-----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, DqicPfTwQd4GNfH2KHRiS6mtX9r04Ktwo5q8K5TTSj9/Ho5qa0y+PiYrklReeuyy d9tdvilxTbSDQp+tHwyzhA== 0001108890-03-000476.txt : 20031124 0001108890-03-000476.hdr.sgml : 20031124 20031124132052 ACCESSION NUMBER: 0001108890-03-000476 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20031124 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11838 FILM NUMBER: 031020166 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 10KSB 1 advancedfinl10ksb3312002.txt PERIOD ENDED 03-31-02 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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, 2002 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 incorporation or organization) Identification No.) 5425 Martindale, Shawnee, KS 66218 ---------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 535-1072 -------------- Securities registered under Section 12(g) of the Act: Title of Each Class Common Stock $.001 par value 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, 2002 were $1,152,171 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 March 31, 2002 and as of the date of filing this Annual Report was $ 0. State the number of shares outstanding of each of the issuer's classes of common equity as of March 31, 2002: 5,866,137. 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 X No ----- ----- Transactional Small Business Disclosure Format Yes___ No _X__ TABLE OF CONTENTS ----------------- ITEM PAGE Part I - ------ Item 1 - Description of Business 3 Item 2 - Description of Property 10 Item 3 - Legal Proceedings 11 Item 4 - Submission of Matters to a Vote of Security Holders 11 Part II - ------- Item 5 - Market for Common Equity and Related Stockholder Matters 12 Item 6 - Management's Discussion and Analysis or Plan of Operation 12 Item 7 - Financial Statements 17 Part III - -------- Item 9 - Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) Of The Exchange Act 36 Item 10 - Executive Compensation 37 Item 11 - Security Ownership of Certain Beneficial Owners and Management 38 Item 12 - Certain Relationships and Related Transactions 39 Part IV - ------- Item 13 - Exhibits and Reports 40 Signatures 43 - ---------- 2 PART I ------ ITEM 1. DESCRIPTION OF BUSINESS History of the Company and Subsidiaries - --------------------------------------- Advanced Financial, Inc. (the "Company" or "AFI") is a Delaware corporation formed in September 1986. 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. ("AFIM"). From the time it was acquired by the Company until operations were suspended in April 1997, AFIM focused on the origination, refinancing and servicing of 1 to 4 family residential mortgages. On February 3, 1997, AFIM entered into an agreement to sell its remaining loan production. In April 1997, the Company and its wholly-owned subsidiary, AFIM, decided that it would be in the best interest of the Company to temporarily suspend its active mortgage operations. On November 7, 1997, AFIM filed for relief under Chapter 11 of the United States 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 confirming the First Amended Joint Plan of Reorganization dated January 29, 1998 of the Company and AFIM ("Plan of Reorganization). Pursuant to the Plan of Reorganization, on February 19, 1999 (the "Effective Date") the Company completed a recapitalization. On the Effective Date, the authorized common stock was decreased from 25,000,000 shares to 10,000,000 shares of $0.001 par value per share and the authorized preferred stock was decreased from 10,000,000 shares to 1,000,000 shares of $0.005 par value per share. All 5,836,476 shares of common stock and all 363,000 shares of preferred stock outstanding immediately prior to the Effective Date were canceled and 3,000,000 shares of new common stock were issued to shareholders of record immediately prior to the Effective Date and to creditors. In addition, warrants to purchase 900,000 shares of common stock, at a warrant exercise price of $1.25 per share, were issued to creditors. The warrants which were callable by the Company at 130% of the strike price expired on March 31, 2002. Of the 3,000,000 new shares of common stock issued in the recapitalization, 300,000 shares were issued to holders of record of the preferred and common stock immediately prior to the Effective Date. Such shareholders received .0546 share of a new common stock for each canceled share of old common stock and old preferred stock. The Company also issued 900,000 shares of new common stock to various creditors of the Company. Argus Investment Group, Inc. ("ARGUS ") formerly known as First Mortgage Investment Co. ("FMIC"), a creditor with secured claims against the Company, received 1,800,000 shares of the new common stock and an option to acquire an additional 3,000,000 shares at $.50 per share. In addition, on the Effective Date, ARGUS purchased the land and building owned by AFIM located at 5425 Martindale, Shawnee, Kansas, for a purchase price of $1,030,000. AFIM used the net proceeds to satisfy the claims of creditors in accordance with the Plan of Reorganization. (See ITEM 2. DESCRIPTION OF PROPERTY) In November 1998, the Company determined that business opportunity existed in the purchasing of delinquent consumer receivables. Effective February 19, 1999, the Company acquired 100% of the outstanding stock of Cannon Financial Company ("CFC"). CFC provides accounts receivable management services to various health 3 care providers, financial institutions, and retail firms on a contingency basis. These services include delinquent debt recovery, management of litigation and skip tracing services to locate debtors and assets. CFC was formed in July 1998 to acquire the collection operations from a firm located in Kansas City, MO. The operations acquired by CFC had been in existence for more than 30 years. CFC is using the existing collection operations as a foundation to acquire charged off credit card debt and collect such debt for its own account. On November 15, 1999, pursuant to an Asset Purchase Agreement between AIH Services, Inc. ("AIH") and CFC, CFC acquired certain assets for use in the operation and conduct of the businesses of AIH known as AIH Receivable Management Services and AIH Early Recovery Services. AIH is engaged in the business of collecting non-performing receivables on behalf of third parties. The funds used to purchase the AIH assets were loaned to CFC from the Registrant's largest shareholder, ARGUS. ARGUS is controlled by Philip J. Holtgraves a director of the Registrant. The assets acquired included furniture, fixtures, equipment, client lists, the FACS system trade names and telephone numbers. CFC and AIH consolidated its operations continuing to use these assets in conducting its operations. CFC later changed its name to AIH Receivable Management Services, Inc. On December 30, 1999, ARGUS converted the balance of its note receivable for $875,000.00 and $38,202.73 of accrued interest to 1,826,405 shares of common stock of the Company by the partial exercise of its option to acquire 3,000,000 shares of common stock received from the Company under provisions of the Plan of Reorganization.. The conversion was equivalent to the option exercise price of $.50 per share. The balance of the option to acquire 1,173,595 shares of the Company's common stock expired on February 19, 2001. During the fiscal year ended March 31, 2001, ARGUS exchanged certain liabilities for 539,732 shares of common stock of the Company. Nature of the Company's Business - ----------------------- -------- Delinquent Debt Recovery - ------------------------ The majority of the Company's revenue is currently derived from the collection of delinquent accounts receivable for its clients. The Company provides its services to clients that include various health care providers, financial institutions, and retail firms. All of the Company's clients are based in the states of Kansas and Missouri with the majority located in the Kansas City metro area. The Company earns a 25%-50% contingency fee depending on the size, age, and the Company's assessment of the collectability of the accounts placed for collection. Litigation Management - --------------------- The Company realizes that to provide effective and thorough receivable management services to its clients, it needs to establish other services and systems to support its core operations. At times the Company will recommend to its clients the need to take legal action to increase the probability of recovery of an account receivable. The Company makes this recommendation on accounts with verified assets and significant balances. The Company has in place a department to manage all aspects of the litigation. The Company works closely with a Kansas City law firm in preparing and filing legal actions on collection accounts and enforcement of judgments. Once a judgment is entered, the Company will pursue the collection of the judgment by filing liens on the debtor's assets and the garnishment of wages as applicable. Litigation management services are available to all of the Company's clients. 4 Consumer Receivables - -------------------- The Company acquires portfolios of charged off consumer debt and then collects on it for its own account. The credit card industry has experienced significant growth. During the last ten-year period, this growth rate has been approximately 26% annually with global credit card charge volume growing to $2 trillion. Even though the US market has been saturated, the industry has significant growth prospects in the long term given the increased consumer utilization of credit cards to pay routine bills as well as the opportunities internationally especially in Asia, Europe, and Latin America. As a result of continued growth prospects for the credit card industry, the volume of charged off credit card debt should continue to escalate. There was an estimated $560 billion in outstanding credit card balances in 1997, up from $238 billion in 1990. According to industry sources, credit card balances will rise to over $780 billion in 2000. Delinquencies, while holding steady as a percent of outstanding balances, are rising on an absolute basis. The level of charged off credit card debt in the United States has generated a new "high growth" industry, that being the collection of such debt. Charged off credit cards, those cards with balances 180 or more days without a payment are expected to increase from $31 billion in 1997 to $39 billion in 2000 and $52 billion in 2005. The collection business is fragmented with about 6,300 companies. Most of these companies are very small. The Small Business Administration has estimated that credit reporting and collections will be the fourth fastest growing small business dominated service industry in the Nation by 2005. In the early nineties, banks and financial institutions, primarily credit card issuers, changed their approach in the management of charged off consumer receivables. These banks and financial institutions began to sell charged off consumer receivable portfolios to delinquent debt recovery firms and investment groups in lieu of third party replacements. The practice has gained acceptance from the major credit card issuers, such that billions of dollars in charged off credit card debt has been sold to debt recovery firms. The advantage of selling charged off debt over maintaining in house recovery departments and collection agencies is that such firms are not subject to some of the business and credit related constraints of banks and collection agencies. CFC is in position to offer a discount to debtors because it acquired the account at a significant discount. If banks offered significant discounts it could set a bad precedence if late paying debtors were rewarded with a discount not available to those whose accounts are current. Collection agencies generally do not offer similar discounts. CFC has the flexibility to tailor repayment plans to realistically fit the debtor's budget. Agency collectors operate within a limited time period in which to work an account, generally resulting in the implementation of unrealistic and unproductive payment plans. Portfolio Acquisitions - ---------------------- There is an active secondary market for the purchase of portfolios of charged off credit card debt. CFC purchases charged off credit card debt at significant discounts to face value. The age of charged off accounts range from 180 days to 5 years or more. CFC's goal is to target portfolios that are 18 to 30 months past due. In many