-----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, PdpafhA6LakaeB6mnKuVsjEg/N0yZJwu7tEM6NDE0amrkXyZsMl51cIJ7NYkK4gG 5/do8M23oAchsGCC5DeGrw== 0001108890-05-000413.txt : 20050615 0001108890-05-000413.hdr.sgml : 20050615 20050615114326 ACCESSION NUMBER: 0001108890-05-000413 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20050615 DATE AS OF CHANGE: 20050615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED ENERGY RECOVERY, 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: 05896788 BUSINESS ADDRESS: STREET 1: 5799 BROADMOOR STREET 2: SUITE 750 CITY: MISSION STATE: KS ZIP: 66218 BUSINESS PHONE: 9135351072 MAIL ADDRESS: STREET 1: 5799 BROADMOOR STREET 2: SUITE 750 CITY: MISSION STATE: KS ZIP: 66218 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED FINANCIAL INC DATE OF NAME CHANGE: 19920703 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 advancedenergy10qsb063004.txt PERIOD ENDED 06-30-04 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 June 30, 2004 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the Transition Period from To ---------- ---------- Commission File No. 0-19485 ADVANCED ENERGY RECOVERY, INC. FORMERLY 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) 5799 Broadmoor, Ste 750, Mission, KS 66218 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 535-1072 APPLICABLE ONLY TO CORPORATE ISSUERS As of June 30, 2004, the Issuer had 1,955,379 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 -June 30, 2004 3 Unaudited Condensed Consolidated Statement of Operations for the three months ended June 30, 2004 and 2003 4 Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended June 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis 20 ------------------------------------- Part 1I Items 1-5. 25 Signatures 25 Certifications 2 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES FORMERLY ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) June 30, 2004 ----------- ASSETS Cash $ 306 Other receivables 27,875 Accrued guaranteed interest return receivable 103,548 Escrow deposit, net of $75,000 reserve -- ----------- Total Assets $ 131,729 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Accounts payable $ 499 Accrued interest payable 47,122 Accounts payable - related parties 52,815 Notes payable 284,450 Dividends accrued- preferred stock of subsidiary 83,345 ----------- Total Liabilities 468,231 ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock of subsidiary, Series A, $10.00 par value; 900 shares authoriized, 900 shares issued 9,000 Paid-in capital, Series A 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, $.003 par value; 10,000,000 shares authorized, 1,955,379 issued and and outstanding 5,867 Paid-in capital 1,253,259 Accumulated deficit (1,595,628) ----------- Total stockholders' equity (deficiency) (336,502) ----------- $ 131,729 =========== The accompanying notes are an integral part of these statements. 3 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES FORMERLY ADVANCED FINANCIAL, INC. & SUBSIDIARES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Three Months June 30, June 30, 2004 2003 ----------- ----------- REVENUES Collection, servicing, and other fees $ -- 242,956 Other 948 5,165 Interest and guaranteed return 33,750 33,769 ----------- ----------- Total revenues 34,698 281,890 ----------- ----------- EXPENSES Operating expenses, including general and administrative costs 13,015 270,697 Interest 3,740 10,871 Depreciation -- 12,510 ----------- ----------- Total expenses 16,755 294,078 ----------- ----------- OPERATING INCOME (LOSS) 17,943 (12,188) Gain on Exchange Transaction (Note C) 1,569,476 -- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES $ 1,587,419 $ (12,188) INCOME TAXES -- -- ----------- ----------- NET INCOME (LOSS) 1,587,419 (12,188) Subsidiary preferred stock dividends accrued (22,511) (22,500) ----------- ----------- EARNINGS (LOSS) FOR COMMON STOCK $ 1,564,908 $ (34,688) =========== =========== Weighted-average shares outstanding 1,955,379 1,955,379 =========== =========== Earnings (Loss) Per Common Share Basic and diluted $ 0.80 $ (0.02) The accompanying notes are an integral part of these statements. 4
ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES FORMERY ADVANCED FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Three Months June 30, June 30, 2004 2003 ----------- ----------- Cash flows from operating activities Net income (loss) $ 1,587,419 $ (12,188) Adjustments to reconcile net loss to net cash used in operating activities Depreciation -- 12,510 Gain on Exchange Transaction (1,569,476) -- Net change in current assets and current liabilities 1,001 (118,615) ----------- ----------- Net cash provided (used) in operating activities 18,944 (118,293) ----------- ----------- Cash flows from investing activities Collections applied to finance receivables -- 4,578 Interest receivable-Gateway Energy Corporation (33,906) (33,750) Project price upside payments received 26,453 -- Acquisitions of