SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECOND AMENDED
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER O-24512
ANZA CAPITAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-1273503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 BRISTOL STREET, SUITE 700
COSTA MESA, CA 92626
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 866-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
---
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X]
State issuer's revenues for its most recent fiscal year. $10,991,250
for the year ended April 30, 2001.
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
rule 12b-2 of the Exchange Act.) $5,688,808.60, based on the closing price of
$0.20 for the common stock on August 3, 2001.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of August 3, 2001, there
were 38,626,543 shares of common stock, par value $0.001, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). None.
Transitional Small Business Disclosure
Format (check one):
Yes _____ No __X__
-
1
ANZA CAPITAL, INC.
TABLE OF CONTENTS
-----------------
PART I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Common Equity and Related Stockholder Matters
Item 6 Management's Discussion and Analysis or Plan of Operations
Item 7 Financial Statements
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K.
2
PART I
EXPLANATORY NOTE
In response to comments from the United States Securities and Exchange
Commission, Anza Capital, Inc. has restated its Annual Statement on Form 10-KSB.
This Annual Statement is for the year ended April 30, 2001, and was originally
filed with the Commission on August 16, 2001. Effective on January 2, 2002, the
Company changed its name from e-Net Financial.com Corporation to Anza Capital,
Inc. References throughout this Annual Statement are accurate as of the date
originally filed, and other than on the front page, references to the Company as
e-Net Financial.com Corporation have been left as originally drafted. The
Company has not undertaken to update all of the information in this Annual
Report, but instead has updated only those areas requested by the Commission.
Please read all of the Company's filings with the Commission in conjunction with
this Annual Report.
This Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading "Management's Discussion and Analysis of Financial Condition or
Plan of Operation." Forward-looking statements also include statements in which
words such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
e-Net Financial.Com Corporation ("e-Net" or the "Company") was incorporated
in the State of Nevada on August 18, 1988 as Solutions, Incorporated. On July
11, 1994, the Company filed a Registration Statement on Form 10-SB with the
Securities and Exchange Commission, which was declared effective on December 22,
1994. At that time, the Company became a reporting company under Section 12(g)
of the Securities Exchange Act of 1934, as amended. On August 16, 1996, the
Company changed its name to Suarro Communications, Inc., and on February 12,
1999, May 12, 1999 and on January 18, 2000, the Company changed its name to
e-Net Corporation, e-Net Financial Corporation and e-Net.Com Corporation,
respectively. On February 2, 2000, the Company changed its name to e-Net
Financial.Com Corporation. In November of 1999, the Company forward-split its
Common Stock on a two-for-one basis, and all references in this Annual Report
reflect such forward split.
e-Net has had a rapid sequence of name changes which reflected significant
acquisitions that shifted the Company's primary business operations over very
short periods of time. Management has decided that one generic name would have
been preferable. As such, effective January 2, 2002, e-Net has changed its name
to ANZA Capital, Inc.
3
BUSINESS OVERVIEW
The Company is a holding company which currently operates through four (4)
subsidiaries, namely AMRES, Expidoc, BravoRealty.com, and Titus Real Estate.
Since March 1, 1999, the Company has acquired a total of nine companies, six of
which have failed, and five of these subsidiaries have never generated any net
revenue. e-Net has never developed a business of its own. Of the nine
companies purchased by e-Net since March 1, 1999, six were purchased from
then-current officers and directors, or parties affiliated with then-current
officers and directors, including EMB. The total dollar value attributed to the
purchase of these nine companies is approximately $4,400,000.
AMRES and Expidoc represent our only significant operations and greater
than 95% of our consolidated revenue. Please see further discussion of AMRES
and Expidoc below.
We have never been profitable, and our net losses have been significant.
For the year ended April 30, 2001, our net loss was $6,745,207, or $0.30 per
share. For the ten months ended April 30, 2000, our net loss was $1,796,899, or
$0.22 per share. See our discussion in Item 6 - Management's Discussion and
Analysis or Plan of Operations, for further details concerning our financial
results.
RECENT CHANGES IN BUSINESS STRATEGY AND CHANGE IN CONTROL
Effective March 1, 1999, the Company acquired e-Net Mortgage Corporation, a
Nevada corporation ("e-Net Mortgage"), and City Pacific International, U.S.A.,
Inc., a Nevada corporation ("City Pacific"). Pursuant to the Share Exchange
Agreement and Plan of Reorganization dated March 1, 1999, regarding e-Net
Mortgage, its shareholders received 2,000,000 shares of Common Stock of the
Company in exchange for all of the issued and outstanding stock of e-Net
Mortgage, which became a wholly owned subsidiary of the Company. Pursuant to
the Share Exchange Agreement and Plan of Reorganization, dated March 1, 1999,
regarding City Pacific, its shareholders received 500,000 shares of Common Stock
of the Company in exchange for all of the issued and outstanding stock of City
Pacific, which became a wholly owned subsidiary of the Company. Effective as of
that date, Michael Roth, who had owned 100% of e-Net Mortgage, became Chairman,
CEO, President, a director, and the owner of 44% of the common stock of the
Company. Also effective as of that date, Al Marchi, who had owned 100% of City
Pacific, became a director and the owner of 11% of the outstanding common stock
of the Company. Following this transaction, the Company entered into a series
of acquisitions as part of its strategy of horizontal market penetration and in
an effort to increase revenues.
On November 29, 1999, the Company issued Paul Stevens 250,000 shares of its
Common Stock in exchange for Mr. Stevens' transfer to the Company of 500,000
shares of Common Stock of EMB Corporation ("EMB") that he owned (the "Stevens
EMB Shares"). On December 21, 1999, and in connection with that exchange, the
Company entered into agreements with Digital Integrated Systems, Inc. ("DIS"),
and EMB to acquire their respective 50% interests in VPN.COM JV Partners, a
Nevada joint venture ("VPN Partners") involved in vertically integrated
communications systems. In consideration of the purchase of the interests, the
Company issued a one-year promissory note to DIS in the amount of $145,000 (the
"DIS Note") and tendered to EMB the Stevens EMB Shares. At the time of such
transactions, Mr. Stevens was the sole owner of DIS and the President and Chief
Executive Officer of VPN Partners. Upon closing of the acquisitions, VPN
Partners was integrated with VPNCOM.Net, Inc. (previously known as City
Pacific), the other communications entity then owned by the Company. At the time
of the transaction, our management believed that VPN Partners and Mr. Stevens
would contribute materially to the planned expansion of the Company.
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On January 12, 2000, as revised on April 12, 2000, the Company entered into
an agreement (the "Amended and Restated Purchase Agreement") with EMB to acquire
two of its wholly owned subsidiaries, namely American Residential Funding, Inc.,
a Nevada corporation ("AMRES"), and Bravo Real Estate, Inc., a California
corporation ("Bravo Real Estate"). At the time of the acquisition, AMRES was the
principle operating company of EMB, and EMB had previously acquired AMRES from
AMRES Holding LLC ("AMRES Holding"), a company controlled by Vincent Rinehart
(now an officer and director of the Company) and in which Mr. Rinehart currently
holds his e-Net common stock, in exchange for EMB common stock. The purpose of
the acquisition was to acquire market share, revenues, and certain key
management personnel. The Company also acquired all of EMB's rights to acquire
Titus Real Estate LLC, a California limited liability company ("Titus Real
Estate") from its record owners. Titus Real Estate is the management company for
Titus Capital Corp., Inc., a California real estate investment trust (the "Titus
REIT"), in which the Company has no ownership interest. Titus REIT currently
holds 10 apartment buildings in Long Beach, California, six of which are in
escrow to be sold.
On February 11, 2000, the Company executed a purchase agreement (the "Titus
Purchase Agreement") for the acquisition of Titus Real Estate and issued 100,000
shares of its Class B Convertible Preferred Stock (the "B Preferred") to AMRES
Holding/Rinehart, and 300,000 shares of its Common Stock to Scott A. Presta, in
their capacities as the owner-members of Titus Real Estate. Mr. Rinehart and Mr.
Presta were not, at the time, otherwise affiliated with the Company in any way,
but both became members of Management in April 2000 (see Item 9). Upon closing,
Titus Real Estate became a wholly owned subsidiary of the Company. The
consideration given was valued at $1.6 million, all of which was allocated to
Goodwill to be amortized over a period of 10 years. Management had hoped that
the acquisition of Titus Real Estate would increase the Company's overall
revenue stream. The Company took a charge for impairment of goodwill in the
amount of $1,155,057 in the fourth quarter 2000 with respect to its investment
in Titus Real Estate.
On February 14, 2000, in our continuing efforts to expand, the Company
acquired all of the common stock of LoanNet Mortgage, Inc., a Kentucky
corporation ("LoanNet"), a mortgage broker with offices in Kentucky and Indiana.
Pursuant to the Stock Purchase Agreement dated February 14, 2000, the Company
issued 250,000 shares of its Common Stock, valued at $2.3 million, to the
selling shareholders of LoanNet, which became a wholly-owned subsidiary of the
Company. As of the closing of the transaction, LoanNet also had 400 shares
outstanding of 8% non-cumulative, non-convertible preferred stock, the ownership
of which has not changed. The preferred stock is redeemable for $100,000. As of
February 28, 2001, all three LoanNet offices have been closed. The Company took
a charge for impairment of goodwill in the amount of $1,985,012 in the fourth
quarter 2000 with respect to its investment in LoanNet.
On March 1, 2000, the Company sold VPNCOM.Net, Inc., which had proven to be
unprofitable and inconsistent with the Company's changing business structure, to
Al Marchi, its then-President. The sales consideration consisted of his 30-day
promissory note in the principal amount of $250,000 (paid in full on April 15,
2000), the assumption of the DIS Note, and the return of 250,000 shares of
Company Common Stock owned by him.
On March 17, 2000, the Company acquired all of the common stock of
ExpiDoc.com, Inc., a California corporation ("ExpiDoc"). ExpiDoc is an
Internet-based, nationwide notary service, with over 6,500 affiliated notaries,
that provides document signing services for various mortgage companies. Pursuant
to the Stock Purchase Agreement dated February 14, 2000, the Company issued
24,000 shares of Common Stock of the Company, valued at $196,510, to the selling
shareholders of ExpiDoc, which became a wholly owned subsidiary of the Company.
As of the closing of the acquisition, the Company entered into management and
consulting agreements with ExpiDoc's owners and management, including Mr.
Rinehart and Mr. Presta. Mr. Rinehart and Mr. Presta were not, at the time,
otherwise affiliated with the Company in any way, but both became members of
Management in April 2000 (see Item 9)
5
On April 12, 2000, the Company closed the acquisition of AMRES and Bravo
Real Estate. Pursuant to the Amended and Restated Purchase Agreement, the
Company issued 7.5 million shares of Common Stock to EMB, representing nearly
40% of the then issued and outstanding common stock of the Company, paid
$1,595,000, and issued a promissory note in the initial amount of $2,405,000,
and AMRES and Bravo Real Estate became wholly owned subsidiaries of the Company.
As of April 30, 2001, the remaining principal balance of the promissory note was
$1,055,000, and the note was cancelled in its entirety effective June 27, 2001,
(see discussion of Global Settlement below). AMRES was the acquirer for
financial reporting purposes. Since Bravo Real Estate had no operations or net
assets, management determined that a nominal value of $1,000 be attributed to
its name. The fair value attributable to the 7.5 million shares of common stock
of e-Net on April 12, 2000 was $3,838,000 based on the fair value of assets
acquired. Because the purchase was accounted for as a reverse acquisition, the
$4.0 million in cash and notes issued to EMB were treated as a deemed
distribution with a charge to the Company's accumulated deficit. On April 12,
2000, James E. Shipley, the former CEO of EMB, was elected Chairman of the Board
of Directors of the Company and Vincent Rinehart was elected a Director,
President, and Chief Executive Officer of the Company. Bravo Real Estate never
commenced operations, had no assets, and is no longer an operating subsidiary.
Mr. Shipley was the CEO, President, and a less than 5% owner of EMB at the
time of the sale of AMRES and Bravo from EMB to e-Net. Mr. Shipley resigned as
Chairman of EMB and became Chairman of e-Net in April 2000 (replacing Mr. Roth
as Chairman), and resigned as an officer of e-Net on December 31, 2000, when Mr.
Rinehart became Chairman.
Mr. Rinehart was never an officer or director of EMB, but was the owner of
2,000,000 shares of EMB common stock, making him an approximate 10% owner of EMB
at the time of the sales in April 2000, and continues as an officer and director
of the Company (e-Net) and as an officer of all wholly-owned subsidiaries of the
Company.
On April 12, 2000, in accordance the provisions of the Certificate of
Designations, Preferences and Rights of Class B Convertible Preferred Stock,
AMRES Holding/Rinehart demanded that its B Preferred be repurchased by the
Company for an aggregate of one million dollars. On April 20, 2000, the Company,
AMRES Holding/Rinehart, and Mr. Presta amended the Titus Purchase Agreement to
provide for the return of 100,000 shares of the Company's preferred stock issued
to AMRES Holdings and Mr. Presta upon the issuance of 1,000,000 shares of common
stock to them.
On May 24, 2000, Michael Roth and Jean Oliver, the sole remaining officers
and directors of prior management, resigned their remaining positions with the
Company. On that date, Mr. Presta, an executive officer and director of Titus
Real Estate, was elected a Director and Secretary of the Company.
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EVENTS SUBSEQUENT TO FISCAL YEAR END
BRIDGE FINANCING
On June 27, 2001, the Company entered into an Investment Agreement and
related documents with Laguna Pacific Partners, LLP. Under the terms of the
agreements, in exchange for $225,000 received by the Company from Laguna
Pacific, the Company
(i) executed a promissory note in favor of Laguna Pacific in the principal
sum of $200,000, bearing interest at the rate of 7% per annum, secured by all of
the assets of the Company, and payable on the earlier of nine months from its
issuance date or the date the Company's common stock is listed on the NASDAQ
Small Cap market. The purpose of this bridge financing was to finance the
proposed start-up of Anza Properties and to provide working capital to the
Company, and
(ii) executed a Warrant Agreement which entitled Laguna Pacific to acquire
up to $225,000 worth of e-Net common stock for the total purchase price of
$1.00, calculated at 70% of the closing stock price on the date immediately
preceding the exercise date. The issuance of the warrant was negotiated between
Laguna Pacific and e-Net.
Other than as set forth above, there is no affiliation between the Company
and Laguna Pacific or any of their respective officers or directors.
FORMATION OF ANZA PROPERTIES, INC.
Also on June 27, 2001, in transactions related to the agreements with
Laguna Pacific, the Company formed a wholly-owned subsidiary, Anza Properties,
Inc., a Nevada corporation ("Anza") capitalized with $75,000 from the proceeds
of the bridge loan, which
(i) executed a Bond Term Sheet with e-Net outlining the proposed terms of
an offering to raise up to $5,000,000. The purpose of this offering was to
obtain capital on behalf of Anza Properties to acquire income producing real
estate. This real estate would then provide the Company with improved cash flow
and net worth, on a consolidated basis.
(ii) entered into an Employment Agreement with Thomas Ehrlich beginning
thirty days from the date of the agreement and ending upon the earlier to occur
of the liquidation of the real estate portfolio to be owned by Anza or the
completion of a NASDAQ Small Cap listing by e-Net. The Employment Agreement
provides for a salary of $20,000 per month, payable only by Anza and
specifically not guaranteed of e-Net. Mr. Ehrlich will serve as Anza's Vice
President and will be a director thereof. In connection with the Employment
Agreement, e-Net executed a Stock Option Agreement which entitled Ehrlich to
acquire up to 2,000,000 shares of e-Net common stock at the closing price on the
date of the Option Agreement, vesting equally over the 12 months following the
date of the Employment Agreement, and exercisable only in the event Anza is
successful in raising a minimum of $2,000,000 in a contemplated $5,000,000 bond
offering, and the holders thereof converting at least $2,000,000 of the bonds
into equity of e-Net (any amounts less than $2,000,000 will be applied,
pro-rata, to the total options exercisable under the Option Agreement). Mr.
Ehrlich is to be involved in the identification of potential investment
opportunities, the acquiring of capital, and the operation of Anza Properties.
7
(iii) entered into a Consulting Agreement with Lawrence W. Horwitz to
provide services to Anza. The Consulting Agreement provides for compensation of
$20,000 to be paid on its date of execution, and $5,000 per month for eight
months beginning September 1, 2001, guaranteed by e-Net. In addition, e-Net
executed a Stock Option Agreement which entitled Horwitz to acquire up to
1,000,000 shares of e-Net common stock on terms identical to those of Ehrlich,
described above. Mr. Horwitz is a licensed California attorney. Mr. Horwitz is
providing legal services to e-Net and Anza Properties.
(iv) entered into an Operating Agreement with e-Net concerning the
operations of Anza Properties, Inc. The Operating Agreement specifies in
material part that Vince Rinehart will be the President of Anza Properties, that
Mr. Rinehart and Mr. Ehrlich will be the directors, that the signatures of both
Mr. Rinehart and Mr. Ehrlich will be required on all checking accounts, and that
the assets of Anza Properties cannot be encumbered without the express written
consent of Mr. Rinehart and Mr. Ehrlich.
See our Notes to the Consolidated Financial Statements for accounting
treatment of options and warrants issued above.
The purpose of Anza Properties is primarily to improve the net worth of
e-Net by acquiring income producing real estate. If Anza Properties is
successful in acquiring such properties, its assets would be consolidated with
the assets of e-Net, thereby improving the net worth of e-Net.
GLOBAL SETTLEMENT
As part of the acquisition of AMRES, e-Net was obligated to file and
prosecute until completion a registration statement with the Securities and
Exchange Commission for the purpose of registering 7,500,000 shares of e-Net
common stock issued to EMB. Additionally, e-Net was obligated to pay the sum of
$4,000,000 under the terms of a promissory note issued to EMB.
In an unrelated transaction, Williams de Broe loaned the sum of $700,000 to
EMB, which remained unpaid at the time of the Global Settlement. In connection
with a revision of the agreement between EMB and Williams de Broe, the
then-chairman of e-Net executed a document on behalf of e-Net in favor of
Williams de Broe, which Williams de Broe believed acted as a guarantee of EMB's
obligation. e-Net disputed this assertion.
