SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter ended: Commission file number
September 30, 1996 0-19485
ADVANCED FINANCIAL, INC.
(Name of small business issuer in its charter)
DELAWARE 84-1069416
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5425 Martindale, Shawnee, KS 66218
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (913) 441-2466
_____________________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of October 30, 1996: 5,913,570
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PART I - FINANCIAL INFORMATION
ITEM 1.
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1996 and March 31, 1996
Assets Sept 30, 1996 March 31, 1996
------ ------------- --------------
(unaudited)
<S> <C> <C>
Cash and investments $ 390,043 585,643
Mortgage servicing advances and accounts receivable 2,365,634 520,620
Property and equipment, net 1,576,486 1,718,355
Mortgage bans held for sale 9,067,699 10,110,747
Mortgage bans held for investment 85,320 94,932
Purchased mortgage servicing rights, net 792,754 2,440,780
Excess of cost over fair value of assets acquired, net 499,441 524,798
Net receivable from related party 500,000
Prepaid expenses 98,393 191,442
Deferred income taxes 100,000 440,000
Other investment 206,991 235,800
Receivable from related party 125,000 190,000
Other 300,021 260,899
------------ ----------
Total assets $ 16,107,782 17,313,516
============ ==========
Liabilities
-----------
Accounts payable and accrued expenses $ 2,865,080 2,507,103
Notes payable 11,696,408 13,412,419
Capitalized lease obligations 295,575 415,665
------------ ----------
Total liabilities $ 14,857,063 16,335,187
============ ==========
Stockholders Equity
-------------------
Preferred stock, Series B, $005 par value.
10,000,000 shares authorized; 372,000 and
shares issued 1,860 1,860
Common stock, $001 par value 25,000,000
shares authorized; 5,894,670 and 3,875,476
shares, respectively, issued and outstanding 5,895 4,256
Paid-in capital 9,682,409 8,877,493
Deficit (7,998,100) (7,463,935)
------------ ----------
1,692,064 1,419,674
Treasury stock, 99,869 and 100,119 shares of
commonstock,at cost (441,345) (441,345)
------------ ----------
Total stockholders' equity 1,250,719 978,329
------------ ----------
Total liability and stockholders'equity $ 16,107,782 17,313,516
============ ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three month periods ended September 30, 1996
and September 30, 1995
Sept 30, 1996 Sept 30, 1995
-------------- -------------
Revenues: (unaudited) (unaudited)
<S> <C> <C>
Servicing fee income $ 537,563 626,039
Other fee income 218,340 333,348
Gain on sale of mortgage loans 845,200 708,015
Gain on sale of servicing rights 814,727 --
Interest income 184,482 188,507
Other income 346 12,928
---------- ----------
Total operating revenues 2,600,658 1,868,837
---------- ----------
Expenses:
Servicing expense 383,782 300,077
Personnel 818,347 1,096,834
General and administrative 375,068 478,969
Interest expense 294,416 202,123
Depreciation and amortization 346,375 447,955
Other 14,704 30,455
---------- ----------
Total operating expenses 2,232,692 2,556,413
---------- ----------
Income/(Loss) before income taxes 367,966 (687,576)
Income tax expense 340,000 49,350
---------- ----------
Net income/Loss) $ 27,966 (736,926)
========== ==========
Weighted average shares outstanding 4,437,973 3,777,533
========= ==========
Loss per common share:
Primary $ 0.00 (0.21)
========== ==========
Fully diluted $ 0.00 (0.21)
========== ==========
See accompanying notes to condensed consolidated financial statements.
