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
December 31, 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
-------------------
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
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements..................................... 1
ITEM 2. - Management's Discussion and Analysis or
Plan of Operation........................................ 7
PART II. OTHER INFORMATION
ITEM 1. - Legal Proceedings......................................... 9
ITEM 2. - Changes in Securities and Use of Proceeds................. 9
ITEM 3. - Default 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
December 31, 1997 and March 31, 1997
Assets December 30, 1997 March 31, 1997
----------------- --------------
(Unaudited)
Cash and investments $ 6,029 $ -
Mortgage servicing advances and
accounts receivable 200,115 440,367
Mortgage loans held for sale - 305,193
Mortgage loans held for 11,959 12,713
investment
Property and equipment, net 1,078,107 1,303,802
Prepaid expenses 2,617 23,121
Other
14,883 72,906
--------------- ---------------
Total assets $ 1,313,711 $ 2,158,102
================= ===============
Liabilities
Bank overdraft $ - $ 106,676
Accounts payable and accrued 3,015,205 2,919,541
expenses
Notes payable 1,374,034 1,768,427
Notes payable investors 200,000 200,000
Capitalized lease obligations 65,426 178,886
Other 12,375 -
-------------- ---------------
Total liabilities $ 4,667,039 $ 5,173,530
=============== ===============
Stockholders' Equity
Preferred stock, Series B, $.005
par value; 100,000,00 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 (12,879,474) (12,541,574)
-------------- ---------------
(2,911,983) (2,574,083)
Treasury stock, 99,869 shares of
Common Stock, at cost (441,345) (441,345)
-------------- ---------------
Total stockholders' equity (3,353,328) (3,015,428)
-------------- ---------------
Total liabilities and $ 1,313,711 $ 2,158,102
stockholders' equity =============== ===============
See accompanying notes to condensed consolidated financial statements.
Page - 2
Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
For the three month period ended December 31, 1997 and December 31, 1996
Three Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited)
Revenues:
Servicing fee income $ 1,694 $ 246,420
Other fee income 1,170 137,244
Gain/(Loss) on sale of mortgage (104) 408,115
loans
Loss on sale of servicing rights - (36,650)
Interest 134 155,610
Other 37,125 (2,079)
-------------- ---------------
Total operating revenues $ 40,019 $ 908,660
=============== ===============
Expenses:
Servicing Expense (776) 349,753
Personal 15,943 709,094
General and administrative 23,006 327,963
Interest 35,021 158,574
Depreciation and amortization 7,553 200,238
Consulting Expense - 593,750
Other (19,257) 7,919
-------------- ---------------
Total operating expenses 61,490 2,347,291
-------------- ---------------
Loss before income taxes (21,471) (1,438,631)
Income tax expense - (101,884)
--------------- ---------------
Net loss $ (21,471) $ (1,540,515)
=============== ===============
Weighted average shares 5,736,607 6,342,177
outstanding
Loss per common share $ (0.01) $ (0.24)
=============== ===============
See accompanying notes to condensed consolidated financial statements.
Page - 3
Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
For the nine month period ended December 31, 1997 and December 31, 1996
Nine Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited)
Revenues:
Servicing fee income $ 56,916 $ 1,312,943
Other fee income 22,311 539,274
Gain/(Loss) on sale of mortgage (45,261) 1,947,427
loans
Gain on sale of servicing rights - 764,595
Interest 10,937 580,372
Other 136,329 13,710
--------------- ---------------
Total operating revenues
181,232 5,158,321
$ --------------- $ ---------------
Expenses:
Servicing expense $ 80,371 $ 873,116
Personel 152,487 2,547,424
General and administrative 114,749 1,101,823
Interest 135,823 675,179
Depreciation and amortization 56,852 920,161
Consulting expense - 593,750
Other
(21,150) 79,664
--------------- ---------------
Total operating expenses
519,132 6,791,117
--------------- ---------------
Loss before income taxes (337,900) (1,632,796)
Income tax expense - (441,884)
--------------- ---------------
Net loss $ (337,900) $ (2,074,680)
================ ===============
Weighted average shares 5,736,607 4,776,110
outstanding
Loss per share of Common Stock $ (0.08) $ $(0.45)
================ ===============
See accompanying notes to condensed consolidated financial statements.
