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
December 31, 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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 25, 1997: 6,527,470.
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Advanced Financial, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1.
Page - 2
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1996 and March 31, 1996
Assets Dec 31, 1996 March 31, 1996
------ ------------- --------------
(Unaudited)
<S> <C> <C>
Cash and investments $ - $ 585,643
Mortgage servicing advances and accounts receivable 897,309 520,620
Property and equipment, net 1,508,753 1,718,355
Mortgage loans held for sale 8,994,343 10,110,747
Mortgage loans held for investment 82,159 94,932
Purchased mortgage servicing rights, net 717,488 2,440,280
Excess of cost over fair value of assets acquired, net 486,763 524,798
Prepaid expenses 86,091 191,442
Deferred income taxes - 440,000
Other investment 192,781 235,800
Receivable from related party - 190,000
Other 299,186 260,899
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Total assets $ 13,264,873 $17,313,516
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Liabilities
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Accounts payable and accrued expenses $ 2,435,600 $ 2,507,103
Checks outstanding in excess of bank balance 140,954 -
Notes payable 10,348,097 13,412,419
Capitalized lease obligations 237,898 415,665
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Total liabilities $ 13,162,549 $16,335,187
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Stockholders' Equity
-------------------
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; 6,514,870 and 3,875,476
shares, respectively, issued and outstanding 6,515 4,256
Paid-in capital 10,373,910 8,877,493
Deficit (9,538,616) (7,463,935)
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843,669 1,419,674
Treasury stock, 99,869 shares of
common stock,at cost (441,345) (441,345)
Stockholders' notes receivable (300,000) -
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Total stockholders' equity 102,324 978,329
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Total liability and stockholders'equity $ 13,264,873 $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 December 31, 1996
and December 31, 1995
Dec 31, 1996 Dec 31, 1995
-------------- -------------
Revenues: (Unaudited) (Unaudited)
<S> <C> <C>
Servicing fee income $ 246,420 $ 591,137
Other fee income 137,244 213,522
Gain on sale of mortgage loans 408,115 811,483
Loss on sale of servicing rights (36,650) -
Interest income 155,610 189,111
Other income (2,079) 139,624
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Total operating revenues 908,660 1,944,877
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Expenses:
Servicing expense 349,753 284,257
Personnel 709,094 866,644
General and administrative 327,963 404,171
Interest expense 158,574 187,215
Depreciation and amortization 200,238 442,837
Consulting Expense 593,750 -
Other 7,919 13,100
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Total operating expenses 2,347,291 2,198,224
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Loss before income taxes (1,438,631) (253,347)
Income tax expense (101,884) -
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Net loss $(1,540,515) $ (253,347)
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Weighted average shares outstanding 6,342,177 3,778,478
========== ==========
Loss per common share:
Primary $ ( 0.24) (0.08)
========== ==========
Fully diluted $ (0.24) (0.08)
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See accompanying notes to condensed consolidated financial statements.
Page - 4
</TABLE>
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the nine month periods ended December 31, 1996 and
December 31, 1995
Dec 31, 1996 Dec 31, 1995
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Revenues: (Unaudited) (Unaudited)
<S> <C> <C>
Servicing fee income $ 1,312,943 $ 1,852,627
Other fee income 539,274 782,891
Gain on sale of mortgage loans 1,947,427 2,033,466
Gain on sale of servicing rights 764,595 99,759
Interest income 580,372 478,571
Other income 13,710 166,595
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Total operating revenues 5,158,321 5,413,909
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Expenses:
Servicing expense 873,116 813,837
Personnel 2,547,424 2,831,059
General and administrative 1,101,823 1,340,698
Interest expense 675,179 542,639
Depreciation and amortization 920,161 1,425,546
Consulting Expense 593,750 -
Other 79,664 88,407
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Total operating expenses 6,791,117 7,042,186
=========== ==========
Loss before income taxes $(1,632,796) $(1,628,277)
Income tax expense (441,884) 49,350
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Net loss $(2,074,680) $(1,677,627)
=========== ===========
Weighted average shares outstanding 4,776,110 3,787,147
=========== ==========
Loss per common share:
Primary $ (0.45) $ (0.47)
=========== ==========
Fully diluted $ (0.45) $ (0.47)
=========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page - 5
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<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended December 31, 1996 and
December 31, 1995
Dec 31, 1996 Dec 31, 1995
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash (used in) provided by operating activities $ (1,042,301) $ (2,974,346)
Cash flows from investing activities:
Acquisition of property and equipment (8,505) (27,616)
Proceeds from sale of mortgage servicing rights 2,054,847 -
Sale of real estate owned - 57,931
Acquisition/Principal payments on mortgage loans
held for investment 12,773 (67,999)
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Net cash provided by (used in)
investing activities 2,059,115 (37,684)
Cash flows from financing activities:
Notes payable, net (3,064,322) 2,645,737
Checks outstanding in excess of bank balance 140,955 99,217
Issuance of common stock 1,498,677 -
Payments on capitalized lease obligations (177,767) (166,960)
Payment of preferred dividends - (78,120)
----------- ----------
Net cash provided by (used in) financing activities (1,602,457) 2,499,874
Net decrease in cash (585,643) (512,156)
Cash at beginning of period 585,643 512,156
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Cash at end of period $ 0 $ 0
=========== ==========
Supplemental disclosures for cash flow:
Cash paid for interest $ 427,426 $ 451,501
Cash paid for income taxes $ 1,881 $ -
Supplemental disclosures of noncash
financing and investing activities:
Property acquired under capital leases $ - $ 35,646
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page - 6
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Advanced Financial, Inc.
ADVANCED FINANCIAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 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 $174,000,000 as of December 31, 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.
Page - 7
<PAGE>
Advanced Financial, Inc.
ITEM II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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GENERAL
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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 $174,000,000 mortgages as of December 31, 1996 and originated
approximately $103 million in single family housing mortgages for the nine
months ended December 31, 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 an adjusted gain of $764,595,
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.
On February 3, 1997 the Company entered into an agreement to sell First
Mortgage Investment Co. (FMIC) the retail loan production operations of AFIM.
The agreement calls for FMIC to acquire AFI's mortgage pipeline and assume the
operating expenses related to mortgage originations as of February 3, 1997. FMIC
has hired 24 of AFIM's salaried employees and 23 loan officers. FMIC has also
agreed to lease 10,000 square feet of the Company's 20,000 square foot
facilities along with leasing various furniture and equipment. The rental rate
for the office space leased by FMIC is $10 per square foot. This will result in
monthly leasing revenue to the Company of $8,333. FMIC also agreed to lease
various furniture and equipment from the Company for a monthly fee of $15,000.