In order to settle the outstanding disputes among all the parties, on June
26, 2001, e-Net entered into a settlement agreement with EMB Corporation, AMRES
Holding LLC, Vincent Rinehart, and Williams de Broe (the "Global Settlement").
As part of the Global Settlement:
(i) e-Net issued to EMB 1,500,000 shares of restricted common stock as
consideration for EMB's waiver of its registration rights for 7,500,000 shares
of e-Net common stock already held by EMB. The shares were valued at $0.14 per
share based on a 10% discount from the closing price on the date of the
agreement. The Company will record a settlement expense of $229,500 with regard
to this issuance. e-Net issued to EMB a promissory note in the principal amount
of $103,404, which represents the reduced amount due to EMB by e-Net under a
promissory note previously issued in connection with the AMRES acquisition,
after giving effect to a principal reduction offset for amounts owed by EMB to
Wdb, but which were satisfied by e-Net (see below). The note bears interest at
the rate of 10% per annum and is convertible into common stock of e-Net.
(ii) e-Net issued to Williams de Broe ("WdB") 3,000,000 shares of
restricted common stock valued at $459,000 as consideration for WdB's release of
all claims against e-Net arising under the purported guarantee of EMB's
obligation to WdB by e-Net. The parties agreed that the amount be credited as
additional consideration to apply to the EMB notes payable. e-Net received
relief of debt to EMB in the amount of $624,766, but does not expect to receive
any reimbursement from EMB.
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iii) EMB acknowledges its obligations to pay all outstanding leases
covering equipment and/or furniture now in the possession of e-Net as
contemplated by the agreement.
iv) EMB assigns its rights of a portion of e-Net's note payable totaling
$485,446 to AMRES Holdings LLC, owned by Vincent Rinehart. The note bears
interest at 10% per annum. This note is convertible into shares of common stock
based on 80% of the closing stock price on the date of the conversion. The
Company assigned a value of approximately $54,000 to the beneficial conversion
feature imbedded in this note. The entire principal balance, together with
accrued interest, shall be due and payable, in full, on December 15, 2002.
v) EMB forgave principal and interest totaling $168,006. The balance of
$103,404 convertible notes was issued, bearing interest at 10% per annum. The
note has a mandatory conversion into the Company's common stock on December 15,
2001.
EXECUTIVE COMPENSATION
On July 1, 2001, e-Net entered into an Employment Agreement with Vincent
Rinehart. Under the terms of the agreement, the Company is to pay to Mr.
Rinehart a salary equal to $275,000 per year, subject to an annual increase of
10% commencing January 1, 2002, plus an automobile allowance of $1,200 per month
and other benefits, including life insurance. The agreement is for a term of
five years and provides for a severance payment in the amount of $500,000 and
immediate vesting of all stock options in the event his employment is terminated
for any reason, including cause. Mr. Rinehart was granted options to acquire
2,500,000 shares of e-Net common stock at the closing price on the date of the
agreement, which shall vest over a three year period. The number of shares to
be acquired upon exercise of the options shall not be adjusted for a stock
split, and is limited to both a maximum value of $1,900,000, and 20% of the
outstanding common stock of the Company.
DISCUSSION OF OPERATIONS
BravoRealty.com, which is not affiliated with the now non-operational Bravo
Real Estate, is an internet-based real estate brokerage which was incorporated
in May 2000 and began operations in January 2001. AMRES owns 69% of
BravoRealty.com, with the balance owned by Vincent Rinehart (15%), David
Villarreal (15%), and Kevin Gadawski (1%). Bravorealty.com's business model
targets real estate agents as its customers and offers 100% commission retention
for the agent, while charging a minimal fixed fee per closed transaction.
Bravorealty.com's web site is operational, but it is currently in need of
funding to complete its launch and implement the required infrastructure. If
e-Net is able to secure the required funding, e-Net will remain the majority
shareholder. If the required funding is secured from outside investors, e-Net
may retain only a minority ownership position.
Titus Real Estate is the management company of Titus REIT. Titus Real
Estate, while currently operational, is not expected to provide significant
revenues for e-Net. As stated above, Titus REIT is currently the owner of ten
apartment buildings in Long Beach, California, six of which are in escrow to be
sold. Titus REIT is in need of additional capital in order to expand its
operations, and if it successful, the amount of revenue to e-Net through Titus
Real Estate may increase.
9
LoanNet is not operating at this time. Due to insufficient capitalization,
the Company decided to close all three offices previously in operations. While
in operation, LoanNet recorded cumulative net losses and did not provide any
cash flow for the Company. The Company wrote off its full investment in LoanNet
in the third quarter of 2000.
AMERICAN RESIDENTIAL FUNDING, INC. ("AMRES")
GENERAL
The Company, through its wholly owned subsidiary, e-Net Mortgage, had,
since 1999, engaged in business as a retail mortgage broker. However, e-Net
Mortgage was not capitalized to the level that permitted it to expand its
operations outside of its offices in San Jose, and Costa Mesa, California, and
Las Vegas, Nevada. With the pending acquisition of American Residential
Funding, Inc. ("AMRES"), e-Net Mortgage stopped conducting business in the
fourth quarter of the fiscal year ended April 30, 2000. With the completion of
the acquisition of AMRES, AMRES has become the principal operating mortgage
subsidiary of the Company. It is the intent of the Company for AMRES to operate
primarily as a mortgage banker and mortgage broker through an expansion of its
existing company-owned and branch operations. AMRES has not been profitable,
but management anticipates that it may achieve profitability in the next fiscal
year.
The name "AMRES" is approved for use by American Residential Funding, Inc.
by the California Department of Real Estate, the primary governing body of
AMRES. An appropriate DBA filing of AMRES has been done, and the company is
regularly referred to as "AMRES".
LOAN MAKING
AMRES is primarily a loan broker, arranging approximately $50,000,000 a
month in home loans. AMRES, through their agents in some 140 branches (1-8
agents in each branch) is licensed in 39 states to originate loans. Although
AMRES has a $2,000,000 line of credit with which to fund loans, less than 5% of
total loan volume is funded this way. AMRES, through their loan agents, locates
prospective borrowers from real estate brokers, home developers, and marketing
to the general public. After taking a loan application, AMRES processes the
loan package, including obtaining credit and appraisal reports. AMRES then
presents the loan to one of approximately 200 approved lenders, who then approve
the loan, draw loan documents and fund the loan. AMRES receives a commission
for each brokered loan, less what is paid to each agent.
LOAN STANDARDS
Mortgage loans arranged by AMRES are generally loans with fixed or
adjustable rates of interest, secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances that
do not exceed 95% of the value of the mortgaged properties, unless such loans
are FHA-insured or VA-guaranteed. Generally, each mortgage loan having a
loan-to-value ratio in excess of 80%, or which is secured by a second or
vacation home, will be covered by a Mortgage Insurance Policy, FHA Insurance
Policy or VA Guaranty insuring against default of all or a specified portion of
the principal amount thereof. 95% of all loans originated by AMRES are brokered
to lenders and not underwritten or funded by AMRES.
The mortgage loans are "one-to-four-family" mortgage loans, which are
permanent loans (as opposed to construction or land development loans) secured
by mortgages on non-farm properties, including attached or detached
single-family or second/vacation homes, one-to-four-family primary residences
and condominiums or other attached dwelling units, including individual
condominiums, row houses, townhouses and other separate dwelling units even when
located in buildings containing five or more such units. Each mortgage loan must
be secured by an owner-occupied primary residence or second/vacation home, or by
a non-owner occupied residence. The mortgaged property may not be a mobile home.
10
In general, no mortgage loan is expected to have an original principal
balance less than $30,000. While most loans will be less than $700,000, loans of
up to $2,000,000 may be brokered to unaffiliated third-party mortgage lenders.
Fixed rate mortgage loans must be repayable in equal monthly installments which
reduce the principal balance of the loans to zero at the end of the term.
Credit, Appraisal and Underwriting Standards
Each mortgage loan must (i) be an FHA-insured or VA-guaranteed loan meeting
the credit and underwriting requirements of such agency, or (ii) meet the
credit, appraisal and underwriting standards established by the lender. For
certain mortgage loans which may be subject to a mortgage pool insurance policy,
the lender may delegate to the issuer of the mortgage pool insurance policy the
responsibility of underwriting such mortgage loans, in accordance with the
lender's credit appraisal and underwriting standards.
A lender's underwriting standards are intended to evaluate the prospective
mortgagor's credit standing and repayment ability, and the value and adequacy of
the proposed mortgaged property as collateral. In the loan application process,
prospective mortgagors will be required to provide information regarding such
factors as their assets, liabilities, income, credit history, employment history
and other related items. Each prospective mortgagor will also provide an
authorization to apply for a credit report which summarizes the mortgagor's
credit history. With respect to establishing the prospective mortgagor's ability
to make timely payments, the lender will require evidence regarding the
mortgagor's employment and income, and of the amount of deposits made to
financial institutions where the mortgagor maintains demand or savings accounts.
In some instances, mortgage loans may be arranged by the lender under a Limited
Documentation Origination Program. For a mortgage loan to qualify for the
Limited Documentation Origination Program, the prospective mortgagor must have a
good credit history and be financially capable of making a larger cash down
payment in a purchase, or be willing to finance less of the appraised value, in
a refinancing, than would otherwise be required by the Company. Currently, only
mortgage loans with certain loan-to-value ratios will qualify for the Limited
Documentation Origination Program. If the mortgage loan qualifies, the lender
waives some of its documentation requirements and eliminates verification of
income and employment for the prospective mortgagor. The Limited Documentation
Origination Program has been implemented relatively recently and accordingly its
impact, if any, on the rates of delinquencies and losses experienced on the
mortgage loans so originated cannot be determined at this time.
The lender's underwriting standards generally follow guidelines acceptable
to FNMA ("Fannie Mae") and FHLMC ("Freddie Mac"). The lender's underwriting
policies may be varied in appropriate cases. In determining the adequacy of the
property as collateral, an independent appraisal is made of each property
considered for financing. The appraiser is required to inspect the property and
verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the appraiser's judgment of values, giving
appropriate weight to both the market value of comparable homes and the cost of
replacing the property. Over 95% of all loans processed are underwritten and
funded by approved lenders of AMRES. Very few loans, approximately 5%, are
funded by AMRES on their line of credit for future resell.
Title Insurance Policies
The lender will usually require that, at the time of the origination of the
mortgage loans and continuously thereafter, a title insurance policy be in
effect on each of the mortgaged properties and that such title insurance policy
contain no coverage exceptions, except those permitted pursuant to the
guidelines established by FNMA.
11
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V"), provides that state usury limitations do not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. The Federal Home Loan Bank Board is authorized to issue
rules and regulations and to publish interpretations governing implementation of
Title V, the statute authorizes any state to reimpose interest rate limits by
adopting a law or constitutional provision which expressly rejects application
of the federal law. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V. As of the date hereof,
certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
The above described laws do not have a material effect on the Company's
operations because it acts primarily as a broker to direct lenders.
MORTGAGE SOFTWARE AND TECHNOLOGY
AMRES currently uses loan origination software developed by an independent
third party, which is accessible by its Company-owned offices and at branch
offices through an Intranet system. This software can quickly review the
underwriting guidelines for a vast number of loan products, including those
offered by Fannie Mae and Freddie Mac and select the appropriate loan product
for the borrower. The software then allows the routing of pertinent information
to the automated underwriting systems employed by Fannie Mae and Freddie Mac,
the primary secondary-market purchasers of mortgages, and the automated systems
of independent lenders such as IndyMac. Thus, in less than one hour, a borrower
can receive loan approval, subject only to verification of financial information
and appraisal of the subject property. The software also permits the
contemporaneous ordering and review of preliminary title reports and escrow
instructions. The AMRES Intranet system allows branch offices to have
around-the-clock access to the system.
Customer Service and Support
AMRES provides branch owners with on-line technical support, training,
consulting and implementation services. These services consist of the
following:
Customer Education and Training
AMRES offers training courses designed to meet the needs of end users,
integration experts and system administrators. AMRES also trains customer
personnel who in turn may train end-users in larger deployments. Training
classes are provided at the customers' offices or on-line with an on-line
tutorial. No fees are charged the branch for these services.
System Maintenance and Support
The Company offers telephone, electronic mail and facsimile customer
support through its central technical support staff at the Company's
headquarters. The Company also provides customers with product documentation
and release notes that describe features in new products, known problems and
workarounds, and application notes.
12
EXPIDOC NATIONWIDE NOTARY SERVICES
ExpiDoc is an Internet-based nationwide notary service that specializes in
providing mortgage brokers with a solution to assist with the final step of the
loan process: notarizing signatures of the loan documents. This is accomplished
through ExpiDoc's automation of the process, its knowledgeable, experienced
staff, and proprietary technology. ExpiDoc provides its clients with real-time
access to the status of their documents, 24 hours a day. ExpiDoc's proprietary
software executes both the front office notary coordination and the back office
administration. ExpiDoc currently employs 3 people, located in Costa Mesa.
SALES AND MARKETING
As of June 30, 2001, the Company marketed and sold its mortgage brokerage
services primarily through a direct sales force of loan agents totaling
approximately 24 persons based in Costa Mesa, California, as well as
approximately 120 loan agents at branch locations. The Company maintains four
Company-owned offices in Southern California and approximately 140 branch
offices in 39 states.
The sales efforts of the Company to market its branch opportunities are
located primarily in the Company's Costa Mesa, California headquarters office.
Once a branch is opened, a branch manager supervises a licensed branch office
and its employees, and receives a percentage of the profits of that branch.
AMRES provides accounting, licensing, legal, compliance and lender access for
each branch, retaining a percentage of commission generated by loan
correspondents at each branch. The branch managers must follow all guidelines
set forth by AMRES as well as all regulations of various government agencies and
are independently responsible for the expenses incurred at the branch level,
including personnel expenses.
COMPETITION
The Company faces intense competition in the origination, acquisition and
liquidation of its mortgage loans. Such competition can be expected from banks,
savings and loan associations and other entities, including real estate
investment trusts. Many of the Company's competitors have greater financial
resources than the Company.
PROPRIETARY RIGHTS AND LICENSING
The Company's success is dependent, to a degree, upon proprietary
technology. The Company may rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions with
its employees, consultants and business partners to protect its proprietary
rights. The Company may seek to protect its electronic mortgage product
delivery systems, documentation and other written materials under trade secret
and copyright laws, which afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's systems or to obtain and use information that the
Company regards as proprietary. While the Company is not aware that any of its
systems infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Certain components of the electronic
mortgage products delivery system currently employed by the Company are not
proprietary to the Company and other competitors may acquire such components and
develop similar or enhanced systems for the electronic delivery of mortgage
products to mortgage brokers and borrowers.
In addition, the Company relies on certain software that it licenses from
third parties, including software which is used in conjunction with the
Company's mortgage products delivery systems. There can be no assurance that
such firms will remain in business, that they will continue to support their
products or that their products will otherwise continue to be available to the
Company on commercially reasonable terms. The loss or inability to maintain any
of these software or data licenses could result in delays or cancellations in of
contracts with Net Branch operations until equivalent software can be identified
and licensed or developed and integrated with the Company's product offerings.
Any such delay or cancellation could materially adversely affect the Company's
business, financial condition or results of operations.
13
ENVIRONMENTAL MATTERS
The Company has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be
no assurance, however, that this will remain the case in the future.
In the course of its business, the Company may acquire properties securing
loans that are in default. Although the Company primarily lends to owners of
residential properties, there is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
TRADE NAMES AND SERVICE MARKS
The Company will devote substantial time, effort and expense toward
developing name recognition and goodwill for its trade names for its operations.
The Company intends to maintain the integrity of its trade names, service marks
and other proprietary names against unauthorized use and to protect the
licensees' use against claims of infringement and unfair competition where
circumstances warrant. Failure to defend and protect such trade name and other
proprietary names and marks could adversely affect the Company's sales of
licenses under such trade name and other proprietary names and marks. The
Company knows of no current materially infringing uses.
EMPLOYEES
As of June 30, 2001, the Company employed a total of 143 persons. Of the
total, 15 officers and employees were employed at the principal executive
offices of the Company in Costa Mesa, California, all of whom were engaged in
Finance and Administration. In addition, the Company, through its net branch
operations employed 128 individuals, 29 of whom were engaged in loan
administration and 99 of whom were engaged in loan production. None of the
Company's employees is represented by a labor union with respect to his or her
employment by the Company.
ITEM 2 - DESCRIPTION OF PROPERTY
Our principal place of business is in Costa Mesa, California, where we
lease an approximately 6,800 square foot facility for $190,000 per annum
(subject to usual and customary adjustments), under a written lease which
terminates in March 2003. This location houses our corporate finance,
administration, and sales and marketing functions. ExpiDoc and the Costa Mesa
office of AMRES sub-lease space at this facility from e-Net on a month-to-month
basis for $1,000 and $4,000, respectively.
14
AMRES leases additional facilities: Long Beach, California (month-to-month,
$3,450 per month); Palmdale, California (month-to-month, $ 1,911 per month), and
Riverside, California (term expiring in 2003, $2,117 per month).
All branch offices are leased in the name of its respective manager, with
lease payments made from revenues generated by that branch. The Company does not
undertake any liability for those locations.
We believe that our current facilities will be adequate to meet our needs,
and that we will be able to obtain additional or alternative space when and as
needed on acceptable terms.
The Company may also hold real estate for sale from time to time as a
result of its foreclosure on mortgage loans that may become in default.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fiscal year.
15
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company is currently quoted on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc., under the symbol
"ENNT".
When the trading price of the Company's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stock" that are subject to
rules promulgated by the Securities and Exchange Commission (Rule 15g-1 through
15g-9) under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a) delivering to
customers the Commission's standardized risk disclosure document; (b) providing
to customers current bid and offers; (c) disclosing to customers the
brokers-dealer and sales representatives compensation; and (d) providing to
customers monthly account statements.
For several years prior to March of 1999, the market price of the Common
Stock of the Company was either nominal or non-existent because the Company had
no substantial assets and had little or no operations. However, after the
Company entered into an acquisition agreement regarding the purchase of certain
assets of e-Net Mortgage and City Pacific in March 1999, the Common Stock of the
Company began trading. Following the execution of the initial agreement with EMB
to acquire certain of its assets in January 2000, more active trading of the
Company's Common Stock commenced.
