for
the extension, the Company issued 200,000 shares of the Company's
common stock, valued at $100,000. The related financing expenses from
the July and August agreements are included in other income and
expense on the accompanying consolidated statement of operations and
comprehensive loss. As of September 30, 2003, the notes are in default
for the aggregate principal amount of $375,000. No penalty has been
accrued for this default at September 30, 2003, as there was no stated
penalty provision in the promissory note and the note holder has not
taken any action. On
F-16
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 11 - NOTES PAYABLE (Cont'd)
August 30, 2003, the individual entered into an additional loan
agreement with the Company for an additional $25,000. The loan bears
interest at a rate of 10% per annum and matures on August 18, 2004.
In July 2003, the Company entered into an agreement to purchase
equipment from a vendor for a purchase price of $7,500,000. The
Company satisfied $7,000,000 of the purchase price through the
issuance of the Company's common and preferred stock (see Note 5). The
remaining $500,000 due to the vendor was financed in the form of a
note payable. The note is non-interest bearing and is for a term of
five years. The note will be paid in cash in installment payments
equal to 20% of the gross proceeds from any resale of the equipment.
Should the Company obtain a loan by collateralizing the equipment,
than the note shall be satisfied from reductions in the loan proceeds,
but only where such net loan proceeds exceed $3,000,000, otherwise
only a pro-rata amount shall be due from the net loan proceeds in
excess of $500,000. If after 36 months from the date of the note no
resale of the equipment has occurred, or loan proceeds obtained, the
note will become due and the equipment will be placed at auction, with
the cash proceeds of the auction to be utilized to pay the note.
Interest expense for the nine months ended September 30, 2003 on the
above notes aggregated $67,889.
NOTE 12 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2003:
Payroll tax penalties and interest $ 196,695
Interest 105,514
Services 86,080
Payroll 40,738
Other
-------------
4,288
Total $ 433,315
=============
NOTE 13 - 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.
F-17
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont'd)
Operating leases (cont'd)
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 nine months ended
September 30, 2003 was $72,154.
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 nine months
ended September 30, 2003 was $12,938. 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.
Employment agreements
In April 2003, the Company entered into a formal employment agreement
with the Regional Sales Manager of the Company. The agreement is for a
term of three years with an annual salary of $78,000. The employee
received 80,000 shares of the Company common stock as additional
consideration for the agreement. (See Note 15). The employee will also
receive 10 basis points
F-18
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont'd)
Employment agreements (cont'd)
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
Lack of insurance (cont'd)
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 by December 31, 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 September 30, 2003, the Company owes approximately $730,000 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
F-19
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont'd)
Litigation (cont'd)
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
September 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. During the quarter ended September 30, 2003, the
Company has offered to settle the dispute with the former employee
wherein the former employee will receive 250,000 shares of the
Company's common stock, which will entitle the former employee to
registration and piggyback registration rights. At September 30, 2003,
the settlement has not been accepted, however, the Company has
expensed the value of the 250,000 share issuance of $247,250 as a
reduction to deferred compensation on the accompanying consolidated
balance sheet, and as salaries and related expense on the accompanying
consolidated statement of operations and comprehensive loss.
The Company is party to various legal proceedings generally incidental
to its business as is the case with other companies in the same
industry.
Settlement of Accrued Expenses
On July 14, 2003, the Company entered into a settlement agreement for
$86,080 for amounts due to a consultant. Under the terms of the
agreement, the Company will pay the consultant $10,000 upon the
Company's receipt of $500,000 under it's Private Placement Memorandum
("PPM") (See Note 15). The Company will not have a payment obligation
to the consultant out of the next $630,000 received under the PPM
unless certain parties designated to receive the funds from the PPM
elect to defer those payments. If these parties elect to defer the
payments, then 5% of the unused funds will be paid to the consultant.
In addition, the consultant is entitled to receive 10% of any funds
received from the PPM in excess of $1,130,000. The Company also agreed
to pay the consultant any remaining balance due if the Company
receives a total of $2,000,000 under the PPM. If the consultant has
not been paid in full by the time the Company files any Form SB-2
offering, then any balance due to the consultant will be paid in full
within 5 business days of the filing. Any unpaid balance due to the
consultant after October 1, 2003 will begin accruing interest at 12%
per year. Regardless of anything above, any outstanding balance is due
and
F-20
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont'd)
Settlement of accrued expenses (cont'd)
payable no later than December 31, 2003. The settlement agreement
further states that the consultant has the option to convert any
unpaid amount due into shares of the Company's common stock at $0.50
per share. At September 30, 2003, the amount due to the consultant is
$86,080 and is included in accrued expenses in the accompanying
consolidated balance sheet.