The February 3, 1997 sale of the Company's mortgage production operations
will reduce the Company's income by approximately $790,000 each quarter.
Additionally, the Company anticipates that it will be able to reduce its expense
by approximately $ 900,000 each quarter, thereby reducing the Company's net loss
and cash flow requirements by approximately $110,000.
The companies continue to pursue negotiations of consolidating and
combining both companies, but have not reached a Definitive Agreement. The sale
of the production operations will allow AFI to significantly reduce its expenses
and cash requirements immediately while it continues negotiations. FMIC is a
privately held mortgage company based in the suburban Kansas City areas. FMIC
orginates approximately $10 million per month in retail loan originations
through 6 branch offices in the Kansas and Missouri markets and has a mortgage
servicing portfolio of approximately $730 million.
On October 2, 1996 the Company announced that it had signed a Letter of
Intent to acquire a California based mortgage bank. However, during the due
diligence process, AFI discovered a potential liability in excess of $1million.
This liability could potentially be incurred by AFI if the transaction were to
close at this time. Therefore, AFI has informed the California based mortgage
bank that this issue must be resolved prior to completing any transaction
between the parties. As a result, the Company is no longer pursuing this
acquisition.
Page - 8
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Advanced Financial, Inc.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended December 31, 1996 Compared To The Quarter Ended December 31, 1995
- -------------------------------------------------------------------------------
The Company had operating revenues of $908,660 for the quarter ended
December 31, 1996 compared to $1,944,877 for the quarter ended December 31,
1995. Net loss for the quarter ended December 31, 1996 was $1,540,515 or .24
cents per share primary and fully diluted compared to net loss $253,347 or .08
cents per share primary and fully diluted for the quarter ended December 31,
1995. Primary earnings per share for the quarter ended December 31, 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
December 31, 1996.
Nine months ended December 31, 1996 Compared To The Nine months
ended December 31, 1995
- ----------------------------------------------------------------
The Company had operating revenues of $5,158,321 for the nine months ended
December 31, 1996 compared to $5,413,909 for the nine months ended December 31,
1995. Loss before taxes for the nine months ended December 31, 1996 was
$1,632,796 compared to $1,628,277 for the nine months ended December 31, 1995.
Net loss for the nine months ended December 31, 1996 was $2,074,6810or .45 cents
per share primary and fully diluted compared to a net loss of $1,677,627 or .47
cents per share primary and fully diluted for the nine months ended December 31,
1995. Primary earnings per share for the quarter ended December 31, 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 nine months
ended December 31, 1996.
The decrease in service fee income to $1,312,943 for the nine months ended
December 31, 1996 from $1,852,627 for the nine months ended December 31, 1995
reflected the decrease in the servicing portfolio to $174,000,000 of servicing
at December 31, 1996 from $468,000,000 at December 31, 1995. In the first
quarter of fiscal 1997, the Company completed the sale and transfer of
approximately $20 million of servicing for a slight loss of $13,482. At
September 30, 1996, the Company sold $234,000,000 of servicing for an adjusted
gain of $764,595. 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
$424,595. Approximately $100,000 of estimated transfer cost are reflected in the
servicing expense for the nine months ended December 31, 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 $539,274 for the nine months ended
December 31, 1996 from $782,891 is also the result of the decrease in the
servicing portfolio to $174,000,000 at December 31, 1996 from $468,000,000 at
December 31, 1995.
Gain on sale of mortgage loans for the nine months ended December 31, 1996
was $1,947,427 compared to a gain on sale of mortgage loans of $2,033,466 for
the nine months ended December 31, 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 and hedging losses. For the nine months ended December 31,
1996, the Company closed and funded approximately $103 million of retail loan
production compared to $79 million for the nine months ended December 31, 1995.
The slight decrease in gain on sale of mortgage loans despite increased
production is due to hedging losses experienced in the third quarter of fiscal
1997. 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 increase in interest income to $580,372 for the nine months ended
December 31, 1996 from $478,571 for the nine months ended December 31, 1995 is
due to increased loan production to $103 million from $79 million, respectively.
The Company's total operating expenses for the nine months ended December
31, 1996 were $6,791,117 compared to $7,042,186 for the nine months ended
December 31, 1995. Included in the operating expenses for nine months ended
December 31, 1995 is expense relating to the Washington operations of $576,000.
Effective October 1995, the Company sold its two Washington operations to two
independent companies.
Page - 9
<PAGE>
Advanced Financial, Inc.
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 December
31, 1996. The $694,000 was paid to FHLMC during the third fiscal quarter from
the proceeds received from the sale of the related servicing at September 30,
1996.
The increase in servicing expense, with a decrease in the servicing
portfolio, to $873,116 for the nine months ended December 31, 1996 compared to
$813,837 for the nine months ended December 31, 1995 is due to 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 $2,547,424 for nine months ended
December 31, 1996 compared to $2,831,059 for nine months ended December 31, 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 $675,179 for the nine months ended
December 31, 1996 from $542,639 for the nine months ended December 31, 1995 is
the result of increased loan production to $103 million from $79 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 nine months ended December
31, 1996 was $469,180 compared to $774,184 for the nine months ended December
31, 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 December 31, 1996 was 9.94%. 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.
On October 1, 1996, the Company entered into two consulting agreements with
two independent consulting firms to perform public relation services for the
Company. Each agreement provided the issuance of 250,000 shares of common stock
in exchange for the service. Although the consulting agreements were finalized
on October 1, 1996, the Company entered into a letter of agreement on August 27,
1996 at which time the Company's common stock was $1.1875. The resulting value
of the service of $593,750 is reflected as expense in the current period income
statement as well as equity on the balance sheet at December 31, 1996. The
agreements continue for a 24 month period.
Page - 10
<PAGE>
Advanced Financial,Inc.
The Company has a net operating loss carryforward for tax purposes of
approximately $7 million at December 31, 1996. No income tax benefits were
recognized for the nine months ended December 31, 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 has been recognized as tax expense on the December 31, 1996
income statement since the evaluation of the remaining portfolio does not
support a gain to be recognized through the sale of such servicing rights.
FINANCIAL POSITION
- ------------------
The Company has seen a decrease in its total assets and a decrease in its
stockholders' equity. The Company's total assets were $13,264,873 at December
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 December 31, 1996
as well as the $1,038,000 reduction of the PMSR related to the servicing sale.