property, furniture, and equipment 0 -- ----------- ----------- Net cash provided by (used in) investing activities (7,453) (29,172) ----------- ----------- Cash flows from financing activities Change in checks issued in excess of cash balances -- 54,961 Payments on notes payable (1,350) (21,606) Issuance of subsidary preferred stock -- 900,000 Subscriptions receivable-subsidiary preferred stock -- (900,000) Advances from related parties -- 71,914 Subsidiary preferred stock dividends paid (16,569) -- ----------- ----------- Net cash provided by financing activities (17,919) 105,269 ----------- ----------- Net increase (decrease) in cash (6,428) (42,196) Cash, beginning of period 6,734 42,196 ----------- ----------- Cash, end of period $ 306 $ -- =========== =========== Cash paid for interest $ -- $ 5,063 The accompanying notes are an integral part of these statements. 5
Advanced Energy Recovery, Inc. and Subsidiaries Formerly Advanced Financial, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 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 Energy Recovery, Inc., formerly Advanced Financial, Inc., (the Company) owns 100% of Allen Drilling Acquisition Company ("ADAC"). ADAC is engaged in operations in the energy industry (See Note 3 below). Under date of February 27, 2004, the Company, through an Information Statement pursuant to Section 14 (c) of the Securities Exchange Act and Regulation 14A, solicited the consents of the common stockholders (the "Solicitation") to effect several transactions in an effort, among other things, to restructure the Company, to dispose of the financial service operations which have accumulated significant losses and to change its focus and growth efforts to the energy industry with its primary emphasis on natural gas. The consents solicited included the following: 1. To adopt an amendment to the Company's Certificate of Incorporation to; (i) change the name of the corporation to "Advanced Energy Recovery, Inc."; (ii) effect a 1 for three reverse split of the outstanding Common Stock of the Company; and (iii) set the authorized Common Stock of the Company at 10,000,000 common shares. 2. To obtain Stockholders' consent to an exchange of 100% of the outstanding stock of AIH Receivable Management Services, Inc. ("AIH") (a wholly owned subsidiary of the Company) for an assumption by the primary secured lender of the Company of all of the AIH liabilities ("the Exchange Transaction"). 3. To obtain Stockholders' consent and ratification of the engagement by the Board of Directors of Weaver and Martin L.P. as the Company's independent public accountants. 6 4. To obtain Stockholders' consent and ratification of the appointment by the Board of Directors of two directors to fill two vacancies created by resignations. Such directors will serve until the next annual meeting of Stockholders. On March 24, 2004, the Company, under a Form 8-K under date thereof, announced that it had received the requisite affirmative consent votes from the common shareholders to effect the four proposals set forth in the February 27, 2004, Solicitation. The Exchange Transaction was completed in August, but was effective as of 12:01 AM April 1, 2004. The consolidated financial statements as of June 30, 2004, include the accounts of the Company and ADAC. The consolidated financial statements (Statement of Operations and Statement of Cash Flows) as of June 30, 2003, 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 accounted for its investment through March 31, 2004, 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 were established with underlying accounts having similar attributes, based on acquisition timing and by seller. Once a static pool was established, the accounts in the pool were not changed. Each pool was initially recorded at cost. Until it was determined that the amount and timing of collections were reasonably estimable and collection was probable, PB6 required the receivable be accounted for under the cost-recovery method. All of the Company's pools were accounted for under the cost-recovery method. Application of the cost-recovery method required that any amounts received be applied first against the recorded amount of the pool; when that amount had been reduced to zero, any additional amounts received were recognized as income. The discount between the cost of each pool of receivables purchased and the contractual receivable of the accounts in the pool was not recorded since the Company expected to collect a relatively small percentage of each pool's contractual receivable balance. 3. Property and Equipment All property, furniture, and equipment was owned by AIH and accordingly included in the Exchange Transaction and the determination of the gain thereon. 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 7 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 had estimated net operating loss carryforwards ("NOLs") of approximately $10.8 million as of March 31, 2004. Such NOLs will be reduced by the taxable gain, yet to be determined, for the gain on the April 1, 2004, Exchange Transaction, The net operating losses will expire in the years ended March 31, 2009 through March 31, 2025. 