Conformed
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter ended: Commission file number
September 30, 1997 0-19485
ADVANCED FINANCIAL, INC.
(Name of small business issuer in its charter)
DELAWARE 84-1069416
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5425 Martindale, Shawnee, KS 66218
(Address of principal executive offices) (Zip Code)
(913) 441-2466
Issuer's telephone number
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ___ No X
State the number of shares outstanding of each of the issuer's classes
of common equity as of January 25, 1999: 5,836,476
Check whether the issuer has filed all documents and reports to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes___ No___
Transactional Small Business Disclosure Format Yes___ No X
Advance Financial, Inc. and Subsidiary
Table of Contents
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements (Unaudited) 1
ITEM 2. - Management's Discussion and Analysis or
Plan of Operations 7
PART II. OTHER INFORMATION
ITEM 1. - Legal Proceedings 9
ITEM 2. - Changes in Securities and Use of Proceeds 9
ITEM 3. - Defaults Upon Senior Securities 9
ITEM 4. - Submission of Matters to a Vote of Security Holders 9
ITEM 5. - Other Information 9
ITEM 6. - Exhibits and Reports on Form 8-K 10
Signatures 12
i
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Page - 1
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
September 30, 1997 and March 31, 1997
Assets September 30, 1997 March 31, 1997
------------------ --------------
(Unaudited)
Cash and investments $ 1,681 $ -
Mortgage servicing advances and
accounts receivable 182,585 440,367
Mortgage loans held for sale - 305,193
Mortgage loans held for investment 12,341 12,713
Property and equipment, net 1,085,660 1,303,802
Prepaid expenses - 23,121
Other 20,434 72,906
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Total assets $ 1,302,702 $ 2,158,102
=================== ==================
Liabilities
Bank overdraft $ - $ 106,676
Accounts payable and accrued expenses 2,999,020 2,919,541
Notes payable 1,370,115 1,768,427
Notes payable investors 200,000 200,000
Capitalized lease obligations 65,426 178,886
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Total liabilities $ 4,634,560 $ 5,173,530
Stockholders' Equity
Preferred stock, Series B, $.005 par value;
100,000,000 shares authorized; 363,000
issued and outstanding $ 1,815 $ 1,815
Common Stock, $.001 par value; 25,000,000
shares authorized; 5,836,476 issued
and outstanding 5,836 5,836
Paid-in capital 9,959,840 9,959,840
Deficit (12,858,004) (12,541,574)
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(2,890,513) (2,574,083)
Treasury stock, 99,869 shares of
Common Stock, at cost (441,345) (441,345)
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Total stockholders' equity $ (3,331,858) $ (3,015,428)
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Total liabilities and stockholders' equity $ 1,302,702 $ 2,158,102
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Page - 2
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
For the three month period ended September 30, 1997 and September 30, 1996
Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Unaudited) (Unaudited)
Revenues:
Servicing fee income $ 1,584 $ 537,563
Other fee income 515 218,340
Gain/(Loss) on sale of mortgage loans (30,549) 845,200
Gain on sale of servicing rights - 814,727
Interest 1,729 184,482
Other 40,806 346
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Total operating revenues 14,085 2,600,658
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Expenses:
Servicing expense (842) 383,782
Personal 18,700 818,347
General and administrative 35,551 375,068
Interest 45,948 294,416
Depreciation and amortization 12,373 346,375
Other (40,645) 14,704
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Total operating expenses $ 71,085 $ 2,232,692
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Loss before income taxes (57,000) 367,966
Income tax expense - 340,000
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Net loss $ (57,000) $ 27,966
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Weighted average shares outstanding 5,736,607 4,437,973
Loss per share of Common Stock $ (0.02) $ (0.00)
=================== ==================
See accompanying notes to condensed
consolidated financial statements
Page - 3
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
For the three month period ended September 30, 1997 and September 30, 1996
Six Months Ended
September 30, 1997 September 30, 1996
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(Unaudited) (Unaudited)
Revenues:
Servicing fee income $ 55,222 $ 1,066,523
Other fee income 21,141 402,030
Gain/(Loss) on sale of mortgage loans (45,157) 1,539,312
Gain on sale of servicing rights - 801,245
Interest 10,803 424,762
Other 99,204 15,789
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Total operating revenues 141,213 4,249,661
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Expenses:
Servicing expense 81,147 523,363
Personal 136,545 1,838,330
General and administrative 91,743 773,860
Interest 100,802 516,605
Depreciation and amortization 49,298 719,923
Other (1,892) 71,745
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Total operating expenses $ 457,643 $ 4,443,826
