Conformed
_________________________________________________________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number
March 31, 1998 0-19485
ADVANCED FINANCIAL, INC.
(Name of small business issuer in its charter)
DELAWARE 84-1069416
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
5425 Martindale, Shawnee, KS 66218
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (913) 441-2466
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Securities registered under Section 12(g) of the Act:
Title of Each Class
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Common Stock $.001 par value
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ___ No X
Check if there is no disclosure of delinquent files in response to Item 405
of Regulation S-B if not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
Issuer's revenues for the fiscal year ended March 31, 1998 were $ 257,629.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock on the
consolidated reporting system on the NASDAQ Bulletin Board on January 25, 1999
was $54,016.
State the number of shares outstanding of each of the issuer's classes of
common equity as of January 25, 1999: 5,836,476
Check whether the issuer has filed all documents and reports to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes___ No___
Transactional Small Business Disclosure Format Yes___ No X
<PAGE>
Advanced Financial, Inc.
TABLE OF CONTENTS
ITEM PAGE
Part I
Item 1 - Description of Business................. 3
Item 2 - Description of Property................. 7
Item 3 - Legal Proceedings....................... 8
Item 4 - Submission of Matters to a Vote of
Security Holders........................ 8
Part II
Item 5 - Market for Common Equity and Related
Stockholder Matters..................... 8
Item 6 - Management's Discussion and Analysis or
Plan of Operation....................... 9
Item 7 - Financial Statements.................... 10
Item 8 - Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure.................... 12
Part III
Item 9 - Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a) Of The
Exchange Act............................ 11
Item 10 - Executive Compensation................... 12
Item 11 - Security Ownership of Certain Beneficial
Owners and Management.................... 14
Item 12 - Certain Relationships and Related
Transactions............................. 15
Part IV
Item 13 - Exhibits and Reports on Form 8-K......... 15
Signatures................................................... 17
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Advanced Financial, Inc.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
Advanced Financial, Inc. (the "Company" or "AFI") is a
Delaware corporation formed in September 1986.
SUBSEQUENT EVENTS
In April 1997, the Company and its wholly-owned subsidiary, AFI
Mortgage, Corp. ("AFIM"), decided that it would be in the best interest of the
continuity of the Company's business enterprise to temporarily suspend its
active mortgage operations. On November 7, 1997, AFIM filed for relief under
Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the
United States Bankruptcy Court, District of Kansas, Topeka Division, Case No.
97-43122. On May 8, 1998, the Company also filed for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court, District of Kansas,
Topeka Division, Case No. 98-41228. The two cases were consolidated on July 2,
1998. On November 13, 1998, the United States Bankruptcy Court for the District
of Kansas entered an order (the "Confirmation Order") confirming the First
Amended Joint Plan of Reorganization dated July 29, 1998 of the Company and AFIM
("Plan of Reorganization"). The confirmation of the Plan of Reorganization was
reported in a Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 25, 1998. A copy of the Plan was filed as Exhibit 2.1 to
the Form 8-K and a copy of the Confirmation Order was filed as Exhibit 99.1 to
the Form 8-K. See also Note B to the Consolidated Financial Statements of the
Company in Item 7 hereof.
DESCRIPTION OF BUSINESS
OF COMPANY AND AFIM
The following information concerning the Company and AFIM is provided as
of March 31, 1998, unless otherwise indicated.
History of the Company and AFIM
- -------------------------------
The Company was formed in September 1986. In July 1990, the Company
determined that an opportunity existed in the mortgage servicing industry due to
the collapse of the savings and loan industry and decided to pursue the
opportunity. The Company acquired Creative Financing, Inc. in March 1991,
changed the subsidiary's name to Continental Mortgage, Inc. in 1992 and changed
the name again in 1994 to AFI Mortgage, Corp. From the time it was acquired by
the Company, AFIM focused on the origination, refinancing and servicing of 1 to
4 family residential mortgages. Between fiscal 1992 and fiscal 1995, AFIM
invested its capital mainly in the purchase of mortgage servicing portfolios
from the Resolution Trust Corporation and during that period its servicing
portfolio reached a principal balance of approximately $750 million.
The servicing portfolio was AFIM's primary source of revenue and cash
flows. In March 1994, AFIM determined that it needed to enter the retail
origination market to increase its servicing portfolio through the origination
of new loans rather than bulk purchases, which would require raising additional
capital. AFIM also determined that it needed to find an origination concept and
strategy that would not require the capital necessary to implement a traditional
branch office operation. AFIM wanted to take advantage of the many new
technologies which had recently became available to the mortgage industry. It
was at this time that AFIM initiated its concept of putting a loan officer
directly in an established real estate office.
During March and April, 1994, AFIM proceeded to invest a significant
amount of its capital into both systems and personnel in an effort to implement
this new origination strategy. AFIM had anticipated marketing this new concept
in May, 1994. Unfortunately, technical problems encountered in meshing the
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Advanced Financial, Inc.
technologies for its Desk Top Origination units delayed marketing until January,
1995. During 1995, AFIM was very successful in establishing its strategy in
several real estate offices around the country.
Although AFIM was successful in locating real estate offices in which to
implement its Desk Top Origination System, it was not nearly as successful in
hiring experienced and qualified loan officers to operate the locations. The
inability to hire experienced loan originators caused AFIM to fall significantly
short of its loan production goals and projections. Therefore, AFIM was unable
to generate from its loan production operations the revenue and cash flow
necessary to support the infrastructure which was in place to handle much
higher anticipated volumes. This led to significant losses during fiscal 1997.
In an effort to generate the capital necessary to support the loan
production operations, AFIM sold approximately $234,000,000 of its remaining
servicing portfolio in September 1996 and an additional $9,000,000 in the fourth
quarter of fiscal year 1997, anticipating that loan production would increase
sufficiently to offset the lost revenue and cash flow previously realized from
the servicing operations. Unfortunately, loan production did not increase as
anticipated and AFIM had to close several of its nonproductive locations. AFIM's
revenues and cash flow were insufficient to continue to support current
operations and in January, 1997, AFIM decided to decided that it would be in the
best interest of the continuity of the Company's business enterprise to
temporarily suspend its active mortgage operations and liquidate its remaining
assets to satisfy creditors.
On February 3, 1997, AFIM entered into an agreement to sell its remaining
loan production operations to First Mortgage Investment Co. ("FMIC"). This
allowed AFIM to eliminate the costs related to those operations. At that time
AFIM, still had approximately $150,000,000 of mortgage servicing rights of The
Government National Mortgage Association ("GNMA"), from which it derived some
revenue.
However, due to the nature of the servicing portfolio and AFIM's lack of
capital, AFIM was unable to service the portfolio properly within GNMA's
guidelines. Thus, in April, 1997, AFIM advised GNMA of its deteriorating
financial condition and requested approval for the sale of the remaining GNMA
servicing rights to a third party. AFIM also advised GNMA that if the
transaction was consummated under the proposed terms, AFIM anticipated having a
shortage of approximately $350,000 to $400,000 in AFIM'S mortgage custodial
accounts, however, GNMA chose to seize the servicing portfolio instead of
approving the sale. At such time, AFIM decided that it would be in the best
interest of the continuity of the Company's business enterprise to temporarily
suspend its active mortgage operations. The Company sold most of its remaining
fixed assets to FMIC in May 1997. For additional information concerning the
history of the Company and AFIM, see "SUBSEQUENT EVENTS" set forth above.
Description of Real Estate and Operating Data
- ---------------------------------------------
At March 31, 1998, the only real estate owned by or in which the Company
had an investment interest was the Company's headquarters building which was
developed for the Company and which the Company occupied in June of 1993. The
building housed all administrative functions of the Company. The Company
currently leases the building to the mortgage company who purchased the
production platform until such time as the sale of the building is completed.
Loan Servicing
--------------
Prior to fiscal year 1997, the Company serviced substantially all the
mortgage loans that it originated or purchased from failed institutions.
Servicing includes collecting and remitting loan payments, making advances when
required, accounting for principal and interest, holding escrow (impound) funds
for payment of taxes and insurance, making inspections of the mortgage premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults and generally administering the
loans. The Company received fees for servicing the mortgage loans in its
servicing portfolio, which mortgage loans were owned by investors. The fees on
the Company's servicing portfolio were calculated on the outstanding principal
balances of the loans serviced and were recorded as income when earned. Other
fee income consisted of ancillary income (late charges, fax fees, insurance
commissions, etc.) associated with loan servicing and was recorded as income
when collected.
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The Company's servicing portfolio was subject to reduction by normal
amortization and by prepayment or foreclosure of loans. In addition, the Company
had in the past sold portions of its portfolio of loan servicing rights. In
general, the decision to buy or sell servicing rights was based upon
management's assessment of the Company's cash requirements, the Company's debt
to equity ratio and other significant financial ratios, the market value of
servicing rights, and the Company's current and future earnings objectives.
