-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FVuYipZpx9dz/+qc8AR4GPEpHdcvefipX3yuzv6F0b2clIerOsR5GG2bvZ/w1AQL j1f/YDTFsGKwzEyHyVZbCA== 0001000096-97-000068.txt : 19970222 0001000096-97-000068.hdr.sgml : 19970222 ACCESSION NUMBER: 0001000096-97-000068 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED FINANCIAL INC CENTRAL INDEX KEY: 0000823314 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 841069416 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11838 FILM NUMBER: 97533781 BUSINESS ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 BUSINESS PHONE: 9134412466 MAIL ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED MEDICAL DYNAMICS INC DATE OF NAME CHANGE: 19910617 FORMER COMPANY: FORMER CONFORMED NAME: WEINCOR FINANCIAL CORP DATE OF NAME CHANGE: 19890406 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter ended: Commission file number December 31, 1996 0-19485 ADVANCED FINANCIAL, INC. -------------------------------------------- (Name of small business issuer in its charter) DELAWARE 84-1069416 - -------------------------------- ----------------------------------- (State or other jurisdiction I.R.S. Employer Identification No.) of incorporation or organization) 5425 Martindale, Shawnee, KS 66218 - --------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 441-2466 ----------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- State the number of shares outstanding of each of the issuer's classes of common equity, as of January 25, 1997: 6,527,470. Advanced Financial, Inc. PART I - FINANCIAL INFORMATION ITEM 1. Page - 2
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets December 31, 1996 and March 31, 1996 Assets Dec 31, 1996 March 31, 1996 ------ ------------- -------------- (Unaudited) Cash and investments $ - $ 585,643 Mortgage servicing advances and accounts receivable 897,309 520,620 Property and equipment, net 1,508,753 1,718,355 Mortgage loans held for sale 8,994,343 10,110,747 Mortgage loans held for investment 82,159 94,932 Purchased mortgage servicing rights, net 717,488 2,440,280 Excess of cost over fair value of assets acquired, net 486,763 524,798 Prepaid expenses 86,091 191,442 Deferred income taxes - 440,000 Other investment 192,781 235,800 Receivable from related party - 190,000 Other 299,186 260,899 ------------ ---------- Total assets $ 13,264,873 $17,313,516 ============ =========== Liabilities ----------- Accounts payable and accrued expenses $ 2,435,600 $ 2,507,103 Checks outstanding in excess of bank balance 140,954 - Notes payable 10,348,097 13,412,419 Capitalized lease obligations 237,898 415,665 ------------ ---------- Total liabilities $ 13,162,549 $16,335,187 ============ =========== Stockholders' Equity ------------------- Preferred stock, Series B, $.005 par value. 10,000,000 shares authorized; 372,000 shares issued $ 1,860 $ 1,860 Common stock, $.001 par value 25,000,000 shares authorized; 6,514,870 and 3,875,476 shares, respectively, issued and outstanding 6,515 4,256 Paid-in capital 10,373,910 8,877,493 Deficit (9,538,616) (7,463,935) ------------ ---------- 843,669 1,419,674 Treasury stock, 99,869 shares of common stock,at cost (441,345) (441,345) Stockholders' notes receivable (300,000) - ------------ ---------- Total stockholders' equity 102,324 978,329 ------------ ---------- Total liability and stockholders'equity $ 13,264,873 $17,313,516 ============ =========== See accompanying notes to condensed consolidated financial statements.
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ADVANCED FINANCIAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the three month periods ended December 31, 1996 and December 31, 1995 Dec 31, 1996 Dec 31, 1995 -------------- ------------- Revenues: (Unaudited) (Unaudited) Servicing fee income $ 246,420 $ 591,137 Other fee income 137,244 213,522 Gain on sale of mortgage loans 408,115 811,483 Loss on sale of servicing rights (36,650) - Interest income 155,610 189,111 Other income (2,079) 139,624 ---------- ---------- Total operating revenues 908,660 1,944,877 ---------- ---------- Expenses: Servicing expense 349,753 284,257 Personnel 709,094 866,644 General and administrative 327,963 404,171 Interest expense 158,574 187,215 Depreciation and amortization 200,238 442,837 Consulting Expense 593,750 - Other 7,919 13,100 ---------- ---------- Total operating expenses 2,347,291 2,198,224 ---------- ---------- Loss before income taxes (1,438,631) (253,347) Income tax expense (101,884) - ---------- ---------- Net loss $(1,540,515) $ (253,347) ========== ========== Weighted average shares outstanding 6,342,177 3,778,478 ========== ========== Loss per common share: Primary $ ( 0.24) (0.08) ========== ========== Fully diluted $ (0.24) (0.08) ========== ========== See accompanying notes to condensed consolidated financial statements. Page - 4
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the nine month periods ended December 31, 1996 and December 31, 1995 Dec 31, 1996 Dec 31, 1995 ------------- ------------- Revenues: (Unaudited) (Unaudited) Servicing fee income $ 1,312,943 $ 1,852,627 Other fee income 539,274 782,891 Gain on sale of mortgage loans 1,947,427 2,033,466 Gain on sale of servicing rights 764,595 99,759 Interest income 580,372 478,571 Other income 13,710 166,595 ----------- ---------- Total operating revenues 5,158,321 5,413,909 ----------- ---------- Expenses: Servicing expense 873,116 813,837 Personnel 2,547,424 2,831,059 General and administrative 1,101,823 1,340,698 Interest expense 675,179 542,639 Depreciation and amortization 920,161 1,425,546 Consulting Expense 593,750 - Other 79,664 88,407 ----------- ---------- Total operating expenses 6,791,117 7,042,186 =========== ========== Loss before income taxes $(1,632,796) $(1,628,277) Income tax expense (441,884) 49,350 ----------- ---------- Net loss $(2,074,680) $(1,677,627) =========== =========== Weighted average shares outstanding 4,776,110 3,787,147 =========== ========== Loss per common share: Primary $ (0.45) $ (0.47) =========== ========== Fully diluted $ (0.45) $ (0.47) =========== ========== See accompanying notes to condensed consolidated financial statements.
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ADVANCED FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows For the nine month periods ended December 31, 1996 and December 31, 1995 Dec 31, 1996 Dec 31, 1995 ------------- ------------- (Unaudited) (Unaudited) Net cash (used in) provided by operating activities $ (1,042,301) $ (2,974,346) Cash flows from investing activities: Acquisition of property and equipment (8,505) (27,616) Proceeds from sale of mortgage servicing rights 2,054,847 - Sale of real estate owned - 57,931 Acquisition/Principal payments on mortgage loans held for investment 12,773 (67,999) ----------- ---------- Net cash provided by (used in) investing activities 2,059,115 (37,684) Cash flows from financing activities: Notes payable, net (3,064,322) 2,645,737 Checks outstanding in excess of bank balance 140,955 99,217 Issuance of common stock 1,498,677 - Payments on capitalized lease obligations (177,767) (166,960) Payment of preferred dividends - (78,120) ----------- ---------- Net cash provided by (used in) financing activities (1,602,457) 2,499,874 Net decrease in cash (585,643) (512,156) Cash at beginning of period 585,643 512,156 ----------- ---------- Cash at end of period $ 0 $ 0 =========== ========== Supplemental disclosures for cash flow: Cash paid for interest $ 427,426 $ 451,501 Cash paid for income taxes $ 1,881 $ - Supplemental disclosures of noncash financing and investing activities: Property acquired under capital leases $ - $ 35,646 See accompanying notes to condensed consolidated financial statements.