The following table sets forth the range of high and low closing bid prices
per share of the Common Stock as reported by Pink Sheets LLC (formerly known as
the National Quotation Bureau, L.L.C.), for the periods indicated.
HIGH LOW
FISCAL YEAR ENDED APRIL 30, 1999:
1st Quarter . . . . . . . . . . . $ .01 $ .01
---------------------------------
2nd Quarter . . . . . . . . . . . $ .01 $ .01
3rd Quarter . . . . . . . . . . . $ .02 $ .01
4th Quarter . . . . . . . . . . . $ 6.00 $ .02
FISCAL YEAR ENDED APRIL 30, 2000:
1st Quarter . . . . . . . . . . . $ 7.50 $2.00
---------------------------------
2nd Quarter . . . . . . . . . . . $ 7.00 $1.19
3rd Quarter . . . . . . . . . . . $12.88 $1.00
4th Quarter . . . . . . . . . . . $15.63 $3.25
FISCAL YEAR ENDED APRIL 30, 2001:
---------------------------------
1st Quarter . . . . . . . . . . . $ 3.75 $1.43
2nd Quarter . . . . . . . . . . . $ 1.34 $0.28
3rd Quarter . . . . . . . . . . . $ 1.38 $0.25
4th Quarter . . . . . . . . . . . $ 0.43 $0.11
Close on August 8, 2001 . . . . . $ 0.17 $0.17
The Company is unaware of the factors which resulted in the significant
fluctuations in the bid prices per share during the periods being presented,
although it is aware that there is a thin market for the Common Stock, that
there are frequently few shares being traded, and that any sales significantly
impact the market.
16
HOLDERS
As of April 30, 2001, and August 3, 2001, there were 23,608,939 and
38,626,543 shares, respectively, of Common Stock issued and outstanding which as
of August 3, 2001 were held by approximately 66 holders of record. As of April
30, 2001, and August 3, 2001, there were no shares of Class A Convertible
Preferred Stock or Class B Convertible Preferred Stock outstanding and there
were 20,000 and 18,693 shares, respectively, of Series C Convertible Preferred
Stock outstanding. On July 13, 2001, 1,307 shares of Series C Convertible
Preferred Stock were converted into 4,666,663 shares of e-Net common stock.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities. The
payment of cash dividends in the future will be at the discretion of the Board
of Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On May 2, 2000, the Company issued 666,667 shares of common stock to
Jupiter European Special Situations Fund, an accredited investor, for which the
investor paid $2,000,000, or $3.00 per share. As additional consideration, the
Company issued to Jupiter warrants to acquire 333,334 shares of common stock at
an exercise price of $3.00 per share. The issuances were exempt pursuant to
section 4(2) of the Securities Act of 1933.
In May 2000, the Company issued an aggregate of 60,000 shares of common
stock to four (4) employees as consideration for services rendered to the
Company. The issuances were exempt pursuant to section 4(2) of the Securities
Act of 1933.
On April 26, 2001, the Company issued 2,500,000 shares of common stock to
its wholly-owned subsidiary, AMRES, to provide capitalization under HUD
requirements. The issuance was valued at $0.13 per share. The issuance was
exempt pursuant to section 4(2) of the Securities Act of 1933.
On April 27, 2001, the Company issued 150,000 shares of common stock to
James E. Shipley, an accredited investor, in satisfaction of a $300,000 note
owed to him. The issuance was exempt pursuant to Section 4(2) of the Securities
Act of 1933.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth under "Risk Factors". The following discussion should
be read together with our financial statements and the notes to those financial
statements included elsewhere in this annual report.
17
OVERVIEW
Except for historical information, the materials contained in this
Management's Discussion and Analysis are forward-looking (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and involve a number of risks and uncertainties. These
include the Company's historical losses, the need to manage its growth, general
economic downturns, intense competition in the financial services and mortgage
banking industries, seasonality of quarterly results, and other risks detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. Although forward-looking statements in this Annual Report reflect
the good faith judgment of management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements. Readers are urged to carefully review and consider
the various disclosures made by the Company in this Annual Report, as an attempt
to advise interested parties of the risks and factors that may affect the
Company's business, financial condition, and results of operations and
prospects.
We have never operated profitably. However, our revenues continue to
increase, and we have been successful through various strategies in reducing our
outstanding debt, and as a result management believes that we may achieve
profitability in the next fiscal year.
REVENUES
Revenues increased by $6,302,080, or 130.4%, to $10,991,250 for the year
ended April 30, 2001, compared to $4,689,170 for the ten (10) months ended April
30, 2000. The growth in revenues is primarily attributable to the expansion and
growth of AMRES primarily through the brokering of loans. AMRES accounted for
approximately 95.7% and 97.6%, of consolidated revenues in the year ended April
30, 2001 and the ten months ended April 30, 2000, respectively. AMRES, as did
most of the mortgage industry, benefited greatly from the decline in interest
rates over the last twelve months. Typically, as interest rates fall, the
refinance market heats up expanding the market of interested borrowers beyond
those borrowing for the purchase of their primary residence. AMRES benefited
from this market upturn, as they had the capacity in terms of people and
infrastructure to accommodate the additional business.
More significantly, the growth of the net branch program at AMRES was the
major contributor to the growth in revenue. AMRES' net branch program comprised
approximately 140 branches as of April 30, 2001, compared to less than ten
branches as of April 30, 2000. For the twelve months ended April 30, 2001, the
total revenue associated with the Net Branches was approximately $6,947,000.
The Company did not evaluate the performance of the NetBranches during the ten
months ended April 30, 2000. The Net Branch program is expected to continue to
be a primary growth vehicle for the Company in the future. In addition, the
mortgage banking division of AMRES is expected to expand over the next six to
nine months, as evidenced by the its growth in revenue to approximately $218,000
for the year ending April 30, 2001, compared to no revenues for the ten months
ended April 30, 2000.
Revenues for Expidoc also increased significantly, $187,723 for the period
ended April 30, 2001 compared to $38,225 for the period ended April 30, 2000.
The increase is primarily attributable to a full year of operating results being
included in the consolidated revenues for the full-year ended April 30, 2001,
whereas only approximately two months were included as of April 30, 2000 based
on the timing of the acquisition of Expidoc in March 2000.
18
Revenues from Titus, approximately $9,000, and Bravorealty.com ("Bravo"),
approximately $17,000, were not material for either period presented. See
further discussion of Titus below in section titled Impairment of Goodwill -
Titus. Bravo became operational in January 2001. For the four months January
through April 2001, the management of Bravo focused the majority of their time
in attracting a qualified agent base and refining the technological
infrastructure to allow the company to process the real estate transactions
completed by their agents. During this period, Bravo completed two real estate
transactions, earning revenue of approximately $17,000. Management believes
that Bravo will be a significant growth vehicle for the Company over the next 12
months, as evidenced by the steady increase in the number of listings and closed
transactions generated by Bravo subsequent to year end.
Costs and Expenses
Commissions are paid to loan agents on funded loans. Commissions increased
by $4,116,153 or 121%, for the year ended April 30, 2001, and to $7,527,903 from
$3,411,750 for the year ended April 30, 2000. This increase is primarily
related to the increased revenues discussed above. As a percentage of revenue,
the cost of revenue decreased by 4.3%, to 68.5% compared to 72.8% for the year
ended April 30, 2001 and the ten months ended April 30, 2000, respectively. This
decrease is attributable to the Company leveraging its increased revenues as the
Company earns a higher commission split (compared to the loan agent) once
certain revenue targets are reached.
Salaries and Wages
Salaries and wages totaled $1,370,839 in fiscal 2001 compared to $1,070,357
in the ten-month period ended April 30, 2000. The increase is directly related
to the expansion of AMRES operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $3,491,454 for the
year ended April 30, 2001, compared to $1,989,017 for the ten months ended April
30, 2000. This increase of $1,502,432 can be attributed to several factors. In
addition, the Company incurred costs at the corporate level related to
professional services for items such as the filing of a registration statement,
auditing and certain legal services. The increase in selling, general and
administrative expenses can be primarily attributed to the business growth of
the operating subsidiaries, namely AMRES, as additional personnel, office space
and other administrative costs are required to handle the expansion. Effective
in the first quarter of fiscal 2001, the Company had implemented significant
cost reductions to reduce its administrative expenses at corporate offices.
Goodwill amortization relating to the Company's acquisitions of Expidoc,
Titus, and LoanNet amounted to $349,104 for the year ended April 30, 2001,
compared to $122,749 for the ten months ended April 30, 2000. The increase is
attributable to the timing of the acquisitions as all of the acquisitions
occurred in the fourth quarter of last year, and as such only partial years
worth of amortization of goodwill was recorded for the period ending April 30,
2000.
Consulting Expenses
To date, the Company has not generated positive cash flow from operations,
and as such has been forced to fund a portion of these costs through the use of
its common stock paid to outside consultants. During the twelve months ended
April 30, 2001, general and administrative costs paid in the form of stock to
outside consultants totaled approximately $1,855,915, representing 2,863,591
shares of common stock. For the ten months ended April 30, 2000, costs paid in
the form of stock to outside consultants was immaterial. The breakout in terms
of types of consulting services performed during the year ended April 30, 2001
is summarized in Note 11 in the Financial Statements.
19
Twelve Months Ended April 30, 2001
Costs Shares
Incurred Issued
--------- --------
Financial and Accounting Services. $300,512 630,500
Mergers and Acquisition
Consulting . . . . . . . . . . . . 888,996 875,945
BravoRealty Start-up Costs 286,337 718,500
Information Technology Consulting. 41,650 71,000
Legal Services . . . . . . . . . . 338,425 567,646
---------- ---------
Total $1,855,920 2,863,591
========== =========
Impairment of Goodwill - LoanNet
On February 14, 2000 the Company issued 250,000 shares of common stock for
all the issued and outstanding stock of LoanNet Mortgage, Inc., a Kentucky
corporation. The Company recorded goodwill in the amount of $2,226,873 as part
of the transaction. LoanNet had a limited and unprofitable operating history,
but provided the Company with projections and representations which showed
positive operational cash flow within the first year of operations. During the
first and second quarters of year ended April 30, 2001, the officers of LoanNet
began to express the need for a capital infusion of approximately $300,000.
These Officers indicated that without this infusion of capital, the business
would likely fail.
The Company did not have the capital requested by the Officers of LoanNet,
and was unable to raise additional capital primarily due to the market
conditions and the decline in the Company's stock price. During the third
quarter, the Company decided to close all three LoanNet offices and cease
operations. On March 30, 2001, the Board of Directors of e-Net, none of whom
were officers, directors or management of LoanNet, rescinded the acquisition of
LoanNet due to misrepresentations by LoanNet's management, officers, and
directors. E-Net management demanded the return of the 250,000 shares issued,
and attempted to deliver the shares of common stock it received in connection
with the acquisition to the original selling shareholder, whom is also the
preferred stockholder, the chief executive officer and director of LoanNet.
While in operation, LoanNet recorded cumulative net losses and did not provide
any cash flow for the Company. The Company wrote off its full investment in
LoanNet in the fourth quarter of 2001. LoanNet's preferred shareholder seized
the remaining assets of LoanNet (estimated to be worth less than $15,000), and
assumed responsibility, due to his actions of taking assets subject to certain
leases, of certain liabilities, the amounts of which are unknown to e-Net
management. Management of e-Net is not aware of ay claims against e-Net or its
subsidiaries in connection with LoanNet.
20
At that point, the Company deemed it appropriate to write off its remaining
investment in LoanNet and as such, took a charge for the unamortized portion of
goodwill amounting to $1,985,012.
Impairment of Goodwill - Titus Real Estate
On February 11, 2000 the Company executed a purchase agreement for the
acquisition of Titus Real Estate for $1,600,000. The Company allocated the
purchase price to goodwill associated with the transaction of $1,600,000 (refer
to Note 3 to the consolidated financial statements). Titus is the management
company for Titus R.E.I.T. At the time of the acquisition of Titus Real Estate,
the then-chairman of the Company was close to finalizing a commitment from
investors to raise over $30,000,000 in capital for the R.E.I.T. No commitment
was obtained by the Company.
Unfortunately, as the securities markets deteriorated, so did the funding
for the Titus R.E.I.T. During the year ended April 30, 2001, the Company
focused the majority of its efforts on its other subsidiaries, namely AMRES,
Expidoc, and Bravo Rrealty.com, and as such, Titus did not provide the Company
with any significant revenue or cash flow (approximately $9,000 of revenue for
the year ended April 30, 2001). Through April 30, 2001, management has been
unsuccessful in obtaining capital for the Titus R.E.I.T. However management
intends to actively seek capital for the Titus R.E.I.T. as management believes
there is a significant opportunity to generate cash flows for e-Net; however,
there are no assurance that such capital will be raised. Since we have been
unsuccessful in our capital raising and operating efforts, we found it necessary
to impair goodwill by an additional $1,155,057 based on a current liquidation
value of the Titus R.E.I.T of an estimated $250,000.
Interest Expense
Interest expense was $203,306 as of April 30, 2001, compared to $27,343 as
of April 30, 2000. This increase is associated with the interest on the notes
payable to EMB Corporation relating the Company's acquisition of AMRES. The
Company did not make any principal or interest payments on this note during the
last eleven months of the year ending April 30, 2001. Subsequent to year end,
the notes due to EMB, as well as certain other obligations owed by the Company,
were satisfied as part of the "Global Settlement" agreed to by all parties. See
further discussion of the Global Settlement in Events Subsequent To Year End
beginning on page 6, and in Note 14 to the Consolidated Financial Statements.
Net Losses
The Company's net losses for the twelve and ten months ended April 30, 2001
and 2000 were ($6,573,527), and ($1,796,899), or ($0.30) and ($0.22) per share
respectively. During the most recent twelve-month period, the non-cash expense
component of the Company's net loss was significant. For the year ending April
30, 2001, non-cash expense relating to impairment of goodwill and stock paid to
consultants and other non-cash expenses amounted to $5,727,544, compared to
$1,145,139 for the ten months ended April 30, 2000. The impairment charges
relating to goodwill are of a non-recurring nature and as such, the Company
believes that with its continued growth in revenues and its ability to leverage
its fixed costs against those revenues, it will be able to reduce its net losses
in the future.
21
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $894,143 for the twelve months
ending April 30, 2001 and the ten months ending April 30, 2000, respectively.
For both periods, the Company incurred net losses from operations. Significant
non-cash expenses impacting the loss from operations for the period ending April
30, 2001 were depreciation and amortization of $393,439, permanent impairment of
goodwill in the amount of $3,140,069, and stock compensation paid to outside
consultants and employees of $2,025,825. Significant non-cash expenses
impacting the loss from operations for the ten months ending April 30, 2000 were
depreciation and amortization of $132,440, and stock compensation recorded on
the conversion of preferred shareholders in the amount of $1,000,000.
Net cash used by investing activities were $14,634 for the year ended April
30, 2001. Net cash provided by investing activities was 178,188 for the
ten-month period ended April 30, 2000. The primary contributors to the cash
provided by investing activities for the period ending April 30, 2000 were the
issuance of a note receivable to a related party in the amount of $39,400 and
the net impact of the acquisitions of Titus, Expidoc, and LoanNet amounting to
$147,970.
Net cash provided by financing activities was $716,080 and $704,326 for the
periods ending April 30, 2001 and April 30, 2000 respectively. Cash provided by
financing for both periods relates primarily to net proceeds received from
private placements of the Company's stock, reduced by payments made on the
Company's note payable to EMB corporation related to the acquisition of AMRES.
The net proceeds from private placements were $1,699,973 and $1,775,000, while
the payments made on related party notes payable amounted to $1,350,000 and
$1,530,000 for the periods ended April 30, 2001 and April 30, 2000,
respectively. Additionally, the Company received $459,326 during the 10-month
period ended April 30,2000 from the issuance of notes to related parties. During
the year ended April 30, 2000, the Company drew down from its line of credit
$340,842.
On April 7 and May 2, 2000, we completed two private placements raising a
total of $4 million less costs of $525,027. These funds were used to finance
our current operations and reduce our indebtedness to EMB Corporation ("EMB") to
approximately $1.1 million as of April 30, 2001.
As part of the agreement for the April 7, 2000, private placement, we were
required to file and cause to be declared effective a registration statement
with the Securities and Exchange Commission by November 7, 2000. On August 4,
2000, we filed the registration statement and received an initial response from
the Commission on or about September 7, 2000. As the private placement
agreement called for the registration to be declared effective by November 7,
2000, we incurred monthly liquidated damages with the holders of the Class C
Preferred of approximately $40,000 for each full month subsequent to November 7,
2000 in which the registration statement was not declared effective. The Class
C Preferred has elected to begin converting their holdings to common stock
beginning in July of 2001.
On September 15, 2000, we received $125,000 (less costs and fees of
$20,000) in exchange for a short-term note payable in the amount of $150,000 due
on January 15, 2001. The proceeds were used to fund current operations. The
holder of the note payable granted an extension of the due date beyond January
15, 2001. As of August 8, 2001, $39,150 remains due on the note, payable in
nine equal monthly installments with no interest.
22
During fiscal 2001, the Company satisfied a note payable due a former
related party in the amount of $300,000 plus interest by issuing 150,000 shares
of restricted common stock. The stock was valued at $332,666 (the amount of the
principal balance plus accrued interest) and no gain or loss was recorded on the
settlement.
To date, the Company has not generated income from operations and has an
accumulated deficit of $13,301,068. The Company has financed a majority of its
operations through the issuance of its common stock. Subsequent to year end, the
Company executed a "Global Settlement" with its primary creditors (refer to Note
14 in the Consolidated Financial Statements). Pursuant to this agreement, the
company issued 1,500,000 shares of restricted stock to EMB and 3,000,000 shares
of restricted stock to Williams de Broe. These shares were tendered to, among
other things, satisfy the remaining obligation owed by the Company to EMB
relating to the acquisition of AMRES (approximately $1.3 million including
accrued interest as of April 30, 2001). This obligation is reflected in
long-term liabilities on the Consolidated Financial Statements for the period
ending April 30, 2001.