During fiscal year 1998, the Company had no loan originations and received
revenue from its remaining servicing portfolio for only 15 days during April
1997. In addition, due to the Company's continued losses in fiscal 1997,
management made the decision in September, 1996 to sell the entire servicing
portfolio to pay off as much related indebtedness as possible. At that time, the
sale of the servicing allowed the Company to significantly reduce its cash flow
needs.
Servicing Capability
--------------------
In the past a non-affiliated third party provided electronic data
processing through the Company's IBM AS/400. This relationship and service was
terminated, in April 1997.
Loan Originations
-----------------
In January 1992, the Company expanded its mortgage banking operations to
include the ability to refinance mortgage loans. This was designed to enhance
the Company's servicing portfolio in several ways. It allowed the Company to
retain a portion of its payoffs as new loans. Previously, the refinanced loans
enhanced the value of the Company's portfolio because the new loan had a lower
note rate and a longer servicing life. During fiscal 1997, originated and
refinanced mortgage loans were sold servicing released which increased current
cash flow and revenues. Also the revenues and earnings provided by the loan
originations allowed the Company to diversify its potential revenue producing
business away from loan servicing. During fiscal 1998, the Company had no loan
originations compared to 1,242 loans with a principal balance of approximately
$110,500,000 in fiscal 1997.
AFIM had developed an important expertise which allowed the Company to
close new loans in several states through closing agents and title companies
without the necessity to invest in branch office overhead. This expertise was
critical in the ability to place Desktop installations in real estate offices
nationwide. All processing and underwriting was centralized at AFIM
headquarters. Eighteen Desktop terminals were in operation during the fourth
quarter of fiscal 1997. The system included core software capabilities which ran
on a desktop or personal computer. The Company had in-house computer oriented
employees trained on the software to perform necessary modifications to software
as well as installation of the software.
The Company anticipated completed installations (terminals installed and
operational, including the staffing of a loan officer on the Company's payroll)
of 70 locations by the end of fiscal 1997. Unfortunately the Company did not
reach its goal, but did have as many as 45 locations at its peak. Due to various
reasons several of these locations did not meet the Company's profitability
projections and were subsequently closed. Eighteen locations were in place when
the Company sold its production platform. The Company estimated the initial
set-up cost of an office for the first 90 days, including monthly cost of
license and equipment, office supplies, etc., to be approximately $7,000 per
location.
The system was initially being targeted for placement in real estate
brokerage companies with high residential growth. The system was designed to be
operated on-site by an AFIM loan representative with "expert systems" feedback
to the borrower, an evaluation of loan balance and repayment options. The
information was electronically transmitted by modem to AFIM where the actual
processing and underwriting were performed. The system offered the convenience
of one stop shopping for the home buyer in addition to productivity advantages
for the agents. The "Step 1 Pre-Approval Process" provided the potential home
buyer with a formal written pre-approval for a monthly mortgage payment based on
the application in approximately 48 hours. This allowed the home buyer and real
estate agent the advantage of knowing financing opportunities prior to the
negotiation of a potential contract.
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Advanced Financial, Inc.
Loan Processing
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In connection with the origination of each loan, the Company processed the
loan application, prepared mortgage documentation, conducted credit checks, had
the property valued by appraisers and funded the loan. Loan applications were
approved by the Company's underwriting department for compliance with
underwriting criteria, including the loan-to-value ratio, borrower's income
qualification and necessary insurance. After approval, the Company's policy was
to obtain pre-closing commitments from investors to purchase substantially every
loan to be originated or purchased by the Company. In the case of loans to be
sold to private investors, the Company submitted the loan file to a prospective
investor for its approval.
FNMA and FHLMC did not review individual loan files prior to issuance of
commitments to purchase loans. Upon receipt of a commitment from an investor to
purchase a loan or loans from the Company once closed, the Company issued a
commitment to the prospective borrower specifying the amount of the loan, the
prevailing interest rate, the fees to be paid to the Company and the date on
which the Company's commitment expired. The actual interest rate of the loan was
established prior to loan closing based upon the then prevailing interest rate,
unless the borrower has purchased a "rate lock," which guarantees a specified
rate for a designated period. The normal interval of time between the Company's
issuing its commitment and the closing of a loan was one to three weeks.
Types of Loans
--------------
Approximately half of the loans serviced by the Company were conventional
loans. The Company emphasized the origination of "conforming" loans, which are
conventional loans having principal amounts within the maximum amounts eligible
for sale to FNMA and FHLMC (currently $203,150 for a one-family property) and
which otherwise comply with FNMA and FHLMC requirements. The Company also
originated "jumbo" loans (conventional loans that exceed the maximum amounts
qualifying for sale to FNMA or FHLMC but that otherwise generally comply with
FNMA or FHLMC requirements and other loans that do not comply with FNMA or FHLMC
requirements) but that do comply with requirements for sale to private
investors. It was the Company's policy to obtain a title insurance policy on
every mortgage loan. In addition, substantially all of the Company's originated
loans were first mortgage loans. During the fourth quarter of fiscal 1995, the
Company did introduce a second mortgage loan program for which the originated
loans were sold to private investors.
Markets and Competition
-----------------------
The loan origination market share is somewhat diversified with a few large
players and many small players. As a whole, the industry is incorporating
technology and pursuing point of sale strategies to generate mortgage loan
originations. The company also believes that its strategy for implementing its
technology and strategy for point of sale originations was unique and should
have allowed it to compete even with its largest competitors. Unfortunately due
to the shortage and availability of experienced loan officers, caused by the
industry's increased production volumes, the Company was unable to attract and
hire experienced loan originators to operate its desktop locations. This meant
that the company had to hire and train less experienced personnel. This caused a
much longer than anticipated time frame for loan origination volumes to meet
projected goals. In many cases, due to the Company's shortage of capital, the
Company could not continue to keep the locations open in anticipation of future
loan production.
Regulation
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The Company's mortgage banking business was subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, prohibit discrimination, provide for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to VA loans, fix maximum interest rates. Moreover, FHA
lenders such as the Company were required annually to submit to the Federal
Housing Commissioner audited financial statements. FNMA, FHLMC and GNMA required
the maintenance of specified minimum net worth levels (which vary depending on
the amount of the portfolio serviced). The Company was subject to examination by
the Federal Housing Commissioner at all times to assure compliance with FHA
regulations, policies and procedures. The Company's mortgage origination
activities were subject to the Equal Credit Opportunity
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Advanced Financial, Inc.
Act, the Federal Truth-in Lending Act and the Real Estate Settlement Procedures
Act and the regulations promulgated thereunder which prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit and settlement costs.
Additionally, there were various state laws and regulations affecting the
Company's mortgage servicing and banking operations. The Company was also
licensed as a mortgage banker or retail installment lender in those states in
which it did business that required such a license.
The Company's conventional mortgage operations may also have been subject
to state usury statutes. The Company's FHA and VA loans and activities were
exempt from the effect of such statutes.
Other Operations
----------------
On August 1, 1994, the Company purchased 100% of the stock of Century Real
Estate of Lincoln, Nebraska. The acquisition was planned as a short term
investment which allowed for deployment of some of the first Desktop terminals
in a closely monitored real estate brokerage environment. Effective December 20,
1994, the Company sold this temporary investment in Century to Home Real Estate
Services of Lincoln, Inc. ("Home") and concurrently through a stock exchange
purchased 10% of Home. The combination of Century and Home created the largest
real estate brokerage firm in the Lincoln, Nebraska market. Also, as part of the
sale, AFIM had the right to install its Desktop Mortgage Loan Origination System
in all four of Home's real estate offices in the Lincoln area.
On March 1, 1997, Home elected to exercise its right to repurchase 10% of
Home from the Company pursuant to a Stock Redemption Agreement between the
Company and Home. The Company received $141,669 from Home for the repurchase of
its 10% ownership, the proceeds of which were used to pay down Company debt.
Employees
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As of March 31, 1998, the Company and its subsidiary had 1 full time
employee.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
Real Estate Owned
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At March 31, 1998, AFIM owned fee simple title to a 20,000 square foot
office building and the land on which the building sat located at 5425
Martindale, Shawnee, Kansas (the "Property"). The Property is subject to a first
and second mortgage. The first mortgage had a principal balance at March 31,
1998 of $717,000 with a fixed interest rate of eleven and three quarters percent
(11.75%) per annum and was payable monthly with the entire balance due and
payable March 31, 1998. The term of the loan has subsequently been extended
until March 31, 1999, with all the same terms. The balance may be prepaid at any
time without penalty. In the fourth quarter of the 1996 fiscal year, the Company
took out a second mortgage on the Property of $350,000 that was due March 1998.