Page - 6 Advanced Financial, Inc. ADVANCED FINANCIAL, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 and 1995 (1) Organization and Summary of Significant Accounting Policies ----------------------------------------------------------- The Company's financial statements include the accounts of Advanced Financial, Inc. (the Company) and its wholly-owned subsidiary AFI Mortgage Corp, formally Continental Mortgage, Inc. (AFI Mortgage). AFI Mortgage is a full service mortgage banking company currently servicing first and second mortgage loans of approximately $174,000,000 as of December 31, 1996. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB. To the extent that information and footnotes required by generally accepted accounting principles for complete financial statements are contained in or consistent with the audited financial statements incorporated by reference in the company's Form 10-KSB for the year ended March 31, 1996, such information and footnotes have not been duplicated herein. In the opinion of management, all adjustments considered necessary for fair presentation of financial statements have been reflected herein. The March 31, 1996 condensed consolidated balance sheet has been derived from the audited balance sheet as of that date. Page - 7 Advanced Financial, Inc. ITEM II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --------------------------------------------------------- GENERAL - ------- Advanced Financial, Inc. (the "Company") is a publicly traded Delaware corporation formed in June 1988. In July 1990 the principals of the Company recognized an opportunity existed in the mortgage servicing industry due to the collapse of the savings and loan industry. On March 29, 1991, the Company was successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary. In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name was again changed, due to expansion into additional states, to AFI Mortgage, Corp. ("AFIM") in November 1994. AFIM is a mortgage banking company servicing a principal balance of approximately $174,000,000 mortgages as of December 31, 1996 and originated approximately $103 million in single family housing mortgages for the nine months ended December 31, 1996. AFIM is a full service residential mortgage company and has all approvals needed to service mortgages for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA). Due to the current size of the servicing portfolio, the Company does not believe it is taking advantage of the economies of scales for cost of servicing to maximize the return on its investment in mortgage servicing rights. Also, the current price the Company is receiving from investors for the servicing rights on originated loan production is strong and beneficial to fund the operations of the Company. As a result, the Company sold approximately $234,000,000 of its current servicing portfolio as of September 30, 1996 for an adjusted gain of $764,595, as well as future servicing rights generated from its own originations, to reduce its outstanding debt and related interest expense. The Company intends to continue its expansion through the implementation of a convenient, low cost and rate competitive national network known as the Desktop Mortgage Loan Origination System (Desktop). The Company's Desktop installations are primarily targeted at respected residential real estate brokerage offices. This market is targeted due to the fact that current mortgage loan production volume is driven by real estate transactions versus refinancing transactions. However, if the market provides for a decrease in interest rates , an active refinancing market will be established through not only such real estate brokers but the placement of terminals with respected mortgage brokers. On February 3, 1997 the Company entered into an agreement to sell First Mortgage Investment Co. (FMIC) the retail loan production operations of AFIM. The agreement calls for FMIC to acquire AFI's mortgage pipeline and assume the operating expenses related to mortgage originations as of February 3, 1997. FMIC has hired 24 of AFIM's salaried employees and 23 loan officers. FMIC has also agreed to lease 10,000 square feet of the Company's 20,000 square foot facilities along with leasing various furniture and equipment. The rental rate for the office space leased by FMIC is $10 per square foot. This will result in monthly leasing revenue to the Company of $8,333. FMIC also agreed to lease various furniture and equipment from the Company for a monthly fee of $15,000. The February 3, 1997 sale of the Company's mortgage production operations will reduce the Company's income by approximately $790,000 each quarter. Additionally, the Company anticipates that it will be able to reduce its expense by approximately $ 900,000 each quarter, thereby reducing the Company's net loss and cash flow requirements by approximately $110,000. The companies continue to pursue negotiations of consolidating and combining both companies, but have not reached a Definitive Agreement. The sale of the production operations will allow AFI to significantly reduce its expenses and cash requirements immediately while it continues negotiations. FMIC is a privately held mortgage company based in the suburban Kansas City areas. FMIC orginates approximately $10 million per month in retail loan originations through 6 branch offices in the Kansas and Missouri markets and has a mortgage servicing portfolio of approximately $730 million. On October 2, 1996 the Company announced that it had signed a Letter of Intent to acquire a California based mortgage bank. However, during the due diligence process, AFI discovered a potential liability in excess of $1million. This liability could potentially be incurred by AFI if the transaction were to close at this time. Therefore, AFI has informed the California based mortgage bank that this issue must be resolved prior to completing any transaction between the parties. As a result, the Company is no longer pursuing this acquisition. Page - 8 Advanced Financial, Inc. RESULTS OF OPERATIONS - --------------------- Quarter ended December 31, 1996 Compared To The Quarter Ended December 31, 1995 - ------------------------------------------------------------------------------- The Company had operating revenues of $908,660 for the quarter ended December 31, 1996 compared to $1,944,877 for the quarter ended December 31, 1995. Net loss for the quarter ended December 31, 1996 was $1,540,515 or .24 cents per share primary and fully diluted compared to net loss $253,347 or .08 cents per share primary and fully diluted for the quarter ended December 31, 1995. Primary earnings per share for the quarter ended December 31, 1996 and 1995 are calculated after deducting, from net income/loss, $39,060 for preferred stock dividends. No preferred stock dividends were paid in the quarter ended December 31, 1996. Nine months ended December 31, 1996 Compared To The Nine months ended December 31, 1995 - ---------------------------------------------------------------- The Company had operating revenues of $5,158,321 for the nine months ended December 31, 1996 compared to $5,413,909 for the nine months ended December 31, 1995. Loss before taxes for the nine months ended December 31, 1996 was $1,632,796 compared to $1,628,277 for the nine months ended December 31, 1995. Net loss for the nine months ended December 31, 1996 was $2,074,6810or .45 cents per share primary and fully diluted compared to a net loss of $1,677,627 or .47 cents per share primary and fully diluted for the nine months ended December 31, 1995. Primary earnings per share for the quarter ended December 31, 1996 and 1995 are calculated after deducting, from net loss, $78,120 for preferred stock dividends. No preferred stock dividends were actually paid in the nine months ended December 31, 1996. The decrease in service fee income to $1,312,943 for the nine months ended December 31, 1996 from $1,852,627 for the nine months ended December 31, 1995 reflected the decrease in the servicing portfolio to $174,000,000 of servicing at December 31, 1996 from $468,000,000 at December 31, 1995. In the first quarter of fiscal 1997, the Company completed the sale and transfer of approximately $20 million of servicing for a slight loss of $13,482. At September 30, 1996, the Company sold $234,000,000 of servicing for an adjusted gain of $764,595. The related deferred tax asset was expensed as tax expense in the amount of $340,000 resulting in a net gain after tax of approximately $424,595. Approximately $100,000 of estimated transfer cost are reflected in the servicing expense for the nine months ended December 31, 1996. Also, in the first quarter of fiscal 1996, the Company completed the sale and transfer of approximately $4.6 million in second mortgages. A gain of $99,759 was recognized on the sale in fiscal 1996. The Company continues to evaluate the need to sell its remaining servicing portfolio. The decrease in other fee income to $539,274 for the nine months ended December 31, 1996 from $782,891 is also the result of the decrease in the servicing portfolio to $174,000,000 at December 31, 1996 from $468,000,000 at December 31, 1995. Gain on sale of mortgage loans for the nine months ended December 31, 1996 was $1,947,427 compared to a gain on sale of mortgage loans of $2,033,466 for the nine months ended December 31, 1995. The gain on sale of mortgages is derived through the sale of loans originated and sold to investors, such as FNMA, FHLMC or GNMA as well as private investors. This gain also includes all servicing release premiums, origination fee income and is net of all direct origination expenses and hedging losses. For the nine months ended December 31, 1996, the Company closed and funded approximately $103 million of retail loan production compared to $79 million for the nine months ended December 31, 1995. The slight decrease in gain on sale of mortgage loans despite increased production is due to hedging losses experienced in the third quarter of fiscal 1997. As a result of the capital needed to expand the Desktop product as well as other avenues for originations, substantially all loans are being sold servicing