instances, the portfolios have been sent out once or twice to collection agencies. CFC believes that by the time it acquires the account, the event that may have caused the debtor to default, (a divorce, loss of job, or medical emergency etc.), may be resolved and the debtor may be recovering financially. The Company feels it can continue to buy this type of debt for 5 approximately $.04 to $.06 on the dollar. Typically, the market price for "fresher", or recently charged off debt is approximately $.08 to $.10 on the dollar. CFC has purchased portfolios with principal balances between $167,000 and $9,275,000 with accounts in most states, however, the majority of the current accounts are in the states of Kansas and Missouri. Portfolios are sold in the secondary market either through a bidding, negotiated, or contractual ("forward flow") arrangement. To date all of the Company's purchases have been negotiated sales. The Company is pursuing additional financing to pursue forward flow arrangements. Such financing would allow the Company to meet the financial commitments required in a forward flow agreement. Collection Process - ------------------ Once the Company purchases a portfolio, the accounts are entered into its Flexible Automated Collection System (FACS). The portfolio is then screened for deceased and bankrupt customers. If any are found they are returned to the seller for replacement or a refund. The next step is to verify addresses. On those accounts with no known addresses, job or phone number, a skip trace is performed. At this point the Company's experienced collection officers work the accounts for collection. The Company's policy is to use a gentler and more pragmatic approach than followed by most traditional collection agencies. Experience suggests that most debtors get into trouble due to life altering changes such as divorce, job loss, or medical emergency, and the Company believes that a positive approach is more productive than a confrontational one. Accounts that do not respond to collection efforts are referred for legal action. The Company works closely with a law firm, which prepares and files the legal actions necessary to obtain a judgment against the debtor. Once a judgment is entered, the Company pursues the judgement. Systems - ------- The Company uses the Flexible Automated Collection System (FACS) produced and maintained by Ontario Systems. The FACS System operates on the Unix local area network. The Company's current systems are capable of handling the Company's anticipated growth for the foreseeable future. Customers - --------- The Company generally has a broad and well-diversified client base that includes hospitals, medical groups, laboratories, convalescent homes, banks, and credit unions. Although, the Company has several customers and the loss of any one of these customers could have a material adverse effect on the Company's operations, no customer comprises more than 10% of the Company's consolidated revenues as of March 31, 2002. Markets and Competition - ----------------------- The Company maintains a full-time sales representative that continuously solicits business by pursuing leads from existing clients, multiple business and commerce directories, and promotional material. The third party accounts receivable management and collection business is highly competitive. The Company concentrates its efforts in the Kansas City metro area and competes with a number of national, local, and regional companies with operations similar to those of the Company. Many of the Company's competitors have far greater resources than the Company and have access to capital markets, which may be unavailable to the Company. 6 The Company believes that the principal competitive factors affecting the Company's receivable management and collection business are increasingly based upon collection performance, price, and services provided. These competitive factors have generally caused a downward adjustment in commission rates. The Company believes that it can compete effectively by offering its clients innovative receivable management solutions by continually enhancing its collection procedures. There is also substantial competition for the acquisition and management of non-performing consumer obligations and account receivables. The Company competes with other purchasers of defaulted consumer receivables and with third-party collection agencies. Although the amount of non-performing and other distressed obligations available for sale are quite large, there are numerous competitors that have more resources than the Company. Regulation - ---------- The Company is regulated by the Fair Debt Collection Practice Act (FDCPA) and the Telephone Consumer Protection Act (TCPA), which are enforced by the Federal Trade Commission (FTC). The Company devotes considerable time and effort, through training of personnel and compliance monitoring, to provide ethical, innovative, high quality accounts receivable management and collection business practices which meet the needs of its clients and complies with the law. The FDCPA and comparable state statutes establish specific guidelines and procedures, which debt collectors must follow to communicate with consumer debtors, including the time, place and manner of such communications. It is the Company's policy to comply with the provisions of the FDCPA and comparable statutes in all of its collection activities, although it may not be specifically subject thereto. If the laws apply to some or all of the Company's collection activities, the Company's failure to comply with such laws could have a materially adverse effect on the Company. Federal and state consumer protection and related laws and regulations extensively regulate the relationship of a customer and a credit card issuer. Because many of the Company's purchased receivables originated through credit card transactions, certain of the Company's operations are affected by such laws and regulations. Significant laws include the FDCPA, the Fair Credit Reporting Act, the Federal Truth-In-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Electronic Funds Transfer Act (and the Federal Reserve Board's regulations which relate to these Acts), as well as comparable statutes in those states in which the credit grantors are located. State laws may also limit the interest rate and fees that a credit card issuer may impose on its customers. Among other things, the laws and regulations applicable to credit card issuers impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at the end of monthly billing cycles and at year-end. Federal law requires credit card issuers to disclose to consumers the interest rate, fees, grace periods and balance calculation methods associated with their credit card accounts, among other things. In addition, customers are entitled under current laws to have payments and credits applied to their credit card accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. In addition, some laws prohibit certain discriminatory practices in connection with the extension of credit. Failure by credit grantors to have complied with applicable statutes, rules and regulations could create claims and rights for the customers that would reduce or eliminate their obligations under their receivables, and this could have a materially adverse effect on the Company. Pursuant to agreements under which the Company purchases receivables, the Company is normally indemnified against losses caused by failure of the credit grantor to have complied with applicable statutes, rules and regulations relating to the receivables before they are sold to the Company. Certain laws, including the laws described above, may limit the Company's ability to collect amounts owing with respect to the receivables regardless of any act or omission on the part of the Company. For example, under the federal Fair Credit Billing Act, a credit card issuer is subject to all claims (other than tort claims) and defenses arising out of certain transactions in which a 7 credit card is used if the obligor has made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction and, except in cases where there is a specified relationship between the person honoring the card and the credit card issuer, the amount of the initial transaction exceeds $50.00 and the place where the initial transaction occurred was in the same state as the customer's billing address or within 100 miles of that address. As a purchaser of defaulted consumer receivables, the Company may purchase receivables subject to legitimate defenses on the part of the customer. The statutes further provide that, in certain cases, customers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were the result of an unauthorized use of the credit card. No assurance can be given that certain of the receivables were not established as a result of unauthorized use of a credit card, and, accordingly, the amount of such receivables could not be collected by the Company. Pursuant to some agreements under which the Company purchased receivables, the Company is indemnified against certain losses with respect to such receivables regardless of any act or omission on the part of the Company or credit grantor. Although the Company believes that it is currently in compliance with applicable statutes and regulations, there can be no assurance that the Company will always be able to maintain such compliance. Additional consumer protection laws may be enacted that would impose requirements on the enforcement of and collection on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted as well as existing consumer protection laws, may adversely affect the ability of the Company to collect the receivables. In addition, the failure of the Company to comply with such requirements could adversely affect the Company's ability to enforce the receivables. The Company's policy is to respond promptly and fully to inquiries from the Federal, State and local regulators in connection with alleged complaints from customers. Employees - --------- As of March 31, 2002, the Company and its subsidiary had 25 full time employees. The Company believes that its relations with its employees are good. Subsequent Events ----------------- On June 7, 2001, the Company executed a Letter of Intent, which Letter of Intent was amended in February 2002, to acquire, through a wholly owned subsidiary, 100% of the Common Stock of a private company in the energy field services ( primarily natural gas) industry. On April 22, 2002, the Company executed a definitive Stock Purchase Agreement, the closing of which was subject to several conditions. As a result of a material adverse change in the operating results for the company to be acquired ( which results were generally consistent with other companies in the same industry), the transaction did not close. The parties, by mutual agreement, continued to leave the definitive agreement open, and $75,000 of escrow deposits in place in anticipation of a turn around in the industry. During the second quarter of fiscal year 2003, with the prices of natural gas at unusual highs along with predicted natural gas production shortfalls for sometime in the future, the anticipated industry turn occurred. The Company intends to pursue the closing of the transaction, however the closing will depend upon the availability of adequate financing at reasonable rates and a favorable re-valuation of the field services company's fixed assets. 