$200,000 of the second mortgage was repaid in fiscal years 1997 and 1998 from
the sale of servicing rights. In the opinion of management, the Property is
adequately covered by insurance.
Subsequent Events. Under the Plan of Reorganization, and subject to the
terms and conditions set forth in the Plan of Reorganization, FMIC is to
purchase the Property for $1,030,000, the net proceeds of which would satisfy
the first mortgage, and would also release the second mortgage it holds against
the building. The net proceeds to AFIM from this transaction would be used to
satisfy the claims of creditors in accordance with the Plan of Reorganization.
This building is currently leased to FMIC. See Item 1: "DESCRIPTION OF BUSINESS
- -- SUBSEQUENT EVENTS."
Investment Policies
- -------------------
The only type of real estate in which the Company has invested is the
office building and land described above. The Company manages its own property
and the financing of said property is as described above. The Company has not
adopted any policies which would limit the number or amount of
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Advanced Financial, Inc.
mortgages which may be placed on any piece of property owned by the Company. The
Company presently has no plans to purchase or invest in real estate except for
its headquarters building as described above. No limitations concerning the
percentage of assets of the Company which may be invested in any one investment,
or type of investment. Any investment policy of the Company may be changed
without a vote of security holders.
Investments in Real Estate Mortgages
- ------------------------------------
During fiscal 1998, the Company did not invest in any real estate
mortgages.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities
- --------------------------------------------------------------------------------
During fiscal year 1998, the Company did not invest in securities of or
interests in persons primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In March 1994, the Company was named as co-defendant in a lawsuit filed by
two former officers of the Company. The lawsuit, filed in the United States
District Court for the District of Nebraska, alleges that the Company violated
securities laws, delaying the ability of these former officers from selling
common stock of the Company owned by them, resulting in alleged losses of
$300,000. The validity of the stock owned by these plaintiffs was the subject of
concurrent litigation pending in the state court in Omaha, Nebraska. In January
1997, the Company settled the litigation by agreeing to issue the plaintiffs a
total of 300,000 shares of the Company's restricted common stock. In turn, one
of the parties pledged 100,000 shares as collateral for a note receivable of
$214,000 due AFIM. At March 31, 1998, the Company had 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.
The Company had various other lawsuits initiated from various lenders as
a result of the Company's inability to make required payments on its various
debt. On November 7, 1997, AFIM filed for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court, District of Kansas,
Topeka Division, Case No. 97-43122. On May 8, 1998, the Company also filed for
relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court, District of Kansas, Topeka Division, Case No. 98-41228. The two cases
were consolidated on July 2, 1998. On November 13, 1998, the United States
Bankruptcy Court for the District of Kansas entered the Confirmation Order. The
confirmation of the Plan of Reorganization was reported in a Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 25, 1998.
A copy of the Plan was filed as Exhibit 2.1 to the Form 8-K and a copy of the
Confirmation Order was filed as Exhibit 99.1 to the Form 8-K. All pending
litigation was suspended pending the final outcome of the Company's Chapter 11
Plan of Reorganization. Upon the Company's discharge from bankruptcy, all
litigation will have been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended March 31, 1998, either through the
solicitation of proxies or otherwise.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
The Company's Common Stock was traded on the American Stock Exchange from
March 29, 1993 to April 3, 1997 under the symbol AVF. On December 6, 1996, the
Exchange halted trading of the Company's Common Stock due to the fact that the
Company was not in compliance with the Exchange's listing requirements. As a
result the Company's Common Stock was delisted on April 3, 1997. The
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Advanced Financial, Inc.
Company's Common Stock is currently traded on the NASDAQ Bulletin Board under
the symbol AVFI. The following table sets forth the high and low prices for
Common Stock as reported on the American Stock Exchange and the NASDAQ Bulletin
Board for the four quarters of fiscal years 1997 and 1998. The prices were
obtained from the American Stock Exchange and the NASDAQ Bulletin Board. The
prices do not include retail mark-ups, mark-downs, or other fees or commissions,
and may not represent actual transactions.
1997
---- High Low
---- ---
Quarter Ended June 30, 1996 $1.62 $1.00
Quarter Ended September 30, 1996 $1.75 $1.00
Quarter Ended December 31, 1996 $2.00 $1.00
Quarter Ended March 31, 1997 $1.38 $1.38
1998
---- High Low
---- ---
Quarter Ended June 30, 1997 $0.38 $0.04
Quarter Ended September 30, 1997 $0.19 $0.04
Quarter Ended December 31, 1997 $0.07 $0.01
Quarter Ended March 31, 1998 $0.01 $0.005
At January 25, 1999, the closing market price of the Company's common
stock was $.012 per share. On such date, 178 holders of record held the
Company's common stock and the Company estimates that it has approximately 1,200
beneficial shareholders.
At March 31, 1998, the Company had not paid any cash dividends on its
Common Stock and had not paid any dividends on its 10.5% Series B Preferred
Stock since the second quarter of fiscal 1996. The Company was not subject to
any restrictive covenants or agreements which limit its ability to pay
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
GENERAL
- -------
As described in Item 1 hereof, the Company and AFIM suffered substantial
losses in fiscal years 1997 and 1998. Management decided that it would be in the
best interest of the continuity of the Company's business enterprise to
temporarily suspend its active mortgage operations in April 1997 and the Company
and AFIM subsequently filed for relief under Chapter 11 of the Bankruptcy Code.
The following discussion of the Company's financial condition as of March 31,
1998 and the Company's results of operations for fiscal year 1998 should be read
in conjunction with description of events subsequent to March 31, 1998 contained
in Item 1 hereof.
RESULTS OF OPERATIONS
Year Ended March 31, 1998 Compared To The Year Ended March 31, 1997
- -----------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and short-term investments increased from ($106,676) at
March 31, 1997 to $58,759 at March 31, 1998. The increase in cash and short-term
investments is attributable to the fact that the Company suspended operations,
except for limited operations necessary to operate under Chapter 11 of the
Bankruptcy Code, sold its remaining assets, except for the office building, and
collected on various receivables due the Company.
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Advanced Financial, Inc.
Also see Item 1: "DESCRIPTION OF BUSINESS--SUBSEQUENT EVENTS" and Item 1:
"DESCRIPTION OF BUSINESS -- DESCRIPTION OF BUSINESS OF THE COMPANY AND AFIM."
Losses
------
Consolidated operating result for fiscal year 1998 reflect a net loss of
$375,589 as compared to a net loss of $5,077,639 in fiscal year 1997. The
decrease in losses is attributable to the fact that the Company suspended
operations and reduced expenses, except for limited operations necessary to
operate under Chapter 11 of the Bankruptcy code. Also see Item 1: "DESCRIPTION
OF BUSINESS--SUBSEQUENT EVENTS" and Item 1: "DESCRIPTION OF BUSINESS --
DESCRIPTION OF BUSINESS OF THE COMPANY AND AFIM."
FINANCIAL POSITION
- ------------------
During fiscal 1998, the Company saw a significant decrease in the Company's
assets and stockholders' equity. The Company's total assets were $1,300,490 at
March 31, 1998 compared to $2,158,102 at March 31, 1997. Stockholders' deficit
was $(3,391,017) at March 31, 1998 compared to $(3,015,428) at March 31, 1997.
These decreases were due to the fact that the Company suspended the majority of
its operations and had limited revenues, causing the Company to continue to
operate at a loss during fiscal 1998. The Company sold its loan production
operations in February, 1997, causing its loans held for sale to decrease to $0
at March 31, 1998 compared to $305,193 at March 31, 1997. Because the Company
was no longer borrowing on its warehouse facility to fund loan originations,
Notes Payable also decreased to $1,577,194 at March 31, 1998 compared to
$1,968,427 at March 31, 1997.
At March 31, 1998, the Company had a cash position of $58,759 compared to
a negative cash position of $106,676 at March 31, 1997. After year end March 31,
1997, the Company covered its negative cash position through the collection of
receivables and the funding of the remaining Mortgage Loans Held for Sale. Since
March 31, 1998, and while operating under the protection Chapter 11 of the
Bankruptcy Code, the Company has been able to fund its limited operations from
the sale of various assets and the collection of various receivables.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
None
ITEM 7. FINANCIAL STATEMENTS
--------------------
Financial statements for the years ended March 31, 1998 and March 31,
1997, are presented on the following pages.