released resulting in a premium paid by the purchaser for these loans of approximately 1.25 percent of unpaid principal balance. The increase in interest income to $580,372 for the nine months ended December 31, 1996 from $478,571 for the nine months ended December 31, 1995 is due to increased loan production to $103 million from $79 million, respectively. The Company's total operating expenses for the nine months ended December 31, 1996 were $6,791,117 compared to $7,042,186 for the nine months ended December 31, 1995. Included in the operating expenses for nine months ended December 31, 1995 is expense relating to the Washington operations of $576,000. Effective October 1995, the Company sold its two Washington operations to two independent companies. Page - 9 Advanced Financial, Inc. In connection with a review of the Company's servicing operation by Federal Home Loan Mortgage Corporation (FHLMC), the Company was advised in April 1996 that unreconciled shortages existed in certain bank accounts used to accumulate funds related to loans serviced by the Company for FHLMC. The Company was advised that the shortage either be researched and resolved or otherwise paid by the Company. During the fiscal quarter ending September 30, 1996, the Company did complete its research and determined the shortage to be approximately $694,000. Approximately $255,000 of the shortage had already been identified and reflected in accounts payable and accrued expenses in the Company's consolidated balance sheet at March 31, 1996. Approximately $56,000 represents unfunded penalties over the past 3 years, approximately $112,000 represents unfunded monthly interest and approximately $46,000 is unidentified due to incomplete records at the time of original transfer of the servicing to the Company. These items are expensed in the current periods income statement, $102,000 in servicing expense and $112,000 in interest expense. The remaining $225,000 represents claims the Company is currently filing with previous servicers for errors in cash balances transferred to the Company at the time the servicing was originally purchased. These claims are reflected in mortgage servicing advances and accounts receivable in the Company's consolidated balance sheet at December 31, 1996. The $694,000 was paid to FHLMC during the third fiscal quarter from the proceeds received from the sale of the related servicing at September 30, 1996. The increase in servicing expense, with a decrease in the servicing portfolio, to $873,116 for the nine months ended December 31, 1996 compared to $813,837 for the nine months ended December 31, 1995 is due to the expensing of the items discussed above related to the FHLMC shortage as well as the $100,000 estimated transfer costs associated with the sale of the servicing. The decrease in personnel expense to $2,547,424 for nine months ended December 31, 1996 compared to $2,831,059 for nine months ended December 31, 1995 is due primarily to internal reorganization as well as the selling of the Washington operation in October 1995. With increased production and the growth of the Desktop installations anticipated by management during fiscal 1997, a further decrease in personnel costs is not anticipated. The increase in interest expense to $675,179 for the nine months ended December 31, 1996 from $542,639 for the nine months ended December 31, 1995 is the result of increased loan production to $103 million from $79 million, respectively. The Company has a banking relationship that provides more favorable warehouse interest rates because of compensating escrow balances from the servicing portfolio. With the sale of a portion of the servicing portfolio, the Company will want to make sure the mortgage loans held for sale are shipped to investors timely for funding to ensure the benefit of the positive spread due to the remaining compensating balances. The increase is also attributable to the FHLMC shortage discussed above. In connection with the acquisition of mortgage servicing rights, the Company capitalizes the price paid for the mortgage servicing rights acquired. The resulting asset is amortized on an accelerated basis and evaluated for impairment on a quarterly basis. Amortization for the nine months ended December 31, 1996 was $469,180 compared to $774,184 for the nine months ended December 31, 1995. The Company's servicing portfolio is subject to reduction by normal amortization, by sales of servicing rights, by prepayment or by foreclosure of outstanding loans. The value of the Company's loan servicing portfolio may be adversely affected if mortgage interest rates decline and loan prepayments increase. The value is also adversely affected by unanticipated rates of default. Conversely, as mortgage interest rates increase or as rates of default decrease, the value of the Company's loan servicing portfolio may be positively affected. The weighted average interest rate on the underlying mortgage loans being serviced by the Company at December 31, 1996 was 9.94%. The Company's PMSRs are subject to a great degree of volatility in the event of unanticipated prepayments or defaults. Prepayments or defaults in excess of those anticipated at the time PMSRs are recorded result in decreased future net servicing income. Such decreases in future net servicing income would result in accelerated amortization and/or impairment of PMSRs. The Company's net earnings, future net earnings and liquidity are adversely affected by unanticipated prepayments of the mortgage loans underlying its PMSRs. On October 1, 1996, the Company entered into two consulting agreements with two independent consulting firms to perform public relation services for the Company. Each agreement provided the issuance of 250,000 shares of common stock in exchange for the service. Although the consulting agreements were finalized on October 1, 1996, the Company entered into a letter of agreement on August 27, 1996 at which time the Company's common stock was $1.1875. The resulting value of the service of $593,750 is reflected as expense in the current period income statement as well as equity on the balance sheet at December 31, 1996. The agreements continue for a 24 month period. Page - 10 Advanced Financial,Inc. The Company has a net operating loss carryforward for tax purposes of approximately $7 million at December 31, 1996. No income tax benefits were recognized for the nine months ended December 31, 1996 or 1995 since a valuation allowance for the same amount would have been required under FASB 109. In determining the amount of the valuation allowance, management has relied on a potential tax-planning strategy whereby an unrealized taxable gain in the Company's purchased mortgage servicing rights portfolio could be recognized through the sale of such servicing rights. As a result of the sale of $234,000,000 of the servicing portfolio, $340,000 of the deferred tax asset has been recognized as tax expense on the September 30, 1996 income statement. The remaining $100,000 has been recognized as tax expense on the December 31, 1996 income statement since the evaluation of the remaining portfolio does not support a gain to be recognized through the sale of such servicing rights. FINANCIAL POSITION - ------------------ The Company has seen a decrease in its total assets and a decrease in its stockholders' equity. The Company's total assets were $13,264,873 at December 30, 1996 compared to $17,313,516 at March 31, 1996. The decrease is due primarily to the decrease in mortgage loans held for sale at December 31, 1996 as well as the $1,038,000 reduction of the PMSR related to the servicing sale. Stockholders' equity has decreased to $102,324 at December 31, 1996 from $978,329 at March 31, 1996. The decrease in stockholder's equity is lower than would be expected due to year to date losses due to several capital infusions totaling approximately $1,403,375 during the nine months ended December 31, 1996. AFIM's net worth is currently satisfactory for those financial institutions purchasing loans from the Company on a servicing release basis. However, AFIM is not currently in compliance with minimum net worth requirements for GNMA and FHA. AFIM plans to increase the net worth to meet both agency requirements through additional capital infusion as well as the sale of the origination platform and anticipated acquisition of another mortgage company discussed above. To help preserve the net worth, preferred stock dividends have been suspended until the cash flow of the Company permits payment. The preferred stock carries a $.42 per share annual cumulative dividend. Management believes that the items noted above will enable the Company to meet its obligations and maintain its financial ratios and balances required by its lenders and mortgage investors; however, there are no assurances that the Company will ultimately be able to realize its assets' values and discharge its liabilities in the normal course of business. The mortgage servicing advances and accounts receivable were $897,309 at December 31, 1996 compared to $520,620 at March 31, 1996. The increase is due primarily to a portion of the proceeds to be received for the sale of servicing being recorded as a receivable at September 30, 1996. The balance is also comprised of advances made related to servicing functions. There are some pools in the servicing portfolio that require the servicer to pass on to the investor all principal and interest payments regardless of whether the payment has been collected. If customers are delinquent, an advance is required by the Company. As payments are made by borrowers during the month, the advance is repaid to the Company. At December 31, 1996, the Company had a $300,000 outstanding notes receivable from related party that is recognized as a contra equity item on the Balance Sheet since it is the result of stock issuance compared to the outstanding receivable of $190,000 at March 31, 1996, which was subsequently collected and shown on as an asset on the Balance Sheet. The receivables resulted from consulting agreements entered into in February 1996 with four companies. Under the terms of each agreement, the Company is