8 In July, 2001, the Company entered into a four year Agreement with AFI Capital Corporation ("Capital") a Nebraska corporation. Pursuant to the agreement, Capital is providing financial, acquisition, and general public company business consulting services. Compensation for such services is based on a "successful efforts" basis and will initially primarily consist of the Company's common equity and cash performance fees as earned. The above proposed acquisition transaction discussed above, is subject to this Agreement, wherein AFI Capital Corporation is serving as the "Sponsor" of the proposed transaction. On April 30, 2003, the Company announced the closing of an Agreement with Gateway Energy Corporation and certain of its subsidiaries of Houston, Texas ("Gateway") under which it provided, through the Company's wholly-owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), $900,000 of credit enhancements in the form of Letters of Credit. These credit enhancements enabled Gateway to obtain additional financing, in the form of a three year Balloon Note from a Houston bank to complete the construction of certain natural gas pipeline facilities ("Pipeline Facilities") located in Madison County, Texas, (The "Madisonville Project"). ADAC secured the Letters of Credit through the private placement of a new series of preferred stock (the "Series A"), to two investor groups. The Certificate of Designation for the Series A provides, among other things, for dividend payments to the named holders thereof, equal to sixty-six and two thirds, (66.67%) of distributions received by ADAC from Gateway, and an unanimous vote of the Series A to exercise the Equity Participation Option as further described below. The Agreement provides, among other things, that ADAC will receive, during the term of the additional financing, one-half (50%) of the price upside portion only, if any, of the monthly fee to be received by Gateway from the Madisonville Project. The Agreement also provides that ADAC will have the option to either: (i) receive at the end of the Balloon Note term a lump-sum payment, which when added to the payments received, if any, for the price upside portion, will result in a 15% pre-tax internal rate of return on the $900,000, or (ii) to exercise the Equity Participation Option by paying off the Balloon Note on or before the end of the Balloon Note term in exchange for a thirty-three and one-third (33.33%) ownership interest in the Pipeline Facilities from that date forward. Gateway is obligated to pay the periodic interest payments on the Balloon Note during the three year term of the Balloon Note. Further, Gateway has granted liens to ADAC, subordinate to its banks, on its economic interest in the Madisonville Project and certain other natural gas operating systems and natural gas operating assets. The Agreement contains cross collateral and cross default provisions linking it to an additional Gateway term note at the same bank, the proceeds of which were used by Gateway to fund the Madisonville Project. The Madisonville Project is operated under a long-term agreement between Gateway, Hanover Compression Limited Partnership, and Redwood Energy Production, L. P. and is designed to treat gas to remove impurities from the gas to enable the gas to meet pipeline sales quality specifications. The Madisonville Project employs the state-of-the-art, patented, absorption based technology developed by Advanced Extraction Technologies, Inc., for which Gateway has the exclusive U. S. license, to remove nitrogen from the gas. To implement the provisions, terms and conditions of the various agreements including the Certificate of Designation for the ADAC Series A Preferred Stock: (i) Larry J. Horbach and Christopher D. Davis were appointed to the Board of Directors of the Registrant to fill the vacancies created by the resignation of two directors following the Registrant's emergence from it's Chapter XI Reorganization, serving until elected at the next meeting of shareholders; and (ii) Mr. Horbach resigned as a director of ADAC, with that position then being filled by Mr. Davis. The Registrant, as the sole shareholder of ADAC, effected 9 such ADAC director changes and entered into an agreement to amend the ADAC By-laws to provide that the number of ADAC directors shall be fixed at three as long as any Series A Preferred Shares remain outstanding. In addition, Mr. Davis as well as the Registrant's President, Charles Holtgraves, were elected to the ADAC board of directors. Mr. Holtgraves and Mr. Horbach are directors of Gateway. Mr. Davis has no affiliation with Gateway. Mr. Holtgraves owns 14.65% of an entity that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis serves as the Trustee of the Davis Investment Management Trust for the Davis Investments VI LP, which LP owns 44.44% of the ADAC Series A Preferred Stock. Mr. Horbach owns no ADAC stock. The Company, as of the filing of this Annual Report, has also entered into preliminary negotiations to participate in a similar venture with Gateway, which project has an anticipated closing first quarter of fiscal 2004. With the proposed transaction under the April 22, 2002 agreement, the completion of the Madisonville Project and the pending venture with Gateway, the Company has determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (as described under the NATURE OF THE COMPANY'S BUSINESS) were sold. The Company would then concentrate its growth efforts in the energy industry. Negotiations have been entered into with an entity controlled by the Company's principal creditor and majority stockholder, Argus, wherein these operations would be exchanged for the debt held by Argus. The Board of Directors has engaged an investment banking firm to determine the fair market value as of September 30, 2003 of the operations to be sold. The transaction is anticipated to result in a gain to the Company. Upon completion of the transaction, the Company intends to amend its Certificate of Incorporation to effect a 1 for 3 reverse stock split and a name change. Argus, the holder of over 71% of the presently outstanding common stock of the Company has indicated its intent to vote in favor of the above transactions. ITEM 2. DESCRIPTION OF PROPERTY ----------------------- Real Estate Owned - ----------------- As of February 18, 1999, AFIM owned fee simple title to a 20,000 square foot office building and the land located at 5425 Martindale, Shawnee, Kansas (the "Property"). The Property was subject to a first and second mortgage. The 11.75% first mortgage had a principal balance due on March 31, 1998 of $717,000 with accrued interest. The due date was extended until March 31, 1999. In the fourth quarter of the 1996 fiscal year, a second mortgage, also due March 31, 1998, of $350,000 was placed on the Property, which due date was also extended. During fiscal years 1997 and 1998, $200,000 of the second mortgage was repaid from the sale of servicing rights. On February 19, 1999, pursuant to the Plan of Reorganization, ARGUS purchased the Property for $1,030,000. Argus also released the second mortgage it held against the building. The proceeds were used to satisfy the first mortgage and creditor claims. Investment Policies - ------------------- The Company has not adopted any policies which would limit the number or amount of mortgages which may be placed on any piece of property owned by the Company. The Company presently has no plans to purchase or invest in real estate. The 10 Company has no limitations with respect to 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 2002, 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 2002, the Company did not invest in securities of or interests in persons primarily engaged in real estate activities. ITEM 3. LEGAL PROCEEDINGS ----------------- The Company is not involved in any lawsuits as of March 31, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the Company's fiscal year ended March 31, 2002, either through the solicitation of proxies or otherwise. 11 PART II ------- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------- The Company's common stock traded on the OTC Pink Sheets under the symbol AVFI. The following table sets forth the high and low prices for the common stock as reported on the Pink Sheets for the four quarters of fiscal 2002 and 2001. The prices do not include retail mark-ups, markdowns, or other fees or commissions, and may not represent actual transactions. 2002 High Low - -------------------------------------- ------------------ ------------------- Quarter ended June 30, 2001 No transactions No transactions Quarter ended September 30, 2001 No transactions No transactions Quarter ended December 31, 2001 No transactions No transactions Quarter ended March 31, 2002 No transactions No transactions 2001 High Low - -------------------------------------- ------------------ ------------------- Quarter ended June 30, 2000 $0.10 $0.10 Quarter ended September 30, 2000 $1.25 $0.01 Quarter ended December 31, 2000 $0.01 $0.01 Quarter ended March 31, 2001 $0.001 $0.001 At March 31, 2002, and as of the date of filing this Annual Report, no active market existed for the Company's common stock. On such date, 524 holders of record held the Company's common stock. The Company estimates that it has approximately 1,200 beneficial shareholders. Reference is made to PART I, ITEM 1 for a description of the Company's Plan of Reorganization and recapitalization and its effects on the common stock and stockholders of the Company. At March 31, 2002, and as of the date of filing this Annual Report, the Company had not paid any cash dividends on its common stock. The Company was not subject to any restrictive covenants or agreements, which limit its ability to pay dividends. The Company has no plans to pay cash dividends on its common stock in the near future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --------------------------------------------------------- GENERAL - ------- As described in ITEM 1 hereof, the Company's Plan of Reorganization was confirmed by the United States Bankruptcy Court on November 13, 1998 and became effective on February 19, 1999. In accordance with the American Institute of Certified Public Accountants Statement Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, the Company accounted for the reorganization using "Fresh-Start Reporting," whereby all remaining assets and liabilities were adjusted to their fair market values as of February 19, 1999. 12 The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, competition, which has and will continue to put price pressure on the Company's third party collection business, the cost and availability of capital to finance its portfolio receivables, and overall macro-economic conditions. RESULTS OF OPERATIONS - --------------------- Year Ended March 31, 2001 - ------------------------- Liquidity and Capital Resources - ------------------------------- The Company had a deficit cash balance at March 31, 2001 of $23,689. The Company's deficit cash balance and working capital requirements are being funded by Argus Investment Group, Inc. ("ARGUS ") the Company's majority shareholder, On February 5, 1999, ARGUS agreed to make available to the Company a line of credit in the amount of $875,000 for five years with an interest rate of 7% annually. This line of credit was used to acquire charged off credit card debt. During the year ended March 31, the maximum was reached under the line of credit and Argus converted such amount to common stock and entered into a series of 7% demand secured notes with the Company and advances. The balance due under the secured notes at March 31, 2001 was $560,000, and $205,840 under the advances. As of March 31 2001, the Company's total assets were $742,348 and stockholders' equity was a deficit of $530,272. Argus has agreed to provide funding as and when required by the Company to meet its cash flow requirements through two lines of credit totaling $1,040,000. As of March 31, 2002, Argus and its related entities, through direct loans or guarantees had provided in excess of $1,000,000 in credit with an outstanding balance of approximately $815,000 of direct loans. Operations - ---------- Consolidated operations for the year ended March 31, 2001 resulted in a net loss of $696,761 on collection, servicing and fee gross income of $1,423,153. Revenues from the collection of the Company's portfolio receivables are recognized only after the cost of such portfolios has been recovered. During the period, the Company recovered $388,155 from its portfolio receivables of which $285,686 was applied to reduce the carrying value of its finance receivables asset leaving a portfolio carrying value of $255,605 represented by 4 of the original 11 portfolios. As of March 31, 2001, the remaining outstanding balance of the receivables portfolio was approximately $15,500,000. Operating expenses, including general and administrative costs, for the period ended March 31, 2001, were $1,971,540 which was an increase of $250,000 over the prior fiscal year. The increase primarily reflects the payroll costs related to the buildup of additional operating staff to handle increases in the receivable portfolios toward the end of fiscal year 2000. 