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REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Advanced Financial, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Advanced
Financial, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Advanced Financial, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, on November 7, 1997, the Company filed a
voluntary petition for reorganization in the United States Bankruptcy Court for
the District of Kansas (Bankruptcy Court) under Chapter 11 of the United States
Bankruptcy Code (Bankruptcy Code). Pursuant to the Bankruptcy Code, the Company
has continued to manage its business as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court, but has no ongoing operations. On November
13, 1998, the Bankruptcy Court confirmed the Company's First Amended Joint Plan
of Reorganization dated July 29, 1998. These factors, among others, as discussed
in Note B to the consolidated financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note B. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GRANT THORNTON LLP
Kansas City, Missouri
January 26, 1999
10-1
<PAGE>
<TABLE>
<CAPTION>
Advanced Financial, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1998 1997
--------------------- -----------------------
<S> <C> <C>
Cash $ 58,759 $ -
Mortgage servicing advances and accounts receivable (note A2) 151,097 440,367
Mortgage loans held for sale (notes A3, D and E) - 305,193
Mortgage loans held for investment (notes A3 and E) 5,997 12,713
Property and equipment, net (notes A4, E, F, and J) 1,070,5553 1,303,802
Prepaid expenses - 23,121
Other 14,084 72,906
--------------------- -----------------------
$ 1,300,490 $ 2,158,102
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Bank overdraft $ - $ 106,676
Accounts payable and accrued expenses 24,292 2,919,541
Note payable (note E) 717,357 1, 768,427
Notes payable to related parties (note G) - 200,000
Capitalized lease obligations (note F) - 178,886
--------------------- -----------------------
741,649 5,173,530
LIABILITIES SUBJECT TO COMPROMISE (note B)
Accounts payable and accrued expenses 3,024,595 -
Notes payable (note E) 659,837 -
Notes payable on stock recission (note G) 200,000 -
Capitalized lease obligations (note F) 65,426 -
--------------------- -----------------------
3,949,858 -
COMMITMENTS AN CONTINGENCIES (notes F, G, and L) - -
STOCKHOLDERS' EQUITY (DEFICIENCY) (notes B, G, and H)
Preferred stock, Series B, $.005 par value 10,000,000 shares
authorized; 363,000 shares issued and outstanding 1,815 1,815
Common stock, $.001 par value; 25,000,000 shares authorized; 5,836,476
shares issued 5,836 5,836
Paid-in capital 9,959,840 9,959,840
Accumulated deficit (12,917,163) (12,541,574)
--------------------- -----------------------
(2,949,672) (2,574,083)
Treasury stock, 99,869 shares of common stock, at cost (441,345) (441,345)
--------------------- -----------------------
(3,391,017) (3,015,428)
--------------------- -----------------------
$ 1,300,490 $ 2,158,102
===================== =======================
The accompanying notes are an integral part of these statements
</TABLE>
10-2
<PAGE>
<TABLE>
<CAPTION>
Advanced Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1998 1997
--------------------- -----------------------
<S> <C> <C>
Revenues
Servicing fees $ 58,492 1,558,933
Gains (losses) on sales of mortgage loans, net (including origination
fee income (expense) of ($40,681) and $788,868, respectively) (45,261) 2,232,547
Other fees 23,373 674,388
Gains on sales of mortgage servicing rights - 827,482
Interest 11,036 691,559
Rental Income (note F) 165,027 46,667
Other 44,962 105,197
--------------------- -----------------------
Total revenues 257,629 6,136,773
Expenses
Servicing expense 90,926 1,630,457
Personnel 168,471 2,903,116
General and administrative 156,669 2,275,168
Interest 156,786 851,952
Depreciation and amortization 49,374 2,201,103
Other 10,992 910,456
--------------------- -----------------------
Total expenses 633,218 10,772,252
--------------------- -----------------------
Loss before income taxes (375,589) (4,635,479)
Income tax expense (notes A8 and I) - (442,160)
--------------------- -----------------------
Net loss $ (375,589) $ (5,077,639)
===================== =======================
Weighted average shares outstanding $5,736,607 4,651,327
===================== =======================
Loss per common share (note A9) $ (0.09) $ (1.12)
===================== =======================
The accompanying notes are an integral part of these statements
</TABLE>
10-3
<PAGE>
<TABLE>
<CAPTION>
Advanced Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
Years ended March 31, 1998 and 1997
Preferred Common Paid-in Accumulated Treasury
stock stock capital deficit stock Total
------------- ------------- --------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996 $ 1,860 $ 4,256 $8,877,493 $ (7,463,935) $ (441,345) $ 978,329
Net loss - - - (5,077,639) - (5,077,639)
Exercise of stock options (notes G
and H) - 771 414,361 - - 415,132
Services rendered in exchange
for stock (note G) - 500 593,250 - - 593,750
Stock issued in legal
settlement (note L) - 300 74,700 - - 75,000
Conversion of 9,000 shares of
preferred stock to common stock (45) 9 36 - - -
------------- ------------- --------------- ---------------- ------------- ---------------
Balance at March 31, 1997 1,815 5,836 9,959,840 (12,541,574) (441,345) (3,015,428)
Net loss - - - (375,589) - (375,589)
------------- ------------- --------------- ---------------- ------------- ---------------
Balance at March 31, 1998 $ 1,815 $ 5,836 $9,959,840 $(12,917,163) $ (441,345) $(3,391,017)
============= ============= =============== ================ ============= ===============
The accompanying notes are an integral part of these statements
</TABLE>
10-4
<PAGE>
<TABLE>
<CAPTION>
Advanced Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (375,589) $ (5,077,639)
Adjustments to reconcile net loss to net
cash provided by) operating activities:
Depreciation and amortization 49,374 2,201,103
(Gains) losses on sales of mortgage loans held for sale 45,261 (2,232,547)
Gains on sales of mortgage servicing rights - (827,482)
Gain on sale of investment - (18,205)
Deferred income taxes - 440,000
Loss on diposal of property and equipment 40,415 -
Services rendered in exchange for stock - 593,750
Stock issued in legal settlement - 75,000
Mortgage loans held for sale originated - (117,647,385)
Mortgage loans held for sale sold 259,932 129,685,486
Changes in assets and liabilities:
Mortgage servicing advances and accounts receivable 289,270 80,253
Prepaid expenses and other assets 81,943 285,916
Accounts payable and accrued expenses 129,346 412,438
-------------------- ------------------
Net cash provided by operating activities 519,952 (7,970,688)
Cash flows from investing activities
Acquisition of property and equipment - (26,978)
Proceeds from sales of mortgage servicing rights - 2,103,386
Proceeds from disposal of property and equipment 30,000 -
Principal payments received on other receivables - 302,336
Principal payments received on mortgage loans held for investment 6,716 82,219
Proceeds from sale of investment - 141,669
-------------------- ------------------
Net cash provided by investing activities 36,716 2,602,632
Cash flows from financing activities
Bank overdraft (106,676) 106,676
Change in revolving borrowings, net (289,749) (9,449,895)
Proceeds from notes payable 15,000 739,031
Notes payable on stock rescission - 200,000
Principal payments on notes payable (116,484) (2,933,128)
Payments on capitalized lease obligations - (236,779)
Exercise of stock options - 415,132
-------------------- ------------------
Net cash used in financing activities (497,909) (11,158,963)
-------------------- ------------------
Net increase (decrease) in cash 58,759 (585,643)
Cash at beginning of year - 585,643
-------------------- ------------------
Cash at end of year $ 58,759 $ -
==================== ==================
Supplemental disclosures of cash flow information
Cash paid for interest $ 126,658 $ 845,346
Cash paid for taxes - 2,160
Supplemental disclosures of noncash financing and investing activities
Capitalized lease obligations forgiven upon return of
property and equipment $ 113,460 $ -
Conversion of preferred stock to common stock - 45
The accompanying notes are an integral part of these statements
</TABLE>
10-5
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Asummary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Organization and Principles of Consolidation
Advanced Financial, Inc. (the Company) owns 100% of AFI Mortgage, Corp.
(AFI). Prior to ceasing operations in 1997, AFI originated, sold to
investors, and serviced residential first mortgage loans (see Note B). The
Company also owns 100% of Continental Mortgage Services, Inc. (CMSI) and
Network Appraisals, Inc. (Network). Both of those subsidiaries are
inactive.
The consolidated financial statements include the accounts of the Company,
AFI, CMSI, and Network. All significant intercompany accounts and
transactions have been eliminated.
2. Mortgage Servicing Rights and Mortgage Servicing Advances
Receivable
Purchased mortgage servicing rights were recorded at cost and were
amortized in proportion to and over the estimated positive future cash
flows derived from servicing the portfolio. The Company evaluated the
recoverability of the cost of each bulk purchase of servicing rights, or,
in the case of correspondent purchases, by grouping such servicing rights
by interest rates and purchase dates of similar loans. If necessary, the
Company further disaggregated bulk purchases for purposes of evaluating
recoverability if the underlying loans did not have similar underlying
economic characteristics. The Company estimated remaining net cash flows to
be received from servicing the portfolio; if such amounts, on a discounted
basis, were less than amortized cost, appropriate amortization adjustments
were made. This additional amortization, when required, resulted in
servicing rights being carried at the lower of cost or market. Gains on
sales of mortgage servicing rights were determined by deducting from the
selling price the remaining unamortized cost of such servicing rights.