provided with financial and public relations services, including advice concerning marketing surveys, investor profiles and increasing investor awareness of the Company and its products and services. The term of each agreement was six months. As compensation for this service, the Company has granted options to purchase 1,000,000 shares of common stock at $.50 per share. As of September 30, 1996, all options have been exercised generating $500,000 capital for the Company. The Company used the $350,000 of the proceeds to pay down a working capital line. At December 31, 1996, there was a note receivable from related party of $ 300,000. The $300,000 note receivable from related party represents the completion of a private placement of the Company's common stock. The original receivable of $500,000 consists of three collateralized promissory notes from three separate companies to purchase 1,000,000 shares of common stock at $.50 per share. During the third fiscal quarter $200,000 of the notes was received. The remaining notes which originally expired during the third fiscal quarter of 1997 were extended to March 31, 1997 and carry an 8% interest rate. The shares of stock purchased are held in escrow pending receipt of the funds to satisfy the promissory notes. The above transactions do not involve any officers or directors of the Company; however, the people involved in such transactions are being referred to as related parties due to the number of shares issued in conjunction with the two transactions. The Company had $8,994,343 in mortgage loans held for sale at December 31, 1996 (which were pledged to collateralize the Company's warehouse lines) compared to $10,110,747 at March 31, 1996, which reflects the timing of the sale of the mortgage loans in the secondary market. Page - 11 Advanced Financial, Inc. As noted above, on October 1, 1996, the Company entered into two consulting agreements with two independent consulting firms to perform public relation services for the Company. Each agreement provided the issuance of 250,000 shares of common stock in exchange for the service. Although the consulting agreements were finalized on October 1, 1996, the Company entered into a letter of agreement on August 27, 1996 at which time the Company's common stock was $1.1875. The resulting value of the service of $593,750 is reflected as expense in the current period income statement as well as equity on the balance sheet at December 31, 1996. The agreements continue for a 24 month period. The net decrease in cash of the Company was $726,598 for the nine months ended December 31, 1996. At the end of fiscal 1996, the Company received proceeds from a loan financing of $750,000. The proceeds were used to pay down a servicing escrow advance line and pay $50,000 down on the working capital line with Bank One. The Company paid an additional $350,000 down on the working capital line during the nine months ended December 31, 1996 from the proceeds received due to the exercise of the stock options discussed above. The Company also paid $120,090 in capital lease payments for the purchase of the IBM AS/400, office furniture and Desktop computers and equipment. During fiscal 1997, the Company expects to generate cash through a possible acquisition , liquidation of the notes receivable from purchase of common stock and the raising of additional capital, if necessary. As previously noted, the Company sold approximately $234,000,000 of its outstanding servicing portfolio for an adjusted gain of $764,595 before expense for the related deferred tax asset of $340,000. A portion of the proceeds from the sale were used to fund the shortage in the FHLMC account of approximately $694,000. In fiscal 1996, the Company had a note payable come due of approximately $550,000 secured by a portion of the servicing portfolio currently sold. Management paid $330,000 on the note with proceeds from the sale and refinanced the remaining $222,000. An additional $300,000 of the proceeds were used to pay down additional outstanding debt related to the servicing sold, thus reducing that debt to approximately $400,000. The Company also paid off $400,000 of the $750,000 loan financed at March 31, 1996. The remaining $100,000 of the BankOne working capital line was also paid off with proceeds from the servicing sale. The Company believes that the decrease in the servicing income will be offset by the decrease in expenses related to that servicing as well as the decrease in monthly debt payments. PROSPECTIVE TRENDS - ------------------ As noted previously, on February 3, 1997 the Company entered into a non-binding Letter of Intent to acquire FMIC. The Company also entered into an agreement with FMIC to sell them the retail mortgage loan production operations. FMIC currently closes approximately $10 million per month in retail loan originations and has a mortgage servicing portfolio of approximately $730 million. The Letter of Intent calls for a definitive agreement to be completed by March 1, 1997 and is subject to a fairness opinion and a vote of the shareholders. A key technology that the Company implemented in the first quarter of fiscal 1997, is the use of Automated Underwriting. Automated Underwriting is the use of artificial intelligence through computer technology to make underwriting and credit decisions on residential mortgage loans. The use of automated underwriting will reduce the time needed to process and underwrite a residential mortgage loan from approximately 30 to 45 days to as few as 5 to 14 days. It will also significantly lower the cost of processing and underwriting those loans since the technology will increase the number of loans processed and underwritten per employee. To compliment the Desktop sites, the Company will be recruiting loan originators to set up "net branches". The originator, who will be employed by AFIM, will be credited all revenues generated from the loan above the Company's par price which will be netted against all the expenses related to the origination site. The Company feels this is another cost efficient method of originating loans in comparison to the traditional retail branch. Page - 12 Advanced Financial, Inc. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - ---------------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 114 and 118, "Accounting by Creditors for Impairment of Loan-Income Recognition and Disclosures," during the first quarter of fiscal 1996. This statement requires the accounting by creditors for impairment of certain loans. The impact of adopting the statement on the Company's consolidated financial statements was not material. The Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment to FASB Statement No. 65", during the first quarter of fiscal 1997. The statement generally requires entities that sell or securitize loans to retain the mortgage servicing rights to allocate the total cost of mortgage servicing rights to the loan and the related servicing right based on their relative fair values. Costs allocated to mortgage servicing rights should be recognized as a separate asset and amortized over the period of estimated net servicing income and periodically evaluated for impairment based on fair value. The impact of adopting this statement will not be material on the Company's 1997 consolidated financial statements since the Company intends on selling primarily all originated loans servicing released during fiscal 1997. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is required for fiscal year beginning April 1,1996. The Statement requires that certain long-lived assets be reviewed for impairment when events or circumstances indicates that the carrying amounts of the assets may not be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset's carrying value is written down to fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The impact of adopting this Statement on the Company's consolidated financial statements has not been determined by Management. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," will be adopted by the Company during fiscal year ending March 31, 1997. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. These plans include all arrangements by which employees receive shares of stock or other equity investments of the employer or where an employer issues its equity instruments to acquire goods and services from nonemployees. This statement will require pro forma disclosures of net income and earnings per share as if a new accounting method based on the estimated fair value of employee stock options had been adopted. The Company has not decided if the optional accounting treatment proposed by SFAS No. 123 will be adopted. Page - 13 Advanced Financial, Inc. PART II ITEM 1 Legal Proceedings - ------------------------ The Company reached a settlement with two former officers of the Company who had named the Company as a codefendant in a law suit filed in the United States District Court for the District of Nebraska. The Company settled the litigation by agreeing to issue the plantiffs a total of 300,000 shares of restricted AFI common stock. In turn, one of the parties will pledge 100,000 shares as collateral for a note receivable of $214,000 due the Company. The Company has already reserved $74,815 against the note and $140,000 towards the settlement of this litigation. The parties settled this litigation to avoid any further uncertainty and expense of litigation. ITEM 2. Changes in Securities. none. - ------------------------------ ITEM 3. Defaults upon Senior Securities. - ---------------------------------------- The Company postponed the payment of its regular quarterly dividend on its Series "A" Cumulative Convertible Preferred Stock. The dividend will accumulate until such time as the Company has determined that its cash flows have improved enough to pay the dividend from the cash flow of its operations. The total arrearage is currently $156,240. ITEM 4. Submission Matters to a Vote of Securities Holders. none. - ---------------------------------------------------------- ITEM 5. Other Information - ------------------------- On December 6, 1996 the Company was notified by the American Stock