Stockholders' equity has decreased to $102,324 at December 31, 1996 from
$978,329 at March 31, 1996. The decrease in stockholder's equity is lower than
would be expected due to year to date losses due to several capital infusions
totaling approximately $1,403,375 during the nine months ended December 31,
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 the sale of the
origination platform and anticipated acquisition of another mortgage company
discussed above. 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' values and discharge its
liabilities in the normal course of business.
The mortgage servicing advances and accounts receivable were $897,309 at
December 31, 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 December 31, 1996, the Company had a $300,000 outstanding notes
receivable from related party that is recognized as a contra equity item on the
Balance Sheet since it is the result of stock issuance compared to the
outstanding receivable of $190,000 at March 31, 1996, which was subsequently
collected and shown on as an asset on the Balance Sheet. The receivables
resulted from consulting agreements 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 each 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
December 31, 1996, there was a note receivable from related party of $ 300,000.
The $300,000 note receivable from related party represents the completion of a
private placement of the Company's common stock. The original receivable of
$500,000 consists of three collateralized promissory notes from three separate
companies to purchase 1,000,000 shares of common stock at $.50 per share. During
the third fiscal quarter $200,000 of the notes was received. The remaining notes
which originally expired during the third fiscal quarter of 1997 were extended
to March 31, 1997 and carry an 8% interest rate. The shares of stock purchased
are held in escrow pending receipt of the funds to satisfy the promissory notes.
The above transactions do not involve any officers or directors of the Company;
however, the people involved in such transactions are being referred to as
related parties due to the number of shares issued in conjunction with the two
transactions.
The Company had $8,994,343 in mortgage loans held for sale at December 31,
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.
Page - 11
<PAGE>
Advanced Financial, Inc.
As noted above, on October 1, 1996, the Company entered into two consulting
agreements with two independent consulting firms to perform public relation
services for the Company. Each agreement provided the issuance of 250,000 shares
of common stock in exchange for the service. Although the consulting agreements
were finalized on October 1, 1996, the Company entered into a letter of
agreement on August 27, 1996 at which time the Company's common stock was
$1.1875. The resulting value of the service of $593,750 is reflected as expense
in the current period income statement as well as equity on the balance sheet at
December 31, 1996. The agreements continue for a 24 month period.
The net decrease in cash of the Company was $726,598 for the nine months
ended December 31, 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 escrow 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 nine months ended December 31, 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 a possible acquisition , 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 an adjusted gain of $764,595 before expense
for the related deferred tax asset of $340,000. A portion of the proceeds from
the sale were 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 paid $330,000 on the note with proceeds from the sale and
refinanced the remaining $222,000. An additional $300,000 of the proceeds were
used to pay down additional outstanding debt related to the servicing sold, thus
reducing that debt to approximately $400,000. The Company also paid off $400,000
of the $750,000 loan financed at March 31, 1996. The remaining $100,000 of the
BankOne working capital line was also 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.
PROSPECTIVE TRENDS
- ------------------
As noted previously, on February 3, 1997 the Company entered into a
non-binding Letter of Intent to acquire FMIC. The Company also entered into an
agreement with FMIC to sell them the retail mortgage loan production operations.
FMIC currently closes approximately $10 million per month in retail loan
originations and has a mortgage servicing portfolio of approximately $730
million. The Letter of Intent calls for a definitive agreement to be completed
by March 1, 1997 and is subject to a fairness opinion and a vote of the
shareholders.
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 - 12
<PAGE>
Advanced Financial, Inc.
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-Income Recognition and
Disclosures," 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 - 13
<PAGE>
Advanced Financial, Inc.
PART II
ITEM 1 Legal Proceedings
- ------------------------
The Company reached a settlement with two former officers of the Company who had
named the Company as a codefendant in a law suit filed in the United States
District Court for the District of Nebraska. The Company settled the litigation
by agreeing to issue the plantiffs a total of 300,000 shares of restricted AFI
common stock. In turn, one of the parties will pledge 100,000 shares as
collateral for a note receivable of $214,000 due the Company. The Company has
already reserved $74,815 against the note and $140,000 towards the settlement of
this litigation. The parties settled this litigation to avoid any further
uncertainty and expense of litigation.
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 $156,240.
ITEM 4. Submission Matters to a Vote of Securities Holders. none.
- ----------------------------------------------------------
ITEM 5. Other Information
- -------------------------
On December 6, 1996 the Company was notified by the American Stock Exchange that
trading in its common stock would be halted due to the fact that the Company had
fallen below certain of the Exchange's continued listing guidelines. On December
9, 1996 the Exchange also notified the Company that it had issued 1.0 million
shares of its common stock, through a private placement, prior to receiving
notification from the Exchange that the securities had been approved for
listing. This is a violation of the Exchange's listing agreement and is a factor
considered by the Exchange when reviewing a Company's continued listing
eligibility. On December 11, 1996 the Exchange informed the Company that it
would proceed with a filing of an application with the Securities and Exchange
Commission to strike the Company's common stock from listing and registration on
the Exchange. On December 13, 1996 the Company informed the Exchange that it had
decided to pursue its right to appeal this decision to the Exchange's Board of
Governors and requested a hearing. On February 5, 1997 the Company had its
hearing with the Exchange's Board of Governors. At that time the Company
presented to the Board of Governors its plans on how it intended to meet the
Exchange's continued listing requirements through the acquisition of another
mortgage company. Also the investors who had received the 1.0 million shares of
common stock through a private placement had returned all 1.0 million shares to
the transfer agent. The investors have agreed to let the transfer agent hold
such shares until such time as the issues have been resolved with the Exchange.
At this time the Company has not received a final ruling from the Exchange in
reference to its delisting. Should the Exchange choose to delist the Company's
common stock, the Company will pursue having its shares traded on NASDAQ's
Electronic Bulletin Board until such time as it is able to make application to
the small cap market.
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
a. Exhibit 10.1 Asset Purchase Agreement By and Among AFI Mortgage
Corp., as Seller and, and First Mortgage Investment Co.,
as Buyer
b. None
Page - 14
<PAGE>
Advanced Financial, Inc.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED FINANCIAL, INC.
