-----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, Ct0KO+keSUIzxlnqQ1LKcLrHO+9HcyC1zylJZp94A09VVwPGe1zjCUHV1qRBpxxP TsONLSaqtw6F9awLh8pWKQ== 0001108890-04-000004.txt : 20040102 0001108890-04-000004.hdr.sgml : 20040101 20040102154405 ACCESSION NUMBER: 0001108890-04-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20040102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED FINANCIAL INC CENTRAL INDEX KEY: 0000823314 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 841069416 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11838 FILM NUMBER: 04501302 BUSINESS ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 BUSINESS PHONE: 9134412466 MAIL ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED MEDICAL DYNAMICS INC DATE OF NAME CHANGE: 19910617 FORMER COMPANY: FORMER CONFORMED NAME: WEINCOR FINANCIAL CORP DATE OF NAME CHANGE: 19890406 10QSB 1 advancedfin10qsb093003.txt PERIOD ENDED 09-30-03 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2003 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the Transition Period from ________ To_______________ Commission File No. 0-19485 ADVANCED FINANCIAL, INC. -------------------------------------------- (Name of small business issuer in its charter) DELAWARE 84-1069416 ------------------------------ ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5425 Martindale, Shawnee, KS 66218 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 535-1072 APPLICABLE ONLY TO CORPORATE ISSUERS As of December 1, 2003, the Issuer had 5,867,222 shares of its common stock outstanding. Transitional Small Business Disclosure Format: Yes____ No___X___ FORM 10-QSB Part 1 ------ Item 1. Financial Statements Page Unaudited Condensed Consolidated Balance Sheet -September 30, 2003 3 Unaudited Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2003 and 2002 4 Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended September 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 Part 1I Items 1-6. 16 ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET September 30, 2003 ----------- (Unaudited) ASSETS Collection fees receivable 39,127 Finance receivables 9,249 Other 7,641 Property, furniture and equipment, net 51,605 Customer lists, net of amortization 224,612 Accrued interest receivable 67,500 Escrow deposit, net of $75,000 reserve -- ----------- Total Assets $ 399,734 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Checks issued in excess of cash balances $ 84,322 Accounts payable and accrued expenses 214,060 Accounts payable - related parties 565,307 Notes payable 990,734 Dividends accrued-preferred stock of subsidiary 45,000 ----------- Total Liabilities 1,899,423 ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock of subsidiary, Series A, $10:00 par value; 900 shares authorized, 900 shares issued and outstanding 9,000 Paid in capital, Series A Preferred Stock 891,000 Subscriptions receivable, Series A Preferred Stock (900,000) ----------- ----------- ----------- 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, 5,867,222 issued an outstanding 5,867 Paid-in capital 1,253,259 Accumulated deficit (2,758,815) ----------- (1,499,689) ----------- ----------- Total Stockholders' Equity (Deficiency) (1,499,689) ----------- ----------- ----------- $ 399,734 =========== The accompanying notes are an integral part of these statements. 3
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Three Months Six Months Six Months 09/30/2003 09/30/2002 09/30/2003 09/30/2002 ----------- ----------- ----------- ----------- REVENUES Collection, servicing, and other fees $ 239,827 $ 284,943 $ 482,783 $ 575,168 Other 8,788 2,695 13,953 25,386 Interest 33,758 68 67,527 140 ----------- ----------- ----------- ----------- Total revenues 282,373 287,706 564,263 600,694 ----------- ----------- ----------- ----------- EXPENSES Operating expenses, including general and administrative costs 275,839 348,790 560,815 721,042 Interest 2,479 3,237 5,121 5,005 Depreciation and amortization 8,404 6,347 14,864 12,694 Escrow reserve -- -- -- 75,000 ----------- ----------- ----------- ----------- Total expenses 286,722 358,374 580,800 813,741 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (4,349) $ (70,668) $ (16,537) $ (213,047) Subsidiary preferred stock dividends accrued (22,500) -- (45,000) -- ----------- ----------- ----------- ----------- EARNINGS (LOSS) FOR COMMON STOCK $ (26,849) $ (70,668) $ (61,537) $ (213,047) =========== =========== =========== =========== Weighted-average shares outstanding 5,867,222 5,866,137 5,867,222 5,866,137 =========== =========== =========== =========== Loss per common share $ (0.00) $ (0.01) $ (0.01) $ (0.04) =========== =========== =========== =========== The accompanying notes are an integral part of these statements. 4
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Six Months Sept 30, Sept 30, 2003 2002 --------- --------- Cash flows from operating activities Net income (loss) $ (16,537) $(213,047) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 8,404 12,695 Escrow reserve -- 75,000 Net change in current assets and current liabilities (125,481) 5,543 --------- --------- Net cash used in operating activities (133,614) (119,809) --------- --------- Cash flows from investing activities Collections applied to finance receivables 21,747 34,978 Interest receivable-Gateway Energy Corporation (67,500) -- Acquisition escrow deposit -- (75,000) Acquisitions of property, furniture, and equipment 12,509 21,006 --------- --------- Net cash provided by (used in) investing activities (33,244) (19,016) --------- --------- Cash flows from financing activities Change in checks issued in excess of cash balances 84,322 -- Issuance of subsidiary preferred stock 900,000 -- Subscriptions receivable-subsidiary preferred stock (900,000) -- Payments on notes payable (29,181) (30,979) Advances from related party 69,521 166,696 --------- --------- Net cash provided by financing activities 124,662 135,717 --------- --------- Net increase (decrease) in cash (42,196) (3,108) Cash, beginning of period 42,196 37,794 --------- --------- Cash, end of period $ -- $ 34,686 ========= ========= Cash paid for interest $ 10,545 $ 7,512 The accompanying notes are an integral part of these statements. 5