13 RESULTS OF OPERATIONS - --------------------- Year Ended March 31, 2002 - ------------------------- Liquidity and Capital Resources - ------------------------------- The Company had a positive cash balance at March 31, 2002 of $37,794. In March 2001, the Company's majority shareholder agreed to make available to the Company an additional line of credit bringing the aggregate credit line to $1,355.000. The line of credit draws interest at the prime rate, is due on demand, and is secured by substantially all of the Company's assets, This line of credit is used to acquire charged off credit card debt and working capital requirements. The balance due under the line of credit at March 31, 2002 was $813,932. In addition to the credit line, ARGUS had open advances to the Company of $205,840 at March 31, 2002 As of March 31, 2002, the Company's total assets were $562,750 and stockholder's equity was a deficit $1,026,771. During the year, the Company did not acquire any finance receivables for its own account. Operations - ---------- Consolidated operations for the year ended March 31, 2002 resulted in a net loss of $496,498 on collection, servicing and fee gross income of $1,088,126. Revenues from the collection of the Company's portfolio receivables are recognized only after the cost of such portfolios has been recovered. During the period, the Company recovered $267,258 from its portfolio receivables of which $166,706 was applied to reduce the carrying value of its finance receivables asset leaving a portfolio carrying value of $88,899. As of March 31, 2002, the remaining outstanding balance of the receivables portfolio was approximately $14,000,000. Operating expenses, including general and administrative costs for the year ended March 31, 2002 were $1,508,007 compared to $1,971,540 for the prior year. The reduction was primarily a reflection of a reduction in payroll resulting from a re-organization of various employee departments. Factors Affecting Future Results - -------------------------------- The Company's ability to generate long-term value for the common stockholders is dependent in part upon future acquisitions of assets which can generate profitable operations, and the ability to obtain financing of such acquisitions from sources other than its majority stockholder at rates that can result in a reasonable return on those acquisition investments. As described earlier under ITEM 1. Subsequent Events, the Company entered into a Letter of Intent followed with an agreement in fiscal year 2003 to acquire, through a wholly-owned subsidiary, the stock of a private company in the oil and gas industry which could provide a reasonable return on the investment therein. Funds to effect this transaction will be provided from outside sources. There is no assurance that the contemplated transaction can be completed. In addition to the open agreement, the Company, through a wholly-owned subsidiary, has concluded a natural gas project agreement with Gateway Energy Corporation in fiscal year 2004. 14 ACCOUNTING PRONUNCEMENTS AND - ---------------------------- RECENT REGULATORY DEVELOPMENTS - ------------------------------ In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill and other intangible assets having an indefinite useful life acquired in business combinations completed after June 30, 2001, are no longer subject to amortization to earnings. Effective April 1, 2002, all goodwill and other intangible assets having an indefinite useful life are no longer amortized to earnings. The useful lives of other intangible assets must be reassessed, and the remaining amortization periods must be adjusted accordingly. Goodwill and other intangible assets having an indefinite useful life will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, using a two-step impairment assessment. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The Company adopted the provisions of SFAS 142 on April 1, 2002 and completed the first step of the two-step impairment test. There was no impairment charge upon completion of the impairment review. The Company's consolidated results of operations will be impacted with the adoption of SFAS 142, when approximately $23,000 in annual amortization will cease. Also in June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations, which requires that the fair value of the liability for asset retirement costs be recognized in an entity's balance sheet, as both a liability and an increase in the carrying value of such assets, in the periods in which such liabilities can be reasonably estimated. It also requires allocation of such asset retirement cost to expense over its useful life. This Statement is effective for fiscal years beginning after June 15, 2002. The Company has determined the impact of this Statement on its consolidated financial position or results of operations is not material. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and related literature and establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company implemented the provisions of SFAS 144 as required on January 1, 2002. The adoption did not have a material effect on the Company's consolidated financial position or consolidated results of operations. In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that are similar to sale-leaseback transactions. The statement also amends other existing pronouncements. This statement is effective for fiscal years beginning after May 15, 2002. The impact of adopting this statement on the consolidated financial position or results of operations will not be material. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting and reporting for costs associated with exit and disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of adopting this statement on the consolidated financial position or results of operations will not be material. 15 Effective July 30, 2002, the Sarbarnes-Oxley Act of 2002 (the "Act") was signed into law. The Act encompasses a broad range of new legislation designed to increase accountability of public companies and investor confidence. The Act establishes a new regulatory body, the "Public Company Accounting Oversight Board", under the auspices of the Securities and Exchange Commission (the "SEC") to oversee audits of companies offering equity or debt securities to the public, and further regulates and redefines the relationship between a registered public accounting firm and its audit clients. The Act establishes new disclosure requirement for public companies, financial certification standards for public company CEOs and CFOs restriction on the ability of officers and directors to engage in certain types of transactions, accelerated reporting of certain types of transactions and new rules of analysts. In addition, the Act enhances a number of criminal penalties and enforcement measures available for securities related offenses. The SEC was directed to study and issue final rules to implement a number of directives contained in the Act, and some of the ensuing rules are discussed below. In August 2002, among other matters, the SEC adopted amendments to accelerate filing deadlines for certain public reports, and adopted new rules to implement Section 302 of the Act pertaining to financial statement certification and clarify disclosure controls and procedures. The Company is not subject to the accelerated filing deadlines at this time due to its size, however, it is subject to the financial statement certification and disclosure control rules. The Company intends to fully comply with all applicable new rules as they become effective. In December 2002, the FASB issued SFAS No. 148. "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 of the same name to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years and interim periods ending after December 15, 2002 and the Company has implemented it effective with this filing. The Company intends to continue using the intrinsic method of accounting for stock-based compensation first allowed under APB Option No. 25, "Accounting for Stock Issued to Employees". Therefore, the impact of adopting SFAS No. 148 on the consolidated financial statements of the Company is limited to the expanded disclosure requirements of the statement. In January 2003, the SEC adopted rules implementing Sections 406 and 407 of the Act. Section 406 of the Act requires public companies to annually disclose whether the company has adopted a code of ethics for its principal executive and financial officers, and if it has not, to explain why it has not. Additionally, the rules will required disclosure on a Form 8-K filing any amendments to or waivers from the code of ethics relating to those officers. Section 407 of the Act required public companies to disclose annually whether it has at least one "audit committee financial expert", as defined in the rules, on the Company's audit committee, and if so, the name of the audit committee financial expert and whether the expert is independent of management. A company that does not have an audit committee financial expert will be required to disclose this fact and explain why it has no such expert. Both rules are effective for small business issuers' annual reports for fiscal years ending on or after December 15, 2003. The Company intends to comply with these rules on a timely basis. Also in January 2003, the SEC adopted rules implementing section 401(a) of the Act, which required public companies to disclose "all material off-balance sheet financing transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with consolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues 16 or expenses." The rules require an additional section in Management's Discussion and Analysis for the presentation of this new disclosure, and there are additional rules for companies that are not small business issuers. The rules are effective for interim and annual filings for periods ending on or after June 15, 2003. The impact of adopting this statement on the consolidated financial position or results of operations will not be material ITEM 7. FINANCIAL STATEMENTS -------------------- Financial statements for the years ended March 31, 2001, and March 31, 2002 are presented on the following pages. 17 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ADVANCED FINANCIAL, INC. AND SUBSIDIARIES March 31, 2001 and 2002 18 Report of Independent Certified Public Accountants Stockholders and Directors Advanced Financial, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Advanced Financial, Inc. and Subsidiaries as of March 31, 2002 and the related consolidated statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Financial, Inc and Subsidiaries as of March 31, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note N to the financial statements, the Company has suffered recurring losses from operations and is dependent upon the continued sale of its securities or obtaining debt financing for funds to meet its cash requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are also described in Note N. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Weaver & Martin, LLC Kansas City, Missouri October 27, 2003 19