5. Income (Loss) Per Common Share Income (Loss) per common share is based on the weighted average number of common shares outstanding during the periods presented. The inclusion of stock options and warrants had no effect on basic earnings per share. 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. 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 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 8 provisions of SFAS 142 on April 1, 2002. There was no impairment charge upon completion of the impairment review as of March 31, 2003. However, at March 31, 2004, the Company provided an impairment charge of $90,000 in connection with the goodwill arising from a prior year's acquisition. The operations with respect to such acquisition were included in the Exchange Transaction. 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 adoption did not have a material effect on the Company's consolidated financial position or consolidated results of operations 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, "Recession 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 adoption did not have a material effect on the Company's consolidated financial position or consolidated results of operations 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 adoption did not have a material effect on the Company's consolidated financial position or consolidated results of operations. Effective July 30, 2002, the Sarbanes-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 9 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, 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 has complied with all applicable new rules as they became 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. As of March 31, 2004, because of its recent restructuring and small size of the 10 Board, the Company did not have on its Board of Directors a member who could meet the qualifications as defined in the rules for serving on an audit committee, or a member who could meet the qualifications of an audit committee financial expert. 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. In January 2003, the FASB issued interpretation No. 46 "Consolidation of Variable Interest Entities, and interpretation of Accounting Research Bulletin No. 51" ("The Interpretation"). The Interpretation requires the consolidation of variable Interest Entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected returns, or both, as a result of ownership, contractual or other financial interests in the entity. The Interpretation was originally immediately effective for variable interest entities created after January 31, 2003, and effective in the fourth quarter of the Company's fiscal 2003 for those created prior to February 1, 2003. However, in October 2003, the FASB deferred the effective date for those variable interest entities created prior to February 1, 2003 until the fourth quarter of fiscal 2004. The Company has substantially completed the process of evaluating the Interpretation and believes its adoption will not have a material impact on its financial position or results of operations. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The standard is effective for contracts entered into or modified after June 30, 2003. The Company's adoption of SFAS No. 149 did not have a material impact on its financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150") SFAS No. 150 establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective in the first quarter of the Company's fiscal 2004. The Company's adoption of SFAS No. 149 did not have a material impact on its financial position or results of operations. 11 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. NOTE B - 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. To address these issues, early in fiscal year 2004, management of the Company developed a plan to restructure the Company and to change its focus and business strategy to the energy industry. The plan was implemented throughout the year, and culminated in the Exchange Transaction, which transaction was effective on April 1, 2004. In addition, on November 15, 2004, the Company closed two transactions which should further address the going concern issues. These statements, however, do not reflect adjustments that might result if the Company is unable to continue as a going concern. NOTE C- THE EXCHANGE TRANSACTION The AIH operations had resulted in significant losses despite the efforts by the Company to restructure and reorganize various AIH segment operations. These losses were funded by ARGUS. The following sets forth in summary form the consolidated results of operations for five years: 12