In connection with servicing mortgage-backed securities guaranteed by
federal agencies, the Company advanced certain principal and interest
payments to security holders prior to their collection from specific
mortgagors. In addition, the Company made certain payments of property
taxes and insurance premiums in advance of collection from specific
mortgagors, as well as certain payments of attorneys' fees and other costs
related to loans in foreclosure. Such advances were included in mortgage
servicing advances receivable.
10-6
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Mortgage Loans Held for Sale and Investment
Mortgage loans held for sale were carried at the lower of cost or fair
market value as determined by outstanding commitments from investors or
current investor yield requirements calculated on an aggregate basis. Gains
or losses on sales of mortgage loans were recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans at the date of sale using the specific identification
method. Mortgage loans held for investment are carried at the lower of cost
or market on the date of acquisition or transfer from the held for sale
account.
4. Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets,
ranging from three years to thirty years.
5. Excess of Cost Over Fair Value of Assets Acquired
The excess of cost over fair value of assets acquired, resulting from the
Company's acquisition of AFI, was being amortized over fifteen years. The
Company evaluated this excess to be of no future value and wrote off the
entire amount of $524,798, which was included in depreciation and
amortization expense during the year ended March 31, 1997.
6. Foreclosed Assets
Foreclosed assets, included as other assets in the accompanying
consolidated balance sheets, are recorded at the lower of the loan balance
or the fair value of the property less estimated selling costs.
7. Servicing and Other Fees
Servicing fees represent fees earned for servicing mortgage loans owned by
investors. These fees are calculated on the outstanding principal balances
of the loans serviced and are recorded as income when collected.
Other fees consist of ancillary income associated with loan servicing and
are recorded as income when collected.
10-7
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Income Taxes
The Company accounts for income taxes under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Deferred tax assets are
recognized to the extent management believes that it is more likely than
not that they will be realized.
9. Loss Per Common Share
Loss per common share is based on the weighted average number of common
shares outstanding during the periods plus common stock equivalents, when
dilutive, consisting of stock options and warrants. For purposes of this
computation, net losses have been adjusted for the dividends on the
preferred stock. The computation of diluted loss per share includes the
common stock issuable upon conversion of preferred stock, when dilutive.
Because the effect of such inclusion is anti-dilutive in 1998 and 1997,
diluted per share information is not presented herein. It is probable the
events discussed in Note B will require the issuance of common stock,
thereby diluting current equity interests.
10. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. Reclassifications
Certain items in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
10-8
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE B - BANKRUPTCY AND REORGANIZATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company experienced net losses
of $375,589 and $5,077,639 for the years ended March 31, 1998 and 1997,
respectively. In an effort to generate the capital necessary to support
loan production operations, during fiscal 1997 the Company sold most of its
servicing portfolio, anticipating that loan production would increase
sufficiently to offset the lost revenue and cash flow previously realized
from the servicing operations. Unfortunately, loan production did not
increase as anticipated and the Company had to close several of its
nonproductive locations. Ultimately, revenues and cash flow were
insufficient to continue to support current operations and in January 1997,
the Company decided to discontinue its operations and liquidate its
remaining assets to satisfy creditors.
In February 1997, the Company entered into an agreement to sell its
remaining loan production operations to First Mortgage Investment Co.
(FMIC). This allowed the Company to eliminate the costs related to those
operations. At that time, the Company still had approximately $150,000,000
of GNMA mortgage servicing rights, from which it derived some revenue.
However, due to the nature of the servicing portfolio and the lack of
capital, the Company was unable to service the portfolio properly within
GNMA's guidelines. Thus, in April 1997, the Company advised GNMA of its
deteriorating financial condition and requested approval for the sale of
the remaining GNMA servicing rights to a third party. The Company also
advised GNMA that if the transaction was consummated under the proposed
terms, the Company anticipated having a shortage of approximately $350,000
to $400,000 in the Company's mortgage custodial accounts. GNMA chose to
seize the servicing portfolio instead of approving the sale. As a result,
the Company was left with no ongoing operations.
As a result of these events, on November 7, 1997 (the Filing Date), the
Company filed a voluntary petition for reorganization in the United States
Bankruptcy Court for the District of Kansas (Bankruptcy Court) under
Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code).
On November 13, 1998, the Bankruptcy Court confirmed the Company's First
Amended Joint Plan of Reorganization (the Plan) dated July 29, 1998.
10-9
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE B - BANKRUPTCY AND REORGANIZATION - Continued
Pursuant to the Plan, among other things:
(a) FMIC, a creditor of the Company, will release its secured claims
against, and acquire certain assets of the Company in exchange for
1,800,000 shares of common stock of the Company, initially
constituting 60% of the 3,000,000 new shares to be issued as part of
the Company's recapitalization and reorganization. In addition, FMIC
has an option to acquire an additional 3,000,000 shares at $.50 per
share or $1.5 million increasing its ownership to 80% of the
outstanding shares of the Company.
(b) The Company will issue shares of common stock, warrants and make
partial payments to certain other creditors in exchange for a release
of their claims. The creditors will receive 900,000 shares of common
stock of the Company, constituting 30% of the 3,000,000 new shares to
be issued as a part of the Company's recapitalization and
reorganization. The creditors will also receive 900,000 warrants
allowing the holder to purchase one share of common stock per warrant
at a price of $1.25. The warrants are callable by the Company at 130%
of the strike price paid and expire on March 31, 2002.
(c) Shares currently held by preferred and common shareholders of the
Company will be canceled and they will receive 300,000 shares of new
common stock of the Company, constituting 10% of the 3,000,000 new
shares to be issued as part of the Company's recapitalization and
reorganization. Each preferred and common shareholder will receive
approximately .05269 new shares for each old share.
The completion of these transactions is subject to numerous conditions.
In view of the matters described above, recoverability of a major portion
of the recorded asset amounts shown in the accompanying consolidated
balance sheets is dependent upon completion of the Plan. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management believes the steps in the Plan are sufficient to provide the
Company with the ability to continue in existence.
10-10
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE B - BANKRUPTCY AND REORGANIZATION - Continued
Since the Filing Date, the Company has operated its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
During such time, all claims against the Company in existence prior to the
Filing Date have been stayed and have been classified as "liabilities
subject to compromise" in the 1998 consolidated balance sheet, except for
fully secured liabilities that are expected not to be compromised.
NOTE C - MORTGAGE SERVICING RIGHTS
A summary of the activity related to purchased mortgage servicing rights is
as follows at March 31,
1998 1997
--------- ----------
Balance at beginning of year $ - $2,440,280
Purchases - -
Scheduled amortization - (542,497)
Amortization resulting from - (621,879)
impairment
Sales - (1,275,904)
--------- ----------
Balance at end of year $ - $ -
========= ==========
NOTE D - MORTGAGE BANKING ACTIVITIES
The Company's portfolio of mortgage loans serviced for investors, including
loans originated by the Company, aggregated approximately $0 and
$150,000,000 at March 31, 1998 and 1997, respectively. Included in the
portfolio at March 31, 1998 and 1997 are approximately $0 and $150,000,000,
respectively, of GNMA mortgage-backed securities (see Note B). Under terms
of the guarantee agreement with GNMA, the Company was required to advance
principal and interest not collected from the mortgagor and is liable for
amounts lost in foreclosure of defaulted loans not recovered from the
loans' insurers.
At March 31, 1998 and 1997, escrow funds related to the serviced loans
approximated $0 and $4 million, respectively, and are not included in the
accompanying consolidated balance sheets. Included in servicing expense are
foreclosure losses of $77,665 and $1,023,444 at March 31, 1998 and 1997,
respectively.