NOTE 14 - 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 September 30, 2003, twelve partnerships have terminated
their operations at the request of the limited partners. 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 nine months ended
September 30, 2003, net operating losses include operations from the
limited liability partnerships in operation during the first three
quarters of fiscal 2003. Ten of the partnerships had net operating
losses aggregating approximately $113,000, and the remaining seven
partnerships had income from operations aggregating approximately
$77,000. In accordance with the partnership agreements, the
partnerships were allocated approximately $31,000 of income from
operations from those partnerships with net operating income, and
approximately $11,000 of the aggregate net operating losses from those
partnerships with net operating losses. The net expense to the Company
of $19,920 has been classified as minority interest on the
accompanying statement of operations. At September 30, 2003, assets of
$116,091 and liabilities of $127,181 for these limited liability
partnerships are included on the balance sheet along with the minority
interest balance of $107,953.
NOTE 15 - STOCKHOLDERS' EQUITY
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
F-21
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants in Consideration for Debt
Financing (cont'd)
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") 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 ("SEC") for sale to the
F-22
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants in Consideration for Debt
Financing (cont'd)
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 nine months ended September 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 are 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.
According to the agreement, if the remaining notes of $855,000 are not
repaid by September 30, 2003, the Escrow Agreement would 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 issued 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
F-23
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants in Consideration for Debt
Financing (cont'd)
share with 50% of the amount in excess of the $600,000 received by the
Company. In July 2003, the agreement was amended to provide for the
additional issuance of 435,000 shares of the Company`s common stock,
valued at $217,500 to the founding shareholder and spouse in
consideration for their guarantee of the debt.
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.
Common Stock and Warrants Issued for Services
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 has
been expensed.
F-24
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Common Stock and Warrants Issued for Services (cont'd)
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 1,319,727, 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 has 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 has 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
F-25
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Sale of Stock (cont'd)
Company has valued the warrants at $1,969 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On August 21, 2003 an individual purchased for $3,000 from the Company
6,000 shares of the Company's common stock plus warrants to purchase
600 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 $300 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On August 27, 2003 an individual purchased for $2,000 from the Company
4,000 shares of the Company's common stock plus warrants to purchase
600 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 $200 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 8, 2003 an individual purchased for $3,000 from the
Company 20,000 shares of the Company's common stock plus warrants to
purchase 4,000 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
$1,996 using the Black-Scholes pricing model. The value of the
warrants has been expensed.
On September 8, 2003 two individuals purchased for $20,000 and $5,000
from the Company 40,000 and 10,000 shares respectively, of the
Company's common stock plus warrants to purchase 4,000 and 1,000
shares, respectively, 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 $2,496 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 16, 2003 an individual purchased for $3,000 from the
Company 2,000 shares of the Company's common stock plus warrants to
purchase 400 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 $200 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 18, 2003 an individual purchased for $5,000 from the
Company 10,000 shares of the Company's common stock plus warrants to
purchase 1,000 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 $500 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 24, 2003 an individual purchased for $10,000 from the
Company 20,000 shares of the Company's common stock plus warrants to
purchase 4,000 shares of the Company's common
F-26
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Sale of Stock (cont'd)
stock. The warrants have an exercise price of $0.50 per share and
expire within five years. The Company has valued the warrants at $998
using the Black-Scholes pricing model. The value of the warrants has
been expensed.
On September 26, 2003 an individual purchased for $3,000 from the
Company 20,000 shares of the Company's common stock plus warrants to
purchase 600 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 $300 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 26, 2003 an individual purchased for $20,000 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 $998 using the Black-Scholes
pricing model. The value of the warrants has been expensed.
On September 29, 2003 an individual purchased for $2,500 from the
Company 20,000 shares of the Company's common stock plus warrants to
purchase 500 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 $250 using the Black-Scholes
pricing model. The value of the warrants has 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 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.
F-27
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
Conversion of Debt (cont'd)
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
Conversion of Commissions Payable
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.
The above-mentioned officers have advanced funds to the Company which
were later converted to shares of the Company's common stock, as
described above. In August 2003, 22,500 shares were issued to the
officers related to these loans, valued at $17,362. The Company has
expensed the entire amount, which is included in interest and
financing costs on the accompanying consolidated statement of
operations and comprehensive loss.