Also subsequent to year end, the Company secured "Bridge Financing" in the
amount of $200,000 and executed an investment agreement with Laguna Pacific
Partners, LLP. In addition, in transactions related to the agreements with
Laguna Pacific Partners, LLP, the Company formed a wholly-owned subsidiary, Anza
Properties, Inc., which executed a Bond Term Sheet with e-Net outlining the
proposed terms of an offering to raise up to $5,000,000. Please refer to Note 14
of the Consolidated Financial Statements for further discussion.
Our consolidated financial statements have been prepared assuming the
Company will continue as a going concern. Because the Company has incurred
significant losses from operations and has excess current liabilities over
current assets totaling approximately $375,000, it requires financing to meet
its cash requirements. Our auditors included an explanatory paragraph in their
report raising substantial doubt about its ability to continue as a going
concern. Subsequent to year-end, the Company executed relief from certain
obligations by settlement of its creditors. Cash requirements depend on several
factors, including but not limited to, the pace at which all subsidiaries
continue to grow, become self supporting, and begin to generate positive cash
flow, as well as the ability to obtain additional services for common stock or
other non-cash consideration.
If capital requirements vary materially from those currently planned, the
Company may require additional financing sooner than anticipated. At present,
there are no firm commitments for any additional financing, and there can be no
assurance that any such commitment can be obtained on favorable terms, if at
all. Management has implemented a several reductions of costs and expenses to
reduce its operating losses. Management plans to continue its growth plans to
generate revenues sufficient to meet its cost structure. Management believes
that these actions will afford the Company the ability to fund its daily
operations and service its remaining debt obligations primarily through the cash
generated by operations; however, there are no assurance that management's plans
will be successful. No adjustments have been made to the carrying value of
assets or liabilities as a result of these uncertainties.
23
ITEM 7 - FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
e-Net Financial.Com Corporation
Report of McKennon Wilson & Morgan LLP F-1
Consolidated Balance Sheets as of April 30, 2001 F-2
Consolidated Statements of Operations for the year
ended April 30, 2001 and the ten months ended
April 30, 2000 F-3
Consolidated Statements of Stockholder's Equity
for year ended April 30, 2001 and the ten
months ended April 30, 2001 F-4
Consolidated Statements of Cash Flows for the
year ended April 30, 2001 and the ten months
ended April 30, 2000 F-8
Notes to the Consolidated Financial Statements F-11 to F-26
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no events required to be reported by this Item 8.
24
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
-----------------------------------
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
Unless described below, there are no family relationships among any of the
directors and officers.
Name . . . . . . Age Position(s)
---------------- --- --------------------------------------------
Scott A. Presta. 29 Director
Vincent Rinehart 51 Director, Chairman, President, and
Chief Executive Officer,
Principal Accounting Officer
Mr. Presta has been a director of the Company since April 12, 2000. A
former member of the National Association of Securities Dealers, Inc., he was
the licensed General Securities Principal of Pacific Coast Financial Services,
Inc., ("Pacific Coast"), a brokerage firm in Long Beach, California, from
October of 1993 through November of 1995. Following his tenure with the
brokerage firm, Mr. Presta formed a series of companies that were involved in
the real estate and oil and gas industries, one of which, Titus, was acquired by
the Company. Mr. Presta attended California State University Long Beach from
1989 through spring of 1992, when he became employed by Pacific Coast.
Mr. Rinehart has been a director and the President and Chief Executive
Officer of the Company since April 12, 2000, and its Chairman since January 1,
2001. He also serves in the following capacities: Chairman of the Board of
AMRES (commencing in 1997); Chief Executive Officer of Firstline Mortgage, Inc.,
a HUD-approved originator of FHA, VA, and Title 1 loans (commencing in 1985);
and Chairman of the Board of Firstline Relocation Services, Inc., a three office
enterprise that provides real estate sales, financing, destination, and
departure services to Fortune 500 companies (commencing in 1995). Mr. Rinehart
received his B.A. in Business Administration from California State University at
Long Beach in 1972.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
------------------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, none of the required parties are delinquent in their
16(a) filings.
25
Board Meetings and Committees
--------------------------------
During the fiscal year ended April 30, 2001, the Board of Directors met on
20 occasions and took written action on numerous other occasions. All the
members of the Board attended the meetings. The written actions were by
unanimous consent.
The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors.
ITEM 10 - EXECUTIVE COMPENSATION
Executive Officers and Directors
-----------------------------------
2000 Stock Compensation Program
The Company has reserved shares of Common Stock for issuance under its 2000
Stock Compensation Program (the "Plan"), as amended. At April 30, 2001,
3,803,059 shares of Common Stock had been granted and issued under the Plan. Our
Plan was adopted by our board of directors in December 1999 and will be
presented to the stockholders for approval at the next annual meeting of
stockholders. A total of 5,000,000 shares of common stock has been reserved for
issuance under the Plan, as amended to date. The maximum number of shares of
common stock which may be awarded under the Plan during any fiscal year to any
participant is 600,000 shares.
The Plan is administered by the board of directors. The administrator has
the power to determine the individuals to whom options, restricted shares or
rights to purchase shares shall be granted, the number of shares or securities
subject to each option, restricted share, purchase right or other award, the
duration, times and exercisability of each award granted, and the price of any
share purchase or exercise price of any option.
Options granted under the Plan are generally not transferable by the
optionee except by will or the laws of descent and distribution, and each option
is exercisable, during the lifetime of the optionee, only by the optionee.
Options generally must be exercised within 30 days following the end of the
optionee's status as an employee or consultant unless extended to 90 days in the
discretion of the administrator. Options may be exercised for up to 6 months
upon death or disability. However, in no event may an option be exercised later
than the earlier of the expiration of the term of the option or five years from
the date of the Plan.
The Plan may be amended, altered, suspended or terminated by the
administrator at any time, but no such amendment, alteration, suspension or
termination may adversely affect the terms of any option, restricted share,
purchase right or other award previously granted without the consent of the
affected participant. Unless terminated sooner, the Plan will terminate
automatically in December of 2004.
Board Compensation
Directors of the Company receive no compensation as a Director but they are
entitled to reimbursement for their travel expenses. The Company does not pay
additional amounts for committee participation or special assignments of the
Board of Directors.
26
Summary Compensation Table
----------------------------
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the fiscal years ended April 30, 2001
and 2000. Other than as set forth herein, no executive officer's salary and
bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------------------ ------------------------------------------
Awards Payouts
------------------------- --------------
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
YEAR ($) ($) ($) ($) SARS(#) ($) ($)
Vincent Rinehart, 2001 180,697.18 -0- 17,364.36 -0- -0- -0- -0-
President (1)
2000
Scott Presta (2). . . . . 2001 -0- -0- -0- -0- -0- -0- -0-
2000 35,000 -0- -0- -0- -0- -0- -0-
(1) In April of 2000, Mr. Rinehart was appointed Chief Executive Officer and
President of the Company.
(2) Mr. Presta did not receive compensation from the Company in any years
represented. However, he did receive wages totaling $35,000 in 2000 for
services performed at American Residential Funding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES ERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN EXERCISE OF BASE PRICE
NAME FISCAL YEAR (#) ($/SH) ($/SH) EXPIRATION DATE
----------------------------------------------------------------------------------------------------------------
Vincent Rinehart -0- N/A N/A N/A
Scott Presta -0- N/A N/A N/A
27
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
----------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SECURITIES UNDERLYING MONEY OPTION/SARS
SHARES ACQUIRED ON OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------------------------------------------------------------------------------------------
Vincent Rinehart -0- N/A N/A N/A
Scott Presta -0- N/A N/A N/A
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 3, 2001, certain information
with respect to the Company's equity securities owned of record or beneficially
by (i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all Directors and Executive Officers as a group.
Common Stock
--------------
Name and Address of Amount and Nature of Percent
------------
Title of Class Beneficial Owner (1) Beneficial Ownership of Class (2)
-------------- -------------------------------------- -------------------- ------------
Common
Stock. . . . . Vincent Rinehart 1,067,500 2.7%
Common
Stock. . . . . Scott A. Presta 115,000 0.3%
Common . . . . American Residential Funding,
Stock. . . . . Inc. (AMRES) (3) 2,750,000 7.1%
EMB Corporation (4)
10159 E. 11th Street, Suite 415
Common . . . . Tulsa, Oklahoma 74128
Stock 9,000,000 23.3%
Willbro Nominees Ltd. (5)
Common . . . . 6 Broadgate
Stock. . . . . London, EC2M-2RP England 3,000,000 7.8%
Common . . . . All officers and directors as a group
Stock. . . . . (2 persons) 1,182,500 3.0%
(1) Unless otherwise noted, the address of each beneficial owner is c/o
e-Net Financial.com Corporation, 3200 Bristol Street, Suite 700, Costa Mesa,
California 92626.
(2) Based on 38,626,543 shares outstanding as of August 3, 2001.
28
(3) In May 2001, the Company issued 2,500,000 shares of common stock to
its subsidiary, American Residential Funding, Inc., in order to appropriately
capitalize AMRES. In April of 2000, the Company issued 250,000 shares of common
stock to AMRES.
(4) To the best knowledge of the Company, these shares are under the
control of the board of directors of EMB. Includes 1,500,000 shares issued to
EMB as part of the Global Settlement (see Item 1 - Global Settlement, above).
Vincent Rinehart is a shareholder of EMB. Vincent Rinehart holds a limited
proxy for all of these shares until December 31, 2001.
(5) These shares were issued as part of the Global Settlement involving
Williams de Broe (see Item 1 - Global Settlement, above).
Preferred Stock
---------------
Name and Address of Amount and Nature of Percent
-------------------------------------- ---------------------
Title of Class. Beneficial Owner Beneficial Ownership of Class
--------------- -------------------------------------- --------------------- ---------
Cranshire Capital, L.P.
c/o Downsview Capital, Inc.
Series C. . . . 666 Dundee Road, Suite 1901
Preferred . . . Northbrook, Illinois 60062 6,531 (1) 36.3%
EURAM Cap Strat. "A" Fund Limited
c/o JMJ Capital, Inc.
Series C. . . . 666 Dundee Road, Suite 1901
Preferred . . . Northbrook, Illinois 60062 4,431 (1) 24.6%
Keyway Investments, Ltd
19 Mount Havlock
Series C. . . . Douglas, Isle of Man
Preferred . . . United Kingdom 1M1 2QG; 4,531 (1) 25.2%
The dotCom Fund, LLC
Series C. . . . 666 Dundee Road, Suite 1901
Preferred . . . Northbrook, Illinois 60062 2,491 (1) 13.9%
Series C. . . . All officers and directors as a group
Preferred . . . (2 persons) -0- -0-%
(1) In April 2000, the Company issued 20,000 shares of Series C Convertible
Preferred Stock, (the "C Preferred") for $1,775,000, net of fees of $225,000 in
a private placement. As additional consideration, the Company issued warrants
to purchase 151,351 shares of the Company's common stock at an initial exercise
price of $6.73 per share. The C Preferred has a liquidation value of $2,000,000
and the holder is entitled to receive cumulative dividends at an annual rate of
$7.00 per share (7% per annum), payable semi-annually. The C Preferred is
convertible, at any time at the option of the holder, into shares of the
Company's common stock at a price equal to the lesser of (a) $6.91 per share or
(b) 95% of the average closing bid price of the Company's common stock during
the five trading days preceding the conversion after 150 days to 85% of the
average closing bid price of the common stock during the five trading days
immediately preceding such conversion after 240 days. The longer the C
Preferred is held the greater discount on conversion into common stock. In the
event the holders of C Preferred have not elected to convert at the time of
mandatory conversion, the C Preferred will convert at an amount equal to 85% of
the purchase price of the holder's C Preferred plus an amount equal to accrued
and unpaid dividends, if any, up to and including the date fixed for redemption,
whether or not earned or declared. As of July 13, 2001, 2,016 shares of Series
C Preferred have been converted into 4,666,663 shares of e-Net common stock,
leaving 17,984 shares outstanding.
29
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
--------------------------------------------------
Effective March 1, 1999, the Company acquired e-Net Mortgage Corporation, a
Nevada corporation ("e-Net Mortgage"), and City Pacific International, U.S.A.,
Inc., a Nevada corporation ("City Pacific"). Pursuant to the Share Exchange
Agreement and Plan of Reorganization dated March 1, 1999, regarding e-Net
Mortgage, its shareholders received 2,000,000 shares of Common Stock of the
Company in exchange for all of the issued and outstanding stock of e-Net
Mortgage, which became a wholly owned subsidiary of the Company. Pursuant to
the Share Exchange Agreement and Plan of Reorganization, dated March 1, 1999,
regarding City Pacific, its shareholders received 500,000 shares of Common Stock
of the Company in exchange for all of the issued and outstanding stock of City
Pacific, which became a wholly owned subsidiary of the Company. Effective as of
that date, Michael Roth, who had owned 100% of e-Net Mortgage, became Chairman,
CEO, President, a director, and the owner of 44% of the common stock of the
Company. Also effective as of that date, Al Marchi, who had owned 100% of City
Pacific, became a director and the owner of 11% of the outstanding common stock
of the Company. Following this transaction, the Company entered into a series
of acquisitions as part of its strategy of horizontal market penetration and in
an effort to increase revenues.
On November 29, 1999, the Company issued Paul Stevens 250,000 shares of its
Common Stock in exchange for Mr. Stevens' transfer to the Company of 500,000
shares of Common Stock of EMB Corporation ("EMB") that he owned (the "Stevens
EMB Shares"). On December 21, 1999, and in connection with that exchange, the
Company entered into agreements with Digital Integrated Systems, Inc. ("DIS"),
and EMB to acquire their respective 50% interests in VPN.COM JV Partners, a
Nevada joint venture ("VPN Partners") involved in vertically integrated
communications systems. In consideration of the purchase of the interests, the
Company issued a one-year promissory note to DIS in the amount of $145,000 (the
"DIS Note") and tendered to EMB the Stevens EMB Shares. At the time of such
transactions, Mr. Stevens was the sole owner of DIS and the President and Chief
Executive Officer of VPN Partners. Upon closing of the acquisitions, VPN
Partners was integrated with VPNCOM.Net, Inc. (previously known as City
Pacific), the other communications entity then owned by the Company. At the time
of the transaction, our management believed that VPN Partners and Mr. Stevens
would contribute materially to the planned expansion of the Company.
On January 12, 2000, as revised on April 12, 2000, the Company entered into
an agreement (the "Amended and Restated Purchase Agreement") with EMB to acquire
two of its wholly owned subsidiaries, namely American Residential Funding, Inc.,
a Nevada corporation ("AMRES"), and Bravo Real Estate, Inc., a California
corporation ("Bravo Real Estate"). At the time of the acquisition, AMRES was the
principle operating company of EMB, and EMB had previously acquired AMRES from
AMRES Holding LLC ("AMRES Holding"), a company controlled by Vincent Rinehart
(now an officer and director of the Company) and in which Mr. Rinehart currently
holds his e-Net common stock, in exchange for EMB common stock. The purpose of
the acquisition was to acquire market share, revenues, and certain key
management personnel. The Company also acquired all of EMB's rights to acquire
Titus Real Estate LLC, a California limited liability company ("Titus Real
Estate") from its record owners. Titus Real Estate is the management company for
Titus Capital Corp., Inc., a California real estate investment trust (the "Titus
REIT"), in which the Company has no ownership interest. Titus REIT currently
holds 10 apartment buildings in Long Beach, California, six of which are in
escrow to be sold.
30
On February 11, 2000, the Company executed a purchase agreement (the "Titus
Purchase Agreement") for the acquisition of Titus Real Estate and issued 100,000
shares of its Class B Convertible Preferred Stock (the "B Preferred") to AMRES
Holding/Rinehart, and 300,000 shares of its Common Stock to Scott A. Presta, in
their capacities as the owner-members of Titus Real Estate. Mr. Rinehart and Mr.
Presta were not, at the time, otherwise affiliated with the Company in any way,
but both became members of Management in April 2000 (see Item 9). Upon closing,
Titus Real Estate became a wholly owned subsidiary of the Company. Management
had hoped that the acquisition of Titus Real Estate would increase the Company's
overall revenue stream. The Company took a charge for impairment of goodwill in
the amount of $1,155,057 in the fourth quarter 2000 with respect to its
investment in Titus Real Estate.
On February 14, 2000, in our continuing efforts to expand, the Company
acquired all of the common stock of LoanNet Mortgage, Inc., a Kentucky
corporation ("LoanNet"), a mortgage broker with offices in Kentucky and Indiana.
Pursuant to the Stock Purchase Agreement dated February 14, 2000, the Company
issued 250,000 shares of its Common Stock to the selling shareholders of
LoanNet, which became a wholly-owned subsidiary of the Company. As of the
closing of the transaction, LoanNet also had 400 shares outstanding of 8%
non-cumulative, non-convertible preferred stock, the ownership of which has not
changed. The preferred stock is redeemable for $100,000. As of February 28,
2001, all three LoanNet offices have been closed. The Company took a charge for
impairment of goodwill in the amount of $1,985,012 in the fourth quarter 2000
with respect to its investment in LoanNet.
On March 1, 2000, the Company sold VPNCOM.Net, Inc., which had proven to be
unprofitable and inconsistent with the Company's changing business structure, to
Al Marchi, its then-President. The sales consideration consisted of his 30-day
promissory note in the principal amount of $250,000 (paid in full on April 15,
2000), the assumption of the DIS Note, and the return of 250,000 shares of
Company Common Stock owned by him.
On March 17, 2000, the Company acquired all of the common stock of
ExpiDoc.com, Inc., a California corporation ("ExpiDoc"). ExpiDoc is an
Internet-based, nationwide notary service, with over 6,500 affiliated notaries,
that provides document signing services for various mortgage companies. Pursuant
to the Stock Purchase Agreement dated February 14, 2000, the Company issued
24,000 shares of Common Stock of the Company to the selling shareholders of
ExpiDoc, which became a wholly owned subsidiary of the Company. As of the
closing of the acquisition, the Company entered into management and consulting
agreements with ExpiDoc's owners and management, including Mr. Rinehart and Mr.
Presta. Mr. Rinehart and Mr. Presta were not, at the time, otherwise affiliated
with the Company in any way, but both became members of Management in April 2000
(see Item 9).