(Registrant)
Dated: February 11, 1997 By: /S/ Debbie K. Towery
-----------------------------
Debbie K. Towery
Chief Financial Officer
Dated: February 11, 1997 By: /S/ William E. Moffatt
------------------------------
William E. Moffatt
President/Director
Page - 15
ASSET PURCHASE AGREEMENT
By and Among
AFI MORTGAGE CORP.,
as Seller,
and
FIRST MORTGAGE INVESTMENT CO.,
as Buyer
Dated February 4, 1997
<PAGE>
TABLE OF CONTENTS
1. SALE AND PURCHASE OF ASSETS......................................... 1
---------------------------
1.1 Sale and Purchase of Assets................................ 1
---------------------------
1.2 Purchase Price............................................. 1
--------------
1.3 Installment Payments on "Unlocked" Pipeline................ 2
-------------------------------------------
1.4 Assumption of Certain Obligations.......................... 3
---------------------------------
2. LEASE OF PREMISES................................................... 3
-----------------
2.1 Lease Agreement............................................ 3
---------------
3. LEASE OF FURNITURE, FIXTURES AND EQUIPMENT.......................... 3
------------------------------------------
3.1 Lease of FF&E.............................................. 3
-------------
3.2 Purchase Option............................................ 3
---------------
4. PURCHASE OF PRODUCTION PLATFORM..................................... 3
-------------------------------
4.1 Production Platform........................................ 3
-------------------
5. INDEMNIFICATION..................................................... 4
---------------
5.1 Indemnification............................................ 4
---------------
6. CLOSING............................................................. 4
-------
6.1 Date, Time, and Place of Closing........................... 4
--------------------------------
6.2 Deliveries by Seller....................................... 4
--------------------
6.3 Deliveries by Buyer........................................ 6
-------------------
7. REPRESENTATIONS, WARRANTIES, AND COVENANTS.......................... 6
------------------------------------------
7.1 Representations, Warranties, and Covenants of Seller....... 6
----------------------------------------------------
7.1.1 Organization, Standing and Corporate Power........ 6
------------------------------------------
7.1.2 Corporate Authorization........................... 6
-----------------------
7.1.3 Conflicting Agreements; No Liens.................. 6
--------------------------------
7.1.4 Consents.......................................... 6
--------
7.1.5 Title to Assets; Lack of Encumbrances............. 7
-------------------------------------
7.1.6 Business Expenses................................. 7
-----------------
7.1.7 Delivery of Documents............................. 7
---------------------
7.1.8 Disclosure........................................ 7
----------
7.1.9 No Changes in Assets.............................. 7
--------------------
7.1.10 Title and Condition of Assets..................... 7
-----------------------------
7.2 Representations, Warranties, and Covenants of Buyer........ 7
---------------------------------------------------
7.2.1 Organization, Standing and Corporate Power........ 7
------------------------------------------
7.2.2 Corporate Authorization........................... 8
-----------------------
<PAGE>
7.2.3 Disclosure................................... 8
----------
8. ADDITIONAL AGREEMENTS OF THE PARTIES......................... 8
------------------------------------
8.1 Survival............................................ 8
--------
8.2 Payment of Costs.................................... 8
----------------
8.3 Specific Performance................................ 8
--------------------
8.4 Additional Assurances............................... 8
---------------------
8.5 Seller's Employees.................................. 8
------------------
9. PRIOR TO CLOSING............................................. 9
----------------
9.1 Access.............................................. 9
------
9.2 Conduct of Business Pending Closing................. 9
-----------------------------------
9.3 Required Consents and Approvals.................... 10
-------------------------------
10. CLOSING CONDITIONS; RIGHT TO TERMINATE...................... 10
--------------------------------------
10.1 Conditions to Buyer's Obligations.................. 10
---------------------------------
10.2 Conditions to Seller's Obligations................. 11
----------------------------------
10.3 Right To Terminate................................. 11
------------------
10.4 Post-Closing Obligations.......................... 11
------------------------
11. MISCELLANEOUS............................................... 12
-------------
11.1 Notices............................................ 12
-------
11.2 Time............................................... 12
----
11.3 Law Governing...................................... 12
-------------
11.4 Confidentiality.................................... 12
---------------
11.5 Publicity.......................................... 13
---------
11.6 Expenses and Attorney Fees......................... 13
--------------------------
11.7 Entire Agreement; Amendments; Waivers.............. 13
-------------------------------------
11.8 Headings........................................... 13
--------
11.9 Incorporation of Exhibits and Schedules............ 13
---------------------------------------
11.10 Binding Effect..................................... 13
--------------
11.11 Parties in Interest................................ 13
-------------------
11.12 Counterparts....................................... 13
------------
<PAGE>
EXHIBITS
--------
Exhibit Assets
Exhibit Obligations
Exhibit Lease Agreement
Exhibit Furniture, Fixtures & Equipment
Exhibit Letter of Intent
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS AGREEMENT, made and entered into the 4th day of February 1997, by and
between FIRST MORTGAGE INVESTMENT CO., a Missouri corporation (hereinafter
referred to as "Buyer"), and AFI MORTGAGE CORP., a Nebraska corporation,
(hereinafter referred to as "Seller").
Recitals
--------
WHEREAS, Seller is engaged in the business of soliciting, funding, and
selling residential mortgage loans (the "Business").
WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase from
Seller, on the terms and conditions set forth below, the Mortgage Pipeline Loans
(hereinafter referred to as the "Assets") of Seller, as defined in Section
hereof.
WHEREAS, Buyer desires to lease from Seller approximately Ten Thousand
(10,000) square feet of space in the building owned by Seller, as more
specifically described in Exhibit and certain office furniture and equipment, as
described in Exhibit , all on the terms, considerations and conditions set forth
in the Lease Agreement, Exhibit , attached hereto and incorporated herein by
reference.
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties, intending to be legally bound, agree as follows:
Agreement
---------
1. SALE AND PURCHASE OF ASSETS
---------------------------
Sale and Purchase of Assets. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, transfer, convey, assign, and deliver
the Assets to Buyer or his assignee, and Buyer hereby agrees to purchase and
acquire the Assets from Seller. As used in this Agreement, the term "Assets"
shall mean Seller's mortgage loans and Seller's remote site contracts as more
specifically described in Exhibit hereto; provided, however the Assets shall not
include any contract not expressly being assumed by Buyer.
Purchase Price. The purchase price for all of the Assets shall be fifty
percent (50%) of the Net Profit of the Pipeline (the "Purchase Price"). The
"Pipeline" shall mean all loans for which an application has been submitted as
of the close of business on the day before Closing. The Purchase Price shall be
paid as follows:
1
<PAGE>
1.2.1 A down payment on the Date of Closing equal to fifty percent
(50%) of the Net Profit on the "locked" Pipeline. "Locked" Pipeline shall
include those loans where the resale price of the Loan is committed to be paid
by an independent party; and
1.2.2 Fifty percent (50%) of the Net Profit on the "unlocked"
Pipeline. "Unlocked" Pipeline shall include all loans which are not "locked" as
defined above, which shall be paid on an installment basis as described in
Section hereof.