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. As of September 30, 2003, the Company had not paid
the required monthly installments. No additional penalty has been
accrued for as there was no stated penalty provision in the settlement
agreement and the law firm has not taken any action.
F-28
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 15 - STOCKHOLDERS' EQUITY (cont'd)
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, L.C.C
("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.
Employee Compensation
In April 2003, the Company entered into a formal employment agreement
with the Regional Sales Manager of the Company. (See Note 13). On July
15, 2003, as additional compensation, the employee has been granted
80,000 shares of the Company's common stock, valued at $40,000 of
which $5,556 is included as a component of salaries and related
expenses as the accompanying consolidated statement of operations and
comprehensive loss, and the remaining $34,444 is included in deferred
compensation, and is a component of stockholders' equity.
During the quarter ended September 30, 2003, the Company issued
212,000 shares of the Company's common stock to various employees as
bonus compensation for services performed. The issuances had an
aggregate value of $106,000 which is included as a component of
salaries and related expenses in the accompanying consolidated
statement of operations and comprehensive loss.
In September 2003, the Company issued 2,500 shares of the Company's
common stock, valued at $1,250, to a former employee as severance
compensation for services previously performed. The expense is
included as a component of salaries and related expenses in the
accompanying consolidated statement of operations and comprehensive
loss.
Private Placement
On July 11, 2003, the Company issued a Private Placement Memorandum
(`PPM") whereby the Company offered to sell up to 4,000,000 shares of
it's common stock at $0.50 per share with "piggyback" registration
rights which include warrants to purchase 10% of the number of shares
of common stock purchased exercisable at $0.50 per share, over a
five-year period.
F-29
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 16 - 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 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.
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
F-30
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 16 - STOCK OPTIONS (cont'd)
Grant of Stock Options (cont'd)
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 nine months ended September 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
====================== =============
At September 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.
F-31
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 16 - STOCK OPTIONS (cont'd)
Grant of Stock Options (cont'd)
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 17 - 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 has been fully expensed at
June 30, 2003.
NOTE 18 - SUBSEQUENT EVENTS
On October 10, 2003, the Company entered into a loan agreement with a
shareholder in the amount of $5,000. The note bears interest at a rate
of 15% per anum and matures in January 2004. As additional
consideration for the loan, the shareholder will receive 1,000 shares
of the Company's common stock valued at $500. The loan has a secured
interest in the assets held for sale by the Company (see Note 5).
F-32
AVAILENT FINANCIAL, INC. AND SUBSIDIARIES
(FORMERLY SEACREST INDUSTRIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 18 - SUBSEQUENT EVENTS (cont'd)
On October 8, 2003 a previously existing shareholder 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 on
the fifth anniversary of the grant date.
F-33
Item 2. Management's Discussion and Analysis or Plan of Operation.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act, Section 21E of the Exchange Act, or the
Private Securities Litigation Reform Act of 1995. Any statements contained in
this report that are not statements of historical fact may be deemed
forward-looking statements. Terms such as may, might, will, would, should,
could, project, estimate, pro forma, predict, potential, strategy, anticipate,
attempt, develop, plan, help, believe, continue, intend, expect, future, and
similar terms and terms of similar import (including the negative of any of the
foregoing) may be intended to identify forward-looking statements. However, not
all forward-looking statements may contain one or more of these identifying
terms. Forward-looking statements in this report may include, without
limitation, statements regarding a projection of revenues, income (including
income/loss), earnings (including earnings/loss) per share, capital
expenditures, dividends, capital structure, or other financial items, (ii) the
plans and objectives of management for future operations, including plans or
objectives relating to our products or services, (iii) future economic
performance, including any such statementcontained in a discussion and analysis
of financial condition by management or in the results of operations included
pursuant to the rules and regulations of the Commission, or (iv) the assumptions
underlying or relating to any statement described in subparagraphs (i), (ii), or
(iii).
The forward-looking statements are not meant to predict or guarantee
actual results, performance, events, or circumstances and may not be realized
because they are based on our current projections, plans, objectives, beliefs,
expectations, estimates, and assumptions and are subject to a number of risk
factors and uncertainties, many of which are beyond our control. Actual results
and the timing of future events and circumstances may differ materially from
those described or implied by the forward-looking statements as a result of
these risk factors and uncertainties. Factors that could cause actual results to
differ materially from those described in the forward-looking statements may
include, without limitation, inability to obtain adequate financing,
insufficient cash flows and resulting illiquidity, dependence upon business
referrals from real estate brokers or significant employees, inability to expand
our business, lack of diversification, sales volatility or seasonality,
increased competition, changing customer preferences, results of arbitration and
litigation, stock volatility and illiquidity, failure to successfully comply
with government regulations, failure to implement our business plans or
strategies, failure to attract key employees or customers, or ineffectiveness of
our marketing program to develop and capitalize on strategic alliances or
limited partnerships with real estate brokers. A description of some of the risk
factors and uncertainties that could cause our actual results to differ
materially from those described by the forward-looking statements in this report
appears under the caption "Risk Factors" in our most recently filed Form 10-KSB.
