As filed with the Securities and Exchange Commission on May 13, 1996
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement Under
The Securities Act of 1933
ADVANCED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of (Primary Standard
incorporation or organization) Industrial Classification)
Code Number)
84-1069415
(IRS Employer Identification No.) 5425 Martindale, Shawnee, KS 66218
Tel. (913) 441-2466
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
Norman L. Peterson, President
Advanced Financial, Inc.
5425 Martindale
Shawnee, KS 66218
(913) 441-2466
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Allen G. Reeves, Esq.
Allen G. Reeves, P.C.
900 Equitable Building
730 17th Street
Denver, CO 80202
(303) 534-6278
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ X ]
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
Title of each Proposed Proposed
class of maximum maximum
securities offering aggregate Amount of
to be Amount to be price per offering registration
registered registered share price(1) fee
- --------------------------------------------------------------------------------
Common Stock 1,000,000 $ .50 $ 500,000 $ 172.40
$.001 par
value(2)
Common Stock 400,000 $ 10.00 $4,000,000 $1,379.20
$.001 par value(3)
================================================================================
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457, based on the average of the high and low price of
the registrant's common stock in the consolidated reporting system on
the American Stock Exchange on April 24, 1996.
(2) Issuable upon exercise of stock options.
(3) Issuable upon exercise of Class B Warrants.
This Registration Statement also covers, pursuant to Rule 416, any
additional shares of Common Stock which may become issuable by reason of the
anti-dilution provisions of the stock options and Class B Warrants.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
ADVANCED FINANCIAL, INC
CROSS REFERENCE SHEET
Form S-1 Item Numbers and Caption Heading in Prospectus
- --------------------------------- ---------------------
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus.......... Cover Page of Form S-1 and
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information, Risk Factors............ Summary Information and
and Ratio of Earnings to Fixed Charges Risk Factors
4. Use of Proceeds.............................. Cover Page of Prospectus;
5. Determination of Offering Price.............. Not Applicable
6. Dilution..................................... Not Applicable
7. Selling Security Holders..................... Selling Stockholders
8. Plan of Distribution......................... Cover Page of Prospectus
9. Description of Securities to be Registered... Description of Capital Stock
of the Company
10.Interests of Named Experts and Counsel....... Legal Matters and Experts
11.Information With Respect To The Registrant... The Company, Selected
Financial Data, Management's
Discussion and Analysis of
Results of Financial
Condition; Management; Certain
Transactions
12.Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities............................ Indemnification
13.Other Expenses of Issuance and
Distribution............................... Part II
14.Indemnification of Directors and Officers... Part II
15.Recent Sales of Unregistered Securities..... Part II
16.Exhibits and Financial Statement Schedules.. Part II
17.Undertakings................................ Part II
<PAGE>
PROSPECTUS
ADVANCED FINANCIAL, INC.
This Prospectus relates to an aggregate of 1,000,000 shares of the common
stock, $.001 par value per share, of Advanced Financial, Inc., which may be
offered for sale by certain shareholders of the Company (the "Selling
Stockholders") should they exercise their purchase rights granted to them
pursuant to certain stock options. This Prospectus relates to the shares
underlying such stock options and also relates to their possible resale by the
Selling Shareholders. The Company will receive none of the proceeds from the
sale of shares by the Selling Stockholders should they sell the shares
underlying such stock options. However, the Company will receive a maximum of
$500,000 in connection with the exercise of the 1,000,000 options, the shares of
which are covered by this Prospectus. This Prospectus also relates to the
issuance of up to 400,000 shares which may be issued to holders of Class B
Warrants outstanding in the event such warrants are exercised at a price of
$10.00 per warrant prior to their expiration on December 31, 1996. Such proceeds
will be used for general corporate purposes. All of the expenses of this
offering, estimated at $20,000, will be borne by the Company.
The Company's common stock has been traded on the American Stock Exchange
since March 29, 1993 under the symbol AVF. On April 24, 1996, the stock had a
market price of $1.38.
The Company has been advised by the Selling Stockholders that the shares
may be offered and sold from time to time by or on behalf of the Selling
Stockholders, in or through transactions or distributions, (including crosses
and block transactions) on the American Stock Exchange at market prices
prevailing at the time of sale, or at negotiated prices, and in connection
therewith commissions may be paid to brokers. Brokers participating in such
transactions may act as agents for the Selling Stockholders. The Selling
Stockholders, and any brokers participating in this offering, may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, and any
commissions received by them may be deemed to be underwriting compensation.
THE SHARES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK
FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
1
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information concerning the Company can be inspected
and copied at the Public Reference Room maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C., 20549. Copies of this material
may also be obtained from the Public Reference Section of the Commission, 450
Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy
statements and other information concerning the Company can also be inspected at
the offices of the American Stock Exchange, Inc., 86 Trinity Place, New York,
New York 10006.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933 with respect to the securities offered by this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement certain parts of which are omitted in accordance with
the rules of the Commission. For further information with respect to the Company
and the securities offered hereby, reference is made to the Registration
Statement including the exhibits. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
where the contract or other document has been filed as an exhibit to the
Registration Statement each such statement is qualified in all respects by
reference to the applicable document filed with the Commission.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the information that has
been incorporated by reference in this Prospectus (other than exhibits).
Requests should be directed to the Company at its principal executive offices,
5425 Martindale, Shawnee, Kansas 66218, telephone (913) 441-2466.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus.
The Company
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
company formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991 the Company was
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed due to expansion into additional states, to AFI Mortgage, Corp
("AFIM") in November 1994. AFIM is a mortgage banking company servicing
approximately $480,000,000 in mortgage loans as of March 31, 1996.
2
<PAGE>
The Company's common stock has been traded on the American Stock Exchange
since March 29, 1993 under the symbol AVF. On April 10, 1996, the stock had a
market price of $1.38.
The Company's principal executive offices are located at 5425 Martindale,
Shawnee, Kansas 66218. Its telephone number is (913) 441-2466.
Summary Financial Data
The following summary financial data has been derived from the financial
statements of the Company and should be read in conjunction with such financial
statements.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
December 31 March 31 March 31
1995 1994 1995 1994
---- ---- ---------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $5,413,909 $4,033,315 $ 5,481,199 $7,329,138
Expenses 7,011,377 7,237,080 10,295,464 7,002,657
Income (Loss From) Operations (1,677,627) (1,988,689) (4,814,265) 326,481
Weighted Average Shares 3,778,478 3,720,574 3,726,000 3,527,000
Earnings (loss) per Share ( .47) ( .57) ( 1.11) -0-
BALANCE SHEET DATA:
December 31,
1995
-----------
Total Assets $12,323,644
Long Term Debt 2,081,507
Total Liabilities 10,073,797
Stockholders' Equity 2,249,847
</TABLE>
RECENT EVENTS
On February 15, 1996, the Company entered into consulting agreements with
Ocean Marketing Corporation, a Colorado corporation; and three Delaware
corporations, Cored Capital Corporation, Pyramid Holdings, Inc., and Affiliated
Services, Inc. Under the terms of each agreement, the Company is to be provided
with financial and public relations services, including advice concerning
marketing surveys, investor profile information, methods of expanding investor
support and increasing investor awareness of the Company and its products and
services. The above named consultants are also to provide services to the
Company, including broker relations, assisting in the preparation and format of
due diligence meetings, and attendance at conventions and trade shows. The term
of each consulting agreement is six months, commencing on February 15, 1996. As
compensation for each consultant's services, the Company has granted an option
to purchase 250,000 shares of common stock to such consultant at an exercise
price of $.50 per share. With respect to options granted to Affiliated Services
and Pyramid Holdings, such options expire, if not previously exercised, thirty
days after a registration statement covering the shares underlying such options
has been declared effective by the Securities and Exchange Commission. Any
shares issued upon exercise prior to the effectiveness of such registration
statement shall be restricted securities as described in Rule 144 promulgated
under the Securities Act of 1933. With respect to options granted to Cored
Capital Corporation and Ocean Marketing Corporation, such options expire, if not
previously exercised, ten days after a registration statement covering the
shares underlying such options is filed with the Securities and Exchange
Commission.
3
<PAGE>
In January of 1996, the Company defaulted in the payment of its regular
quarterly dividend payable on its 10.5% Series B Convertible Preferred Stock.
All dividends not paid will accumulate until such time as the Company has
determined that its cash flows have improved enough to sufficiently pay the
dividend from the cash flow of its operations. The total average is one
quarterly payment totaling $39,060 and interest does not accrue on such average.
RISK FACTORS
The common stock offered hereby involves a high degree of risk, including,
but not necessarily limited to the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
1. Continued Operating Losses. The Company has experienced large operating
losses recently. For example, in the year ended March 31, 1995, the Company had
a net operating loss of $3,963,497. During the nine month period ended December
31, 1995, the Company experienced a further loss of $1,677,627. While the
Company has narrowed its losses and expects to see improvement in cash flow for
the fiscal year 1997, there can be no assurance that operating losses will not
continue into the foreseeable future. See "Management Discussion and Analysis".
2. Possible Early Termination of Loan Servicing Fees. The purchase price
the Company paid to acquire loan servicing portfolios was based in part on the
Company's expectation of the rate that borrowers will make prepayments on these
loans. In the event such loans are prepaid, generally either as a result of the
re-financing or sale of the property associated with the loan, the loan
servicing fees are terminated. In evaluating the price paid for a loan servicing
portfolio, the Company generally assumed a prepayment rate of 12 to 30% per
annum rather than the historical prepayment rate of 6% to 8% as described above.
While the Company believes its valuation process is conservative with respect to
prepayment expectations, there is no assurance that prepayments will not exceed
expectations, thus lowering yields the Company could expect to receive from its
loan servicing portfolios. For example, the Federal National Mortgage
Association ("FNMA") has reported that its prepayment rate for loans of similar
characteristics as those of the Company had gone from % at the start of 1995 to
% in December of 1995. The rate of prepayment is directly related to the
interest rate of the note to be prepaid. The lower the interest rate, the lower
the prepayment rate. The Company, as of December 31, 1995, had an average
interest rate on loans it serviced of 9.12%.
4
<PAGE>
3. Risk of Loan Defaults. The Company cannot generate servicing fees from
defaulted loans, since defaulted loans do not generate cash flows. The Company
has not seen any unanticipated increase in the default rate associated with its
loan servicing portfolios. However, there can be no assurance that the loan
default rate will not accelerate, thus increasing the risk that the Company will
generate less revenue from its servicing rights, and experience increased costs
associated with such loans.
4. Risks Associated with Changes in Resale Markets and Loss of Status as
Approved Servicer. The Company's business depends in part on its ability to sell
to investors mortgage loans that it originates or purchases. Accordingly, any
significant change in the secondary mortgage market, including the operations,
level of activity or underwriting criteria of FNMA or the Federal Home Loan
Mortgage Corporation ("FHLMC"), could have an adverse effect on the Company's
business and results of operations. In addition, sellers and servicers of
mortgage loans held by FNMA and FHLMC must comply with the FNMA and FHLMC
seller/servicer guides, including criteria relating to maintaining minimum net
worth levels. If the Company fails to comply with the seller/servicer guides,
its approval as a seller/servicer could be withdrawn and its servicing rights
could be transferred to another servicer without compensation to the Company.
5. Greater Resources of Competitors. The mortgage banking industry is
competitive and competition is based heavily on price. Many of the Company's
competitors have greater financial resources than does the Company and
consequently may be able to achieve economies of scale that are unavailable to
the Company. There is no assurance that the Company will be a successful
competitor in its industry.
5
<PAGE>
6. Risks Associated with Recourse Obligations. A portion of the servicing
rights held by the Company relate to mortgage loans sold "with recourse", which
means that if a loan serviced by the Company is foreclosed, the Company will be
obligated to repurchase the loan from the loan investor, dispose of the property
subject to the mortgage and absorb any shortfalls between the unpaid amount of
the loan (including interest and expenses) and the sale price of the property.
Of the approximately $480,000,000 of mortgage loans serviced by the Company at
March 31, 1996, 3.75% were with recourse to the Company. Should the Company's
current portfolio of mortgage loans serviced with recourse have an unexpected
large level of foreclosures, the Company might be unable to meet its recourse
obligation. Furthermore, the Company might experience losses upon foreclosure
and ultimate sale of foreclosed properties. As of December 31, 1995, the Company
had loss reserves of $85,512 relating to loans sold with recourse servicing. The
Company has not set aside any funds in order to cover its potential obligation
to repurchase recourse loans. The Company's current policy is to only purchase
or retain servicing rights without recourse. However, the Company may change
this policy in the future.
7. Cyclical Nature of the Industry. As a result of its sensitivity to
interest rate fluctuations and other economic conditions, the mortgage banking
industry tends to experience cycles of greater and lesser activity and
profitability. For example, during the mid-1980's, when interest rates declined
sharply and the housing market was very strong, the mortgage banking industry
experienced significant growth and profitability; during the late 1980's, when
interest rates rose and the housing market declined, the mortgage banking
industry experienced retrenchment and lower profitability.
8. Risks Associated with Representations and Warranties Assumed or Made by
the Company. When a mortgage loan originator or purchaser sells a mortgage loan
to FNMA, FHLMC or private investors, it makes certain representations and
warranties relating to the mortgage loan, including representations and
warranties as to the compliance by the originator or purchaser with applicable
underwriting guidelines. A purchaser of the rights to service the mortgage loan
becomes obligated to the investor with respect to the accuracy of these
representations and warranties, and, if these representations and warranties are
incorrect, the investor may require the servicer to repurchase the mortgage
loan. Any loss resulting from a material inaccuracy in the representation or
warranty would fall on the servicer. The Company attempts to limit its exposure
to this risk through due diligence of mortgage portfolios prior to acquisition
and by negotiating appropriate representations and warranties and
indemnification from entities from which it acquires mortgage servicing rights.
In the ordinary course of business the Company makes representations and
warranties to the purchasers of servicing rights and purchasers and insurers of
mortgage loans. Any loss resulting from a material inaccuracy in these
representations and warranties would fall on the Company. There is no assurance
that a breach or breaches of such representations or warranties would not have
an adverse effect upon the Company.
6
<PAGE>
9. Risks Associated with Loan Servicing Rights. The Company typically
purchases loan servicing rights; in addition, it may from time to time elect to
accept a lower price for loans that it originates in return for selling those
loans while retaining the related servicing rights ("servicing retained"). In
each such case, the Company's decision is based on its estimate of the market
value of the servicing rights purchased or retained, which in turn is based on
the estimated present value of future cash flow from such rights. Various
events, such as a higher than anticipated rate of default or prepayment on the
loans as to which the Company has servicing rights, could adversely affect the
value of and earnings from those rights. Many of the events that could have such
an effect are likely to be caused by conditions beyond the control of the
Company. There is no assurance that the Company's assessment of the value of
servicing rights purchased or retained by it will prove to be justified. The
Company makes provisions for accelerated prepayment experience from time to
time.
10. Risks Associated with Fluctuating Interest Rates. The Company's
operations and the value of its assets are sensitive to interest rate
fluctuations in several ways. An increase in interest rates may have an adverse
effect on the market value of the Company's fixed rate loan originations and
purchases. Conversely, a significant decrease in interest rates could provide an
incentive to borrowers to refinance loans as to which the Company has servicing
rights, thereby reducing the value of and earnings from those assets. Such
financing might be accelerated in the event of a general economic recovery,
which could result in, among other things, an increase in the market value of
the collateral securing loans and the greater availability of credit. Higher
interest rates can have a negative impact on housing markets, reducing the
market value of the collateral securing loans in the Company's loan portfolio or
with respect to which the Company has a recourse obligation. Fluctuating
interest rates may affect the net interest income earned by the Company because
the Company typically earns interest income on fixed rate mortgage loans and
incurs interest expense on a variable basis. Fluctuations in the prime rate (on
which the Company's interest cost is based) may not parallel fluctuations in
mortgage interest rates. Although the Company's current policy is to obtain
commitments from investors prior to closing loans, thereby diminishing the
effect of fluctuating interest rates on its loan portfolio and net interest
income, the Company has at various times held, and in the future may hold, a
significant amount of uncovered loans.
7
<PAGE>
11. Dependence on Existing Management. The success of the Company has been
dependent upon its existing management, including Norman L. Peterson and William
B. Morris. The loss of the services of either of them could have an adverse
effect upon the Company if suitable replacements cannot be quickly retained. The
Company does not have employment agreements with either person. See
"Management". The Company has not obtained "key man" life insurance policy on
either of these individuals.
12. Control By Management. The Company's officers and directors currently
own approximately 35.1% of the Company's outstanding Common Stock and are in a
position to effectively control the Company.
13. Potential Future Sales Pursuant to Rule 144. Immediately prior to the
date of this Prospectus, a total of 1,360,477 shares of the Company's
outstanding Common Stock were "restricted securities" as that term is defined
under Rule 144 promulgated under the Securities Act of 1933. In general, under
Rule 144, a person (or persons whose shares are aggregated) who holds securities
which have been outstanding and not owned beneficially by any affiliate of the
Company for at least two years may sell within any three month period a number
of shares which does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume during
the four calendar weeks prior to such sale. Rule 144 also permits the sale of
shares by a person who is not an affiliate of the Company and who has satisfied
a three-year holding period without any quantity limitation. The Company is
unable to predict the effect that sale made under Rule 144 or pursuant to other
exemptions under the Securities Act of 1933 may have on the then prevailing
market price of the Common Stock. Nonetheless, the possibility exists that the
sale of these shares may have a negative effect on the price of the Company's
Common Stock in any such market.
14. Default in Payment of Series B Preferred Stock Dividend. In January of
1996 the Company defaulted in the payment of its quarterly dividend payment on
its 10.5% Series B Preferred Stock. Each holder is entitled to a dividend of
$.42 per year. The aggregate deficiency in dividend payment is cumulative and
must be fully paid or set apart for payment before any dividend can be paid or
set apart for payment of any class of common stock of the Company. This default
and corresponding cumulation makes it more unlikely that any dividend will be
paid on the Company's common stock in the foreseeable future.
CAPITALIZATION
The following table sets forth capitalization of the Company as of
December 31, 1995. This table should be read in conjunction with the Financial
Statements and related notes thereto included elsewhere in this Prospectus.
8
<PAGE>
December 31, 1995
-----------------
Long Term Debt $1,226,717
----------
Stockholders' Equity:
Preferred Stock, Series B $.005 par value,
10,000,000 shares authorized;
372,000 shares issued
and outstanding 1,860
Common Stock $.001 par value -
25,000,000 shares authorized,
3,875,476 shares issued and
outstanding 3,876
Additional Paid-In Capital 8,642,442
Deficit (5,956,986)
Total Shareholders' Equity 2,249,847
---------
Total Capitalization $3,476,564
==========
SELECTED FINANCIAL DATA
The selected financial data set forth below, with respect to the Company's
statements of operations for the years ended March 31, 1995 and 1994 and with
respect to the Company's balance sheets as of March 31, 1995, is derived from
financial statements of the Company. The selected financial data, with respect
to the Company's statements of operations for the nine months ended December 31,
1995 and 1994, and with respect to the Company's balance sheet as of December
31, 1995, is derived from unaudited financial statements of the Company. The
unaudited financial statements include all adjustments, consisting only of
normal accruals, that the Company considers necessary for a fair presentation of
the financial position and results of operations for these periods. Operating
results for the nine months ended December 31, 1995 are not necessarily
indicative of the results that may be expected for the entire year ended March
31, 1996. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto included
herein.
9
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS DATA:
<CAPTION>
Nine Months Ended Years Ended
December 31, March 31
Revenues: 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Servicing fee income $ 1,852,627 $2,531,318 $3,293,878 $3,886,487
Other fee income 782,891 602,971 835,432 400,506
Appraisal income -0- 54,325 -0- -0-
Gain on sale of mortgage loans 2,033,466 410,992 515,478 484,579
Gain on sale of servicing rights 99,759 189,413 383,443 2,112,064
Interest income 478,571 147,354 197,105 417,567
Other income 166,595 96,942 255,863 27,935
---------- ---------- ---------- ----------
Total operating revenues 5,413,909 4,033,315 5,481,199 7,329,188
---------- ---------- ---------- ----------
Expenses:
Servicing expense 813,837 968,216 1,285,843 493,038
Personnel 2,831,059 2,685,010 3,576,031 2,720,830
General and administrative 1,340,698 989,181 2,298,834 1,359,155
Interest expense 542,639 370,290 485,338 770,653
Depreciation and amortization 1,425,546 1,978,728 1,860,926 1,561,910
Other 88,407 245,655 788,492 97,071
---------- ---------- ---------- --------
Total operating expenses 7,042,186 7,237,080 10,295,464 7,002,657
---------- ---------- ---------- ----------
Loss before income taxes (1,628,277) (3,203,765) (4,814,265) 326,481
Income tax expense (benefit) 49,350 (1,215,076) ( 850,768) 148,197
---------- ---------- ---------- ----------
Net loss from continuing
operations $(1,677,627) (1,988,689) (3,963,497) 178,284
---------- ---------- ---------- ----------
Weighted average shares outstanding 3,778,478 3,725,574 3,726,000 3,527,000
========== ========= ========== ==========
Loss per common share $( 0.47) ( 0.57) $( 1.11) -0-
========== ========== ========== ==========
</TABLE>
Balance Sheet Data
Assets DECEMBER 31, 1995
------ -----------------
(unaudited)
Mortgage servicing advances and accounts receivable 1,753,461
Property and equipment, net 1,753,461
Mortgage loans held for sale 5,065,765
Mortgage loans held for investment 204,523
Purchased mortgage servicing rights, net 2,760,266
Other 1,748,557
-----------
Total Assets $12,323,644
===========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,646,057
Notes payable 7,801,372
Other 626,368
-----------
Total liabilities $10,073,797
Total stockholders' equity 2,249,847
-----------
Total liability and stockholders' equity $12,323,644
===========
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company's wholly owned subsidiary, AFI Mortgage is a full service
residential mortgage company and has all approvals needed to service mortgages
for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC) and Government National Mortgage Association (GNMA). AFI
Mortgage is servicing approximately 16,500 first and second mortgage loans of
approximately $468,000,000 as of December 31, 1995. During January 1996, the
Company acquired approximately 3,000 loans with outstanding principal balances
of $26,300,000 into its current servicing portfolio. The Company plans to pay
for the purchase of this portfolio from operating income. The portfolio consists
of primarily private investors. This transfer brings the loans serviced to
approximately 19,500 for an outstanding principal balance of $494,300,000. With
the Company's 20,000 square foot facility and the utilization of computer
servicing technology, the Company now has the capacity to service approximately
$2.5 billion in principal balance or approximately 50,000 loans.
11
<PAGE>
Nine Months Ended December 31, 1995 compared to the Nine Months
Ended December 31, 1994
The Company had operating revenues of $5,413,909 for the nine months ended
December 31, 1995 compared to $4,033,315 for the nine months ended December 31,
1994. Losses before income taxes were $1,597,468 for the nine months ended
December 31, 1995 compared to $3,203,765 for the nine months ended December 31,
1994. Net loss for the nine months ended December 31, 1995 was $1,677,627 or .47
cents per share compared to net loss of $1,988,689 or .57 cents per share for
the nine months ended December 31, 1994. Primary loss per share for the nine
months ended December 31, 1995 and 1994 are calculated after adding to net loss,
$177,180 accrued and paid in preferred stock dividends.