Advanced Financial, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 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 Allen Drilling Acquisition Company ("ADAC") (See Note 3 below) formerly AFI Mortgage Corp. and 100% of Cannon Financial Company (Cannon). 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. 6 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. 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. The Company has estimated net operating loss carryforwards of approximately $10.7 million as of March 31, 2003. These net operating losses will expire in the years ended March 31, 2009 through March 31, 2024. 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 evaluated annually for impairment. No impairment has been recognized in the six months ended September 30, 2003. 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 7 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. There was no impairment charge upon completion of the impairment review as of March 31, 2003. 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 Company has determined the impact of the statement on its consolidated financial position or results of operations is not 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 Company has determined the impact of the statement on its consolidated financial position or results of operations is not 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 8 company CEOs and CFOs, restrictions 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 this statement. 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 require 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 is not material. 9 9. 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. 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 - 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. 10 With the completion of the Madisonville Project, and the possible pending venture with Gateway Energy Corporation (all as described later), the Company has determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (AIH Receivable Management Services, Inc.) were sold. The Company would then concentrate its growth efforts in the energy industry focusing primarily on natural gas. The Company, as of the filing of this quarterly report, has entered into preliminary negotiations to participate in an additional venture with Gateway Energy Corporation, which project agreement has a possible execution date early in the calendar year 2004 and a first phase start up date early in the second quarter of 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. In accordance with the above business strategy, an agreement in principal has been entered into with an entity controlled by the Company's principal creditor and majority stockholder, Argus, wherein the common shares of AIH would be exchanged for the debt held by Argus related to the AIH operations. The Board of Directors has engaged an investment banking firm (Morgan Stanley) to determine the fair market value as of September 30, 2003, of the AIH operations. The exchange transaction is anticipated to result in a gain to the Company. Upon completion of the exchange transaction, the Company intends to amend its Certificate of Incorporation to effect a 1 for 3 reverse stock split and a name change. In order to minimize costs, the Company intends to solicit the consents of the Company's common shareholders (in lieu of a proxy) for these and certain other matters as quickly as possible after receipt of the fair market valuation report discussed above. 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. NOTE D - ACQUISITIONS AND AGREEMENTS 1. 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 successful-efforts basis and will consist primarily of the Company's common equity. The Company will issue to Capital approximately 308,350 shares of its common stock (post reverse split basis) in connection with this July 2001 Agreement upon completion of the transactions described above. In addition, the proposed acquisition transaction discussed in Note 2 below is subject to the terms and conditions of this agreement, wherein Capital would be compensated if the acquisition is consummated. 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. 11 2. 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, one of which included certain matters with respect to the financing of the acquisition transaction. As a result of a material adverse change in the operating results for the company to be acquired, the transaction could not close primarily due to the financing requirement matters. As of September 30, 2003, $75,000 of escrow earnest money deposits remain in the hands of the Seller. Given the above, it is more likely than not, that the transaction can be closed under the terms and conditions as set forth in the definitive Stock Purchase Agreement, thus necessitating several modifications to the Agreement's terms and conditions, including the total consideration to be paid. In addition, a closing will be depended upon a favorable re-valuation of the company's fixed assets and the availability of adequate financing at reasonable rates. Due to the uncertainty of the above matters, and the potential non-recovery of the escrow deposit in the event the transaction is not closed, a reserve of $75,000 has been established for the escrow deposit. 3. The Gateway Energy/Madisonville Project Agreement On March 6, 2003, the Company executed an Agreement which was closed on April 30, 2003, 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 participating 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 cash 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. 