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Financial Position 03/31/00 03/31/01 03/31/02 03/31/03 03/31/04 ----------- ----------- ----------- ----------- ----------- Total assets $ 1,139,576 $ 742,348 $ 562,750 $ 435,032 $ 332,697 Total liabilities 1,027,060 1,272,620 1,589,521 1,873,184 2,234,107 Stockholders' equity $ 112,516 $ (530,272) $(1,026,771) $(1,438,152) $(1,901,410) Amounts due to ARGUS $ 560,000 $ 765,840 $ 1,129,772 $ 1,318,709 $ 1,442,618 Operations Total revenues $ 977,439 $ 1,423,153 $ 1,152,171 $ 1,128,441 $ 987,819 Total expenses 1,898,423 2,119,914 1,648,669 1,539,822 1,361,077 Net loss $ (920,984) $ (696,761) $ (496,498) $ (411,381) $ (373,258) The consolidated operations for the fiscal year ended March 31, 2004, included amounts with respect to the Company's wholly owned subsidiary's, (ADAC) participation in the Madisonville Project as described in Note C herein. For the fiscal year then ended, ADAC reported net income of $105,616. As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point where the Company could no longer service this outstanding debt given the downsizing of the Company that was the result of the reorganization and restructuring of the various AIH segment operations. Also during these years, and to the current date, the current President and Treasurer of the Company did not draw a salary, nor were any amounts accrued with respect thereto. With the completion of the Madisonville Project investment, and the joint venture with_GulfWest Energy Inc. as discussed later, the Company had determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (AIH) were sold and the Company concentrated its growth efforts in the energy industry, focusing primarily on natural gas. In accordance with this business strategy, an agreement was entered into with ARGUS, subject to common shareholder approval, wherein the common shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH liabilities (the "Exchange Transaction"). The Board of Directors engaged an investment banking firm (Morgan Stanley) to determine the fair market value of the AIH operations on a going concern basis. Morgan Stanley, through its SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the Company received the requisite affirmative consent votes from the common shareholders to effect the Exchange Transaction. The Exchange Transaction was effective at the beginning of business on April 1, 2004. The following sets forth the opening consolidated balance sheet on April 1, 2004, reflecting the Exchange Transaction : 13
Condensed Consolidated Balance Sheet March 31,2004 Assets Actual Transaction April 1,2004 ----------- ----------- ----------- Cash (overdrafts) $ (112,489) $ 119,223 $ 6,734 Receivables and other 65,927 (40,791) 25,136 Accrued interest receivable 96,095 96,095 Property, net 36,063 (36,063) 0 Customer lists, net 134,612 (134,612) 0 Escrow deposit 75,000 75,000 Escrow depost reserve (75,000) (75,000) ----------- ----------- $ 220,208 $ 127,965 =========== =========== Liabilities Payables and accrued expenses $ 396,742 (352,861) 43,881 Payables to related parties 52,815 A 52,815 Notes payable 1,594,658 B (1,308,858) 285,800 Preferred stock dividends accrued 77,403 77,403 ----------- ----------- Total 2,121,618 459,899 ----------- ----------- Stockholders Equity (Deficiency) Subsidary preferred stock 900,000 900,000 Subscriptions receivable (900,000) (900,000) Series B Preferred stock 0 0 Common stock and paid in capital 1,259,126 1,259,126 Accumulated deficit (3,160,536) C 1,569,476 (1,591,060) ----------- ----------- Total (1,901,410) (331,934) ----------- ----------- $ 220,208 $ 127,965 =========== =========== Notes to Condensed Consolidated Balance Sheet: (A) At March 31, 2004, the amounts due to related parties consisted of $52,815 due to AFI Capital Corporation. (B) Notes payable at March 31, 2004, consisted of the following: Due ARGUS, $1,442,618, interest at prime, due on demand, secured by substantially all of the Company's assets. Due AFI Capital Corporation, $75,000, interest at 8%, unsecured, due on demand. Due bank, $77,040 under a $100,000 Line of Credit, interest at 2% over prime, unsecured, due March 31, 2004, guaranteed by a director of the Company. The ARGUS note payable included $185,900 which was used to fund general Company corporate operations since the Company's emergence from its Chapter XI filing in 1999. A new prime interest rate demand note (accrued interest of $33,381 with respect to such note is included in accrued expenses above) was issued to ARGUS. The balance ($1,308,858) related to the funding of the AIH operations and was included in the Exchange Transaction. 