The decrease in service fee income to $1,852,627 for the nine months ended
December 31, 1995 from $2,531,318 for the nine months ended December 31, 1994
reflected the decrease in the servicing portfolio to $468,000,000 at December
31, 1995 from $597,000,000 at December 31, 1994. Other fee income increased to
$782,891 from $602,971 for the nine months ended December 31, 1995 and 1994,
respectively, due to a monthly accounting fee earned by the Company relating to
GNMA accounts transferred in which servicing began in the third quarter of
fiscal 1995.
It is common practice in the mortgage banking industry to purchase and sell
servicing rights. During the nine months ended December 31, 1995, the Company
recognized the sale of the servicing rights underlying $4.5 million in second
mortgages for a gain of $99,759.
Gain on sale of mortgage loans for the nine months ended December 31, 1995
was $2,033,466 compared to a gain on sale of mortgage loans of $410,992 for the
nine months ended December 31, 1994. The gain on sale of mortgages is derived
through the sale of loans originated and sold to investors, such as FNMA, FHLMC,
GNMA or private investors. This gain also includes all origination fee income
and is net of all origination expenses. The increase is due to the originations
from the 37 Desktop terminals, of which 33 have been in place at least 30 days,
as well as originations from the Seattle operation (for the first seven months
of fiscal 1996) that were not present for the total nine months ended December
31, 1994. The Company originated $79 million loans for the nine months ended
December 31, 1995 compared to $28 million for the nine months ended December 31,
1994. As a result of the capital needed to implement the Desktop product,
substantially all loans are being sold servicing released resulting in a premium
paid by the purchaser for these loans. The Company expects to see increased
gains on sale of mortgage loans for fiscal 1996 due to the reasons cited above.
The Company currently has a $17 million credit facility with BankOne, Texas and
a $20 million Merrill Lynch credit facility to fund servicing advances and
originations of mortgage loans.
12
<PAGE>
The Company's total operating expenses for the nine months ended December
31, 1995 were $7,011,377 compared to $7,237,080 for the nine months ended
December 31, 1994.
Effective July 1, 1994, the Company opened mortgage production branches
with 3 locations in the state of Washington. The amounts included in operating
expenses relating to these operations have been approximately $576,000 for the
nine months ended December 31, 1995. Effective October 1995, the Company sold
its two remaining Washington operations to two independent companies. The
reduction in expenses to the Company approximated $215,000 for the fiscal
quarter ended December 31, 1995.
There is an increase in interest expense to $542,639 for the nine months
ended December 31, 1995 compared to $370,290 for the nine months ended December
31, 1994 due to increased production. The Company has a banking relationship
that provides more favorable warehouse interest rates based on compensating
escrow balances. During the first seven months of the nine months ended December
31, 1995, the average warehouse balance exceeded the compensating balances and
therefore, there was a higher interest rate used against loan fundings. To help
maintain the interest margin in future quarters, the Company transferred
additional escrow balances to the lending facility. As a result the Company's
warehouse interest was less for the last month of the quarter due to the
increased escrow balances.
In connection with the acquisition of mortgage servicing rights, the
Company capitalizes the price paid for the mortgage servicing rights acquired.
The resulting asset is amortized on an accelerated basis and evaluated for
impairment on a quarterly basis. Amortization for the nine months ended December
31, 1995 was $774,194 versus $1,120,603 for the nine months December 31, 1994.
The Company reviews its servicing portfolio, on a quarterly basis, to determine
if adjustments should be made to its amortization schedules or carrying values
of its PMSR's due to changes in interest rates, historic prepayment rates,
expected prepayment rates and other economic factors. No impairment write-down
was required for the nine months ended December 31, 1995.
13
<PAGE>
The Company's servicing portfolio is subject to reduction by normal
amortization, by sales of servicing rights by prepayment or by foreclosure of
outstanding loans. The value of the Company's loan servicing portfolio my be
adversely affected if mortgage interest rates decline and loan prepayments
increase. The value is also adversely affected by unanticipated rates of
default. Conversely, as mortgage interest rates increase or as rates of default
decrease, the value of the Company's loan servicing portfolio may be positively
affected. The weighted average interest rate on the underlying mortgage loans
being serviced by the Company as of March 31, 1996 was 9.02% compared to 9.00%
as of March 31, 1995. The Company's purchased mortgage servicing rights (PMSR)
are subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments or defaults in excess of those anticipated
at the time PMSRs are recorded result in decreased future net servicing income.
Such decrease in future net servicing income would result in accelerated
amortization and/or impairment of PMSRs. The Company's net earnings, future net
earnings and liquidity are adversely affected by unanticipated prepayments of
the mortgage loans underlying its PMSRs.
The slight increase in personnel expenses to $2,831,059 for the nine months
ended December 31, 1995 from $2,685,010 for the nine months ended December 31,
1994 is due primarily to the personnel costs related to increased production.
With the growth of the Desktop installations anticipated by Management during
fiscal 1997, a decrease in Desktop personnel costs is not expected. However, due
to the sale of the Washington operations, in the third quarter of fiscal 1996,
Management experienced a decrease related to those salaries of approximately
$125,000.
The decrease in the servicing expense to $813,837 for the nine months ended
December 31, 1995 from $968,216 for the nine months ended December 31, 1994 is
the result of the decrease in the servicing portfolio to $468,000,000 at
December 31, 1995 compared to $597,000,000 at December 31, 1994.
The Company had a loss carryforward for tax purposes of approximately
$5,248,000 for the nine months ended December 31, 1995. No income tax benefits
are recognized for nine months ended December 31, 1995 since a valuation
allowance for the same amount would be required under FASB 109. In determining
the amount of the valuation allowance, management has relied on a potential tax-
planning strategy whereby an unrealized taxable gain in the Company's purchased
mortgage servicing rights portfolio could be recognized through the sale of such
servicing rights. At the end of the nine months ended December 31, 1995, the
Company wrote the asset down to $440,000 from $489,35O for which management
believes that it is more likely than not that this deferred tax asset will be
realized.
14
<PAGE>
Year Ended March 31, 1995 Compared To the Year Ended March 31, 1994
The Company has operating revenues of $5,481,199 for the year ended March
31, 1995 compared to $7,329,138 for the year ended March 31, 1994. Loss before
income taxes was $4,814,265 for the year ended March 31, 1995 compared to
earnings of $326,481 for the year ended March 31, 1994. Net loss for the year
ended March 31, 1995 was $3,963,497 or ($1.11) per share compared to net income
of $178,284 or less than .01 cent per share for the year ended March 31, 1994.
Service fee income of $3,293,878 for year ending March 31, 1995 compared to
$3,886,487 for the year ended March 31, 1994 reflected the sale of servicing
rights underlying $93,000,000 of servicing in fiscal 1995. The Company did
acquire the servicing rights to a small portfolio in the first quarter of fiscal
1995 (approximately $7 million).
It is common practice in the mortgage banking industry to sell servicing
rights. Gains from the sale of servicing rights aggregated $383,443 in 1995 and
$2,112,064 in 1994. In fiscal 1994, the Company recognized approximately
$500,000 on the sale of the servicing rights on first mortgage loans. Also, in
fiscal 1993 the Company acquired a unique second mortgage servicing portfolio.
The service fee on this portfolio was larger than that of the first mortgage
portfolio due to the difference between the borrowers' principal balances and
the principal balances due to the investor which was created when the loans were
originated. During the last quarter of 1994, the Company sold a substantial
portion ($27,000,000 unpaid principal balance) of its second mortgage servicing
portfolio and recognized a gain on the sale of approximately $1,000,000. To
provide for the loss in cashflow, the sales proceeds were used to purchase the
servicing rights to a GNMA portfolio representing approximately $263,000,000 in
unpaid principal balances. Service fee on this new portfolio offset, to some
extent, the loss in the service fee on the second mortgage servicing portfolio.
During the last quarter of fiscal 1995, the remaining servicing rights related
to the second mortgages were sold ($4,960,000 unpaid principal balance) for a
gain, to be recognized in the first fiscal quarter of 1996, of approximately
$100,000.
Certain of the sales of servicing rights represented the remaining
servicing rights underlying the participation agreements outstanding of
approximately $68,000,000 in unpaid principal balances resulting in a reduction
of interest expense of $59,000 as a result of the participation liability being
satisfied. In addition, the Company bought back the 75% cash flow participation
on $11.6 million of underlying servicing for $79,000. This resulted in a
reduction of interest expense for the fiscal year ended 1995 of approximately
$41,000.
15
<PAGE>
Gains on sales of mortgage loans for the year ended March 31, 1995
increased slightly to $515,478 compared to $484,579 for the year ended March 31,
1994. The gain on sale of mortgages is derived through the sale of loans
originated and sold to investors, such as FNMA, FHLMC or GNMA as well as private
investors. This gain also includes all servicing released premiums, origination
fee income and is net of all direct origination expenses. In fiscal 1995, the
Company eliminated the wholesale division of the Company which resulted in a
decrease in loan production and related origination revenues for the first half
of the year. However, with the operations in the Washington areas as well as the
implementation of the Desktop system, the production increased significantly in
the second half of fiscal 1995. As a result of the capital needed to implement
this Desktop product, substantially all loans are being sold servicing released
resulting in a premium paid by the purchaser for these loans of approximately 1
percent of unpaid principal balance. The Company expects to see increased gains
on sale of mortgage loans for fiscal 1996 due to the issues above.
In previous years, the Company has successfully increased its servicing
portfolio through the wholesale acquisition of mortgage loans, loan origination
and refinancing. Once the company acquired or originated a loan, it sold the
mortgage loans to investors and retained an interest in the right to service the
loans. Currently, as cash needs require, the Company is selling originated loan
servicing released. For fiscal 1995, the Company originated approximately $36.4
million in mortgages of which 55% were originated through its Washington
operation. The Washington operations have retail originations of which a
significant portion is of less than A credit paper resulting in higher premiums
to the Company. The Company currently has a $17 million credit facility with
Bank One, Texas and is negotiating a $20 million Merrill Lynch credit facility
to fund servicing advances and origination of mortgage loans.
The Company has other appraisal fee income of $85,905 for fiscal year ended
1995 compared to zero for fiscal year ended 1994 due to the purchase of Network.
The Company performed appraisals for our Northwest region. The Company also has
income of $88,581 from CMSI for work performed on servicing portfolio
acquisitions and sales.
The Company's total operating expenses for the year ended March 31, 1995
were $10,295,464 compared to $7,002,657 for the year ended March 31, 1994. The
Company had higher operating expenses during the year ended March 31, 1995 than
would normally be experienced due to several factors. Effective July 1, 1994,
the Company opened mortgage loan production branches with three locations in the
State of Washington. The amounts included in operating expenses relating to
these operations are approximately $1,093,000 for fiscal 1995. The Company
anticipates a decline in these expenses for fiscal 1996 due to the downsizing of
the operation to more efficiently utilize our Desktop system. The Company also
experienced one time write offs and reserve establishments in the amount of
$700,000 for the 1995 fiscal year.
16
<PAGE>
The increase in servicing expense to $1,285,843 for year ended March 31,
1995 from $493,038 for year ended March 31, 1994 is the result of the increase
in custodial fees paid for the GNMA portfolio purchased in the fourth quarter of
fiscal 1994 as well as the fees related to the FNMA portfolio amounting to
approximately $306,000. These are partially offset by commissions of
approximately $51,000 for forced placed insurance on the 12,000 GNMA loans
purchased. This commission, which is included in other income, was received in
the third quarter of fiscal 1995. Additionally, the operating cost of the
mortgage loan servicing system which was installed in the second quarter of
fiscal 1994, amounted to approximately $211,000 for fiscal 1995 compared to
$85,000 for fiscal 1994. The servicing expense for fiscal 1995 also includes a
write-off of approximately $135,000 in foreclosure claims. The Company filed a
test claim with the RTC to determine if the claim would be paid. Subsequently,
the test case was denied by the RTC so the outstanding foreclosure claims
pertaining to the test claim and similar items were written off.
The decrease in interest expense to $485,338 for the year ended March 31,
1995 from $770,653 for year ended March 31, 1994 is the result of the decreased
borrowings to finance the production of mortgage loan originations. Mortgage
loans originations decreased to $36,400,000 from $105,000,000. This decrease in
originations was due primarily to the elimination of the wholesale department in
fiscal 1995. On a positive trend, of the $36,400,000 in originations, 66% came
in the last half of the fiscal year.
The increase in general and administrative expenses to $2,298,834 for year
ended March 31, 1995 from $1,359,155 for year ended March 31, 1994 paralleled
the growth in the Company's operation with the administrative cost to set up and
operate the new Desktop system as well as the expense related to the Washington
operations. At March 31, 1995, the Company had 18 installations operational and
another 23 locations pending for which the application has been reviewed and
approved by Management. The Company also set up legal reserves in the amount of
$170,000 for litigation arising and settled in fiscal 1995 or expected to settle
in fiscal 1996.
The increase in personnel expenses to $3,576,031 for the year ended March
31, 1995 from $2,720,830 is due primarily to the installation of the new Desktop
loan representatives as well as the Company's Washington operation personnel.
With the growth of the Desktop installations anticipated by Management during
fiscal 1996, a decrease is not expected during fiscal 1996.
17
<PAGE>
The Company had a loss carryforward for tax purposes of approximately
$3,570,244 for the fiscal year ended March 31, 1995. Income tax benefits of
$850,768 is after recognizing a valuation allowance to reduce deferred tax
assets to an amount which management believes that it is more likely than not it
will be realized.
The price paid for the mortgage servicing rights acquired is amortized on
an accelerated basis and evaluated for impairment on a quarterly basis.
Amortization, including impairment charges, for 1995 was $1,442,874 versus
$1,252,911 in 1994. The Company reviews its servicing portfolio to determine if
adjustments should be made to its amortization schedules or carrying values of
its PMSRs due to changes in interest rates, historic prepayment rates, expected
prepayment rates and other economic factors. As a result of significant
prepayment activity combined with projections of future prepayment activity, the
Company recorded additional amortization in 1994 charges of approximately
$101,000 related to an adjustment to the carrying value of purchased mortgage
servicing rights (PMSRs). As a percentage of PMSRs at the beginning of the year,
amortization, including impairment charges, was approximately 25% and 35% for
1995 and 1994, respectively. If the Company continues to experience high levels
of prepayments, acceleration of amortization, impairment charges or both may be
required in the future.
The Company's servicing portfolio is subject to reduction by normal
amortization, by sales of servicing rights, by prepayment or by foreclosure of
outstanding loans. The value of the Company's loan servicing portfolio may be
adversely affected if mortgage interest rates decline and loan prepayments
increase. The value is also adversely affected by unanticipated rates of
default. Conversely, as mortgage interest rates increase or as rates of default
decrease, the value of the Company's loan servicing portfolio may be positively
affected. The weighted average interest rate on the underlying mortgage loans
being serviced by the Company as of March 31, 1995 was 9.0%. The Company's PMSRs
are subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments or defaults in excess of those anticipated
at the time PMSRs are recorded result in decreased future net servicing income.
Such decreases in future net servicing income would result in accelerated
amortization and/or impairment of PMSRs. The Company's net earnings, future net
earnings and liquidity are adversely affected by unanticipated prepayments of
the mortgage loans underlying its PMSRs.
A schedule of the Company purchased servicing portfolio and related PMSRs
by year of acquisition as of March 31, 1995 is as follows:
18
<PAGE>
<TABLE>
<CAPTION>
PMSRs Weighted Averages
Principal Original Unamortized
Year of Balance Purchase Capitalized Coupon Maturity Service Fee
Acquisition Serviced* Price* Amount* In Months
<S> <C> <C> <C> <C> <C> <C>
1992 $ 61,482 $1,268 $ 363 9.19% 226 0.56%
1993 $ 27,136 $ 310 $ 147 9.53% 242 0.58%
1994 $376,419 $4,114 $2,974 8.32% 241 0.52%
1995 $ 6,324 $ 63 $ 51 7.70% 310 0.25%
TOTAL $471,361 $5,755 $3,535 8.50% 240 0.53%
</TABLE>
This schedule generally reflects the characteristics used by the
Company in its evaluation of PMSRs. For this disclosure, bulk acquisitions have
been grouped by year of acquisitions. For discussion of the Company's method of
disaggregation for impairment testing, see Note 1 of notes to financial
statements.
A schedule of the Company's purchased servicing portfolio by interest
rate is as follows:
Principal
Balance Number of
Coupon Rate Ranges Serviced* Loans
- ------------------ --------- ---------
Less than 7.00% $ 39,369 896
7.01% to 8.00% $ 89,183 2,155
8.01% to 9.00% $127,065 5,894
9.01% to 10.00% $107,705 4,445
10.01% to 11.00% $ 38,874 1,114
11.01% to 12.00% $ 39,092 1,442
12.01% and above $ 30,073 1,320
- -------------------------------------------------------
Totals $471,361 17,266
====================================
*All Dollars in Thousands
The increase in other expense to $788,492 for year ended March 31, 1995
from $97,071 for year ended March 31, 1994 is due to establishing reserved for
REO's and loans held for investment in the amount of $58,000 and for receivables
in the amount of $105,000. The Company also had some expenses related to the
Washington operations, in addition to those noted above, in the amount of
$131,000. As a result of settling a lawsuit with a Phoenix corporation, a
receivable in the amount of $62,000 was written off during the fourth quarter of
fiscal 1995. The Company also wrote off a $100,000 receivable relating to the
second mortgage loans sold during fiscal 1995.
Financial Position
The Company has seen a slight increase in its total assets and a decrease
in its stockholders' equity, The Company's total assets were $12,323,644 at
December 31, 1995 compared to $11,796,012 at March 31, 1995. Stockholders'
equity decreased to $2,249,847 at December 31, 1995 from $4,044,655 at March 31,
1995.
19
<PAGE>
The mortgage servicing advances and accounts receivable were $791,072 at
December 31, 1995 compared to $1,283,907 at March 31, 1995. The decrease is due
to the repayment of Principal & interest advances, as well as Taxes & Insurance
advances, during the nine months ended December 31, 1995. There are some loan
pools in the servicing portfolio that require the servicer to pass on to the
investor all principal and interest payments regardless of whether the payment
has been collected. If customers are delinquent, an advance is required by the
Company. As payments are made by borrowers during the following month, the
advance is repaid to the Company.
The Company had $5,065,765 in mortgage loans held for sale at December 31,
1995 (which were pledged to collateralize the Company's warehouse lines)
compared to $2,351,912 at March 31, 1995 which reflects increased originations
as a result of the 37 Desktop installations. The mortgage loans held for sale
are financed through the warehouse line at approximately 97% of the loan value.
The Company expects its assets to continue to grow as the Company expands
its origination business through the increased sites for the Company's Desktop
installations nationwide. The Company currently has a $17 million credit
facility with BankOne, Texas, and a $20 million credit facility with Merrill
Lynch. As a result, the warehouse lines are in place to accommodate increased
loan originations. The Merrill Lynch credit agreement expired in the third
quarter of fiscal 1995 and was renewed in the second quarter of fiscal 1996. The
Merrill agreement is an uncommitted line with approval on a loan by loan basis.
The covenants for the BankOne credit facility requires a minimum net worth for
AFI Mortgage of $3.5 million. The Company fell below this threshold in the
second quarter of fiscal 1996, for which a waiver was received. However, the
BankOne, Texas line which was up for renewal in December 1995 has been extended
until March 1 at which time Management and the lender will review and adjust the
covenant. Renewal is anticipated. In fiscal 1996, the Company has a note payable
of approximately $550,000 secured by a portion of the servicing portfolio coming
due which management expects to either refinance or repay with the proceeds from
the sale of the related servicing.
The net decrease in cash of the Company was $611,373 for the nine months
ended December 31, 1995. The primary reason for the decrease in cash results
from the large increase in mortgage loans held for sale and the related
warehouse lending process. BankOne will not lend 100% of the outstanding loan
balance; therefore, the Company must fund the difference. The outstanding
mortgage loans at December 31, 1995 are $5,065,765 compared to the warehouse
note payable being only $4,803,567. The Company is currently implementing
procedures to decrease the time between warehouse funding and investor payoff.
The Company also paid out $200,743 in capital lease obligations during the nine
months ended December 31, 1995 along with $78,120 in preferred dividends. The
Company received a working capital line of $500,000 in the second quarter of
fiscal 1996. The capital was used for Desktop operations. Due to the increase in
loan production and the approximate time for the Company to receive payment on
loans sold in the secondary market, the Company has set up new procedures to
facilitate the process and expedite the related payment by investors. As a
result, the Company expects to see improvements in cash flow for the fourth
quarter of fiscal 1996.
20
<PAGE>
On March 31, 1996, the Company entered into a loan transaction with First
Mortgage Investment Corp. (FMIC) of Prairie Village, Kansas. The loan was
structured into two separate notes. One was for $400,000 at a rate of prime plus
four percent, with a term of six months, secured by the Company's servicing
portfolio and certain other assets. The second note is for $350,000 at a rate of
prime plus four percent, a $100,000 principal reduction is due within six
months, and the remaining $250,000 will become due in two years and is secured
by a second mortgage on the Company's building. Both notes are convertible to
common stock of the Company at the option of FMIC at 75% of the then market
price of the common stock at the time of conversion. The Company is using the
proceeds as operating capital.
Prospective Trends
The Company will continue to develop and implement the latest
state-of-the-art technologies that will enhance the Company's operating
efficiency as well as increase productivity. The Company's management believes
that new technologies will be one of the largest factors in increasing
production volume and reducing costs of originating and servicing mortgage
loans. Another significant factor will be the strategies used to implement these
new technologies. As a result, the Company believes its strategy of implementing
a convenient, low cost national network of the Desktop systems will
substantially increase the Company's loan originations and ultimately its
servicing portfolio.
A key technology that the Company plans to implement in fiscal 1996 is the
use of Automated Underwriting. Automated Underwriting is the use of artificial
intelligence through computer technology to make underwriting and credit
decisions on residential mortgage loans. The use of automated underwriting will
reduce the time needed to process and underwrite a residential mortgage loan
from approximately 30 to 45 days to as few as 5 to 14 days. It will also
significantly lower the cost of processing and underwriting these loans since
the technology will increase the number of loans processed and underwritten per
employee. This technology has only been available since March 1995 and the
Company is aiming for an implementation date of June 1996.
21
<PAGE>
As of March 1996, the Company has 37 installations in place and anticipates
70 installations by the end of fiscal 1997. In addition, the Company has a
minimum of 20 sites that have signed broker leases and are currently in the loan
originator recruiting phase of the implementation process. Management estimated
the original cost for installation of a new location to be approximately $8,000;
however, management has implemented changes in the marketing and installation
process to reduce the anticipated cost to approximately $4,500. The Company
anticipates the source for funding these new locations will come from future
sales of servicing rights and income received from current originations sold in
the secondary market. The Company works with a marketing firm that has extensive
knowledge of the real estate sales industry. This marketing firm helps target
potential real estate offices with an interest in our system. This marketing
relationship will allow the Company to develop the network needed to meet the
Company's expectations of Desktop terminal installations. Due to the positive
trends the Company has been experiencing since the beginning of the calendar
year, the Company believes there will be a substantial increase in mortgage loan
originations resulting in an improvement in the Company's fiscal performance in
fiscal 1997.