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</TABLE>
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the six month periods ended September 30, 1996 and
September 30, 1995
Sept 30, 1996 Sept 30, 1995
------------- -------------
Revenues: (unaudited) (unaudited)
<S> <C> <C>
Servicing fee income $ 1,066,523 1,261,490
Other fee income 402,030 569,369
Gain on sale of mortgage loans 1,539,312 1,221,983
Gain on sale of servicing rights 801,245 99,759
Interest income 424,762 289,460
Other income 15,789 26,971
----------- ----------
Total operating revenues 4,949,661 3,469,032
----------- ----------
Expenses:
Servicing expense 523,363 613,907
Personnel 1,838,330 1,964,415
General and administrative 773,860 936,527
Interest expense 516,605 355,424
Depreciation and amortization 719,923 898,382
Other 71,745 75,307
----------- ----------
Total operating expenses 4,443,826 4,843,962
=========== ==========
Gain/(Loss) before income taxes (194,165) (1,374,930)
Income tax expense 340,000 49,350
----------- ----------
Net loss $ (534,165) (1,424280)
=========== ==========
Weighted average shares outstanding 3,988,797 3,776,868
=========== ==========
Loss per common share:
Primary $ (0.15) (0.40)
=========== ==========
Fully diluted $ (0.15) (0.40)
=========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the six month periods ended Sept 30, 1996 and Sept 30, 1995
Sept 30, 1996 Sept 30, 1995
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net cash provided by (used in) operating activities $ (1,220,286) (8,061,117)
Cash flows from investing activities:
Acquisition of property and equipment (10,229) 70,322
Purchase of real estate owned -- --
Proceeds from sale of mortgage servicing rights 2,054,848 --
Acquisition/Principal payments on mortgage loans
held for investment,net 9,612 6,759
----------- ----------
Net cash used in investing activities 2,054,231 119,341
Cash flows from financing activities:
Proceeds from issuance of common stock, net 806,556 --
Notes payable, net (1,716,011) 7,624,082
Payments on capitalized lease obligations (120,090) (113,299)
Payment of preferred dividends -- (78,120)
----------- ----------
Net cash provided by (used in) financing activities (1,029,545) 7,432,663
Net increase (decrease) in cash (195,600) (509,113)
Cash at beginning of period 585,643 512,156
----------- ----------
Cash at end of period $ 390,043 3,043
=========== ==========
Supplemental disclosures for cash flow:
Cash paid for interest $ 358,387 306,122
Cash paid for taxes -- --
Supplemental disclosures of noncash
financing and investing activities:
Property acquired under capital leases $ -- 24,592
Receivable recognized for exercise of stock options $ 124,000 --
Receivable recognized for issue of stock $ 500,000 --
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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ADVANCED FINANCIAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(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
$183,307,000 as of September 30, 1996.
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,
1996, such information and footnotes have not been duplicated herein.
In the opinion of management, all adjustments considered necessary for
fair presentation of financial statements have been reflected herein.
The March 31, 1996 condensed consolidated balance sheet has been
derived from the audited balance sheet as of that date.
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ITEM II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
GENERAL
- -------
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
corporation 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 a principal balance of
approximately $183,000,000 mortgages as of September 30, 1996 and originated
approximately $78 million in single family housing mortgages for the six months
ended September 30, 1996. AFIM 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). Due to the current size of the
servicing portfolio, the Company does not believe it is taking advantage of the
economies of scales for cost of servicing to maximize the return on its
investment in mortgage servicing rights. Also, the current price the Company is
receiving from investors for the servicing rights on originated loan production
is strong and beneficial to fund the operations of the Company. As a result, the
Company sold approximately $234,000,000 of its current servicing portfolio as of
September 30, 1996 for a gain of $814,727, as well as future servicing rights
generated from its own originations, to reduce its outstanding debt and related
interest expense.
The Company intends to continue its expansion through the 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
but the placement of terminals with respected mortgage brokers.
Page - 8
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RESULTS OF OPERATIONS
- ----------------------
Quarter Ended September 30, 1996 Compared To The Quarter Ended
September 30, 1995
The Company had operating revenues of $2,600,658 for the quarter ended
September 30, 1996 compared to $1,868,837 for the quarter ended September 30,
1995. Income before taxes for the quarter ended September 30, 1996 was $367,966
compared to loss before taxes of $687,576 for the quarter ended September 30,
1995. Net income for the quarter ended September 30, 1996 was $27,966 or .00
cents per share primary and fully diluted compared to a net loss of $736,926 or
.21 cents per share primary and fully diluted for the quarter ended September
30, 1995. Primary earnings per share for the quarter ended September 30, 1996
and 1995 are calculated after deducting, from net income/loss, $39,060 for
preferred stock dividends. No preferred stock dividends were paid in the quarter
ended September 30, 1996.