10-11
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE E - NOTES PAYABLE
The following summarizes the Company's notes payable at March 31,
1998 1997
--------- -----------
Borrowings under a $17,000,000 line of
credit, collateralized by mortgage
loans and mortgage servicing rights,
interest at the agreement's default
rate of prime plus 4% (12.5% at March
31, 1998), due January 31, 1997. $ - $289,749
Borrowings under a $1,000,000 line of
credit, collateralized by mortgage
servicing rights, interest at 9.75%,
monthly payments of $20,517 with
final payment due July 1, 1999. 364,393 328,897
Note payable, collateralized by mortgage
servicing rights, interest at 10.25%,
with monthly payments of $4,758 and
final payment due August 1, 1998. 75,148 72,244
Note payable, collateralized by real
estate, interest at 11.75%, with
monthly payments of $8,812 and final
payment due March 28, 1998. 717,357 734,177
Note payable, collateralized by stock,
interest at 9.5%, with payment due
December 1, 1996. 35,000 35,000
Note payable, collateralized by note
receivable, interest at 9.5%, with
monthly installments of $5,556, with
final payment due January 1, 1998. - 53,196
Note payable, collateralized by furniture
and fixtures, interest at prime plus
2% (10.5% at March 31,
1998), with monthly installments of
$1,389, with final payment due
February 27, 2001. 25,145 55,145
Note payable, collateralized by real
estate and mortgage servicing rights,
interest only at prime plus 6% (14.25%
at March 31, 1998), with
payment of $150,000 due September 30,
1996 and final payment due March 29,
1998. 145,151 200,019
Note payable to FMIC, no interest due
upon approval by the Bankruptcy Court
of the offset of the principal amount
with amounts receivable from FMIC. 15,000 -
---------- -----------
$1,377,194 $1,768,427
========== ===========
10-12
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE E - NOTES PAYABLE - Continued
Substantially all of the Company's assets are pledged to secure the notes
payable.
NOTE F - LEASES
The Company is leasing its land and building to FMIC through December 1,
1999 for $12,375 per month.
The Company has a capitalized lease obligation of $65,426, which is
considered subject to compromise under the Plan.
The Company had various operating lease agreements for branch locations.
Operating lease expense for fiscal 1998 and 1997 was approximately $11,000
and $235,000, respectively. All operating leases have expired.
NOTE G - CAPITAL STOCK
The Company's preferred stock bears a 10.5% cumulative dividend rate. Total
unpaid cumulative dividends at March 31, 1998 is $383,040. The preferred
stock is redeemable at the option of the Company upon payment of one share
of common stock plus all unpaid dividends.
On March 29, 1993, the Company completed an offering of 900,000 shares of
common stock at an offering price of $4.25 per share. In addition, the
Company issued warrants to the underwriter to acquire 100,000 shares of
common stock. The warrants were exercisable until March 29, 1998, at an
exercise price of $5.95. None were exercised before the expiration date.
On September 30, 1996, the Company issued to three companies a total of
1,000,000 shares of common stock valued at $0.50 per share in exchange for
$500,000 of promissory notes, of which the Company had collected $200,000.
In December 1996, the Company was notified this private placement violated
the listing agreement with the American Stock Exchange (see Note L).
Therefore, all parties agreed to rescind the issue and, accordingly, the
transaction is not reflected in the 1997 financial statements. The $200,000
received is recorded as notes payable on stock rescission and is considered
subject to compromise under the Plan.
10-13
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE G - CAPITAL STOCK - Continued
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 market value of
the Company's common stock was $1.1875. The resulting value of the service
of $593,750 is reflected as expense in the 1997 consolidated statement of
operations as well as equity on the consolidated balance sheet at March 31,
1997.
NOTE H - STOCK OPTION PLANS
The Company has key employee option and incentive stock option plans.
Options to acquire common stock are granted, at fair market value, on the
date of grant and expire in 2001 through 2006; 2,000,000 shares of common
stock have been reserved for issuance under the plans. The following
schedule sets forth information regarding option activity under these
plans:
Number Option price
----------- ------------
Outstanding at April 1, 1996 1,253,891 $.81 - 4.25
Granted 1,708,824 .50 - 2.00
Canceled (1,040,150) .81 - 4.25
Exercised (1,152,000) .50 - 1.50
-----------
Outstanding at March 31, 1997 770,565 .81 - 4.25
Canceled (534,250) .81 - 4.25
-----------
Outstanding at March 31, 1998 236,315 .81 - 4.25
===========
As of March 31, 1998, all of the above options were exercisable. All
options will be canceled under the Plan.
On February 15, 1996, the Company entered into consulting agreements with
four companies. Under the terms of each agreement, the Company was to be
provided with financial and public relations services, including advice
concerning marketing surveys, investors' profile information, investors'
methods of expanding investor support and increasing investor awareness of
the Company and its products and services. The term of each consulting
agreement was six months, commencing on February 15, 1996. As compensation
for each consultant's services, the Company granted options to purchase
1,000,000 shares of common stock to the consultants at an exercise price of
$.50 per share. Options to acquire 380,000 shares were exercised subsequent
to March 31, 1996, and were reflected in the 1996 financial statements.
10-14
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE H - STOCK OPTION PLANS - Continued
The $190,000 was collected and the remaining 620,000 options were exercised
during the fiscal year ended March 31, 1997.
The disclosures required under Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation, are not
material, and, in light of the bankruptcy of the Company, are meaningless
and may be misleading.
NOTE I - INCOME TAXES
The following are the components of income tax expense for the years ended
March 31,
1998 1997
---------- ----------
Current $ - $ 2,160
Deferred - 440,000
---------- ----------
$ - $442,160
========== ==========
Federal $ - $440,000
State - 2,160
---------- ----------
$ - $442,160
========== ==========
The difference between actual income tax expense and expected income tax
benefit at the statutory federal income tax rate (34%) computes as follows:
1998 1997
--------- -----------
Expected income tax benefit at
statutory rate $(127,700) $(1,576,063)
State income taxes, net (17,972) (221,951)
Amortization of excess cost
over fair value of - 178,431
assets acquired
Change in valuation allowance 145,650 2,276,190
Other, net 22 (214,447)
Actual income tax expense $ - $442,160
========== ===========
10-15
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE I - INCOME TAXES - Continued
The following is the tax effect of temporary differences that give rise to
the significant portions of the deferred tax assets and liabilities at
March 31,
1998 1997
Deferred tax assets:
Net operating loss $3,786,224 $3,600,104
carryforward
Valuation reserves 134,822 195,002
Deferred state taxes 552,040 534,071
Other 1,495 1,965
--------- ---------
Total deferred tax assets 4,474,581 4,331,142
Deferred tax liabilities:
Other - (2,211)
--------- ---------
Total deferred tax - (2,211)
liabilities
--------- ---------
4,474,581 4,328,931
Valuation allowance (4,474,581) (4,328,931)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The Company has net operating loss carryforwards of approximately $11.1
million as of March 31, 1998. These net operating losses will expire in the
years ended March 31, 2009 through March 31, 2013.
Total deferred taxes consist primarily of the benefit of the net operating
loss carryforward. Management has established a valuation allowance of
$4,474,581 to reduce the total deferred tax asset to $0. As of March 31,
1998, the Company has no recoverable income taxes previously paid.
10-16
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE J - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31,
1998 1997
Land $ 300,000 $ 300,000
Building 905,344 905,344
Furniture and fixtures - 386,034
Office and computer equipment - 957,646
Automobile - 5,331
--------- ---------
1,205,344 2,554,355
Accumulated depreciation 134,791 1,250,553
---------- ----------
$1,070,553 $1,303,802
========== ==========
NOTE K - OTHER INVESTMENT
The Company's other investment consisted of a 10% common ownership interest
and a noninterest-bearing note receivable, which had been discounted to yield
9% to the Company from Home Real Estate Services of Lincoln, Inc. (Home). This
investment results from the issuance of 62,500 shares of the Company's stock
and the sale of substantially all of the assets of Century Realty in December
1994.
Home is a residential real estate brokerage company located in Lincoln,
Nebraska. The Company's investment in Home was accounted for at cost of
approximately $125,000. During the fiscal year ended March 31, 1997, this
investment was sold and the note was collected.
NOTE L - CONTINGENCIES
In March 1994, the Company was named in a lawsuit filed by two former
stockholders and officers of the Company. The lawsuit alleges that the Company
breached an employment contract and violated securities laws, delaying the
ability of these former officers to sell common stock of the Company owned by
them, resulting in alleged losses of $200,000 and $300,000, respectively.
During 1997, the Company reached a settlement with the two former officers.
The Company settled the litigation by agreeing to issue the plaintiffs a total
of 300,000 shares of common stock. In turn, one of the parties pledged 100,000
shares as collateral for a note receivable of $214,000 due to the Company.
10-17
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE L - CONTINGENCIES - Continued
In connection with a review of the Company's servicing operation by Federal
Home Loan Mortgage Company (FHLMC), the Company was advised in January 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 approximated $600,000 and that such
amounts should either be researched and resolved or otherwise paid by the
Company. The Company completed its research and determined the shortage to be
$694,000, which was paid during the year ended March 31, 1997.
On December 6, 1996, the Company was notified by the American Stock Exchange
(the Exchange) that trading in its common stock would be halted because 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 1,000,000 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 (see Note G). 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. The
Exchange subsequently chose to delist the stock.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, Disclosure About Fair
Value of Financial Instruments, and Financial Accounting Standards Board
Statement No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments, require that the Company disclose estimated
fair values for its financial instruments. Fair value estimates have been made
as of March 31, 1998 based on the current economic conditions, risk
characteristics of the various financial instruments, and other subjective
factors.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value:
Cash - The carrying amounts approximated fair value because of the short
maturity of these instruments.