Exchange that trading in its common stock would be halted due to the fact that the Company had fallen below certain of the Exchange's continued listing guidelines. On December 9, 1996 the Exchange also notified the Company that it had issued 1.0 million shares of its common stock, through a private placement, prior to receiving notification from the Exchange that the securities had been approved for listing. This is a violation of the Exchange's listing agreement and is a factor considered by the Exchange when reviewing a Company's continued listing eligibility. On December 11, 1996 the Exchange informed the Company that it would proceed with a filing of an application with the Securities and Exchange Commission to strike the Company's common stock from listing and registration on the Exchange. On December 13, 1996 the Company informed the Exchange that it had decided to pursue its right to appeal this decision to the Exchange's Board of Governors and requested a hearing. On February 5, 1997 the Company had its hearing with the Exchange's Board of Governors. At that time the Company presented to the Board of Governors its plans on how it intended to meet the Exchange's continued listing requirements through the acquisition of another mortgage company. Also the investors who had received the 1.0 million shares of common stock through a private placement had returned all 1.0 million shares to the transfer agent. The investors have agreed to let the transfer agent hold such shares until such time as the issues have been resolved with the Exchange. At this time the Company has not received a final ruling from the Exchange in reference to its delisting. Should the Exchange choose to delist the Company's common stock, the Company will pursue having its shares traded on NASDAQ's Electronic Bulletin Board until such time as it is able to make application to the small cap market. ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- a. Exhibit 10.1 Asset Purchase Agreement By and Among AFI Mortgage Corp., as Seller and, and First Mortgage Investment Co., as Buyer b. None Page - 14 Advanced Financial, Inc. SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANCED FINANCIAL, INC. (Registrant) Dated: February 11, 1997 By: /S/ Debbie K. Towery ----------------------------- Debbie K. Towery Chief Financial Officer Dated: February 11, 1997 By: /S/ William E. Moffatt ------------------------------ William E. Moffatt President/Director Page - 15 EX-10.1 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT By and Among AFI MORTGAGE CORP., as Seller, and FIRST MORTGAGE INVESTMENT CO., as Buyer Dated February 4, 1997 TABLE OF CONTENTS 1. SALE AND PURCHASE OF ASSETS......................................... 1 --------------------------- 1.1 Sale and Purchase of Assets................................ 1 --------------------------- 1.2 Purchase Price............................................. 1 -------------- 1.3 Installment Payments on "Unlocked" Pipeline................ 2 ------------------------------------------- 1.4 Assumption of Certain Obligations.......................... 3 --------------------------------- 2. LEASE OF PREMISES................................................... 3 ----------------- 2.1 Lease Agreement............................................ 3 --------------- 3. LEASE OF FURNITURE, FIXTURES AND EQUIPMENT.......................... 3 ------------------------------------------ 3.1 Lease of FF&E.............................................. 3 ------------- 3.2 Purchase Option............................................ 3 --------------- 4. PURCHASE OF PRODUCTION PLATFORM..................................... 3 ------------------------------- 4.1 Production Platform........................................ 3 ------------------- 5. INDEMNIFICATION..................................................... 4 --------------- 5.1 Indemnification............................................ 4 --------------- 6. CLOSING............................................................. 4 ------- 6.1 Date, Time, and Place of Closing........................... 4 -------------------------------- 6.2 Deliveries by Seller....................................... 4 -------------------- 6.3 Deliveries by Buyer........................................ 6 ------------------- 7. REPRESENTATIONS, WARRANTIES, AND COVENANTS.......................... 6 ------------------------------------------ 7.1 Representations, Warranties, and Covenants of Seller....... 6 ---------------------------------------------------- 7.1.1 Organization, Standing and Corporate Power........ 6 ------------------------------------------ 7.1.2 Corporate Authorization........................... 6 ----------------------- 7.1.3 Conflicting Agreements; No Liens.................. 6 -------------------------------- 7.1.4 Consents.......................................... 6 -------- 7.1.5 Title to Assets; Lack of Encumbrances............. 7 ------------------------------------- 7.1.6 Business Expenses................................. 7 ----------------- 7.1.7 Delivery of Documents............................. 7 --------------------- 7.1.8 Disclosure........................................ 7 ---------- 7.1.9 No Changes in Assets.............................. 7 -------------------- 7.1.10 Title and Condition of Assets..................... 7 ----------------------------- 7.2 Representations, Warranties, and Covenants of Buyer........ 7 --------------------------------------------------- 7.2.1 Organization, Standing and Corporate Power........ 7 ------------------------------------------ 7.2.2 Corporate Authorization........................... 8 ----------------------- 7.2.3 Disclosure................................... 8 ---------- 8. ADDITIONAL AGREEMENTS OF THE PARTIES......................... 8 ------------------------------------ 8.1 Survival............................................ 8 -------- 8.2 Payment of Costs.................................... 8 ---------------- 8.3 Specific Performance................................ 8 -------------------- 8.4 Additional Assurances............................... 8 --------------------- 8.5 Seller's Employees.................................. 8 ------------------ 9. PRIOR TO CLOSING............................................. 9 ---------------- 9.1 Access.............................................. 9 ------ 9.2 Conduct of Business Pending Closing................. 9 ----------------------------------- 9.3 Required Consents and Approvals.................... 10 ------------------------------- 10. CLOSING CONDITIONS; RIGHT TO TERMINATE...................... 10 -------------------------------------- 10.1 Conditions to Buyer's Obligations.................. 10 --------------------------------- 10.2 Conditions to Seller's Obligations................. 11 ---------------------------------- 10.3 Right To Terminate................................. 11 ------------------ 10.4 Post-Closing Obligations.......................... 11 ------------------------ 11. MISCELLANEOUS............................................... 12 ------------- 11.1 Notices............................................ 12 ------- 11.2 Time............................................... 12 ---- 11.3 Law Governing...................................... 12 ------------- 11.4 Confidentiality.................................... 12 --------------- 11.5 Publicity.......................................... 13 --------- 11.6 Expenses and Attorney Fees......................... 13 -------------------------- 11.7 Entire Agreement; Amendments; Waivers.............. 13 ------------------------------------- 11.8 Headings........................................... 13 -------- 11.9 Incorporation of Exhibits and Schedules............ 13 --------------------------------------- 11.10 Binding Effect..................................... 13 -------------- 11.11 Parties in Interest................................ 13 ------------------- 11.12 Counterparts....................................... 13 ------------ EXHIBITS -------- Exhibit Assets Exhibit Obligations Exhibit Lease Agreement Exhibit Furniture, Fixtures & Equipment Exhibit Letter of Intent ASSET PURCHASE AGREEMENT ------------------------ THIS AGREEMENT, made and entered into the 4th day of February 1997, by and between FIRST MORTGAGE INVESTMENT CO., a Missouri corporation (hereinafter referred to as "Buyer"), and AFI MORTGAGE CORP., a Nebraska corporation, (hereinafter referred to as "Seller"). Recitals -------- WHEREAS, Seller is engaged in the business of soliciting, funding, and selling residential mortgage loans (the "Business"). WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase from Seller, on the terms and conditions set forth below, the Mortgage Pipeline Loans (hereinafter referred to as the "Assets") of Seller, as defined in Section hereof. WHEREAS, Buyer desires to lease from Seller approximately Ten Thousand (10,000) square feet of space in the building owned by Seller, as more specifically described in Exhibit and certain office furniture and equipment, as described in Exhibit , all on the terms, considerations and conditions set forth in the Lease Agreement, Exhibit , attached hereto and incorporated herein by reference. NOW, THEREFORE, in consideration of the foregoing recitals and the covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows: Agreement --------- 1. SALE AND PURCHASE OF ASSETS --------------------------- Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, Seller hereby agrees to sell, transfer, convey, assign, and deliver the Assets to Buyer or his assignee, and Buyer hereby agrees to purchase and acquire the Assets from Seller. As used in this Agreement, the term "Assets" shall mean Seller's mortgage loans and Seller's remote site contracts as more specifically described in Exhibit hereto; provided, however the Assets shall not include any contract not expressly being assumed by Buyer. Purchase Price. The purchase price for all of the Assets shall be fifty percent (50%) of the Net Profit of the Pipeline (the "Purchase Price"). The "Pipeline" shall mean all loans for which an application has been submitted as of the close of business on the day