On April 12, 2000, the Company closed the acquisition of AMRES and Bravo
Real Estate. Pursuant to the Amended and Restated Purchase Agreement, the
Company issued 7.5 million shares of Common Stock to EMB, representing nearly
40% of the then issued and outstanding common stock of the Company, paid
$1,595,000, and issued a promissory note in the initial amount of $2,405,000,
and AMRES and Bravo Real Estate became wholly owned subsidiaries of the Company.
As of April 30, 2001, the remaining principal balance of the promissory note was
$1,055,000, and the note was cancelled in its entirety effective June 27, 2001,
(see discussion of Global Settlement below). On April 12, 2000, James E.
Shipley, the former CEO of EMB, was elected Chairman of the Board of Directors
of the Company and Vincent Rinehart was elected a Director, President, and Chief
Executive Officer of the Company. Bravo Real Estate never commenced operations,
had no assets, and is no longer an operating subsidiary.
31
Mr. Shipley was the CEO, President, and a less than 5% owner of EMB at the
time of the sale of AMRES and Bravo from EMB to e-Net. Mr. Shipley resigned as
Chairman of EMB and became Chairman of e-Net in April 2000 (replacing Mr. Roth
as Chairman), and resigned as an officer of e-Net on December 31, 2000, when Mr.
Rinehart became Chairman.
Mr. Rinehart was never an officer or director of EMB, but was the owner of
2,000,000 shares of EMB common stock, making him an approximate 10% owner of EMB
at the time of the sales in April 2000, and continues as an officer and director
of the Company (e-Net) and as an officer of all wholly-owned subsidiaries of the
Company.
On April 12, 2000, in accordance the provisions of the Certificate of
Designations, Preferences and Rights of Class B Convertible Preferred Stock,
AMRES Holding/Rinehart demanded that its B Preferred be repurchased by the
Company for an aggregate of one million dollars. On April 20, 2000, the Company,
AMRES Holding/Rinehart, and Mr. Presta amended the Titus Purchase Agreement to
provide for the return of 100,000 shares of the Company's preferred stock issued
to AMRES Holdings and Mr. Presta upon the issuance of 1,000,000 shares of common
stock to them.
On May 24, 2000, Michael Roth and Jean Oliver, the sole remaining officers
and directors of prior management, resigned their remaining positions with the
Company. On that date, Mr. Presta, an executive officer and director of Titus
Real Estate, was elected a Director and Secretary of the Company.
On April 13, 2000, Mr. Shipley loaned the Company $300,000 due April 12,
2001, together with interest at 10% per annum. This loan was satisfied by the
issuance of 150,000 shares of common stock to Mr. Shipley on or about April 25,
2001. Based on a press release by EMB, effective July 25, 2001, James E. Shipley
again became the Chief Executive Officer of EMB.
32
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
------------ -----------
2.1 Share Exchange Agreement and Plan of Reorganization dated March 1, 1999
between the Company and E-Net Mortgage Corporation is incorporated by reference
to Exhibit 2.3 to the Annual Report on Form 10-KSB of the Registrant for the
fiscal year ended April 30, 1999, filed on August 13, 1999 (the "1999 10-KSB").
2.2 Share Exchange Agreement and Plan of Reorganization dated March 1, 1999
between the Company and City Pacific International, U.S.A., Inc., is
incorporated by reference to Exhibit 2.4 to the 1999 10-KSB.
3.1 Certificate and Articles of Incorporation, as filed with the Nevada
Secretary of State on August 18, 1988 is incorporated by reference to the
Exhibits to the Registration Statement on Form 10-SB of the Registrant filed on
September 1, 1994.
3.2 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on July 29, 1997, is incorporated by reference to
Exhibit 3.3 to the Annual Report on Form 10-KSB of the Registrant for the fiscal
year ended April 30, 1997, filed on January 4, 1999.
3.3 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on February 19, 1999, is incorporated by reference to
Exhibit 3.4 to the 1999 10-KSB.
3.4 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on May 12, 1999, is incorporated by reference to
Exhibit 3.5 to the 1999 10-KSB.
3.5 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on January 18, 2000, are incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K of the Registrant filed on January
27, 2000 (the "January 8-K").
3.6 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on February 2, 2000, is incorporated by reference to
Exhibit 3.6 to the Annual Report on Form 10-KSB of the Registrant for the fiscal
year ended April 30, 2000, filed on August 1, 2000 (the "2000 10-KSB").
33
3.7 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on March 3, 2000, is incorporated by reference to
Exhibit 3.7 of the 2000 10-KSB.
3.8 Amended and Restated By-laws of the Registrant is incorporated by
reference to Exhibit 3.8 of the 2000 10-KSB.
4.1 Certificate of Designations, Preferences and Rights of Class A
Convertible Preferred Stock, as filed with the Nevada Secretary of State on
April 7, 2000, is incorporated by reference to Exhibit 4.1 of the 2000 10-KSB.
4.2 Certificate of Designations, Preferences and Rights of Class B
Convertible Preferred Stock, as filed with the Nevada Secretary of State on
April 7, 2000, is incorporated by reference to Exhibit 4.2 of the 2000 10-KSB.
4.3 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock, as filed with the Nevada Secretary of State on
April 7, 2000, is incorporated by reference to Exhibit 3.7 of the 2000 10-KSB.
10.1* Settlement Agreement dated June 26, 2001 by and between EMB
Corporation, e-Net Financial.com Corporation, AMRES Holding LLC, Vincent
Rinehart, and Williams de Broe.
10.2* Limited Irrevocable Proxy dated June 27, 2001.
10.3* Promissory Note dated June 27, 2001 executed by e-Net in favor of
AMRES Holding LLC.
10.4* Promissory Note dated June 27, 2001 executed by EMB Corporation in
favor of Williams de Broe.
10.5* Promissory Note dated June 27, 2001 executed by e-Net in favor of EMB
Corporation (later terminated).
10.6* Promissory Note dated June 27, 2001 executed by e-Net in favor of EMB
Corporation.
10.7* Redeemable Convertible 10% Promissory Note dated June 28, 2001
executed by e-Net in favor of EMB Corporation.
10.8* Registration Rights Agreement dated June 27, 2001 executed by e-Net in
favor of Williams de Broe.
10.9* Investment Agreement dated June 27, 2001 by and between e-Net and
Laguna Pacific Partners, LLP
10.10* Secured Promissory Note dated June 27, 2001 executed by e-Net in
favor of Laguna Pacific Partners, LLP
34
10.11* Warrant Agreement dated June 27, 2001 by and between e-Net and Laguna
Pacific Partners, LLP
10.12* Form of Warrant
10.13* Operating Agreement dated June 27, 2001 by and between e-Net and Anza
Properties, Inc.
10.14* ENET Bond Term Sheet by and between e-Net and Laguna Pacific
Partners, LLP
10.15* Employment Agreement dated June 27, 2001 by and between Anza
Properties, Inc. and Thomas Ehrlich
10.16* Stock Option Agreement dated June 27, 2001 by and between e-Net and
Thomas Ehrlich
10.17* Consulting Agreement dated June 27, 2001 by and between Anza
Properties, Inc. and Lawrence W. Horwitz
10.18* Stock Option Agreement dated June 27, 2001 by and between e-Net and
Lawrence W. Horwitz
10.19* Employment Agreement dated effective July 1, 2001 by and between
e-Net and Vincent Rinehart.
* Incorporated by reference to the Company's Form 10-KSB filed with the
Commission on August 16, 2001.
(B) REPORTS ON FORM 8-K
On March 15, 2001, the Company filed a Form 8-K/A, amending item 7(b) of
its Current Report on Form 8-K filed with the Commission on April 19, 2000, to
file unaudited pro forma condensed consolidated financial information for the
Company reflecting the acquisition of American Residential Funding, Inc. on
April 12, 2000.
35
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.
Dated: February 20, 2002 Anza Capital, Inc.
/s/ Vincent Rinehart
______________________________
By: Vincent Rinehart
Its: President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Vincent Rinehart
Dated: February 20, 2002 _____________________________
By: Vincent Rinehart
Its: President, Chairman,
Chief Executive Officer,
Chief Financial Officer,
Chief Accounting Officer,
and Director
/s/ Scott A. Presta
Dated: February 20, 2002 _____________________________
By: Scott A. Presta
Its: Director
36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-1
Consolidated Balance Sheet as
of April 30, 2001 F-2
Consolidated Statements of Operations
for the Ten Months Ended April 30, 2000,
and the Year Ended April 30, 2001 F-3
Consolidated Statements of Stockholders'
Equity (Deficit) for the Ten Months Ended
April 30, 2000, and the Year Ended April 30, 2001 F-8
Consolidated Statements of Cash Flows
for the Ten Months Ended April 30, 2000,
and the Year Ended April 30, 2001 F-8 - F-11
Notes to the Consolidated Financial Statements F-12 - F-28
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
e-Net Financial.Com Corporation
We have audited the accompanying consolidated balance sheet of e-Net
Financial.Com Corporation ("e-Net") and subsidiaries (collectively, the
"Company") as of April 30, 2001, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the ten months ended April 30,
2000, and for the year ended April 30, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of e-Net Financial.Com
Corporation and subsidiaries as of April 30, 2001, and the results of their
operations and their cash flows for the ten months ended April 30, 2000, and for
the year ended April 30, 2001, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred operating losses,
has a working capital deficit and shareholders' deficit at April 30, 2001. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ McKennon, Wilson & Morgan LLP
--------------------------------------
Irvine, California
August 8, 2001
F-2
e-NET FINANCIAL.COM CORPORATION
Consolidated Balance Sheet
April 30, 2001
----------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 92,886
Accounts receivable, net of allowance for doubtful
accounts of $74,123. . . . . . . . . . . . . . . . . . . . . . . 480,723
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . 357,350
Advances to employees . . . . . . . . . . . . . . . . . . . . . . . 65,250
Prepaid and other current assets. . . . . . . . . . . . . . . . . . 84,604
----------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,080,813
Property and equipment, net of accumulated depreciation of $78,385. 89,985
Goodwill, net of accumulated amortization
and impairments of $1,385,049. . . . . . . . . . . . . . . 425,247
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,307
----------------
$ 1,607,352
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 494,280
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . 340,842
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 224,628
Commissions payable . . . . . . . . . . . . . . . . . . . . . . . . 260,313
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 135,707
----------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 1,455,770
Note payable to related party. . . . . . . . . . . . . . . . . . . . 1,055,000
Interest payable on notes to related party . . . . . . . . . . . . . 129,876
Long-term note payable . . . . . . . . . . . . . . . . . . . . . . . 150,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,088
----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 2,791,734
----------------
Commitments and contingencies (Note 10). . . . . . . . . . . . . . . -
Stockholders' deficit:
Class C convertible preferred stock, no par value;
liquidation value of $2.00 per share;
20,000 shares issued and outstanding . . . . . . . . . . . . . . . . 2,000,000
Common stock, $0.001 par value; 100,000,000 shares
authorized; 23,634,884 issued and outstanding. . . . . . . . . . . . 23,635
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 10,119,184
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (13,301,068)
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . (26,133)
----------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . (1,184,382)
----------------
$ 1,607,352
===========
See accompanying notes to these consolidated financial statements
F-3
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Operations
Ten Year
Months Ended Ended
April 30, 2000 April 30, 2001
---------------- ----------------
Revenues:
Broker commissions. . . . . . . . . . . . . . . . 4,647,848 10,558,885
Other . . . . . . . . . . . . . . . . . . . . . . 41,322 432,365
------------- -------------
4,689,170 10,991,250
------------- -------------
Cost of revenues-
Commissions . . . . . . . . . . . . . . . . . . . . 3,411,750 7,527,903
------------- -------------
Gross profit. . . . . . . . . . . . . . . . . . . . 1,277,420 3,463,347
------------- -------------
Sales and marketing
General and administrative.. . . . . . . . . . . 3,059,374 6,865,208
Loss on rescission of LoanNet acquisition. . . . . . - 1,838,012
Goodwill impairment of Titus . . . . . . . . . . . . - 1,155,057
------------- -------------
Total costs and expenses. . . . . . . . . . . . . 3,059,374 9,858,277
------------- -------------
Operating loss. . . . . . . . . . . . . . . . . . (1,781,954) (6,394,930)
Interest expense (27,343) (203,306)
Other income (expense), net. . . . . . . . . . . . . 12,398 24,709
------------- -------------
Net loss. . . . . . . . . . . . . . . . . . . . . $ (1,796,899) $ (6,573,527)
============= =============
Basic and diluted net loss per share of common stock $ (0.22) $ (0.31)
============= =============
Weighted average common shares outstanding . . . . . 8,129,791 21,511,987
============= =============
See accompanying notes to these consolidated financial statements
F-4
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
For the Ten Months Ended April 30, 2000, and the year ended April 30, 2001
Class B Class C
Mandatory Redeemable Preferred Convertible Preferred Common Stock
Shares Amount Shares Amount Shares Amount
---------------------------------- ------------------------- --------------------
Balances, June 30, 1999 - $ - - $ - 7,500,000 7,500
Shares and values assigned to
acquired companies on
April 12, 2000:
Acquisition of Titus 100,000 1,000,000 - - 300,000 300
Acquisition of LoanNet - - - - 250,000 250
Acquisition of Expidoc - - - - 24,000 24
Acquisition of e-Net
shell company - - - - 10,729,937 10,730
Dividend deemed distributed
at April 12, 2000, for AMRES - - - - - -
Issuance of Class C Convertible
Preferred, net of costs of $225,000 - - 20,000 1,775,000 - -
Value of warrant issued in
connection with Class C
Convertible Preferred - - - (281,362) - -
Value of beneficial conversion
feature of Class C
Convertible Preferred - - - (352,941) - -
Conversion of Class B
Mandatory Redeemable Preferred (100,000) (1,000,000) - - 1,000,000 1,000
Contributed capital from EMB - - - - - -
Net loss for the ten months ended
April 30, 2000 - - - - - -
---------- ------------ --------- ---------- ---------- ----------
Balances, April 30, 2000 . . . . - $ - 20,000 $1,140,697 19,803,937 $19,804
See accompanying notes to these consolidated financial statements
F-5
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
For the Ten Months Ended April 30, 2000, and the year ended April 30, 2001
Additional
Paid-In Capital Deferred Compensation Accumulated Deficit Total
--------------- --------------------- ------------------- --------
Balances, June 30, 1999 $ - $ - $ (71,339) $ (63,839)
Shares end values assigned to
acquired companies on
April 12, 2000:
Acquisition of Titus. . . . . . . . 599,700 - - 1,600,000
Acquisition of LoanNet. . . . . . . 2,305,375 - - 2,305,625
Acquisition of Expidoc . . . . . . . 196,486 - - 196,510
Acquisition of e-Net
shell company . . . . . . . . . 123,931 (339,733) - (205,072)
Dividend deemed distributed
at April 12, 2000, for AMRES . . . - - (4,000,000) (4,000,000)
Issuance of Class C
Convertible Preferred,
net of costs of $225,000. . . . . . - - - 1,775,000
Value of warrant issued in
connection with Class C
Convertible Preferred. . . . . . . . 281,362 - - -
Value of beneficial
conversion feature of Class C
Convertible Preferred. . . . . . . . 352,941 - - -
Conversion of Class B
Mandatory Redeemable Preferred . . 1,999,000 - - 1,000,000
Contributed capital from EMB . . . . 419,356 - - 419,356
Net loss for the ten
months ended April 30, 2000 . . . . - (1,796,899) (1,796,899)
--------- ---------- ------------ ------------
Balances, April 30, 2000 . . . . . $6,278,151 $(339,733) $(5,868,238) $ 1,230,681
See accompanying notes to these consolidated financial statements
F-6
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
For the Ten Months Ended April 30, 2000, and the year ended April 30, 2001
Class B Class C
Mandatory Redeemable Preferred Convertible Preferred Common Stock
Shares Amount Shares Amount Shares Amount
---------------------------------- ------------------------- --------------------
Shares issued in
Private Placement on May 2, 2000 - - - - 666,667 $ 667
Accretion of C Preferred
to liquidation value - - - 859,303 - -
Shares issued to
consultants for services - - - - 2,863,591 2,864
Shares issued for
deferred salaries - - - - 90,689 90
Shares issued for
employee long-term incentives - - - - 60,000 60
Shares issued for
settlement of note payable - - - - 150,000 150
Amortization of deferred
stock compensation - - - - - -
Value of management services - - - - - -
Net loss for year - - - - - -
--------- ----------- ---------- ----------- ----------- ---------
Balances, April 30, 2001. . . . . . - $ - 20,000 $2,000,000 23,634,884 $ 23,635
========= =========== =========== =========== =========== =========
See accompanying notes to these consolidated financial statements
F-7
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
For the Ten Months Ended April 30, 2000, and the year ended April 30, 2001
Additional
Paid-In Capital Deferred Compensation Accumulated Deficit Total
--------------- --------------------- ------------------- --------
Shares issued in
Private Placement
on May 2, 2000 $ 1,699,306 $ - $ - $ 1,699,973
Accretion of C Preferred
to liquidation value - - (859,303) -
Shares issued to
consultants for services 1,539,452 - - 1,542,316
Shares issued for
deferred salaries 49,819 - - 49,909
Shares issued for
employee long-term incentives 119,940 - - 120,000
Shares issued for
settlement of note payable 332,516 - - 332,666
Amortization of deferred
stock compensation - 313,600 - 313,600
Value of management services 100,000 - - 100,000
Net loss - - (6,573,527) (6,573,527)
------------ ---------- -------------- -----------
Balances, April 30, 2001. . . . $ 10,119,184 $ (26,133) $(13,301,068) $ (1,184,382)
============= ========== ============= ===========
See accompanying notes to these consolidated financial statements
F-8
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Cash Flows
Ten Months Year
Ended Ended
April 30, 2000 April 30, 2001
---------------- ----------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,796,899) $ (6,573,527)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,440 393,439
Loss from disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 64,068
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,699 36,687
Loss on rescission of LoanNet acquisition - 1,838,012
Goodwill impairment of Titus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,155,057
Fair value of services contributed by an officer . . . . . . . . . . . . . . . . . . . . - 100,000
Stock compensation to consultants. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,542,316
Stock compensation to employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 169,909
Amortization of deferred stock compensation. . . . . . . . . . . . . . . . . . . . . . . - 313,600
Compensation attributable to conversion of B Preferred . . . . . . . . . . . . . . . . . 1,000,000 -
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (99,351) (269,972)
Increase in loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (357,350)
Increase (decrease) in other current assets. . . . . . . . . . . . . . . . . . . . . . (2,946) 64,068
Increase in due from employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (65,250)
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,789 298,354
Increase in commission payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 260,313
Increase in accrued interest expense . . . . . . . . . . . . . . . . . . . . . . . . . - 118,016
Increase (decrease) accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . - (33,525)
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . (10,746) 46,797
Increase (decrease) in other current liabilities . . . . . . . . . . . . . . . . . . . (69,234) 4,845
---------------- ----------------
Net cash used in operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . (702,248) (894,143)
---------------- ----------------
Cash flows from investing activities:
Decrease (increase) in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,845) 9,128
Acquisitions of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . - (23,762)
Issuance (repayment) of note
receivable to related party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,400 -
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,786) -
Purchase of companies, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . . 147,970 -
Recapitalization of e-Net, net of cash acquired. . . . . . . . . . . . . . . . . . . . . 12,449 -
---------------- ----------------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . . . . 178,188 (14,634)
---------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable to related parties . . . . . . . . . . . . . . . . . . . . . 459,326 -
Payments on notes payable to related parties . . . . . . . . . . . . . . . . . . . . . . (1,530,000) (1,350,000)
Proceeds from issuance of long-term notes payable. . . . . . . . . . . . . . . . . . . . - 105,000
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (79,735)
Advances from line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 340,842
Proceeds from private placement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,699,973
Proceeds from sale of C Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,775,000 -
---------------- ----------------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . 704,326 716,080
---------------- ----------------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,266 (192,697)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,317 285,583
---------------- ----------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,583 $ 92,886
================ ================
Supplemental cash flow information:
Cash paid for interest and income taxes was not significant during the periods presented
See accompanying notes to these consolidated financial statements
F-9
Supplemental cash flow information:
Cash paid for interest and income taxes was not significant during the
periods presented
F-10
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Cash Flows
For the
Ten Months For the Year
Ended Ended
April 30, 2000 April 30, 2001
--------------- -----------------
Supplemental disclosure of non-cash financing and investing activities:
B Preferred and common stock issued for acquisition of Titus . . . . . $ 1,600,000 $ -
============ =========
Common stock issued for acquisition of LoanNet . . . . . . . . . . . . $ 2,305,625 $ -
============ =========
Common stock issued for acquisition of ExpiDoc . . . . . . . . . . . . $ 196,510 $ -
============ =========
Dividend deemed distributed resulting from issuance of note payable. . $ 4,000,000 $ -
============ =========
Value of C Preferred beneficial conversion feature . . . . . . . . . . $ 281,362 $ -
============ =========
Value of warrants issued with issuance of C Preferred. . . . . . . . . $ 352,941 $ -
============ =========
Issuance of common stock for conversion of B Preferred . . . . . . . . $ 1,000,000 $ -
============ =========
Capital contributed in satisfaction of debt. . . . . . . . . . . . . . $ 419,356 $ -
============ =========
Acquisition of property and equipment through capital leases . . . . . $ - $ 3,226
============ =========
Settlement of debt with issuance of common stock . . . . . . . . . . . $ - $ 332,666
============ =========
LoanNet acquisition, net of cash acquired:
Working capital deficit, other than cash acquired. . . . . . . . . . . $ (55,776) $ -
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 84,089 -
Preferred stock not acquired . . . . . . . . . . . . . . . . . . . . . (100,000) -
Purchase price in excess of the net assets acquired. . . . . . . . . . 2,226,873 -
Capital Stock issued in acquisition. . . . . . . . . . . . . . . . . . (2,305,625) -
------------ ---------
Net cash obtained in acquisition of LoanNet. . . . . . . . . . . . . . $ (150,439) $ -
============ =========
ExpiDoc acquisition, net of cash used:
Working capital deficit, other than cash acquired. . . . . . . . . . . $ (11,317) $ -
Purchase price in excess of the net assets acquired. . . . . . . . . . 210,296 -
Capital stock issued in acquisition. . . . . . . . . . . . . . . . . . (196,510) -
------------ ---------
Net cash used to acquire ExpiDoc . . . . . . . . . . . . . . . . . . . $ 2,469 $ -
============ =========
Titus acquisition, net of cash acquired
Purchase price in excess of the net assets acquired. . . . . . . . . . $ 1,600,000 $ -
Capital stock issued in acquisition. . . . . . . . . . . . . . . . . . (1,600,000) -
------------ ---------
- -
============ =========
See accompanying notes to these consolidated financial statements
F-11
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
e-Net Financial.Com Corporation ("e-Net"), a Nevada corporation, was originally
incorporated on August 18, 1988, under the name of Solutions, Inc.