14 The AFI Capital Corporation note payable consists of two advances to ADAC in connection with a proposed acquisition transaction The bank note payable relates to the operations of AIH and was included in the Exchange Transaction. The gain to the Company on the Exchange Transaction. Such gain was the difference between the ARGUS obligations cancelled and the AIH operation's net assets (assets less liabilities assumed by ARGUS). NOTE D -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 provided financial, acquisition, and general public company business consulting services in other than the financial services industry. Compensation for such services was based on a "successful efforts" basis and primarily consisted of the Company's common equity and cash performance fees as earned. At March 31, 2004, $52,815 was due to Capital under the compensation portion of the Agreement, which amount was converted to 337,500 shares of Common Stock (post reverse split basis) subsequent to March 31, 2004, in accordance with the provisions of the Agreement. Upon issuance of the shares, the Agreement was terminated and all parties released from any obligations arising there from. Larry J. Horbach, who was appointed assistant secretary of the Company, and appointed 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 and an officer of Capital. Upon issuance of the shares, Mr. Holtgraves resigned as a director and officer of Capital and his Capital shares were redeemed by Capital. 2. Allen Drilling Acquisition Company Agreement On April 22, 2002, the Company, through a wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC") executed a definitive Stock Purchase Agreement to acquire a service company in the energy industry. The closing, which was not subject to a specific date, 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. Ernest money deposits in the amount of $75,000 were provided to ADAC by Capital under an 8% demand promissory note. Rather then pursuing the closing of the Agreement and incurring additional expense at the time, ADAC notified the seller that the earnest deposit could be used to offset certain obligations incurred by Capital to the company of the seller. ADAC then focused its attention on the March 6, 2003, Gateway Energy Corporation transaction as described herein. Given the above, as 15 well as the present stance of the parties, it is more likely than not, that the transaction will never be closed. Due to the uncertainty of the above matters, a reserve of $75,000 was established by ADAC as of March 31, 2003, 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 further 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. During the quarter ended June 30, 2004, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return and received $26,453 in price upside payments. These payments were offset to the accrued minimum 16 guaranteed return. During the quarter ended June 30, 2004, ADAC also accrued Series Preferred Stock dividends payable of $22,511, representing 66-2/3% of such minimum guaranteed return and paid cash dividends of $16,569. The 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 became effective. 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 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 is currently a director of Gateway. Mr. Horbach, who was a director of Gateway for several years, resigned his directorship on August 27, 2004. 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 Series A Preferred Stock. NOTE E - NOTES PAYABLE At June 30, 2004, Notes Payable consisted of the following: Due ARGUS, $185,900, interest at prime, due on demand, unsecured. Due to two officers and directors of the Company under an assignment by AFI Capital Corporation, $75,000, interest at 8%, unsecured, due on demand. NOTE F - ACCOUNTS PAYABLE - RELATED PARTY Accounts payable - related parties consisted of amounts advanced to the Company by AFI Capital, ($52,815). No interest or repayment terms exist. 17 NOTE G - SUBSEQUENT EVENTS GulfWest Energy Inc. Joint Venture On July 21, 2004, the Company entered into a Letter of Intent, subject to the execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located in Houston, Texas, under which the Company and GWEI, through one or more Joint Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes and Madison County, Texas. Certain of the Madison County reserves, if developed and produced, are expected to require treatment similar to that described in the Madisonville Project as discussed later under the Gateway Energy Corporation Agreement. On October 14, 2004, the Company, through its wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI for the purpose of initially developing certain portions of the GWEI oil and gas asset bases in Madison County and Hardin County, Texas. Participation in the development of the Grimes County asset base by ADAC was deferred and will not be a part of this LLC. GWEI contributed certain assets valued at approximately $540,000, and the Company committed to provide up to $595,000 in initial capital funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three manager positions, such positions filled by Charles A. Holtgraves and Larry J. Horbach. The various agreement transaction requirements were completed on November 15, 2004, including the required cash initial capital funding requirements. The initial capital funding was raised by ADAC through a private placement of 595 shares of a new