before Closing. The Purchase Price shall be paid as follows: 1 1.2.1 A down payment on the Date of Closing equal to fifty percent (50%) of the Net Profit on the "locked" Pipeline. "Locked" Pipeline shall include those loans where the resale price of the Loan is committed to be paid by an independent party; and 1.2.2 Fifty percent (50%) of the Net Profit on the "unlocked" Pipeline. "Unlocked" Pipeline shall include all loans which are not "locked" as defined above, which shall be paid on an installment basis as described in Section hereof. "Net Profit" shall mean, for purposes of this Agreement, (i) the amount loaned to a customer of the Business plus all fees and points collected less (ii) the resale proceeds of the loan plus commissions and overages. Neither Buyer nor any assignee of Buyer's interest hereunder is assuming nor shall either be liable for any liabilities of Seller, including but not limited to: 1.2.3 any national, state, or local taxes, 1.2.4 any liability arising from or claimed to have arisen from the operation of the Business prior to the Closing Date, as such term is defined in Section (the "Closing Date"), 1.2.5 any existing, pending, or threatened litigation against Seller, or 1.2.6 any existing or future obligation or liability of Seller to any of its present or former employees for severance pay, back pay, benefits under any retirement, health insurance, savings, or other form of employee benefit plan, or otherwise, all of which obligations and liabilities Seller shall retain. Seller shall pay all sales, use, stamp, and other transfer and excise taxes of any type arising out of the transaction contemplated hereunder, whether imposed on Seller or Buyer. 1.3 Installment Payments on "Unlocked" Pipeline. Buyer shall pay to Seller its fifty percent (50%) of the Net Profit on any "unlocked" loans, which have been closed and funded during each calendar month following the Closing, within three (3) business days of the end of each calendar month. Such payment shall be made "plus or minus" any necessary adjustments, which shall include, but not be limited to, repricing or loan buy back. The installment payments shall continue until there are no loans left in the Pipeline, as defined in Section above. In the event the Net Profit for a given calendar month results in a loss which is the result of Seller's actions, Seller shall repay the Buyer one hundred percent (100%) of such loss amount, or if not repaid within five (5) business days of the date of demand, the Buyer shall have an express right of set-off against any other amounts Buyer may owe Seller under this or any other arrangement between the parties. 2 1.4 Assumption of Certain Obligations. Buyer shall have the right, but not the obligation' to assume any or all of Seller's obligations described hereto on Exhibit , by delivering to Seller written notice of such election to assume any or all of such liabilities on or prior to the Closing Date. Failure by Buyer to give such written notice to Seller shall be deemed an election by Buyer not to assume any of such liabilities. 2. LEASE OF PREMISES. ------------------ 2.1 Lease Agreement. Buyer shall execute the Lease Agreement, Exhibit , attached hereto and incorporated herein by reference. 3. LEASE OF FURNITURE, FIXTURES AND EQUIPMENT ------------------------------------------ 3.1 Lease of FF&E. Buyer shall lease from Seller the furniture, fixtures and equipment, located on the Leased Premises, as defined in the Lease Agreement, and as more specifically described in Exhibit , attached hereto and incorporated herein by reference, for a term of three (3) months beginning February 3, 1997. The parties may extend the term of the lease for an additional thirty (30) day period upon the expiration of the initial term of the lease. In addition, either party may terminate this lease at any time by giving the other party thirty (30) days prior written notice. Buyer shall pay Seller, as rent, an amount equal to Fifteen Thousand Dollars ($15,000.00) per month. Each monthly payment set forth hereinabove shall be due and payable in advance on the third (3rd) day of each month with the first payment due on February 3, 1997, and on the third (3rd) day of each and every month thereafter. All rent provided for in this Section shall be paid or mailed to AFI Mortgage Corp., 5425 Martindale Street, Shawnee Mission, Kansas 66218, or to such other payee or address as Seller may designate in writing to Buyer. In the event the Seller fails to make any payments due pursuant to the underlying leases, as more specifically described in Exhibit hereto, and Buyer makes such payment on behalf of Seller, Buyer shall have an express right of set-off against any other amounts Buyer may owe Seller under this or any other arrangement between the parties. 3.2 Purchase Option. The Seller grants to the Buyer the option to purchase the furniture, fixtures and equipment for an amount equal to the outstanding lease or at the appraised value, whichever is greater, at any time after ninety (90) days from the date of this Agreement. 4. PURCHASE OF PRODUCTION PLATFORM ------------------------------- 4.1 Production Platform. In the event the transaction contemplated by the Letter of Intent, as shown in Exhibit , attached hereto and incorporated herein by reference, is not consummated, the Buyer agrees to purchase the Seller's Production Platform. For purposes of this 3 Agreement, the "Production Platform" shall mean all loans originated after February 1, 1997 which were sourced in one of the "remote sites" identified in Exhibit hereto and acquired by the Buyer under this Agreement. The purchase price for the Production Platform shall be one-eighth of a percent (.125%) of the gross principal amount of all loans in the Production Platform closed during the twelve month period beginning February 1, 1997 and ending February 1, 1998, excluding those loans already purchased by Buyer pursuant to this Agreement. Such amount is to be computed on a monthly basis. In no event shall the total purchase price exceed One Hundred Twenty-Five Thousand and No/100 Dollars ($125,000.00). The Buyer shall apply any amount of the purchase price due under this Section on a monthly basis against any amount Seller may owe Buyer pursuant to the Second Mortgage dated March, 1996 between FMIC, AFI and Advanced Financial, Inc. 5. INDEMNIFICATION --------------- 5.1 Indemnification. In the event either party breaches (or in the event any third party alleges facts that, if true, would mean the party had breached) (the "Indemnifying Party") any of its representations, warranties, and covenants contained in this Agreement, and, if there is an applicable survival period pursuant to Section hereof, provided that the party suffering any Adverse Consequences, the "Indemnified Party," makes a written claim for indemnification against the Indemnifying Party, the Indemnifying Party agrees to indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the party may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, in the nature of, or caused by misrepresentation or breach (or alleged misrepresentation or breach). "Adverse Consequences" shall mean any actions, suites, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. 6. CLOSING ------- 6.1 Date, Time, and Place of Closing. The closing shall take place at the offices of Shughart Thomson & Kilroy, P.C., Twelve Wyandotte Plaza, 120 West 12th Street, Kansas City, Missouri on such date or time or at such other place as Buyer and Seller may agree in writing (the "Closing Date"). 6.2 Deliveries by Seller. At the closing, Seller shall deliver to Buyer: 6.2.1 Seller shall transfer to Buyer all current files, books, records, accounts receivable records, lists, catalogs, sales promotion literature, customer and investor lists, employee files, contract files and other business information and documents used by Seller in connection with the Assets. 4 6.2.2 Seller shall transfer to Buyer any deposit funds held by Seller for appraisal fees, credit reports or commitment fees collected in connection with any of the Assets purchased by and assigned to Buyer. 6.2.3 Seller shall deliver duly executed (and acknowledged where appropriate) assignments, bills of sale, and other appropriate instruments of transfer as are, in the opinion of counsel for Buyer, effective to vest in Buyer good and indefeasible title to all of the Assets. 6.2.4 The opinion of Erickson & Sederstrom, P.C., counsel to Seller, dated the Closing Date, in form and substance reasonably satisfactory to Buyer, to the effect that: (a) Seller is a corporation duly organized and validly existing in good standing under the laws of Nebraska, and is duly qualified and in good standing to transact business as a foreign corporation in all jurisdictions where such qualification is required by reason of the transaction of business in such jurisdiction by Seller or the ownership of property in such jurisdiction by Seller, except where the failure to so qualify would not, individually or in the aggregate, have a material adverse effect on Seller or on the conduct of the Business; (b) Seller has duly executed this Agreement and Seller is bound by the terms of this Agreement in accordance with its terms except as the same may be limited by any applicable bankruptcy, insolvency, reorganization, or other laws relating to or affecting creditors' rights generally and general principles of equity; (c) all necessary corporate actions have been taken to duly authorize the execution, delivery, and performance of this Agreement by Seller; (d) no approval of any court, governmental agency (other than those described in such opinion which have been obtained and are then in effect) or, to the knowledge of such counsel, other person, firm, or other entity is required in order that this Agreement may be lawfully and validly consummated; (e) neither the execution and delivery of this Agreement nor the performance hereof in accordance with its terms is restricted by or in violation of the terms of Seller's articles or certificate of incorporation, bylaws, or other charter documents or of any contract, mortgage, indenture, order, decree, or other contractual obligation of Seller, as regarding consent to transfer or to which Seller or any of the Assets may be subject; and (f) the instruments of transfer delivered to Buyer by the Seller are sufficient in form to convey to Buyer good and merchantable title to all of the Assets conveyed thereby. 