Subsequently, its name was changed to Suarro Communications, Inc. on August 16,
1996, on February 12, 1999, May 12, 1999 and on January 18, 2000, the entity
changed its name to e-Net Corporation, e-Net Financial Corporation and e-Net.Com
Corporation, respectively. On February 2, 2000, the entity changed its name to
e-Net Financial.Com Corporation. Since inception, e-Net has had unprofitable
operations.
Effective March 1, 1999, e-Net, e-Net Mortgage Corporation ("e-Net Mortgage")
and City Pacific International, Inc. ("City Pacific") merged under a Plan of
Reorganization. E-Net Mortgage, a Nevada corporation, formally known as the
Hospitality Group, Inc., was formed on November 20, 1996, to engage in the
business of providing retail and wholesale mortgage products and services.
However, such operations did not materially commence. City Pacific, a Nevada
corporation, was formed on July 10, 1997, to provide telecommunications products
and services for commercial and residential customers, directly or through joint
ventures with strategic partners. City Pacific did not achieve material
operations.
On December 21, 1999, e-Net completed its acquisition of VPN.COM JV Partners, a
Nevada joint venture. VPN.COM JV Partners provides comprehensive broadband
networks and connectivity. These networks facilitate customized telephone,
video teleconferencing, Internet access, and data transfer. City Pacific
changed its name to VPNCOM.NET, Inc. on December 23, 1999. E-Net sold
VPNCOM.Net, Inc. on March 1, 2000, at a gain of approximately $1.8 million,
since this business did not meet its business focus. The gain on the sale, and
the historical results of the discontinued operations of VPNCOM.NET, Inc. have
been excluded from the historical consolidated financial statements of e-Net due
to the change in reporting entity in connection with acquisitions of new
businesses as discussed below.
On January 20, 2000, e-Net entered into, and announced, definitive agreement to
acquire all the issued and outstanding common stock of American Residential
Funding, Inc. ("AMRES"), as well as Bravo Real Estate, Inc. and Residential
Mortgage Corporation ("RMC") from EMB Corporation ("EMB"). RMC was not acquired
by amendment to the definitive agreement on April 12, 2000 as discussed below.
Bravo Real Estate, Inc. never commenced any form of operations since inception.
As further discussed in Note 3, from February to March 2000, e-Net acquired
Titus Real Estate, Inc., formerly Mystery Travel, Inc., ("Titus"), LoanNet
Mortgage, Inc. ("LoanNet") and Expidoc.com, Inc. ("Expidoc").
On April 12, 2000, as amended, e-Net acquired AMRES and Bravo Real Estate, Inc.
from EMB. AMRES is a Nevada corporation organized on March 13, 1998, for the
purpose of originating and selling HUD-insured mortgages and conventional loans.
E-Net, prior to a series of acquisitions in February and March 2000, was
considered a blank-check company with limited operating history. The entities
acquired in March and April 2000, represented less than 10% of revenues and less
than 10% of tangible assets of AMRES. Such shareholders received less than 10%
of e-Net common stock after the acquisitions. The original e-Net shareholders
(holders on or about January 31, 2000) owned approximately 56% of the
outstanding common stock. The AMRES selling shareholder, EMB, retained
approximately 40% of the outstanding common stock immediately after the
acquisition. In addition, certain former management of EMB and subsidiaries
controlled the day-to-day operations of e-Net and AMRES. Accordingly, AMRES is
considered the acquiror for financial reporting purposes (see Note 3).
On May 1, 2000, e-Net and its current chief executive, along with an unrelated
individual, formed Bravo Realty.com, Inc. ("Bravo Realty'), internet-based real
estate brokerage targeted to minority home buyers. E-Net owns 70% and E-Net's
current chief executive owns 15% of Bravo Realty. Bravo Realty commenced
operations on or about January 31, 2001; however, as of April 30, 2001, such
operations were not significant.
F-12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of e-Net
and its wholly-owned subsidiaries, collectively, the "Company." All significant
intercompany transactions and balances have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has incurred
significant losses from operations, has a working capital deficit totaling
approximately $375,000 and requires financing to meet its cash requirements as
they become due. Cash requirements depend on several factors, including but not
limited to, the pace at which all subsidiaries continue to grow, become self
supporting, and begin to generate positive cash flow, as well as the ability to
obtain additional services for common stock or other non-cash consideration.
If capital requirements vary materially from those currently planned, the
Company may require additional financing sooner than anticipated. Subsequent to
year-end, the Company executed a settlement agreement with its primary creditors
pursuant to which the Company issued 3,325,000 shares of restricted common stock
in satisfaction of approximately $234,000 and a contingent liability totaling
approximately $424,766. Additionally, subsequent to year-end, the Company
secured $200,000 in bridge financing. Management plans to continue to seek
capital on favorable terms; however, There are no firm commitments for any
additional financing, and there can be no assurance that any such commitment can
be obtained on favorable terms, if at all. Management has implemented
significant cost reductions and expects to keep its operating costs to a minimum
until each is available through financing or operating activities. Management
believes that these actions, in addition to the continued growth of the
Company's operating subsidiaries, will afford the Company the ability to fund
its daily operations and service its remaining debt obligations primarily
through the cash generated by operations. However, there are no assurances that
the company will continue to experience rapid growth profitably. No adjustments
have been made to the carrying value of assets or liabilities as a result of the
uncertainty about obtaining cash required to pay obligations as they become due.
Change in Reporting Entity
The accompanying financial statements include the accounts of AMRES for the
periods presented as a result of the reverse acquisition of AMRES on April 12,
2000. The operations of Titus, LoanNet and ExpiDoc are included in operations
from the dates of acquisition (see Note 3).
Significant Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with a remaining maturity of three
months or less to be cash equivalents. Balances in bank accounts may, from time
to time, exceed federally insured limits.
F-13
Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated and held,
pending sale, to interim and permanent investors. The mortgages are carried at
the lower of cost or market as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis. The Company separately evaluates for impairment the estimated fair
value of its commitments to lend. If impairment exists, the Company records a
charge to earnings in the current period. Gains or losses on such sales are
recognized at the time legal title transfers to the investor based upon the
difference between the sales proceeds and the basis of the loan sold, adjusted
for net deferred loan fees and certain direct costs, selling costs and any other
adjustments. The Company defers net loan origination fees charged as a component
of the loan balance on the balance sheet. Such costs are not amortized and are
recognized into income as a component of the gain or loss upon sale.
The Company sells its loans it originates, typically within 30 days of
origination, rather than hold them for investment. The Company sells its loans
to institutional loan buyers under [an existing contract]. The Company sells the
servicing rights to its loans at the time it sells those loans. Typically, the
Company sells the loans with limited recourse to it. This means that, with some
exceptions, the Company reduces its exposure to default risk at the time it
sells the loan, except that it may be required to repurchase the loan if it
breaches the representations or warranties that it makes in connection with the
sale of the loan, in the event of an early payment default, or if the loan does
not comply with the underwriting standards or other requirements of the ultimate
investor.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Maintenance and repairs are charged to
expense as incurred. Significant renewals and betterments are capitalized. At
the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net
assets of acquired businesses as of April 30, 2001. Goodwill is amortized on a
straight-line basis over the expected periods to be benefited. Management
estimated the periods to be benefited at seven to ten years. During the ten
months ended April 30, 2000, and the year ended April 30, 2001, amortization of
goodwill amounted to $122,749 and $349,104. See Note 4 for impairment of
goodwill.
In June 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001, and
for purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 121. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001, to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company is assessing, but has not yet determined, how the adoption of SFAS
141 and SFAS 142 will impact its financial and results of operations.
Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
Long-lived assets, including goodwill, of the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company evaluates
quarterly the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated liquidation value of such long-lived assets,
and provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset. The amount of impairment,
if any, is measured based on fair value or discounted cash flows, and is charged
to operations in the period in which such impairment is determined by
management. See Note 4 for the impairment of goodwill.
F-14
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between bases used for financial reporting and income tax reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
Revenue Recognition
Commissions generated from brokering loans are recognized at the date of close.
Notary services related revenue is recognized when the services are performed.
Also see accounting policy for loans held for sale.
Registration Costs
Direct costs to register restricted common shares (the "Registration") are
accrued at the time the shares are issued. At April 30, 2000, the Company
accrued $125,000 for estimated legal, accounting, and filing fees directly
related to the Registration. No additional amounts were accrued as of April 30,
2001.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB No. 25 must make pro forma disclosures of net income (loss) and
earnings (loss) per share, as if the fair value method of accounting defined in
SFAS No. 123 had been applied. The Company continues to account for stock-based
compensation under APB No. 25. Stock-based compensation for non-employees are
accounted for using the fair value approach consistent with SFAS No. 123.
F-15
Loss Per Common Share
The Company presents basic earnings per share ("EPS") and diluted EPS on the
face of all statements of operations. Basic EPS is computed as net income (loss)
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities. Due to the net losses incurred during the ten months ended April 30,
2000, the year ended April 30, 2001, all common stock equivalents outstanding
were considered anti-dilutive and were excluded from the calculations of diluted
net loss per share. Weighted average shares outstanding were computed based on
the 7,500,000 shares reflected as outstanding at the beginning of the periods
presented as a result of the reverse acquisition, with the shares retained by
e-Net, LoanNet, Titus, and Expidoc as issued on April 12, 2000, and outstanding
for 19 days. This is, in effect, an exchange ratio method computing weighted
average shares.
Anti-dilutive securities which are not included in the calculation of dilutive
EPS for the ten months ended April 30, 2000 and the year ended April 30, 2001,
which could be dilutive in future periods, include the C Preferred convertible
into approximately 481,696 and 18,287,108 shares of common stock, respectively.
Reporting Comprehensive Income
The Company reports the components of comprehensive income using the income
statement approach. Comprehensive income includes net income (loss), as well as
certain non-shareholder items that are reported directly within a separate
component of stockholders' equity and bypass net income (loss). The provisions
of this statement had no impact on the accompanying consolidated financial
statements.
Disclosures about Segments of an Enterprise and Related Information
Management discloses financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. An operating segment is a component of an enterprise that engages
in business activities that generate revenue and incur expense, whose operating
results are reviewed by the chief operating decision-maker in the determination
of resource allocation performance, and for which discrete financial information
is available. See Note 10 for these disclosures.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends
existing accounting standards and is effective for fiscal years beginning after
June 15, 2000. SFAS No. 133 requires that all derivatives be recognized in the
balance sheet at their fair market value, and the corresponding derivative gains
or losses be either reported in the statement of operations or as a component of
other comprehensive income depending on the type of hedge relationship that
exists with respect to such derivative. The adoption of SFAS No. 133 did not
have a material impact on it's the Company's consolidated financial statements.
F-16
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities" ("SFAS 140") in September
of 2000. SFAS 140 is a replacement of Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), revising the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. However, SFAS 140 carries over most of SFAS 125's
provisions without reconsideration. SFAS 140 is effective for transfers and
servicing of financial assets and extinquishments of liabilities occurring after
March 31, 2001, however, the disclosure requirements are effective for fiscal
years ending after December 15, 2000. The adoption of the provisions of SFAS 140
is not expected to have a material impact on the results of operations or the
financial position of the Company.
Also see Goodwill above for accounting pronouncements recently issued.
NOTE 3 - ACQUISITIONS
Titus Real Estate, Inc.
On February 11, 2000, e-Net acquired all the issued and outstanding capital
stock of Titus in a tax-free exchange valued at $1.6 million. Titus is an
entity which retains rights to manage the operations of a Real Estate Investment
Trust ("REIT") that owns certain apartment complexes consisting of 121 units.
Titus and AMRES have historically had common management, and such individuals
are also officers and key employees of e-Net. The purchase price consisted of
300,000 shares of common stock subject to a share-cancellation amendment dated
March 1, 2000, valued at $600,000 and 100,000 shares of Series B Mandatory
Redeemable Preferred stock (the "B Preferred") with a redemption price of $1.0
million. A portion of the common shares were subject to cancellation to the
extent the value of the 300,000 common shares exceeded a fair market value of
$600,000, based on the average closing price of the Company's common stock
fifteen trading days prior to June 11, 2000. The holder of the B Preferred was
entitled to demand redemption of such shares for $1.0 million at any time after
the completion of the acquisition of AMRES. The Board of Directors had the
option to deliver ten (10) shares of common stock for each share of B Preferred
upon the receipt of demand from the holder of the B Preferred in lieu of payment
of cash.
On April 12, 2000, the holder of the B Preferred redeemed the 100,000 shares of
B Preferred for payment of $1 million. On April 20, 2000, the parties agreed to
amend the original contract and satisfy the demand through the issuance of
1,000,000 shares of e-Net's common stock, subject to certain share-cancellation
provisions. The amended contract dated April 20, 2000, required the holder of
the 1,000,000 common shares to return a number of such shares 90 days from the
amendment date (July 20, 2000) in the event the Company's common stock exceeds
$2.00 per share. The shares to be returned to the Company were determined based
on $2.0 million divided by the average closing bid price of the Company's common
stock 15 trading days prior to July 20, 2000, subject to a maximum number of
shares to be retained of 1,000,000 shares of common stock. The average price of
the Company's common stock the 15 trading days prior to July 20, 2000, was $1.81
per share. Since the number of shares computed exceeded 1,000,000 shares, the
holder retained the entire 1,000,000 shares. Upon the conversion of the B
Preferred into common stock, the Company recorded a charge to general and
administrative expenses for the incremental value of $1.0 million, based on the
difference between the $1.0 million carrying value of the B Preferred and the
$2.0 million fair value of the common stock.