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, March 31, 2001 2002 ----------- ----------- ASSETS Cash $ $ 37,794 Collection fees receivable (note E) 72,824 83,468 Finance receivables (notes A and D) 255,605 88,899 Other 14,676 11,749 Property, furniture and equipment, net (notes A, F, and I) 148,630 116,227 Customer lists, net of amortization of $56,164 and $127,236 at March 31, 2001 and 2002, respectively (notes A and C) 250,613 224,613 ----------- ----------- Total assets $ 742,348 $ 562,750 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Checks issued in excess of cash balances $ 23,689 $ Accounts payable and accrued expenses 417,473 317,154 Accounts payable - related party (note L) 205,840 205,840 Notes payable (note E) 560,000 1,066,527 Capitalized lease obligations (note F) 65,618 ----------- ----------- Total liabilities 1,272,620 1,589,521 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) (notes B and G) Preferred stock, Series B, $.005 par value; 1,000,000 shares authorized, none issued and outstanding -- -- Common stock, $.001 par value; 10,000,000 shares authorized, 5,866,137 and 5,866,137 shares issued and outstanding in 2001 and 2002, respectively 5,866 5,866 Paid-in capital 1,253,261 1,253,261 Accumulated deficit (1,789,399) (2,285,898) ----------- ----------- Total stockholders' equity (deficiency) (530,272) (1,026,771) ----------- ----------- ----------- ----------- $ 742,348 $ 562,750 =========== =========== The accompanying notes are an integral part of these statements. 20 ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended Year ended March 31, 2001 March 31, 2002 --------------- -------------- REVENUES Collection, servicing, and other fees $ 1,312,370 $ 1,088,126 Other 109,939 63,644 Interest 844 401 ----------- ----------- Total revenues 1,423,153 1,152,171 ----------- ----------- EXPENSES Operating expenses, including general and administrative costs 1,971,540 1,508,007 Interest 52,600 66,549 Depreciation and amortization 95,774 74,113 Impairment of intangible assets (note A) -- -- ----------- ----------- Total expenses 2,119,914 1,648,669 ----------- ----------- ----------- ----------- NET LOSS $ (696,761) $ (496,498) =========== =========== Weighted-average shares outstanding 5,329,346 5,866,137 =========== =========== Loss per common share (note A) $ (0.13) $ (0.08) =========== =========== The accompanying notes are an integral part of these statements. 21 ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred Common Paid-in Accumulated Treasury stock stock capital deficit stock Total ---------- ----------- ----------- ------------ ---------- ----------- Balance, March 31, 2000 -- 5,326 1,199,828 (1,092,638) -- 112,516 Net loss for year ended March 31, 2001 -- -- -- (696,761) -- (696,761) Issuance of common stock for operating costs (539,732 shares) -- 540 53,433 -- -- 53,973 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2001 -- 5,866 1,253,261 (1,789,399) -- (530,272) Net loss for year ended March 31, 2002 (496,498) (496,498) Rounding (1) (1) ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2002 $ 0 $ 5,866 $ 1,253,261 $(2,285,898) $ 0 $(1,026,771) =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of this statement. 22 ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended Year ended March 31, 2001 March 31, 2002 --------------- -------------- Cash flows from operating activities Net loss $(696,761) $(496,498) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 95,774 74,113 Rent paid in stock 53,973 -- Changes in assets and liabilities Collection fees receivable 29,111 (10,644) Other assets (6,927) 2,926 Accounts payable and accrued expenses 93,130 (100,319) --------- --------- Net cash used in operating activities (431,700) (530,422) --------- --------- Cash flows from investing activities Collections applied to finance receivables 285,686 166,706 Acquisitions of property, furniture, and equipment (6,416) (15,710) --------- --------- Net cash provided by (used in) investing activities 279,270 150,996 --------- --------- Cash flows from financing activities Change in checks issued in excess of cash balances (31,367) (23,689) Proceeds from notes payable -- 506,527 Payments on capitalized lease obligations (22,043) (65,618) Advances from related party 205,840 -- --------- --------- Net cash provided by financing activities 152,430 417,220 --------- --------- Net increase (decrease) in cash -- 37,794 Cash, beginning of year -- -- --------- --------- Cash, end of year $ -- $ 37,794 ========= ========= Supplementary disclosures of cash flow information Cash paid for interest $ 52,600 $ 5,397 The accompanying notes are an integral part of these statements. 23
Advanced Financial, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies 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), a mortgage lender with no current operations and 100% of Cannon Financial Company (Cannon). Subsequent to March 31, 2001, AFI changed its name to Allen Drilling Acquisition Company ("ADAC"). See Note M. Cannon collects debts for others for a fee and purchases charged-off credit card debt to collect at a profit from debtors located throughout the United States. On November 15, 1999, pursuant to an Asset Purchase Agreement between AIH Services, Inc. and Cannon, Cannon acquired certain assets for use in the operation and conduct of the businesses of AIH Services, Inc. known as AIH Receivable Management Services and AIH Early Recovery Systems. AIH Receivable Management Services and AIH Early Recovery Systems are engaged in the business of collecting nonperforming receivables on behalf of third parties. Cannon and AIH Services, Inc. combined operating assets and operations, and Cannon changed its name to AIH Receivable Management Services, Inc. (AIH) effective December 1, 1999. The consolidated financial statements include the accounts of the Company, ADAC and AIH. All significant intercompany accounts and transactions have been eliminated. 2. Finance Receivables And Revenue Recognition The Company accounts for its investment in finance receivables under the guidance of the American Institute of Certified Public Accountants Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans (PB6) using unique and exclusive static pools. The pools are established with underlying accounts having similar attributes, based on acquisition timing and by seller. Once a static pool is established, the accounts in the pool are not changed. Each pool is initially recorded at cost. Until it is determined that the amount and timing of collections are reasonably estimable and collection is probable, PB6 requires the receivable be accounted for under the cost-recovery method. All of the Company's pools are accounted for under the cost-recovery method. Application of the cost-recovery method requires that any amounts received be applied first against the recorded amount of the pool; when that amount has been reduced to zero, any additional amounts received are recognized as income. The discount between the cost of each pool of receivables purchased and the contractual receivable of the accounts in the pool is not recorded since the Company expects to collect a relatively small percentage of each pool's contractual receivable balance. 3. Property and Equipment Property, furniture, and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets; the lives have been determined by management to be seven years. 24 4. 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. 5. Loss Per Common Share Loss per common share is based on the weighted average number of common shares outstanding during the periods presented. Because the effect of the inclusion of stock options and warrants is anti-dilutive, diluted per share information is not presented. 6. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). 7. Customer Lists Intangible assets consist of customer lists obtained in acquisitions and are being amortized over 15 years. During the year ended March 23, 2000, the Company estimated that the value and future benefits of certain of these customer lists, based on discounted cash flows, indicated the unamortized costs should be reduced. Accordingly, an impairment charge of $45,070 was recorded. 8. Accounting Pronouncements and Recent Regulatory Developments In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill and other intangible assets having an indefinite useful life acquired in business combinations completed after June 30, 2001, are no longer subject to amortization to earnings. Effective April 1, 2002, all goodwill and other intangible assets having an indefinite useful life are no longer amortized to earnings. The useful lives of other intangible assets must be reassessed, and the remaining amortization periods must be adjusted accordingly. Goodwill and other intangible assets having an indefinite useful life will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, using a two-step impairment assessment. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its 25 fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The Company adopted the provisions of SFAS 142 on April 1, 2002 and completed the first step of the two-step impairment test. There was no impairment charge upon completion of the impairment review. The Company's consolidated results of operations will be impacted with the adoption of SFAS 142, when approximately $23,000 in annual amortization will cease. Also in June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations, which requires that the fair value of the liability for asset retirement costs be recognized in an entity's balance sheet, as both a liability and an increase in the carrying value of such assets, in the periods in which such liabilities can be reasonably estimated. It also requires allocation of such asset retirement cost to expense over its useful life. This Statement is effective for fiscal years beginning after June 15, 2002. The Company has determined the impact of this Statement on its consolidated financial position or results of operations is not material. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and related literature and establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company implemented the provisions of SFAS 144 as required on January 1, 2002. The adoption did not have a material effect on the Company's consolidated financial position or consolidated results of operations. In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that are similar to sale-leaseback transactions. The statement also amends other existing pronouncements. This statement is effective for fiscal years beginning after May 15, 2002. The impact of adopting this statement on the consolidated financial position or results of operations will not be material. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting and reporting for costs associated with exit and disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of adopting this statement on the consolidated financial position or results of operations will not be material. Effective July 30, 2002, the Sarbarnes-Oxley Act of 2002 (the "Act") was signed into law. The Act encompasses a broad range of new legislation designed to increase accountability of public companies and investor confidence. The Act establishes a new regulatory body, the "Public Company Accounting Oversight Board", under the auspices of the Securities and Exchange Commission (the "SEC") to oversee audits of companies offering equity or debt securities to the public, and further regulates and redefines the relationship between a registered public accounting firm and its audit clients. The Act establishes new disclosure requirement for public companies, financial certification standards for public company CEOs and CFOs restriction on the ability of officers and directors to engage in certain types of transactions, accelerated reporting of certain types of transactions and new rules of analysts. In addition, the Act enhances a number of criminal penalties and enforcement measures available for securities related offenses. The SEC was directed to study and issue final rules to implement a number of directives contained in the Act, and some of the ensuing rules are discussed below. 26 In August 2002, among other matters, the SEC adopted amendments to accelerate filing deadlines for certain public reports, and adopted new rules to implement Section 302 of the Act pertaining to financial statement certification and clarify disclosure controls and procedures. The Company is not subject to the accelerated filing deadlines at this time due to its size, however, it is subject to the financial statement certification and disclosure control rules. The Company intends to fully comply with all applicable new rules as they become effective. In December 2002, the FASB issued SFAS No. 148. "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 of the same name to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years and interim periods ending after December 15, 2002 and the Company has implemented it effective with this filing. The Company intends to continue using the intrinsic method of accounting for stock-based compensation first allowed under APB Option No. 25, "Accounting for Stock Issued to Employees". Therefore, the impact of adopting SFAS No. 148 on the consolidated financial statements of the Company is limited to the expanded disclosure requirements of the statement. In January 2003, the SEC adopted rules implementing Sections 406 and 407 of the Act. Section 406 of the Act requires public companies to annually disclose whether the company has adopted a code of ethics for its principal executive and financial officers, and if it has not, to explain why it has not. Additionally, the rules will required disclosure on a Form 8-K filing any amendments to or waivers from the code of ethics relating to those officers. Section 407 of the Act required public companies to disclose annually whether it has at least one "audit committee financial expert", as defined in the rules, on the Company's audit committee, and if so, the name of the audit committee financial expert and whether the expert is independent of management. A company that does not have an audit committee financial expert will be required to disclose this fact and explain why it has no such expert. Both rules are effective for small business issuers' annual reports for fiscal years ending on or after December 15, 2003. The Company intends to comply with these rules on a timely basis. Also in January 2003, the SEC adopted rules implementing section 401(a) of the Act, which required public companies to disclose "all material off-balance sheet financing transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with consolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses." The rules require an additional section in Management's Discussion and Analysis for the presentation of this new disclosure, and there are additional rules for companies that are not small business issuers. The rules are effective for interim and annual filings for periods ending on or after June 15, 2003. The impact of adopting this statement on the consolidated financial position or results of operations will not be material 8. 