Mortgage loans held for investment - The carrying amounts approximated fair
value since carried at lower of cost or market.
10-18
<PAGE>
Advanced Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Notes payable - The fair values of the notes payable are estimated based on
discounted values of contractual cash flows using rates currently available
for similar loan types.
The estimated fair value and carrying value of the Company's financial
instruments are as follows at March 31, 1998:
Carrying value Fair value
Financial assets:
Cash $ 58,759 $ 59,000
Mortgage loans held for investment 5,997 6,000
Financial liabilities:
Notes payable 1,577,194 1,577,000
10-19
<PAGE>
Advanced Financial, Inc.
ITEM 8. CHANGES TO AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers.
As of March 31, 1998, the following persons served as directors and
executive officers of the Company.
NAME AGE POSITION
- -----------------------------------------------------------------------
William B. Morris 40 Chairman/Secretary/
Sr. Vice President
Daniel Starczewski 50 Director
Richard Schoenfeld 49 Director
William B. Morris. Since 1991, Mr. Morris has been Secretary and a Director
of the Company and Mr. Morris is the only officer to continue with the Company
after the Company filed for relief under Chapter 11 of the Bankruptcy Code. On
October 14, 1997, although Mr. Morris did not stand for re-election at the
meeting of shareholders on September 6, 1996, the Board of Directors elected Mr.
Morris to fill a Director vacancy for the fiscal year 1998. At that time, the
Board of Directors elected Mr. Morris to the office of Chairman. From 1991 to
1996, Mr. Morris participated with a former officer and director, Mr. Norman L.
Peterson, in a partnership called Lancaster Partners, Shawnee, Kansas, which
provided consulting services to small to mid-sized companies on raising capital
and becoming publicly traded. From 1984 to 1989, Mr. Morris was an account
executive at the investment banking firm of Stuart James & Company in Denver,
Colorado, and from 1983 to 1984, Mr. Morris was an account executive at the
venture capital brokerage firm R.B. Marich, Inc. in Denver, Colorado.
Daniel Starczewski. Mr. Starczewski was a Director of the Company from
September 6, 1996 until the confirmation of the Company's bankruptcy plan of
reorganization in November, 1998. Mr. Starczewski has been president of Investor
Resource Services, a public and investor relations firm, since 1993. After
working for several years as an office manager, Mr. Starczewski started an
accounting partnership in Winston-Salem, North Carolina in 1975. Currently he
serves on the Board of Directors of both Atlantis Group, Inc. and Tollgate, Inc.
Richard Schoenfeld. Mr. Schoenfeld was a Director of the Company from May
27, 1997 until the confirmation of the Company's bankruptcy plan of
reorganization in November, 1998. Mr. Schoenfeld was a certified public
accountant from Los Angeles, California.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 and the related
regulations require the Company's directors, executive officers and persons who
own more than ten percent of the Company's Common Stock to file with the
Securities and Exchange Commission initial reports of their beneficial ownership
of the Company's Common Stock and other equity securities of the Company. In
addition, such persons are required to furnish the Company with copies of all
such filings.
To the Company's knowledge, based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended March 31, 1998, all Section
16(a) filing requirements applicable to its directors, executive officers and
ten percent beneficial owners were complied with.
Page - 11
<PAGE>
Advanced Financial, Inc.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The following table sets forth information regarding compensation paid
by the Company in each of the last three years to the Chief Executive Officer in
the 1995, 1996 and 1997 fiscal years. The Chief Executive Officer was the only
executive officer to receive compensation in excess of $100,000 in any of those
fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
----------------------
Annual Compensation (1)(2) Awards Payouts
-------------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Name and Annual Stock LTIP All Other
Principal Compensation Award(s) Options/Payouts
Compensation
Position Salary ($) Bonus ($) ($) ($) SARs(#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------
William B.
Morris Year Ended
Chairman March 31,
of the 1998 $ 65,000 -0- -0- -0- -0- -0- -0-
Board
Year Ended
Norman L. March31,
Peterson 1997 $ 65,272(4) -0- 500 -0- -0- -0- -0-
Chairman
of the Year Ended
Board March31,
President 1996 $120,000 -0- 2,500 -0- 25,000(3) -0- -0-
and Chief
Executive
Officer
William E.
Moffatt Year Ended
Chairman March31,
of the 1997 $157,565 -0- 500 -0- 450,000(3) -0- -0-
Board
President
and Chief
Executive
Officer
</TABLE>
(1) Amounts shown set forth all cash compensation earned by each of the named
individuals in the years shown.
(2) While the named individuals received perquisites or other personal benefits
in the years shown, in accordance with applicable regulations, the value of
these benefits are not indicated since he did not exceed in the aggregate
the lesser of $25,000 or 25% of the individual's salary and bonus in any
year.
(3) These options have expired prior to the filing of this report as a result
of the termination of the executive officers.
(4) Pursuant to an agreement between Mr. Peterson and the Company and in
connection with the termination of Mr. Peterson's employment, the Company
agreed to pay Mr. Peterson $2,000 a month for six months beginning on
December 1, 1996 and health benefits for one year beginning on December 1,
1996.
Page - 12
<PAGE>
Advanced Financial, Inc.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED MARCH 31, 1997
AND OPTION/SAR VALUES AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Values of
Unexercised
Number of In-the-Money
Unexercised Options/SARs at
Shares Options/SARs at FY-End ($)
Acquired on Value FY-End(#) Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
--------------------------------------- ---------------------------------------
William B. Morris -0- -0- 125,000/0 $-0-
</TABLE>
Compensation of Directors
The Company made no payments for board meetings which occurred during
fiscal year 1998.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company entered into an employment agreement with William E. Moffatt
on April 8, 1996. The agreement required the Company to pay to Mr. Moffatt a
base salary of $165,000 for an initial 12 month period and at a rate of $180,000
per year for each fiscal quarter thereafter if the preceding quarter was
profitable. If a merger transaction was completed which created a larger
organization, then the base salary would increase to $200,000 per year. Mr.
Moffatt was to receive 5 weeks of paid vacation per year and was to be
reimbursed for all travel expenses associated with commuting from his home in
California to the Company's offices in Shawnee, Kansas. If terminated, Mr.
Moffatt was to receive 4 months severance to be paid based on a pro rata share
of his existing salary plus benefits. Mr. Moffatt was also granted an option to
purchase up to 450,000 shares of the Company's Common Stock at an exercise $1.00
per share which vested at a rate of 37,500 shares each month for a period of 12
months. Mr. Moffatt resigned on May 20, 1997 and was paid eight weeks of
severance pay and the Company agreed to pay medical and dental benefits for six
months in exchange for his agreement not to pursue his rights under his
employment contract. Pursuant to his employment contract, Mr. Moffatt's option
expired unexercised 90 days from the date of his resignation.
Mr. Peterson resigned from the Company on November 21, 1996. As a
condition of his resignation the Company entered into an agreement with Mr.
Peterson to pay Mr. Peterson a severance of $12,000 to be paid in payments of
$2,000 a month for six months starting December 1, 1996. The Company agreed to
continue paying health benefits for a one year period beginning December 1,
1996. The Company agreed to indemnify Mr. Peterson from adverse claims made by
two previous officers which were pending in the Nebraska State Court and
Nebraska Federal District Court. This litigation was subsequently settled
between the parties on January 31, 1997. Mr. Peterson and the Company agreed to
waive and mutually release each other from any and all claims which they may
have against each other, if any which existed at that time.
The Company has not entered into any other employment contract with any
executive officer or any other contract with respect to the resignation,
retirement or any other termination of such executive officer's employment with
the Company or its subsidiary or resulting from a change-in-control of the
Company or a change in any executive officer's responsibility following a
change-in-control other than those specified above.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of July 26, 1996, the record date for
determining the shareholders of the Company entitled to vote at the shareholders
meeting held September 6, 1996, by: (i) each director; (ii) each executive
officer named in the Summary Compensation Table; (iii) all executive officers
and directors of the Company as a group; and (iv) all those known by the Company
to be beneficial owners of more than five percent of its Common Stock. The
percentage of ownership is based on 3,875,476 shares outstanding
Page - 13
<PAGE>
Advanced Financial, Inc.
on the July 26, 1996 record date. Pursuant to the Company's Plan of
Reorganization, on the effective date of the Plan of Reorganization, all
existing shares will be canceled and each shareholder of record on the effective
date shall receive such shareholder's pro rata share of three hundred thousand
(300,000) new shares of Common Stock of the Company. All currently outstanding
options and warrants will be canceled. See Item 1: "DESCRIPTION OF BUSINESS --
SUBSEQUENT EVENTS."