"Net Profit" shall mean, for purposes of this Agreement, (i) the amount loaned
to a customer of the Business plus all fees and points collected less (ii) the
resale proceeds of the loan plus commissions and overages. Neither Buyer nor any
assignee of Buyer's interest hereunder is assuming nor shall either be liable
for any liabilities of Seller, including but not limited to:
1.2.3 any national, state, or local taxes,
1.2.4 any liability arising from or claimed to have arisen from the
operation of the Business prior to the Closing Date, as such term is defined in
Section (the "Closing Date"),
1.2.5 any existing, pending, or threatened litigation against Seller,
or
1.2.6 any existing or future obligation or liability of Seller to any
of its present or former employees for severance pay, back pay, benefits under
any retirement, health insurance, savings, or other form of employee benefit
plan, or otherwise, all of which obligations and liabilities Seller shall
retain.
Seller shall pay all sales, use, stamp, and other transfer and excise taxes of
any type arising out of the transaction contemplated hereunder, whether imposed
on Seller or Buyer.
1.3 Installment Payments on "Unlocked" Pipeline. Buyer shall pay to Seller
its fifty percent (50%) of the Net Profit on any "unlocked" loans, which have
been closed and funded during each calendar month following the Closing, within
three (3) business days of the end of each calendar month. Such payment shall be
made "plus or minus" any necessary adjustments, which shall include, but not be
limited to, repricing or loan buy back. The installment payments shall continue
until there are no loans left in the Pipeline, as defined in Section above.
In the event the Net Profit for a given calendar month results in a loss
which is the result of Seller's actions, Seller shall repay the Buyer one
hundred percent (100%) of such loss amount, or if not repaid within five (5)
business days of the date of demand, the Buyer shall have an express right of
set-off against any other amounts Buyer may owe Seller under this or any other
arrangement between the parties.
2
<PAGE>
1.4 Assumption of Certain Obligations. Buyer shall have the right, but not
the obligation' to assume any or all of Seller's obligations described hereto on
Exhibit , by delivering to Seller written notice of such election to assume any
or all of such liabilities on or prior to the Closing Date. Failure by Buyer to
give such written notice to Seller shall be deemed an election by Buyer not to
assume any of such liabilities.
2. LEASE OF PREMISES.
------------------
2.1 Lease Agreement. Buyer shall execute the Lease Agreement, Exhibit ,
attached hereto and incorporated herein by reference.
3. LEASE OF FURNITURE, FIXTURES AND EQUIPMENT
------------------------------------------
3.1 Lease of FF&E. Buyer shall lease from Seller the furniture, fixtures
and equipment, located on the Leased Premises, as defined in the Lease
Agreement, and as more specifically described in Exhibit , attached hereto and
incorporated herein by reference, for a term of three (3) months beginning
February 3, 1997. The parties may extend the term of the lease for an additional
thirty (30) day period upon the expiration of the initial term of the lease. In
addition, either party may terminate this lease at any time by giving the other
party thirty (30) days prior written notice. Buyer shall pay Seller, as rent, an
amount equal to Fifteen Thousand Dollars ($15,000.00) per month. Each monthly
payment set forth hereinabove shall be due and payable in advance on the third
(3rd) day of each month with the first payment due on February 3, 1997, and on
the third (3rd) day of each and every month thereafter. All rent provided for in
this Section shall be paid or mailed to AFI Mortgage Corp., 5425 Martindale
Street, Shawnee Mission, Kansas 66218, or to such other payee or address as
Seller may designate in writing to Buyer.
In the event the Seller fails to make any payments due pursuant to the
underlying leases, as more specifically described in Exhibit hereto, and Buyer
makes such payment on behalf of Seller, Buyer shall have an express right of
set-off against any other amounts Buyer may owe Seller under this or any other
arrangement between the parties.
3.2 Purchase Option. The Seller grants to the Buyer the option to purchase
the furniture, fixtures and equipment for an amount equal to the outstanding
lease or at the appraised value, whichever is greater, at any time after ninety
(90) days from the date of this Agreement.
4. PURCHASE OF PRODUCTION PLATFORM
-------------------------------
4.1 Production Platform. In the event the transaction contemplated by the
Letter of Intent, as shown in Exhibit , attached hereto and incorporated herein
by reference, is not consummated, the Buyer agrees to purchase the Seller's
Production Platform. For purposes of this
3
<PAGE>
Agreement, the "Production Platform" shall mean all loans originated after
February 1, 1997 which were sourced in one of the "remote sites" identified in
Exhibit hereto and acquired by the Buyer under this Agreement. The purchase
price for the Production Platform shall be one-eighth of a percent (.125%) of
the gross principal amount of all loans in the Production Platform closed during
the twelve month period beginning February 1, 1997 and ending February 1, 1998,
excluding those loans already purchased by Buyer pursuant to this Agreement.
Such amount is to be computed on a monthly basis. In no event shall the total
purchase price exceed One Hundred Twenty-Five Thousand and No/100 Dollars
($125,000.00). The Buyer shall apply any amount of the purchase price due under
this Section on a monthly basis against any amount Seller may owe Buyer pursuant
to the Second Mortgage dated March, 1996 between FMIC, AFI and Advanced
Financial, Inc.
5. INDEMNIFICATION
---------------
5.1 Indemnification. In the event either party breaches (or in the event
any third party alleges facts that, if true, would mean the party had breached)
(the "Indemnifying Party") any of its representations, warranties, and covenants
contained in this Agreement, and, if there is an applicable survival period
pursuant to Section hereof, provided that the party suffering any Adverse
Consequences, the "Indemnified Party," makes a written claim for indemnification
against the Indemnifying Party, the Indemnifying Party agrees to indemnify the
Indemnified Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences the party may suffer after
the end of any applicable survival period) resulting from, arising out of,
relating to, in the nature of, or caused by misrepresentation or breach (or
alleged misrepresentation or breach). "Adverse Consequences" shall mean any
actions, suites, proceedings, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings, damages,
dues, penalties, fines, costs, amounts paid in settlement, liabilities,
obligations, taxes, liens, losses, expenses, and fees, including court costs and
reasonable attorneys' fees and expenses.
6. CLOSING
-------
6.1 Date, Time, and Place of Closing. The closing shall take place at the
offices of Shughart Thomson & Kilroy, P.C., Twelve Wyandotte Plaza, 120 West
12th Street, Kansas City, Missouri on such date or time or at such other place
as Buyer and Seller may agree in writing (the "Closing Date").