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Loss before income taxes (316,430) (194,165)
Income tax expense - 340,000
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Net loss $ (316,430) $ (534,165)
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Weighted average shares outstanding 5,736,607 3,988,797
Loss per share of Common Stock $ (0.07) $ (0.15)
=================== ==================
See accompanying notes to condensed
consolidated financial statements
Page - 4
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the six month period ended September 30, 1997 and September 30, 1996
Six Months Ended
September 30, 1997 September 30, 1996
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(Unaudited) (Unaudited)
Net cash (used in) provided by
operating activities $ 450,913 (1,220,286)
Cash flows from investing activities:
Acquisition of property and equipment 168,844 (10,229)
Proceeds/Acquisition of mortgage
servicing rights - 2,054,848
Acquisition/Principal payments on
mortgage loans held for investment, net 372 9,612
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Net cash provided by (used in) investing
activities 169,216 2,054,231
Cash flows from financing activities:
Proceeds from issuance of common
stock, net - 806,556
Notes payable, net (398,312) (1,716,011)
Checks outstanding in excess of
bank balance (106,676) -
Payments on capitalized lease obligations (113,460) (120,090)
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Net cash provided by (used in)
financing activities (618,448) (1,029,545)
Net increase/(decrease) in cash 1,681 (195,600)
Cash at beginning of period 0 585,643
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Cash at end of period $ 1,681 $ 390,043
=================== ==================
Supplemental disclosure of cash flow:
Cash paid for interest $ 27,920 358,387
Supplemental disclosure of noncash
financing activities:
Receivable recognized for
exercise of options $ - 125,000
Receivable Recognized for
issue of stock $ - 500,000
See accompanying notes to condensed
consolidated financial statements
Page - 5
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997 and September 30, 1996
(1) Organization and Summary of Significant Accounting Policies
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The Company's financial statements include the accounts of Advanced
Financial, Inc. (the "Company" or "AFI") and its wholly-owned subsidiary AFI
Mortgage, Corp. ("AFIM").
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-QSB. To the extent that information
and footnotes required by generally accepted accounting principles for complete
financial statements are contained in or consistent with the audited financial
statements incorporated by reference in the Company's Annual Report on Form
10-KSB for the year ended March 31, 1997, such information and footnotes have
not been duplicated herein. In the opinion of management, all adjustments
considered necessary for fair presentation of financial statements have been
reflected herein. The March 31, 1997 condensed consolidated balance sheet has
been derived from the audited balance sheet as of that date.
Page - 6
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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GENERAL
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The Company and AFIM continued to suffer losses for the quarter ended
September 30, 1997. In April 1997, the Company and its wholly-owned subsidiary,
AFI Mortgage, Corp. ("AFIM"), decided that it would be in the best interest of
the continuity of the Company's business enterprise to temporarily suspend its
active mortgage operations. On November 7, 1997, AFIM filed for relief under
Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the
United States Bankruptcy Court, District of Kansas, Topeka Division, Case No
97-43122. On May 8, 1998, the Company also filed for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court, District of Kansas,
Topeka Division, Case No. 98-41228. The two cases were consolidated on July 2,
1998. On November 13, 1998, the United States Bankruptcy Court for the District
of Kansas entered an order (the "Confirmation Order") confirming the First
Amended Joint Plan of Reorganization dated July 29, 1998 of the Company and AFIM
("Plan of Reorganization"). The confirmation of the Plan of Reorganization was
reported in a Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 25, 1998. A copy of the Plan was filed as Exhibit 2.1 to
the Form 8-K and a copy of the Confirmation Order was filed as Exhibit 99.1 to
the Form 8-K. See also the Company's Annual Report on Form 10-KSB Item 1:
"Description of Business" and Item 7: "Note B to the Consolidated Financial
Statements of the Company."
Under the Plan of Reorganization, and subject to the terms and conditions
set forth in the Plan of Reorganization, the Company will sell its office
building to First Mortgage Investment Co. ("FMIC") for $1,030,000 and FMIC
release of its second mortgage. The net proceeds will satisfy the first
mortgage. The remaining net proceeds received by AFIM will be used to satisfy
the claims of creditors in accordance with the Plan of Reorganization.