Six Months Ended September 30, 1996 Compared To The Six Months Ended
September 30, 1995
The Company had operating revenues of $4,249,661 for the six months ended
September 30, 1996 compared to $3,469,032 for the six months ended September 30,
1995. Loss before taxes for the six months ended September 30, 1996 was $194,165
compared to $1,374,930 for the six months ended September 30, 1995. Net loss for
the six months ended September 30, 1996 was $534,165 or .15 cents per share
primary and fully diluted compared to a net loss of $1,424,280 or .40 cents per
share primary and fully diluted for the six months ended September 30, 1995.
Primary earnings per share for the quarter ended September 30, 1996 and 1995 are
calculated after deducting, from net loss, $78,120 for preferred stock
dividends. No preferred stock dividends were actually paid in the six months
ended September 30, 1996.
The decrease in service fee income to $1,066,523 for the six months ended
September 30, 1996 from $1,261,490 for the six months ended September 30, 1995
reflected the decrease in the servicing portfolio to $417,000,000, prior to the
sale of $234,000,000 of servicing on September 30, 1996, at September 30, 1996
from $493,000,000 at September 30, 1995. In the first quarter of fiscal 1997,
the Company completed the sale and transfer of approximately $20 million of
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servicing for a slight loss of $13,482. At September 30, 1996, the Company sold
$234,000,000 of servicing for a gain of $814,727. The related deferred tax asset
was expensed as tax expense in the amount of $340,000 resulting in a net gain
after tax of approximately $474,727. Approximately $100,000 of estimated
transfer cost are reflected in the servicing expense for the six months ended
September 30, 1996. Also, in the first quarter of fiscal 1996, the Company
completed the sale and transfer of approximately $4.6 million in second
mortgages. A gain of $99,759 was recognized on the sale in fiscal 1996. The
Company continues to evaluate the need to sell its remaining servicing
portfolio.
The decrease in other fee income to $402,030 for the six months ended
September 30, 1996 from $569,369 is also the result of the decrease in the
servicing portfolio to $417,000,000, prior to the servicing sale, at September
30, 1996 from $493,000,000 at September 30, 1995.
Gain on sale of mortgage loans for the six months ended September 30, 1996
was $1,539,312 compared to a gain on sale of mortgage loans of $1,221,983 for
the six months ended September 30, 1995. 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 release premiums, origination fee income and is net of all direct
origination expenses. For the six months ended September 30, 1996, the Company
closed and funded approximately $78 million of retail loan production compared
to $51 million for the six months ended September 30, 1995. As a result of the
capital needed to expand the Desktop product as well as other avenues for
originations, substantially all loans are being sold servicing released
resulting in a premium paid by the purchaser for these loans of approximately
1.25 percent of unpaid principal balance. The Company expects to see continued
increased gains on sale of mortgage loans for fiscal 1997 due to the factors
described above. The Company currently has a $17 million credit facility with
BankOne, Texas which allows the Company to fund originations of mortgage loans.
The increase in interest income to $424,762 for the six months ended
September 30, 1996 from $289,460 for the six months ended September 30, 1995 is
due to increased loan production to $78 million from $51 million, respectively.
The Company's total operating expenses for the six months ended September
30, 1996 were $4,443,826 compared to $4,843,962 for the six months ended
September 30, 1995. Included in the operating expenses for six months ended
September 30, 1995 is expense relating to the Washington operations of $536,000.
Effective October 1995, the Company sold its two Washington operations to two
independent companies.