Similar to the Desktop origination concept of low overhead installations in
real estate offices, the Company is developing a network of loan representatives
that will target financial institutions such as banks and credit unions. The
network of reps will operate with no overhead as the Company will only supply
the original software. The reps will be responsible for all other costs related
to the origination process. Management believes the development of this network
will replace the lost production form the sale of the Washington operations.
Impact Of Recently Issued Accounting Standards
The Company is required to adopt Statement of Financial Accounting
Standards No. 107 and No. 119, "Disclosures About Fair Value of Financial
Instruments" for March 31, 1996 which generally requires disclosure of the fair
value of financial instruments, both assets and liabilities, recognized and not
recognized on the balance sheets.
The Company adopted Statement of Financial Accounting Standards No. 114 and
118, "Accounting by Creditors for Impairment of Loan," during the first quarter
of fiscal 1996. This statement requires the accounting by creditors for
impairment of certain loans. The impact of adopting the statement on the
Company's consolidated financial statements was not material.
The Company is required to adopt Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment to
FASB Statement No. 65", for fiscal year beginning April 1, 1996. The statement
generally requires entities that sell or securitize loans to retain the mortgage
servicing rights to allocate the total cost of mortgage servicing rights to the
loan and the related servicing right based on their relative fair values. Costs
allocated to mortgage servicing rights should be recognized as a separate asset
and amortized over the period of estimated net servicing income and periodically
evaluated for impairment based on fair value. The adoption of this statement is
not expected to have a material effect on the Company's 1996 consolidated
financial statements since the Company intends to sell substantially all
originated loan servicing released during fiscal 1996.
22
<PAGE>
SFAS No. 123, "Accounting For Stock-Based Compensation," will be adopted by
the Company during fiscal year ending March 31, 1996. This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. These plans include all arrangements by which employees
receive shares of stock or other equity investments of the employer or where an
employer issues its equity instruments to acquire goods and services from its
nonemployees. The impact of adopting the statement on the Company's consolidated
financial statements is not expected to be material.
PRICE RANGE OF COMMON STOCK
The Company's common stock has been traded on the American Stock Exchange
since March 29, 1993 under the symbol AVF. Prior to that time, the Company's
common stock was traded in the over the counter market on NASDAQ under the
symbol AVFI. The following table sets forth the 1994 period and the 1995 period
closing prices for common stock as reported on the American Stock Exchange. The
prices were obtained from the American Stock Exchange and do not include retail
mark-ups, mark-downs, or other fees or commissions, and may not represent actual
transactions.
1995
- ----
High Low
Quarter Ended June 30, 1994 $3.68 $2.38
Quarter Ended September 30, 1994 2.88 1.75
Quarter Ended December 31, 1994 2.25 1.06
Quarter Ended March 31, 1995 1.56 1.00
1996
- ----
Quarter Ended June 10, 1995 1.75 .88
Quarter Ended September 30, 1995 1.56 1.00
Quarter Ended December 31, 1995 1.38 .56
Quarter Ended March 31, 1996 1.38 .62
At April 15, 1996, the market price of the Company's common stock was $1.38
per share. On such date the Company had 181 holders of record of the Company's
common stock and the Company estimates that it has approximately 1,300
beneficial shareholders.
23
<PAGE>
The Company has not yet paid any cash dividends on its Common Stock to date
and, except for the dividend requirements under the Company's issued and
outstanding 10.5% Series B Preferred Stock, the Company does not anticipate
paying dividends in the foreseeable future. The Company is not subject to any
restrictive covenants or agreements which limits its ability to pay dividends.
Ultimately, funds for the payment of dividends will be provided by the Company's
subsidiaries. While AFI Mortgage Corp. is subject to restrictive covenants in
connection with certain of its borrowing arrangements, it is not presently
anticipated that such covenants will preclude the Company from paying dividends
on the currently issued and outstanding preferred stock.
BUSINESS
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
company formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991 the Company was
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed, due to expansion into additional states, to AFI Mortgage,
Corp ("AFIM") in November 1994. AFIM is a mortgage banking company servicing
approximately $468,000,000 in mortgages as of December 31, 1995.
In 1992 the Company completed a 400,000 Unit public offering of its
securities and received net proceeds therefrom of $1,265,418. Each Unit
consisted of one share of 10.5% Series B Preferred Stock, one Class A Warrant to
purchase one share of Common Stock at $3.50 per share and one Class B Warrant to
purchase one share of Common Stock at $10.00 per share. This Prospectus covers
the shares underlying such Class B Warrants. On October 19, 1993 the Company
called for redemption all Class A Warrants resulting in the exercise of 395,990
warrants at $3.50 each (total proceeds of 1,263,732, net of costs). The Company
also completed, on March 29, 1993, a public offering of its common stock and
raised net proceeds therefrom of $3,510,138. The net proceeds were used
primarily to purchase mortgage loan servicing rights.
AFIM'S History
AFIM was founded in February of 1982. Since inception, AFIM has focused on
the origination, refinancing and servicing of 1-4 family residential home
mortgages. The Company's physical facilities and computer system allows the
Company to handle that volume of loans which the Company anticipates it will
service and originate in the foreseeable future.
24
<PAGE>
The Company intends to build on its implementation of a convenient, low
cost and rate competitive national network known as the Desktop Mortgage Loan
Origination System (Desktop). The Company's Desktop installations are primarily
targeted at respected residential real estate brokerage offices. This market is
targeted due to the fact that current mortgage loan production volume is driven
by real estate transactions versus refinancing transactions. However, if the
market provides for a decrease in interest rates an active refinancing market
will be established through not only such real estate brokers and the Company's
own servicing portfolio but the placement of terminals with respected mortgage
brokers, small savings and loan institutions and branch bank locations without a
competitive mortgage product.
As of March 31, 1996, the Company had 33 installations in place for at
least 30 days. The Company's philosophy is to manage the loan representatives
versus a more common occurrence of control by the real estate broker. The
typical lead-time required to interview and hire a loan officer, install the
Desktop system and train the respective staff averages 90 days. The Company
works with a marketing firm to help target potential real estate offices for
application and possible installations. When an application is received, it is
reviewed for number of buyer side transactions as well as location to determine
those real estate brokers whose business has growth potential. The Company has
increased its desktop locations from 12 at March 31, 1995 to 33 at March 31,
1996. Accordingly, the Company anticipates significant growth of mortgage loan
origination production during the fiscal 1997 year from the Desktop terminals.
Investment Policies
Investments in Real Estate Mortgages
The Company invests in real estate mortgages by acting as a loan originator
as part of its core business. Primarily all mortgage originations are first
mortgages on single family dwellings. For a general description of each type of
mortgage activity in which the Company engages, such as origination, servicing
and warehousing, and the portfolio turnover rate, see below.
The Company does not generally invest in securities of or interests in
persons primarily engaged in real estate activities. The only real estate owned
by or in which the Company has an investment interest is the Company's
headquarters building which was developed for the Company and which the Company
occupied in June of 1993. The building houses all executive, administrative and
servicing functions of the Company.
25
<PAGE>
Properties Owned by the Company.
The Company owns the building and land upon which the building sits in fee
simple subject to a mortgage in favor of Citizens Bank of Shawnee, Shawnee,
Kansas. As of March 31, 1996, the mortgage has a principal balance of $589,848,
with a fixed rate of eight percent and is payable monthly with the entire
balance due and payable in 1996. The balance may be prepaid at any time without
penalty. In the opinion of management, the property is adequately covered by
insurance. The building is utilized entirely by the Company. The federal tax
basis of the property is $1,100,000; the property is depreciable for tax
purposes at the rate of 3.179% per year; the method of depreciation is straight
line; the life of the property for purposes of depreciation is 31.5 years; the
real estate tax rate is approximately 13% and the annual real property taxes are
approximately $24,000.
Loan Servicing
In the past, the Company serviced substantially all the mortgage loans that
it originated or purchased from failed institutions. Currently, substantially
all originated mortgage loans are sold servicing released. As a result purchased
contracts to service single-family residential mortgage loans originated by
other lenders comprise the majority of the Company's mortgage servicing
portfolio at March 31, 1996. Servicing includes collecting and remitting loan
payments, making advances when required, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections of the mortgage premises, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. The Company receives fees for
servicing mortgage loans, owned by investors. The fees on the Company's
portfolio are calculated on the outstanding principal balances of the loans
serviced and are recorded as income when earned. Other fee income consists of
ancillary income (late charges, fax fees, insurance commissions, etc.)
associated with loan servicing and is recorded as income when collected.
The Company's servicing portfolio is subject to reduction by normal
amortization and by prepayment or foreclosure of loans. In addition, the Company
has in the past and will in the future sell a portion of its portfolio of loan
servicing rights. For example, the Company sold servicing rights on
approximately $93,000,000 and $75,000,000 of mortgage loans from its loan
servicing portfolio during fiscal 1995 and 1994, respectively. In general, the
decision to buy or sell servicing rights is based upon management's assessment
of the Company's cash requirements, the Company's debt to equity ratio and other
significant financial ratios, the market value of servicing rights, and the
Company's current and future earnings objectives.
26
<PAGE>
The Company believes that it has developed systems that enable it to
service mortgage loans efficiently and therefore enhance the returns it can earn
from investments in servicing rights. In addition, the Company believes that the
earnings from its servicing portfolio may to some extent offset the effect of
interest rate fluctuations on loan origination revenues. In general, the value
of the Company's loan servicing portfolio may be adversely affected as mortgage
interest rates decline and expected loan prepayments increase. Income generated
from the Company's loan servicing portfolio also may decline in such an
environment. This negative effect on the Company's income may be offset somewhat
by a rise in origination and servicing income attributable to new loan
originations, which historically have increased in periods of low mortgage
interest rates. However, there can be no assurance that low mortgage rates will
result in increased loan originations, particularly during periods of slow or
negative economic growth. The weighted average note rate of the Company's
servicing portfolio as of December 31, 1995, was 9.12%. The amount of prepayment
is directly related to the note rate; the lower the note rate the lower the
prepayments. As of December 31, 1995, the Company's prepayment rate was 10%
annualized.
In the past, substantially all of the conforming loans (those loans that
are conventional loans originated by the Company) have been sold to Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") programs on a non-recourse basis, whereby foreclosure losses are
generally the responsibility of FNMA and FHLMC, and not the Company. However,
currently, all conforming conventional loans and non-conforming loans (loans
which do not meet FNMA, FHLMC and GNMA guidelines) originated by the Company are
being sold servicing released to private investors on a non-recourse basis.
Similarly, the government insured loans serviced by the Company are securitized
through the Government National Mortgage Association ("GNMA") , whereby the
Company is insured against loss by the Federal Housing Authority ("FHA") or
partially guaranteed against loss by the Veterans Administration ("VA").
Servicing Capability
A nonaffiliated third party provides electronic data processing through the
Company's IBM AS/400. Management believes this relationship increases the
Company's productivity and reduces its cost of servicing.
Servicing Portfolio Characteristics
The following table sets forth certain information regarding the Company's
servicing portfolio of mortgage loans, including loans held for sale, for the
periods indicated:
27
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(000's Omitted) (000's Omitted)
<S> <C> <C>
Composition of Servicing Portfolio at Period End:
FHA Insured/VA Guaranteed Mortgage Loans....................... $215,640 $211,100
Conventional Mortgage Loans................................... 264,483 256,573
Second Mortgages............................................. 458 532
Delinquent Mortgage Loans and Pending Foreclosures
at Period End:
30 Days...................................................... 4.47% 6.14%
60 Days...................................................... .92% 1.11%
90 Days or more.............................................. .79% .10%
---- ----
Total Delinquencies 6.18% 7.95%
Foreclosure Pending.............................................. 0.59% .64%
</TABLE>
At March 31, 1996, the delinquency rate had decreased to 6.18% from 6.96%
at March 31, 1995.
Loan Originations
In January 1992 the Company expanded its mortgage banking operations to
include the ability to refinance mortgage loans. This enhances the Company's
servicing portfolio in several ways. It allows the Company to retain a portion
of its payoffs as new loans. Previously, the refinanced loans enhanced the value
of the Company's portfolio because the new loan had a lower note rate and a
longer servicing life. Currently, originated and refinanced mortgage loans are
sold servicing released which increases current cashflow and revenues. Also the
revenues and earnings provided by the refinancing business allow the Company to
diversify its potential revenue producing business away from loan servicing.
Between March 31, 1995 and March 31, 1996, the Company originated 1,284 loans
with a principal balance of approximately $111,500,000.
AFIM has developed an important expertise which allows the Company to close
new loans in several states through closing agents and title companies without
the necessity to invest in branch office overhead. This expertise is now
critical in the ability to place Desktop installations in real estate offices
nationwide. AFIM believes it is at the forefront of the industry to implement an
electronic national network of convenient origination locations with transaction
costs well below the traditional branch office approach. All processing and
underwriting are centralized at AFIM headquarters. The proprietary system
includes core software capabilities which run on a desktop or personal computer.
The Company has in-house computer oriented employees trained on the software to
perform necessary modifications to software as well as installation of the
software.
The Company believes that in the future it will significantly build its
mortgage loan origination volume and ultimately the servicing portfolio
utilizing its proprietary Desktop terminals which it is placing in a network of
real estate brokerages nationwide. The Company believes it is at the forefront
of industry efforts to implement an electronic national network of convenient
origination locations with transaction costs well below the traditional branch
office approach. The Company believes the electronic origination network is
designed to increase convenience for the borrower while also lowering the
overall loan origination cost, thereby creating a cost advantage for the Company
versus industry peers. AFI also originates loans through retail originators
utilizing the Desktop terminals at minimal cost to the Company.
28
<PAGE>
The system is initially being targeted for placement in real estate
brokerage companies with high residential growth, with follow-up strategies to
expand to small banks and small mortgage brokers. The system is designed to be
operated on-site by an AFIM loan representative with "expert systems" feedback
to the borrower, an evaluation of loan balance and repayment options. The loan
representative is managed by AFIM instead of the real estate broker which
management believes is rather unique to the industry philosophy. The information
is electronically transmitted by modem to AFIM where the actual processing and
underwriting is performed. The system offers the convenience of one stop
shopping for the home buyer in addition to productivity advantages for the
agents. The "Stepl Pre-Approval Process" provides the potential home buyer with
a formal written pre-approval for a monthly mortgage payment based on the
application in approximately 48 hours. This allows the home buyer and real
estate agent the advantage of knowing financing opportunities prior to the
negotiation of a potential contract.
In October 1994, the Company entered into a marketing agreement with
Advanced Realty Assistance Corporation, an unrelated Company located in
Clearwater Florida, to place the Desktop terminals in real estate brokerages
throughout the country.
As another method of increasing mortgage loan originations, in July 1994
the Company began mortgage production operations in the State of Washington. The
Company opened operations by hiring some of the staff of a Seattle area mortgage
broker. The Company's Desktop terminals have been installed in two offices as a
means of enhancing operating efficiencies. The predecessor organization
developed an active business in non-conforming loan originations which do not
meet industry standard credit, loan to value, or other criteria. Due to this
loan status, most yields are higher, making a strong market for purchase by
private investors. During the fifteen months of operation, the Washington
operation originated 474 loans with a principal balance of $42,221,000.
Effective October of 1995, the Company sold its two Washington operations to two
independent companies.
Loan Processing
In connection with the origination of each loan, the Company processes the
loan application, prepares mortgage documentation, conducts credit checks, has
the property valued by appraisers and funds the loan. Loan applications must be
approved by the Company's underwriting department for compliance with
underwriting criteria, including the loan-to-value ratio, borrower's income
qualification and necessary insurance. After approval, the Company's current
policy is to obtain commitments from investors to purchase substantially every
loan to be originated by the Company. Most all of the Company's current
investors, including FNMA and FHLMC, do not review individual loan files prior
to issuance of commitments to purchase loans.
29
<PAGE>
Once a commitment is in place and the Company has agreed to the terms of
the loan with the borrower, the loan is then closed by a third party. The loan
is then sold by the Company to the investor and the servicing is either kept or
released depending on the commitment agreed upon with the investor.
The Company's current 20,000 square foot facility will have sufficient
capacity for the employees needed for the anticipated near term production
increases with room to grow in to the fiscal year 1997.
Types of Loans
Approximately half of the loans serviced by the Company are conventional
loans. The Company emphasizes the origination and purchase of "conforming"
loans, which are conventional loans having principal amounts within the maximum
amounts eligible for sale to FNMA and FHLMC (currently $203,150 for a one-family
property) and which otherwise comply with FNMA and FHLMC requirements. The
Company also originates and purchases "jumbo" loans (conventional loans that
exceed the maximum amounts qualifying for sale to FNMA or FHLMC but that
otherwise generally comply with FNMA or FHLMC requirements) and other loans that
do not comply with FNMA or FHLMC requirements but that do comply with
requirements for sale to private investors. It is the Company's policy to obtain
a title insurance policy on every mortgage loan. In addition, substantially all
of the Company's originated loans are first mortgage loans. During the fourth
quarter of fiscal 1995, the Company did introduce a second mortgage loan program
for which the originated loans will be sold to private investors.
Markets and Competition
Through the National Mortgage News, the Mortgage Bankers Association
estimates that mortgage loan originations for calendar year 1995 to reach $654
billion and $765 billion for calendar year 1996. The loan origination market
share is somewhat diversified with several large players and many small players.
As a whole, the industry is incorporating technology and pursuing point of sale
strategies to generate mortgage loan originations. The Company believes that it
is more technologically advanced than most of its peers with the exception of a
few of the largest industry players. The Company also believes that its strategy
for implementing its technology and strategy for point of sale originations is
unique and will allow it to compete even with its largest competitors.
30
<PAGE>
Regulation
The Company's mortgage banking business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling, and servicing mortgage loans. Those rules and regulations,
among other things, prohibit discrimination, provide for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to VA loans, fix maximum interest rates. Moreover, FHA
lenders such as the Company are required annually to submit to the Federal
Housing Commissioner audited financial statements. FNMA, FHLMC and GNMA require
the maintenance of specified minimum net worth levels (which vary depending on
the amount of the portfolio serviced by the Company). The Company is subject to
examination by the Federal Housing Commissioner at all times to assure
compliance with the FHA regulations, policies and procedures. Mortgage
origination activities are subject to the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which prohibit discrimination and require the
disclosure of certain basic information to mortgagors concerning credit and
settlement costs.
Additionally, there are various state laws and regulations affecting the
Company's mortgage banking operations. The Company is licensed as a mortgage
banker or retail installment lender in those states in which it does business
that requires such a license.
Conventional mortgage operations may also be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
Portfolios purchased from RTC historically have had higher delinquency rates.
This has increased the delinquency rates of AFIM's servicing portfolio. Most
investors, in particular FNMA, FHLMC, and GNMA, have very specific requirements
regarding delinquencies. Once the servicer reaches those thresholds the servicer
is required to reduce their delinquency percentage before any additional
acquisitions will be approved by the affected investor. The Company has no such
restrictions by any investor on the purchase and transfer of servicing.
Higher delinquency ratios may adversely affect the Company's cash flow and
profitability. Higher delinquency rates, depending on the type of loans being
serviced, may require the Company to continue to pass through principal and
interest payments to the investor owning the loan. Although recoverable, this
would require the Company to use its cash to advance such payments. The Company
currently has in place $1,000,000 of financing available to make such advances.
31
<PAGE>
Higher delinquency ratios also require additional personnel to administer
collection procedures which increases its cost of servicing.
Other Operations
On July 1, 1994, the Company purchased for $10,000 the outstanding shares
of Network Appraisal Associates, Inc. (Network). Network was previously an
unrelated appraisal company providing services to AFI branch offices and other
mortgage banking companies in the Northwest region. The operations of Network
have been included in the consolidated financial statements for fiscal 1995 but
were not material to these statements. However, in the first quarter of fiscal
1996, the Company made the economic decision to discontinue operations of
Network.
On August 1, 1994, the Company purchased 100% of the stock of Century Real
Estate of Lincoln, Nebraska. The acquisition was planned as a short term
investment which allowed for deployment of some of the first Desktop terminals
in a closely monitored real estate brokerage environment. Effective December 20,
1994, the Company sold this temporary investment in Century and concurrently
through a stock exchange purchased 10% of the real estate brokerage company
which purchased Century. The combination of Century and the acquiring real
estate brokerage created the largest real estate brokerage in the Lincoln,
Nebraska market. Also, as part of the sale, AFI has the right to install its
Desktop Mortgage Loan Origination system in all four of the real estate offices
in the Lincoln area.
Employees
The Company currently has 65 employees in its originations area, 17 in
its servicing area and 16 in its administrative and finance area. The servicing
division has a key employee, with 20 years experience and an additional 10
employees with 5 to 10 years experience.
Legal Proceedings
In March, 1994, the Company was named as a co-defendant in a lawsuit filed
by two former officers of the Company. The lawsuit, filed in the United States
District Court for the District of Nebraska, alleges that the Company violated
securities laws, delaying the ability of these former officers from selling
common stock of the Company owned by them, resulting in alleged losses of
$300,000. The validity of the stock owned by these plaintiffs is the subject of
concurrent litigation pending in the state court in Omaha, Nebraska. The Company
believes the federal lawsuit brought by the former officers is without merit and
it will be vigorously defended.
32
<PAGE>
Facilities
The only type of real estate in which the Company has invested is the
office building described above. The Company manages its own property and the
financing of said property is as described above. The Company has not adopted
any policies which would limit the number or amount of mortgages which may be
placed on any piece of property owned by the Company. The Company presently has
no plans to purchase or invest in real estate except for its headquarters
building as described above. There are no limitations on the percentage of
assets of the Company which may be invested in any one investment, or type of
investment. Any investment policy of the Company may be changed without a vote
of security holders.
MANAGEMENT
Officers and Directors
The following sets forth certain information with respect to the
officers and directors of the Company.
NAME AGE POSITION
---- --- --------
Norman L. Peterson 55 President, Treasurer,
Director
William B. Morris 38 Secretary, Director
Steven J. Peterson 29 Sr. Vice President,
Director
Mark J. Peterson 33 Vice President, Director
Deborah K. Towery 33 Chief Financial Officer
Thomas S. Lilley 45 Director
James L. Mullin, II 31 Director
Patrick E. Elgert 47 Director and Senior
Vice President
Thomas G. Schleich 35 Director
W. Ray Bell 50 Director
33
<PAGE>
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected by the Board of
Directors and hold office until their successors are elected and qualified. The
Company currently has a standing audit committee of its Board of Directors. All
persons who were directors during the year ended March 31, 1996 attended at
least 75% of all the meetings.
Norman L. Peterson. Mr. Peterson has been an officer and director of the
Company since June, 1988. Mr. Peterson is, and has been since 1984, president of
Peterson and Sons Holding Company, a financial consulting company. From 1982 to
1984, he invested in and operated several small businesses in Lincoln, Nebraska.
From 1979 to 1980 he founded, operated and then sold a company that collected
accounts receivables. From 1974 to 1979, he was a senior officer, director and
stockholder of the holding company that owned Platte Valley Bank and Trust
Company. From 1963 to 1973, he was employed by Lincoln Production Credit
Association where he was a branch manager from 1966 to 1973.