Page - 4
Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the nine month period ended December 31, 1997 and December 31, 1996
Nine Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited) (Unaudited)
Net cash (used in) provided by
operating activities $ 438,585 (1,042,301)
Cash flows from investing activities:
Acquisition of property and
equipment 168,844 (8,505)
Proceeds/Acquisition of mortgage
servicing right - 2,054,847
Acquisition/Principal payments on
mortgage loans held for investment, 754 12,773
net
---------- ----------
Net cash provided by (used
in) investing activities 169,598 2,059,115
Cash flows from financing activities:
Proceeds from issuance of
common stock, net - 1,498,677
Notes payable, net (394,393) (3,064,322)
Checks outstanding in excess
of bank balance (106,676) 140,955
Payments on capitalized lease
obligations (101,085) (177,767)
----------- -----------
Net cash provided by (used
in) financing activities (602,154) (1,602,457)
Net increase/(decrease)in cash 6,029 (585,643)
Cash at beginning of period 0 585,643
---------- -----------
Cash at end of period $ 6,029 0
========== ===========
Supplemental disclosure of cash flow:
Cash paid for interest $ 27,059 427,436
Cash paid for income taxes - 1,881
See accompanying notes to condensed consolidated financial statements.
Page - 5
Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and December 31, 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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GENERAL
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The Company and AFIM continue to suffer losses for the quarter ended
December 31, 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's
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
December 31, 1997 and the Company's results of operations for the quarter ended
December 31, 1997 should be read in conjunction with the discussion of events
subsequent to June 30, 1997 set forth in Item 1: "Description of Business"
contained in 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
- ---------------------
Quarter and Nine Months Ended December 31, 1997
- -----------------------------------------------
Compared To The Quarter and Nine Months Ended December 31, 1996
- ---------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and short-term investments increased from ($106,676) at
March 31, 1997 to $6,029 at December 31, 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 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"
contained in the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1997.
Page - 7
Advanced Financial, Inc.
Losses
------
Consolidated operating results for the three months ended December 31, 1997
reflect a net loss of $21,471 as compared to a net loss of $1,540,515 for the
three months ended December 31, 1996. Consolidated operating results for the
nine months ended December 31, 1997 reflect a net loss of $377,900 compared to a
net loss of $2,074,680 for the nine months ended December 31, 1996. The decrease
in losses was attributable to 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. The decrease was also
attributable to the Company's reduction of staff from 20 full time employees to
1 full time employee, thereby reducing its administrative expense, and reduction
of debt, thereby reducing interest expense, to the extent necessary to operate
under protection of Chapter 11 of the Bankruptcy Code. Also see Item 1:
"Description of Business" contained in the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997.
FINANCIAL POSITION
- ------------------
During the three months ended December 31, 1997, the Company saw a
continued decrease in the Company's assets and stockholders' equity. The
Company's total assets were $1,313,711 at December 31, 1997 compared to
$2,158,102 at March 31, 1997. Stockholders' equity was ($3,353,328) at December
31, 1997 compared to ($3,015,428) at March 31, 1997. This decrease was 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 nine months ended December 31, 1997. The Company sold its loan production
operations in February, 1997 causing its loans held for sale to decrease to $0
at December 31, 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 $1,374,034 at December 31, 1997 compared to
$1,768,427 at March 31, 1997.
At December 31, 1997, the Company had a cash position of $6,029 compared to
a negative cash position of $106,676 at March 31, 1997. During the nine months
ended December 31, 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 December 31, 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 additional
receivables.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
None
Page - 8
Advanced Financial, Inc.
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 various debt. As a
result of AFIM and the Company filing for relief under Chapter 11 of the
Bankruptcy Code, all pending litigation was suspended pending the final outcome
of the 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 discharge of the Company and AFIM from
bankruptcy, all litigation will have been dismissed.
ITEM - 2 Change in Securities and Use of Proceeds.
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 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
shareholders 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 the quarter
ended December 31, 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 Item 1: "Description of Business."
Page - 9
Advanced Financial, Inc.
ITEM - 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
*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
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None
Page - 11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED FINANCIAL, INC.
(Registrant)
Dated: February 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