In connection with a review of the Company's servicing operation by Federal
Home Loan Mortgage Corporation (FHLMC), the Company was advised in April 1996
that unreconciled shortages existed in certain bank accounts used to accumulate
funds related to loans serviced by the Company for FHLMC. The Company was
advised that the shortage either be researched and resolved or otherwise paid by
the Company. During the fiscal quarter ending September 30, 1996, the Company
did complete its research and determined the shortage to be approximately
$694,000. Approximately $255,000 of the shortage had already been identified and
reflected in accounts payable and accrued expenses in the Company's consolidated
balance sheet at March 31, 1996. Approximately $56,000 represents unfunded
penalties over the past 3 years, approximately $112,000 represents unfunded
monthly interest and approximately $46,000 is unidentified due to incomplete
records at the time of original transfer of the servicing to the Company. These
items are expensed in the current periods income statement, $102,000 in
servicing expense and $112,000 in interest expense. The remaining $225,000
represents claims the Company is currently filing with previous servicers for
errors in cash balances transferred to the Company at the time the servicing was
originally purchased. These claims are reflected in mortgage servicing advances
and accounts receivable in the Company's consolidated balance sheet at September
30, 1996. The $694,000 has been set up in the accounts payable and accrued
expenses on the Company's consolidated balance sheet at September 30, 1996 and
the shortage in the account will be funded with proceeds from the sale of the
related servicing at September 30, 1996.
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<PAGE>
The decrease in servicing expense to $523,363 for the six months ended
September 30, 1996 compared to $613,907 for the six months ended September 30,
1995 is due to reimbursement of approximately $70,000 from claims filed against
errors and omissions insurance for penalties paid by AFIM for delinquent taxes
on servicing portfolios transferred to the Company through purchases as well as
the decrease in the outstanding servicing portfolio. The decrease is not as
large as would be expected due to the decrease in the outstanding servicing
portfolio because of the expensing of the items discussed above related to the
FHLMC shortage as well as the $100,000 estimated transfer costs associated with
the sale of the servicing.
The decrease in personnel expense to $1,838,330 for six months ended
September 30, 1996 compared to $1,964,415 for six months ended September 30,
1995 is due primarily to internal reorganization as well as the selling of the
Washington operation in October 1995. With increased production and the growth
of the Desktop installations anticipated by management during fiscal 1997, a
further decrease in personnel costs is not anticipated.
The increase in interest expense to $294,416 for the six months ended
September 30, 1996 from $202,123 for the six months ended September 30, 1995 is
the result of increased loan production to $78 million from $51 million,
respectively. The Company has a banking relationship that provides more
favorable warehouse interest rates because of compensating escrow balances from
the servicing portfolio. With the sale of a portion of the servicing portfolio,
the Company will want to make sure the mortgage loans held for sale are shipped
to investors timely for funding to ensure the benefit of the positive spread due
to the remaining compensating balances. The increase is also attributable to the
FHLMC shortage discussed above.
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 six months ended September
30, 1996 was $393,915 compared to $527,402 for the six months ended Septmeber
30, 1995.
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 at September 30, 1996 was 9.01%. 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.
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<PAGE>
The Company has a net operating loss carryforward for tax purposes of
approximately $6.2 million at September 30, 1996. No income tax benefits were
recognized for the six months ended September 30, 1996 or 1995 since a valuation
allowance for the same amount would have been 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. As a result of the sale of
$234,000,000 of the servicing portfolio, $340,000 of the deferred tax asset has
been recognized as tax expense on the September 30, 1996 income statement. The
remaining $100,000 represents tax related to the unrealized gain on the
remaining servicing portfolio and will be evaluated quarterly for valuation.
FINANCIAL POSITION
- ------------------
The Company has seen a decrease in its total assets and an increase in its
stockholders' equity. The Company's total assets were $16,107,782 at September
30, 1996 compared to $17,313,516 at March 31, 1996. The decrease is due
primarily to the decrease in mortgage loans held for sale at September 30, 1996
as well as the $1,038,000 reduction of the PMSR related to the servicing sale.
Stockholders' equity has increased to $1,250,719 at September 30, 1996 from
$978,329 at March 31, 1996. The increase is due to capital infusion of
approximately $810,000 during the six months ended September 30, 1996. AFIM's
net worth is currently satisfactory for those financial institutions purchasing
loans from the Company on a servicing release basis. However, AFIM is not
currently in compliance with minimum net worth requirements for GNMA and FHA.
AFIM plans to increase the net worth to meet both agency requirements through
additional capital infusion as well as possible acquisitions of other mortgage
companies. To help preserve the net worth, preferred stock dividends have been
suspended until the cash flow of the Company permits payment. The preferred
stock carries a $.42 per share annual cumulative dividend.