William B. Morris. From 1991 to the present, Mr. Morris has been Secretary,
Treasurer and a Director of the Company and has also been involved in a
partnership with Mr. Norman L. Peterson, under the name Lancaster Partners, to
consult with small to mid- sized companies on raising capital and becoming
publicly traded. From 1984 to 1989, Mr. Morris was an account executive at the
investment banking firm of Stuart James & Company, and from 1983 to 1984 Mr.
Morris was an account executive at the venture capital brokerage firm R.B.
Marich, Inc. in Denver, Colorado.
Steven J. Peterson. Mr. Peterson attended Rice University where he received
a Master of Business Administration in May, 1992. In 1989, he graduated Magna
Cum Laude from Nebraska Wesleyan University with a Bachelor of Science degree in
finance. From 1989 to the present, he has served as secretary/treasurer for
Peterson & Sons Holding Company, a family owned company. In 1990, Mr. Peterson
was the principal director of a small retail brokerage operation. Mr. Peterson
has been a director of Continental Mortgage, Inc. since graduating from Rice. He
is the son of Norman L. Peterson.
Deborah K. Towery. Ms. Towery graduated from Auburn University in 1985 with
a B.S. degree in Business Administration and became a Certified Public
Accountant in 1986. From 1993 to present she has been the Chief Financial
Officer for the Company. From 1992 to 1993, she was a financial analyst for
Midland Loan Services, LP and previously was the Chief Financial Officer for
South Trust Mobile Services, Inc. (wholly-owned subsidiary of SouthTrust Bank of
Alabama). From 1985 through 1989, she worked for KPMG Peat Marwick, in
Birmingham, Alabama, as an incharge auditor and manager.
34
<PAGE>
Mark J. Peterson. Mr. Peterson attended law school at the University of
Nebraska where he graduated with a Juris Doctorate in May, 1988. He earned a
Bachelor of Science degree from Nebraska Wesleyan University in 1985. Mr.
Peterson worked part-time as a law clerk and is now an associate with the law
firm of Erickson & Sederstrom, P.C. in Omaha, Nebraska. Mr. Peterson is the son
of Norman L. Peterson.
Thomas S. Lilley. Mr. Lilley joined the Company in 1992 with 20 years
experience in the banking business. Most recently Mr. Lilley was employed by
First National Bank of Shawnee where he was Chief Financial Officer. He is
experienced in the areas of portfolio management, asset/liability management,
and personnel management. Mr. Lilley earned a Bachelor of Science degree in
Biology/PreDental, with equivalent minors in Journalism, Chemistry, and Spanish
from Baker University.
James L. (Lenny) Mullin, II. Mr. Mullin graduated from Emporia State
University with a degree in speech communication in 1986. Since 1986 he has been
continuously involved in real estate in Kansas City. He is a land developer,
home builder and real estate broker. He has extensive holdings in residential
rental property that he also manages. He is a member of the National Association
of Realtors, Kansas Association of Realtors, Johnson County Board of Realtors,
National Association of Homebuilders, and the Greater Kansas Homebuilders
Association.
Patrick E. Elgert. Mr. Elgert graduated from the University of Nebraska in
1971 with a Business Degree. Since 1994, Mr. Elgert has been a Senior Vice
President with the company. From 1990 to the 1994 Mr. Elgert was President and
Co-Owner of Coldwell Banker Century Realty in Lincoln, Nebraska and from 1986 to
1990 he was involved in real estate development and insurance. From 1976 to
1981, he was Vice President of Columbus Federal Savings and Loan, where he was
responsible for development of the Retail Mortgage Division. From 1971 to 1976,
he was Vice President of State Federal Savings & Loan and was responsible for
mortgage loan originations and Branch Manager.
Thomas G. Schleich. Mr. Schleich graduated from Nebraska Wesleyan
University in 1985 with a B.S. degree in Business Administration. He graduated
from the University of Nebraska law school in 1988 with a J.D. degree. From 1989
to 1993 he was president of Commercial Investment Properties in Lincoln,
Nebraska. From 1993 to the present he has been the Chief Operating Officer of
Home Real Estate in Lincoln, Nebraska. In addition to being a member of the
Nebraska State Bar Association, he is also licensed by the State of Nebraska as
a Real Estate Broker.
W. Ray Bell. From 1992 to 1995, Mr. Bell was President and Chief Operating
Officer of Commonwealth Mortgage Corporation of America and President of
Fundamental Holdings, Inc. From 1995 to 1996 he was president of AFI Mortgage
Corp., the Company's wholly owned mortgage banking company.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid by
the Company in each of the last three years to the Chief Executive Officer. No
executive officer had total compensation in excess of $100,000, except Mr.
Peterson.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------
Annual Compensation(1)(2) Awards Payouts
------------------------ ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Princi- Other
pal Annual Restricted All Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Salary($) Bonus($) sations($) Award(s)($) SARs(#) Payouts($) sation($)
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
Norman L. March 31,
Peterson 1996 $120,000 -0- 2,500 -0- 25,000 -0- -0-
Chairman
of the Year Ended
Board March 31,
President 1995 $120,000 -0- -0- -0- -0- -0- -0-
and Chief
Executive
Officer Year Ended
March 31,
1994 $120,000 -0- 16,000(3) -0- 25,000 -0- -0-
<FN>
(1) Amounts shown set forth all cash compensation earned by each of the named
individual in the years shown.
(2) While the named individual received perquisites or other personal benefits
in the years shown, in accordance with applicable regulations, the value of
these benefits are not indicated since he did not exceed in the aggregate the
lesser of $25,000 or 25% of the individual's salary and bonus in any year.
(3) Paid in the form of consulting fee to Peterson & Sons Holding Company.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN YEAR ENDED MARCH 31, 1996
(a) (b) (c) (d) (e)
% of Total
Options/
SARs
Granted to
Options/SARs Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- ---- ------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
W. Ray Bell 25,000 8.80% 0.81 06/30/96
James L. Mullin II 25,000 8.80% 0.81 12/01/00
Thomas Schleich 25,000 8.80% 0.81 12/01/00
Thomas Lilley 25,000 8.80% 0.81 12/01/00
Mark J. Peterson 25,000 8.80% 0.81 12/01/00
Steven J. Peterson 25,000 8.80% 0.81 12/01/00
Norman Peterson 25,000 8.80% 0.88 12/01/00
William B. Morris 25,000 8.80% 0.88 12/01/00
Patrick E. Elgert 25,000 8.80% 0.81 12/01/00
Patrick E. Elgert 9,000 3.17% 1.12 09/01/06
Deborah K. Towery 2,500 0.88% 1.25 06/30/06
Deborah K. Towery 2,500 0.88% 0.81 01/01/07
------- -----
239,000
37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED MARCH 31, 1996
AND OPTION/SAR VALUES AS OF MARCH 31, 1996
(a) (b) (c) (d) (e)
Values of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable Unexercisable
- ---- --------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Norman L.
Peterson -0- -0- 137,500/12,500 $7,062.50
William B.
Morris -0- -0- 137,500/12,500 $7,062.50
Steven J.
Peterson -0- -0- 137,500/12,500 $7,062.50
Thomas S.
Lilley -0- -0- 22,500/12,500 $7,062.50
Patrick E.
Elgert -0- -0- 31,500/12,500 $9,357.50
James L.
Mullin -0- -0- 12,500/12,500 $7,062.50
Deborah
Towery -0- -0- 5,000/2,500 $7,062.50
Thomas G.
Schleich -0- -0- 12,500/12,500 $7,062.50
W. Ray Bell -0- -0- 12,500/12,500 $7,062.50
</TABLE>
Compensation of Directors
Directors receive a fee of $250 for board meetings attended and are
reimbursed for expenses incurred in attending such meetings.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company has not entered into any employment contracts with any
executive officer of the Company, nor has the Company entered into any contract
with any executive officer with respect to the resignation, retirement or any
other termination of such executive officers employment with the Company or its
subsidiary or from a change-in-control of the Company or a change in any
executive officer's responsibility following a change-in-control.
CERTAIN TRANSACTIONS
On September 30, 1993 the Company entered into a contractual arrangement
known as a participation agreement with Peterson & Sons Holding Company to
participate in approximately $38,000,000 of servicing rights originated by
Continental Mortgage, Inc. prior to September 30, 1993. The transaction was
valued at $290,000 and was paid for by exchanging 51,627 shares of Advanced
Financial, Inc. common stock. Peterson & Sons Holding Company is 50% controlled
by Mark J. Peterson and 50% by Steven J. Peterson, both of whom are directors of
the Company and sons of Norman L. Peterson, President and Director of the
Company. Under the terms of these agreements, the participants received a
portion (generally 75%) of the underlying cash flows resulting from the
Company's servicing of certain identified mortgage loans. For purposes of the
agreements, cash flow is defined as gross revenues (service fees and ancillary
income) less a contractually pre-determined cost to service the loans. If the
underlying servicing is sold by the Company, the participants receive their
pro-rata portion of the sale proceeds. The Company does not guarantee the
participants a rate of return on their investment, and the Company has no
contractual obligation to repurchase the participant's interest.
38
<PAGE>
These participation agreements are recorded as obligations. To determine an
interest rate on the obligation, the Company estimates the future cash flows to
be paid to the participants and discounts those estimated future cash flows at a
rate so that their present value equals the amount paid by the participant.
Interest expense is recorded on the accrual method, and actual payments to the
participants are applied to reduce the Company's recorded obligation. If
estimates of future cash flows to be paid to participants change, the effective
interest rate is revised and interest expense is adjusted, as necessary, on a
prospective basis.
During fiscal 1995 and 1994, the Company repaid obligations under
participation agreements by either selling the underlying servicing and
remitting the participant's portion of the proceeds from sale, or by settling
the remaining obligation with Company funds. The underlying servicing relating
to Peterson & Sons participation agreements was sold for $243,000, with $163,000
being remitted and the remaining $80,000 was recorded as a non-interest bearing
payable on the financial statements of the Company as of March 31, 1995.
The underlying servicing relating to Lancaster Partners participation was
sold for $178,600 with $49,500 being remitted during the year and the remaining
balance of $128,100 being recorded as a non-interest bearing payable on the
financial statements of the Company at March 31, 1995.
On August 1, 1994, the Company purchased Century Real Estate Central, Inc.
("Century") of Lincoln, Nebraska from Patrick E. Elgert, an officer and director
of the Company, and his brother, for Twenty Dollars. In addition the Company
borrowed $211,685 from an unaffiliated bank and used to pay liabilities of
Century that had been guaranteed by Mr. Elgert in the approximate amount of
$250,000.
On December 20, 1994, the Company sold its Century Realty Central, Inc.
Lincoln, Nebraska subsidiary to Home Real Estate Service of Lincoln, Inc.
("Home") for $250,000, consisting of $50,000 cash and a non-interest bearing
promissory note for $200,000. The promissory note is payable in 36 monthly
installments with the entire balance due January 1, 1998. The note is unsecured
but is guaranteed by Austin Realty, Inc., whose vice president is Mr. Schleich.
The Company owns 10% of the issued and outstanding common stock of Home. The
family of Thomas G. Schleich, a director of the Company, controls Home. In
addition, the Company pays to Home monthly rental of $4,000 for the use of three
offices in the Lincoln, Nebraska area.
39
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1996 by: (i) each director; (ii)
each executive officer named in the Summary Compensation Table; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.
Beneficial Ownership (1)
------------------------
Number of Percent of
Beneficial Owner Shares Total
- ---------------- --------- ----------
Peterson & Sons
5425 Martindale
Shawnee, KS 66218 887,462(2) 22.9%
William B. Morris
5425 Martindale
Shawnee, KS 66218 756,263(3) 18.8%
Mark J. Peterson
770 N. Cotner, #402
Lincoln, NE 68505 887,462(4) 22.9%
Norman L. Peterson
5425 Martindale
Shawnee, KS 66218 1,073,010(5) 26.7%
Lancaster Partners
5425 Martindale
Shawnee, KS 66218 267,600(6) 6.9%
Steven J. Peterson
5425 Martindale
Shawnee, KS 66218 1,026,016(7) 25.6%
40
<PAGE>
Beneficial Ownership (1)
------------------------
Number of Percent of
Beneficial Owner Shares Total
- ---------------- --------- ----------
Thomas S. Lilley
5425 Martindale
Shawnee, KS 66218 32,500(8) less than
one percent
James L. Mullin, II
5425 Martindale
Shawnee, KS 66218 12,500(9) less than
one percent
Patrick E. Elgert
5425 Martindale
Shawnee, KS 66218 31,500(9) less than
one percent
Thomas G. Schleich
225 N. Cotner #107
Lincoln, NE 68505 75,000(10) 1.9%
Deborah Towery
5425 Martindale
Shawnee, KS 66218 5,250(11) less than
one percent
All Executive officers
and directors as a group (7 persons) 1,360,477(12) 35.1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities and
Exchange Commission (the "Commission"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where applicable,
each of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
(2) Includes 267,600 shares controlled by Peterson & Sons Holding Company as 50%
partners of Lancaster Partners, which owns 267,600 shares. Peterson & Sons
Holding Company is 76% controlled by Mark J. Peterson, an officer and director
of the Company, his brother, Steven J. Peterson, and Norman L. Peterson, the
President and a director of the Company, and the father of Mark J. Peterson and
Steven J. Peterson.
(3) Includes 351,163 shares owned personally and 267,600 shares controlled by
William B. Morris as 50% partner of Lancaster Partners which owns 267,600. Also
includes options to purchase 137,500 shares of common stock.
(4) Consists of 887,462 shares controlled by Peterson & Sons Holding Company.
Peterson & Sons Holding company is 24% owned by Mark J. Peterson.
(5) Includes 887,462 shares controlled by Peterson & Sons Holding Company.
Norman L. Peterson disclaims all beneficial ownership in such shares. Also
includes option to acquire 137,500 shares.
(6) Lancaster Partners is 50% owned by William B. Morris and 50% owned by
Peterson & Sons Holding Company.
(7) Includes 887,462 shares controlled by Peterson & Sons Holding Co. Also
includes options to purchase 137,500 shares of common stock. Peterson & Sons
Holding Company is 24% owned by Steven J. Peterson.
(8) Includes options to purchase 22,500 shares of common stock.
(9) Consists entirely of options to purchase common stock.
(10) Includes 62,500 shares of common stock held by Home Real Estate Service of
Lincoln, Inc., a private corporation controlled by the family of Mr. Schleich.
Also includes options to purchase 12,500 shares of common stock.
(11) Includes options to purchase 5,000 shares of common stock.
(12) Includes only shares actually issued and outstanding.
41
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 and the related
regulations require the Company's directors, executive officers and persons who
own more than ten percent of the Company's Common Stock to file with the
Securities and Exchange Commission and the American Stock Exchange initial
reports of their beneficial ownership of the Company's Common Stock and other
equity securities of the Company. In addition, such persons are required to
furnish the Company with copies of all such filings.
To the Company's knowledge, based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended March 31, 1996, all Section
16(a) filing requirements applicable to its directors, executive officers and
ten percent beneficial owners were complied with.
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
Percentage
Ownership Shares Ownership Owned
Selling Prior To Being After After
Stockholder Offering Offered Offering Offering
--------- ------- --------- ----------
<S> <C> <C> <C> <C>
Pyramid Holdings, Inc.(1) 250,000 250,000 -0- 0%
Cored Capital Corporation(1) 250,000 250,000 -0- 0%
Affiliated Services, Inc.(1) 250,000 250,000 -0- 0%
Ocean Marketing Corporation(1) 250,000 250,000 -0- 0%
<FN>
(1) Consists of shares underlying options
</FN>
</TABLE>
The Selling Shareholders have advised the Company that sales of the Common
Stock may be made by one or more of them from time to time in transactions in
the open market, in negotiated transactions or a combination of such methods of
sale, at fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Selling Shareholder may effect such transactions by
selling the Common Stock or through broker-dealers, acting as principal or
agent, who may themselves dispose of the Common Stock in transactions on the
American Stock Exchange. The broker-dealers may receive compensation in the form
of discounts, concessions or commissions from Selling Shareholders or the
purchasers of the Common Stock for whom the broker-dealers act they may act as
agent or to whom they sell as principal or agent or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions). The
Company is not aware of any agreement or arrangement between or among the
Selling Stockholders for the sale or other disposition of the securities owned
by them.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The authorized capital stock of the Company consists of 25,000,000 shares
of $.001 par value Common Stock and 10,000,000 shares of $.005 par value
Preferred Stock. As of March 31, 1996, there were currently outstanding
3,875,476 shares of Common Stock, no shares of Series A Preferred Stock and
372,000 shares of Series B Preferred Stock.
Common Stock
All shares of the Company's Common Stock have equal voting rights, and,
when validly issued and outstanding, entitle the holder to a single vote per
share on all matters to be voted upon by shareholders. Cumulative voting in the
election of Directors is not allowed. This means that holders of more than 50%
of the shares voting for directors can elect 100% of the directors if they
choose to do so; and, in such event, holders of the remaining less than 50% of
the shares voting for directors will not be able to elect any person or persons
to the Board of Directors.
Holders of the Company's Common Stock are entitled to receive dividends
when and as declared by the Company's Board of Directors from available funds,
property or shares of the Company's Common Stock. The Company has not paid or
declared any cash dividends since its inception and presently anticipates that
all earnings except for payment of preferred stock dividends, if any, will be
retained for development of the Company's business, and that no cash dividends
of its Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and would depend, among other things upon future earnings, the operating and
financial condition of the Company, its capital requirements, and general
business conditions. There can be no assurance that any cash dividends on the
Company's Common Stock will be paid in the future.
Shares of the Company's Common Stock have no pre-emptive or conversion
rights, nor redemption or sinking fund provisions, and are not liable to further
call or assessment. The outstanding shares of the Company's Common Stock are,
and any shares issued pursuant to conversion of Series B Preferred Stock or
exercise of Class B Warrant will be, fully paid and nonassessable. Each share of
the Company's Common Stock in entitled to share ratably in any assets available
for distribution to holders of its equity securities upon liquidation of the
Company.
Series A Preferred Stock
On May 2, 1989, the Board of Directors adopted a resolution designating
12,500,000 shares of the authorized preferred stock to be Series A Preferred
Stock. In October of 1991, all 10,000,000 shares of the issued and outstanding
Series A Preferred Stock were converted to 200,000 Common Shares (adjusted to
reflect a one for ten reverse stock split which occurred in December of 1991)
and, accordingly, there are presently no Series A Preferred shares issued and
outstanding. Management has no present intention to issue any Series A Preferred
stock now or in the foreseeable future.
43
<PAGE>
Series B Preferred Stock
Dividend Provisions. The holders of the Series "B" Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors out of funds
for the Company legally available therefore, cumulative cash dividends at the
annual rate equaling 10.5% of the purchase price paid to the Company for such
Series "B" Preferred Stock. Such dividends shall be payable quarterly on the
10th day of April, July, October and January in each year from the date of
issuance of such shares of Series "B" Preferred stock. If the dividend on the
Series "B" Preferred Stock for any dividend period shall not have been paid or
set apart in full for such Series "B" preferred stock, in the aggregate
deficiency shall be cumulative and shall be fully paid or set apart for payment
before any dividend shall be paid or set apart for payment of any class or
common stock of the Company. Accumulation of dividends of the Series "B"
Preferred Stock shall not bear interest. There are currently 372,000 shares of
10.5% Series "B" Preferred Stock issued and outstanding. The payment of such
dividends by the Company has been in default since January of 1996.
Right to Convert. One share of Series "B" Preferred Stock shall be
convertible, at the option of the holder thereof, into one fully paid and
non-assessable share of the Company's Common Stock.
Redemption of Series "B" Convertible Preferred Stock. The Series "B"
Preferred Stock shall be redeemable, in whole or in part, at the option of the
Company by resolution of its Board of Directors, at any time and from time to
time upon payment of one share of the Company's Common Stock for each share of
Series "B" Preferred Stock so redeemed, plus all dividends accrued and unpaid on
such Series "B" Preferred Stock up to the date fixed for redemption. Provided,
however, that the Company's right to redeem the Series "B" Preferred Stock shall
be subject to the requirement that the Company's Common Stock must have had a
minimum reported bid price of $5.75 per share for twenty consecutive trading
days prior to notice of redemption as described below.
In the event of any redemption of only part of the then outstanding Series
"B" Preferred stock, the Company shall effect such redemption pro rata among the
holders of outstanding share thereof according to the respective number of
shares of each class held by such holders.
44
<PAGE>
Voting Rights. Except as otherwise required by law, the holders of Series
"B" Preferred stock will not be entitled to any voting rights. Unless the vote
or consent of the holders of greater number of shares is required by law, the
consent of the holders of at least a majority of all issued and outstanding
Series "B" Preferred Stock shall be required to change, alter or revoke the
rights and preferences conferred upon the Series "B" Preferred stock by the
Certificate of Incorporation or to adopt an amendment to the Certificate of
Incorporation adversely affecting the rights of the holders of Series "B"
Preferred Stock.
Priority of Series "B" Preferred stock in the Event of a Dissolution. In
the event of any liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or otherwise, after payment or provision for payment
of debts and the liabilities of the Company, the holders of Series "B" Preferred
Stock shall be entitled to receive, out of the net assets of the Company, the
amount of the purchase price paid to the Company upon the original issuance of
the Series "B" Preferred Stock, in cash for each share of Series "B" Preferred
Stock, plus an amount equal to all dividends accrued and unpaid on each such
share up to the date fixed for distribution before any distribution shall be
made to the holders of any class of Common Stock of the Company.
Warrants
There are currently issued and outstanding 400,000 Class B Warrants (the
"Class B Warrants"). Each Class B Warrant will entitle the holder thereof to
purchase at a price of $10.00 at any time, one share of Common Stock. The
Company reserves the right, at any time after the bid price of the Common Stock
is at least 115% of the exercise price of the respective B Warrant for a period
of at least 10 consecutive business days, to call any or all of such Warrants
(but not less than the entire class of Warrants) upon 30 days' written notice to
warrantholders at a redemption price of $0.001. If the Warrants are called, they
will expire and will be of no further value if they are not exercised by the
holders on or before the call date. However, the Company will not redeem the
Warrants unless a current registration statement is in effect. The Company, in
its sole discretion may extend the expiration date of Warrants and/or reduce the
exercise price of the Warrants.
The Warrants were issued under a Warrant Agreement (the "Warrant
Agreement") dated June 4, 1992, between the Company and Interwest Transfer Co.,
Inc.
In order for a holder to exercise the Warrants there must be a current
registration statement in effect with the United States Securities and Exchange
Commission and the various state commissions relating to the shares of Common
Stock underlying the Warrants or an opinion of counsel for the Company that no
registration is required. The Company will be required to file post-effective
amendments or a new registration statement. There is no assurance that the
registration statement or a new registration statement can be kept current. The
registration statement of which this prospectus is a part updates the
registration statement previously filed at the time the Class B Warrants were
originally issued. If it is not kept current for any reason, the Warrants will
not be exercisable and may be deprived of any value. In addition, if the Common
Stock underlying the Warrants is not qualified for sale in the state in which a
Warrantholder resides, such holder will not be permitted to exercise the
Warrants and will have no choice but to either sell his Warrants or let them
expire.