The following discussion of the Company's financial condition as of
September 30, 1997 and the Company's results of operations for the quarter ended
September 30, 1997 should be read in conjunction with the discussion of events
subsequent to June 30, 1997 set forth in Item 1: "Description of Business" of
the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1997 and set forth in the Current Report on Form 8-K filed November 25, 1998,
described above.
RESULTS OF OPERATIONS
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Quarter and Six Months Ended September 30, 1997
- -----------------------------------------------
Compared To The Quarter and Six Months Ended June 30, 1996
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Liquidity and Capital Resources
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The Company's cash and short-term investments increased from ($106,676) at
March 31, 1997, to $1,681 at September 30, 1997. The increase in cash and
short-term investments is attributable to the fact that the Company suspended
its active mortgage operations and reduced its staff, to the limited extent
necessary to operate under protection of Chapter 11 of the Bankruptcy Code, sold
its remaining assets, other than its office building, and collected various
receivables due the Company. Also see Item 1: "Description of Business" of the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997.
Page - 7
Losses
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Consolidated operating results for the three months ended September 30,
1997 reflect a net loss of $57,000 as compared to a net gain of $27,966 for the
three months ended September 30, 1996. The gain for the three months ended
September 30, 1996 was due to a gain of $814,727 recognized on the sale of
servicing rights compared to no such sales for the three months ended September
30, 1997. The six months ended September 30, 1997 reflect a net loss of $316,430
as compared to a net loss of $534,165 for the six months ended September 30,
1996. The decrease in losses, for the six months ended September 30, 1997, is
attributable to the fact that the Company's suspension of its active mortgage
operations and sale of its remaining assets, other than its office building,
thereby reducing the quarterly depreciation expense, and the Company's reduction
of its staff from 20 full time employees to 1 full time employee, thereby
reducing administrative expenses, and, reduction of debt, thereby reducing
interest expense, to the limited extent necessary to operate under protection of
Chapter 11 of the Bankruptcy Code. Also see Item 1: "Description of Business" of
the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1997.
FINANCIAL POSITION
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During the six months ended September 30, 1997, the Company saw a
continued decrease in the Company's assets and stockholders' equity. The
Company's total assets were $1,302,702 at September 30, 1997 compared to
$2,158,102 at March 31, 1997. Stockholders' equity was ($3,331,858) at September
30, 1997 compared to ($3,015,428) at March 31, 1997. These decreases were due to
the fact that the Company suspended its active mortgage operations and had
limited revenues, causing the Company to continue to operate at a loss during
the six months ended September 30, 1997. The Company sold its loan production
operations in February, 1997 causing its loans held for sale to decrease to $0
at September 30, 1997 compared to $305,193 at March 31, 1997. Because the
Company was no longer borrowing on its warehouse facility to fund loan
originations, Notes Payable also decreased to $1,370,115 at September 30, 1997
compared to $1,768,427 at March 31, 1997.
At September 30, 1997, the Company had a cash position of $1,681 compared
to a negative cash position of $106,676 at March 31, 1997. During the six months
ended September 30, 1997, the Company covered its negative cash position from
the collection of receivables and the funding of the remaining Mortgage Loans
Held for Sale. Since September 30, 1997, and while operating under the
protection of Chapter 11 of the Bankruptcy code, the Company was able to fund
its limited operations from the sale of various assets and the collection of
various receivables.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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None
Page - 8
PART II
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ITEM - 1 Legal Proceedings
Various lenders initiated lawsuits against the Company and AFIM as a
result of the Company's inability to make required payments on its various debt.
As a result of the filing for relief under Chapter 11 of the Bankruptcy Code,
all actions against the Company and AFIM were suspended pending the final
outcome of the Company's Chapter 11 proceeding. See Item 2: "Management's
Discussion and Analysis or Plan of Operation--General." Pursuant to the Plan of
Reorganization, Claims of Creditors, including persons asserting claims against
the Company in litigation, will be deemed satisfied and, upon the discharge of
the Company and AFIM from bankruptcy, all litigation will have been dismissed.
ITEM - 2 Change in Securities.
See Item 3 (b) Below
ITEM - 3 Defaults upon Senior Securities.
(a) The following table sets forth any indebtedness which exceeds 5% of
the Company's assets, for which the Company was in default at the time of this
filing. Interest was accrued on such indebtedness until November 7, 1997, the
date on which AFIM filed for protection under Chapter 11 of the Bankruptcy Code.