Management allocated the excess of the purchase price over the fair value of the
assets acquired of $1.6 million to goodwill. New management of e-Net determined
the value of the REIT management contract be included in goodwill since the
estimated period to be benefited for both goodwill and the management contract
is estimated to be ten years due to the limited operating history of Titus.
Accordingly, such excess purchase price over net assets acquired have been
combined and included in goodwill in the accompanying consolidated balance
sheet. Refer to Note 4 for impairment of the goodwill totaling $1,155,057. The
carrying value of goodwill at April 30, 2001 is $250,000.
LoanNet Mortgage, Inc.
On February 14, 2000, the Company acquired all the issued and outstanding common
stock of LoanNet, a privately-held company providing mortgage loans primarily to
residential customers in three Eastern states. In connection with this
acquisition, the Company issued 250,000 shares of its common stock valued at
$2.3 million. Management determined that the common stock issued in connection
with this transaction was the best indicator of fair value in light of market
conditions at the time, and the active market in the Company's common stock.
Management calculated the fair value per share issued using the average closing
prices 15 trading days before and after the announcement of such transaction in
February 2000. Our common shares issued were restricted, and as a result, we
discounted the average trading prices by 10%. The acquisition was accounted for
under the purchase method of accounting with the excess of cost over the fair
value of the net assets acquired of $2.2 million was allocated to goodwill.
LoanNet had few assets, consisting primarily of office equipment valued at
approximately $100,000. Goodwill was being amortized on a straight-line basis
over seven years prior to the closing of LoanNet's operations at which time
goodwill was impaired (see Note 4).
F-17
On March 30, 2001, the Board of Directors of e-Net, none of whom were officers,
directors or management of LoanNet, rescinded the acquisition of LoanNet due to
misrepresentations by LoanNet's management, officers and directors. E-Net
management demanded the return of the 250,000 shares issued, and attempted to
deliver the shares of common stock it received in connection with the
acquisition to the original selling shareholder, whom is also the preferred
stockholder, the chief executive officer and director of LoanNet. Also, see Note
4. The 250,000 shares or the Company's common stock were not returned by the
former LoanNet shareholders. The Company accounted for the rescission of the
acquisition transaction by removing the assets and liabilities of LoanNet
resulting in net liabilities totaling approximately $147,000, offset by the
write-off of goodwill of approximately $1,985,000 (Note 4). The carrying value
of the net assets acquired totaling approximately $1,838,000, were charged to
operations in fiscal 2001.
ExpiDoc.Com, Inc.
On March 17, 2000, the Company acquired all the issued and outstanding capital
stock of ExpiDoc, a privately held company that provides notary services, for
24,000 shares of the Company's common stock valued at $196,510. Management
determined that the common stock issued in connection with this transaction was
the best indicator of fair value in light of market conditions at the time, and
the active market in the Company's common stock. Management calculated the fair
value per share issued using the average closing prices 15 trading days before
and after the announcement of such transaction on February 28, 2000. Our common
shares issued were restricted, and as a result, we discounted the average
trading prices by 10%. The Company provided working capital of $125,000 to
Expidoc, as required. The acquisition was treated under the purchase method of
accounting with the excess of cost over the fair value of the net liabilities
acquired of $210,296 allocated to goodwill. At the time of the acquisition,
ExpiDoc had no material operating or investment assets. Goodwill is being
amortized on a straight-line basis over seven years.
American Residential Funding, Inc.
On April 12, 2000, e-Net closed the acquisition of AMRES and Bravo Real Estate.
Pursuant to the amended and restated purchase agreement, the e-Net issued 7.5
million shares of common stock to EMB, representing nearly 40% of the then
issued and outstanding common stock of the Company, paid $1,595,000, and issued
a promissory note in the initial amount of $2,405,000. AMRES and Bravo Real
Estate became wholly owned subsidiaries of the Company. As discussed in Note 1,
AMRES is the acquirer for financial reporting purposes. Since Bravo Real Estate
had no operations or net assets, management determined that a nominal value of
$1,000 be attributed to its name. The fair value attributable to the common
stock retained by the shareholders of e-Net on April 12, 2000 was $3,838,000.
The fair value of the net assets (liabilities) acquired by AMRES, by entity, in
the consolidated Group of e-Net, at April 12, 2000, is as follows:
e-Net (shell company) $ (205,000)
Titus 1,568,000
Loan Net 2,295,000
Expidoc 280,000
----------
Total $3,938,000
==========
The fair value of net assets acquired (net liabilities assumed) was originally
determined by management on the dates of acquisitions by e-Net, subject to
change for known events, through April 12, 2000, the date of reverse
acquisition. The fair value ascribed for Titus, LoanNet and Expidoc was
determined based on the consideration given by the Company in accordance with
APB No. 16 (as discussed in the preceding paragraphs). Management determined
that no change in fair value occurred from the dates of the acquisitions by
e-Net in February and March 2000, through the date of the reverse acquisition on
April 12, 2000 since the dates of acquisitions nothing came to the attention
which cause management to reassess fair value. The fair value of e-Net, the
non-operating public shell, was based on the net liabilities acquired by AMRES
of e-Net, excluding those assets acquired in February and March 2000. Since
e-Net, the non-operating company, had no operations which constitute a trade or
business, no value was ascribed to goodwill.
Because the purchase was accounted for as a reverse acquisition, the $4.0
million in cash and notes issued to EMB were treated as a deemed distribution
with a charge to retained earnings.
NOTE 4 - GOODWILL
The Company's previous business combinations were accounted for purchase method,
unless the combination was among common control parties. All future business
combinations will be accounted for under the purchase method, which may result
in operations, either by amortization or impairment charges, in the future. For
purchase business combinations completed prior to June 30, 2001, the net
carrying amount of goodwill is $425,247. Amortization expense during the year
ended April 30, 2001, was $349,104. The Company intends to adopt the provisions
of SFAS 141 and 142 beginning May 1, 2001. The impact of the adoption of SFAS
141 and 142 on the Company's financial position and results of operations could
be material.
During the year ended April 30, 2001, the Company recorded asset impairment
charges related to LoanNet and Titus totaling $1,985,012 and $1,155,057,
respectively, in the accompanying consolidated statement of operations.
Management determined that LoanNet was unprofitable and required significant
cash from financing activities to meet its obligations as they become due and
expand in sales and marketing. In February 2001, E-Net management determined to
rescind its acquisition of LoanNet as discussed in Note 3. Management of E-Net
determined its investment was materially impaired. Since management could not
reasonably estimate the residual value, if any, of LoanNet, management impaired
all remaining goodwill.
The Company originally acquired Titus, a REIT management company, to
significantly increase the REIT assets by obtaining funding of up to $30
million. The Company's then chief executive was in negotiation for a commitment
for the funding, however, no definitive commitment was obtained by management of
Titus. Due to the passage of time and the lack of a firm commitment to raise
capital to expand the operations of the REIT, management determined that an
impairment of goodwill was appropriate. Management determined that any future
significant cash flows would be generated through a sale of Titus.
Management estimated that the sale of Titus would net the Company at least
$250,000, net of costs to sell. Management assessed the fair value of the
management company and the REIT based on management's belief that an existing
management company of an established REIT could be sold for $250,000, based on
discussions with knowledgeable persons, as well as the costs to establish, to
obtain required approvals in the state of California and to maintain a REIT.
Accordingly, management determined an impairment of the net carrying value of
goodwill and the expected net cash flows to be recovered.
F-18
NOTE 5 - LOANS HELD FOR SALE
The Company held five conventional uninsured mortgages totaling $357,350 as of
April 30, 2001. These loans were originated by AMRES with various interest
rates ranging from 7-13%, per annum, funded using, and collateralized by, the
Company's warehouse credit line (Note 8) and were subsequently sold to investors
within one month of balance sheet date.
NOTE 6 - ADVANCES TO OFFICERS
As of April 30, 2001, the Company had amounts due from an officer of $50,000.
This advance was repaid in May 2001.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of April 30, 2001:
Equipment $ 99,002
Furniture and fixtures 55,353
--------
154,355
Less: accumulated depreciation (64,370)
--------
$ 89,985
=========
During the ten months ended April 30, 2000, and the year ended April 30, 2001,
depreciation expense totaled $31,826 and $32,319, respectively. Also, the
Company impaired $64,139 of equipment as of April 30, 2001.
NOTE 8 - LINE OF CREDIT
The Company maintains a $2,000,000 warehousing line of credit which will mature
March 31, 2002. The agreement is personally guaranteed by the Company's chief
executive officer. The credit agreement calls for various ratios and net worth
requirements, minimum utilization requirements, and limits the warehouse period
to 45 days for any specific loan. The interest rate as of April 30, 2001, was
9% per annum calculated on the daily outstanding balance. The adjustable
interest rate is based upon a published prime rate plus 1.5% and is payable
monthly. The line of credit is collateralized by the loans held for sale as
referenced above.
F-19
NOTE 9 - NOTES PAYABLE
In connection with the acquisition of AMRES, the Company issued a note payable
in the amount of $4,000,000, interest at 10% per annum to EMB. On April 12,
2000, the Company made a principal reduction of $1,595,000 on this note. During
May 2000, the note was reduced to $1,055,000 through proceeds received from a
private placement of the Company's common stock. Subsequent to April 30, 2001,
all principal and interest except $103,000 was satisfied by settlement of
certain EMB debts guaranteed by the Company totaling $424,766 through the
issuance 3,000,000 shares of the Company's common stock and the settlement of an
EMB debt to AMRES Holdings (former shareholder of AMRES prior to being acquired
by EMB) totaling $485,446 (see Note 14). In connection with the settlement
transaction, EMB expressly forgave principal and interest totaling approximately
$200,000. The balance of $103,000 is due December 15, 2001 and has a mandatory
conversion into the Company's common stock upon maturity at the option of the
Company.
On April 13, 2000, a former officer loaned the Company $300,000, due April 12,
2001, together with interest at 10% per annum. On July 7, 2000, the note,
including accrued interest of $32,666 was converted into 150,000 shares of
restricted common stock.
As of April 30, 2001, the Company had two notes payable aggregating $35,518,
interest at 10% per annum due on August 31, 2000. Subsequent to April 30, 2001,
these notes were assumed by a third party in exchange for amounts that were due
to the Company.
As of April 30, 2001, the Company had a 10% note payable totaling $150,000. On
July 2, 2001, the parties entered into a settlement agreement whereby the
Company paid $43,280 of principal, issued 325,000 shares of common stock to
reduce the note by $63,440, and will pay the remaining $43,280 over ten months
beginning August 5, 2001, together with interest at 10% per annum. See Note 14.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company acquired equipment and furniture under capital lease obligations
over 24 months. The present value of future annual minimum lease payments under
capital leases are as follows:
Years Ending
April 30,
---------
2002 106,387
2003 1,180
--------
107,567
Less amount representing interest (1,369)
--------
106,198
Less current portion (105,110)
--------
Long-term portion $ 1,180
=========
As of April 30, 2001, the Company had $85,958 of equipment and furniture under
capital leases, at cost.
Operating Leases
The Company leases its corporate office located in Costa Mesa, California, under
a non-cancelable operating lease from unrelated third parties that expires on
March 31, 2002. In addition, the Company leases certain of its branch offices
under non-cancelable operating leases that expire through 2005. The Company
also has various equipment leases that expire at various dates ranging from one
to five years. Rental expense for the ten-month period ended April 30, 2000,
and the year ended April 30, 2001, was $186,322 and $510,182, respectively.
F-20
Minimum future annual rental payments under the lease agreements with a term in
excess of one year at April 30, 2001, are as follows:
Years Ending
April 30
--------
2002 $ 337,963
2003 274,490
2004 54,676
2005 9,446
--------
$ 676,575
========
As of April 30, 2001, the Company was in default on certain capital lease
obligations totaling approximately $91,000, which management is currently in
negotiation to settle such amounts. There are no assurances that management will
be successful in reaching a favorable settlement.
Litigation
The Company is subject to a limited number of claims and actions, which arise in
the ordinary course of business. The litigation process is inherently
uncertain, and it is possible that the resolution of the company's existing and
future litigation may adversely affect the Company. Management is unaware of
any matters that may have material impact on the Company's consolidated
financial position, results of operations or cash flows.
Employment agreements
AMRES has entered into an executive employment agreement with its chief
executive officer, which provides for annual compensation, allowances, medical
benefits and life insurance. The agreement also provides for incentive bonuses
upon meeting certain criteria. On June 1, 2001, the Company's board of
directors consisting of Mr. Presta and Mr. Rinehart approved a new compensation
arrangement for Mr. Rinehart in his capacity as chief executive of e-Net (see
Note 14). The Company is also a party to other employment agreements in the
normal course of business. Future annual minimum payments for employment
compensation packages are as follows:
Year End
April 30,
2002 $ 238,333
2003 312,584
2004 343,841
2005 378,226
2006 67,105
-------
$ 1,340,089
==========
F-21
Investment Banking Agreement
On May 27, 1999, the Company entered into an agreement with an investment banker
to seek debt financing through public or private offerings or debt or equity
securities and in seeking merger and acquisition candidates. Per the agreement,
the Company granted the investment banker options to purchase 200,000 shares of
the Company's common stock at an exercise price of $0.13, expiring on May 31,
2001. Additionally, the Company was required to pay $60,000 for the initial
twelve months. In addition, the agreement specified that the investment banker
will receive a percentage of consideration received in a merger, acquisition,
joint venture, debt or lease placement and similar transactions through May 31,
2001. The Company valued these options using the Black Scholes model at $3.14
per share for total consulting expenses of $627,200 and amortized such an
expense over the course of the contract. As of April 30, 2001, the Company had a
deferred compensation of $26,133 in connection with this agreement. In April
2000, the parties agreed to amend the agreement to eliminate the fee based on a
percentage of the consideration of a transaction, and to grant the investment
banker 200,000 shares of the common stock and to cancel the options to purchase
200,000 shares. These shares were not issued; however, management reflected such
shares as issued and outstanding because of the legal obligation to issue the
shares. Through August 7, 2001,the investment banker had rights to receive such
shares by amendment amongst the parties. On August 7, 2001, the Company agreed
to settle a dispute over the non-delivery of the 200,000 shares previously
agreed upon in April 2000, in exchange for 1,500,000 of the Company's restricted
common stock (see Note 14). No additional compensation charges will be incurred
as a result of the final settlement since the historical financial statements
reflect the value of the services rendered. During fiscal 2001, the Company
charged operations by $313,600 for this service agreement.
Guarantee of Debt
On July 6, 2000, the Company guaranteed to a third party the debt of EMB
totaling $657,349. The guarantee was provided due to the EMB sale of AMRES to
ensure repayment of the note since EMB had limited assets. On June 26, 2001,
this guarantee was satisfied with the issuance of 3,000,000 shares of the
Company's restricted common stock (see Note 14).
NOTE 11 - STOCKHOLDERS' EQUITY (DEFICIT)
General
In March 2000, the Company amended its Articles of Incorporation to change the
authorized number of shares of its $0.001 par value common stock from 20,000,000
to 100,000,000. Additionally, the Board of Directors authorized the issuance of
1,000,000 shares of preferred stock. The preferred stock may be divided into
and issued in one or more series.
Class B Mandatorily Redeemable Preferred Stock
In connection with the acquisition of Titus, the Company issued
100,000 shares of B Preferred. The note was converted into 1,000,000 shares of
common stock on April 20, 2000, subject to certain cancellation provisions. See
Note 3 for further discussion of the Company's B Preferred.
F-22
Class C Convertible Preferred Stock
In April 2000, the Company issued 20,000 shares of Class C Convertible Preferred
Stock, (the "C Preferred") for $1,775,000, net of fees of $225,000 in a private
placement. As additional consideration, the Company issued warrants to purchase
151,351 shares of the Company's common stock at an initial exercise price of
$6.73 per share. The C Preferred has a liquidation value of $2,000,000 and the
holder is entitled to receive cumulative dividends at an annual rate of $7.00
per share (7% per annum), payable semi-annually. No dividends have been
declared. The C Preferred is convertible, at any time at the option of the
holder, into shares of the Company's common stock at a price equal to the lesser
of (a) $6.91 per share or (b) 95% of the average closing bid price of the
Company's common stock during the fifteen trading days preceding the conversion
after 150 days to 85% of the average closing bid price of the common stock
during the fifteen trading days immediately preceding such conversion after 240
days. The longer the C Preferred is held the greater discount on conversion
into common stock. In the event the holders of C Preferred have not elected to
convert at the time of mandatory conversion, the C Preferred will convert at an
amount equal to 85% of the purchase price of the holder's C Preferred plus an
amount equal to accrued and unpaid dividends, if any, up to and including the
date fixed for redemption, whether or not earned or declared. As of April 30,
2001, no shares of C Preferred have been converted into common stock. Subsequent
to April 30, 2001, shareholders converted 2,016 shares of C preferred to
4,666,663 shares of the Company's restricted common stock. During the year
ended April 30, 2001, the Company accreted the difference between the carrying
value and the liquidation value totaling $859,303.
Common Stock
On February 14, 2000, the Company issued 250,000 shares of restricted common
stock valued at $2,305,625 or $9.22 per share in exchange for all the
outstanding common stock of LoanNet in a transaction accounted for under the
purchase method of accounting. See Note 3 for further discussion.
On March 17, 2000, the Company issued 24,000 shares of restricted common stock
valued at $196,510 or $8.19 per share in exchange for all the outstanding common
stock of ExpiDoc in a transaction accounted for under the purchase method of
accounting. See Note 3 for further discussion.
In connection with the reverse acquisition of AMRES, the shares totaling
10,779,937 retained by the shareholders of record on or about January 31, 2000,
of e-Net are considered as issued acquire e-Net, the non-operating entity, in
connection with the reverse acquisition of AMRES.
On May 2, 2000, the Company sold 666,667 shares of common stock for $1,699,973,
net of fees and commissions of $300,027 in a private placement and issued
warrants to purchase 333,334 shares of the Company's common stock at an exercise
price of $3.00 per share. The shares and warrants were subject to registration
which was not effected.