45
<PAGE>
Warrantholders may be diluted by the issuance of additional shares of
Common Stock in the future and are protected against dilution of their interest
represented by the underlying shares of Common Stock only upon the occurrence of
stock splits, capital reclassification and mergers and sales of the Company's
assets. Warrantholders have no voting power, are not entitled to dividends, and
have no other rights generally conferred on shareholders. In the event of
liquidation, dissolution or winding up of the Company, Warrantholders are not
entitled to participate in the Company assets.
Exercise of Warrants. The Warrants may be exercised on surrender of the
applicable Warrant certificate on or prior to expiration of the applicable
Warrant exercise period, with the form of "Election to Purchase" on the reverse
side of the certificate executed as indicated, and accompanied by payment of the
full exercise price for the number of Warrants being exercised. Payment must be
by certified funds or cashier's check payable to the order of the Warrant Agent.
Transfer and Warrant Agent
The transfer agent and warrant agent for the Company is Interest Transfer
Co., Inc., P.O. Box 17136, Salt Lake City, Utah 84117.
LEGAL MATTERS
The legality of the securities being offered by this Prospectus in
connection with the laws governing corporations in the State of Colorado have
been passed upon for the Company by the law firm of Allen G. Reeves, P.C., 900
Equitable Bldg., 730 17th Street, Denver, Colorado 80202.
INDEMNIFICATION
Delaware Statutes provide for indemnification of the officers and directors
of the Company against certain liabilities incurred in connection with their
activities on behalf of the Company. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to the Company or
directors, officers or persons controlling the Company under such
indemnification provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
46
<PAGE>
EXPERTS
The financial statements of Advanced Financial, Inc. as of and for the
years ended March 31, 1995 and 1994 included herein and elsewhere in the
registration statement in reliance upon the report of KPMG Peat Marwick, LLP,
independent certified public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in accounting and auditing.
47
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1995 and March 31, 1995
Assets December 31, 1995 March 31, 1995
------ ----------------- --------------
(unaudited)
<S> <C> <C>
Cash and investments $ ---- 512,156
Mortgage servicing advances and accounts receivable 791,072 1,283,907
Property and equipment, net 1,753,461 1,982,517
Mortgage loans held for sale 5,065,765 2,351,912
Mortgage loans held for investment 204,523 136,524
Purchased mortgage servicing rights, net 2,760,266 3,534,450
Excess of cost over fair value of assets acquired, 537,476 575,512
net
Note receivable from stockholder 214,815 214,815
Prepaid expenses 168,411 294,431
Deferred income taxes 440,000 490,000
Other investment 249,745 297,378
Other 138,110 122,410
----------------------- ------------------
Total assets $ 12,323,644 11,796,012
======================= ==================
Liabilities
-----------
Accounts payable and accrued expenses $ 1,646,057 1,594,525
Checks outstanding in excess of bank balance 99,217 ----
Amounts due to related parties ---- 207,709
Settlement liabilities on purchased mortgage
servicing rights 85,512 118,374
Notes payable 7,801,372 5,155,636
Capitalized lease obligations 441,639 675,113
----------------------- ------------------
Total liabilities $ 10,073,797 7,751,357
----------------------- ------------------
Stockholders' Equity
--------------------
Preferred stock, Series B, $.005 par value.
10,000,000 shares authorized; 372,000
shares issued and outstanding 1,860 1,860
Common stock, $.001 par value. 25,000,000
shares authorized; 3,875,476 shares issued
and outstanding 3,876 3,876
Paid-in capital 8,642,442 8,642,442
Deficit (5,956,986) (4,162,178)
----------------------- ------------------
2,691,192 4,486,000
Treasury stock, 99,869 shares of common
stock, at cost (441,345) (441,345)
----------------------- ------------------
Total stockholders' equity 2,249,847 4,044,655
----------------------- ------------------
Total liability and stockholders' equity $ 12,323,644 11,796,012
======================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three month periods ended December 31, 1995 and December 31, 1994
December 31, 1995 December 31, 1994
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Servicing fee income $ 591,137 815,002
Other fee income 213,522 311,868
Appraisal income ----- 14,525
Gain on sale of mortgage loans 811,483 220,771
Gain on sale of servicing rights ----- 348,362
Interest income 189,111 53,602
Other income 139,624 83,141
------------------ ------------------
Total operating revenues 1,944,877 1,847,271
------------------ ------------------
Expenses:
Servicing expense 284,257 269,584
Personnel 866,644 1,035,780
General and administrative 404,171 383,153
Interest expense 187,215 64,212
Depreciation and amortization 442,837 539,187
Other 13,100 118,872
------------------ ------------------
Total operating expenses 2,198,224 2,410,788
------------------ ------------------
Loss before income taxes (253,347) (563,517)
Income tax (expense) benefit ----- (247,383)
------------------ ------------------
Net loss (253,347) (316,134)
================== ==================
Weighted average shares outstanding 3,778,478 3,720,574
================== ==================
Loss per common share:
Primary $ (0.08) (0.10)
================== ==================
Fully diluted $ (0.08) (0.10)
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the nine month periods ended December 31, 1995 and December 31, 1994
December 31, 1995 December 31, 1994
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Servicing fee income $ 1,852,627 2,531,318
Other fee income 782,891 602,971
Appraisal income ----- 54,325
Gain on sale of mortgage loans 2,033,466 410,992
Gain on sale of servicing rights 99,759 189,413
Interest income 478,571 147,354
Other income 166,595 96,942
------------------ ------------------
Total operating revenues 5,413,909 4,033,315
------------------ ------------------
Expenses:
Servicing expense 813,837 968,216
Personnel 2,831,059 2,685,010
General and administrative 1,340,698 989,181
Interest expense 542,639 370,290
Depreciation and amortization 1,425,546 1,978,728
Other 57,598 245,655
------------------ ------------------
Total operating expenses 7,011,377 7,237,080
------------------ ------------------
Loss before income taxes (1,597,468) (3,203,765)
Income tax expense (benefit) 49,350 (1,215,076)
------------------ ------------------
Loss from continuing operations (1,646,818) (1,988,689)
------------------ ------------------
Discontinued operations:
Loss from operations of Network Appraisal, Inc.
from April 1, 1995 through
June 30, 1995 (net of -0- tax benefit) (30,809) -----
------------------ ------------------
Net loss (1,677,627) (1,988,689)
================== ==================
Weighted average shares outstanding 3,787,147 3,709,965
================== ==================
Loss per common share:
Primary $ (0.47) (0.57)
================== ==================
Fully diluted
$ (0.47) (0.57)
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended December 31, 1995 and December 31, 1994
December 31, 1995 December 31, 1994
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Net cash (used in) provided by operating activities $ (2,974,345) 2,313,708
Cash flows from investing activities:
Acquisition of property and equipment (27,616) (40,911)
Proceeds/(Acquisition) of mortgage servicing rights ----- (70,082)
Sale of real estate owned 57,931 -----
Acquisition/Principal payments on mortgage loans
held for investment,net (67,999) 115,498
------------------ ------------------
Net cash provided by (used in)
investing activities (37,684) 4,505
Cash flows from financing activities:
Notes payable, net 2,645,737 (3,452,685)
Checks outstanding in excess of bank balance 99,217 -----
Payments on capitalized lease obligations (166,960) (159,281)
Payment of preferred dividends (78,120) (117,181)
Principal payments on participation agreements ----- (450,223)
------------------ ------------------
Netcash provided by (used in) 2,499,874 (4,179,370)
financing activities
Net decrease in cash (512,156) (1,861,157)
Cash at beginning of period 512,156 1,930,562
------------------ ------------------
Cash at end of period $ 0 69,405
================== ==================
Supplemental disclosures of cash flow:
Cash paid for interest $ 451,501 286,834
Cash paid for income taxes $ ----- -----
Supplemental disclosures of noncash financing
and investing activities:
Property acquired under capital leases $ 35,646 62,541
Equity investment received in exchange for $ ----- 92,450
issuance of common stock
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
ADVANCED FINANCIAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
The Company's financial statements include the accounts of Advanced
Financial, Inc. (the Company) and its wholly-owned subsidiary AFI
Mortgage Corp., formally Continental Mortgage, Inc. (AFI Mortgage). AFI
Mortgage is a full service mortgage banking company currently servicing
first and second mortgage loans of approximately $468,000,000 as of
December 31, 1995.
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-QSB. To the extent that
information and footnotes required by generally accepted accounting
principles for complete financial statements are contained in or
consistent with the audited financial statements incorporated by
reference in the company's Form 10-KSB for the year ended March 31,
1995, such information and footnotes have not been duplicated herein.
The March 31, 1995 condensed consolidated balance sheet has been derived
from the audited balance sheet as of that date.
F-5
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Financial, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Advanced
Financial, Inc. and subsidiaries as of March 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Financial, Inc. and subsidiaries as of March 31, 1995 and 1994 and the
results of their operations and their cash flows for the years then ended.
KPMG Peat Marwick LLP
June 2, 1995
Kansas City, Missouri
F-7
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1995 and 1994
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Cash and investments $ 512,156 1,930,562
Mortgage servicing advances and accounts receivable 1,283,907 3,730,541
Mortgage loans held for sale (note 3) 2,351,912 3,394,766
Mortgage loans held for investment 136,524 275,908
Purchased mortgage servicing rights, net (notes 2 and 3) 3,534,450 5,740,532
Property and equipment, net (notes 3, 5 and 9) 1,982,517 2,106,855
Excess of cost over fair value of assets acquired, net of accumulated
amortization of $239,860 and $135,978, respectively 575,512 669,394
Prepaid expenses 294,431 628,596
Income taxes receivable - 311,983
Deferred income taxes (note 8) 490,000 -
Other investment (note 10) 297,378 -
Other (note 11) 337,225 536,936
----------- ------------
Total assets $ 11,796,012 19,326,073
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 1,594,525 493,584
Amounts due to related parties (note 4) 207,709 328,761
Deferred income taxes (note 8) - 341,476
Settlement liabilities on purchased mortgage servicing rights 118,374 1,712,787
Notes payable (note 3) 5,155,636 7,175,945
Obligations under participation agreements (note 4):
Related parties - 211,138
Other - 246,403
Capitalized lease obligations (note 5) 675,113 744,817
------------ ------------
Total liabilities 7,751,357 11,254,911
------------ ------------
Stockholders' equity (notes 6 and 7):
Preferred stock, Series B, $.005 par value. 10,000,000 shares
authorized; 372,000 shares issued 1,860 1,860
Common stock, $.001 par value. 25,000,000 shares authorized;
3,875,476 and 3,802,976 shares issued, respectively 3,876 3,803
Paid-in capital 8,642,442 8,550,390
Deficit (4,162,178) (42,441)
------------ ------------
4,486,000 8,513,612
Treasury stock, 99,869 and 100,119 shares of common stock,
respectively, at cost (441,345) (442,450)
------------ ------------
Total stockholders' equity 4,044,655 8,071,162
Commitments and contingencies (notes 5 and 11)
Total liabilities and stockholders' equity $ 11,796,012 19,326,073
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended March 31, 1995 and 1994
1995 1994
---- ----
<S> <C> <C>
Revenues:
Servicing fees $ 3,293,878 3,886,487
Gains on sales of mortgage loans, net (including origination
fee income (expense) of $412,297 and $(812,339) at
March 31, 1995 and 1994, respectively) 515,478 484,579
Other fees 835,432 400,506
Gains on sales of mortgage servicing rights 383,443 2,112,064
Interest 197,105 417,567
Other 255,863 27,935
------------- ------------
Total operating revenues 5,481,199 7,329,138
------------- ---------
Expenses:
Servicing expense 1,285,843 493,038
Personnel 3,576,031 2,720,830
General and administrative 2,298,834 1,359,155
Interest 485,338 770,653
Depreciation and amortization 1,860,926 1,561,910
Other 788,492 97,071
------------- ------------
Total operating expenses 10,295,464 7,002,657
------------- ---------
Income (loss) before income taxes (4,814,265) 326,481
Income tax benefit (expense) (note 8) 850,768 (148,197)
------------- -------------
Net income (loss) $ (3,963,497) 178,284
============= ============
Weighted average shares outstanding 3,726,000 3,527,000
============= =========
Income (loss) per common share $ (1.11) -
==== ==
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 1995 and 1994
Preferred Common Paid-in Treasury
stock stock capital Deficit stock Total
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 $ 1,986 3,222 6,739,110 (56,742) - 6,687,576
Net income - - - 178,284 - 178,284
Dividends on preferred stock,
$.42 per share - - - (163,983) - (163,983)
Issuance of 480,830 shares of
common stock, net of costs - 481 1,576,946 - - 1,577,427
Issuance of 97,885 shares of
common stock in exchange - 68 207,990 - 132,069 340,127
for services rendered
Issuance of 7,500 shares of
common stock in exchange for
net assets of subsidiary acquired - 7 26,243 - - 26,250
Conversion of 25,250 shares of
preferred stock to common stock (126) 25 101 - - -
Acquisition of 130,004 shares
of common stock for the treasury - - - - (574,519) (574,519)
----- --------- ---------- -------- ------- ----------
Balance at March 31, 1994 1,860 3,803 8,550,390 (42,441) (442,450) 8,071,162
Net loss - - - (3,963,497) - (3,963,497)
Issuance of 62,500 shares of
common stock in exchange for
other investment - 63 73,687 - - 73,750
Issuance of 10,250 shares of
common stock in exchange for
services rendered - 10 18,365 - 1,105 19,480
Dividends on preferred stock,
$.42 per share - - - (156,240) - (156,240)
----- ------ ---------- ---------- -------- ----------
Balance at March 31, 1995 $ 1,860 3,876 8,642,442 (4,162,178) (441,345) 4,044,655
===== ====== ========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended March 31, 1995 and 1994
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,963,497) 178,284
Adjustments to reconcile earnings before extraordinary item to net
cash used in operating activities:
Depreciation and amortization 1,860,926 1,561,910
Gains on sales of mortgage servicing rights (383,443) (2,112,064)
Common stock issued in exchange for services rendered 19,480 340,127
Deferred income taxes (831,476) 360,461
Changes in assets and liabilities:
Mortgage loans held for sale 1,042,854 (2,172,266)
Mortgage servicing advances and accounts receivable 2,446,634 (3,301,062)
Prepaid expenses and other assets 533,876 (628,796)
Accounts payable and accrued expenses 979,889 67,787
Interest related to participations 30,463 (80,630)
Income taxes receivable (payable) 311,983 (589,635)
------------ ------------
Net cash provided by (used in) operating activities 2,047,689 (6,375,884)
------------ ---------
Cash flows from investing activities:
Acquisition of property and equipment (40,885) (690,339)
Acquisition of subsidiary (10,000) -
Other investment (223,628) -
Acquisition of purchased mortgage servicing rights (1,657,472) (2,703,357)
Acquisition of mortgage loans held for investment - (254,370)
Proceeds from sales of mortgage servicing rights 1,209,710 2,995,866
Principal payments received on mortgage loans held for investment 139,384 119,846
------------ ------------
Net cash used in investing activities (582,891) (532,354)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net - 4,870,177
Notes payable, net (2,020,309) 4,864,156
Proceeds from participation agreements - 239,160
Principal payments on participation agreements (488,004) (1,047,915)
Payments on capitalized lease obligations (218,651) (178,493)
Payment of preferred dividends (156,240) (163,983)
------------ ------------
Net cash provided by (used in) financing activities (2,883,204) 8,583,102
--------- ------------
Net (decrease) increase in cash (1,418,406) 1,674,864
Cash at beginning of year 1,930,562 255,698
------------ ------------
Cash at end of year $ 512,156 1,930,562
============ ============
(Continued)
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
2
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1995 1994
---- ----
<S> <C> <C>
Supplemental disclosures of noncash financing and investing activities:
Cash paid for interest $ 485,338 770,653
============ ============
Cash (refunded) paid for taxes $ (332,110) 417,213
============ ============
Treasury stock acquired in connection with participation agreement $ - 574,519
============ ============
Stock issued in exchange for other investment $ 73,750 26,250
============ ============
Acquisition of fixed assets financed by capital leases $ 148,947 923,310
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-12
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
Advanced Financial, Inc. (the Company) owns 100% of AFI Mortgage, Corp.
(AFI). AFI originates and services residential first mortgage loans and,
beginning in 1992, began purchasing rights to service residential first
and second mortgage loans. The Company also owns 100% of Continental
Mortgage Services, Inc. (CMSI) and Network Appraisals, Inc. (Network).
CMSI and Network provide consulting and appraisal services to other
mortgage banking companies.
The consolidated financial statements include the accounts of the Company,
AFI, CMSI and Network. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of prior
year amounts have been made so as to conform to the current
presentation.
(b) Cash and Cash Equivalents
Cash and cash equivalents are defined as all demand deposits and
short-term investments with original maturities of less than three
months.
(c) Mortgage Loans Held for Sale and Investment
Mortgage loans held for sale are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate basis. Gains or losses on
sales of mortgage loans are recognized based upon the difference between
the selling price and the carrying value of the related mortgage loans
sold at the date of sale. Mortgage loans held for investment are carried
at the lower of cost or market on the date of acquisition or transfer
from the held for sale account.
(Continued)
F-13
<PAGE>
2
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Mortgage Servicing Rights and Mortgage Servicing Advances Receivable
Purchased mortgage servicing rights are recorded at cost and are amortized
in proportion to and over the estimated positive future cash flows
derived from servicing the portfolio. The Company evaluates the
recoverability of the cost of each bulk purchase of servicing rights or,
in the case of correspondent purchases, by grouping such servicing
rights by interest rates and purchase dates of similar loans. If
necessary, the Company further disaggregates bulk purchases for purposes
of evaluating recoverability if the underlying loans do not have similar
underlying economic characteristics. The Company estimates remaining net
cash flows to be received from servicing the portfolio and if such
amounts, on a discounted basis, are less than amortized cost,
appropriate adjustments are made. These adjustments, when required,
result in servicing rights being carried at the lower of cost or market.
Consistent with current industry practice, mortgage servicing rights
related to loans originated by the Company are not capitalized. Gains on
sales of mortgage servicing rights are determined by deducting from the
selling price the remaining unamortized cost of such servicing rights.
Inconnection with servicing mortgage-backed securities guaranteed by
federal agencies, the Company advances certain principal and interest
payments to security holders prior to their collection from specific
mortgagors. In addition, the Company will make certain payments of
property taxes and insurance premiums in advance of collection from
specific mortgagors, as well as certain payments of attorneys' fees and
other costs related to loans in foreclosure. Such advances are included
in mortgage servicing advances receivable.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets,
ranging from three to thirty years.
(f) Excess of Cost Over Fair Value of Assets Acquired
The excess of cost over fair value of assets acquired, resulting from the
Company's acquisition of AFI, is being amortized over fifteen years. The
Company periodically evaluates the recoverability of its recorded
goodwill.
(g) Foreclosed Assets
Foreclosed assets, included in other assets in the accompanying
consolidated balance sheets, are recorded at the lower of the loan
balance or the fair value of the property less estimated selling costs.
(Continued)
F-14
<PAGE>
3
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(h) Servicing and Other Fees
Servicing fees represent fees earned for servicing mortgage loans owned by
investors. These fees are calculated on the outstanding principal
balances of the loans serviced and are recorded as income when earned.
Other fees consist of ancillary income associated with loan servicing and
is recorded as income when collected.
(i) Income Taxes
Effective April 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled, and the
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Deferred tax assets are recognized to the extent management believes
that it is more likely than not that they will be realized. The
cumulative effect of adopting the new accounting standard was not
material to the Company's consolidated financial statements.
(j) Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average number of
common shares outstanding during the periods plus common stock
equivalents, when dilutive, consisting of stock options and warrants.
For purposes of this computation, net income (loss) has been adjusted
for the dividends on the preferred stock. The computation of fully
diluted income (loss) per share includes the common stock issuable upon
conversion of preferred stock, when dilutive. Because the effect of such
inclusion is anti-dilutive in 1994 and 1995, fully diluted information
is not presented herein.
(Continued)
F-15
<PAGE>
4
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(k) Effect of New Financial Accounting Standards
SFAS No. 122, "Accounting for Mortgage Servicing Rights," is effective for
the Company on April 1, 1996 and will require that the total cost of
mortgage loans originated or acquired be allocated to the loan and the
related servicing right based on their relative fair values. Costs
allocated to mortgage servicing rights will be recognized as a separate
asset and amortized over the period of estimated net servicing income
and periodically evaluated for impairment based on fair value. The
adoption of this statement is not expected to have a material effect on
the Company's 1996 consolidated financial statements because the Company
intends to sell originated loans servicing released during fiscal 1996.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on April 1, 1994. This statement requires
that investments in debt and certain equity securities be classified in
one of three categories: (1) held-to-maturity securities, which are
carried at amortized cost; (2) trading securities, which are carried at
fair market value, with unrealized gains and losses included in
earnings; and (3) available-for-sale securities, which are carried at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity. The impact of
adopting this statement on the Company's consolidated financial
statements was not material.
The Company is required to adopt SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended, on April 1, 1995. This statement
addresses the accounting by creditors for impairment of certain loans.
The impact of adopting the statement on the Company's consolidated
financial statements is not expected to be material.
SFAS No. 107 and SFAS No. 119, "Disclosures About Fair Value of Financial
Instruments," are effective for the Company on April 1, 1995 and require
disclosure of the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the consolidated financial
statements.
(Continued)
F-16
<PAGE>
5
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Mortgage Servicing Rights
Purchased mortgage servicing rights are presented net of accumulated
amortization of $2,221,205 and $1,507,121 at March 31, 1995 and 1994,
respectively. A summary of the activity related to purchased mortgage
servicing rights is as follows at March 31, 1995 and 1994:
1995 1994
---- ----
Balance at beginning of year $ 5,740,532 3,548,967
Purchases 63,059 4,411,638
Amortization (1,442,874) (1,252,911)
Sales (826,267) (967,162)
------------ ------------
Balance at end of year $ 3,534,450 5,740,532
============ ============
The Company's portfolio of mortgage loans serviced for investors,
including loans originated by the Company, aggregated approximately
$527,000,000 and $712,000,000 at March 31, 1995 and 1994, respectively.
Included in the portfolio at March 31, 1995 and 1994 is approximately
$221,000,000 and $320,000,000, respectively, of Government National
Mortgage Association (GNMA) mortgage-backed securities. Under terms of
the guarantee agreement with GNMA, the Company is required to advance
principal and interest not collected from the mortgagor and is liable
for amounts lost in foreclosure of defaulted loans not recovered from
the loans' insurers.
AtMarch 31, 1995 and 1994, escrow funds related to the serviced loans
approximated $13.5 million and $12.8 million, respectively, and are not
included in the accompanying consolidated balance sheets.