Management believes that the items noted above will enable the Company to
meet its obligations and maintain its financial ratios and balances required by
its lenders and mortgage investors; however, there are no assurances that the
Company will ultimately be able to realize its assets and discharge its
liabilities in the normal course of business.
The mortgage servicing advances and accounts receivable were $2,365,634 at
September 30, 1996 compared to $520,620 at March 31, 1996. The increase is due
primarily to a portion of the proceeds to be received for the sale of servicing
being recorded as a receivable at September 30, 1996. The balance is also
comprised of advances made related to servicing functions. There are some 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 month, the advance is repaid to the
Company.
At September 30, 1996, the Company had a $125,000 outstanding receivable
from related party compared to $190,000 at March 31, 1996. Both the outstanding
receivables, which were subsequently collected, resulted from a consulting
agreement entered into in February 1996 with four companies. Under the terms of
each agreement, the Company is provided with financial and public relations
services, including advice concerning marketing surveys, investor profiles and
increasing investor awareness of the Company and its products and services. The
term of the agreement was six months. As compensation for this service, the
Company has granted options to purchase 1,000,000 shares of common stock at $.50
per share. As of September 30, 1996, all options have been exercised generating
$500,000 capital for the Company. The Company used the $350,000 of the proceeds
to pay down a working capital line. At September 30, 1996, there was a note
receivable from related party of $ 500,000. The $500,000 note receivable from
related party represents the completion of a private placemenet of the Company's
common stoock. The receivable consists of three promissory notes from three
seperate companies to purchase 1,000,000 shares of common stock at $.50 per
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share. The notes expire during the third fiscal quarter of 1997 and carry an 8%
interest charge. The shares of stock purchased are held in escrow until receipt
of the funds to satisfy the promissory notes. The above transactions do not
involve any officers or directors of the Company, however, are being referred to
as related parties due to the number of shares issued in conjunction with the
two transactions.
The Company had $9,067,699 in mortgage loans held for sale at September 30,
1996 (which were pledged to collateralize the Company's warehouse lines)
compared to $10,110,747 at March 31, 1996, which reflects the timing of the sale
of the mortgage loans in the secondary market.
The Company expects its assets to continue to grow as the Company expands
its origination business. The Company currently has a $17 million credit
facility with BankOne, Texas which is sufficient to accommodate increased loan
originations. The BankOne, Texas agreement is up for renewal in December 1996 at
which time the Company anticipates a review and adjustment of covenants. The
Company's building note is also up for renewal in fiscal 1997 which Management
plans to refinance. The Company had a $450,000 working capital line with
BankOne, Texas which was paid down to $100,000 from proceeds from the capital
infusions discussed above. The remaining $100,000 will be paid from the proceeds
of the servicing sale.
The net decrease in cash of the Company was $195,600 for the six months
ended September 30, 1996. At the end of fiscal 1996, the Company received
proceeds from a loan financing of $750,000. The proceeds were used to pay down a
servicing escrows advance line and pay $50,000 down on the working capital line
with Bank One. The Company paid an additional $350,000 down on the working
capital line during the six months ended September 30, 1996 from the proceeds
received due to the exercise of the stock options discussed above. The Company
also paid $120,090 in capital lease payments for the purchase of the IBM AS/400,
office furniture and Desktop computers and equipment. During fiscal 1997, the
Company expects to generate cash through the additional loan originations ,
liquidation of the notes receivable from purchase of common stock and the
raising of additional capital, if necessary.
As previously noted, the Company sold approximately $234,000,000 of its
outstanding servicing portfolio for a related gain of $814,727 before expense
for the related deferred tax asset of $340,000. A portion of the proceeds from
the sale are to be used to fund the shortage in the FHLMC account of
approximately $694,000. In fiscal 1996, the Company had a note payable come due
of approximately $550,000 secured by a portion of the servicing portfolio
currently sold. Management will repay $330,000 on the note with proceeds from
the sale and refinance the remaining $217,000. Approximately $300,000 of the
proceeds will be used to pay down additional outstanding debt related to the
servicing sold reducing that debt to approximately $370,000. The Company will
also pay off $400,000 of the $750,000 loan financed at March 31, 1996. The
remaining $100,000 of the BankOne working capital line will also be paid off
with proceeds from the servicing sale. The Company believes that the decrease in
the servicing income will be offset by the decrease in expenses related to that
servicing as well as the decrease in monthly debt payments.