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. 27 NOTE B - BANKRUPTCY AND REORGANIZATION As a result of numerous events, on November 7, 1997 (the Filing Date), the Predecessor 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. Until February 19, 1999, the Company operated its business as debtor in possession. On February 19, 1999 (the effective date), all material conditions precedent to the Plan becoming binding were resolved, the Plan became effective, and the following provisions of the Plan commenced: Argus Investment Group, Inc. (Argus) formerly First Mortgage Investment Co. (FMIC), a creditor of the Company, released its secured claims against, and acquired certain assets in exchange for 1,800,000 shares of Company common stock of the Company; these shares initially constituted 60% of the 3,000,000 new shares issued as part of the Company's recapitalization and reorganization and an option to acquire an additional 3,000,000 shares at $.50 per share or $1,500,000. Argus is controlled by Phillip J. Holtgraves, a member of the Board of Directors of the Company and the father of Charles A. Holtgraves, the Company's Chairman and President. The Company issued shares of common stock and warrants and made partial payments to certain other creditors in exchange for a release of their claims. The creditors received 900,000 shares of Company common stock; these shares constituted 30% of the 3,000,000 new shares issued as a part of the Company's recapitalization and reorganization. The creditors also received 900,000 warrants each of which allowed 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 and expired on March 31, 2002. Shares held by preferred and common stockholders of the Predecessor Company were canceled; these stockholders received 300,000 shares of new Company common stock, constituting 10% of the 3,000,000 new shares issued as part of the Company's recapitalization and reorganization. NOTE C - ACQUISITIONS AND AGREEMENTS 1. AIH Services, Inc. On November 15, 1999, Cannon purchased certain assets of AIH Services, Inc. Cannon paid a negotiated purchase price of $210,000, less cash received of $38,154, which purchase price was paid in three non-interest-bearing installments during the year ended March 31, 2000. The funds used to purchase the AIH assets were loaned to Cannon by Argus. The assets included principally furniture, equipment, and customer lists. Based on management's estimate of relative fair market values, $100,000 of the purchase price was allocated to furniture and equipment; the remainder was allocated to customer lists. 2. AFI Capital Corporation Agreement In July 2001, the Company entered into a four-year agreement with AFI Capital Corporation (Capital), a Nebraska corporation. Pursuant to the agreement, Capital will provide financial, acquisition, and general public company business consulting services. Compensation for such services will be based on a 28 successful-efforts basis and will consist primarily of the Company's common equity. The proposed acquisition transaction discussed in the following paragraph is subject to the terms and conditions of this agreement, wherein Capital will be compensated for the successful completion of the acquisition. Larry J. Horbach, who was appointed assistant secretary of the Company, and elected to fill a vacant Company director position in March 2003, is the president and a director of AFI Capital Corporation. Mr. Holtgraves is a founding director. 3. Allen Drilling Acquisition Company Agreement On June 7, 2001, the Company executed a Letter of Intent, which Letter of Intent was amended in February 2002, to acquire, through a wholly owned subsidiary, 100% of the Common Stock of a private company in the energy field services ( primarily natural gas) industry. On April 22, 2002, the Company executed a definitive Stock Purchase Agreement, the closing of which was subject to several conditions. As a result of a material adverse change in the operating results for the company to be acquired ( which results were generally consistent with other companies in the same industry), the transaction did not close. The parties, by mutual agreement, continued to leave the definitive agreement open, and $75,000 of escrow deposits in place in anticipation of a turn around in the industry. During the second quarter of fiscal year 2003, with the prices of natural gas at unusual highs along with predicted natural gas production shortfalls for sometime in the future, the anticipated industry turn occurred. The Company intends to pursue the closing of the transaction, however the closing will depend upon the availability of adequate financing at reasonable rates and a favorable re-valuation of the field services company's fixed assets. With the proposed transaction under the April 22, 2002 agreement, the completion of the Madisonville Project as described in NOTE M- SUBSEQUENT EVENTS and the pending venture with Gateway, the Company has determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (as described under the NATURE OF THE COMPANY'S BUSINESS) were sold. The Company would then concentrate its growth efforts in the energy industry. Negotiations have been entered into with an entity controlled by the Company's principal creditor and majority stockholder, Argus, wherein these operations would be exchanged for the debt held by Argus. The Board of Directors has engaged an investment banking firm to determine the fair market value as of September 30, 2003, of the operations to be sold. The transaction is anticipated to result in a gain to the Company. Upon completion of the transaction, the Company intends to amend its Certificate of Incorporation to effect a 1 for three reverse stock split and a name change. Argus, the holder of over 71% of the presently outstanding common stock of the Company has indicated its intent to vote in favor of the above transactions. 29 NOTE D - FINANCE RECEIVABLES AIH purchases defaulted consumer receivables at a discount from the actual principal balance. The following summarizes the change in finance receivables for the years ended March 31, 2001 and 2002 respectively: 2001 2002 --------- --------- Beginning balance, acquisition $ 541,291 $ 255,605 Purchase of finance receivables Collections applied to principal on finance receivables (285,686) (166,706) --------- --------- Balance, March 31 $ 255,605 $ 88,899 ========= ========= To the extent that the carrying amount of a pool of receivables exceeds its fair value, a valuation allowance would be recognized in the amount of such impairment. As of March 31, 2002, no provision for loss has been recorded. NOTE E - NOTES PAYABLE The following summarizes the Company's notes payable at: March 31 March 31 2001 2002 --------- ---------- Unsecured borrowings under a $1,355,000 line of credit from ARGUS, interest at prime, secured by substantially all of the Company's assets $ 560,000 $ 923,932 ---------- Due AFI Capital Corporation none interest bearing, non secured 42,815 Borrowings under bank line of credit, interest at two over prime, unsecured, guaranteed by a director 99,780 ---------- $1,066,527 ---------- NOTE F - LEASES The Company leased its office space from its majority stockholder, ARGUS, under an operating lease at a lease cost of $8,800 per month through February 2002, under a non-cancelable lease agreement. The Company subsequent thereto entered into a month to month lease with Argus through July 31, 2002. On August 1, 2002, the Company entered into a two year lease with a non-related third party. 30 The Company leased equipment under a capital lease for a period of five years. During the fiscal year ended March 31, 2002, the Company paid off the lease. Property recorded under the capital lease had an original cost of $121,311 and a net book value of $34,568 at March 31, 2002. Operating lease expense was approximately $139,400 and $ 123,700 for fiscal years 2001 and 2002 respectively. The following is a schedule of future minimum rental payments required under the above leases as of March 31, 2002: Year ending Capital Operating March 31, Lease Lease --------------- ----------------- ----------------- 2003 - $ 62,368 2004 - 99,792 2005 - 34,304 ----------------- $ 162,160 ================= NOTE G - EMPLOYEE STOCK OPTIONS On February 19, 1999, the Company issued 50,000 shares of common stock at $0.50 per share, to a non-employee for service provided in connection with an acquisition. The options are immediately exercisable and will expire ten years from the date of issuance. Options to purchase 299,999 shares of the Company's common stock have been issued to an officer of the Company. One hundred forty-nine thousand nine hundred ninety-nine (149,999) of the options were exercisable at $0.25 per share on or after November 13, 2000 through the expiration date of November 13, 2010, if the Company's common stock has attained and maintained bid prices of $1, $2, $3, and $4 for twenty consecutive trading days, respectively, one-fourth (37,500) of the options are exercisable. In January, 2001, in connection with the resignation of the officer, the terms of the option were changed resulting in an immediate vesting of all options and a fixed exercise price of $.25 per share exercisable to February 19, 2011. The stock options are accounted for as a variable plan under APB 25 and related Interpretations. No compensation cost has been recognized for the options. Had compensation cost for the options been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, and to reflect the changes in January 2001, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below for the year ended March 31, 2001 and 2000 respectively. 31 2001 2002 ------------------------------------- Net loss As reported $ (696,761) $ (496,498) Pro forma (705,014) (496,498) Loss per common share As reported $ (0.13) $ (0.08) Pro forma (0.13) (0.08) The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants: dividend yield of 0.0%; expected volatility of 289.1%; risk-free interest rates of 5.54%; and expected lives of 10 years. The following summary sets forth the activity under the Plan:
Options Options exercisable exercisable at $.50 at $.25 - -------------------------------------------------------------------------------------------------------------------------- Time Vested Time Vested vesting on grant vesting on grant Total Outstanding at March 31, 2000 5,000 50,000 150,000 149,999 354,999 Granted during fiscal year ended March 31, 2001 35,000 - - 299,999 334,999 Canceled during fiscal year ended March 31, 2001 (15,000) - (150,000) (149,999) (314,999) Exercised during fiscal year ended March 31, 2001 - - - - - --------- -------- -------- ------- ------- 25,000 50,000 - 299,999 374,999 ========= ======== ======== ======= ======= Options vested - 50,000 - 299,999 349,999 ========= ======== ======== ======= ======= Outstanding at March 31, 2001 25,000 50,000 - 299,999 374,999 Granted during fiscal year ended March 31, 2002 - - - - - Canceled during fiscal year ended March 31, 2002 - - - - - Exercised during fiscal year ended March 31, 2002 - - - - - 25,000 50,000 - 299,999 374,999 --------- -------- -------- ------- ------- Options vested - 50,000 - 299,999 349,999 ========= ======== ======== ======= ======= The following tables summarizes information about options outstanding at March 31, 2001 and 2002: 2001 compensatory stock options ------------------------------- Options outstanding Options exercisable - ----------------------------------------------------------------------------- --------------------------------- Weighted-average Range of Number remaining Weighted-average Number Weighted-average exercise prices outstanding contractual life exercise price exercisable exercisable price --------------- ----------- ---------------- -------------- ----------- ----------------- $0.25 to $0.50 374,999 7.1 years $ 0.30 349,999 $ 0.29 2002 compensatory stock options ------------------------------- Options outstanding Options exercisable - ------------------------------------------------------------------------- --------------------------------------- Weighted-average Range of Number remaining Weighted-average Number Weighted-average exercise prices outstanding contractual life exercise price exercisable exercisable price - ------------------ ----------------- ----------------- ----------------- ----------------- -------------------- $0.25 to $0.50 374,999 8.1 years $ 0.29 50,000 $ 0.50