(Continued)
F-17
<PAGE>
6
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Notes Payable
The following summarizes the Company's notes payable at March 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Borrowings under a $17,000,000 line of credit, secured by mortgage
loans and mortgage servicing rights, interest at Federal Funds
rate plus
2.5%, due December 31, 1995 $ 2,409,577 -
Borrowings under a $20,000,000 repurchase agreement regarding mortgage
loans, interest at Federal Funds rate plus 2.5%, repaid December 8,
1994 - 2,890,763
Borrowings under a $500,000 warehouse line of credit, secured by mortgage
loans, interest at prime plus 1%, due October 1, 1995
455,872 414,115
Borrowings under a $975,000 warehouse line of credit, secured by
$1,000,000 U. S. treasury bill, interest at prime, repaid April 15,
1994 - 974,418
Borrowings under a $1,000,000 warehouse line of credit, secured by
mortgage loans, interest at prime plus 1%, repaid October 25, 1994
- 635,162
Borrowings under a $1,000,000 line of credit, secured by mortgage
servicing rights, interest at prime plus 1.5%, monthly payments of
$20,517 with final payment due July 1, 1999
891,910 -
$632,329 note payable, secured by mortgage servicing rights, interest
at prime, with monthly payments of $7,020 and final payment of
$546,575
due January 1, 1996 579,975 624,592
Borrowings under a $1,000,000 line of credit, secured by mortgage
servicing rights, interest at prime plus .25%, repaid April 22, 1994
- 998,659
$650,000 note payable, secured by real estate, interest at 8%, with
monthly payments of $6,197 and final payment of $572,494 due
October
1, 1996 614,118 638,236
Note payable, secured by stock and note receivable, interest at prime
plus 1%, with monthly installments of $5,556 and final payment of
$163,047 January 1, 1996 204,184 -
------------ -----------
$ 5,155,636 7,175,945
============ ============
Substantially all of the Company's mortgage loans held for sale, mortgage
loans held for investment and servicing rights (both purchased and
originated), and property and equipment are pledged to secure the notes
payable.
(Continued)
</TABLE>
F-18
<PAGE>
7
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Scheduled maturities of long-term debt, including borrowings under lines
of credit, are:
1996 $ 3,837,354
1997 767,433
1998 199,211
1999 221,165
2000 130,473
------------------
$ 5,155,636
==================
The Company's $17 million line of credit described above contains
restrictive covenants which, among other things, require AFI to maintain
stockholders' equity of at least $3.5 million. The Company believes
AFI's stockholders' equity may fall below this minimum level during
fiscal 1996. Additionally, that indebtedness and certain other
indebtedness as described above mature during fiscal 1996. Although the
Company has not had substantive discussion with the lenders, the Company
expects to renegotiate the covenants and to refinance such indebtedness
on terms similar to those in the existing loan agreements.
(4) Participation Agreements
Prior to 1995, the Company entered into contractual arrangements known as
participation agreements with both related and unrelated parties. Under
the terms of those agreements, the participants received a portion
(generally 75%) of the underlying cash flows resulting from the
Company's servicing of certain identified mortgage loans. For purposes
of the agreements, cash flow was defined as gross revenues (service fees
and ancillary income) less a contractually pre-determined cost to
service the loans. If the underlying servicing was sold by the Company,
the participants received their pro-rata portion of the sale proceeds.
The Company did not guarantee the participants a rate of return on their
investment, and the Company had no contractual obligation to repurchase
the participants' interests.
(Continued)
F-19
<PAGE>
8
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amountsreceived by the Company from the parties to the participation
agreements were recorded as obligations under participation agreements.
To determine an interest rate on the obligation, the Company estimated
the future cash flows to be paid to the participants and discounted
those estimated future cash flows at a rate so that their present value
equaled the amount paid by the participant. Interest expense was
recorded on the accrual method, and actual payments to the participants
were applied to reduce the Company's recorded obligation. If estimates
of future cash flows to be paid to participants changed, the effective
interest rate was revised and interest expense was adjusted, as
necessary, on a prospective basis. During fiscal 1995 and 1994, the
Company repaid obligations under participation agreements by either
selling the underlying servicing and remitting the participants' portion
of the proceeds from sale, or by settling the remaining obligation with
Company funds. The Company recorded a noninterest bearing account
payable of approximately $269,000 as of March 31, 1995, of which
$207,709 was due to related parties, for the participants' pro-rata
portion of the settlement proceeds and, therefore, no remaining
obligation under participation agreements existed at March 31, 1995.
The following table summarizes the participation activity during the
fiscal years ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Related parties Unrelated parties
---------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of year $ 211,138 683,484 246,403 123,591
Amounts borrowed under participation
agreements - 529,822 - 249,189
Accrual (refund) of interest (9,120) 118,206 39,583 20,270
Payments or payable to participants (202,018) (1,120,374) (285,986) (146,647)
--------- ------------ --------- ----------
Balance at end of year $ - 211,138 - 246,403
========= ============ ========= ==========
Effective interest rate:
During the year - % 25 25 25
End of year - 25 - 25
(Continued)
</TABLE>
F-20
<PAGE>
9
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Capitalized Lease Obligations
The Company has entered into various capital lease agreements, relating
primarily to computer equipment and furniture. The future lease payments
as of March 31, 1995 are as follows:
1996 $ 292,924
1997 291,109
1998 156,805
1999 2,992
--------------
Total future lease payments 743,830
Less amounts representing interest at
rates ranging from 7% to 10% 68,717
--------------
$ 675,113
==============
The Company has entered into various operating lease agreements for branch
locations. The operating lease expense for fiscal 1995 and 1994 was
approximately $77,000 and $0, respectively. The Company's future
obligations for operating leases having lease terms in excess of one
year are as follows: 1996 - $78,000; 1997 - $33,000.
(6) Capital Stock
On June 4, 1992, the Company completed the offering of 400,000 units at an
offering price of $4 per unit. In connection with the offering, the
Company issued warrants to acquire 40,000 units to the underwriter. The
underwriter's warrants are exercisable until June 1, 1997 at an exercise
price of $6.60. Each unit consisted of one share of Series B preferred
stock, one Class A warrant and one Class B warrant. The preferred stock
bears a 10.5% cumulative dividend rate, and is redeemable at the option
of the Company upon payment of one share of common stock plus all unpaid
dividends. The Class A warrants entitled the holder to purchase one
share of the Company's common stock for $3.50 until December 4, 1993, at
which time the warrants expired. 395,990 Class A warrants were exercised
during fiscal 1994 and the Company received proceeds, net of costs, of
$1,263,732. The Class B warrants entitle the holder to purchase one
share of the Company's common stock for $10 until December 1, 1995, at
which time they expire. The warrants are redeemable at the option of the
Company, at which time the holders of the warrants may exercise their
right to acquire common stock as described above.
(Continued)
F-21
<PAGE>
10
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 29, 1993, the Company completed the offering of 900,000 shares of
common stock at an offering price of $4.25 per share. In addition, the
Company issued warrants to acquire 100,000 shares of common stock to the
underwriter. The warrants are exercisable until March 29, 1998 at an
exercise price of $5.95. Total net proceeds of the common stock
offering, net of offering costs of $628,557, aggregating $3,196,443 were
recorded in the Company's 1993 consolidated balance sheet. On May 12,
1993, the underwriter notified the Company of its intent to exercise its
over allotment option to acquire an additional 84,840 shares of common
stock, and on May 21, 1993, the Company received additional proceeds
from the issuance of such shares, net of offering costs, of $313,695.
The Company acquired 130,004 shares of common stock for the treasury in
fiscal 1994 as consideration for certain of the participation agreements
described in note 4. The treasury stock and related obligation were
recorded based upon the market value of the stock at the dates of the
transactions, ranging from $3.625 to $5.625 per share.
On September 2, 1994, the Company issued 10,000 shares of common stock
valued at $1.87 per share (market value at the date of the transaction),
in exchange for professional services performed for the Company.
Additionally, on December 20, 1994, the Company issued 62,500 shares of
common stock valued at $1.18 per share (market value at the date of the
transaction), in exchange for a 10% interest in Home Real Estate
Services of Lincoln, Inc. (Home) (see note 10).
(7) Stock Option Plans
The Company has adopted a key employee stock option plan and an incentive
stock option plan. Options to acquire common stock are granted, at fair
market value, on the date of grant and expire in 2002 and 2003; 500,000
shares of common stock have been reserved for issuance under each of the
plans. The following schedule sets forth information regarding option
activity:
Option
Number price
--------- -----------
Outstanding at March 31, 1993 412,000 $ 4.00
Granted 133,000 4.25
Canceled (4,250) 4.00-4.25
----------
Outstanding at March 31, 1994 540,750 4.00-4.25
Granted 77,400 1.31-2.25
Canceled (16,250) 1.50-4.25
---------
Outstanding at March 31, 1995 601,900 1.31-4.25
=========
As of March 31, 1995, 542,000 of the Company's outstanding options were
exercisable.
(Continued)
F-22
<PAGE>
11
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes
The components of income tax expense (benefit) for the years ended March
31, 1995 and 1994 are as follows:
1995 1994
---- ----
Current $ (19,292) (212,233)
Deferred (831,476) 360,430
------- -----------
$ (850,768) 148,197
======= ===========
Federal $ (698,935) 125,386
State (151,833) 22,811
------- -----------
$ (850,768) 148,197
======= ===========
The reasons for the difference between actual income tax expense (benefit)
and expected income tax expense (benefit) at the statutory federal
income tax rate (34%) are as follows:
1995 1994
---- ----
Expected income tax expense
at statutory rate $ (1,636,850) 111,004
State income taxes, net (226,849) 16,784
Amortization of excess cost
over fair value of
assets acquired 18,010 18,010
Change in valuation allowance 1,064,755 -
Other, net (69,834) 2,399
------------ ----------
$ (850,768) 148,197
============ ==========
(Continued)
F-23
<PAGE>
12
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to the significant
portions of the deferred tax assets and liabilities at March 31, 1995
and 1994 are as follows:
1995 1994
---- ----
Deferred tax assets:
Net operating loss carryforward $ 1,346,715 69,860
Valuation reserves 30,600 17,000
Basis difference in purchased
mortgage servicing right 51,494 -
Deferred state taxes 193,255 -
Other 7,356 -
------------ --------
Total deferred tax assets 1,629,420 86,860
Valuation allowance 1,064,755 -
------------ --------
Net deferred tax assets 564,665 86,860
------------ ---------
Deferred tax liabilities:
Deferred gain on sale of servicing - 347,480
Basis difference in fixed assets 37,495 37,719
Deferred state taxes - 43,137
Deductible prepaid expenses 30,537 -
Other 6,633 -
------------ --------
Total deferred tax liabilities 74,665 428,336
------------ ---------
Net deferred tax liability (asset) $ (490,000) 341,476
============ =======
The Company has net operating loss carryforwards of $3,570,244 and
$390,681 arising in the years ended March 31, 1995 and 1994,
respectively. These net operating losses will expire in the years ended
March 31, 2010 and 2009, respectively.
Total deferred tax assets of $1,629,420 consist primarily of the benefit
of the net operating loss carryforward. Management has established a
valuation allowance of $1,064,755 to reduce the total deferred tax asset
to an amount which management believes will, more likely than not, be
realized. At April 30, 1995, the Company has no recoverable income taxes
previously paid. In determining the amount of the valuation allowance,
management has relied on a potential tax-planning strategy whereby an
unrealized taxable gain in the Company's purchased mortgage servicing
rights portfolio could be recognized through the sale of such servicing
rights. Therefore, management believes that it is more likely than not
that the $490,000 deferred tax asset will be realized.
(Continued)
F-24
<PAGE>
13
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Property and Equipment
Property and equipment consisted of the following at March 31, 1995 and
1994:
1995 1994
---- ----
Land $ 300,000 300,000
Building 901,288 880,132
Furniture and fixtures 385,046 391,585
Office and computer equipment 1,005,106 830,535
Automobile 5,331 5,331
------------ ------------
2,596,771 2,407,583
Accumulated depreciation 614,254 300,728
------------ ------------
$ 1,982,517 2,106,855
============ ============
(10) Other Investment
The Company's other investment represents a 10% common ownership interest
and a noninterest bearing note receivable which has been discounted so
as to yield 9% to the Company from Home. Home is a residential real
estate brokerage company located in Lincoln, Nebraska. The Company's
investment in Home is accounted for at cost of $131,080 and the balance
of the note receivable at March 31, 1995, which matures on January 1,
1998, was $166,298.
(11) Contingencies
InMarch 1994, the Company was named in a lawsuit filed by two former
stockholders and officers of the Company. The lawsuit alleges that the
Company violated securities laws, delaying the ability of these former
officers from selling common stock of the Company owned by them,
resulting in alleged losses of $300,000. The validity of the stock owned
by these plaintiffs is the subject of concurrent litigation. The Company
believes the lawsuit filed by the former stockholders is without merit
and it will be vigorously defended. Included in other assets at March
31, 1995 and 1994 is a $214,815 note receivable from one of the former
officers which is unsecured, bears interest at 8% and was due December
30, 1992. The Company is currently negotiating with the stockholder for
payment.
F-25
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered. All of the amounts
shown are estimable except the Commission registration fee. Such expenses will
be paid by the Company. None of these expenses will be paid by the Selling
Stockholders.
Registration fee. . . . . . . . . . . . $ 1,379.00
Printing expenses . . . . . . . . . . . $ 1,000.00
Accounting fees and expenses. . . . . . $ 2,000.00
Legal fees and expenses (other than
Blue Sky). . . . . . . . . . . . . . . $15,000.00
Blue Sky fees and expenses. . . . . . . $ 1,000.00
Miscellaneous . . . . . . . . . . . . . $ -0-
Total. . . . . . . . . . . . . . . $20,379.00
Item 14. Indemnification of Directors and Officers.
A. The Delaware General Corporation Law, under which the Registrant is
incorporated, gives a corporation the power to indemnify any of its directors,
officers, employees, or agents who are sued by reason of their service in such
capacity to the corporation provided that the director, officer, employee, or
agent acted in good faith and in a manner he believed to be in or not opposed to
the best interests of the corporation. With respect to any criminal action, he
must have had no reasonable cause to believe his conduct was unlawful.
B. The Company's Certificate of Incorporation provides for indemnification
of officers and directors as follows:
Each person who was or is made a party or is threatened to be made a party
or is involved in any action, suit or proceeding, whether civil, criminal
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer, of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may
48
<PAGE>
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorney's fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable.
Item 15. Recent Sales of Unregistered Securities
Since April 1, 1993, sales of unregistered securities were made as follows:
NO. OF
DATE SHARES CONSIDERATION
------- ------ -------------
COMMON STOCK 8/13/93 48,000 Services
rendered
49
<PAGE>
NO. OF
DATE SHARES CONSIDERATION
------- ------ -------------
8/13/93 7,500 Purchase of
Continental
Mortgage
Services,
Inc.
9/2/94 10,000 Services
rendered
12/20/94 62,500 Purchase of
Home Real
Estate
OPTIONS TO PURCHASE
COMMON STOCK
NO. OF
NAME DATE SHARES CONSIDERATION
- ---- ---- ------- -------------
Lance Hutchinson 5/3/95 125,000 Marketing
services
Butch Gordon 12/1/95 2,500 Consulting
services
Cored Capital Corp. 2/15/96 250,000 Consulting
services
Affiliated Services 2/15/96 250,000 Consulting
services
Pyramid Holdings, Inc. 2/15/96 250,000 Consulting
services
Ocean Marketing
Corporation 2/15/96 250,000 Consulting
services
First Mortgage
Investment Corp. 3/31/96 100,000 Part of
financing
transaction
With respect to the sale of unregistered securities as described above, the
Company relied upon the exemptions afforded by Section 4(2) of the Securities
Act of 1933. None of the sales were made to officers, directors or affiliates.
Each security is restricted, contains a restrictive legend, and requires a legal
opinion as to compliance with Rule 144 before a transfer may take place.
50
<PAGE>
Item 16. Exhibits.
See Exhibit Index filed herewith.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represents a
fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
Provided, however that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual
report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement
51
<PAGE>
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the foregoing provisions (see Item 15 above),
or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the
securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
52
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Shawnee, Kansas on May
10, 1996.
ADVANCED FINANCIAL, INC.
By: /s/ NORMAN L. PETERSON
------------------------
NORMAN L. PETERSON
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Norman L. Peterson his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits and schedules thereto, and
all other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully ratifying and confirming all that said attorney-in-fact and
agent or their substitutes or substitute may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ NORMAN L. PETERSON President, Treasurer,
- ---------------------- Director May 10, 1996
Norman L. Peterson
/s/ WILLIAM B. MORRIS Secretary, Director
- ----------------------
William B. Morris May 10, 1996
/s/ STEVEN J. PETERSON Sr. Vice President,
- ---------------------- Director May 10, 1996
Steven J. Peterson
Vice President,
- ---------------------- Director May , 1996
Mark J. Peterson
/s/ DEBORAH K. TOWERY Chief Financial Officer,
- ---------------------- Chief Accounting
Deborah K. Towery Officer May 10, 1996
/s/ THOMAS S. LILLEY Director
- ---------------------- May 10, 1996
Thomas S. Lilley
/s/ JAMES L. MULLIN, II Director May 10, 1996
- -----------------------
James L. Mullin, II
/s/ PATRICK E. ELGERT Sr. Vice President,
- ---------------------- Director May 10, 1996
Patrick E. Elgert
Director May , 1996
- ---------------------
Thomas G. Schleich
Director May , 1996
- ---------------------
W. Ray Bell
53
<PAGE>
EXHIBIT INDEX
TO
REGISTRATION STATEMENT ON FORM S-1
ADVANCED FINANCIAL, INC.
------------------------
3.1 Certificate of Incorporation of Registrant(2)
3.2 Certificate of Amendment to the Certificate of
Incorporation of Registrant(3)
3.3 Bylaws of Registrant(4)
4.0 Certificate of Designation, Preferences, Rights
and Limitations of Series "B" Proposed Stock(5)
4.1 Specimen Stock Certificate of $.001 par value common stock(6)
4.2 Form of Class B Warrant(7)
5.1 Proposed Form of Opinion of Counsel regarding legality(1)
10.1 Consulting Agreement between Registrant and Cored
Capital Corporation(1)
10.2 Consulting Agreement between Registrant and Affiliated
Services, Inc.(1)
10.3 Consulting Agreement between Registrant and Pyramid Holdings, Inc.(1)
10.4 Consulting Agreement between Registrant and Ocean
Marketing Corporation(1)
24.1 Consent of counsel(1)
24.2 Consent of KPMG Peat Marwick, LLP, certified public accountants(1)
(1) Filed herewith.
(2) Incorporated by reference to Exhibit 3.1 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
(3) Incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
(4) Incorporated by reference to Exhibit 3.3 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
(5) Incorporated by reference to Exhibit 4.0 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
(6) Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
(7) Incorporated by reference to Exhibit 4.2 to the Registration Statement
on Form S-2 of Advanced Financial, Inc. filed with the Securities and
Exchange Commission on January 31, 1992 (No. 33-45406).
Exhibit 5.1
May 10, 1996
Advanced Financial, Inc.
5425 Martindale
Shawnee, KS 66218
Gentlemen:
I have acted as counsel for Advanced Financial, Inc. (the "Company") in
connection with the preparation and filing of the Registration Statement and
Prospectus on Form S-1 with the Securities and Exchange Commission relating to
the issuance of up to 1,400,000 shares of Common Stock (the "Common Stock").
I have examined copies of the Company's Certificate of Incorporation,
Bylaws and certain other corporate documents including copies of resolutions
adopted by the Board of Directors of the Company and certificates of officers of
the Company, and I have reviewed such other documents and made such
investigations as I have deemed necessary or appropriate in order to express my
opinion on the matters set forth below.
The opinions hereinafter expressed are subject to the qualification
that I am an attorney admitted to practice in Colorado, and am not an expert in
the laws of any other jurisdiction, and have not obtained opinions of local
counsel in any other jurisdiction.
Based upon and subject to the foregoing, I am of the opinion that:
The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware, with full
corporate power and authority to own and operate its properties and to carry on
its business as set forth in the Registration Statement and Prospectus.
The Company is duly qualified and registered to transact the business
in which the Company is engaged and is qualified and in good standing in each
and every jurisdiction in which its ownership of property or its conduct of
business requires such qualification or registration.
<PAGE>
Advanced Financial, Inc.
Page 2
May 10, 1996
The Company has an authorized and outstanding capitalization as set
forth in the Registration Statement and Prospectus; the Common Stock offered
thereby of the Company conforms to the statements concerning it in the
Registration Statement and Prospectus; the outstanding Common Stock of the
Company has been duly and validly issued and is fully paid and non-assessable
and no Common Stock is subject to any pre-emptive rights.
The holders of the issued and outstanding shares of Common Stock are,
and the holders of the securities to be sold under the registration statement,
namely, the Common Stock and component securities offered pursuant to the
prospectus will be entitled to the rights and preferences set forth in the
certificates representing the same.
No consents, approvals, authorizations or orders of agencies, offers or
other regulatory authorities are necessary for the valid authorization, issue or
sale of the Common Stock except as required under the 1933 Act or state Blue Sky
or other securities laws.
The issuance and sale of the Common Stock will not conflict with or
result in a breach of any of the terms, conditions or provisions of, or
constitute a default under, the Certificate of Incorporation, or Bylaws of the
Company or any note, indenture, mortgage, Deed of Trust or other Agreement or
instrument (however characterized or described) known to as to which the Company
is a party or any of its property is bound or any existing law, order, rule,
regulation, writ, injunction or decree known to me of any government,
governmental instrumentality, agency, body, arbitration tribunal or court,
domestic or foreign, having jurisdiction over the Company or its property.
This opinion is intended for the sole and exclusive use of Advanced
Financial, Inc. and is not to be made available to or relied upon by other
persons, firms or entities without my prior written consent.
Very truly yours,
ALLEN G. REEVES, P.C.
By:
------------------------------------
Allen G. Reeves
AGR:nms
Exhibit 10.1
CONSULTING AGREEMENT
This Agreement is effective as of the 15th day of February, 1996, by and
between Advanced Financial, Inc., a Delaware corporation (the "Company"), and
Cored Capital Corporation, a Delaware corporation, or its assignees, (the
"Consultant").
WHEREAS, the Company is a publicly held company; and
WHEREAS, Consultant is in the business of assisting public companies in
financial relations; and
WHEREAS, the Company desires to retain Consultant to provide certified
specified services for the Company.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereby agree as follows:
1. Duties and Involvement
a. The Company hereby engages Consultant to provide financial and
public relations service. Such services will generally include
advice to and consulting with the Company's management concerning
marketing surveys, investor profile information, methods of
expanding investor support and increasing investor awareness of the
Company and its products and/or services. Consultant will also
provide additional services to the Company, including broker
relations, assisting in the preparation and format of due diligence
meetings, and attendance at conventions and trade shows.
b. Consultant acknowledges that neither it not any of its employees or
affiliates is an officer, director, or agent of the Company, that in
rendering advice or recommendations to the Company it is not and
will not be responsible for any management decisions on behalf of
the Company and that it is not authorized or empowered to commit the
Company to any recommendation or course of action. The Company
represents that Consultant does not have, through stock ownership or
otherwise, the power to control the Company nor to exercise any
dominating influence over its management.
2. Terms
This agreement shall continue until six (6) months from date of execution
(see 20 b)
<PAGE>
3. Compensation
As total and complete consideration for the services to be provided by
Consultant to the Company, the Company hereby grants to Consultant the
following:
Consultant or its designee shall receive an option to purchase two
hundred fifty thousand (250,000) shares of the Company's 144 common
stock at fifty cents (0.$50) per share. The options shall be
exercised, if at all, within ten (10) days following the filing of
the registration statement covering the common shares underlying
this option with the Securities Exchange Commission. Company shall
deliver to Consultant stock certificates representing the number of
shares exercised under this option within 30 days after exercised by
consultant. Such certificates shall contain the normal 144
restrictive legend.