6.2 Deliveries by Seller. At the closing, Seller shall deliver to Buyer:
6.2.1 Seller shall transfer to Buyer all current files, books,
records, accounts receivable records, lists, catalogs, sales promotion
literature, customer and investor lists, employee files, contract files and
other business information and documents used by Seller in connection with the
Assets.
4
<PAGE>
6.2.2 Seller shall transfer to Buyer any deposit funds held by Seller
for appraisal fees, credit reports or commitment fees collected in connection
with any of the Assets purchased by and assigned to Buyer.
6.2.3 Seller shall deliver duly executed (and acknowledged where
appropriate) assignments, bills of sale, and other appropriate instruments of
transfer as are, in the opinion of counsel for Buyer, effective to vest in Buyer
good and indefeasible title to all of the Assets.
6.2.4 The opinion of Erickson & Sederstrom, P.C., counsel to Seller,
dated the Closing Date, in form and substance reasonably satisfactory to Buyer,
to the effect that:
(a) Seller is a corporation duly organized and validly existing
in good standing under the laws of Nebraska, and is duly qualified and in good
standing to transact business as a foreign corporation in all jurisdictions
where such qualification is required by reason of the transaction of business in
such jurisdiction by Seller or the ownership of property in such jurisdiction by
Seller, except where the failure to so qualify would not, individually or in the
aggregate, have a material adverse effect on Seller or on the conduct of the
Business;
(b) Seller has duly executed this Agreement and Seller is bound
by the terms of this Agreement in accordance with its terms except as the same
may be limited by any applicable bankruptcy, insolvency, reorganization, or
other laws relating to or affecting creditors' rights generally and general
principles of equity;
(c) all necessary corporate actions have been taken to duly
authorize the execution, delivery, and performance of this Agreement by Seller;
(d) no approval of any court, governmental agency (other than
those described in such opinion which have been obtained and are then in effect)
or, to the knowledge of such counsel, other person, firm, or other entity is
required in order that this Agreement may be lawfully and validly consummated;
(e) neither the execution and delivery of this Agreement nor the
performance hereof in accordance with its terms is restricted by or in violation
of the terms of Seller's articles or certificate of incorporation, bylaws, or
other charter documents or of any contract, mortgage, indenture, order, decree,
or other contractual obligation of Seller, as regarding consent to transfer or
to which Seller or any of the Assets may be subject; and
(f) the instruments of transfer delivered to Buyer by the Seller
are sufficient in form to convey to Buyer good and merchantable title to all of
the Assets conveyed thereby.
6.2.5 A detailed list and description of all furniture, fixtures and
equipment, Exhibit , to be leased by Buyer pursuant to this Agreement; and
5
<PAGE>
6.2.6 All termination statements and other form of lien releases, duly
executed and in form and substance satisfactory to Buyer, required to terminate
and release all security interests and liens on the Assets.
6.3 Deliveries by Buyer. At the Closing, Buyer shall deliver to seller:
6.3.1 A check payable to Seller in the amount of the Purchase Price,
net of any amounts assumed by Buyer pursuant to Section .
6.3.2 Lease Agreement, substantially in the form of Exhibit hereto.
7. REPRESENTATIONS, WARRANTIES, AND COVENANTS
7.1 Representations, Warranties, and Covenants of Seller. Seller hereby
represents, warrants, and agrees to and with Buyer as follows:
7.1.1 Organization, Standing and Corporate Power. Seller is a
corporation, duly organized, validly existing and in good standing under the
laws of its state of incorporation, with all requisite corporate power and
authority to carry on its business as now conducted, to own the Assets, and to
execute, deliver and perform this Agreement.
7.1.2 Corporate Authorization. The execution, delivery and performance
of this Agreement and the consummation of the transaction contemplated hereby
have been duly and validly authorized by all necessary corporate action on the
part of Seller, and this Agreement is a valid and legally binding obligation of
Seller, enforceable in accordance with its terms.
7.1.3 Conflicting Agreements; No Liens. Neither the execution and
delivery of this Agreement by Seller nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of or constitute (whether or not with the giving of notice or
lapse of time, or both) a default under or result in a violation of the charter
or by-laws of Seller or any agreement, contract, instrument, order, judgment or
decree to which Seller is a party or by which it is bound, or violate any
provision of any applicable law, statute, rule or regulations or any order,
decree, writ or injunction of any court of governmental body, or result in the
creation of any charge, lien, restriction, security interest or other
encumbrance of any nature whatsoever on any of the Assets, or impose a condition
on or render void or ineffective the sale or assignment to Buyer of any of the
Assets. On the Closing Date, none of the Assets will be subject to any lien,
charge, mortgage, security interest, or encumbrance.
7.1.4 Consents. No consent form, or other approval of, any court,
governmental body or any other person is necessary in connection with the
execution, delivery or performance of this Agreement by Seller, other than
consents and approvals which have already been obtained, and
6
<PAGE>
other than the approval of the Bankruptcy Court, and the consummation of the
transactions contemplated by this Agreement will not require the approval of any
entity or person in order to prevent the termination of any right, privilege,
license or agreement of Seller which is necessary for the conduct of the
Seller's Business.
7.1.5 Title to Assets; Lack of Encumbrances. Seller has and will
deliver to Buyer good and marketable title to (or, in the case of leased
property, valid leasehold interests in), all of the Assets, real and personal,
tangible and intangible, free and clear of all liens, mortgages and other
encumbrances and claims of any kind or character, except, in the case of the
leasehold, the rights of the Lessor.
7.1.6 Business Expenses. Seller shall pay all expenses attributable to
the Business through the Closing Date, including, but not limited to, payment of
salaries and loan officers' commissions, health insurance, social security taxes
and other such expenses.
7.1.7 Delivery of Documents. True copies of all written instruments
listed on the Exhibits hereto have been made available to Buyer. Seller also has
made and will continue to make available to Buyer all books and records (if any)
retained by Seller and relating to the Business.
7.1.8 Disclosure. None of the representations or warranties in this
Agreement, in any document, written statement, certificate or schedule furnished
or to be furnished to Buyer pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of any material fact, or omits or will omit to state any material fact necessary
to make the statement of facts contained therein not misleading.
7.1.9 No Changes in Assets. Seller has not
(a) sold, leased, mortgaged, pledged, hypothecated, transferred,
or disposed of any of the Assets; or
(b) suffered any material adverse change in the Assets.
7.1.10 Title and Condition of Assets. Seller has good and merchantable
title to all of the Assets.
7.2 Representations, Warranties, and Covenants of Buyer. Buyer represents,
warrants, and agrees to and with Seller as follows:
7.2.1 Organization, Standing and Corporate Power. Buyer is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Missouri, with all requisite corporate power and authority
to execute, deliver and perform this Agreement.