6.2.5 A detailed list and description of all furniture, fixtures and equipment, Exhibit , to be leased by Buyer pursuant to this Agreement; and 5 6.2.6 All termination statements and other form of lien releases, duly executed and in form and substance satisfactory to Buyer, required to terminate and release all security interests and liens on the Assets. 6.3 Deliveries by Buyer. At the Closing, Buyer shall deliver to seller: 6.3.1 A check payable to Seller in the amount of the Purchase Price, net of any amounts assumed by Buyer pursuant to Section . 6.3.2 Lease Agreement, substantially in the form of Exhibit hereto. 7. REPRESENTATIONS, WARRANTIES, AND COVENANTS 7.1 Representations, Warranties, and Covenants of Seller. Seller hereby represents, warrants, and agrees to and with Buyer as follows: 7.1.1 Organization, Standing and Corporate Power. Seller is a corporation, duly organized, validly existing and in good standing under the laws of its state of incorporation, with all requisite corporate power and authority to carry on its business as now conducted, to own the Assets, and to execute, deliver and perform this Agreement. 7.1.2 Corporate Authorization. The execution, delivery and performance of this Agreement and the consummation of the transaction contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Seller, and this Agreement is a valid and legally binding obligation of Seller, enforceable in accordance with its terms. 7.1.3 Conflicting Agreements; No Liens. Neither the execution and delivery of this Agreement by Seller nor the fulfillment of or compliance with the terms or provisions hereof will result in a breach of the terms, conditions or provisions of or constitute (whether or not with the giving of notice or lapse of time, or both) a default under or result in a violation of the charter or by-laws of Seller or any agreement, contract, instrument, order, judgment or decree to which Seller is a party or by which it is bound, or violate any provision of any applicable law, statute, rule or regulations or any order, decree, writ or injunction of any court of governmental body, or result in the creation of any charge, lien, restriction, security interest or other encumbrance of any nature whatsoever on any of the Assets, or impose a condition on or render void or ineffective the sale or assignment to Buyer of any of the Assets. On the Closing Date, none of the Assets will be subject to any lien, charge, mortgage, security interest, or encumbrance. 7.1.4 Consents. No consent form, or other approval of, any court, governmental body or any other person is necessary in connection with the execution, delivery or performance of this Agreement by Seller, other than consents and approvals which have already been obtained, and 6 other than the approval of the Bankruptcy Court, and the consummation of the transactions contemplated by this Agreement will not require the approval of any entity or person in order to prevent the termination of any right, privilege, license or agreement of Seller which is necessary for the conduct of the Seller's Business. 7.1.5 Title to Assets; Lack of Encumbrances. Seller has and will deliver to Buyer good and marketable title to (or, in the case of leased property, valid leasehold interests in), all of the Assets, real and personal, tangible and intangible, free and clear of all liens, mortgages and other encumbrances and claims of any kind or character, except, in the case of the leasehold, the rights of the Lessor. 7.1.6 Business Expenses. Seller shall pay all expenses attributable to the Business through the Closing Date, including, but not limited to, payment of salaries and loan officers' commissions, health insurance, social security taxes and other such expenses. 7.1.7 Delivery of Documents. True copies of all written instruments listed on the Exhibits hereto have been made available to Buyer. Seller also has made and will continue to make available to Buyer all books and records (if any) retained by Seller and relating to the Business. 7.1.8 Disclosure. None of the representations or warranties in this Agreement, in any document, written statement, certificate or schedule furnished or to be furnished to Buyer pursuant to this Agreement or in connection with the transactions contemplated hereby contains or will contain any untrue statement of any material fact, or omits or will omit to state any material fact necessary to make the statement of facts contained therein not misleading. 7.1.9 No Changes in Assets. Seller has not (a) sold, leased, mortgaged, pledged, hypothecated, transferred, or disposed of any of the Assets; or (b) suffered any material adverse change in the Assets. 7.1.10 Title and Condition of Assets. Seller has good and merchantable title to all of the Assets. 7.2 Representations, Warranties, and Covenants of Buyer. Buyer represents, warrants, and agrees to and with Seller as follows: 7.2.1 Organization, Standing and Corporate Power. Buyer is a corporation, duly organized, validly existing and in good standing under the laws of the State of Missouri, with all requisite corporate power and authority to execute, deliver and perform this Agreement. 7 7.2.2 Corporate Authorization. The execution, delivery and performance of this Agreement and the consummation of the transaction contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement is a valid and legally binding obligation of Buyer, enforceable in accordance with its terms. 7.2.3 Disclosure. None of the representations or warranties in this Agreement, in any document, written statement, certificate or schedule furnished or to be furnished to Seller pursuant to this Agreement or in connection with the transactions contemplated hereby contains or will contain any untrue statement of any material fact, or omits or will omit to state any material fact necessary to make the statement of facts contained therein not misleading. 8. ADDITIONAL AGREEMENTS OF THE PARTIES ------------------------------------ 8.1 Survival. The representations and warranties of the parties herein and all agreements assumed or undertaken pursuant to this Agreement shall survive the closing, any investigation by or on behalf of any party to this Agreement, and the delivery of transfer documents contemplated hereby; provided, however, such representations and warranties shall expire and be of no further force and effect following a period commencing on the Closing Date and ending five (5) years from the Closing Date. 8.2 Payment of Costs. Buyer and Seller shall share on a 50/50 basis all costs and expenses incurred or to be incurred in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement. 8.3 Specific Performance. Seller acknowledges that the Assets to be sold and delivered to Buyer pursuant to this Agreement are unique and that Buyer may have no adequate remedy at law if any party shall fail to perform any of its obligations under this Agreement. ln such event, Buyer shall have the right, in addition to any other rights and remedies it may have at law or in equity, to specific performance of this Agreement. 8.4 Additional Assurances. Each party hereto agrees to promptly execute, acknowledge, and deliver to any other party hereto, on or after the Closing Date, such additional deeds, bills of sale, assignments, documents, certificates, instruments, or agreements and to promptly take such other action as the party requesting the same may reasonably request in order to more fully effectuate and consummate the transactions contemplated by this Agreement and the transfer of and payment for the Assets. 8.5 Seller's Employees. Buyer does not promise to employ any of the current employees of Seller. Seller shall preserve and make available to Buyer the personnel files on each of Seller's employees who are employed by Buyer. 8 9. PRIOR TO CLOSING ---------------- 9.1 Access. During the period from the date of this Agreement to the Closing Date, Seller shall cause Buyer to be given free access to the Assets and to Seller's offices and other premises, records, files, books of account, contracts, commitments, insurance policies, surety bonds, leases, and copies of tax returns of Seller for the purpose of conducting an investigation of the Assets through Buyer's employees or agents, independent public accountants, outside business consultants, and attorneys; provided, however, that such investigation shall be conducted in a manner that does not unreasonably interfere with Seller's normal operations and employee relationships. Seller shall cause its personnel to assist Buyer in making such investigation and shall cause its counsel, accountants, employees, and other representatives to be available to Buyer for such purposes. During such investigation, Buyer shall have the right to make copies of such records, files, and other materials as it may deem advisable. If the transactions contemplated by this Agreement are not consummated as provided herein, Buyer and its representatives shall treat all information obtained in such investigation and not otherwise known to Buyer, or already in the public domain, as confidential shall return to Seller all copies made by Buyer and its representatives of material belonging to Seller and shall not use any such information for any purpose whatsoever. 