In the event this agreement is terminated for any reason whatsoever,
the shares referred to herein shall remain in full force and effect
and with respect to any shares which is issued or are issuable
thereunder. Consultant shall have the right of retention of said
shares of common stock in consideration for services performed.
4. Services not Exclusive
Consultant shall devote such of its time and effort necessary to the
discharge of its duties hereunder. The Company acknowledges that
Consultant is engaged in other business activities and that it will
continue such activities during the term of this Agreement. Consultant
shall not be restricted from engaging in other business activities
during the term of this Agreement.
5. Confidentiality
Consultant acknowledges that it will have access to confidential
information regarding the Company and its business. Consultant agrees
that it will not, during or subsequent to the term of this Agreement,
divulge, furnish, or make accessible to any person (other than with the
written permission of the Company) any knowledge or information or plans
of the Company with respect to the Company or its business, including,
but not limited to, the products of the Company, whether in the concept
or development stage or being marketed by the company onthe effective
date of this Agreement or during the term hereof.
2
<PAGE>
6. Covenant not to Compete
During the term of this Agreement, Consultant warrants, represents, and
agrees that it will not directly participate in the information
developed for and by the Company and will not compete directly with the
Company in the Company's primary industry or related fields.
7. Investment Representation
a. Access to Information
The Company represents and warrants that it has provided Consultant
access to all information available to the Company concerning its
condition, financial and otherwise, its management, its business and
its prospects. The Company represents that it has provided
Consultant with a copy of the Company's most recent Form 10-K and
any subsequent filing required or filed under the rules and
regulations promulgated under the Securities Act of 1933 as amended
(the "Act") or the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), if any, (the "Disclosure Documents"). Consultant
acknowledges that it is aware that because of the Company's
financial position and other factors, the acquisition of the shares
to be paid to Consultant as compensation hereunder involves a high
degree of risk, including the risk that Consultant may lose its
entire investment in the shares of Common Stock. Consultant further
represents that it and its advisors have been afforded the
opportunity to discuss the Company with its management. The Company
represents that it has and will continue to provide Consultant with
any information or documentation necessary to verify the accuracy of
the information contained in the Disclosure Documents and will
promptly notify Consultant upon the filing of any registration
statement or other periodic reporting documents filed pursuant to
the rules and regulations of the Act or the Exchange Act. Any
additional sale or registration and filings with the NASD and SEC
will be made available to consultant at such time by notifying in
writing at least 30 days prior to any registration or sale.
3
<PAGE>
b. Registration of Securities
Consultant understands and acknowledges that the shares of common
stock are being acquired by Consultant for its own account and not
on behalf of any other person and is being acquired for investment
purposes and not for distribution. Consultant represents that an
investment in the common stock is a suitable investment for
Consultant, taking into a consideration the restrictions on
transferability affecting the common stock.
The Company agrees to file a Registration Statement on an
appropriate form with piggyback rights to register these shares upon
the earlier of ninety (90) days from the date hereof or a soon as
practicable after the date of the mutual execution of the Agreement.
The Company will undertake to comply with the various states
securities laws with respect to the registration of the Shares
referred to herein. The Company undertakes to make available for
review and comment, on a timely basis and prior to submission with
any regulatory agency, copies of the Registration Statement.
The Company hereby acknowledges that time is of the essence in
respect to the registration of the Shares and agrees that in the
event the Shares are not registered and qualified for public sale
pursuant to an effective registration statement within one hundred
fifty (150) days from the date of this Agreement ("Penalty Date"),
the Company shall agree to issue an additional number of Shares
equal to 10% of the total number to the Consultant pursuant to the
terms of paragraph 3(a) herein for each additional thirty (30) day
delay in providing an effective registration statement pursuant to
which the Shares may be sold, provided however that the penalty
described herein shall not take effect if the Company has filed a
registration statement covering the shares with the Securities and
Exchange Commission, and said Registration Statement has not been
declared effective for reasons beyond the control of the Company. So
long as the Company has made a good faith and reasonable attempt to
have such registration statement declared effective. In the event of
a delay less than a full thirty (30) day period, the Consultant
shall be entitled to a pro rata allocation ofadditional Shares.
Penalty shares if not registered upon delivery would come with
demand registration and piggyback registration rights.
4
<PAGE>
8. Assignment
This Agreement may not be assigned by either party hereto without the
written consent of the other but shall be binding upon the successors of
the parties.
9. Arbitration
Any dispute arising between the Company and the Consultant arising out
of or related to this Agreement or breach thereof, shall be settled by
arbitration, which shall be conducted in the State of Florida. Any award
made by such arbitrators shall be binding and conclusive for all purpose
thereof, may include injunctive relief, as well as orders for specific
performance and may be entered as a final judgment in any court of
competent jurisdiction. No arbitration arising out of or relating to
this Agreement shall include, by consolidation or joinder or in any
other manner, parties other than the Company or Consultant and other
persons substantially involved in common question of fact or law whose
presence is required if complete relief is to be afforded in
arbitration. The cost and expense of such arbitration shall be borne in
accordance with the determination of the arbitrators and may include
reasonable attorney's fees. Each party hereby further agrees that
service of process may be made upon it by registered or certified mail
or personal service at the address provided for herein.
10. Indemnification
a. The Company agrees to indemnify and hold harmless Consultant and its
agents and employees against any losses, claims, damages or
liabilities, joint or several, to which Consultant or any such other
person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arise out of or are based upon any
untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission to state therein a material fact require the Consultant
or any such other person for any legal or other expenses reasonably
incurred by Consultant or any such other person in connection
withinvestigating or defending any such loss, claim, damage,
liability, or action, suit or proceeding; provided, however, that
the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based
upon an untrue statement, or omission or alleged omission from the
Registration Statement, any preliminary prospectus, the prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the
Consultant specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the
Company may otherwise have.
5
<PAGE>
b. Consultant will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration
Statement and each person, if any, who controls the Company within
the meaning of the Act against any losses, claim, damages or
liabilities to which the Company or any such other person may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions, suite, or proceedings in
respect thereof) arise out of or are based upon any untrue
statement, of any material fact, contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based on the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in each case to the extent, but only to the extent, that such untrue
statement, in reliance upon and in conformity with written
information furnished to the Company by Consultant specifically for
use in the preparation thereof, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such other
person in connection with investigating or defending any such loss,
claim, damage, liability or action, suit or proceeding. This
indemnity agreement will be in addition to any liability which the
Consultant may have.
c. Promptly after receipt by an indemnified party under this Section or
notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under the Section, notify the
indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding is
brought against any indemnified party, and it notified an
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and, to the extent it
may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
6
<PAGE>
11. Notices
All notices required or permitted to be given under with Agreement shall
be in writing and shall be deemed to have been duly given (i) two (2)
hours after delivered personally to the party to be notified; or (ii)
six (6) business days after deposited in the U.S. mail, postage paid via
registered or certified mail, return receipt requested. Notices to the
Company shall be addressed to its president at its principal executive
office and to the Consultant at the address set forth beneath the
signature line, or to such other addresses as either party may designate
upon at least ten days' notice to the other party.
12. Governing Law
This Agreement shall be constructed by and enforced in accordance with
the laws of the State of Florida.
13. Representations
Consultant and it employees represent that they are not acting as either
a broker or brokerage firm nor are they affiliated or registered with
any securities agency and are acting merely as a consultant or investor.
a. Company states and represents there are and will be no S-8 or
registrations without prior approval from Consultant during the term
of agreement. Such approval shall not be unreasonably withheld.
7
<PAGE>
b. Company states and represents they will not do any reg-S placement
without prior written approval from consultant during the term of
agreement. Such approval shall not be unreasonably withheld.
c. Company states and agrees that there will be no additional issuance
of securities, options or warrants of any kind without prior written
approval. Such approval shall not be unreasonably withheld.
Any violation of the above representations of 13a, 13b, 13c, a penalty
of 10% of the total amount of shares owed in this agreement shall be
paid in additional shares to Consultant per month until the expiration
of agreement. Shares would be issued with piggyback registration rights.
14. Entire Agreement
This Agreement contains the entire understanding and agreement between
the parties. There are no other agreements, conditions or
representations, or written, express or implied, with regard thereto.
This Agreement may be amended only in writing signed by both parties.
15. Non-waiver
A delay or failure by either party to exercise a right under this
Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
16. Headings
Headings in this Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
17. Counterparts
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same agreement.
18. Binding Effect
The provisions of the Agreement shall be binding upon the parties, their
successors and assigns.
8
<PAGE>
19. Severability
If any provisions of this Agreement, except paragraph 1 and 3, or
application thereof to any person or circumstance shall be deemed or
held to be invalid, illegal, or unenforceable to any extent, the
remainder of this Agreement shall not be affected and the application of
such affected provision shall be enforced to the greatest extent
possible under law.
20. Restrictions
a. Company will complete a Pooling Agreement with
management/directors/officers. Such pooling agreements will require
management/directors/ officers to notify consultant in writing prior
to any sale of the Company's securities held by them.
b. At the option of the Company, the Company can extend agreement for
an additional six (6) months, in which case Consultant will provide
the same type, quantity, and quality of service as provided during
the first six (6) months. These services will be provided under the
same terms as otherwise contained in this agreement. Company agrees
to compensate Consultant with two hundred fifty thousand dollars
($250,000) in restricted stock with piggyback registration rights at
fifty percent (50%) of the average of the bid for the last five (5)
trading days of the agreement at the end of the first six (6)
months.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement to be effective as of the day and year first above written.
ADVANCED FINANCIAL, INC. CORED CAPITAL CORPORATION
By: /s/ Norman L. Peterson By: /s/ Charles S. Arnold
-------------------------- -----------------------------
Norman Peterson, President Charles S. Arnold, President
5425 Martindale P.O. Box 606
Shawnee, KS 66218 Goldenrod, FL 32733
9
Exhibit 10.2
CONSULTING AGREEMENT
This Agreement is effective as of the 15th day of February, 1996, by and
between Advanced Financial, Inc., a Delaware corporation (the "Company"), and
Affiliated Services, Inc., a Delaware corporation, or its assignees, (the
"Consultant").
WHEREAS, the Company is a publicly held company; and
WHEREAS, Consultant is in the business of assisting public companies in
financial relations; and
WHEREAS, the Company desires to retain Consultant to provide certified
specified services for the Company.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereby agree as follows:
1. Duties and Involvement
a. The Company hereby engages Consultant to provide financial and
public relations service. Such services will generally include
advice to and consulting with the Company's management concerning
marketing surveys, investor profile information, methods of
expanding investor support and increasing investor awareness of the
Company and its products and/or services. Consultant will also
provide additional services to the Company, including broker
relations, assisting in the preparation and format of due diligence
meetings, and attendance at conventions and trade shows.
b. Consultant acknowledges that neither it not any of its employees or
affiliates is an officer, director, or agent of the Company, that in
rendering advice or recommendations to the Company it is not and
will not be responsible for any management decisions on behalf of
the Company and that it is not authorized or empowered to commit the
Company to any recommendation or course of action. The Company
represents that Consultant does not have, through stock ownership or
otherwise, the power to control the Company nor to exercise any
dominating influence over its management.
2. Terms
This agreement shall continue until six (6) months from date of execution
(see 20 b)
<PAGE>
3. Compensation
As total and complete consideration for the services to be provided by
Consultant to the Company, the Company hereby grants to Consultant the
following:
Consultant or its designee shall receive an option to purchase two
hundred fifty thousand (250,000) shares of the Company's 144 common
stock at fifty cents (0.$50) per share. The options shall be
exercised for in whole or in part by the holder thereof on or before
thirty (30) days from the date of the registration statement
covering the Shares becomes effective. Company agrees to issue 144
stock represented in this agreement within 30 days of execution. The
Company shall deliver to consultant stock certificates representing
the number of shares exercised under this option within 30 days
after exercised by consultant. Such certificates shall be free
trading unless options are exercised prior to the date of an
effective registration statement, in which case the certificates
shall contain the normal 144 restrictive legend.
In the event this agreement is terminated for any reason whatsoever,
the shares referred to herein shall remain in full force and effect
and with respect to any shares which is issued or are issuable
thereunder. Consultant shall have the right of retention of said
shares of common stock in consideration for services performed.
4. Services not Exclusive
Consultant shall devote such of its time and effort necessary to the
discharge of its duties hereunder. The Company acknowledges that
Consultant is engaged in other business activities and that it will
continue such activities during the term of this Agreement. Consultant
shall not be restricted from engaging in other business activities
during the term of this Agreement.
5. Confidentiality
Consultant acknowledges that it will have access to confidential
information regarding the Company and its business. Consultant agrees
that it will not, during or subsequent to the term of this Agreement,
divulge, furnish, or make accessible to any person (other than with the
written permission of the Company) any knowledge or information or plans
of the Company with respect to the Company or its business, including,
but not limited to, the products of the Company, whether in the concept
or development stage or being marketed by the company on the effective
date of this Agreement or during the term hereof.
2
<PAGE>
6. Covenant not to Compete
During the term of this Agreement, Consultant warrants, represents, and
agrees that it will not directly participate in the information
developed for and by the Company and will not compete directly with the
Company in the Company's primary industry or related fields.
7. Investment Representation
a. Access to Information
The Company represents and warrants that it has provided Consultant
access to all information available to the Company concerning its
condition, financial and otherwise, its management, its business and
its prospects. The Company represents that it has provided
Consultant with a copy of the Company's most recent Form 10-K and
any subsequent filing required or filed under the rules and
regulations promulgated under the Securities Act of 1933 as amended
(the "Act") or the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), if any, (the "Disclosure Documents"). Consultant
acknowledges that it is aware that because of the Company's
financial position and other factors, the acquisition of the shares
to be paid to Consultant as compensation hereunder involves a high
degree of risk, including the risk that Consultant may lose its
entire investment in the shares of Common Stock. Consultant further
represents that it and its advisors have been afforded the
opportunity to discuss the Company with its management. The Company
represents that it has and will continue to provide Consultant with
any information or documentation necessary to verify the accuracy of
the information contained in the Disclosure Documents and will
promptly notify Consultant upon the filing of any registration
statement or other periodic reporting documents filed pursuant to
the rules and regulations of the Act or the Exchange Act. Any
additional sale or registration and filings with the NASD and SEC
will be made available to consultant at such time by notifying in
writing at least 30 days prior to any registration or sale.
3
<PAGE>
b. Registration of Securities
Consultant understands and acknowledges that the shares of common
stock are being acquired by Consultant for its own account and not
on behalf of any other person and is being acquired for investment
purposes and not for distribution. Consultant represents that an
investment in the common stock is a suitable investment for
Consultant, taking into a consideration the restrictions on
transferability affecting the common stock.
The Company agrees to file a Registration Statement on an
appropriate form with piggyback rights to register these shares upon
the earlier of ninety (90) days from the date hereof or a soon as
practicable after the date of the mutual execution of the Agreement.
The Company will undertake to comply with the various states
securities laws with respect to the registration of the Shares
referred to herein. The Company undertakes to make available for
review and comment, on a timely basis and prior to submission with
any regulatory agency, copies of the Registration Statement.
The Company hereby acknowledges that time is of the essence in
respect to the registration of the Shares and agrees that in the
event the Shares are not registered and qualified for public sale
pursuant to an effective registration statement within one hundred
fifty (150) days from the date of this Agreement ("Penalty Date"),
the Company shall agree to issue an additional number of Shares
equal to 10% of the total number to the Consultant pursuant to the
terms of paragraph 3(a) herein for each additional thirty (30) day
delay in providing an effective registration statement pursuant to
which the Shares may be sold, provided however that the penalty
described herein shall not take effect if the Company has filed a
registration statement covering the shares with the Securities and
Exchange Commission, and said Registration Statement has not been
declared effective for reasons beyond the control of the Company. So
long as the Company has made a good faith and reasonable attempt to
have such registration statement declared effective. In the event of
a delay less than a full thirty (30) day period, the Consultant
shall be entitled to a pro rata allocation of additional Shares.
Penalty shares if not registered upon delivery would come with
demand registration and piggyback registration rights.
4
<PAGE>
8. Assignment
This Agreement may not be assigned by either party hereto without the
written consent of the other but shall be binding upon the successors of
the parties.
9. Arbitration
Any dispute arising between the Company and the Consultant arising out
of or related to this Agreement or breach thereof, shall be settled by
arbitration, which shall be conducted in the State of Florida. Any award
made by such arbitrators shall be binding and conclusive for all purpose
thereof, may include injunctive relief, as well as orders for specific
performance and may be entered as a final judgment in any court of
competent jurisdiction. No arbitration arising out of or relating to
this Agreement shall include, by consolidation or joinder or in any
other manner, parties other than the Company or Consultant and other
persons substantially involved in common question of fact or law whose
presence is required if complete relief is to be afforded in
arbitration. The cost and expense of such arbitration shall be borne in
accordance with the determination of the arbitrators and may include
reasonable attorney's fees. Each party hereby further agrees that
service of process may be made upon it by registered or certified mail
or personal service at the address provided for herein.
10. Indemnification
a. The Company agrees to indemnify and hold harmless Consultant and its
agents and employees against any losses, claims, damages or
liabilities, joint or several, to which Consultant or any such other
person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arise out of or are based upon any
untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission to state therein a material fact require the Consultant
or any such other person for any legal or other expenses reasonably
incurred by Consultant or any such other person in connection with
investigating or defending any such loss, claim, damage, liability,
or action, suit or proceeding; provided, however, that the Company
will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement, or omission or alleged omission from the
Registration Statement, any preliminary prospectus, the prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the
Consultant specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the
Company may otherwise have.
5
<PAGE>
b. Consultant will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration
Statement and each person, if any, who controls the Company within
the meaning of the Act against any losses, claim, damages or
liabilities to which the Company or any such other person may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions, suite, or proceedings in
respect thereof) arise out of or are based upon any untrue
statement, of any material fact, contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based on the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in each case to the extent, but only to the extent, that such untrue
statement, in reliance upon and in conformity with written
information furnished to the Company by Consultant specifically for
use in the preparation thereof, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such other
person in connection with investigating or defending any such loss,
claim, damage, liability or action, suit or proceeding. This
indemnity agreement will be in addition to any liability which the
Consultant may have.
c. Promptly after receipt by an indemnified party under this Section or
notice of the commencement of any action, suit or proceeding, such
indemnifiedparty will, if a claim in respect thereof is to be made
against an indemnifying party under the Section, notify the
indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding is
brought against any indemnified party, and it notified an
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and, to the extent it
may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
6
<PAGE>
11. Notices
All notices required or permitted to be given under with Agreement shall
be in writing and shall be deemed to have been duly given (i) two (2)
hours after delivered personally to the party to be notified; or (ii)
six (6) business days after deposited in the U.S. mail, postage paid via
registered or certified mail, return receipt requested. Notices to the
Company shall be addressed to its president at its principal executive
office and to the Consultant at the address set forth beneath the
signature line, or to such other addresses as either party may designate
upon at least ten days' notice to the other party.
12. Governing Law
This Agreement shall be constructed by and enforced in accordance with
the laws of the State of Florida.
13. Representations
Consultant and it employees represent that they are not acting as either
a broker or brokerage firm nor are they affiliated or registered with
any securities agency and are acting merely as a consultant or investor.
7
<PAGE>
a. Company states and represents there are and will be no S-8 or
registrations without prior approval from Consultant during the term
of agreement. Such approval shall not be unreasonably withheld.
b. Company states and represents they will not do any reg-S placement
without prior written approval from consultant during the term of
agreement. Such approval shall not be unreasonably withheld.
c. Company states and agrees that there will be no additional issuance
of securities, options or warrants of any kind without prior written
approval. Such approval shall not be unreasonably withheld.
Any violation of the above representations of 13a, 13b, 13c, a penalty
of 10% of the total amount of shares owed in this agreement shall be
paid in additional shares to Consultant per month until the expiration
of agreement. Shares would be issued with piggyback registration rights.
14. Entire Agreement
This Agreement contains the entire understanding and agreement between
the parties. There are no other agreements, conditions or
representations, or written, express or implied, with regard thereto.
This Agreement may be amended only in writing signed by both parties.
15. Non-waiver
A delay or failure by either party to exercise a right under this
Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
16. Headings
Headings in this Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
17. Counterparts
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same agreement.
8
<PAGE>
18. Binding Effect
The provisions of the Agreement shall be binding upon the parties, their
successors and assigns.
19. Severability
If any provisions of this Agreement, except paragraph 1 and 3, or
application thereof to any person or circumstance shall be deemed or
held to be invalid, illegal, or unenforceable to any extent, the
remainder of this Agreement shall not be affected and the application of
such affected provision shall be enforced to the greatest extent
possible under law.
20. Restrictions
a. Company will complete a Pooling Agreement with
management/directors/officers. Such pooling agreements will require
management/directors/ officers to notify consultant in writing prior
to any sale of the Company's securities held by them.
b. At the option of the Company, the Company can extend agreement for
an additional six (6) months, in which case Consultant will provide
the same type, quantity, and quality of service as provided during
the first six (6) months. These services will be provided under the
same terms as otherwise contained in this agreement. Company agrees
to compensate Consultant with two hundred fifty thousand dollars
($250,000) in restricted stock with piggyback registration rights at
fifty percent (50%) of the average of the bid for the last five (5)
trading days of the agreement at the end of the first six (6)
months.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement to be effective as of the day and year first above written.
ADVANCED FINANCIAL, INC. AFFILIATED SERVICES, INC.
By: /s/ Norman L. Peterson By: /s/ Tracia N. Arnold
------------------------- ---------------------------
Norman Peterson, President Tracia N. Arnold, President
5425 Martindale Rt. 1 Box 242
Shawnee, KS 66218 360 Speaks Rd.
Advance, NC 27006
9
Exhibit 10.3
CONSULTING AGREEMENT
This Agreement is effective as of the 15th day of February, 1996, by and
between Advanced Financial, Inc., a Delaware corporation (the "Company"), and
Pyramid Holdings, Inc., a Delaware corporation, or its assignees, (the
"Consultant").
WHEREAS, the Company is a publicly held company; and
WHEREAS, Consultant is in the business of assisting public companies in
financial relations; and
WHEREAS, the Company desires to retain Consultant to provide certified
specified services for the Company.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereby agree as follows:
1. Duties and Involvement
a. The Company hereby engages Consultant to provide financial and
public relations service. Such services will generally include
advice to and consulting with the Company's management concerning
marketing surveys, investor profile information, methods of
expanding investor support and increasing investor awareness of the
Company and its products and/or services. Consultant will also
provide additional services to the Company, including broker
relations, assisting in the preparation and format of due diligence
meetings, and attendance at conventions and trade shows.
b. Consultant acknowledges that neither it not any of its employees or
affiliates is an officer, director, or agent of the Company, that in
rendering advice or recommendations to the Company it is not and
will not be responsible for any management decisions on behalf of
the Company and that it is not authorized or empowered to commit the
Company to any recommendation or course of action. The Company
represents that Consultant does not have, through stock ownership or
otherwise, the power to control the Company nor to exercise any
dominating influence over its management.