In July 2000, the Company issued 150,000 shares of restricted common stock in
satisfaction of a note payable to a former officer, of $300,000 and accrued
interest of $32,666.
In April 2001, the Company issued 2,500,000 shares of restricted common stock to
AMRES valued at $292,500 to capitalize AMRES based on the closing price of the
Company's common stock on the date of issuance. The Company is required, as a
loan broker, by the Department of Housing and Urban Development ("HUD") to
maintain net capital of $250,000. E-Net issued the shares of common stock to
AMRES to meet its HUD capital requirements. These shares were treated as an
intercompany transaction and eliminated on the Company's consolidated financial
statements.
F-23
In May 2000, in connection with the stock deferral plan that was effective in
1999, the Company issued to an employee 5,000 shares at the Company's common
stock that were registered under an S-8 filing and recorded compensation expense
at $3.38 per share for a total of $16,900. In July 2000 the Company issued
additional shares totaling 3,630 shares of the Company's restricted stock and
recorded compensation expense at $1.40 per share for a total of $5,097, a 10%
discount for the restriction of the stock. In December, 2000, the Company issued
additional shares totaling 38,059 shares of the Company's common stock that were
registered and recorded compensation expense at $ 0.56 per share for a total of
$21,313. Also, in April, 2001, the Company issued an additional 44,000 shares of
the Company's common stock that were registered and recorded compensation
expenses at $ $0.15 per share for a total of $6,600.
In June 2000, in connection with the stock bonus plan that was effective in
1999, the Company issued 60,000 shares of the Company's common stock that were
registered and recorded compensation expense at $2.00 per share for a total of
$120,000.
At various dates from May 2000 through April 30, 2001, the Company issued
2,863,591 shares of common stock, valued at $1,542,316 to various consultants.
Consulting services performed during the year ended April 30, 2001 is summarized
below:
F-24
Year Ended April 30, 2001
Costs Shares
Incurred Issued
Financial and Internal
Accounting Services $300,512 630,500
Mergers Acquisitions Consulting 888,992 875,945
Bravo Realty Start-up Costs 286,337 718,500
Information Technology Consulting 41,650 71,000
Legal Services 338,425 567,646
------------------ ---------
Total $1,855,916 2,863,591
================== =========
Stock Options and Warrants
On July 6, 1999, the Company executed stock purchase option agreements with five
employees and two consultants. The agreements granted the individuals options to
purchase a total of up to 475,000 shares of restricted common stock at a price
of $1.50 per share. No options pursuant to these agreements were exercised. On
January 7, 2000, the stock purchase option agreements dated July 6, 1999, were
terminated upon the effectiveness of a stock bonus agreement with these
individuals. Effective December 16, 1999, the Board of Directors adopted the
2000 Stock Compensation Program (the "2000 Plan"), which was later terminated.
The 2000 Plan was composed of a Stock Bonus Plan ("Bonus Plan") and a Stock
Deferral Plan ("Deferral Plan") and the maximum aggregate number of shares of
common stock subject to the 2000 Plan was 1,000,000 shares. Under the Bonus
Plan, shares of common stock could be granted to key employees and consultants
as a bonus for performing duties essential to the growth of the Company. Under
the Deferral Plan, participants could elect to defer up to one-third of their
gross quarterly compensation and receive options to purchase shares of common
stock at $1.00 per share. During the week after the close of the calendar
quarter, participants must choose to convert the deferred amount into shares of
common stock or receive cash. Eligible participants included all officers,
employees, directors, consultants or advisors and independent contractors or
agents of the Company or its subsidiaries. Prior to January 31, 2000, the
Company granted options to purchase 162,336 shares of common stock. The options
were vested and converted on the date granted. Prior management of e-Net granted
to stock options to employees which are no longer employed with the Company
because they were terminated upon the acquisition of AMRES. Any compensation
expense recorded would have been charged to operations, as well as the pro forma
effects, under the predecessor basis of accounting as a result of the reverse
acquisition of AMRES. Since current management has not granted any employees
stock option from April 12, 2000 through April 30, 2001, pro forma presentation
is not considered appropriate by management. Management has reported common
stock grants subsequent to April 12, 2000 at fair value as discussed in the
preceding paragraph.
In April, 2000, as an additional consideration to the C preferred private
placement, the Company issued warrants to purchase 151,351 shares of the
Company's common stock at an initial exercise price of $6.73 per share. See note
11-Class C Convertible Preferred Stock for further discussion.
In May, 2000, as an additional consideration to a private placement, the Company
issued warrants to purchase 333,334 shares of the Company's common stock at an
initial exercise price of $3.00 per share. See note 11-Common Stock for further
discussion.
Stock-option and warrant activity during the ten months ended April 30, 2000 and
the year ended April 30, 2001, was as follows:
Options issued to employees and consultants:
Weighted Weighted
Range of Average Average
Exercise Exercise Fair Value of
Options Prices Price Options Granted
--------- ------------ -------- ---------------
Outstanding, June 30, 1999. - - - -
Granted. . . . . . . . . . 837,336 $0.13-1.50 $ 1.08 $2.34
Canceled . . . . . . . . . (675,000) $0.13 1.50 1.50
Exercised. . . . . . . . . (162,336) 1.00 1.00
---------
Outstanding, April 30, 2000 - $ - $ -
Granted. . . . . . . . . . - - - $ -
Canceled . . . . . . . . . - - -
Exercised. . . . . . . . . - - -
---------
Outstanding, April 30, 2001 - $ - $ -
=========
During the ten months ended April 30, 2000, the Company granted options to
consultants to purchase a total of 163,054 shares of common stock that were
valued using the fair value method; however, such amounts were reported under
the previous reporting entity, e-Net, and are not included in the accompanying
consolidated financial statements. In addition, see Note 10 for discussion of
warrants to purchase 200,000 shares at $0.13 per share granted and canceled in
fiscal 2000 resulting in deferred compensation. Assumptions used to value
options and warrants in fiscal 2000 were a risk free interest rate of 6%,
expected volatility of the Company's common stock of 100% and an expected life
of 2 years.
Warrants issued in connection with private placements:
Weighted Weighted
Range of Average Average
Exercise Exercise Fair Value of
Options Prices Price Options Granted
--------- ------------ -------- ---------------
Outstanding, June 30, 1999. - - - -
Granted. . . . . . . . . . 151,351 $ 6.73 $ 6.73 $6.00
Canceled . . . . . . . . . - - -
Exercised. . . . . . . . . - - - -
---------
Outstanding, April 30, 2000 151,351 $ 6.73 $ 6.73 $6.00
Granted. . . . . . . . . . 333,334 $3.00 $ 3.00 $1.42
Canceled . . . . . . . . . - - - -
Exercised. . . . . . . . . - - - -
---------
Outstanding, April 30, 2001 484,685 $3.00- 6.73 $ 4.16 $2.85
=========
F-25
The 484,685 warrants outstanding and exercisable at April 30, 2001,
expire in April 2005 through May 2005.
NOTE 12 - INCOME TAXES
At April 30, 2001, the Company had net operating loss carry-forwards for federal
and state income tax purposes totaling approximately $5.3 million and $2.7
million, respectively, which for federal reporting purposes, begin to expire in
2008 and fully expire in 2021. For state purposes, the net operating loss
carry-forwards begin to expire in 2003 and fully expire in 2006. The utilization
of these net operating losses may be substantially limited by the occurrence of
certain events, including changes in ownership. The net deferred tax assets at
April 30, 2001 and 2000, before considering the effects of the Company's
valuation allowance amounted to approximately $2.0 million and $710,000,
respectively. The Company provided an allowance for substantially all its net
deferred tax assets since they are unlikely to be realized through future
operations. The valuation allowance for net deferred tax assets increased
approximately $1.3 million and $685,000 during the year and the ten months ended
April 30, 2001 and 2000, respectively. The Company's provision for income taxes
differs from the benefit that would have been recorded, assuming the federal
rate of 34%, due to the valuation allowance for net deferred tax assets.
NOTE 13 - SEGMENT AND OTHER INFORMATION
Segments were determined based on services provided by each segment. Accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Performance of the segments is evaluated on
operating income before income taxes, excluding reorganization and restructuring
charges, unusual gains and losses, and interest expense. For the year ended
April 30, 2001 management has provided the following information with respect to
its operating segments (in thousands):
Revenues: Operating Income (loss) Assets
2000 2001 2000 2001 2000 2001
---- ---- ---- ---- ---- ----
Loan brokering Corporate. . . . . . .. $ 4,648 $ 3,612 $ (426) $ (98) $ 2,675 $ 535
Loan brokering Net Branches . . . . . . - 6,947 - 25 - 92
Mortgage banking. . . . . . . . . . . . - 218 - (19) - 357
Notary Services . . . . . . . . . . . . 38 188 (37) (39) 306 217
REIT Management . . . . . . . . . . . . 3 27 3 (48) 1,568 251
------ ------- --------- --------- ------- -------
$ 4,689 $ 10,992 (460) (179) 4,549 1,452
====== =======
Amortization and impairment of goodwill (123) (3,489)
Compensatory stock (1,000) (2,026)
Corporate (199) (700) 322 154
--------- -------- ------- -------
Total $(1,782) $(6,394) $ 4,871 1,606
======== ========== ======== =======
F-26
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
The primary historical activities of AMRES has been brokering retail residential
real estate mortgages. AMRES commenced its mortgage banking division in fiscal
2001, which currently has $2,000,000 in warehouse lines, and funds directly
about 5% of the loans originated by AMRES agents. Loans funded are primarily
second mortgages and subprime loans. AMRES owns and operates four
corporate-owned branches in Long Beach, Costa Mesa, Riverside, and Palmdale,
California. The significant growth has been from their branch offices, which are
operated by managers for a profit. As of April 2001, over 140 such branches were
producing over $40,000,000 in monthly loans. The Company did not evaluate the
performance of the NetBranches or the mortgage banking operations during the
year ended 2000.
ExpiDoc provides a loan document signing service, with available notaries
nationwide. BravoRealty.com, which is not affiliated with the now
non-operational Bravo Real Estate, is an internet-based real estate brokerage
which began operations in January 2001. Bravorealty.com's business model
targets real estate agents as its customers and offers 100% commission retention
for the agent, while charging a minimal fixed fee per closed transaction. The
operations of Titus are not significant.
NOTE 14: SUBSEQUENT EVENTS
Global Settlement of Debts
On June 26, 2001, e-Net entered into a settlement agreement with EMB Corporation
("EMB"), AMRES Holding LLC, Vincent Rinehart, and Williams de Broe, PLC (the
"Global Settlement"). As part of the Global Settlement:
i) e-Net issued to EMB 1,500,000 shares of restricted common stock as
consideration for EMB's waiver of its registration rights for 7,500,000 shares
of e-Net common stock already held by EMB. The shares issued were valued at
$0.14 per share based on 10% discount from the closing price on the date of the
agreement. The Company will record a settlement expense of $229,500 with regard
to this issuance.
ii) e-Net issued to Williams de Broe ("WdB") 3,000,000 shares of restricted
common stock valued at $459,000 as consideration for WdB's release of all
claims against e-Net arising under the purported guarantee of EMB's obligation
to WbD by e-Net. The parties agreed that the amount be credited as additional
consideration to apply to the EMB notes payable.
iii) EMB acknowledges its obligations to pay all outstanding leases covering
equipment and/or furniture now in the possession of e-Net as contemplated by the
agreement.
iv) EMB assigns its rights of a portion of e-Net's note payable totaling
$485,446 to AMRES Holdings LLC, owned by Vincent Rinehart. The note bears
interest at 10% per annum. This note is convertible into shares of common stock
based on 80% of the closing stock price on the date of the conversion. The
Company assigned a value of approximately $54,000 to the beneficial conversion
feature imbedded in this note. The entire principal balance, together with
accrued interest, shall be due and payable, in full, on December 15, 2002.
v) EMB forgave principal and interest totaling $168,006. The balance of
$103,404 convertible notes was issued, interest at 10% per annum. The note has a
mandatory conversion into the Company's common stock on December 15, 2001.
The following reflects the reduction of the note payable to EMB as follows:
Note payable $1,055,000
Accrued interest 160,856
---------
Total due EMB prior to settlement 1,215,856
Less:
Value of 3,000,000 shares to WdB (459,000)
Payable to AMRES Holdings, LLC (485,446)
Debt and interest relief (168,006)
---------
Balance due EMB after settlement $ 103,404
=========
Bridge Financing
On or about June 27, 2001, the Company entered into an agreement and related
documents with Laguna Pacific Partners, LLP ("Laguna Pacific"). Under the terms
of the agreements, in exchange for $200,000 received by the Company subject to
additional advances totaling $25,000, from LagunaPacific, the Company:
i) executed a promissory note in favor of Laguna Pacific in the principal
sum of $200,000, subject to additional advances totaling $25,000,
bearing interest at the rate of 7% per annum, secured by all
the assets of the Company, and payable on the earlier of nine months from its
issuance date or the date the Company's common stock is listed on the NASDAQ
Small Cap market, and
ii) executed a warrant agreement which entitled Laguna Pacific to acquire up
to $225,000 worth of e-Net common stock for the total purchase price of $1.00,
calculated at 70% of the closing stock price on the date immediately preceding
the exercise date. The Company is required to allocate the proceeds received to
the value the warrant and the bridge loan using the relative fair value method,
and resulting warrant value is reflected as an increase in additional paid-in
capital and a corresponding reduction (discount) to the face value of the note.
Management established the fair value based on $225,000 in common stock, divided
by the discount to market of 30% which the holder of the warrants receive when
purchasing the shares of common stock, for a computed value of $321,428. The
relative value of the warrant amounted to $132,345, and such amount is reflected
as a discount to the note. The discount on the note will be amortized over the
term of the note (March 27, 2002), using the effective interest method.
On June 26, 2001, in transactions related to the agreements with Laguna Pacific,
the Company formed a wholly-owned subsidiary, Anza Properties, Inc., a Nevada
corporation ("Anza"), which
i) executed a Bond Term Sheet with e-Net outlining the proposed terms of an
offering to raise up to $5,000,000,
ii) entered into an employment agreement with an individual beginning thirty
days from the date of the agreement and ending upon the earlier to occur of the
liquidation of the real estate portfolio to be owned by Anza or the completion
of a NASDAQ Small Cap listing by e-Net. The employment agreement provides for a
salary of $20,000 per month, payable only by Anza and specifically not
guaranteed of e-Net. The employee will serve as Anza's Vice President and will
be a director thereof. In connection with the employment agreement, e-Net
executed a stock option agreement which entitled Ehrlich to acquire up to
2,000,000 shares of e-Net common stock at the closing price on the date of the
options agreement, vesting equally over the 12 months following the date of the
employment agreement, and exercisable only in the event Anza is successful in
raising a minimum of $2,000,000 in a contemplated $5,000,000 bond offering, and
the holders thereof converting at least $2,000,000 of the bonds into equity of
e-Net (any amounts less than $2,000,000 will be applied, pro-rata, to the total
options exercisable under the Option Agreement). The options are subject to an
anti-dilution provision in the event of future issuances of common stock or a
reverse stock split. The holder in no event can the option holder own more than
10% of the issued and outstanding common stock in the event of a reverse stock
split. The Company will assess the value of these options when the
contingencies are removed in accordance with APB No. 25.
F-27
iii) entered into a consulting agreement with an individual to provide
services to Anza. The consulting agreement provides for compensation of $20,000
to be paid on its date of execution, and $5,000 per month for eight months
beginning September 1, 2001, guaranteed by e-Net. In addition, e-Net executed a
stock option agreement, which entitled the holder to acquire up to 1,000,000
shares of e-Net common stock on terms identical to those described above in ii)
above. The options are subject to an anti-dilution provision in the event of
future issuances of common stock or a reverse stock split. The holder in no
event can the option holder own more than 5% of the issued and outstanding
common stock in the event of a reverse stock split. The Company will assess the
value of these options when the contingencies are removed in accordance with
SFAS No. 123.
Employment Agreement
On June 1, 2001, e-Net entered into an Employment Agreement with Vincent
Rinehart. Under the terms of the agreement, the Company is to pay to Mr.
Rinehart a salary equal to $275,000 per year, subject to an annual increase of
10% commencing January 1, 2002, plus an automobile allowance of $1,200 per month
and other benefits, including life insurance. The agreement is for a term of
five years and provides for a severance payment in the amount of $500,000 and
immediate vesting of all stock options in the event his employment is terminated
for any reason, including cause. Mr. Rinehart was granted options to acquire
2,500,000 shares of e-Net common stock at the closing price on the date of the
agreement, which shall vest monthly over a three- year period. The options are
subject to an anti-dilution provision in the event of future issuances of common
stock or a reverse stock split. The holder in no event can the option holder
own more than 20% of the issued and outstanding common stock in the event of a
reverse stock split. The Company will assess the value of these options.
Stock Issuance
On June 14, 2001, Class C Preferred stockholders exercised their option and
converted 1,616 shares of Class C Preferred stock into 3,741,671 of the
Company's restricted common stock. These shares were trading at $0.14 per
share. No expense was realized with this transaction. Also, on July 13, 2001
an additional 400 shares of the Class C were converted at the option of the
shareholders into 924,992 shares of the Company's restricted common stock.
These shares were trading at $0.14 per share. No expense was realized with
regard to this transaction.
Subsequent to April 30, 2001 through August 1, 2001, the Company issued an
aggregate of 600,000 shares of the Company's restricted common stock and a total
of 2,200,000 of the Company's registered common stock under a Form S-8 to
consultants. These shares were valued at $385,900 and the Company charged this
amount to consulting expense. Shares were issued for business development,
legal, internal accounting and finance services, as well as additional
compensation to a consultant to launch BravoRealty.
On August 7, 2001, the Company entered into a settlement agreement whereby, the
Company was to issue a total of 1,500,000 shares of the Company's restricted
common stock to settle a dispute over an amendment of an investing banking
agreement entered into on May 27, 1999 (see Note 10).
As of April 30, 2001, the Company had a 10% note payable totaling $150,000. On
July 2, 2001, the parties entered into a settlement agreement whereby the
Company paid $43,280 of principal, issued 325,000 shares of common stock to
reduce the note by $63,440, and will pay the remaining $43,280 over ten months
beginning August 5, 2001, together with interest at 10% per annum.
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