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<PAGE>
PROSPECTIVE TRENDS
- ------------------
Effective October 2, 1996, the Company signed a non-binding letter of
intent to purchase the assets of an independent California-based mortgage
banking company. The transaction will involve an exchange of the Company's
common stock for assets. The acquired company currently orginates approximately
$15,000,000 to $20,000,000 in mortgages per month through 15 offices in 3
states. The Company feels that the acquisition will provide a strong base in the
lucrative California market where no offices currently exist. With the
consolidation of its current production and that of the acquired company, the
Company believes it will continue to show profits through fiscal 1997.
The Company will continue to develop and implement the latest
state-of-the-art technologies that will enhance the Company's operations as well
as increase productivity. The Company's Management believes that new
technologies will be one of the most significant factors in increasing
production volume and reducing costs of originating and servicing mortgage
loans. Another important factor will be the strategies used to implement these
new technologies. The Company believes its strategy of implementing a
convenient, low cost national network of Desktop Mortgage Loan Origination
Systems will substantially increase the Company's loan originations and
ultimately its servicing portfolio.
A key technology that the Company implemented in the first quarter of
fiscal 1997, 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 those
loans since the technology will increase the number of loans processed and
underwritten per employee.
To compliment the Desktop sites, the Company will be recruiting loan
originators to set up "net branches". The originator, who will be employed by
AFIM, will be credited all revenues generated from the loan above the Company's
par price which will be netted against all the expenses related to the
origination site. The Company feels this is another cost efficient method of
originating loans in comparison to the traditional retail branch.
Page - 14
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment to FASB Statement No.
65", during the first quarter of fiscal 1997. 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 impact of adopting this statement will not
be material on the Company's 1997 consolidated financial statements since the
Company intends on selling primarily all originated loans servicing released
during fiscal 1997.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
required for fiscal year beginning April 1,1996. The Statement requires that
certain long-lived assets be reviewed for impairment when events or
circumstances indicates that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell. The impact of
adopting this Statement on the Company's consolidated financial statements has
not been determined by Management.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," will be adopted by the Company during fiscal year
ending March 31, 1997. 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 nonemployees. This statement will
require pro forma disclosures of net income and earnings per share as if a new
accounting method based on the estimated fair value of employee stock options
had been adopted. The Company has not decided if the optional accounting
treatment proposed by SFAS No. 123 will be adopted.
Page - 15
<PAGE>
PART II
ITEM 1 Legal Proceedings none.
ITEM 2. Changes in Securities. none.
ITEM 3. Defaults upon Senior Securities. The Company postponed the payment of
its regular quarterly dividend on its Series "A" Cumulative Convertible
Preferred Stock. The dividend will accumulate until such time as the Company
has determined that its cash flows have improved enough to pay the dividend
from the cash flow of its operations. The total arrearage is currently $117,180.
ITEM 4. Submission Matters to a Vote
of Securities Holders. none.
ITEM 5. Other Information none.
ITEM 6. Exhibits and Reports on Form 8-K
Page - 16
<PAGE>
SIGNATURES
- ----------
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED FINANCIAL, INC.
(Registrant)
Dated: November 8, 1996 By: /S/ Debbie K. Towery
-------------------------------
Debbie K. Towery
Chief Financial Officer
Dated: November 8, 1996 By: /S/ William E. Moffatt
-------------------------------
William E. Moffatt
President/Director
Page - 17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 390,043
<SECURITIES> 0
<RECEIVABLES> 2,365,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,576,486
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,107,782
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1,860
<COMMON> 5,895
<OTHER-SE> 1,242,964
<TOTAL-LIABILITY-AND-EQUITY> 16,107,782
<SALES> 0
<TOTAL-REVENUES> 4,249,661
<CGS> 0
<TOTAL-COSTS> 3,855,476
<OTHER-EXPENSES> 71,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516,605
<INCOME-PRETAX> (194,165)
<INCOME-TAX> 340,000
<INCOME-CONTINUING> (534,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (534,165)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
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