2. Terms
This agreement shall continue until six (6) months from date of execution
(see 20 b)
<PAGE>
3. Compensation
As total and complete consideration for the services to be provided by
Consultant to the Company, the Company hereby grants to Consultant the
following:
Consultant or its designee shall receive an option to purchase two
hundred fifty thousand (250,000) shares of the Company's 144 common
stock at fifty cents (0.$50) per share. The options shall be
exercised for in whole or in part by the holder thereof on or before
thirty (30) days from the date of the registration statement
covering the Shares becomes effective. Company agrees to issue 144
stock represented in this agreement within 30 days of execution. The
Company shall deliver to consultant stock certificates representing
the number of shares exercised under this option within 30 days
after exercised by consultant. Such certificates shall be free
trading unless options are exercised prior to the date of an
effective registration statement, in which case the certificates
shall contain the normal 144 restrictive legend.
In the event this agreement is terminated for any reason whatsoever,
the shares referred to herein shall remain in full force and effect
and with respect to any shares which is issued or are issuable
thereunder. Consultant shall have the right of retention of said
shares of common stock in consideration for services performed.
4. Services not Exclusive
Consultant shall devote such of its time and effort necessary to the
discharge of its duties hereunder. The Company acknowledges that
Consultant is engaged in other business activities and that it will
continue such activities during the term of this Agreement. Consultant
shall not be restricted from engaging in other business activities
during the term of this Agreement.
5. Confidentiality
Consultant acknowledges that it will have access to confidential
information regarding the Company and its business. Consultant agrees
that it will not, during or subsequent to the term of this Agreement,
divulge, furnish, or make accessible to any person (other than with the
written permission of the Company) any knowledge or information or plans
of the Company with respect to the Company or its business, including,
but not limited to, the products of the Company, whether in the concept
or development stage or being marketed by the company on the effective
date of this Agreement or during the term hereof.
2
<PAGE>
6. Covenant not to Compete
During the term of this Agreement, Consultant warrants, represents, and
agrees that it will not directly participate in the information
developed for and by the Company and will not compete directly with the
Company in the Company's primary industry or related fields.
7. Investment Representation
a. Access to Information
The Company represents and warrants that it has provided Consultant
access to all information available to the Company concerning its
condition, financial and otherwise, its management, its business and
its prospects. The Company represents that it has provided
Consultant with a copy of the Company's most recent Form 10-K and
any subsequent filing required or filed under the rules and
regulations promulgated under the Securities Act of 1933 as amended
(the "Act") or the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), if any, (the "Disclosure Documents"). Consultant
acknowledges that it is aware that because of the Company's
financial position and other factors, the acquisition of the shares
to be paid to Consultant as compensation hereunder involves a high
degree of risk, including the risk that Consultant may lose its
entire investment in the shares of Common Stock. Consultant further
represents that it and its advisors have been afforded the
opportunity to discuss the Company with its management. The Company
represents that it has and will continue to provide Consultant with
any information or documentation necessary to verify the accuracy of
the information contained in the Disclosure Documents and will
promptly notify Consultant upon the filing of any registration
statement or other periodic reporting documents filed pursuant to
the rules and regulations of the Act or the Exchange Act. Any
additional sale or registration and filings with the NASD and SEC
will be made available to consultant at such time by notifying in
writing at least 30 days prior to any registration or sale.
3
<PAGE>
b. Registration of Securities
Consultant understands and acknowledges that the shares of common
stock are being acquired by Consultant for its own account and not
on behalf of any other person and is being acquired for investment
purposes and not for distribution. Consultant represents that an
investment in the common stock is a suitable investment for
Consultant, taking into a consideration the restrictions on
transferability affecting the common stock.
The Company agrees to file a Registration Statement on an
appropriate form with piggyback rights to register these shares upon
the earlier of ninety (90) days from the date hereof or a soon as
practicable after the date of the mutual execution of the Agreement.
The Company will undertake to comply with the various states
securities laws with respect to the registration of the Shares
referred to herein. The Company undertakes to make available for
review and comment, on a timely basis and prior to submission with
any regulatory agency, copies of the Registration Statement.
The Company hereby acknowledges that time is of the essence in
respect to the registration of the Shares and agrees that in the
event the Shares are not registered and qualified for public sale
pursuant to an effective registration statement within one hundred
fifty (150) days from the date of this Agreement ("Penalty Date"),
the Company shall agree to issue an additional number of Shares
equal to 10% of the total number to the Consultant pursuant to the
terms of paragraph 3(a) herein for each additional thirty (30) day
delay in providing an effective registration statement pursuant to
which the Shares may be sold, provided however that the penalty
described herein shall not take effect if the Company has filed a
registration statement covering the shares with the Securities and
Exchange Commission, and said Registration Statement has not been
declared effective for reasons beyond the control of the Company. So
long as the Company has made a good faith and reasonable attempt to
have such registration statement declared effective. In the event of
a delay less than a full thirty (30) day period, the Consultant
shall be entitled to a pro rata allocation of additional Shares.
Penalty shares if not registered upon delivery would come with
demand registration and piggyback registration rights.
4
<PAGE>
8. Assignment
This Agreement may not be assigned by either party hereto without the
written consent of the other but shall be binding upon the successors of
the parties.
9. Arbitration
Any dispute arising between the Company and the Consultant arising out
of or related to this Agreement or breach thereof, shall be settled by
arbitration, which shall be conducted in the State of Florida. Any award
made by such arbitrators shall be binding and conclusive for all purpose
thereof, may include injunctive relief, as well as orders for specific
performance and may be entered as a final judgment in any court of
competent jurisdiction. No arbitration arising out of or relating to
this Agreement shall include, by consolidation or joinder or in any
other manner, parties other than the Company or Consultant and other
persons substantially involved in common question of fact or law whose
presence is required if complete relief is to be afforded in
arbitration. The cost and expense of such arbitration shall be borne in
accordance with the determination of the arbitrators and may include
reasonable attorney's fees. Each party hereby further agrees that
service of process may be made upon it by registered or certified mail
or personal service at the address provided for herein.
10. Indemnification
a. The Company agrees to indemnify and hold harmless Consultant and its
agents and employees against any losses, claims, damages or
liabilities, joint or several, to which Consultant or any such other
person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arise out of or are based upon any
untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission to state therein a material fact require the Consultant
or any such other person for any legal or other expenses reasonably
incurred by Consultant or any such other person in connection with
investigating or defending any such loss, claim, damage, liability,
or action, suit or proceeding; provided, however, that the Company
will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement, or omission or alleged omission from the
Registration Statement, any preliminary prospectus, the prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the
Consultant specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the
Company may otherwise have.
5
<PAGE>
b. Consultant will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration
Statement and each person, if any, who controls the Company within
the meaning of the Act against any losses, claim, damages or
liabilities to which the Company or any such other person may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions, suite, or proceedings in
respect thereof) arise out of or are based upon any untrue
statement, of any material fact, contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based on the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in each case to the extent, but only to the extent, that such untrue
statement, in reliance upon and in conformity with written
information furnished to the Company by Consultant specifically for
use in the preparation thereof, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such other
person in connection with investigating or defending any such loss,
claim, damage, liability or action, suit or proceeding. This
indemnity agreement will be in addition to any liability which the
Consultant may have.
c. Promptly after receipt by an indemnified party under this Section or
notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under the Section, notify the
indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding is
brought against any indemnified party, and it notified an
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and, to the extent it
may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
6
<PAGE>
11. Notices
All notices required or permitted to be given under with Agreement shall
be in writing and shall be deemed to have been duly given (i) two (2)
hours after delivered personally to the party to be notified; or (ii)
six (6) business days after deposited in the U.S. mail, postage paid via
registered or certified mail, return receipt requested. Notices to the
Company shall be addressed to its president at its principal executive
office and to the Consultant at the address set forth beneath the
signature line, or to such other addresses as either party may designate
upon at least ten days' notice to the other party.
12. Governing Law
This Agreement shall be constructed by and enforced in accordance with
the laws of the State of Florida.
13. Representations
Consultant and it employees represent that they are not acting as either
a broker or brokerage firm nor are they affiliated or registered with
any securities agency and are acting merely as a consultant or investor.
7
<PAGE>
a. Company states and represents there are and will be no S-8 or
registrations without prior approval from Consultant during the term
of agreement. Such approval shall not be unreasonably withheld.
b. Company states and represents they will not do any reg-S placement
without prior written approval from consultant during the term of
agreement. Such approval shall not be unreasonably withheld.
c. Company states and agrees that there will be no additional issuance
of securities, options or warrants of any kind without prior written
approval. Such approval shall not be unreasonably withheld.
Any violation of the above representations of 13a, 13b, 13c, a penalty
of 10% of the total amount of shares owed in this agreement shall be
paid in additional shares to Consultant per month until the expiration
of agreement. Shares would be issued with piggyback registration rights.
14. Entire Agreement
This Agreement contains the entire understanding and agreement between
the parties. There are no other agreements, conditions or
representations, or written, express or implied, with regard thereto.
This Agreement may be amended only in writing signed by both parties.
15. Non-waiver
A delay or failure by either party to exercise a right under this
Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
16. Headings
Headings in this Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
17. Counterparts
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same agreement.
8
<PAGE>
18. Binding Effect
The provisions of the Agreement shall be binding upon the parties, their
successors and assigns.
19. Severability
If any provisions of this Agreement, except paragraph 1 and 3, or
application thereof to any person or circumstance shall be deemed or
held to be invalid, illegal, or unenforceable to any extent, the
remainder of this Agreement shall not be affected and the application of
such affected provision shall be enforced to the greatest extent
possible under law.
20. Restrictions
a. Company will complete a Pooling Agreement with
management/directors/officers. Such pooling agreements will require
management/directors/officers to notify consultant in writing prior
to any sale of the Company's securities held by them.
b. At the option of the Company, the Company can extend agreement for
an additional six (6) months, in which case Consultant will provide
the same type, quantity, and quality of service as provided during
the first six (6) months. These services will be provided under the
same terms as otherwise contained in this agreement. Company agrees
to compensate Consultant with two hundred fifty thousand dollars
($250,000) in restricted stock with piggyback registration rights at
fifty percent (50%) of the average of the bid for the last five (5)
trading days of the agreement at the end of the first six (6)
months.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement to be effective as of the day and year first above written.
ADVANCED FINANCIAL, INC. PYRAMID HOLDINGS, INC.
By: /s/ Norman L. Peterson By: /s/ Kent T. Allen
-------------------------- ---------------------------
Norman Peterson, President Kent T. Allen, President
5425 Martindale 1049 Corkwood Dr.
Shawnee, KS 66218 Oviedo, FL 32765
9
Exhibit 10.4
CONSULTING AGREEMENT
This Agreement is effective as of the 15th day of February, 1996, by and
between Advanced Financial, Inc., a Delaware corporation (the "Company"), and
Ocean Marketing Corporation, a Colorado corporation, or its assignees, (the
"Consultant").
WHEREAS, the Company is a publicly held company; and
WHEREAS, Consultant is in the business of assisting public companies in
financial relations; and
WHEREAS, the Company desires to retain Consultant to provide certified
specified services for the Company.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereby agree as follows:
1. Duties and Involvement
a. The Company hereby engages Consultant to provide financial and
public relations service. Such services will generally include
advice to and consulting with the Company's management concerning
marketing surveys, investor profile information, methods of
expanding investor support and increasing investor awareness of the
Company and its products and/or services. Consultant will also
provide additional services to the Company, including broker
relations, assisting in the preparation and format of due diligence
meetings, and attendance at conventions and trade shows.
b. Consultant acknowledges that neither it not any of its employees or
affiliates is an officer, director, or agent of the Company, that in
rendering advice or recommendations to the Company it is not and
will not be responsible for any management decisions on behalf of
the Company and that it is not authorized or empowered to commit the
Company to any recommendation or course of action. The Company
represents that Consultant does not have, through stock ownership or
otherwise, the power to control the Company nor to exercise any
dominating influence over its management.
2. Terms
This agreement shall continue until six (6) months from date of execution
(see 20 b)
<PAGE>
3. Compensation
As total and complete consideration for the services to be provided by
Consultant to the Company, the Company hereby grants to Consultant the
following:
Consultant or its designee shall receive an option to purchase two
hundred fifty thousand (250,000) shares of the Company's 144 common
stock at fifty cents (0.$50) per share. The options shall be
exercised, if at all, within ten (10) days following the filing of
the registration statement covering the common shares underlying
this option with the Securities Exchange Commission. Company shall
deliver to Consultant stock certificates representing the number of
shares exercised under this option within 30 days after exercised by
consultant. Such certificates shall contain the normal 144
restrictive legend.
In the event this agreement is terminated for any reason whatsoever,
the shares referred to herein shall remain in full force and effect
and with respect to any shares which is issued or are issuable
thereunder. Consultant shall have the right of retention of said
shares of common stock in consideration for services performed.
4. Services not Exclusive
Consultant shall devote such of its time and effort necessary to the
discharge of its duties hereunder. The Company acknowledges that
Consultant is engaged in other business activities and that it will
continue such activities during the term of this Agreement. Consultant
shall not be restricted from engaging in other business activities
during the term of this Agreement.
5. Confidentiality
Consultant acknowledges that it will have access to confidential
information regarding the Company and its business. Consultant agrees
that it will not, during or subsequent to the term of this Agreement,
divulge, furnish, or make accessible to any person (other than with the
written permission of the Company) any knowledge or information or plans
of the Company with respect to the Company or its business, including,
but not limited to, the products of the Company, whether in the concept
or development stage or being marketed by the company onthe effective
date of this Agreement or during the term hereof.
2
<PAGE>
6. Covenant not to Compete
During the term of this Agreement, Consultant warrants, represents, and
agrees that it will not directly participate in the information
developed for and by the Company and will not compete directly with the
Company in the Company's primary industry or related fields.
7. Investment Representation
a. Access to Information
The Company represents and warrants that it has provided Consultant
access to all information available to the Company concerning its
condition, financial and otherwise, its management, its business and
its prospects. The Company represents that it has provided
Consultant with a copy of the Company's most recent Form 10-K and
any subsequent filing required or filed under the rules and
regulations promulgated under the Securities Act of 1933 as amended
(the "Act") or the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), if any, (the "Disclosure Documents"). Consultant
acknowledges that it is aware that because of the Company's
financial position and other factors, the acquisition of the shares
to be paid to Consultant as compensation hereunder involves a high
degree of risk, including the risk that Consultant may lose its
entire investment in the shares of Common Stock. Consultant further
represents that it and its advisors have been afforded the
opportunity to discuss the Company with its management. The Company
represents that it has and will continue to provide Consultant with
any information or documentation necessary to verify the accuracy of
the information contained in the Disclosure Documents and will
promptly notify Consultant upon the filing of any registration
statement or other periodic reporting documents filed pursuant to
the rules and regulations of the Act or the Exchange Act. Any
additional sale or registration and filings with the NASD and SEC
will be made available to consultant at such time by notifying in
writing at least 30 days prior to any registration or sale.
3
<PAGE>
b. Registration of Securities
Consultant understands and acknowledges that the shares of common
stock are being acquired by Consultant for its own account and not
on behalf of any other person and is being acquired for investment
purposes and not for distribution. Consultant represents that an
investment in the common stock is a suitable investment for
Consultant, taking into a consideration the restrictions on
transferability affecting the common stock.
The Company agrees to file a Registration Statement on an
appropriate form with piggyback rights to register these shares upon
the earlier of ninety (90) days from the date hereof or a soon as
practicable after the date of the mutual execution of the Agreement.
The Company will undertake to comply with the various states
securities laws with respect to the registration of the Shares
referred to herein. The Company undertakes to make available for
review and comment, on a timely basis and prior to submission with
any regulatory agency, copies of the Registration Statement.
The Company hereby acknowledges that time is of the essence in
respect to the registration of the Shares and agrees that in the
event the Shares are not registered and qualified for public sale
pursuant to an effective registration statement within one hundred
fifty (150) days from the date of this Agreement ("Penalty Date"),
the Company shall agree to issue an additional number of Shares
equal to 10% of the total number to the Consultant pursuant to the
terms of paragraph 3(a) herein for each additional thirty (30) day
delay in providing an effective registration statement pursuant to
which the Shares may be sold, provided however that the penalty
described herein shall not take effect if the Company has filed a
registration statement covering the shares with the Securities and
Exchange Commission, and said Registration Statement has not been
declared effective for reasons beyond the control of the Company. So
long as the Company has made a good faith and reasonable attempt to
have such registration statement declared effective. In the event of
a delay less than a full thirty (30) day period, the Consultant
shall be entitled to a pro rata allocation of additional Shares.
Penalty shares if not registered upon delivery would come with
demand registration and piggyback registration rights.
4
<PAGE>
8. Assignment
This Agreement may not be assigned by either party hereto without the
written consent of the other but shall be binding upon the successors of
the parties.
9. Arbitration
Any dispute arising between the Company and the Consultant arising out
of or related to this Agreement or breach thereof, shall be settled by
arbitration, which shall be conducted in the State of Florida. Any award
made by such arbitrators shall be binding and conclusive for all purpose
thereof, may include injunctive relief, as well as orders for specific
performance and may be entered as a final judgment in any court of
competent jurisdiction. No arbitration arising out of or relating to
this Agreement shall include, by consolidation or joinder or in any
other manner, parties other than the Company or Consultant and other
persons substantially involved in common question of fact or law whose
presence is required if complete relief is to be afforded in
arbitration. The cost and expense of such arbitration shall be borne in
accordance with the determination of the arbitrators and may include
reasonable attorney's fees. Each party hereby further agrees that
service of process may be made upon it by registered or certified mail
or personal service at the address provided for herein.
10. Indemnification
a. The Company agrees to indemnify and hold harmless Consultant and its
agents and employees against any losses, claims, damages or
liabilities, joint or several, to which Consultant or any such other
person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions, suits or
proceedings in respect thereof) arise out of or are based upon any
untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission to state therein a material fact require the Consultant
or any such other person for any legal or other expenses reasonably
incurred by Consultant or any such other person in connection with
investigating or defending any such loss, claim, damage, liability,
or action, suit or proceeding; provided, however, that the Company
will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement, or omission or alleged omission from the
Registration Statement, any preliminary prospectus, the prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the
Consultant specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the
Company may otherwise have.
5
<PAGE>
b. Consultant will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration
Statement and each person, if any, who controls the Company within
the meaning of the Act against any losses, claim, damages or
liabilities to which the Company or any such other person may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions, suite, or proceedings in
respect thereof) arise out of or are based upon any untrue
statement, of any material fact, contained in the Registration
Statement, any preliminary prospectus, the prospectus, or any
amendment or supplement thereto, or arise out of or are based on the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in each case to the extent, but only to the extent, that such untrue
statement, in reliance upon and in conformity with written
information furnished to the Company by Consultant specifically for
use in the preparation thereof, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such other
person in connection with investigating or defending any such loss,
claim, damage, liability or action, suit or proceeding. This
indemnity agreement will be in addition to any liability which the
Consultant may have.
c. Promptly after receipt by an indemnified party under this Section or
notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under the Section, notify the
indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding is
brought against any indemnified party, and it notified an
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and, to the extent it
may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
6
<PAGE>
11. Notices
All notices required or permitted to be given under with Agreement shall
be in writing and shall be deemed to have been duly given (i) two (2)
hours after delivered personally to the party to be notified; or (ii)
six (6) business days after deposited in the U.S. mail, postage paid via
registered or certified mail, return receipt requested. Notices to the
Company shall be addressed to its president at its principal executive
office and to the Consultant at the address set forth beneath the
signature line, or to such other addresses as either party may designate
upon at least ten days' notice to the other party.
12. Governing Law
This Agreement shall be constructed by and enforced in accordance with
the laws of the State of Florida.
13. Representations
Consultant and it employees represent that they are not acting as either
a broker or brokerage firm nor are they affiliated or registered with
any securities agency and are acting merely as a consultant or investor.
a. Company states and represents there are and will be no S-8 or
registrations without prior approval from Consultant during the term
of agreement. Such approval shall not be unreasonably withheld.
7
<PAGE>
b. Company states and represents they will not do any reg-S placement
without prior written approval from consultant during the term of
agreement. Such approval shall not be unreasonably withheld.
c. Company states and agrees that there will be no additional issuance
of securities, options or warrants of any kind without prior written
approval. Such approval shall not be unreasonably withheld.
Any violation of the above representations of 13a, 13b, 13c, a penalty
of 10% of the total amount of shares owed in this agreement shall be
paid in additional shares to Consultant per month until the expiration
of agreement. Shares would be issued with piggyback registration rights.
14. Entire Agreement
This Agreement contains the entire understanding and agreement between
the parties. There are no other agreements, conditions or
representations, or written, express or implied, with regard thereto.
This Agreement may be amended only in writing signed by both parties.
15. Non-waiver
A delay or failure by either party to exercise a right under this
Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
16. Headings
Headings in this Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
17. Counterparts
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same agreement.
18. Binding Effect
The provisions of the Agreement shall be binding upon the parties, their
successors and assigns.
8
<PAGE>
19. Severability
If any provisions of this Agreement, except paragraph 1 and 3, or
application thereof to any person or circumstance shall be deemed or
held to be invalid, illegal, or unenforceable to any extent, the
remainder of this Agreement shall not be affected and the application of
such affected provision shall be enforced to the greatest extent
possible under law.
20. Restrictions
a. Company will complete a Pooling Agreement with
management/directors/officers. Such pooling agreements will require
management/directors/ officers to notify consultant in writing prior
to any sale of the Company's securities held by them.
b. At the option of the Company, the Company can extend agreement for
an additional six (6) months, in which case Consultant will provide
the same type, quantity, and quality of service as provided during
the first six (6) months. These services will be provided under the
same terms as otherwise contained in this agreement. Company agrees
to compensate Consultant with two hundred fifty thousand dollars
($250,000) in restricted stock with piggyback registration rights at
fifty percent (50%) of the average of the bid for the last five (5)
trading days of the agreement at the end of the first six (6)
months.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement to be effective as of the day and year first above written.
ADVANCED FINANCIAL, INC. OCEAN MARKETING CORPORATION
By: /s/ Norman L. Peterson By: /s/ Richard J. Fixaris
--------------------------- ---------------------------
Norman Peterson, President Richard J. Fixaris, President
5425 Martindale 2901 Hill Street
Shawnee, KS 66218 New Smyrna Beach, FL 32169
9
Exhibit 24.1
CONSENT OF COUNSEL
The consent of Allen G. Reeves, P.C., of all references made to it in the
Prospectus included as a part of this Registration Statement on Form S-1 of
Advanced Financial, Inc. and in all Amendments thereto are included in its
opinion filed as Exhibit 24.1 to the Registration Statement.
ALLEN G. REEVES, P.C.
By: /s/ Allen G. Reeves
--------------------
Allen G. Reeves
Denver, Colorado
May 10, 1996
Exhibit 24.2
ACCOUNTANT'S CONSENT
The Board of Directors
Advanced Financial, Inc.
We consent to the use in this Registration Statement of Advanced Financial, Inc.
on Form S-1, of our report dated June 2, 1995 on the consolidated financial
statements of Advanced Financial, Inc. and subsidiaries as of March 31, 1995 and
1994, and for the years then ended, and to the reference to our firm under the
heading "Experts" in the related prospectus.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Marwick LLP
Kansas City, Missouri
May 9, 1996