7
<PAGE>
7.2.2 Corporate Authorization. The execution, delivery and performance
of this Agreement and the consummation of the transaction contemplated hereby
have been duly and validly authorized by all necessary corporate action on the
part of Buyer, and this Agreement is a valid and legally binding obligation of
Buyer, enforceable in accordance with its terms.
7.2.3 Disclosure. None of the representations or warranties in this
Agreement, in any document, written statement, certificate or schedule furnished
or to be furnished to Seller pursuant to this Agreement or in connection with
the transactions contemplated hereby contains or will contain any untrue
statement of any material fact, or omits or will omit to state any material fact
necessary to make the statement of facts contained therein not misleading.
8. ADDITIONAL AGREEMENTS OF THE PARTIES
------------------------------------
8.1 Survival. The representations and warranties of the parties herein and
all agreements assumed or undertaken pursuant to this Agreement shall survive
the closing, any investigation by or on behalf of any party to this Agreement,
and the delivery of transfer documents contemplated hereby; provided, however,
such representations and warranties shall expire and be of no further force and
effect following a period commencing on the Closing Date and ending five (5)
years from the Closing Date.
8.2 Payment of Costs. Buyer and Seller shall share on a 50/50 basis all
costs and expenses incurred or to be incurred in negotiating and preparing this
Agreement and in closing and carrying out the transactions contemplated by this
Agreement.
8.3 Specific Performance. Seller acknowledges that the Assets to be sold
and delivered to Buyer pursuant to this Agreement are unique and that Buyer may
have no adequate remedy at law if any party shall fail to perform any of its
obligations under this Agreement. ln such event, Buyer shall have the right, in
addition to any other rights and remedies it may have at law or in equity, to
specific performance of this Agreement.
8.4 Additional Assurances. Each party hereto agrees to promptly execute,
acknowledge, and deliver to any other party hereto, on or after the Closing
Date, such additional deeds, bills of sale, assignments, documents,
certificates, instruments, or agreements and to promptly take such other action
as the party requesting the same may reasonably request in order to more fully
effectuate and consummate the transactions contemplated by this Agreement and
the transfer of and payment for the Assets.
8.5 Seller's Employees. Buyer does not promise to employ any of the current
employees of Seller. Seller shall preserve and make available to Buyer the
personnel files on each of Seller's employees who are employed by Buyer.
8
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9. PRIOR TO CLOSING
----------------
9.1 Access. During the period from the date of this Agreement to the
Closing Date, Seller shall cause Buyer to be given free access to the Assets and
to Seller's offices and other premises, records, files, books of account,
contracts, commitments, insurance policies, surety bonds, leases, and copies of
tax returns of Seller for the purpose of conducting an investigation of the
Assets through Buyer's employees or agents, independent public accountants,
outside business consultants, and attorneys; provided, however, that such
investigation shall be conducted in a manner that does not unreasonably
interfere with Seller's normal operations and employee relationships. Seller
shall cause its personnel to assist Buyer in making such investigation and shall
cause its counsel, accountants, employees, and other representatives to be
available to Buyer for such purposes. During such investigation, Buyer shall
have the right to make copies of such records, files, and other materials as it
may deem advisable. If the transactions contemplated by this Agreement are not
consummated as provided herein, Buyer and its representatives shall treat all
information obtained in such investigation and not otherwise known to Buyer, or
already in the public domain, as confidential shall return to Seller all copies
made by Buyer and its representatives of material belonging to Seller and shall
not use any such information for any purpose whatsoever.
9.2 Conduct of Business Pending Closing. During the period from the date
hereof to the Closing Date, Seller shall conduct its Business operations with
respect to the Assets according to its ordinary and usual course of business and
shall maintain its records and books of account in a manner that fairly reflects
its financial transactions with respect to the Assets. Seller agrees that during
such period it shall not, in its operation of the Assets, without the written
consent of Buyer:
9.2.1 Pay or incur any obligation or liability, absolute or
contingent, other than current liabilities incurred in the ordinary and usual
course of business;
9.2.2 Mortgage, pledge, or, other than in the ordinary and usual
course of the Business, subject to lien or other encumbrance any of the Assets;
9.2.3 Except in the ordinary and usual course of the Business, sell,
or transfer any of its properties or assets or cancel, release, or assign any
indebtedness owed to it or any claims held by it;
9.2.4 Make any material change or decrease in its Business insurance,
advertising, or employment commitments or arrangements, or enter into or amend
(a) Any contract for the purchase of supplies or inventory other
than such contracts incurred in the ordinary and usual course of business;
(b) Any employment, management, or consultation agreement;
9
<PAGE>
(c) Any lease, license, royalty, or union agreement; or
(d) Any other agreement not in the ordinary and usual course of
business; or
9.2.5 Enter into any transaction or agreement or take any other action
which would, if effected prior to the Closing Date, constitute a breach of any
of the representations, warranties, or covenants contained in this Agreement.
9.3 Required Consents and Approvals. The Seller shall obtain all necessary
consents and approvals in order to enable Seller to assign and transfer to Buyer
the Assets.