Because of the risks and uncertainties related to these factors and the
forward-looking statements, readers of this report are cautioned not to place
undue reliance on the forward-looking statements. Availent disclaims any
obligation to update these forward-looking statements or to announce publicly
the results of any revisions to any of the forward-looking statements contained
in this report to reflect any new information or future events or circumstances
or otherwise. There can be no assurance that any events or results described in
any forward-looking statement will actually occur or be achieved. We undertake
no obligation to publicly revise the forward-looking statements to reflect
events or circumstances that arise after the date of this press release or to
reflect new information, future events or circumstances, changes in assumptions,
or otherwise. Readers should read this report and the following discussion and
analysis in conjunction with the discussion under the caption "Risk Factors" in
our most recently filed Form 10-KSB, the Consolidated Financial Statements and
the related notes thereto included in Item 1 of Part I of this report, and other
documents filed by Availent from time to time 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 September 30, 2003 Compared to
Three Months Ended September 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 September 30,
2003 decreased $176,429 from $293,472 for the three months ended September 30,
2002 to $117,043 for the three months ended September 30, 2003. However,
management believes that a comparison of revenues from the third quarter of 2002
to the same period in 2003 is not meaningful because we operated as a mortgage
broker only during the third quarter of 2002 and commenced our mortgage banking
operations after the third quarter of 2002 and that revenues for the three
months ended September 30, 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
$106,310 from $398,349 for the three months ended September 30, 2002 to $504,659
or the three months ended September 30, 2003. This decrease was primarily due to
the establishment of the banking operations in the fourth quarter of 2002.
Commissions. Commissions decreased $ 79,218 from $ 132,580 for the three
months ended September 30, 2002 to $53,362 for the three months ended September
30, 2003. This decrease was primarily attributable to the downsizing of
operations with commission-based compensation.
Other Operating Expenses. Other operating expenses increased $ 32,093
from $ 348,691 for the three months ended September 30, 2002 to $380,784 for the
three months ended September 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 $21,915 from $0 for the
three months ended September 30, 2002 to $21,915 for the three months ended
September 30, 2003 due to the establishment of our mortgage banking operations.
Occupancy and Other Office Expenses. Occupancy and other office expenses
increased $17,377 from $ 15,737 for the three months ended September 30, 2002 to
$33,114 for the three months ended September 30, 2003. This increase was
primarily due to the acquisition of larger office space and the increased number
of offices and limited partnerships Other office expenses include rent,
telephone, and miscellaneous office expenses.
Total Operating Expenses. Total operating expenses increased $ 98,477
from $ 895,357 for the three months ended September 30, 2002 to $993,834 for the
three months ended September 30, 2003. This increase was primarily due to the
establishment of our banking operations in the fourth quarter of 2002. 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 and Financing Expense--Other. Interest expense-other increased
$635,571 from $ 97,163 for the three months ended September 30, 2002 to $732,734
for the three months ended September 30, 2003. This increase was primarily
attributable to the establishment of our mortgage loaning operations and
increased borrowings under our credit facilities.
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 $1,183,155 and $1,027,786
for the three months ended September 30, 2002 and 2003, respectively. Net cash
provided by financing activities for quarterly periods ended September 30, 2002
and 2003 was primarily from borrowings under our existing financing agreements
and sales of our common stock.
Net cash used in operating activities was $ 1,099,150 and $1,180,694 for
the three months ended September 30, 2002 and 2003, respectively.
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.
To maintain its FHA lending certification, Mortgage is subject to
certain net worth requirements for HUD. At September 30, 2003, Mortgage's
adjusted net worth for HUD requirement purposes amounted to a surplus of
$1,387,448. HUD requires an adjusted net worth of $250,000; therefore Mortgage's
adjusted net worth was above the HUD requirement by $1,137,448.
In addition, the Company has failed to pay the required payroll tax
returns for the last two quarters of 2002, and the first three quarters of 2003.