series preferred stock. The Senior Series B Preferred Stock, Stated Value $1,000 per share provides, among other things, for a preferential dividend right based on the Company's proportionate interest in the operations and cash flow from Elgin, and a preferential liquidation right consisting of a proportionate share of the Company's Capital Account in Elgin. Charles A. Holtgraves, Larry J. Horbach and Christopher D. Davis are directors of the Registrant. Mr. Holtgraves and Mr. Horbach are officers of the Registrant. Entities in which these individuals either control or have an interest in, have subscribed for 577 of the 595 authorized shares. AER/Elgin and Gateway Energy Corporation Agreement On November 15, 2004, AER and Elgin entered into a LICENSE AGREEMENT (the "Agreement") with Gateway Energy Corporation and certain of its subsidiaries. The Agreement, provides, among other things, for the granting of a sublicense to AER and Elgin to enable Elgin to treat the gas produced from the leasehold interests owned by Elgin in Madison County, Texas, which interests fall within a defined Area of Mutual Interest, ("AMI"). The AMI is described in certain agreements with respect to the "The Gateway Energy/Madisonville Project Agreement" discussed briefly in Note D, 3 above. In addition, the Agreement provides that AER and Elgin will dedicate the gas produced from its interests in the AMI to the Madisonville Project plant and will advance up to $91,250 to 18 Gateway, in the form of a prepayment, the license and other fees due Advanced Extraction Technologies ("AET") for the processing of a minimum of 5,000 Mcf per day. The Agreement further grants to AER or its designees, an option to participate pari passu with Gateway, subject to certain limitations, in future projects which require the treatment of natural gas containing high nitrogen, which projects utilize the AET license held by Gateway. Reference is made to the Registrant's SEC Form 8-K filed on November 19, 2004 for additional information with respect to the above. Settlement With AFI Capital Corporation The $52,815 due to AFI Capital Corporation at June 30, 2004, was converted to 337,500 shares of AER Common Stock (post reverse split basis) in August, 2004, in accordance with the provisions of the July, 2001 Agreement between AFI Capital and the Company. Upon issuance of the shares, the Agreement was terminated and all parties released from any obligations arising there from. Office Lease On August 31, 2004, the Company entered into a month to month lease for space located at 5799 Broadmoor, Suite 750, Mission, KS, 66203, at a cost of $1,000 per month with a former subsidiary of the Company. NOTE O - RELATED PARTIES 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 resigned as a director from Gateway on August 27, 2004. Mr. Horbach is the President and Chairman of the Board of AFI Capital Corporation. Mr. Holtgraves is a director of AFI Capital Corporation. Mr. Holtgraves resigned as a director of AFI Capital Corporation on August 27, 2004. Argus Investment Group, Inc. ("ARGUS ") 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., which was a wholly owned subsidiary of the Registrant to March 31, 2004, ("AIH") for collection services. The fees paid by BIF for regular collections are 36% and 50% for legal accounts, which fees were comparable for non related party accounts. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL - ------- Effective April 1, 2004, the Company completed a restructuring and changed its business focus to the energy industry, having disposed of all of its financial service related operations. Thus, any comparisons of results of operations and financial condition would be somewhat meaningless. However the prior year's Management's Discussions are included for a historical perspective. 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 particularly those dealing with the Exchange Transaction and the Subsequent Events footnote. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in any forward-looking statements included herein. In addition, because of the change to a new business strategy, the Company will be subject to all of the energy industry common and traditional risks associated with the economic production of hydrocarbons including, but not limited to, acquisition of reserves that can produce adequate returns to attract the necessary investment capital to develop such reserves, the petroleum engineering of underground oil and gas reserves, drilling of the wells, and the fluctuation of hydrocarbon prices. The Company has limited capital resources and management has limited experience with respect to this segment of the energy industry. Accordingly, the Company is utilizing the joint venture approach to mitigate these risks. RESULTS OF OPERATIONS - --------------------- Three Month's Ended June 30, 2003 - ---------------------------------- Liquidity and Capital Resources - ------------------------------- The Company had a deficit cash balance at June 30, 2003 of $54,961. The Company's deficit cash balance and working capital requirements continue to be 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 7% demand secured notes with the Company and advances. The balance due under the secured notes at June 30, 2003 was $822,932 and $514,786 under the advances. 