10. CLOSING CONDITIONS; RIGHT TO TERMINATE
--------------------------------------
10.1 Conditions to Buyer's Obligations. Each and every obligation of Buyer
to Seller hereunder to be performed on the Closing Date shall be subject to the
satisfaction of each of the following conditions, occurrence of which may,
except for approvals and consents required by laws, at the option of Buyer, be
waived:
10.1.1 The representations and warranties of Seller contained in this
Agreement shall all be true in all material respects on or as of the Closing
Date, with the same effect as though such representations and warranties had
been made or given on and as of the Closing Date;
10.1.2 The Assets, taken as a whole, shall not have been materially
adversely affected in any way as a result of fire, explosion, earthquake,
disaster, accident, any action of any governmental authority, flood, storms,
embargo, riot, civil disturbance, uprising activity of armed forces, or acts of
God or public enemies;
10.1.3 Seller shall have performed and complied in all material
respects with all of its obligations under this Agreement which are to be
performed or complied with by it prior to or on the Closing Date;
10.1.4 There shall not be pending or threatened any litigation
challenging the lawfulness of the transactions contemplated hereby or seeking to
enjoin or restrain the consummation of this Agreement;
10.1.5 Seller shall have obtained (and Seller hereby agrees to exert
reasonable efforts to obtain) the valid consent of all parties whose consent is
required to the transfer and assumption of any contracts, leases or other Assets
where the failure to obtain such consent would have a material adverse effect on
the intended business of Buyer or its assignee;
10.1.6 Seller shall have delivered all documents required to be
delivered by it to Buyer at the Closing;
10
<PAGE>
10.1.7 Buyer and its counsel shall be reasonably satisfied that all of
the foregoing conditions have occurred and are continuing; and
10.2 Conditions to Seller's Obligations. Each and every obligation of
Seller to be performed on the Closing Date shall be subject to the satisfaction
of each of the following conditions, occurrence of which may, except for
approvals and consents required by law, at the option of Seller, be waived:
10.2.1 The representations and warranties of Buyer contained in this
Agreement shall all be true in all material respects on or as of the Closing
Date, with the same effect as though such representations and warranties had
been made or given on and as of the Closing Date;
10.2.2 Buyer shall have performed and complied with all of its
obligations to Seller which are to be performed or complied with by it prior to
or on the Closing Date;
10.2.3 There shall not be pending or threatened any litigation
challenging the lawfulness of the transactions contemplated hereby or seeking to
enjoin or restrain the consummation of this Agreement;
10.2.4 Buyer shall have delivered all documents required to be
delivered by it to Seller pursuant to this Agreement at the Closing; and
10.3 Right To Terminate. If each of the conditions set forth above shall
not have occurred and be continuing (for any reason other than default by a
party) and if the transactions contemplated by this Agreement shall not have
been consummated on or before the Closing Date, either Buyer or Seller shall
have the right to terminate this Agreement at any time thereafter without
liability to any other party hereto.
10.4 Post-Closing Obligations. At all times following the Closing Time,
Seller shall promptly deliver to Buyer any payments received by Seller in the
form so received on account or with respect to any of the receivables, accounts,
or other assets being purchased by Buyer hereunder, with such endorsements or
other signatures as may be reasonably requested by Buyer in order for Buyer to
promptly realize payment of such items.
In addition, Seller agrees to pay to Buyer for providing Post-Closing Services
on loans that have been closed by Seller, an amount equal to Four Thousand and
No/100 Dollars ($4,000.00) which shall be netted against the final payment to
Buyer of the outstanding Mortgage Pipeline Loans. For purposes of this Section,
"Post-Closing Services" shall include all the required procedures to deliver
loans to third party investors until the loan is funded by such investor and all
procedures required to complete all quality control procedures necessary to have
a completed loan as required by investor guidelines.
11
<PAGE>
11. MISCELLANEOUS
-------------
11.1 Notices. Any notices or other communications required or permitted
hereunder shall be in writing, and shall be deemed to have been duly given on
the date of service if served personally on the party to whom notice is to be
given, or on the fifty (5th) day after mailing if mailed to the party to whom
notice is to be given by first class mail, or upon delivery if by registered
mail, return receipt requested, postage prepaid and properly addressed as
follows:
If to Seller: AFI Mortgage Corp.
5425 Martindale Street
Shawnee Mission, Kansas 66218
With copy to: Erickson & Sederstrom, P.C.
Regency Westpointe
10330 Regency Parkway Drive
Suite 100
Omaha, Nebraska 68114-3761
Attn: Mark Peterson
If to Buyer: First Mortgage Investment Co.
5225 West 75th Street
Prairie Village, Kansas 66208
With copy to: Shughart Thomson & Kilroy, P.C.
Twelve Wyandotte Plaza
120 West 12th Street
Suite 1600
Kansas City, Missouri 64105
Attn: Steven H. Goodman
Any party may change the address to which notices and other communications
hereunder are to be delivered by giving the other party notice in the manner
herein set forth.
11.2 Time. Time is of the essence of this Agreement.
11.3 Law Governing. This Agreement shall be construed in accordance with
and governed by the laws of the State of Kansas.
11.4 Confidentiality. Except as may be required to comply with applicable
law and regulations or to obtain required regulatory approvals to consummate
this transaction, the parties hereto shall each use their best efforts to keep
confidential any and all information relating to this transaction and to one
another and will instruct their officers, employees and other representatives
12
<PAGE>
having access to such information of such obligations of confidentiality. In the
event the transactions contemplated herein are not consummated, each of the
parties hereto shall return all documents, including any copies thereof, to the
party which provided the same.
11.5 Publicity. Each party hereto will advise, confer with and obtain the
prior written consent of the other, prior to the issuance of any reports,
statements or releases to the media or otherwise pertaining to this transaction
or the implementation thereof.
11.6 Expenses and Attorney Fees. Except to the extent otherwise provided in
this Agreement, each party shall be responsible for all expenses and attorney's
fees incurred by it in performing its obligations under this Agreement. In the
event of any suit, action or proceeding brought by any party for the breach of
any term hereof, or to enforce any provisions hereof, the prevailing party shall
be entitled to reasonable attorney's fees in addition to court costs and other
expenses of litigation as allowed by law.
11.7 Entire Agreement; Amendments; Waivers. This Agreement (including the
documents referred to herein) constitutes the entire Agreement between the
Parties and supersedes any prior understandings, agreements, or representations
by or between the Parties, written or oral, to the extent they related in any
way to the subject matter hereof. No supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the parties to be bound
hereby. No waiver of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
11.8 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.9 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
11.10 Binding Effect. All of the terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective transferees, successors and assigns. No party may assign either
this Agreement or any of its rights, interests, or obligations hereunder without
the prior written approval of the other party.
1.11 Parties in Interest. Notwithstanding any other provision of this
Agreement, this Agreement shall not create any rights or benefits on behalf of
any employee, creditor, third party or other person, and this Agreement shall be
effective only as to the parties hereto, their successors and assigns.
11.12 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instruments.
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on their behalf on the date first above written.
AFI MORTGAGE CORP., as Seller
ATTEST:
By:
---------------------------------------
- ------------------------- Name:
Secretary ------------------------------------
Title:
------------------------------------
FIRST MORTGAGE INVESTMENT CO., as Buyer
ATTEST:
By:
--------------------------------------
- ------------------------- Name:
Secretary ------------------------------------
Title:
-----------------------------------
14
<PAGE>
EXHIBIT 1.1
ASSETS
1. All mortgage pipeline loans.
2. All rights to the remote site contracts, including all information
necessary to operate the remote site computer network.
15
<PAGE>
EXHIBIT 1.4
OBLIGATIONS
None.
16
<PAGE>
EXHIBIT 2.1
LEASE AGREEMENT
17
<PAGE>
EXHIBIT 3.1
FURNITURE, FIXTURES & EQUIPMENT
18
<PAGE>
EXHIBIT 4.1
LETTER OF INTENT
19
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