32 NOTE H - INCOME TAXES The difference between actual income tax expense (benefit) and expected income tax expense (benefit) at the statutory federal income tax rate (34%) computed as follows at March 31, 2001 2002 --------- --------- Expected income tax benefit at statutory rate $(236,899) $(168,809) State income taxes, net (22,487) (16,024) Change in valuation allowance 252,070 180,901 Other 7,316 3,932 --------- --------- Actual income tax expense $ -- $ -- ========= ========= The following is the tax effect of temporary differences that gave rise to the significant portions of deferred tax assets and liabilities at March 31, 2001 2002 ----------- ----------- Deferred tax assets Net operating loss carryforward $ 3,966,699 $ 4,147,600 Valuation allowance (3,966,699) (4,147,600) ----------- ----------- Net deferred tax asset $ -- $ -- =========== =========== The Company has estimated net operating loss carryforwards of approximately $10.37 million as of March 31, 2002. These net operating losses will expire in the years ended March 31, 2009 through March 31, 2022. 33 Total deferred taxes consist primarily of the benefit of the net operating loss carryforward. Management has established a valuation allowance to reduce the total deferred tax asset to $0. As of March 31, 2002, the Company has no recoverable income taxes previously paid. NOTE I - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at: March 31, March 31, 2001 2002 --------- --------- Furniture and fixtures $ 276,389 $ 292,099 Accumulated depreciation (127,759) (175,872) --------- --------- $ 148,630 $ 116,227 ========= ========= NOTE J - 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, 2001 and March 31, 2002 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. Finance receivables: The Company records finance receivables at cost, which is discounted from the actual principal balance. This cost is reduced as collections are made. The carrying value of finance receivables approximates fair value at March 31, 2001 and 2002. 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, 2001 and 2002: 34
__________2001__________ __________2002__________ Carrying value Fair value Carrying value Fair value ------------------ ------------------------------------- ------------------- Financial assets: Cash $ (61,136) $ (61,136) $ 37,793 $ 37,793 Finance receivable 255,605 255,605 88,899 88,899 Financial liabilities: Notes payable 560,000 560,000 1,066,527 1,066,527
NOTE L - ACCOUNTS PAYABLE - RELATED PARTY Accounts payable - related party consisted of amounts advanced to the Company by ARGUS. No interest or repayment terms exist. NOTE M - SUBSEQUENT EVENTS On April 30, 2003, the Company announced the closing of an Agreement with Gateway Energy Corporation and certain of its subsidiaries of Houston, Texas ("Gateway") under which it provided, through the Company's wholly-owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), $900,000 of credit enhancements in the form of Letters of Credit. These credit enhancements enabled Gateway to obtain additional financing, in the form of a three year Balloon Note from a Houston bank to complete the construction of certain natural gas pipeline facilities ("Pipeline Facilities") located in Madison County, Texas, (The "Madisonville Project"). ADAC secured the Letters of Credit through the private placement of a new series of preferred stock (the "Series A"), to two investor groups. The Certificate of Designation for the Series A provides, among other things, for dividend payments to the named holders thereof, equal to sixty-six and two thirds, (66.67%) of distributions received by ADAC from Gateway, and an unanimous vote of the Series A to exercise the Equity Participation Option as further described below. The Agreement provides, among other things, that ADAC will receive, during the term of the additional financing, one-half (50%) of the price upside portion only, if any, of the monthly fee to be received by Gateway from the Madisonville Project. The Agreement also provides that ADAC will have the option to either: (i) receive at the end of the Balloon Note term a lump-sum payment, which when added to the payments received, if any, for the price upside portion, will result in a 15% pre-tax internal rate of return on the $900,000, or (ii) to exercise the Equity Participation Option by paying off the Balloon Note on or before the end of the Balloon Note term in exchange for a thirty-three and one-third (33.33%) ownership interest in the Pipeline Facilities from that date forward. Gateway is obligated to pay the periodic interest payments on the Balloon Note during the three year term of the Balloon Note. Further, Gateway has granted liens to ADAC, subordinate to its banks, on its economic interest in the Madisonville Project and certain other natural gas operating systems and natural gas operating assets. The Agreement contains cross collateral and cross default provisions linking it to an additional Gateway term note at the same bank, the proceeds of which were used by Gateway to fund the Madisonville Project. The Madisonville Project is operated under a long-term agreement between Gateway, Hanover Compression Limited Partnership, and Redwood Energy Production, L. P. and is designed to treat gas to remove impurities from the gas to enable 35 the gas to meet pipeline sales quality specifications. The Madisonville Project employs the state-of-the-art, patented, absorption based technology developed by Advanced Extraction Technologies, Inc., for which Gateway has the exclusive U. S. license, to remove nitrogen from the gas. NOTE N - GOING CONCERN The accompanying consolidated financial statements have been prepared on going concern basis, which contemplates the Company's continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. These statements do not reflect adjustments that might result if the Company is unable to continue as a going concern. As a result of continued poor operating performance such matters are subject to significant uncertainty. As set forth in NOTE M-SUBSEQUENT EVENTS, the Company, in fiscal year 2004, has closed an initial investment in the oil and gas industry with Gateway Energy Corporation of Houston, Texas (the Madisonville Project). The Company intends to continue investing in the oil and gas industry through a field services acquisition, as is described in Note B. In addition, the Company, as of the filing of this Annual Report, has entered into negotiations to participate in an additional venture with Gateway Energy Corporation, which project has an anticipated closing early in the calendar year 2004. Management believes this industry and the future acquisitions and project ventures with Gateway Energy could bring profits and capital to sustain future growth and operations. NOTE O - RELATED PARTIES Reference is made to NOTE M- SUBSEQUENT EVENTS and NOTE C- ACQUISITIONS AND AGREEMENTS for additional information concerning the following: Larry J. Horbach who was appointed to fill a vacant director's position in May 2003, and Charles A. Holtgraves, the Chairman of the Board and President of the Registrant are also directors of Gateway Energy Corporation. Mr. Horbach is the President and Chairman of the Board of AFI Capital Corporation. Mr. Holtgraves is a director of AFI Capital Corporation, Argus Investment Group, Inc. ("ARGUS ") formerly known as First Mortgage Investment Co. is a family owned corporation involved in venture capital lending and financing. The stock of ARGUS is 100% owned by the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Philip J. Holtgraves is the Chairman of ARGUS , a Director of the Registrant and the father of Charles A. Holtgraves. Charles A. Holtgraves is the President of ARGUS and Chairman, President and Director of the Registrant. Mr. Holtgraves is the President and the 100% owner of Balance In Full, Inc. ("BIF") BIF. places delinquent charged of credit card accounts with AIH Receivable Management Services, Inc. ,a wholly owned subsidiary of the Registrant, ("AIH") for collection services. The fees paid by BIF for regular collections are 36% and 50% for legal accounts, which fees are comparable for non related party accounts. During the fiscal year ended March 31, 2002, gross collections were approximately $66,100. AIH leased office space from ARGUS for $8,800 per month to February 2002 and then $4,400 per month through July 2002. The property was then sold by ARGUS to a non related party, and AIH is currently paying $7,795 per month. 36 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, 2002, the following persons served as directors and executive officers of the Company. NAME AGE POSITION ---- --- -------- Charles A. Holtgraves 37 Chairman/ President/Treasurer/ Director Philip J. Holtgraves 77 Director and Secretary Charles A. Holtgraves. From November 1998 to current, Mr. Holtgraves has been Chairman, President, Treasurer and Director of the Company and its subsidiaries.. Mr. Holtgraves is the President of Argus Investment Group, Inc. ("Argus") a family owned corporation involved in venture capital lending and financing. Mr. Holtgraves was the Chief Financial Officer and Vice President of First Mortgage Investment, Co., a full service mortgage banking operation, which he co-founded in 1988 until its sale of assets in August 1998. Mr. Holtgraves has been an officer and director of Gateway Energy Corporation, a publicly traded natural gas company, since 1988. Mr. Holtgraves graduated from McPherson College in 1988 with a dual degree in Finance and Accounting. Charles Holtgraves is the son of Philip J. Holtgraves. Philip J. Holtgraves. From November 1998 to current, Mr. Holtgraves has been a Director of the Company and also serves as the Secretary of the Company. Mr. Holtgraves is the Chairman of Argus a family owned corporation involved in venture capital lending and financing. Mr. Holtgraves was the principal owner of First Mortgage Investment, Co., a full service mortgage banking operation, which he co-founded in 1988. Mr. Holtgraves was president and Chief Operating Officer of Missouri Valley Investment, Co. from 1954 through 1987, becoming the sole shareholder in 1965. Mr. Holtgraves sold Missouri Valley Investment, Co. in 1987 to a Texas Savings Association. From 1950 to 1954, Mr. Holtgraves was employed by the Mid Continent regional office of the Prudential Insurance Co. in Kansas City. In addition Mr. Holtgraves was the principal owner of and President of Construction materials Inc., a chain lumber dealer in eastern Kansas. He sold his interest in the operation in 1976. Mr. Holtgraves was admitted to the Missouri Bar Association in 1951 and practiced law in the Kansas City area until 1952. Mr. Holtgraves has served on the board of directors of several banks including First National Bank of Chanute and Mark Twain Plaza Bank in Kansas City. Mr. Holtgraves was an agent for Rail Road Savings & Loan in the Olathe, Kansas area for over twenty-five years. Mr. Holtgraves also holds a Missouri Real Estate Broker's License. He is the father of Charles Holtgraves. 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. 37 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, 2002, all Section 16(a) filing requirements applicable to its directors, executive officers and ten percent beneficial owners were complied with., except that Argus failed to timely file a report with respect to the exchange of 539,732 shares of common stock of the Registrant for certain obligations owed to Argus, ITEM 10. EXECUTIVE COMPENSATION ---------------------- The following table sets forth information regarding compensation paid by the Company to the Chief Executive Officer in the 2000, 2001, and 2002 fiscal years. No executive officer received compensation in excess of $100,000 in any of those fiscal years.