As a result, the Company has delinquent payroll and related payroll tax
liabilities of approximately $730,000, inclusive of accrued interest and
penalties. 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 September 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. 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.
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.
CAPITAL COMMITMENTS
The following is a summary of the Senior Notes, Demand Notes, Other Notes and
warrants currently outstanding:
Financing Principal Amount Maturity Accrued Interest Number
Instrument Of Notes Date As of September 30, 2003 Of Warrants
---------- -------- ---- ------------------------ -----------
Mike Banes - Citibank $10,000.00 12/28/02 2,042.26
Dr. Jeff Wasserman $40,000.00 07/15/02 13,250.00
Dr. Mark Fraga $10,000.00 07/15/02 3,312.50
Nantash Limited (Cook) $50,000.00 08/12/02 15,937.50
Patricia Arst $10,000.00 08/19/02 3,179.17
Stephen & Jan Smith $3,000.00 03/05/03 406.54 1,875
Brad Blankenship $10,000.00 03/06/03 1,351.03 6,250
Stephen & Jan Smith $7,000.00 03/25/03 891.06 4,375
Terry Earley $10,000.00 04/05/03 1,231.85 6,250
Bobby Lutz $25,000.00 09/30/03 208.33
Charles Rabie $53,000.00 04/03/03 331.25
Bobby Lutz $375,000.00 09/30/03 - 275,000
Inwood Bank $50,000.00 11/01/03 -
PSC Equipment $500,000.00
1 - Note personally gauranteed by Michael Banes not collateral, warrants ,
etc.
2 - Various notes that having various due dates, no investor has extended but
has not moved on us
3 - Bobby Lutz has first position on the equipment for all notes, he received
warrants and stock for his transaction
4 - Charles Rabie received stock and warrants for this tranaction
5 - Line of credit with bank, currently negotiating to extend
6- Part of the Equipment purchase agreement, only due when money is raised
against the assets or assets are sold. No interest is accruing.
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 September 30, 2003, 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.
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
bellow issuances, offerings and sales were deemed to be exempt under Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended (the
"1933 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 1933 Act. The below-referenced persons
represented that they 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. The Company has valued the
warrants at $394 using the Black-Scholes pricing model. The value of the
warrants have been expensed.
On September 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 September 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.
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.
On August 21, 2003 an individual purchased for $3,000 from the Company
6,000 shares of the Company's common stock plus warrants to purchase 600 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 $300
using the Black-Scholes pricing model. The value of the warrants has been
expensed.
On August 27, 2003 an individual purchased for $2,000 from the Company
4,000 shares of the Company's common stock plus warrants to purchase 600 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 $200
using the Black-Scholes pricing model. The value of the warrants has been
expensed.
On September 8, 2003 an individual purchased for $3,000 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 4,000
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 $1,996 using the Black-Scholes pricing model. The value of the
warrants has been expensed.
On September 8, 2003 an individual purchased for $5,000 from the Company
10,000 shares of the Company's common stock plus warrants to purchase 1,000
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 $500 using the Black-Scholes pricing model. The value of the
warrants has been expensed.
On September 16, 2003 an individual purchased for $3,000 from the Company
2,000 shares of the Company's common stock plus warrants to purchase 400 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 $200
using the Black-Scholes pricing model. The value of the warrants has been
expensed.
On September 18, 2003 an individual purchased for $5,000 from the Company
10,000 shares of the Company's common stock plus warrants to purchase 1,000
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 $500 using the Black-Scholes pricing model. The value of the
warrants has been expensed.
On September 24, 2003 an individual purchased for $10,000 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 4,000
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 $998 using the Black-Scholes pricing model. The value of the
warrants has been expensed.
On September 26, 2003 an individual purchased for $3,000 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 600 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 $300
using the Black-Scholes pricing model. The value of the warrants has been
expensed.
On September 29, 2003 an individual purchased for $2,500 from the Company
20,000 shares of the Company's common stock plus warrants to purchase 500 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 $250
using the Black-Scholes pricing model. The value of the warrants has been
expensed.
On September 26, 2003 an individual purchased for $20,000 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 $998 using the Black-Scholes pricing model. The value of the
warrants has 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 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 September 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 September 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.
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 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.
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.
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: November 19, 2003 Availent Financial, Inc.
By: /s/ PATRICK A. MCGEENEY
Name: Patrick A. McGeeney
Title: President
Date: November 19, 2003 By: /s/ DARREN J. CIOFFI
Name: Darren J. Cioffi
Title: Chief Financial Officer