Default Default Total
Lender Principal Interest Arrearage
------ --------- -------- ---------
Commercial Federal Bank $364,393 $41,653 $406,046
Argo Federal Savings $75,148 $8,022 $83,170
(b) The Company suspended payment of its regular quarterly dividend on its
Series "B" Cumulative Convertible Preferred Stock in January 1996. The unpaid
cumulative dividends at the time of this filing were $499,275. Pursuant to the
Plan of Reorganization all preferred stock will be converted to common and each
shareholder shall receive such shareholder's pro rata share of new common stock
as defined in the Plan of Reorganization No unpaid dividends will be paid
pursuant to the Plan of Reorganization.
ITEM - 4 Submission of Matters to a Vote of Securities Holders.
No matters were submitted to a vote of security holders during quarter
ended September 30, 1997, either through the solicitation of proxies or
otherwise.
ITEM - 5 Other Information.
See Item 2: "Management's Discussion and Analysis or Plan of
Operation--General" and the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1997 and Item 1: "Description of Business."
Page - 9
ITEM - 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
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*2.1 First Amended Joint Plan of Reorganization dated July 29, 1998 of Advanced
Financial, Inc. and AFI Mortgage Corp. (Exhibit 2.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 25,
1998).
*3.1 Articles of incorporation and by-laws (Exhibit 3.2 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the Securities
and Exchange Commission on January 31, 1993 (No. 33-45406)).
*4.1 Instruments Defining Rights of Holders (Exhibit 4.0 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the Securities
and Exchange Commission on January 31, 1993 (No. 33-45406)).
*4.2 Variable Rate Commercial Note Secured With Loan Servicing Rights dated July
27, 1994 made by AFI Mortgage Corp., successor to Continental Mortgage, Inc.
("AFIM"), to the order of Commercial Federal Bank, successor to Railroad Savings
Bank, FSB ("Lender") and Agreement dated October 11, 1996 between Advanced
Financial, Inc. and AFIM, as Borrower, and Lender and Matrix Financial Servicers
Corporation (Exhibit 4.2 to Advanced Financial, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997 filed with the Securities and
Exchange Commission on February 16, 1999).
*4.3 Variable Rate Commercial Balloon Note For Purchase of Loan Servicing Rights
dated December 31, 1993 made by AFI Mortgage Corp., successor to Continental
Mortgage, Inc. ("Borrower"), to the order of Argo Federal Savings Bank, FSB
("Lender") and Security Agreement For Sale of Mortgage Loan Servicing Rights
dated December 31, 1993 between Borrower and Lender (Exhibit 4.3 to Advanced
Financial, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended March
31, 1997 filed with the Securities and Exchange Commission on February 16,
1999).
*10.1 Commercial Real Estate Contract with Standard Builders (Exhibit 10.1 to
Registration Statement on Form S-2 of Advanced Financial, Inc. filed with the
Securities and Exchange Commission on February 11, 1993 (No. 33-58186)).
*10.2 Contract for Services between the Company and Rollie C. Johnson (Exhibit
10.1 to Registration Statement on Form S-2 of Advanced Financial, Inc. filed
with the Securities and Exchange Commission on February 11, 1993 (No.
33-58186)).
*10.3 Real Estate Mortgage to Secure a Loan from Citizen's National Bank of Fort
Scott ("Bank") dated February 3, 1997 made by AFI Mortgage Corp., as Mortgagee,
to Bank and accompanying notes as amended. (Exhibit 10.3 to Advanced Financial,
Inc.'s Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997
filed with the Securities and Exchange Commission on February 16, 1999).
*10.4 Second Mortgage dated March 29, 1996 made by Advance Financial, Inc.
and AFI Mortgage Corp., as Mortgagor, to First Mortgage Investment Co., as
Mortgagee. (Exhibit 10.4
Page - 10
to Advanced Financial, Inc.'s Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997 filed with the Securities and Exchange Commission on
February 16, 1999).
27.1 Financial Data Schedule
* Asterisk indicates exhibits incorporated by reference as indicated, all
other exhibits are filed herewith.
(b) Reports on Form 8-K
None
Page - 11
SIGNATURES
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED FINANCIAL, INC.
(Registrant)
Dated: February 16, 1999 By:/s/William B. Morris
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William B. Morris
Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/William B. Morris Chairman, Secretary, February 16, 1999
- -------------------- Principal Accounting
William B. Morris Officer
Page - 12