SUMMARY COMPENSATION TABLE Long Term Compensation ---------------------- Annual Compensation (1)(2) Awards Payouts -------------------------- ------ ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Restricted Securities Name and Annual Stock Underlying LTIP All Other Principal Compensation Award(s) Options/SARs Compensation Position Salary ($) Bonus ($) ($) ($) (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------- Year Ended March 3l, William B. Morris Chairman of the Board, Secretary 2000 $ 65,000 -0- -0- -0- -0- -0- -0- and Sr, Vice 2001 $ -0- -0- -0- -0- -0- -0- -0- President (3) Charles A. Holtgraves Chairman of the Board, 2000 $ -0- -0- -0- -0- -0- -0- -0- President and 2001 $ -0- -0- -0- -0- -0- -0- -0- Treasurer 2002 $ -0- -0- -0- -0- -0- -0- -0-
(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 they did not exceed in the aggregate of the lesser of $25,000 or 25% of the individual's salary and bonus in any year. (3) Mr. Morris resigned as an officer and director in January,2001. 38 OPTION/SAR GRANTS IN LAST FISCAL YEAR None ---- AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED MARCH 31, 2002 None ---- OPTION/SAR VALUES AS OF MARCH 31, 2002
(a) (b) (c) (d) (e) Values of Unexercised Number of In-the-Money Unexercised Options/SARs at Shares Options/SARs at FY-End ($) Acquired on Value FY-End (#) Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable ------------------------------------------------- -------------------------------------------- William B. Morris (1) -0- -0- 0/299,999 $-0-
(1) Mr. Morris resigned as an officer and director in January 2001, but was allowed, as a part of his severance package to retain his options. Compensation of Directors The Company paid no director's fees. Employment Contracts and Termination of Employment and Change-in-Control Arrangements The Company has not entered into any 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. 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 March 31, 2002: (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 5,866,137 shares outstanding on March 31, 2002. 39 Beneficial Ownership (1) Beneficial Owner Number of Shares Percent of Total - -------------------------------------------------------------------------------- Charles A. Holtgraves 5425 Martindale Shawnee, KS 66218 4,166,135(2) 71.0% Philip J. Holtgraves 5425 Martindale Shawnee, KS 66218 4,166,135 (3) 71.0% Argus Investment Group, Inc. 5425 Martindale Shawnee KS, 66218 4,166,135 71.0% All Executive officers and directors as a group (2 persons) 4,166,135(4) 71.0% (1) 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 4,166,135 shares controlled by Argus Investment Group, Inc. ("Argus"). Charles A. Holtgraves is the President of Argus. Argus is 100% owned by the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Charles A. Holtgraves is the son of Philip J. Holtgraves. (3) Includes 4,166,135 shares controlled by Argus. Philip J. Holtgraves is the Chairman of Argus. (4) Includes only shares actually issued and outstanding. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Argus Investment Group, Inc. ("ARGUS ") formerly known as First Mortgage Investment Co. ("FMIC") is a family owned corporation involved in venture capital lending and financing. The stock of ARGUS is 100% owned by the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Philip J. Holtgraves is the Chairman of ARGUS , a Director of the Company and the father of Charles A. Holtgraves. Charles A. Holtgraves is the President of ARGUS and Chairman, President and Director of the Company. Reference is made to ITEM 1. Description of Business - History of the Company and Subsidiary and Subsequent Events for additional information with respect to this ITEM 12. Such items discuss various related party transactions as a result of the implementation of the February 19, 1999 Plan of Reorganization and recapitalization of the Company. 40 PART IV ------- ITEM 13. EXHIBITS AND REPORTS -------------------- (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 of 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 order of Commercial Federal Bank, successor to Rail Road Savings Bank, FSB ("Lender") and agreement dated October 11, 1996 between Advanced Financial, Inc. and AFIM, as Borrower, and Lender and Matrix Financial Services 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)). *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 Advanced 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). 41 *10.5 AFI Capital Agreement. *10.6 Agreement by and between Gateway Energy Corporation and its wholly-owned subsidiaries and Allen Drilling Acquisition Company, filed as Exhibit A in Registrant's Form 8-K dated May 9, 2003. *10.7 The Certificate of Designation, Preferences and Rights of the Senior Series A Preferred Stock, Stated Value of $1,000 of Allen Drilling Acquisition Company, filed as Exhibit B in Registrant's Form 8-K dated May 9, 2003. *10.8 Agreement between Advanced Financial, Inc., Charles A. Holtgraves, Davis Investments VI LP, and Allen Drilling Acquisition Company, filed as Exhibit C in Registrant's Form 8-K dated May 9, 2003. *16 Letter regarding change in certifying accountant, filed as Exhibit 16 to Registrant's Form 8-K-A/1 dated May 13, 2003. 21 Subsidiaries of Registrant, filed herewith. 31 Certification Pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith 32 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith 99.C6 Opinion of Weaver & Martin, LLC, Certified Public Accountants, March 31, 2002, and dated October 27, 2003, filed herewith (b) Reports on Form 8-K - ----------------------- * Report dated May 9, 2003 - Items 4, 5, and 7. Asterisk indicates exhibits and reports on Form 8-K incorporated by reference as indicated; all other exhibits and reports are filed herewith. 42 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANCED FINANCIAL, INC. (Registrant) Dated: November 21, 2003 By: /s/ Charles A. Holtgraves ------------------ ---------------------------------- Charles A. Holtgraves Chairman, President, and Treasurer 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. Signatures Title Date - ---------------------------- --------------- ----------------- /s/ Charles A. Holtgraves Director 11-21-03 - ---------------------------- --------- Charles A. Holtgraves /s/ Phillip J. Holtgraves Director 11-21-03 - ---------------------------- --------- Phillip J. Holtgraves 43 EX-21 3 advancedexhib21-10k033102.txt SUBSIDIARIES OF THE REGISTRANT ADVANCED FINANCIAL, INC. ------------------------ EXHIBIT 21 ---------- SUBSIDIARIES OF REGISTRANT -------------------------- State of Business Name Incorporation Conduct Name ---- ------------- ------------ AFI Mortgage Corp. (Name changed to Allen Drilling Acquisition Company-F/Y 2002) Nebraska Same Cannon Financial Company (Name changed to AIH Receivable Management Services, Inc.-12/1/99 Kansas Same EX-31 4 advancedexhib31-10k033102.txt CERTIFICATION OF CEO PER SECTION 302 Exhibit 31 CERTIFICATION ------------- Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. I, Charles A. Holtgraves, Chief Executive Officer of Advanced Financial, Inc., certify that: 1. I have reviewed this annual report on Form 10-KSB of Advanced Financial, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/21/03 /s/ Charles A. Holtgraves --------- --------------------------- Charles A. Holtgraves Chief Executive Officer EX-32 5 advancedexhib32-10k033102.txt CERTIFICATION OF CEO PER SECTION 906 Exhibit 32 ADVANCED FINANCIAL INC. AND SUBSIDIARIES Section 906 Certification of Principal Executive Officer and Chief Executive Officer I, Charles A. Holtgraves, Chief Executive officer (Principal Executive Officer and Chief Financial Officer), certify that this annual report on Form 10-KSB for the annual period ended (March 31, 2002) fully complies with the requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, and that the information contained herein fairly presents, in all material respects, the financial condition and results of operations of Advanced Financial Inc. and its subsidiaries for the periods presented. Date: November 21, 2003 /s/ Charles A. Holtgraves ----------------------------------- Charles A. Holtgraves Chief Executive Officer Chief Financial Officer EX-99.C6 6 advancedexhib99c6-033103.txt OPINION OF CERTIFIED PUBLIC ACCOUNTANTS Exhibit 99.C6 Report of Independent Certified Public Accountants Stockholders and Directors Advanced Financial, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Advanced Financial, Inc. and Subsidiaries as of March 31, 2002 and the related consolidated statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Financial, Inc and Subsidiaries as of March 31, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note N to the financial statements, the Company has suffered recurring losses from operations and is dependent upon the continued sale of its securities or obtaining debt financing for funds to meet its cash requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are also described in Note N. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Weaver & Martin, LLC Kansas City, Missouri October 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----