20 On April 30, 2003, the Company closed 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, 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. 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 June 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. 21 As of June 30, 2003, the Company's total assets were $392,016 and the common stockholders' equity was a deficit of $1,472,840. Argus has agreed to continue provide funding as and when required by the Company to meet its cash flow requirements. Operations Consolidated operations for the quarter ended June 30, 2003 resulted in net loss of $12,188 on collection, servicing and fee gross income of $242,956 and the guaranteed minimum return accrual of $33,750 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 period, the Company recovered $36,203 from its portfolio receivables of which $4,578 was applied to reduce the carrying value of its finance receivables asset leaving a portfolio carrying value of $26,418. As of June 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 June 30, 2003, were $270,697 compared to $372,252 for the 2002 period. The reduction was primarily a reflection of a reduction in payroll resulting from the company's continuing re-organization of various employee departments. RESULTS OF OPERATIONS - --------------------- Three Month's Ended June 30, 2004 - ---------------------------------- Liquidity and Capital Resources - ------------------------------- As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point where the Company could no longer service this outstanding debt given the downsizing of the Company that was the result of the reorganization and restructuring of the various AIH segment operations. Also during these years, and to the current date, the current President and Treasurer of the Company did not draw a salary, nor were any amounts accrued with respect thereto. With the completion of the Madisonville Project investment, and the joint venture with GulfWest Energy Inc. as discussed later, the Company had determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (AIH) were sold and the Company concentrated its growth efforts in the energy industry, focusing primarily on natural gas. In accordance with this business strategy, an agreement was entered into with ARGUS, subject to common shareholder approval, wherein the common shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH liabilities (the "Exchange Transaction"). The Board of Directors engaged an 22 investment banking firm (Morgan Stanley) to determine the fair market value of the AIH operations on a going concern basis. Morgan Stanley, through its SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the Company received the requisite affirmative consent votes from the common shareholders to effect the Exchange Transaction. The Exchange Transaction was effective at the beginning of business on April 1, 2004. In the Exchange Transaction, ARGUS assumed $1,661,719 of liabilities, (including $1,308,858 of notes payable, substantially all of which carried a prime interest rate), resulting in a gain to the Company on the exchange of $1,569,476 Subsequent to June 30, 2004 the Company entered into two transactions which significantly impacted the Company- GulfWest Energy Inc. Joint Venture On July 21, 2004, the Company entered into a Letter of Intent, subject to the execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located in Houston, Texas, under which the Company and GWEI, through one or more Joint Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes and Madison County, Texas. Certain of the Madison County reserves, if developed and produced, are expected to require treatment similar to that described in the Madisonville Project as discussed earlier under the April 30, 2003 Gateway Energy Corporation Agreement. On October 14, 2004, the Company, through its wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI for the purpose of initially developing certain portions of the GWEI oil and gas asset bases in Madison County and Hardin County, Texas. Participation in the development of the Grimes County asset base by ADAC was deferred and will not be a part of this LLC. GWEI contributed certain assets valued at approximately $540,000, and the Company committed to provide up to $595,000 in initial capital funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three manager positions, such positions filled by Charles A. Holtgraves and Larry J. Horbach, directors and officers of the Registrant. The various agreement transaction requirements were completed on November 15, 2004, including the required cash initial capital funding requirements. The initial capital funding was raised by ADAC through a private placement of 595 shares of a new series preferred stock. The Senior Series B Preferred Stock, Stated Value $1,000 per share provides, among other things, for a preferential dividend right based on the Company's proportionate interest in the operations and cash flow from Elgin, and a preferential liquidation right consisting of a proportionate share of the Company's Capital Account in Elgin. Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr. Horbach are officers of the Registrant. Entities in which these individuals either control or have an interest in, have subscribed for 577 of the 595 authorized shares. 23 The Company/Elgin and Gateway Energy Corporation Agreement On November 15, 2004, the Company and Elgin entered into a LICENSE AGREEMENT (the "Agreement") with Gateway Energy Corporation and certain of its subsidiaries. The Agreement, provides, among other things, for the granting of a sublicense to the Company and Elgin to enable Elgin to treat the gas produced from the leasehold interests owned by Elgin in Madison County, Texas, which interests fall within a defined Area of Mutual Interest, ("AMI"). In addition, the Agreement provides that the Company and Elgin will dedicate the gas produced from its interests in the AMI to the Madisonville Project plant and will advance up to $91,250 to Gateway, in the form of a prepayment, the license and other fees due Advanced Extraction Technologies ("AET") for the processing of a minimum of 5,000 Mcf per day. The Agreement further grants to the Company or its designees, an option to participate pari passu with Gateway, subject to certain limitations, in future projects which require the treatment of natural gas containing high nitrogen, which projects utilize the AET license held by Gateway. Operations - ---------- The revenues for the three months ended June 30, 2004 consisted of the interest and guaranteed return from the Madisonville Project. During the quarter ended June 30, 2004, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return and received $26,453 in price upside payments. These payments were offset to the accrued minimum guaranteed return. During the quarter ended June 30, 2004, ADAC also accrued Series A Preferred Stock dividends payable of $22,511, representing 66-2/3% of such minimum guaranteed return and paid cash dividends of $16,569. The 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 became effective. Operating income was $17,943 after general and administrative costs of $13,015 and interest of $3,740, generating net positive cash flow of $18,944. Such general and administrative costs are not indicative of future operations as the sole three employees/officers of the Company (Charles Holtgraves, Philip Holtgraves and Larry Horbach) have waived current compensation in order to preserve cash flow for Company investment in on going projects. For such waiver of current compensation, these individuals have been given the right to invest on a pari-passu basis in these initial high risk capital projects along side the Company and other outside accredited investors. To date, entities in which these individuals either control or have an interest in, have provided a majority of all of the capital invested in the initial energy projects described above. During the quarter ended June 30, 2004, the Company recognized a gain on the Exchange Transaction of $1,569,476. Such gain was the difference between the ARGUS obligations cancelled and the AIH operation's net assets (assets less liabilities assumed by ARGUS). 24 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. Exhibits and Reports on Form 8-K (a) Exhibits -------- 31 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports ------- On May 9, 2003, the Registrant filed a Form 8-K reporting under Items 4, 5, and 7. On November 19, 2004, the Registrant filed a Form 8-K reporting under Item 8.01. 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 ENERGY RECOVERY, INC. (Registrant) Dated: 06-15-05 By: /s/ Charles A. Holtgraves ------------------------------------- Charles A. Holtgraves Chairman, President, and Treasurer 25 EX-31 2 advancedexhib31-063004.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 Energy Recovery, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Advanced Energy Recovery, 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: 6/15/05 /s/ Charles A. Holtgraves --------- ------------------------------- Charles A. Holtgraves Chief Executive Office EX-32 3 advancedexhib32-063004.txt CERTIFICATION OF CEO & CFO PER SECTION 906 EXHIBIT 32 ADVANCED ENERGY RECOVERY, 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 (June 30,2004) 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 Energy Recovery, Inc. and its subsidiaries for the periods presented. Date: June 15, 2005 /s/ Charles A. Holtgraves ---------------------------------- Charles A. Holtgraves Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----