12 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. During the quarter ended September 30, 2003, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return. It also accrued a Series Preferred Stock dividend payable of $22,500, representing 66-2/3% of such minimum guaranteed return. These dividends are not payable until such time as ADAC receives project cash distributions from Gateway. The plant was deemed to be in service on October 1, 2003, which is the date that the price up side provisions of the agreement become effective. NOTE E - NOTES PAYABLE At September 30, Notes Payable consisted of the following: Due ARGUS, $822,932 interest at prime, due on demand, secured by substantially all of he Company's assets. Due AFI Capital Corporation, $75,000, interest at 8%, unsecured, due on demand. Due bank, $92,802 under a $100,000 Line of Credit, interest at 2% over prime, unsecured, due March 31, 2004 guaranteed by a director of the company. NOTE F - ACCOUNTS PAYABLE - RELATED PARTIES Accounts payable - related parties consisted of amounts advanced to the Company by ARGUS ($514,786) and AFI Capital ($50,521). No interest or repayment terms exist. NOTE G- OTHER RELATED PARTY TRANSACTION As of September 30, 2003, the Company had advanced to Balance In Full, Inc. ("BIF") $10,676, in connection with the acquisition of certain accounts. Charles A. Holtgraves, the Company's President, is the 100% owner of BIF. BIF places delinquent charged off credit card accounts with AIH for collection services, for which BIF pays to AIH fees for collection services. The fees paid are comparable to non related party accounts. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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. 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 - --------------------- Three Month's Ended September 30, 2002 And 2003 - ------------------------------------------------- Liquidity and Capital Resources - ------------------------------- The Company had a cash balance of $34,686 and a negative balance of $84,322 at September 30, 2002 and 2003 respectively. The Company's 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, 2001, the maximum was reached under the line of credit and Argus converted such amount to common stock and entered into a series of prime rate demand secured notes with the Company and advances. The balance due under the secured notes at September 30, 2002 and 2003 was $875,747 and $822,932 respectively. In addition, Argus had advanced under open non interest bearing advances $372,536 and $514,786 as of the above dates. As of September 30, 2002, and 2003, the Company's total assets were $455,847 and $399,734 respectively, and stockholders' equity was a deficit of $1,239,818 and $1,499,689 respectively. Argus has agreed to provide funding as and when required by the Company to meet its cash flow requirements through two lines of credit. 14 Operations - ---------- Consolidated operations for the quarters ended September 30, 2002 and 2003 resulted in net losses of $70,668 and $4,349 respectively on collection, servicing and fee gross income of $284,943 and $482,783. Revenues from the collection of the Company's portfolio receivables are recognized only after the cost of such portfolios has been recovered. During the periods, the Company recovered $74,234 and $30,961 from its portfolio receivables of which $16,179 and $17,169 was applied to reduce the carrying value of its finance receivables asset leaving a portfolio carrying value of $53,921 and $9,249 at September 30, 2002 and 2003 respectively. As of September 30, 2003, the remaining outstanding balance of the receivables portfolio was approximately $14,000,000. Operating expenses, including general and administrative costs, for the quarter ended September 30, 2003, were $275,839 compared to $348,790 for the same period in 2002 which was a decrease of 26% between 2003 and 2002. The reduction was primarily a reflection of a reduction in payroll resulting from the Company's continued efforts in a re-organization and streamlining of various employee departments resulting in fewer full time employees. RESULTS OF OPERATIONS - --------------------- Six Month's Ended September 30, 2002 And 2003 - ---------------------------------------------- Operations - ---------- Consolidated operations for six months ended September 30, resulted in a net loss of $213,047 in 2002 and $16,537 in 2003 on collection, servicing and fee gross income of $575,168 and $482,783. The 2003 operating results includes $67,500 of accrued minimum guaranteed interest return with respect to the Madisonville Project. Revenues from the collection of the Company's portfolio receivables are recognized only after the cost of such portfolios has been recovered. During the six month periods ended September 30, 2002 and 2003, the Company recovered $141,832 and $57,950 respectively from its portfolio receivables of which $34,978 and $21,747 was applied to reduce the carrying value of its finance receivables asset. As of September 30, 2002 and 2003, the remaining outstanding balance of the receivables portfolio was approximately $14,000,000. Operating expenses, including general and administrative costs, for the six months ended September 30, 2002 and 2003, were $721,042 and $560,815 respectively, which was a decrease of approximately 29% between 2002 and 2003. The reduction was primarily a reflection of a reduction in payroll resulting from a re-organization and streamlining of various employee departments resulting in fewer full time employees. 15 During the quarter ended June 30, 2002, the Company provided a reserve of $75,000 with respect to an escrow deposit for an earnest deposit on a possible acquisition transaction as there is no assurance that the delayed transaction can be closed. Part II Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Description 31 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 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: December 31, 2003 By: /s/ Charles A. Holtgraves ----------------- -------------------------------- Charles A. Holtgraves Chairman, President, and Treasurer 16 EX-31 3 advancedexhib31-093003.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 quarterly report on Form 10-QSB of Advanced Financial, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred in this most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. I have disclosed, based on my 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 Date: December 31, 2003 /s/ Charles A. Holtgraves ----------------- ----------------------------------- Charles A. Holtgraves Chief Executive Officer EX-32 4 advancedexhib32-093003.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 quarterly report on Form 10-QSB for the quarterly period ended (September 30,2003) 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: December 31, 2003 /s/ Charles A. Holtgraves ----------------------------------- Charles A. Holtgraves Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----