Beneficial Ownership (1)
Beneficial Owner Number of Shares Percent of Total
- -------------------------------------------------------------------------------
Peterson & Sons
5425 Martindale
Shawnee, KS 66218 887,462(2) 22.9%
William B. Morris
5425 Martindale
Shawnee, KS 66218 756,263(3) 18.8%
Mark J. Peterson
770 N. Cotner, #402
Lincoln, NE 68505 887,462(4) 22.9%
Norman L. Peterson
5425 Martindale
Shawnee, KS 66218 1,073,010(5) 26.7%
Lancaster Partners
5425 Martindale
Shawnee KS, 66218 267,600(6) 6.9%
Steven J. Peterson
5425 Martindale
Shawnee, KS 66218 1,026,016(7) 25.6%
All Executive officers
and directors as a group
(4 persons) 1,238,625(8) 32%
(1) This table is based upon information obtained by the Company's
transfer agent listing the shareholders of record on July 26, 1996,
and Schedules 13D and 13G filed with the Securities and Exchange
Commission (the "Commission"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned.
(2) Includes 267,600 shares controlled by Peterson & Sons Holding Company
as 50% partners in Lancaster Partners, which owns 267,600 shares.
Subsequent to the record date of July 26, 1996, Lancaster Partners was
dissolved and 50% of the shares, or 133,800 shares, were issued
directly to Peterson & Sons Holding Company. Peterson & Sons Holding
Company is 76% controlled by Mark J. Peterson, his brother, Steven J.
Peterson, and their father Norman L Peterson, all of whom are former
officers and directors of the Company.
(3) Consists of 351,163 shares owned personally and 276,600 shares
controlled by William B. Morris as 50% partner of Lancaster Partners
which owns 267,600 shares. Subsequent to the record date of July 26,
1996, Lancaster Partners was dissolved and 50% of the shares, or
133,800 shares, were issued directly to William B. Morris. Also
included is an option to purchase 137,500 shares of common stock which
will be canceled on the effective date of the Plan of Reorganization.
(4) Consists of 887,462 controlled by Peterson & Sons Holding Company.
Peterson & Sons Holding company is 24% owned by Mark J. Peterson.
Page - 14
<PAGE>
Advanced Financial, Inc.
(5) Consists of 887,462 shares controlled by Peterson & Sons Holding Company
of which Norman L. Peterson disclaims all beneficial ownership. Also
includes options to acquire 137,500 shares all of which subsequently
expired.
(6) Lancaster Partners was 50% owned by William B. Morris and 50% owned by
Peterson & Sons Holding Company. Subsequent to the record date of July
26, 1996, Lancaster Partners was dissolved and William B. Morris and
Peterson & Sons Holding Company each received 133,800 shares directly.
(7) Consists of 887,462 shares controlled by Peterson & Sons Holding
Company. Peterson & Sons Holding company is 24% owned by Steven J.
Peterson. Also includes an option to purchase 137,500 shares, all of
which subsequently expired.
(8) Includes only shares actually issued and outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On December 20, 1994, the Company sold its Century Realty Central, Inc.
Lincoln, Nebraska subsidiary to Home Real Estate Service of Lincoln, Inc.
("Home") for $250,000, consisting of $50,000 cash and a non-interest bearing
promissory note for $200,000. The promissory note was payable in 36 monthly
installments with the entire balance due January 1, 1998. The note was unsecured
but was guaranteed by Austin Realty, Inc., whose vice president is Mr. Thomas G.
Schleich, a former director of the Company. The Company owns 10% of the issued
and outstanding common stock of Home. The family of Thomas G. Schleich controls
Home. The Note was paid in full as described below.
On November 11, 1996, the Company entered into an agreement to sell its
10% ownership interest in Home back to Home pursuant to a Stock Redemption
Agreement entered into by the parties on December 20, 1994. Pursuant to the
terms of the Stock Redemption Agreement, the purchase price was determined to be
$141,669 which was paid to the Company in exchange for its 10% ownership of Home
on March 1, 1997. In addition, Home paid the remaining balance of the
non-interest bearing promissory note due the Company. On February 1, 1997, the
Company sold its loan production operations and therefore no longer pays Home a
monthly rental for the use of the three offices in the Lincoln Nebraska area.
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits ------------
*2.1 First Amended Joint Plan of Reorganization dated July 29, 1998 of
Advanced Financial, Inc. and AFI Mortgage Corp. (Exhibit 2.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 25, 1998).
*3.1 Articles of incorporation and by-laws (Exhibit 3.2 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the
Securities and Exchange Commission on January 31, 1993 (No.
33-45406)).
*4.1 Instruments Defining Rights of Holders (Exhibit 4.0 to Registration
Statement on Form S-2 of Advanced Financial, Inc. filed with the
Securities and Exchange Commission on January 31, 1993 (No.
33-45406)).
*4.2 Variable Rate Commercial Note Secured With Loan Servicing Rights dated
July 27, 1994 made by AFI Mortgage Corp., successor to Continental
Mortgage, Inc. ("AFIM"), to the order of Commercial Federal Bank,
successor to Railroad Savings Bank, FSB ("Lender") and Agreement dated
October 11, 1996 between Advanced Financial, Inc. and AFIM, as
Borrower, and Lender and Matrix Financial Servicers Corporation
(Exhibit 4.2 to Advanced Financial, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997 filed with the
Securities and Exchange Commission on February 16, 1999).
*4.3 Variable Rate Commercial Balloon Note for Purchase of Loan Servicing
Rights dated December 31, 1993 made by AFI Mortgage Corp., successor
to Continental Mortgage, Inc. ("Borrower"), to the order of Argo
Federal Savings Bank, FSB ("Lender") and Security Agreement For Sale
of Mortgage Loan Servicing Rights dated December 31, 1993 between
Borrower and Lender (Exhibit 4.3 to Advanced Financial, Inc.'s Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997 filed
with the Securities and Exchange Commission on February 16, 1999.
*10.1 Commercial Real Estate Contract with Standard Builders (Exhibit 10.1
to Registration Statement on Form S-2 of Advanced Financial, Inc.
filed with the Securities and Exchange Commission on February 11, 1993
(No. 33-58186)).
Page - 15
<PAGE>
Advanced Financial, Inc.
*10.2 Contract for Services between the Company and Rollie C. Johnson
(Exhibit 10.1 to Registration Statement on Form S-2 of Advanced
Financial, Inc. filed with the Securities and Exchange Commission on
February 11, 1993 (No. 33-58186)).
*10.3 Real Estate Mortgage to Secure a Loan from Citizen's National Bank of
Fort Scott ("Bank") dated February 3, 1997 made by AFI Mortgage Corp.,
as Mortgagee, to Bank and accompanying notes as amended. (Exhibit 10.3
to Advanced Financial, Inc.'s Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1997 filed with the Securities and
Exchange Commission on February 16, 1999)
*10.4 Second Mortgage dated March 29, 1996 made by Advance Financial, Inc.
and AFI Mortgage Corp., as Mortgagor, to First Mortgage Investment
Co., as Mortgagee. (Exhibit 10.4 to Advanced Financial, Inc.'s Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997 filed
with the Securities and Exchange Commission on February 16, 1999)
*21.1 List of Subsidiaries. (Exhibit 21.1 to Advanced Financial, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31, 1997
filed with the Securities and Exchange Commission on February 16,
1999)
27.1 Financial Data Schedule.
* Asterisk indicates exhibits incorporated by reference as indicated,
all other exhibits arc filed herewith.
(b) Reports on Form 8-K
- -----------------------
None.
Page - 16
<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 16, 1999 By: /s/William B. Morris
--------------------
William B. Morris
Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/William B. Morris Chairman, Secretary, February 16, 1999
- -------------------- Principal Accounting
William B. Morris Officer
Page - 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial informa-
tion extracted from audited financial statements
for the fiscal year ended March 31, 1998 and is
qualified in its entirety by reference to such
financial statements
</LEGEND>
<CIK> 823314
<NAME> Advanced Financial, Inc.
<MULTIPLIER> 1
<CURRENCY> United States
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 58,759
<SECURITIES> 0
<RECEIVABLES> 151,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 229,937
<PP&E> 1,070,553
<DEPRECIATION> 49,374
<TOTAL-ASSETS> 1,300,490
<CURRENT-LIABILITIES> 4,691,507
<BONDS> 0
0
1,815
<COMMON> 5,836
<OTHER-SE> (2,957,323)
<TOTAL-LIABILITY-AND-EQUITY> 1,300,490
<SALES> 0
<TOTAL-REVENUES> 257,629
<CGS> 0
<TOTAL-COSTS> 633,218
<OTHER-EXPENSES> 10,992
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,786
<INCOME-PRETAX> (375,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (375,589)
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