9.2 Conduct of Business Pending Closing. During the period from the date hereof to the Closing Date, Seller shall conduct its Business operations with respect to the Assets according to its ordinary and usual course of business and shall maintain its records and books of account in a manner that fairly reflects its financial transactions with respect to the Assets. Seller agrees that during such period it shall not, in its operation of the Assets, without the written consent of Buyer: 9.2.1 Pay or incur any obligation or liability, absolute or contingent, other than current liabilities incurred in the ordinary and usual course of business; 9.2.2 Mortgage, pledge, or, other than in the ordinary and usual course of the Business, subject to lien or other encumbrance any of the Assets; 9.2.3 Except in the ordinary and usual course of the Business, sell, or transfer any of its properties or assets or cancel, release, or assign any indebtedness owed to it or any claims held by it; 9.2.4 Make any material change or decrease in its Business insurance, advertising, or employment commitments or arrangements, or enter into or amend (a) Any contract for the purchase of supplies or inventory other than such contracts incurred in the ordinary and usual course of business; (b) Any employment, management, or consultation agreement; 9 (c) Any lease, license, royalty, or union agreement; or (d) Any other agreement not in the ordinary and usual course of business; or 9.2.5 Enter into any transaction or agreement or take any other action which would, if effected prior to the Closing Date, constitute a breach of any of the representations, warranties, or covenants contained in this Agreement. 9.3 Required Consents and Approvals. The Seller shall obtain all necessary consents and approvals in order to enable Seller to assign and transfer to Buyer the Assets. 10. CLOSING CONDITIONS; RIGHT TO TERMINATE -------------------------------------- 10.1 Conditions to Buyer's Obligations. Each and every obligation of Buyer to Seller hereunder to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, occurrence of which may, except for approvals and consents required by laws, at the option of Buyer, be waived: 10.1.1 The representations and warranties of Seller contained in this Agreement shall all be true in all material respects on or as of the Closing Date, with the same effect as though such representations and warranties had been made or given on and as of the Closing Date; 10.1.2 The Assets, taken as a whole, shall not have been materially adversely affected in any way as a result of fire, explosion, earthquake, disaster, accident, any action of any governmental authority, flood, storms, embargo, riot, civil disturbance, uprising activity of armed forces, or acts of God or public enemies; 10.1.3 Seller shall have performed and complied in all material respects with all of its obligations under this Agreement which are to be performed or complied with by it prior to or on the Closing Date; 10.1.4 There shall not be pending or threatened any litigation challenging the lawfulness of the transactions contemplated hereby or seeking to enjoin or restrain the consummation of this Agreement; 10.1.5 Seller shall have obtained (and Seller hereby agrees to exert reasonable efforts to obtain) the valid consent of all parties whose consent is required to the transfer and assumption of any contracts, leases or other Assets where the failure to obtain such consent would have a material adverse effect on the intended business of Buyer or its assignee; 10.1.6 Seller shall have delivered all documents required to be delivered by it to Buyer at the Closing; 10 10.1.7 Buyer and its counsel shall be reasonably satisfied that all of the foregoing conditions have occurred and are continuing; and 10.2 Conditions to Seller's Obligations. Each and every obligation of Seller to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, occurrence of which may, except for approvals and consents required by law, at the option of Seller, be waived: 10.2.1 The representations and warranties of Buyer contained in this Agreement shall all be true in all material respects on or as of the Closing Date, with the same effect as though such representations and warranties had been made or given on and as of the Closing Date; 10.2.2 Buyer shall have performed and complied with all of its obligations to Seller which are to be performed or complied with by it prior to or on the Closing Date; 10.2.3 There shall not be pending or threatened any litigation challenging the lawfulness of the transactions contemplated hereby or seeking to enjoin or restrain the consummation of this Agreement; 10.2.4 Buyer shall have delivered all documents required to be delivered by it to Seller pursuant to this Agreement at the Closing; and 10.3 Right To Terminate. If each of the conditions set forth above shall not have occurred and be continuing (for any reason other than default by a party) and if the transactions contemplated by this Agreement shall not have been consummated on or before the Closing Date, either Buyer or Seller shall have the right to terminate this Agreement at any time thereafter without liability to any other party hereto. 10.4 Post-Closing Obligations. At all times following the Closing Time, Seller shall promptly deliver to Buyer any payments received by Seller in the form so received on account or with respect to any of the receivables, accounts, or other assets being purchased by Buyer hereunder, with such endorsements or other signatures as may be reasonably requested by Buyer in order for Buyer to promptly realize payment of such items. In addition, Seller agrees to pay to Buyer for providing Post-Closing Services on loans that have been closed by Seller, an amount equal to Four Thousand and No/100 Dollars ($4,000.00) which shall be netted against the final payment to Buyer of the outstanding Mortgage Pipeline Loans. For purposes of this Section, "Post-Closing Services" shall include all the required procedures to deliver loans to third party investors until the loan is funded by such investor and all procedures required to complete all quality control procedures necessary to have a completed loan as required by investor guidelines. 11 11. MISCELLANEOUS ------------- 11.1 Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the fifty (5th) day after mailing if mailed to the party to whom notice is to be given by first class mail, or upon delivery if by registered mail, return receipt requested, postage prepaid and properly addressed as follows: If to Seller: AFI Mortgage Corp. 5425 Martindale Street Shawnee Mission, Kansas 66218 With copy to: Erickson & Sederstrom, P.C. Regency Westpointe 10330 Regency Parkway Drive Suite 100 Omaha, Nebraska 68114-3761 Attn: Mark Peterson If to Buyer: First Mortgage Investment Co. 5225 West 75th Street Prairie Village, Kansas 66208 With copy to: Shughart Thomson & Kilroy, P.C. Twelve Wyandotte Plaza 120 West 12th Street Suite 1600 Kansas City, Missouri 64105 Attn: Steven H. Goodman Any party may change the address to which notices and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 11.2 Time. Time is of the essence of this Agreement. 11.3 Law Governing. This Agreement shall be construed in accordance with and governed by the laws of the State of Kansas. 11.4 Confidentiality. Except as may be required to comply with applicable law and regulations or to obtain required regulatory approvals to consummate this transaction, the parties hereto shall each use their best efforts to keep confidential any and all information relating to this transaction and to one another and will instruct their officers, employees and other representatives 12 having access to such information of such obligations of confidentiality. In the event the transactions contemplated herein are not consummated, each of the parties hereto shall return all documents, including any copies thereof, to the party which provided the same. 11.5 Publicity. Each party hereto will advise, confer with and obtain the prior written consent of the other, prior to the issuance of any reports, statements or releases to the media or otherwise pertaining to this transaction or the implementation thereof. 11.6 Expenses and Attorney Fees. Except to the extent otherwise provided in this Agreement, each party shall be responsible for all expenses and attorney's fees incurred by it in performing its obligations under this Agreement. In the event of any suit, action or proceeding brought by any party for the breach of any term hereof, or to enforce any provisions hereof, the prevailing party shall be entitled to reasonable attorney's fees in addition to court costs and other expenses of litigation as allowed by law. 11.7 Entire Agreement; Amendments; Waivers. This Agreement (including the documents referred to herein) constitutes the entire Agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the parties to be bound hereby. No waiver of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 11.8 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 11.9 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 11.10 Binding Effect. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective transferees, successors and assigns. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other party. 1.11 Parties in Interest. Notwithstanding any other provision of this Agreement, this Agreement shall not create any rights or benefits on behalf of any employee, creditor, third party or other person, and this Agreement shall be effective only as to the parties hereto, their successors and assigns. 11.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instruments. 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on their behalf on the date first above written. AFI MORTGAGE CORP., as Seller ATTEST: By: --------------------------------------- - ------------------------- Name: Secretary ------------------------------------ Title: ------------------------------------ FIRST MORTGAGE INVESTMENT CO., as Buyer ATTEST: By: -------------------------------------- - ------------------------- Name: Secretary ------------------------------------ Title: ----------------------------------- 14 EXHIBIT 1.1 ASSETS 1. All mortgage pipeline loans. 2. All rights to the remote site contracts, including all information necessary to operate the remote site computer network. 15 EXHIBIT 1.4 OBLIGATIONS None. 16 EXHIBIT 2.1 LEASE AGREEMENT 17 EXHIBIT 3.1 FURNITURE, FIXTURES & EQUIPMENT 18 EXHIBIT 4.1 LETTER OF INTENT 19 EX-27 3
5 9-MOS MAR-31-1996 DEC-31-1996 0 0 897,309 0 0 0 1,508,753 0 13,264,873 0 0 0 1,860 6,515 93,949 13,264,873 0 5,158,321 0 6,036,274 79,664 0 675,179 (1,632,796) 441,884 (2,074,680) 0 0 0 (2,074,680) (.45) (.45)
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